Thanks for joining us this morning as we share Spark's full year results for the year ending 30 June 2022. I'm joined today by Spark's Finance Director, Stefan Knight, and as always, we'll leave time at the end of the presentation for some questions. We're really pleased to deliver an excellent result for our shareholders today. While we saw continued COVID-19 disruption and increasing economic volatility during the year, with focused execution of our strategy, we've returned to revenue growth and delivered EBITDA at the top end of our guidance range. The board has declared a total FY 2022 dividend of NZD 0.25 per share, 100% imputed. I'm really happy to share that we're guiding to a higher dividend of NZD 0.27 per share in FY 2023. That will be funded through earnings and free cash flow.
This will be the first increase in Spark's total dividend since 2016 and reflects the confidence we have and the confidence the board has in our strategy and our ability to grow earnings and free cash flow into the future. As we delivered what we said we would in this, our second year of our strategy, we were also focused on maximizing shareholder value and setting ourselves up to invest in future growth through the establishment of TowerCo. As we announced in July, we've come to an agreement to sell a 70% stake in TowerCo to Ontario Teachers' Pension Plan. When that transaction completes, we'll receive around NZD 900 million in net proceeds. We intend to return up to NZD 350 million to shareholders through an on-market share buyback.
This is subject to market conditions at the time, and we may explore other return options. We will then retain another NZD 350 million to invest in future growth. This'll include digital infrastructure investments, for example, 5G acceleration, edge computing, data centers, accelerating our growth in Spark IoT and Spark Health, and investing in emerging technologies. The remaining proceeds will be used to offset increased lease liabilities resulting from our long-term lease agreement with TowerCo. These investment decisions will be made in line with our new capital management framework, and Stefan's gonna speak to that more shortly. Let's now turn to the detail of our FY 2022 results. Revenue increased 3.5% to NZD 3.72 billion. That was driven by standout performance in mobile, new business wins in Spark Health, and ongoing growth in our IoT business.
Mobile service revenue grew 5.5%, with Spark outperforming the market. Data and AI-driven marketing drove a 13% increase in customers on endless plans, while pay monthly, prepaid, and business connections grew steadily as we delivered what customers desired. Following a successful redesign of our broadband plans, we've stabilized our base at 704,000, in line with our strategy to maintain market leadership. While this drove a 4.6% revenue decline to NZD 639 million in a highly competitive market, wireless broadband connection growth of 16,000 helped to offset this impact through avoided input costs. We're on track to deliver our FY 2023 target of 30% of our base on wireless, reaching around 28% by the end of the FY.
Cloud security and service management revenue grew modestly at 0.7% to NZD 446 million and fell short of our aspirations. Our performance was impacted by COVID-19 lockdowns in the first half, which restricted our access to customer sites. We did see some delays in transformation projects, ongoing supply chain disruption, and there were some execution challenges in parts of the business. We are focused on product enhancement, a pricing refresh, and further boosting of our specialist skills in the year ahead, which will support our higher forecast growth of 2%-5% for cloud security and service management in FY 2023. Spark IoT and Spark Health made a strong contribution to revenue growth during the year. Spark IoT revenue increased 22% as connections climbed 75% to 832,000, while Spark Health revenue increased 46%, supported by new national business.
In support, we delivered a successful second season of cricket to remain focused on strategic partnerships to improve returns. When we combine our top-line momentum with ongoing cost discipline, we delivered a 2.8% increase in our EBITDA to NZD 1.15 billion, and that was at the top end of our guidance range. NPAT increased 7.6% to NZD 410 million, and that was as a result of the EBITDA growth I just touched on with Nick, financing, depreciation and amortization, and tax were stable. Capital investment of NZD 410 million was in line with guidance and our target envelope of approximately 10%-11% of revenue. Free cash flow was lower than aspiration at NZD 296 million.
That was impacted by advanced purchasing of inventory and network equipment to mitigate supply chain disruption risks, and then that had a related impact on working capital. We remain confident in achieving our FY 2023 cash flow aspiration of approximately NZD 460 million-NZD 500 million, and Stef's gonna provide more detail on that shortly. Move to slide seven. The results we've delivered across our established and future markets have been supported by the core capabilities we're embedding in the business, which we identified as drivers of market differentiation in our three-year strategy. We are a simpler and more digital organization than we were a year ago, with 102 legacy mobile and broadband plans retired.
Digital journeys increased by 23%, which has in turn delivered a 17.5% reduction in customer care calls and an 18% growth in online revenue. Our data and AI-driven marketing capability continues to mature and can now better predict the needs of around 90% of customer households and make recommendations for more than half of our SME customer base as well. This has increased our campaign conversion by 19%, and it's delivered a 16% improvement in marketing efficiency. We're now extending this capability into business segments. As we deliver these simplified, more digital and more data-driven customer experiences, we are improving engagement with our customer interaction net promoter score up 9 points to +29.
The aspiration we set back in 2020 was to create Aotearoa's smart automated network, and we are on track to deliver through our substantial digital infrastructure investment. We've made solid progress with our 5G rollout. Despite the delays we experienced over several months due to COVID-19 lockdowns, we extended or launched 5G coverage across 12 locations during the year, bringing us to a total of 21 locations across the country by the end of FY 2022. We remain focused on our 2023 calendar target of circa 90% population coverage. However, this remains reliant on timely resolution of the New Zealand government spectrum auction or allocation for both C-band and 600 MHz spectrum, more so for rural.
In addition to the immediate benefits of 5G delivered through increased speed and network capacity, it also has the potential to underpin new B2B use cases that will support productivity, efficiency, safety, and sustainability improvements across a range of sectors. We are accelerating our understanding of these opportunities and commercialization of new use cases. We've built Aotearoa's first 5G standalone core network with a number of multi-access edge compute trials underway. Our Kapiti data center expansion is now over 85% contracted, and it's on track for completion in 2023. While our Mayoral Drive upgrade was completed this month. We have significantly boosted capacity and resilience through the build of our Optical Transport Network 2.0. We're pleased to see the Southern Cross NEXT fiber cable launch, almost doubling international capacity to New Zealand.
All of these achievements are underpinned by a sustained focus on building a high-performance inclusive culture where all of our people can thrive. We're pleased to maintain high levels of engagement despite COVID-19 disruptions with our employee net promoter score at +70. We've achieved 40/40/20 gender representation at the board, leadership squad, and senior leadership level. We're pleased to see our female representation increase from 42% - 47% in senior leadership roles. We also made significant progress to closing our median pay gap, which reduced from 28%- 24%. Our focus on diversity extends well beyond gender, and we're also pleased to increase the understanding of Spark's ethnic diversity during the year. With the percentage of Spark people sharing their data with us increasing 30 percentage points to around 50%. The key enabler of targeted action to improve representation in the future.
We shift to slide eight. We've continued to mature our sustainability practices to support New Zealand's transition to a low-carbon economy. We know the win-window to take meaningful action on climate change is closing fast and that every business has a role to play. We've established an emissions reduction and energy efficiency program, which helps drive action against our science-based targets of a 56% reduction in Scope 1 and 2 emissions by 2030, and that's from an FY 2020 baseline. Over the past year, we saw a 15% reduction in emissions through a combination of grid decarbonization and energy efficiency improvements within Spark.
While positive, emissions remain higher than our FY 20 baseline, and to meet our target, we must continue to pursue efficiency gains while decoupling our growth from emissions by linking our energy procurement to new sources of renewable electricity, which is a focus for the years ahead. We know technology will play a critical enabling role across the economy as businesses seek efficiencies and adapt to climate change. We can already see this through our Spark IoT business with over 50% of its FY 22 revenue linked to sustainability solutions. We are acutely aware that as digitization accelerates further, it will widen our already unacceptable digital divide in Aotearoa.
A long-term focus on lifting digital equity remains a priority, and we're really pleased to grow our not-for-profit broadband service, Skinny Jump, by around 33% during the year, supporting over 23,000 households that would otherwise have been excluded from the digital world. If I turn now to our FY 2022 indicators of success. We are pleased to have met or exceeded the majority, building the capabilities that are delivering improved customer experiences and market differentiation, outperforming the market in mobile, accelerating future market growth, and maintaining our cost discipline while building a sustainable future. While we saw positive wireless broadband connection growth overall, when we remove our Skinny Jump base, the increase in our commercial connections fell short of our aspirations as delays to our 5G rollout during COVID lockdowns slowed some of our momentum.
We picked up speed quickly in the second half and expect our progress to continue to accelerate across FY 2023. Noted earlier, our cloud security and service management revenues were also impacted by a range of factors, and we have a clear path forward to return to high levels of growth in FY 2023. Finally, our aspiration to have five customers onboarded to Spark Health digital platform Tui Ora is on track but slightly behind schedule, with customers being onboarded now. As we look ahead, we're firmly focused on delivering what we said we would in the final year of our strategy. We're well placed to adapt to an inflationary environment with resilient products and services well-positioned in the market. We're seeing an acceleration in technology convergence as 5G, Multi-access Edge Compute, data and AI, IoT, and cloud computing combine to deliver powerful solutions to business problems.
This is opening up new commercialization opportunities that Spark is already exploring in the market. Our investment in Mattr, which specializes in digital identity and verifiable data, reached the stage of commercialization during the year, with Mattr supporting the creation of the government's COVID-19 vaccination certificate and securing additional contracts in offshore markets with Swiss Post and the Association of Registrars of the Universities and Colleges of Canada around educational credentials. Okay. To summarize, it's been a big year. Really proud of what the Spark team has delivered. Got strong market momentum, and we're on track to deliver our FY 2023 strategy ambitions. We are maximizing shareholder value, which is great earnings and free cash flow.
As we better realize the value of our passive mobile assets through the TowerCo transaction, we're very happy to close out FY 2022 ranked number two against international peers for total shareholder returns with a compound annual growth rate of around 12% for three years. As we look ahead, we're excited about the opportunity we now have to harness the power of technology to help our customers transform, to help Aotearoa transform to a low-carbon economy, and to keep delivering great experiences for our customers and great returns for our shareholders. I'm now gonna hand over to Stefan to talk you through our updated capital management policy and the financials. Thank you, Stefan.
Thanks, Jolie, and good morning, everyone. I'm gonna step through the updated capital management policy and framework and how we'll apply that framework to the cash flow we're generating and to the proceeds from our recent TowerCo deal. I'll then move on to the financial summaries of what's been a really big year. Let's get started. The board has reviewed Spark's capital management policy and implemented a new framework that aims to grow long-term shareholder value through disciplined investment, while returning excess capital to shareholders, and maintaining financial strength and flexibility. In order to maximize shareholder value, the policy focuses on growing dividends via growth in earnings and sustainable free cash flow.
The board has introduced this new policy to provide investors with greater clarity around the long-term approach to dividends, while noting that we'll continue to provide annual dividend guidance on a cents per share basis as we do today. The new dividend policy will be to pay out 80%-100% of free cash flow on a long-run basis. We've revised the definition of free cash flow to reduce the volatility associated with the current definition. Excess capital will be returned to shareholders using capital management options such as on-market buybacks and special dividends. The new policy also focuses on investing for growth, both organically and via M&A, that earnings per share accretive over time.
The policy outlines principles for investment to ensure that any funds invested are aligned to strategy, are NPV positive, deliver an ROI greater than Spark's hurdle rate in years 3-5, and operate within a CapEx to sales ratio of 10%-11% in the long run. While noting there will be times that we'll exceed this ratio. Lastly, the new policy will allow Spark to maintain financial strength and flexibility with a commitment to an investment-grade credit rating. Our current credit rating is an A-, but the policy provides the flexibility to move to a BBB+ should it be required to support growth in line with the investment principles. Slide 14 outlines how the framework will be applied in FY 2023. As far as free cash flow growth and TowerCo proceeds will be used in accordance with this new policy.
We look to FY 2023 with confidence in our ability to grow free cash flow to NZD 460 million-NZD 500 million, which funds our ordinary dividend. Such, in line with our new framework, we're guiding to a total FY 2023 dividend of NZD 0.27 per share, 100% imputed. In addition, following the completion of the TowerCo transaction, we intend to return up to NZD 350 million to our shareholders through an on-market share buyback. However, that will be subject to market conditions at the time, and we may investigate alternative return options. We currently anticipate completion of the TowerCo transaction in the first half of FY 2023 once OIO approval is received, and we look to begin shareholder returns after that.
In addition, we intend to retain another NZD 350 million for investing future growth opportunities such as digital infrastructure, scaling our Spark Internet of Things, and Spark Health businesses, and new commercialization opportunities from emerging technologies. The remaining funds will be used to offset debt headroom resulting from the increased lease liability associated with our long-term agreement with TowerCo. Following the completion of the TowerCo transaction, we expect our net debt to EBITDA ratio to reduce before increasing again as we return funds to shareholders and investments are made. We think this approach strikes the right balance between returning capital to shareholders, while also retaining funds to invest in growth and maintaining financial flexibility for future opportunities. Moving now to the results for the year and the summary of the key financials as set out on page 16 of the results presentation.
Spark generated revenue of NZD 3.72 billion, EBITDA of NZD 1.15 billion, and net profit after tax of NZD 410 million. Free cash flow was NZD 296 million, and I'll talk to this in more detail shortly. We've confirmed the H2 FY 2022 dividend at 12.5 cents per share, fully imputed and in line with guidance. Let's now go through the key elements of those in a bit more detail, and I can provide a bit more color on them. Starting with an overview of the key movements in revenue as outlined on page 18. We're really pleased with the return to top-line revenue growth in a challenging environment. Mobile performance was once again the standout, and we secured the highest revenue and connection growth in market.
Service revenues grew at 5.5% and was driven by growth in pay monthly connections, which were up 51,000, and prepaid connections, which were up 30,000. It was particularly pleasing to see ARPU lift across the board with pay monthly up NZD 0.46, or just over 1%, and prepaid up NZD 1.48 or around 10%. Procurement revenues were the largest driver of revenue growth, with significant spike in health forms and ongoing demand for hardware and software to support working from home. Cloud security and service management revenues grew 0.7%, which was well below our aspiration for 5%-8%. Cloud revenues grew 1.7% as we saw strong demand for public cloud. However, this was offset by private cloud, where we continue to see competitive pricing pressure.
While we had expected service management revenues to bounce back more quickly post the 81 lockdowns, the rate of growth was slower than expected and further restrained by delays to transformation projects and ongoing supply chain disruption. Our broadband revenues were down NZD 31 million or 4.6%, reflecting the impact of redesigning our plan lineup to be more competitive. Our future markets of health and IoT grew strongly and now a material driver of growth. It's worth noting our voice revenue declines included a cycle of non-recurring wire maintenance charges as we fully accounted for these refunds in FY 2021. Stripping out the impact of these changes or these charges, our underlying voice revenue decline of around 12% is in line with previous trends.
If we shift focus to look at the operating expenses, they grew 3.9%, and that was primarily driven by increased procurement costs and in line with the associated revenue increases. Product costs, excluding procurement, were broadly flat, which is a really pleasing outcome in a high inflation environment. Labor costs were also broadly flat and actually slightly down if we've removed the impacts of the acquisition of Connect 8, which completed during the year. The decrease in operating expenses was driven by lower network support costs and improved marketing efficiency. We continue to manage the impacts of inflation through the use of our multi-brand strategy, which ensures we've got compelling brands and offers for all of the segments of the market in price-conscious times.
We've refreshed pricing where appropriate and continue to target opportunities to automate our processes to drive cost efficiency, while also running our usual targeted cost reduction programs. With revenues up NZD 127 million and costs up NZD 96 million, we saw EBITDA grow by NZD 51 million, which is at the top end of our guidance range and a very pleasing outcome. The growth in EBITDA mostly flowed through to NPAT, which was up NZD 29 million or 7.6%. Depreciation and amortization remained broadly flat, and while finance income was down, so too was finance expense, meaning net interest was broadly flat too. There were no Southern Cross dividends received during the period, but with the Southern Cross NEXT cable now live, we expect to see a return to dividends from FY 2024.
Looking ahead to FY 2023, we remain on track to deliver the revenue and cost aspirations that we outlined as part of our three-year strategy. In mobile, we expect the market to continue to grow, and we're well-placed to capitalize on that growth. As borders reopen, we expect to see roaming revenues return to around 60%-65% of pre-COVID levels and have built that assumption into our FY 2023 aspiration for mobile service revenue growth of 5%-8%. The broadband market is expected to grow modestly as borders open and we see immigration return. Our ambition is to maintain our connection base and share in a highly competitive market. We're on track to achieve our ambition for 30% of our customer base to be served via wireless technologies, and this continues to deliver significant input cost savings.
When we look ahead for cloud security and service management, we expect public and private cloud markets to continue to grow, and our focus will be on adding additional functionality to private cloud to differentiate it from public cloud more effectively, also refreshing our pricing to ensure it's market competitive. We expect growth of 2%-5% in FY 2023 as we lay the foundations for a return to higher growth that is more in line with market trends in future years, particularly as our new data center comes online and starts to generate incremental revenues. The outlook for future markets of health and IoT is strong. In health, we expect to see growth of 10%-15%.
While this is lower than our FY 2022 growth, it remains a significant opportunity and takes into account the material reforms being undertaken across the sector over the next year. IoT connections are expected to grow to 1.2 million during the year, and that in turn will support strong revenue growth in this space. Moving now to CapEx and free cash flow. FY 2022 CapEx was NZD 410 million, up NZD 10 million compared to the prior year spend of NZD 400 million, which included NZD 51 million in spectrum. This was in line with guidance, and the key drivers of investment are highlighted on the slides. In FY 2023, we expect to spend around NZD 410 million in CapEx again, with 50-60 million of this focused on growth CapEx.
Free cash flow for FY 2022 was NZD 296 million, which was down NZD 137 million on the prior year. This is below our aspiration of NZD 420 million-NZD 460 million and reflects NZD 129 million of supply chain and temporary working capital impacts. Supply chain impacts of NZD 53 million were primarily felt across CapEx and inventory, where we purchased equipment early and in greater volumes to ensure greater holdings were available onshore. Also impacting free cash flow was NZD 76 million of temporary accounts payable and accounts receivable impacts, where we saw late receipts from some large wholesale customers and some significant invoices were paid early as we migrated to a new ERP.
These timing impacts have mostly unwound in July. Looking ahead to FY23 and in line with the new capital management framework set by the board, we continue to focus on funding the dividend from free cash flow and aspire to between NZD 460 million-NZD 500 million, supported by ongoing EBITDA growth. Accordingly, we have increased our dividend guidance for FY23 to NZD 0.27 per share. It is worth noting we made some adjustments to the way we define free cash flow, removing the impacts of working capital to provide greater stability, while also separating out growth CapEx, which will be funded in the near term from the proceeds of the TowerCo transaction. Further details are included in the appendix of the investor presentation. As at 30 June, the net debt to EBITDA ratio was 1.3 times and consistent with S&P BBB credit rating.
As we enter into a higher interest rate environment, we're well protected and expect the rising interest rates to only have a modest impact in the near term, with only 35% of our debt portfolio subject to variable rates and only one maturity during the period. Moving on to our FY23 indicators of success. To help investors monitor progress, we've laid out the critical factors that will influence business performance over the coming year, and we'll report on our progress against these measures at halfway and at the full year. The majority are self-explanatory and consistent with success factors we've laid out in the past. Moving on to guidance. For FY23, we have set guidance subject to no material change in operating outlook.
The EBITDA of NZD 1.185 billion-NZD 1.225 billion, and that excludes any gain on sale from the Telco transaction. CapEx of around NZD 410 million and a total FY23 dividend of NZD 0.27 per share fully imputed. Lastly, it's worth noting that we're in the final year of our three-year strategy. We're very pleased with the strong financial returns and shareholder value created over the last two years. It's been underpinned by the core capabilities and high-performance culture we've been building, which continue to differentiate Spark in the market. We continue to see strong momentum in our future markets, and investments we're making in digital infrastructure will create new opportunities for growth. We'll be developing a refreshed strategic plan, and we'll share our next three-year strategy at an investor day towards the end of this financial year.
That now concludes the formal component of our presentation, and let's move to questions. Operator, can you please introduce the first question?
Thank you. If you wish to ask a question, you will need to press star one and wait for your name to be announced. Your first question comes from Arie Dekker with Jarden. Please go ahead.
Oh, good morning. First one just on the EBITDA guidance, which, you know, is in terms of growth is stronger than what we've seen in recent years. Just wanted to sort of explore a few of the drivers of that. In terms of the EBITDA growth, how much would you put down to the reversal of some of the COVID impact you've had over the last couple of years? Thinking in particular, roaming and some of the pent-up cloud work, that sort of growth there, slower in FY22 in particular.
Oh, hi, Arie. Good morning. When you look at that sort of guidance ahead, I think roaming and some of those impacts, as we just talked about, would be a reasonable component of that. As we said in the was over earlier, around about 65%, we're anticipating 65% return of roaming into results. We're obviously only a month in, but we have seen more than a month in, two years. But we have seen that through the July period. For us, that's a reasonable component of that shift.
In terms of overhead savings, do you expect them to contribute meaningfully in the growth in EBITDA this year? You know, thinking particularly around labor or do you think it's more likely in the inflationary environment and with some of the stuff that you're going on that you'll be working hard to keep that sort of flat again?
Yeah, hi, Arie. Stefan here. Look, if you look at our cost base, basically the way we think about it is you've got about 20% of the cost base that is associated with regulatory inputs or regulated price inputs. We're able to manage that as we have already by passing some of that cost through in pricing for broadband plans. Another 35% of the cost base is tied up with long-term supply contracts. While there will be inflationary pressure, it's phased in over multiple years as those contracts come up for renewal. Where we see the main potential impacts of inflation will be around labor and discretionary costs.
We have programs of work underway there, mainly around doing things like automation of some of our processes to help drive greater levels of efficiency. I think one of the things we would notice that we've got a pretty strong record of managing cost reduction programs. Obviously we'll be managing that pretty tightly this year in a higher inflation environment. I think that will kind of help offset the inflationary pressure and therefore kind of guide to a, you know, cost being more flat. Yeah, that's the way we're thinking about it.
Sure. No, that's helpful. Then just in terms of broadband, which might be a little bit of a net offset, obviously you called out the reset and plans which, you know, is part of stabilizing the base. How much more of the impact we sort of saw in FY23 too do you think will flow through FY23 in terms of negative pressure on revenue and margins?
You'll still see a bit flow through in terms of that shift because it happened partway through the year. At the same time, we've obviously also lifted our price based on the higher input cost as well. You've got a combination of factors there.
There was a more stable base as well. Yeah.
Yeah.
Sure. I'm just moving to the dividend. I guess, in particular, just how you're gonna be approaching this new concept of the growth CapEx going forward, and sort of separating out from maintenance. I mean, perhaps if we sort of, you know, particularly sort of looking at 2022 and 2023 as examples, you've called out NZD 25 million, which relates to accelerated 5G investment, I think.
Yeah.
I mean, when I look at your mobile network CapEx in 2022, you know, the reality is, if you look at the average over the last four years, it wasn't substantially greater in 2022 than the average over the last four years, certainly not NZD 25 million higher. So how are you gonna sort of separate out what is growth investment? You know, particularly also given, you know, the top line and EBITDA has tended to be, you know, reasonably low single digits sort of growth.
The way we're thinking about it, if you look at FY 2022, as you know, NZD 25 million of it was related to what we call 5G acceleration. If you look back over the last four years, there have been various other times where we've had peaks. You know, one of the notable ones would be investing for Rugby World Cup. I think, you know, what we tend to think of mobile as being more on a long-run basis of spending around that NZD 100 million mark would be a kind of more common place for us. Hence why we called out the 25 as acceleration. The other component of it was around NZD 30 million of investment in data centers, being both the upgraded Mayoral Drive and the extension at Takanini.
When you look forward to FY 2023, that will also be a majority of the NZD 50 million-NZD 60 million that we've indicated there is focused on data center spend. The way we kind of think about it is that what we call maintenance CapEx is more what would be kind of our more traditional BAU type activity, and then those large lumpier investments or accelerations are the things that we'll put into the growth CapEx line.
We share that.
Would you-
We will provide further detail and share that, you know, each period as we update.
Sure. Okay. I'll actually just also in terms of that change in approach, you know, beyond FY 2023, do you think it'll impact your ability to fully impute the dividend?
No, because when you look forward, the ultimate way we're trying to do it is driving free cash flow growth, and that's driven by earnings growth. Provided the earnings are growing, then you're generating taxable earnings, which in turn provide you the imputation credits to support the dividend.
Not that we're guiding beyond FY-
Well, 23, really. Yeah.
Okay.
Yeah. I guess the only problem you sort of foresee is that if you're still gonna have some of the depreciation, that you'll be, you know, depreciating for tax purposes, but excluding the CapEx and that it's not gonna sorta create issues.
No. Not that we believe.
The other thing then, I guess you're sort of also indicating is that, you know, the portion of the CapEx spend sort of, you know, attributable as sort of growth, you would not expect that to be meaningfully higher than sort of the amount you've kind of called out for 2022, 2023. That sort of 10%-15% of the total envelope.
What we have said is that we've got NZD 350 million of that we've retained for investment, and we'll be working through opportunities in line with our investment criteria. At that point, when we identify opportunities for that, then we'll provide further updates to the market. What we've got line of sight to today is kind of that NZD 410 million, which is where the guidance is at. Arie, probably at this point, just in fairness to other some of the others on the call, we might move on to the next set of questions, just so that we make sure we give everyone a chance to ask.
Sure. Thank you.
Thanks, Arie.
Thanks, Arie.
Your next question comes from Kane Hannan with Goldman Sachs. Please go ahead.
Hey, guys. Appreciate you passing it on. Maybe just the free cash flow guidance, I suppose in 2023 on your old definition, you know, sort of NZD 400 million-NZD 450 million. Can you talk about how that compares to the NZD 500 million target you've said you're on track for in February? Are we thinking about a working capital tailwind into FY 2023?
Under the old methodology, yes, there would've been a working capital tailwind, but also that working capital is driving quite a level of volatility, which is a big part of the reason why we changed the definition because it, you know, as I called out earlier, a portion of that happened in the last month of the year and then unwound in July. That doesn't actually represent the long-run free cash flow of the business, which is why we moved to something more in line with peers and to take out that volatility.
Yeah. Perfect. Just the dividend policy as well. Just, I suppose, how I think about long-run basis. Are you thinking where your free cash flow will be two or three years out? I appreciate the comments around, you know, franking and imputation, but just trying to understand how you're arriving at those numbers.
When we to that kind of 80%-100% on a long-run basis. What we're trying to signal is that what we believe is a sustainable position that we can support. What we've noted is that every year we will give actual dividend guidance on a cents per share basis that will reflect the current cash and debt positions and everything else that we take into account when discussing with the board. We'll give an annual position on that. That's the way we think about it over that longer run period, because we think that's a sustainable position.
Okay, perfect. Maybe just one last one. Just, I mean, how far away do you think we are before the net debt to EBITDA ratio stabilizes?
Look, I mean, that's a good question. Obviously, it's gonna come down in the near term because of the proceeds. It will ultimately depend on our ability to return those proceeds through the on-market buyback and then the investments we make, which will probably be over a few years before it really is back to a more normalized level, I would say.
Perfect. Thanks, Stef.
Thanks, Kane.
Your next question comes from Entcho Raykovski with Credit Suisse. Please go ahead.
Morning. My first question is, hopefully a pretty straightforward one. Just interested in how much of that NZD 129 million of supply chain and temporary impacts you're likely to see reversing in FY 2023?
We'd expect the majority of the working capital and I think a chunk of the supply chain impacts, but not necessarily all. You know, it's very hard to read global supply chain issues a year in advance. At this stage, our intention will be to make sure that we have adequate supply of both network equipment and inventories like CPE systems and modems and things onshore. We'd probably run slightly higher inventory.
Okay, got it. Secondly, just the thinking behind putting in place a buyback as opposed to a special dividend, sort of what are the factors which went into the decision-making?
Ultimately we looked at what is the most effective way to return those proceeds to shareholders. At the moment, our intention is to do that via an on-market buyback, but clearly it's subject to market conditions at the time. Obviously we have to make sure we have completion first. We'll continue to assess against those market conditions and we always reserve that right to pursue alternative options if the market conditions aren't suitable.
Got it. Sorry if I missed this, but what's the exact quantum of the lease liability that you expect to crystallize as part of the TowerCo sale?
Look, we think that'll be around about NZD 350 million net change to the balance sheet. The actual lease liability will be a bit more than that, but we already have lease liability on there, which will disappear because some of those assets transfer now to TowerCo. The net impact is around NZD 350 million. When you align that with some other adjustments that S&P we believe will make and other changes to headroom, we've retained around NZD 200 million of the proceeds to offset that increase in the lease liability.
Okay, great. Just a final one. Do you envisage having to contribute any further capital to TowerCo? I guess there's a fairly aggressive build commitment of 670 additional sites. Just wondering whether that will be internally funded or whether you might need to chip in.
No, it'll be internally funded. We won't need to provide additional funding.
That's great. Thank you.
Your next question comes from Wade Gardiner with Craigs Investment Partners. Please go ahead.
Hi there. Just a couple from me. Your comments on the buyback versus the special and retaining the right to change the approach. Can you give a bit of color on what you mean by market conditions and sort of what price you think, you know, a buyback is less attractive or special is more appropriate? Hi, Wade. Look, we're not gonna go into any level of detail on that. I think we'll just stick with the statements we've made today, which is that we'll assess it relative to the market conditions at the time.
Just a couple of things. Around, you know, you talked about this NZD 350 million to, you know, accelerate CapEx, and in particular, the 5G rollout. What would that sort of look like on a, say, a two to three year view in terms of the sort of the population targets or et cetera?
If you stand back and think about the population targets, we put out a 90% population coverage by the end of calendar 2023. Obviously, in this last year, we've had the implications of some of the COVID restrictions in which there were several months for which you couldn't actually do proactive rollout. We're looking to accelerate through the next, I guess 18 months to the end of the calendar year. That would require investment there. When we look holistically at the digital infrastructure, though, we're talking around 5G, but also around data centers that we're doing in IoT and the network sphere, but also other emerging technologies. It'll be a combination of all of those sectors we consider in terms of investment levels.
Right. Okay. Can you just clarify your guidance and the impact of the TowerCo sale? My understanding is essentially because most of that site there is leased assets. It was sort of already below the line anyway, and so the TowerCo sale doesn't really impact your EBITDA number, you know, in relation to the guidance that you've given. There's not a like for like adjustment we should be making.
Correct. If you look at the appendix to the-
Slide 30 of the presentation has. I think it's slide 30, isn't it? Shows you what FY 2023 and 2024 will look like, the implication on that from the ongoing operations of TowerCo. It shows it's pretty minimal.
Okay, cool.
In terms of impact. This is aligned. Obviously, there'll be a one-off gain, though, on the sale which is obviously outside the guidance that we talked about here.
Okay. Cool. That's all for me. Thank you.
Thanks, Wade.
Thanks, Wade.
Your next question comes from Aaron Ibbotson with Forsyth Barr. Please go ahead.
Yes. Hi there. Good morning. I've got a few questions. My first one was just, you sort of kept your long run CapEx guidance of 10%-11% of revenues. I assume this includes growth CapEx. At least I couldn't see anything that suggested the contrary. I just wondered if there's any chance you can share with us. My question basically then is, what would it be for maintenance CapEx and particularly considering lack of tower investments? Would you be willing to give a slightly lower number as an idea?
Like, one clarification. Sorry, can I just make one clarification there. Yes, that is correct in broad terms, but that may be the whole point of the growth CapEx, because sometimes it could be lumpy. There may be an individual year that has a higher percentage, but on average, the 10%-11% is the long run capital.
Yes.
CapEx for. Thank you.
Yes. That has been crystal clear this morning. But I just was hoping that you might be willing to share a maintenance CapEx number or, you know, excluding growth that you see as a steady state.
You can see that, in FY 2023, it's around the NZD 350 million mark. Then I think a better way to think about it is that, while we've got those additional proceeds, the overall CapEx envelope will increase, but on a long run basis, 10%-11% for total CapEx for sales is kind of still a good long run assumption to work towards.
Okay. Thank you. Just to clarify your answer to Wade's question on the TowerCo. These numbers we see on page 30, have they been included in your guidance for half of the year or something like that?
Yes, they have.
Okay, fantastic. Finally, just a question on your cloud security and service revenue growth of 2%-5%. I mean, considering the comments you're making about, you know, COVID having had an impact and general lockdowns in sort of this FY 2022 just reported. It does seem a little bit low, considering we're sort of lapping a quite difficult year. Is it conservative or is there some continued headwinds that you're sort of taking into consideration?
Aaron, I think it's worth kind of giving a bit of context. If you look at FY 2022, as you note there has been a number of factors which have driven it. Lockdown and some supply chain issues, but also there is still price pressure in this market and particularly in the private cloud space. When we look ahead, part of the drive or the change we need to make is to continue to refresh that pricing. We're pretty clear that to reestablish or to get the growth that we want, we need to refresh the pricing, add some functionality to the portfolio set, and also bring on the right skill capability in a tight labor market.
Those are the factors which mean that the growth rate is slightly lower than you've seen in other years as we allow time for that to rebuild.
Okay. Thank you. That's clear. That was it for me.
Thanks, Aaron.
Thanks, Aaron.
Your next question comes from Brian Han with Morningstar. Please go ahead.
Thank you. Just a couple of questions. Firstly, can you please talk a bit more about the increase in mobile gross margins, the sustainability of the fall in those product costs? What do you think your underlying mobile EBITDA margins are?
Maybe if we just break them into the different components. If you think about the EBITDA, the mobile margins, effectively what we've seen is the use of both data and AI to better target and understand the products and propositions our customers are looking for. Certainly in the consumer space has worked well, and that's meant that we're only offering those services that customers want and therefore is a lower cost there. We continue always to be looking at how we create efficiencies in our overall process. All of those things, when you sit back and think about mobile margins, will continue to exist ahead. We also touched on the fact that we have roaming and retailing as well and so that will have an improvement on margin as well.
If you can add, if you want to add something.
No, I think probably just the only other thing we've done is around to manage margin. We're also very mindful of how we manage our value-added services and making sure that the best that we support around the capabilities that our customers are using. No, nothing further on that.
Just secondly, on mobile, can you please talk about the drivers behind the specifically prepaid ARPU increase? I mean, this is the second consecutive year-on-year of, you know, new double-digit ARPU growth in prepaid.
We're seeing that broadening of people searching for data in the same way that we see it in our pay monthly base as well. On prepaid, it's greater data usage, which is leading to that increase in ARPU. Yeah, that's the main driver.
Finally, Stefan, just a little question for you. Did you change how you calculate the contribution margin for cloud and security?
No. Yeah. Maybe it's a conversation we can take offline if you wanna go through it in more detail, but no, we haven't changed anything in terms of contribution margin there.
Okay. It just seems they are 400 basis points higher, but yeah, I'll take it as well. Thank you.
Thanks.
Your next question comes from Phil Campbell with UBS. Please go ahead.
Yeah. Morning, everyone. Just a few questions from me. The first one, Stefan, was just I think it's one of the slides talks about the possibility of relaxing the credit rating to BBB+. I was just wondering if you can give us a bit more detail around when you think that would happen and what would kind of cause that to happen, and maybe some of the thinking about why, because you have been rated obviously to an A- credit rating for quite a while.
Yeah. Look, you're right. We have had A- for quite some time. You'll see that obviously our new policy is based around financial strength and flexibility. We noted there that there's the option to move to that. If you look at the reality of where we are today, we obviously just, you know, once this TowerCo transaction completes, we'll obviously have a significant amount of proceeds. It's really more around creating flexibility, but also being clear that at this point in time, there's nothing on the horizon that would see us moving away from that in the current horizon.
Right. Just, another question just on mobile, just in terms of 5G. I'd just be interested in, I suppose a couple of things on 5G. One is, you know, when are we expecting an update from the government in terms of the 5G spectrum allocation? And then the second one is just the 90% population target by the end of next year. Can that actually be achieved on 350 MHz spectrum, or does that assume that you're refarming some of the 700 MHz spectrum?
Yes.
Yes.
Phil, on both of those questions, we don't have a definitive date when we can expect an announcement from the government. They understand it's very important for us in terms of continuing the rollout to the point of can you do it all on the 350, 600 MHz and other of those licenses are important to refarm for when you think about rural capacity and coverage. Those are important considerations in terms of achieving that 90% range.
Right. Gotcha. I suppose just, obviously one of the key products with that 5G rollout is gonna be wireless broadband. Obviously sounds like the modem prices.
Yes.
are still pretty high. Like, what's your kind of expectation in terms of those modem prices and when you can be a bit more aggressive in terms of that 5G wireless program rollout?
I think with all technology, what you see is it reduces over time as take-up lasts. Of course, globally, we would be more competitive in the global outlook on that. It isn't holding us back per se. It's probably more linked to the ability to roll out and launch in different markets and keep moving on that and the locations. We've talked about what we're doing there and the acceleration we're already seeing this year. We're looking at driving that through. Like any time you're adding new services to the marketplace too, it's always about tuning it and making sure it's outward in the right way. That's been a balance that we're learning over the last 12 months. You can see we're also starting to trial standalone as well.
We did that in rural with UGG license, so with following the mm wave spectrum. For us, it's just a continuation of this growth and giving the opportunities that exist out there, particularly for enterprise, if you think about that.
Sorry, just one last very last question just for Stefan, is in terms of coming up with the NZD 350 million in terms of the share buyback, can you just kind of walk us through you know the thinking around kinda how you come up with that number? Because obviously it looks as though the other NZD 350 million is earmarked for growth. You know, obviously you've got NZD 50 million-NZD 60 million earmarked this year. But yeah, just be curious to see you know whether we could see any changes in that 350 as you know depending on what the growth CapEx profile is like over the next few years.
When we look at the proceeds of broadly NZD 900 million, and as I mentioned earlier, we recognized early on that we'd need to retain a bit of kind of NZD 200 million to offset the lease liability, which then left us with broadly NZD 700 million of surplus proceeds, I guess you'd call it. We based on the new capital management framework, we looked at how do we make sure that we maximize value for shareholders. We're also retaining funds to invest for growth. We looked at precedent transactions. We got some external advice, and we felt that a 50/50 ratio represented a fair balance between meeting the needs of all of those our objectives.
That was kind of the thought process we went through around aligning as to how we divvy up those funds, so to speak.
Maybe just following on from that earlier question, 'cause again, I suppose, it's quite interesting around the credit rating changes and because based on these metrics, basically the net debt to EBITDA ratio is actually going down in the short term. Yeah, it's just, I suppose it's interesting that you are potentially rating to BBB+ when you're gonna be well within an A-, aren't you?
I think you know, maybe to set expectations. What we've said is a set of principles and policies as we look ahead that should serve us far more than one or two years. I think all we've indicated there that investment grade rating will always be important to us. What we are saying there is if there were growth opportunities or other things that we saw that we felt we could get an appropriate return, then we will consider a movement. It's not an indication that we are moving today or next year. I think that's probably just a differentiation I would make. It's just more that we would be open if we saw the right growth options.
Okay, great. That makes sense. Awesome. Thanks so much for that.
Okay, thanks.
Your next question comes from Lance Reynolds with Aspiring. Please go ahead.
Hi, guys. Thanks for the call. Just a question on top line. Historically, the company in its various forms has always talked about that kind of zero real, maybe a little, maybe a little bit backwards in real terms at the top line. I see now inflation's up 7% year to date, and your revenue is up 4%. When you look forward, has the strategy changed given that payout ratio? Are you still targeting to try and hold inflation or just come below it at the top line?
Hi, Lance. Look, I don't want to get into a position where we're trying to give revenue guidance or anything further in FY 2023. I think what we've previously said is that we still see good opportunities for revenue growth across our key markets and our future markets. As our voice business becomes a smaller component, then those headwinds become a bit less. You know, our aspiration has been always around kind of what we call small D kind of growth. Definitely still to keep that top line in growth. Yeah.
The last time you guys mentioned long-term targets, and I'm assuming they haven't changed because you haven't restated them, was it like something 0%-2% nominal revenue growth? Am I wrong there?
Uh, we just-
0 real.
That's right. That's right.
Yeah.
Yeah.
Okay. That's cool. Thanks. Thanks very much.
Yeah.
There are no further questions at this time. I'll now hand back for closing remarks.
That's all. Thank you everyone for the call.
Thank you for having us.