I would now like to hand the conference over to Mr. Mark Aue, CEO. Please go ahead.
[Foreign language] Chorus. Good morning, everyone, and welcome to Chorus's results presentation for the six 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 2026 guidance, and I will close out with the outlook for the second half and longer term. For the past two 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. So are 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 NZD 357 million is NZD 11 million ahead of the comparative half, with underlying operating cash flows in line with prior year. Gross CapEx was NZD 158 million, with sustaining CapEx of NZD 79 million, driven in part by lifecycle planning and project timing shifts into the second half.
Finally, the board has declared an unimputed interim dividend of NZD 0.24 for the half. In our last results announcement, I was pleased to speak to the foundations and groundwork we'd laid to set us up across our 10-year outlook. Now, six 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. 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. We see positive pathways to regulatory change as only a question of time. Turning to performance across our four 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're 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. 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 four out of five customers on a 500 mb plan or higher.
Total churn, as in off-net greater than four 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 mb plan and subsequent Boost initiative to 100 and 500 mbs 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 low 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. This has settled. We've seen encouraging trends over the past quarter, in particular. Demand for the 100 mb 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 three months, 32% from off-net greater than one year, and 62% from premises off-net greater than two years. Our hypothesis being the previous 50 mb plan didn't appeal and/or the previous 300 mb 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 mb 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 mb plan, versus 23.6% for fixed wireless. Data demand continues to accelerate. Average monthly usage at 699 GB in December, increased even further to 722 GB in January, up 12% from a year ago. Across our base, 20% of fibre customers now use more than 1 TB 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 five years to 25, and is expected to do the same again over the next five. We see this only playing to fibre's strengths 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 20,000-25,000 lots per annum. Encouragingly, consenting volumes have grown 9% off their 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 in cell site connections, and demand remains steady across our Smart Locations products. Broader opportunities and connectivity of data center are also now being realized. Our new product, Express Connect, is now in five 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 timeframe. 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 NZD 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 workstream.
With metals pricing at historic highs, our estimates for returns are now at the top end of the NZD 30 million-NZD 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.
Thank you, Mark, kia ora, 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 NZD 357 million, up NZD 11 million from half year 2025. Revenues of NZD 506 million were up by a net NZD 6 million. For operating expenses, we made cost savings from the change to operating model, incurred lower consulting fees, and made good progress on reducing legacy costs. That helped us absorb inflation in a number of cost lines. Having completed the accelerated depreciation on our copper assets in core UFB areas in the prior period, depreciation and amortization was NZD 216 million in the half, down NZD 19 million from half year 2025.
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 NZD 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 NZD 9 million of settlement costs. Income tax expense of NZD 11 million is up NZD 4 million from half year 2025, primarily driven from our higher, higher profits. Overall, this meant we recorded NZD 15 million of net profit after tax for the half year, compared to a loss of NZD 5 million in half year 2025.
Looking in more detail at our revenue categories, our fibre broadband revenues were up 7% or NZD 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 NZD 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 NZD 18 million or 43% lower annually. As we continue to execute our multi-year 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 in brownfields projects.
Other revenues were stable annually and were lower on a sequential basis, as the prior half included approximately a NZD 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 NZD 149 million for the half year, and were NZD 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 for non-tradables such as rent and rates. Labor costs were NZD 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 NZD 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 H2, network maintenance costs will not decline as much as prior periods as contractual CPI increases occur, along with a 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 NZD 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, 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 cabinet. Electricity expense was up NZD 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 NZD 4 million annually as a prior year consultant spend included investments to explore the potential new revenue opportunity in the Trans-Tasman subsea cable. Advertising expenses of NZD 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 NZD 158 million, down NZD 41 million from the prior half. Within gross CapEx, NZD 79 million was sustaining and NZD 79 million was for growth.
Gross CapEx was supported by NZD 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 refurbishing 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 NZD 125 million for the half year. For the non-RAB CapEx, you can see copper CapEx was NZD 3 million, down NZD 3 million, down annually and was mainly funded, third-party funded.
Total RAB increased by NZD 73 million over the calendar year to NZD 5.98 billion, with core RAB increasing to NZD 5.11 billion, up NZD 203 million, offset by the financial loss asset declining by NZD 130 million to NZD 0.86 billion as the flood appreciates further. Our total net debt as of December 31st was NZD 3.2 billion, up approximately NZD 100 million from June 30th, primarily as a result of issuing EUR 400 million in euro notes in November. Proceeds were used to repay EUR 243 million of the EMTN 300 notes due in December 2026, along with paying down entirely the revolving credit facility. We have two 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, 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 a 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 their prior methodology.
As I will speak to shortly on the status of the NIFCo security sale, the final determination by S&P on their leverage calculations and final down driver metrics will depend on the outcome of the NIFCo security sale later this year. The table on this page provides a 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 . 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 three years.
Turning to the next slide, this 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 this slide, and the face value of the combined securities is NZD 1.16 billion, of which NZD 683 million are classified as equity securities. Chorus will not participate in buying these NIFCo securities in the current government sale process, and importantly, if the securities are sold to a third party and transit from the Crown, the terms of the securities to Chorus cannot be altered without Chorus's agreement.
If the sale process does conclude later this year, and depending on the acquirer, S&P may reclassify the NZD 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 NIFCo equity as debt, this would mean the S&P leverage calculation would be increased to approximately 6x net debt to EBITDA. Still well below their 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 NIFCo sale process is complete. In all scenarios, we are below the leverage thresholds.
Finally, on dividend and guidance, we've announced an interim dividend of NZD 0.24, unimputed, to be paid in April. The DRP is not available. Dividend guidance for the full financial year remains NZD 0.60, unimputed, and reflects the ongoing positive trend in cash flows. Net cash flows from operating activities were a pro forma NZD 257 million on the same basis as last year, as we note that a NZD 29 million payment from one customer missed the cut-off for half year results and was paid in early January. FY 2026 EBITDA guidance remains at NZD 710 million-NZD 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 2026 also remains at NZD 375 million to NZD 415 million, and we now expect to be in the lower half of this range. Correspondingly, our sustaining CapEx guidance range of NZD 195 million to NZD 215 million for fiscal year 2026 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.
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. 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. 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, 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 2026. As we step further into our Horizon 2, we're certainly on a fast track to being an all-fibre business. Under LEAP, 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, we expect a run rate uplift in H2. 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 align to fibre's superiority. We retain our 80% uptake aspiration and our conviction of growth opportunities in our core fibre business through under-penetrated 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 for 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 will 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. 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 NZD 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 non-core high sites by full year and will work with interested parties over the coming months.
Broadly, exchange footprints could also yield beneficial outcomes in coming years, with alternative asset owners or lease models for space in desirable transport locations. As a worst-case scenario, this represents a material cost out opportunity for what become non-core assets. To wrap, we're pleased with another robust set of results, again, reflective of the resilience of fibre. Economic recovery is still lumpy, 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 six 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 non-core 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. Our fundamental belief that fibre is technologically superior in every way that matters holds firm. Thank you all. Let's go to the questions on the phone line, please, operator.
Thank you. If you wish to ask a question, please press star One on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star Two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Entcho Raykovski with E&P.
Morning, Mark. Morning, Drew.
Morning, Entcho.
Yeah, Entcho.
My first question is around the guidance. You've moved EBITDA guidance to the top half of the range. I, I, I'm just curious whether that means that you're seeing any improvement in underlying economic conditions or whether you're seeing perhaps a better mix than what you expected back in August. I, I, I'm just conscious that the fibre connections trajectory is not dissimilar to the trend in FY25, and you spoke back in August about being in the bottom half if economic weakness persisted. 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 might, might hold off on those for now.
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, as we spoke to NPD, consents to build are increasing. That's opportunity. The way we look at our connections growth, we have targeted incentives with all of our retail service partners. As we look forward into H2, we're seeing initiatives take hold with their plans.
That's why we spoke to increasing connections growth and the corresponding revenue. 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. We feel very good about managing through that and continuing into that to the second half.
Yep. Maybe just to add to that, too, Entcho, I think, you know, for a Q3 uplift, you referenced the connections as well for the first half. You know, we're, we're quite encouraged by Q3. Our January result was the strongest for, I think, I think since mid-2024. You know, again, we talked to some of those encouraging trends on max. We're seeing churn actually come down as we're stabilising on the volumes of downgrades we'd seen previously as well.
Then equally starting to see the reactivation rates from premises that have been off-net longer term, which, you know, for us, the hypothesis being, you know, the 100 meg fibre plan, in particular, is appealing to customers and premises that the 50 mb plan didn't previously. It's been a distinct shift in the reactivation rates, that have been off-net for, you know, over a year, over two years even, and one that we, we hope obviously continues.
Okay, great. Thank you. That's good color. 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, I think you incurred about NZD 9 million of one-off costs for the entire FY 2025, so I don't know if you can break that down first half, second half. 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'd spoken to about NZD 300 million net in FY 25. Thank you.
I mean, to speak to the H1 2025, there was the NZD 4 million that we in consulting fees that we incurred that half. That's what I spoke to in there. Consulting fees were down NZD 4 million. You can see that pretty clearly as. The rest of it, it would be organic in the sense that our operating model change, you know, that did take hold after H2, so you can see the impact of that in our H1 2026 results. Inflationary factors, it's pretty clear in terms of some of those line items, you know, in terms of rents, 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.
While we, we've and I did call out that we'd increase that in H2 as we continue to, you know, get customers off cabinets, work with the retail service partners and the lines companies to coordinate together to get the those cabinets powered down. 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. We've seen this we still see that stabilized. Hopefully that provides enough color. I did call out advertising. There's always seasonality, and that would be up, you know, approximately NZD 2 million in H2.
Okay. Thanks, Drew. The 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, it's now being applied to Chorus? I mean, as you've said, under all scenarios, you have plenty of headroom. I mean, perhaps is that part of that answer? Do you, do you expect Moody's will make any changes to their methodology, or is it happening just S&P specific?
Let me answer. If the capital management policy that was set at for RP2, which says a growing sustainable dividend at real rates. That's where we set the NZD 0.60 this year. We've achieved that, and we're very happy with that. Under S&P, there are so many moving parts in terms of the NIFCo sale and what that will do ultimately based on the owner. Again, if you take the two scenarios for S&P, the security sell, the equity is treated as debt, where it's 6x pro forma leverage with a 7x down driver. If the NIFCo securities don't sell, S&P has called out in this, their credit notes, 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 or increase to 13%. The amount of headroom is not as much as people see, just based on where we stand today, based on that uncertainty of the NIFCo security sale. For S, 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. 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. 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. Okay, great. Thank you.
Your next question comes from Ben Crozier with Forsyth Barr.
Morning, guys. Just one question on sort of-
Morning, Ben.
Infrastructure revenue. I think at the investor day, just over 1 year ago, you talked to that infrastructure revenue in aggregate was sort of NZD 155 million, and you're targeting NZD 180 million-NZD 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?
Yeah, morning, Ben. Look, it's probably it's similar levels today. I think we'd also spoken to some of the legacy products that over time will, will, will be retired. That drops down before then going back up. You drop below the NZD 150 million mark, and our aspirations would get to, for Horizon 2, were to get to NZD 180 million-NZD 200 million, of, of revenue. As I said, you know, we, 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 a, the LoRaWAN IoT that we were exploring as a trial, we, 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. We'd rather put that, that investment and resources, et cetera, into areas where we think they, 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.
Perfect. That's some good color. Thank you. Second, just on sort of the MAR or, 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. Don't know if you have that idea, and I presumably you've underearned your MAR a decent amount in this first calendar year of the second regulatory period, as, as expected, given the meaningful step up in the MAR. Can you also give sort of a 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, rest to be caught on a wash up?
Yeah, I mean. We're in year one of RP2, you're correct, we earned under the MAR, that's deliberate to give us time to grow into it. We don't have the final numbers. They'll be produced as part of our ID reporting. It comes out in end of May. In essence, we will continue to focus on how much we want to close the MAR, you know, over the next three calendar years. We do factor that in, Ben, as our function of connections and price increases and so forth, and mix. We're very focused on enclosing a gap and did what we did in RP1, which we got within NZD 1 million of the MAR at that point. We would need headroom at the beginning, and we'll increase over the next three years.
Then maybe last, just on sort of satellite and Starlink. Do you think, you know, have any data or have any inclination of-- are they sort of attacking some of these sort of fringe suburban areas where fibre's available, but maybe Starlink as well was sort of getting a bit of an uptake? Or do you think Starlink is pretty much just a rural product at the moment?
Look, I, I, I think primarily it's still an option for customers and premises that can't access fibre. The, the more the, of the non-fibre areas or rural New Zealand. That said, you know, 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, they create optionality, you know, for those premises that, that are looking at fixed, wireless, or satellite. There is likely some in metro areas, but predominantly we still see it as areas where there's not fibre available.
Thank you. That's all for me. Cheers, guys.
Thank you, Ben.
Thanks, Ben.
Your next question comes from Arie Dekker with Jarden.
Oh, good morning. Yeah, just firstly, just maybe a little bit more color on these infrastructure opportunities. Appreciate you, you talked to the commercial sensitivity, but could you just sort of give a, perhaps an indication of, of, you know, the extent to which, and you, you said, I think there were several, that, that they utilize your existing infrastructure, and also whether, you know, any of those opportunities would, would involve you acquiring existing infrastructure already in place?
Yeah. Morning, Ari. Look, yeah, 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 that they're all, all in that, 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, on areas that we don't think we have a natural right to play. But they are, they are all natural adjacencies.
To your, to your. And look, timing, timing-wise, I think as I said, what, what we would recognize is they take longer to bring to market and to commercialize. It's a competitive market, but there, 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. You know, whether we, whether we can build the capability internally and into our own infrastructure network, or likewise, whether there's something that, that could be acquired, into, into our existing infrastructure as well.
Okay, no, great. Thank you. Then just with regards to the fibre infill build, you know, where, where you're turning your attention, you know, given, given the lack of, of, of government support for expansion and you size for 200. Could you just talk a little bit about, you know, how you'll go about assessing that? You know, whether you see the opportunity, sort of in more dense urban as more attractive than, you know, sort of more on the fringes. Yeah, just how you're looking at the assessment and where you think the best opportunity will be for you?
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? 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. There's 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, 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 that 200? Where's the second 10, the third 10, et cetera? Wanting to, 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. I think the, 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.
Yeah, okay. No, great. Then, then just on the, you know, a little bit further on, on the, the 80%, you know, aspiration and that. You know, I think you've talked at various points, you know, on the call about, you know, what you're doing on that. I guess just firstly, just in terms of your conviction, like, would that still sit, you know, at the same sort of level as, you know, just over 1 year ago when you introduced it?
Or, or do you think that your conviction level on getting to that point is a little bit lower now than it was one year ago? Then also just, you know, of the various initiatives, what would be, you know, I guess, the one or two key ones you would call out, you know, as being the focus, you know, in the next 12 months or so to lift, you know, the penetration rates which are sort of, you know, stabilising, you know, even in some of your higher penetration areas like Auckland?
Sure. Okay. My conviction, yes, absolutely unwavering on 80%, even a year on. I think the learnings from a year on are 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, you know, that's more broadly how we will execute. I think we gave a figure that broadly we needed to, to, to be at about 40,000 new net fibre connections each year over, over our Horizon 2.
That was more as a, "Look, on average, you need to do that." You know, the, 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. You know, my sense that it's gonna take a little bit of time to build up, so some years might be lower, some might be, you know, would need to be higher. My conviction remains at the 80%. I think that is achievable. Looking at the under-penetrated pools that we have, and to talk to those, in the main, if we start at a holistic level, there's the 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 subsidised 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. I think that gives us ability to think about the economics in a different way for a further build-out. That's 200,000. The, the other large pool holistically is the inactive ONTs, right? They are intact but inactive. That's another 200,000. Right? Between those two pools, there's lots of crossover to fixed wireless, obviously.
That's on, inherent on us around the execution, and how do you, 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. The inactives are an opportunity for us. The fibre is already there, right? Actually, again, working with retailers in a smarter way, what our go-to-market execution is, that's inherent on us. You know, I'll stop at the two large pools, but because between them, you have 400,000 premises, essentially, that are potential, half of which already have fibre installed today.
Yeah, no, no, that, that, that's helpful. Then just last one from me, just going a little bit further with the Starlink. I, I mean, you, you talked to Metro, but, but I guess, you know, just interested in your view on where the extent of competition you're seeing, you know, in, in those areas where, you know, in the rural or in the fibre, you know, extensions, you know, some, some of those smaller settlements where, you know, I think in RBI. Or sorry, UFB2 in, in the extension, your, your penetration sort of mid-60s or so. Like, do you notice, is there a lot of Starlink there, and are, are you sort of thinking about, you know, working with retailers on initiatives there to sort of, you know, to tackle? tackle Starlink?
I, I think, and to, to, to work backwards from that, absolutely. Working with retailers in whatever means that we need to, where we're seeing competition. As I said, you know, look, I, I said Metro, and I think is relatively low. I think it's a fair point that on fringes, of, of large areas or small settlements, then, you know, there, there could well be, penetration, of Starlink. So we wouldn't, we wouldn't say that there's not at all. I think, you know, 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, as a technology that will actually, manage that future demand.
Oh, that's great. Thank you.
Thank you, Arie. Sorry.
Your next question comes from Wade Gardiner with Craigs Investment Partners.
Hi there, guys. You mentioned briefly weather impacts. Can you sort of talk to, are you seeing anything in the second half, particularly around those, the, the recent, really poor weather that we've had?
Morning, Wade.
Maybe also around that, just, split out the, the maintenance costs into sort of copper versus fibre.
Fibre faults are significantly lower than copper, so they're nowhere near. We won't, we don't give the dollars, but fault rates are substantially lower than copper. And yes, there have been weather events, I mean, as, you know, you can read the news, we kind of deal with it. We have a team, they stand up and react quickly. That's normal for our course of business in terms of seasonality.
Yeah, I think, Wade, to add to that, like, 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. You know, I think at the same time, though, the positives we take out of it is that our ability to respond quickly as an industry. We are looking at resilience, obviously, all the time. You can't plan for these things where the next event's actually gonna, gonna show up, but it's always inherent in our cost assumptions.
Okay. if I go back to August, I think there was 755 FTEs at that stage, and you were sort of talking about 30 vacancies. That looks like it's changed now. You're down to 751, and, and what's the vacancy situation like?
Well, we still have vacancies as, as BAU, and I'd say it's still around, it's a little bit lower than that now, so we've filled some of those roles.
Equally driving further simplicity and efficiency. You know, what we'd recognized as part of that Horizon 1 was a very deliberate shift. You know, 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 think to AI, to data analytics, customer retention, things that, you know, Chorus didn't have as mature frameworks previously, so we're still investing in those. 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.
Any thoughts on what that FTE number will go to?
Not, not, no, not as a, I, I guess what I'm, would say is we're not about to do another, a deliberate shift, right? I think we're comfortable with the Horizon 1 foundations that we 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. You know, one of the, one of the references, as I said, my opening, is that it really does come down to execution now, right? But I'm not-- I don't foresee that there is another substantive shift down again.
Okay. Just in terms of the down trading that, you know, we saw that, say, 6 months ago or longer, you mentioned in your presentation that it was sort of 25% of the additions into the 100 mb bucket, was sort of down trades, but you also mentioned some people upgrading. Is that 25% a net number?
Roughly speaking, yeah. We, as I say, encouragingly.
Right.
We are seeing some of those, those trends. We're seeing more upgrades go from the 100 into the 500, some of which are, we can see, are premises that have downgraded previously and have gone back.
In, in, in total, it's still a net, down trading that you're, you're seeing?
broadly speaking, it's around.
Has that continued in recent months or?
Yeah, look, I mean, it's, it's improving a little bit on that. Yeah, broadly speaking, about 25%. I mean, previously it was about one-third, I think, when we were sort of talking two-thirds of off-net growth and, and one-third of down trades. Certainly saw post the Boost initiative and, and change in mid-last year or start of Q1 for us. The, it was the, those downgrades were exacerbated by a lot of the pricing changes that a number of the retailers had put through. I think we've, we've seen that stabilized now as well, so you'd hope to see over time ideally for us, seeing below that 25% as coming from downgrades.
Okay, just finally from me, you, you mentioned, I think it was positive pathways to regulatory change. Where, where do you get that confidence from?
Oh, look, I, I, 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, when you look at the TSO, we're, we've been really collaborative, really open. We want to work with all of the stakeholders. You know, setting our, our timeline at 2030 was as much about putting us all on notice, all stakeholders, and how do we all work backwards to collectively so that we can find a, and confirm a pathway to exiting copper technology, right? I, I just, I think we're so, so far into fibre now. We look at the, the rates that are, copper connections are dropping off. You look at the Commerce Commission's own reporting on rural connectivity.
There's just, 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. We've been really supportive in working with the government and, and other agencies around how we do that in the best way, where customers are essentially protected, regardless of the fact that, that actually already 97% can access one of three other technologies other than copper.
Right. You're talking more around deregulation of, around copper than anything to do with, a change to the, the fibre, building block approach?
Oh, no, I think, yeah, no. Yeah. No, good point to qualify, yeah. I'm talking more about copper, exiting legacy technology. It's those legacy constructs, I think we've had a number of, of discussions around. You know, 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, the, the coming couple of months. But I, I wouldn't, I wouldn't be in a position to suddenly say that, "Oh, we think we know what the outcome's going to be." We've got to, we've got to work through that.
Okay. Thank you. That's all for me.
Thanks, Wade.
Thanks, Wade.
Your next question comes from Brian Han with Morningstar.
Oh, hi. You said somewhere that Chorus doesn't care who owns the NIFCo equity shares, but do you know whether the government is as ambivalent as you are with respect to who buys those securities?
Well, thanks, Brian. 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, you know, comfortable with the payment, you know, which is 2030, 2033, and 2036, zero coupon debt. You know, so that's where we see, you know, very comfortable in that construct. You know, again, it's the government's process, and we'll kind of wait to get further updates from them as the year goes on.
Okay, thanks. Drew, while you're there, just more on labor costs. As you simplify and become more efficient, is there a, is there a ratio or a target you guys are working to with respect to labor costs as opposed to FTEs?
Well, I mean, if you can look at our NZD 41 million, which is at a 42% cap labor rate, I'd say, you know, without the fibre expansion programs underway, you'd see, you know, capital labor rates around that's, you know, low 40% range. I think it's too early to say of any AI changes. As Mark spoke to early, you know, early FTEs, we have no big programs of change. In the medium term, you'd expect them to see be the same level.
Thank you.
Thanks, Brian.
Our next question comes from Phil Campbell with UBS.
Yeah. Morning, everyone. 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, is that third quarter fiscal, or are we looking more kind of third quarter calendar for an update from the government?
Phil, hey, morning, Phil. I'm hoping for, and would really like a decision by our Q3, so, you know, from a calendar year Q1, I guess. You know, this is a process that's been going for a long time, lot of engagement. You know, our priority is, is getting confirmation, particularly on an exit pathway to legacy technology. You know, I, I would really hope that, that we get confirmation by the end of this, of our financial year at the latest, Phil, but obviously anything before that is, is an advantage.
Great. Then 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. I'm assuming that was obviously feeding into this, any decision on the TSO?
Well, I mean, I think we've always said the TSO kind of goes hand in hand with a, a view on copper deregulation anyway, because they are. The TSO only applied to a, a subset of customers back in the early 2000s. I, you know, as far as the Triple Zero outage in Australia, we've done a thorough investigation here as well. I can say that more broadly for the, for the telco sector as well, and we don't have the same risks that were inherent in Australia.
Great. Awesome. Just on the S&P situation, you know, assuming that the Crown securities are sold-. Then they treat the Crown securities as debt. My understanding was that they count the debt as the P.V. of the debt, so I, I end up with a lower number than 6x . 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?
S&P and Moody's treat it differently. Moody's does it on the PV basis. When you read the November credit note from S&P, they basically may infer they treat all of it as debt on a, on a total basis, and that's how they even expect, you know, calculate around 6x down driver.
Oh, okay.
Pro forma.
Awesome.
Pro forma. Yeah.
Yeah. Just another question for you, Drew. Just again, on the balance sheet, just for the retained earnings being a negative balance. Like, is there any plans to, like, try and revalue the, the fibre network at some point?
Well, we've indicated previously that certainly asset reval is, is in our strategy. Certainly, Phil, I think in August we'll have much more definitive update on that. I'd say if you want to wait till August, results, we can give, give more specific on the numbers.
Okay, awesome. The last one for me was 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?
Pretty, pretty minimal at this stage. I think Phil was. Would be the answer, I think, 'cause it, because it was essentially, isolated to two events with The Ashes and the Australian Open. You can see, 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'd need to, you'd need to see that running at, you know, multiple channels where it becomes more like your standard, as 4K.
Okay. Yep, great. Awesome.
Thanks, Phil.
That's all for me.
Thanks, Phil.
Thank you.
That does conclude our question and answer session. I will now hand back for any closing remarks.
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.