Slide 1: Institutional investor presentation stock exchange announcement
Chorus Limited Level 10, 1 Willis Street P O Box 632 For personal use only Wellington 6140 New Zealand Email: company.secretary@chorus.co.nz STOCK EXCHANGE ANNOUNCEMENT 21 May 2014 Institutional investor presentation Chorus will today give institutional investors and analysts a presentation on its b
Slide 2: Chorus Institutional Investor Briefing
For personal use only Chorus Institutional Investor Briefing 21 May 2014 // PAGE PAGE 1 1
Slide 3: Disclaimer
Disclaimer For personal use only 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 construc
Slide 4: Mark Ratcliffe, Chorus CEO
For personal use only Mark Ratcliffe Chorus CEO // PAGE PAGE 3 3
Slide 5: Agenda
Agenda For personal use only >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 & Insi
Slide 6: We're getting on with things
For personal use only 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 7: Regulation – Anna Moodie
Regulation – Anna Moodie For personal use only / PAGE 6
Slide 8: Total Service Long Run Incremental Cost (TSLRIC)
Total Service Long Run Incremental Cost (TSLRIC) The service: For personal use only 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 servi
Slide 9: TSLRIC is not…
TSLRIC is not… For personal use only A hypothetical network + a hypothetical service = hypothetical price / PAGE 8
Slide 10: TSLRIC – asset valuation
TSLRIC – asset valuation For personal use only 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
Slide 11: TSLRIC – valuing our network
TSLRIC – valuing our network For personal use only • 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 incre
Slide 12: Cost of Capital
Cost of Capital For personal use only 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 adju
Slide 13: 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 For personal use only 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 p
Slide 14: Regulatory calendar
Regulatory calendar For personal use only 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 dr
Slide 15: Technology – Martin Sharrock
Technology – Martin Sharrock For personal use only / PAGE 14
Slide 16: 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 For personal use only year. Historic and future data for New Zealand volume and
Slide 17: Global Macro Technology Themes
Global Macro Technology Themes Market Trends For personal use only 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 applicati
Slide 18: Fibre is at the heart of everything
Fibre is at the heart of everything Fibre >initially a transport technology For personal use only 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
Slide 19: Why is fibre the future?
Why is fibre the future? Mobile Copper (VDSL2) Fibre THz ….. 5MHz 5MHz For personal use only 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
Slide 20: Fibre Build – Technology Developments
Fibre Build– Technology Developments >Focus on simple, consistent, flexible build design For personal use only 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.
Slide 21: Fibre Connections – Technology Developments
Fibre Connections– Technology Developments >Focus on simple, consistent methodology for connection For personal use only 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 blowi
Slide 22: Chorus Network Strategy
Chorus Network Strategy For personal use only 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 Fibr
Slide 23: In Summary
In Summary > Global technology themes are driving bandwidth needs. Cloud computing, video For personal use only 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 fut
Slide 24: Morning tea break
Morning tea break – For personal use only back in 15 minutes / PAGE 23
Slide 25: Build – Ed Beattie
For personal use only Build – Ed Beattie / PAGE 24
Slide 26: Unprecedented scale and scope
Unprecedented scale and scope For personal use only > 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-
Slide 27: Auckland and Wellington >60% of Chorus rollout
Auckland and Wellington >60% of Chorus rollout For personal use only > 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 de
Slide 28: UFB rollout now at maximum pace
UFB rollout now at maximum pace For personal use only > 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 starte
Slide 29: Progress by Chorus area, as at April
Progress by Chorus area, as at 30 April Auckland (incl. Waiheke, Whakatane Rotorua Taupo For personal use only 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 12,30
Slide 30: Understanding UFB communal capex
Understanding UFB communal capex For personal use only > 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/footpat
Slide 31: Step down in CPPP from FY15
Step down in CPPP from FY15 For personal use only 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 ▪
Slide 32: Chorus' communal deployment toolbox
Chorus’ communal deployment ‘toolbox’ For personal use only 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
Slide 33: Options for installing underground duct
Options for installing underground duct For personal use only 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 under
Slide 34: Rapid trenching
Rapid trenching For personal use only • 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 Auck
Slide 35: Aerial deployment
Aerial deployment For personal use only 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 36: Deployment flexibility: CFH agreement
Deployment flexibility: CFH agreement For personal use only > 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 exi
Slide 37: Premises types and connections process
Premises types and connections process For personal use only 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, excludin
Slide 38: Multi-Dwelling Units (MDUs)
Multi-Dwelling Units (MDUs) For personal use only > 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
Slide 39: Rights of way
Rights of way For personal use only > 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
Slide 40: 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 For personal use only (>3 stories) Chorus funded Residential/business standard lead-in from street to building entry Note: funding policy will point at ti
Slide 41: Reducing cost to connect
Reducing cost to connect For personal use only > 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; m
Slide 42: Connections process
Connections process For personal use only > 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 wit
Slide 43: Market insights – Rosalie Nelson
For personal use only Market insights – Rosalie Nelson / PAGE 42
Slide 44: Social benefits of ultra-fast broadband
Social benefits of ultra-fast broadband Telecommunications globally is transforming Internet of ‘things’ Trends in New Zealand For personal use only Connected Home Exponential device growth – slow on home management • Multiple devices per user, per household • Average # of smart devices in NZ homes
Slide 45: In 2013 NZ was one of OECD's fastest-growing broadband markets
In 2013 NZ was one of OECD’s fastest-growing broadband markets For personal use only 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: G
Slide 46: Fibre penetration showing good growth from low base
Fibre penetration showing good growth from low base For personal use only 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 2
Slide 47: Target of 75% coverage will put NZ into leadership quadrant
Target of 75% coverage will put NZ into leadership quadrant For personal use only 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 Br
Slide 48: Industry in transition
Industry in transition > Industry grappling with price/value propositions For personal use only 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 foreca
Slide 49: Total connections holding steady
Total connections holding steady For personal use only > 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 > ‘
Slide 50: Broadband growth continues
Broadband growth continues For personal use only 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 -
Slide 51: 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 For personal use only > In 2013, 79% of broadband lines offered more than 20GB > RSP marketing focus is shifting to speed/capability > We have good high
Slide 52: NGA: Mass market GPON services dominate
NGA: Mass market GPON services dominate For personal use only *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 Direc
Slide 53: Regional uptake reflects activity of local RSPs
Regional uptake reflects activity of local RSPs > Local competition is still growing For personal use only > 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
Slide 54: Consumer fibre uptake is on low end plans
Consumer fibre uptake is on low end plans For personal use only % 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
Slide 55: NZ market aligning to international practices
NZ market aligning to international practices FTTx Bandwidth speeds available in 350 residential packages For personal use only 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 collect
Slide 56: Implications
Implications > Underlying demand drivers are strong For personal use only 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 u
Slide 57: Any questions?
Any questions? For personal use only / PAGE 56