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Executives

Meera Bhatia – Communication Manager

Jon Fredrik Baksaas – President and CEO

Richard Aa – EVP and CFO

Analysts

Espen Torgersen – Carnegie

Andrew Lee – Goldman Sachs

Ulrich Rathe – Jefferies

Jakob Bluestone – Credit Suisse

Laurie Fitzjohn – Citigroup

Akhil Dattani – JP Morgan

Telenor Group (OTCPK:TELNY) Q1 2013 Earnings Call April 26, 2013 3:00 AM ET

Meera Bhatia

Good morning, and welcome to Telenor’s First Quarter Results Presentation whether you’re present here at Fornebu, listening on the phone or watching this via webcast. My name is Meera Bhatia, and I have the pleasure of guiding you through the presentation this morning.

I hope you all have a copy of our press release and the presentation. The material is also available on our website on telenor.com. And you can also find there further instructions how to follow this and watch the presentation of our webcast.

There will be as usual a Q&A session directly after the presentation, firstly, from the audience then from our phone participants. We aim to end this session at around 10:00 and we ask you kindly to limit yourself to one question. I know it’s tough, but try and you have one follow-up clarification question. After the Q&A, there will also be the opportunity to speak to our CEO and CFO, one-to-one interviews.

And to present the update today, we have our CEO, Jon Fredrik Baksaas; and CFO, Richard Aa. First, I’ll leave the floor to Mr. Baksaas.

Jon Fredrik Baksaas

Yeah. Thank you, Meera, and good morning to all of you that has taken the trip here to Fornebu this morning, as well as the one following us on the net. And today, we are reporting our first quarter for 2013 and we – again, we are reporting a very financially-strong quarter.

There are solid margin around in the group and there is a strong cash flow this quarter. We do recognize, however, that the reported organic growth this quarter is somewhat below what we are being used to over the last couple of years from the Telenor Group.

We’ve had a slow start this year, which is largely explained by low growth contribution from handsets in some of the operations and more technically, we do not have the growth factor in our Indian operation this quarter because of the comparisons to first quarter 2012, which included a bigger footprint than what we presently run in India after the license process. And in addition to this, there are regulatory factors in Pakistan and Bangladesh, explaining a little bit of this and we’re coming to get – and we’re going to get back to these issues.

Adjusted for the issues like the IT challenges in Thailand, fewer working days with the Leap Year and the Easter thing, and multiple locations with strikes and unrest in Pakistan and Bangladesh, the underlying organic growth revenue this quarter is around 2%.

With this positive development – with this development, we also see some special improving signs here towards the end of March into April. So we believe that the growth in the coming quarters will improve again. But due to this, we are giving a slight downward and cautious relation to the revenue forecast for the year and Richard will get back to those details.

At the beginning of the work as you know, invested in clarification on regulatory conditions in India, we have now full focus in positioning our service offering in the remaining six circles. And we feel that we’re doing well. The customer acquisition machinery seems to have worked well under also the new regulatory mechanisms on new customer acquisition and registrations. And this is done at the same time as we’re progressing towards the cash flow breakeven target that we have for 2013.

I will then move to Norway, and here we see the healthy underlying growth in mobile subscription and traffic revenues continue. We continuously benefit from the bundled subscriptions that was introduced two years ago, and we now have 65% of our postpaid consumer retail base is now on this price plan.

Excluding one-offs and the effect of the leap year in Easter this year, Q1 versus Q2 compared to last year, the mobile subscription and traffic revenues in fact increased by 6% which is almost at par with what was the growth factor on previous quarters.

During this quarter, we have continued to strengthen our network leadership position. We are doing significant investments in various fixed and mobile networks. The three coverage – the 3G coverage and capacity is improving. The 4G roll off has continued when we launched the 4G on 1800 which enables the iPhone5 users to enjoy the benefits of the 4G. And this has taken the user group of 4G handsets in Norway in the Telenor networks up to anticipated 300,000 users.

Finally, we are also now seeing clarity on the 800 megahertz frequencies coming out with the auction expected to take place in the second half of this year. And this is a very important move because it is a very important move because it will enable us to even more efficiently rollout 4G on a nationwide basis.

The increase to mobile data consumption continues and adjustments to service offerings need to follow. And here, we are focusing on the key differentiators in the data world. The data volumes included in the bundles have been increased somewhat recently. We have been added music services.

We have also introduced subscriptions for more advanced data users, higher volumes including the 4G speed. And with this, renewed service offerings, we believe that we will strengthen our business proposition towards our customers and at the same time, monetize on the investments made in order to realize this tremendous growth to happen.

Moving then to Sweden and Denmark. In both Sweden and Denmark, we see some EBITDA margin improvements this quarter. About time, many of you will say and we’re happy this happens. On the other hand, there are also questions around the growth factor in these countries. In Sweden, the underlying EBITDA improvement is 1.5 percentage point. The rest is more or less explained by one-offs. In a quarter with relatively low market activities, mobile service revenues excluding the handsets-related discounts increased by 1.4%, which is slightly less than in Q4 when it was at 2%.

The acquisitions of Open Net and O-net last year contributes to growth and then strengthened the broadband position of Telenor Sweden.

Denmark continues really to be a very challenging market. The revenue development is heavily impacted by a 65% cut in mobile termination rates from the beginning of this year. In actual figures, the termination rates moved from €23 to €8 at that point in time. And of course, this explains more or less 50% of the top line declines in this quarter.

Mobile subscription and traffic revenues declined by 4% which represents how many listening compared to previous quarters when the decline was more 10%.

In March, we announced a new strategy. We have reorganized Danish operation. We will focus more on existing customers and we will simplify our service offerings and we’ll do this throughout the whole value chain. This reorganization needs to adjust to the tough environment in Denmark which also unfortunately and inevitably result in workforce reductions.

The network joint venture with Telia is up and running and we have launched 4G in March. The next step towards network improvement starts in May when the joint venture will provide full 3G improved coverage also to Telenor. And it will definitely strengthen the cost position going forward.

Before leaving Scandinavia, I’ll throw in a comment on broadcast which have a quarter in first quarter 2013 with very stable revenues and stable margin following a very strong close in 2012.

In the other parts of Europe, the macroeconomic picture haven’t improved that much really over this quarter. We see though that our Central and Eastern European operation are delivering pretty strong operational performance despite this challenging macroeconomic environment.

In Hungary, organic revenues excluding Interconnect increased by 1.5% and the underlying EBITDA margin increased by four percentage points. The first telecom tax thought that was introduced in 2010 was removed from 1st of January 2013 and has contributed to a margin lift up of 6%.

However, the second telecom tax that was introduced in July 2012 has effectively increased from January 2013 as the temporary caps that was in place in second half of 2012 has been removed. And this take the effect from the second tax to a burden that increased from six to eight percentage points on the EBITDA margin. Longer term, the effect of this is probably that this tax will be more included in the price structures moving forward.

In Serbia, the migration from prepaid to postpaid continues. The Serbian operation has another very strong quarter and all parameters are moving in the right direction, really. Customers are growing, the customer base is growing. The prepaid to postpaid continues. ARPU increases and margin follows, so what more can we ask. At the end of this quarter, 44% of our customers in Serbia are now on postpaid subscriptions and ARPU was up 4.5%, coupled with 3% year-on-year growth in the subscriber base. This resulted in organic revenue growth of 8%.

More on the structural side, the operation in Central and Eastern Europe are continuing to explore a joint operational excellence initiative and trying to utilize the regional scale and best practices in the region.

Moving then to Asia and first, the two most mature and advanced Asian markets, Thailand and Malaysia. Both operations see a strong increase in data usage, which again, is translating into revenue growth. Although the revenues – the voice revenues are under pressure, we reiterate that the full-year revenue growth outlook for the companies for 2013 is standing strong.

DiGi, 5% to 7% growth and DTAC, high-single digit. In Thailand, DTAC reported a healthy service revenue growth, 8%, which is in line with previous quarters. Total revenues were plus 6% on the back of lower handset sales. The subscription and handset sales performance this quarter was impacted by an unstable performance of the order management system that have been launched in January. Unfortunately, this more or less shut down sales for a period in the first two months. This is just the result during the quarter and DTAC is now more active in the market again.

DTAC finished also its network swap in Q1 and is now preparing for the launch of 3G services on a new 2.1 gigahertz license and launch is expected in second quarter. And this is a very important step for DTAC going forward, which takes the market from the concession regime and more on over to very normal license regime.

The 3G license gives DTAC a significant opportunity and we have decided to increase the CapEx profile in 2013 in order to meet this growing demand in the country. This stay within our CapEx guidance for the group. The improved EBITDA margin in DTAC is caused both by an underlying OpEx to sales improvement and lower sales with lower margin on handsets.

Moving then to DiGi Malaysia, the Q1 results were in line with expectations. We saw a 5% revenue growth on the back of growth on mobile Internet revenue and higher sales on smart devices. We expect to see a large share of the growth coming from service revenues in Q2. The revenue growth is partly offset by continued price pressure on both domestic and international voice traffic.

We saw however high demand from bundle offerings including handsets and this gave some margin dilution year-on-year that will drive data revenues going forward. The smartphone penetration in Malaysia is anticipated to be 28%.

The network swap is progressing according to plan, now close to 70% of the sites have been swapped and we are aiming to complete by the end of Q3. And this of course, we are pleased to see that improved network quality comes with it.

We’re back to growth in Bangladesh but see a temporary slowdown in Pakistan. Growth rates in Q1 in both operations were lower than what we used to see including the effect of the leap day, et cetera. This is mainly related to regulatory changes. We see the growth prospects for both markets as still being positive for the rest of the year and we will comment more deeply on our view on this.

Grameenphone has stabilized its revenue market share and has better momentum in the marketplace in this quarter. We have a solid subscriber growth in the quarter reporting 1.8 million new subscribers in first quarter 2013. And this, of course, improves the SIM card penetration at the SIM card market share. However, it also put pressure on ARPU and other elements.

The revenue growth continues to be impacted by the implementation of the 10-second billing, which came around last year, and roughly the effect of this is for Grameenphone roughly minus 2 percentage points.

For the time being, we are registering quite unstable conditions in Bangladesh. There are several nationwide strikes where we see politics positioning towards the upcoming election early 2014. And we will consider that some of these kind of challenges will continue to be there for the rest of the year.

GP has increased the market activities over the past quarters. We’re focusing now on bundled offers and sharing reducing campaigns. We’ve increased marketing spend and we have improved the customer acquisition results. But it also put some pressure on the margin which is now at the level of 48%.

In Pakistan, the revenue growth also impacted by regulations on restrictions in the phased channels and it does in the industry very, very severely in the first two months of the quarter. And there are also – this comes in parallel with several government to enforce network closures, which took place both in January and March.

In addition, we see a drop in incoming international traffic after the establishment of an international clearing house. And this in a way puts new challenges on how traffics are being routed in the country.

In December 2012, a new and stricter regulation on SIM sales through retail channels were introduced and it effectively took the number of outlets qualified under new regulations, down from 75,000 to zero, which means that we have to build up a complete new procedure for customer acquisition. The team has done an impressive job on adapting to the new situation and has significantly strengthened the footprint on alternative sales channels during the quarter, and they’re now back at a level of 28,000 outlets qualified for customer acquisition.

The customers have been picking up again and in the second half of Q1 and pretty nearly April numbers pointing a very right direction. So we believe that growth will improve again in the coming quarters.

In this quarter, it’s been a fairly quiet news flow from India compared to what we’re used to. We are on track towards the operational cash flow breakeven target that we have set for the year, and whereas the reported revenue numbers this quarter is affected from scale, mainly the fact that the footprint has been reduced from 13 circles to six circles.

Our six circles added 1.4 million subscribers during Q1, and I’m very pleased that the churn is also coming significantly down and it’s now at the level of 5% per month versus 12% in Q4 2012. We saw a 7% organic revenue growth year-on-year and the underlying ARPU has increased to INR 94 for this quarter. And it was for last quarter in 2012. It was INR 90. The improvement was driven by increased loyalty and growth in usage. The government has taken in principal decision to grant Uninor an offset and refund of the 2008 license fee. We are awaiting the official confirmation to that and also details regarding that implementation.

Meanwhile, we are fully committed to our targets on reaching operational cash flow breakeven by the end of 2013, as well as achieving this within the peak funding requirement that we have established for the projects.

Closing then in on some few remarks on the basic strategies of the group. The way forward is all about doing the right things to ensure both continued growth and improved efficiency. The strategy is in place. It’s dynamic in the sense that we hopefully also manage to grab new activities coming around and new trends coming around in the industry, but it’s execution that counts. The sustainable growth comes from being preferred by the customers over time. And this means that we have to stay relevant to the customers, including being able to adjust the service offerings according to changes in customers’ behavior, market needs, as well as competitive moves.

Improved efficiency is partly about continuous improvement along the road, but also, about utilizing group scale and also daring to adapt new operating models. Technologies are evolving, suppliers are evolving, new ways of operating comes with it.

There are many initiatives in place in all our opcos in distance. These are in place locally and includes, of course, group initiatives originating from group industrial development as well as from the group unit trying to plow into the service side of the new ecosystem where GSR is coming out in new data digital services. And of course, the focus is on executing in this direction with close follow-up at all levels.

I will then hand over to Richard who will, as he will take us through the financials.

Richard Aa

Thank you, Fredrik. I will do that. I will do that in three sections. First, I will talk about P&L and about debt in the balance sheet and then finally our guiding for the rest of the year.

Let’s start with the top line. As Fredrik said, we have a flat top line this quarter year-on-year. I think there are a few explanation that is very helpful to go through when we analyze the top line development. First and foremost, we can start with 2012, which you see on the right hand side here where we have around pace of around 5% organic growth.

But bear in mind, approximately 1% came from India where you compare a much lower revenue base in 2011 to 2012 and 2012 to 2013. And as you build up growth in India, the growth percentage will naturally decline and we also have effects of a smaller footprint. That’s one effect and the other effect is the handset sales. We increased handset sales tremendously in our Asian operations in 2012. In the first quarter, the sales have been more flat and that our sales that comes with basically very low margin.

So the underlying service revenues were really – we have the strong margin in Telenor is around 2% last year. So comparing those 2% to what we have achieved in the first quarter of about 0.3%, we see also a weaker growth when compare it to 0.3%. But we have a few special things in the first quarter that is worth noticing.

India and handsets, already commented upon but we have fewer working days in the first quarter due to Easter and Leap Year. Then we have the commissioning of the IT system in DTAC that severely hampered the sales in DTAC in January and February, and the regulatory issues that Fredrik explained in Bangladesh and Pakistan.

So all in all, we estimate that the underlying service revenues in the first quarter is on par with last year. And that’s also why – and I come back to that, why we don’t reduce the guiding more than the effect of the first quarter. So if you remember, before we have a guiding of 3% to 5%. Now, we’re guiding 2% to 4%. That basically means with the zero growth in the first quarter that you have to grow with 3% to 5% for the three remaining quarters. So the guiding for the rest of the year is basically unchanged going back to that.

Moving on to the margin, strong development because some of the revenues, we don’t then get this quarter on handsets and the growth in India that comes with a low margin. So actually the margin increased from 31% to 34% and an improvement on the EBITDA of NOK 660 million. And there are really four biggest to the nations to the EBITDA development and that is seen on the right side here.

First and foremost, it’s India where we have reduced losses significantly compared to first quarter last year. That’s due to a lower footprint, their close and profitable circles, and the new registration procedures that came in place in the fourth quarter in India is really helping us. But you know, we have a distribution model that differs from our competitors.

We’ve aligned our self directly with the point of sales. The new procedures now with much more stricter enforcement on the operators’ responsibility out on the point of sales, we have a competitive advantage in our distribution system.

We see now that churn is coming significantly down from a really crazy level of more than 12% a month, now down to the 5% range with this new registration procedures. The quality of the subscribers are becoming better, ARPU is going up. And most importantly, our customer acquisition cost are dropping dramatically which will help us achieving the cash flow breakeven target.

So moving India for the rest of the year, it’s really about using our distribution force to get more net adds in this new regime. We have to increase to net adds to get significantly to get to the breakeven and also list the gross margin. Those are the three big marching orders to the Indian organization, and we believe they can do it.

Then on Norway, really a strong quarter on efficiency. Reduced OpEx in Norway coming really I would say from two main sources. One is more of the distribution goes online on web at significantly lower cost done in physical retail and secondly, a good OpEx control in operations. I think David and the crew, they have done some very important changes in how we work more prudently on the maintenance and repair side to avoid callouts and so on entrepreneurs.

We see now that the volume we use on entrepreneurs on fault handling is dropping significantly and more of the volume is shifted towards new build and CapEx on fiber and coverage, which is a very good trend.

DTAC, despite all the issues with the order management system, strong growth in the margin. This explains how powerful the data growth in Thailand is now, also in Malaysia going back to that and March was really a strong month in Thailand. Then GP, you see a negative development. And my friend, Vivek, previously the CFO in Uninor, started as the CEO in GP and trying to merge the very good strength of GP with ultra-low cost mindset of Uninor and winning everyday concept of Uninor into Grameenphone and started really well.

Very good growth side development, but we’re spending money now to fight back in the market. We could not accept sitting and see our market shares slide anymore and they’re doing – the team there is doing a very good job of re-energizing GP to fight back and a good start, I would say. Other, we have front-loaded some costs in Malaysia on the market side on handsets and so on.

And of course, the development in Denmark continues to take its toll on our EBITDA with the top-line development but good margin development in Eastern Europe and Sweden this quarter. So in total, strong quarter on EBITDA, NOK 8.4 billion.

Then on the CapEx side, around 12% CapEx to sales this quarter NOK 2.9 billion, about one-third of that is spent in Norway, and whilst in my opinion on 3G and 4G coverage and fiber-to-the-home. We see both those investment is very profitable going forward. And we’re proud to say now that we have more than 200,000 mobile customers on 4G. We’re really the only operator that had mobile customers on 4G. The other ones have basically PCs and pads and so but we have on bundles but we are the only one with on mobile subscription and it’s picking up really fast.

Then we see a lot of CapEx going into the DGM Pakistan. That is explained but those are two last companies that are now swapping the networks to all IP-based networks. DiGi is in the final stage while Pakistan is in the mid.

Mentioning DTAC care, not so big CapEx this quarter. Remember, DTAC is our biggest mobile operation but we expect to spend significantly more CapEx during the year as we plan to launch 3G on 2.1 in the second quarter. The rest of the operations are really on a more normal CapEx levels.

And that translates into cash flow, EBITDA less CapEx. We have a cash flow of NOK 5.5 billion this quarter, 23.5% cash flow margin. Quite strong. And the 12 months rolling cash flow is now close to NOK 21 billion as you see on the right side here, helped by the trends that we saw on the earlier slides.

Then, summing up the P&L, we have been through the revenues and EBITDA. On other items, we have expensed NOK 270 million this quarter. NOK 106 million of those are related to write-down on this order system in DTAC that shouldn’t have happened. The rest is basically on workforce reductions in the Nordics as the main contributors.

And on our OpEx agenda, I would say we are progressing but the regulatory costs as I mentioned on the fourth quarter results are making it more challenging to reach our targets. And also, knowing regulatory costs also takes – regulatory is just taking such a big toll on the top line as a measure OpEx to sales. As an efficiency, it makes the goal moving so that we have to find even more mitigating actions to be able to reach our targets on efficiency.

So D&A on the lower level, as we have approached final stages of accelerated depreciations with the network swaps, with the exception of DiGi and Pakistan. And then, we don’t have any impairment this quarter and we have big impairments the first quarter last year due to the write-down of licenses in India. So the EBIT is more or less on a normal level of NOK 4.7 billion.

Also, the contribution from VimpelCom I would say is more on a normal level and that’s the fourth quarter results of VimpelCom coming in with approximately NOK 1.1 billion. Net financials, we had a one-off positively first quarter last year. I would say this quarter is reduced underlying due to the refinance expensive loans in India during the summer last year. So finance cost underlying is reduced.

So profit before taxes NOK 5.6 billion, normal tax shortlist this quarter and also normal effect on minorities. So net income to the Telenor shareholders NOK 3.6 billion this quarter which translates into earning per share to NOK 34, which is pretty close to normalized level as we have very few special effects this quarters.

Then, moving on to the balance sheet and the debt. Remembering back to the fourth quarter, we’ve had a leverage ratio of level of the 1 point debt to EBITDA and our debt at year-end stood at NOK 33 billion. That’s been reduced by NOK 4.2 billion during the quarter and the ratio is now back to 0.9 which is very solid in the telecom industry, and the average for European telcos is around 2. Actually, a little higher than 2 now. And we see a lot of telcos going out for capital increases and so reducing dividends. That’s not our plan.

And reconciling the net debt, you have the EBITDA. We’ve been through interest and taxes from a normal level. CapEx paid slightly less than CapEx accrued, NOK 300 million. Share buyback this quarter was finalized then we received NOK 2.6 billion of dividends from VimpelCom. This is for the dividends withheld due to the issues we have in the Russian court system last year, and also the final dividend coming out of 2012, NOK 2.6 billion.

Then dividend to minorities in Asia and then various effects on working capital currency that’s trend slightly negative this quarter so net debt stands at NOK 28.9 billion. So what to expect going forward? Bear in mind that we’ll pay out NOK 9.4 billion in dividends to Telenor shareholders in the second quarter. So that will have a leverage effect on the group, but we will also get NOK 3.8 billion in dividends from VimpelCom in the second quarter that goes the opposite way. And so both those things, you bear in mind when you look at our leverage forecast going forward.

We also have the buyback of shares from the Norwegian state. That will come also now in the next quarters of around NOK 2.6 billion going out. So total is NOK 12 billion going out in dividends and share buyback to the Telenor shareholders and then NOK 3.8 billion coming in from VimpelCom in addition to the NOK 2.6 billion. So in total, VimpelCom will contribute to our cash flow with NOK 5.4 billion in 2013.

Capital allocation, just to remind the audience on that and the priorities. First and foremost, maintain a solid balance sheet and keep the net debt EBITDA below 2. We’re at 0.9 now, so doing well on that. Continuously give a competitive shareholder remuneration. As you will now receive the dividend in May of NOK 6, which is a significant increase from last year. We have done pretty well on this the last three years and then to aim for a growth in dividend going forward which should be possible as we see the Indian losses now coming to an end.

And then finally, on the M&A agenda, within if we do something within our core assets and region and adjacent to that and most importantly, value-driven.

Then finally on the guidance, we’re making a slight adjustment on the revenue guidance. And as I said, we’re really only adjusting for the first quarter. As you see here, we previously guided 3 to 5 percentage points revenue growth for the year and first quarter was basically flat.

So again, repeating myself, if you were to now retro guiding on 2 to 4, we need to maintain the guiding of 3% to 5% for the rest of the year. And there are a lot of effects supporting that. We see the trends now in March and April. Handset sales should come back and they have other things that we can go on explaining. But I think we can do that more on one-on-one on Investor Relations. I think the key effects was on the first slide.

The EBITDA margin despite very strong quarter in the first quarter, we’re not guiding the EBITDA margin up because we expect handset sales to come back that has a low margin. We would really have hoped to be able to guide the EBITDA margin up to 35% but that requires that we get more progress on our operational excellence agenda, and like I said, that is being challenged by all the regulatory issues both on the cost side and the pressure on the top line. We have not at all given up on that and working diligently to try to close that gap. But the 34% margin does not include a closure of that gap.

Then on the CapEx to sales, we don’t change the guiding even though we increased the CapEx spending in DTAC considerably. We estimate that that should be able to maintain within that guiding.

And also I would say, ending my presentation here as the CFO, I always try to focus on being very efficient on CapEx but I think what we’re doing on the CapEx now especially in Thailand and Norway is very good. And if we can do the fiber investment and the 4G, 3G investments in Norway in an efficient way, and the 3G rollout in Thailand, it’s very good for the group long-term if we actually end in the higher end of this bracket of 14%.

So with that, thank you.

Question-and-Answer Session

Meera Bhatia

Thank you, Richard. We are now ready for the Q&A session. So I would like invite Mr. Baksaas back to the podium. We will start with the audience present here then from the ones participating on the phone. Just a kind reminder, please limit yourself to one question and a microphone will be passed around and please, introduce yourself.

Espen Torgersen – Carnegie

Hi, it’s Espen Torgersen at Carnegie. You’ve mentioned the importance of mobile data growth and obviously handset sales. So is that in essence the real reason why you’ve changed full year guidance after two months based on what happened in Thailand?

Jon Fredrik Baksaas

Well, Espen, it’s good to get you back on the questions. You promised last time to come back with questions. Here we are. So not really Thailand in itself, as Richard said, the speed on the startup in Pakistan and Bangladesh due to regulatory issues and the consequences of the not working order management system in Thailand in that period. We have decided that we lost momentum in Thailand in particular on sales in that period. And when we took the rollback position, it was a sort of challenge to do that. But when we did that, we got back into volumes.

So we believe that the underlying drivers here for growth possibilities and potentials in these three markets will – is basically there but we need to handle them better.

Meera Bhatia

Any further questions from the audience? No questions at all from the audience? Don’t be shy.

Richard Aa

Well, we have no questions on the floor.

Meera Bhatia

Okay. Since there are no further questions then I will open up to the call host to introduce the questions from the phone callers. Please?

Meera Bhatia

Question from?

Andrew Lee – Goldman Sachs

Andrew Lee, Goldman Sachs.

Meera Bhatia

Please, go ahead.

Andrew Lee – Goldman Sachs

Good morning, everyone. I just have one question with a follow-up. Can you just give us an update on your efficiency program to get towards your 35% OpEx to sales targets? Do you have the trends in place now to at least attempt to get to this?

And Richard, were you saying earlier that the regulatory and top line pressures have delayed this process? Just any updates around that will be great. Thank you.

Jon Fredrik Baksaas

I can start. Richard you might fill in. The OpEx to sales – sorry, for 35% in 2013 is under pressure. We have to recognize that and there are several reasons for that. One can say that some of the initiatives takes some more time to show progress across the group. However, the fact that the growth dimension is a little bit different also puts some pressure on it. So, Richard?

Richard Aa

No, I think we told you on the fourth quarter that basically, we are on-track when we look at what we have done on the manning side, what we have done with partners, what we have done on network efficiency, energy efficiency and so on. All those programs are basically on-track. But you have seen a massive increase in regulatory costs both in Grameenphone in Malaysia and in Thailand.

So we have to compensate for that as well, which makes it more challenging than we expected when we set out this program in 2010. And also, what we announced in the first quarter, in addition to that the costs are hitting us badly on the regulatory side. You see also that these regulatory effects, especially then in Thailand and – sorry, in Pakistan and Bangladesh and the first quarter results are now hitting the top line to get the pressure on both parameters, both the top and the bottom line.

Our ambition is still to reach the 35%, but the message is that it’s more challenging due to the regulatory side. That means that we have to find more profit-mitigating actions in all the business units. And this will be a focus for the rest of the year, obviously.

Andrew Lee – Goldman Sachs

Thanks. Can I just follow up? Is your ambition still for – to reach – at least try to reach that target for 2013? Do you think that’s in any way realistic? And then just secondly, given the increased regulatory cost pressures, is that basically offsetting your – the benefits of the handset sales to margins and that’s why you have driven your margin guidance higher. Thanks.

Richard Aa

Yes, the funny thing is actually that handset sales, if it doesn’t give you any margin really, it really helps you reaching OpEx to sales. So – but it’s really the quality of earnings that should matter in the long run. But the ambition is clearly to reach 35% but it will require that we don’t – that we achieve the revenue targets we have put up here and also that the increase, the execution on the OpEx side for the rest of the year. But yes, the ambition is still to reach the 35%.

Andrew Lee – Goldman Sachs

Thank you.

Jon Fredrik Baksaas

Next?

Meera Bhatia

Ulrich Rathe with Jefferies.

Jon Fredrik Baksaas

Please go ahead.

Ulrich Rathe – Jefferies

Thanks very much. I’m wondering about Norwegian mobile in particular. I understand that the churn of the customer base you took in last year on this heavy marketing, you said it was higher and that you took the measures by increasing commercial spend and also increasing your Big Data allowance and some tariff.

I’m just wondering, I mean, is this – how severe an issue in terms of looking forward, is this really, is there really a bit of a shift in the way you have to approach the Norwegian market? Or would you consider this more as sort of a glitch in the way you expected the customer base to behave in particular, vis-à-vis, Tele2’s efforts in the market, which of course, weren’t very strong in the first quarter but there is a chance here that they are getting more aggressive I think in some areas. I was just wondering how you look at that. Thank you.

Jon Fredrik Baksaas

I think we have to say that we were not as present in the most marketing channels as we should have wished. So in the first two months, our competitors, Tele2 in particular with Network Norway had a particularly strong performance in that period. Whereas saw at the end of the quarter when we realign the price structures to a certain extent, then we see that that effect, that gives us a positive effect immediately.

So we don’t necessarily believe this is a shift but of course the competitive situation and the dynamics between players needs to be overlooked and needs to be handled and needs to be responded to as we’ll take an initiative in a more or less dynamic situation.

The underlying trend though is that the Norwegian market is eager to the data pay, so to speak. It happens as we speak and the intensity here is quite strong as is the purchasing power of the market itself.

Ulrich Rathe – Jefferies

Thank you.

Richard Aa

I think just to add, we have not really adjusted our prices. But what we have done is that we have included some more data in the packages as we see the data growth is tremendous in Norway now and we also saw the competitors ahead of us, adjusted their data offerings and we can really be that off. But remember, the Norwegian market is still compared to very many other markets quite I would say normal on the data volumes especially if you compare it to a market like Denmark where the data volumes are exceptionally high from all operators.

Jon Fredrik Baksaas

Next?

Meera Bhatia

Jakob Bluestone, Credit Suisse. Go ahead please.

Jakob Bluestone – Credit Suisse

Hi, there. I was hoping to get a little bit more clarity just in terms of the things you’re doing to get around the regulatory issues in Pakistan. And I think you said that you’d – the number of qualified outlets was reduced from 75,000 to zero basically overnight and you’re working on growing alternative distribution channels.

And could you maybe give a little bit more clarity on what does that mean, what are these alternative distribution channels and what is it actually in practical terms involved in getting distribution going again. Thank you.

Jon Fredrik Baksaas

What happened here was that towards the end of the year the regulator introduced a new procedure to have all customer acquisition forms to be signed by a company representative. And with that mechanism in hand basically, the distribution system is then slowed down immediately because we don’t have company representatives being able to sign customer acquisition forms at that high number of points of sales.

So, that means that you have to rebuild your logistics in order to get that done. We have that experience in India because the more or less the same procedure was introduced there some periods before. And in Uninor we managed to come around that in a very speedy way. So we managed to keep the sales momentum towards the end of fourth quarter. But it took some while to get that going in Telenor Pakistan and I don’t think we can say that we were lagging there, the other players in the market on that score. On the contrary, I think we were as clever as we could be in order to get that back into operation.

So as you hear from my comments, we’re now more or less back to a process which can handle customer acquisition in the same way as we did before. What will this mean longer term? I think that the market basically will adjust through these kind of mechanics and achieve to organize the logistics in the customer acquisition in such a way that we properly register all customers in the way that is described by the regulator. And we feel that these are quite important steps to take because what the government really wants to achieve here is to know who is who on the network at any point in time.

It was also introduced a max SIM per individual regulation, which enabled only five SIMs to be registered on one person and that may seem strange if you make sort of a Western measurements on it. But on the other hand, usually, the SIMs in Pakistan for a whole family is registered on the family head, and then we obviously understand that the number of SIMs can grow quite high.

Jakob Bluestone – Credit Suisse

If I can ask any follow up, please, on Pakistan. The logistical measures that you’re introducing to deal with this regulatory issue, will that leave you with structurally higher cost and maybe also just in terms of their impacts so far. It obviously had a significant slowdown in the revenue growth in Pakistan during the quarter compared to previous quarters’ growth rate. Did you exit the quarter with better growth than – so higher growth in March than in January?

Jon Fredrik Baksaas

We exited the quarter with better performance than the initial part of the quarter, yes, and we don’t see that these costs, basically is in a long term structural one. However, it’s a kind of a struggle to get from the one to the other.

Jakob Bluestone – Credit Suisse

Great. Thank you.

Jon Fredrik Baksaas

Next?

Meera Bhatia

Laurie Fitzjohn, Citigroup. Please go ahead.

Laurie Fitzjohn – Citigroup

Thanks. Just on Norway mobile, with the upcoming respect to reforming, do you think you have much risk to your network advantage and you said you need to invest more in base station to compensate for the likely more evenly balanced spectrum holdings we’re going to have towards the end of the year. Thanks.

Richard Aa

No, we’re looking forward through these options. I think to get more low frequency it’s extremely important to build a high quality network at an acceptable cost. And of course, the network also if you look more than coverage, it’s the top of all total network that we give to the customers including the services. We build around it which you also invest heavily from Telenor. And as an example like I mentioned to you, we’re the only one now that really offering 4G on a mobile phone because we have built the handover systems that can take the mobile phones up and down from the various technologies.

I think moving on now into full IT based network. Yes, spectrum is important but it’s really in how we deploy the network and will services around it and give a total quality offering that is most important. But, yes, we are looking forward to the option and to get more low frequency that will able us to build it out in a more efficient way than if we have to base it only with high frequencies.

Jon Fredrik Baksaas

and may I add there that with 800 coming in as a platform for better regional coverage in Norway, which this will also enable us to increase the capacities delivered on the access compared also to the fixed network. There are a number of households in this country which are dependent on DSL lines, which are having limitations on capacities as it stands because of its length and its quality, and to deliver that access over 800 is much more efficient, both from a build-out perspective, as well as from a customer perspective because it gives better capacities in the customer end.

Meera Bhatia

We have time for one more question.

Jon Fredrik Baksaas

Next?

Akhil Dattani – JP Morgan

Akhil Dattani, JP Morgan. Yes, hi, good morning. Just a question on India, please. As you mentioned in the presentation, you’re still expecting an update on the 2008 license refund and you suggested the government has in principle agreed to that should be forthcoming. But I guess it’s been quite a while since we’ve had any sort of update and initially, we’re expecting a conclusion to this either late last year or early this year. So could you just help us understand what the latest developments are around that or does any change or any sort of change in view, really from you in terms of how likely that refund is? And with that, does that have any sort of impact in terms of your ability to achieve your cumulative loss guidance in India, please? Thanks.

Jon Fredrik Baksaas

The license refund is by principle decided by the empowered group of ministers and delivered from that ministry to telecom industry for implementation.

There was one sort of kind of problematic issue that came out in the last end of March because the head of the department which was responsible for the whole process, he moved into pension. And new guys on the block, that means new explanations and new process and what he did on his last day of employment was to send it over to the Justice Department for comments and it has now been returned from the Justice Department with no comments. So in writing from our perspective, this is an implementation process that needs to be done and we need to put the pressure on the whole system in order to do that.

So in principle, we feel that that decision has been taken and it’s to put pressure on the process in order to get it done which really has to be done also from our part. What do we learn from this? You don’t get anything for free. You have to be there, and you have to collect your rights at any point in time or whatever kind of question that is hanging over the industry or yourself as a player on that industry.

Meera Bhatia

Thank you very much. That concludes the session here today. And thank you for joining. And for media presence I’m collecting a list, so please just come up to me.

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