Chorus Limited's (CHRYY) CEO Mark Ratcliffe on Q2 2016 Results - Earnings Call Transcript

| About: Chorus Limited (CHRYY)

Chorus Limited ADR (OTCPK:CHRYY) Q2 2016 Earnings Conference Call February 18, 2016 4:00 PM ET

Executives

Mark Ratcliffe - CEO

Andy Carroll - CFO

Analysts

Arie Dekker - First NZ Capital

Blair Galpin - Forsyth Barr

Tristan Joll - UBS

Brian Han - Morningstar

Peter Wise - IDC

Mark Ratcliffe

Welcome to Chorus's First Half Results Announcement for the period to 31 December, 2015. I'm Mark Ratcliffe, Chorus Chief Executive, and this is Andy Carroll, our CFO with me today. We also have several directors present with us today, including our Deputy Chairman, Jon Hartley.

We have got a fairly short presentation packed today as we know there are a few key areas people are focused on and of course I have slides on regulation have dramatically reduced from previous announcements.

First off I'll give you a brief business performance overview. Looking at the key trends with our connections as well as an update from our fibre rollout and uptake. Andy has got the detail numbers including how we're tracking relative to guidance on CapEx and EBITDA. He will also take you through our thinking on dividends and I'll give you an overview of our priorities and outlook looking particularly at what we're doing to deal with the fibre connection volumes we’re experiencing and then we'll go to questions.

In terms of an overview of the period of the financial level it's been another unusual one in the sense that for the first five and a half months I’ve been charging the commission's benchmark pricing for our copper products. So as expected our financial results are down sharply on the prior period within [indiscernible] 33 million compared to 64 million the same period in the prior year. EBITDA was 275 million of revenues of 479 million. At a network level we saw a decrease of 33,000 fixed line connections. We estimate that maybe a third of these disconnections with the ongoing cleanup of jewel copper fibre connections by one retail service provider and the rest is attributable to line loss to alternative network providers and the usual seasonal variation that we see in December as was typically over those summer months where the students go off for the holidays. On the flip side broadband connections continue to grow across the remaining fixed line base and we saw a net increase of 16,000 broadband connections for the period.

This slide gives an insight on some of the trends within our product categories over the last six quarters and a fixed line level, the decline in baseband copper for the last two quarters is very apparent. A lot of people are shifting to fibre or broadband only products. Fibre connections were up 42% for the half and you can see the acceleration over the last three quarters.

Naked lines up 13% for the half. When commentators talk about the death of the fixed line I think what they really mean is the end of traditional voice calling on fixed networks this appears to be no real decline in number of fixed networks there. We also now have about 6000 baseband IP connections with service providers looking to lower their voice input costs by dealing directly with us for those baseband services.

Among unbundling UCL lines are really starting to reduce at a faster pace as fibre demand grows. Within our broadband products the shift of fibre is showing up and the decline in basic and enhanced UBA services on copper and you can also see the VDSL demand has tapered off or make it VDSL has picked up in the half to the fibre roll out.

Our roll out of the UFB fibre network remains on track at 31, December we've taken fibre past 400,000 premises. So then about 48% of the way through the rollout means about 539,000 consumers are now within reach of fibre and we are now at 105,000 actual connections within that footprint from 68,000 at June 2015. That equates to an uptake rate of about 19,000 across the consumers able to connect to the network. The bar chart shows the uptake rates against each of our areas with the dotted line indicating the percentage of the roll out complete, Blenheim continues to lead as the area with the highest uptake of 25% and Blenheim is one of the seven areas in New Zealand that we've now completed.

The average connection speed across our entire network is now 23 megabits per second. That's up from 10 megabits per second in 2011 and will continue to increase as more people switch to higher speed products. Upgrade of modems or benefit from network upgrades under the Rural Broadband Initiative. The rural roll out is pretty much complete and it's providing urban like broadband speeds to many rural consumers. I received an e-mail from a shareholder last week is they're not getting excellent feed VDSL speeds about 15 kilometers outside Fongaray.

They may be among those benefiting from recent changes to the frequencies that we use at VDL which has increased the average peak speed for VDSL to 50 megabits per second and the peak speed to something close to a 100. One of the fascinating trends in the last year has been the rapid rise in the amount of bandwidth being consumed by New Zealanders. The red line of this chart indicates the traditional network assumption the bandwidth demand grows by 50% a year. The arrival of online video streaming combined with consumption generally of higher speed broadband services means average throughput per user almost doubled in 2015. It's now just over 500 kilobits per second.

The same time we're seeing strong demand for high speeds on fibre, a 100 megabits per second seems to have become the default entry level fibre products on the course network and higher speed plans now account for 41% of consumer and small business fibre connections. That's up from 30% in June and around 5% of consumers have choose the 200 megabits per second plan.

Together I think the demand for bandwidth and high speeds are very positive pointers on the central role of fixed networks as the Ferrari equivalent when it comes to broadband networks.

I will now pass over to Andrew.

Andy Carroll

Thanks, Mark and good morning everyone. The sliders is an overview of our earnings result for the first half of FY ‘16. This period featured half a month of final FPP pricing. The comparative purposes in this pic is we are refinancing the final half of the FY ‘15, revenues were flat compared to that period with that half month of FPP pricing off sitting line, count loss in some movement sudden movement from our [indiscernible] cost inputs.

Operating cost were up slightly resulting in a modest decline in EBITDA, hedging was reduced resulting in a slight increase in net earnings for the period. In the six month period we've seen the same general product trends as previous periods with consumers migrating to high quality broadband products particularly fibre as we foreshadowed an August we have also experienced some revenue losses RSPs migrate from legacy and ports to lower cost fibre inputs as well as some loss of share to fibre companies. On the cost front overall costs are up slightly, ongoing cost management and favorable [indiscernible] resulted in loan network maintenance and other costs. Labor costs have increased largely because we are employing more people to improve the fibre connection experience for consumers and this is still a relatively manual process. So some of the increase in personnel that we've seen in that period relates to dealing with growing volumes but around 30 of their increase in personnel relates to new NGA [ph] processes that we have brought in-house in the first half to improve industry and consumer outcomes.

We now have 887 permanent and fixed term employees up from a 142. Provisioning costs have increased slightly as we provisioned a greater proportion of VDSL and basedband IP products and other expenses in that half back in line with the first half of the FY ‘15 that did dip in the second half of FY ‘15 largely due to a number of one off items.

Now to capital expenditure, a total 254 million for the half year similar to the second half of FY ‘15 but we’re expecting a bigger second half. I will cover off connection CapEx in more detail on the next slide but for fibre generally we had a good first half from a cost efficiency perspective with average cost per unit cost of the half year trending slightly below annual guidance for our key metrics.

Copper spleen [ph] reduced relative to the prior six month period because we didn't have a repeat of the investment and additional capacity for rapid traffic growth, common CapEx or substantial drop as building and engineering projects have biased towards the second half of the year.

In terms of connection CapEx it continues to grow broadly in line with fibre uptake, [indiscernible] CapEx was up slightly as we had more splitters, imports they keep the ahead of demand. We've built around 38,000 new mass market fibre connections and 1600 premium business connections in the half. Average backbone bill costs are tracking along with what we expected at the start of the year. We remain in discussions with CFH regarding the future of the nonstandard installation fund which is currently covering the costs of most of the nonstandard connection build. We have agreed a small number of meters that allow us to confirm that the fund will continue until the end of this calendar year. We continue to discuss opportunities with CHF to potentially extend beyond that date.

In terms of guidance there are no changes but we providing some qualitative updates on the slide. For the communal build work completed we are slightly below annual cost guidance what they had expected to track back and arrange in the second half. On the connection CapEx front there is a similar story with the average cost of a standard connection slightly below guidance reflecting the mix to-date. We are increasing our estimate for new connections to be built in FY ‘16 from 80,000 to a range of 85,000 to 95,000 connections.

As I’ve said before forecasting annual volume mix is challenging, it's demand is ultimately shaped by retail service provider marketing and online content. And on the earnings front we are tracking toward the top half of the range that’s inclusive of around $5 million worth of additional. NGA related OpEx we didn't anticipate at the start of the year with much of that OpEx writing to new industry support roles we're taking on.

We've spent a lot of time in the last 2,5 years talking about how benchmarked pricing changes required us to reorient and reshape the business to manage for cash, executing on a range of operational programs, capital management and other initiatives. With FPP pricing now confirmed I wanted to briefly make the point that contrary to popular opinion there has been no miraculous one for going for Chorus. We are still around 50 million per annum in the whole relative to the demerger pricing, that will have ongoing consequences for us with one being that we aren't able to reinstate dividends back to the demerger levels.

That said particularly with the change in covenant levels we agreed with our being in 2015 we now have sufficient financial flexibility to revisit a number of managed for cash initiatives. In the near term the main operational changes are likely to relate to how we price certain discretionary investment. To-date we've broadly been working on full cost recovery for the small portion of our CapEx spend. While that's particularly our cash position that has resulted in some loss of market share and we'll look to tweak the pricing of some of those commercial services to optimize long term value rather than short term cash.

In terms of many of the other programs there won't be significant need to make changes. We will take our time to reassess our copper maintenance in light of fibre uptake growing ahead of expectations. While other things such as IT suppression programs are large and complex so naturally take time to work through.

Capital Management, that’s been 30 months since I've had an opportunity to talk to a dividend slide. So I would like to thank our shareholders for their extraordinary patience. We are pleased to announce an FY ‘16 dividend of $0.20 per share with an interim dividend of $0.08 per share. We're also reinstating our dividend reinvestment plan at a discount of 3%. We expect to be able to provide shareholders with modest long term dividend growth for the balance of the UFB bill period subject to there being no material change in circumstances or outlook and we continue to think a BBB star writing and capital management settings that support our appropriate full course.

Net debt to EBITDA calculations have deteriorated in the last six months despite no material change in the levels, it's simply that this calculation now reflects a 11.5 months of benchmark pricing and only half a month of FPP pricing so you will see that improve in future calculations.

With a $450 million deep tranche maturing at the end of July we are necessarily well progressed in our refinancing plans. We are looking at a range of options to diversify our source of our funding including possible New Zealand or overseas bond issues.

I will now hand back to Mark.

Mark Ratcliffe

Thank you, Andy. And as we said at the full year results we have taken a long hard look at how to improve the fibre connection experience for consumers. It's been a number one operational priority and we've made some progress to-date. We set up a team of around 30 people to contact customers ahead of their schedule visit to check we have the right details and they were going to be there. That has helped reduce technician visits and resulted in more customers being at home when we need them to be there. We've also increased the number of fibre crews from 300 to 380, it's not a quick process because the training time frames involved and the need to manage resources from area to area in line with forecast demand. To that end we work closely with retail service providers to reduce the variability in demand forecasts, we’ve also reallocated connection work across some of our service company areas and we've expanded the role of UCG who are connecting multi dwelling units in some areas for us. They are now doing that work across all of our UFB areas and we will in future start to do the connection work within the buildings for which preexisting and future apartment order exists.

The upshot of these initiatives is that we are now averaging about 450 connections each week day compared to about 300 in September. It's a 50% increase and we're also doing about 120 connections on the weekends. The average lead time for the first site visits appointment has reduced from 22 days in October to 12 days in January. During January we did receive around 13,000 orders compared to just over 9000 that we had received in October.

Cancellations and consent issues means that not all of these orders actually become connections but clearly we need to have to continue to increase our connection capacity. Our target at the moment is to be doing at least 600 connections a week day by July. So another major step increase in a relatively short period of time.

However recruiting field crews is not enough, we also need to continue to increase the productivity of the crews. At the moment we’re utilizing field crews of about 85% of the available time because about a third of the jobs require to be resettled on the day. A recent survey by consumer suggested 57% of those who had switched to fibre has moved process and as you can see that leaves plenty of room for improvement. We've proposed from the end of February early March that we take of a managing all the customer interactions for retail service providers for when they receive an order for fibre through the activation of service thereby reducing the number of hand overs in the process.

We believe this will help groom [ph] much of pain for consumers experiencing as they interact with multiple parties throughout the process. We've offered to cover the cost of this additional support for retail service providers through the end of December 2016 and that cost will depend largely on a number of service providers that take up the offer and how long they work for us as they start to automate things through their own. IT systems and need for that's goes way. The launch of our fibre provisioning portal does now mean that service providers can begin to work to automate provisioning process from an end to end basis. Another initiative that we expect to make a difference for consumers is the launch of an online order tracker so they can easily access updated information about the progress with their connection and we aim to have that up and running by much March. I guess this also goes to show that it's not that going digital is just as relevant for the utilities as is for the retailers.

I'm not going to dwell too much on the copper pricing determination as it's yesterday's news. It's a positive that the five year price path for copper restores some price relativity between copper and fibre products, I think we're already seeing the benefit of that with retail service providers promoting the 100 megabit fibre product that we’ve recently introduced. Obviously we're pleased that the commission finally recognized that it does cost more to provide network infrastructure in New Zealand and benchmarking against European countries might suggest. And that's reflected in the rebalancing of pricing between UCLL and UBA services. We still don't consider the final prices represented of the actual network costs investment, when you consider simple things like the copper pricing is for a nationwide network which fibre is only for urban, the trenching cost used versus the actual costs that we're experiencing in the rollout to-date. The large links the network excluded from the commission's calculations and a very, very low weighted average cost of capital that's been applied to that investment.

We continue to believe the electricity networks will remain a much clearer sense checks when looking at the overall cost of the network. Despite disagreeing with some key elements of the decision we have elected not to appeal it because we believe it's in the best long term value for everyone can be achieved by focusing on how to live a better broadband for New Zealand in the future and I think it's quite clear that the industry has drawn a line on the copper pricing with no litigation or appeals which I believe is increasing signs of the a maturing industry.

Events of the last four years have clearly shown New Zealand does need a more stable and predictable framework that aligns the interests of consumers and investors. The current situation is the copper pricing has been met out for the next five years and the contracted pricing for fibre products under UFB rollout expires at the end of 2019. As a telco industry highlighted just last week the industry is investing at one of the highest rates in the OECD. Government is now seeking to take fibre to at least another 5% of the population by the end of 2022 and have set an aspirational target of 50 megabits per second broadband to 99% of New Zealanders by 2025.

We’re interested and willing to help deliver better broadband if it provides long term value to shareholders but long term investment is inextricably linked to future regulatory frameworks. The government's discussion document does set out a preliminary view and a building block model appears that most appropriate methodology for fibre that looks sensible to us and we are heartened that there is a clear industry consensus on the need for change and improvement.

Our view is that the new regulatory model for both fibre and copper is needed. This could be achieved through a special access undertaking, the subject of policy decisions could be implemented quickly to apply from 2020. We could move forward from today's prices to avoid pressure shocks and manage the price relatively between copper and fibre or there could be a transitional approach that implies until 2030 before a full building block model is implemented under a special access undertaking. All this remains up for discussion and we await the next steps in the government's process.

Putting the copper pricing process behind us means that we can now devote more attention to actually running the business. It's probably the biggest change in terms of how we're thinking about the next six months. As Andy indicated the various cost saving measures we have put in place can't and won't be switched back on overnight. We're going to consider everything carefully and only reverse things where it makes sense to do say. If anything our focus on costs is sharper than ever because what we've had to do within the last three years. A hand break on discretionary investment will only come off where we see a long term shareholder value. This is all more important because we are in operating in a very different environment to the one we were in three years ago.

Fibre demand and the pace of that transition means we are already thinking carefully about how we operate fibre and copper networks in parallel. The uncertainty around the future regulatory framework and possible extension of the UFB roll out are overarching things that we have to take into account in making these long term decisions. We're facing added competition as other fibre networks grow and retail service providers seek to reduce costs from us. The consumer demand for bandwidth together with the capability of our copper and fibre broadband network does give us confidence in the continued growth in demand of fixed line broadband. The growth in demand for higher ARPU fibre, the growth of region such as Oakland and emerging demand for our new baseband IP and regional transport products are just some of the other reasons we remain positive about the underlying business.

I'll open floor now to questions from analysts or investors. And if there are any media questions we will take those at the end. So perhaps we will go to the room first if there are any questions from anybody in the room.

There aren't any questions from anybody in the room so we'll now move online.

Question-and-Answer Session

Operator

[Operator Instructions]. And your first question comes from the line of Arie Dekker from First NZ Capital. Please go ahead.

Arie Dekker

First question I guess just sort of one of the last things you touched on, the special access undertakings that you’ve sort of outlined there as an approach that might be suitable. Can you just sort of comment on whether they have been any commercial discussions between yourself, the [indiscernible] and some of the areas based [ph] on what that might look like and if so what you’ve who what you have in mind in terms of how that might look?

Mark Ratcliffe

We have had no discussions with any of the retailers on special access undertakings. What we have discussed with them as customers are the kinds of products and services that we think that they'd be looking for post 2020, so trying to get us sort of framework for how those products would look and we’re in relatively early discussions with them but it's more around what the framework for products would look like rather than any particular regulatory thing -- the regulatory form I think is the matter for governments. They are not for industry participants but in terms of doing what you do trying to understand what your customers are like to want in the long term is the kind of in discussions we've had today.

Arie Dekker

And from [indiscernible] perspective in terms of I guess the pricing and that sort of thing I mean do you have any view on how that might look vis-à-vis copper and fibre pricing in 2020?

Mark Ratcliffe

We've got a set of commercial price parts for products and services under existing regime where in general prices drift slowly upwards but the product mix changes over time I think we're already highlighted today to seeing increasing demand for the higher speed products. So I guess it's my view is that probably what people think of 100 megabit per second product so terrific for 2016 I'm sure by 2021 then it's 500 plus and you might find that’s entry level product. And I think this is why we've got a great deal of confidence in the fixed line network performance in New Zealand because the demand is going to go upwards.

So I think what we'll see is a migration of more for the products that we used to think with medium speed say a 50 megabit products will be medium speed might be 200 in a few years' time. So it's trying to agree at that sort of framework that we're trying to in the first instance, Arie.

Arie Dekker

Now just in terms of the guidance on the dividend through to 2020, you had a comment modest growth, I guess there will be a couple of key factors that will influence that connections over the next few years where you end up in terms of your financing covenants and that sort of thing. I guess without been specific on the actual path that we would take, could you perhaps just provide a little bit of color on what a range might look like in terms of growth and what you’ve in mind in terms of because modest can be interpreted quite differently do you have sort of a range in which the dividend growth might look like over the next few years?

Mark Ratcliffe

Good try, Arie, we’re not going to be drawn on being more specific on what modest means modest is modest.

Arie Dekker

Okay. I had to try. Two very quick questions just to finish off, I imagine it's a timing thing the delivery of new premises passed in the first half was sort of low compared to the sort of the 100,000 you're targeting each year. What will you be delivering 100,000 were just over for FY ‘16?

Mark Ratcliffe

Yes I mean, I think you've seen that every year the way that the handover is calculated is the end of completed lots, so it's always skewed to the second half of the year. Yes I think -- premises passed in the first instance?

Arie Dekker

Yes correct.

Mark Ratcliffe

No consent at all.

Arie Dekker

And then just on the new OpEx, you talked about 5 million was that an annual number and how much of that came through in the first half versus second half?

Mark Ratcliffe

It's not an annual number Arie, so that’s the additional cost we expected to turn up this year so if you’re annualizing it you can look to double that but in terms of the support offers that we’re making for the industry, we’re saying some of that will be available this year free of charge, this calendar year and we'll look to charge next year. So I don't think you should be thinking about it as a permanent long term feature.

Arie Dekker

Maybe I can sort of phase out over sort of [indiscernible] month?

Mark Ratcliffe

Some of this is happening because we don't have IT systems that talk to one another is the case in copper. So we having to put people into the process to do the job that systems might otherwise do. And [indiscernible] and the remaining handoffs across the industry so it's the right thing to do. You know we can see the frustration that consumers are experiencing showing up and costs for us and retail service providers. So our view is that additional costs this year is going to be in the order of 5 million this this financial year. Some of it is simply because we need additional people to deal with the additional volume within our systems and some of it the broadened scope and the broadened scope is more than half of the additional cost.

Operator

And your next question comes from the line of Blair Galpin from Forsyth Barr. Please go ahead.

Blair Galpin

This might have had positive results just rather especially on the weekly [ph] prices. I think firstly in terms of cost you sort of indicated that some new [ph] IT -- should we be thinking of that more as CapEx cost or sort of operating expenses?

Mark Ratcliffe

It was almost impossible to hear that question I'm afraid.

Blair Galpin

In terms of cost increases overtime are we like to see more in terms of capital cost or operating cost increases?

Mark Ratcliffe

In connection to fibre provisioning?

Blair Galpin

No, you sort of mentioned increasing IT spend and so on.

Mark Ratcliffe

I think that we pulled the handbrake on pretty firmly on all but essential IT capital expenditure sort of 2.5 years ago. So you would expect to see that program slowly ramp up again. We think it's in our long term best interests both operationally and from a cost perspective to get ourselves off the spark infrastructure wherever we can and as quickly as we can and will now start to explore that and obviously in their case they've moved on quite a lot in that time and have started to change the way that they deploy the systems I think we all heard Simon [ph] talk yesterday about the increasing digitalization of their business and we don't want to be stranded on the old legacy network -- legacy IT either. So we see more of it but I think that will show up as capital.

Blair Galpin

In terms of VDSL speed versus the fibre speed obviously VDSL now is in fact an entry level fibre, what you’re thinking on what the entry level fibre speed should be over the next 12 to 18 months, any views of changing that?

Mark Ratcliffe

We are finding that on our network at least increasingly retailers are thinking that the 100 meg is the entry level products, the 30 megabit per second product is a contracted one that has to be available so we won't be withdrawing that one but we think on our own at least it's unlikely that people will go for that one but I think that is a very popular product on other peoples network.

Blair Galpin

Okay. And finally just in terms of the both the subsidies [ph] we had [indiscernible], you sort of indicated that discussions are going on in that regard. Does it that Chorus maybe be able to put more money towards that overtime?

Mark Ratcliffe

Well I think we've agreed some things with CHF that enable us to confirm that the fund will remain in place till the end of this year and discussions beyond that day we’re working through that and we've talked about the types of things believe that will allow us to do that. There are levers within the contract that when tweaked gives us value that we can -- that allow us to cover that gross CapEx. I think the best long term solution for non-standard expenditure is the future regulatory framework. So getting that expenditure into the AC base, so if you asked me what's the -- this long term outside that -- so another incentive to get the right regulatory framework in place.

Operator

And your next question comes from the line of Tristan Joll from UBS. Please go ahead.

Tristan Joll

Just got a couple of things on CapEx, when I look at that’s layered to connection CapEx slide saying big buying out, would it be fair for us to share which was 200 million in the half, is it fair for us to share that’s kind of more related to the communal build out sort of in-line with communal build out as opposed to mixing themselves?

Mark Ratcliffe

So you’re talking about the backbone build?

Tristan Joll

Yes.

Mark Ratcliffe

So that is a function of our type but that occurs when we have to connect the multi dwelling unit or someone done it right of way. So that it triggered by the nature of the demand so we will move your period on period depending on the mix of multi dwelling units in lots of way that show up in the period. So big multi dwelling units.

Tristan Joll

I guess the point I was making as you move along during the communal build presumably somebody will turn up in the multi-dwelling unit in this connection therefore you know it might be more related to we have communal builds going as opposed to explicit uptake and it might be quite uniform through the next 3 or 4 years.

Mark Ratcliffe

Yes, and there is more multi-dwelling units in lots of way in Oakland and Mannington than they are in other parts of the country.

Tristan Joll

And then just, I don't know there has been a lot about fibre demand and I clearly -- it's been a real success and you’re trying to beat things more efficiently. I just wonder whether you think that at these currently where we talk about nearing a 100,000 [indiscernible]. Do you think from an industry and a realistic point of view even doing since more efficiently that sort of the next month that makes sense? What do you think there is more resource out there that we could do more?

Mark Ratcliffe

We need more resource, the nature of the work is skilled and most skilled resources in New Zealand are in employment. So what we're looking is to look adjacent industries where people can do this as part of the range of skills that they've got. We are looking offshore. One of the benefits of the Aussies pulling back on their own fibre to the home project is that there are resources available who are trained up. And then there are people in other industries who could potentially develop new skills and move into this. As you’ve obviously seen with the 50% increase in resources in a relatively short period of time is possible to attract people into the industry or back to it and we'll just have to keep on working on that but there aren't a thousand people sitting around waiting for the call unfortunately.

Tristan Joll

Yes, I mean -- [indiscernible] with the above the line marketing and stuff, to see they are giving you that you could certainly see this with a 100 or 1000 run-rate increase materially or?

Mark Ratcliffe

I don’t know that the retailers are in but better position than us to assess just how high the demand is going to be. And we've seen this massive spike in February, I mean as much as anything else that I would think that some of that might well be due to barbecue conversations across the summer for the 100,000 plus people in New Zealand that have already got fibre telling everybody else what a great experience it is and to come back off holiday and think I'll see if I can place an order for mine because there's been relatively little about the line advertising for this. So it's mostly word of mouth and possibly something to do with the relativities between copper and fibre pricing, pushing people to fibre. But I think the experience is good, the research say that on the fibre network you're getting the best broadband experience. In New Zealand I think more and more people know that.

Tristan Joll

And just finally I mean I see to the timelines around UFB 2, understand you’re in a negotiation around that but how do we think about the pricing on UFB 2 in terms of the expectation that when you’re doing these negotiations that whatever you agree to do will just fall into the regulatory framework? Because you know sort of one thing out of text, the other ultimately doesn’t--

Mark Ratcliffe

We are not in any negotiations on the UFB 2, we have put a proposal and we're waiting to hear back from--

Tristan Joll

I guess my point is there is not going to be differentiated pricing on whatever network that is after 2020, it's all going to be the same and does that effect on to your thinking?

Mark Ratcliffe

I mean we're not clear how it's going to play out. I mean it could I think our expectation is that it could well be like UFB 1 that there are contract specified that they are process specified contract and then there is a regulatory framework formed to be agreed. And the two will set aside alongside one another.

Tristan Joll

Okay, it's the same but you could end up with pricing that sits outside of the [indiscernible] New Zealand. Thanks very much guys, this was very helpful.

Operator

[Operator Instructions]. And you’ve a question coming from the line of Brian Han from Morningstar. Please go ahead.

Brian Han

My only question is I understand that you’ve covenant under your senior debt of four times but in terms of that underlying EBITDA in the that calculation so the EBITDA that you're going to report this calendar year would that be underlying or are there any special items that I need to be aware of?

Mark Ratcliffe

The earnings that you see -- the earnings that go into that calculation the point is that the current calculation reflects benchmark pricing. So if PP pricing flows through the denominator that the calculation will change so the metric will go down and the indices [ph] we've done a bit of work there effectively restating historical earnings as FPP pricing applied so you can put those earnings into that calculation and you end up with a number quite a lot less than three times. But as a rough guide for how things might play out.

Operator

And your next question comes from the line of Ann Martin from Newstreet Research [ph]. Please go ahead.

Unidentified Analyst

I was wondering with the growth in mobile broadband over the last couple of year, what your experience was or what your observation was in terms of whether it has an impact and -- but it will only have [indiscernible] and also what implications it might have for your mobile backlog product?

Mark Ratcliffe

I think we see mobile and fixed as highly complementary services and yes there has been a lot of growth in mobile traffic as there has been a lot of great in fixed traffic just as a lot -- we started from a much higher position but we're growing at about the same sorts of straight, so we do see them as complementary. Obviously there are some households which don't have a fixed line but they tend to be low bandwidth houses places where there is low demand for data.

I think it's quite a different factor that goes on between Australia and New Zealand. The Australian fixed broadband networks perform at nothing like the performance of the New Zealand ones and therefore mobile substitution is a much more powerful proposition to the end customers.

Unidentified Analyst

And how important in this scheme of things is mobile backlog for Chorus?

Mark Ratcliffe

We’re a backlog provider -- we provide fibre to the sites of all three of the mobile players in New Zealand. So that's a critical part of our business and as they expand their footprints then so our footprint expands too.

Operator

And your next question comes from the line of Peter Wise from IDC. Please go ahead.

Peter Wise

I just wondered [indiscernible] going to a close in Phase 1, can you give us maybe bit of an update particularly interested in sort of what sort of space rural are getting on average you talked about 23 meg, so that is all I guess, I want to understand how that’s all going?

Mark Ratcliffe

Well I mean I don't have a number for the average rural speed but I mean if you're in rural depending on what your proximity to the cabinet is you get exactly the same experiences if you’re in the urban centers so if there is -- and I think we've previously said that we have upgraded about 100,000 rural lines to a mixture of VDSL and ADSL depending on where you sit in relation with the cabinet and they are experiencing the same speeds which means that if you're in a rural area and you're within 100 meters of a cabinet and get VDSL, you will be getting pretty close to a 100 megs.

Peter Wise

So it's just the lengths [ph]? The other factor?

Mark Ratcliffe

Yes the people who live there -- I mean if you live more than sort of 800 to 1000 meters away from the cabinet then we don't encourage VDSL, ADSL actually performs better.

Peter Wise

So [Technical Difficulty] trying to get a sense of how much higher it performed?

Mark Ratcliffe

It's a range, I mean there are some lines that perform at about a megabit per second which I guess it probably barely passes the broadband test anymore and some perform upto a 100 so it's highly dependent on where you live in relation to the equipment.

Peter Wise

And I'm trying to get a sense [Technical Difficulty] areas rather than the wireless format--

Mark Ratcliffe

Yes, I’ve never seen any data for the wireless uptake in rural.

Operator

And there are no further questions at this time. So I will turn the conference back to today's presenters. Please continue gentlemen.

Mark Ratcliffe

Okay. I really appreciate you all turning up and we will be saying I think most of you over the coming few weeks and look forward to continuing the conversation. Thank you very much for your time today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!