Chorus Ltd (CNU) Q4 2021 Earnings Call Transcript

Chorus Ltd (NZE:CNU) Q4 2021 earnings call dated Aug. 23, 2021.

Corporate Participants:

JB Rousselot — Chief Executive Officer

David Collins — Chief Financial Officer

Analysts:

Arie Dekker — Jarden Limited — Analyst

Philip Campbell — UBS — Analyst

Brian Han — Morningstar — Analyst

Ian Martin — New Street Research — Analyst

Presentation:

Good morning, everyone, and welcome to our Full Year Result Announcement for FY ’21.

I’m JB Rousselot, the CEO of Chorus, and with me is David Collins, our CFO. As New Zealand has moved back to a level 4 lockdown, we are joining you virtually from Auckland and from Wellington. The structure of today’s presentation is much the same as previous results announcements and is summarized on the slide. And as usual, we’ll take questions from the phone at the conclusion of the presentation.

Our focus in FY ’21 was to help consumers [Technical Issues] head starts that our fiber network has given New Zealand, and we had a really strong year, operationally delivering that. Market conditions have been softer in the wake of COVID-19 as New Zealand’s border remains closed, resulting in low net migration into the country and a slightly lower overall broadband gross market. Within this softer market, we continued our active [Technical Issues] 100 retail service providers to connect another 120,000 customers to fiber [Technical Issues] fiber connections to 871,0000, well on the way to our 1 million target for 2022. In the areas where other companies, the LFCs, provide fiber, when consumers move from copper to fiber, we lose the broadband connection. As a result of this continuing dynamic, we lost 26,000 overall growth and connections [Technical Issues] we gained 5,000 during the year and more importantly, gained 11,000 broadband connections in H2.

We also saw a continuation of voice only connections loss across all geographies as consumers increasingly get voice services as part of their broadband or mobile service. The result of all these factors meant that our total connections reduced by 75,000. As a side note, our total connection numbers of 1.34 million excludes the 10,000 student households that we’ve continued to connect to broadband as part of our COVID-19 response, and these are now partly subsidized by the Ministry of Education.

On the financial side, we continued to manage costs tightly. This included changes to our organizational structure through the year, resulting in a reduction in total employee numbers from 870 to 817. These efforts and the absence of the one-off COVID costs that we faced last year meant that costs were down $13 million overall, and that helped us [Technical Issues] we delivered an EBITDA of $649 million, up $1 million compared to last year. Net profit after tax was $47 million, down from $52 million in FY ’20, and we’ve confirmed a fully imputed final dividend of $0.145, bringing the total dividend for the year to $0.25 per share. As usual, David will talk through the financials in a lot more detail shortly.

The pleasing aspect of our strong operational performance was the continued improvement in customer satisfaction. Fiber installations were rated an average of 8.2 out of 10 across FY ’21. That’s up from the three months average of 8.1 that we had at the end of FY ’20, and it reflects the work that we’ve done with retailers on improving things like processes and communications to consumers. And with a greater proportion of installations coming through our managed migration program, we’re having more direct communication with consumers, and that has also made a difference in customer satisfaction. With 1 million fiber sockets now installed in homes and businesses, about 50% of fiber orders are from these already installed or intact addresses. We’ve put a lot of effort into speeding up the time it takes for these customers to have their broadband services switched on, with a goal of as little as one hour. And we’ve worked closely with retailers on identifying improvements that we can take together, and that produced a lift in the three months average for intact customers from 7.3 to 7.5 by the end of FY ’21, and we expect our initiatives will drive further improvements in FY ’22.

On the build side, our UFB rollout is ahead of schedule and now 95% complete, with another 69,000 premises passed this year. There are just 53,000 homes and businesses remaining to pass by the end of 2022. So we’re making excellent progress and connecting many [Technical Issues] across the completed UFB footprint continued its strong growth from 60% to 65%. In the completed UFB1 areas, that growth was from 63% to 69%, and in UFB2 areas, it grew from 37% to 42%, reflecting the fact that we’re still expanding that footprint. That strong progression also shows in the uptake rates across the larger UFB1 towns and cities. Invercargill and the South Island continues to be at the top of the list with close to 80% take-up. Auckland is at about 75% uptake and grew by 6.5% during the year. That is great outcome, given that it is [Technical Issues] showing ongoing growth despite being already in the mid-70% penetration. During the year, we put some marketing effort into areas with lower uptake, and that’s made a positive difference. For example, the strongest growth came into the Wellington and Kapiti regions, where we’ve historically had lower market share due to cable network competition. Both of these areas increased penetration by 10% and a significant portion of that was coming from off-net. So it’s pleasing to see that consumers in those markets are recognizing the benefits of fiber.

The key trend supporting fiber uptake continues to be ongoing growth in data demand and slide 8 shows how much it is growing. Average monthly data usage grew from 350 gigabytes to 432 gigabytes during the year. As the chart shows, fiber users were averaging 500 gigabytes per month in June. July was higher again at 515 gigabytes, so normal everyday usage was pretty much back at the lockdown levels that we saw last year. Another trend is that upload traffic has become more significant as a result of COVID-19 and its effect on consumer behavior like working from home and video conferencing.

Managed migration continues to be a major focus. Of the 172,000 fiber installations completed during the year, about 60,000 were generated through our door knocking activity, encouraging customers to have fiber installed in their house. Almost 30,000 consumers activated a fiber service that had been installed through this program either this year or before. What’s pleasing is that about 30,000 of those connections came from off-net consumers, either wireless or cable customers, and we’re seeing about 56% of our managed migration installations activate within 12 months.

Another positive key trend is the strong growth that we’re seeing come through in new property development. We received almost 30,000 orders for new properties in FY ’21 and completed work for 22,000. We now have 32,000 in our order book, up from 25,000 at the start of last year. Most of this growth is coming in the Auckland region and Statistics NZ reported recently that a record 44,000 homes were consented in the year to June and about 19,000 of those were issued in Auckland, and that was up almost 30%.

As I said earlier, we added 120,000 fiber connections during the year. Slide 11 gives you a sense of the services that make up that growth across the consumer and business mass markets. 1 gigabit services increased from about 16% of plans to 19% during the year as demand for high-speed continues to grow and as retailers leveraged our incentives to promote higher speed services. We’ve also seen good growth in the uptake of business plans as businesses recognize the value of fiber and the higher restoration commitments that we’ve now attached to our business services.

Finally, slide 12 is the chart from our Q4 update, showing the changes in connections by zone. In our UFB zone, we’ve seen an increase in copper voice disconnections as some retailers accelerate their departure from copper and the PSTN. We saw an impact of MNOs aggressively promoting fixed wireless in the first half of the year, resulting in a 6,000 loss of broadband services, but the second half showed a significant improvement with 11,000 net increase in broadband services. Broadband is still growing, helped by our incentives and fiber migration, but at a slightly slower rate given the softer broadband market since COVID-19. In local fiber company areas, we’re continuing to see a consistent rate of disconnection, as expected. And in areas outside of the fiber rollout, we’re seeing more wireless competition as a result of the government supported mobile tower deployment, but this is being partly offset by subdivision growth in these areas and we now have 27,000 fiber connections here.

I’m now going to hand over to David to go through the financials. David?

David Collins — Chief Financial Officer

Thank you, JB, and good morning, everyone. Thanks for joining us.

I’ll start on slide 14 and look at the income statement. As JB mentioned, we’ve reported EBITDA of $649 million, an increase of $1 million on full year ’20. I’ll talk through the revenue and expenses specifics on the ensuing slides, just to call out a few things on the front page. Depreciation is up $12 million, which reflects the ongoing investment in our fiber network. Amortization levels are also up circa $11 million, which reflects investment in software systems to support our fiber uptake growth. On the interest line, our interest net cost is down $11 million. That reflects refinancing undertaken during the year and we repaid a NZD400 million bond in May, which was refinanced by year bonds raised in December of 2020. And secondly, we saw the full year benefit of the GBP bond repayment in late financial year ’20. Our net average interest cost was 4.16% over full year ’21, which is a reduction from full year ’20 of 5.16%. Lastly on this slide, the income tax expense is higher. It’s higher because there was a one-off benefit in full year ’20, representing building depreciation and also as a reminder, we have a higher net effective tax rate due to the permanent differences arising from the Crown funding, the CIP interest and the RBI funding amortization.

Moving to slide 15 and revenue. Revenue was down $12 million on the year to $947 million. A brief comment on COVID impact, in particular on fiber revenue. We have seen a slower broadband market growth rate due to the closed borders, and that has impacted our fiber revenue, and we also had a deferral of the CPI increase for quarter one. So we calculate an impact of about $12 million on fiber revenue from COVID during the period. However, we have seen very strong fiber connection growth, which is encouraging, with fiber connections up some 120,000 over the year and ARPU growth up to $49.87. Copper connections continued to decline as connections migrate either to fiber or fixed wireless or alternative technologies, which is a continuation of trends that we have seen previously.

Looking at field services revenue, that is slightly down due to a reduction in chargeable maintenance activities. Lastly, on the bottom of the slide we have given a view of the flow share of revenue for the year, which we have estimated at 59% for full year ’21, which was up from 49% in the comparative period. We haven’t given further details in terms of the breakdown by category yet, given that we don’t have final decisions until December but we will continue to provide updates as the regulatory process unfolds.

Moving to slide 16 and expenses. Expenses are down on the period some $13 million or 4%. That’s due to tight cost management within our business and also due to the absence of one-off COVID costs, which impacted the prior year by around $9 million. A few specific call-outs on the labor line. FTEs are down some 6% year-on-year, as JB mentioned earlier on, but we did have a $2 million restructuring allowance or redundancy provision within the current year results. In the prior year, for labor, we had COVID impacts of approximately $4 million. The maintenance line was marginally down year-on-year, a little less than the reduction we’d seen previously due firstly to weather impacts in full year ’21, and secondly, full year ’20 was an unusual year due to COVID impacts. Other network costs in the prior year had some one-off payments to service companies due to the COVID support, and in the current year we have higher property optimization costs across our network and also higher pole testing costs. So overall a good result on expenses. Similar to revenue, we’ve given a view of the flow share [Phonetic] at the bottom of the page. It is around 53%, which is up from 47% in the prior year. We haven’t given a detailed dissection by expense element due to the fact that we don’t yet have final views from the Commission, but if you look at our March 26 release, you’ll get an idea of the broad split across the categories as best we can estimate them.

Moving to slide 17 and a few comments on maintenance. The important callouts are that copper reactive maintenance continues to fall in our business. And indeed, you will notice that copper reactive maintenance in non-UFB areas is now less than in UFB areas. Fiber maintenance over time will continue to grow as we invest in the asset and as the asset ages. As we pointed out previously, we do anticipate a reduction in fixed to maintenance costs of approximately $10 million over the medium term as we exit over time the copper business.

Slide 18 and capex. We’ve reported total capex for the year of $672 million, which is $9 million up on the previous year. For the UFB communal network, we had UFB2 spend of $147 million, and as a reminder, UFB1 completed in December of 2019. We expect to be most of the way through UFB2 communal by the end of full year ’22. Fiber installations: we did 172,000 SDUs over the period, which is an increase of 5,000 on the previous year at 167,000. A little callout on this slide. We have made a small disclosure change. The line that’s described as other fiber and growth was previously other fiber connections and growth. What we’ve done this year is call out and separately show the fiber sustain, which we think is appropriate. And then the key things to note within the remaining other fiber and growth are, firstly, greenfield spend, which was about $47 million during the year, and secondly the West Coast fiber spend during the year, which was circa $32 million. Both of those are predominantly self-funding through a grant funding and through developer contributions. Customer retention costs were up $9 million, but are consistent with what full year ’19 level was. ’20 was a little lower impacted by COVID.

Moving on to slide 20 — slide 19, I should say, a little more detail on installation capex across our business. The layer 2 spend was consistent at $31 million across the period. Installation capex was a little below guidance at $275 million versus guidance at $285 million to $295 million. The key driver of that was, we had favorable unit rates across our installations, driven by different delivery methods that we’ve — we’ve been able to put in place across the country. Volumes were also low but within range, just at the lower end. As I mentioned before, SDU installations were up 5,000 to 172,000, and importantly, cost per premises connected or unit rates for both UFB1 and UFB2 connects were at the lower end of the range. Backbone spend was lower in the year, some $24 million, which reflects a different mix across our business.

So on to slide 20, copper and common capex. The only real callout here is that copper capex continues to decline as connections reduce across our business.

Slide 21, Crown funding. We’ve now drawn approximately NZD1.2 billion out of the total facility of NZD1.3 billion. So we are most of the way through. The equity component of the UFB2 securities is mostly drawn down, as you can see on the chart on the left-hand side. Our next major refinancing event is in late calendar 2023, which is the euro bond for $785 million. At the 30 June balance date, we were drawn on our revolving credit facility approximately $140 million, which gives us headroom of $210 million within our total facility of $350 million.

Moving on to gearing and credit metrics on slide 22. We are at a net debt to EBITDA level of 4.24 times at June 30. This compares with the half year of 4.37. So we have seen an improvement in our S&P credit metric. We are well within the covenants within our bank facility, which was set at 4.75, and we are continuing to talk with rating agencies as we transition into a new regulatory regime around what the appropriate level might be going forward.

Slide 23. Our final dividend for full year ’21, as JB referenced earlier, on $0.145 per share fully imputed. We have a supplementary dividend also for non-resident shareholders, and the dividend reinvestment plan remains in place at a discount of 2%.

Moving onto regulatory on slide 24. There are a number of key regulatory decisions that are still outstanding. There have been a number of major steps or decisions over the last couple of months, including the IAV just past week. But there is still a lot to be decided in the lead-up to December. We will have a final view on MAR and RAB for the first regulatory period. Given the uncertainty, we are continuing to execute our business plan. We’re continuing to drive uptake and we’re continuing to push for good outcomes for consumers. Given that we’ve talked previously and continue to make submissions to the Commerce Commission that it’s very important that our regulatory revenue or MAR, maximum allowable revenue, is at least at the level of the business plan. That’s important because it incentivizes us to continue to invest in good consumer outcomes. It continues incentivizes us to invest in new products and speed upgrades. Our uptake levels are still at 65%. There is therefore still some way to go. There are pricing protections in place for consumers on the 100 meg or anchor product as that is API capped over RP1. So regardless of the level of the MAR, appropriate price protections are in place. And lastly, the financial loss asset is a considerable component of the RAB at $1.5 billion. It’s important that that is recouped as quickly as possible through the maximum allowable revenue regime.

A couple of comments on depreciation profiling. The Commission has proposed a form of depreciation profiling through using the diminishing value method in their draft price quality decision in May, and we had in turn proposed a form of depreciation profiling. We are supportive of depreciation profiling. We do think, however, it’s important to point out that what it actually does is bring forward revenue from future periods to the current period and is NPV neutral over the term or life of the asset. So whilst it’s helpful to hold the maximum allowable revenue up, it’s actually covering for shortfalls in other areas, which are the result of the input methodologies decisions like last year. So having said that, there is still some work to do on the regulatory front to achieve an appropriate level of maximum allowable revenue for us.

The key areas of focus: firstly on the opex, the Commission did propose significant reductions to our opex of circa 10% or $52 million. We’ve made strong submissions in our response and look forward to a positive outcome later in the year. We’ve also made strong submissions on the issue of incentives capex. The Commission has proposed that there is — there will be an approval process for that separate to the rest of our capex proposal. We think it’s important that RSPs are able to continue to access incentives. They are widely used across our RSP base and they support growing uptake and consumer outcomes. So we will be making submissions to the Commission on that front.

Moving to slide 25 and our full year ’22 guidance for gross capex. We’re guiding today to gross capex of $550 million to $590 million. This is down considerably on the prior period and reflects the reduction in installation capex and UFB communal capex as we evolve through our build to operate transition. The chart on the right of the slide is consistent with what we have shown in previous presentations and gives a forward view to a full year ’24 of installation spend and UFB2 communal spend. A key core callout — or the key callouts from that side are the communal finishes in late ’22, and installation capex continues to decline as we look forward.

Some other call-outs in our fiber capex guidance. West Coast fiber project, we have another $20 million to go that is predominantly government funded. There is $80 million to $90 million lift on the UFB2 communal project during the year and we are still tracking to the program level guidance for UFB2. Cost per premises connected are consistent with the current year guidance. Copper capex, whilst the range is similar, we expect that trajectory to continue to show reductions looking forward. The common capex range is slightly higher, which reflects some earthquake strengthening work and exchange refresh work that we need to do across our business.

Moving to slide 26 and a few comments on the transition to our new dividend policy. Our new policy, which is free cash flow based, is now in place from July 1. As a reminder, that policy is based on paying out a majority of free cash flow, with free cash flow defined as operating cash flows minus sustaining capex. That is unchanged. The key inputs into the policy and the transition to it are firstly our credit rating. We are close to our metrics at present, and we do currently have high levels of non-sustaining capex due to the UFB build. We will therefore be temporarily constrained as we enter our new dividend policy which we’ve communicated previously and we will continue to talk about today. That impact will be more severe in the current year as we finish UFB2 communal. That will then taper in line with the installation spend reduction looking forward per the chart on the previous slide.

A brief comment on sustaining capex. We’ve guided previously to $200 million per annum. That is still the right guidance and is still appropriate. In full year ’21, we came in at $180 million, which was a little less than $186 million in the prior year.

Moving to slide 27 and guidance for full year ’22. Starting with dividend guidance. We are providing initial guidance today of $0.26 per share. It’s important to note that there has been no change to the free cash flow based policy and its implementation. It’s also important to note that there has been no change to our view of forecast free cash flow growth in the coming years as non-sustaining capex or UFB capex decreases. That view remains and is unchanged. The reason that we’ve described the guidance as initial and there are couple of factors here.

Firstly, there are, as I mentioned earlier on, significant regulatory uncertainties in play as we move towards December. We feel it’s appropriate to get a complete and final view on our RAB and MAR before we make firm decisions around dividend. It’s also important to note that, as I mentioned before, we are constrained by high levels of non-sustaining capex at present. We will continue to monitor those capex levels, including any COVID impacts as we go through this year. We are also talking to our credit rating agencies, as we’ve referenced previously, and we will continue those discussions through the next six months. We are therefore advising that we will provide an update in February 2022 upon finalization of the regulatory settings and having a more complete view of the other issues that I referenced before. We will also include in that update a view on future payout range for our policy.

A couple of comments on imputation. As we’ve referenced earlier, imputation is — we are announcing a fully imputed dividend for full year ’21. As we’ve described previously, we are in a low tax paying position at present due to accelerated depreciation on our fiber assets. As we look forward, we expect to be able to fully impute the full year ’22 interim dividend, which is payable in April of next year, but we expect the final FY ’22 dividend paid in October to be unimputed. We would then expect there to be a period of unimputed dividends over the short to medium term before we’re able to commence partially imputing dividends again looking forward.

And lastly from me on this slide, EBITDA guidance for full year ’22. We’re guiding for $640 million to $660 million. Our ambition for modest EBITDA growth remains, and we continue to pursue that objective. An important caveat to note around COVID. I mentioned earlier in the presentation that we had an impact in the current year of circa $12 million on revenue. We’ve allowed for those impacts in setting this guidance range, with the obvious one being borders closed and a slower broadband market. However, I do want to call out that what we have not allowed for is a scenario of extended lockdowns. We’re seven days into lockdown across New Zealand at the moment. We felt that it’s too early to be able to arrive at clear assumptions around making an adjustment to EBITDA guidance for extended lockdowns. So, for that reason, I do note that caveat when I note our EBITDA guidance of $640 million to $660 million.

So on that note, JB, thank you. I’ll hand it back to you.

JB Rousselot — Chief Executive Officer

Thank you very much, David.

Now, FY ’22 is shaping up as a bit of a crossroads year for Chorus and for the ongoing development of broadband in New Zealand. The UFB rollout is pretty much complete. Almost two-thirds of homes and businesses have connected, and a number of ongoing digital trends are driving demand for bandwidth and speed in a way that has made fiber even more essential. If you look across the ditch, the NBN in Australia has said it will upgrade more premises to fiber. In the UK, BT is taking fiber to 25 million homes after regulatory commitments for a fair return. And a few weeks ago, Virgin Media, in the UK again, said that they will convert their cable customers to fiber. So there is no questions that fiber continues to be a technology on the rise. And the latest lockdown in New Zealand reminds us how critical, reliable has been broadband has become in our lives. To give you an idea, the amount of traffic going through our broadband network since last week has reached unprecedented level, as you can see on the next slide. On Saturday, we reached 3.75 terabits per second at 9:00 PM, and that’s about 33% higher than the peak pre lockdown.

On to slide 30. For now, our strategy remains largely unchanged from what we shared with you previously. As David said, our working assumption is that the Commission will make final decisions by the end of the year that ensure a smooth transition, continue to encourage the current positive trends and are consistent with our business plan. And if that’s the case, we’ll keep investing in fiber deployment and push for 1 million connections. Our strategy continues to be anchored around four pillars: winning in our core fiber business, optimizing our non-fiber assets, growing new revenues and building the long-term future of the business.

A slight change from last year is that for the next 12 to 18 months, we’re putting more emphasis on the top quadrant, winning in fiber and developing the long-term future of the business. That’s where the bulk of the organization efforts needs to be as we leverage the trends to bring more people to fiber, embed in the new regulatory regime and reshape the business from a build focus. That’s not to say that we are taking our focus off the other two priorities of growing new revenues and optimizing our non-fiber assets, and I’ll talk through each of these priorities in a little bit more detail. The other change is that we’ve put our new sustainability policy at the heart of our strategy. We’ve published our first sustainability report today, and this puts more emphasis on the many things that we’re doing and enabling as part of our global — our goal to make New Zealand better.

On the first priority: to win in fiber. We will continue to focus on customer experience to ensure that moving to fiber and then experiencing it is as smooth as an experience as possible. We will also ensure that our fiber offering evolves with the needs of residential and business customers for higher capacity and faster speed. Peak time performance is really becoming more important than ever. As the charts on slide 31 shows, traffic around 9:00 PM grew by almost 30% in the last year. That’s phenomenal growth. And before the latest lockdown, we were already consistently seeing peak time traffic around the 3 terabit per second level and that’s what we had experienced during the lockdown last year. A key trend behind that growth is the streaming of online content.

New Zealand On Air research last year said that digital media consumption was on the cusp of overtaking traditional media. That shift is only going to grow with the new content from the likes of NBC or Discovery that are expected to be made available in this country in the near future. So the peak is going to keep growing as more homes basically replace their TV aerial with a direct Internet connection for either live TV viewing or for content on demand, and that, plus the increased penetration of 4K TVs is behind the growing share of 1 gig services, now representing almost 20% of our fiber connections. We want to make sure that more consumers are able to enjoy the benefits of reliable, high-speed fiber by keeping up with their expectation. And that means adjusting our portfolio of product and services. We also need to make sure that our products can attract the last 35% of customers that are yet to order a fiber service by offering speed and price points that work for them. To that point, we have just started consultation with the market about how to evolve our product portfolio. It’s a bit too early for me to describe how this will play out as we are still in consultation. But you can expect some shifts in our portfolio to be announced soon.

On slide 33. Kiwis enjoy market leading telecommunication networks, especially in terms of fiber reach and performance. But we continue to believe that they need more transparent information about the various products in the market so that they can make educated choice about what’s best for them. It’s a little ironic that while having some of the best networks, this market is one of the least informed in terms of guaranteed product performance, and this is why we are extremely supportive of the Commerce Commission’s Measuring Broadband reporting that helps customers understand what performance to expect from the various products and technologies that are in the market. And the data is clear in terms of fiber performance, especially during peak periods. We also support the regulators’ efforts for more transparent data and less confusing messaging around technology choices and migrations. We believe that Kiwis should be able to make educated choices based on facts and unbiased equivalent data rather than on misrepresentation and on hype. So let’s stop pretending that fiber connections need your driveway or your garden to be dug out. In most cases, we can bring fiber to your home via that bust in your driveway, and the simple fact is that more than 1 million of the premises already have fiber installed and are ready to connect today.

Besides delivering a very broad and highly performing fiber network, the UFB program has also significantly improved the number of choices available to consumers by improving competition. We now provide fiber wholesale services to more than 90 retailers in addition to the top 3 players, and the share of these 90 plus retailers has increased by 5% last year to 29% as they have actively promoted fiber and bundled it with other services such as energy or video content. They also tend to adopt and promote new fiber services faster, which has enabled them to capture 38% of the 1 gig market. As many of you know, Sky TV is one of these new entrants to the broadband market and they are promoting 1 gig as their broadband hero product at a very attractive price point when bundled with their pay TV service. Electricity retailers like Contact, NOVA and Trustpower are showing good momentum with their bundled offers. That dynamic will become even stronger if Mercury, who is not currently in the market but is the fourth largest electricity retailer, concludes its purchase of Trustpower and starts bundling broadband as well.

Now to the point of incentives that David was making. Our incentives for retailers have been critical to helping drive this market activity. That’s why we are concerned that the draft Commission decision has proposed subjecting our incentives to a drawn out approval process. We believe that this could stifle our ability to offer incentives that ultimately help retailers to make better fiber offerings and that would be a poor outcome for consumers.

During the last 12 months, we’ve made significant progress adjusting our operating model to reflect our shift in operational focus from build to operate to reflect the latest market trends and to prepare for the implementation of the final regulatory model. And despite the challenges that reorganizations bring, our people showed great resilience and we maintain employee engagement at 8.5 out of 10. In FY ’22, we are accelerating our efforts around our strategic priorities to develop the long-term future of our business. A significant part of this is the introduction of agile practices in the way we deliver strategic initiatives and especially in the delivery of key platforms and key systems. We’re extending the use of practices like design thinking or iterative thinking to themes focused on product simplification and regulatory readiness. We will also reflect our new mix of office work and working from home like many businesses in our workplaces and in our collaboration tools. And another significant part of this strategic pillar is the finalization and the implementation of strategic relationships providing our field operations. We’ve been engaging with our current field service providers to come up with a future model that really reflects our new mix of activities, and we expect to finalize these during the year.

Onto the optimizing our nonfiber asset. I’m now on slide 35. As fiber uptake grows, one of our priorities is optimizing the rest of our network. We exited another 36 properties and leases this year. They are mostly rural sites that are no longer needed because our network footprint has changed or whether it is not economic for us to be the natural owner. We expect to continue this and to exit more of these sites in FY ’22, and we’re exploring opportunities to sub-divide some of them to see what can be done there. We keep producing our use of leased space in stock exchange and we’re upgrading some of our own sites to help accommodate this. And then finally our copper withdrawal trial is also going well, with just 80 services remaining out of the 28 cabinets that are scheduled to be shut down in October. About 180 cabinets currently have withdrawal notices, and we expect to double that by the end of the year, subject to what we learned from the first trial. But let me say another time. Our withdrawal of copper remains very much a small-scale, street-by-street proposition.

On to growing new revenues. While growing new revenues remains a priority, our focus for this year is very much on leveraging the innovative products that we have already launched. As I mentioned earlier, we’ve seen strong growth in our small business fiber product after we enhanced that offering. We’ve also added an 8 gigabit service to our hyperfiber services and we’ve made that available in a number of CBD exchange. We’re continuing to add mobile backhaul connections as those networks operators expand their rural and urban footprint. We implemented new peering and backhaul products that are enhancing competition in the New Zealand market, and these services complement our edge center capability. The original Rackspaces in our Mount Eden edge per space have been filled, and the shift to cloud computing continues to support our view that we have a part to play in the data center ecosystem.

The WiFi capability of our existing 90 is also being used now by some retailers, and we hope to grow that in the future. And WiFi is a big topic around the globe at consumer level because consumers — sorry, because governments have been allocating spectrum in the 6 gigahertz range of WiFi use, and the US and Canada have led the way by releasing the entire spectrum for unlicensed use. This spectrum enables new WiFi 6 devices that are now in market, and the consumer services industry is calling for as much spectrum to be made available as possible. As Dave point out, WiFi is the service that’s most used by consumers and it is where the greatest innovation is happening. So more unlicensed spectrum means greater capacity and speed which in turn means a better consumer experience. And New Zealand is yet to decide how much unlicensed spectrum will be allocated.

Now, for the first time, we have published a separate report highlighting our sustainability strategy. It is articulated around three pillars: sharpening digital futures, thriving people and a thriving environment. And on the environment front, fiber networks are extremely reliable and energy-efficient, and this is attracting growing focus overseas. The German Environment Agency, for example, says that fiber delivers high-definition streaming at significantly lower rates of carbon emissions than most copper or wireless technologies. As more customers migrate to fiber for their broadband, our energy consumption reduces. As the left-hand chart on slide 37 shows, while data traffic on our network has doubled in the last four years, electricity usage has reduced by 11%, and the migration to fiber, along with the expected decarbonization of New Zealand’s electricity network will continue to reduce our emissions substantially. By enabling more activities to go digital, we also contribute to New Zealand’s overall carbon footprint reduction by facilitating working and studying from home, online shopping and things like telemedicine.

Now, on the regulatory front. Our regulatory model is expected to be finalized between now and January 1, as David said, and there are still many parameters that need to be set for the first regulatory period. Residential and business customers will continue to benefit from ongoing investment as long as the Commission’s final determinations provide for a smooth transition into the new regime that drives us to add more connections at higher speeds, sufficient opex and capex to let us meet the demands of our customers, the ability to continue our active wholesaler strategy and a recognition of the full cost of building our UFB network and a fair return on the public-private partnership investments that was made to build the network over the last decade. A smooth migration will require that the mechanism that have so far contributed to increased fiber coverage, increased fiber take-up, investment and take-up of faster speed plans and broader and healthy competition are maintained, and the incentives that we provide equally to all service providers have been critical to achieving these trends and they have delivered great outcomes to consumers. We are therefore very concerned by the current draft decision that these should be subject to a drawn out approval process. Retail service providers need early certainty around these incentives to plan their own offerings and campaigns and as they have delivered great consumers outcomes, they need to be extended to ensure a smooth transition. The Commission has many opportunities to make adjustment during and post the fiber regulatory period. So let’s not break something that is working extremely well and delivering great results to consumers and to the industry.

In our voice submissions to the Commissions, we’ve also made the case that some of the draft outcomes don’t yet fairly recognize investment made over many years by investors. We will continue to provide inputs into the regulatory process, advocating for opening RAB and MAR values that better reflect the investment made. Reasonable outcomes are really needed to ensure that in the long run we have the incentives to continue to invest in coverage, in capacity, in product improvements and resilience and that we’re able to deliver on the customers’ expectations.

In conclusion, our priority is to keep investing to maintain the gigabit advantage that New Zealand has developed in the last decade, continue the growth in everything digital and data traffic continues to fuel the need for faster, more reliable while environmentally friendly and effective technologies. The latest lockdown impacting the country’s unfortunately a stark reminder of these growing needs. Like many other telcos around the world, we believe that fiber is the best technology to meet them. The good news is that we’ve built fiber past 1.3 million homes and businesses and that fiber services are either already live or ready to switch on today in 1 million of them. With the Commerce Commission’s focus on transparent and equivalent product performance information, we believe that Kiwis will soon have the information that will allow them to take control and make educated choices about what’s best for their homes or for their businesses. And assuming reasonable regulatory setting, we’ll be in a great position to continue to play a significant role in the next stage of the journey of [Indecipherable] New Zealand to a more digital future.

And with that, let’s go to Q&A. So, over to you, Eddie.

Questions and Answers:

Operator

Your first question is from the line of Arie Dekker from Jarden. Please go ahead, sir. Thank you.

Arie Dekker — Jarden Limited — Analyst

Good morning. First question is just looking to unpack the unregulated free cash flow. Based on your slight sort of indications on revenue and expenses, it looks like [Indecipherable] on the unregulated side is about $250 million. I guess this question is, the expenses that you allocate of $158 million to FLAs, just confirming that is based on your submission as opposed to where the Com Com settle on at at the moment. And then just wondering if you could provide some detail in terms of common capex and fiber capex, how much of that customer retention, for example, and fiber and some other areas would not fall into the regulatory bucket. Just trying to get a sense of where the free cash flows are currently.

David Collins — Chief Financial Officer

Yeah, sure, Arie. Thank you. I’ll have a go at that. Firstly in terms of the flows proportion that we’ve given for expenses. Yes, that is based on our submissions to the Commission. So it doesn’t reflect the IAV release just on Thursday of last week. We’re still working through that. In terms of the common capex, which just looking at the slide, is on slide number 20. As a rule of thumb, if you were to say, this is subject to the final IAV decisions, Arie, but I would say if you used half and half as a starting point as to what’s unregulated and what’s not, that would be a good starting point, I think. And more broadly, on cost allocations, as you know, the final view on those we won’t know till December. But we do have draft views now for the decision just last Thursday on IAV.

Arie Dekker — Jarden Limited — Analyst

Sure. So, I mean, if you look at those factors, I mean, clearly that non-regulated sort of [Indecipherable] coming down below 200 and the rate of revenue loss in that area is much greater than the operating cost declines. What’s your sort of view in terms of outlook over the next couple of years in terms of where that sort of non-regulatory free cash flow proxy sort of heading and what you might be doing to kind of support retaining that cash flow for as long as you can?

David Collins — Chief Financial Officer

Sure. I’ll make a couple of comments, Arie, and JB might like to weigh-in as well. The key driver on the revenue front of course is copper. So, in terms of we have losses in LFC areas, which we expect will continue as customers migrate to fiber. In terms of voice copper, they have — it has reduced $14 [Phonetic] million year-on-year. That will continue to decline, but it will reach a plateau. There are parts of New Zealand that will have a voice line for some period of time yet, particularly in runs [Phonetic]. We’ll continue to manage our costs aggressively both — across both regulatory and non-regulatory. It’s probably too early to give a view looking forward of what I think non-regulatory free cash flow looks like. I do appreciate and respect the question, but that’s probably the key things that I could call out now, JB, unless you had any other comments on the revenue stream.

JB Rousselot — Chief Executive Officer

No. I think on the short term, you’ve described it very well. The longer term, Arie, of course, there will be the progressive growth of hopefully unregulated revenues. Some of the new revenues that we’ve talked about would be in the unregulated tiller and that’s something that we’ll make sure we continue to grow, but that will probably take time to get to significant numbers.

Arie Dekker — Jarden Limited — Analyst

Sure. Thanks. Just in terms of your conversations with the ratings agencies and the potential for an uplift in the down driver, what are they sort of indicating or what are your expectations around uplift on the basis that the current draft regulatory settings were implemented as I think communicated so far by the Com Com? And then also, just what influences ongoing line loss to competing networks having and their willingness to lifting the down driver?

JB Rousselot — Chief Executive Officer

Sure, Arie. So I can quote what the agencies have said publicly. Moody’s have been more vocal on this issue, and what they have said publicly in their last release was that they will lift our down driver metric or down driver threshold when they have more certainty on the outcomes of our regulatory regime. So in our view, we are right in that period now. So that’s what they’ve said publicly, and that’s certainly confirmed in the discussions that we’ve had with them and continue to have with them. In terms of what the down driver metric could be, it’s probably not appropriate for me to comment. Again, I’ve said publicly that they view Vector as a potential comparator for us, albeit they’re in a different industry and are at a one notch up in terms of credit rating.

With regard to impact of competitive technologies on our business and what do the rating agencies think of that, they do take that into account, absolutely. They look to our underlying business performance and we have similar discussions with them on that issue as we do with the external market. So that’s — there is nothing of significance there that isn’t publicly discussed already in these presentations.

Arie Dekker — Jarden Limited — Analyst

Sure, I understand that. But what you’ve sort of — I guess the question I was asking and perhaps you’re sort of confirming it that where draft regulatory settings sort of set, there is nothing inconsistent with that and the potential for that down driver to be lifted coming into the year?

David Collins — Chief Financial Officer

No. Apologies, if I misunderstood, Arie. No, that’s the correct — the answer is no.

Arie Dekker — Jarden Limited — Analyst

Great. Thank you. Just a couple more. I guess — and this is a key one, obviously, and I understand what you’ve done around the dividend settings for now and [Indecipherable]. As the current draft regulatory settings were finalized as they currently sit and what your will clearly outline view and we capex and hence free cash flows cadence in FY ’24, I guess where do you sort of see yourself landing in a free cash flow payout? You’ve talked about the majority of free cash flow [Indecipherable] sort of leaning towards the upper end of the range as things sort of land as I sit today. And then also, I guess just how important is confirmation of accelerated loss amortization as outlined in the draft PQP1 decision to the absolute level of dividends over the next few years all other things being held constant.

David Collins — Chief Financial Officer

Sure. No problem, Arie. On the payout range, I have noted in the presentation that we will look to provide an update on that in February when we have finalization of regulatory outputs. If they were the same as they are today, what I would say is that I’d repeat what we’ve said previously that we expect to pay the majority of free cash flow consistent with our peers in the industry. I know that’s probably not a specific answer as what you are looking for, but that’s all I’m able to provide at the moment. So no change from what we’ve said previously. On depreciation profiling, that is an important part of the MAR outcome that did bring forward a significant component of revenue into RP1. The Commission did it via a diminishing value method on the financial loss asset. We had proposed a different form of tilting across both the core RAB and the FLA, which is the financial loss asset. We don’t mind which approach. At the end of the day, the profiling is important because that bridge the gap between where the MAR sit as a result of the input methodologies outcomes last year versus what our forecast is per our business plans.

Arie Dekker — Jarden Limited — Analyst

Sure. And then just two very quick last ones. On your guidance, what is the peak level you’re forecasting for net debt to EBITDA in FY ’22? And have you turned your mind yet to sort of where operating costs are sort of heading? I mean, I guess in your guidance, more specifically, are you sort of factoring in another sort of circa $10 million reduction in operating costs in FY ’22?

David Collins — Chief Financial Officer

Sure, Arie. In terms of the peak debt levels or metrics, we will manage within the S&P metric, so around 4.25. There are sometimes ups and downs during the year. The demonstration of that was at the half where we were 4.37, but we will continue to manage to that metric, and that’s where I would expect us to be during the year. On the issue of costs and forecasts, we’ve got our business plan in place which I’ve described previously as being a gradual consistent reduction in our cost base. We have proposals with the regulator, which cover the next, well, through until December of 2024. Those business plans are reflected in those submissions. So my previous language around gradual consistent reductions in our cost base remain, and that is reflected in the proposals we’ve given to the regulator.

Arie Dekker — Jarden Limited — Analyst

Okay. Thank you very much. That’s really clear.

JB Rousselot — Chief Executive Officer

Thanks, Arie.

David Collins — Chief Financial Officer

Thank you, Arie.

Operator

Your next question is from the line of Phil Campbell from UBS. Please go ahead, sir. Thank you.

Philip Campbell — UBS — Analyst

Yeah. Morning, guys. Hope you can hear me. Just a quick one for David. Just obviously, we had the Com Com announcement last week. Just wanted to get your views, obviously the RAB came in about 1% below where I think your initial estimate was. But obviously the MAR was about 2% to 2.5% below and didn’t seem to get a lot of attention. So I’d just be interested in your views on that and obviously the impact of some of the DPS policy. And then obviously the other thing that Com Com kind of stated quite categorically was that the $6 billion RAB number was pretty much off the table, but — and so any kind of comments on that would be great as well. Thanks.

David Collins — Chief Financial Officer

Sure, Phil. So, in terms of the MAR commentary — and it was buried in a footnote on page 58 of the Commission’s decision if you couldn’t find it and it noted that the impact of the RAB proposal which it was $80 million less than our submission. The impact of that on the MAR using the price quality draft in May and holding all other factors consistent other than an updating to the final WACC which is 4.52%, that impact would be a reduction in the MAR of 2% to 2.5%. The reason that’s a little higher than the straight RAB reduction of 1% is some of the cost allocation components within the decision, particularly around CTO common costs and how that would impact the opex proposal for RP1. So that’s why it’s a little higher than the 1% RAB reduction. In terms of our perspective on this 2% to 2.5%, it’s $10 million to $15 million. It’s a significant amount of money, but then in the grand scheme of things, perhaps not so significant. What’s important for us overall is that the MAR outcome aligns with our business plan. As I mentioned earlier on, our opex submissions post the — or in response to the Commission’s draft decision in May have outlined our case, so while we believe the opex reductions weren’t appropriate and we believe we’ve put a strong case forward as we have with the incentive capex per JB’s earlier comment. And so our expectation is that we will get to an outcome where we have a MAR that is at least level with business plan, and there are a number of ways that the commission has to achieve this or a number of tools in their toolkit. So that would be my summary view on that, Phil.

Philip Campbell — UBS — Analyst

Okay. Thanks, David. And just any comment on the RAB in terms of the quite strong — quite strong commentary from — quite, quite strong commentary from Com Com just on the — rejecting that $6 billion RAB number.

David Collins — Chief Financial Officer

Right. Yes, Arie. I missed that part of the question. We still believe that the $6 billion RAB more accurately reflects the costs that we incurred to roll this fiber network out over the last nine years. Also, as JB mentioned, daily run will continue to advocate for all of the arguments that we feel passionately and positively about. We still believe in a RAB at that level. The Commission have been reasonably clear on what they’ve said. But we’ll continue to make the case for what we believe are fair outcomes for both consumers, but also for investors.

Philip Campbell — UBS — Analyst

Great. Thanks. Awesome.

David Collins — Chief Financial Officer

Thank you very much.

Operator

Your next question is from the line of Brian Han from Morningstar. Please go ahead, sir. Thank you.

Brian Han — Morningstar — Analyst

Just on guidance. Can you please clarify, did you say the guidance factors in the reasons for the $12 million revenue shift last year, and yet it doesn’t factor in the potential impact of the current and future lockdowns, is that what you said?

David Collins — Chief Financial Officer

Yeah, sure, Brian. I’ll have a go at this one. We’ve seen impacts over the full year ’21 when there were only minor lockdown periods. But we have — we did say quite a significant impact through closed borders, and therefore a slower broadband market growth that impacted our revenue over full year ’21. We expect that will continue into full year ’22. The borders are still shut. There is no — there is not much chance of them reopening anytime soon. So we have allowed for that. What we have not allowed for is an extended hard lockdown period which we are now seven days into across New Zealand. That is a different level of impact, which we have not allowed for. So I hope that’s clear. We’ve allowed for what has happened over full year ’21 but not for an extended, Level 4, hard lockdown.

Brian Han — Morningstar — Analyst

Okay. So what you’re saying there is, you’re basically saying there will be no snap back of the $12 million. You’re not saying that there will be $12 million extra impacts in F ’22?

David Collins — Chief Financial Officer

That’s correct. There will be no snap-back, correct.

Brian Han — Morningstar — Analyst

Yeah. Okay. And also on the cost side, David, can you please talk about the outlook for underlying labor costs and what impact these current lockdowns may have on top of that?

David Collins — Chief Financial Officer

Right. Certainly, the trend for labor cost for Chorus is a downward trajectory. That’s driven by firstly the build to operate transition as our build program completes for communal and as installations start to taper down. As we talked earlier on FTE numbers were down 6% during the year, we expect that trend to continue looking forward, and that’s a — and that has been reflected in our regulatory submissions. In terms of COVID impact on labor, it’s a good question. We were impacted by $4 million in full year ’20 on our labor line, which was mostly lower levels of capitalization, along with a little bit of extra provision on cost. So there could be an impact, and that’s one of the areas that we have not allowed for is if there is a long hard lockdown. So overall, the trend is labor will continue to reduce, but there will be a hiccup if there is a long lockdown period.

Brian Han — Morningstar — Analyst

Okay. Great. Thanks, David.

Operator

Thank you, sir. Your next question is from the line of Ian Martin from New Street Research. Please go ahead, sir. Thank you.

Ian Martin — New Street Research — Analyst

Well, thanks. You look [Indecipherable] the draft RAB decision, just looking at the core fiber assets, total unallocated value, $5.1 billion versus the allocated value to UFB $3.98 billion. That’s a big difference, 20%, 25% difference. I just wonder what that reflects. And then, I guess I have some question, just going back to what part of the revenue base is going to end up being captured by regulation. Do we have any more insight into what products will be included in that PQ regulation versus what won’t be?

David Collins — Chief Financial Officer

Yeah, sure, Ian, and thanks for dialing in. I think there’s a couple of things in the difference between unallocated and allocated RAB. The main one is our copper assets across non-US [Multiple Speakers]

Ian Martin — New Street Research — Analyst

[Multiple Speakers]?

David Collins — Chief Financial Officer

Pardon?

Ian Martin — New Street Research — Analyst

There is just core fiber assets, $5.1 billion unallocated. So presumably no copper in there.

David Collins — Chief Financial Officer

Right, okay. I don’t have that in front of me, Ian. So I might need to come back to you on that question.

Ian Martin — New Street Research — Analyst

And so, the second part of the question is, I mean, there is still a big part of the even putting aside — there is still a big part of the asset base of invested capital which isn’t captured in the regulated RAB, UFB RAB. So do we have any clarity on yet what’s going to be included in regulated products versus unregulated?

David Collins — Chief Financial Officer

Yeah. So you’re looking for quantum of shared assets that will come into the RAB in the future or is that a more specific question about which lines of revenue are in and which lines of revenue are out?

Ian Martin — New Street Research — Analyst

Yeah, the latter.

David Collins — Chief Financial Officer

Right, okay. So the easiest way — and on the revenue side, we’ve given a view of — initial view of what FLAs revenue looks like. The easiest way to think about it is, if you look at the JPON line, which is the top line, it’s almost all of that like in the high ’90s as a proportion with the only be excluded being the LFC fiber that we’ve laid. The second line, fiber point to point premium, it’s in round numbers, probably two-thirds to 75% quarters of that with the exclusion being certain non-regulated products with an example being tile extension services. Other than that, if you guided on the revenue — go down through our P&L, the infrastructure line, the component that relates to fiber, it will be a proportion of that but a reasonably low proportion. If you look at field services revenue, a good proportion of that is greenfields which are treated as capital contributions. So that would be excluded. Transport relocation is also included in field service revenue — that would be excluded. So the component that would be included is chargeable maintenance within the field services line. So that’s — that’s a brief run-through, but we can do chapter inverse related to the lines, if that’s helpful.

Ian Martin — New Street Research — Analyst

I just have another question related to the announcements on Thursday. In section — in paragraphs 2,104 for instance, the Commission seems to start to recognize that its approach to the fixed loss asset — that is, its forward looking approach in the financial capital management doesn’t — doesn’t just sort of provide the best way to look at what investment was made prior to the new regulatory framework coming through. I just wonder what your perception is on those kind of — that kind of recognition.

David Collins — Chief Financial Officer

I guess that some of the encouragement that I did take out of the decision, Ian, is that the commission did identify that investors – it is important that investors are traded appropriately and fairly through this process, which we were really pleased to see that recognition along we see their obvious focus on consumers. On the pre-UFB build assets, the duct [Phonetic] asset component is one of the areas where the Commission has taken a different view both pre-2011 duct assets and also post 2011 duct assets. We’ll be looking at that and making submissions on that front. So there are a couple of comments that I would make, Ian.

Ian Martin — New Street Research — Analyst

Okay. Thanks, David.

Operator

Thank you very much. There are no further questions at this point. I would like to hand the floor back to your speakers for any closing. Thank you. Please go ahead, gentlemen.

JB Rousselot — Chief Executive Officer

Thank you very much. And thank you, David. You had to handle all of the questions this time. So I feel like I got out easy. Listen. Thanks for joining the report. We feel that this was a strong performance for the year. The biggest trend that I look at is the fact that, again, at the end of the day, if you look at the three last quarters of broadband market, as measured by the IDC report, if you took every 10 customers that moved off copper, eight of them continues to be fiber and we believe that’s because consumers understand that it is a better future-proof technology and one that keeps up with the increasing demand in data and in particular, big data and big evening speed that every customers need. So we’re encouraged by that trend. We’re also encouraged by the fact that the Commission is really pushing for better information for all consumers so that consumers can take control of the decision and make the right decisions for themselves by providing equal, equivalent information so that they can make those decisions by themselves. We will see where the final results come out in terms of the regulatory process over the last six months. We are encouraged by the conversations that we’ve been having with the regulator over the period, and we look forward to updating you again in about six months for the half year. Thanks again.

David Collins — Chief Financial Officer

Thank you.