Chorus Limited · NZX:CNU
Chorus — FY2020 Earnings Presentation
52 slides from Chorus's earnings presentation, Aug 24, 2020
Slide 1: FY20 Full Year Result
FY20 FULL YEAR RESULT 24 August 2020
Slide 2: Disclaimer
Disclaimer This presentation: • Is provided for general information purposes and does not constitute investment advice or an offer of or invitation to purchase Chorus securities. • Includes forward-looking statements. These statements are not guarantees or predictions of future performance. They inv
Slide 3: Agenda
Agenda JB Rousselot, CEO > FY20 overview, COVID-19 impact 4-7 > UFB rollout and uptake 8-12 David Collins, CFO > Financial results 13-17 > Capex 18-20 > FY21 guidance and UFB2 update 21-22 > Capital management, FY21 dividend, debt 23-28 > Regulatory update 29-31 JB Rousselot, CEO > COVID-19 and broa
Slide 4: FY20 overview
FY20 overview 4 24 August 2020 FY20 FULL YEAR RESULT
Slide 5: Our network passed its biggest test in FY20
Our network passed its biggest test in FY20 COVID-19 proved the value of fixed line network capacity 5 24 August 2020 FY20 FULL YEAR RESULT
Slide 6: Our response to COVID-19
Our response to COVID-19 We implemented a range of initiatives to support community, industry and our people Price reductions 10,000 free $2 million relief on 1Gbps and education fund for retailer small business connections bad debt plans Fees removed to Ongoing CPI increase enable temporary investm
Slide 7: COVID-19 had substantial impact on field activity
COVID-19 had substantial impact on field activity Fibre installations (NZ wide) 20,000 > Lockdown constrained fibre rollout and uptake FY19 FY20 FY21 ▪ UFB2 rollout halted 18,000 ▪ restrictions on non-essential activity reduced fibre 16,000 installations by ~15k 14,000 ▪ reduced installations and ma
Slide 8: Significant lift in customer experience in FY20
Significant lift in customer experience in FY20 Fibre installations and customer 167k fibre installations (FY19:186k) experience 200,000 8.5 ▪ lifted customer satisfaction with installation Installations (LHS) 180,000 8.3 from 7.7 to 8.1 exceeding target of 7.9 160,000 Customer satisfaction (RHS) 8.
Slide 9: UFB uptake reaches 60%; rollout 88% complete
UFB uptake reaches 60%; rollout 88% complete Uptake Chorus UFB uptake by programme 90 > UFB uptake increased from 53% to 60% within completed footprint 80 ▪ uptake in UFB1 areas grew from 54% to 63% 70 ▪ uptake in UFB2 areas grew from 23% to 37% % uptake (note: uptake includes some UFB2 areas that h
Slide 10: 1Gbps plans grew 98% to 115k
1Gbps plans grew 98% to 115k 141,000 mass market fibre connections Total mass market fibre uptake by plan type added in FY20 (FY19: 166k) 100 ▪ 1Gbps connections grew from 10% to 16% Business/Education plans 1Gbps $60 p.m. $56 p.m. 90 from 1 July of connections (58k to 115k) 200Mbps $55 p.m. $56.38
Slide 11: Connection changes by Zone (indicative)
Connection changes by Zone (indicative) > Chorus UFB zone: 34k broadband growth more than offset copper voice disconnects of 29k. Fibre growth Change in connections (‘000s) by zone** constrained in Q4 by COVID-19 limitations on non- -15 -5 5 15 essential work. > Local Fibre Company (LFC) zone: Reduc
Slide 12: Chorus broadband mix in planned UFB zone
Chorus broadband mix in planned UFB zone 73% of Chorus broadband connections in planned UFB zone are on fibre (FY19:61%) Auckland: Chorus broadband connections by type (%) 1,000,000 900,000 8 800,000 700,000 10 600,000 No. of connections 500,000 400,000 300,000 200,000 100,000 82 0 Fibre VDSL (coppe
Slide 13: Financial performance
Financial performance David Collins, Chief Financial Officer 24 August 2020
Slide 14: Income statement
Income statement FY20 FY19 $m $m > ~$3m COVID-19 impact from industry hardship Operating revenue 959 970 fund ($2m) and migrations/connections Operating expenses (311) (334) > ~$9m COVID-19 impact across labour, other network (sercos $5m) and provisioning lines Earnings before interest, tax, 648 636
Slide 15: Revenue
Revenue FY20 FY19 $m $m Fibre broadband (GPON) 393 294 > Growing fibre uptake and ARPU: June FY20 $48.42* vs June FY19: $47.50 Fibre premium (P2P) 73 74 > Direct fibre and backhaul growth helping offset legacy churn Copper based voice 82 106 Copper revenues declining as customers migrate to Chorus f
Slide 16: Expenses
Expenses FY20 FY19 $m $m > 5% reduction in staff numbers, offset by COVID-19 impact on capitalisation Labour 80 74 rates and annual leave costs, plus investment in regulatory capability Network maintenance 64 75 > Lower fault volumes due to favourable weather, fibre uptake and COVID-19 restrictions
Slide 17: Reactive maintenance: Chorus network
Reactive maintenance: Chorus network Key drivers for $58m spend Reactive spend by type 20 ▪ reactive maintenance spend in H2 FY20 was affected by COVID- 15 19 with lower reported fault volumes $m 10 ▪ copper (fixed and variable) fault volumes reduced due to drought 5 conditions in upper North Island
Slide 18: FY20 gross capex $663m vs $610m - $650m range
FY20 gross capex $663m vs $610m - $650m range Faster than expected recovery from initial COVID-19 lockdown Fibre capex FY20 FY19 $m $m UFB communal 170 245 > includes $145m UFB2 rollout (FY19: $105m) Fibre connections & layer 2 282 308 > 167,000 installations (FY19: 186,000), including 27,000 UFB2 F
Slide 19: Capex: Fibre connections & layer 2
Capex: Fibre connections & layer 2 Connections capex of $282m vs FY20 guidance of $260m-$280m ▪ Cost per UFB1 premises connected (CPPC): $1,022* vs $1,000 - $1,150 guidance (FY19: $1,025) * excludes layer 2 and includes standard installations, some non-standard single dwellings and service desk cost
Slide 20: Capex: Copper and Common
Capex: Copper and Common Copper capex FY20 FY19 Common capex FY20 FY19 $m $m $m $m Network sustain 31 44 Information technology 43 34 Copper connections 1 2 Building & engineering services 17 22 Copper layer 2 7 12 Other 0 3 Product 0 1 Subtotal 60 59 Customer retention costs 16 22 Subtotal 55 81 ▪
Slide 21: FY21 guidance summary
FY21 guidance summary EBITDA: $640m to $660m Gross capex: $630m to $670m ▪ subject to no material changes in expected > Fibre $530m-$560m regulatory and competitive outlook ▪ $275m-$295m fibre connections & layer 2 (based on mass market 145,000 – 165,000 fibre ▪ includes ~$10m allowance for ongoing
Slide 22: UFB2 programme guidance update
UFB2 programme guidance update With rollout now almost halfway complete we’re narrowing communal guidance UFB2 rollout (premises) > Updating communal guidance range from $505m to $565m 80000 to a new range of $548m to $568m to reflect: ▪ greater proportion of underground build than aerial in 70000 r
Slide 23: FY20 final dividend, FY21 dividend guidance
FY20 final dividend FY21 dividend guidance 14cps, fully imputed 25cps, subject to no material adverse changes in circumstances or outlook ▪ supplementary dividend of 2.47 cps payable to non-resident shareholders ▪ record date: 15 September 2020 ▪ payment date: 12 October 2020 ▪ Dividend Reinvestment
Slide 24: Transition to free cash flow based dividend policy
Transition to free cash flow based dividend policy > from FY22 we will transition to a dividend policy based on a pay-out range of free cash flow UFB capex demands reducing ▪ free cash flow will be defined as net cash flows from operating activities minus sustaining capex Communal spend Connection &
Slide 25: Defining sustaining capex
Fibre capex: sustaining $m Layer 2 31 Defining sustaining capex Fibre products & systems Other fibre connections 14 20 $186m of FY20 capex was sustaining Customer retention costs* 7 > Sustaining capex is defined as total capex excluding: Subtotal 72 ▪ UFB communal & future footprint expansion Copper
Slide 26: FY22 capital allocation framework driven by shareholder value
FY22 capital allocation framework driven by shareholder value Net cash flow from operating activities > Transition from FY22 to dividend distribution based on pay- out range of free cash flow to reflect: • a focus on providing shareholders with dividend Sustaining capital predictability, stability a
Slide 27: Net debt/EBITDA
Net debt/EBITDA As at > S&P ND/EBITDA threshold 4.25x on a sustained basis 30 June 2020 > Moody’s intend to review 4.2x threshold once there is $m further clarity on regulatory framework and portion of Borrowings 2,234 revenue regulated + PV of CIP debt 183 > Financial covenants require senior debt
Slide 28: Crown financing and debt profile
Crown financing and debt profile > At 30 June, debt of $2,234m comprised: > up to $1.33 billion CIP financing ▪ Long term bank facilities of $550m ($30m drawn); $5m OD available by 2023 (57:43 equity/debt) ▪ NZ bond: $400m and $500m > $1,067m drawn at 30 June 2020 ▪ Euro Medium Term Notes $1,299m (N
Slide 29: Implementation Methodologies (IM) update
Implementation Methodologies (IM) update Recent IM process developments Chorus’ view > Commerce Commission is nearing completion of > Final IMs should deliver outcomes that: substantial and complex IM process ▪ provide ongoing incentives for fibre companies to drive > Key IM elements under continued
Slide 30: Chorus' commercial UFB reality
Chorus’ commercial UFB reality Commission’s implied debt and WACC doesn’t reflect Chorus’ actual cost 8 % > Standard commercial infrastructure practice to 7 recognise build and financing risks at the start of a 6 project, not optimised with the benefit of hindsight ▪ Crown Fibre Holdings (CFH) estim
Slide 31: Next regulatory steps
Next regulatory steps What we’re focused on…. > Final submission rounds on Input Methodologies ▪ Cross submissions on updated draft determinations (excluding financial losses) 3 September ▪ Submissions on financial loss asset consultation 10 September ▪ Cross submissions on financial loss asset cons
Slide 32: Fibre. It's how we internet now.
Fibre. It’s how we internet now. JB Rousselot, Chief Executive Officer FY20 FULL YEAR RESULT 24 August 2020
Slide 33: COVID-19 has cemented broadband's utility role
COVID-19 has cemented broadband’s utility role Monthly average data usage Monthly average data usage (combined per connection on our network (downstream) downstream and upstream) 450 429 600 400 Downstream Upstream 500 350 346 Data 300 400 usage 250 225 (GB) 300 200 150 200 100 100 50 Copper Fibre A
Slide 34: Video meetings create Godzilla effect
Video meetings create Godzilla effect Upstream traffic spikes half hourly, consistent with meeting start times 34 24 August 2020 FY20 FULL YEAR RESULT
Slide 35: The shift to remote working
The shift to remote working Reliable broadband becomes a necessity Which of the following workplace technologies do you consider as Do you plan to upgrade your home broadband service? ‘must have’ when working from home or remotely in general? Other 2 % of respondents Tablet 7 VOIP 8 Wi-Fi expander/e
Slide 36: Fibre = the "gold standard" of broadband
Fibre = the “gold standard” of broadband > Commerce Commission report (May 2020) noted reliability of > ~70% of Chorus survey respondents fixed line services through lockdown vs fixed wireless consistently rate fibre 8-10 (out of 10) (average download speeds decreased by around 25% and for internet
Slide 37: Our strategic focus in FY21
Our strategic focus in FY21 37 24 August 2020
Slide 38: 1. Winning in our core fibre business
1. Winning in our core fibre business We’re lifting our connections intensity in FY21 25,000 greenfield properties under ▪ growth strongest in Auckland, good demand outside UFB zone ~80,000 UFB2 contract addresses to pass in ▪ uptake continues to track at ~30% within 6 months of network build; ~80,0
Slide 39: Leveraging fibre uptake across a suite of retailers
Leveraging fibre uptake across a suite of retailers Broadband connection market share Q4 19 Fibre market share Q4 19 12.9 17.6 5.4 35.1 38.7 6 7.1 7.2 12.7 13.5 19.4 24.4 Source: IDC market data 39 24 August 2020 FY20 FULL YEAR RESULT
Slide 40: Lifting our open access wholesaler programme another level
Lifting our open access wholesaler programme another level > Migration and winback incentives ▪ upweighting retailer incentives based on customer segment, plan and volumes (up to $300 for targeted copper ‘late adopters’; up to $500 for winback of offnet connections) ▪ direct to consumer incentives (
Slide 41: Continued connection growth in legacy cable areas
Continued connection growth in legacy cable areas No. of No. of connections Karori exchange connections Island Bay exchange 3400 2100 3300 3200 2000 3100 1900 3000 1800 2900 1700 2800 2700 1600 2600 1500 2500 1400 UFB rollout 2400 UFB rollout Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun 20 4
Slide 42: Boosting our business and network portfolio
Boosting our business and network portfolio > Enhancing our business services ▪ plan to expand Hyperfibre footprint beyond initial centres in H1 FY21 ▪ small business fibre uptake doubled to 3k in H2; revised $52 pricing to drive uptake further ▪ upgraded premium business services with proactive fau
Slide 43: 2. Grow new revenues
2. Grow new revenues Smart locations (e.g. CCTV, traffic lights) ▪ streamlined our processes to help realise market growth opportunity ▪ new 50Mbps symmetrical plan to support connectivity of urban infrastructure (e.g. poles, traffic lights) $55 per month Wi-Fi ONT service ▪ co-developed service wit
Slide 44: 3. Optimise non-fibre assets
3. Optimise non-fibre assets Detailed review underway of existing network infrastructure > Focus on reducing ongoing network costs ▪ 20 network sites exited in FY20 (e.g. New Plymouth site – LFC zone; Whangarei Heads rural site) ▪ reshaping proactive maintenance programme in UFB zone to reflect shif
Slide 45: Copper withdrawal in UFB areas won't happen overnight
Copper withdrawal in UFB areas won’t happen overnight Fibre penetration - exchange area 100 Chorus broadband connections Total Chorus lines Fibre 90 penetration (%) 80 Draft copper withdrawal code 70 60 > The Commerce Commission has proposed: ▪ six months’ notice by Chorus to the end user and retail
Slide 46: 4. Develop long term future of the business
4. Develop long term future of the business Reviewing our operating model, including flexible working Employee preference for % of working week at home vs office 25 % of responses 20 15 10 5 0 100% at 80% at 60% at 50% at 40% at 20% at 100% at home home home home home home office 46 24 August 2020 F
Slide 47: 24 August 2020 FY20 FULL YEAR RESULT
47 24 August 2020 FY20 FULL YEAR RESULT
Slide 48: Appendix A: Connection and market trends
Appendix A: Connection and market trends 30 June 30 Sept 31 Dec 31 March 30 June 2019 2019 2019 2019 2020 1400000 Baseband copper Unbundled copper 24,000 21,000 18,000 17,000 15,000 Unbundled copper (no broadband) 1200000 Baseband copper 214,000 201,000 192,000 185,000 179,000 (no broadband) Copper
Slide 49: Appendix A: Connection and market trends (continued)
Appendix A: Connection and market trends (continued) Broadband uptake by retailer (all technology) NZ broadband market – by technology 2,000,000 2,000,000 1,800,000 1,800,000 1,600,000 1,600,000 1,400,000 1,400,000 1,200,000 1,200,000 1,000,000 1,000,000 800,000 800,000 600,000 600,000 400,000 400,0
Slide 50: Appendix B: RAB parameters
Appendix B: RAB parameters Parameters Summary of key parameters indicated by Commission process to date Crown financing New proposal to not treat Crown financing as debt-like and instead apply a WACC to Crown-funded assets, removing any return on capital pre-2022. A -25bps WACC adjustment would appl
Slide 51: Crown financing
Crown financing ▪ CIP equity securities • unique class of security with no right to vote at Equity shareholder meetings, but entitle the holder to a securities right to repayment preference on liquidation subject to • an increasing portion of the securities will attract paying dividend payments from
Slide 52: Appendix C: Making New Zealand better
Appendix C: Making New Zealand better We take a long term view of our network infrastructure investments and our people take pride in delivering an asset for New Zealand’s ongoing social and economic betterment. Chorus is included in the Dow Jones Sustainability Australia Index. > Environment ▪ Targ