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Telkom to spend millions on retrenchments

Johannesburg - Telecoms company Telkom [JSE:TKG] has made a provision for retrenchment and voluntary severance packages of approximately R591m, according to an operational update from the company.

On Wednesday, Telkom further said in a trade update that it expects a related tax benefit of about R165m in the current financial year regarding its retrenchment and voluntary severance packages.

The telecoms company noted that it also expects a R546m tax benefit on the payment to an insurer for the transfer of post-retirement medical aid liability for certain pensioners.

Telkom said earlier this year that it has embarked on restructuring process, affecting the likes of its Direct Stores and resulting in the outsourcing of its call centres, IT Legacy Systems, internal printing and supply chain.

The company said it is continuing to focus on restructuring its cost base to help its profit growth.

“Although we managed to further improve on cost efficiencies in certain areas, we experienced delays in the implementation of other initiatives. The delayed initiatives included the workforce reduction initiative and the renegotiation of certain key contracts,” said Telkom.

“Cost management achievements include a reduction in marketing expenses, consulting and business transformation expenses as well as reduced vehicle costs. We also reduced expenditure relating to our post- retirement medical aid liability for in-service members, certain pensioners and part time staff.

“These savings were partially offset by annual salary increases, higher bad debts and higher electricity costs as the economy and the challenges around energy supply negatively impacted our results,” said Telkom.

Telkom said the cost management measures have helped it with its improvement in its EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin.

“Further restructuring of our balance sheet saw the removal of a post-retirement medical aid obligation to certain pensioners of approximately R2bn from our balance sheet in the second half of the year,” said Telkom.

Earnings

Telkom’s announcement regarding its provision for retrenchment and voluntary severance packages has been made in light of the company telling shareholders that its reported and normalised earnings for the year ended 31 March 2015 are expected to differ from the previous period.

With the likes of retrenchments factored in, Telkom has said that its reported headline earnings per share is expected to be 20%-40% lower. The company’s normalised headline earnings per share is expected to be 40%-60% higher.

Meanwhile its basic earnings per share is set to be 10%-30% lower and its normalised basic earnings per share is set to be 100%-120% higher.   

For March 31 2014, Telkom recorded a reported basic earnings per share of 758.1 cents and a normalised basic earnings per share of 285.2 cents. The company's reported headline earnings per share was 861 cents on March 31 2014 while its normalised headline earnings per share was also 388 cents in this previous period.

Telkom further said that the increase in its normalised basic earnings per share for the year ended 31 March 2015 is mainly as a result of lower payments to mobile operators resulting from the benefit of around R743m in the reduction in termination rates; lower asset impairments and write-offs.

A decrease in expenses relating to the post-retirement medical aid liability owing to the curtailment and settlement of part of the liability has also boosted its normalised basic earnings, Telkom said.

Telkom further noted that this was partially offset by lower foreign exchange gains as a result of the implementation of hedge accounting from 1 October 2013.

The company went on to say that the main reason for a higher increase in normalised basic earnings per share when compared to the increase in normalised headline earnings per share “is the higher asset impairments and write offs in the prior corresponding period, and higher gain on sale of assets in the current period, which are both excluded from the calculation of headline earnings per share”.

Pressures on the business

Talking about the business more broadly, Telkom said certain challenges continue to affect it.

“Our performance for the full year to 31 March 2015 continued the trend experienced and reported on in our interim results where a challenging operating environment was once again compounded by competitive pressures and regulatory interventions,” according to the trading update.

“We have managed to further stabilise the business and have performed reasonably well despite these challenges,” said the update on Wednesday.

Meanwhile, Telkom further added that it continues to experience pressure on its fixed line voice usage and lease line revenues.

Better performance in mobile

However, Telkom has said the performance observed in its mobile business has experienced a growth in subscribers and higher postpaid and prepaid average revenue per user (ARPUs).

“Our mobile data offering is performing well with usage and revenue growing year on year. This as well as good data growth in our consumer market was instrumental in us achieving flat growth in gross revenue despite these challenges.

“Net revenue reflects a modest increase driven by the lower payments to mobile operators. An increase in other income was due to an increase in profit on the sale of non-core parts of our property and real estate portfolio.

Telkom in its announcement also added that it has forced prioritisation within the capital allocation process which resulted in the lower capital expenditure (CAPEX) to revenue ratio of between 14% - 17%.

Telkom is set to release its results for the year ended 31 March 2015 in June 2015.

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