Chorus : Annual Report 2023 (including audited financial statements)

Annual Report 2023

1. Chorus Board and management overview

1. Management commentary

1. Financial statements

1. Governance and disclosures

1. Glossary

FY23 results overview

Operating revenue

FY23FY22

$980m $965m

Net profit after tax

FY23FY22

$25m $64m

Share price

FY23FY22

$8.425 $7.22

About this report

EBITDA1

FY23FY22

$672m $675m

Dividend

FY23FY22

42.5cps 35cps

Our 2023 Annual Report covers the financial year ended 30 June 2023 and includes aspects of our environment, social and governance (ESG) performance. For additional ESG reporting, including emissions and climate-related information, please refer to our separate 2023 Sustainability Report available at www.chorus.co.nz/reports.

This report is dated 21 August 2023 and is signed on behalf of the Board of Chorus Limited by Mark Cross, Board Chair, and Kate Jorgensen, Chair of the Audit & Risk Management Committee.

Mark Cross	Kate Jorgensen
Chair	Chair Audit & Risk Management Committee

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 core operations of our business.

Dear investors

On behalf of your Board, I'm pleased to report that Chorus has delivered another strong financial result in a year of operating challenges and change.

Over a period of economic volatility, inflationary pressures and uncertainty, Chorus continued to prove its resilience as an essential utility provider. As the recent pandemic and extreme weather events have shown, Kiwi homes and businesses are more reliant than ever on our fast and reliable broadband connections to live, learn, work and play.

We've announced a final unimputed dividend for the year of 25.5 cents per share, bringing total dividends for FY23 to 42.5 cents per share. The dividend reinvestment plan remains paused.

This is my first annual report as Chair after six years on the Board as a director. I'm excited to be part of Chorus' transition from a successful era of building one of the world's most advanced fixed broadband networks to now operating as a digital infrastructure company that can power

New Zealand's digital future.

Strategy and Core Beliefs

I think it's important for shareholders to understand what our beliefs as a board are for your company. These beliefs underpin Chorus' three strategic pillars: to win in core fibre, to optimise the non-fibre asset base and to grow new revenues.

• Empowering our people: One of the best investments we can make is in having the right people, empowered and appropriately incentivised. Our aspiration is for Chorus to be a diverse and inclusive employer of choice.
• Fibre is future-proofed: We believe fibre is the most effective technology choice for the vast majority of New Zealanders because it provides a dedicated connection that delivers fast and extremely reliable connectivity. While alternative technologies have a place in the market, fibre has a clear and easily scalable upgrade path to meet the expected growth in consumer needs far into the future.
• Connections, connections, connections: Chorus' long- term value is inextricably linked to fibre connections. Now that we've built a world-classnetwork, in partnership with government, the greatest benefit to the country is to harness its potential. We've begun retiring the copper network in our urban fibre areas and this will drive fibre uptake even higher. Consumers value fibre above other technologies as a high-qualitydependable service and we're willing to invest in connecting more addresses and devices (e.g. traffic cameras) where the acquisition cost is justified by the long-termvalue of that connection.
• Managed exit from copper: Our copper network is nearing the end of its technological life and alternative technologies will be needed beyond the reach of fibre. Our focus is on managing our copper costs down while deploying fibre
  to the maximum extent and ensuring regulation supports consumers to get the best possible services.

• Be an active wholesaler: As an open access wholesaler we treat all our retailer customers equally. Yet, our largest customers are also our network competitors and have direct consumer relationships where we don't. This means we need to be an active wholesaler, promoting our network services and ensuring that the regulatory regime supports a level playing field between network providers and keeps consumers fully informed.
• Promote digital equity: We're the provider of an essential utility service that enables New Zealanders to access
  an increasingly digitised world. This means Chorus can and should play its part in improving digital equity. Because we're a wholesale only provider, this requires a collaborative effort with government agencies and retail service providers.
• Prioritise long-termvalue: Capital allocation is one of our most important responsibilities. We're making investment decisions for long-term value, not short-term profit. We'll prioritise the efficient allocation of capital that grows shareholder value and supports a growing sustainable dividend through time. Our assessment of the necessary level of returns, the impact on consumer pricing, competitive market conditions, and the parameters of our dividend policy and debt limits, will guide our approach to discretionary investment.
• A considered approach to new opportunities: We believe generating non-regulatedincome streams is important, but they must pay their way. We would need to have, or build, the capability to run these businesses well. We'll tread carefully and generally steer away from businesses that our shareholders can invest in directly, unless there is a compelling adjacency to, and synergies with, our core business.
• An appropriate capital structure: We're committed to maintaining a capital structure reflective of a utility business. At the heart of this is the maintenance of an investment-gradecredit rating (BBB or equivalent) and financial policies that support this. We've begun turning our minds to the first tranche of Crown funding that will be due in mid-2025.

Reshaping Chorus for its next phase

We've spoken in the past about the transition from a fibre rollout organisation to one that is focused more on operating that network. With the UFB rollout finished and the new regulatory regime for fibre established, Chorus is entering this new phase of its evolution.

In May, we announced the beginning of changes to our operating model to better execute our strategy, reflect the new regulatory framework and respond to a changing market environment. That environment includes the progressive withdrawal of our copper network, the emergence of new technologies and changing consumer needs.

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This new operating model includes the introduction of three end-to-end value streams that are aligned to the core focus areas of our strategy: win in fibre, grow new revenues and optimise non-fibre assets. New capabilities, tools and ways of working are also being introduced so our people can deliver key initiatives with better focus and prioritisation, and ultimately provide improved consumer outcomes. This is a significant change from our historical operating model that had been built around delivering a 12-year fibre rollout and the mass uptake of fibre.

Unfortunately, it has meant the disestablishment of some executive roles.I would like to acknowledge Andrew Carroll (GM Customer & Network Operations) and Ed Hyde (Chief Customer Officer) for the significant contributions they made to Chorus. Andrew was a member of the leadership team since Chorus was listed and helped us navigate a number of significant challenges over many years. Ed was instrumental in developing our fibre proposition for consumers and ultimately reaching our target of one million connections in FY23.

Governance

Two directors, Jack Matthews and Kate Jorgensen, are scheduled to be up for re-election at this year's annual shareholders meeting, with no retirements. We've had two director changes during the year, with the retirement of Patrick Strange as Chair and the subsequent appointment of Will Irving as a director. Will has been an excellent addition to the Board, bringing a combination of regulatory, technology and operational telco experience from his roles at Telstra and the National Broadband Network in Australia.

I'd like to acknowledge Patrick for his leadership over a long period at Chorus and for the smooth handover to me. I extend that appreciation to my fellow Board members for their support to me in the Chair role and their valuable contributions.

As directors we're energised by the goals we have set for the company. I believe the Board has the right blend of experience and diversity in the broadest sense to drive the strategy of the company, and to support and challenge our management.

Becoming an all-fibre digital infrastructure company

We've provided dividend guidance of 47.5 cents per share, unimputed, for FY24. There is approximately $11 million remaining to be returned to shareholders through the $150 million share buyback programme. To date, more than 17 million shares have been bought back.

In April, we were pleased to see UniSuper receive government approval to increase its shareholding in Chorus up to 20%, should it choose to do so. We see this as a positive endorsement both of Chorus' strategy and growing investor recognition of our value as a provider of essential digital infrastructure.

The global boom in fibre rollouts gives us great confidence that we've invested in the right infrastructure for the future. Recent OECD data shows fibre already accounting for 38% of all fixed broadband subscriptions at the end of 2022, surpassing cable on 32% and copper broadband on 24%.

This shift to fibre, and the emergence of alternative wireless and satellite broadband networks in rural areas, has started the countdown on the usefulness of copper networks.

Norway and Sweden, for example, are well advanced in the retirement of copper. We expect this to occur here in the next decade and we believe fibre should be extended further to help bridge the digital divide between urban and rural communities. We're exploring how we could play a part with the right investment incentives.

At the same time, we're enhancing our existing fibre footprint with upgrades to multi-gigabit Hyperfibre capability. We know we're on the right path when Singapore's latest Digital Connectivity Blueprint calls for seamless 10Gbps connectivity to be enabled within the next five years. The trends all point to exponential data growth in the coming years and the rapid rise of artificial intelligence services in the past year shows just how fast and far-reaching changes in our industry can be.

I'd like to thank our chief executive JB Rousselot, our executive team and the wider Chorus team for their outstanding efforts over the past year, particularly the way they dealt with significant operating challenges, including Cyclone Gabrielle and the ongoing technician shortages.

Finally, I would like to thank you, our shareholders, for your continued support of Chorus and we look forward to updating you at our annual meeting in November.

.

Mark Cross

Chair

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Operating highlights

	FY22	FY23
Fixed line connections2	1,304,000	1,271,000
Broadband connections2	1,189,000	1,188,000
Data traffic	7,140 petabytes	7,402 petabytes
Employee engagement	8.5 out of 10	8.7 out of 10
score3

The completion of the government backed ultra-fast broadband (UFB) rollout provided the foundation for another strong financial performance, despite workforce constraints and extreme weather events bringing new operational challenges. Fibre connections continued to grow and were up 72,000 in the year. The migration of consumers to fibre and alternative networks saw copper connections reduce by 105,000. Overall, total fixed line connections reduced by 33,000 compared to 36,000 in the prior year.

The increase in fibre connections and ongoing growth in the uptake of high-speed fibre plans, together with inflation- linked price changes, underpinned underlying revenue growth from $959 million to $981 million.

Despite inflationary pressure on various cost lines, underlying operating expenses were held flat at $299 million.

These operating results produced underlying FY23 EBITDA of $682 million, a $22 million increase on underlying FY22 EBITDA of $660 million4. This was within our updated half year EBITDA guidance range of $675 million to $690 million that had excluded allowance for flood and cyclone-related impacts. Reported EBITDA was $672 million when including $10 million of one-off costs for the extreme weather events and operating model changes.

Net profit after tax (NPAT) was $25 million, down from $64 million in FY22. This reflects the effects of increasing interest rates, and higher depreciation as we progress the shutdown of our copper network in fibre areas.

Capital expenditure reduced to $454 million, down from $492 million in FY22. This was slightly above our guidance of $410 million to $450 million and reflects a record year of work completed for new property developments. Our borrowings at the end of FY23 were 4.39 times net debt to EBITDA and well within our business tolerance level of 4.75 times.

1.1 Winning in our core fibre business

	FY22	FY23
Fibre connections	959,000	1,031,000
Fibre uptake (UFB areas)	69%	73%
Average data usage (June)	567GB	585GB
Customer satisfaction -	8.2 out of 10	7.8 out of 10
fault restoration		(target 8.2)
Customer satisfaction -	7.3 out of 10	7.3 out of 10
intact provisioning		(target 7.6)

We reached a significant milestone in December when we connected the last community, Opononi in the Northland region, to fibre under our 11-yearpublic-private partnership with the government. By the end of June, fibre uptake had reached 73% in the completed UFB rollout areas, up from 69% in FY22.

Across our wider fibre network (i.e. including fibre deployment outside the original UFB rollout footprint), fibre connections grew to 1,031,000. This surpassed our long-held target of one million connections by December 2022.

About 250,000, or 24%, of our mass market connections are on speeds of 1 gigabit per second (Gbps) or Hyperfibre

(2, 4 or 8 Gbps) plans. About 620,000, or 67%, of residential connections are on our popular 300Mbps plan.

Our entry level 50 megabits per second (Mbps) Home Fibre Starter plan, intended for price conscious consumers with basic broadband needs, grew strongly to number 16,000 connections by the end of FY23. We were pleased to see some large retailers begin offering the plan at $50, compared to the $60 retail price required to attract the $35 wholesale line fee.

Workforce challenges

Like many industries, one of the unforeseen challenges we had to grapple with in FY23 was a shortage of skilled workers. Visa changes for migrant workers meant many of the technicians who carried us through the pandemic either took the opportunity to reconnect with family and friends overseas, or moved to other local industries. Strong global competition for fibre technicians was another contributor.

This saw a workforce gap of about 380 technicians emerge in the first half of FY23. Although our recruitment and training initiatives had largely bridged this gap by the end of FY23, the workforce constraints we experienced through the year meant we weren't able to meet consumer demand for installations. This shortage was compounded by the need to prioritise fault restoration work in the wake of Cyclone Gabrielle. In the second half of FY23, for example, we had more than 60 days in which field activity was subject to force majeure conditions.

1. Excludes partly subsidised education connections provided as part of Chorus' COVID-19 response.
2. Based on the average response to four key engagement questions.
3. Refer to page 13 of the FY23 investor presentation for the detailed reconciliation to EBITDA.

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