Annual Report 2018 01 Chorus Board and management overview 17 Management commentary 27 Financial statements 65 Governance and disclosures 92 Glossary FY18 results overview Fixed line connections Broadband connections FY18 FY17 FY18 FY17 1,526,000 1,602,000 1,187,000 1,186,000 Fibre connections Net profit after tax FY18 FY17 FY18 FY17 445,000 305,000 $85m $113m EBITDA1 Adjusted2 EBITDA FY18 FY17 FY18 FY17 $653m $652m $653m $710m2 Dividend Employee engagement score FY18 FY17 FY18 FY17 22cps 21cps 57% 81% 1 Earnings before interest, income tax, depreciation and amortisation (EBITDA) is a non-GAAP profit measure. We monitor this as a key performance indicator and we believe it assists investors in assessing the performance of the core operations of our business. 2 Adjusted to reflect the effect the NZ IFRS accounting standards adopted in FY18 would have had if they had applied in FY17. Dear investors Kate McKenzie Patrick Strange Chief Executive Chair We’ve made strong progress this year A fully imputed final dividend of 13 cents per share will be in our quest to keep New Zealand new. paid on 9 October 2018, bringing total dividends for FY18 to 22 cents per share. It is easy to overlook the scale and pace of the technological Our focus on tight cost management meant we met our change we’re bringing to New Zealand communities. fibre capital expenditure forecasts for another year, despite More than 900,000 homes and businesses now have fibre a record year for fibre connections and inflation in the wider at their gate and uptake has surged from 35% to 45% during construction market. Our commitment to investing in a fibre FY18. This has been achieved through our focus on the future was evident in our August 2017 UFB2+ agreement more visible and challenging part of our broadband rollout with the Government to take fibre even further. By the end – the connection from the street into customers’ homes of 2022 we’ll have extended fibre to about three-quarters and businesses. We didn’t get it right every time, but we’ve of the 87% of New Zealanders to be covered by the UFB continued to improve the experience for customers while programme. In the meantime, our investment in VDSL completing 156,000 fibre installations. That’s a 20% lift in broadband upgrades has helped narrow the digital divide, productivity from the previous year. improving potential broadband speeds for up to 85,000 We ended the year with 64% of our broadband connections rural addresses. on either fibre or high-speed VDSL broadband, up from We invested in bridging the digital divides within urban 45% last year. This was driven by our shift to being an communities too. We worked with Network for Learning, active wholesaler, investing to promote awareness of a government education group, to trial the extension the better broadband options already available to many of a school wifi network to students in the surrounding New Zealanders through advertising, collaborative community, using our street poles and copper cables in campaigns with retailers and our own door knocking new ways. This was part of our innovation initiatives, focused initiatives. This new approach, combined with underlying on identifying opportunities to use our network assets to demand for broadband, helped us to turn last year’s develop future products and services. We’ve also run trials decline of 40,000 broadband connections into a gain of to develop connectivity options for the Internet of Things, 1,000 connections for FY18. Although competition from network edge computing and television broadcasting. wireless and other fibre networks meant our total fixed line The success of these trials has increased our belief in the connections continue to reduce, the pace slowed to 76,000 potential socio-economic benefits our infrastructure can connections compared to 125,000 connections in FY17. This bring to New Zealanders, while providing future alternative reduction in connections was predominantly copper lines sources of revenue for our business. outside of our fibre network areas. Regulatory clarity remains critical to our focus on long-term Against this backdrop of declining connection numbers, shareholder value. We worked through the year to assist we took steps to implement a range of cost management the progress of the utility style regulatory framework, as initiatives identified in our FY17 strategic review. This included initially set out in draft legislation in August 2017, through reducing our internal workforce by 12%, from peak August Select Committee and revised legislation is expected before 2017 levels, as part of broader organisational change. We Parliament in FY19. We look forward to working with the achieved net profit after tax of $85 million and EBITDA Commerce Commission on a smooth and timely transition of $653 million, modestly above the top end of our initial to a framework that aligns the interests of customers and FY18 EBITDA guidance of $625 million to $650 million. investors through recognition of a fair return on investment. This compares with adjusted1 FY17 EBITDA of $710 million, reflecting the effect of fewer connections on our revenues. 1 Adjusted to reflect the effect the NZ IFRS accounting standards This report is dated 27 August 2018 and is signed on behalf of the Board adopted in FY18 would have had if they had applied in FY17. of Chorus Limited. Annual Report 2018 1 1.0 Keeping New Zealand new As a utility network operator, we take a long Although we ended the year with an improved score of 7.5, term view. We want to make New Zealand better, this was below our target. However, the less than desired keeping it at the cutting edge through our network improvement was achieved in the context of a year of unprecedented demand where we recruited 185 additional infrastructure and the connectivity we can field crews to deal with strong fibre demand and complete provide. Our network of fibre and copper cables 20% more fibre installations than the prior year. The passing connects homes and businesses nationwide, via of new land access legislation in the first half of FY18 also our exchange buildings and cabinets. About 100 meant we’ve been connecting a backlog of orders where retailers use our network to deliver their services the customers had gone through a drawn out and potentially unsatisfactory experience. to their customers. This includes using our fibre network for backhaul connections to mobile Further, results varied widely between retailers, reflecting the network towers. multiple customer touchpoints involved in the connection process. Customer satisfaction levels can be influenced by Demand for broadband has been growing very strongly, everything from the quality of initial communication between fuelled by the emergence of broadband as the fourth utility, customers and their retailer, through to our communication together with the rollout of fibre and ongoing premises and technicians turning up when expected, as well as the growth, particularly in New Zealand’s largest city, Auckland. quality of the installation itself. Some retailers achieved However, the continuing evolution of technology, market customer satisfaction scores of more than 8 out of ten, dynamics and industry regulation means we operate in an reflecting a focus on clear expectation setting with their ever changing environment. To ensure we maintain our customers and well developed processes. Our technicians are leading network position and a sustainable business well completing more than 700 installations a day and typically into the future, we’re focused on creating an environment achieve 8 out of ten on customer satisfaction surveys. for our customers and our people that optimises today’s There’s clearly still more we can do to improve the business and allows for us to innovate for growth. experience for customers and we have an extensive 1.1 Transforming customer experience programme of initiatives underway including: It’s our belief that once a home or business owner has • streamlining the connection process for simple fibre connected to fibre, its technological superiority will ensure connections so customer effort is reduced to one visit, they remain connected. This means we need to make it rather than two. In June 2018 we were already achieving as easy as possible for customers to connect to our fibre this goal of "fibre in a day" for about 25% of customers network. Fibre installations can be challenging because connected. Our goal is to reach 100% by the end of FY19. of the variability in conditions between every home and • increasing our joint targeted marketing campaigns business, as well as the layers of communication and with retailers so we better coordinate service coordination required between us, our service companies, company resources. retailers and their customers. We’ve made significant progress in streamlining processes with our investment in • running more of our own door knocking campaigns automated platforms, but we know we need to make things so we better align our fibre installation work with initial better if we’re to continue to encourage customers to make network rollout activity. the effort to upgrade to fibre. • continuing to clear the backlog of complex multi- This is why our number one operational priority remains dwelling and rights of way connections following a high quality connection experience for customers changes to the land access legislation. connecting to our fibre network for the first time. We • reducing rescheduling and cancellations by proactively set ourselves a customer satisfaction target of 7.8 out of 10 managing fibre orders to better identify missing by the end of FY18, up from 7.4 in FY17, based on a rolling information and complex installations. three month average of scores from a survey of newly connected customers each month from across a range • improving customer expectation setting with of retail service providers.