Chorus Limited · NZX:CNU
Chorus — FY2015 Earnings Presentation
59 slides from Chorus's earnings presentation, Aug 24, 2015
Slide 1: Chorus Full Year Result, FY15
Chorus Full Year Result, FY15 For 12 months ending 30 June 2015 24 August 2015, Wellington / PAGE 1
Slide 2: Disclaimer
Disclaimer > This presentation may contain forward-looking statements regarding future events and the future financial performance of Chorus, including forward looking statements regarding industry trends, regulation and the regulatory environment, strategies, capital expenditure, the construction o
Slide 3: Mark Ratcliffe, Chorus CEO
Mark Ratcliffe Chorus CEO / PAGE 3
Slide 4: Agenda
Agenda Mark Ratcliffe, CEO > Business performance overview > Connections trends > UFB and RBI programmes Andrew Carroll, CFO > Financial results > Capex, CPPP and CPPC > Guidance update > Net debt and capital management > FPP update Mark Ratcliffe, CEO > Bringing NZ better broadband > Improving the
Slide 5: Regulatory impact overshadows investment
OVERVIEW Regulatory impact overshadows investment FY15 v FY14 change > Net Profit After Tax of $91 million 39% > EBITDA of $602 million 7% > Revenue of $1,006 million 5% > Total fixed line connections increased to 1,794,000 1% > Broadband connections increased to 1,207,000 4% > Better broadband roll
Slide 6: Fixed line connections
Fixed line connections Fixed line connections 30 June 2015 30 June 2014 Baseband copper 1,408,000 1,471,000 UCLL 123,000 127,000 SLU/SLES 3,000 4,000 Naked Basic/Enhanced UBA and Naked VDSL 159,000 117,000 Data services over copper 13,000 16,000 Fibre 88,000 42,000 Total fixed line connections 1,794
Slide 7: Continuing broadband growth
Continuing broadband growth Broadband connections 30 June 2015 30 June 2014 Basic UBA 96,000 164,000 Naked Basic UBA 10,000 9,000 Enhanced UBA 792,000 802,000 Naked Enhanced UBA 118,000 93,000 VDSL 85,000 49,000 Naked VDSL 31,000 15,000 Fibre (mass market) 75,000 31,000 Total broadband connections 1
Slide 8: Chorus connections drivers
Chorus connections drivers Maintaining connections Reducing connections 1 Dec billing changes identified 16,000 baseband copper lines Expect decline over time of ~20,000 dual copper-fibre lines now being billed. previously retained for voice services for some RSP end-users. Record net gain of 58,300
Slide 9: NZ fixed line market
NZ fixed line market > Significant changes in FY15: video content, RSP consolidation and new entrants Pay TV Sky TV Electricity Deploying IP sector set-top boxes Subscription Neon Lightbox Netflix Quickflix video on Launched in NZ in March 2015 demand Retail Vodafone 2o Spark M2 Others Trustpower se
Slide 10: Fibre market
Fibre market 30% > 88,000 fibre connections nationwide (FY14: 42,000) ▪ 68,000 fibre connections within UFB deployed 22% footprint (FY14: 27,000) ▪ ~2,000 mass market connections added outside Chorus planned UFB ▪ smaller RSPs continue to gain greater proportion of fibre market > More RSPs promoting
Slide 11: UFB build on track
UFB build on track > 44% of way through rollout 495,000 end-users now within reach of Chorus UFB total build complete for 368,000 premises FY15 build complete for 107,000 premises vs target 106,000 Annual rollout plan FY15-FY20 Cumulative rollout plan FY15-FY20 1,200,000 160,000 140,000 1,000,
Slide 12: UFB rollout progress
UFB rollout progress / PAGE 12
Slide 13: Regional fibre uptake vs build
Regional fibre uptake vs build Chorus UFB Uptake by Candidate Area – June 2015 20% 100% 18% 90% Uptake relative to capable addresses % of build completed (premises) 16% 80% 14% 70% 12% 60% 10% 50% 8% 40% 6% 30% 4% 20% 2% 10% 0% 0% UFB Uptake June % build complete June Chart shows end-user uptake a
Slide 14: Rural Broadband rollout
Rural Broadband rollout Highly successful programme, tracking to lower end of expected range of $280-$295 million > $257m invested to 30 June > 1,015 schools and 39 hospitals passed by fibre > 93,000 lines within reach of better broadband; ~85% uptake > Average synch speed increased from less than 6
Slide 15: Andrew Carroll, Chorus CFO
Andrew Carroll Chorus CFO / PAGE 15
Slide 16: Income statement
Income statement FY15 FY14 $m $m Operating revenue 1,006 1,058 Operating expenses 404 409 Earnings before interest, tax, 602 649 depreciation and amortisation (EBITDA) Depreciation and amortisation 324 322 Earnings before interest and income tax 278 327 Net interest expense 151 121 Net earnings befo
Slide 17: Revenue and Expenses
Revenue Expenses FY15 FY14 FY15 FY14 $m $m $m $m Basic copper 491* 543 Labour costs 73 72 Enhanced 268* 293 Provisioning 58 58 copper Network maintenance 91 99 Fibre 98 75 Other network costs 34 38 Value Added 36 38 Network IT costs 65 55 Services Rents, rates and 25 24 Field Services 84 75 property
Slide 18: Reshaping business
Reshaping business Expenses change year-on-year > Initiatives ahead of target in FY15 8 860 Focus on cash rather than value 840 6 Employees capex savings greater than anticipated: 820 proactive maintenance and IT separation 4 800 capex deferred 780 2 FY15 revenue and cost benefits ahead of 760
Slide 19: FY16 EBITDA outlook
FY16 EBITDA outlook > Unable to provide traditional earnings guidance as FPP decision expected in December and outcome uncertain. > Chorus continues to believe FPP modelling does not support pricing below demerger levels FY15 EBITDA FY15 EBITDA FY16 EBITDA outlook (actual) (adjusted) (for the period
Slide 20: FY15 gross capex summary
Fibre capex FY15 FY14 FY15 gross UFB communal 236 338 UFB connections & fibre layer 2 140 74 capex summary Fibre products & systems Other fibre connections & growth 26 63 38 63 RBI 39 53 > Total gross capex of $597m Subtotal 504 566 (FY14: $679m) Copper capex > Capex spend below FY15 guidance Networ
Slide 21: FY15 UFB communal capex
FY15 UFB communal capex > Communal deployment progressing well; transition in build mix as move from CBDs into more suburban areas ▪ $236m with build complete for 107,000 premises ▪ $2,134 average cost per premises passed (CPPP) below $2,150-$2,400 target ▪ FY16 CPPP guidance range of $1,700 - $1,77
Slide 22: FY15 UFB connection capex
FY15 UFB connection capex > $140m total spend below guidance as a result of demand mix in H2 ▪ 49k connections built (all NZ) and ~6% of ultimate UFB footprint now connected ▪ 4,700 backbone builds vs ~6,400 forecast (2,300 MDU; 2,400 Rights of way) ▪ MDU build mix included more large MDUs implying
Slide 23: Backbone and non-standard capex
Backbone and non-standard capex > Growing volumes and evolving build tactics are helping inform estimates of the proportion of MDUs and RoWs that may require backbone build to connect > In Chorus’ assessment, with growing fibre uptake plus increasing deployment in rights of way and multi-dwelling un
Slide 24: FY16 fibre connections capex
FY16 fibre connections capex > FY16 CPPC guidance: $1,050 to $1,250 (excluding layer 2) ▪ No change to total programme view of $900 to $1,100 real (circa $1,000 to $1,200 in FY15 dollars) average cost to connect standard residential premises > Current estimate is FY16 Fibre connections & layer 2 cap
Slide 25: FY16 capex guidance
FY16 capex guidance FY16 guidance FY15 actuals $m $m Copper capex 60-80 60 Common capex 35-45 33 Fibre capex 480-510 504 Gross capex 580-630 597 Note: The individual ranges presented above are not necessarily additive > Fibre capex reflects earlier assumptions around CPPP and CPPC, connection mix, a
Slide 26: Guidance summary
Guidance summary FY16 guidance FY15 guidance Cost Per Premises $1,050 - $1,250 $1,150 - $1,350 Connected (CPPC) (excluding layer 2 and including standard (excluding layer 2 and including standard installations and some non-standard single installations and some non-standard single dwellings) dwellin
Slide 27: Net Debt / EBITDA
Net Debt / EBITDA > Key financial covenants require senior debt ratio to be no greater than the applicable senior debt ratio, which is currently 3.75 times As at 30 June 2015 $m Borrowings 1,742 + PV of CFH debt securities (senior) 53 + Net Finance leases 127 Sub total 1,922 - Cash (80) Total net de
Slide 28: Capital management
Capital management > Chorus will address July 2016 debt tranche post FPP outcome > Consistent with previous advice, Chorus will update investors on dividend policy once the Commission’s final pricing review is complete. ▪ Commerce Commission has indicated December for final determination April 2020
Slide 29: Final Pricing Principle – July draft
FPP UPDATE Final Pricing Principle – July draft > Chorus’ view remains that the draft pricing significantly undervalues the true cost of network investment in New Zealand and the TSLRIC price should be at or above 2011 levels. For example: Monthly Commission July draft Chorus assessment Chorus view
Slide 30: July draft (cont.)
FPP UPDATE July draft (cont.) Commission draft position Chorus assessment Chorus view Transaction Adopted lowest 30% efficiency factor impossible to Use Chorus’ 3rd party tendered costs charges observation of benchmark achieve and at odds with actual set: 30% overall reduction service company costs
Slide 31: Correcting the initial price
FPP UPDATE Correcting the initial price > The Commission has acknowledged benchmarking is flawed: “…New Zealand’s local loop network is unique when compared to overseas benchmarks…Simplistic comparisons of international wholesale broadband prices do not tell the true story.” (Commerce Commission med
Slide 32: Mark Ratcliffe, CEO
Mark Ratcliffe CEO / PAGE 32
Slide 33: Bringing NZ better broadband
Bringing NZ better broadband > $1.9 billion invested in fibre networks and capability since demerger ▪ 588,000 end-users able to benefit from UFB/RBI ▪ 60% able to access better broadband than they use today ▪ fibre available at ~2,000 schools across New Zealand ▪ FY16: expect to complete Waiuku, Ro
Slide 34: Improving the fibre process
Improving the fibre process 40 retail 1 million + service end-users providers order scope consent build connect Multiple Chorus sercos + contractors / PAGE 34
Slide 35: Current challenges
Current challenges RSP orders in Verify availability Consent required? Schedule visit Reschedules Cancellations Average time to connect subject to agreeing deployment method / PAGE 35
Slide 36: Chorus taking on larger role
Chorus taking on larger role > We need to make installations a sustainable and scalable production line that provides a positive experience for all end-users. Taking fibre mainstream Current phase External review Customer workshops ‘Cottage industry’ Chorus team changes phase / PAGE 36
Slide 37: FY16 Outlook
FY16 Outlook Government Improve end-user Leverage open Final price review framework fibre connections access network review Focus on improving returns to shareholders and securing a regulatory environment that enables shareholders to earn a fair return on the investment they are making to bring bett
Slide 38: Any questions?
Any questions? / PAGE 38
Slide 39: Appendices
Appendices Pages A: Adjusted EBITDA 40 B: Revised FY14 expenses re-presentation 41 C: Capex, expenses, revenue trends FY13-FY15 42-43 D: Regulatory history vs share price 44 E: Chorus mass market fibre products and pricing 45 F: NZ market and network trends 46-51 G: UFB premises types, installation
Slide 40: Appendix A: Non statutory measure – adjusted EBITDA
Appendix A: Non statutory measure – adjusted EBITDA This appendix provides a high level summary of adjusted EBITDA. It has been prepared on the basis of prevailing regulatory pricing. The initial benchmarked pricing changed on 1 December 2014 and for comparative purposes this flows the pricing throu
Slide 41: Appendix B: Revised FY14 Expenses re-presentation
Appendix B: Revised FY14 Expenses re- presentation This appendix provides a summary of what has been re-presented between FY14 expense categories following Chorus’ SAP migration. Operating Original FY14 Adjustment Revised Expenses presentation FY14 presentation $m $m $m Labour costs 79 -7 72 Provisi
Slide 42: Appendix C: Capex, Expenses, Revenue trends FY13-FY15
Appendix C: Capex, Expenses, Revenue trends FY13-FY15 / PAGE 42
Slide 43: Expenses and Revenue FY13-FY15
Expenses FY13-FY15 120 mFY13 @FY14 m@FY15 100 80 60 40 0 onl as. =o Labour Provisioning Network Other Electricity Rents, rates, Consultants Insurance Other maint network maint 700 Revenue FY13-FY15 600 mFY13 mFY14 mFY15 500 400 300 200 | 10 : 0 PT | | oom OFF Basic copper Enhanced Fibre Value Added
Slide 44: Appendix D: Regulatory history vs share price
Appendix D: Regulatory history vs share price > Chorus’ share price performance since demerger in 2011 has been dominated by regulatory decisions and processes Commission draft UCLL benchmarking Commission Commission Commission final UCLL + final UBA releases draft draft UBA benchmarking FPP decisio
Slide 45: Appendix E: Chorus mass market fibre products and pricing
Appendix E: Chorus mass market fibre products and pricing Mass market fibre product pricing $70.00 Accelerate: 200/200Mbps $65.00 Accelerate: 200/100Mbps $60.00 Accelerate: 200/20Mbps $55.00 Evolve 4: 100/50Mbps Accelerate: 100/100Mbps $50.00 Accelerate: 100/50Mbps $45.00 Accelerate: 100/20Mbps $40.
Slide 46: Appendix F: NZ market and network trends
Appendix F: NZ market and network trends > Fixed line connections have proved > Market has been dominated by 3 relatively stable, while broadband growth larger internet service providers. has continued Source: Commerce Commission Annual Telecommunications Monitoring Report 2014, p10 and p18 / PAGE 4
Slide 47: Regional fibre uptake – June 2015
Regional fibre uptake – June 2015 Uptake relative to capable addresses Chart shows end-user uptake as a proportion of UFB capable addresses (i.e. network is commissioned for service) Uptake may decrease from period to period as more network is commissioned in an area / PAGE 47
Slide 48: Fibre adoption curve to date
Fibre adoption curve to date Technology adoption in NZ (% of households) Fibre uptake based on % addresses covered, given incremental build DSL/broadband 75% Sky TV 51% Fibre Dial up 4% Years from launch Sources: Statistics NZ Household Use of ICT survey 2009, 2012 (household dial-up/broadband uptak
Slide 49: Online TV performance
Online TV performance 3 minute snapshots of traffic over a 100Mbps fibre connection while streaming online TV 1 Ultra High Definition stream from 4 simultaneous streams Netflix • 1 x UHD stream (on a 4K Smart TV) • Data bursting due to adaptive streaming • 3 x HD streams (2 on laptops, 1 on a • Thro
Slide 50: Bandwidth demand
Bandwidth demand > Annual bandwidth growth has traditionally been 50% > Chorus saw 50% growth in just 6 months 50% growth in six months Spark Lightbox free Netflix launch launch Data captured at 1st of each month / PAGE 50
Slide 51: VDSL and fibre redefine broadband experience
VDSL and fibre redefine broadband experience Current connection Speed Distribution Chart 100,000 90,000 80,000 Number of Connections 70,000 59% of VDSL users can get 30-70Mbps. This % will increase following bandplan changes 60,000 30Mbps 100Mbps fibre provides a ‘Wow’ factor 50,000 fibre 40,000 30,
Slide 52: Appendix G: UFB premises types, installation types and funding
Appendix G: UFB premises types, installation types and funding 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, exclud
Slide 53: UFB installation types and funding
Rights of way Single dwelling units Simple Multi-dwelling units (up Complex Multi-dwelling to 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: change at end of UFB 1. New underground
Slide 54: Appendix H: CFH securities summary
Appendix H: CFH securities summary / PAGE 54
Slide 55: Appendix I: Revenue categories
Appendix I: Revenue categories • core regulated products that are earlier technology or products Basic Copper with limited scope for further development e.g Baseband copper (UCLFS), Basic UBA, Naked UBA, UCLL, SLU, SLES • products enhanced to deliver higher speed capability and better Enhanced Coppe
Slide 56: Appendix J: Capex categories
Appendix J: Capex categories Fibre capex categories UFB • cost of building UFB network along street to pass communal premises Connections • connections are subject to demand via RSPs & fibre layer 2 • Layer 2 electronics Fibre products & • Fibre- related product and system development systems Other
Slide 57: Copper capex categories
Copper capex categories • Upgrading or replacing plant (e.g. poles, cabinets, cables) where risk of failure or degraded service Network sustain • Proactive network replacement more cost effective than reactive maintenance Copper • Demand for copper connections for residential / connections business
Slide 58: Common capex categories
Common capex categories • Investment in future Chorus IT platforms, in part to Information meet June 2014 deadline to move from Telecom technology enterprise systems Building and • Spend for growth and plant replacement (e.g. power, engineering air conditioning) at Chorus exchange, building and serv
Slide 59: Appendix K: Contributions to capex
Appendix K: Contributions to capex • CFH funds up to $929 million over course of programme, at a UFB rate of $1,118 per premises • Government grant funding of ~$236 million over 5 years to cover most layer 0 and 1 capex spend RBI • Layer 2 is not covered by the grant • Grant is payable on completion