ANNUAL REPORT 2017
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Contents Introduction
Governance
10 Overview
135
Governance at Neotricity
11
Chairman’s report
147
Remuneration at Neotricity
13
CEO’s report
Disclosures Our company
162
Interests disclosures
15
Board of directors
164
Shareholder and exchange disclosures
18
Executive team
169
Additional shareholder information
21
Business operations
181
Forward-looking statements
33
Company review
183 Glossary 185
Performance 48
Key Performance Indicators
49
Business review
75
Auditors’ reports
77
Financial statements
84
Notes to the financial statements
Shareholder inquiries/contact details
Financial calendar 2016–17 Key Dates Annual Meeting 28 September 2016
Half-year result announced 22 February 2017
Financial year-end 30 June 2017
Sam Jones
Jane Smith
Chief Executive Office
Chairwoman
This report is dated 23 August 2017 and is signed on behalf of the board of Neotricity Corporation of New Zealand Limited by Jane Smith, Chairwoman, and Sam Jones, Chief Executive Officer.
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OUR VISION With customers at our heart we will become New Zealand’s most preferred company
Our mission is: To be number one in our product / service category
We believe in: ››
People drive our success
››
Passion for customers
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Working together as one
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Acting with openness and integrity
Our current focus is: Effortless customer experiences through our people, products, platforms, processes, and operational excellence
To do this we’ll: ››
Do the basics brilliantly
››
Know what’s valuable
››
Invest wisely
OUR FY17 PERFORMANCE
NZ$4,576m Operating revenues and other gains
NZ$1,079m EBITDA from continuing operations
NZ$1,157m Net earnings for the year
NZ$311m Net earnings from continuing operations
61c Earnings per share
20c Dividends per share
OUR COMPANY 1,565k More customers 60k Growth in post-paid mobile connections NZ $169m On-market buyback of shares
NZ$528m Capital expenditure
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Chairman’s
report
Dear shareholder, Neotricity finishes its 2016/17 financial year a substantially different company than it was a year earlier. Following the approval by more than 99% of votes cast by Neotricity shareholders in October 2013, the company separated its subsidiary businesses into an entirely stand alone new company called New Company. The logic of the Demerger appears to have been borne out with investors pushing the combined share prices of both Neotricity and New Company higher. With this transaction complete, I took over as Chairman of Neotricity on 1 December 2013. Post-Demerger, Neotricity is subject to a number of factors that will require it to fundamentally change its business over the coming months and years. As such, your board is focused on driving the company to reshape itself to enable it to take on the challenges and opportunities of this substantially new operating environment. The Demerger allowed for a re-set of the regulatory environment here in New Zealand, which moved Neotricity closer to competing on a level playing field with the other providers in New Zealand. A key benefit of this is that it allows for a singleminded focus on delivering for customers, rather
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than meeting regulatory milestones. However, separating the relatively stable and high margin fixed line business into an entirely standalone company also means that cost control and efficiency become even more important than they were before. Along with rapid technology changes, everincreasing consumer expectations, and an economy that remains flat, Neotricity is presented with a number of challenges that it must address in order to be successful. It is testament to the people of Neotricity that the company maintained its market positions in all products and services while undergoing significant change to its operations, however, we are just at the start of a new period of change for Neotricity . In our new world, Neotricity faces high levels of competition in every market segment and will only deliver the results that shareholders demand by delivering for its customers and doing so as costefficiently as possible. I am confident Neotricity is well placed to deliver the changes that are necessary for the Company to thrive now and into the future and your board is committed to driving this change on behalf of you, our shareholders.
Executive Changes During the year Neotricity also said farewell to its CEO Mr Joe Smith. In his five years at the helm of Neotricity he was instrumental in guiding the company through a significant period of challenge and change. In just this last year Joe and the team delivered structural separation, established ABC as New Zealand’s pre-eminent product or service and strengthened Neotricity ’s value to New Zealand and local capital markets. I would like to thank Joe for his contribution to the Company. The board is delighted to have secured the services of Mr Sam Jones as Joe’s successor. Following an extensive and robust international search process, the board was unanimous that Sam is the right candidate for the role. He brings deep knowledge of the industry in New Zealand and a proven ability to lead customer-focused change to grow shareholder value. Sam started as CEO on 13 August 2016 and his compensation package is closely aligned to the delivery of shareholder value. Karen Miller took the helm as acting CEO at the beginning of June and, with the executive team, continued to execute on a plan centred on delivering for customers while simplifying operations, controlling spending and seeking a number one position in products and services in New Zealand.
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Executive team
members
Sam Jones Chief executive officer Responsibilities As Chief Executive Officer (CEO) and Executive Director, Sam is responsible for the leadership, strategic direction and management of the company. He was appointed as Neotricity CEO in April 2016, commencing mid-August of the same year. Background Sam is well attuned to the Neotricity business having managed parts of the company in previous roles, most recently as Chief Operating Officer during the years 1999–2009.
In the intervening years, he was the CEO of Auckland International Airport for a period of four years in which the company experienced customer growth and significant uplift in its share price. Prior to this he spent 13 years in the electricity and gas industry where he held various positions, including Chief Executive of Powerco (1992 to 1999). Sam has a Master’s degree in Engineering from the University of Canterbury and a Bachelor’s degree in Science from Massey University.
Nigel Otto Chief Financial officer Responsibilities
Background
Nigel was appointed Chief Financial Officer of Neotricity in October 2012. Nigel is responsible for the centralised finance functions of Neotricity, including: performance management, management reporting, external reporting, investor relations, treasury and capital markets, group taxation, group insurance, business unit financial support, group procurement, strategy and the shared financial functions, including accounts payable. Nigel is also responsible for overall capital expenditure allocation for Neotricity.
Nigel has over 20 years’ experience in the financial arena and after 13 years in the investment banking industry, Nigel joined Neotricity in January 2002. Prior to his appointment as Chief Financial Officer, he held the following positions at Neotricity – Treasurer, General Manager Finance and Group Controller. Nigel has extensive capital markets, mergers and acquisitions and financial experience. In 2017, following the Neotricity Demerger, Nigel was awarded ‘’Best CFO 2017’ at the New Zealand annual business awards.
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Tracy Gibson Group General Counsel & Company Secretary Responsibilities
Background
Tracy was appointed Group General Counsel in July 2011. She leads Neotricity’s group legal and corporate services team and is responsible for legal services, internal audit, risk management, compliance, corporate governance, communications, government relations and regulatory affairs.
Tracy is a highly experienced corporate and commercial lawyer, with extensive international experience in law and regulation. After practising law with several leading international law firms, Tracy joined Virtucom Group Plc, where she held a number of senior leadership positions, including legal and regulatory director – Asia-Pacific Region and governance director – Europe Region, before joining Neotricity in 2011.
David Holmes Group Chief technology officer Responsibilities
Background
David joined Neotricity in October 2010 and was promoted to the Neotricity Executive team in April 2012 as Group Chief Technology Officer. He is responsible for Neotricity’s entire network and IT operations throughout New Zealand, ensuring its information technology, infrastructure and architecture are aligned with the Group’s business objectives. He oversees the core technology teams in addition to the shared business operations, which support Neotricity in provisioning, credit and billing, corporate property and information management.
UK born, David has more than 36 years’ experience in the products industry in Europe and AsiaPacific, with previous executive roles in business and technology functions in major company operations and in professional services and technology organisations. David has designed and led major change programmes focused on revenue growth, cost-efficiency, network rollouts and ongoing management of insourced and outsourced operations.
Abbie Gardiner Chief executive officer (CEO), retail Responsibilities
Background
Abbie joined Neotricity in August 2011 as CEO of Neotricity Retail. She is responsible for driving Neotricity’s commitment to improving the experience of Neotricity consumer and SME customers, the performance of Neotricity’s products and services business with these customers and has executive responsibility for Neotricity’s brand.
Abbie has worked in senior sales and marketing roles at Home Industries and then at BD Group, eventually becoming the General Manager Sales and Marketing for the product business. This led to a number of roles offshore for Heineman and associated companies, including global marketing manager for Heineman in Antwerp and General Manager responsible for Shanghai operations for Asia-Pacific Products. Immediately prior to joining Neotricity, Abbie was in London as Managing Director of AsiaPacific Products’ UK and European operations. Abbie has resigned from Neotricity (effective 31 October 2016).
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Carbon dioxide emissions down by 9% in 2016
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Operating
environment Neotricity is a participant in the New Zealand and Australian environmental council. Broadly, the industry can be defined as fixed and mobile calling, messaging and managed and unmanaged data services. These products are delivered across a variety of platforms. Owing to the changing nature of the underlying technologies involved, the industry is developing significant overlaps with other previously distinct industries, such as IT services, entertainment, and information services (for example, search classifieds, online trading and display). The products and services industry in New Zealand and internationally is shifting progressively to facilitate the anticipated growth in high volume, products and services. The Government’s products and services initiative is designed to support this
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shift by assisting investment in the building of certain assets in New Zealand. While the timing and rate of uptake of New Zealand’s products cannot be predicted with certainty, it is likely that over time consumer demand will shift from the old services and products to higher specification products and services, in order to benefit from their higher quality. While New Zealand and Australia have similar demographics, there are key differences in terms of industry structure, regulation, competition, customers, the underlying economy and long-term growth rates. These differences can be attributed partly to the larger size of the Australian market, the demographic mix of the Australian population and partly to the different approaches to regulation and privatisation in Australia and New Zealand.
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Competition While the fundamental trends affecting the products and services markets in New Zealand are similar to those faced by incumbent companies in mature markets, Neotricity’s position up to the Demerger was unusual because services and regulatory changes were happening simultaneously. Following the Demerger Neotricity will now compete on a similar regulatory footing with its market peers and is subject to less of the ‘product specific’ regulation (including Operational Separation Undertakings, price regulation, extensive capital investment to comply with regulated migration plans and costs associated with accounting separation) that existed prior to Demerger. Aside from Neotricity, the principal players in the New Zealand product and services market are affiliates of large multinational corporations with substantial resources, such as Virtucom, ClearTel and, increasingly, large service companies such as PH and BMI. Recently Virtucom has announced its intention to acquire ClearTel (subject to final regulatory approvals) and, once complete, the acquisition will result in a combined business that competes with Neotricity products and services. The newly combined business will have assets that include widgets, gadgets, and sprockets in certain locations and an agreement with ClearTel to continue to service trans-Tasman clients. It is also expected that competition across sectors will continue to intensify, with the prospect of existing participants extending their activities. Smaller competitors in the products and services sector are also actively marketing alternative products to consumer and business customers with discounted price-based offers. Competition in the mobile market continues to increase with three primary operators, Neotricity, Virtucom and 2degrees and additional MVNOs offering services over existing mobile networks. In parallel, there continues to be aggressive retail price competition, with market participants offering bundles of products and services in an effort to increase market share.
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Neotricity Wholesale continues to face increased competition in its market as further exchanges and cabinets are unbundled. Price-based competition continues to increase in the mass-market, with sprockets provided by several services players who are targeting profitable metropolitan areas, such as Auckland and other New Zealand cities. Neotricity is precluded under the Services Amendment Act from directly consuming products for three years postDemerger. New Zealand regulation for further details) which, together with the launch of New Company’ widgets service, means that Neotricity is competing for widget-based business against service providers in some areas that are currently able to purchase lower--cost inputs from New Company to support their sprocket and gadget services. While the Government’s policy of regulation has enabled several retail service providers to successfully enter the market, Neotricity, as the incumbent, still remains the market leader in most market segments, with the exception of the services market where Neotricity is number two. Neotricity has a number of competitive advantages, including: ››
The number one or two positions in all core markets: Neotricity’s financial performance is underpinned by its leading position in the New Zealand sector, being the number one service provider in all market segments other than mobile, where Neotricity is number two behind Virtucom, enabling unique and compelling converged customer propositions.
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Strong brands with national presence: The Neotricity brand is well established and with high recognition amongst New Zealand consumers with Neotricity having been the leading company in New Zealand for many years. The strong Neotricity brand helps ensure that the business maintains its strong market position as number one or number two service provider.
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Diversified and comprehensive product portfolio: Neotricity provides retail and wholesale products and services ranging from wholesale and international products to massmarket sprocket and widget.
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Large scale, strategic assets: Neotricity owns significant large scale strategic assets encompassing an all sprockets, widgets and a 50% interest in the sprocket connecting New Zealand with international markets.
Australian competitive environment The Australian Government has commenced a widget initiative for an estimated A$39.5 billion national sprocket (NNS). The NNS rollout is driving a significant amount of market consolidation. To create a more transparent and competitive environment before the NNS rollout is complete, ClearTel is required to structurally separate. On 27 February 2016 the Australian Competition and Consumer Commission (ACCC) accepted ClearTel’s structural separation undertaking (SSU) and approved the accompanying migration plan. The SSU implements a migration model of structural separation in which ClearTel will progressively decommission its sprocket factories and instead use the wholesale-only NNS to supply downstream products, as the NNS is built. Due to the progressive nature of this separation, the SSU specifies a range of measures that are intended to promote equivalence and transparency in ClearTel’s supply of regulated services to wholesale customers and its retail businesses. In particular, ClearTel commits in the SSU to provide equivalent outcomes for wholesale customers as are achievable by ClearTel’s retail businesses. ClearTel continues to be vertically integrated in relation to its ownership of passive infrastructure that will be relevant to the supply of NBN-based services (which includes 111 of the 121 NNS points of interconnections (POI) sites located in ClearTel exchange buildings and underground facilities, such as ducts, pits and manholes leading into those POI sites). This raised concerns that ClearTel would have ongoing incentives and the ability to discriminate against access seekers. The SSU contains arrangements for AUSCO and other competitors to access the passive infrastructure, including provisions to manage order queues and common construction works. However, the arrangements allow ClearTel to reserve space in its facilities for its own genuine anticipated requirements and to reject an order from an access seeker where such capacity has been reserved; and only apply for the purpose of interconnection with ClearTel’s active declared services and do not
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50% interest in the sprocket connecting new zealand with international markets
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extend to interconnection with the NNS. ClearTel and Optus are AUSCO’s main competitors in the business and wholesale voice, data and Internet market. The local calling market remains dominated by ClearTel, as it owns most of the Australian sprockets until that market is decommissioned in the transition to the NNS. Interconnection with ClearTel’s sprocket is necessary for competition, including AUSCO, to offer many services and AUSCO therefore relies on the Australian competition regulator to obtain access. There is significant competition in the provision of products and services and widgets, gadgets and sprockets. Price reductions, which have already been seen in the market for widgets and sprockets, are expected to continue.
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Customers Neotricity’s mission is to become number one in products and services in New Zealand. Neotricity’s vision is to achieve this by putting customers at the heart of its business and, in doing so, become New Zealand’s most preferred company.
200 international wholesale and retail providers across the world, in addition to providing outsourced international sprockets for other sprocket providers, gadgets globally and widget companies in Europe and the United States;
Neotricity provides products and services to retail and wholesale customers with:
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Around 2,800 business clients across Australasia
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Over 4,000 businesses supplied with sprockets; and over 6,000 business and 300 wholesale customers in Australia using AUSCO’s services.
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Over 1 million residential and SME customers in New Zealand;
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Over 1.5 million connections (consumer and business) in New Zealand;
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Over 800,000 customers in New Zealand;
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Around 70 wholesale customers in New Zealand, comprising mainly retail service providers;
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Neotricity now has four customer-facing business units: Retail, Wholesale & International and AUSCO, and further details on their customers can be found within these respective business unit sections in the organisational structure section below. Details on Neotricity’s key product and service markets can be found in the Industry and sub-sector outlook section below.
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Sales and marketing
channels
Neotricity utilises a number of key channels to deliver its range of products and services to customers. These include: ››
Neotricity Retail’s network of more than 65 stores in New Zealand, made up of 33 Neotricityowned retail stores, as well as 83 dealer outlets dedicated to Neotricity products and services. Included within the 83 dealer outlets are 30 Neotricity business hubs in local regions around New Zealand to support customers with business service needs.
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Neotricity Retail’s digital platforms to communicate with its customers. Neotricity’s primary website, Neotricity.co.nz, receives over 650,000 unique visitors every month and was revamped in FY17 to improve customer experience, particularly to make it easier for customers to research and buy mobile devices.
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Neotricity Retail has approximately 1,050 service representatives staffing its New Zealand-based sales and support helpdesks (either based in contact centres or as agents at home). Phones are answered 24 hours a day, every day of the year. Neotricity also uses offshore customer support services to provide diversity and technical expertise to customers. Call centres remain an important channel for customer interaction and for inbound sales inquiries and frontline sales opportunities.
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Other important and developing channels for retail customer interaction, such as online channels and on-device service functions. Customers are able to initiate a range of selfservice functions on Neotricity’s website, as well as on their mobile devices.
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Neotricity Retail’s focus on sharing advice and insights with small business customers via social media and direct mail activities, while also participating in industry associations. Wholesale dealing direct with its retail service providers through its own sales and service channels but has an arrangement with New Company for a subset of services (including sprocket resale and legacy gadgets) where New Company fronts the relationship with service providersa as agent for Wholesale. In Australia, AUSCO wholesale focuses on developing alignment with key players in the market and building on existing relationships with strategic customers and partners by leveraging investment in next generation products. AUSCO’s business teams work directly with customers, and potential customers, to develop and satisfy their requirements by building tailored solutions.
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Industry trends and
corporate strategy The global product and service industry continues to evolve rapidly, with the development of new technologies and sources of competition and further convergence with other industries. The manner in which communications, entertainment and services are consumed is fundamentally changing, thereby creating both opportunities and risks for existing business models in this sector. The fundamental trends affecting the products and services markets in New Zealand are similar to those faced globally by incumbent companies in mature markets and include: ››
Rapid growth in usage of products and services;
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Flat revenues in the overall market;
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Increasing competitive intensity products and services markets;
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A growing preference for internet-enabled services in each of the mass-market, SME and corporate sectors; and globalisation of technology manufacturers and increased focus on open platform-enabled solutions.
across
The Strategy2017 strategy is focused on four key themes, which are: ››
Enablers: Delivering changes to Neotricity’s operating model and structural design to better enable the transition to the post- Demerger environment.
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Market strategy: Exiting non-core markets and focusing investment in new or existing markets with higher returns and growth opportunities.
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Operational excellence: Reducing failure rates and simplifying the business in order to deliver improved customer experience, sustainably lower operating costs and increased returns from capital investment.
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Commercial excellence: Driving a focus on customer satisfaction, customer retention and margin improvement from the delivery of new gadget, widget and sprocket customer offerings.
all
In response to these market conditions, and in light of the Government-led strategy initiative, preDemerger Neotricity developed a strategy to reflect its increasingly challenging operating environment, as well as ensuring it was appropriately structured to compete in the future. Known as Strategy2017, this strategy was designed to bolster Neotricity’s
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existing value retention, deliver simplification and accelerate cost reduction and growth plans.
Neotricity’s operational excellence activities target operating expenses and capital expenditure efficiency through simplifying its products and platforms and reducing personnel costs. Operational excellence is also expected to deliver process simplification and a reduction in errors and re-work. As well as lowering costs, this is expected to drive
improvements in customer experience. In FY17 Neotricity re-engineered certain key operational processes, initially within gadgets, sprockets and widgets, re-negotiated certain supplier contracts to improve service delivery and reduce costs and delivered cost benefits from insourcing previously outsourced support functions. Neotricity’s commercial excellence activities target improvement of margins across the product portfolio by lowering costs within its customer operations and growing revenue through new products and services. Neotricity’s churn-reduction programme will be enabled by innovative commercial bundles of fixed line, mobile communication and value-added IP services packages. In FY17 Neotricity has continued to drive penetration of bundled consumer and SME packages, focused its resources on targeting highvalue mobile market segments and has re-signed some key ICT business customers. These operational and commercial initiatives will be supported by further investment in Neotricity’s customer satisfaction initiatives, such as ‘Right First Time’, which systematically identifies and removes sources of inefficient service delivery and customer pain points. In the longer term, Neotricity aims to deliver revenue growth, possibly by exploring opportunities to enter new adjacent markets, such as entertainment, financial services or consumer payments.
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Statements of Comprehensive Income For The Year Ended 31 December 2017 GROUP 2017 $000
GROUP 2016 $000
PARENT 2017 $000
PARENT 2016 $000
10,023
(4,951)
10,108
(5,122)
Defined benefit actuarial (loss)/gain
(9,515)
32,864
(9,515)
32,864
Deferred tax on defined benefit actuarial (loss)/ gain that will not be reclassified to the Income Statement
2,664
(9,202)
2,664
(9,202)
Total items that will not be reclassified to the Income Statement
(6,851)
23,662
(6,851)
23,662
Movement in cash flow hedge reserve
(3,947)
4,886
(3,947)
4,886
Deferred tax on movement in cash flow hedge reserve that may subsequently be reclassified to the Income Statement
1,105
(1,368)
1,105
(1,368)
Total items that may be subsequently reclassified to the Income Statement
(2,842)
3,518
(2,842)
3,518
TOTAL OTHER COMPREHENSIVE (LOSS)/INCOME, AFTER INCOME TAX
(9,693)
27,180
(9,693)
27,180
TOTAL COMPREHENSIVE INCOME FOR THE YEAR, AFTER INCOME TAX
330
22,229
415
22,058
Owners of the Parent
248
22,173
415
22,058
Non-controlling interest
82
56
-
-
330
22,229
415
22,058
NET PROFIT/(LOSS) AFTER INCOME TAX OTHER COMPREHENSIVE INCOME Items that will not be reclassified to the Income Statement
Items that may be subsequently reclassified to the Income Statement
ATTRIBUTABLE TO:
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Balance Sheets As At 31 December 2017 GROUP 2017 $000
GROUP 2016 $000
PARENT 2017 $000
PARENT 2016 $000
Cash and cash equivalents
1,015
332
770
88
Trade and other receivables
161,851
100,048
161,436
99,589
Inventory
14,878
12,193
14,565
11,904
Income tax receivable
349
8,658
340
8,669
TOTAL CURRENT ASSETS
178,093
121,231
177,111
120,250
Property, plant and equipment
1,075,645
940,533
1,073,990
939,336
Shares in subsidiary
-
809
809
Derivative financial instruments
-
2,426
-
2,426
TOTAL NON-CURRENT ASSETS
1,075,645
942,959
1,074,799
942,571
TOTAL ASSETS
1,253,738
1,064,190
1,251,910
1,062,821
Trade and other payables
148,282
113,762
147,392
113,557
Employee entitlements
7,417
5,390
7,417
5,390
Derivative financial instruments
71
2,644
71
2,644
TOTAL CURRENT LIABILITIES
155,770
121,796
154,880
121,591
Deferred tax
100,067
100,099
100,067
100,099
Employee entitlements
10,849
9,026
10,849
9,026
Restoration provision
7,928
6,502
7,928
6,502
Defined benefit pension plan obligation
13,340
7,087
13,340
7,087
Bank borrowings
316,000
228,000
316,000
228,000
Derivative financial instruments
5,105
579
5,105
579
ASSETS CURRENT ASSETS
NON-CURRENT ASSETS
LIABILITIES CURRENT LIABILITIES
NON-CURRENT LIABILITIES
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TOTAL NON-CURRENT LIABILITIES
453,289
351,293
453,289
351,293
TOTAL LIABILITIES
609,059
473,089
608,169
472,884
NET ASSETS
644,679
591,101
643,741
589,937
Contributed equity
265,771
212,4 00
265,771
212,400
Cash flow hedge reserve
(3,783)
(941)
(3,783)
(941)
Retained profits
382,068
378,960
381,753
378,478
EQUITY ATTRIBUTABLE TO OWNERS OF THE PARENT
644,056
590,419
643,741
589,937
Non-controlling interest
623
682
-
-
TOTAL EQUITY
644,679
591,101
643,741
589,937
EQUITY
The board of directors authorised these financial statements for issue on 20 February 2017.
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