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Executives

Meera Bhatia – Communication Manager

Jon Fredrik Baksaas – President and CEO

Richard Aa – EVP and CFO

Analysts

Espen Torgersen – Carnegie

Peter Kurt Nielsen – Kepler Cheuvreux

Laurie Fitzjohn – Citigroup

Barry Zeitoune – Berenberg

Thomas Heath – Handelsbanken

Jakob Bluestone – Credit Suisse

Telenor ASA (OTCPK:TELNY) Q2 2013 Earnings Call July 23, 2013 3:00 AM ET

Meera Bhatia

Good morning and welcome to Telenor’s Second Quarter Results Presentation. My name is Meera Bhatia, and I have our CEO, Jon Fredrik Baksaas; and CFO, Richard Olav with me here today, who will go through the financial results and development. The conference is now being recorded.

There will be the opportunity for questions from the floor, on line and over the phone. And I would like to kindly remind you to limit yourselves to one to two questions, and introduce yourselves by name and company. In addition, there will be time for some brief one-on-one interviews at the end of the presentation. We aim to end the session by about 10:00 AM.

I now leave the floor to Mr. Baksaas.

Jon Fredrik Baksaas

Yeah. Good morning also from me to this Second Quarter 2013 Reporting. We – I’m pleased to present a report where we see growth picking up, and margins are improving both actually on EBITDA and on cash revenue.

We had a slow start beginning of this year, with flat organic revenues. But, as expected, we have seen in this quarter an improvement as compared to the first quarter, with an organic growth of 2%. We expect this positive trend to continue over the next quarters in this year, and as indicated through the unchanged outlook for the year, as you can see from the report. Richard will come back to this later.

We also got a better momentum on customer acquisitions and added more than 5 million subscribers this quarter. This is the highest number reported since Q1 2012. The growth is driven by several markets actually, where both dtac, Grameenphone, Telenor Pakistan and India contributes to the 5 million this quarter. I’m slow on this one today, must be the summer temperature. Sorry for that.

In Scandinavia, in this quarter we have seen a definite move to data-centric gear pricing in all our Scandinavian markets. And this reflects the change in user behavior, the unlimited voice and SMS right now included in bundle subscriptions at various sizes.

It’s been also an eventful period on the M&A side with two important milestones in this quarter. We have announced the acquisitions of Globul, the number two operator in Bulgaria. And in June, we declared – we were declared a successful applicant for a telecom license in Myanmar. I will come back to both of them later in my presentation.

At first, to Norway – in Norway, we have adjusted our mobile offerings by adding more data volumes to our service offerings. And we also included unlimited voice and SMS to the bundled subscriptions. Increased market activities related to the renewed offerings have resulted in improved customer uptake where we actually added 20,000 new postpaid customers in this quarter alone. After what we have to say, it was a slow start at the beginning of the year.

Unfortunately, though, revenues, ARPU and EBITDA this quarter was negatively impacted by a one-time correction of the mobile content revenues from previous periods on NOK 114 million, stretching from Q1 2011 into to 2013. Excluding this effect, though, mobile revenues remained stable compared to the same period last year. And this happens in a market which is very intense by competition.

During the quarter, we continue to strengthen our network leadership position through significant investments, both in mobile and fiber networks. The 4G rollout continued including launch of 4G in many popular summer holiday areas in Southern Norway. Population coverage has now reached 40%, and we believe we have roughly 300,000 4G-enabled devices in the network as we speak.

Finally, we are also moving towards clarity on the 800 megahertz here in Norway. There is an auction expected to take place in December this year, and we see this as a very important step to further improve the nationwide rollout of 4G.

With these renewed mobile service offerings, we aim to strengthen our relevance to our customers. And at the same time, monetize on the significant network investments that are being done in the Norwegian market.

Telenor Sweden reports a very strong quarter with 24,000 new mobile subscribers this quarter and a solid margin uplift. Mobile service revenues, excluding the handset-related discount, increased by 4.7%. The acquisitions of Open Net and Ownit last year contributes to growth and strengthened also the position in the fixed broadband area.

EBITDA in local currencies increased by 23% compared to second quarter last year, and this improvement is driven by both increased gross profit and several operational excellence initiatives that now starts to pay off.

Denmark, though, continues to be our most challenging marketplace. The revenue development is heavily impacted by the 65% mobile termination rate cuts from the beginning of this year. However, this explains only half of the top-line decline also in the second quarter.

The rest of the decline is explained by continuous price pressure and competition in the mobile segment structure in the market. The EBITDA margin in Denmark dropped this quarter below 20% driven by a handset campaign on the iPhone 4. The new strategy, which focused on simplification throughout the value chains, is now being developed and is critical for us in the quarters to come.

Before moving to the operations outside Scandinavia, I should give credit to the Telenor Broadcast team. Telenor Broadcast in this quarter reports a revenue growth of 1%, and which is a margin of 32.6%, which we consider very strong. A lot of good work has now started to really pay off for Telenor Broadcast.

Moving then more south in Europe, in Central and Eastern Europe we see strong operational performance this quarter despite continued challenging macroeconomic environment. In Hungary, the organic revenue, excluding interconnect, increased by 1%, and underlying EBITDA margin increased by 4 percentage points. And we see the growth in subscription traffic revenues which now is offsetting the decline in the Mobile termination rate.

The EBITDA margin of 39% is very solid, especially taking into account that the 8 percentage points’ drag comes from the telecom tax. From 1st of August, this telecom tax on corporate customers will increase, putting additional pressure on the margin in Hungary.

In Serbia, the migration from prepaid to postpaid continues. At the end of the quarter, 45% of our customers in Serbia were on postpaid subscriptions. Although revenue growth has slowed somewhat compared to previous quarters, performance is solid with a 41% margin in – for the quarter.

The operations in Central and Eastern Europe are continuing to explore joint operational excellence initiatives, both based on regional scale, as well as on group scale, which contributes to this performance.

And then, now we are ready to move to Bulgaria. The acquisition of Globul in Bulgaria was announced 26th of April. This acquisition has now been approved by the EU Commission, and we expect to close the transaction during the third quarter. Globul is already a well-run company with a strong number two position in the Bulgarian mobile market, and we now really look forward to welcome our new colleagues in Globul to the Telenor Group.

But also, by leveraging on the Telenor scale and expertise and competencies in the region, we aim to further strengthen the Globul’s performance in the marketplace. Stein-Erik Vellan, who was the CEO of Telenor Serbia in the initial phase, will now head the Bulgarian operation. When the transaction is completed, we will work with the local management team to establish the ambitions going forward, and also expect to be able to share more of these details about plans and the further development of Globul later this year.

Moving then to Asia which once again constituted the growth engine of Telenor Group. The data-driven growth continues in both – more to advanced and mature markets in Asia. For both dtac and DiGi, we are very pleased to see that most of the growth is driven by service revenues as both companies are able to offer attractive Internet bundles both for the prepaid and postpaid segments. In dtac, we see an impressive 11% of service revenue growth and a solid subscriber uptake as the company today – actually today, as we speak, launches its new 3G network on 2.1 gigahertz.

The launch of the new network marks the start of the important transition from the concession to the license. And the company will now start to migrate subscriber base to this new license. To support this migration, dtac will now speed up its investments in 3G network rollout as reflected in the revised CapEx guidance from the company. This will take us to 50% population coverage on the new 3G network by the end of the year.

Activities also to increase the 3G handset penetration in the customer base is also part of the migration plan where affordable own-branded handsets were introduced in second quarter. We still expect to deliver a healthy single-digit revenue growth this year on the back of solid demand in the mobile data area.

Also in DiGi, DiGi is now on track to its expected 5% to 7% revenue growth this year and has a good momentum on mobile data. Although voice revenues are under pressure, we still see that there are improvements in the revenue mix where most of the growth this quarter is driven by service revenues. We reckoned that 30% of DiGi subscriber base is now on smartphones and the company has also launched its 4G service – network earlier in July.

Also more importantly, the growth is picking up in Bangladesh and Pakistan. Growth factor is improving after a fairly slow start this year. Both markets had their regulatory challenges and are also characterized by intense competition. Grameenphone has good momentum on its increased market activities and we see improvements on top-line growth and, in this quarter, as much as 2.2 million new subscribers coming in from the new campaigns. We believe Grameenphone has improved its SIM market share this quarter.

And also, in spite of seeing as much as 2 million new subscribers coming in, we have seen the EBITDA margin improving from previous quarters.

In Pakistan, growth is also improving this quarter, and we have a 5.5% organic revenue growth to report. The subscriber growth of 1.3 million this quarter was the highest since Q2 2008. We have also continued to improve our retail sales channels and distribution, and we still see regulatory effects and intensified competition. And of the growth factor of 5.5%, 2% of this – 2 percentage points of this growth comes from financial services alone. We will have to expect the intensified competition going forward. It’s hard work to position, I would say this successfully. And at Telenor, we’re ready to compete for that position in the market.

Moving then to India – we see around 7% underlying revenue growth in our six circles and a significant reduction of churn versus the 2012 levels. Our ambition is to reach cash flow breakeven by the end of 2013, and this remains very firm. But that doesn’t mean that we also need to improve the top line growth and customer intake going forward

The business transfer from Unitech Wireless to Telewings is still not approved by the Department of Telecoms. And the management is continuing to work with the Department of Telecoms to complete this process, and also to formally receive the unified licenses as a result of the auctions in November.

And finally, to complete my presentation today, we were declared the successful applicant for the new license in Myanmar. This is another important milestone for us. We are in neighboring countries. We have done greenfields before. We have the competencies and the people to do this. And we are very much looking forward to get started, currently while waiting the telecom law and the final license conditions from the authorities in Myanmar.

Myanmar is one of the world’s very few remaining greenfields where penetration is still below 10% and offers, of course, an attractive opportunity, although there will be plenty of risks and uncertainties. Once the final license is secure, we will enter with the aim of – to leverage their whole competence package and experience from the Telenor Group and their track records in the region and neighboring countries and, of course, have the ambition to become the market leader over time.

But, as we know, things take time in telecoms. So, we also know that there will be an investment period before profitability can be established. Although we cannot share details of the business plan at this stage, I should say that some of the market estimates on the funding, as we have seen them, they look fairly high.

We entered Pakistan, just to remind you, which had a population of three times that of Myanmar, in 2005. And our accumulated investments in network, et cetera, in Pakistan was 1.9 billion before reaching operating cash flow breakeven. And both the equipment prices and other elements in the value chain has come down and delivered higher degree of efficiencies. And in addition to this, the network share in mobile will be utilized in its full potential in Myanmar compared to the situation in Pakistan, where we more or less built all our towers ourselves.

So, we strongly believe that the Myanmar business case is under control, seen from the perspective of the experiences in the group. However, there are plenty of uncertainties when it comes to the overall framework and the lack of institutional setup in the country that we have also have to work with during this project. This is though a significant boost to the Telenor group at this stage, and we really look forward to start delivering services to new customers in the country.

With these words, I conclude my presentations for second quarter 2013 and leave the floor to Richard.

Richard Olav Aa

Thank you, Fredrik. I will take you through three items this morning. First, I will take a deep bow into the P&L, both for the consolidated entity but also for the full set of entity that we have some movements there this quarter. And secondly, we will have the local activity on the M&A side and also on share buyback and – or debt side. So, I’ll take you a little bit through the capital allocation principles of the Telenor group and see how the actions in the second quarter stack up through our principles. And finally, I will go through the guiding.

So, let’s start with the P&L. I think we – as Fredrik said, we were a little bit concerned after the first quarter with zero growth. I think we’re now seeing the second quarter as we’re growing in the right places. We’re growing in data in Asia which is very an important value driver long term for the Telenor Group. And we see the service bundling in Thailand and Malaysia is giving very strong effects, and it has a good negotiating position with the service providers, the OTT players in those countries.

In the voice-centric markets, Bangladesh and Pakistan and also, India, strong subscriber uptake in this quarter and particular towards the end of the quarter. So, also there, we’re growing in the right way. The growth trend in Pakistan is much lower than have been in the past, and we have to watch Stockholm as competition has heated up in Pakistan.

On Norway, we should have wished for more growth on the mobile revenues on the back of having investments. Given the competitive climate, we have only been able to report stable mobile revenues in Norway.

EBITDA, strong this quarter, 34% margin, up 10%, improvement of NOK 800 million in EBITDA. Three main sources: India, losses coming down as expected, contributing close to NOK 0.5 million; then the strong performance in dtac on the top line is also coming true on the EBITDA, with more than NOK 200 million improvement; and then, the strong margin and cost development in Sweden of NOK 185 million.

If you recall, second quarter last year, we had a normal high customer-service cost in Sweden. So, it’s a little bit inflated by that fact. Norway, we have the one-off effects on the CPA of more than NOK 100 million. So, adjusting for that, it’s a small positive improvement in EBITDA in Norway.

Also important to note, on the group units, we are having higher OpEx of more than NOK 100 million this quarter compared to second quarter last year. And that’s not related to VimpelCom and Uninor as it used to be. It’s related to more investments, even though they’re not capitalized but expensed into group industrial development and digital services, that will be important to drive top-line growth and efficiencies in the years to come.

On the CapEx side, we are also investing more into CapEx, NOK 3.5 billion this quarter, 14% CapEx to sales, which is up NOK 500 million from same quarter last year. And you see from the pie chart where the money is going.

About one-third goes to Berit, more than NOK 1 billion in CapEx Norway in the second quarter, mostly related to modernizing both the mobile and the fixed network, 3G and 4G coverage and capacity, and more fiber build-out. We have to watch the CapEx in Norway carefully going forward, and we need to speed up to get the efficiency and the revenue growth on the back of the CapEx front.

Then we have the last two markets that have not swapped – fully swapped their network to all IP-based network yet. That is Malaysia and Pakistan, contributing 22% of the CapEx. Those swaps are progressing now according to plan, very important in Malaysia to provide good data capacity and very importantly in Pakistan both to prepare for 3G but also to take down energy costs, which is now at an alarmingly high level in Pakistan.

And finally and maybe most notably this quarter is the increased CapEx in dtac on the 3G rollout on 2.1 gigahertz. And given the strong development in dtac, we have decided to increase the CapEx further. That is reflected in our guiding.

Despite the higher investments in group activities and the higher CapEx, we are delivering a better cash flow, NOK 200 million, year-on-year up. And as you recall, we have the NOK 500 million higher CapEx, NOK 100 million higher OpEx on group, which means that the underlying improvements on the business units on the earnings is more than NOK 800 million improved. And this is important to see these trends, to understand that it’s realistic to reach the NOK 28 billion cash flow target in 2015.

That was a quick run-through on the consolidated entities. And then we have the associates where we also have important events this quarter. As you see from the graph, the associates typically contributes between NOK 1 billion and NOK 1.1 billion, mainly coming from our stake in VimpelCom.

This quarter, associates only contributed NOK 230 million coming from two effects. One is that we were diluted in VimpelCom. Our ownership went from 36% economics to 33% economics in broad terms.

When we’re doing that, we have to expense some of the currency losses that’s previously been booked to the equity. This is a very technical accounting explanation, and it has no cash effect. But that we cannot have a support to our equity anymore and it has to be recycled through the P&L. That explains most of the NOK 385 million loss related to the dilution in VimpelCom.

More economic kind of – is led to understand is the impairment of C More, that is a content aggregation company, we have together with Bonnier. We own one-third of that. They have quite reached subscriber development now in 2013. And based on the weak subscriber development, that results in losses in the company. And based on that, we decided to write-off the remaining value of C More, and that is NOK 311 million. So, those two effects mainly explains the drop from the earlier quarters on the associates.

Then to sum up the P&L this quarter, we’ve already been through the revenues and the EBITDA. On other items, there are some pluses and minuses. On a very positive side, I would say that we have been conservative when it comes to the exit cost of the circles in India that comes in with NOK 47 million. And then we have the more typical restructuring cost in the Nordic units and some other effects.

So, the EBITDA after other items is around NOK 8.8 billion, close to NOK 900 million improvement from last year. Depreciation is lower, bringing the EBIT to NOK 5.4 billion, which is NOK 1.1 billion stronger than last year. So, strong improvement on EBIT. Then we have the effects on associated, which we have improved. Net financials, nothing in normal this quarter, but we see from second quarter last year, had high interest costs in India. We had some currency losses, and we had some movements on (inaudible) we have in VimpelCom shares that was negative, so a strong improvement from net financials, and profit before tax is up more than NOK 1.3 billion.

On the tax side, two important events this quarter. We have the reassessment, our dispute with the Norwegian tax authorities are tax return swap in VimpelCom in 2006. That was reassessed, and we got back NOK 500 million from Norwegian tax authorities in cash.

Then the Bangladeshi government changed the tax rate program in phone from 30% to 35%, the corporate tax rate, and we have to expense that this quarter of NOK 303 million. So, the underlying tax – taxes are a little bit higher than we have reported here.

Minorities, strong profits in dtac and dg increases the expense to minorities. And then net income to Telenor shareholders stands at NOK 3.2 billion, which is up more than or close to NOK 1.2 billion from last year. Earnings per share of NOK 2.1 million which is a little bit below the underlying earnings per share as associates’ line is weaker than the underlying.

Then that was the P&L. Then moving on to the balance sheet and the capital allocation. The debt level of Telenor didn’t move that much, but there are some important gross and net explanations there. We have paid out to the shareholders of Telenor, including withholding tax, more than NOK 9 billion this quarter. In addition, we have paid out dividends to minorities in Asia of almost NOK 1 billion. So, we have paid out more than NOK 10 billion in dividend to various shareholders of the group.

We got back approximately NOK 4 billion in dividends from VimpelCom. So, net outflow for dividends is approximately NOK 6 billion this quarter. And that has been mostly financed by the operation, and it developed basically as expected, but we have positive effects that came in not as expected, and that was the weakening of the Norwegian krone. So, our debt is mainly in foreign currency, which has then increased the value of the debt to about NOK 1.5 billion.

So, that explains about half of the movement from NOK 28.9 billion to NOK 31.7 billion, NOK 2.8 billion increase to debt. But as the EBITDA is improving, even though we have NOK 4 billion higher debt compared to same quarter last year, the ratio of net debt-to-EBITDA is not that unchanged, and it’s down comfortably at 0.95. So, the debt is lower than the yearly EBITDA. And we have set the cap of 2 times net debt-to-EBITDA comfortably below that trend.

Also, on the debt side, we have done a little work on the quality of the debt. We have issued two new bonds at quite attractive terms, particularly proud of the Eurobond. I think it’s a 12-year bond at a coupon of 2.5% which will then – before the weakening of the krone and the long interest rate picked up in June. That is largely for the financing of the Globul acquisition and also including the maturity profile of our debt significantly. Also, did I use dollar bond five-year over a coupon 1.75%. So, this is now the maturity profile of our debt. The blue is for the mother company, and the gray is subsidiary. And you see, it’s a very comfortable level the next years. And we’ve also been able to move some of the debt out past 2021, and the average maturity now of the debt is more than six years.

Further on the capital allocation, for the fourth consecutive year, we’re doing buyback. This will take the total buyback for the Telenor Group to 10%. That is more than 20% of the free float in the shares we have bought back the last four years. 1% equals around NOK 2 billion, a little less than that at today’s share price. On top of the NOK 9 billion dividend, that would mean that we will pay out more than NOK 11 billion to Telenor shareholders with this buyback program.

We aim to be finished by the program – with the program before the AGM next year. And then the Norwegian state will cancel shares proportionally. 1% is lower than we have on – in previous years. The main reason for that is that we have a very good growth in our dividend per share, which we expect to continue forward as the Indian losses are going away, and we have good and line cash-flow growth in the rest of the business.

So, in order to have a good shareholder remuneration, which is both competitive and healthy, we don’t see that much need for share buybacks to top up going forward, although they have been very important in the period with heavy India investments.

Another factor as well, which I would like to point out is that, as I said, we have bought back more than 20% of the free flow of the share and – of shareholder base and also to change significantly in the last four years to more long-term shareholders, which are not that actively trading the share. And we have to be a little careful to reduce liquidity in the share too much so people can also move in and out of the share when price develops without being worried about spreads. So, I think it makes a lot of sense now, going forward, to pay more attention on the shareholder remuneration to the dividend and the buyback.

Then, just to make that absolutely clear that, although we have a lot of activity on the M&A side and also on the debt side and also the share remuneration side with the buyback, our capital allocation stands firm. First and foremost, maintain a solid balance sheet below 2 times net debt-to-EBITDA, a competitive shareholder remuneration, growing dividends, and 50% to 80% dividend payout based on normalized net income, and then disciplined and selective M&A and both Globul and Myanmar falls within that category.

Then, to the outlook, based on the second quarter and how we see the rest of the year, we don’t see any reason to change our outlook. The revenue growth is expected to be stronger in the second half than it was in the first half. That comes from the strong subscriber intake in Asia and the data-services trends you see particular in Malaysia and Thailand. We also expect the revenue losses in Denmark to not be that high impact in the second half. And also, remember that India and Bangladesh will have easier comparables in the second half.

To reach the kind of high end of the guiding, I think you need to see more handset sales to get to the 4%. So, I think without any significantly new event on the handset sales, we shouldn’t really expect to be at the very high end of the range, but we don’t feel prudent to change range either as we really are comfortable with it.

On the EBITDA, we guide around 34%, same as before. We have a lot of operational efficiency initiatives on our plate in the second half. If all of those are coming in with good success, maybe we will be able to do better on the EBITDA. We have said earlier that that could be conservative. But where we are now, we don’t see a strong-enough reason to change it upwards.

CapEx to sales, more investments in dtac being released, which is good news, I think, because that comes on the back of strong service revenue growth. I think it’s fair to say that we expect to end up higher in the range on the CapEx. So, with a little bit of that voiceover, I think we stand firmly behind that we maintain the outlook for 2013.

Finally, I want to announce the Capital Markets Day, 17th of September. That will be the next event here. I think the main purpose of Capital Markets Day this year is to give more insight in how we’re going to reach the NOK 28 billion to NOK 30 billion cash flow in 2015. We’ll cover the big units, dtac and Norway, and also deficiency agenda in Europe, in particular, both Denmark, Sweden but also Central and Eastern Europe. And hopefully, we’ll be able to give you more insights into Globul and Myanmar, but that depends on where we are on those processes.

So, by that, I wish you all a hearty welcome to the Capital Markets Day. And, Meera, you can...

Question-and-Answer Session

Meera Bhatia

Thank you, Richard.

Richard Olav Aa

Take over the regime.

Meera Bhatia

Yes. Thank you. We are now ready to take questions. So, I would like to invite Mr. Baksaas back to the podium. We will start here with the audience and then move on to the phone. Please wait for microphone to be passed on.

One question here in the second row.

Espen Torgersen – Carnegie

Hi. It’s Espen Torgersen, Carnegie. With all your comments relating to the Norwegian market, CapEx initiatives in the marketplace, changed in price plans, et cetera, when should we expect growth return into the Norwegian markets? I don’t see if this is any question mark relating to if, this is more when.

The second question relates to Denmark. Obviously, we’ve grown used to seeing weak numbers from Denmark, but – so, where do you think they’re progressing today? Do you see the need for additional initiatives in the Danish organization?

Jon Fredrik Baksaas

Norway first. And it’s good that Torgersen sort of – last time, you didn’t say anything, if I recall. So, now you’re back in the stage show.. Good. The growth here in Norway should already be here, really. There is a phenomenal growth element in data consumption or such. And the way the market has changed to this new pricing models should, in a way, point to also a bit of the effect that we have some quarters ago when growth really happened in the mobile space.

So, it is actually the competitive situation and the pricing structure between the competitors for the time being that doesn’t – plus the one-time effect. But if you adjust for that one, we – the underlying market trends that we should, as an industry, be able to set the pricing levels in such a way that we also participate in the enormous consumption growth which is out there.

So, here the industry really needs to work at the pricing intelligence, so to speak, in order to drive this in the right direction and to defend the big investments that are being done in the network capacities not only by Telenor as such, but also in the whole of the marketplace.

Then for Denmark, yes, there will be changes in Denmark over time. We’re looking at a simplification set-up in the overall stack, which starts with really the joint network initiative with Telia, which contributes significantly to the cash flow situation in the – both as it is now and will do in the quarters to come. But yes, there will also be changes in the cost structures in the periods to come, not to be specific at this point in time.

Meera Bhatia

Any further questions from the audience here? None at all. Then none from the Internet, either. Then I will move on to our conference call host to introduce questions from the phone, please.

Operator

Peter Kurt Nielsen, Kepler Cheuvreux.

Jon Fredrik Baksaas

Please, go ahead.

Peter Kurt Nielsen – Kepler Cheuvreux

Thank you. Just two questions, Fredrik, if I can just follow up. I mean, you mentioned – as we’ve heard from other Nordic operators, Fredrik, that we have now moved sort of basically across through the – a data-centric pricing sort of in and across the three – at least the three Scandinavian markets. Does that sort of shift which obviously has had some initial negative implications on revenue trends? Does that make you a bit more optimistic about service revenue trends going forward that we have now sort of completed this move?

And secondly, if I may just return to your comments on Denmark, Fredrik, because your network partner, Telia, mentioned the other day that they expect some costs in the coming period, sort of from dismantling of the old networks as we’re rolling out new networks in Denmark also vis-à-vis sort of OpEx line. Is that also something which you’re anticipating for the coming quarters? Thank you.

Jon Fredrik Baksaas

Well, we should be positive on revenue development given the demand out there. We – the world goes digital as we speak. And in this room just today, we are heavy users of data, so to speak, only by sitting here. I don’t know how many in this room that really has been on network activities while you’re sitting here, but I’m pretty sure some of you are. So, this is happening. And telco operators in general terms, needs to understand that there is a phenomenal advantage for all consumers, all customers, all people, where you have this kind of ability to share into – of the Internet wherever you are and to follow whatever purpose there is.

So, in that context, telecoms really comes off very cheap as a service in our daily lives. But also given the competitive situation here and to shelter also market shares, there will be competition, which is the principle of this industry. But that doesn’t take away the responsibility for all players in the marketplace, being it Norway, Sweden or Denmark or other markets for that matter, to sort of balance the investments and the resources fed into the equation than there need to be revenue streams following those resources.

This is the same change as we saw under the ISDN generation, which came 15 years ago. It’s the same changes happening once again, and there is a phenomenal change out there. Consumption is positive then we need to understand the dynamics of the market and price services correctly. And the correct price is a combination of underlying cost structures and the competitive intensity in the marketplace. It has been so for many – for all the years I’ve been around at least.

Then for the dismantling side of it, well, we haven’t, in a way, dived into though there are significant construction in dismantling. I remember some years ago, we had to take some – take down some of the old lines which were on old poles here in Norway. But I think we – I don’t think we are setting on a real important bill from dismantling. But there is a change out there in technology all the time. So, old equipment is gradually taken out, and new equipment is gradually taken in. That happens all the time. And we have also seen some speeded-up depreciations when we did the network swaps in order to get from the one generation to another. So, there will be some elements of this but not very significant.

Peter Kurt Nielsen – Kepler Cheuvreux

Okay. Thank you, sir. May I just ask a follow-up? When you talk about return on investments in Norway, are you happy with the way your fiber demand is sort of progressing in Norway?

Jon Fredrik Baksaas

Yeah, we are definitely satisfied with the fact that many customers appreciate the good quality of the network as it stands. But that doesn’t mean that we’re finished. We – it is in with this generation, as it is with others, and this summer doesn’t change – is no change from previous summers where people call me and say, why don’t I have 4G on my specific holiday space.

So, there will always be pockets in the geography which doesn’t have the same geography. And then, the best way of getting that coverage is usually to point to the competitor and say, he has coverage in this area. So, that happens also this summer.

So, what – we have now 40% population coverage by 4G handsets. There are more than 300,000 handsets out there. And as for my own use of 4G, I can see gradually that this comes and grows in the Norwegian geography, and that will be the experience of our customers of Telenor in Norway. There is phenomenal network out there, and 3G high speed is also a very good service, but once 4G is working, then, of course, you will – you really don’t want anything else.

Peter Kurt Nielsen – Kepler Cheuvreux

Okay. Thank you.

Meera Bhatia

Next question, please.

Jon Fredrik Baksaas

Next?

Laurie Fitzjohn – Citigroup

Laurie Fitzjohn, Citigroup.

Jon Fredrik Baksaas

Please go ahead.

Laurie Fitzjohn – Citigroup

Thank you. Firstly, just on Norway, with the shift to unlimited voice tariff and mobile minutes’ growth accelerated to 14%, I mean, are you seeing this kind of like fixed line voice minute and revenues at all, or is this sort of market minutes’ growth in addition?

And then secondly, on India, I mean, how much of their capacity is on the network, and at what point you think you’ll need to start investing in new tower sites? Thanks.

Jon Fredrik Baksaas

I didn’t quite get the second part of it. So, maybe you have to repeat that or maybe Richard got it. But as to the first one, on Norway – now I forgot the dimension of your question. Maybe Richard can help me.

Richard Olav Aa

No. I think what you’re seeing in Norway now is a shift both on the fixed and the mobile side, the demand for much higher capacity and speeds. So, the early question about also the fiber investments, we see a strong need for fiber investments to the home, and we see good profits on the fiber investments.

We had a slow start on this because we were uncertain about the profitability in the earlier years back in 2008, 2009, 2010, 2011, but we have speeded up on significantly up now and also did an acquisition last year, and that’s because we see very good returns on the fiber-to-the-home. And it’s a lot of single households, so CapEx is significant. We need to see those returns. We also see good returns in the fiber to the corporate market.

But the voice is continuing the same trends as before; nothing new there on the traditional fixed voice. But the main challenge now on the revenue side is to monetize the significant investment going into 3G and 4G coverage and CapEx. And we cannot be happy with just stable revenue growth on the back of those big investments. So, I think you can isolate it analytically as that – if that was of help.

Meera Bhatia

If you please repeat the second question on India?

Laurie Fitzjohn – Citigroup

Sure. Just asking how much of their capacity is there in the network and at what point do you think you’ll need to start investing in new tower sites rather than you running under existing tower sites? Thanks.

Jon Fredrik Baksaas

We are, on the capacity side, in the Indian network, we are not at its full end so to speak, as of yet. But it would be helpful to get to the new license setup where the number of frequencies increases from 4.2 to 5. That would be helpful in some of the regions, some of the circles, and it’s the best-performing circles that are looking at that element.

But there is no – the situation in India is so that, since we don’t have the business transfer and the formal new license is not signed in as of yet, then we are restricted to do the new deployment on base stations in – which we have in stock from some of the other circles that we have closed. And we are at – we’re coming at a point in time where this comes up as a bottleneck for us.

Richard Olav Aa

But it’s also fair to say that the Indian organization have been very innovative in kind of increasing the capacity utilization of the network. And if we have now got the new licenses which we have already paid for and get the 5 megahertz, I think there will be very limited need for capacity investments for the next periods.

However, we see varying good potentials in improving coverage because we have a lot of idle equipment from the circles that we have shut down. So, we can reuse that equipment for coverage. But then, we desperately need the business transfer and approvals to go ahead, both to do that and to point the extra 0.6 megahertz in spectrum. With that, we would be in a pretty good shape in India.

Jon Fredrik Baksaas

And this shows that, once again, not only in India but in India specifically, the regulatory decisions that governments are taking, it takes time to get it into operative decisions and formalities done. And then, remember back last year how this was going back and forth. And now, we have the decisions or principles, but we are still in lack of the formalities with some of these elements. And where we have seen a softening then on the Indian authority – this approach to foreign ownership to telecoms as such, and that is of course welcome in the set-up.

Meera Bhatia

Next question, please?

Jon Fredrik Baksaas

Next?

Barry Zeitoune – Berenberg

Barry Zeitoune, Berenberg.

Jon Fredrik Baksaas

Please go ahead.

Barry Zeitoune – Berenberg

Hi. I just got another question on Denmark, please. I’m just interested to know why you think that the adds number, particularly the postpaid adds, where you lost 20,000 subscribers for several weeks. Given that you were subsidizing the iPhone 4S this quarter and that was one of the reason that your margin was impacted. And also, you changed your pricing during the quarter to make it more competitive. I would have thought that that should have led to an improvement in your subscriber intake. I was just wondering if you can share some thoughts on how you do expect to improve your subscriber intake in the coming quarters. Thank you.

Jon Fredrik Baksaas

I think the Danish market is a very competitive market. The new management that came in Denmark, they have focused more on customer retention and customer quality than chasing gross adds in the last six months. We had hoped that that should be kind of a part of a more quiet marketplace in the Danish market, but we see that our competitors then eat into our postpaid subscriber base quite heavily in the first half this year, which is a negative trend. Bearing that one six months is that we tried to be more prudent in the pricing and not chasing gross adds.

Then we change to data-centric pricing, which is the trend in all the Nordic markets. But that was done in June. We shouldn’t expect that much effect for that already in the second quarter. And iPhone 4 subsidies, they were given to customers committing to a higher ARPU going forward, so that should hopefully also then give effect going forward. But a little bit of caution, the Danish market is extremely competitive, and as you rightfully pointed out, and customers now for six months. So, that will be very important to caution for a lot of close vendor in the second half.

Barry Zeitoune – Berenberg

If I can just ask a follow-up, do you – have you seen an improving trend since your new pricing came out in terms of your customer positioning? And then, in addition, given that you have focused on retention heavily, do you think you need to focus on actually gaining share from some of your competitors more than just focusing on retention? Thank you.

Richard Olav Aa

I don’t think we should dwell into the detailed trends in Q3 right there and now. That would not be fair to people not listening in. I think we have to come back to them when we report Q3. When it comes to retention versus acquisition, I think there is a limit to everything. But I think, going forward, in Denmark, we have to focus on service and retaining customers and bundle any good services to our customers long term, because in a four-play market, everybody focus heavily on acquisitions and gross adds, there is only – there would be only one primary result of that, and that is low profits to everybody and sustainable low profit that will not cater for good investment going forward.

Barry Zeitoune – Berenberg

Okay. Thank you.

Meera Bhatia

Next question, please.

Thomas Heath – Handelsbanken

Thomas Heath, Handelsbanken.

Jon Fredrik Baksaas

Please go ahead.

Thomas Heath – Handelsbanken

Thank you. A few questions, if I may. Firstly, on the tax one-off, if you could just go through the cash-flow impact there given that Bangladesh is partly a restatement.

Second, on the improved profitability in Sweden, do you consider this sustainable, and to what extent is it in effect of a slow-handset quarter?

And then thirdly, if you would be willing to elaborate a little bit on the recent discussions in the EU about roaming charges and allowing operators to compete in other European countries at regulated MDNO rates. It seems this could be quite a big issue and perhaps how you see it – see this problem and what you can do about it. Thank you.

Jon Fredrik Baksaas

Should you take the tax first?

Richard Olav Aa

Yes. I can start with the tax. The tax has a cash-flow impact of NOK 500 million, and we got the check early July. So, that’s an easy one.

Jon Fredrik Baksaas

The one in Bangladesh.

Richard Olav Aa

The one is Bangladesh, it’s coming in for tax year 2012. For that, you will have to be – paid all the – part of the paid taxes for 2012. They have a fiscal year from 1st of July 2012 to 1st of July 2013. And this tax was introduced in June. So, that will have to be on the tax really for 2012.

Jon Fredrik Baksaas

Sustainability in Sweden, on the good performance there. This, of course, heavily depends on the activity level in the market as such. So, part of these improvements on the OpEx side is definitely sustainable. However, the decisions as to how much you fuel in the markets based as such is, of course, a kind of variable decision that you take on a running basis. So, between the performance that we have had this quarter. We do believe – we do feel that we have a pretty good momentum and that we are on top of what kind of actions that we should take in order to monitor the situation going forward. We are where we are on market share, and we have the ambition to safeguard that one and improve it gradually if possible.

Then on the EU roaming, that’s a big topic. And there was a meeting in Brussels yesterday over the issue and EU has given mixed signals on how roaming is going to develop. Firstly, they say that structural roaming mechanism should be implemented by all EU operators by July 2014.

Personally, I believe that that structural opening up of roaming possibilities for customers moving from one country to another doesn’t necessarily bring anything new to the industry or such. On the contrary, regulation of this element, of what we’re doing will reduce innovation in the competitive space landscape. So, I don’t personally think that that is helpful to anything else than to take roaming rates down, which is basically done – has basically been done in the Nordic region, for example, to illustrate competition, which is a much better element to get the right prices in the marketplace.

However, there is an imbalance on roaming rates in Europe where northern countries basically feed southern countries with roaming revenues. And I think Brussels have, to a certain extent, grow tired of saying that roaming rates – that it takes a long time to get roaming rates down. But in a way, if you introduce regulation to a part of our value chain, into a part of what we’re doing, then the players in that part of the value chain will sit as quiet as they can until the regulation starts to have an impact. So, it’s in a way, self-enforcing.

If you take a look at how the super profit in the long distance for fixed line disappeared, some years ago, it disappeared out of sheer competition between players. And I think that have been – should have been in a much better development curve for roaming prices as such. And as you can see, in most of Europe in these days, the services offerings are gradually attacking the roaming rates if you travel in Europe. Then there is still elements of super profit involved in roaming rate if you cross continents. And so, let that be a comment over a very big issue.

Thomas Heath – Handelsbanken

Thank you. Very clear. As a follow-up on the last question, if I may, do you see any risks that a regulated MVNO tariff in EU countries would let so one operator introduce MVNO business in another country? It’s opening up a wave of MVNO with a Serbian operator offering end-user products in Norway, for example, at a regulated low tariff. Do you see any risk of that? Thank you.

Jon Fredrik Baksaas

Well, the MVNO system, at least here in Norway is – there is a practice on that, which has been an active element of how to develop the three-player market in Norway. So, to do that I don’t really see that as feasible as it may indicate.

However, the regulatory approach that Brussels have taken through the European telecoms, you saw that it hasn’t been too much consumer-oriented to the extent that what’s been more important for the politicians is to show actions up against consumer tariffs rather than to look at the incentives for investments of the industry.

And really, this philosophy in Brussels had basically taken the industry in Europe to a standstill. And in any case, we can say, not as relevant, is this common for Scandinavia. But if you compare Continental Europe to United States, which has had a harmonized approach to regulation, 4G has just happened.

4G has not happened in Europe and it would have been much better for Europe, as a whole, if 4G had happened also in Europe because it would mean a lot on the activity level for this industry and the higher CapEx level in European telecoms. It would definitely also increase and give some ease to the employment situation in Europe.

And this is the big question: whether the regulatory approach in Brussels basically have established thresholds for the industry to really boost investment into the next generation of networks? Also being in lack of harmonized spectrum, and it’s the key. The key was really harmonized spectrum for United States. They’ve got 4G on the road.

Meera Bhatia

We are slightly running over time. So, we have room for one more question on the phone.

Jon Fredrik Baksaas

But this is an important question.

Meera Bhatia

Absolutely. One more question.

Jakob Bluestone – Credit Suisse

Jakob Bluestone, Credit Suisse in London.

Jon Fredrik Baksaas

Please go ahead.

Jakob Bluestone – Credit Suisse

Hi there. I’ll keep it to one question for Richard, big one as well. Just looking at what’s happening in Europe today with the consolidation in Germany, and just wondering if you could share your thoughts on the potential for end-market consolidation within your European footprint, and if there’s any particular market where you see a similar sort of move happening? Thanks.

Jon Fredrik Baksaas

Yes, that question is definitely a follow-up on the previous topic, really, because the question of consolidation in Europe, one say that, well, there are 60 to 70 operators in Europe, whereas only four in the United States. And then they compare the geography. But in a way, in – and I wouldn’t share into the questions on what will happen or what might not happen. But the question on conservation is there, and there are companies out there which are still carrying a high level of debt. But there are probably others that might look in to Europe from outside and see whether this is an opportunity to move. But this is generic use, and there are plenty of voices out there. So, don’t let me add anything to it.

In the Telenor case, we are concentrating on the portfolio we have, and we have extended into two new markets this year, and we are focusing on getting them onstream.

Jakob Bluestone – Credit Suisse

Thank you.

Richard Olav Aa

But just as a general comment, I would say that in our capital allocation, of course, we prioritize sharing, in market sharing like network sharing and so on if that’s possible. I could, looking at now in Myanmar and also in market consolidation if it’s possible. And in several of our European markets, if it would be good and also the Asian markets, if it would will be good with – within market consolidation. But it takes two to dance and it’s not so obvious to see the consolidation puzzles in the various markets we’re in.

That was a general comment. We would very much welcome that if it can be done at sensible terms.

Jakob Bluestone – Credit Suisse

Thank you.

Meera Bhatia

Thank you, Fredrik and Richard. This concludes our session here today. Thank you all for joining us. And for media present, I’m compiling a list for one-on-one interview. Thank you.

Jon Fredrik Baksaas

Thank you.

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