Telecom - Continued Operating Performance Improvements

MEDIA RELEASE


Continued Operating Performance Improvements and a Successful Demerger

Telecom New Zealand has today reported Net Profit after Tax (NPAT) of $1,006m for the six months to 31 December 2011.

The period included five months of trading before the demerger of Chorus on 30 November 2011, and one month of trading post-demerger. The result includes a large non-cash accounting adjustment relating to the demerger of Chorus, as well as several other one off items.

Reported and adjusted result highlights

$m REPORTED ADJUSTED
H1 FY12 Change % H1 FY12 Change %
EBITDA – continuing operations 519 3.6% 488 0.2%
EBITDA – discontinued operations 1,137 NM 321 NM
Total EBITDA 1,656 90.3% 809 N/A
Net Profit after Tax 1,006 NM 240 51.9%
Capex 325 -32.3% 325 -32.3%

“I am pleased to report that Telecom continued to deliver operating performance gains during a half year that also featured the successful demerger of its Chorus business,” said Paul Reynolds, Telecom CEO.

“The momentum built up last year has been maintained and we delivered improvements in customer satisfaction and operating efficiency, as well as real progress towards our strategic growth goals in broadband, mobile and ICT.

“The demerger was probably the most complex corporate transaction in recent New Zealand history and a world’s first for a telecommunications company. I am pleased it has helped deliver real value for customers and shareholders.

“Following the successful demerger, Telecom is positioned for the future serving of customers and retaining number one or number two position in all core markets, through a suite of services that run on our national, mobile, data and PSTN networks.

“In addition, the company can now compete on a similar footing to its competitors, due to the reduced impact of regulation in the new industry structure,” Dr Reynolds said.

“Due to the demerger timing and the associated accounting impact, year-on-year financial comparisons are complicated. However, the ongoing operational improvement in Telecom’s continuing business is clear after adjusting for the significant non-cash accounting and other impacts of the demerger.

“In line with the company’s Vision 2013 strategy, simplification of our business has delivered both improvement to customer satisfaction and reduction in costs.

“The continued focus on mobile, broadband and ICT has provided a strong platform for the future, and delivered growth in NZ broadband revenues as well as average revenue per user growth (ARPUs) in both mobile and broadband. There has also been further margin growth in IT services.”

“Customer satisfaction has improved in New Zealand, and the focus on simplicity and efficiency means that costs have declined faster than revenues, enabling Telecom to maintain flat EBITDA for its continuing operations.

“This, along with emphasis on good control of Capex, has resulted in a 25% improvement in adjusted Free Cash Flow when compared to the first half of the previous financial year. The share buyback, announced today, will return further value to shareholders.”

Adjusting items

The adjusted results remove the impact of a number of one-off items, the most significant of which relate to the demerger, to provide a clearer view of the underlying operational performance of the business.

The demerger-related adjusting items are:

• A $863m non-cash gain upon demerger of Chorus
• A $28m non-cash reclassification following the simplification of the corporate structure
• $110m debt restructuring costs
• $47m Demerger costs

The largest adjusting item is an $863m non-cash gain on the demerger of Chorus.

$775m of this gain relates to the difference between the historic cost and the fair value of assets transferred to Chorus on demerger.

The historical cost of the Chorus assets was $489m, while fair value, based on the Chorus share price on 30 November 2011, was $1,264m giving rise to a one off non-cash gain of $775m to Telecom.

A further $88m gain mostly relates to the difference between the net present value of lease payments that will be received from Chorus for exchange buildings, and the book value of the exchange buildings being leased.

Dividend, Capital Management and Guidance

A fully-imputed dividend of 9c per share has been declared for H1 FY12.

Telecom has also announced an on-market buyback of shares to return surplus capital to shareholders. The buyback of up to $300m will be executed during the 2012 calendar year.

“Telecom remains committed to maintaining ‘A-band’ credit ratings with Moody’s and Standard and Poor’s,” said Nick Olson, Telecom CFO.

“It is possible to return up to $300m of surplus capital to shareholders during the calendar year while maintaining a net debt to EBITDA ratio of less than 1.1x.”

Telecom has today announced forecast guidance of:

• H2 FY12 adjusted EBITDA of around $560m
• H2 FY12 adjusted NPAT of $160m to $190m
• H2 FY12 Capex of $190m to $220m

Mobile

NZ mobile revenues were up 12% when compared to the first half of the prior financial year. This is primarily due to an increase in device revenues relating to a change in subsidy accounting. ARPUs increased 9% on the equivalent period, driven by very strong data growth.

“The focus on increasing our share of high value post-paid customers has delivered a 27,000 post-paid connection increase in the half, due to strong Android and iPhone sales,” said Dr Reynolds.

“At the end of the period we also launched Skinny, our new standalone business and brand oriented at the youth market.

“The prepaid customer base is down by 92,000 connections, with little revenue impact, as some of our very occasional-use connections on CDMA disconnect. We remain on-track for the closure of the CDMA network in July 2012.

“639,000 customers remain on CDMA, representing 11% of mobile revenues, and we continue to bring a wide range of offers to the market for transferring CDMA customers.”

Broadband

NZ Broadband revenues were up 5% during the half, through a combination of a 7,000 increase in connections during the half and a 2% increase in ARPUs.

“Our strategy of bundling broadband, access and calling is delivering benefits, with more than 500,000, or 92%, of retail broadband customers on a bundled package. This has ensured low levels of churn with Telecom and Gen-i’s market share of connections at 51%.”

IT Services

Gen-i IT Services EBITDA was up 27% vs H1 FY11, with IT Services margins increasing to 7%, up from 6% in H1 FY11.

“IT Services EBITDA increased as costs continued to decline, reflecting improvements in delivery processes that also helped improve customer satisfaction. We sold the Software Solutions business during the period and Gen-i remains the NZ market leader, with around 14% share of the IT services market.”

Access and Calling

Telecom’s traditional access and calling revenues continued to decline at around 4% during the period, in line with worldwide trends. However, total reported revenues in this segment during the period declined by 12%, reflecting the sale of AAPT consumer in 2011, the withdrawal from unprofitable international voice customer contracts overseas, reduced mobile termination rates on receipts from other carriers and lower dividends from Southern Cross. In aggregate, these unusual items had minimal EBITDA impact.

“Telecom and Gen-i’s fixed access market share is 64%.”

Business Unit highlights

Retail

EBITDA was down 3% or $7m, after absorbing a $27m increase in mobile cost of sales. Labour costs were down 12% following restructuring activity.

“Post-paid mobile is performing well, and it is very pleasing to see positive trends in the Consumer market,” said Alan Gourdie, Telecom Retail CEO. “Our broadband strategy is working well; ARPU is growing and churn remains low. We are working on developing our fibre products and will be ready for UFB.”

Gen-i

EBITDA is up 17% as a result of good growth in mobile following strong connection growth and through ongoing transformational activity that has reduced labour costs 9%.

“Our mobile market share in the corporate market is now 71%, with several more good corporate wins during the period, including KiwiRail, Harcourts, Mainfreight and Ray White,” said Chris Quin, CEO Gen-i. “Mobile and leadership in fibre remain a key focus for Gen-i.”

“Our IT services EBITDA grew 27%. We are driving the margin improvement by creating a culture of operational excellence, reducing errors and improving service. Also, by standardising the customer experience, this has allowed us to get more efficient and get it right the first time more often.”

Wholesale & International

EBITDA was up 5% primarily as a result of lower operating costs.

“The transformation and re-organisation of the International Voice business has successfully been executed with a 40% lower operating cost base and an improvement to customer satisfaction to world class levels,” said Nick Clarke, GM Wholesale and International.

“A new commercial NZ Wholesale business has been set up which has a much lower operating cost base, and a greater focus on future, commercial wholesale services, such as MVNO and managed services.”

AAPT

EBITDA of A$31m is 18% lower than H1 of last year

“The reduction in EBITDA reflects a very tough operating environment,” said David Yuile, CEO AAPT. “However, free cash flow has improved by 113% as capex reductions have more than offset the reduction in EBITDA.”

ENDS

Income statement – reported

Six months ended 31 December 2011 2011
$M 2010
$M Change
%
Revenue 2,358 2,555 -7.7%
Expenses (1,839) (2,054) -10.5%
EBITDA 519 501 3.6%
Depreciation & amortisation (284) (377) -24.7%
EBIT 235 124 89.5%
Net finance expense (59) (63) -6.3%
Share of associates’ profit/(losses) 0 1 NM
Income tax expense (47) (28) 67.9%
Net Earnings from Continuing Operations 129 34 NM
Earnings from discontinued operations, net of tax 877 131 NM
Net Earnings 1,006 165 NM

EPS 52 9 NM
DPS 9.0 7 28.6%

Income statement - adjusted

Six month ended 31 December 2011 2011
$M 2010
$M Change
%
Revenue 2,322 2,537 -8.5%
Expenses (1,834) (2,050) -10.5%
EBITDA 488 487 0.2%
Depreciation & amortisation (284) (377) -24.7%
EBIT 204 110 85.5%
Net finance expense (59) (63) -6.3%
Share of associates’ profit/(losses) 0 1 NM
Income tax expense (46) (29) 58.6%
Net Earnings from Continuing Operations 99 19 NM
Earnings from discontinued operations, net of tax 141 139 NM
Net Earnings 240 158 51.9%

EPS 12 8 50.0%
DPS 9.0 7 28.6%

© Scoop Media