Chorus Limited (CNU) Earnings Call Transcript & Summary

[Foreign Language] Greetings, and welcome to our Half Year Results Announcements for the Half Year '24. I'm JB Rousselot, the CEO of Chorus, and with me is Mark Aue, our Chief Operating Officer. As usual, we'll cover the areas that are summarized on the slide, including key results, financials, guidance and trends, and then we'll take questions from the phone at the end of our presentation. We're pleased to be presenting a very solid results today in what seems to be like our first normal operating period for a long time. If you remember this time a year ago, we were in the middle of dealing with operational challenges that included extreme weather events and ongoing technician shortages in the wake of COVID. That isn't to say that things are very easy today. Like other businesses, we're dealing with inflationary and broader macroeconomic challenges. But demand for broadband remains resilient, and fiber uptakes continues to grow. In the 6 months, we grew total fiber connections by 31,000 to just over 1,060,000 connections. That fiber broadband growth held our overall broadband connections flat for the half, offsetting the copper broadband reductions that we continue to see outside of our fiber areas. And then copper voice disconnections reduced slightly and total fixed line connections were down 50,000, compared to a loss of 19,000 in the half year 2023. So this meant that we ended up December with just over 1.25 million fixed line connections. On the financial side, revenue continued to grow and was up $16 million from half year '23 to $503 million. Underlying EBITDA was $349 million when you exclude one-off costs of $2 million for changes to our operating model, and that's up $7 million from the half year 2023. Net profit after tax was $5 million compared to $9 million the previous year as a result of higher interest rates and accelerated depreciation on our copper assets. And we have also confirmed an un-imputed interim dividend of $0.19, in line with our guidance of $0.475 per share for the full year. We've now built fiber past 1.49 million addresses, and that footprint grew by 16,000 addresses in the half. And again, 1.25 million of these addresses have a fiber socket already installed. Fiber uptake across this footprint grew by 1.2% in the half to reach 70.6%, and the uptake levels in our more recent UFB2 rollout areas showed even stronger growth, lifting from 51% to 55% in the half. In our UFB1 areas, uptake is at 74% and is still growing. Now this slide is familiar for you. It's from our December quarterly update, and it shows that the broadband growth in our fiber areas is offsetting copper disconnections. We can withdraw copper where fiber is available. So our copper withdrawal program is helping drive some of that fiber broadband growth. But this contribution will reduce over time as the pool of remaining copper connections shrinks. Other important contributors to fiber growth are new homes in greenfield developments and encouraging consumers to activate fiber in homes where inactive fiber sockets exist. We added 11,000 net broadband connections in our fiber area, even with the headwind of student disconnections that we typically see around the summer holiday. Line loss in other fiber company areas, so the LFC, remains reasonably consistent, and we have about 25,000 copper connections remaining there. And in the non-fiber zone, the pace of disconnection slowed slightly in the half, and we just have over 100,000 copper connections remaining. Our Home Fibre Starter, the 50-megabit plan, had very strong traction in the half. It doubled to 30,000 connections. We consciously held the pricing of that plan at $35 given the cost of living crisis, and it is a useful tool in our copper migration toolkit. Consumers on 1-gigabit plans also grew, up from 24% of residential plan mix to 25%. And then multi-gigabit Hyperfibre services, they don't show on the bar chart yet, but they now number almost 3,000 connections, and about 85% of that Hyperfibre demand is from residential customers. And then on the business side, business fiber connections grew by 4,500, and 3/4 of those business connections are on speed of 500 megabits or above. Speaking of data consumption, the proportion of power users consuming more than 1 terabit of data was 16% in December, and the average monthly data usage on fiber was 599 gigabytes per month. And that's back near the record usage levels that we last saw during the COVID lockdowns in late 2021. And it shows that there is ongoing growth in everyday data usage. And that growth is happening despite lower data users joining from copper. Based on overseas market comparison, we continue to forecast ongoing data growth. And as we've noted before, we anticipate that a step-up in usage will occur as consumer video consumptions continues to evolve. For example, average user would double if all the current streaming traffic was on 4K quality. Now the average doesn't tell you the full story. More and more usage is happening in the evening peak times. So this means that the network capacity is having to flex a lot more. If you look at the chart on the right, you can see how an average evening, the red line, peaks around 3.8 terabits per second of download. But that is completely eclipsed on evenings when events like Fortnite upgrades drive record peaks. And for this example, it was 5.3 terabits per second. And the peak in December '23 was 35% higher than the peak in December 2022. Now the good news is fiber can handle those spikes far better than other technologies. But we do need to keep investing in capacity to keep ahead of that growth in demand. So I'm now going to hand over to Mark for more detail on what was behind our steady financials, and I'll be back on trend.

Thanks, JB, and morning, everyone. If we turn to the earnings statement first, and JB's kind of covered these at a headline. But the thematic I'd really say for the first half is one of a steady set of results with no material operating surprises, which is pleasing. That's underpinned by continued growth in revenue, ongoing cost containment, and that's delivered further gains in EBITDA. In revenue, we're lifted by $16 million in the half, with EBITDA up $5 million compared to H1 '23. Operating expenses were up $11 million compared to a year ago, or $9 million on an underlying basis when we do exclude the operating model change costs. We had about $2 million booked in this half. As we noted in prior periods, our push to migrate customers from copper to fiber means that we have accelerated depreciation on copper cables in our fiber areas. We've adopted the same approach for copper-related ducts in our local fiber company areas, and we did that from the start of this financial year. And that's really driven the $6 million left in D&A compared to our half year '23. Those ducts will be fully depreciated by June 2026, in line with our broader copper withdrawal program. For transparency, net interest expense was up $16 million compared to the half year '23 when we exclude the $11 million of early refinancing costs of the Eurobonds that we did and incurred that in the prior period. Total debt has increased by roughly $150 million. And interest rate increases have seen our weighted average effective interest rate on debt increase marginally from 5.4% to 5.8% in the half. As a result, that combination of higher D&A and net interest expense has reduced net earnings from $9 million to $5 million over the half. If we look at revenue, reported total revenues of $503 million reflect that ongoing growth in fiber broadband as fiber uptake is increasing. And although total broadband connections across fiber and copper were flat between the half year periods, fiber broadband revenues were actually up $39 million with copper broadband revenues reducing by $17 million. CPI increases had a staggered effect through the half. There was an average 6% increase across some fiber broadband services in October and 5.65% for some copper broadband services from mid-December. fiber ARPU has grown from $53.38 to $56.05, and that's also noting that we've continued to see growth in our higher speed plans. However, copper voice revenues are continuing to decline at a consistent rate. And field services revenue were down $3 million, and that's largely driven by greenfields revenue that reduced by $6 million on the year as new property development has eased off. And that's due to that broader market conditions and rising building industry costs that we've all seen. And then finally, we saw a $2 million benefit in other revenue, and that's related to our property optimization program where we've exited some of those assets. If we look to expenses, operating expenses were up $11 million from half year '23. But on an underlying basis, we're actually flat sequentially to H2. Of those key movements, labor costs were $39 million. That included that $2 million of changes related to the new operating model, and that came into effect from the 1st of February. Now as referenced, about 130 roles across the business were impacted or changed, with about 30 roles actually being disestablished, and that's as we realign the business around the new value streams and the new operating model. I can confirm that there won't be further change-related costs in the second half of this year. And from an overall FTE perspective, we continue to look at opportunities where they are available in third-party supply, and also contract and sourcing that bring cost efficiencies in. That might mean that FTEs can go up, but actually our costs overall would be coming down. Network maintenance costs were down $1 million and continue to trend down as customers do migrate to fiber. As we've noted previously, the inflation uplifts that were applied to our service company contracts, they came into effect from April last year. And the resulting step-up in cost, though, has largely been offset by reduced fault volumes. IT costs were largely flat. Noting again, last year, we had the benefit of a $2 million software provision release. Other network costs though increased $3 million, and that's due to ongoing property and network optimization as we decommission and exit copper and other legacy assets. And then rents, rates and property, equally impacted by inflation, but also a catch-up of some deferred property maintenance activity that we've spoken to previously. And then finally, in other spend, increased by $3 million. That includes a portion of uplift in advertising and other costs to support ongoing sustainability and our regulatory work. From an underlying perspective, whilst the one-offs were pretty immaterial in the first half of this year, they were substantially greater in the prior period. So we've included this slide for comparative purposes. As JB noted, the underlying EBITDA actually did increase $7 million to $349 million this year compared to the half and prior year. And that continues a modest growth of around 2%. And total expenses in the half were $154 million, when excluding those operating change-out costs. That result is flat sequentially, as I said, but up $9 million. And that's driven by, again, the inflationary impacts and the projects that we've talked to that we had underway. To gross CapEx, $232 million in the half, is up $10 million from the prior year. That included $2 million of Cyclone Gabrielle recovery spend. And again, to confirm, we don't anticipate further cyclone-related costs in the second half. Fiber installations and layer 2 expenditure at $108 million with 49,000 installations completed. Average cost per install was about $1,100, which was at the bottom end of the guidance range that we had provided. Within that layer 2 spend was up $13 million to $36 million as we replace end-of-life equipment that really supports network traffic and it provides for future capacity. Now I would note too, these projects are front-end loaded in the first half based on both lead time for delivery and also cost efficiencies that we gained. So layer 2 spend will be materially lower in the second half. And other fiber and growth CapEx was down $12 million. That's largely because of the slowdown in new property development CapEx from $38 million to $31 million. Network sustain CapEx, up $8 million, and that's driven again by a combination of increased roadworks activity that we do generate revenue for and ongoing life cycle programs to replace legacy fiber routes. And then finally, in customer acquisition costs, they were up $5 million. That's largely due to a change in mix with a higher proportion of off-net connections coming on to the network and higher plan upgrade costs. To copper and common CapEx. Copper has been the $12 million for the half. That includes $2 million for rural cabinet upgrades, which are largely grant funded, and also another $1 million of those cyclone-related costs. So underlying, if you think $9 million spent on copper, and that continues to trend down in line with the copper withdrawal program. And then common CapEx is up $6 million from prior year, and that's due to the ongoing work on exchange buildings and particularly earthquake strengthening that was previously delayed by the pandemic effects. And we do have growth in new investment for our EdgeCentre Colocation capacity and products. To guidance and dividend. Our EBITDA guidance range of $680 million to $700 million is unchanged, and we are tracking to the upper half of that range. There's no change to our CapEx guidance range at a total level of $400 million to $440 million. But again, we are tracking to the upper half of that range. And then in the subcategories for fiber, copper and common CapEx also unchanged. And then finally, I'd note, from a sustaining perspective, we invested $116 million in the first half and our guidance for the full year of between $220 million and $240 million for sustaining is unchanged. That split of CapEx is in the appendix pages for reference. From a dividend perspective, we've announced an un-imputed interim dividend of $0.19 to be paid in April, and the DRP will remain suspended. And the full year '24 guidance of $0.475 per share also remains unchanged. As a reminder that we've completed now our $150 million share buyback in the first half. We now have just under 434 million shares on issue with about 19 million shares that were canceled through the buyback. Now with the conclusion of our share buyback and our imminent entry into a new full year regulatory period, we're undertaking a capital management review. Now I'd say this review wasn't an overhaul of our current framework at all, but more like a warrant of fitness. And that's really to consider how it's operating in practice and to ensure that it's fit for purpose across at least the next regulatory period. And this is the same approach we took heading into RP1. Now as we've said in the past, Chorus is committed to growing shareholder value and delivering a sustainable and growing dividend through time, and that hasn't changed at all. We expect to provide an update on the review at the full year results later in the year, and we'll be considering, as you would expect, factors such as the next regulatory settings, shareholder feedback, comparable company benchmarks and broader macroeconomic factors. To gearing, our net debt to EBITDA has grown to 4.56x, up from 4.39 in June, with borrowings increasing by about $150 million. We had $750 million of fixed interest rate swaps that started in the half year of '24. And that's lifted the fixed component of our interest rate exposure from 65% that we were at the end of the financial to now 70% fixed for the next 3 years. The various rates for our debt profile are detailed in the table on the slide. To Crown financing and debt profile, no material movements here. What you will see on the slide is all of our debt profile and the tenor. And I would just note our recent Australian dollar bond on the chart now for 2030, and that replaced the October 2023 Eurobond. Our next refinancing activity isn't now until mid-2025 when the first tranche of the Crown financing of $170 million comes due. To regulatory, we are about to step into that next full year regulatory period that commences in January of next year of 2025. We lodged our expenditure proposal for that period back in November last year, and we updated that proposal 3 weeks ago. We have confirmed we will be proceeding with fiber deployment and expansion to another 10,000 premises at a rollout cost of about $40 million. And we did remove approximately $200 million of discretionary investment from that submission that would have been needed to take fiber past another 30,000 premises. As a result, our total CapEx proposal for the next regulatory period is now approximately $1.3 billion, nominally down from about the $1.5 billion that we had initially submitted. At the commission's draft decision on our OpEx and CapEx proposal is still expected in the first quarter of this calendar year, with a final decision due in the second quarter. We also expect the draft maximum allowable revenue or the MAR decision toward the end of Q2, but still expect the final MAR decision towards the end of the year in Q4. I would note too the risk-free rate for the next regulatory period WACC is due to be calculated shortly. The commission released a WACC for information disclosure purposes. And that indicates a materially higher WACC than in the first regulatory period, as you'll see on the table. But again, I don't think that would be a surprise. So overall, like I said, a steady set of results with no operating surprises, and we look forward to that ongoing momentum in the next half. Back to you, JB. Thank you.

Okay. Thank you, Mark. Now we've talked before about becoming a simpler fiber-only digital infrastructure company. And this calendar year, we'll see some substantial steps towards that goal. The legacy complexity of copper is really starting to fall away from our business. When you look at the connection trends in the last 12 months, copper connections reduced by 94,000 and fiber grew from 78% to 85% of our connections. And that shift to fiber has already seen total fault volumes fall by 15% between half year '23 and half year '24. We expect to retire copper in our urban fiber areas by the end of 2026, and more copper savings will follow as we then optimize the associated network and property asset. We're also continuing to improve our fiber business. For example, we've seen our simplified business service stack deliver some good customer growth in the business segment. Another area that we've been working with retailers is on improving customer experience, customer satisfaction, for activation of existing fiber connections. So these intacts, as we call them, make up about 75% of our fiber activations. But they can become complicated when a homeowner is changing between retailers and sometimes the timelines don't really align. But our efforts are starting to deliver some results with customer experience scores lifting from 7.2 to 7.6 just in that half year. From the beginning of February, we began operating under our new operating model. As Mark has mentioned, this business change has affected a large number of roles. The goal of that change was not exclusively cost reduction, but to reflect our evolution to being a network operator and to make us more effective in delivering our strategy. It introduces new capabilities and more end-to-end focus in the 3 new value streams that we've created that are focused on access, infrastructure and fiber frontier. Regulatory certainty is, of course, another significant focus in 2024, as Mark mentioned. We're just 10 months away from the start of a new 4-year regulatory period. And we expect that the regulatory settings for this new period will better reflect our shift to a fiber-centric business and enable improved long-term planning. Now to our strategic pillars. Winning in our core fiber business remains our top priority. And we're focusing on how we push for 80% fiber uptake. Our active wholesaler strategy will keep evolving to help grow fiber connections. Our UFB2 areas and the existing base of inactive fiber sockets are natural growth areas that we'll keep targeting. But we also know that the tailwinds that we're getting from copper withdrawal will ease over time as the customer pool shrinks. And that's why we need to keep sharpening our marketing and our retailer incentives. For example, we're trying things like tailored migration approaches for specific customer groups, such as retirement villages, where we know that the customer requirements are different. We're pleased with the success of the Home Fibre Starter plan. It was initially developed to fill a gap in the market for lower-cost fiber plans. Economic circumstances mean that it is now helping consumers affected by cost of living pressures to stay on fiber. While that means that we're seeing some trade-down from 300 megabits plan, we're keeping those customers on-net and on fiber. And we're also seeing some retailers use the plan to target wireless consumers because it offers a better service. And the plan also fulfills a really important role in supporting our goal of migrating those low data users from copper to fiber. At the other end of the speed spectrum, 1-gigabit plans continue to capture a high share of growth, and we're seeing more retailers get behind our multi-gigabit Hyperfibre plan. We believe that consumers appreciate the value of fiber when considering its benefits compared with other technologies. Now we have noted from online discussions such as the one that's highlighted here on this slide that there may be instances of a bit of overpromising from some wireless retailers regarding their network capabilities. Similar occurrences have been observed in the past, and we will continue to encourage the Commerce Commission to take steps that ensure consumers receive clear and fair information about all technology options that are available. As a wholesale-only business, our direct engagement with consumers is limited. So maintaining a balanced and an equitable broadband market in New Zealand, where all network options are fairly presented, is essential. And as I've said before, there is no such thing as fiber-like. You're either on fiber or you're not, and you will notice the difference if you're not. Ongoing new revenue. Mark has mentioned earlier we've confirmed plans to extend fiber broadband to another 10,000 premises. These 10,000 premises include suburbs and communities that are just outside of our existing fiber footprint or places like Milford Sound, where we just completed a government-funded backhaul link into the township. We've started the rollout in a few areas already, and we expect to complete the bulk of the rollout in FY '25. About 60% of the premises in these areas are off-net. So this is a great win-back opportunity for us given that a number of these customers will be on less reliable fixed wireless broadband. And already, we're receiving really strong preregistration of interest from some of the initial communities in the rollout plan. Our other growth focus is to drive revenue from our existing assets. And to do that, Mike Shirley has joined us to lead our new infrastructure value stream. He has a strong telco industry background, spanning retail mass market and business, wholesale and infrastructure. Most recently, Mike had led the Vector's fiber business in Auckland. He's passionate about the evolving industry structure supporting New Zealand's digital transformation, and he sees great opportunity for Chorus to help customers and industries as they digitize their business. And as an example, we've just expanded our EdgeCentre capacity in Auckland by about 20 racks, and half of those have already been taken up. Mike's other areas of focus in that infrastructure value stream include new property development, which made fiber available to about another 15,000 slots in the half, and also our backhaul and our smart location products, and then optimizing our non-fiber assets, and specifically copper. The other benefit of our new 10,000-premise rollout is that it enables us to withdraw copper services in that footprint. This chart shows just 100,000 copper connections remain in areas where fiber isn't available, and that continues to trend down steadily. The shift from copper is happening a lot faster in the fiber areas where we're driving the migration for copper to fiber with about 47,000 copper retirement notices already issued to consumers to date. We issued about 17,000 of these notice in the last 6 months, and more than 800 cabinets are now closed. And we've achieved an 82% broadband retention on those. Copper connections in our current fiber zone have now fallen below 70,000 lines and below 25,000 lines in other fiber company areas. Now global developments have made it clear that copper is a sunset technology and, ultimately, the legacy service obligations that we carry need to change to reflect this reality. Countries like Norway have already recognized that there are better options for consumers and have accepted other technologies. Closer to home, the Australian government has just launched a review to modernize their universal service obligations and are testing both satellite and wireless services for voice delivery. We expect that their findings will help inform the next steps here in New Zealand. A recent ministry briefing to the incoming Minister for Communications acknowledged that high-capacity fiber investments make socioeconomic sense. They noted that wireless rural networks face ongoing capacity issues as consumers' data demand continues to grow. The 10,000 prems that we're now building to represents commercially feasible areas for viable network deployment under the current regulatory and policy settings. And as Mark said, we'll continue to investigate ways that we can extend our fiber footprint further, but the $200 million that we had identified to reach another 30,000 prem was always contingent on pricing, market and regulatory settings. In the absence of clarity on those conditions, we chose to remove that investment from the regulatory proposal, now being reviewed by the Commerce Commission. But should material changes in those settings allow a clearer commercial return on our investment, we could look at reintroducing additional investment through an individual CapEx proposal. So to recap, half year '24 was a solid 6 months for Chorus with no surprise. Fiber connections continued to grow, reflecting higher data demand and supported by our broad range of plans and also effective incentive programs. We delivered EBITDA growth by growing revenues and by having good controls on cost in a high-inflation environment. The RP2 process is progressing well and submission and determination milestones are on track. We've started work on an extension of fiber to 10,000 more premises that are very close to our network and have many off-net customers. And we've started operating under a new operating model that reflects our future fiber-only network operator profile. Finally, we did also announce a smooth transition to a new CEO with me stepping down in mid-April and Mark taking over as the new CEO. It's been a privilege to lead this organization through significant milestones for the last 4.5 years. And I know that I'm leaving it in amazingly capable pair of hands with Mark. And with that, let's now go to questions.

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

Question just on withdrawal of that circa [Audio Gap] any response from government on -- they might be able to help you get more palatable?

Sorry, Arie. We had a lot of audio problems and cutting in and out, so we could not understand the question. Do you mind repeating it? Hopefully, we'll get through with time.

Yes, sure. Just on the withdrawal of that $200 million of rural extension, have you had -- has that drawn any response from government today on how they might be able to make that more commercially palatable?

No, it's a bit early to do so. And as you see, we mentioned the minister doing -- the briefing to incoming minister, the BIM, that kind of highlighted that it does make socioeconomic sense. When you prepare those submissions, they take a long time, so you prepare them a long time ago. You put in there your best view of what the market, the regulatory and the policy environment will be. You do so almost 1 year, 1.5 years in advance, and things do change. So we do have seen some changes in market dynamics, some changes in macroeconomics, and we have a new government in place. So we had introduced in the plan a discretionary spend for increasing the fiber footprint. We know that having it as a discretionary element was complicating a bit the overall regulatory process. In the meantime, we also finalized and contracted for the first 10,000 premises, and we were comfortable with the returns that we could do for them under the current regulatory market and policy settings. But as Mark said, the $200 million was always conditional upon some better terms. So we've now withdrawn that. If we see significant changes in market, in policy or regulatory setting, we could consider to bring them back. We will have an ongoing conversation with both MB, with the regulator and with government to see how those can be changed.

Very political answer, JB. As you look to pricing changes later in the year, does the success you are having with Home Starter provide an opportunity to increase the price point there? Or is the intention to hold that through the copper withdrawal period?

I think it's too early for us to signal any pricing decision. As you know, they come towards the later part of the year. So I'll reserve our answer to that. We're closely monitoring how the plans are competing in the market, and we'll make a decision when we get closer to that point in time. Overall, our revenue growth is driven by a mix of increased fiber connections. We added another 30,000 in the half. It's driven by a difference in speed mix. We still see growth in the 1-gig plan. And overall, we're still seeing an ARPU growth from $53 to just over $56 in the half.

And just on CapEx, just one question. Just on the layer 2 spend, you noted it had been materially lower in second half. Just to provide some context, can you sort of give some context of what you achieved with that layer 2 spend in FY '24 and what the outlook might be for FY '25? Or would it be contingent on to spend the same amount on FY '25?

Yes, sure. Arie, let me pick that up. So I think the first thing to note is I said that's front loaded to the half, which is why you'd see a bit of an uplift more so than what you'd look to, perhaps. And that's due to timing and from a lead delivery perspective. But equally, efficiencies that we can drive. So I'd expect that to moderate, as I said, over -- materially, over the second half. Some of it's Hyperfibre augmentation. And we've talked previously around the time it just takes to augment the network and build capacity. And then some of that is life cycle work and aggregation of equipment as we replace equipment in the network that is either aging or becomes unsupported over time. So there's a program of work from a life cycle perspective that runs across a couple of the CapEx lines that you'd expect to lift, as we've said, at the end of full year result last year, around lifting that guidance on sustaining to the $220 million to $240 million that was primarily driven by inflation, but it was also recognizing there was a lift in life cycle replacement work.

Okay. And then just last question from me. Just any update on where you might be at with the rating agencies on the refinancing of that first tranche of Crown funding and the treatment of it? I mean, do you think -- I guess, specifically, do you think you'll be able to avoid needing to do a hybrid-like instrument to replace it, particularly given the small size of that first prepayment?

Yes. And that hasn't changed. Our intention is to look for a hybrid-type replacement on the SIP financing. It's something we're continuing to work through.

Okay. So your intention is actually to replace that with a hybrid-like instrument, it seems like?

Yes, yes.

Your next question comes from Brian Han with Morningstar.

You mentioned that average cost to fix a fault on your network is higher due to the third-party provider cost. But over the long term, is there anything structural with fiber networks that would elevate that average cost per unit?

I'm sorry. We're having real audio problems, unfortunately.

I'll try. So I think your question was around the cost of fixing faults having increased, and we did mention that some of that was driven by the fact that we do have inflation built in some of our Serco contractors. I think this is -- the bulk of the evolution that you're seeing in those, there is nothing structural in terms of the fiber faults that we're experiencing. It's just this flow-through of the inflation.

Yes. Maybe if I'd just add to that. So the recognition on the service contracts and the changes that we've had because previously, we've been managing the -- any inflationary sort of lift. In April last year, there was a lift in the service contracts out because of that inflation and CPI uplift. So we only had one quarter on a like-for-like basis in the prior period, whereas we have now had a full period at inflated rate. And the point I was making, though, is that if you look in the operating expenses on that network maintenance line, actually, they've come down. So we're continuing to trend down on an operating cost basis. And so even though the rates and cost of faults have actually gone up per fault, the number of faults have come down overall. So as we're continuing to migrate off copper and onto fiber, you'd expect that trend to continue.

Okay. That's really clear. And my final question was when you say you're aiming for net debt to EBITDA to not materially exceed 4.75, sorry for getting into the finer details of English language, but does that mean 4.75 is your sustainable comfort level? Or is that your maximum tolerable level?

No. We have a 5x level. The 4.75 is actually an internal ceiling that we've had, but we have the ability to go up to 5x.

Right. Okay. So you can go up to 5x if circumstances dictated, without any problems in terms of internal board policy?

Sorry, we're really having a hard time answering questions. I really apologize about that. If you see us frowning, it's not that we're puzzled by the questions. It's just that we can't even hear them, so I'm really sorry about that.

Apologies.

So I can assure you that I'm not on a fixed wireless. It's something to do with my fixed line broadband in Australia. Look, I'll just leave it at that. But JB, just want to wish you all the best in the future and hope you have a lot of fun.

Thank you. I appreciate that. I will be doing the roadshow, so I'll have a chance to catch up with some of you guys.

Your next question comes from Aaron Ibbotson with Forsyth Barr.

Hopefully, your audio improves. Mark, congratulations on your new role. And I guess, JB, good luck with whatever you planned, and thanks for your contribution to [ NZ Inc. ]. So I've got a couple of questions, if you can hear me. So first of all, I was just wondering if either of you would be willing to elaborate a little bit on sort of the CapEx and the cash cost tail of the copper business, so basically copper withdrawal. Not just the next 6 to 12 months, but how do you see this balance between revenues and cash costs going down on the copper side over the next few years? That's my first question. Thank you.

Yes. So I'll have the first go and then Mark might drop in. So if you think about the dynamics of what happens when you do copper withdrawal, you have an instant saving in maintenance OpEx because you reduce the number of truck rolls. So that's the first wave of cost reduction that you're seeing as we're driving this copper withdrawal program. After that, as we've said, we're starting to turn off cabinets. So those are more step changes once we've got all the services off on the cabinets. We've mentioned we've already turned off 800 of those, and that triggers a saving in terms of power consumption of that equipment. So that's the next wave. Once we've done all of the copper equipment in an exchange, we'll then be able to see a reduction in the power consumption that exists at that exchange. So that will be the last wave in terms of the bulk. So that will drive very focused in the fiber areas, in our own fiber areas. As we said, we want to be out of that by 2026. So we anticipate to be able to get all of those savings in that footprint by 2026. The local fiber areas where there is fiber will probably shortly follow. And then we'll be left with the non-fiber areas going forward.

Aaron, I was just going to note, we talked too that -- so there is a truck roll, so there's a cost involved when we do decommission. But that -- we've got that broader program out over accelerating our depreciation, but withdrawing from those cabinets. And you see that step change in each of the results, I think. So when I just talked to OpEx earlier, even though we've had a lift in the service agreement contracts and pricing, actually, we've been able to offset that through lower fault volumes. Equally, the power cost, albeit there's some volatility that we're seeing in spot rates, but expect those costs to come down immediately as well. In the CapEx side of things, we are seeing that underlying trend for copper. We're about $9 million in copper CapEx for the half. And whilst the majority of common CapEx, you'd say, is fiber related, there's actually a portion in there that -- also that's copper that you would expect to come down and moderate over time, too.

Okay, that's some detail. I'll try to be more specific. So previously, you've talked a little bit on potential asset sales as you're exiting some of these cabinets. But in general, you must have some internal forecast for the actual free cash flow that's coming out of your copper business. Is it positive or negative when you look into '24, '25, '26? That's my question, basically. And maybe also around disclosure, if we're going to see some more granularity on this tail.

Sorry, we're just having really difficult problems with the audio. I think what you asked probably more is linked to profitability of copper over a longer run. We don't -- copper is still profitable.

No. Not profitability. Cash. Cash.

Actual cash. Well, I mean you still got -- we've still got a customer base now on copper that we still generate revenue and margin from. We're obviously -- we're migrating actively and withdrawing copper ourselves, so we will see that shift. But overall, you're going to see the cash improve because the CapEx is going to reduce as we do withdraw. And we've got less cost to actually maintain that network because there is literally just less of it. But we will still have the stub for the rural side. What we talked to is that exit from UFB and LFC areas. But it's the rural New Zealand that, as we have discussed in the past, we think that the TSO construct is outdated and we're seeing alternative technologies come in and the uptake of that growth. So that's part of the conversations that we're continuing to have with government.

So you are free cash flow positive on copper and expect to continue to be? So is that correct? Understood?

Yes.

Okay. Second question. Just on the capital management review. And I guess, you sort of semi answered it in your introduction. But why are you announcing this? If I'm honest, because the way you described it, it sounded like something that every large corporate would do continuously. So you're introducing an element of uncertainty, which sort of feels unnecessary, if I'm honest. So are you -- if you're not planning any material changes, why are you announcing this right now? What is the background to feeling the need that you're going to announce that you are going to do sort of a review in January?

Yes. Look, Aaron, I'd just say it was more for reference. We -- there's a combination of things. We finished the share buyback. We're about to enter another 4-year regulatory period. We did the same thing heading into RP1, and ensuring -- what we want to ensure is that capital management framework is fit for purpose for at least the next regulatory period. Our aims haven't changed. So that's still on providing that sustainable and growing dividend path. But we've called out the share buyback in the regulatory period. I'd say, at the same time, we've had the formalization of the new operating model. We're accelerating copper withdrawal. So it was more a reference so that when we're coming back, like I would say, it's more of a warrant of fitness check. And we'll come back at the full year results, post review.

Okay. But just to clarify, is the initiative of this coming from the Board? Or is it something that the 2 of you sort of initiated? Or is it coming from debt holders, rating agencies? Who has taken initiative to announce a capital management review with this half year results?

I wouldn't read into it too much, Aaron. I think as you'd expect, the conversations that JB and I and the executive with the Board as well as we're working through that life cycle and about to enter a new regulatory period, that's just ensuring again that we're fit for purpose over the next rate period.

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

Just I had a quick question on the succession planning. Obviously, JB, with you leaving, going to be sad to see you go. And obviously, congrats, Mark, on your role. I just wanted to know what's happening on the CFO role. Obviously, it's quite an important next few months with RP2 and, obviously, this capital management review and so forth. So just wondering if there's any comment on the succession planning for the CFO?

Yes, look -- and thank you, Phil. And I think for now, we'd say JB is still the CEO, I'm still the COO and holding the CFO accountability as well. We haven't got an announcement to make or further announcement to make around CFO, and we'd expect to do that in due course. But the fact that I'm here, I've been part of that design for the operating model, and as we're talking about this warrant of fitness-style capital management review, I'm here as part of that as well. But we'll make announcements in due course about the roles, what happens with CFO and COO.

Okay. Awesome. Will that be pretty soon, given that you're taking over on the 15th of April? Or would it be after that?

No, it would be in line with that, if not before.

Okay. Awesome. Just wondering if you could, just in terms of the decision to go with the 10,000-premise expansion, can you just kind of give us a bit of color as to kind of a background? By that, what kind of criteria do you run through to kind of make that decision? Obviously, you've toned it down from 40,000 to 10,000. So what's -- is it a return on capital calculation you go through? Or what is the kind of criteria you use to decide there?

I mean, clearly, ultimately, the return on that investment is the one that we are looking at most closely. Those 10,000, as I've mentioned in the presentation, they tend to be at the very edge of our existing footprint. So they are suburbs that just missed out because they were on the wrong side of the street or they were one street down to where the UFB footprint stopped or I've mentioned the Milford Sound, where we've just had a government-funded backhaul link that was established too. And we can then leverage that to do connections to a number of premises in that area at a reasonable cost. So what you can expect is those first 10,000 are the ones that were the most cost effective for us to roll out to. We also looked at areas where there was a lot of off-net people, so people that were neither on our copper network or on our fiber network. There was no fiber, so that was easy. So for us, it's how quickly and cost effectively we can roll out and then how quickly there is pent-up demand for a better service and, therefore, how quickly we can turn those passed premises into live connections and revenue-generating connections. So that's how we've picked the first 10,000. And then as I've said, we'll need to have a conversation with the government in terms of the broader settings to see how we create an environment where the next batches become economical for us to invest in.

Great. Awesome. And maybe I just had one final question, this one on capital management. This one is for Mark. Just -- I think it's Page 30, in Appendix B, it just talks about the capital management framework. It kind of talks about kind of phasing of discretionary CapEx to kind of fit within the dividend policy. I just wanted to check on that because, obviously, when you put your RP2 submission in, you got the $1.3 billion of CapEx, which is obviously phased over those 4 years. Like is there much room to phase that discretionary CapEx, when you kind of put that out there to ComCom? Or is it -- how should I read that comment?

Sorry, it was cutting out again, Phil. But if I understand the question you'd said -- yes, when we phased that overlay for the discretionary CapEx, yes, we -- there is a -- that's based on timing of when we think these can happen. So I don't know if there was a second part to the question. Sorry, Phil. It's kind of just cutting out.

No, I think there was. Yes, what I was asking was just with the RP2 submission, you obviously got the CapEx plans out there on a [ premium ] basis. Is there much room to shift the discretionary or phase the discretionary CapEx? Or is it pretty much kind of a [indiscernible]?

Sorry, I understand you. You're not meaning the $200 million, you're meaning in general around the discretionary CapEx. I mean look, we're balancing those plans as you would expect us. The CapEx -- the essential CapEx, if you will, of the things that we really -- that we really have to do, there is a sustaining element of keeping the network going. There's a sustaining element that's actually building augmentation and capacity into the network for future growth. And then there's equally the discretionary portion that we would invest into other growth areas. And if you think about the operating model that we've put in place now, particularly with infrastructure, if you took that, the independence of -- now of those value streams actually does open up a lot more opportunity for us to focus and invest on some of those areas.

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

Okay. Well, listen, thank you very much. I'll just go through those 6 bullet points that we put on the solid FY -- sorry, half year '24. We do think that we delivered no surprise and a strong operating and financial results for the half. We're confident about the RP2 process, which will provide us the certainty for the next 4 years. We're excited about the new op model. And as I said, we have, we hope, delivered a smooth CEO transition, which we'll deliver fully over the next 6 or to 7 weeks. I will be doing the roadshows with Mark, so I look forward to catching up with some of you in person. And hopefully, we'll be able to answer your questions better than this time. Thank you again for joining us. And next time will be Mark.

Thanks, everyone.