Telenor Group's (TELNY) CEO Jon Fredrik Baksaas on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Telenor ASA (TELNY)

Telenor Group (OTCPK:TELNY) Q2 2014 Earnings Conference Call July 23, 2014 3:00 AM ET

Executives

Meera Bhatia – IR

Jon Fredrik Baksaas – President and CEO

Richard Olav Aa – EVP and CFO

Analysts

Christer Roth – DnB Markets

Jakob Bluestone – Credit Suisse

Andrew Lee – Goldman Sachs

Thomas Heath – Handelsbanken Capital Markets

Georgios Ierodiaconou – Citigroup

Barry Zeitoune – Berenberg

Terence Tsui – Morgan Stanley

Meera Bhatia

Good morning, everyone and welcome to Telenor Group’s Second Quarter Results Presentation. My name is Meera Bhatia and I have the pleasure to guiding you through today’s presentation. Our CEO, Jon Fredrik Baksaas, and CFO Richard Olav will present the financial update today. There will be a Q&A session directly after the presentation firstly here from the audience and then from our phone and webcast participants. We aim to end the session at 10 O' Clock. For media persons there will be also the opportunity to speak to our CEO and CFO briefly after the Q&A session.

Without further ado, Fredrik, if I could ask you on stage?

Jon Fredrik Baksaas

Thank you, Meera and welcome to this second quarter 2014 presentation of the Telenor Group. Let me then start to say that the results for the second quarter 2014 are characterized by continued growth, both when it comes to subscribers and revenues. And this also builds on the profitability side of our business. We added 4 million new subscribers this quarter and have added 10 million new subscribers so far this year and this is driven by India, Bangladesh, and Pakistan.

The Group’s organic revenue growth was 1.6% this quarter, but more importantly, and as in previous quarters the underlying mobile service revenue growth was 4%. The increased data consumption is now a key driver for the revenue growth in several of our markets. We are showing good progress in our Internet-For-All strategy with the number of active internet users now currently standing at 22% that means 38 million customers out of the customer base of 176 million.

And it is vital that we are able to monetize the significant investments we are making to establish this data readiness works and this quarter stands as a good example in that respect. With 36% EBITDA margins and 6% organic growth in EBITDA, we are also this quarter delivering profitable growth.

On the back of the performance so far this year and our estimates for the remainder of 2014, we maintain our revenue outlook for the year while raising our EBITDA margin guidance somewhat. And Richard will cover this in more detail later.

In Norway it is encouraging to see that Telenor delivers another quarter with solid top-line growth both within fixed and mobile. Our focus in Norway is to provide our customers with relevant services supported by superior network quality and coverage.

And during the second quarter, we have taken necessary steps to better align our tariffs with this significant increase in mobile data usage. The 5% underlying growth in mobile service revenues in Norway this quarter was a strong growth in data usage.

The data traffic in our network has almost doubled from second quarter last year and average data consumption is now 1.2 gigabytes and the median which we think is a more relevant measure is now standing at 232 megabytes which is up 90% from second quarter last year. And the driver here, we see that of course being coverage and handsets.

Smartphone penetration is now about 70%, and one-third of the handsets now supports 4G. We continue to improve our 4G coverage and are approaching 80% population coverage in this quarter. In the fixed market, internet and TV revenues increased by 6% and this is driven by price adjustments and more premium packages.

And we continue to grow our fiber customer base which now stands at 94,000. While internet and TV revenues are increasing, we still see pressure on fixed telephony revenues as before and the number of PSTN, ISTN subscribers is now close to 600,000.

The changes in customer demand and our significant investments in new infrastructure, demands continue the efforts to improve efficiency and building capabilities for the future. The mobile phone growth is importance and relevance for most people and when the payment solutions will be integrated to this handset later this year, we will further strengthen this.

Telenor Sweden reports another quarter with solid growth and core mobile revenues and an expanding EBITDA margin. The integration of the fiber and cable business acquired from Tele2 is well on track, but dilutes the EBITDA margin by around 2 percentage points. Excluding the acquired business, the EBITDA margin increased by 2.5 percentage points.

Mobile subscriber growth and handset sales has been low in Sweden this quarter resulting in lower acquisition costs. The operation is also benefiting from increased OpEx efficiencies following the implementation of new operating models.

I also want to thank Lars-Åke Norling the CEO of Telenor Sweden for the work that he and his team has done over the past years. As he now moves As he now moves to Malaysia to head Digi, he leaves the Telenor Sweden in good shape with a solid market position within both mobile and fixed and at the same time, I wish Patrik Hofbaue our welcome and good luck. And Patrik as you know, he headed the broadcast and he should be proud what he and his team has achieved over the last years in Telenor Broadcast including this quarter.

The operation in Denmark though are still – the Danish mobile market remains challenging with intense price competition and Telenor Denmark’s revenues were down 12% in local currency, mainly driven by the shift towards lower price points. As a consequence of the declining top-line and costs related to the transformation program, the EBITDA margin is under pressure and stands now at 11%. The transformation program is expected to show results early next year.

Moving over to Asia. In Thailand, the DTAC revenue growth is negatively impacted by the reduced interconnect rate from July 2013. It’s an intensive competitive marketplace for the time being and there is also a weak macroeconomic environment.

But at the same time, the migration of customers to the new license network continues to be on track, two-thirds of the customer base has now migrated to the new network. And as a result of this, regulatory cost continues to come down now at 22.5% of sales down from 32.1% in the second quarter of 2013.

An intense competition has required more sales and marketing spend this quarter despite this, EBITDA increased by 6% compared to the second quarter last year. Digi in Malaysia once again demonstrated robust performance, and we believe Digi is well on track to meet their ARPU target of 4% to 6% revenue growth and EBITDA margin in line with 2013.

With the modernized data network and relentless drive to deliver best customer experience, Digi is now well positioned to capture growth from the increased data usage in Malaysia.

In both Bangladesh and Pakistan, I am very pleased to see healthy top-line growth and strong margins this quarter. Grameenphone’s reports a solid top-line growth of 10% supported by a continued subscriber growth of 12% year-on-year and increasing mobile data revenues following the 3G launch. Grameenphone is working actively to stimulate the data demand through awareness and relevant activities. And as a consequence, Grameenphone has already close to 6 million data users.

Revenue growth combined with strong execution and operational excellence resulted in a 3 percentage points improvements in the EBITDA margin this quarter. Telenor Pakistan is also delivering healthy top-line growth and improved margin. Average revenue per user in Pakistan is impacted by on net competition and subscriber growth in lower revenue generating segments.

But we added 1.4 million new subscribers this quarter and increase of subscriber base is driving revenue growth to 6%. Also financial services is an important contributor to this with an approximated 200 points of the growth coming from financial services. An important milestone this quarter has also been reached where the commercial launch of 3G services took place in June.

I want to thank Lars Christian Iuel and his team for preparing for this and again also we are seeing Michael Foley, good luck in taking over as a CEO in Telenor Pakistan this summer. I am going then of course then looking forward to see both Grameenphone and Telenor Pakistan and their initiatives on delivering profitable growth based on both market growth and data growth going forward.

Moving then over to India, we are working hard to strengthen our challenging position in India. We see solid growth trends continuing this quarter with 2 million new subscribers taking the customer base to 32.6 million, 46% organic revenue growth this quarter, slightly up from last quarter and 11% ARPU growth.

We are improving our market position quarter-by-quarter and we take significantly more than our fair share of the total subscriber growth in the circles where we are present. We are opening new segments to the benefits of modern communication services by attracted and affordable services on offer.

We are continuing to improve the population coverage within our or six circles by redeploying equipment from the circles that we exited in 2012. The redeployment program which now is one-third on its way comprises around 5000 sites and is expected to be completed by the end of the third quarter this year and this will improve coverage from 42% to around 51%. And our subscriber market share as a consequence of this is also growing and stands at 10% in the circles where we have our operations whereas the revenue market share stands at 6%.

Data usage is also increasing in India and it’s increasingly rapidly also in our customer segments. From May to June, data usage increased by 15%. And data consumption is already then contributing to ARPU growth in India. We see this is a strong potential for future revenue growth in our customer segments in this respect.

Looking ahead, we will continue to implement efficiency initiatives across the operating units in the Telenor Group. This is basically the fuel for us to help us to keep pace with technology and market development both in the industry and in each market. Here performance management is key both within our group – through comparisons within causing our group as well as comparisons to the industry at large.

Most important though and as illustrated in our reported figure this quarter is the ability to align pricing structures with market trends and here our strategy Internet For All is at the core of realizing this in the quarters to come.

And with these words, I am going to hand over to Richard who will take us through the financials.

Richard Olav Aa

Thank you, Fredrik and also good morning to all of you from me. I will take you through the results in more detail. I will comment on some of the key parameters on our balance sheet and give some color to the guiding. But let’s start with the results.

And here are a more detailed description of the revenue development of the Group. We grew revenues with approximately 1 billion kroner from the second quarter last year to this quarter. That is a growth of approximately 4%. The organic revenue growth is 1.6%. The delta is acquisitions of Globul and fiber and cable networks that we bought from Tele2 last year.

But then let's take a look at organic revenues growth which stands at 1.6% and at the right hand chart here, you see the decomposition of organic revenue growth and if you read it from right to left, you see the big impact of interconnect and this is mainly due to the interconnect rate reductions in Thailand. That has an affect 1.5% at this point on the organic revenue growth.

Excluding interconnect which is fairly neutral on our profits, the organic revenue growth is slightly above 3%. The two next boxes reading from right to left of other revenues and fixed voice are more or less compensating each other. The other revenues are mainly Internet and TV revenues and they are growing faster than the decline in fixed voice which is that plain old telephony revenues.

But bear in mind that the fixed voice comes with a higher gross margin than TV revenues due to the company cost. So this quarter these effects more or less out right each other on the profits. But then, most important is the bar to the left which is the mobile service revenues that are growing close to 3%. And these are the core revenue that generates gross profits and value creation for the Group. As you see the – is necessary this quarter.

The 2 .9% mobile service revenue growth that is measured on the total revenue base. If we measure it on the service revenue base, it's an underlying growth of 4%, which are also Frederick mentioned that in his start obviously in his presentation.

And this is probably the most important to curve we use internally to track our performance on a top-down level when it comes to development in the core revenues which drives then the core profits. And the blue line here is then the underlying mobile service revenue growth for the Group in total. And as we see, it’s been remarkably stable for the last few years between 4% and 6%.

And also this quarter we come in at approximately 4%. But what you see underlying this is a big variation between the regions, while Asia had remarkable strong performance the last year it's slided off somewhat this quarter due to the drop in Thailand.

Very strong growth in Malaysia, India, Pakistan, and Bangladesh, but offset by the weakness in Thailand. So growth in Asia this quarter was around 6%. But the very strong performance in Norway, which delivered mobile service revenue growth close to 6% this quarter pulls in the other direction.

Obviously, Europe slightly more struggling still good growth rates in Sweden, but at a lower growth than previously and then the weak situation in Denmark takes it down to close to zero for the European region. But the main message is the stability of the underlying mobile service revenue growth of the Group.

And then this translates then into growth also in the EBITDA. We have 6% organic growth in the EBITDA this quarter and that translates in money terms into approximately 750 million kroner in growth this quarter and a margin of 36%, which is 1.5% to 2% higher than we had in the similar period last year.

Most of the units are contributing to the strong growth in EBITDA. The only significant exception is Denmark and you see the reconciliation on the right of the column and Norway being the two most strong contributors while also did contributions from most of the other units.

Also here included Globul and Myanmar together to show up the new units contributes together.

Then moving on to the cash flow, how does this good growth in EBITDA translates then into the cash flow and cash flow stands this quarter at 5.6 billion which is up 250 million from the similar quarter last year. And also here to the right let’s try to reconcile this in a slight different way than we have done I the past, showing the importance of growing the core revenues and with the mobile service revenue growth.

We started the our second quarter last year 0.4 billion than they have a close to 600 million effect from the increase in gross profit and that comes from the growth in mobile service revenues. Then on the – the OpEx programs are delivering as expected. So we are able to compensate inflation, salary adjustment, growth program that is for the years 2012 to 2015 through keeping OpEx flat in the core business.

So it's a very good operational leverage. We are translating the growth in mobile core service revenues which has a high gross margin. There is a lot that’s coming from data with the profitability operational network of programs has been not increasing our OpEx despite massive increase in number of customers, massive increase in number of sites and salary and inflation.

But we are investing more, 209 million higher CapEx this quarter mainly driven by increased investments in DTAC, but also to some extent in the 3G network, while then Globul and Myanmar combined, if you recall the last slide they have the positive contribution in EBITDA while we are investing a lot of CapEx in Myanmar and also starting to invest in a network swap in Globul so that to the new units they contribute negatively with 150 million this quarter on the cash flow. So that will up to 5 for the year-on-year.

So then, going through the full net income. We’ve been through the revenues and the development in EBITDA. In other items, we have a prominent cost building up depreciation and amortization – depreciation of Globul that has increased. Associated companies deserves a comment and there are three factors there that needs explanations.

First it’s Wimplecom, contributing negatively this quarter with 321 million. The direct contribution comes ordinarily around 100 million plus, but we had more losses connected to the settlement in Algeria this quarter that was not fully disclosed in the first stock exchange release from Wimplecom that came in three and effect also had 7 million to 8 million this quarter.

And then finally, our joint venture with Schibsted we are investing in market positions in particularly in Brazil and Southeast Asia for Telenor down to the taxes in the group with 3 billion.

Then on the balance sheet, the net debt to EBITDA ratio stands at 1.1 this quarter that means that the net debt compared to the last 12 months EBITDA, net debt now stands up 7.2 billion from same quarter last year, sorry, from the end of the first quarter 2014. And the main reason for this increase is quite planned. It's the dividend payment to Telenor’s quarter and not next quarters as well unless until Wimplecom has deleveraged further.

I didn’t intend to go through all the reconciliation of the net debt in this quarter are not the underlying structures. Maybe little note on the income taxes, they are lower than normal due to that they have a very low tax payable. The increase is seasonal in this dividend payment and it’s well below our ceiling of net debt to EBITDA of 2. So there are really no worries even if the debt increases by 7 billion.

We are guiding margin and CapEx to sales. On the organic revenue growth, we are at 1.6 percentage points year-to-date and as you recall from the first slide, approximately 1.5 percentage point negatively impact is in Thailand be there in this equal we should have a higher growth in the second half than the first. So we find it prudent to keep the organic revenue growth guiding at the low single-digit.

Then on the EBITDA margin, as early significant other than last year-to-date. We are 35.8, the full year last year was at 34.5 and year-to-date 2013 also 34.2. So it's up 1.6 percentage points year-to-date.

So we find it pretty margin will be a loss yet in line with 2013. And bear in mind these guidings are excluding and Myanmar as it’s still early days in Myanmar and we’d like to have more visibility on the ramp-up in Myanmar before we can include Myanmar in the guiding.

And then finally CapEx to sales we’re also changing the guiding goal adjustment as that of the towards seven satellite is now delayed from the fourth quarter this year until expected now first quarter next year. And that affect our OpEx to sales – with the sales guiding to between 14% and 15% which is really the midpoint of the satellite. So there's not any big changes in action that the on so far.

Then to finally to sum up, we have a very – we believe we have a strong quarter this quarter, but most encouraging is really that a lot of our growth in the past is coming from adding voice customers in Asia. What we see this quarter to start to growth through mobile service revenue growth and it’s particularly stable in Telenor Norway Telenor Sweden and Digi in Malaysia.

But also I would like to – the underlying figures in DTAC on data growth are very strong. It's really the voice revenues in DTAC that has taken beating this quarters. We see very solid data trends in the Thai market still and going forward. And this is really what's driving our internet for all strategy to continue with the group and we see encouraging trends like Frederick mentioned in both Bangladesh and also India and Pakistan now when they launch the 3G.

So and also then combined with the good cost control that we are able to keep the OpEx flat and get – like I said operational from this means that growth in the EBITDA higher than the growth in mobile service revenues and then also increased margins, so far this year and also guiding for next years.

So the priorities going forward is clear. This continue to work on the efficiency programs and by capturing the – to be done we need to see better the trends in Thailand going forward hope the better macro picture there going forward and also the situation in Denmark. The trends there has to has to be good.

Question-and-Answer Session

Meera Bhatia

We will start with the audience present. Are there any questions from the audience? In the second row could we pass the microphone please?

Unidentified Analyst

Hi, just two questions one in Norway. Very encouraging to see the performance in Norway and especially the migration – subscriber migration trends and ARPU trends. How do you see this trending the remaining part of the year and how important is new handsets or handset sales provides the migration for Denmark? What's next? Obviously the results are not anywhere close to what you would expect. Do you think it's possible to revise the trends organically or do you think we need to see a market consolidation for that to happen?

Jon Fredrik Baksaas

Activities in the market in general but the handsets stock in Norway is quite modern. In Sweden though we have been waiting new iPhones since here with some having a strong deposition. So where we are right now is 70% handsets on smartphones then of course it's the 4G generation that will further assist the data growth to have – that will bring higher intensity on data usage in general.

And of course, the 4G penetration stands fairly low compared to the overall smartphone. very good health. I have also this summer experienced that there are pockets in the geography that people are really seeking to get the coverage and as we have seen in Denmark market in particular after the two events that took place in Ireland and Germany where the regulators came out with a certain remedies for – to happen -

Meera Bhatia

Next question please from the audience.

Christer Roth – DnB Markets

Yes, hi. Christer Roth from DnB Markets. How much of the – so far and how much you expect the residual effect to be in the second half of the year? And secondly could you also update us on in terms of the operational free cash flow targets for next year 28 billion to 30 billion adjusted obviously for the postponed satellite investment? Thank you.

Richard Olav Aa

Yes, on the cost-cutting program we – for the three-year period with a slight increase in the third year 2015. So it’s approximately little less than one-third this year and we're right on track on that program and on the 2015 cash flow ambition like you say, yes we have to adjust for the satellite and we also need to see quick changes in the revenue growth in Thailand in order for that target to be.

Meera Bhatia

Now, and we will open up the conference call line please?

Operator

We will now take our first question from Mr. Jakob Bluestone, Credit Suisse

Jakob Bluestone – Credit Suisse

Well, how are you doing from a network utilization point of view? Is this leading to any network congestion or at least you had a lot of spare capacity in your network with the doubling of data traffic? Thank you.

Jon Fredrik Baksaas

In general, our capacity reserve, if there is a congestion of or accumulation of people around a big event, the overall capacity for video is limited but that we consider a special events.

But the general citing on capacity and people of course will say at the base stations now and then the base station runs full or you don't get the speed that you could expected and those kind of issues are there. But the general picture of it is that we are always. But you have to do it for them. And Throughout this year we have brought fiber capacity to up to 90% to all our base stations in Norway roughly. And of course that is way to go with.

Jakob Bluestone – Credit Suisse

Okay, a follow up, I mean your revenue trends are significantly better than your peers is that you put that down to some sort of network advantage or is there anything else you would particularly highlight out indexing so much?

Jon Fredrik Baksaas

I think we have to see this over a period of time and longer than just this quarter. In 2012 Telenor Norway did a very good price structure for Telenor in Norway. And if we compared to what happened in Sweden in that year, Sweden was weak. Then came 2013 and the pricing structures changed primarily into data-oriented packages.

And at the time be struggling over pricing structure with two rich packages which was a problem last year in Norway, but which was not a problem in Sweden which had a better go at that kind of question throughout 2013. And we spoke a lot about this in the – when we reported in quarter 2012 with our – with the need to really align the pricing structures with the consumption patterns that we saw on the development and the high demand for more data.

And the pricing structures that were then revised, I think it was around April this year, basically gave us much better pricing structures combined with the fact that we focused our sales to the higher end of the scale throughout in particular fourth quarter and the first quarter which now gives results having a bigger portion of our customer base at the better price points.

And the price competition in Norway aside over the summer where price points in the lower end has been more intense in competitive terms and of course to what we did in our pricing revisions when we did this in April, we have to see how this moves out and this quarter it moves well for us.

Jakob Bluestone – Credit Suisse

Thank you very much.

Meera Bhatia

Next question please?

Jon Fredrik Baksaas

Next.

Operator

Our next questions is from Mr. Andrew Lee, Goldman Sachs.

Andrew Lee – Goldman Sachs

Yes good morning everyone. Thanks for taking my question. Firstly a questions on Norway. Your execution has improved materially over the last couple of quarters. So I just wondered how confident you are in the sustainability of the current higher end up selling tactic over the next year or so and do you still expect – or do you expect reduced competition in the near term given the ownership changes in Norwegian mobile?

And then secondly on Denmark, you suggested you might not need doing a consumer business in Denmark on Tele’s call management mentioned that they are taking a strategic review of their assets in a shape as they believe they probably cannot turn the business profitable enough on their own. So they could be buyers or sellers to consolidate the Danish mobile market. The question is you’d be a more willing buyer or seller in Denmark? Thank you.

Jon Fredrik Baksaas

Consolidation effects in Norway, I think it’s difficult to in that way be very precise on what is going to happen in that respect process with the competition authorities until we have a conclusion on this and I think we have to wipe that out and rather concentrate on being on top of what is going on in the market in the second half, as the number one priority.

The potential consolidation that is on the table is a result of Tele2 not getting spectrum, in the spectrum auction that took place in the fourth quarter and as a consequence without having that spectrum you are out of business basically. And with spectrum you can entertain the customer base of Tele2 which obviously Tele seen as an opportunity. And it’s not strange that such things happens after an auction result in the way it was.

Then for Denmark, I think we have – we are at the same opinion I said before on the issue that you mentioned in your question and from our side, I think we should have all options available when it comes to what we will be doing in Denmark also in respect to the question on consolidation. But on the other – on the mid stuff with Telenor Denmark, and need to show progress on that agenda.

Meera Bhatia

Thank you. Next question please?

Andrew Lee – Goldman Sachs

Follow-up

Meera Bhatia

Yes, follow-up is still possible.

Andrew Lee – Goldman Sachs

Yes, I did have – yes, thank you – a follow-up on Norway. Just, part of – or the first part of the question in Norway is to you or how confident you are in the sustainability on the effects on up selling customers to the higher end tariffs that you have? Is that kind of a medium to long term opportunity to drive growth? Thank you.

Jon Fredrik Baksaas

In my view, this is fairly simple. There is a big demand out there. The world goes digital. People in general, the median customer is growing his consumption – he has having consumption dramatically in these days.

People want to use it more and for people to be able to use this more, the industry need to deploy quite significant investments in order to realize the capacities and coverage issues in a long stretch country like Norway to see this happen. And in that need and we have also in Norway a real disposable income growth year-over-year and in such a climate we should have the ambition of also to grow revenues along with increased amounts and strong investments.

And this is what we are doing this year and I will argue that this is necessary for the industry in order to be able to renew itself and further both build further capacities as well as be sufficiently in order to bring new services to the market.

Meera Bhatia

Thank you. Next question please?

Operator

Our next question is from Mr. Maurice Patrick, Barclays.

Maurice Patrick – Barclays

Hi, there, yes, Maurice from Barclays. So a quick question on India please. You’ve seen operating cash flow turning more negative as you’ve redeploy the sites which you said you would do, you said it will be completed in the 3Q.

Surprised EBITDA but stronger given the strong revenue momentum you’ve had, so perhaps if you can talk a little bit about what’s happening to those gross margins? When should we expect the inflation to take place in the EBITDA or in the free cash flow? That would be very helpful. Thank you.

Richard Olav Aa

Yes, good morning, Maurice. Yes, there is a small slow indeed in India this quarter. But – so there are really two effects, the small one-off and there is also the fact that the new sites we’re deploying they are hampering also the EBITDA before they fill up with traffic, because you have to pay tower rent and energy on the sites. So we don’t expect to kind of see a contribution from those sites before well into the third quarter and into the fourth quarter. It takes some months before you get a positive contribution.

Maurice Patrick – Barclays

Okay, thank you.

Meera Bhatia

Thank you. Next question please?

Operator

Our next question is from Mr. Thomas Heath, Handelsbanken.

Thomas Heath – Handelsbanken Capital Markets

Thank you. Two questions if I may. Firstly again on Denmark, given that the market is what it is now with competition, when would you expect to see improvement on the basis of your own initiatives with transformation and the network sharing with Telenor in the tiers we see a quite heavy down trading of business ARPU but a stable consumer ARPU.

Then secondly on Thailand, do you see this deterioration and hike in competition as a temporary issue that we should expect to see improving next year or is this the new level of competition we should expect given the re-regulation in Thailand?

Jon Fredrik Baksaas

Our own initiatives on the transformation agenda in Denmark will start to show results beginning in 2015. However, the competitive intensity in that market is anticipated to remain the same and that raises the question on the robustness of the four player market in Denmark in the longer run. And I think we have to address that question seriously. Thailand really continue, the macroeconomic situation in Thailand right now is at best neutral probably negative.

And the NTT 3G and the new license regime in Thailand boosted a lot of activities among the three operators. And this high activity level comes after a waiting period for the whole market waiting for 3G as you remember it took a two year prolongation basically or delay to get the frequencies into play.

And with this very high activity level in Thailand, we have – we are then seeing a very high competitive intensity among the three players. At the same time as we see a macroeconomic constraints and consumer reluctance on consumer spending. So, what does it take to turn this around? I would anticipate that the government is really working hard at establishing an investment-friendly platform for investments to happen and we want to secure that and in particular also to secure the serious flow in and out of Thailand as one of the – one does means.

So, I think it’s important to follow the overall macro signals for Thailand and when we see signs of this moving in the right direction I think we will see an immediate boost also in consumer spending in the country.

Meera Bhatia

Next question please?

Thomas Heath – Handelsbanken Capital Markets

Thank you. That’s very helpful

Meera Bhatia

Sorry, do you have a follow-up question?

Thomas Heath – Handelsbanken Capital Markets

No, thank you. That’s very helpful.

Meera Bhatia

Okay, thank you. Next question please.

Operator

Our next question is from Mr. Georgios Ierodiaconou, Citi.

Georgios Ierodiaconou – Citigroup

Yes sir, good morning from my side and thank you for taking the questions. Apologies for going back to the same topics on some of the previous one. Firstly, around Denmark, I believe earlier you used the word interesting to describe the remedies in Ireland and Germany.

And I was wondering that you could be a bit more directional with – they are encouraging or would you be awarded with given the MVNO history of the Danish market with on flows in signing after such type of remedy? And secondly on Norway, around the ARPU dynamics. Is it possible to give us an indication of the ARPU accretion you are seeing on the migrate into the new type of parties and whether the migration benefit has accelerated since May when you launched the new product portfolio? Thank you.

Jon Fredrik Baksaas

When I used the word interesting in Denmark is I was pointing and tell you that we were in with some statements on go to market side on both brands and basically the two rulings in Ireland and Germany could slot into a new perspective. So, one could argue that the consolidation question in European telecom basically stands differently today compared to the point in time when Telenor and Telia did our – when we did our joint venture on the network co-operation.

If it hadn’t been for the network co-operation that both Telenor and Telia entered into, we would have had seen probably very much more negative figures in particularly on the CapEx side for the two entities. So that was my sort of reference to why I used the word interesting.

As to Norway, I think that the main contributor to this quarter gross results in Norway is two-folded, our data will be a little bit more when you use less. That’s number one, number two, we have focused our sales efforts beginning third quarter last year as I said on bringing a better and better tailored service offering from Telenor to the customer in respect to how much the customer consumes and in that respect we are probably, we are at least aiming for having the best and the right offer in the enhancement to the consumer consumption at the individual level.

And as an example of that, we are to receive a SMS from – customer service team on my daughter’s subscription. And my daughter is currently in Denmark and obviously over the last half year. She has not been using that subscription that very much and I was offered a cheaper offer from Telenor in order to save some kroner on that which shows that we are actually following the consumer consumption at an individual level and issue offers in that respect. And I think this way of interaction with our customers and the customer’s needs is something that we need to follow-up on later on.

Meera Bhatia

Thank you. Next question please.

Operator

Our next question is from Barry Zeitoune, Berenberg.

Barry Zeitoune – Berenberg

Hi, good morning. I just got two questions please. The first is also on Denmark. Not really thinking about it from a consolidation standpoint but thinking about how the transformation program might impact numbers? I believe that you had about 80 million north of cost in your EBITDA this quarter which would have been about 10% margin.

And then I assume you are expecting some margin benefit going into next year from the program itself, so, how should we think about margins after this year in Denmark? And when I look a smaller competitor of within the three, now they’ve done a 26% margin this quarter. So, is that the kind of margin aspiration do you have for the Danish entity as a standalone business as it is today?

And then my second question is on Thailand and really, we’ve seen a step-up in sales and marketing expense as a result of the increased competition. And I was just wondering, do you think, do you look at that step-up as a temporary step-up and something that’s solely related to the migration of subscribers away from concession or do you think we’ve moved into a new phase of sales and marketing in Thailand? And that this is a step change that will partly offset some of the benefits from the move away from concession? Thank you.

Jon Fredrik Baksaas

Well, since I have been talking that much on – precise as from my – our side, I believe that the transition to the new license set up really spurred a lot activities for all three players, because it gave all three players the possibility into bear cost that has happened more or less then hopefully the loyalty factor between the operator and the customer base starts to establish itself a little bit more than what we see in this transition phase.

There are a lot of arguments against that but at least – and DTAC is well positioned. We have a good track record for moving over from the one to the other set up here. We have come a long way but the long tail here in this quarter results we have somewhere down approximately 100 million year-over-year on EBITDA and about 60% of that comes from reduced gross profit and 40% from increased OpEx and should we expect and accelerating into 2016.

But what is concerning is that the gross profit is continuing to slide and that has been another close to 60 million this quarter. And that’s driven by a lower customer base one in the pricing in Denmark that did not succeed. We lost a lot of customers and the customers we get in now that comes in with a lower ARPU and they cost more to acquire.

We are back in the early model, at least clearly not very profitable for each operator given that we only have a fixed non-commitment period in the business. But we felt that we had no choice other than to moving back to subsidies as the customer losses were too massive.

And we all know without the revenue market share and the same market share we will operate during the market. So we just had to fight back and then work hard on the costs in an attempt to kind of restore margins. But it is very hard to predict if we are able to restore the margins if the continued drop in pricing and gross profits continues then the OpEx saving is just taking.

Meera Bhatia

Thank you.

Barry Zeitoune – Berenberg

From a competitive perspective, what needs to happen to reduce the subsidies again in Denmark or remove the subsidies again in Denmark?

Richard Olav Aa

Yes, that’s – that’s of course a very good question. So, we – at least we felt other choice when the others are rising.

Meera Bhatia

Thank you. We have time for one more question before ending the session today.

Operator

We now take our last question from Mr. Terence Tsui, Morgan Stanley.

Terence Tsui – Morgan Stanley

Yes, good morning everyone. Thanks for taking my questions. A clarification on the EBITDA margin guidance. You are now saying that you are targeting a higher level than in 2013. I was just wondering if you can be a bit more specific. I noticed that the H1 margins were up over a 100 – I think are in the 130 basis points year-over-year versus H1 2013.

Should we expect a similar amount in the second year following. Just wondered if you had any new developments about data, just wondering what you are basing in into your estimates in terms of launch and the level of aggression? Thank you.

Richard Olav Aa

I am guiding, I think we have needs to be said, second half normally has a little bit more intensive than its if you take the whole portfolio. We have said above last year, I think what has been said, what needs to be – that has been said. Then on your last question, it’s very difficult in a way make a – we have no insights in how that issue basically evolves.

Having said that, and by concluding this presentation, I think we have a very strong momentum in the Telenor Group in general. Asia is still a very strong growth engine for us. Thailand is – we hope it’s temporary when it comes to not being able to have the same speed as the other markets in Asia.

And we are very glad that the efforts on the go to market initiatives in Norway is working the way they are which is highly needed in pretty Norwegian kroner and in the investments in both coverage and capacity in this country.

And with those words, I wish you a continued good summer. Thank you.

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