Operating & Financial Review
Strategy
The group is committed to long-term shareholder value through the provision of an excellent telecommunications service.
Financial Performance
Overall performance in eircom for the year was very strong, operating profit grew by 39% to €118 million due to improved gross margins and lower operating costs. The operating profit before exceptionals was €180 million.
Gross profit improved by 3% to €1,218 million. A change in revenue mix led to improved gross profit margins of 75% in the year ending March 2004 compared to 70% the previous year. This was due mainly to access price increases and a reduction in lower margin transit interconnect turnover and some sold and discontinued businesses.
Adjusted EBITDA, before exceptional operating costs and pension amortisation, improved by 9% to €602 million due to improved gross margins and lower operating costs.
The key components of this year’s performance are highlighted in the following tables:
| 2004 €‘m |
2003 €‘m |
% Change | |
|---|---|---|---|
| Turnover | 1,628 | 1,682 | (3)% |
| Gross profit | 1,218 | 1,183 | 3% |
| Operating costs before exceptional operating costs, depreciation and goodwill amortised |
632 | 648 | (2)% |
| EBITDA before exceptional operating costs |
586 | 535 | 9% |
| Adjusted EBITDA befor exceptional operating costs and pension amortisation |
602 | 551 | 9% |
| Operating profit | 118 | 85 | 39% |
| Cash outflows relating to capital expenditure |
208 | 197 | 6% |
| Net debt excluding capitalised fees |
1,959 | 1,791 | 9% |
| 2004 | 2003 | % Change | |
|---|---|---|---|
| Total access channels (‘000) | 1,997 | 1,950 | 2% |
| Traffic minutes (millions) | 13,155 | 13,093 | - |
| Wholesale minutes (millions) | 7,050 | 6,837 | 3% |
| Average headcount | 8,306 | 9,129 | (9)% |
| Year-end headcount | 7,943 | 8,547 | (7)% |
| 2004 | 2003 | |
|---|---|---|
| Gross margin | 75% | 70% |
| EBITDA margin | 36% | 32% |
| Adjusted EBITDA margin | 37% | 33% |
| Operating profit margin | 7% | 5% |
| 2004 €‘m |
2003 €‘m |
% Change | |
|---|---|---|---|
| Access (rental, connections, DSL) | 489 | 423 | 16% |
| Traffic and data communications | 903 | 959 | (6)% |
| Total Access,Traffic and data | 1,392 | 1,382 | 1% |
| Interconnect/other | 318 | 397 | (20)% |
| Gross income | 1,710 | 1,779 | (4)% |
| Discounts | (82) | (97) | (15)% |
| Total turnover | 1,628 | 1,682 | (3)% |
Turnover
Overall turnover decreased by 3% in the financial year. This was mainly due to reduced voice traffic, both in volumes and tariffs. In addition we experienced a decline in turnover from data communications and low margin interconnect transit traffic. As against this, we were successful in rebalancing our access tariffs and continued our successful rollout of DSL. Part of the reduction in turnover was due to our planned exit from certain businesses, including eircom Retail stores.
Connecting Ireland – Fixed line access
Turnover from the group’s fixed line access increased by 16% to €489 million in the financial year ended 31 March 2004. This was due primarily to increases in PSTN line rental charges, growth in the number of ISDN channels and increases in ADSL and Bitstream turnover as a result of increased customer demand for the new low-cost broadband service.
Connecting Ireland – Traffic and data communications
Overall turnover from traffic and data communications decreased by 6% in the financial year ended 31 March 2004. This was due primarily to a reduction on traffic turnover, caused by reductions in tariffs on national and fixed-to-mobile call types and an overall decline in traffic volumes due to loss of market share and weakness in the traditional voice market, principally due to mobile substitution and also a reduction in data communications due to a reduction in leased line turnover. This reduction was offset by increased turnover from data traffic due to growth in internet usage.
Connecting Ireland – Interconnect and Other
Overall turnover from interconnect and other decreased by 20% in the financial year ended 31 March 2004. This was due primarily to a reduction in low margin interconnect transit turnover and the discontinuation of certain businesses, including eircom Retail stores.
Gross Profit
Gross profit margin improved to 75%, up 5% compared to last year. This improvement has been brought about by changes in our revenue mix as well as the elimination of costs relating to the interconnect transit traffic mentioned above.
Operating Costs
Total operating costs before exceptional operating costs, depreciation and goodwill amortised decreased by 2%, compared to last year. Headcount at 31 March 2004 reduced by over 600 people to 7,943. In addition capitalised labour was up due to insourcing of major access network upgrade projects. However, pay inflation meant that overall pay cost reduction was only 2% for the year. Other operating costs were down 3% on last year, due to continuing management focus.
Capital Expenditure
The cash outflows relating to CAPEX was €208 million (net of grants) for the year, up 6% on last year. We are entering the second year of a three year programme of upgrading the Access network, in order to improve our services and customer satisfaction. These programmes are required to support the continued strong committment to our roll-out of broad band.
Cashflow
The group continues to be significantly cash generative.
The cash balance of the group in 2004 decreased by €88 million mainly due to the payment of €400 million in dividends to the former shareholders of the group during the year ended 31 March 2004.
Liquid Resources
At 31 March 2004, we had long-term debt of approximately €2.263 billion, compared with €2.125 billion as at 31 March 2003. Net debt at the end of March was €1.959 billion. The debt profile of the group changed significantly during the year. We refinanced our bank debt and issued High Yield bonds on the Euro and US markets. The bonds were over subscribed, and constituted the largest Euro bond issue at that time. We also negotiated a €150 million revolving credit facility as part of our senior credit facility. This facilility was undrawn at year-end.
Other Financial Matters
Treasury Management
The group co-ordinates all treasury activities through a central function whose purpose is to manage the financial risks of the group as described below and to secure funding at competitive rates. The central treasury function operates within a framework of clearly defined board approved policies and procedures. It is not permitted to make use of financial instruments or other derivatives other than to hedge identified exposures of the group. Speculative use of such instruments or derivatives is not permitted, and none has occurred during the year.
Risk Management
The Group is exposed to a variety of risks, particularly the fact that the provision of telecommunications services in Ireland is subject to extensive and changing regulation. The group has a dedicated risk management function which works in close co-ordination with internal audit and compliance. The functional head of these areas attends the audit committee. In addition the group operates an interest rate policy designed to optimise interest cost and reduce volatility in reported earnings. This is achieved partly through the fixed rate debt and partly through straightforward derivatives. At the end of March 2004 interest rates on almost 68% of total borrowings has been fixed. The US dollar denominated bond is fully hedged, and, accordingly at the end of March the group had no material currency exposure.
Share Price
The group floated on the Irish and London Stock Exchanges in March 2004. While turbulent markets caused the price to fall at initial trading the share price is now showing encouraging signs of recovery.
Pension costs
Pension costs in these financial statements computed in accordance with Statement of Standard Accounting Practice 24 totalled €41 million (2003: €41 million) of which €22 million (2003: €22 million) was in respect of defined benefit schemes. Full implementation of Financial Reporting Standard 17 ‘Retirement Benefits’ (FRS 17), has been deferred by the Accounting Standards Board, except for the detailed disclosure required in the notes to the financial statements. As at 31 March 2004, the net FRS 17 pension fund liability amounted to €256 million (2003: €284 million).
Accounting Policies
The accounting policies have been consistently applied. The group has adopted FRS 5 “Reporting the substance of transactions” Application Note G for Revenue Recognition. The adoption of this Application Note did not have a material impact on the results of the group.
Peter E Lynch CFO