Telstra CEO Vicki Brady facing her first big test

There’s a lot that needs to go right for the telco boss, who has her work cut out to meet promised cost targets.

Telstra boss Vicki Brady is facing her first serious test since taking charge more than 16 months ago, with a faster-than-expected switch by business customers to low cost cloud-based phone services threatening to take the shine off the telco’s much-vaunted reinvention.

And there’s a lot that needs to go right for Brady, the former finance executive who is halfway through her own restructuring program that promised $500m in cost savings by June next year.

Like all businesses, Brady is running against inflation pressures bubbling up through the financial accounts while a new round of wage negotiations with unions later this year is set to make the job even harder.

So far Telstra has secured just $105m since her T25 program started two years ago. Brady says there’s more to come over the coming year and she remains committed to the $500m figure as well as the earnings and customer growth targets that were also part of the program. This deep into the program any major buckling from the numbers will tinge her credibility.

In an interview Brady acknowledges there’s “more significant action” now needed than when the program was launched two years ago.

This will involve slicing IT spend and more job losses are likely as back office functions are streamlined. More will be done on productivity, with the telco planning to ramp up its use of artificial intelligence across the business, including with customers, in order to stay ahead of inflation and carve out savings.

Telstra is starting to fall behind on promised cost savings. Picture: NCA NewsWire / Luis Enrique Ascui

Brady has put the 67 per cent collapse in earnings from selling telco services to medium and large businesses partly down to customers cutting back spending in a slowing economy, as well as the structural shift of more moving their tech spend to the cloud. The technology shift will continue and the challenge for Telstra to manage the decline while finding new sources of business revenue remains.

The Network and Services business where most of the problems sit is a “long way“ from where it needs to be, Brady says, and this will involve a serious response.

“We are taking action … because I think you’ve got to use these moments to make sure we have that business absolutely set up for success,” Brady tells The Australian.

In the near term it is likely jobs will be lost following a review, with costs needing to come out of the unit that had previously been a powerhouse profit centre behind mobiles.

Those days are increasingly behind it and Telstra will have to seriously re-examine its proposition to business customers where margins in cloud-based calling are wafer thin. Indeed, the fall was so serious it has prompted Telstra to shave $100m from the top end of its full-year earnings guidance. This was behind the initial 2 per cent drop in Telstra shares on Thursday.

Brady continues to believe that over the medium to long run there remains a strong case for selling telco and communication services to business.

It’s the sign of how far Telstra has come through its serious reinvention with its previously challenged mobiles and infrastructure now driving all the momentum. The telco posted an 11.5 per cent jump in December half net profit to $1bn, hitting expectations, while mobile earnings were up 13 per cent and once-sleepy infrastructure now delivering earnings growth of more than 3 per cent.

Telstra managed to scoop up the bulk of Optus’s disgruntled mobile customers with the lift running in the tens of thousands of customers. In total, the higher margin post-mobile customers increased by more than 63,000 in the December half, resisting a round of price hikes from the telco through the year.

Brady would argue mobile growth also comes back to strategy and long-term investment in the mobile network. The telco is capturing more customers from its retail stores and bringing call centres back to Australia.

It was this confidence in the momentum of mobile and infrastructure and a looming turnaround in business services that prompted the telco’s board to push through a bigger-than-expected 5.9 per cent hike in first half dividend to 9 cents a share. Telstra is now running a payout ratio of 107 per cent, which means it its dipping into its surplus cash to pay investors. This level of payout is only sustainable if everything goes right.

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Scott keeps faith

Rob Scott of Wesfarmers insists the mission for his near $1bn investment in building up a lithium miner and domestic processing plant hasn’t changed a bit, even with the collapse in lithium prices. He points to the patient capital that Wesfarmers can bring to the table to see through any near term volatility while it ramps up production of spodumene concentrate.

The question is just how patient is he prepared to be?

The WA-based lithium mine has come onstream just as prices for spodumene, the rock containing lithium, have fallen some 80 per cent over the past year.

Keeping the faith. Rob Scott of Wesfarmers. Picture Ross Swanborough.

The near-term mood around slowing electric vehicle sales globally are hitting sales. Scott says going into the project there was always expectations of volatility in lithium prices given the immaturity of the market.

“Nothing has really changed,” Scott says. “We expect that we’ll continue to see volatility but our relative cost structure should continue to be very favourable”. He points out the Covaent project, a joint venture with Chilean miner SQM, was never about digging up lithium rock and just selling it offshore.

The end game is about building a domestic processing plant to add value and fill a strategic gap in the global lithium supply chain that is now overwhelmingly dominated by China. Construction continues on the plant, with some spodumene being sold on the spot market, albeit at a loss. “We continue to be positive about the long term fundamentals of our project,” Scott says.

He was speaking as his Wesfarmers conglomerate posted a 3 per cent increase in its December half profit as earnings lifted 1.6 per cent to $2.19bn. The earnings lift was helped by record earnings at discount retailer Kmart. Earnings from WesCEF that houses lithium venture were hit by a drop in ammonia prices. Strong cashflow backed a 3.4 per cent lift in interim dividend to 91c.

More broadly Scott says the results which are likely to prompt a string of market upgrades, show the Wesfarmers model is working - even as the economy is clearly cooling. From brands covering Bunnings, Kmart, Target and now the Priceline pharmacy chain this offers the right mix of resilience and growth.

While much of this comes down to keeping ahead of changing shoppers preferences in Bunnings and Kmart, significant work is also taking place behind the scenes. Scott says a big spend on technology and work practices are now playing a role in keep costs down in a high-inflation environment.

Workplace productivity too is a big focus for the company that counts more than 120,000 employees. Scott says the Albanese government’s new right to disconnect rules represents “unnecessary red tape” likely to push up the cost of doing business.

The rules introduced this month and as they stand, could see employers face criminal charges for emailing, calling or holding online meetings beyond typical work hours. All this is creating massive uncertainty across business. He labels the changes as unnecessary with Wesfarmers already “respectful” of non-work hours.

“The bottom line is that our teams care about our businesses and our customers. And if we contact our team, they genuinely want to help because they want to work for successful businesses,” Scott tells The Australian. Wesfarmers shares ended up more than 4.6 per cent.

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Originally published as Telstra CEO Vicki Brady facing her first big test