Telecom focusing on paying back debt, generating cash flow

By NZPA

Friday 9th August 2002

Telecom New Zealand reported its first full-year loss but said the hard work had been done to ensure the company was generating free cash flow and paying back debt.

The market seemed to agree, with Telecom shares closing up 11c to $4.98.

It seemed unfazed by the company's $188 million loss for the year to June 30, following an $850 million writedown on its Australian unit AAPT.

But Telecom improved core earnings as it cut costs faster than revenue fell, beating analysts' expectations with a pre-abnormal profit of $670 million.

That was a 9.1 percent increase on its $643 million 2001 profit, which included a $245 million dividend from its half-owned trans-Pacific broadband network, Southern Cross Cable.

Revenue was up 2.5 percent at $5.54 billion, and expenses dropped by 1.8 percent to $3.27 billion. Capital expenditure virtually halved to $778 million.

The company will pay a fully imputed fourth quarter dividend of 5c per share, bringing the total year's dividend to a flat 20cps.

"The major positive I think is the trend of the improving margins in Australia, and the free cashflow turning positive," Macquarie Equities senior analyst Arthur Lim said.

Calling 2002 "a year of consolidation", Telecom chief executive Theresa Gattung said it had been particularly pleasing to see the Australian operations generate cashflow in the fourth quarter.

Earnings before interest, tax, depreciation and amortisation (ebitda) in Australia was up 43 percent on last year, but after depreciation and amortisation fell 18.5 percent to $44 million.

No revenue growth was expected this year but the Australian businesses were expected to eventually become a medium-to-long term engine of growth, Ms Gattung said.

The New Zealand businesses had solid earnings growth, thanks to a rise in revenue and decline in costs, and were expected to have modest revenue growth this year as broadband got under way.

Wireline, the company's fixed line network, had performed strongly, rising 2.3 percent to $1.57 billion, and the company had exceeded its 120,000 customer target for its CDMA wireless network by 50,000 people.

However, mobile earnings dipped 0.4 percent to $277 million.

The New Zealand operations' ebitda rose 5.5 percent to $2.12 billion.

Chairman Roderick Deane said the AAPT writedown was not unexpected, in the light of the global slump in telecommunication valuations. Nevertheless, Telecom still held to its hopes of medium to long-term growth in Australia.

" So long as that business is generating cash then it's self-sufficient, it's not a drain on the rest of the business...and we just have to concentrate on those areas of the market that we think are profitable."

Those areas included a partnership in a 3G rollout in Australia, and the rollout of broadband in New Zealand. Margins in more traditional parts of the business would be under pressure.

"The margin position in Australia we would hope to be able to improve but the truth is that it's a really competitive market place now so...some prices will continue to decline, and unless we can get our costs down fast enough by utilising the technologies that are available, we won't be able to improve our margins," Dr Deane said.

That applied to New Zealand also, where revenue was fairly flat. "But the bottom line earnings performance in New Zealand has been very commendable, given the huge uncertainties in the industry."

Looking ahead, Dr Deane said the company was keen to maintain a strong credit rating because of negative global sentiment about telcos. Telecom has already reduced its short term debt from $1.5 billion to $0.6 billion and net debt was marginally lower, from $5.3 billion to $5.2 billion.

It plans to drive down debt further over the next 18-24 months.

Chief financial officer Marko Bogoievski would not give specifics but indicated Telecom was planning to repay several hundred million dollars.

Telecom also announced it was selling its 10 percent shareholding in IT company EDS back to the company at the price it bought it for.

Dr Deane said the shareholding was no longer necessary to cement its relationship with EDS. The sale would bring $45.9 million into Telecom's coffers in September.

Fourth quarter figures showed a 23 percent rise in net earnings excluding abnormals at $190 million, compared to $154 million over the same period a year ago.

Revenue fell 3 percent to $1.32 billion and expenses dropped 12.7 percent to $736 million. Fourth quarter ebitda was $271 million compared with $526 million last year, or $591 million excluding abnormals.

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