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Chorus slashes costs as it opts for no interim dividend

New Zealand network operator reports a tranche of cost cutting measures is likely to be implemented in July.
Written by Rob O'Neill, Contributor

Reporting a net profit after tax of NZ$78 million for the six months to December 31, down 7.1% year-on-year, network operator Chorus indicated it intends to slash costs across the business.

Many of the identified cuts are scheduled to be implemented from July.

Chief executive Mark Ratcliffe said a planned shift to a utility model for the business has been hastened by government regulatory intervention to cut the prices Chorus can charge for copper network access.

While the methodology behind that regulatory determination is now under review, Chorus is still projecting it to reduce revenues by NZ$142 million from 1 December 2014.

“We have already begun reshaping the business to secure a sustainable operating framework for Chorus in the context of a substantial reduction in revenue,” Ratcliffe said. “We have made good progress, but the UBA [unbundled bitstream access] pricing decision will reduce revenues by NZ$142m from 1 December 2014 so this progress must be accelerated.

“To that end we have undertaken a fundamental review of the entire business to identify an extensive range of operating cost out, capital expenditure out and revenue initiatives.

“Many initiatives are in train for implementation from July 2014, and some smaller initiatives have already been implemented.”

Ratcliffe said Chorus is getting on with managing its costs and revenues without reliance on any regulatory outcomes.

“The reality of our situation is that like all of the telecommunications industry we are adapting our business to significantly lower revenues,” he said.

In January, ratings company Moody's downgraded Chorus' credit rating while S&P maintained its BBB rating on CreditWatch with negative implications.

Chorus reported broadband continued to grow during the period, with total connections increasing by 20,000.

Substantial growth was seen in VDSL while fibre broadband connections doubled off what is still a small base. Chorus reported there were (pdf) 13,000 VDSL users and 11,000 fibre customers by 30 September 2013.

Ratcliffe said both the Ultrafast Broadband and Rural Broadband initiatives are “comfortably on track”.

Chorus has spent NZ$1.1 billion on fibre rollouts in the two years since Chorus was structurally separated from Telecom NZ and listed in its own right on the New Zealand Stock Exchange.

24% of Chorus’ UFB rollout is now complete, bringing 259,000 end users within reach of fibre. Ratcliffe also reported progress in reducing UFB rollout costs, with the cost per premises passed was around 4% below target.

Chorus has been in discussions with government-owned Crown Fibre Holdings about reducing the cost of UFB ahead of any loss of revenue from an adverse decision by the Commerce Commission.

“We have been discussing a number of potential initiatives with CFH and this work is ongoing. We hope to be in a position to announce a conclusion to the first tranche of initiatives shortly,” said Ratcliffe.

Chorus withdraw dividend guidance on 18 November due to regulatory risk. As that risk is not yet resolved it has elected not to pay an interim dividend.

Chorus said its capital management objectives are to maintain an investment grade rating “with headroom” and setting a sustainable dividend policy once certainty is achieved.

Chorus expects to be at the top end of its 2014 guidance of flat to low single digit percentage decline in EBITDA, relative to underlying 2013 EBITDA of NZ$654 million.

Gross capital expenditure guidance of NZ$660 to NZ$690 million remains unchanged.

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