Chorus Limited · NZX:CNU
Chorus — FY2014 Earnings Presentation
47 slides from Chorus's earnings presentation, Aug 25, 2014
Slide 1: Chorus Full Year Result, FY14
Chorus Full Year Result, FY14 For 12 months ending 30 June 2014 25 August 2014, Wellington / PAGE 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, regulation and the regulatory environment, strategies, capital expe
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 Reshaping Chorus – Mark Ratcliffe, CEO > Workstreams > Regulatory processes > Q and A / PAGE 4
Slide 5: Solid financial performance
OVERVIEW Solid financial performance > Net Profit After Tax of $148 million > EBITDA of $649 million > Revenue of $1,058 million > Total fixed line connections largely stable at 1,781,000 > UFB and RBI rollouts ahead of schedule; 425,000 end-users within reach of better broadband > NZ 15th in OECD f
Slide 6: Fixed line connections
Fixed line connections Fixed line connections 30 June 2014 30 June 2013 Baseband copper 1,475,000 1,521,000 UCLL 127,000 122,000 SLU/SLES 4,000 6,000 Naked Basic/Enhanced UBA and Naked VDSL 117,000 91,000 Data services over copper 16,000 25,000 Fibre 42,000 19,000 Total fixed line connections 1,781,
Slide 7: Continuing broadband growth
Continuing broadband growth Broadband connections 30 June 2014 30 June 2013 Basic UBA 164,000 331,000 Naked Basic UBA 9,000 11,000 Enhanced UBA 802,000 680,000 Naked Enhanced UBA 93,000 78,000 VDSL 49,000 2,000 Naked VDSL 15,000 2,000 Fibre (Bitstream 2, 3 and fibre subdivisions) 31,000 8,000 Total
Slide 8: Fibre connection types
Fibre connection types > 27,000 fibre connections within UFB deployed footprint > 42,000 fibre connections nationwide Fibre uptake by category 35,000 30,000 Jun-13 Jun-14 25,000 20,000 22% of residential Number of 15,000 fibre end-users on connections 100Mbps plans 10,000 5,000 0 Direct/dark fibre E
Slide 9: UFB uptake varies widely
UFB uptake varies widely / PAGE 9
Slide 10: UFB rollout progress by area
UFB rollout progress by area / PAGE 10
Slide 11: UFB build ahead of schedule
UFB build ahead of schedule > UFB rollout 31% complete 353,000 end users now within reach of Chorus UFB Build complete for 261,000 premises; includes 57,000 (73%) priority premises FY15 target: 106,000 premises to be completed UFB rollout progress 400,000 350,000 300,000 Premises passed / 250,
Slide 12: Rural Broadband rollout
Rural Broadband rollout > About 3,100 km fibre laid; 951 schools complete > 72,100 lines within reach of better broadband; 80% uptake Complete % To be completed complete FY12 FY13 FY14 FY15 FY16 Schools 473 306 172 94 64 - Hospitals 4 17 9 100 - - Fibre to RBI tower sites 13 40 37 58 51 13 FTTN cabi
Slide 13: Broadband provisioning mix
Broadband provisioning mix > High speed plans (VDSL + mass market fibre) up from 15% to 40% of provisioning activity during FY14 Broadband provisioning by type (where truck roll required) 30000 Telecom Vodafone ‘Giganaire’ launched Mass market fibre VDSL UBA campaign Sky TV offer 25000 Telecom Vodaf
Slide 14: Andrew Carroll, Chorus CFO
Andrew Carroll Chorus CFO / PAGE 14
Slide 15: Income statement
Income statement FY14 FY13 $m $m Operating revenue 1,058 1,057 Operating expenses (409) (394) Earnings before interest, tax, depreciation 649 663 and amortisation (EBITDA) Depreciation and amortisation (322) (319) Earnings before interest and income tax 327 344 Net interest expense (121) (108) Net e
Slide 16: Revenue
Revenue FY14 FY13 $m $m Basic copper 543 631 Revenue change FY13-FY14 100 Enhanced copper 293 215 80 Fibre 75 60 60 Value Added 38 37 40 Network Services 20 Field Services 75 85 0 Infrastructure 19 17 -20 Other 15 12 -40 Total revenue 1,058 1,057 -60 -80 -100 / PAGE 16
Slide 17: Operating expenses
Operating expenses FY14 FY13 $m $m Labour costs 79 67 Expenses change FY13-FY14 Provisioning 56 51 14 Network maintenance 99 100 12 Other network costs 38 37 10 IT costs 55 52 8 Electricity 13 13 6 Rents, rates and 24 24 4 property maintenance 2 Consultants 5 6 0 -2 Insurance 4 4 -4 Other 36 40 -6 T
Slide 18: FY14 gross capex summary
FY14 gross capex summary > Total FY14 capex of $679m > Fibre-related spend $566m (83% of total capex) Fibre capex FY14 FY13 Copper capex FY14 FY13 $m $m $m $m UFB communal 338 362 Network sustain 35 33 UFB connections & 74 31 Copper connections 15 21 fibre layer 2 Copper layer 2 10 8 Fibre products
Slide 19: Cost per premises passed: tracking well
Cost per premises passed: tracking well > FY14 UFB communal spend of $338m included: ▪ $42m work in progress (FY13: $30m) ▪ $4m ‘synergy’ build ahead of planned rollout > FY14 CPPP: achieved lower end of guidance range ($2,900 to $3,200) with $2,973 for brownfields premises and $2,948 ‘blended’ CPPP
Slide 20: UFB connection capex
UFB connection capex > Total programme view at demerger in 2011: $900 to $1,100 real (circa $1,000 to $1,200 in FY14 dollars) average cost to connect standard residential premises. No change. > In any one year, UFB connection capex reflects cost per premises connected (CPPC) plus upfront common buil
Slide 21: FY14 UFB connection capex
FY14 UFB connection capex > 21,000 end-users added in FY14 > FY13 connection capex almost exclusively single dwelling units (SDUs) > FY14 included ‘backbone’ spend on multi dwelling units (MDUs) + rights of ways (RoWs) > ‘backbone’ capex in MDUs and RoWs = 28% of FY14 spend FY14: UFB connections & l
Slide 22: CPPC: SDUs and apartments
CPPC: SDUs and apartments > FY14: $1,680 average for standard connections (mix of existing/new duct and aerial) paid during year, excluding layer 2 % of installs: % of installs: Standard Non-standard Lead-in 86% 14% Average $1,680 (includes all non- $620 (incremental cost of cost standard in-home wi
Slide 23: Connection capex: MDUs and RoWs
Connection capex: MDUs and RoWs > FY14: $6,500 average for MDU/RoW ‘backbone’ + street entry ▪ ‘backbone’ or common build reflects non-standard capex and/or brought forward standard capex to be averaged across future connections ▪ costs highly variable depending on MDU and RoW type ▪ specialist MDU
Slide 24: FY15 UFB connection capex
FY15 UFB connection capex > FY15 CPPC guidance: $1,300 to $1,500 (excluding layer 2) > Materially more ‘backbone’ capex relative to prior years as MDU and RoW build progresses > Current estimate is FY15 ‘UFB connections & layer 2’ capex $105m - $115m based on: ▪ ~36,000 connections ▪ corresponding u
Slide 25: FY15 EBITDA and capex guidance
FY15 EBITDA and capex guidance FY15 guidance FY14 actuals $m $m EBITDA 590-605 649 Copper capex 55 – 85 61 Common capex 45 – 50 52 Fibre capex 490 – 510 566 Gross capex 590 – 640 679 Note: The individual ranges presented above are not necessarily additive > FY15 EBITDA guidance reflects $34.44 UBA p
Slide 26: Net Debt / EBITDA
Net Debt / EBITDA > Average indebtedness increased through FY14 but closing leverage ratio reduced, reflecting timing of customer payments FY14 vs FY13 ▪ Note: underlying EBITDA is used for covenant reporting As at 30 June 2014 $m Borrowings 1,817 + PV of CFH debt securities (senior) 36 + Net Financ
Slide 27: Capital management
Capital management > In February, Chorus noted its broader capital management objectives were to: ▪ maintain an investment grade rating with headroom. In the longer term, the Board continues to consider a “BBB” rating appropriate for a business like Chorus; and ▪ setting a financially sustainable di
Slide 28: Reshaping Chorus
eee on ese a “* = : Reshaping Chorus ©) Chorus / PAGE 28
Slide 29: Addressing the funding gap
Addressing the funding gap* CFH discussions Chorus initiatives Regulatory *Funding gap refers to the $1 billion funding shortfall identified by Chorus following the UBA decision / PAGE 29 of 5 November 2013, as confirmed by the EY report of 14 December 2013
Slide 30: CFH discussions
CFH discussions UFB improvements • First package of contractual amendments agreed 11 March 2014, providing Chorus with greater deployment flexibility and better matching of CFH funding to Chorus cost of build until June 2015. • Changes to Chorus’ marketing commitments and charging regime for UFB sub
Slide 31: Chorus initiatives
Chorus initiatives Revenues • Changed pricing for a range of commercial activities. • Boost product proposals launched for consultation to RSPs 14 May. Discussions ongoing. Commission investigation into regulated UBA opened on 22 July. Operating model • Reduction in support staff; FY15 short term in
Slide 32: Regulatory
Regulatory Court process • Seeking clarification of application of Telco Act. Appeal dismissed in High Court. • Court of Appeal decision pending. FPP reviews • UCLL review requested February 2013; UBA review requested December 2013. • Commission’s preliminary modelling views on a number of parameter
Slide 33: Chorus' network reality
service access expectation service terrain definition Chorus’ network reality DOCUMENT TITLE / V 1.0 / XX DAY 2012 / PAGE 33
Slide 34: End-users value functionality
End-users value functionality > modelling should cost-in services end-users use and expect on the existing network ▪ e.g. burglar alarms, medical alarms, Sky TV, eftpos / PAGE 34
Slide 35: Fixed wireless limitations
Fixed wireless limitations > Fixed wireless can’t be unbundled. Australia modelled just 1% for TSLRIC ▪ NBN target ~3%, but with satellite as backstop > Capacity and coverage challenges ▪ Kordia 20% failure rate; NBN modelling 7% ▪ NBN review suggests ~$1.1bn extra capex to double base stations On a
Slide 36: Final pricing principle calendar
Final pricing principle calendar Aerial deployment 25 August cross-submissions Draft determination due 1 December Interested parties’ cost models to 1 December Commission Submissions on draft 2 February determination due Commission conference on FPP 3-6 March Final determination due 1-30 April / PAG
Slide 37: Innovation focus
Innovation focus Chorus wholesale product overview – from 1 December 2014 Data Business / Entry level SME and Copper services services: Branch Point to Point Fibre mass premium for home and SME business / Office / for Corporate / Govt market fibre consumer fibre branch School Pricing subject to FPP
Slide 38: Enabling service differentiation
Enabling service differentiation / PAGE 38
Slide 39: FY15: a watershed year
FY15: a watershed year Framework changes – 1 Dec Reshaping Chorus ▪ Benchmark UBA pricing applies ▪ Progressive implementation ▪ Installation fees chargeable for of initiatives underway new UBA connections ▪ Regulatory clarity required ▪ Draft FPP pricing due now (and for post 2020) to justify discr
Slide 40: Any questions?
eee on Any questions? ©) Chorus / PAGE 40
Slide 41: Appendix A: UFB premises types
Appendix A: UFB premises types 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: Rights of
Slide 42: Appendix B: UFB installation types and funding
Appendix B: 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 conn
Slide 43: Appendix C: Revenue categories
Appendix C: 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 44: Appendix D: Capex categories
Appendix D: Capex categories Fibre capex categories UFB • cost of building UFB network along street to pass communal premises UFB • UFB connections are subject to demand via RSPs connections • Layer 2 electronics & fibre layer 2 Fibre products & • Fibre- related product and system development system
Slide 45: 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 46: 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 47: Appendix E: Contributions to capex
Appendix E: 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