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Telecom: no more AAPT writeoffs

By Nick Stride

Friday 7th February 2003

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Telecom executives are confident there will be no further writedowns in Australia this year despite continued losses at AAPT.

Chief executive Theresa Gattung yesterday told The National Business Review AAPT was trading as management had expected at the time of the last review and she was still comfortable with its carrying value.

"It's cashflow positive and comfortably self-sustaining."

Telecom slashed $850 million from AAPT last August but analysts said then the $2 billion value still needed to be cut by as much as half.

In the December half-year the company's Australian operations were still losing money at the bottom line.

At the ebitda (earnings before interest, tax, depreciation, and amortisation) level they made $78 million, up from $67 million a year ago. But depreciation and amortisation took all of that, leaving Telecom with zero "earnings from operations."

Australian revenue fell 17.7% and expenses 17.5% as Telecom pursued a strategy of abandoning low-value customers to rivals, mainly Telstra, and focusing on high-value business.

That theme appeared across the group result, which pleased the market with better-than-expected net earnings of $312 million.

New Zealand earnings from operations of $776 million were up 2.2% on the previous period. Revenue fell 2.9% to $1.87 billion but expenses fell 6.2% to $1.09 billion.

At the group level Ms Gattung emphasised the improvement in operating cashflow (up from $517 million to $776 million) and the reduction in net debt (down to $5.02 billion from $5.3 billion).

The group's operating performance would allow it to continue to repay debt in the second half but not as quickly as in the first, which featured a big reduction in working capital.

The company could also continue to cut costs faster than revenue fell.

"We've moved fixed costs to variable costs so that costs fall when revenues do and rise when they rise," she said.

Telecom was well on the way to achieving the target balance sheet ratios rating agencies Standard & Poor's and Moody's had set as a condition of maintaining the A and equivalent ratings.

The company had set itself a target of reducing net debt to about $4.4 billion. At that point, probably in 18 months to two years' time, the board would probably look at lifting the dividend payout ratio from 50%.

In the latest half the net interest bill fell only marginally ­ from $207 million to $203 million ­ but Ms Gattung said the rate of reduction would accelerate as debt levels fell. Or as she put it, "We'll see deleveraging driving earnings growth."

Telecom has upgraded its assessment of the regulatory threat to its earnings as reviews by telecommunications commissioner Douglas Webb pick up pace.

The commissioner's rulings are still some way off.

Telecom has complained his draft rulings on interconnection and wholesale are unfair and inconsistent with the regulatory environment in Australia.

The residential access debate has only just got going. The commissioner is expected to give his view on the TSO (telecommunications service obligation) late this year.

"It's a tough, short period of time, but doable. We want it out of the way because we want certainty," Ms Gattung said.

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