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Edited Transcript of CNU.NZ earnings conference call or presentation 25-Aug-19 11:00pm GMT

Full Year 2019 Chorus Ltd Earnings Call

Wellington Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Chorus Ltd earnings conference call or presentation Sunday, August 25, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Collins

Chorus Limited - CFO

* Kate M. McKenzie

Chorus Limited - CEO, MD & Director

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Conference Call Participants

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* Adrian Allbon

Craigs Investment Partners Limited, Research Division - Senior Research Analyst

* Arie Dekker

Jarden Limited, Research Division - Head of Research

* Philip Campbell

UBS Investment Bank, Research Division - Analyst

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Presentation

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Kate M. McKenzie, Chorus Limited - CEO, MD & Director [1]

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Good morning, everyone, and welcome to our full year results announcement for FY '19. I'm Kate McKenzie, Chorus CEO; and with me is David Collins, our CFO.

We'll start with an overview of the key numbers and trends before David takes you through the financials, including guidance to FY '20. I'll then cover on the -- cover off on the things that we're focusing on for this year.

FY '19 was a clear

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you'll see uptake grew from 45% to 53%. That's outstanding when you consider our contractual target with the government was 20% by December this year. 80% of the fiber rollout is complete, and it continues to be delivered on time and on budget, and with limited CapEx spend to slightly below the lower end of our guidance range despite FY '19 being our peak year for premises rollout.

Total fixed line connections were down by 76,000. That was consistent with the decline in the year both below at a headline level, but the mix was more favorable in FY '19 with the majority of the decline on voice-only lines that have a lower ARPU than broadband connections.

We continue to put a lot of focus on reducing our costs. We've adopted new digital processes and tools that helped to reduce network maintenance costs and lift customer satisfaction for fiber installations from 7.5 to 7.7 out of 10. That's required our people to embrace new ways of working, and we achieved 7.6 out of 10 in our engagement survey with a Net Promoter Score of 28, a very pleasing result. That was despite continuing reductions in overall employee numbers as we reshaped the business.

Against this backdrop, we reported NPAT of $53 million and EBITDA of $636 million for the period. We've confirmed a final dividend of $0.135, taking the total dividend for the year to $0.23 per share.

As I mentioned, FY '19 was our peak rollout year. Another 176,000 customers were brought into the UFB footprint. And even with that ongoing network expansion, we still increased UFB uptake from 45% to 53%. That reflected another 169,000 connections added in our UFB area.

This was our biggest user connections yet with 30,000 more fiber installations completed than the year before. That's all the more impressive when you consider installation crews reduced from 800 to about 670 through the year.

We also reduced work in progress, and lead times in June this year were 8 business days compared to 13 days last year. We've achieved this leap in productivity by working with service companies and retailers to redesign the fiber installation process from end-to-end and by introducing new digital tools. By using smart data categorization and machine learning to analyze our databases and connection records, we've pre-identified 400,000 addresses as potentially simple connections needing just one installation visit. We've achieved about 90% accuracy to date, and we're seeing days where more than 70% of connections are being connected in a single appointment.

Customer satisfaction for those connections increased from 7.5 to 8 during FY '19. Overall, we lifted customer satisfaction for all fiber installations from 7.5 out of 10 last year to 7.7. Our target for the year was 7.9, and we did reach that halfway through the year but we do continue to see significant variance between retailer processes flowing through to our result, and that's something we continue to work on.

Our migration program where we work alongside retailers or we undertake our own door knocking, completed a massive 23,000 installations and is achieving customer satisfaction of 8 out of 10. Technicians continue to rate highly with a customer satisfaction score of 8.5 out of 10.

This next slide is a summary of the quarterly connection movements you've seen previously. At a high level, LFCs are adding fiber connections in their areas, and wireless network retailers have had a focus on voice-only customers.

Rural connections have held up well despite wireless competition helped by our VDSL vectoring upgrade and new premises growth. In our UFB areas, we've seen really strong broadband growth. That's a combination of more premises being built, increasing broadband penetration and the win back of offnet customers from competing cable and wireless networks as our fiber footprint grows.

However, we've also seen mobile network operators targeting their customers with wireless voice offices. Some consumers appear to have been advised that they need to disconnect from the copper network when that isn't the case. We believe retailers need to take care to avoid creating customer confusion about the time frames for copper switch-off. The Commission's copper withdrawal code isn't due until the middle of next year, and even then, we'll be maintaining copper for quite some time across large parts of the country.

Broadband growth has continued since year-end and connections are now at 1.2 million lines, a level we last achieved back in 2017. Voice line loss has also slowed considerably.

This slide gives you more insight into the broadband mix in our planned UFB zone and in the rural zone. In rural areas outside our UFB footprint, the total number of broadband connections has remained stable, and there are a growing number of fiber-connected premises. They number about 17,000 in total, and the increase reflects the growth in subdivisions just outside major towns and cities nationwide.

In the chart on the right, you can see fiber connections now make up about 61% of our broadband connections in our planned UFB zone. You can also see the positive ongoing growth in total broadband connections in this area over the last 2 years.

The retail market remains very competitive, and smaller retailers continue to grow market share on fiber. Bundling broadband with electricity is proving popular with Nova Energy, the latest to enter the broadband market. The proportion of connections on 50-megabit plans continues to shrink, and 100-megabit plans grew from 69% to 71% of mass market connections.

The standout change, though, has been the proportion of customers taking 1-gigabit plans. The number of customers on 1-gig services has pretty much doubled each year since FY '17, and they are now 10% of mass market connections. About 15% of total orders are for 1 gig when you combine new connections and upgrades of existing customers.

A large factor in that demand for 1 gig is retailers sharpening their pricing to below the $100 mark. That's being helped by our incentive program and the repricing from $65 to $60 in July. 2degrees, for example, are offering 1 gig per year at $90 per month with a $200 joining credit and free subscription to Amazon Prime.

Video streaming is also helping demand for high-speed broadband on copper. About 2/3 of our copper orders are now from VDSL service, and we are promoting VDSL as a great option for people wanting to stream the upcoming Rugby World Cup matches, especially for customers in rural areas where our network enables unlimited data use and we have plenty of very good VDSL coverage.

I'll now hand over to David to take you through the financials.

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David Collins, Chorus Limited - CFO [2]

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Thank you, Kate. Good morning, everyone. It's great to be with you today.

Starting with our income statement. It's a fairly straightforward view for the company. At the revenue line, we are seeing the impact of lower copper connections, but we are also seeing strong fiber broadband growth.

So revenue down $20 million. On the expenses line, our tight cost control has seen our expenses come in $3 million lower than full year '18.

On the depreciation line, our depreciation does continue to grow, in line with the growth of our UFB footprint. Specifically, we have accelerated the depreciation on our copper cables in UFB areas with the objective of fully writing those assets down by full year '25. Our amortization on the other hand has reduced driven by the lower spend on customer connection costs for copper.

Looking at the interest line in our income statement. Our interest does continue to grow driven by the growth in debt to support the build of our project, and specifically the CIP interest, so Crown Infrastructure Partners, grows also in line with the drawdowns on our CIP debt.

We did have a major refinance during the year, which was the issue of our New Zealand dollar bond in December of 2018.

In terms of the average interest rate on our debt, it is now 5.7%, down from 5.9% in full year '18.

Turning to revenue in a little more detail. As I mentioned before, our copper connections are reducing, both in terms of voice and broadband, but importantly, total broadband numbers are growing, so we are seeing strong growth in fiber broadband across the business.

In terms of field services revenue, we are continuing to see strong greenfields growth or subdivision demand, which we would expect to continue to see in the future.

So the summary for revenue, down $20 million, copper connections impact but offset by strong fiber connection growth and also greenfield subdivision demand.

Moving now to expenses. Expenses, we are keeping a very tight lid on, in light of the reducing revenue picture for the year, and we've seen a reduction in total expenses of $3 million against full year '18.

Taking a couple of the lines specifically and starting with labor. With labor, we've achieved a flat outcome for the year. It's had some CPI impact and also lower capitalization levels, which have had an impact of pushing labor up, but we've had an offset in terms of lower FTE numbers across the business and there was a higher one-off impact in the prior year in full year '18.

Maintenance costs has been a very impressive outcome for us in the year, and we are down $12 million versus full year '18. A couple of key drivers there. We're seeing the RSPs make better use of technology in terms of reducing the number of truck rolls that we need to undertake. We've also seen the impact of fewer copper connections and fewer faults across our network. We would expect this trend to continue, and we'll make some more comments on that later in the presentation.

Looking at IT spend. We continue to invest in new IT platforms across our business. Examples including the billing platform and the assure platform for faults. And that is seeing the IT costs for our business continue to reduce and down $4 million against the prior year.

Conversely, costs that relate to the size of our footprint have increased. So things like rent and rates and property maintenance, as our UFB footprint expands, these costs will obviously rise in conjunction with that.

And lastly on expenses, regulatory costs, we are moving closer to the implementation of our new BBM regime. It is natural that we are seeing some higher rate costs as we look forward, but we will, of course, maintain and manage those as best we can. So the summary on the expense line, a good outcome, down $3 million for the year.

We thought it would we be useful to have a closer look at reactive maintenance in our business, given the positive outcome on maintenance overall. Reactive maintenance in full year '19 came in at $66 million, which is down from $75 million in full year '18. Within that number, our fiber reactive maintenance has grown, which is an expected outcome, given that connections are growing, but conversely, copper reactive maintenance is reducing across our business. When you look at the lower chart on the screen, you'll see, particularly in our UFB zones, copper reactive maintenance is reducing. We would expect this to continue as we look forward in our business.

We've spoken previously about the fixed cost component of copper maintenance. We've estimated that and continue to estimate that at $10 million per annum. That is a benefit that will flow through in the coming years as we progressively move our customers off copper and onto fiber for our business.

Moving on to CapEx. I'm pleased to be able to report that we are now past our CapEx peak in full year '19. It was our peak communal build year for our business, and we've also seen significant reduction in copper CapEx over the year. We have come in at just under the guidance range for CapEx, so a total of $804 million for full year '19. And we are giving guidance for full year '20 of $660 million to $700 million, which I'll come to in a couple of slides' time.

Looking specifically at the fiber component of CapEx for full year '19. Fiber CapEx came in at $664 million, $44 million up from the previous year. Communal CapEx, we spent $245 million, which importantly is now starting to move towards UFB and UFB2+, of which specifically we spent $105 million during the year.

Looking at costs per premises passed. We've held that consistent with prior periods, and it's come in at $1,573 per premises passed. That is in the top half of our guidance range, with that range remaining at $1,500 to $1,600 per premises passed. During the year, we did claim Crown funding for 18,000 greenfields premises, which were passed in prior years.

Looking at fiber installations. As Kate mentioned earlier on, we completed 186,000 during the year, of which 14,000 were UFB2 installations. Although the volume was 30,000 higher in terms of installations than the prior year, our layer 2 spend was actually only up $14 million, which is driven by a lower mixed cost for MDU and RoW assets.

Lastly, looking at customer retention costs. These are a focus area for us for fiber. They have grown, which is consistent with our ongoing programs to incentivize our customers to move on to fiber. And that is a trend we would expect to continue.

Looking more specifically at connections and layer 2 CapEx. You can see on this slide the dissection across the various components. This is quite simple and was within our -- just under our guidance range for the year. Cost per premises connected was at the lower end of our range, so just on $1,025 per connection compared to a range of $1,000 to $1,150.

Moving on to common and copper CapEx. Copper-related spend reduced by $51 million during the year. This is a key focus area for us as our number of copper connections reduces, and I'll make some more comments on that in the ensuing slides.

Layer 2 spend for copper reduced driven mostly by the vectoring program in the prior year in full year '18, and we are continuing to see customer retention spend reduce for copper as we focus on moving customers onto fiber and incentivizing them to do so. Common CapEx remains flat and includes spend on our IT systems to help to drive our IT costs lower.

We've had a lot of discussions with our investors in recent times around how we approach CapEx spend. So I thought it would be useful to make a few comments on how we think about making decisions on CapEx.

There's a couple of lenses that we apply, and the first one is around is the spend contractual? Is it sustaining? Or is it discretionary? So as you think about CapEx, that is the order that we will consider it in. Contractual, of course, the obvious one is the UFB spend, and that is something that we don't have a choice from a contractual position in terms of whether we spend that money or not. Sustaining CapEx, well, that's staying business CapEx. It's what we need to spend to maintain our asset and keep it fit for purpose. Discretionary is where we have choice, and I'll talk in a moment about how we make choices around discretionary CapEx in our business.

There are then 3 lenses or 3 horizons that we consider when we look at CapEx. We look at is it in our UFB zone? Is it in our local fiber company zone? Or is it in rural? Clearly, we have different drivers in each of those zones. When we think about UFB, of course, we incentivize customers to move on to fiber. That is our key driver. In LFC zones, we look to compete for as long as it's economically logical with our copper connections, and that's our key motivation in LFC. Within rural regions, we need to consider our TSO obligations and treat our customers and maintain our customers -- or meet their requirements, but we look to be as efficient as we can in optimizing our CapEx in those areas.

So how do make decisions on discretionary CapEx? There are a couple of, I guess, 3 headlines around how we consider making those decisions. And the first one is we're very conscious that we're approaching free cash flow for our business. We're most of the way through UFB1 at present, and UFB2 will complete in the coming couple of years. So we are approaching free cash flow, and we're very conscious of that when we look at our CapEx and when we make decisions.

We also consider our overall strategy, and this is very much through the lenses of the 3 geographic horizons that I mentioned previously.

And lastly, we do think about our regulatory and our actual cost of capital. It is important that we consider what our cost of capital is when we make investment decisions. We would note that the regulatory WACC that is -- that will be determined through the regulatory process will be a key consideration for us. It will be something that we look at as we make investment decisions going forward. The implied cost of capital through the Emerging Views paper that the Commission released is below our view of what our cost of capital is and it is below our investors' view of what is our cost of capital. So that is something that we will consider as we think about capital expenditure going forward.

Moving on to guidance and starting with CapEx. We are guiding for full year '20 in the range of $660 million to $700 million. Fiber does continue to make up the bulk of the spend, as you would expect, being $550 million to $580 million. Most of that is driven by connection CapEx, and we've given guidance at 160,000 to 180,000 connections over full year '20. That is lower than the full year '19 connection outcome of 186,000, which is due to the completion of UFB1 in the coming months. In terms of UFB1 communal spend, there is some $30 million left to spend, so we are very close to the end of UFB1.

A quick comment again about copper CapEx. As we look forward, you'll see we've guided to a range of $50 million to $70 million. That is a substantial reduction on the full year '19 outcome, and that reflects our ongoing focus on optimizing our spend on copper CapEx within our business.

Moving on to EBITDA guidance for full year '20. We're providing guidance in the range of $625 million to $645 million for the business. We remain very focused on our aspiration of modest EBITDA growth into full year '20 and indeed are on track to achieve that ambition.

Looking at revenue firstly, our focus will be to drive and maximize the number of fiber connections across our business. We are seeing very strong fiber demand, and we would expect that to continue looking forward. We will maintain focus on growing ARPU within our business. I note that our 1-gigabit plans, we're now up to 10% of our customer base, up from 7% a year ago, that will continue to be a focus area for us. And lastly, on revenue, we will look to commercialize new revenue opportunities wherever available for us to maximize and lever the fiber asset as we continue to roll it out.

On the expenses side, what are our key focus areas? We will continue to see a reduction in the total expense line for Chorus looking forward. Couple of the key drivers in that front. In terms of maintenance, as I mentioned, we were down some $12 million in the current year versus the prior year. That trend will continue driven by reducing copper connections driven by the use of technology across our business and ongoing productive efficiencies. We have transformation programs running across the business with a major example at present being a restructure process between our customer care group and network field management, which does impact some 500 people across our business. So over half of our business impacted by that process. There are various other transformation programs underway that is a key example for us.

We will continue to leverage digitization across our business and the use of technology. I mentioned earlier on the billing project during the year and also the assure project, examples of moving to more modern digital platforms, which will continue to drive our costs down across the business, particularly with regards to IT. The remaining cost base, we'll keep a tight lid on costs and we'll manage our regulatory costs ongoing.

So EBITDA guidance, $625 million to $645 million, and we are on track to deliver our ambition of modest EBITDA growth for full year '20.

The guidance summary in terms of the next slide summarizes the key areas that I've spoken about previously. Not a lot more to add here. I would note that for UFB2, we have not given cost per premises connected guidance. The reason for that is there is significant variability across the geographic regions for UFB2 and 2+, and we are early in the program so we don't think it's of value to provide CPPC guidance for UFB2. I would note our program guidance is unchanged, and we've included that in the appendices of the presentation.

So moving on to dividend policy for Chorus. We have an existing dividend policy of modest growth in dividends leading to full year '20. The Board, in thinking about the way forward for our company, has thought about what are the key milestones that we have in front of us as a business that are relevant for consideration of our dividend policy. The key one, of course, is the regulatory pathway towards the commencement of our building blocks model regime in January of 2022. The Commerce Commission at the moment is working through the input methodologies process, with the draft decision due in November of this year and the final in June of 2020 and followed by the price quality determination process leading to June of 2021.

What that means for us is that we won't have certainty on our revenue levels, on our RAB levels and on the key components within the building blocks model until June of '21 based on the Commerce Commission's current time line. We've therefore taken the view that in terms of dividend policy, it's appropriate to maintain our current policy of modest dividend growth subject to the usual caveats through until June of '21 when we will have certainty around the revenue and RAB levels for our business.

In thinking about this judgment, it's also very relevant to think about our capital spend. We are already over 80% of the way through the total UFB project. As we think through the next couple of years, we will be mostly complete by the time we get to June of '21, and that is a consideration as well for our dividend policy.

It's also worth mentioning discussions with credit rating agencies and I'll come back to that a little later in a later slide, but we are talking to both Moody's and S&P around what the appropriate thresholds are for our business. And that is a key consideration in thinking about our future dividend policy also.

So the summary is our existing policy of modest dividend growth will remain in place until June of '21, at which point the Board will reconsider our dividend policy and update the market accordingly.

Moving on to our FY '19 final dividend. As Kate mentioned earlier on, we are declaring a dividend of $0.135 per share fully imputed and a supplementary dividend of $0.024 payable to our foreign shareholders. We are maintaining the dividend reinvestment plan per previous periods with a consistent discount of 3%, and we're not intending to underwrite the DRP.

Guidance for full year '20. We are issuing at $0.24 per share subject to the usual caveats, and we would expect to maintain the same payment profile at 40% and 60% over the 2 halves of full year '20.

A couple of comments on imputation credits. You'll have noted in our accounts that our imputation balance is reducing over time. The reason it's reducing is that we are not in a taxpaying position in full year '20 and we would anticipate that will continue in the short to medium term. The key driver of that is that as our fiber asset is built out, we do have the benefit of accelerated tax depreciation on our fiber asset. So we do anticipate, as we look forward, that our imputation balance would continue to decline, and that's another factor that we'll take into account as we think about dividend policy in the future.

Moving on to debt and rating agencies. Looking at where we've come in at net debt to EBITDA. We've come in at 3.92x for the period compared with the S&P threshold at 4x and Moody's at 4.2.

Looking over full year '20, we would expect to -- as we approach the peak debt levels for the business and as we complete UFB1, we would expect to temporarily exceed the allowances from the rating agencies but then come back within them shortly thereafter. And both rating agencies are comfortable with this on a look-through basis being how the agencies look at our thresholds.

With regard to Moody's, we're very pleased to note that they made comments recently on their intention to revisit our threshold levels upon the implementation of the BBM framework in June of 2021. They noted that they expect our risk levels to lower at that point and noted specifically that they saw Vector as a comparable entity for us, albeit noting that our risk levels that we face as a business are higher than Vector, which we think is a very important factor as we think about our future in the regulatory regime.

Moving on to regulatory outcomes and risk. We do think it's important that the view of risk of our business is taken into account by the Commerce Commission in thinking about the regulatory settings for our business. We certainly agree with Moody's perspective around the risks that we face and they are higher than the risks that are faced by regulated utilities such as Vector.

We have made a number of submissions to the Commerce Commission as have our investors in recent months, and we'll continue to work constructively with the Commerce Commission to demonstrate the risks that we face as a business and how we believe that they should be built into our cost of capital.

When we look at our contractual partner in the UFB, Crown Fiber Holdings, or now known as Crown Infrastructure Partners, I would note that they commented at the start of the UFB program that fiber companies do carry more risk than telcos. It's also widely acknowledged in the current market by European regulators and also around the risk levels that we face. And I would note back on Crown Fiber that there was not the risk of 5G in place when they made their original comments at the inception of our program.

So to summarize, we do think it's important that the build and financing risks that we face as a business are taken into account through the regulatory regime. Very specifically, over the loss period, that's 2011 to 2022, our view of the appropriate cost of capital and specifically the risk-free rate that should apply too in that period is that it should be set at the time that we made the investment decision, which was in 2011. That's the time where we assessed risk and we took risk on over the term of the UFB project. It was a long-term decision. It's a long-term project, and we believe that's the appropriate time to set the risk-free rate and the WACC for the period of the lost asset. We are engaging with the Commission on this point specifically and will continue to do so in a constructive and supportive way, and we're also grateful for the support of our investors in making submissions on this also.

Moving on to Crown financing and our debt profile. We do have Crown financing in total available to us of $1.33 billion over the term of the UFB build. We are drawn to $912 million as at the balance date.

This is another important area to consider when we think about regulatory framework. One of the judgments through setting the maximum allowable revenue for our company is what is the cost of the Crown financing. The Commerce Commission has noted in their Emerging Views paper that they view the cost of Crown financing as being 0, that is as being costless. We strongly disagree with this view and have made submissions accordingly as have some of our investors.

The financing from the Crown was not free money. It came with many obligations and conditions attached to it. And very specifically, the Crown financing involved debt risk for the Crown, not project risk. So it was in the form or in the nature of bank debt, and therefore, the risk that was taken was debt risk and not project risk. We've therefore submitted that we believe our view of the appropriate cost of Crown financing from our perspective is 1.8%. And that is a very considerable and important assumption in looking at our revenues under the regulatory regime going forward.

Lastly on this slide, on the right-hand side, you can see our debt profile looking forward. We do have a significant refinance in the current year, which is the GBP bond, due for maturity in April of 2020. We have in place undrawn revolving credit facilities of $550 million, and we have cash on hand of $273 million, which is available to support that refinance. However, we anticipate that we will go to market to refinance that debt ahead of April in any case, but we do have contingency if we need it in terms of the undrawn debt and free cash that we have on hand.

I'd now like to hand back to Kate. Thank you.

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Kate M. McKenzie, Chorus Limited - CEO, MD & Director [3]

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Thanks very much, David. Very comprehensive review of our financial results. I will now spend some time talking about our priorities in the year ahead.

Definitely, our overarching strategy remains unchanged and it's pretty simple. We'll keep connecting as many customers for fiber as we can, as fast as we can and continue to do everything that we can to improve customer satisfaction.

For this year, though, the difference is that the fiber rollout is entering its final phase and annual rollout volumes begin to slow, so we're shifting our focus from building the network to how we maintain and operate it. As David noted, we're starting to see the change in the mix of our connections from copper to fiber, with fiber being now more than copper connections, and that's playing out in reduced network maintenance. This has implications for our service company workforce. And as some of you may have noticed, we recently agreed a new short-term network maintenance contract through to early 2022. The reducing volume and scope of work meant that we went from 3 service companies to 2 for those contracts. We'll keep working closely with our service companies to manage our reducing workforce needs as maintenance and network build volumes reduce. And that's going to continue to be a very important focus for us.

The shift to an operate focus also means we're reshaping our own organization. As David mentioned, we're in the process of combining our customer care and network field management teams. Together, these teams account for about 500 of our people, and by merging the 2 teams, we believe that we can ensure more of an end-to-end focus for customers and better leverage the digital platforms we're investing in. That's a process that's underway now and in the usual Chorus fashion, we're doing that in close consultation with our staff.

As I've said previously, a lot of our current challenges stem from our legacy systems and processes and the way this shapes our interaction with service companies and retailers. Our fiber in a day program and the launch of our digital APIs, has shown that we can achieve a virtuous cycle or a virtuous circle of positive outcomes for everyone in the value chain by simplifying and streamlining the way that we operate, and we've made some great progress on that. Our customers like those changes. The digital channels that we've launched have seen exponential growth in usage from about 1 million requests a month to 11 million a month in FY '19. We're excited about the progress that we've made and the potential of digital solutions to simplify things for our customers even more. So with fiber uptake at 50% and tracking strongly, we're accelerating our transformation program.

Through a combination of customer-centered design and digital solutions, we think we can ultimately get to a place where 90% of premises already connected by fiber can have this service activated automatically. And around 75% of service issues should get to the point where they are resolved without a customer having to wait on the phone.

So how will we do that? Well, David's mentioned a couple of the important platforms that we've invested in. But for example, the new assure channel that David mentioned for retailers will make a big difference. It provides a simplified process and integrated tools that speed up and simplify the diagnosis and resolution of faults. You really need to come and see these platforms in operation to make that real. But it really does make a big difference to the information that people dealing with end customers have when faults get reported into the system.

We also want to make it easier and faster for people to activate their broadband where there's already an intact fiber connection in the home. That's becoming increasingly important for us when you consider how many homes and businesses are already connected to fiber and the number of people who move between homes and between retailers. And we'll keep refining the fiber connection process to improve productivity as well as improving our processes to manage complex connection orders and the strong demand we're seeing from property developers.

In FY '19, we processed about 19,000 connections via our property development team. And government data shows building consents continuing to grow, with Auckland setting a record with 14,000 consents issued for new homes in the year. That's all great news for us, and we want to make the service experience associated with those connections as simple as we can.

We're continuing to be an active wholesaler. There's a range of activity that falls under this umbrella, including things like providing marketing funds for retailers, connection incentives such as our copper connect offer that provides credits to retailers for promoting VDSL upgrades or new connections in areas where fiber isn't available. Or the mix it up offer from migrating customers to 1-gig plans. These incentives are becoming increasingly targeted since we first started on them 2.5, 3 years ago now. And we've developed our modeling tools, and we are providing retailers with deeper insights into market opportunities. We're also trialing different messaging and direct marketing to consumers with things like prezzy cards for activating their fiber connection. Whilst it's early days, we're getting some pretty positive response to those initiatives.

A related stream of activity is our Chorus-led migration program. Customers who we door knock and then install fiber for have much higher customer satisfaction. And we see 60% of those installations activated within 12 months. The response rate has been even higher in some small UFB2 areas like Ohau with a 70% uptake rate. That is a great outcome for the field crews who don't have to make repeat visits to those more remote locations.

Another interesting trend that we're seeing is growing customer demand for open access networks and communal developments such as retirement villages and apartment blocks. Residents may have been limited to one retail provider in the past, but the rise of online streaming means there's growing awareness of the wide variety of retailers and offers now in the market. These types of residences are another focus for our marketing team in FY '20.

One of the areas where we've been focusing on winning back offnet customers is in Wellington. Our copper network historically had approximately a 45% market share in the 2 suburbs shown on this slide. We're now seeing good gains in connections where fiber has been rolled out, with market share moving up to over 50% on an address basis. There are still some large suburbs like Island Bay left to complete in the next few months. And we're looking to emulate the effect that we've seen here in Wellington around the country in areas where fixed wireless was marketed ahead of the fiber rollout. And certainly, from our communal visits that we do out into those regions, there's lots of pent-up demand and people who would love to connect to our fiber network.

New Zealand also has about 0.5 million small businesses, but only 1/3 of small businesses have connected to fiber where it's available. And that's often on a consumer-grade connection. So as part of our focus on ARPU growth, we've looked at enhancing our product suite with a service that offers something more to small businesses than an entry-level broadband plan. Our research found that the reliability of the broadband connection is the strongest driver of overall customer satisfaction, and about 20% of businesses said they would need restoration of broadband within 1 hour to keep operating, just goes to show how dependent small businesses have become on these services. And that's only going to increase as more and more business functions move into the cloud. And so as a result of that research, we've recently launched new small business plans that provide targeted response times previously only available to enterprise customers. It's early days, but we've had some very positive feedback and smaller retailers have been quick out of the blocks to market the new plan. That's very encouraging.

We're also growing our commercial product portfolio off the back of the innovation work that I have talked to you about previously. We now have 3 edge center sites open for business, and about 30% of the space is already filled. We found that's pretty straightforward for us to develop and expand these sites in relatively short time frames when it looks like there's going to be demand. Our initial focus for customers has been retail service providers for things like [CDN] equipment. And we have promising inbound interest.

We're now exploring other customer segments that will help us to tap into the rapid growth of cloud-based services here in New Zealand. Smart locations are another segment of business where we're putting a lot more emphasis. These are things like ATMs, traffic lights or CCTV cameras that we connect using a mini ONT, and we charge a monthly wholesale fee of $65. They can be a little more complex to connect than a residential home because of power issues and limited site access. So we're working on refining our processes to enable us to make more of those connections and to make them in a faster and simpler way. This market is expected to grow, and we're already seeing evidence of that.

Of course, fiber technology isn't standing still, and we've also been trialing 10GPON with customers across 3 service providers. And actually, there has been an amazing amount of interest in this product. While 10-gigabit speeds may seem over the top to some of us, the trial has helped us to identify potential use cases for customers like video production companies waiting to transfer -- wanting to transfer large data files between locations.

Fiber to the desktop is another potential service that we've been exploring. Reducing business requirements for powered networking equipment office space does seem to be a good potential market, and we are continuing to assess what part we can play in the service [route] as well as potential channels to market.

We've also begun deploying our new WiFi capable ONTs that we've talked to you about before. We're considering how they might be used to monitor network performance in the home and potentially remove the need for retailers to provide their own residential gateway device.

And we can't have one of these conversations without talking about 5G. So whilst there is a lot of talk about 5G, we continue to see fiber and mobile as complementary technologies. 5G networks will need a lot of fiber and many, many more towers and sites. And so we're busy preparing our network to be a core backhaul provider, and we're developing a mobile access product that we expect to launch shortly.

We've also begun trialing small cell connections on our infrastructure with mobile operators. But 5G won't be able to overcome the inherent capacity challenges of shared spectrum and capacity, not to mention the cost of spectrum, stronger towers and higher OpEx than fiber. So we remain very confident that for the vast majority of people, a fiber connection is going to be essential going forward.

Capacity is key, and the Commerce Commission has indicated the average monthly usage on a mobile is 2 gigabytes. This just really emphasizes why fiber is so important. Fiber usage averaged 357 gigabytes in July, and copper usage averaged 193 gigabytes. The fixed line network today carries about 95% of Internet traffic, with unlimited data and streaming now the norm. The growing catalog of content available online is clearly driving that. And a range of service providers have announced new content builds, portals or packages this year. We don't see this phenomenon slowing down anytime soon. Demand for this kind of content and streaming over the Internet is just becoming more and more the norm.

Sky TV have reported that they had 55,000 customers streaming the recent Bledisloe Cup match. And of course, the Rugby World Cup, New Zealand's religion, is just around the corner. To cater for a spike in peak viewing demand during the Rugby World Cup, we've booked forward about a year's worth of capacity investment, and that has increased the peak demand headroom on our network by about 50% this year.

And there's no doubt that more capacity is needed as Kiwis do more online. The amount of peak time traffic on our network reached a new high of 2.18 terabits per second in July. That's a doubling of traffic in the last 2 years. And we think this trend is only going to continue as more streaming content is consumed online. As the chart on the right shows, peak time performance remains a core strength of a fixed line network relative to the shared capacity of fixed wireless.

This next slide is a summary of our priorities for FY '20, most of which we've already covered so I won't run through this in a lot of detail.

I've also announced today that I'll be stepping down at the end of 2019, but these priorities remain very much a focus for myself, my fantastic team and everyone across our organization. As David said, we're on track to deliver modestly increasing EBITDA, and I'm very proud of the work that we've done to improve customer experience and productivity.

We've also made great progress in the evolution of Chorus' culture to be more innovative and customer-focused. I'll have been at Chorus almost 3 years by the end of the year, and given where we are now in the fiber rollout and the next phase that Chorus is moving into, it's a natural juncture for me to hand over to someone else. I'll be moving back to Australia to spend more time with my family, and I don't intend to take on a new exec role. Of course, my one regret is I'd love to take the fantastic Chorus fiber network back home with me, but yes, that's probably not going to happen.

There is one piece of the puzzle that remains to be sorted in New Zealand, and that's the regulatory framework. I believe and I hope that, that continues to develop in a way that supports the brilliant model that's been created here for an open access fiber network with healthy competition. I really think New Zealand has gotten this completely right. It has been a world leader in building shared broadband infrastructure, and it's great to see others now recognizing this. I'm a convert and I will definitely keep telling everyone the story when I'm back over the ditch.

And on that note, we will draw it to a close and we will open it up for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Arie Dekker from Jarden.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [2]

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First question just with regards to labor costs and the expensed labor line on the income statement. In terms of the transformation initiatives you've got underway, what sort of quantum could this come down by? And should we expect any one-off costs in FY '20 as well associated with that?

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David Collins, Chorus Limited - CFO [3]

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Thanks, Arie. What I would say about the transformation and the restructures that we've got underway, as I mentioned that our customer care function and NFM are working through a merged process at the moment. The restructure does impact circa 500 of our people, so it does impact over half of our workforce.

It's very early in that process, so it's not appropriate yet for me to put out a target on that or a range on that. And there will be an element of one-off costs that will result from that, but the outcome will be a saving for our business looking forward.

So I can't give you a specific number, Arie, but clearly, it's a substantial part of our business that we're looking at through that process.

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Kate M. McKenzie, Chorus Limited - CEO, MD & Director [4]

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And I guess the only thing to add, Arie, Andy is overseeing that process, so you can expect that it will be done with rigor and discipline and also that we will be very careful to make sure that we are looking after the customer experience. So it will be very much guided by doing things better end-to-end and getting rid of wasted work as opposed to making cuts that might have an impact on customer experience.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [5]

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Sure. And then just one other line item. Network maintenance was down for various reasons. Just in terms of, I guess, the weather aspect of that. What sort of form factor was that between FY '18 and '19? And sort of was that materially under what you'd expect in, say, a normal year?

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David Collins, Chorus Limited - CFO [6]

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Sure, Arie. It's true that the weather was more favorable in full year '19, but I would not describe that as a material factor looking forward. And just reiterating what I said in my comments when we looked at reactive maintenance, we do expect our maintenance costs to continue to trend downwards driven mostly by reductions in copper maintenance. So I wouldn't place too much reliance on the weather factor. It did help in full year '19, but the trend and the view looking forward is very clear and that is down for our maintenance costs.

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Kate M. McKenzie, Chorus Limited - CEO, MD & Director [7]

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And that's mostly volume-related, and you can see that in the results.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [8]

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Right. Just in relation to your dialogue with the Commerce Commission and obviously through the formal process as well. You touched on a couple of areas where you're obviously focusing and talking to them. I guess just in this very low interest rate environment that we find ourselves in, I just wondered what conversation you're having with them with regards the potential for very low risk-free rates when the first regulatory period is sort of hit. What sort of offsets that now you can kind of expect or are sort of working for to ensure that, that doesn't cause unnecessary, I guess, shock to pricing paths envisaged through the anchor pricing?

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David Collins, Chorus Limited - CFO [9]

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Sure. Thanks, Arie. That's obviously very topical for us at the moment. I would also note, I saw Vector's results a few days ago or last week and they made some comments in there on this issue as well.

We are in a low risk-free rate environment. That is something that we're talking to the Commission about, and we're also talking to other regulated entities as well. There's a couple of contextual comments that I think are important here. We can't control risk-free rates, and they are low at present. However, the Commission does have other tools in its toolkit that can be used to offset the impact of low risk-free rates. The Commission themselves have talked about depreciation profiles as being one area that they can look at to manage this issue. There are also the other components of the WACC itself specifically around asset beta, which we've made our arguments in our position quite clear to the Commission.

I would also note that in looking at WACC, it's important but it's also just the first 3 years that we're talking about here for an asset that's a 50-year-plus asset. So I think that contextual piece is important when we discuss the issue of WACC. Of course, the judgment is what the risk-free rate will be in full year 2021 as opposed to what it is at present, albeit I note that the curves are quite flat at present when we look out a couple of years.

The last more fundamental point that we make to the Commission and will continue to do as constructively and openly as we can, is that we don't believe our cost of equity moves in alignment with the risk-free rate. So as our risk-free rate goes down, it's not a linear relationship with our cost of equity. Our investors would support that view, and we will certainly continue to talk about that with the Commission. So there are other areas that the Commission can use to help to deal with the issue itself.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [10]

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Sure. And then just on tax. I note and I think I have noted correctly (inaudible). So you referenced the imputation account balance, and obviously you didn't pay much in the way of cash tax in 2019. When you look out at that dynamic around, I guess, to say there's some leverage occurring in the business with regards to profit before tax, but then that ability to, I guess, accelerate some of the tax depreciation. Are you expecting -- when you look at your tax profile in the next 2 or 3 years, are you expecting to pay the cash tax in the next 2 or 3 years?

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David Collins, Chorus Limited - CFO [11]

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Sure, Arie. If we look forward in the short to medium term, we don't anticipate reaching or going back to being a taxpaying position. So in the short to medium term, which means if you look at our imputation balance, and there's a note in the accounts on this, you can work out quite easily what that profile looks like for our imputation account. So without giving you a specific date as to when we will pay tax again, and of course, it's a good thing not to pay tax and we are benefiting from the accelerated depreciation on our fiber asset, but it will be a few years yet before we revert to a tax paying position.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [12]

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So when you look at the impact of that on your dividend policy and I guess [kind of] dovetails nicely into sort of the June 2021 consideration where you have a RAB and you have your MAR, I guess what are some of the alternatives to a dividend that you might be thinking about if you don't have an imputation credit balance and that's not an effective means with which to distribute?

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David Collins, Chorus Limited - CFO [13]

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Sure, Arie. And I guess I'll make some really broad comments. It's a little bit dangerous to talk 2 years out given the amount of things that can change. As we think about our dividend policy and more broadly as we think about capital management, [all thoughts] around investor base, around what our investor preferences are, we'll consider with our Board what the appropriate way forward is. Of course, we can simply pay unimputed dividends if that was -- that's one choice. We can look at options to return capital within the constraints of our balance sheet structure, and we will ultimately look to what our investor preferences are, noting, of course, that we do have a spread of investors across retail and institutions and also across international geographies as well.

So a little dangerous to look out a couple of years, but there's some generic comments, Arie, on that topic.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [14]

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Sure. And last question, you might not have it to hand, but what is the available subscribe capital of the business?

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David Collins, Chorus Limited - CFO [15]

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I'm sorry, can you repeat that?

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Arie Dekker, Jarden Limited, Research Division - Head of Research [16]

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What is the available subscribe capital of Chorus?

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David Collins, Chorus Limited - CFO [17]

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In round numbers, $200 million.

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Arie Dekker, Jarden Limited, Research Division - Head of Research [18]

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$200 million.

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David Collins, Chorus Limited - CFO [19]

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Yes.

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Operator [20]

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Your next question comes from the line of Adrian Allbon from Craigs Investment Partners.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [21]

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A question. Just sort of following on, I guess, from the thing that Arie raised around, I guess, the Commerce Commission discussions, and I guess effectively balancing cash profits with probably a [growing RAB]. One of the points you didn't mention until the offset was the whole indexation thing. Can you give us a sense of how you're thinking about that because obviously it's particularly relevant in a much lower risk-free rate environment?

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David Collins, Chorus Limited - CFO [22]

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Sure, Adrian. Thank you. Very happy to talk about indexation. That's another very topical comment for us as we think about our RAB looking forward. Our position on indexation is that we are supportive of indexation. We believe it's important in the regulatory regime that we have certainty around the level of real returns for our business looking forward, and we would rather not be taking inflation risk.

A key concept within the regulatory regime is real financial capital maintenance, and we believe that an indexation approach is more supportive and more appropriate. I would also add that the Commission has said that their preferred approach to revaluation of assets and revaluation of the RAB specifically is indexation. So in an indexation environment or construct, we have greater certainty over the future of our regulatory asset base.

I'd also note specifically for Chorus here that we have -- we're at 53% uptake at present, so we're just past 50% and we have a profile looking forward for our uptake level. And also we have the inclusion of the loss asset in our initial RAB. Both of those factors would support pushing -- a backdating of revenue, which is an impact of indexation as opposed to a situation where you did not have indexation, you would have more revenue brought forward, which we think given where we are at, at present, doesn't make sense for us.

So we do understand there are both sides. There are a number of sides to that argument, but we are supportive of indexation and we believe the Commission's view is consistent with that as well.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [23]

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Okay. Just in terms of the depreciation balance, which is around $300 million, can you give us a sense of how much of that would be fiber?

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David Collins, Chorus Limited - CFO [24]

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Did you say how much was fiber?

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Adrian Allbon, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [25]

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Yes.

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David Collins, Chorus Limited - CFO [26]

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Is that the question? What I can do is direct you to the note in the accounts, which I don't have in front of me. But that will give you an indication of the split of our depreciation expense across our different categories.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [27]

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Yes, I'm looking at that. [But I'd like to swing you. Obviously, it's a -- like it's an important input into where it might be].

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David Collins, Chorus Limited - CFO [28]

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Yes. Okay. Well, I guess if I turned it this way and said, well, what was the amount that we spent to date on the UFB asset in round numbers, it's around $3.2 billion is the spend to date. And if you were to look forward and say, well, what is there remaining to be spent, there's about another $1 billion or so to get us into the low 4s in terms of actual spend. The depreciation component I can't quote to you off the top of my head, but I'm happy to talk with you separately, Adrian, to give you some more context on that.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division - Senior Research Analyst [29]

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Okay. And then just one -- I guess one of the elements you didn't sort of talk about in terms of [capping] forward to the dividend whenever the Board -- the dividend change. How are you thinking about the competition side of it, like the 5G? I mean we sort of talked about -- I mean you haven't -- from a Vector perspective, indexation has suffered (inaudible) bird in the hand, but and avoiding the technology [in the tower], but you seem to be more aligned the other way.

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David Collins, Chorus Limited - CFO [30]

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Sure. And we will -- there'll be a number of factors to consider when we look at dividend policy out a couple of years. One of them, as you very correctly point out, is risk. So what is the risk that we face across our business? One of those risks is 5G. Probably the most obvious way that would feed into our dividend decision is to what level of contingency or buffer do we want in our credit rating metrics.

So we have at present 4x for S&P, 4.2x for Moody's. We expect those thresholds will be lifted in the future, and Moody's have said specifically they will review them in June of '21. But the judgment around risk is one that we'll make at the time and it will be -- it will materialize through how much contingency we allow ourself against that credit rating threshold. And we did talk in some detail in our presentation on 5G versus fiber, and we are comfortable as we look forward at our risk profile.

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Operator [31]

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Your next question comes from the line of Phil Campbell from UBS.

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Philip Campbell, UBS Investment Bank, Research Division - Analyst [32]

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Just a few questions for me. David, first on the CapEx guidance, the CPPP guidance of $1,500 to $1,600, I just noticed that the kind of mix of UFB2 premises had gone up obviously. So I was kind of thinking that number might have been a little bit higher than that, but I don't know if there's something else going on there that's offsetting it. That was my first question.

The second one was just on, I think, it's Slide 8 where you've got the rural mix of connections. I'm just wondering on the non-fiber-to-the-home connections for rural, can you give us a feel for like what percentage is VDSL and kind of maybe what's the average speed within connections within there?

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David Collins, Chorus Limited - CFO [33]

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Sure, Phil. So on the cost per premises passed metric, there isn't anything of significance to call out in that. It's fairly consistent and fairly flat with prior years. It is towards the upper end of the guidance between $1,500 and $1,600. Your rural question, I don't have that to hand and I don't know whether there's anything else that we could add to that.

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Kate M. McKenzie, Chorus Limited - CEO, MD & Director [34]

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No, no. I think that's a level of detail we don't have with us today, Phil. We can probably take that up with you off-line.

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Philip Campbell, UBS Investment Bank, Research Division - Analyst [35]

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Yes. And just one last one while I've got you on the line is I just noticed there was an announcement like a month ago just saying that the July connections were very, very strong, like I think it was 26,000 connections, it might have been 33,000 orders. I'm kind of assuming that, that was a bit of a Rugby World Cup-driven event. But obviously that's kind of about 1.5x your normal monthly average. So I'm just wondering is that kind of just a very short-term event that's happening because obviously it doesn't look as [though it's necessary], that type of run rate's [not] obviously flowing through to your annual connection numbers. But I don't know if you've got any color, that would be quite useful.

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Kate M. McKenzie, Chorus Limited - CEO, MD & Director [36]

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I think there's always a bit of a seasonality effect, and we've had a lot of new releases and we expect that we will be continuing to have a lot of new releases from as build complete between now and the end of the year. And we always get a tick up from that because we get quite high rates of take-up when those new release areas come out. There could be a bit of Rugby World Cup effect, it's hard to know. But all I would say is volumes are continuing to track favorably and we are very happy with how that's developing.

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Operator [37]

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There are no further questions at this time. I will now hand back to the speakers. Over to you.

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Kate M. McKenzie, Chorus Limited - CEO, MD & Director [38]

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Okay. Well, thank you very much, everyone, for your time this morning. And we look forward to catching up with you soon. No doubt, we will get to speak to most of you one-on-one over the next couple of weeks. So thanks very much. Bye-bye.

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David Collins, Chorus Limited - CFO [39]

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Thank you.