Chorus Limited (CNU) Earnings Call Transcript & Summary

[Foreign Language] Greetings, and welcome to our full year results announcement for FY '23. I'm JB Rousselot, the CEO of Chorus and with me is Mark Aue, our Chief Financial and Operations Officer. Now most of you will know Mark from his previous role as the CEO of 2degrees and also his earlier telco finance experience. He's been in the seat for just a few months. I'm sure he is going to do an absolutely great job today, but just keep that in mind during the Q&A later in the presentation. As usual, we're going to cover the areas summarized on the slide, including key results, financials, guidance and also future trends. And then we'll take questions from the phone at the end of the presentation. Chorus has delivered another strong result in a year of many challenges and change. Like many other sectors, we were impacted by a softer economy, by cost of living concerns and increased costs across the board. Other more operational challenges included extreme weather events and especially Cyclone Gabrielle and the shortage of skilled workers when borders reopened post-COVID. So this meant that we faced significant constraints on the number of customers that we could connect when they needed a physical install. Despite that, we managed to grow total fiber connections by 72,000 to 1,031,000. We added another 22,000 net broadband connections in our fiber areas, meaning that we gained broadband market share in areas where we have fiber. Net broadband connections were down just 1,000 connections when you add the non-Chorus UFB areas and the rural and regional regions. And total connections were down 33,000 compared to a loss of 36,000 in the year before. We now ended up with 1.27 million connections. On the financial side, reported revenue lifted by $15 million to $980 million, that's our second year of revenue growth. As we flagged at the time, our half year upgraded EBITDA guidance did not include an allowance for the extreme weather impacts that we were dealing with at the time. Those weather-related costs came in at $7 million, and changes to our operating model also added one-off costs of about $3 million. When you exclude these costs, underlying EBITDA was $682 million, so up $22 million from an underlying EBITDA in FY '22 of $660 million. Net profit after tax was $25 million compared to $64 million in FY '22. And we have confirmed a final unimputed dividend of $0.255 taking total dividends for the year to $0.425. Now despite the workforce constraints that I've mentioned, we continued to see good gains in uptake in our UFB rollout areas. UFB1 areas were up 3% and UFB2 areas rose by 6.5%. So overall, the uptake stands now at 73% across the combined UFB footprint, which is 4% better than last year. And of the 72 connections that we added, about 10% came from outside our UFB fiber area. So our growth is not just about the UFB areas. This slide is from our June quarterly update. So you're familiar with it. At a high level, it shows the strong broadband growth in our UFB areas that I mentioned earlier. And that growth is largely offsetting the reduction in copper voice lines. In our non-UFB zone, we have seen an uplift in disconnections, and we attribute that more to consumers switching from low-speed copper services to improve satellite offers. And then finally, line loss in the other fiber companies areas, the LFC areas is reasonably constant, and we now have about 39 connections remaining there. When you look at installations, the 92,000 fiber installations that we completed in the year was at the lower end of our initial guidance of 90 to 110 installations. The field workforce challenges meant that we had to shift part of our managed migration efforts to really encourage fiber activations in homes where the installation had already been done. And you can see that play out in the chart on the right, with the migration contributing just 35,000 of the total installations down from 43,000 the year before. But the good news is we did lift activations from 32,000 to 36,000 and 17,000 of those were from offnet addresses. Now the workforce shortage and the restoration work that was caused by the extreme weather events obviously had an effect on our customer experience scores. To give you an idea, we had something like 60 days in which field activity was subject to force majeure conditions just in the second half of the year. We also had to delay some planned improvements to impact provisioning processes, and we hope that these changes will help lift the CX scores for those installs in the new year. We've now returned to sustainable workforce levels. We're pleased to be back to carrying out our proactive installations and see them make a difference going forward. Our plan mix for residential and business services continues to show positive trends. 1 gig and multi-gigabit Hyperfibre services were 39% of the residential connections growth in the year. That helped lift the 1-gigabit service from 23% to 24% of the plan mix. Our home fiber started, a 50-megabit plan also started to get some good traction, growing to 16,000 connections. And a very encouraging characteristic of these new home fiber starter customers is that about 60% of these were coming from offnet just in the month of July. On the business side, we now have 71% of connections on speeds of 500 megabits per second and above. 91% of both residential and business plans are on speed of 300 megabits or better. And that's a really strong competitive position to be in. So overall, some high-level solid results. I'm now going to hand over to Mark, who will take you into more details of the financials.

Thanks, JB, and good morning, everyone. Whilst I've only been with the Chorus team for a few short months, I've been in the telco industry for over 20 years here in New Zealand and overseas, and will have cross paths with many of you on the call today. So once again, I wanted to say hello. Let me say I'm consistently amazed at the quality of telco infrastructure we have in New Zealand, which I think often gets lost. You only have to look at other global benchmarks to recognize how fortunate we are in New Zealand and even more so when you consider our relatively low number of population and our diverse topography. Chorus is built to now run a fantastic fiber infrastructure across our country that we can be exceedingly proud of, and likewise, I'm proud to be part of the Chorus team. If we turn to the slides. This is our usual slide summarizing the earnings result. The overarching thematic, I would say, is that despite a challenging year due to the extreme weather events and technician shortages, we've been able to maintain revenue growth and underlying EBITDA growth. On a reported basis, revenue has grown by $15 million with EBITDA largely flat year-over-year. However, as we've reported previously, at the half, there are several one-off adjustments impacting both underlying revenue and expenses. These are detailed in a subsequent slide. When adjusting for these, revenue was up $22 million. Operating expenses were flat and underlying EBITDA has grown by $22 million to the $682 million in FY '23. As we've noted in prior periods, our push to migrate customers from copper to fiber means that we've accelerated depreciation on copper cables in our fiber areas. This contributed most of the $19 million left in D&A throughout the year. Net interest expense has a number of moving parts that has resulted in an increase of $53 million. That's primarily being driven by rising interest rates and some increased to levels of debt. Tax expense reduced as a consequence of lower earnings, but also a $10 million accounting adjustment relating to the revaluation in land and building assets. Reported total revenues of $980 million reflect the ongoing growth in fiber broadband as fiber uptake increases, and we see good growth in higher speed plans. As JB has mentioned, we're consistently seeing about 40% of quarterly net adds taking up these plans. Although total broadband connections were flat, the ongoing migration of consumers from copper to fiber has meant fiber broadband revenues have grown by $74 million and copper broadband reduced by $36 million. CPI increases had a staggered effect throughout the year. There was an average of 5% increase across some fiber services from October last year and then 7.2% for some copper services from December last year. Overall, our fixed lines reduced by 33,000 connections and the bulk of those were copper voice lines. Those voice revenues were down $13 million and are consistent with the prior trends. In field services, revenue was stable. We did see a large lift in greenfields revenue for new property development, up 14% year-over-year to $33 million. However, roadworks and other activity was down and offsetting this. On an underlying basis, total expenses are flat at $299 million, which you'll see on the following slide. But on a reported basis, expenses increased $18 million. Of the key movements, labor costs whilst increasing by $12 million on an underlying basis, are only up $5 million, again, due to one-off adjustments for the holiday pay provision and COVID impacts from FY '22. As at 30 June, we had 846 permanent and fixed-term employees. That represents roughly a 6% increase from this time last year. And that increase reflects some contractors becoming permanent and additional resourcing to support the implementation of the new fiber regulatory framework as we reported earlier this year. Network maintenance costs continue to trend down as customers migrate to the fiber network. As a result, we've seen lower network faults, but this was offset by $3 million of costs relating to the extreme weather events, some CPI increases and a more complex fault mix. I would note our service company contracts meant CPI adjustments only flowed through from April this year. So we've only seen 1 quarter of inflationary impact and more will come through in future maintenance and CapEx costs this year. IT costs are down $8 million, benefiting from the release of a $2 million software provision and savings from ongoing migration of legacy IT systems. And other network costs increased $8 million, again partially driven by extreme weather-related costs of $3 million, but there were also ongoing property and network optimization costs of $3 million as we exit copper and other legacy assets. On an underlying basis, for EBITDA, we increased $22 million to $682 million with both years incurring one-off adjustments. FY '22 adjustments were $15 million; by FY '23, had $10 million relating to again to the weather events and operating model changes. Secondly, I'd note that we've been looking into our optimization of our assets, and we've identified that our land and buildings were valued significantly below market value. Having now gone through an independent verification process, we've applied a $282 million revaluation to those assets. There'll be a small effect on depreciation from this change. And barring market volatility, we would expect to review this valuation now every 3 years. And gross CapEx for the year were $454 million and it's down $38 million from the prior year., much of that follows the end of the UFB rollout. Fiber installations and layer 2 expenditure was $193 million with 92,000 installations completed. The average cost per installation in UFB areas was $1,067 and well within the guidance range we provided for this year. Layer 2 spend was $51 million, up from $29 million in FY '22 as we scale up our network capability and make multi-gigabit Hyperfibre services more widely and readily available. Other fiber growth CapEx was up $36 million, driven by strong demand for new property development, up from $54 million to $68 million and capacity upgrades to our core and metro transport network electronics. I'd also note there was roughly $6 million of spend on fiber backhaul in Fiordland that is largely government funded. Copper spend was down significantly at a reported level spend of $33 million was down $5 million for the year as we implemented stop sales in UFB areas, but the underlying decrease was actually $12 million or more than 30% when you remove $7 million of rural cabinet upgrades that were also largely grant funded. Common CapEx lifted from FY '22 levels as building projects resumed after COVID delays, and we had various IT projects, including those that are helping us exit legacy systems and reduce our ongoing OpEx. Our EBITDA guidance for FY '24 is a range of $680 million to $700 million and reflects our ongoing objective of modest EBITDA growth. While we continue to expect favorable trends on connections and ARPU mix, there are some headwinds specific to FY '24. For example, in greenfields, we anticipate some moderation to revenue from our record high last year given the macro market challenges impacting the building industry and indications from large developers for slowdown. We also anticipate cost to be approximately $10 million higher and again, specific to FY '24, due to a number of factors. These include the deferral of some FY '23 initiatives because of technician shortages and weather events that have now shifted into FY '24. Inflation that is hitting a range of cost lines, network maintenance in particular, will have a full year of service company CPI on annualization. The regulatory and compliance costs are growing with our next regulatory submission, a significant focus through this year as we build up to RP2. And finally, costs to transition to our new operating model from Q2. Moving to CapEx guidance. For FY '24, we are expecting CapEx in the range of $400 million to $440 million. Within that fiber CapEx of $320 million to $340 million, and the majority of that is installation and layer 2 spend of $180 million to $190 million. That's based on between 80,000 to 100,000 installations. Copper CapEx also includes about $6 million for the remainder of the rural cabinet upgrade program and that, again, is largely grant funded. Sustaining CapEx is expected to be in the range of $220 million to $240 million, up from $207 million in FY '23 in part because we see the inflationary effects come through and a number of key projects that either continue or will come online. Those projects include some that we mentioned back in February as part of our CapEx outlook, such as the exchange building work that have been delayed by COVID, the deployment of Hyperfibre capability into the network, upgrades to provide greater capacity on key transport links and ensure we avoid network congestion and a multiyear lifecycle project where we're replacing rural transport equipment. Our net debt to EBITDA grew to 4.39x from 4.08x in June. Borrowings were up circa $170 million, primarily due to the new bond issue in September. About 65% of our interest rate exposure was fixed as at 30 June this year with an average effective interest rate of 5.4%. We have $750 million of fixed interest rate swaps starting in the first half of FY '24 at better than current market rates. That will then take us to around 70% fixed over the next 3 years as per our treasury policy. And those rate swaps are detailed in the presentation slide in the appendix. On our debt profile, you can see the new 2029 euro bond on the chart that was issued in September last year in conjunction with our decision to proactively repurchase $457 million of the October '23 bond. That was at a net cost of $11 million, but effectively delivered a net $2 million benefit. The remaining amount on the October 2023, Euro bond is $328 million, so we'll be undertaking further financing activity in the near future. With the UFB rollout now finished, we've completed the drawdown of the $1.3 billion in Crown financing and the first debt repayment of $85 million is due in mid-25. In line with our guidance, there are $0.425 per share dividend for FY '23. We've announced an unimputed final dividend of $0.255 to be paid in October this year. The DRP remains suspended. Dividend guidance for FY '24 has been confirmed at $0.475 per share unimputed and subject to the usual caveats. And I'd note, our dividend policy to pay 60% to 80% of net cash flow from operating activities less our sustaining capital expenditure is now in effect. With regard to the share buyback, there's just 11 million left to run of the original program, and our intention is to close that out in FY '24. Total shares on issue have now reduced to 435 million. Finally, on the regulatory front, I'm sure many of you have waded through the wealth of information in our information disclosure filings earlier in May this year. The main points were our estimates that the RAB had grown to $5.7 billion at the end of calendar 2022 and a MAR wash-up balance of $47 million that will be carried forward to the next regulatory period for RP2. For us, we're very focused on that next regulatory milestone with that proposal due in late October this year. And we'd expect to provide an update on that proposal sometime in early November. With that, back to you, JB.

Thank you, Mark. As part of our active wholesale strategy, we now have a campaign in market that promotes the fact that New Zealand now runs on fiber. So before I go into future trend and priorities, I just want to reinforce some of Aotearoa's success in broadband connectivity and the strong position of Chorus in that space. New Zealand ranks ninth in terms of fiber broadband penetration among all OECD countries. The coverage of fiber, the fact that 87% of Kiwi homes and businesses can order it and the take-up at 73% are among the best. And providing 75% of that fiber coverage, Chorus runs an extensive network with the capability to already support multi-gig services. It's a future-proof network that requires limited investment to keep up with demand, now that the fiber is in the ground. And once customers have experienced fiber, they tend to stay with it, which is why we're focusing on driving fiber uptake. More than 3 million Kiwis are now able to access fiber and the ones that are on fiber are making the most of it. To show that, it was just on 2 years ago that we saw the biggest spike in average monthly data usage when the Auckland region was locked down for weeks. We're no longer in locked down, but data usage is pretty much back to where it was during that peak. The average monthly usage in June was 585 gigabytes on fiber. And in July, it was 595 gigabytes. Now while there's a lot of talk about Metaverse, things like virtual reality, we think that the more immediate lift in data usage is going to come from the proliferation of 4K streaming content. Today, 45% of traffic on our network is being driven by video streaming traffic. If all that traffic was in 4K quality, monthly usage would double to about 1,200 gigabytes per month. And if all broadcast TV content moved online, monthly usage would be in the order of 2,000 gigabyte. So as Kiwi viewing trends are likely to catch up with what is happening internationally, and especially in things like 4K live sport, we do expect that this will drive demand for high-speed reliable Internet. And this kind of demand can also snowball because video and latency requirements grow in tandem. We're clearly seeing new applications that are driving greater bursts of data download and upload whether it's for gaming or software updates. At the same time, the number of devices in the home is expected to double every 5 years. So for us, this all points to continued growth in the demand for high bandwidth and speed, load agency and rock solid reliability and consistency. And there's no question that fiber is the best technology to deliver this and that New Zealand is right up there with the global leaders in that space as we deploy 8-gig capable Hyperfibre and also 400-gigabit capacity in our metro networks. As consumer needs evolve, Chorus is also evolving. I've talked previously about our focus shifting to a more operational future now that the fiber rollout is done. We're adopting a new operating model that will help us streamline the way we respond to trends and deliver better consumer outcomes. This means changing from the very strong vertically integrated network and product business units that helped us deliver the rollout and large-scale uptake of UFB to a matrix structure. This structure is centered around 3 value streams that are aligned with our strategic priorities. Access is responsible for high-volume consumer and small business products and is tasked with driving fiber uptake and retention. Infrastructure is focused on higher spec products and charge with leveraging our network and assets to grow new revenues. And fiber frontier is about extending our fiber coverage beyond in our UFB footprint and ultimately retiring our copper services. And we plan to have this new structure in place from Q2 to unlock more value out of our great assets. If we look at our strategic focus of winning in core fiber, that will be driven by both the access and the infrastructure groups. We believe that we can lift fiber uptake to 80%, and we're seeing strong market dynamics that support this. While some RSPs are keen to grow fixed wireless broadband, many continue to grow market share by offering competitive fiber services and leveraging our latest offers. Our 50-megabit home fiber starter plan is getting good traction with several retailers now promoting it at a $50 retail price. We're seeing demand lift and about 60% of those home fiber starter net adds came from offnet. As I mentioned earlier, 1-gigabit demand also remained strong and is contributing about 40% of adds currently. Over the last few months, we've seen larger retailers starting to offer Hyperfibre which is a great development. In the current year, you can expect us to see leveraging our copper withdrawal program even harder to make sure that we grow uptake in our UFB footprint. And especially, we're going to be putting more focus on smaller UFB2 communities, and we'll keep driving activations from our installed base of inactive fiber sockets. We're also continuing to take a considered approach to product pricing. So we're holding pricing on our home fiber starter and on Hyperfibre plans while applying inflation to most others. The new operating model means that the infrastructure and the fiber frontier teams will bring greater focus to developing potential opportunities. We are pleased this year to see our new PowerSense service get immediate traction by helping power companies deal with the effect of the weather events. We're completing rack space for our Auckland Edge Center, and we already have orders for about 30% of that. Backhaul is also an area where we think that we can develop more and we've connected 7 data center nodes as well as seeing more sell-side demand. Smart location is an area that we haven't talked about much before, but we're approaching several thousand connections in that space. And these are for things like traffic cameras, digital billboards and so on. And we've seen 19% growth last year in that space. The infrastructure team will also look after the new property development. And as you've heard Mark say, that's had a record year. You can see that we completed build for about 33,000 lots in FY '23 and the volume of orders remain solid, but a little bit below the peak. Now I mentioned at the half year that we were looking at taking fiber further into rural areas. We've issued now a tender for 10,000 premises that are adjacent to our UFB footprint or existing fiber. About 60% of those are offnet, and we expect to have a view of that project sometime later in FY '24. As we've said before, any rural expansion beyond that remains subject to business casing, but also to regulatory and policy outcomes. Now the growth in consumer broadband needs and the global shift to fiber has reinforced our belief that the copper network is approaching the end of its technological life. Our copper connections reduced by 1/3 in FY '23 with just 240,000 remaining. Of the 100,000 reduction, the vast majority were in our UFB footprint, and they migrated to Chorus fiber. So that's why we expect to be a pure fiber business company within a decade, with copper retired in our UFB areas by the end of 2026 and then in non-fiber areas by the early 2030s. We have about 90,000 copper connections remaining in our UFB areas, and the access team will be managing our withdrawal program. We're no longer selling copper in these areas, and we expect to issue another 30,000 withdrawal notices this year, closing another 750 cabinets and targeting the continuation of a high broadband retention rates when we do so. In the areas that are provided by other fiber companies, the LFCs will take an economic approach to couple withdrawal and we're already conducting some trials with them. And in non-fiber areas, we have about 115,000 copper connections remaining. Now the Commerce Commission has already noted that this is less than half of the market. The growth of mobile coverage and the emerging satellite offerings mean that the copper legacy obligations that we have in those areas are less and less relevant. And this should be reflected in the commission's regulatory review of copper services, which is due to be completed by 2025. Now I've talked previously about fiber's green credentials. FY '23 was another record year for data traffic on our network with 7,400 petabytes, but despite that ongoing growth, the efficiency of fiber means that we can carry more data while realizing electricity reduction. And this year, we reduced electricity by 5% as we began to shut down the copper. Our target ultimately is to have a 25% reduction by 2030. We also saw our Scope 1 and 2 emissions fall by 24% from the year before, and we've begun preparing for our first climate statement, which is due next year. And you can read about this and also our digital inclusions and D&A initiatives in the sustainability report that was also released today. So in summary and before going to Q&A. FY '23 was a solid year from an operational point with growing fiber take-up despite a very challenging environment. Our financial results were solid as the positive EBITDA impact of delaying some of the initiatives due to our shortage in field resources allowed us to absorb the one-off cost of extreme weather events. For FY '24, we plan to continue to grow overall revenues and deliver modest EBITDA growth despite catching up with some of the delayed initiatives and the impact of high inflation. Data consumption continues to reinforce the competitive positioning and the future-proof nature of fiber compared to other technologies. For us, it is disappointing to see that some retailers are not offering all our products to their customers, especially the low-cost Home Fiber Starter product or our high-speed Hyperfibre range. It is something that we really hope the regulator will start questioning. We also think that it would be in the interest of customers to be transparently and fairly presented with all technology options by retail service providers because it is still often too hard to find our full range of fiber product, it was recently highlighted in a business test article. Customer preferences should drive technology choices, not network economics because ultimately, there is no such thing as fiber-like products, you're either on fiber or you're not. And you will notice the difference. And with that, let's now go to the questions, which will be moderated by the operator. Operator, do we have any questions?

[Operator Instructions] Your first question comes from Arie Dekker with Jarden.

Firstly, just on revenue guidance. Just at the lower end and thinking about where, your comments on field services, but the bulk of the revenue obviously comes from fiber mass market and to a much lesser extent copper, where you've got very strong inflation going through on all core products. So at the lower end of guidance, can you just sort of give us some visibility on what you're assuming around connection loss in line with FY '23 or not at or worse? And then also economic conditions, like are you assuming trade down to cheaper retail products? You obviously have the $60 fiber retail product in the market now, what are the assumptions on those 2 things?

Yes. I'd say on the guidance for revenues, we continue to plan the same trends that we've seen last year. So we continue to plan for an uptake increase in terms of fiber take-up. We grew by 4% last year on the UFB footprint. There is strong indication that this uptake is continuing to increase. On the copper losses, overall, we dropped less total connections this year than we did last year, but we're definitely seeing a bit of an uptake, especially outside of the UFB footprint in terms of copper broadband and voice reductions. So those would be included in our revenue assumptions going forward. From a product mix perspective, we still see the fact that the startup fiber product, the 50-megabit product, is growing as a good thing. I mentioned that about 60% of the net add in that product were from offnet. So it tells us that with this product, we're actually targeting a segment of the market that is currently not with us, either on copper or on other fiber products. So we're not seeing signs of a downgrade in terms of product mix. And we just continue to believe that Hyperfibre product 50 megabits service will continue to grow.

Just a quick point of clarification on Mark's dividend policy comment and it being in effect. Can you just clarify, is that open-ended in terms of term? Or are you going to review policy when you say where RP2 settings land next calendar year?

No, I think it's the first year in place, Arie. We've put into the 60% to 80% range and we were comfortable that, that actually would see us through the secondary regulatory period as well.

See you through second regulatory. And another point of clarification, just quickly on the OpEx. That $10 million that you're guiding to, is that on the normalized OpEx base?

Yes, if I understand what you're saying. I mean, I think probably the best way to think about it, if I think about our EBITDA guidance range is either we're doing it on a reported numbers or we're doing it on an underlying basis. But the 10 million applies in either case, which is why I'd say our aim was for ongoing moderate EBITDA growth. If you were to take our midpoint as an example, on the EBITDA range at say, the 690 million, you're either comparing that 690 to 672 as a reported basis? Or you're comparing 680 to on an underlying basis to and you've then got to add the tune on to the midpoint to get to 700? Either way, you're looking at roughly that 20 million of growth. I hope that makes sense.

Yes. But -- yes. Well, I guess what I was asking was there were one-off costs and your adjusted costs were 299. I can think about the $10 million being $10 million of additional OpEx on the 299.

Yes.

And then just on the operating model changes, I take your comments that you're beating it on. And obviously, there's order focus for them beyond sort of cost out. But can you just perhaps JB, just talk briefly to whether there is any ambition for those operating model changes to ultimately result in cost savings and on what time frame that might be?

Yes. Listen, the primary objective for the model change is to really unlock the value that we've created now that we finished the build of the UFB footprint. The old operating model with really strong horizontal business units served us really well to deliver the UFB program on time and on budget. But now the focus has moved to unlock the value that exists in this asset. And that's why we're moving to this value stream model with 3 value streams that have a very focused and dedicated teams that are looking at specific market segments and growth initiatives with access on the kind of big volumes, broadband products that we provide, with infrastructure, looking at the more complex services and also adjacent revenue opportunities and with fiber frontier looking at the rural and regional strategy. So the core primary focus of this value stream model is to have a dedicated team really focused on specific growth opportunities with very sharp, short, medium and long-term strategies and also with an ability to better deliver end-to-end. So the primary objective is not to reduce cost. But that being said, you can definitely count on the long-term D&A of Chorus being a very efficient operator to continue to be something that will play out as we implement that new up model.

And then just lastly on the CapEx guidance, and I'm just looking to understand that a little bit better. Just on the way of CapEx, would you expect that to be similar in '24 to '23? And can you just talk briefly about where most of that layer 2 CapEx is going and how long you'd expect it to be at these sorts of levels?

Yes. Arie, look, I mean I think that layer 2 CapEx recognizes some of the scaling for network and network augmentation and actually building for future demand and capacity, so most notably, the Hyperfibre capability. So we see that opportunity, and that's obviously increased in FY '23. And we'd expect that as we roll out the network as well and meet that future demand that would be over the next couple of years as well.

And then just in terms of the installations, do you expect to continue to do installations in excess of your net connections and fiber at a similar level as FY '23 or would you expect that gap to close?

Well as you saw, because of the shortage in field workforce, this year was a quite special one, where we basically really focused the effort of the managed migration teams on activating the premises where [ Aotearoa ] had already been installed, and you were seeing this in the graph that we covered during the presentation. We now have the field workforce resources that allow us to go back to this active managed migration plan. It's something that has served us really well, especially now that we're in a phase of active copper disconnection in the UFB footprint. So yes, you'll continue to see us focus some of those installations in a proactive install mode, knowing that the vast majority of them actually turn into an active connections within 12 to 18 months.

And Arie -- sorry, Arie, I was going to just add to, I'd recognize that the guidance that we've set for FY '23 was 92 and 110. And obviously, that was suppressed we were at 92 for the year, but it was suppressed given the technician shortages in the main and some of those weather events. So that demand rolls forward as well.

Yes. And then the last bit to this, my strain is just on customer retention costs. I mean $30 million, I mean, in some ways, depending on how you look at it, it's quite high on an average net connection basis, albeit you're managing churn and that sort of thing as well. Can you just sort of talk to how you're thinking about customer retention costs in '24 as net connections do start to slow down? Are you going to continue to invest at that sort of level? Or what should we expect to see it come down?

No. I mean, listen, the good news for us is that the churns that we experience of people that are on fiber continues to remain very low. We do still need to continue to invest, and you'll see that in the incentive plans that we have and then the retention plans that we have. So yes, it's something that you'll continue to see a focus on from us.

Your next question comes from Aaron Ibbotson with Forsyth Barr.

Yes. My first question was actually just on general data demand, which we don't talk about so much. If you look at the 1 gigabit adoption, it seems to have slowed quite dramatically. And I'm just curious what your sense is amongst the end consumer, you're paying $10 extra or 3x, 4x the speed and your penetration growth from whatever, 23% to 24%. So how do you see that going forward? I know there are big sort of consultancy forecast over the next 5 to 7 years. But if you look more on the ground, what you're seeing for data demand?

Yes. I'd say we're still very encouraged by the demand that we see in the gigabit and now multi-gigabit service with the Hyperfibre product. While we got from 23% to 24% in terms of the overall footprint, when you look at the new customers that are signing up, the net new adds. It's about 40% of that that's coming in that 1 gig and above type of services. So the average monthly consumption data that I shared, the 595 gigabytes per month of traffic again, matching where we were when we're in locked that period is the main driver for that. Many households now have multiple people using a broadband stream in parallel. And so that's when you start needing the 1 gigabit service when you have multiple people streaming content in the household. So we do not see this as a reducing stream. In fact, we continue to see this as a future growth area for our product mix.

And if I could just probe a little bit because previously, you talked about WiFi 6 and where the actual speed is experience for the end consumer, how many uses them on WiFi and how many use the data plugged in. So presumably, the vast majority is experienced the speed via WiFi rather than plugged in. So do you have any data on that? Because I look at the same chart and I draw a slightly different conclusions from you. It looks like it's been flat for 2-3 years. I appreciate there's a lot of cover disruptions there, but you can squeeze 600 gigabytes of data out over 300 megabit connection quite quickly. So what is the main reason you think for the 1 gigabit uptake having slowed down? Is it price conscious? Or has it been just less advertising around it from your retailers?

Again, I'm not sure I would agree with the qualification of it having dropped off. We're still seeing a really strong number of people that are signing up to this product. On the WiFi point that you're making, what's encouraging for us is to see that a number of the retailers are now providing a WiFi 6 capable modem as the modem that they provide with the service is definitely the case for some of the retail service providers. So that will actually make it easier for people to experience the full benefit of a 1 gig connection in that household. What's driving that as I said in the presentation is a continuing growth in video streaming. And if you think about the viewing trends in New Zealand compared to what's happening overseas. We have a percentage of people that are using that 1 terabyte of data per month. That's a lot lower than what you see in the U.S. or in some European countries. So why we're viewing habits in New Zealand be any different. We still continue to believe that video streaming growth and in particular, the 4K one will drive people to look at those higher speed plans.

Second question, you gave a lot of detail around the interest expense. And I'm sure we can sort of figure it out ourselves. But do you have anything you'd be willing to share when it comes to just expected weighted average interest expense for FY '24 interest rates, or weighted average interest rates, basically?

Yes. Aaron, I'd just point to where we landed at the end of June this year, we were at 65% fixed. But actually, and I think that's a 5.4% effective interest rate. I think what that chart showed in the slide as well is that we've been able to take advantage of having a portion of our interest -- our debt actually is floating over the last few years and take advantage of those rates. Obviously, the interest rates have increased rapidly over the past year. We do have in place though forward-looking hedges from the end of this year, this calendar year, that would ensure that we are over 70% of our debt that's actually flexed and we'd be comfortable with that. But that's going to ensure that we're at rates that are lower than where are in market today.

I guess we'll run the numbers ourselves. Finally, I just wanted to know if you had any sort of qualitative comments you can add maybe from the regulator or elsewhere with regards to your indicative sort of long-term investment opportunities that you've put out to the market? Have you got any indication of whether this is going to be well received or where there are some sticky points or anything you could add over qualitative remarks, I'm sure you're in regular contact?

Yes. Listen, I think it's probably just a little bit early because as you know, we are putting together our RP2 submissions to the commission. So I think that rather than look at the indicative data that we've put at the half year, they're waiting to see what the numbers will look up in the document. One of the things I'll say is that in preparation for this RP2, we did a big consultation of consumers and ask them what they valued in terms of investment going forward in terms of resilience, in terms of future capability, higher speeds, also in terms of digital equity and being able to grow the coverage of UFB footprint. And so this is some of the elements that are part of our UFB submission. But in terms of Commerce Commission's reaction, I think they do support in general, resilience. They do support growing the fiber footprint. They do support better capacity and faster speed. But it's too early to really comment until we've put the submissions out and they started to comment on it.

The next question comes from Brian Han with Morningstar.

Just a few more questions on expenses, if I may. In the other network cost line, the $3 million network and property optimization costs incurred, would that be a recurring cost into F '24? And if so, how much do you think it will be this year? And on advertising costs, what do you think the sustainable advertising cost base will be in this post-COVID environment?

I'll take the advertising one as a high-level answer, and I'll throw back to Mark on the specific ones that you asked. But we've been in market with what we've described as an active wholesaler approach. We feel that it's still important that we are in market to clearly explain to customers the benefits of fiber and why they should consider fiber when they look at a broadband services. So you can expect a continuation of that campaign, in particular, in the UAP footprint because ultimately, this is what drives customers asking for that service going forward. On the other one, I don't know if, Mark, you've got a chance to cover that.

Yes. Brian, so the $3 million that was in there this year, I mean you look at where we are withdrawing from copper, and there are costs involved of actually being able to do that on the cabinets, so initially mothballing the cabinets. So in effect that we don't have customers on them, so we get the electricity savings at that point, but we haven't physically removed the cabinet, which would happen later on. So those are some of those optimization costs that go in there. From an ongoing basis, that's also some of the work that was delayed out of 2023 and has shifted into 2024. If you think about roughly speaking, from a cabinet withdrawal perspective, we've reduced by 400 or so in the year to 2023, and the plans are to reduce over 700 in the 2024 year. So there's a significant step up and again reflects our desire to accelerate that copper withdrawal.

Got you. Great. And while you're there, Mark, a question for you, if I may. As you assumed the COO role, should we expect any notable changes in the way Chorus works with resellers, apart from all that advertising that you're going to do yourself?

Well, I think for one, given my previous experience on the retail side, I think that probably brings a bit of insight as well as being able to work at a strategic level with the retailers. I think there are opportunities there that I see for Chorus and the retailers as well to come together. Look, I think from a COO perspective, I think what it really enables us, it's bringing the customer into the conversation in an integrated way, but we're bringing the commercial and the finance elements together. And part of that, I'd recognize, Brian, is just the maturing of an organization as well as we shift out of what was largely the build program and now into an operate and run and how we really drive that optimization.

[Operator Instructions] Your next question comes from Phil Campbell with UBS.

Just a quick one for Mark. Just on the FY '24 sustaining CapEx. Obviously, it's kind of gone up from $200-odd million up to $240 million. I just kind of wanted to get your view on that. It sounds as though reading between the lines. Some of it is kind of CPI related and some of it possibly is one-off. But I just wanted to get your view on kind of going forward beyond '24, like what that sustaining CapEx level would be?

Yes. A couple of things I'd note. First one on timing, and I think when we look at the chart and you look back over the last couple of years, I think we'd say the $160-odd million in 2022 was a bit of an aberration, given all the cover impacts and delays. I think where we've landed at 2023 at $207 million and then moving to a 24 view in a range of $220 million to $240 million. Yes, there's a big piece of that, that's driven by inflationary impact, which is obviously real. I think equally, some of the initiatives that we've talked to and part of that network scaling. So augmentation of the network and actually building for that demand and capacity in the future as well takes time. So it's not a case of waiting and switching a light on. And then there's equally some life cycle spend. So as the network gets to being 12 years old, then obviously, some of that life cycle spend that goes out over multi-years as well starts to come into play. Obviously, then offset by the sustaining CapEx for copper as we keep withdrawing.

So just -- so I understand correctly. So if I go into say '25, I was trying to estimate it. Would it be still around that level, given that most of it's CPI? Or would you see it just drop back a little bit?

Well, I mean, look, the first qualifier I'd say is given that we're in the process for the RP2 submission and what the allowance has come out, that's all subject to the ComCom. But however, I think where we see 2024, you could see some of those multiyear life cycle programs, the scaling and augmentation of the network for future demand and capacity that will continue to come through in the short term.

And I just noticed normally, you used to kind of disclose the kind of copper OpEx and revenues versus the fiber OpEx revenues this time around. Is that because you've got the RP2 exposure coming up or is it...

Exactly. And we're still working through that process for the submission in October this year.

Maybe just one last one for JB. Because I did notice in the annual part kind of outlook statement, you did kind of talk about this WiFi issue. Because I suppose if we have got such a big demand and we've got 4K transition and stuff like that, even a one good connection on the ComCom numbers is kind of like average speeds of like 280 megabits per second in the home. So does that act as a bit of a constraint? Or do you end up with the possibility of somehow retailers trying to switch out modem try and give us WiFi 6 and other means to try and get faster on home speeds?

Yes. That's a good question. And just to be clear, the Commerce Commission does show that the measure at the box is indeed delivering the 1 gig service. It's when you actually use WiFi to access that service that you would experience a different speed. And that's why, for us, we do want to encourage a conversation with the retail service providers but also the providers of WiFi extended to really lift the standard so that WiFi 6 is generally spread throughout premises and people can really realize the benefit of what a 1-gig connection to your home actually is. It is a full chain from the fiber into the home, going into the modem, going on to WiFi and then going on to each of the devices that you use in your home to consume that stream. That ultimately is the experience that an end user will have when they use an application. So we will continue to push that. It is a space that the retailers have said they want to have control of ultimately, the gateway that is installed in the home is a gateway that is service provided by your retail service providers. But we'll continue to push for when the Commerce Commission to do that measuring so that there is transparency about what the efficiency of the services and especially the home modems are, so that consumers can make the right choice.

There are no further questions at this time. I'll now hand back for closing remarks.

Okay. Well, thank you very much for everybody who joined this broadcast. It was Mark's first one. And hopefully, we answered all the questions that you had. We look forward to catching up with some of you during the road show over the next few weeks. Thanks again, and talk to you in 6 months.