CNU
31/10/2012 09:25
ADDRESS
REL: 0925 HRS Chorus Limited (NS)
ADDRESS: CNU: Chorus Annual Meeting CEO's Speech
31 October 2012
STOCK EXCHANGE ANNOUNCEMENT
Chorus Limited
CEO's speech delivered at the 2012 Annual Meeting, Illott Theatre, Wellington
Town Hall, Wellington at 10:00am on 31 October 2012:
Chorus Limited annual meeting
31 October 2012
Chief Executive's address: Mark Ratcliffe
SLIDE 11: A NEW COMPANY, A FRESH START
Thank you Sue. Good morning ladies and gentlemen, thank you for taking the
time to attend Chorus' first ever Annual Meeting. This has been a financial
year full of milestones, beginning with perhaps the most significant - our
establishment as a publicly listed standalone company.
As you know, Chorus' commitment to achieving the fibre vision for New Zealand
was underpinned by change of the most significant kind: the structural
separation of Chorus from Telecom New Zealand. For those of you who were
Telecom shareholders at the time, the magnitude of the change involved was
evidenced by the size of the 525 page demerger document that would have
arrived in your mailbox.
Chorus is leading what is effectively a programme of generational change.
Other countries are looking on with interest as they also grapple with the
challenge of encouraging private investment in fibre optic networks while the
telecommunications industry faces flat or declining revenues.
The way in which we entered into a public private partnership with the Crown,
through Crown Fibre Holdings, to achieve the jointly held goal of a fibre
future is a world first. We want to build a future-proofed network and, by
partnering with the Crown, we are receiving the financial backing that
enables us to accelerate an upgrade to fibre at a time when the economic
returns aren't yet clear.
New Zealand is seen as having taken a pragmatic and cost effective path to
fibre.
o First, New Zealand is set to benefit from a new fibre optic network that
Chorus will provide the capital for, helped by Crown debt and equity
financing.
o Second, Chorus is now solely focused on building and maintaining the
network, and that network is a level playing field upon which all retail
service providers - including Telecom - can compete for end users.
This approach is quite different from Australia where the state is in effect
taking over the building and running of the fibre network and investing tens
of billions of dollars to do so. And, although it isn't a race, the
Australian NBN has reported passing about 32,000 premises with fibre. We
started much later and had passed 42,000 premises at 30 June.
SLIDE 12: A PATH WITH CHALLENGES
In deciding to be part of the ultra-fast broadband roll-out we haven't taken
the easy path. The amount of work required to take fibre past the 830,000 or
so premises in our deployment areas is massive. We are looking to replicate
in eight years what has been built up over a century.
This programme is not just one big 1.4 to 1.6 billion dollar project. It is
actually around 5,500 projects over eight years, with up to 500 projects
running simultaneously. Each requires detailed planning, from the initial
network design stage through to working with councils and then doing the
actual digging or drilling down the street. About 44,000 streets across 24
towns and cities. We are enhancing a national network through local build.
And we need to do this work in time to meet contractual milestones agreed
with Crown Fibre Holdings, passing a home or business every minute of the
working week for the next eight years.
We like challenges at Chorus! And the challenge doesn't stop at the street.
Once people request a fibre service, for example from Callplus or Orcon today
we then need to come back and install the fibre from the street through to
their home or business. This is much more than, say, a Sky TV installation.
Each fibre installation will involve more digging, drilling and splicing -
all the way from the property boundary, above or below the garden or lawn,
into the home and, in most cases, probably through to the living room where
the fibre will connect to an optical network terminal. This is a big step up
from our traditional build work where customers may not have even noticed a
cabinet going into their suburb and at most might have had to upgrade their
modem to make the most of the improved broadband capability.
So far we have completed about 700 fibre installations for people connecting
to the new fibre network. By the time we've finished building the network in
2019, about 1 million customers will be within reach of a Chorus fibre
connection. Clearly there is a lot to be done.
SLIDE 13: WE'RE UP FOR THE CHALLENGE
Chorus is up for the challenges I've outlined.
We have successfully demerged from Telecom - surely one of the fastest
corporate demergers in the world. Despite the transition involved for our
690 or so people, we were awarded Best Employer for Australasia status by Aon
Hewitt. This follows research that found 85% of our people were fully
engaged, demonstrating the high performing culture and sense of commitment
people have brought to Chorus.
About 100 of our people have just recently joined us from Telecom where they
performed customer service functions on Chorus' behalf. This people
transition is a continuation of the demerger process and reflects Chorus'
focus on increased self sufficiency. We continue to share some systems with
Telecom, and this relationship will diminish over time. Over the next few
weeks we will submit a plan to Government on how we will transition off some
of these shared systems in the near future.
We haven't just recruited people with a diverse range of skill sets to help
us get Chorus up and running, and deal with the complexities ahead. We also
have the backing of technicians from our three service company partners.
Since September, we have been ramping up our work force in the field to the
point where we now have about two thousand people busy building the UFB
network from Albany to Invercargill
SLIDE 14: DELIVER UFB AND RBI AGREEMENTS
So what have we achieved in our first seven months? The main focus has of
course been on getting the roll out of the new fibre network underway and
we've made satisfactory progress on that front.
By 30 June we had laid more than 1,000 km of fibre to put 57,000 end users
within reach of the new network. These numbers have of course continued to
grow since 30 June and we have now laid more than 1,500 kilometres of fibre
to bring about 72,000 end users within reach of the network. Whilst work is
underway in 16 of our UFB candidate areas, the majority of premises to be
passed this financial year will be completed between January and June 2013.
At the same time, we have been busy on our other major government-backed
deployment programme; the Rural Broadband Initiative. This five-year
programme will see Chorus deploying about 3,100km of fibre into rural areas
to connect schools, hospitals, Vodafone's wireless broadband towers and about
1,000 of our own broadband cabinets. We made good progress with more than
19,000 rural lines now within reach of better broadband. We were also pleased
to be awarded further government-funded work to improve rural broadband
capability as part of phase 2 of the Rural Broadband Initiative. This will
see more schools and community sites connected by fibre in the coming years.
The UFB and RBI roll-outs continue at pace this financial year. The
significant difference is that we are now moving from the start-up phase -
where we were getting our processes, systems, resources and stakeholder
engagement in place - to a phase where the emphasis is on delivering a faster
and more efficient deployment. This is critical given our year one deployment
costs and our target of reducing costs per premises passed to between $2,500
and $2,700 for this financial year. By the end of the deployment programme
our aim is to have that cost even closer to the $1,118 that the Crown is
financing for each premise passed.
SLIDE 15: TRANSITION TO A FIBRE WORLD
Our focus is, of course, to provide all our customers with a reliable network
and good service. This means that we are working very closely with our retail
service provider customers as they develop and trial the delivery of services
across the new fibre network.
While we have more than 30 retail service providers signed up so they can
offer fibre services, some are naturally taking more time than others to
actually develop and begin marketing their offers, particularly for
residential customers. That's not surprising when you consider it took us
about three years to reach an agreement with the Crown on the roll-out of the
network and it has been about six months since the very first fibre area was
switched on. This trend is not dissimilar to when broadband was in its
infancy. Early adopter brands tend to be quicker to market because they spot
an opportunity to gain market share, while others will take more time to
consider their brand propositions and approach.
At the same time, it should be remembered that the early years of the
roll-out are focused on priority premises such as businesses and hospitals. A
range of retail service providers already have specialist business services
in place and took advantage of reduced pricing on our existing business fibre
network to connect more businesses. We are continuing to see growth in demand
for these business connections.
There has also been some focus on the question of installation costs for
residential premises beyond the standard distances agreed in our contract
with the Crown. We have a trial offer in place to the end of this year for
these so-called non-standard installations, and we hope to be able to provide
much needed certainty to our retail service provider customers in the near
future.
SLIDE 16: DRIVE COPPER AND FIBRE NETWORK EFFICIENCIES
While the UFB and RBI roll-outs tend to grab the limelight, we must not lose
sight of the fact that 99% of our fixed line connections today remain on our
existing copper network and that is what our customers and their end user
customers rely on. Pleasingly, network performance and service levels are the
best they have ever been - a result of network improvements, capital
investment and the relentless focus of our infrastructure team over the last
few years.
SLIDE 17: 7 MONTHS PERFORMANCE
That operational efficiency was a key contributor to our first EBITDA result
of $399 million for the seven month period to 30 June.
Our revenue for the seven months was $613 million. This was underpinned by
our 1,776,000 fixed line connections and over 1 million wholesale broadband
access connections. Significantly, our total number of fixed line connections
remains largely static, and the investment we've made in the network in
recent years is providing a platform for strong growth in broadband
connections. In the December to July period we saw an increase of 50,000
broadband connections, following promotions from our retail service provider
customers.
In 2011, New Zealand ranked as the fourth fastest growing broadband market in
the OECD. Broadband penetration (measured per 100 inhabitants) is 27%, ahead
of the OECD average (26%). New Zealand also now has the highest level of OECD
broadband penetration relative to GDP.
Our investment in fibre is providing the broadband capability for New Zealand
to continue up the ranking.
SLIDE 18: FY12 REVENUE
This chart shows that our revenues are still mostly driven by the copper
network - represented there by the basic copper and enhanced copper
categories, which include both line access and broadband revenues.
This underlines the point that Sue made earlier about our copper network
continuing to underpin the business as we roll out the fibre network over the
next eight years. With about 80% of Chorus' revenues subject to pricing
review by the Commerce Commission, it is crucial that any regulatory
decisions reflect the generational investment that we are making and support
an efficient industry transition. When we decided to take the leap and invest
in a fibre future, it was in the context of fibre pricing that was contracted
with the Crown through to 2020. And that fibre pricing was set so as to be
attractive in comparison to the copper pricing.
While the demerger Scheme Booklet did outline the potential for regulatory
uncertainty, any significant change to the regulatory framework agreed at
the time of demerger, risks undermining Chorus' business case to overbuild
its existing network. It is that business case upon which many New Zealand
and international investors chose to contribute their capital, to help
realise the fibre vision that we and the government share.
SLIDE 19: ALIGNING REGULATION WITH THE ROAD TO FIBRE
That was the sentiment when we met last month with major investors both here
in New Zealand and overseas in Melbourne, Sydney, Hong Kong, London,
Edinburgh, New York, Boston and Chicago. I am pleased to tell you that there
was a lot of interest in New Zealand generally and in Chorus specifically.
However, in virtually every meeting we spent around half of the time trying
to explain the regulatory environment.
Investors continually said they don't understand the rationale for pricing on
copper-based services potentially being reduced at the same time that
taxpayers are supporting a Government backed generational change to fibre.
They are clear that reducing the price of copper services will inevitably
slow the uptake of fibre.
For some years now New Zealand's copper regulatory framework was focused upon
Telecom's role as a vertically integrated company and fostering the supply of
wholesale services. Chorus' structural separation means the industry has
moved on. Indeed, it was a seismic shift. A shift predicated on a longer term
migration from copper to fibre. The Commission's final UCLL decision due late
next month, followed by a draft decision on broadband access pricing shortly
after, will be the clearest indications yet on whether fibre is indeed to be
the industry's focus.
It's my view that regulatory frameworks need regular review, simply because
they take time to catch up with the reality of changing industries. The
legislation enacted for the demerger process has put some markers in the
ground for wider reviews of the regulatory framework. This includes a review
of telecommunications service obligations to commence next year and a general
industry review in 2016.
SLIDE 20: FROM NEW ZEALAND TO NEW YORK
I believe we have an opportunity to look at how regulation can both support
the transition to fibre and provide the certainty New Zealand and
international investors need, if they are to have the confidence to invest in
New Zealand infrastructure assets like Chorus. Ultimately it is all about
getting everyone working together for New Zealand's benefit - to realise the
growth and productivity benefits that a fibre network can enable.
This was brought home to me a few weeks ago when Chorus took the digital
design work of some up and coming New Zealand artists and displayed it on
digital billboards in Times Square in New York. It's a powerful example of
how fibre technology can overcome distance and connect NZ ideas or products
to the global economy.
So, we have some challenges ahead, but we look forward to working with
industry stakeholders to develop a framework that that builds upon and
supports the innovative public-private-partnership approach New Zealand has
chosen. My first year as Chorus' inaugural CEO has been both challenging and
rewarding. I want to express my appreciation to the Board, the Chorus
Management team and the wider Chorus family for their hard work and support.
Our goal is to make Chorus the best place people have ever worked. For me it
already is.
Thank you.
ENDS
For investor relations queries, please contact:
Brett Jackson
Investor Relations Manager
Email: [email protected]
+64 (0)4 498 9271
End CA:00229102 For:CNU Type:ADDRESS Time:2012-10-31 09:25:49
