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Cesky Telecom presented its new restructuring program on Friday

18.11.2003 10:35

Cesky Telecom made public its restructuring program on Friday, the program starts at the end of 2003 and it should be completed in July 2005. It is focused mostly on (i) efficiency improvements (including synergies with Eurotel, its mobile operator subsidiary) with the aim to significantly cut costs (this follows recent management and organization-structure change, and the announcement of an incentive program), and (ii) a more customer-oriented approach. Few concrete targets were provided; among those that were, we note that:

* CT will reduce its workforce by 20% in 2003 (to below 11,000), and the number of employees should not exceed 9,500 in 2005.

The planned workforce reduction below 11,000 employees (i.e., 20% y-o-y decline) in 2003 was previously declared in August (the company had 12,610 employees as of September 2003; related severance pay is expected to reach 6-10 monthly salaries).

The reduction in 2004 and 2005 is more aggressive than we expected (our projections assumed more than 10,000 employees at Cesky Telecom and Eurotel by the end of 2005).

* CAPEX should be below 12% of revenues in 2005 (consolidated with 100% of Eurotel), unless attractive opportunities arise outside of the scope of CT’s current business plan. This is very ambitious, and significantly below our expectations (a capex 16% of sales in 2005, which corresponds to a difference of more than CZK 2bn).

The consolidated EBITDA margin of CT (48.6% in 9M 2003, 49.47% in 2002; Eurotel, 51% owned by CT, had a 9M EBITDA margin of 51.55%) is already high by both regional and European standards. Further efficiency improvements (on both opex and capex level) are logical steps focused at offsetting the impact of falling revenues on free cash flow. Similarly, a more customer-oriented approach is a must in the current market. Thus a clearly defined strategy and its implementation are key for the success of the company, but these are widely expected from the new CEO and management team.

Separately, CFO J. Sedivy told Reuters on Friday that without an increase of monthly fees Cesky Telecom would be forced to write-off part of its massive investment in fixed-line infrastructure made between 1996 and 1998 (under IFRS, a company must write-off investment that does not bring sufficient revenue). Should this happen, the company could reportedly slip into a loss this year.

Although the hints on the write-offs are around for some time already, and these are but an accounting exercise, the market would react negatively to large negative P&L impact.

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