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Operator: Thank you for standing by, and welcome to the Chorus HY '26 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Mark Aue, CEO. Please go ahead.
Mark Aue: Good morning, everyone, and welcome to Chorus' results presentation for the 6 months ended 31 December 2025. I'm Mark Aue, Chief Executive; and joining me is Drew Davies, our Chief Operating Officer. I'll begin with an overview of our results for the half year and cover some of the progress we're making on our strategy, having just entered our next phase into Horizon 2. Drew will then take you through the financials and FY '26 guidance, and I will close out with the outlook for the second half and long term. For the past 2 years, we've noted the economic downturn and its material impact across our country. We'd recognize economic recovery is at best still lumpy. Over the same period, we've continued to highlight the resilience of fibre more seemingly as an essential service, and so I'm pleased to be reporting another robust result for the first half. From a results perspective, comparing half-on-half, total fibre connections were up 3% at over 1.1 million, with uptake lifting to 72.4% and fibre revenues growing by 7%. Our ongoing focus on simplicity and efficiency has reduced operating expenses by 3%. Per previous thematic, this is despite inflationary pressures and non-tradable costs, such as rent rates and electricity. EBITDA of $357 million is $11 million ahead of the comparative half with underlying operating cash flows in line with prior year. Gross CapEx was $158 million with sustaining CapEx of $79 million, driven in part by life cycle planning and project timing shifts into the second half. Finally, the Board has declared an unimputed interim dividend of $0.24 for the half. In our last results announcement, I was pleased to speak to the foundations and groundwork we've laid to set us up across our 10-year outlook. Now 6 months into Horizon 2, focus continues shifting to growth, simplicity, and efficiency. We continue to build capability through new leadership and remain optimistic about fibre growth. Likewise, we're alive to adjacent infrastructure opportunities, evaluating several and discounting a number, but we'd also recognize these take time to commercialize and bring to market. Brand fibre messaging continues to land, raising awareness of comparative differences in technology. Research trends continue to move favorably with fibre's preference as first choice interconnect connection now over 67% compared to 12% for fixed wireless customers. Our accelerated retirement of copper continues at pace with just 3,000 lines remaining in UFB areas. This opens material opportunity through recycling, and we see positive pathways to regulatory change as only a question of time. Turning to performance across our 4 strategic LEAP pillars. In Lead, we lifted fibre uptake to 72.4%. UFB2 areas increased to 63% and original UFB1 areas are at 75%. Encouragingly, we are seeing pockets where fibre has already exceeded our 80% target, while others like Auckland and Nelson are at 76% already. In the past, copper withdrawal provided a pipeline to fibre growth. But as the right-hand chart shows, we're maintaining fibre connection growth without the copper tailwind and are unlocking other growth pools. Our plan mix remains positive with over 4 out of 5 customers on a 500-megabit plan or higher. Total churn as an off-net greater than 4 weeks is reducing with indications fixed wireless is plateauing. At the top end, demand for 1 gigabit plans is stable with hyperfibre adding roughly 500 connections per month now. There is often discussion about our home fibre starter plan. I'd say we remain resolute. The introduction of our 50-megabit plan and subsequent boost initiatives to 100 and 500 megabits were the right decisions. Overlay high cost of living pressure, these provided optionality, and we're confident has opened us to markets and customers that existing fibre plans did not appeal to previously. Profiling shows in the main, these are distinct customer groups with lower usage and they have greater churn and reactivation rates than higher tier plans. Whilst we saw initial downgrades from higher plans, this was also exacerbated by some retailers moving pricing at the same time in Q1. Now this has settled, we've seen encouraging trends over the past quarter in particular. Demand for the 100-megabit plans is strong with circa 75% of that growth coming from off-net and 25% from downgrades. Even more favorably, we're seeing a material shift in uptake for long-term inactive fibre premises with a 24% increase from premises off-net greater than 3 months, 32% from off-net greater than a year, and 62% from premises off-net greater than 2 years. Our hypothesis being the previous 50-megabit plan didn't appeal and/or the previous 300-megabit plan was too much. And that was also part of our boost rationale to create clear air between fibre and fixed wireless plans. Downgrades of the 500-meg plan have now stabilized post boost with overall churn also reducing. We're also increasingly seeing upgrades into the 500-megabit plan with customers wanting either more speed or those customers who may have downgraded previously, but are now returning back to the 500-meg plan. Finally, we'd note intention to switch research continues to highlight fibre's tenure over fixed wireless. Fibre at 6.7%, even for the 100-megabit plan, versus 23.6% for fixed wireless. Data demand continues to accelerate. Average monthly usage at 699 gigabytes in December increased even further to 722 in January, up 12% from a year ago. Across our base, 20% of fibre customers now use more than a terabyte of data each month. Peak events also continue to grow with a 14% average increase in peak usage. In part, that's also reflective of both the number and quality of connected devices, which has almost doubled over the past 5 years to 25 and is expected to do the same again over the next 5. We see this only playing to fibre's strength of resilience, quality, and the scalability of the network. Turning to our Expand pillar. We continue to see opportunities for new infrastructure growth, but we'll take a disciplined approach to investment where the returns must be scalable to reach our Horizon 2 aspirations. These relate specifically to natural adjacencies with several we are exploring now, and expect to have a more fulsome update at our full year results. In our core, while property sector has continued to see subdued activity, our new property development volumes have continued in line with pre-COVID levels. We delivered 11,000 lots in the first half and our pipeline continues to support our estimates of 20,000 to 25,000 lots per annum. Encouragingly, consenting volumes have grown 9% off the cyclical lows. And while early days, this is starting to show up again in incoming NPD volumes. Mobile infrastructure connectivity continues to grow with 7% growth [Technical Difficulty]. Broader opportunities in connectivity of data center are also now being realized. Our new product, Express Connect is now in 5 data centers and has materially enhanced our go-to-market proposition and delivery, with plans to double the number of DCs served by end of this financial year. Our Adapt pillar is a key lever of Horizon 2 in driving operational excellence. During the half, we've continued our focus on simplification and efficiency, refining our operating model. This has seen a realignment of teams, processes, and a 12% reduction of roles whilst building new leadership and capability in customer retention, data and analytics and AI integration. Copper retirement is progressing well, enabling us to power down over 400 cabinets in the half with an intent to accelerate that in H2. We also continue to see positive regulatory pathways developing, having collaboratively worked with government and broader industry stakeholders. We're hopeful a decision relating to copper deregulation and the related TSO review within Q3. Likewise, a decision from the Ministry for Regulation review over a similar time frame. Finally, to our Pioneer pillar. As I noted, just 3,000 copper lines remain within UFB areas, and we're on track to retire this fully by end of June. In non-fibre areas, copper connections have declined by 26,000 over the last year with only 54,000 lines now remaining. Relatedly, we've seen a $4 million reduction in reactive fault spend, with a 22% reduction in truck rolls. The copper network itself remains free cash flow positive but we continue to highlight our imperative with government to shift regulation and enable a pathway to a full exit of legacy technology that has been far superseded by alternatives. To other strategic opportunities copper recycling remains positively on track. We're transitioning out of trial now into final contract phase of a fully operationalized work stream. With metals pricing at historic highs, our estimates for returns are now at the top end of the $30 million to $50 million range. To fibre expansion, we were encouraged the Infrastructure Commission had endorsed our fibre expansion plan to 95% of the population. However, the reality of funding and competing government priorities during an election period have forced us to refocus. Whilst we maintain New Zealand would benefit significantly, both financially and societally, it is clear even joint funding and partnership is not viable in the short term. We've instead shifted greater focus to our other large opportunity pool as brownfields infill, where roughly 200,000 premises have previously been passed with fibre during the initial UFB rollout but were not installed or connected. Finally, to property optimization, where alternatives are enabled as we retire and exit from the copper network. We continue to review high sites and how these may be broken into tranches as a test case, and we have several parties interested. I'll now hand over to Drew, to take us through the financials.
Andrew Davies: Thank you, Mark, and hello, everyone. Overall, as Mark said earlier, we delivered robust results in a challenging economy and we continue to see solid fibre revenue growth annually, offset by the continuing copper legacy revenue reductions. Turning firstly to our overall income statement. EBITDA was $357 million, up $11 million from half year '25. Revenues of $506 million were up by a net $6 million. For operating expenses, we made cost savings from the changed operating model, incurred lower consulting fees and made good progress on reducing legacy costs. That helped us absorb inflation and a number of cost lines. Having completed the accelerated depreciation on our copper assets in Chorus UFB areas in the prior period, depreciation and amortization was $216 million in the half, down $19 million from half year '25. As a reminder, copper cables and copper-related ducts and poles in local fibre company areas will be fully depreciated by June this year. Those in non-fibre areas will be fully depreciated by June 2030. Net finance expense was $6 million higher half-on-half. While our weighted average interest rate on debt reduced from 5.7% to 4.9%, we repaid the majority of our EUR 300 million notes early with EUR 9 million of settlement costs. Income tax expense of $11 million is up $4 million from half year '25, primarily driven from our higher profits. Overall, this meant we recorded $15 million of net profit after tax for the half year compared to a loss of $5 million in half year '25. Looking in more detail at our revenue categories. Our fibre broadband revenues were up 7% or $26 million from the prior year, driven by fibre connections up 31,000 lines, along with an approximate 4% increase in ARPU to end at $57.73 for the year. With total copper connections down 60,000 or almost 50%, this resulted in combined copper broadband, voice, and data revenues being down $18 million or 43% lower annually as we continue to execute our multiyear copper exit strategy. We continue to see copper connections and revenue declining in the second half similar to the first half. Field service revenues were down slightly, primarily driven by lower new property development activity, as Mark spoke to earlier, and was partly offset by higher revenue from new connections and brownfields projects. Other revenues were stable annually and were lower on a sequential basis as the prior half included approximately a $3 million net gain from copper cable recycling sales based on the trial we conducted in that fiscal year. Based on the learnings from that trial, we have completed a tender process with vendors and expect in the second half of this fiscal year to implement this program to realize a similar level of net sales from copper recycling in the low single millions. As I've spoken about previously, we intend to adopt the new accounting standard, IFRS 18 for this financial year, reporting to June 30. The new structure allows us to be more prescriptive in our income statement, and we're currently working through what this will look like in our full year results. Total operating expenses were $149 million for the half year and were $5 million or 3% lower than the comparative period. We continue to drive strong cost management disciplines to offset the persistent inflationary pressures, which rose in the half year, mainly from nontradables, such as rent and rates. Labor costs were $41 million, down approximately 4% annually as a result of our new operating model with about 100 fewer roles in the business. The labor capitalization rate reduced from 45% to 42% as network build activities declined versus prior periods, primarily from fewer fibre footprint expansion projects. For network maintenance, costs were down $7 million half year on half year. The key drivers were lower copper fault volumes to premises as copper connections continue to decline, resulting in a 22% reduction in truck rolls, partly offset by network-related fault costs. This has been complemented by improved cost efficiency programs implemented across maintenance activities. For half 2, network maintenance costs will not decline as much as prior periods as contractual CPI increases occur along with the seasonal increase in weather-related faults, which impact network-related fault volumes, especially in more rural areas. IT expenses were up slightly as a result of some one-off cloud-based system implementation costs included in this half. Other network costs were $5 million higher than HY '25. This was mainly due to higher payments to service companies from better service levels this year, higher engineering activity as a result of weather events. We also saw timing differences on project spend annually, including the one-off copper cabinet shutdown costs we incurred to power down each cabinets. Electricity expense was up $1 million annually. And while our electricity consumption continues to decline annually by approximately 6%, this favorable trend was more than offset by higher lines charges. Consultant expense was down $4 million annually as the prior year consultant spend included investments to explore the potential new revenue opportunity in the trans-Tasman subsea cable. Advertising expenses of $5 million are traditionally lower for Chorus in the first half, and we expect this will increase in the second half, similar to prior years. Moving now to CapEx. Gross CapEx for the half year was $158 million, down $41 million from the prior half. Within gross CapEx, $79 million was sustaining and $79 million was for growth. Gross CapEx was supported by $20 million of customer contributions for roadworks, new property development and rural broadband upgrades. While CapEx was lower during the first half, we see an uplift in CapEx spend in H2 as a result of our planned project expenditures during this financial year. This includes phasing of large national fibre build projects underway, major network property refurbishment projects, and large IT project deliveries. This slide shows CapEx using regulated categories for the fibre regulated asset base, RAB. CapEx attributable to investing in the RAB, which excludes capital contributions, is estimated to be about $125 million for the half year. For the non-RAB CapEx, as you can see, copper CapEx was $3 million, down annually and was mainly funded -- third-party funded. Total RAB increased by $73 million over the calendar year to $5.98 billion, with core RAB increasing to $5.11 billion, up $203 million, offset by the financial loss asset declining by $130 million to $0.86 billion as the FLA depreciates further. Our total net debt as of December 31st was $3.2 billion, up approximately $100 million from June 30th, primarily as a result of issuing $400 million in euro notes in November. Proceeds were used to repay EUR 243 million of the EMTN 300 notes due in December '26, along with paying down entirely the revolving credit facility. We have 2 rating agencies that issue credit opinions on our leverage, Moody's and S&P. Moody's rates Chorus as Baa2 stable with a threshold of 5.25x debt-to-EBITDA down driver, which we are currently at approximately 4.8x. S&P rates Chorus as BBB positive outlook. As we have updated previously, S&P introduced a new digital infrastructure rating criteria covering tower companies, fibre companies such as Chorus and data centers. This new criteria uses the funds from operations to debt ratio for its leverage calculations and have set a threshold of 9%. Chorus is currently well above this threshold at 17%. This new leverage criteria is equivalent to 7x down driver of debt to EBITDA when using the prior methodology. As I will speak to shortly on the status of the NIFFCo security sale, the final determination by S&P on their leverage calculations and final down driver metrics will depend on the outcome of the NIFFCo security sale later this year. The table on this page provides our bank covenant calculation using the revolving credit facility, which has remained at no greater than 5.5x senior debt-to-EBITDA ratio, and we're currently at 4.49x. While S&P have changed the methodology, importantly, Moody's have made no change to their threshold of 5.25x. So this is our leverage down driver that is our focus for our capital management policy. Lastly, about 70% of our interest rate exposure is fixed for the next 3 years. Turning to the next slide. In December, the New Zealand government announced the sale process will proceed for its bespoke Crown funding securities provided to Chorus. The key terms of the securities are set on the right-hand side of the slide. And the face value of the combined securities is $1.16 billion, of which $683 million are classified as equity securities. Chorus will not participate in buying these NIFFCo securities in the current government sale process. And importantly, if securities are sold to a third party and transit from the Crown, the terms of the securities to Chorus cannot be altered without Chorus' agreement. If the sale process does conclude later this year and depending on the acquirer, S&P may reclassify the $683 million of equity securities as debt rather than as equity as they currently treat them in their leverage calculations. On a pro forma basis, if S&P treat all of the NIFFCo equity as debt, this would mean the S&P leverage calculation would be increased to approximately 6x net debt to EBITDA. So still well below the current 7x down driver. On an FFO to debt basis, this would be approximately 13%. We will not know the final S&P leverage calculations of course until later this year, until after the NIFFCo sale process is complete. But in all scenarios, we are below the leverage thresholds. Finally, on dividend and guidance, we've announced an interim dividend of $0.24 unimputed to be paid in April. The DRP is not available. Dividend guidance for the full financial year remains $0.60 unimputed and reflects the ongoing positive trend in cash flows. Net cash flows from operating activities were pro forma $257 million on the same basis as last year as we note that a $29 million payment from one customer missed the cutoff for half year results and was paid in early January. FY '26 EBITDA guidance remains at $710 million to $730 million, and we now expect to be in the upper half of this EBITDA range. And we base this expectation to be in the upper half based on increasing fibre connection growth and corresponding revenue increases and continuing disciplined cost management. CapEx guidance for fiscal '26 also remains at $375 million to $415 million, and we now expect to be in the lower half of this range. Correspondingly, our sustaining CapEx guidance range of $195 million to $215 million for fiscal year '26 also remains, and we expect to be in the lower half of this range. This reflects the capital project deliveries in the second half that I spoke to earlier. Overall, we continue to track well, and we're pleased with the progress we are making in this early phase of our strategic objectives for Horizon 2 through 2030. I'll now hand back to Mark to run through the outlook.
Mark Aue: Thanks, Drew. I've spoken previously to our overarching purpose for Chorus, and this is anchored in enabling better futures for Aotearoa at an intergenerational level, in many cases, a driving role we play through connectivity. So we're proud to be launching an Equity Fibre product designed to provide affordable and accessible connectivity at a time where we know nearly 400,000 households cannot afford a package of meaningful digital access in New Zealand. Our Equity Fibre product is a key tool in our digital inclusion efforts. It's shaped through extensive research and deep collaboration with community partners and is now available for retailers to activate. Given the inherent complexity of hardship, our trusted community partners will be vital in helping to identify and connect eligible families. And we're encouraged by an initial interest from smaller community-focused RSPs and we're working towards broader retailer participation. Digital inclusion is a shared challenge. And whilst ideally, we'd have a national government-funded program that isn't realistic in the short term. Instead, as Chorus, we're taking it upon ourselves to drive initial change, prove this is feasible, show how digital connectivity materially improves lives and develop a use case for this to be scaled nationally. We're not waiting for someone else to make a difference. Turning to our focus for the remainder of FY '26. As we step further into our Horizon 2, we're certainly on a fast track to being an all-fibre business. Under Lead, formal pricing changes across our products came into effect from January 1, although retailers had previously revised pricing. The connection trends I noted earlier are encouraging and we expect the run rate uplift in half 2. Awareness and preference of fibre over other technologies is clear. Broader industry thematics of connected devices, growing usage, need for resilience, evolving content quality and an AI revolution, all aligned to fibre's superiority. We retain our 80% uptake aspiration and our conviction of growth opportunities in our core fibre business through underpenetrated pools. We expect improving data and analytics capability will also reshape our execution with retailers through smarter and more efficient means. Likewise, that analysis will inform our approach to brownfields fibre infill to premises passed by fibre but not yet installed. We've shown through our prior Frontier initiative, bringing fibre to almost 10,000 new addresses. This can be executed at pace and a faster conversion to connections. We're good at building fibre and we'll have qualified rollout intentions for infill over the course of H2. To expand, core product growth continues, leveraging existing fibre assets and an expected uplift in NPD greenfield volumes as property developers ramp back up. Earlier, I noted we're assessing several infrastructure-related initiatives over H2 and we'll provide a more substantive update at the full year results. There is some commercial sensitivity to these given market competition and the provision of infrastructure services. To adapt regulatory focus and driving formal decisions to outstanding reviews is a priority for us. But as we've noted, through ongoing collaboration, we see favorable pathways emerging. Cost discipline will continue as will the drive for simplification and efficiency, which will lead in turn to further savings. In Pioneer, we're accelerating copper retirement and the exit of cabinets over H2. UFB will be completely retired by July, and we're still estimating LFC areas by end of calendar year '26. H2 will see our copper recycling program in full operational mode with delivery partners and expected returns in year of low single-digit millions. Development of extraction plans and timing will also be completed by the full year results. We would also hope to confirm an exit approach to our noncore high sites by full year, and we'll work with interested parties over the coming months. More broadly, exchange footprints could also yield beneficial outcomes in coming years with alternative asset owners or lease models to space in desirable transport locations. As a worst-case scenario, this represents a material cost-out opportunity for what become noncore assets. So to wrap, we're pleased with another robust set of results, again, reflective of the resilience of fibre. Economic recovery is still lumpy but improvements will only be favorable to our uptake and mix. Equally, we're pleased with the foundational groundwork laid in Horizon 1 that enabled us to step into the first 6 months of Horizon 2. We have a clear aspiration. And whilst the benefits of change will be realized progressively out to 2030 in our plans, we can already see a shift in focus, capability and execution. Horizon 2 is focused on growth, simplicity and efficiency. We're clear on growth opportunity pools. And paired with the superior fibre technology, it really comes down to execution. Today, we're already delivering greater simplicity, efficiency and savings. Exiting legacy copper technology is tangibly in sight and opens new opportunities to optimize our portfolio of assets. We've shown our discipline, leveraged our superior fibre assets and sought to exit from noncore ones. Investments will be core to our business or natural adjacencies but they must be scalable on returns. As we've said many times, an investment in digital infrastructure is both for today and the future. And our fundamental belief that fibre is technologically superior in every way that matters holds firm. Thank you all, and let's go to the questions on the phone line, please, operator.
Operator: [Operator Instructions] Your first question comes from Entcho Raykovski with E&P.
Entcho Raykovski: So my first question is around the guidance. You've moved EBITDA guidance to the top half of the range. I'm just curious whether that means that you're seeing any improvement in underlying economic conditions or whether you're seeing perhaps some better mix than what you expected back in August. I'm just conscious that the fibre connections trajectory is not dissimilar to the trend in FY '25, and you spoke back in August about being in the bottom half if economic weakness persisted. So is there something in particular that you're seeing in the outlook which is more encouraging, or is it mix? I mean, that's my first question. I've got a couple of others, but I might hold off on those for now.
Mark Aue: Thanks, Entcho. I'll start with that. I mean, clearly, H1, I think, is still a tough economy. I think there's no doubt that it was challenges. I wouldn't say that we're seeing significant changes in H2. But as we spoke to NPD, consents to build are increasing. So that's opportunity. The way we look at our connections growth, we have targeted incentives with all of our retail service partners. And as we look forward into H2, we're seeing initiatives take hold with their plans. So that's why we spoke to increasing connections growth and the corresponding revenue. So that's where we see some opportunities there. And we've also been very disciplined in cost management in H1. We did see inflationary pressures. And as I spoke to there, we have seen some areas that we brought down. Other areas have gone up as the inflation effects have taken hold in rent, electricity and rates. So we feel very good about managing through that and continuing into that to the second half.
Andrew Davies: Yes. Maybe just to add to that, too, Entcho, I think for our Q3 uplift, you referenced the connections as well for the first half. We're quite encouraged by Q3. Our January result was the strongest for -- I think since mid-2024. And again, we talked to some of those encouraging trends on mix. So we're seeing churn actually come down that we're stabilizing on the volumes of downgrades we've seen previously as well. And then equally starting to see the reactivation rates from premises that have been off-net longer term, which for us, the hypothesis being the 100-meg fibre plan in particular, is appealing to customers and premises that the 50 megabit plan didn't previously. It's been a distinct shift in the reactivation rates that have been off-net for over a year, over 2 years even and one that we hope obviously continues.
Entcho Raykovski: Great. And you sort of touched on OpEx, but I'm wondering if you can give us an idea of what the underlying OpEx growth was in the first half ex any one-offs in the PCP. I think you incurred about $9 million of one-off costs for the entire FY '25. So I don't know if you can break that down first half, second half. And just as a follow-on to that, do you still expect to see low single-digit growth in OpEx on a net basis in FY '26 from -- I think you've spoken to about $300 million net in FY '25?
Mark Aue: Yes. I mean to speak to H1 '25, there was the $4 million that we -- in consulting fees that we incurred that half. And so that's what I spoke to in the consulting fees were down $4 million. So you can see that pretty clearly as -- the rest of it would be organic in the sense that our operating model change. That did take hold after H2, so you can see the impact of that in our H1 '26 results. Inflationary factors, it's pretty clear in terms of some of those line items in terms of rent rates and electricity where we've seen some of that increase. In other network costs, that's where we have our copper cabinet power down costs. And so while we've -- and I did call out that we'd increase that in H2 as we continue to get customers off cabinets, work with the retail service partners and the lines companies to coordinate together to get those cabinets powered down. So that will increase slightly. I did call out that the reduction in network maintenance costs will not be as great as what we've seen before, primarily as we've gotten more customers off the premises-based copper connections to network faults. So we've seen -- we still see that stabilize. So hopefully, that provides enough color. And I did call out advertising. It's always seasonality and that would be up approximately $2 million in H2.
Entcho Raykovski: Final one, I mean, you've spoken about the updated S&P criteria for digital infrastructure assets. I guess, is it too early to say how it may impact your capital management policy given it's now being applied to Chorus? I mean, as you said, under all scenarios, you have plenty of headroom. And I mean, perhaps as part of that answer, do you expect Moody's will make any changes to their methodology or is just S&P specific?
Mark Aue: Well, let me answer -- so it's a capital management policy that was set for RP2, which says a growing sustainable dividend at real rates. And so that's where we set the $0.60 this year. So we've achieved that, and we're very happy -- the Board is very happy with that. Under S&P, there are so many moving parts in terms of the NIFFCo sale and what that will do ultimately based on the owner. And again, if you take the 2 scenarios for S&P, the security sell, the equity is treated as debt, we're at 6x pro forma leverage with a 7x down driver. If the NIFFCo securities don't sell, S&P has called out in their credit notes that they would increase this to BBB positive that would reduce the down driver to 6x approximately, as well as reduce the FFO to debt to increase to 13%. So the amount of headroom is not as much as people see just based on where we stand today based on that uncertainty of the NIFFCo security sale. For Moody's, there's been no change. And they've always treated the equity as debt essentially for their calculations with -- they've been ambivalent to the owner of the securities. So there's no change coming from them. Their down driver is 5.25x. We have our annual credit opinion discussion at the end of March. There have been no indications that they're changing that criteria at all. So I would expect that, that would be remaining as our down driver at 5.25x, which now sets for our capital management policy, what we manage to.
Operator: Your next question comes from Ben Crozier with Forsyth Barr.
Benjamin Crozier: Just one question on sort of the infrastructure revenue. I think at the Investor Day just over a year ago, you talked to that infrastructure revenue in aggregate was sort of $155 million and you're targeting $180 million to $200 million. Can you give us sort of an update on how that's progressing in terms of an aggregate and where that sort of revenue sits today?
Mark Aue: Yes. Look, it's probably at similar levels today. I think we've also spoken to some of the legacy products that over time will be retired. So that drops down before then going back up. So you drop below the $150-odd mark and our aspirations for Horizon 2 would get to $180 million to $200 million of revenue. So as I said, we're continuing to look at a number of initiatives, several that we're actively looking at right now. We've discounted a number -- you may have seen already that from the LoRaWAN IoT that we were exploring as a trial and we've actually moved away from that. So we don't believe that's a scalable opportunity for Chorus in the current market at the moment. So we'd rather put that investment and resources, et cetera, into areas where we think they can be scalable. And there is some commercial sensitivity to several of the options that we're looking at, hence, my reference to a more substantive update at the full year result.
Benjamin Crozier: Perfect. Second, just on sort of the MAR or regulatory revenue achieved in the first half. I think at the full year, you sort of gave an indication of how much of the total revenue was regulatory. I don't know if you have that idea. And presumably, you've underearned your MAR, a decent amount in this first calendar year of the second regulatory period, as expected, given the meaningful step-up in the MAR. Sort of -- can you also sort of talk to when do you expect that gap to close? Are we sort of at the end of the second regulatory period and then the rest to be caught on a washout?
Mark Aue: Yes. I mean, so we're in year 1 of RP2. And so you're correct, we earned under the MAR, but that's deliberate to give us time to grow into it. And so we don't have the final numbers that will be produced as part of our ID reporting comes out in end of May. But in essence, we will continue to focus on how much we want to close the MAR over the next 3 calendar years. So we do factor that in, Ben, as a function of connections and price increases and so forth and mix. So we're very focused on and closing a gap. And did what we did in RP1, which we got within $1 million of the MAR at that point. So we need headroom at the beginning and will increase over the next 3 years.
Benjamin Crozier: Maybe last just on sort of satellite and Starlink. Do you think -- have any data or have any inclination of -- are they sort of attacking some of these sort of fringe suburban areas where fibre is available, but maybe Starlink as well is sort of getting a bit of an uptake, or do you think Starlink is pretty much just a rural product at the moment?
Mark Aue: I think primarily, it's still an option for customers and premises that can't access fibre. So more of the non-fibre areas or rural New Zealand. That said, we wouldn't say that there is no Starlink in any of the metro areas. Some of the multi-dwelling units that may not have had fibre installed at the time of build, they create optionality for those premises that are looking at fixed wireless or satellite. So there is likely some in metro areas. But predominantly, we still see it as areas where there's not fibre available.
Operator: Your next question comes from Arie Dekker with Jarden.
Arie Dekker: Just firstly, just maybe a little bit more color on these infrastructure opportunities, and I appreciate you talked to the commercial sensitivity. But could you just sort of give perhaps an indication of the extent to which -- and you said, I think there were several that they utilize your existing infrastructure and also whether any of those opportunities would involve you acquiring existing infrastructure already in place?
Mark Aue: Look, yes, there is some commercial sensitivity to them. We've always been really clear that they would need to be either core or natural adjacencies to our core. And I can say they're all in that camp. They're all scalable opportunities. We're really defining what the opportunity is and not wanting to invest or spend our resource time on areas that we don't think we have a natural right to play. But they are all natural adjacencies. To your -- and look, timing-wise, I think as I said, what we would recognize is they take longer to bring to market and to commercialize. It's a competitive market. But we certainly see that there are opportunities where we have a natural right to play. To your second point on inorganic opportunities, yes, absolutely. We're looking at both, whether we can build the capability internally into our own infrastructure network or likewise, whether there's something that could be acquired into our existing infrastructure as well.
Arie Dekker: Great. Then just with regards to the fibre infill build where you're turning your attention given the lack of government support for expansion and you sized the 200. Could you just talk a little bit about how you'll go about assessing that, whether you see the opportunity sort of a more dense urban as more attractive than sort of more on the fringes. Just how you're looking at the assessment and where you think the best opportunity will be for you?
Mark Aue: Sure. So look, the 200,000 premises are premises already that were passed and they have a premise on them. It's about 70,000 or so premises that we do pass with fibre but they're vacant lots, right? So we know that there's roughly 200,000 and there is a home there. Obviously, they split up between single dwelling units and multi-dwelling units. Equally opportunities with retirement villages, with second homes and holiday homes as well. I think the opportunity for us and where I've really wanted to drive our focus is leveraging better data analytics, being smarter about our execution. There's some opportunity to be a bit smarter, too, with AI and look at where -- if you were to take, say, like Fibre Frontier, where are the next 10,000 premises out of 200, where is the second 10, the third 10, et cetera. So wanting to filter them rather than a mass market type approach and actually being a lot smarter about how we engage with retailers as well and looking at products that they themselves in many cases, are offering. So I think the short version of that, Arie, is that we're looking to be a lot smarter with our tools and execution where it's a lot more targeted.
Arie Dekker: Then just on the -- a little bit further on the 80% aspiration in that. And I think you've talked at various points on the call about what you're doing on that. But I guess just firstly, just in terms of your conviction, like would that still sit at the same sort of level as just over a year ago when you introduced it? Or do you think that your conviction level on getting to that point is a little bit lower now than it was a year ago? And then also just of the various initiatives, what would be, I guess, the 1 or 2 key ones you would call out as being the focus in the next 12 months or so to lift the penetration rates, which are sort of stabilizing even in some of your higher penetration areas like Auckland?
Mark Aue: Sure. Okay. So my conviction, yes, absolutely unwavering on 80%, even a year on. I think the learnings from a year on that, as I've just talked to around being smarter on the execution, using AI, using data analytics, being more targeted in our approaches I'd say that, that's more broadly how we will execute. I think we gave a figure that broadly we needed to be at about 40,000 new net fibre connections each year over our Horizon 2. But that was more as a -- look, on average, you need to do that. The work we did in Horizon 1, the foundational piece, building capability, building organization structure, being clear around the aspiration, having that clarity and specificity of where we would go, we needed to do all that work. So my sense is that it's going to take a little bit of time to build up. So some years might be lower, some might be -- would need to be higher. But my conviction remains at the 80%. I think that is achievable, looking at the underpenetrated pools that we have. And to talk to those in the main if we start at a holistic level, there's 200,000 premises as brownfields infill. They're in our denominator. We need to do something with those. And I think there's real opportunity here when the fibre passed the premise previously. But for whatever reason, either it wasn't eligible for a subsidized build of fibre back then or the premise didn't exist back then. I think we can go back and relook at that because the fibre that's running past the premise is essentially a sunk cost today. So I think that gives us the ability to think about the economics in a different way for a further build-out. So that's 200,000. The other large pool holistically is the inactive on -- they are intact, but inactive. That's another 200,000, right? Now between those 2 pools, there's lots of crossover to fixed wireless, obviously. So that's inherent on us around execution. And how do you keep raising that awareness and the differences on fibre to other technologies. I think the trends in the market are going to exacerbate that anyway. But the INTAGs are an opportunity for us. The fibre is already there, right? So actually, again, working with retailers in a smarter way, what our go-to-market execution is, that's inherent on us. But I'll stop at the 2 large pools because between them, you have 400,000 premises essentially that are potential, half of which already have fibre installed today.
Arie Dekker: Yes. Then just last one for me, just going a little bit further with the Starlink. I mean you talked to metro. But I guess just interested in your view on where the extent of competition you're seeing in those areas where in the rural or in the fibre extensions, some of those smaller settlements where I think in RBI -- sorry, UFB2 and the extension, your penetration is sort of mid-60s or so. Like do you notice -- is there a lot of Starlink there? And are you sort of thinking about working with retailers on initiatives there to sort of tackle Starlink?
Mark Aue: I think to work backwards from that, absolutely working with retailers and whatever means that we need to where we're seeing competition. As I said, look, I said metro and I think it is relatively low. I think it's a fair point that on fringes, of large areas or small settlements, then there could well be penetration of Starlink. We wouldn't say that there's not at all. I think ultimately, though, we look at the broad thematics where usage is developing, content is developing, AI is developing and think that, again, I know we're biased, but we only see fibre as a technology that will actually manage that future demand.
Operator: Your next question comes from Wade Gardiner with Craigs Investment Partners.
Wade Gardiner: You mentioned briefly weather impacts. Can you sort of talk to -- are you seeing anything in the second half, particularly around the recent really poor weather that we've had? And maybe also around that, just split out the maintenance costs into sort of copper versus fibre?
Mark Aue: Well, fibre faults are significantly lower than copper. So they're nowhere near. And so it's not -- we don't give the dollars, but fault rates are substantially lower than copper. And yes, there have been weather events, as you can read the news. And so we kind of deal with it. We have a team that stand up and get react quickly. So those -- but that's normal for our course of business in terms of seasonality.
Andrew Davies: I don't think, Wade, to add to that, but copper is an aging technology. And given the severity and frequency of these weather-related events we're having, copper just doesn't perform. The fault rates are significantly higher than fibre. I think at the same time, though, the positives we take out of it is our ability to respond quickly as an industry. We are looking at resilience, obviously, all the time, but you can't plan for these things where the next event is actually going to show up. But it's always inherent in our cost assumptions.
Wade Gardiner: If I go back to August, I think there was 755 FTEs at that stage, and you were sort of talking about 30 vacancies. So that looks like it's changed now. You're down to 751. And what's the vacancy situation like?
Andrew Davies: Well, we still have vacancies at BAU, and I'd say it's still around -- it's a little bit lower than that now. So we filled some of those roles.
Mark Aue: But equally driving further simplicity and efficiency. So I think we did -- what we'd recognized as part of that Horizon 1 was a very deliberate shift. Looking at organization structure, the way we establish value streams for infrastructure and for access, they were really deliberate. I think what we're seeing now over time is where we're investing in further capability and leadership; so I think to AI, to data analytics, customer retention, things that Chorus didn't have as mature frameworks previously. So we're still investing in those. But at the same time, where some of these projects that we're either shelving or moving away from, we're continuing to see a lot more efficiency in our base that becomes more BAU.
Wade Gardiner: So any thoughts on what that FTE number will go to?
Mark Aue: No, not -- I guess, what I would say is we're not about to do another deliberate shift. I think we're comfortable with the Horizon 1 foundations that we've built, the organization structure that we've got. We've got a clear strategy, clear aspiration and purpose that we can anchor to our execution around, our prioritization and the way our projects are, we're clear on. So one of the references I said in my opening that it really does come down to execution now. So I'm not -- I don't foresee that there is another substantive shift down again.
Wade Gardiner: Just in terms of the down trading that we saw that, say, 6 months ago or longer. And you mentioned in your presentation that it was sort of 25% of the additions into the 100-megawatt -- 100 megabit bucket with sort of downgrades. But you also mentioned some people upgrading. So is that 25% a net number?
Mark Aue: Roughly speaking, yes. Encouragingly, we are seeing some of those trends. So we're seeing more upgrades go from the 100 into the 500, some of which are -- we can see our premises that had downgraded previously and have gone back.
Wade Gardiner: Right. But in total, it's still a net down trading that you're seeing...
Mark Aue: Broadly...
Wade Gardiner: That continued in recent months or...
Mark Aue: Yes. Look, I mean, it's improving a little bit on that. But yes, broadly speaking, about 25%. I mean, previously, it was about 1/3, I think, when we were sort of talking 2/3 of off-net growth and 1/3 of down trades. Certainly saw post the boost initiative and change in mid last year or start of Q1 for us, it was -- those downgrades were exacerbated by a lot of the pricing changes that a number of the retailers have put through. So I think we've seen that stabilize now as well. So you'd hope to see over time, ideally for us seeing below that 25% is coming from downgrades.
Wade Gardiner: Just finally for me, you mentioned, I think it was positive pathways to regulatory change. Where do you get that confidence from?
Mark Aue: Look, I could be wrong, but I think we've got -- we've been really open and really transparent. From a copper deregulation as an example, and you look at the TSO, we've been really collaborative, really open. We want to work with all of the stakeholders, setting our time line at 2030 was as much about putting us all on notice, all stakeholders and how do we all work backwards collectively so that we can find and confirm a pathway to exiting copper technology, right? So I just -- I think we're so far into fibre now. We look at the rates that copper connections are dropping off. You look at the Commerce Commission's own reporting on rural connectivity. There's just this bow wave that I would say that actually, I can't see any pathway other than copper actually disappearing. It's just a question on timing for deregulation. But we've been really supportive in working with the government and other agencies around how we do that in the best way where customers are essentially protected regardless of the fact that actually already 97% can access 1 of 3 other technologies other than copper.
Wade Gardiner: Right. So you're talking more around deregulation around copper than anything to do with a change to the fibre building blocks...
Mark Aue: I think, yes. No, good point to qualify. Yes, I'm talking more about copper, exiting legacy technology. I think -- and that's those legacy constructs. I think we've had a number of discussions around. The share cap ownership is the other that's being reviewed by Ministry for Regulation. I think on the fibre input methodologies, that happens over the coming couple of months. But I wouldn't be in a position to suddenly say that we think we know what the outcome is going to be. We've got to work through that.
Operator: Your next question comes from Brian Han with Morningstar.
Brian Han: You said somewhere that Chorus doesn't care who owns the NIFFCo equity shares. But do you know whether the government is as ambivalent as you are with respect to who buys the securities?
Andrew Davies: Well, thanks, Brian. So since it's not our process, I can't speculate as to who the government would want to sell the securities to. I mean when I say that, it's because the terms are set. And so we know we're very comfortable with the payments, which is 2030, 2033 and 2036, 0 coupon debt. So that's where we see very comfortable in that construct. Again, it's a government's process and we'll kind of wait to get further updates on them as the year goes on.
Brian Han: Drew, while you're there, just more on labor costs. As you simplify and become more efficient, is there a ratio or a target you guys are looking to with respect to labor costs as opposed to FTEs?
Andrew Davies: Well, I mean, if you can look at our $41 million, which is at a 42% cap labor rate, I'd say without the fibre expansion programs underway, you'd see capital labor rates around that low 40% range. I think we're just too early to say of any AI changes, as Mark spoke to, earlier FTEs, we have no big programs to change. So in the medium term, we expect them to be at the same level.
Operator: Your next question comes from Philip Campbell with UBS.
Philip Campbell: Just a few questions from me. The first one, just on the government's kind of regulatory reviews. I think, Drew, you said you're expecting third quarter. Is that third quarter fiscal or are we looking more kind of third quarter calendar for an update from the government?
Andrew Davies: I would -- I'm hoping for and would really like a decision by our Q3. So from a calendar year Q1, I guess. But this is a process that has been going for a long time, a lot of engagement. Our priority is getting confirmation, particularly on an exit pathway to legacy technology. So I would really hope that we get confirmation by the end of this -- of our financial year at the latest. But obviously, anything before that is an advantage.
Philip Campbell: Just a follow-up to that on the TSO. Like obviously, in Australia, we've had a lot of issues around the Triple Zero problems with mobile and so forth. Is that -- I'm assuming that was obviously feeding into this -- any decision on the TSO?
Andrew Davies: Well, I mean, I think we've always said the TSO kind of goes hand-in-hand with a view on property regulation anyway because the TSO only applied to a subset of customers back in the early 2000. So as far as the Triple Zero outage in Australia, we've done a thorough investigation here as well and I can say that more broadly for the telco sector as well. And we don't have the same risks that were inherent in Australia.
Philip Campbell: Just on the S&P situation, assuming that the Crown securities are sold, and then they treat the Crown securities as debt. My understanding was that they count the debt as the PV of the debt. So I end up with a lower number than 6x. So I just wanted to check if that's your understanding or do you think they bring in the face value of the debt in that calculation?
Andrew Davies: Well, S&P and Moody's treated differently from Moody's does on the PV basis. When you read the November credit note from S&P, they basically make and further treat all of it as debt on a total basis. And that's how they even calculate around 6x down driver.
Philip Campbell: Just another question for you, Drew. Just again on the balance sheet, just with the retained earnings being a negative balance. Like is there any plans to like try and revalue the fibre network at some point?
Andrew Davies: Well, we've indicated previously that certainly asset reval is in our strategy. Certainly, Phil, I think in August, we'll have much more definitive update on that. So I'd say if you want to wait until August results, we can get more specific on the numbers.
Philip Campbell: Then just the last one for me was just, obviously, with Sky launching the 4K product. Are you kind of noticing any increased usage as a result of that or is it pretty minimal at this stage?
Mark Aue: Pretty minimal at this stage, I think Phil would be the answer. I think because it was essentially isolated to 2 events with the Ashes and the Australian Open. You can see a difference in the usage profiles because obviously, it needs more bandwidth given the content quality. But versus the whole network, you need to see that running at multiple channels where it becomes more like your standard as 4K.
Operator: That does conclude our question-and-answer session. I will now hand back for any closing remarks.
Mark Aue: Great. Well, thank you again. And as always, thanks for your time, and we appreciate you joining. Hopefully, we've been able to answer your questions with color. And we look forward to seeing many of you over the coming days. Take care, and enjoy the rest of your day.
Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.