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Telecom delivers result in line with expectations

24 August 2012

Telecom delivers result in line with expectations, following successful demerger

Telecom has today announced Net Earnings of $1,157m for the year ended 30 June 2012.

The period included five months of trading before the demerger of Chorus, which became effective on 1 December 2011, and seven months of trading post-demerger.

The result includes a large non-cash accounting adjustment made in H1 that relates to the demerger of Chorus. This adjustment, as well as several other one off items and the overall impact of the demerger, makes prior year comparisons complex.

Reported and adjusted result highlights


REPORTED FY12 ($M)

ADJUSTED

FY12 ($M)


ADJUSTED

H2 FY12 ($M)

EBITDA - continuing

1,079

1,048

560

EBITDA - discontinued

1,103

321

0

Total EBITDA

2,182

1,369

560

Net Earnings

1,157

422

182

Total Capex

528

528

203

“Telecom has delivered a satisfactory result in a year that included the Chorus demerger, and the subsequent establishment of Telecom as a new fixed line and IT services provider and mobile network operator,” said Chris Quin, Acting Telecom CEO.

“Telecom’s operational performance reflects an increasingly competitive market and is in line with guidance. Following the creation of a new industry model post demerger, we expect strong competition to continue, with increasing consolidation. Telecom will focus on winning in key markets to drive long term value and will compete aggressively in fixed line to maintain broadband market share.

“I would like to thank our customers for their ongoing support and business during the year, and also recognise the enormous contribution of Telecom’s people during the last 12 months which has seen the creation of two new standalone companies and the closure of the 10 year old CDMA network,” he said.

Telecom reported $1,048m of adjusted Earnings Before Interest, Tax, Depreciation and Amortisation (adjusted EBITDA) for its continuing operations. This represents an increase in adjusted EBITDA of 4.8% on the previous year; however comparisons with prior periods are complex. On a pro-forma basis EBITDA was flat.

Reported EBITDA from continuing operations (prior to eliminating the effects of significant one-off gains, expenses and impairments) increased by 41.8% on the previous year to $1,079m in FY12. Adjusted operating revenues have declined by 8.9% to $4,540m.

“There have been a number of one-off changes affecting the year-on-year revenue trends, relating to the rationalisation of low margin customers in our international business and in Australia, the impact of mobile termination rate regulation and the effect of the AAPT consumer division sale part-way through the prior year.

“When these declines are ring-fenced the New Zealand business revenues fell around 2% for the year. Core business such as domestic fixed line access, calling and data continue to decline and are partially offset by growth in mobile and broadband.

“In addition, the decline in revenue has been offset by reductions in operating expenses, which fell by more than 12% compared to the prior year.

“Total capital expenditure is down 42% to $528m and we have delivered strong adjusted free cash flows for continuing operations of $656m,” he said.

Dividend and capital management

Telecom has declared a second half dividend of 11c per share with 75% imputation, bringing the total dividend for the year to 20c per share.

“This improvement in adjusted free cash flow has enabled the payment of the same level of dividend that we delivered in the previous financial year as an integrated company,” said Chris Quin.

Telecom’s on-market buy-back to return up to $300m of capital during the calendar year has returned $169m to date. Management will continue to adopt a conservative approach and may elect to complete the buyback, of up to $300m, over a longer period of time if required.

Key product lines

Post demerger, Telecom has retained its focus on the key markets of mobile, broadband and ICT.

“During the year Telecom worked towards the closure of its 10 year old CDMA mobile network, which was switched off a month after the end of the financial year,” said Chris Quin.

“Telecom’s total mobile base reset to around 1.6m connections at 31 July 2012, reflecting the impact of the CDMA closure The average revenue per month of CDMA connections remaining on the network at shutdown was around $1.50 per connection.

“We lost some lower-value or zero use CDMA customers as we approached the switch off. We have welcomed 63,000 new customers onto higher value post-paid plans on our newer Smartphone network during the financial year. As a result mobile voice and data revenues grew by 2% compared to the prior year.

“We have also seen increasing competition and price pressure in the fixed line business, however retention offers have stabilised the customer base.

“Broadband and internet revenues in New Zealand increased by $13 million, or 4.1%, to $333m in FY12.

“Despite an increase in price-based competition in the market, broadband connections increased by 9,000, to 619,000 at 30 June 2012, an increase of 1.5% when compared to 30 June 2011.

“And on the ICT front, Telecom’s Gen-i business secured and extended major contracts worth $734m during the period. IT services margin has increased to 9%,” he said.


Financial outlook

FY13 financial outlook remains subject to strategy review by the incoming CEO.

FY13 EBITDA – flat to low single digit percentage decline
Telecom will be investing to hold broadband market share
FY13 Capex of approximately $460m (includes spectrum spend and an allowance for data centre spend)
FY13 dividend policy – continuation of 90% pay out ratio
Dividend Reinvestment Plan retained
Imputation expected to be between 70% and 100%

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.

In addition to the adjusting items disclosed in the half year results announcement, which are available in the management commentary, the following adjusting items were accounted for during the second half.

An adjustment of $11m relating to additional assets identified post-demerger that have transferred to Chorus based on the agreed terms of the asset allocation plan;
An adjustment of $20m, relating to reassessments made on finance leases;
Additional costs of $3m comprising specific separation-related systems, employee and transaction costs; and
$3m of related tax benefit on the above adjustments.

ENDS

FULL YEAR INCOME STATEMENT - REPORTED

Year ended 30 June

2012

$M

2011

$M

Change

%

Revenue

4,576

5,004

-8.6%

Expenses

(3,497)

(4,243)

-17.6%

EBITDA

1,079

761

41.8%

Depreciation & amortisation

(576)

(708)

-18.6%

EBIT

503

53

NM

Net finance expense

(80)

(137)

-41.6%

Share of associates’ profit/(losses)

0

1

NM

Income tax expense

(112)

4

NM

Net Earnings from Continuing Operations

311

(79)

NM

Earnings from discontinued operations, net of tax

846

245

NM

Net Earnings

1,157

166

NM




EPS

60

9

NM

DPS

20

20

0%

FULL YEAR INCOME STATEMENT - ADJUSTED

Year ended 30 June

2012

$M

2011

$M

Change

%

Revenue

4,540

4,986

-8.9%

Expenses

(3,492)

(3,986)

-12.4%

EBITDA

1,048

1,000

4.8%

Depreciation & amortisation

(576)

(708)

-18.6%

EBIT

472

292

61.6%

Net finance expense

(80)

(137)

-41.6%

Share of associates’ profit/(losses)

0

1

NM

Income tax expense

(111)

(68)

63.2%

Net Earnings from Continuing Operations

281

88

NM

Earnings from discontinued operations, net of tax

141

300

-53.0%

Net Earnings

422

388

8.8%




EPS

22

20

10.0%

DPS

20

20

0.0%

ends

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