Chorus Limited · NZX:CNU
Chorus — Investor Day (May 2014)
56 slides from Chorus's investor day presentation, May 21, 2014
Slide 1: Chorus Institutional Investor Briefing
Chorus Institutional Investor Briefing 21 May 2014 // PAGE PAGE 1 1
Slide 2: Disclaimer
Disclaimer Forward-Looking Statements > This presentation may contain forward-looking statements regarding future events and the future financial performance of Chorus, including forward looking statements regarding industry trends, strategies, capital expenditure, the construction of the UFB networ
Slide 3: Mark Ratcliffe, Chorus CEO
Mark Ratcliffe Chorus CEO // PAGE PAGE 3 3
Slide 4: Agenda
Agenda >Introduction - Mark Ratcliffe, CEO >Regulation – Anna Moodie, Assistant General Counsel >Technology – Martin Sharrock, Head of Network Engineering >Morning tea break (15 mins approx) >Build – Ed Beattie, GM Infrastructure >Market – Rosalie Nelson, Market Strategy & Insight Manager >Q and A /
Slide 5: We're getting on with things
We’re getting on with things > New fibre and copper plans announced > Continuing work to reshape business ▪ Global award for fibre fulfilment system ▪ Chorus people engagement score 81% > Fixed line connections increased to 1,781,000 at 30 April / PAGE 5
Slide 6: Regulation – Anna Moodie
Regulation – Anna Moodie / PAGE 6
Slide 7: Total Service Long Run Incremental Cost (TSLRIC)
Total Service Long Run Incremental Cost (TSLRIC) The service: Step 1 > Can be unbundled What is the > Has the full functionality of UCLL/UBA (network built for STD, voice, TSO service? etc) MEA Options: Step 2 What MEA > Copper – orthodox, real world data can deliver that service? > GPON fibre and f
Slide 8: TSLRIC is not… A hypothetical network + a hypothetical service
TSLRIC is not… A hypothetical network + a hypothetical service = hypothetical price / PAGE 8
Slide 9: TSLRIC – asset valuation
TSLRIC – asset valuation Optimised Replacement Cost (ORC) “ORC is the appropriate asset valuation methodology for the purposes of any determination that applies TSLRIC as the final pricing principle.” “[E]ven if the assets were to be replaced by the same asset, historical costs will not capture the
Slide 10: TSLRIC – valuing our network
TSLRIC – valuing our network • Replacement cost valuation • Access network (Layer 1) only $14.2bn Accounting • Independently audited Separation • Reported by Telecom under accounting separation (2010) • Excludes UBA, full FTTN costs and predates significant trenching cost increases • Adjusted down b
Slide 11: Cost of Capital
Cost of Capital Cost of capital should reflect key risks experienced in NZ environment: > asymmetric risks to cash flows include regulatory stranding, natural disasters > key risks to Chorus include mobile substitution, fixed line competition, demand risk > 75th percentile adjustment critical to ens
Slide 12: Where we've come from – benchmarking is variable and doesn't reflect NZ
Where we’ve come from – benchmarking is variable and doesn’t reflect NZ UCLL 2007 UCLL 2012 UCLL/UCLFS 2012 UBA 2013 connection charges Australia Belgium Belgium Denmark Finland Cyprus Cyprus Sweden Norway Czech Republic Czech Republic Sweden Denmark Denmark “The Commission’s preliminary views are b
Slide 13: Regulatory calendar
Regulatory calendar Court of Appeal hearing on UBA initial pricing principle 31 July – 1 August Commerce Commission draft determination on 19 August UBA final pricing principle (FPP) due Submissions on UBA FPP draft determination 16 September due Cross-submissions on UBA FPP draft 30 September deter
Slide 14: Technology – Martin Sharrock
Technology – Martin Sharrock / PAGE 14
Slide 15: Bandwidth – It's a growth business
Bandwidth – It’s a growth business Neilsen’s law of internet bandwidth states that Bandwidth on Chorus’ network has been growing at Internet connection speeds grow by 50% per over 80% per year due to increased connection year. Historic and future data for New Zealand volume and increased bandwidth u
Slide 16: Global Macro Technology Themes
Global Macro Technology Themes Market Trends Smart Devices Online Video Cloud Services > Broadband devices requiring data at > Video is the largest consumer of > High bandwidth and low latency means home and on the move. internet traffic. it is possible to store & run applications > Proliferation of
Slide 17: Fibre is at the heart of everything
Fibre is at the heart of everything Fibre >initially a transport technology for long distance and large Mobile data capacity Wireless >originally a technology for voice >becoming the end to end >designed to bridge the very short distance >a bridging technology between fibre and connectivity technolo
Slide 18: Why is fibre the future?
Why is fibre the future? Mobile Copper (VDSL2) Fibre THz ….. 5MHz 5MHz Performance Mobile Copper Fibre 30MHz Impacts Broadband Broadband Broadband 5MHz 5MHz Shared connection Yes No No Copper (G.fast) Backhaul constraint Yes Yes No Spectrum constraint Yes Yes No Spectrum $ Yes No No Interference Yes
Slide 19: Fibre Build – Technology Developments
Fibre Build– Technology Developments >Focus on simple, consistent, flexible build design New Air Blown Fibre Access Terminal Cost effective, hidden from view underground Less materials required, easier for duct re-use, easier siting Developed with international suppliers. Expect Integrates wit
Slide 20: Fibre Connections – Technology Developments
Fibre Connections– Technology Developments >Focus on simple, consistent methodology for connection New underground fibre closure used New air blown fibre cable New practices where existing duct or for all connection types more reliable aerial is not available: greater blowing distance use new
Slide 21: Chorus Network Strategy
Chorus Network Strategy Enable bandwidth Enable future Ethernet Aggregation growth now bandwidth growth Selective product development (e.g. DSL GPON Innovate service & Boost) (on copper) (on fibre) speed capability Network Electronics Passive Infrastructure Maintain Copper Fibre Build & Connect GPON
Slide 22: In Summary
In Summary > Global technology themes are driving bandwidth needs. Cloud computing, video consumption and smart device usage necessitate ultra fast networks. > Bandwidth will continue to grow exponentially. Expect >50% data growth per annum on the Chorus network. > Fibre is future proof and ubiquito
Slide 23: Morning tea break
Morning tea break – back in 15 minutes / PAGE 23
Slide 24: Build – Ed Beattie
Build – Ed Beattie / PAGE 24
Slide 25: Unprecedented scale and scope
Unprecedented scale and scope > Chorus deploying fibre in 24 areas along ~44,000 streets > each rollout area has varying: ▪ existing infrastructure available for re- use ▪ geotypes (premises density and terrain) ▪ local authority requirements > chart shows scale of Chorus ramp-up in initial years So
Slide 26: Auckland and Wellington >60% of Chorus rollout
Auckland and Wellington >60% of Chorus rollout > Highest population density and number of narrow or busy ‘Level 2’ roads > Already significant pressure on infrastructure > Underground utilities close together > Volcanic rock > CBD and inner suburbs require mostly underground deployment > Inner city
Slide 27: UFB rollout now at maximum pace
UFB rollout now at maximum pace > Flatter programme in FY14 as productivity increases, but still tail-end ‘hump’ ▪ Target (cumulative): 255,000 premises to be passed by end of FY14 ▪ Build complete for 238,000 premises at 30 April = 93% target (cumulative) ▪ Work already started on FY15 areas for 8%
Slide 28: Progress by Chorus area
Progress by Chorus area, as at 30 April Auckland (incl. Waiheke, Whakatane Rotorua Taupo Waiuku, Pukekohe) 5,500 premises 20,900 premises 9,900 premises 372,000 premises 27% complete 66% complete 75% complete 20% complete Gisborne Napier/Hastings Feilding Palmerston North 12,300 premises 40,900 prem
Slide 29: Understanding UFB communal capex
Understanding UFB communal capex > Civil costs >Network specific >Other ▪ drilling/trenching/aerial along costs ▪ project management street ▪ materials ▪ consigned materials (e.g. ▪ laterals to boundary ▪ hauling fibre, duct) ▪ reinstatement of ▪ installing network road/footpath/berm components ▪ tr
Slide 30: Step down in CPPP from FY15
Step down in CPPP from FY15 CPPP expected to decrease from FY14 as deployment mix begins to move from priority premises zones into suburban areas ▪ average property frontage reduces from 30m to 20m ▪ deployment options such as aerial and rapid trenching more widely available ▪ cobbled paving areas a
Slide 31: Chorus' communal deployment toolbox
Chorus’ communal deployment ‘toolbox’ Is existing duct available for fibre to be installed in along street? YES Re-use Chorus duct where possible (40% target) OR consider third party duct, subject to Each option requires conditions cost/benefit analysis of: • time required and NO Consider undergroun
Slide 32: Options for installing underground duct
Options for installing underground duct Open trenching: Directional drilling: Rapid Trenching: can be most disruptive (and enables new ducts and mechanical saw enables costly) method as requires cables to be installed narrow, shallow trenching excavation of a trench along underground with just a str
Slide 33: Rapid trenching
Rapid trenching • Fast deployment with less community disruption • Minismises reinstatement with depth up to 350mm and width of 45-70mm • First demonstrated in MED trial in 2011, but limited council acceptance so far • Used in parts of Wellington and currently trialling in Auckland / PAGE 33
Slide 34: Aerial deployment
Aerial deployment Chorus target ~20% aerial communal deployment: • depends on availability and quality of pole network • lines companies requiring new commercial agreements • subject to council consent in some areas • potential opex trade-off over longer term / PAGE 34
Slide 35: Deployment flexibility: CFH agreement
Deployment flexibility: CFH agreement > Chorus now has ability to determine phasing of rollout and reschedule costly areas includes deferral of build in existing business fibre zones savings will be subject to cheaper deployment options being found and cost to build out existing business fibre i
Slide 36: Premises types and connections process
Premises types and connections process Premises type estimates from UFB deployment premises count methodology Premises 649,000 123,000 10,000 4,000 1,000 787,000* End user 649,000 267,000 43,000 34,000 57,000 1,050,000 connections *Total UFB premises in Candidate Area, excluding greenfields Note: Ri
Slide 37: Multi-Dwelling Units (MDUs)
Multi-Dwelling Units (MDUs) > premises containing more than one occupancy within the SDU boundary CPPC > may include apartment or office blocks > some already fibre connected > connection funding varies depending on height of building Street to and number of tenancies building entry point (outside >
Slide 38: Rights of way
Rights of way > more than one premises with separate ownership sharing a common access to the public roads > may include detached or semi-detached dwellings, apartment blocks, townhouses that share a common access > general principle that end users receive ‘free’ 15m connection from Chorus / PAGE 38
Slide 39: UFB installation types and funding
UFB installation types and funding Rights of way Single dwelling units Simple Multi-dwelling units (up to Complex Multi-dwelling 3 stories) units (>3 stories) Chorus funded Residential/business standard lead-in from street to building entry Note: funding policy will point at time of connection: chan
Slide 40: Reducing cost to connect
Reducing cost to connect > Completed ~2,200 NGA installs in March; 100 more than February ▪ no two properties the same ▪ scope of work greater than in past ▪ meeting SLAs > Data from installs to date has provided basis to begin implementing coded rates with service companies; most apply from early F
Slide 41: Connections process
Connections process > Agree + Build + Connect process full implementation end May splits expertise into 3-step process reduced rescheduling by better matching resources and equipment to on-site conditions end user time on-site halved to ~4 hours continuing to work with RSPs to enhance info
Slide 42: Market insights – Rosalie Nelson
Market insights – Rosalie Nelson / PAGE 42
Slide 43: Telecommunications globally is transforming
Social benefits of ultra-fast broadband Telecommunications globally is transforming Internet of ‘things’ Trends in New Zealand Connected Home Exponential device growth – slow on home management • Multiple devices per user, per household • Average # of smart devices in NZ homes increased from 2.9 to
Slide 44: In 2013 NZ was one of OECD's fastest-growing broadband markets
In 2013 NZ was one of OECD’s fastest-growing broadband markets Wired Broadband Penetration Rates NZ June 2013 29.5 broadband December penetration Broadband Connections per 100 population 2010: UFB March 2008: officially first launch launched of local loop unbundling May 2006: Government announces se
Slide 45: Fibre penetration showing good growth from low base
Fibre penetration showing good growth from low base Percentage of fibre connections in total broadband subscriptions, June 2013 Japan 68.4% Korea 62.8% Sweden 35.8% Estonia 32.7% Slovak Republic 31.0% Annual growth of fibre connections, June 2012-2013 Norway 23.8% 300 Iceland 21.0% Slovenia 19.0% De
Slide 46: Target of 75% coverage will put NZ into leadership quadrant
Target of 75% coverage will put NZ into leadership quadrant Portugal Portugal Target UK Netherlands South Korea France Singapore 100% - Germany Japan target Spain Sweden Denmark Japan 95% - Europe Hong Australia Kong NZ today US NZ 2020 Australia Hungary 90% - Standard Fixed Broadband 85% - Estonia
Slide 47: Industry in transition
Industry in transition > Industry grappling with price/value propositions Cost management remains a focus IDC New Zealand Telecommunications > But also see innovation activity Forecasts March 2014 ‘ShowMeTV’, cloud gaming, integrated WiFi, multicast TV Total revenues forecast to fall 3% per year
Slide 48: Total connections holding steady
Total connections holding steady > Static overall – grew marginally in the March quarter > Benign competitive impact to date > Rural Broadband Initiative providing additional coverage Total connection volumes Product connections > Baseband voice bundled with fibre broadband > ‘Clean up’ of secondary
Slide 49: Broadband growth continues
Broadband growth continues Total fixed & Broadband Connections Quarterly Net Additions > Seasonal factors affected December broadband Quarterly connections 25000 20000 connections – but growth resumed in March 15000 10000 > Basic UBA migration to Enhanced-UBA continues 5000 0 -5000 > Seeing a strong
Slide 50: Appetite for better broadband is increasing
Appetite for better broadband is increasing Cisco Visual Networking Forecasts > Data caps become unlimited NZ Total Monthly Traffic by Application > In 2013, 79% of broadband lines offered more than 20GB > RSP marketing focus is shifting to speed/capability > We have good high speed coverage > VDSL
Slide 51: NGA: Mass market GPON services dominate
NGA: Mass market GPON services dominate *Business Data > 35,000 total fibre connections Services 23% ** Next Generation Access > 18,300 fibre connections within UFB and pre-UFB fibre subdivision connections deployed footprint 11% 66% > Business data connections are stable Direct Fibre > Continue to
Slide 52: Regional uptake reflects activity of local RSPs
Regional uptake reflects activity of local RSPs > Local competition is still growing > There are between 2 and 14 RSPs able to deliver UFB in all areas Uptake relative to capable where deployment has started % of build completed > UFB uptake reflects local activity of addresses RSPs > Auckland and W
Slide 53: Consumer fibre uptake is on low end plans
Consumer fibre uptake is on low end plans % of NGA fibre customers that are on 100Mbps+ > Percentage of users adopting 100Mbps 90% 80% 80.4% 70% plans is stabilising at ~23% 60% 48.7% > RSP promotions are centred on 30Mbps 50% 40% 36.9% 30% 25.4% 23.4% > Wholesale differential of $17.50 20% translat
Slide 54: NZ market aligning to international practices
NZ market aligning to international practices FTTx Bandwidth speeds available in 350 residential packages 300 250 Mbps (Download) 200 150 100 100Mbps 50 6Mbps 0 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q3 2010 Q4 2011 Q1 2013 Q2 2013 Note: Tariffs collected from Singtel and St
Slide 55: Implications
Implications > Underlying demand drivers are strong End users want better broadband RSPs have mixed incentives and will focus on margin gain in addition to new opportunities Potential for higher ARPU through mixed commercial and regulatory portfolio > Fibre represents a unique opportunity for
Slide 56: Any questions?
Any questions? / PAGE 56