Chorus Limited (CNU) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and welcome, everyone, to our full year results announcement for FY '24. I'm Mark Aue. This is my first results presentation as the CEO of Chorus, having taken over the role earlier this year. Alongside me is Katrina Smidt as our Acting CFO. I'd like to start with an overview of how we've delivered against our plans in FY '24. Katrina will then pick up and cover the financials and then the guidance for FY '25, after which, I'll come back and provide an update on our capital management review and the step changes we're making in our strategy to FY '25 and beyond to deliver better outcomes for the longer-term horizon. We're really pleased to be reporting another positive financial result, particularly given the challenging macroeconomic environment facing New Zealand businesses and that demonstrates the resilience of our core fiber business. FY '24 has reflected our continued momentum to becoming an all-fiber business, with an EBITDA result at the top end of our guidance range. Demand for fiber has grown to almost 71.5% with average monthly data usage now higher than pandemic peaks and an expectation that both will continue to grow in line with global fiber trends. Our 50 megabit plan has successfully carved out a market niche, but we've also seen more customers choosing 1 gigabit or higher plans. Copper connections continued to reduce by 83,000 with 60% of those within our Chorus fiber zone, and this reflects our ongoing acceleration of copper withdrawal. In non-fiber areas, we've also seen migration to other technologies. But overall, we see this as a positive thematic for a future exit from all of copper. Cost management has featured heavily in the year, enabling us to partly offset expected inflationary impacts and largely holding costs flat year-over-year. Our fiber RAB was $5.9 billion at the end of 2023 and our regulatory expenditure allowances have just been confirmed for the next 4 years. Whilst we're still going through the finer details of that decision, given they were released end of last week, the allowances we'd see as generally workable within our business plan. And lastly, I'd recognize in year, we've also had substantial change in our operating model and our leadership team. However, combined with greater regulatory certainty, we have clarity on our future aspiration, the strategy to deliver it and the capital management framework to support that. And I'll talk to that more later. Jumping through some of the headline numbers. Revenue were up 3% or $30 million to just over $1 billion. EBITDA growth of 4% or $28 million to $700 million. Growth in both really belies some of the broader macro challenges, particularly in the property sector, that we were able to fortunately offset capital expenditure, though down 6% to $427 million. And we've confirmed an unimputed final dividend of $0.285, in line with our guidance of $0.475 per share for the full year. At a sustainability level, electricity use was down a net 3% as we switched off legacy equipment, including another 730 copper broadband cabinets. That reduction and higher renewable generation in the grid has helped us to achieve a 39% reduction in our Scope 1 and 2 emissions from our FY '20 base year. Our fiber network now passes 1.5 million addresses and uptake has grown to over 71% in the year. Another 29,000 addresses have been passed while connecting over 50,000 more. Uptake in our UFB2 areas has grown strongly to 58%, while UFB1 areas are at 75% with both continuing to grow. There are another 200,000 or so addresses though where fiber is installed but not currently active. They represent clear win-back opportunity to fiber versus the cost, timing and investment return for new installations. We're encouraged by the strong global demand for fiber and New Zealand ranks well among broadband leaders at 17th in the world by the Fiber to the Home Council in Europe. The September '23 data places us just behind Sweden and Japan, but more importantly, it validates our pathway to an 80% fiber uptake through other precedents. Also, recent OECD data shows fiber connections almost doubling to more than 200 million between late 2019 and 2023, with cable and copper connections in material decline. Over the year, we've seen a mix change in our base at the entry level and at the top end. First, we've seen strong uptake of Home Fiber Starter, providing optionality with cost of living pressures and as a defense to fixed wireless. Yes, we've seen some trade down from higher plans, but that's very manageable. And we've always maintained it's better to retain a fiber customer than lose them off-net. We also recognize over 50% of the connection growth has come from off-net and we may not have won it without that product in market. At the top end, 1 gigabit connections continued to grow with almost 40% of our net adds growth, taking up higher value plans and are now at over 25% of our customer base. Finally, business plans were up by 7,000 lines but in a very challenging market, where we've seen a lot of closures due to economic strains. Monthly data usage keeps growing, and it's back above the 600 gigabyte levels we last saw during pandemic peaks. In June, average fiber usage was 623 gigabytes with 16% of our users consuming more than 1 terabyte a month. The global forecasts are for data use to keep growing as more activity moves online, and those growth rates could lift exponentially in our view, with greater streaming, 4K content and use of AI and cloud-based applications. And the chart on the right really shows why fiber is the preferred technology to cater for that demand. Traffic on our network grew to almost 8,000 petabytes in the year, the equivalent of 8 billion gigabytes. As some context, you compare that to 10 years ago, annual usage was 400 petabytes. Despite that growth in year, we've reduced our net electricity by 3% with fiber carrying 94% of the traffic. In optimization, our primary focus has been on withdrawing copper lines. Lines have reduced by 83,000 in the year and we now have fewer than 160,000 copper lines remaining. Of those, 45,000 are in areas where fiber is available and about 2/3 have already been sent withdrawal notices. We've emptied 1,250 cabinets with roughly an 80% retention rate for broadband customers so far. And as you can see, the benefits of copper line reduction flowing through to our reactive fault spend. FY '23 was inflated by extreme weather events, but we're now down to $25 million in a year, and it's clear the large price is exiting copper in non-UFB areas. There's not a lot of new news on revenue growth opportunities, given some of the broader challenges in the economy and a slowdown in the property development sector. However, our fiber expansion for 10,000 premises is underway and positively, we've already had 25% of the planned addresses register their interest for fiber. Demand for backhaul, smart locations and edge center colocation have all increased. However, we acknowledge this is an area that hasn't had appropriate focus relative to market opportunity. We've been more focused on growing residential access and copper withdrawal. Our new operating model that we've talked to provides a dedicated vertical for infrastructure that has the focus, resources and investment to leverage what we know to be an amazing portfolio of fiber assets across New Zealand. There are natural adjacencies for us to scale into and you can expect to see a reset in this space as economic conditions moderate. I'll now hand over to Katrina for more detail on our financial results.

Thanks, Mark, and good morning, everyone. As Mark mentioned, I'm the Acting CFO, and I'm happy to present a strong financial result on behalf of the Chorus team. FY '24 results reflect resilient fiber demand, growing uptake and ARPU as we move to becoming an all fiber business. As Mark said, we've had a strong focus on cost management, enabling us to partly offset expected inflationary impacts and largely hold costs flat. If we turn to the slides, we report a 4% or $28 million increase in EBITDA to $700 million. This was at the top end of our guidance range. Revenue lifted by $30 million as fiber connections and ARPU grew. Expenses were up $2 million on a reported basis, with cost management and favorable weather, mostly offsetting the impact of inflationary increases across multiple expense lines. Depreciation and amortization increased because we've been accelerating depreciation on our copper assets. Depreciation on copper assets was $90 million, up $11 million from the prior year. Some of those assets will be fully depreciated by the end of FY '25. Net interest expense was up $22 million, with total debt up $108 million. Our weighted effective interest rate on debt lifted from 5.4% to 5.77%. This was slightly down from the half after some interest rate swaps came into effect. Income tax expense increased by $24 million. This contains a one-off non-cash cost of $15 million due to the law change to deductibility of tax depreciation on buildings. That meant we technically booked a $9 million net loss for the year. Our revenues were up $30 million from FY '23 to over $1 billion. Fiber broadband revenues were up $75 million as fiber uptake grew by 53,000 connections and ARPU increased to $55.71. Fiber premium revenues were up $2 million as we saw continued demand growth for dark fiber and our backhaul services although legacy enterprise connections are now shifting to alternative services as we shut down legacy platforms. Copper broadband and voice revenues were down by $45 million and still primarily driven by withdrawal in fiber areas. Within the field services line, the decline of $3 million was primarily driven by the slowdown in the property sector. Increased demand for colocation space helped lift infrastructure revenues by $2 million. Value-added network services held flat at $26 million. Other revenues of $4 million reflect sales from our ongoing property optimization program. Operating expenses were largely flat to FY '23 on a reported basis, not allowing for the extreme weather events last year. That was better than our expectations at the start of the year, driven by improved cost management. Labor cost of $80 million included $2 million for operating model change costs, and we've continued to in-source some roles for cost savings. Network maintenance costs were down $7 million, although FY '23 included $3 million for extreme weather events. The general trend remains one of reducing fault volumes, partly offset by inflation and service company costs. Other network costs were up $2 million when you allow for extreme weather costs in '23. Part of that uplift is our property and network optimization costs, which were $4 million in the year. Electricity was up $3 million due to higher spot prices despite our reduced consumption by 3%. Other expenses were up because we increased our provision for doubtful debts and additional costs as we step into the new strategy and add support for long-term market research to help us identify new opportunities. Gross CapEx was down by $27 million to $427 million. So this reflects the end of the UFB rollout in FY '23, fiber installations, reducing after the peak of copper migration to fiber and copper spend falling as we move to an all-fiber network. Within growth CapEx, $205 million was sustaining CapEx and $222 million was for growth. Sustaining CapEx came in below our guidance range of $220 million to $240 million because we released a $9 million provision of network life cycle activity. Several investment projects were also either rephased or not required during the year due to demand during the period. Net CapEx of $372 million after third-party contributions reflects what we've invested in the business after we've received $55 million of third-party contributions in the year. Fiber installations and Layer 2 expenditure was $182 million, with 87,000 installations completed. That was down from 92,000 installations last year. Other fiber and growth CapEx was down $12 million. Within that total, new property development spend was down $18 million. That line was also -- also included $4 million for the 10,000 premises network expansion that we announced in February. Fiber sustain was up $6 million as more roadworks activity is attributed to fiber and we had life cycle work on some older cable routes. There was $2 million of spend for network replacement following Cyclone Gabrielle. Customer acquisition costs were up $9 million, with retailers using our incentive offers to grow connections and upgrade customers to higher speed plans. Copper spend was $23 million, with $12 million funded by third-party contributions. We released a $6 million provision for network life cycle activity in the year. About $1 million of that spend was for cyclone recovery work and common CapEx was down slightly at $60 million. We've provided this new CapEx reporting framework view based on your feedback. The RAB CapEx category aligns with our regulatory reporting categories to help make things simpler and more transparent. We also provide a split between sustaining and growth CapEx across the RAB and non-RAB categories. We've included a historical view of this CapEx in this format in the appendices and we can pick up any detailed questions offline. Net debt to EBITDA lifted slightly to 4.42x with borrowings increasing by $108 million across the year. We remain well below our S&P threshold of 5x. About 70% of our interest rate exposure is fixed for the next 3 years. Our next refinancing activity is due in mid-2025 when the first tranche of Crown financing of $170 million comes due. We intend to be in market after the half year result and intend to refinance with a capital bond on a like-for-like basis. We've announced an unimputed final dividend of $0.285 to be paid in October. For FY '25, guidance is $0.575 and dividends will remain unimputed. EBITDA guidance is for $700 million to $720 million. We continue to see resilient demand for fiber, but there are 2 specific revenue headwinds that are outside our direct control. Firstly, our proposed price changes will be deferred by 1 quarter to January '25 because we expect to be constrained by the 2024 MAR ceiling. Secondly, the reduction of some legacy network services that will roll off completely over the year. Excluding these headwinds, our underlying growth would be around 2% to 4%. On OpEx, we have ongoing cost management initiatives, but we expect modest cost growth over the year. That reflects ongoing inflationary pressure from third parties and electricity spot prices. Other network costs also increased with the acceleration of our copper withdrawal program. Gross CapEx guidance is $400 million to $440 million. Within that range, we expect the RAB and non-RAB proportions to be similar to FY '24. RAB CapEx includes the remaining $35 million to complete the rest of our 10,000 premise rollout and we expect fiber installations to materially lower as we approach the end of our copper migration program. Within non-RAB CapEx, copper spend continues to decline. In sustaining CapEx, we're guiding to $200 million to $220 million, and this reflects a rephasing of some life cycle replacement programs to better align with future demand. I'll finish by noting that we're keeping a close eye on CapEx under our refreshed investment framework and I will hand back to Mark.

Thanks, Katrina. Following the changes to our operating model at the start of 2024, I'm very focused on fast tracking Chorus' transition to a simpler, fiber-only digital infrastructure company. Now, regulatory clarity is essential for that. And in the last few months, we've had some crucial pieces of the puzzle now fall into place and where we now have greater clarity over that future outlook. Our reporting in May showed our fiber RAB had grown to $5.9 billion, with around $105 million of wash-up balances to the end of 2023. Last week, the Commission confirmed our CapEx and OpEx allowances for the next 4 years. And pleasingly, they were a marked improvement on the draft decision. We're still working through the detail, as I said earlier, but they are workable to shape our operations and investment, albeit with some tweaks. In copper, the Commission is investigating whether copper should be deregulated outside fiber areas with a decision expected end of calendar year '25. Also, helpfully, the commission has just released a market study, showing 97% of copper connections in non-fiber areas had coverage from a mobile or alternative wireless provider. That's before you get to satellite coverage that would likely take that to 100%. Considering copper network shutdowns already happening overseas, it's clear copper is well on the way to joining other outdated technologies. The thematics that we're seeing with regulatory review, that customers can access alternative technologies and the fact that they're migrating themselves already, give us a positive outlook on being able to exit copper completely. As part of evolving our future, we've undertaken a reset and developed an aspiration that provides the clarity and the specificity of what it is we want to become. And that is a simplified all fiber business with 80% fiber uptake by 2030. This speaks to driving efficiency and operational excellence, a need to exit copper and transition to a fiber-only business. The 80% uptake is a connection story and it anchors us. It's ambitious, but we believe it's achievable based on global benchmarks. And 2030 is time bound, so we can work backwards on what it is we need to believe. This is a clear step change for the business. Now we also need to plan over a longer term and define what it is we're trying to achieve and what success looks like. We've adopted a Horizon model over 10 years with 3 distinct phases. Horizon 1, our FY '25 year, is about getting future fit for purpose, embedding the new operating model and defining what are those seeds of change that we'll plant now to derive benefits in the future? Horizon 2 from FY '26 to the end of FY '29. That's about the acceleration of the benefits from our transition to an all-fiber business with growth, simplicity and efficiency. And for Horizon 3 from FY '30 beyond is our future state with one single technology, and that is fiber. Chorus is evolving from the great network builder that it was to the great network operator and our horizons create a distinct shift in strategy to be simpler, more focused, more competitive. An 80% fiber uptake anchors everything we do. We'll focus on penetration of fiber over ARPU and develop propositions to markets we currently don't serve. This is about leveraging the core network that we already have as I spoke to the 200,000 premises where ONTs are already installed, but they are not connected. We also need to shift the conversation and raise the awareness of fiber's superiority as a broadband technology, moving beyond the simple download speeds to the characteristics of fiber that of quality, consistency and reliability when compared to other wireless technologies. We need to evolve to a single technology, accelerating that copper withdrawal as rapidly as possible. And we'll continue to advocate for further fiber expansion, but only where those regulatory or government settings actually enable it. We need to drive efficiency and discipline, stopping the activity that doesn't deliver on our strategy whilst embracing simplification and automation. And we'll look to rightsize our business as we transition to the future. Finally, we need to leverage our assets and more effectively scale into opportunities and natural adjacencies and optimize our property portfolio, monetizing non-core assets that could include high sites, exchanges, cabinets, poles or copper cables. And that's a recognition of Chorus today as one of the largest property owners in the country. Now, as a flow on from our strategy reset, we said in February, we would review our capital management policy and provide an update of these results. Last week's final expenditure decision has given us clarity on the parameters we need to be able to provide that update. We described our review as a bit of a warrant of fitness, a check that our current approach remains fit for purpose across at least the next regulatory period. We've considered a number of inputs, our regulatory settings, our financial outlook, feedback from shareholders, a review of comparable companies and broader macroeconomic factors. Other context has also fed into this review, including what is an optimal capital structure for a simpler infrastructure business, appropriately returning free cash flow to shareholders for the substantial investment in fiber since 2011, revised investment hurdles for our growth CapEx and providing more clarity for shareholders on the future dividend path with a focus on steady dividend growth. From the review, we've identified some key principles for our approach. First, we see ourselves operating as an essential regulated infrastructure asset. We now have the clarity for the upcoming regulatory period, and our capital allocation is underpinned by the free cash flow we see these assets now generating. The step-up for dividends at $0.575 has in part been driven by our solid FY '24 results, confidence in our future operating cash flows and a more efficient use of our balance sheet to invest in the business. A core pillar of our capital management framework is a sustainable, growing dividend that was paramount in all shareholder feedback. And our intention is to maintain that dividend growth, at least at the rate of inflation. We maintain the view that a rating of BBB is appropriate for Chorus as a digital infrastructure company. Based on the ratings down driver of 5x, we remain of the view that 4.75x is an appropriate internal limit that allows sufficient buffer and we are comfortable to work up to that level. And we'll use the balance sheet to fund CapEx where it meets our investment hurdle rates. To be clear, any growth investment must deliver greater shareholder value than returning it to shareholders themselves. Turning to our capital management framework. Our review essentially validated that existing framework. The one change to note is our dividend payout range that is as a proportion of net operating cash flow after deducting sustaining CapEx. Greater clarity on cash flows now that we are through the UFB rollout and the peak of fiber installations and the clarity on future fiber expansions means that we can now update the payout range. We've increased this from the 60% to 80% range first indicated in 2022 to a new range of 70% to 90% on average over time. This range better reflects our future cash flow expectations and efficient balance sheet management. As a final recap, we've had a solid year and result, especially in light of broader macro market downsides. And again, we see that demonstrates the resilience of fiber. Both New Zealand and global trends back fiber as essential digital infrastructure, as high quality and differentiated connectivity. And we're seeing many examples of investment into fiber, both domestically and internationally. We now have greater certainty over our future outlook. And we've updated our capital management settings at least out to the end of PQP2 in 2028. These provide us the flexibility to invest, but equally deliver on our commitment to a sustainable, growing dividend. And we've reset our strategy with the clarity and specificity of what we want Chorus to become and what success looks like. And again, that is a simplified all fiber business with 80% uptake by 2030. This year marks a step change in what has been a very successful story to date for Chorus. But now is a transition to a more simplified future state with 1 superior technology, and that is fiber. Let's go to questions on the phone line, please operator.

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

Thanks both for a good presentation. Just in terms of the price changes, and I expect, obviously, it's still a proposal at this point from 1 January '25. Can you just talk a little bit about how you've sort of sized those price changes with reference to the copper migration that you're still managing in terms of the switch off, some of your objectives around fiber win back and then also ultimately, that goal for 80% fiber penetration?

Yes. Sure. Always good to chat. Look, I mean, I think on the pricing, there are a couple of things. We take a broader view across the market and equally across all the plans and where we see uptake. Obviously, CPI inflation is used as a baseline reference. Now, what we've done previously, where we've held pricing flat on some of those plans and then over time, that may see an increase as well, particularly where we're seeing increasing demand. Obviously, as we're switching out of copper, there's the 45,000 or so that we identify in our own area where they've largely been given withdrawal notices already. We see that as a -- 80% retention onto our broadband network is still reasonable. Look, I think on pricing, what I'd secondly say is we see a broader willingness, not both domestically but also internationally, to pay for higher speed broadband. But it's not just speed. I think increasingly, it's becoming broader than that, and as I called out, the quality, the reliability, the consistency that we see of fiber. So perhaps a third thing to just note as well, I did reference that we need to step into developing further propositions and products into market perhaps the segments that we don't currently actually serve. And we've seen that step change with the Home Fiber Starter product as well over the past year. Perhaps some of that's to do with the economy as well. But you're certainly seeing a take-up across other segments. And so we're bearing all of those things in mind relative to the pricing, Arie. But as you say, just a proposal at the moment, we've had the feedback.

Yes. And, yes, are you saying you have had the feedback? What was the feedback in terms of the home starter in particular?

Look, we're still in the consultation process at the moment. So again, just indicating more that that's in a proposal phase before we make any final determinations.

Just turning to the strategy, which I think you've outlined pretty clearly there. I mean, key is a simplified business focused on fiber and you talked about rightsizing and efficiency. I mean, at the moment, you've been managing OpEx pretty flat, maybe a little bit more -- a little bit of growth in the year ahead. But can you just sort of talk to, as the business does simplify around copper retirement and the fiber uptake, I mean, is it your expectation that in the next couple of years [indiscernible] Horizon 2 that we'll see some reduction -- stepwise downwards reduction in the OpEx base?

Yes. Look, I think absolutely. We're accelerating copper as rapidly as we can. And look, I know we've spoken to acceleration of copper withdrawal previously. This is a step change for a 2030 date. We've set a deadline. But again, we talked to the thematics actually being quite encouraging in order to get out of copper completely. So we're clearly going to see that step down in copper costs. At the same time, as we've said previously, there is a cost to actually exiting as we decommission. But over that period in Horizon 2 out to 2030, absolutely expecting those costs to reduce. Secondly, yes, we absolutely think from a simpler, more efficient organization as digital infrastructure. So how does automation play a role? Where does operational excellence overlay? We would expect that you will see efficiencies from there. And we've clearly said that initiatives that aren't supporting the delivery of our strategy, we're going to actively turn those off.

No, that's clear. But would it be fair to say that it's too early for you to provide a bit of a quantum of what the potential is on the existing cost base?

Yes, look, I know you'd love that. I mean I think you can point to copper though, for a 2030 date, and you can see both from a CapEx perspective in the new format that we've provided that range is around $20 million, $25 million on CapEx. I think in OpEx, when you look at the fault management, we're down to $25 million on copper. Some of that will transition into fiber as the uptake increases as well. But you're going to see a pretty significant reduction there also likewise, with property maintenance and with electricity. So you're probably in the same vicinity, even just calling out those 2 things at around $30 million plus of OpEx, another $20 million plus on capital. So potentially $50 million upwards for a cash flow benefit.

No, that's great. And then just in terms of the last part of this question, the new revenue streams in that like -- and you've said there, you're going to be disciplined as well in terms of across the business if it's not core. And that is there any material sort of cost investment being made on new revenue streams at the moment embedded within the cost base?

Not at the moment, Arie. And I suppose that's a call out for me. We're leaning into that to acknowledge that our focus has been on growing residential access and on accelerating that copper withdrawal. The operating model that we've put in place with a dedicated value stream for infrastructure, I think provides that dedicated resource investment and focus to actually grow into that space. We're not about to do things that are outside our core business or adjacent to it, but we still see significant opportunity. [ T-shirt ] sizing that we provided before is probably still relevant from a capital investment perspective. But I think the difference now is we've provided that focus and actually having dedicated resource to step into this. I think I'd equally note, too, it's a bit of a step change in our mindset and approach perhaps where you might think that we were a bit of an order taker rather than an order maker. Again, I think we have some amazing infrastructure assets and we see an opportunity for us to step in more competitively in that space. The final one to call out too is a recognition on property optimization. And I can't give specifics about that because we're exploring it now. What I'd say we'd recognize is we are one of New Zealand's largest property owners. We have hundreds of exchanges -- over 400 exchanges. We have thousands of cabinets. We have a couple of hundred thousand poles as infrastructure high sites. As we accelerate that withdrawal from copper, those increasingly become passive assets, some of which we have ongoing cost to maintain. So we think there is a clear opportunity for us to optimize that property portfolio either as a cost avoidance or actually as a sale where someone else as a third-party recognize greater value in them.

Yes. And then final question. You referred to it in terms of the supportive data sort of that should hopefully be an influence on your ability to fully withdraw from copper by FY '30 and obviously the ComCom has done that work around the rural market. Can you just sort of give a bit of an outline of what your next steps are? I mean, obviously, within your existing frameworks and then the LFCs you're managing it pretty actively. But what the next key steps Chorus are going to take to kind of progress being able to withdraw from copper outside of the fiber areas?

Yes. Look, I think a few things. We continue to have conversations with government and with a number of ministers. And we have been saying for quite some time that copper is not the fit for purpose technology for the future. I think that's become clearly evident with the advent of satellite with Starlink and increasingly customers, wherever they are now, maybe 15%, 16% market share that we believe of customers, again, recognizing, I think, and wanting high-speed broadband that's a lot more consistent than other technologies. So we're continuing those conversations around the thematics. Likewise, with the Commission, as I referred earlier, the 97% that was highlighted in the recent report indicates copper is not needed there. So we have to find a pragmatic solution to exit as we have noted. But dollar spent in copper is certainly a dollar not spent somewhere else. And from a market perspective, when you've actively got customers migrating themselves through no form of withdrawal, I think the thematics are all increasingly positive. So we have asked for, ideally, a date that we can work back to. And subject to that, we've provided our own one as a 2030 view.

Are you -- and you sort of accept all that, but are you concerned about, I guess, on those options that do exist that -- and the ComCom highlights this as well, those -- the pricing of some of those options is clearly a premium. What do you sort of see as being the solution there? Is there any indication from the government in terms of what they might be willing to do in terms of some sort of rural subsidy to help in the move off copper?

There hasn't been a discussion about subsidization. I think that where we're at at the moment is a broader recognition, I think, across all parties, that copper is a dying, outdated technology. And you're seeing other markets now completely get out of copper. I think European capital is looking at a review for copper to be fully withdrawn by 2030 as a date. So the thematics again, are pointing to an exit from copper. There's -- as we say openly, there's a substantial prize and benefit for us of just being able to exit from it. But what we need is some certainty. And whereas in fiber areas today, we have the copper withdrawal code that actually enables us. We need something similar for rural.

The next question comes from Brian Han with Morningstar.

A couple of questions on your guidance, if I may. You mentioned modest cost growth for FY '25. Would you be able to define what modest means in relation to, say, inflation?

Sure. So, look, modest cost growth across the year. There's a couple of things that we are seeing. We do expect to see some -- we are working hard to sort of constrain the cost, and we have our cost management program in place. But we do see a lot of our cost lines subject to inflation, like our Serco costs and labor costs and rates, and also electricity. So we do see that we'll do our best to constrain that. The other area where, I guess, what is really driving that as we expect our other network costs to grow as we accelerate our copper withdrawal. So these are costs to exit cabinets but also to exit exchanges as part of the property optimization. So while we expect some cost savings in that area to partially offset that, that's predominantly where we see the growth coming from.

And Brian, maybe just to touch on, because I think perhaps we all have a very subjective view of what we consider modest to be. But you can think low single-digit growth.

Okay. Great. And also, you guys mentioned expected reduction in legacy network services. Now, are you calling that out because you expect that reduction to be bigger than usual?

We are. So, look, we've been monetizing some of our legacy platforms for quite some time and we have been calling out that we're expecting some of those revenues to fall away. However, they have continued. With the accelerated copper withdrawal, we are calling out that there will be a bit of a step change in FY '25 as some of those platforms shut down.

And the distinction to that, Brian, is it's different than other legacy revenues that you sort of just expect to tail off over time. These are network service revenues with another partner that we've actually been extending and leveraging for some time as plans are being put in place to actually roll off those. And this is, as Katrina has noted, is more of -- it's a headwind that's outside our direct control. It's going to happen over the course of this year. That's quite a distinct shift.

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

Just a few quick ones from me. Just interested in the kind of medium-term guidance for the sustaining CapEx. Obviously, I saw it kind of -- the last result was going to go up to $220 million, $240 million. Come back down to that $200 million to $220 million range for the next year. But is that just kind of a timing issue on certain spend and medium term, it would go back up to the $220 million, $240 million? So that's kind of the first question. And then the second one was just in terms of the kind of capital management policy, just whether or not kind of imputation gets taken into account in that decision.

Yes. Phil, So look, on the first one, from a medium term, yes, look, ballpark, I think you're spot on. What we've recognized is that range on the $220 million to $240 million that we had provided previously, that was relevant at the time. Some of the things, though, that we've stepped through the year and looking at a real disciplined approach and timing of when that investment drops and the relative returns, some of those life cycle programs, we've actually deferred out to future years rather than doing them now, and you could consider, for example, Hyperfiber being one of those. And that was actually part of the Commission's last result -- last week, sorry, that recognizing that deferral on Hyperfiber spend, where, although we've augmented a lot of the network today and is ready for that future demand that we're certain will still come in actual fact, we've now deferred that out, and we're doing only reactive demand now for Hyperfiber if you were to ask for it, for example. So that spend, though, as use cases evolve, as consumer demand evolves, as adoption of AI, et cetera, et cetera, we certainly see that that's only going one way and likely to be exponential, but it's just a rephasing of some of that life cycle that would come back over time. Second point on capital management policy. Look, yes, from a broad-based view on imputation, but as you know, we are a low cash tax paid. So that's more likely to be out over a medium term. But our broader capital management framework, we've looked out to at least the end of PQP2, but also into the broader PQP3 as well. But obviously, as we approach that PQP3 period, you'd expect we're going to do a review. But that's, again, more of that warrant of fitness check that -- like we've done today.

Great. And then the other one was just -- you might not be able to answer this question, but just in terms of S&P and the way that they rate Chorus because I think at the moment, it's a regulated corporate. Would there be -- in your kind of thinking, do you think there's a chance that S&P could go and rate you as a regulated utility and what would kind of be required for them to be -- to do that?

Yes. So a couple of things. Firstly as I said earlier, we see BBB rating as appropriate. Secondly, I'd say we're not actively having conversations with S&P. But more broadly, what we would recognize is there had been previous discussion and S&P view that if they were to see that consistency and from a regulatory perspective and sustainable earnings and then equally, the resilience to wireless substitution, then they may take a different view as a broader regulated entity and rating change.

Great. Awesome. Would you expect any timing on when they might look at doing that another 12 months away?

No. Look, I couldn't speculate. And you're seeing the rollout of the 5G networks to date. Pleasingly, we'd look at it from a fixed wireless perspective, albeit, as you would well know, there's not a lot of information that comes out now with only one provider really reporting it. But if you look at IDC and you look at the results from last week with Spark, it's pretty flat, and you're not seeing a significant uplift there. But look, I think back to your S&P question, I think there's probably a broader consideration over a more medium term.

Your next question comes from Aaron Ibbotson with Forsyth Barr.

I just have a little sort of off-piste question here. Just on average data usage that you're seeing, if you could provide some more color, Mark, with your experience as well. So we talk about that it's a given that data usage is going to continue to grow sort of "exponentially". But if you look over the last 4 or 5 years, it clearly slowed down quite a lot, and we're looking at some sort of mid-single-digit type growth at the moment, which if you think about long-term technology, clearly, something that wireless can keep up with. So I'm just keen to hear your thoughts on what's going to drive increased data usage, if anything? And if you're seeing any sort of sub-trends within your overall trends.

Yes. Thanks, Aaron. As we've noted, we're back above pandemic peaks. That's not a surprise to us. Perhaps we might have seen it tick up a little -- we would have expected to see it tick up a little bit faster. But I think it's actually starting to rise now. In the July month end, we're up again. We've gone into the [ 630s ] I can, say. And we've now got 17% of our base using more than a terabyte. So we're seeing that customer usage in general increase. What I think will happen, though, and it's my personal view, but it's backed also by a lot of the global trends that you would see is that growth will continue to grow and potentially exponentially grow with the adoption of AI and cloud-based apps, in particular. But I think for us too that adoption more of 4K content and more -- as more streaming goes online, I think we're just going to see that generally increase. We've seen before that going to 4K content alone would literally double. You'd be at 1.2 terabytes if you had all streaming come to online -- sorry, all [ tb ] comes online, you're at 2.5 terabytes. You look at other markets around the world that they are growing at that pace. I think the interesting thing for us that we take comfort in is that kind of expansion requires a high-quality, differentiated connectivity network. That's fiber. And yes, given I've been around the industry for a long while and on the other side for mobile, it's not something that you'd see the wireless networks actually coping from a capacity and/or a congestion perspective. I would look as a reference point to T-Mobile in the U.S. We pushed really hard on a fixed wireless basis into 5G, particularly as customers are rolling off cable. They are now actively acquiring fiber companies or fiber assets, partnerships because they've openly recognized that they have concerns about some of the future constraints on capacity and congestion. So again, feeling -- we feel very, very well placed to take advantage of that future demand and we feel it's going to grow exponentially over time with probably a couple of step changes.

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

Well, thank you. Thanks, everyone. Look, again, as a recap, it's been a really solid FY '24 year. There's been a lot of change in the business. There's been a lot of change in the macro market externally. But we recognize FY '25 going forward as a real step change, a step change in our strategy. We've now got the clarity around our aspiration and what we think we want to be in the future and what does success look like. We've got the clarity around a 10-year horizon model with 3 distinct phases and we're stepping into that actively. You can expect to see a more agile, simpler, more efficient and more competitive Chorus. We think the changes that we've made earlier in the year to our operating model now aligned with our strategy, aligned with the regulatory clarity and aligned with our capital management framework are setting us up really well to take advantage of both trends that we see today, but equally as they evolve in the future. Thanks very much for attending. We look forward to speaking with you all soon.

It does conclude our conference for today. Thank you for participating. You may now disconnect.