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Executives

Peter Zydek - Head of IR

Hannes Ametsreiter - CEO

Hans Tschuden - CFO

Analysts

Andrew Lee - Citigroup

Will Draper - Execution

Graeme Pearson - Nomura

Hannes Wittig - JPMorgan

Markus Remis - Cheuvreux

Luis Prota - Morgan Stanley

Hugh McCaffrey - Goldman Sachs

David Wright - Deutsche Bank

Justin Funnell - Credit Suisse

Bernd Maurer - RCB

Russell Waller - New Street Research

Harald Weghofer - UniCredit

Telekom Austria AG (OTCPK:TKAGY) Q2 2009 Earnings Call August 19, 2009 10:00 AM ET

Operator

Good afternoon, ladies and gentlemen, and welcome to the Telekom Austria results for the second quarter of 2009. My name is Levy and I will be your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. (Operator Instructions)

Before the call begins, I must make the following statement on behalf of Telekom Austria. This presentation contains certain forward-looking statements. Actual results may differ materially from those projected or implied in such forward-looking statements. Forward-looking information involves risks and uncertainties that could significantly affect expected results.

I am now handing you over to Peter Zydek to begin today's call.

Peter Zydek

Good afternoon, ladies and gentlemen. I would like to welcome you to today's conference call for Telekom Austria Group's results for the second quarter of 2009. Hannes Ametsreiter, our CEO and Hans Tschuden, the CFO of Telekom Austria Group have joined me here today to present the results and also to discuss the recent trends in the markets that we operate in.

Hannes Ametsreiter will start first and discuss the operation in detail of our Mobile Communication and Fixed Net segment, while Hans Tschuden will later on present the financial results for the second quarter and the first half of 2009.

We will conclude this presentation with our outlook for the full year of 2009, followed by a question-and-answer session. I’ll now give the floor to Hannes Ametsreiter for the key development and later on an overview of the key financials by Hans Tschuden.

Hannes Ametsreiter

Good afternoon, ladies and gentlemen. This is Hannes Ametsreiter speaking. I have the pleasure to highlight the most important developments of Telekom Austria Group in the second quarter of 2009.

Starting with the fixed line, we could cut our Fixed Net line loss by two-thirds with 12,600 lines lost in the second quarter 2009, due to stronger customer retention measures and new product bundles sold. In Mobile Communication segment, we had double-digit subscriber growth by 10.1%. Revenues declined by more than 6.6% to EUR1.5 billion, which was also driven by the disposal of Fixed Net subsidiaries and currency translation effects with a total of EUR25 million.

EBITDA decreased by 3.9% to EUR450 million, which reflect a sequential improvement comparing first quarter 2009. The reduction of operating expenses drove the profitability of our operations. Austria and Belarus contributed to higher EBITDA, while Republic of Serbia and Republic of Macedonia managed to enhance their contribution.

Operations in Bulgaria, Croatia and Slovenia suffer from weak economy and competition but improved compared to first quarter 2009. As announced in May 2009, we fully reiterate our outlook for 2009 and the EUR0.75 DPS guidance for '09 to '12.

Now, I hand over to Hans, who will guide you through the financial overview of our second quarter 2009 results.

Hans Tschuden

Thank you, Hannes. Welcome ladies and gentlemen from my side. In the second quarter 2009, revenues declined by 6.6% to EUR1.2 billion and EBITDA decreased by nearly 4% to EUR450 million. These declines were driven primarily by the Fixed Net segment with almost stable contributions from the Mobile Communication segment.

Operating free cash flow increased by 8.2% to EUR300 million, resulting from lower capital expenditures. Earnings per share decreased from EUR0.22 in the second quarter '08 to EUR0.19 in the second quarter '09.

I would like to go through our share buyback plans. As announced at the beginning of 2009 at our Capital Market Day, we evaluated the resumption of share buyback in recent weeks. Following this year's dividend distribution, net debt was at 2.1 times EBITDA at the end of June 2009. Until year-end, we expect net debt to fall to around 1.9 times EBITDA, which is the midpoint of our target debt structure of 1.8 to 2 times net debt-to-EBITDA.

Therefore, Telekom Austria Group plans to start share buyback in 2010 in line with our cash use policy but subject to normalization of business, stable currencies and provided no investment with a higher return is available. About 1/3 of free cash flow after dividend is available for these buybacks.

Now, Hannes will go ahead with the Fixed Net segment.

Hannes Ametsreiter

Fixed Net revenues decreased by 12.5% to EUR456.9 million in the second quarter, mainly driven by a lower number of access lines and declining voice volumes resulting in lower revenues from Access, Voice & Broadband. Second quarter 2008 included revenues of EUR9.4 million from eTel Slovensko and Telekom Austria Czech Republic, which were sold in November 2008.

Total Fixed Net EBITDA declined by 8.7% to EUR142 million in the second quarter '09 compared to second quarter '08. Lower expenses drove profitability and allowed an improvement of the EBITDA margin from 29.8% to 31.1% respectively. Operating expenses decreased by 13.1% or over EUR50 million to EUR332.6 million due to lower interconnection and employee costs following the implemented structuring program as well as lower material expenses.

Now, let us take a look at the effects of our marketing initiatives. During the first half 2009, we intensively developed our market and increased the offering of customized product bundles. As a result, even without the effect of our Christmas campaign, we still manage to cut excess line loss by 2/3 to 12,600 in the second quarter '09 compared to 35,000 in the second quarter '08.

Average revenue per line declined by 8% to EUR34.5, reflecting lower voice volumes and lower prices. At the end of the second quarter '09, we extended our bundle offering to the business customer segment. Initiatives target small businesses build from the success of retail product bundles and include unlimited broadband Internet, monthly rental of fixed net as well up to five SIM cards. Prices start at EUR99. We have been pretty successful with the product on the market and created 10,000 customers, 70% are new customers.

Now, let's turn to the Austrian broadband market. You are probably aware of the success of mobile broadband in Austria, which contributed to the increase in broadband penetration in Austria to 83.1% at the end of June ’09 compared to 70% in the second quarter ’08. I believe it's also important to have a look at not only mobile broadband and fixed broadband, but we are looking at total growth in future market broadband, there we can clearly see that we could increase our market share in that market.

Broadband net, that’s grew 2.5 times to 22,700 in second quarter ’09. The rising number of retail broadband lines drove the number of Fixed Net broadband lines by 16% to 958,400 at the end of June 2009, more than compensating for a decline in wholesale broadband lines.

On the next slide, I will present the update on the restructuring program. 497 employees had agreed to enter the social plan as of June 2009 and 433 have already left the company. The original plan was 400 people taking the social plan at the end of the year of 2009.

By that time 654 FTEs were released from work and the salary of those employees will be funded from the restructuring provision accrued last year. As announced in November 2008, measures initiated are expected to lead to a reduction of 1,250 employees in 2009.

Now, I will go over to the Mobile Communication segment. A widening number of contract customers in all mobile operations drove the growth of the customer base in the Mobile Communication segment by 10.1% to 18.1 million customers as of June 30, 2009.

Revenues in the Mobile Communication segment fell slightly by 1.7% to EUR800 million in second quarter ‘09 primarily driven by lower revenues in Croatia, Bulgaria and Austria due to the expiry of the national roaming agreement in Croatia and lower international roaming revenues as well as lower prices for voice and data. The foreign currency translation impacted revenues negatively by EUR15 million. On a local currency basis, revenues increased by 0.2%.

While EBITDA rose in Austria and Belarus, the total EBITDA of the Mobile Communication segment declined by 1.8% to EUR313 million in second quarter '09 mainly due to a lower contributions from Croatia, Bulgaria and Slovenia. The losses associated with the launch of operations in the Republic of Serbia and the Republic of Macedonia were further reduced from EUR15 million in second quarter to EUR11 million in second quarter '09. The negative impact of foreign currency translation amounted to EUR4.8 million. On a local currency basis, EBITDA remained almost stable.

Let's have a look at the performance of mobilkom austria. The subscriber base of mobilkom Austria in an extremely competitive market grew by 8.7% to 4.6 million subscribers at the end of June '09 mainly driven by attractively priced tariff models and additional SIM cards for mobile broadband.

Revenue of mobilkom Austria declined by 1.4% to EUR392 million compared to second quarter '08 mainly driven by lower traffic revenues following lower prices for voice and data as well as lower roaming revenues. Average revenues per user decreased by 9.3% to EUR25.5 and an increase in data usage partly offset lower prices for voice and data. ARPU remained stable compared to first quarter '09.

Profitability improved as mobilkom austria’s EBITDA increased by 5.4% to EUR147.1 million in second quarter '09 compared to second quarter '08 as a result of lower marketing and sales costs as well as lower interconnection costs.

Let's turn to mobilkom austria’s key operational figures on the next page. Mobilkom austria kept its market leadership with an almost stable market share of 42.3% at the end of second quarter '09. The mobile penetration rate in Austria rose to 130% at the end of June '09 due to an increasing number of customers with two SIM cards for both mobile broadband and voice services.

Mobilkom austria grew its mobile broadband subscriber base by 43% and had 464,000 mobile broadband customers at the end of June. The number of mobile broadband net adds were 23,850 in the second quarter '09. Data revenues as a percentage of traffic-related revenues rose from 31% in second quarter '08 to 35% in second quarter '09.

Now, let's turn to Mobiltel in Bulgaria. Mobiltel increased its customer base by 1% to 5.2 million customers at the end of June '09. The number of subscribers declined compared to first quarter '09 due to inactive prepaid customers, which were taken out of the subscriber base. Mobiltel’s market share declined slightly to 50% at the end of second quarter '09. Revenues of Mobiltel declined by EUR165.6 million in second quarter '08 to EUR157.7 million in second quarter '09 mainly due to lower subscription and traffic revenues.

A higher contract subscriber base partly offset lower prices as a consequence of fierce competition. EBITDA decreased from EUR96million in second quarter '08 to EUR87.9 million in second quarter 09 mainly due to lower revenues and lower other operating income. The rate of decline materially improved compared to the first quarter. Operating expenses could be reduced by EUR2.3 million mainly due to savings in marketing and material expenses, whereas interconnection costs rose due to rising traffic into other networks partly offset by lower mobile-to-fixed tariffs.

The following slide provides an overview of our Belarusian Velcom. Velcom grew its subscriber base by 13% to 3.8 million customers at the end of June. Velcom’s market share declined from 44.4% at the end of June '08 to 43.1% at the end of June '09 due to the rising market share of the third operator in Belarus.

Revenues grew by 6.3% to EUR75.6 million in second quarter '09 driven by higher revenues from subscription and traffic due to a larger subscriber base. Currency translation differences following the devaluation of the Belarusian Ruble in '09 impacted revenues with an amount of EUR11 million. In local currency, revenue growth was 21.9%.

In second quarter '09 EBITDA rose by 10.9% to EUR38.8 million [as higher] interconnection costs and costs for services received. In local currency, EBITDA increased by 27.3%.

Now, let's turn over to operations in Croatia and Slovenia. Vipnet increased its subscriber base by 14.8% to 2.6 million customers at the end of June '09. Revenues declined by 6.9% to EUR119.3 million in second quarter '09 due to lower wholesale roaming revenues mainly as a result of the expiry of the national roaming agreement with a competitor in 2008 as well as lower subscription and traffic revenues.

Lower interconnection revenues, as a result of a reduction of mobile termination rates, which took effect in April '09, also contributed to this decline. In spite of stable operating expenditures, EBITDA decreased by around 18% to EUR40.6 million in second quarter '09 mainly due to lower revenues. Vipnet is market leader in the wireless broadband segment in Croatia, 13% of airtime revenues grew to 30% compared to the same period in ’08.

Si.mobil; Si.mobil grew its subscriber base by 8.8% to 581,800 customers at the end of June '09. Revenues decreased by 8.6% to EUR42.4 million during second quarter '09 mainly due to lower subscription and traffic revenues as well as interconnection revenues resulting from the symmetry of termination rates with the incumbent introduced in April '09.

Coming to a Vip mobile, Serbia. Vip mobile in the Republic of Serbia grew its subscriber base by 60.1% to 1.1 million customers at the end of June '09 and had a market share of 10.7%. Revenues increased by 45% to EUR18.4 million as a result of higher subscription and traffic revenues driven by a larger subscriber base and higher usage. The negative EBITDA decreased EUR7.4 million compared to EUR9.6 million in second quarter '08.

Vip operator in the Republic of Macedonia had 224,400 customers in second quarter '09, which is an increase of 7.3% Vip operator’s market share was 9.6% at the end of second quarter '09 due to a drop in prepaid customers caused by an earlier promotions churn.

Revenues more than doubled to a EUR5.2 million in second quarter ’09 as a result of higher subscription and traffic revenues. The negative EBITDA of the company declined from EUR5.2 million in second quarter '08 to EUR4.0 million in second quarter 09, reflecting a continuing operating improvement.

Now, Hans will give a financial overview.

Hans Tschuden

Thank you, Hannes. Now, let's have a short look on our profit and loss statement. The main elements revenues and EBITDA has already been discussed. Our EBITDA margin increased to 37.8%, being up 1.1 percentage points compared to last year second quarter and the second quarter net interest expenses increased to a EUR56 million from EUR51 million in the quarter '08 due to the restructuring program which led to an additional non-cash interest expenses and higher interest bearing liabilities following the EUR750 million bond issued in January 2009.

In the second quarter '09, there were no significant effects from foreign exchange valuation on our financial result. Income tax expenses decreased from EUR27 million to EUR26 due to lower income before income tax in the second quarter. Net income amounted to EUR82 million, up in the second quarter '09 after net income of EUR96 million in the second quarter '08. Basic and diluted earnings per share amounted to EUR0.19 versus EUR0.22 a year ago.

The next slide provides a detailed overview on the free cash flow generation of our company. During the second quarter '09, cash generated from operations before working capital decreased by 3.8% to EUR391 million due to lower operating results. For the working capital EUR44 million were spent compared to EUR39 million last year. Total CapEx was reduced during the second quarter by 22% to a EUR149 million to support the free cash flow generation, which increased as a consequence by 12% to EUR198 million or EUR0.45 per share.

For more details on the CapEx let's move onto page 25. On quarterly comparison Fixed Net segment capital expenditure decreased by 13% to EUR56 million mainly due to the postponement of investments into the access and core net infrastructure as well as a restricted investment policy.

In the Mobile Communication segment, capital expenditures decreased by 26% to EUR94 million in the second quarter as lower CapEx in Austria, Bulgaria and the Republic of Serbia did offset higher capital expenditures in Croatia. As a consequence, total cash outflow from investing activities decreased from EUR191 million in the second quarter '08 to EUR144 million in the second quarter '09.

On the next slide I will discuss the changes in the composition of our balance sheet. The total assets decreased to EUR8.7 billion as of June 30, 2009. During the first six months of 2009, current assets increased by 24% due to higher cash and cash equivalents and higher short-term investments following the issue of the EUR750 million bond in January.

Long-term assets declined by nearly 9% due to depreciation charges exceeding additions and as a result of the devaluation of the Belarusian Ruble. Stockholders' equity decreased to EUR1.7 billion as of June 30 due to the payment of dividends amounting to EUR330 million and higher currency translation adjustments following the devaluation of the Belarusian Ruble.

Net debt remained stable at EUR4 billion as of June 30 as cash flow generation offset the payment of dividends and capital expenditures. Excluding the restructuring program, net debt-to-EBITDA remained stable at 2.1 times.

Now, let's on move to the slide about cancellation of shares. The Management Board of Telekom Austria resolved to cancel 17 million treasury shares or 3.7% of share capital of Telekom Austria. Consequently, the number of shares will be reduced to 443 million pieces. This cancellation will result in an increase in the stake of the remaining shareholders by 3.8%.

On slide 28, we compared the expected cash available with the debt maturing in 2009 and 2010. The sources of cash include both cash and short-term investments, which comprises the proceeds of the bond issued in January and the expected free cash flow generated during the course of '09 and '10 after dividend payments.

Those sources of cash more than cover what we have to refinance on maturing debt. This clearly shows our solid financial policy and that we can easily meet our obligations even without drawing on any bank facility of which we have currently about 1.3 billion unutilized committed lines in place.

So we are coming to the last slide of my presentation which shows the outlook for 2009. For the full year 2009 and based on constant currencies, we anticipate slightly weaker revenues than originally expected EUR5.1 billion due to lower Fixed Net wholesaler revenues as well as lower Mobile Communication interconnection and equipment revenues which will be accompanied by a proportionate reduction in cost. Therefore, the EBITDA guidance remains unchanged at about EUR1.9 billion in 2009.

Capital expenditures for the full year are expected to amount to approximately EUR800 million which translate into operating free cash flow which means EBITDA minus CapEx of EUR1.1 billion. The Telekom Austria Group continues to expect to distribute 65% of net income in form of dividends at the minimum flow of EUR0.75 per shares.

Thank you. And now for your attention, I hand over to Peter.

Peter Zydek

Thank you, Hans. Thank you, Hannes. Ladies and gentlemen, after this presentation we would like to answer your questions and discuss the trends in the markets that we operate in and of course also the results that we just presented to you. Please go ahead and ask your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question today comes from the line of Andrew Lee from Citigroup. Please go ahead.

Andrew Lee - Citigroup

Two questions, one on domestic mobile and the next on, group cost-cutting. We've seen a return to intense price competition in Austrian mobile. When and how do you think this can improve again and do we need to see further consolidation in the market for this to happen?

Then, secondly, on cost-cutting, on that numbers you have to raise group EBITDA margins by at least further 50 basis points in the second half to reach your EBITDA guidance. Where do you think the major driver of this expansion will come from and can domestic fixed margin improvements accelerate further into the second half? Thank you.

Hannes Ametsreiter

Covering the two points you mentioned. First, one is the price development in the Austrian mobile market. This development, which we have seen recently was initiated by Orange. Orange, out of a very shortsighted view pushed into the market and tried to increase their [gross share] and market share significantly. This lead to a reaction of other players also in the market. I believe that we will not see such harsh moves in the future because that’s not the place to do so.

We've seen we all know that T-Mobile results in Austria, we also know that Orange needs to focus on profitability and I believe that this was an adventure, which we've seen in the last month but I would believe that there is more rationale acting in and I would hope so, in the future in this Austrian mobile market and I believe we really reached a situation that everybody should look at their profits, should look at their results and this hopefully especially from the bigger players T-Mobile and Orange will be seen the same way.

Hutchinson is a more difficult thing it brings me to your second point, if we talk about consolidation which I don’t know. I mean there are some signals International from Hutchinson that they are willing to make steps in certain markets, in countries, if they are willing to make that step in Austria also we just don't know. But what we are sure is that three infrastructures in Austria is enough.

Hans Tschuden

To cover the second question regarding EBITDA improvement in the second half, we are not anticipated that markets are improving significantly nevertheless here and there I think we do have some opportunities to grow for instance in the fixed line business segment has one element to improve the margins and EBITDA.

On the other side, we have in all operations a close look at their cost structure and to the strong focus on mobile and this should also lead to an improvement in the second half of this year in the cost base, which should help to achieve our targeted EBITDA.

Operator

Your next question comes from the line of Will Draper from Execution. Please go ahead, Will.

Will Draper - Execution

A couple of things. One in Austria and one in the Balkan Sea. Question about domestic Austrian fixed net, please? How does the postponement of some of your CapEx, what impact does that have on your plans to upgrade the network to fiber, fiber-to-the-curb; and then in the long-term fiber-to-the-home in order to compete with the cable guys.

So I guess my question is how detrimental for your fiber plans is postponing CapEx in fixed and my second question relates to mobile termination rates in the Balkans and I'm just wondering if you are aware, it’s a little difficult for us to get visibility in that, so are you aware of any mobile termination rate cuts in any of your Balkan properties and Belarus in the next 12 months that we should know about?

Hannes Ametsreiter

Starting with the fiber investment CapEx, I believe everything in known what our plans are. It is included in our outlook that we are doing three things and it’s we are talking about trials and pilot projects. One is that we start with fiber cities and fill up Villach, Klagenfurt and also in two districts in Vienna. This will cover 150,000 households. It will be a mix of fiber-to-the-curb. In Villach fiber-to-the-building and fiber-to-the-home.

The decision about the mix, that's a very low glistening and needs to be decided in further assessments, but we are now really into that and we start evaluating, assessing and this should give us a very good overview about what technology is good. What service and offering is accepted by the customers, what their real costs are and which technology is the best to apply.

The second thing is VDSL 2 technology in the rural areas. There we are covering 750,000 households. This brings speed up to 30 megabit per second. I believe that's a good move to also assess how to strengthen our position and create new opportunities in the rural areas. And the third one, and the third package is, they had changed to an all IP platform, next generation network, moving our copper cables into the next generation network. That's clearly a process which will last over the next years. But as I said, I mean all these trials and power projects are included in the outlook already.

Hans Tschuden

Regarding the second question about the mobile termination rates, there are no changes we are aware of. The expected mobile termination rates for the Balkans and the development of them, we have presented on our capital market there and there is a chart included in the documentation which shows the gliding path in the different countries but nothing has changed significantly compared to this date as of end of January.

Operator

You next question comes from the line of Graeme Pearson from Nomura. Please go ahead.

Graeme Pearson - Nomura

The fixed revenue trend was a bit worse than we were all expecting in the second quarter, can you just help us with the timing of the various kombi-packet promotions on the retail side place, I guess I'm trying to understand whether the fixed revenue trend is just going to keep getting worse and worse whether it might improve in the second half or at some point going forward.

Secondly on headcount, I think you said that 433 people have taken a social plan by the end of June. I was just wondering if you can say how many people have actually agreed to accept the social plan at this point. And then third, worth a try, it's now nearly the end of August. So can you just say whether you've seen any big changes in the trends in Eastern Europe so far in Q3? I’m obviously thinking about Belarus and Bulgaria in particular. Thanks very much.

Hannes Ametsreiter

Starting with the second question, how many people accepted the social plan? Around 500 accepted the social plan. This is a better result than we originally planned. We planned 400 until the end of the year. We now already have 500 who accepted already the social plan, so I mean that’s the social plan development.

Then third question about the trends and tendencies in Eastern European countries, I have to say it's a very diverse picture. You really need to look at the countries and there is a significant change in the GDP expectations in different countries. There is the expectation in Belarus that they will have a GDP growth. In other countries there will be, their GDP will be shrinking.

We believe in the region, we believe that we are well-positioned with either number one or number two position and I believe we are doing well with our greenfield operations and as you have heard the market share is decent and we are on the way and since we started in the second half of 2007. I believe this is a first phase, which is okay and we further need to see how we develop in this countries.

What is annoying is that we have taxes in Serbia and in Croatia. This is what we did not expect and did not know. This was very immediate action by the local governments and of course it's putting some pressure on us, but I mean it's an amount where we either can make a move to give it to the end consumer or find other ways or suffer. Since there is not every detail now known to us, we are still working to better understand, to discuss with the politicians, and to find the right and proper how to handle it.

The first question about the kombi package, about the timing, we will now bring our next promotion, will be more or less ongoing promotions in different aspects, we at the moment are running promotions a combination of, we call it on (inaudible) that’s a fixed line data Internet and mobile broadband in a package and it's included in a notebook.

That notebook we are on a leasing basis giving for free to the customer. It is an extremely successful promotion; we are now preparing to open an winter promotion and are in the phase of finding a proper setup with regulation which looks good. This means that we'll have another good aggressive promotion starting this winter, this autumn.

Graeme Pearson - Nomura

Just on the revenue trend. I mean, is this go for us yet?

Hannes Ametsreiter

Yes. Following up on the revenue trend, the most difficult thing is the loss of minutes. This is something which is really difficult to approach. Since these minutes are really moving from fixed to mobile, we now out of total voice market in Austria has 14% at Telekom Austira, that's really low, its much higher in other countries like Germany, 60-70%.

So this is already much of pain in the past, but still pain today. How far would it go down, we just don't know. This really hurts because loosing minutes means loosing revenue and EBITDA. And I believe that we see a good development on the broadband side, on the package side, but we have pressure on these minutes. If we once reach a stadium where this minute loss stops, I believe there is a good chance for us to further welcome the line loss, maybe generated in medium, long or whatever term line growth and generate a profit out of this positive development.

We see a good development with new customers because 70% of the kombi package customers are the new customers. So that's really additional revenue, but what we cannot stop is this loss of minutes. How are we taking, we are now at the moment trying to get bundles of lattice. This is already possible in Germany for better telecom, it's not possible here in Austria. If we would b able to get that this would additional value into the monthly fee and would be a good argument for customers to stay with the fixed net and to keep the minute and this is what we are trying to so at the moment, what the outcome will be I cannot tell you. But this is the activities we are taking.

Graeme Pearson - Nomura

That's very clear. Thank you very much.

Operator

Thank you. Your next question comes from the line of Hannes Wittig from JPMorgan. Please go ahead.

Hannes Wittig - JPMorgan

I have two question related to the fixed line again, I mean in a way following up on the first question this afternoon, which was on cost cutting. If I remember correctly, your fixed line cost cutting program which was worth about EUR100 million, so was run up started to be ramped up in the second half of 2008 and then was probably continued into the first half of this year.

So I would presumably see a full run rate of this cost cutting program in the second quarter. So my first question would be, has the cost cutting program that you launched in the summer last year, has that already peaked or is there more to come out of this existing program in the second half of this year to help the margin?

The second question is regarding the fixed line ARPU, I mean you have obviously already just commented on the voice pressure from voice losses, however there are number of other components in this ARPU accretion, so my question would be whether the 34.5 sort of likely to from your point of view may fall a lot further or where that's approaching some kind of bottom in your view?

Hans Tschuden

I'll take the first question Mr. Wittig. Regarding the cost cutting, we're relatively far with the cost cutting program already, but we anticipate it's still kind of 25 million should kick in the second half of this year out of the 100 million.

Hannes Ametsreiter

Concerning the average revenue per line, you are absolutely right there are several components which are kicking in. They is the pressure from the minutes which we are losing. There is a good and positive development in new customers we are generating with this kombi packages and broadband packages. There is another aspect which we did not mention so far and this is the fixed line or the fixed termination. This fixed termination just recently got increased.

I believe that’s good achievement in Austria, because we are the only one in Europe where we could achieve an increase of the fixed termination. This will in the further years have some positive effect for our group and it reflects also the situation that there are so minutes which already moved already to the mobile industry that there need to be some kind of a balance of terminations and this seems to move into the right direction.

Talking about average revenue per line, we are of course trying to keep it as stable as possible to really have the full picture. This will be the moment when we really see a softening after loosening of minutes, which are substituted by the mobile industry.

Operator

Your next question comes from the line of Markus Remis from Cheuvreux. Please go ahead.

Markus Remis - Cheuvreux

A question on Bulgaria, you mentioned that competition has become way more intensive, could you elaborate who is the driving force behind and whether that’s on the corporate side or on the retail clients or the whole market?

Then secondly regarding well CapEx in 2010, if I’m not mistaken you still have to pay around 320 million for the remaining stake in Velcom, as well as the performance link consideration, how the stats are reconciled with the buyback and then lastly do you see any other players in Austria replicating the business kombi package, maybe you could see yourself?

Hannes Ametsreiter

I'll start with the last one, nobody is replicating. So that’s a good thing for Telekom Austria in Austria. Talking about the Bulgarian business, there is at first I mentioned that the economic situation in Bulgaria is not easy. They really came out of a development and our planning figures included GDP growth of around 6%, this now turns out that they are turning into a decrease. This of course is impacting the country, different industries, also us.

The second thing is that we have competition there, intense competition. This competition is coming from GLOBUL but also from Vivatel and BUTECO, Vivatel. They are now more trying to play this everything out of one hand. This we are offering fixed end mobile and try to enter some segments with that approach.

So, I mean, this is the pressure coming from that side. I believe also is important to understand that BUTECO shareholders AIG is in a selling process and they want to address this asset and trying to be aggressive and pushy on the market to achieve a growth which is decent and then which they expect to create a nice story around that.

Hans Tschuden

Regarding the question of the performance payment for the 30% of Velcom, as the full payment for the 30% including the performance pay is included in our net debt calculation. There is no effect or influence on our share buyback plans linked to the payment for the remaining 30% in the performance pay.

Markus Remis - Cheuvreux

So everything will be paid in Q4?

Hans Tschuden

That is to be seen because there are certain elements which have to be met, but our assumption currently is that everything will be paid in October 2010.

Markus Remis - Cheuvreux

Maybe lastly, the amount for the deferred consideration was mentioned around EUR300 million. Did that change given the performance of Velcom recently?

Hans Tschuden

No. It did not change because the operational performance is excellent.

Operator

Your next question comes from the line of Luis Prota from Morgan Stanley. Please go ahead.

Luis Prota - Morgan Stanley

I have two questions. The first one is from domestic mobile ARPU and especially on the compulsion relative to the trend that we saw in the first quarter. In the first quarter, ARPU was coming down 11%. Now, ARPU is the second quarter is down only 9% when in principal we should expect or we should have expected like 3 to 4 percentage points revenues from termination rates that's still around 14%, 15% decline would have made sense to. You are mentioning in the press release data usage.

So if you could elaborate a bit on these and maybe go through the major drivers of ARPU and provide us with the mobile broadband ARPU growth year-on-year would be very useful?

Secondly, on your free cash flow after dividends that you are not going to use for buybacks for the 2/3 that are considered as a kind of reserve. If you could elaborate a bit on the plans you have for this, what are the options, whether acquisitions or even higher (inaudible) if you don't find where to put the money is feasible or not would be good? Thank you.

Hannes Ametsreiter

Talking about the ARPU, that's a complex question. I mean it is always a combination of what kind of structure we are able to generate in our customers. We achieved that we had a growth in the customer base of 9%, so that's very positive thing. We have a mix of postpaid and prepaid customers. We achieved within the latest part that we could move prepaid customers to postpaid customers. We also and that has some impact and pretty much impact on the ARPU, are very successful with our no-frills offer. This means lower ARPU.

So the portion of no-frills subscribers is steadily and significantly increasing. This is lowering the ARPU. On the other hand, it's [much in] lower costs. So their SACs, the subscriber acquisition costs have no-frills what we call bob. We sell it under the brand of bob is zero. So we are earning money by selling the package, and it's only a SIM card. So it is a mix of activities.

One is no-frills absolutely low cost combination, so we're adding customers and ARPU is lower. Then we have let's say normal voice and multimedia customers where we could see normally a pretty flat development. Now, we've seen an aggressive promotion by Orange that's just half the monthly fee and this was clearly offensive and the aggressive move in the market. This is already out of the market. At the moment, it is pretty silent. Everybody went back to the normal thing that (inaudible) like before.

Talking about mobile broadband, of course we see some dynamics there. The price data here is Hutchinson. They have extremely cheap offers in the market. So I mean this really hurts on one hand the fixed line, but also the mobile industry in Austria and is pulling prices down. So I mean that are like the components which we are seeing and this is how it sets together.

Hans Tschuden

Just to add here on our presentation page 42 you will find the development of our data per quarter. Regarding the question of what do we do with the reserve, I mean a reserve should be a reserve and we have no plans currently how to spend it. It's something which we consider from a cautious standpoint and that's the reason why we see we would pay out 1/3 of the free cash flow after dividends.

Operator

Your next question comes from the line of Hugh McCaffrey from Goldman Sachs. Please go ahead.

Hugh McCaffrey - Goldman Sachs

Firstly, 3G in Belarus, I see one license has been [handed arguably] and when do you expect yours and what are your plans are on 3G there and also in Austria, and what kind of usage are you seeing from your mobile broadband subscribers and high as your infrastructure position to absorb all of that?

The final question is really a cost saving one. How much integration is there between the fixed and mobile infrastructure in Austria and what scope do you have that you generate cost savings from bringing those two things closer together?

Hannes Ametsreiter

Starting with the second point that networks and technology, we are already having a very close cooperation of both the companies, mobilkom austria and Telekom Austria, why, because we believe in hybrid products. This means that we found out that mobile broadband 80% usage is at home.

At home you normally have a copper cable, so we are trying to find a combination where a customer doesn’t have to think about technology, he’s just surfing the Internet at home automatically via Wi-Fi connecting to the mobile, abroad using mobile infrastructure. This allows us de-load the mobile infrastructure with the heavy usage at home and gives full freedom and opportunities to our customers. So that’s one aspect.

The other one is that we now start to have a combined planning of technology. This means that we will have a clear coordination of the fiber activities which we already mentioned before ends the planning of (inaudible) plus future of lean activities. This integration enables us to have the most efficient approach in planning and in the use of technology. So that’s what we are already doing and that’s what our plans are in this field.

Regarding the creation of 3G license in Belarus, generally speaking the number three operator has already received the license. We would be interested in getting one, but it is depending on the financial terms which are linked to that.

Hugh McCaffrey - Goldman Sachs

Do you have clarity on those at the moment?

Hannes Ametsreiter

Not yet.

Hannes Ametsreiter

Not yet. Okay. Thank you very much.

Operator

(Operator Instructions). Your next question today comes from the line of David Wright from Deutsche Bank. Please go ahead.

David Wright - Deutsche Bank

Yes. A lot of the questions I think have already been dealt with pretty well, but a couple of more, just on the CapEx guidance obviously 800 million you used to maintain that CapEx, which is broadly similar amount to last year, but your CapEx to the H1 is clearly running way below. Now obviously there are some second half weighted investment funds, but it does still seem the trend across the wider sector to lower CapEx maybe to talk about the potential for that.

Then secondly, you've clearly considered your buyback within the framework of year-end net debt and cash flow next year. Now the original dividend guidance if I understand correctly was for a minimum of EUR0.75. So when you decided upon the buyback why did you not choose for instance to raise that minimum dividend of EUR0.75 instead?

Hans Tschuden

Regarding the first question, the CapEx guidance. We are saying the guidance is around 800 million as well as we are saying that EBITDA guidance is around 1.9 billion so there is some room, but nevertheless we cannot extrapolate what we have seen in the first half of this year because especially in the fixed line segment we see much more investments to come in the second half and so therefore we are not able to quantify in detail to which extent we will use the 800 million or will it be a bit less.

Regarding dividend policy, we have changed our dividend policy or amended our dividend policy at the beginning of the year by putting in a floor of EUR0.75 and we are not foreseeing any changes there. I think it should provide a minimum return to our shareholders with the EUR0.75 even if net income would not give that as a 65% payout ratio and we are not foreseeing any changes to the dividend policy. That has priority, but we want to maintain a stable dividend policy.

David Wright - Deutsche Bank

I guess, there is room though that reserve in the buyback could suggest. You are fairly in a comfortable with the cash flow forecast. I mean, what is the basis of preferring share buyback to additional dividend.

Hans Tschuden

The basis is that we have a concept of stable dividend policy and if there is excess cash, which is not needed, that we would payout ratio of buyback. So it’s kind of how to distribute the excess cash to our shareholders who'll reduce the instrument of a share buyback rather than dividend in order also to have a consistent stable dividend policy.

Operator

Your next question comes from the line of Justin Funnell from Credit Suisse. Please go ahead.

Justin Funnell - Credit Suisse

A couple of questions please. The competitive trends in Austria and Eastern Europe are quite interesting. There seems to be a at least in Q2 a tariff war, but at the same time a pullback by yourselves and the market on SACs and advertising cost, it was a slightly unusual combination? How sustainable do you think that pullback on SAC and advertising cost is.

Secondly, are you able to quantify the benefit in H2 ’09 from the accrual of the earlier asymmetry that you received in ’08. I think that’s one of the benefits you get in the second half of this year.

Hannes Ametsreiter

Talking about SACs, I believe one very important thing and I mentioned it already before is that there are a proportion of no-frill subscribers increased significantly. That’s our way of reacting to aggressive move of our competitors, why because our cost structure is by far lower than before our competitors.

It is a good tool which can used if we want to fight back and we now had an extremely good development of our no-frills brand and this of course helps in the SACs business what you’ve already seen in the past and this is on a certain level will be continuous, but its really always depends on that because if you just consider what the SAC is zero this of course has an impact if we are selling a competitive and good amount of no-frill subscribers.

In our best space, we sold clearly over 1000 per day in our last promotions, which we had on the market, which now already is up, so I think this is a reason for development of SAC. The second question was…

Justin Funnell - Credit Suisse

Yes. I’m sorry. The first question is a just a decision to bring forward [symmetry and MTIs] in 2008, so I think you are booking the benefits of that in the second half of ‘09. Could you quantify that the impact of that on EBITDA in the second half of ‘09 please?

Hannes Ametsreiter

All right. That’s a single digit EBITDA impact.

Justin Funnell - Credit Suisse

Single digit. Thanks for the color on the SACs. Can you give us sort of a rough idea as o proportion of your gross ads in Q2 in Austria that were no-frills? Was that also benefiting Eastern Europe as well or was there just something else going on there?

Hannes Ametsreiter

We don’t want to give out of comparative reasons that exact data about, they’re in proportion of our no-frill subscribers, so sorry for that. But I already mentioned some details that we have seen especially with the last promotion an extremely good development. We are now also offering new products, it's a mobile broadband product on no-frills basis. This is expanding the market and it's just another very good, to be aggressive with very low almost zero cost.

I believe I mean this is just an excellent setup which we are having, we are having a most prestigious, the most, the best quality, the multimedia, having a broadband that A1. And we have the low cost, extremely aggressive, extremely interesting and a brand, which is just different from A1 and so we are very well positioned in advent portfolio, which we are using on a market that enables us to keep our strong position, and as you have seen our market share, I believe this is a decent development which we could show that we've normal as assessee levels, we are able and better assessee levels than our competition are able to keep our (inaudible).

Justin Funnell - Credit Suisse

What about the accessing to be again a pullback on sales and marketing costs you mentioned in the release. Is that no-frills effect or is it something else?

Hannes Ametsreiter

No, we are not using no-frills concept. We are using it in Croatia, but we are not using it in the other countries. The reason for that is that the assesses are more or less zero or very, very low and so this does not really open the room for implementing a no-frills proposition. And I mean, this cannot really applied in most of our markets, exception is Croatia where we are having Tomato as a no-frills brand.

Concerning the marketing and sales costs, it was just a very extremely cautious program which we are running and we reduced wherever we could reduce, but absolutely focused on the market and this is what you already can feel that we are trying to keep our market shares up but in the other hand trying to do it as efficient as possible.

Operator

Thank you. Your next question comes from the line of Hannes Wittig from JPMorgan. Please go ahead.

Hannes Wittig - JPMorgan

Sorry for coming back with another question, but I just wanted to go back to your guidance because you have kindly provided a reiteration of the guidance for 2009, but I just wanted the capital market there you of course gave three year guidance EBITDA of around 1.9 billion, what degree of confidence do you have at this stage that is something that you can actually achieve?

Hannes Ametsreiter

As usually, we reiterate our full year guidance on any occasion for our quarterly results. But we've reviewed our capital markets, day guidance and not yet and this is something we will do in planning for next year.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Bernd Maurer from RCB. Please go ahead.

Bernd Maurer - RCB

I come back to the Bulgarian market, we spoke before stronger declining GDP rates in Bulgaria and that's tough competition. On the other hand I really wondered that ARPUs are priced positively remaining rather stable compared to Q1, what was the reason therefore?

Hannes Ametsreiter

A key reason in Bulgaria is that we achieved to have the major part of the postpaid customers. This was a clear focus of the operation. This means focus on having the customers and this of course is a positive contribution to the ARPU. So, that's the main reason. Also, the situation in Bulgaria, it was difficult (inaudible) and there is pressure on the country and the economy and I believe we've shown improvement now in Bulgaria that we are willing to make steps on CapEx, on OpEx and we are focusing our energy on the right thing at case focusing on there heavily.

Bernd Maurer - RCB

Thank you. But it's met only a higher share of contract customers. It's contract up here remained quite stable increased even slightly prepaid out here as well, but any special things I have to bear in mind?

Hannes Ametsreiter

No.

Bernd Maurer - RCB

No? Okay, a reversal of the trend?

Hannes Ametsreiter

No, I wouldn't say that.

Operator

Thank you. Your next question comes from the line of Russell Waller from New Street Research. Please go ahead.

Russell Waller - New Street Research

I just had a quick point of clarification please. Can you just confirm to me the termination rate that you used in Austria for the mobile business because my understanding was that you didn't actually implement the cut from EUR5.72 to EUR4.5 yet and then that will only happen as of Q3 onwards? And if that's right, could you just tell me what the EBITDA impact would have been, if you had actually have implemented that cut in the second quarter? Thanks very much.

Hans Tschuden

We already implemented EUR4.5 and there is a glaring path which is going down over the next years to EUR0.02. So we are just following the official guidelines of the regulation. We are doing, nothing else.

Russell Waller - New Street Research

Thank you, guys. There was no delay you've done at as you're supposed to.

Hans Tschuden

No.

Operator

Thank you. (Operator Instructions). We have a question coming through from the line of Harald Weghofer from UniCredit. Please go ahead.

Harald Weghofer - UniCredit

I just have a follow-up question on the headcount. There was big noise in the Austrian use that citizens of Austrian Post will shift or get outsourced to the Austrian police. My question is basically, if you see any chance that all the civil servants of Telekom Austria could be transferred to the Austrian police or any other government company?

Hannes Ametsreiter

We've always underlined that this is a great idea. We are fully supporting there is some kind of coordination incorporation with that respective minute space. We already and that’s the interesting thing, but we ask our people which are sitting in the pool at the moment and we are now doing the same with our employees, our civil servants here in Telekom Austria being in reckoned position and there a few hundreds who are interested in moving to the police.

So that’s a positive signal from the employees, how much that realizes in real movements and positions there we don’t know. The process is not clear in very detail at the moment, but there is the willingness of politicians in Austria to increase the security of the country by adding a few more civil servants and office workers to put some load off the shoulders of policemen to keep them out on the streets.

We believe that’s good. It's a politician's promise that they will do something. And we are now contributing by giving all the information which is needed. If it really realizes and will be put into action, we will see how many we will see. But there are good discussions and it looks like an interesting opportunity, but it's too early to say what the real outcome will be.

Operator

Thank you, there are no further questions. So I will hand you back Peter for closing statements.

Peter Zydek

Ladies and Gentlemen I would like to thank you for attending today's presentation, and I would like to wish you a very nice evening. Thank you very much. Good bye.

Operator

Ladies and gentlemen, thank you for joining. You may now replace your handset.

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Source: Telekom Austria AG Q2 2009 Earnings Call Transcript
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