Telenor ASA (ADR) (TELNY.PK)
2011 Capital Markets Day Conference Call
September 22, 2011
Marianne Moe – Head of Investor Relations
Jon Fredrik - Baksaas, Group Chief Executive Officer
Morten Karlsen Sørby – Executive Vice President and Head of Strategy and Regulatory Affairs
Bjørn Harald Brodersen – Head of Group Sourcing
Berit Svendsen – Chief Executive Officer Telenor Norway
Kjell Morten Johnsen – Chief Executive Officer Telenor Serbia
Henrik Clausen – Chief Executive Officer, DiGi, Malaysia
Sigve Brekke – Executive Vice President & Head of the Telenor Asia operatio
Yogesh Malik – Chief Operating Officer Uninor
Richard Olav Aa – Executive Vice President & Chief Financial Officer
Peter Kurt Nielsen – Cheuvreux
Maurice Patrick – Barclays Capital LLC
Ulrich Rathe – Jefferies & Co
Jakob Bluestone – Credit Suisse
Andy Parnis – UBS
Barry Zeitoune – Berenberg
James Britton – Nomura
Stefan Gauffin – Nordea Markets
Laurie Fitzjohn-Sykes – Citi
Will Milner – Arete Research
Maurice Patrick – Barclays Capital
Stefan Gauffin – Nordea Bank AB
Peter-Kurt Nielsen – Cheuvreux
Espen Torgersen – Carnegie
Good morning and welcome to Telenor Group's Capital Markets Day 2011. My name is Marianne Moe, I'm head of Investor Relations, and I have the pleasure of guiding you through the program here today. I hope you all have the presentation materials available, also for you watching the webcast.
The key topic of the Capital Markets Day this year is operational excellence, and as some of you may remember at Capital Markets Day last year, we announced some Group ambitions on operational excellence. This year we will take you into some of the initiatives we are working on to deliver on these ambitions both on business unit level and also on group-wide initiatives. So let’s have a look at the agenda for today. We will start by Group overview and the Group’s strategic direction by the Group’s CEO. After that we will take you into the Telenor Group’s approach to operational excellence how we combine local and group-wide initiatives, and sharing our best practices, and then including a deep thought into sourcing, which is one of the key group-wide initiatives in Telenor.
After the break, we will have presentations from Telenor Norway, Serbia and DiGi. And in the second half of the day, we will have one session on Uninor, also that with an operational excellence, initial approach and what we are doing to become and who is our low cost operator in India. And towards the end of the program, our Group’s CFO, Richard Olav Aa will take you through our financial priorities including the revised dividend policy announced earlier today.
And as last year after the presentation here in the auditorium, we will have breakout sessions with senior management from Telenor Norway, Uninor, Serbia and DiGi.
So, I will not keep you waiting any longer, and I’ll soon leave the floor to our Group’s CEO, Jon Fredrik Baksaas. Please note that the CEO will join the CFO later today for a joint Q&A session, so there will not be a Q&A session after this presentation. Okay, Fredrik.
Jon Fredrik Baksaas
Yeah, good morning, ready to go. Welcome to Fornebu this morning. I have to say that this has been a very, very wet summer and to enter this room in this beautiful autumn weather that is better the changes that this climate on Norway offers us.
But not being disturbed by the climate, I hope that we have some interesting aspects in the Telenor presentations today. We have a great team here both by quality and numbers. So I hope that you can get to know them, get to know the ambitions that we are putting forward through this day.
So let me then start with a bit of the development trends that we have seen in the industry lately and probably which will be part of the picture going forward. Let me start and with where we are over the last periods from a financial perspective. We are a Group now enjoying a bit of the growth factors that we’d see in this industry, and we are not exposed to those economies that basically have a bigger problems with their national economies at least for the time being under these circumstances, one should probably at that.
But on the other hand there is a strong growth momentum in Asia and this has given us through the last quarters and through a couple of years, pretty good growth figures at the top line. And those seeing 2009 pretty meager, everyone in this room probably remember what that year was about. That was developed to handle the consequences and the impact rising from the financial crisis that the peered autumn in 2008 and moving into 2009.
Through that period I think we changed a little bit of the focus in the Telenor Group because we really went into the operations and we’re looking at what is the best way of behaving under those conditions that we are at that time so, and as a consequence we recovered through the operating efforts and delivering on operating results, which has given us this cash flow profile of the Group as you can see at the lower part of this slide.
So through that period coming from $11 billion of operating cash flows back in 2008, the last 12 months figure, when we reported our second quarter figures were 18.6, and whether we can see 20 on the horizon coming up here, rather use sort of up to the future to decide but we don’t shy away from that kind of goal at least.
With this development in the group over the years, we feel now confident that we can adjust the shareholder remuneration approach in the Group. We have the ambition of having a competitive level of shareholder remuneration by the combination of dividends and share buybacks and the record will come back to the details of that.
In growth environments, we have had very strong ambitions over the years in the Telenor Group to grab our fair share or market share. We feel that we have managed to do that reasonably well there are of course some markets that’s struggled to maintain or take their fair shares in faces, but the overall picture is that we have, we’ve been able to capture market share and develop our operations, and that needs to continue. And we do have in the Group a combination of markets, the overall aspects of the international economy is well known in this room, so I won’t drill that very long for that aspect, only to mention that we see and we proceed the Nordic countries being reasonably robust and, and moving quite strongly under the circumstances that we see in Europe for the time being.
We have of course a mixture and very externally directed economy in Norway, but over the years we have also in this country managed to develop the general productivity factor of the society, and we have managed to stay competitive in those things that we make in Norway and produce and deliver to all the markets though they being, of course, very much natural resources-based.
The other markets in Scandinavia have also done reasonably well through this financial crisis. It remains to be seen what kind of consequences that might come next but at least where we stand today. We feel that the Scandinavian part of Europe is a reasonably strong economic platform on how we are operating.
If we then take Southern Europe, Southern Central Europe, where we have three operations, the picture is a bit more varied. It seems like Serbia is sort of on the better side of that equation because that’s where we enjoy a growth factor, pretty strong really, whereas Hungary has been more of a struggle for all three main operators over the last period of times.
Then for Asia, again, we do not see at this point of time a weakening of the Asian economies. I’d say on the contrary, we do see strong economies moving forward, but of course their dependency on international trade and industry, their dependency on the energy prices with potential consequences pouring into food prices is of course something that is constantly there. But where we are today, we don’t see any specific exposure of negative signs for the time being.
And I again have to say on the contrary because when we launched the 3D services from DiGi quite recently, sorry from DTAC in Thailand quite recently, we saw a tremendous uptake immediately. So there is a surge, there is a need in the marketplace for these services.
And then this takes us over to the thriving part of this industry. I think we are all living examples of how we have started to use our connectivity and our handsets differently over the last years. I use to say that make a note that when you start to make use of a new service and how deep and widely you continue to use it because this is sort of a living examples on how we as individuals start to and have and to reap the benefits of modern communications in some way or another.
Some years ago, it wasn’t that obvious that we were sitting in this room with the phones on. We never take them out off when we come here to Telenor, but on the other hand we never take the e-mail off either. So we’re sitting here following the markets and we are following our e-mail account and we’re doing this and that. And I can all see you sort of dipping your head and then moving into the handsets and the connectivity that is there.
So we are living examples on how the society moves into becoming more and more digitalized. And in that sense all we know the beginning, is it so that all the things that has got electric power over the years, now will get communication. Well not necessarily all of them but a lot of them will get a communication attached. So there are different business models arising and we are there to create the connectivity, we are there to partner with those that have good ideas, good ideas that we believe in that can have a market pickup in the longer run and the examples on this slide are plentiful.
And this is of course driven by a number of factors. One of these is the broader bandwidth that is being made available when new frequency plans are coming to the marketplace and when this is done in a standardized and a bigger geographical picture then we have sort of business model potentially taking off and it’s of course also handsets. It’s no doubt that Apple and their success has thrown a lot of new energy into the handset sector and also a lot of new energy into how we utilized these handsets and the way we start to entertain, to be entertained by new services and reaping the benefits of modern communications. And there is a rapid growth in that dimension out there.
Handsets vendors are competing for market positions. Both Samsung and hopefully also Nokia after a while and others will be HTC and others will be competing for positions in this field. And seen from an operated perspective, a varied handsets portfolio out there with a lot of possibilities is something that also will favor utilization and usage of the connectivity factor and also the bandwidth.
So here there is a lot of application and service innovation which will be some of these aspects will appear very close to the operators, whereas other will be part with a broader ecosystem being more distant. And we have to throw our energy into this sphere in such a way that we can position Telenor also in the service part of the digitized economy.
The big megatrend of everything becoming digitalized is sort of an interesting twist on the word in our industry because we’ve fully digitalized sort of the old analog systems back in the 90s more than 15 years here in Norway. But the world becoming digitalized when it comes to services is sort of a big megatrend that is sort of a buzzword in the industry. That doesn’t take away that the operators in Telenor in this case will predominantly remain in mobile operator, providing the connectivity that being voice or that being data. And this connectivity factor will be sort of the main business model in sort of the foreseeable future as we see it.
But on the same side, there are, as I tried to illustrate on the previous slide a lot of things going on in the service field and we need to take certain positions also in that respect and that will give you a couple of examples. The ecosystem here is constantly changing and this is driven by factors which I mentioned on my previous slide. In the Telenor Group, we have taken some initiatives into the service field and we could have taken more but still let me mention a couple.
Financial services is one of these elements of digitalized, of service becoming more digitalized being carried into the hands of the consumers through the mobile phone and enabling customers to participate in financial activity quite differently from what we used to. And this is the case both in Scandinavia as a mature market, as well as in Asia where we can say that these feature to a great resend or emerging.
Here in Scandinavia, we have facilitated in Norway a digital ID to the SIM card, until the end of this year, there will be more than 100,000 users using their mobile phone through their bank ID which we call it embedded to the SIM card which enables me and other users to open your bank account and to do your banking activities from the mobile handsets in a secure way.
And this morning before coming here, I used it to get rid of one of those nasty bills for a period of my mobile phone, just by activating the bank ID. And here we have an example of the trust factor that the mobile operators can bring to the market as well as a convenience factor, because we can sort of handle all financial needs on the run and when there is time to do that.
And how many of you in Scandinavia have been visiting a bank lately? Well, its probably 10 years since I was at least in a bank doing sort of regular banking stuff expect for all the special purposes, maybe.
Now, one more dimension of the financial services. In Asia, we are offering financial services out of our operations to a great number of customers that previously were unbanked. Many of our customers do not have the bank access as such, and then to start offering money transfers as a simple service but very useful service between family members working in a city, living in the countryside through the mobile system as a money transfer using our distribution network, our agents which are used to sell communication services, they can add the extra feature of being distributors of financial funds between individuals. And if you don’t have that service available to you from before, it’s of course a tremendous new service that both brings efficiency, security and convenience to the people.
Another example, which we have had in Asia is to bring about brokering places in the Net where people that have something to share with others, something to sell with to others, can offer their goods, can participate in the marketplace, get to know prices and bring their goods and services to special marketplaces where prices are known.
And again, the modern communications brings new things that one takes for granted in the Western world, but brings new efficiency to new user groups. And it's this micro-activities that really brings the GDP growth and bring more visibility to the GDP growth in these markets.
So what we’re doing is to leverage our position. The brand, the distribution, a good quality network and of course people that understand these marketplaces reasonably well and as well as we are willing to put efforts into creating these kinds of new services.
At the same time, as this is happening there are growth factors, in particular related to mobile data growth that is sort of the strong driver for the time being. In Norway, the data growth and the value add coming from that basically compensate for the existing price pressure on voice and SMS. It does not fully compensate for the reduced termination rates and roaming rates. But generally speaking, in a pretty stable voice minute market in Norway within its existing price pressure attached, the growth in data volumes on mobility is compensating for that price competition in broad terms.
And here we need to change the pricing philosophies, both in the industry and being Telenor, and we need to relate the pricing structures to capacities taken out of the systems, customer by customer or by speed categories. And by this illustration, we are bringing forward sort of the key on how we are thinking about pricing elements for the time being, and this has of course to be tailored to each specific market. But we do believe that the pricing factor will be tilted towards both capacities and speed factors into the future.
And why is that important? Well, the unlimited concept that we had a couple of years ago in the industry proved to be much too expensive in the sense that unlimited users grow the cost sides out of control. And there needs to be a balance between the resources fed into the system as the revenue generated from the system in the long run of course.
In parallel with that, we feel it’s important that there is a balanced device strategy out there. We feel that the industry will be better off with a balanced portfolio of handsets coming from different concepts.
The Android market is one sort of area that crystallizes itself for the time being, Apple is another. And the big question is whether Nokia and Microsoft also will come forward with their historical strengths being combined together in a new set of handsets that hopefully will come during this autumn. And in that sense, I think the Nokia World, which is coming later this autumn might have some newcomers of interest to the industry.
Let me then move to the concept of this Capital Markets Day, which is operational excellence. For a very long time we have had operational excellence as part of our leadership expectations and included in the Telenor way of working, but that doesn’t mean that there is sort an end to that kind of relentless work. This kind of work is ongoing, because technology is moving, competition is moving and markets are moving. So to utilize the new concepts in the industry is of course something that we have to be open towards at all times.
There is no option for us to sit still and wait to do, or to execute on an efficiency measure if it’s available. And if we can do the smart things at the right time and hopefully a little bit earlier than others, we will bring competition efficiency into the structures both of the group and the operating companies. And we used to say that everything that was done yesterday can probably be done smarter tomorrow in some way or another. So, to think alternatively on how work processes and combinations in the IT stack, utilization of spectrum and how these things can be pushed and push several existing imaginary limits into new ways of utilizing the system. And you will hear things of that later today.
And as a group of course, we need to replicate. There are elements that comes out of need in one market that basically challenge how things were done in another market from yesterday. And we need to utilize that for the good of the competitiveness of both the companies that are competing in each market as well as utilizing the scale of the group, standardizing on the right elements, and get the scale to work in the same way as we’ve got it to work in the vendor discussions that led to the network swaps that we are in the midst of executing. So to leverage these scale and to increase these group-wise efforts is a bit of the challenge that we have addressed also by reorganizing the Telenor Group just recently.
And then next two slides, I will be a bit more specific on two very important elements in the portfolio of Telenor’s activities, that of India and that of VimpelCom. And there will be a broad session after lunch on India. So I would limit myself to sort of the broad factors.
We are on track on the business case when it comes to sort of the ultra frameworks. We have of course experience, a much tougher price competition and a regulatory situation, which has sort of developed into almost a (message) for a long period of time, which of course has left us with elements of insecurity when it comes to the general framework of investments in India. But we have managed to navigate through a number of those obstacles that has arisen. And we have also managed to establish a perception of Telenor and Uninor bringing one way of working into the Indian environment with reasonable success.
So on an operating side, Sigve and his team, Yogesh and others, has done a phenomenal job in bringing forward the sales and distribution system, getting the brand visible at street level, and creating now a market position of more than 20 million subscribers after one year plus of operations.
Here to survive in the longer run, we need to take this operating model into a level of slimness that we have never seen in the Telenor Group before. Given the price level of telecoms in India, the cost level sort of needs to find a level that can handle the price level and we are in the midst of that, and Sigve and others will point to our actions in that sense.
The last item in India is of course the clarity on the regulatory framework, in particular when it also comes to consolidation steps in the industry is something that every operator in India is looking to and to get out of the unsecured year-round the license part. We are with clear opinion that the original framework for the licenses offered in 2008 with access to 6.2 megahertz, is part of the promises that the governments offered back then and we have responded to through our investments. And we have reasons to believe that our story telling in that sense is about to be visible among stake holders in India.
Then next VimpelCom. We believe that there is a lot to gain from VimpelCom, becoming more operational-oriented to focus at market activities in each market and to drive the same scale effects that we have demonstrated in the Telenor Group. And we are happy with how the new management in the VimpelCom Group is expressing their ambitions on operating focus going forward. And we believe it will lead to a capital efficiency in that group, which (can) compares betters to others and in that sense, we are talking about moving forward with our competencies more closer to how and what is the needs of the VimpelCom Group moving forward.
Just recently we had examples on that industry cooperation through the two groups, when competencies from our group in Telenor were sticking their heads together to discuss how to approach the license and the license auctions that is about to come in Italy. At the same time we will maintain the arbitration process. We will feed our views of the acquisition transaction and the way it was handled through the arbitration process that will be ongoing and we can anticipate a treatment of that sometime first half next year.
Coming to the end of this presentation, I want to highlight what we have done on the organizational side. We have done some adjustments to the organization in order to facility the operational excellence focus and working the Telenor Group going forward, as well as our willingness to entertain the new digital service field in general.
So I’ll ask Hilde Tonne sitting here. You can raise and smile. Wow. Here we are Hilde. And we have Berit Svendsen, coming in as CEO of Norway. Known to many people here in Norway from before. And you have Kristin who was here for the first time last year. Now taking on a bit stronger focus on how to move in the service layer on how the Internet access is offering these new elements to our customers.
So I have taken then sort of the three newcomers to sort of new positions of this ability and importance to this slide today also by pictures. That doesn’t mean that the rest of the guys that are in group management are not important, because they are all here and you will see them throughout the rest of the day.
So we have tried to build a group management that now is pretty more clear-focused on those aspects that we believe are important to be successful in the coming two to three years, mainly that of bringing forward a higher degree of standardization and operational efficiency across the group and to be more visible and to crystallize ideas in the service field.
Services that comes natural as (inaudible) or Delta Services to the hands of all customers through the mobile phone. And here in Norway, Norway being an exceptional important part of the group, we brought Norway into group management because we are in an important period where pretty significant parts of our CapEx capacity is being utilized to modernize the network this year and will be used next year when we take the LTE step in broader terms for the Telenor Group.
Lastly then, these are topics that will be standing here for the rest of the day. We are here in a situation where we create a top line revenue development about peers for the time being. We enjoy that and we want to push for that to stay on. Of course that depends very much on how macroeconomics will develop, but the way they stand for the time being, we are seeing good prospects for that to continue.
It is to bring Uninor cash flow breakeven within the timeframe work that we have stated for ourselves and to stay within the peak funding guidance and it’s to bring forward value creation in VimpelCom. And with this approach also on operational excellence and bring that one more notch higher up in our focus both through CEOs and group management. We believe that the Telenor Group can sustain also good value creation in the periods to come. So, it’s of course our execution that will prove whether this is the case.
So with those words, I think I am ready to hand over the stick to the next guy on the block that being Morten. Thank you.
Thank you, Fredrik for this introduction. As Fredrik said, the next topic on the agenda is Telenor Group’s approach to operational excellence. We will start by Morten Karlsen Sørby, will explain how Telenor combines local and group wide initiatives, efforts on operational excellence and after this Bjørn Harald Brodersen will talk about how Telenor Group has moved from traditional sourcing to strategic group sourcing and the benefits we are seeing from this.
Morten Karlsen Sørby
Thank you, Marianne Moe. Let me give some thoughts and considerations on the subject of operational excellence and the way we approach that here in Telenor. It’s no doubt that there are different ways of explaining and defining operational excellence with Intel telecom groups. The way we look upon this within Telenor is actually three-folded because we want to be cost effective, but we also want to be preferred by customers. In addition to those traditional measures we also want, as Fredrik said, to leverage further on group standardization and cross-border operation.
There are different ways of organizing a group of operations and this is from a group level. So if you look into this panel, you will see that we have tried to organize the different ways you could set up a operation of several business units, starting with local independence group standards, but still with local execution and then moving into strong group control.
Here are, as I said, different philosophies on this. The philosophy of Telenor has for many years been to capture as much growth within the local markets as possible when growth is there. That is of course driving us towards local independence and that is a strong Telenor culture. But as markets mature, as industry matures, we see a change in this respect. And we haven’t out placed Telenor in the middle with some group founders but still with local execution. Two to three years ago most of you would probably have put Telenor on the left side on the local independent side.
When we look into this sort of tunnels, it’s always a balance between local agility and cross-border operations and looking for scale on the global group level. To us, it’s not a conclusion that we will end up being a very, very integrated group or a strong group with strong group control. That is actually to be seen and I think what you have seen in the telecom industry so far is that no one has really figure out what is the best operating model.
So arguing that for example Orange has the final solution to this that is far too early to say. So the question to ask and that what you will see throughout is how far should we in Telenor go? And let me try to give you some thoughts on that. We have three different items that I would like to discuss with you in more detail. First is the systemic approach which we have adopted in Telenor, then it’s about replicating best practices and how to leverage groups scale.
If we look into the systemic approach, as Fredrik stated earlier, we have established ambitious goals, look to achieve and we announced that last year. The hard work is not related to established goals as such the hard work is to deliver on that and the way we do that. We have four years participated in global benchmarking both internally and externally. Through that work we have established a certain view and realized that there are gaps to be closed.
And we have all yet closed a lot of those gaps but scared to say we also see gaps to be closed in the future. And developing them from just undertaking benchmarking into a more holistic approach where we also identify improvement initiatives and establish improvement initiatives, that has been the focus over the last two years within the group in order really to cater for not as I said just analyzing, but bringing the results into figures and numbers.
This is of course a continuous process, and we have this into our culture, but as we have seen, we have some need to strengthen this to get even bigger part of our culture moving forward. If we look at how to replicate best practices, you could argue that the Telenor Group operates in very different markets and have very different customer segments. So replicating best practices is not the easiest way.
I would claim the opposite, in some domains and local domains, and let me just give you some examples, if we look to the sales tracking system, which is currently deploys in India, that was developed based on the experiences in Asia in (Inaudible) and before that in Norway and the Nordic, but when we put the system in place in India, of course we leveraged everything we knew, and we added more capabilities through that process. Now we are about to take the experiences in India back to the other Asian assets and to the European assets.
On business intelligence three, four years ago, we realized that we had specific competence in two of our operations Hungary and Pakistan, and then we took some of the best competent people in those two operations to a group level, and we have then spend utilizing these resources within over other operating companies for the last three years really deploying the best breed of practice throughout the group, not just in Pakistan and in Hungary.
On Spectrum efficiency, my colleague Yogesh Malik will come back to that after lunch, but I think we have really seen some tremendous efforts in that respect lately. On pricing, we established two years ago a group wide pricing team consisting of now approximately 10 people who work with the different business units in order to create both competitive and innovative price plans going forward.
Of course there are certain challenges by creating leverage on a group scale. There is no doubt about that, but there are also major benefits. One is the ability to replicate best practices, we have the traditional cost focus which really drives down cost on a unit basis, but you also have the competencies here. And what we have learned is that’s really adopting a cross-business unit project, I’ll come back to that. In some cases, have really created more competence to the group than having just a specific competence in one business unit, because if we put our best people in two, three or five operations together, we actually leverage the competence to a higher level than on a specific unit. That has really paid off in certain and several projects.
If we look into examples on how to leverage Group scale on sourcing, we will come back to that rather soon. On network architecture, we have had a community of experts within the IT and network field working for years under the supervision of our CPOs to develop a framework, which is both giving recommendations, but more and more also setting direction for how to develop and deploy the framework within IT and network deployment.
Asia Billing a year ago, we saw that three different units in Asia were heading towards end of life on their billing and charging platforms. And rather than running three independent processes of establishing a new billing and charging platform, we took that into one project and that is called Asia Billing, which comprises DiGi and Pakistan and what we are looking for is one platform to run billing and charging going forward.
You could claim that ERP systems, which is financial systems, HR systems, et cetera are all a simple system and that they should be standardized. But with that the way we have developed within Telenor, it’s not standardized as of today. We have a common platform, but the way we run back office processes, the way we really utilize that is based every much on a individual basis. And what we have formed now is a project to create a more common platform and common processes over the next years to come.
As Fredrik said, we have a strong ambition on this going forward. The macro execution is very important and that is why we are carefully considering in this respect how to drive forward, how many initiatives could we drive at the same time and what is really the logic. So rather than running a very centralized practice on this, we have said that we will utilize a business case concept looking into what is logical and what is reasonable when we start new initiatives.
This means that we will look both for few business units to work together, we could work within a region or we could work with parts of business units in several regions. And it is important for me to stress that this is based on a business case. It’s also fair to say that leveraging scale will become more and more important as we see that global servicing relation and products are becoming much more global on the top of the Internet.
Let me finalize this presentation, and short comments on one subject and that is sourcing. I think we have really gained tremendous benefits over the last years in the field of sourcing. And having worked with the head of sourcing for the last two years very closely, I will now give it away to Bjørn Harald Brodersen for him to take you into the detailed work that we have undertaken on sourcing, the benefits and the way forward.
Please now Harald.
Bjørn Harald Brodersen
Thank you, Morten. I will start this presentation by giving you a quick intro as to why Telenor believes that sourcing is a major contributor into the operational excellence initiatives that we are running in Telenor these days. But the majority of the presentation, I will focus on how we are executing the projects, what kind of projects we are executing, and also show you some of the results that we have been able to achieve during the last couple of years.
If you look at the costs of Telenor, we see that more than 50% of our total OpEx and CapEx is related to buying products and services. So it means that all initiatives we do on making sure we do better sourcing, smarter sourcing, will have a quite significant effect on our bottom line. If you take the 50%, that equals approximately 25 billion zlotys every year, almost equally split between OpEx and CapEx.
In the OpEx there are of course operating and maintaining the networks would be the main cost element, but you also have a lot on advertising, marketing and distribution. And of course on the CapEx side it’s mostly related to the network and IT infrastructure.
I don’t know how familiar you are with the terms procurement and sourcing. For us, the way we look at procurement, it’s a very transaction oriented process where you have some one in the organization who has a need, you issue an RFQ, you negotiate and you sign a contract and then you issue the PO.
This is a very on and off process, it’s very reactive and you don’t really have a holistic perspective on how you attach the main spend areas. So the transition that we are making right now is to have a more strategic approach to sourcing, where you spent more time upfront to identify the high spend areas, what are going to be the needs of Telenor in the future, and how will the vendor market in these areas develop. Based on that we will develop a sourcing strategy and execute continuously over the next couple of years.
So this is a much more fact-based approach, much more systematic, and it will address a much wider range of the spend base of Telenor rather than having the typical transactional procurement process. I will show you how we apply this process in some of the examples in the next part of the presentation.
If you look at how Telenor has moved when it comes to procurement or sourcing, I would say that going a few years back we have, and we still have 12 local procurement departments. But as Morten said, up until recently the focus of Telenor has been capture the growth in each market. We want to make sure we have procurement teams locally so that we are able to launch products quickly into the market.
So this has been a very conscious strategy of Telenor to have strong local procurement teams to support the growth in the markets. We didn’t do a lot of global imitatives. I am not saying that it was totally upset, but the main focus was to support the local operations.
What we did from a global level was to make sure we had best practice sharing, like Morten explained. But last two, three years as the focus on operational excellence has risen, we now put a lot of emphasis into identifying Group wide initiatives. I would say, from the sourcing area at any point in time we are probably running between 25 and 30 global sourcing related initiatives, and the number is increasing every year.
If you look where is this going to take us, I would say that Telenor is propagably moving further towards a global sourcing organization. And by that I am not necessarily saying that we are going to have one central organization. I think Telenor can benefit in using the competencies, using the resources that are already present in the business units. But we need to remove duplicate buying, so maybe we will move towards a direction where you allocate responsibilities for certain products or certain categories, to some business units or some regions. So the whole global sourcing will be much more coordinated.
Okay, the main three focus areas of the global sourcing in Telenor centers around of course extracting the scale effects, which are the projects that would run across all business units. This is where you see business units buying more or less the same products.
The second part is where group has developed and established a team who specializes in running major transformation RFQs complex technical or IT related projects. And I will get back into the details of this, the top two ones. I just want to mention also on the third one is, this is basically the foundation of how we do sourcing in Telenor. You need to make sure we have solid processes. You need to have systems and tools to make sure we can work systematic and also have care and transparent processes towards the vendors.
So the rest of the presentation now, I will dive into the top two areas and show you concrete examples on how we’re working within the sourcing area. Okay, I’ll start out with the Group scale. What we typically do here is, we look for areas where we see that Telenor is going to invest a lot in the future where we see that there are new technologies coming in, new products where we know that Telenor is going to spend a lot of money going forward. And of course also we identify the areas where we are currently spending a lot of money and where we will continue to be buying those products and services.
This is an example from the first project we did back in 2009 on a group scale, relating to USB modems, the one that you plug into to your PC to get onto to the Internet. And you see here, we estimated at that time that the volumes would double more or less every year for the next three or four years. At the same time this is a global vendor markets, and what it did was to collect prices from all the business units to see what is the current price in each of your local markets and we would see price variations between the most expensive business units, and the one with the lowest prices of several 100% for the same items. So from here this is an obvious case where you need to take out the scale effects.
And if you look at the results of the first three projects we did back in 2009, you will see significant scale effects in all these three product areas. And this is for the USB modem where we have an average price reduction of 60%. Some business units benefited probably up until 80% reduction in their unit prices.
What we're seeing is that we are able to take prices that we’ve only seen in Asia, in the high growth companies in Asia even able to take those unit prices also to the European more mature companies.
And an estimate, just these three projects alone is going to give us a potential saving of 600 million zlotys to 700 million zlotys over a three-year contract period. So even if each of these three areas is relatively small spend areas in any business unit, when you aggregate the volumes to a group level the savings potential becomes significant. And then if you have a machine which are able to run 20, 30 of these projects every year, then the numbers are getting quite attractive.
An important part of utilizing the scale effect is standardization of the products. So we spend a lot of efforts on trying to standardize the product specifications. Rather than having 12 sets of local specifications, we are now establishing one set of global product specifications, which means that you get away from the long tails and you have all these verities. You have a very focused negotiation on a few items, so you should get significant price benefit from that.
And this shows some of the recent projects we had this year, where we had been able in the first round to more than cut in half the number of specifications that we're using. And the work will of course continue, so I think by next year we should be able to reduce the number of specifications even further.
So this gives us an additional affect in the negotiations. Not only that, it will reduce the complexity in the network by having fewer specifications. It will simplify the spare parts management of the operation. It will increase the reuse of equipment, you can move equipment then from site to site because it is not specialized or customized to a certain site anymore.
And also, when it comes to competence that you need to have in the technical department, managing 150 specifications on Microwave is not something you can do with one person, you need to have several people. But managing 12 specifications is possible for one person to do.
So we see a lot of effects also outside the pure price effect by doing this standardization effort. These are areas where we have cleaned up existing legacy from the networks. We also have, or are currently working with areas where Telenor is about to launch new products into the market, for example LTE modems or (Inaudible) cells which will be, we are in the midst of launching these days, and we have been able to standardize that from day one so that you don’t need to go back next year and start with (Inaudible) different applications again.
Another example for SIM cards, when we started this project we saw that we had more than 40 local agreements with 12 vendors and we saw a lot of overlap between the business units and which vendors they were using but we were not able to take out the scale effect and of course huge price variations again from the same products and also even from the same vendor.
What we have now is four global agreements, four global vendors that are serving Telenor and we have secured the same low price for all business units across the group. Okay, the last example I will give you on the global scale is we are in the software licensee area. We know that to a large extent all the business units are buying more or less the same software and while that I am having a lot of local agreements, of course we should move that to a global agreement and take out the scale effect.
What we have done in addition in certain areas is that Telenor group actually takes on the ownership to the licenses and we make a financial commitment towards the vendor. And through that we are able to reduce the prices further. The advantage of having Telenor group as the owner of these licenses is that you are able to utilize the assets much more stronger. So, if you have licenses in one business unit which are freed up, then it’s up to group to reallocate those resources to another business unit which might be growing.
So, rather than having free licenses stuck in a business unit and you’re not able to transfer it to other companies Telenor group is now free to distribute this to other companies and that gives us a lot of cost avoidance. Okay, I will move into, you mentioned about the modernization projects. I think you have seen the CapEx the sales ratio of Telenor has been declining and we’re now at 11% I think and it’s still trending downwards.
At the same time, if you see the number of sites implemented in Telenor during the same time period has increased by 60% to 70%. The data traffic in our network is increasing by approximately 100% every year, so even if our CapEx to sales ratio is coming down we are able to maintain and expand our network. And sourcing has been one of the key contributors to that keeping that balance. And here I will show you the structure and methodology on how we work towards the modernization projects in Telenor.
Okay this is the process that I explained early in the presentation. We saw back in 2008, when we started the working with this method that there were going to be an extreme growth in data traffic in Telenor, we would need to make significant investments into 3G and LTE. At the same time, we saw that our current contracts, the price models that we had in the old contracts were not sustainable. We would have a very hard time to make mobile broadband profitable with those kinds of price models. So the starting point from sourcing is that we need to upgrade our network, we need to change the contracts and the pricing towards the vendors.
And then the next phase for us was to look at the vendor markets, what is happening in the vendor markets? At that time in 2008 Telenor have two vendors basically supplying all network equipment to Telenor, so we were facing a duopoly in our negotiations and you all know what its like to negotiate with the vendor and you may get those 5%, if you’re lucky. And so what we said is that we need to have a new approach to how we modernize our networks. And we saw that where a lot of new players coming from Asia with very credible roadmaps, very exciting technology, I’ll explain this model because this it looks complex that this has been basically the key for what we have done in the network sourcing in the last couple of years. And it’s quite a simple differentiating model where you differentiate yourself on costs or you differentiate yourself on the perceived value to the customer.
And back in 2008, we saw that our traditional vendors were expensive that who were giving us a perceived high value, so we’re willing to pay for it because it gave us good benefits. We also saw that the new challengers coming from Asia, still being perceived as having low value that at least at the much lower costs vendor, traditional vendors. Our prediction at that time was that the Asian players are putting so much money into R&D, so we were quite confident that they would very quickly move up to a higher isocost curve giving us more value for the same money or less.
We also guess, I will say that the incumbent vendors would not be able to reduce their costs as quick as the players already established in Asia. So we said that, we believe that those kinds of vendors doesn’t need to integrate in the value chain and move into higher margin areas, you know like none of their services are with us and be at us. So all in all, this set the stage for executing and a new sourcing strategy for Telenor. We guess that most vendors would come up to the upper right corner within the next couple of years that we needed to find a process on how to execute on that.
I’ll bring out two elements of the strategy. One is to create a creditable track, you can sit and negotiate with the same vendor year-after-year but unless you have creditable track, you’re not going to move the price more than those 5%. So one of the key successes, I would say or what Telenor has done in this area is its willingness to standby that creditable tracks and actually acts on it, when we needed through.
And the second part also is that we decided that we want to clean up the network architecture. We saw that over 10 years of legacy of building 2G, 3G networks, the network gets very, very complex, and by doing our network swat, we should take that opportunity to simplify the architecture. Of course then you get into the procurement, the traditional procurement process and picking up on one point here Morten mentioned that we have established a global pricing team.
In the similar way, we have also established a global swat team that goes to the business units and supports the business units in running this process, knowing how the vendors are acting, knowing what are the best practice pricing, knowing the negotiation tactics. And I would say that this has been a key element in our ability to execute on these RFQs.
And finally something which we’ve tend to underestimate is managing and following up the vendors after you have signed the contracts. Normally, you will walk away and be very happy with having lower prices, but this is when the work actually starts, this is where we really need to put our efforts. So what we do now and then we’re trying to ramp up as we speak is to monitor the vendors as to get into the projects and when they get into the operations.
And to keep the pressure on the vendors on performance, we have a supplier development process as well where we make sure that we have effect of all preferred vendors, but if you don’t performed, we will down grade you into a development track. That way we are also making a circulation, so that you get new vendors up to tell and stake the existing vendors.
Okay to sum up, we have executed this structured process now in all business units, we will close Telenor Pakistan on December 16 then we have during the last three years basically run this with each business units since 2009.
One comment to this slide, I think you can see this as separate projects that’s from us decision that we make in one business units will have a tremendous impact on the dynamics going into the next project. And I think the fact that Telenor made a surprise vendor selection in the first award in Uninor going with Alcatel-Lucent and Huawei really changed the dynamics for the negotiation in the next when the incumbent players didn’t win any contract in the first round and in addition when Telenor Montenegro decided to award CEPTE. We have a fantastic setup before we move into the final negotiations of the Nordic Network RFQs. And then we got prices into the Nordic which we never even seen in Asia before. So there is a rethread going between each of these projects.
Looking to the financial benefits. We believe a moderate estimates on the savings, potential savings from this network modernization projects. We will exceed 12 billion Norwegian kroner through the life time of the contract. It’s typically five year contract. On average, we see price reductions on 65% to 70%, a little bit higher on the CapEx, a little bit lower on the OpEx. And by doing this we are replacing all the legacy networks, we are marking it future proof for 3G, 4G. We have equipment which is much more power efficient. We are able to utilize the spectrum to much higher degree than with the old equipments. And we also see that the KPIs and the service levels are increasing back to the levels where they were and even higher.
And the last point which is interesting from Telenor where we start in 2008, there is a duopoly of two vendors, today we have diversified the risk, we have a much more balanced than the portfolio which is a strength not only in pressuring on the vendors but on making sure you have a good negotiation position.
So where is this taking us? We believe that this kind of process can be applied also in other areas. We are now looking into none of their services on the network side, we are looking into IS/IT services where we spend several billion bucks every year. And in all of these areas, we see a lot of the same development in the vendor market. We see that the network vendors and IT vendors are converging. We see that vendors, vendor A is able operate equipment from vendor B and et cetera. So that is all giving us a very, very strong position going into an RFQ and also into the implementation phase.
If I should sum up in the last couple of seconds, I would say that Telenor has been very proactive last couple of years within sourcing. Sourcing has been a main contributor in operational excellence. I think we have only just begun. There is still a lot of potential to grab by executing very structured sourcing activities across the group going forward. Thank you.
Thank you, Bjørn Harald. I will now invite Morten to join Bjørn Harald for a short Q&A session. Please wait for the microphone to be passed around. I think the first one was over there, Peter Kurt, after that it’s Maurice Patrick. Yeah.
Peter Kurt Nielsen – Cheuvreux
Thank you. I’m Peter Kurt Nielsen from Cheuvreux. A question for Fredrik, this one for Morten and I guess one for Morten and Bjørn. And I’ll start with. On the network side, as you just mentioned. You’ve taken a leading position in Europe with your network swaps et cetera, but you’re still doing this at a national level. Do you have any plans for cross border in common network management functions and is that part of your sort of operational excellence strategy and plans going forward, similar to what we have seen one of your larger Nordic competitors doing at the moment? And second question, pricing structures is very much in focus at the moment and Fredrik and Morten just responded earlier on, you changed your prices in all three Scandinavian countries recently. Are you happy with where we are sort of from an industrial perspective on pricing now, and if you look two, three years out in the future, how do you think those models will evolve, and third A question for Fredrik…
Peter Kurt, this Q&A session is with Bjørn Harald and Morten on operational excellence, so you’ll have to wait for the question to Fredrik later on today.
Peter Kurt Nielsen – Cheuvreux
Forgive me, I missed that.
Morten Karlsen Sørby
Shall I do the first one?
Bjørn Harald Brodersen
Morten Karlsen Sørby
All right. I think definitely it’s part of our strategy to think outside of the national borders. I think for us to be able to grab the opportunity that was there in 2008, we needed to move fast. We believe that we were able to extract the synergies and the price reductions by just by the competition in the local market. We saw that a lot of the vendors were out there to kind of do the land grabbing and they were willing to pay for that to get into Telenor. So I don’t think, we would have achieved much more by kind of aggregating that kind of the sourcing activities. However the next phase now that we have executed the project in all business units is to look at for example, radio equipment as more of a commodity and then you could look more into two global price books, so don’t need to execute in 12 different business units to reduce the price, so that is definitely part of the next phase, and as you said also we’ve managed services, network operations across border, as also things we are having now in the short-term I would say.
Bjørn Harald Brodersen
If I may I’d just add, I think, the experience we have with the corporation with three until two in Sweden, and the project we are currently working on in Denmark, you see that we are challenging our traditional thinking in this respect, in order to utilize a greater scale both in country and between business units.
Peter Kurt Nielsen – Cheuvreux
But you’re still be running your networks on a country level here, on the (Inaudible) you don’t have plans for cross border common network management center?
Morten Karlsen Sørby
That is appropriate the example in Sweden is more advanced than what you see elsewhere.
Peter Kurt Nielsen – Cheuvreux
Morten Karlsen Sørby
And we will definitely look into as Bjørn Harald said that how to run network operations for the next years to come.
Okay, and the next question is from Maurice Patrick.
Maurice Patrick – Barclays Capital LLC
Yes, it’s Maurice Patrick from Barclays. Two questions, you’ve highlighted how you are moving towards the end of the migration in the previous slide. I was curious on the OpEx side, how long it will take to see the full savings on the OpEx side as you come through in the numbers in which you report? And then the second question is you obviously have benchmarked lot of yourselves internally across your operations, another many global benchmarking activities that take place I wouldn’t if you had a view in term of how you benchmarked against your global peers in a similar way, thank you.
Morten Karlsen Sørby
Do you want to take the first one?
Bjørn Harald Brodersen
Yeah. On the OpEx part, I would say that of course during the swap phase itself you are not going to see the OpEx effect that’s something that will come probably into year two and year three of the operation, when you have modernize the network then you will gradually see it. I think you, I hope that finance might come back to the more details and how we see that in our cash profile going forward, but through the contract, there is a significant production in the OpEx levels on maintenance and support from these main vendors.
Maurice Patrick – Barclays Capital LLC
On the benchmark, can I just make one clarification did you mean benchmarking on the network part which Bjørn Harald mentioned or you’re benchmarking as a more wider way of expressing it?
Morten Karlsen Sørby
Benchmarking more on the network side.
Maurice Patrick – Barclays Capital LLC
Bjørn Harald Brodersen
Of course all prices and all contract terms are covered by confidentiality process, so direct benchmarking is not possible, that of course, we get signals from the vendors, we are present in the markets, we are present in some of the most competitive markets in the world and you very soon get feedback from the markets, where that you have done a good job on it. And I think at least the feedback we got very quickly from the Indian markets after we entered was that Telenor have achieved prices which were lower than any of the other operators had achieved at that time, but that’s again just coming from the markets not from other operators or other vendors of course.
Maurice Patrick – Barclays Capital LLC
Okay, we are slightly behind schedule, but I think we have time for two quick questions, and the next one is Ulrich Rathe, Jefferies and last one is Jakob Bluestone. Okay.
Ulrich Rathe – Jefferies & Co
Yeah, maybe just one followup on the benchmarking, and would you able to give us a sense of which operations sort of show the largest opportunity within your portfolio, when you look at the benchmarking because obviously the financial is sort of KKR, in the KKR if you look at have structural difference as well because the markets are different, where when you see the biggest opportunities within your own business portfolio based on benchmarking?
Morten Karlsen Sørby
I don’t think, we will go into too much details on this, but I think we can say that every operation business units we have worked with have seen significant and very considerable savings, based on the performance and the agreements that we had when we started the processes.
Jakob Bluestone – Credit Suisse
Hi, Jakob Bluestone from Credit Suisse. One question please, I was trying to understand in terms of the reduction that you’re seeing in your OpEx, in your CapEx, I was trying to understand how much with this due to the initiatives that you’re taking and how much with this due to general deflation in equipment prices, could you possibly split out what sort of average declines are you seeing in the equipment costs (inaudible) what you are seeing in those initiatives?
Bjørn Harald Brodersen
There was probably no exact answer to that, there is definitely being a price erosion in the markets no doubt about that, I think and again based on the feedback we get from external sources is that everyone can take out part of that price reduction that how much and how far you are able to take out is probably depending on how structured process, how transparent process you have and also your ability and creditability in the final negotiation with the vendors, will the vendor believe that you’re going to go for the other vendor if they don’t need your requirements, and I think in that point Telenor has probably in more aggressive than any other operators in our willingness and ability to go into soft projects and more than efficient projects, so I don’t want to get into percentages but I think this process have given us more than what you typically could that actually.
Morten Karlsen Sørby
But I think the key to that question is really that we have been willing and able to introduce new vendors into our vendor portfolio, I think that is the main key, haven’t we have been able to do that, and that includes the Chinese vendors and we would have seen far or less price reductions than we have seen.
Jakob Bluestone – Credit Suisse
Okay, thank you Morten and Bjørn Harald. There will now be a short break refreshments are served upstairs, and we’ll back here in ten minutes
Welcome back. Please find your seats. And I have also been told that as our consumers hope that I'll look for these (inaudible) hearers today, actually it's locally too many, and in the last session people were sitting on the stairs. That is not allowed due to safety reasons, so please try to find available seats in between now. Okay?
Then the next session on the program today is presentations by the business units, Telenor Norway, Telenor Serbia and DiGi, and these presentations will, in addition to give an update on market development also get into operational excellence initiatives and what they are doing on business unit level.
The first speaker is Berit Svendsen, newly appointed CEO of Telenor Norway/
Thank you, madam, and good morning ladies and gentlemen. It's a pleasure for me to present Telenor Norway for you here today. As Marianne mentioned, I have just been in the position as CEO of Telenor Norway for one week. But anyhow, I know Telenor very well. I was the Group CTO from 2000 to 2005, then I was Head of Telenor Norway, the fixed business unit and after that I have in this field of Conax, it’s a daughter company of Telenor.
Telenor has a very special history and place in the Norwegian markets and Telenor Norway is a very important business unit for Telenor. Telenor Norway is actually operating in a market with very stable economy. While consumers are changing behavior regarding use of telecommunication services, my main tasks are to actually strengthen the market position for Telenor Norway in Norway. And the other important task is actually to drive operational excellence.
Telecom is an exciting industry. User behavior regarding use of telecom is changing. Customers, they do have a lot of multiple devices, iPhones, iPads, PCs, TVs, new handsets are coming up and there is an explosion in use of Internet. There is an ever increasing demand for being always on. On Internet, the distinction between the voice and data, TV and broadband is actually less important.
Looking at the Norwegian markets, we do not expect the same growth rate as in many other markets, but anyhow, we expect both a volume and a revenue increase in the Norwegian markets in the following years. And Telenor is a market leader both within television, fixed and mobile voice and fixed and mobile data. Compared to other incumbents in Europe, we have a very, very good market position and we will keep the position going forward.
In some areas however, we need to be even better. We need to introduce even more user-friendly services into the market and we also need to build the most flexible and efficient fixed and mobile infrastructure and we do have very good progress in these two areas.
Despite price pressure and due to competition we have had a stable financial development since 2008, even if we have lost high margin revenue. EBITDA has been stable despite loss of high margin revenue, especially on wholesale and fixed voice. We have cost control and I will come back to that issue later. CapEx is higher than previous years. Regarding infrastructure development, I will come back to CapEx later as well.
So let’s take a look at the revenue streams in more detail. Telenor has a very good track record, handling shift in technologies causing shift in revenue streams. There has been a decline in traditional fixed and mobile voice. On the mobile side, there has been interconnection rate reduction and price pressure due to asymmetric termination regime. When this is set, use of mobile voice is quite stable in the Norwegian market and mobile data, Internet and TV is growing.
When Internet meets television, there is once again a change in consumer behavior. Entertainment and other type of services can be downloaded from Internet and new players are coming on the scene competing with the traditional telcos. When consumers do have an advanced personal video recorder at home use of television is actually increasing with services like start over, patch up and Video on Demand. Telco industry can learn a lot from Pay TV operators with good business models regarding Pay TV.
Telenor Norway have a strong TV and broadband position and we are happy to have Canal Digital. New opportunity is TV content to more devices with the new business models. All these changes drive infrastructure development. VDSL upgrades, cable TV network upgrade and fiber deployment. We are close to complete building the most flexible low-cost mobile network in Europe. Our swap will be finished 1 of October.
In Norway, we have the best position regarding coverage on both 2G and 3G. We will be best on 4G as well, launching it first half of 2012. We will combine frequencies and capacities in a cost optimal way. We will further invest in coverage and backhaul capacity.
Mobile data leadership is about infrastructure but user-friendliness regarding prices and services is utmost important, to strengthen market position. Both will ensure our ability to monetize on mobile data. We are bundling voice and data in one package. There is an incentive for only voice customers to start to use Smartphones and data traffic. Close to 50% of our mobile customers have a Smartphone and that there is an opportunity for them to use new services.
There is also in an incentive for only voice customers to start to use Smartphones and data traffic and our aim is also to reduce churn amongst our high-end customers. We are using speed and volume as a differentiator. Regarding price plans, the trend is simpler and fewer price slabs. We introduced the new price plan in the Norwegian market in April. Two-thirds of the new customers on the new price plans that have chosen voice and data in one package. It is still early days for those price plans, but it does look like we have hit the market. And it also looks like that we handle that (position) regarding ARPU development.
Now we are moving into cost reduction. We have a proven track record of cost reduction in the Norwegian business unit, but we need to raise the bar. Telenor Norway has actually done important cost reductions since 2005. The last three years we have done process improvements. We have utilized sourcing across Telenor. We have done more IT sourcing, IT outsourcing and we have got better agreements regarding field force based on geography.
This slide shows a breakdown of our OpEx and CapEx spending. We do have around NOK 10 billion in cost. 25% of that is sales marketing and the other, rest 75%, is actually process driven and that process driven is personalize IT, field force. That’s the major cost element. The majority of the CapEx is actually going into both the fixed and mobile infrastructure and also product and platform development.
What we will do going forward, is actually to build tomorrow’s customer excellence model. We will focus on customer excellence when we meet the customers. We will utilize web as an important sales channel and improve self service. We will reduce the number of incoming calls for customer service reducing reasons to call customer service. In that way, we will improve customer satisfaction and reduce cost. That’s a good combination. We will put more focus on interaction between the customer service and our deliver unit and the field force unit.
As shown earlier, a majority of our cost space is linked to IS IT operation and field force. Here I will focus on operation and IT. We will further explore possibilities within IT, reducing number of vendors and applications both within application development and application maintenance. We will invest in new infrastructure. We will use technologies as wavelength division multiplexing. We will simplify network architecture with a aim to reduce faults in the network. We will explore more outsourcing and use Telenor Group scale and industrialization effort to actually learn from Telenor’s 12 markets.
With our new initiatives about operational excellence, we have ambitious targets regarding OpEx to sales on 33%. That is through continuous improvements within all major areas, as already mentioned. Regarding investments going forward, we will build and strengthen our market position using CapEx, very effective in mobile backhaul, Fibre to base station, 4G, roll out and TV and fiber deployment. We will ensure operational excellence when building out. CapEx to sales will of course be influenced by these investments.
To sum up, we will strengthen our market position by utilizing user-friendly services in the market, (bundle) voice and data in attractive bundles for the customers. We will continue to offer TV, Fibre and VDSL. We will further build out fixed and mobile broadband infrastructure in a very cost optimal way. We will continue cost reductions with new initiative within IT operation, customer service and field service focusing on end-to-end processes.
And that ends my presentation.
Thank you, Berit. There will now be now be a Q&A session. And we have invited the CFO of Telenor Norway, Line Haugen to join Berit in this session. Okay. I think the first question was over there. That one. Yes.
Andy Parnis – UBS
Hi. Thanks. It’s Andy Parnis from UBS. Two questions. First question was just on the gross margin development. I’ve also seen quite a few slides talking about OpEx to sales coming down to 33%. Could you tell us how you think gross margin is going to develop, especially given the recent MTR wavelength? And the second question was on CapEx. Should we expect that to come down to sort of 10%, 11% again in 2012, now the networks’ works can compete from the 1st of October? Thanks.
I think I can answer the CapEx first, because we are going through a period where we have little bit higher CapEx and after that we aim to go down to the level that the Telenor Group Companies do have. Regarding OpEx that was OpEx to stay on 33%, and I didn’t exactly got the question.
Andy Parnis – UBS
Yeah. So, the question was around gross margin development. Obviously OpEx to sales is, you said that’s going to come down towards 33%. Well I mean, are you assuming gross margin is also going to just go up as you choose the gross costs?
What we have seen lately is that we have moved the revenue from higher gross margin like fixed telephony to lower gross margin revenue as terminal sales. And still we are, as we think that we are going to lose some of the high volume or the high margin revenue, but, so I think that we’ll see more or less the same as we have seen in the last 12 months going forward when it comes to the gross margin.
Andy Parnis – UBS
Okay. Thank you.
And we have (inaudible) to take it please down. Okay. It’s one question from you two guys I guess.
Andy Parnis – UBS
Andy Parnis – UBS
Thanks. I have just one question please. You mentioned that you’ve anticipated Norwegian market overall being flat over the next three years, so kind of going from 40 billion of revenues to 41 billion, so (inaudible) same growth. And do you think you can grow faster than that? How can you grow?
I think we aim to take or to strengthen the market position that we do have today.
Andy Parnis – UBS
Barry Zeitoune – Berenberg
Hi, it's Barry Zeitoune from Berenberg. Two questions if I may, first is, what proportion of your base is currently not taking any data and what proportion of your gross additions with the new pricing are taking data as parts of a package. And then the second question was just from gross cost savings, I think you gave it at $1.2 billion. I was just wondering what proportion of that is actually just the drop in Interconnect rate?
When it comes to small-screen data, as we already said about 50% of our customers have a smartphone today, but what we see is that a less part than 50% is utilizing small-screen data for time being, but that’s increasing every month. Yes, so it’s a smaller part of the customers that's using the smartphone and surfing the internet than that is having a smartphone today. So it’s a potential growth in this part.
And the other question was on Interconnect. This year, we’ve seen that the revenue has been reduced approximately $500 million due to Interconnect rate. So that’s the financial impact on lower Interconnect rates.
Barry Zeitoune – Berenberg
What about the costs?
The cost is more or less the same, so the gross margin is not very influenced. It’s a bit lower, the cost and now with the glide path that we have, because next year also we'll have asymmetric Interconnect rates. So the cost has reduced a bit less than the revenue has.
The next question is to James Britton and after that it's Stefan Gauffin.
James Britton – Nomura
Two questions please. First, can you clarify what hopes you have to pull your customer base from the lower cost smartphones, which seem to be more and more prevalent? Is that a key component in driving up customer lifetime value do you think?
And the second question, I guess a few years ago, we were in this room where you presented that you expected line losses to really start to stabilize on this sort of timeframe. Can you just clarify what your expectations are for fixed connections over the next few years? Thanks.
If I start with the last question is that what we see when it comes to fixed line is that we lose quite a stable amount of customers every week and also that we see that the (IQ) regarding the customers that they have, it's a lot of customers keeping the fixed line but they’re having lower usage of the fixed lines. So it's fairly stable, the reduction in losing fixed line customers. And I'm not sure if I was able to understand the first question, something about low cost and smartphones?
James Britton – Nomura
Sure. I mean there's obviously scope to bring down the average smartphone cost now that smartphone cost came below $100. Can you get your customers to take up those much lower cost handsets?
I guess that you're talking about return on investment on the (sec) levels regarding smartphones. And that of course is a very important part for us, because what we see is selling high-end phones is driving up say the marketing costs. So to have a good focus of return on investment and to be sure that we get the money back from the (sec) levels that we're putting into the smartphone market is very important for us and the things we are looking at going forward.
I think this is question you can also raise at the breakout session later today, where Svein Henning Kirkeng, Chief Marketing Officer will also be attending that. And then I think this must be the last question in this session. Stefan Gauffin?
Stefan Gauffin – Nordea
My question relates to Network Norway. Network Norway is contributing with some wholesale revenues. First of all, I would like to know approximately how much, and secondly, Tele2 has acquired Network Norway. Tele2 has recently signed a new agreement with Netcom. So I guess that you will lose this revenue from Network Norway in due time. And still you have lot a quite aggressive OpEx to sales target. Your lost revenues from the wholesale agreement with Network Norway, is this included in this target?
It’s always interesting to see a consolidation in the market and that's putting us into a new situation. When it comes to the national roaming agreement that we are having with Network Norway, that’s an agreement that’s running for some period and it’s got some clauses in that agreement. It’s not possible to terminate it. And then we’ll just have to see what’s happening. There are two network operators there with spare capacity, so we'll just have to see what happens. It’s going to be a negotiation I guess in the future.
But for some time, there is an agreement that makes them buying national roaming from Telenor. When it comes to the OpEx to sales target, we have not been looking into losing the national roaming revenue in that. So we'll just see what happens.
I understand that there are many questions to Telenor Norway, but again, I would like to remind you that there is a breakout session later today. You will have plenty of opportunity to ask more questions.
Next speaker today is Kjell Morten Johnsen, CEO of Telenor Serbia.
Kjell Morten Johnsen
Thank you very much Marianne and good morning ladies and gentlemen. One week on the job for Berit. That makes, to my shock and amazement, makes me the OPCO CEO in Telenor that has been the longest on the job. It’s pretty hard to believe. It seems like it was only a year ago.
You can wonder why on earth would I start my presentation by showing an office building. There is nothing spectacular about this building. There is nothing that you wouldn’t expect to find in that building. Since we are now celebrating five years in Serbia, I would like to take a little bit of a look back and see what has happened, talk a little bit about why Telenor invested into Serbia and how we’ve come out of it.
When we went into Serbia, we did for, I would say at least two main reasons, one of them being that there was a company available, lot's of good people but mismanaged all the time, an opportunity for a turnaround. Unfit to go for Telenor, who usually goes in an early phase and takes a great part of the growth curve, the s-curve of the market. So this was like a test for Telenor, going into a turnaround case.
When I show you some more slides, I hope I would be able to tell you that this has turned out pretty well. The other reason why we went into Serbia was that Serbia was on the way out of isolation, out of the times of (inaudible), out of this period that they would very much like to put behind themselves.
We believe that going into a future where Serbia becomes a member of the EU becomes an integrated member of the European economy which may have seen more attractive when they made our strategy than it does today. We think that that long-term direction is going to build higher wealth levels in the country and help us to get a good return on our investments. And I’m happy to say to you politically now, the direction is sets President, Government even the main opposition leader going in the same direction. So the direction towards the European families of nations is clearly fits.
When you look at the mobile market because I guess we will get more into numbers here at some point. The crisis didn’t hit Serbia as hard as some of the neighboring countries which is of course good for us who are running the company. And we did now see that there is a higher growth in the markets and that’s primarily happening because of our growth and the growth of the resulted company of Telekom Austria. We do see an underlying growth in the markets, but obviously this is a fairly mature market. So we are getting close to the penetration rates that we will find in Scandinavia and other Western European countries.
We are taking more than our share of this growth that also means that we are increasing our revenue market share. We are as of now the second largest mobile operator in Serbia in terms of customers. We have more than 3 million customers in Telenor Serbia. We have a very strong postpaid position. We are the market leader in business and have been for sometime. And a snapshots of our financials to show that we have a healthy picture of around 43% EBITDA. We have moved OpEx to sales down to a very good level of 25% and in the middle of a swap we are still around an operating and cash flow margin of 29%.
Looking at the year-over-year developments, we had a great development on EBITDA increasing by 30% and I want to say something, maybe I shouldn’t say, it’s a little bit flattering, it has to do with, what clear you to choose to measure. But when you look at the operating cash flow, I’m actually proud to say that in nominal terms, we’re able to increase the operating cash flow in the middle of a network swap. I’ll talk more about that network swap afterwards because it’s more than just changing base stations.
The growth platform for Serbia was basically to put in place in 2010 in the spring and I’m started to executing on it. And there are some key elements of that. The ground platform which I’m going to talk more about afterwards, so I’ll skip it for on this slide. We decided that there is a secular a plea to post migration trend in the markets and we wanted to fueled up and take the Lion’s share of the growth. We also need going forward to have the best data network and everybody talks about having good data network, but we’re going to have the best data network and I’m going to show you why.
If we do these things and execute well on them, we will be number one in postpaid. We already have that position now. We want to be the strongest brand in Serbia not only in industry but the strongest brand in Serbia. And we want to be an innovation leader in market data, sorry in mobile data and there are some aspects of that. You can copy and paste, but you can also develop a few things internally, which I’ll show you.
The growth in postpaid leads to higher COGS and you have to finance that otherwise your EBITDA picture doesn’t look pretty nice. So we set about changing the company in a fundamental way, the network modernization helps us. We also had issues related to bad debt because in Serbia you cannot go and buy a credit report on an individual, it doesn’t exists, so you have to develop your own routines. And then of course, the unpleasant thing that you have to do sometimes is right sizing an ample stuff to the amount of around 10%.
One year ago, I would say that we have set the target for ourselves in terms of reductions of OpEx to sales in number for that. We have surpassed that number by some margin and we have raised the bar. We’re saying our ambition is to have industry leading cost efficient and nothing that.
Looking at the revenue side, we were able to keep a positive revenue development throughout 2009 barely, but we are happy about that because in many neighboring countries in Europe, we saw steep declines in revenues. After that, we’ve been on a very good right where we have now plan to deliver around 12% growth this year which we’re very satisfied with because we have growth in the subscription base and we have been able to up sell and go for a value strategy that has increased ARPU consistently over the last year. We’re also realizing some higher revenues from interconnect, national roaming and other wholesale activities.
And this is the slide where our Investor Relation people told me that this is something that you will say it’s a soft slide, it’s like it what something waiting for the next one with the hard numbers. But you should listen to this one because this is hardcore, this is a real hardcore.
Many players take an inside out view, when they’re start to finding their position, they want to take in the market and that’s not going to take you very far. We often have a lot to learn from FMCG companies and other others in the way we approached the markets. We have made a very elaborate study on purchase patterns in the serving population. That has been given us the opportunity to cluster different segments, small segments in the market and map that with the position we have in Serbia. And see where we can stretch our brand then where we can’t stretch our brands. We have identified three target segments: young fun seekers, ambitious explorers and mid-life power. These are the ones we are addressing. They represent 60% on the value of the market. And I will show you some market data afterwards that indicate that we have done pretty well on that.
The brand positioning, this is where you often to see that people have the right (inaudible) with these kinds of things build message house and all of those things I decide to simplify it for you. There are three things that we talked about. We are connecting people in a hassle-free in a predictable manner and you know what it works. Our differentiation points are the same as we were last, so we don’t have to change few things every year, that two main pillars here, rollover in postpaid is called Flexy in Serbia and that is something we owned in the markets. People have tried to copy it. They haven’t been able to get an instruction on it. This basically means that a customer can rollover the unused credit to the next month, it’s doesn’t sound that difficult, but when you own these differentiation points that will give a value overtime and people trust it.
In prepaid, we have my menu, where people can themselves go in and just their relationship to us in a very easy way. They can pick and choose basically from the menu what they want to have, we’re using the dynamic USSD menus and all those things that we had, where we had unique capabilities in the market. Now that’s coming also with one of our competition.
The other two elements there, best data network and mobile internet where you see, I will touch upon the afterwards. So there are two pieces of information on this slide. One of them is about our brand differentiation. First let me – I’m sometimes a little bit careful about trusting some of these numbers too much when it come. There were many kinds of indicators on who is doing well and not doing so well in the market, but when you see a consistent trend over time then I do trust them. For you who are analyzing this company and they are owning this company, the blended ARPU is a hardcore number. And when is going up by 9%, we are doing a few things right. We’re very happy about that.
Also we have been able to increase our customer base. We are now 6% higher to nowhere in the second quarter of 2010 and that is because we’ve been taking a big part of the growth side. We have actually had across our leadership consistently since July 2010. I’d like to remind you that after – joined the market in 2007, there were periods where we were actually number three.
Talking about the data revenue leader position. You have to have different approaches with different segments of the markets. Let me start by the bottom end of the market, so to speak, the feature phones. We all know that features phones are not great, if you want to use them for accessing the Internet or getting services there. We put in a compression, Opera Mini and we also putting a communicator, so that we could give people like still do smart phone experience on the feature phone.
Faster download speeds, lot of people took these up and of course a delay of starting, making it easier for people to join that part of our business. Obviously, going forward smart phone penetration is picking off in Serbia, we are now at around 13%, but of course as a share of the sales it’s quite high. So this is the more medium term development within smart phones.
Then you have these typical dongles, large film things that a lot of people are pushing very hard, we are not. This is a way to give away a lot of your spectrum for a low price and why on earth you want to do that. We are offering these products in a reasonable way, we have an uptick in the markets, but we see irrational behavior in this segment and we don’t feel that we need to participate in that.
What we do own is the premium tablet category in Serbia. Some of our competition have 50 tablets and they advertise them to show that they are active in this segment, but if when we advertise them you can go to the shop and you can buy that is trust.
Looking at the data revenues and the development here, we have two things playing in here. One is the volume, I mean you know more and more post paid customers, this is post paid. So that in itself brings more people onboard on the data side, but also higher proposition of our users – of the postpaid users are using data services.
The lower one that you see here is more of this dongle type, which we’re offering and people buy it, but this is not our primary focus area. Then you have more or like pay as you go services, it can be GPRS service or others. And then you see now the smart phones coming in, that’s the number 421, that you see for 2011. This is the smart phone that’s starting to kick in and this of course going to be an engine for growth.
On top you have that unique thing that we call Telenor click, where people have a feature phone can have a smart phone like capabilities. This concept has now been taking forward to Montenegro and it has been actually further improved by our colleagues in Hungary. So, we are actually able to use some of these things over the borders, so I think it is a very good sign.
I was talking about brand, why this is a hard court to work on the target segments and showing what direction you are going, while of course you want to get customers and you don’t want to loose customers and you want to make them happy and feel good about you.
We have taken the number one position in terms of gross ads consistently since July 2010, and you can see these are estimates because there are not always data available from the incumbents. More importantly almost is that you get customers on board but you need to keep them. And our postpaid churn has dropped. We have been enable to bring down the postpaid churn by 3 percentage points, which is pretty good. Leading to a 200% increase in the number of postpaid customers over the course of one year.
And that comes in additional to be enabled to keep the prepaid, number of prepaid customers fairly flat for the pre to post migration means that’s some of your customers actually go out from pre into post, so you have to backfill. That can be challenging.
Revenues also developing unstring with the number of customers, so it’s not like we are doing heavy discounting, you have to get customers on board. In the spring of 2010, late winter 2010, we had a very interesting management meeting. We were going to present the strategy to our group. It was very memorable because we sat down and really challenged ourselves into the direction we set. We were 15 percentage points behind the incumbents.
And after having done a fairly elaborate analysis we said to ourselves you know what, we’re going to catch up with them. And then we looked at ourselves and we looked at the numbers, yes we are going to catch up with them. We have now last year increased our revenue market share by 1.8 percentage point in the markets, where there is a third player coming from a lower base.
We are now on track to move towards the revenue market leadership. In the past, we have actually sometimes over estimated the incumbents. So I’m confident that we are at above 40%, and at gap we thought we could close to maybe 5% by the end of this year will be less than 5%.
Going to the cost side, I told you that when we wanted to go into postpaid and spend more costs obviously. We said to ourselves there is no way we can expect that we would be allowed to let the margins drop. So, we initiated some fairly heavy programs to go through our OpEx. So, in a 10% inflation environment, we have enabled to drop to take down normal of OpEx and keep it actually flat now in a time when we are growing. So obviously that places out into the OpEx to sales, where Morten stole my numbers in a positive way, showing that we have moved from 32%, 33% to around 25%. And we are getting close or closer to the target of industry leading cost efficiency.
The network monetization that we’ve done throughout the group has been a very important factor in that. That has reduced our operations and maintenance costs. And we have also been able to fast forward some of these things in Serbia because we are not only changing our base stations and our backhaul microwaves. We are also changing our PS core and CS core. So the entire delivery platform almost, expect billing is changed. So we’ve been able to renegotiate some of these contracts with vendors and giving us a quicker effect also on OpEx. We had to put in place a credit scoring system and I’m happy to say to that the bad debt is cut in half after we implanted these measures.
In order to drive the best data network in Serbia, we have had to look at the whole delivery chain. And you don’t have an efficient market for buying capacities in Serbia. So we have actually built some of these ourselves from Hungary, throughout Serbia, to the Bulgarian border and entered into IOU relationships with our, with the incumbents and swapped with other players. This gives us an opportunity also to sell capacities. So we have basically liberalized this part of the market in Serbia, single handedly. And the plant, what you see on this map is very close to the picture, we wanted to be at in 2014. So we have kind of fast forwarded these things. It is absolutely essential part of being able to deliver on the data going forward.
And Bjørn Harald talked about how we have done much better in the group at bringing down costs here. For illustration purposes, I will show you here the dotted line, which is what we thought, we could do without doing a swap if you try to optimize. And the blue line shows the results after the swap in terms of CapEx and OpEx. So, a spike in CapEx this year still operating in a 13% and 14% environment, so it is not too bad. And then we get all the positive effects as of first, second quarter 2012. Meaning that we can, our cost per gigabyte goes down 15 times by 2015, compared to base case and we cut OpEx on network by 50% from 2012, significant numbers.
Talk about ambitions, where are we going, going forward? Well we want to be the leader. There is no other way to put it in market, in terms of revenue market share, we want to do it in a way where we focus on value, we’re going to keep a – I would say a sober approach to getting market share. We are not going to go after market for market share sake. When it comes to growth, we expect 7% to 9% towards 2014, maybe a little bit higher in 2012 and little bit lower after that, time will show, but in that range.
After the network swap is finished, we expect to deliver an operating cash flow margin of above 35% and we aim at industry leading operational efficiency, also working with our group as we call industrial developments, the new part of it, and working over the boarders. We are actually cooperating between the operations in CEE to look at common delivery platforms and common approaches and finally the best data network it’s going to be there. Thank you.
Thank you, Sen, I guess there are questions for Sen as well. And now let’s start with the Laurie from Citi. That was the first one and after that the row behind Laurie.
Laurie Fitzjohn-Sykes – Citi
Thank you, Laurie Fitzjohn from Citi. Firstly a question on your positions not proactive at the moment in the dongle market, in the data side, I was wondering longer-term, do you still see quite an opportunity from providing mobile for old band to replace the fixed home connections. I mean is this something you could re-visit when you finish the network swap and you potentially have more capacity or are you really waiting to see greater port stability, just a bit more clarity around that decision making process and the longer term opportunity.
Kjell Morten Johnsen
Well I mean, this is not because we cannot do this from a capacity point of view. It’s just we don’t want to contribute into irrational pricing and I think when people are sobering a bit about what they’re really doing, they will probably come more back to our position, but it’s not like we are not providing the service to the market, it’s not like people are not buying it, because one of the things about having a strong brand and having a storing network position is that your competition can dump the market but if they don’t trust your service, they may not buy it anyway. So we don’t see a need to be so aggressive on the price stats.
Laurie Fitzjohn-Sykes – Citi
Will Milner – Arete Research
Thanks, it’s a Will Milner from Arete. This is clearly a business doing well but can I just ask what operational state the Serbian incumbent MTS was in a few years ago. Since it seems its loss petty huge amount of market share in relatively source space of time and also the new entrant I would imagine Telecom Austria has probably done better than any other new entrant in Europe getting to 15% service revenue share as quickly as it has. So I guess the question is how bad was MTS and then secondary to that is there a chance it becomes more competitive going forward?
Kjell Morten Johnsen
Yeah, it’s always difficult to put numbers on that. I think the performance of Telenor and in the past some of them helped by the failed attempt of selling Telecom Serbia to mobile company of MTS, but I think also when we are comparing we are not only looking at MTS, we are looking at how would far compared to (Bit) and when we are able to move from being number three on gross adds to becoming number one and we are able to drive down churn then these are things that indicates us that we’re doing well in the marketplace relative to a Western European player like Telecom Austria. But there is obviously an element of the uncertainty around MTS playing into that. And we can have all our opinion of how much that is
Question from Maurice Patrick.
Maurice Patrick - Barclays Capital
Yeah, hi, it’s Maurice Patrick from Barclays. Just on the slides of the CapEx and OpEx development moving forward. It showed that CapEx falling dramatically from 2012 onwards but it seems that on the OpEx after it falls off for 2011 and 2012 then it starts creeping up again. Is that I think particularly into one of the case.
Kjell Morten Johnsen
Yeah and it’s very simple actually because when you change networks and core systems, then you all enter into a warranty period and when that expires you have to start paying the vendors again for the service agreements. So some of these costs and coming in again, but they are coming in a much more favorable regime for us than what we had in the past. Many of these support agreements in the past were developed in a time people are thinking more like 2G voice. So, that when you had exponential data growth. You got exponential cost increases, which would have been hopeless for this industry.
So once we go into, when we start paying this service agreements again, there is a much more benign scheme for us, but in terms of the overall OpEx-to-sales, it’s not going to go up. We are still planning to do optimizations on that, but if you look at it when you come to a level of 25 you cannot save off another 7% just like that. It’s a bit harder to go from 25 and down than from 32 and down. And then we get some of these costs coming in. We have issues around national roaming possibly going out as we builds up bigger network. So there is like a waterfall here. Some things that contribute positively and some of these things are contributing negatively.
The last question from Stefan Gauffin.
Stefan Gauffin – Nordea Bank AB
Yes, Stefan Gauffin Nordea. Just a clarification on the revenue CAGR target, I know that you have been growing the subscription revenues really well, just want to clarify that the 79% target is that subscription revenue growth and not adding more handset sales?
Kjell Morten Johnsen
Handset sales is a very, very small part of our revenues. So this is based on mostly on increased revenues in postpaid, outgoing revenue, mobile revenues and of course data revenues. The handset proposition of our revenues is very small.
Stefan Gauffin – Nordea Bank AB
Thank you Sen. Next speaker is Henrik Clausen CEO of DiGi in Malaysia.
Thank you. (inaudible) and just see what can happens to you number when you modernize a network, because we are sort of about to embark on a similar journey in Malaysia, but that said I am pleased to be here. Little bit of personal history. Is it better now? Yeah. Okay, better we’ll leave the jacket.
Again, pleased to be here and just very briefly on personal history. It’s good to be back before, I joined DiGi last year in May, I was heading the Danish operation of Telenor. So I have been around for while. Then little bit on geography, not to make this a geography lesson but since Malaysia is bit far away, I just want to share a few data points on Malaysia.
It’s relatively a big country, 28 million inhabitants. That’s the account by the end of 2010 and hat is growth from 5 million. It’s not like it’s a one country, Malaysia is a muti-racial and multi-cultural country. There is a big difference between larger KL, it’s the area around Kuala Lumpur with about 6 billion people and the predominantly east peninsula which is primarily Malai and to North Labuan, the Sabah and Sarawak which are almost independently run states.
So doing business in Malaysia is not only doing business in a country it's doing business at a regional level as well. And so on top of that with an estimated 5% annual growth, this country is on sort of decent track towards the government’s ambition of being a high income nation with more than $50,000 per capita by 2020. Mobile and broadband penetration stood at 119% and 16% respectively and that – it's a relatively developed telecommunications environment.
And in that country with 27% market share and an annual revenue base approaching $2 billion and a customer base of more than $9 million makes DiGi a very large number three, an industry player and at the same time between the 15 to 20 largest companies in Malaysia. Measured on market cap, DiGi is number 13 in Malaysia.
And moving on, as already mentioned the telecommunication space in Malaysia is fast maturing. The mobile penetration is not far from the rates that you see in most (Inaudible) countries including Scandinavia. And they are going forward. We see solid growth from data. You see further expansion of existing infrastructures from four existing 3G players, we see still significant investments in Wi-Fi and WiMAX and as LTE services will became available within the next year or so that would be a key driver for the development as well.
The Malaysian data growth portfolio align with global trend, if you buy proliferation of smart handsets, apps and applications. Current installed base in Malaysia, smartphone is around 20% and with almost half of the phones sold being smartphones that number is growing very fast. Mid-term growth in data, revenues in industry is projected on most industry player to be around 30% annually driven by mobile Internet and mobile broadband since the mixed revenue is expected to be flat and this would translate into an overall growth rate of the industry around 5%.
And then a word on a DiGien performance. DiGi has been accompanying that over the last five years consistently we have outgrown the industry. Revenues have doubled since 2005, and taking the market share from 20 plus to close to 26 by end of 2010. That growth momentum has been maintained into 2011 giving DiGi with a growth of 10% for the first half of this year versus an industry overall growth around 2%. So March and now approaching 27% for DiGi in Malaysia.
And we can say despite increased activity levels and more vibrant competition from other the players, these companies have not managed to make significant enrolls, and therefore industry in Malaysia is still ready to be consolidated. The new players, U Mobile, which is the fourth 3G operator, MNOs, big MNOs (inaudible) and XOX on Celcom’s network and smaller MNOs on our and Maxis network and then a few WiMAX players primarily P1 and (Inaudible).
And a word on the operational performance, not a plane but DiGi has successfully managed to translate that growth into shareholder value and to cash flow over the last five years. And that’s been based on the solid pricing, well managed distribution that has delivered nice operating levels. That combined with a lean organization, good cost control was translated into healthy EBITDA levels. And then finally a forced and prudent spend on ITN network has delivered solid cash flows. And by sticking to these principles, DiGi has kept a strong momentum into 2011 as well. The EBITDA levels are close to 46 in the first two quarters and an operating cash flow of close to $1.1 billion in first half of 2011.
The cash generation has effectively and consistently been converted into shareholder value. It’s reflected in a more than $6.8 billion cash return since 2005 as well as significant appreciation of the shares over the period. And worth mentioning from beginning in this year, the share has appreciated 30%, the market appreciating operational performance of the company. It’s worth mentioning that in the same period compared to Maxis (inaudible) Celcom as they’re close to flat. Our current marketed cap is around $8 plus billion. So what’s driving? Since early 2010 data has become the growth driver for DiGi.
Now despite lunching 3G services two years after the competition due to late access to spectrum, we have already up to two years managed to get our fair share of the small screen data business. Reflecting initial business priorities the market share of large screen is currently at 15%. I will touch up on the rational for this in a moment. The strong momentum of data business is further underlined by the fact that by today 5.3 out of our 9.3 million customers use the Internet on a monthly basis. Data including SMS is now close to 30% of our revenues. With SMS flat this development is stoop on more than 100% yearly growth rate in mobile Internet and mobile broadband.
Though data has become the growth driver due to highest contrary to the competition managed to stabilize the business by selectively targeting underserved geographies and segments, by expanding distribution and affinity. Then on roll out an offering because what we do when we are two years later and are in the key area of growth remaining data we focus. Our 2G coverage today is at 95 and virtually at part with Celcom and Maxis except from marginal differences in some rural areas. This situation is very different in 3G and currently recover slightly above 50% of the population.
We’re targeting around 60 by end of year, early next year. This is competitive coverage of 80%. To overcome the competitors first move a launch that’s having significantly leverage coverage, significantly larger of coverage. And we have embarked on a more targeted phase rollout focusing investments in geographies attractive customers and revenue potential and coverage and capacity can’t be provided cost-effective.
The initial success was driven by the comprehensive go-to-market approach named broadband Android, so by delivering the best and most consistent user experience our managing network resource effectively targeting the right customers with right products, we manage to create and meet the credibility and momentum as a challenger.
And by concurrently leveraging a unique control of distribution and optimizing the individual touch phones DiGi has as previously described to a large extent despite the late entry have been able to catch up.
Over the last six months, we had expanded and optimized the product portfolio to become relevant across more segments. Internet for has been our tagline and comprehensively set the tone for DiGi as a game changer in the Malaysian Internet space.
So to secure a controlled cost effective network roll out built and profitable growth in data, we have almost since beginning of launch of 3G services prioritized the small screen business and one. At the same time it has been a key priority to leverage our strong base and strong hosting prepaid. 85 plus percent of our customers are prepaid. And these priorities have been reflected in a comprehensive go-to-market approach with Internet fall. We’re offering high usage postpaid users DiGi smart brand both with and without bundle handsets. Initially the strong focus on iPhones, now much more balanced and HTCs and other androids are now taking more than 50% of the share.
Modest subsidy levels Max tends to 20% approximately 50% of plans are sold without handsets. Today a smartphone user constitute around 18% of our base, but in postpaid it's 32 alone. On prepaid, 14% of the customers are smartphone users and typically have a high consumption as well. In addition, we’ve targeted the large base of prepaid feature phone users with offerings to stimulate growth and usage. In renewal, we had overspent and improved the customer experience of browsing. These offerings had grown and fueled the data and mobile internet.
As previously mentioned, 5.3 million out of 9.3 million customers are using the Internet on a monthly basis.
Last screen, I have selectively targeted by both post and prepaid offerings. Offerings includes max cap on usage, speed restrictions and policies for downgrading and speed, depending on plan and behavior.
A little bit about the opportunity in the Malaysian market. We believe that we’ve been doing well. DiGi has been doing well in Malaysia, and we believe that country will provide significant opportunity going forward.
As initially described, Malaysia has a relatively robust and growing economy and its Celcom space is fast maturing and provides opportunity in data services. Proliferation of mobile broadband and coverage and services play a pivotal role in the government's aspiration for growth and the sector is expected to be a significant contributor to the nation's growth for which transformation plan managed by Pemandu.
(inaudible) is complemented by significant opportunities for sizable growth reductions from infrastructure sharing and access to adequate spectrum. DiGi and Celcom are currently the driving forces in bringing industry collaborations to the next level. More about that later.
And on spectrum, future potential is still suspect to some certainty, as government and regulators have not yet agreed on an overall plan for spectrum allocation and usage and ongoing processes one 2600, 1800 and 900 are still work-in-progress.
Then looking forward what it’s going to take to deliver growth and shareholder value going forward, we believe that it's important to move the company to the next level. And to secure growth and profitability, DiGi has embarked on a transformation journey to stay competitive and in involvement of increased competition, new value change and need for cost effective access to capacity, we need to step up and significantly improve the way we execute our business going forward. The change will happen in an orchestrated way and be managed through a comprehensive program and a governance structure driven at the most senior level.
The journey was launched six months ago and will have significant impact on cost structures and capabilities the next 12 to 24 months. The transformation will cover core assets and cover bills as in network, IT and distribution. And based on local competencies as well as regional or global scale and best practices, we expect to realize a superior cost structure and capability level in the Malaysia telco space.
The final point, continued access to the right people and skills on the ground in Malaysia is critical for our success. And therefore, a core pillar of the transformation journey is to attract and retain the best people, a second-to-none working environment for development platforms and compensation.
And a few words on the actual initiatives ongoing in the transformational effort. Beginning of this year, we signed an agreement with Celcom, the number two player, a deemed targeting consolidation of all sorts and subsequently sharing of more than 4000 sites which counts for 80% of all DiGi sites going forward. In addition, the agreement covers comprehensive joint build, sourcing and sharing of transmission.
The deal breaks new ground for corporations with telco in Malaysia and marks a significant step-up from existing sharing and swapping arrangement. And this agreement follows a sharing agreement between Telenor and (inaudible) operating companies in Bangladesh.
The initial phase of site consolidation of 200 sites in Iraq is on the way and well underway and the parties are currently deciding on scope of the consolidation volumes in the next phase and agreeing on the first wave of joint transmission build. The parties initially committed $2.2 billion in savings over the next 10 years, and progress so far confirms that we will meet and most likely beat that number.
This year, DiGi signed a deal targeting a complete replacement of our existing network. The project would deliver a state-of-the-art single-line network. The network swap is well underway and expected to be 100% complete by end of 2012. The effort will secure a second-to-none cost structure, enabling DiGi to improve coverage and provide capacity expansions at ultra-competitive terms and at the same time simplify network layout that will enable data management of the customer experience.
Network will be from day one be LTE-capable, enabling DiGi to launch LTE services as soon as spectrum is made available by the regulator, fully ongoing 2600 process. Network cost and investments are for DiGi as with any other telco, a significant part of cost structure. And therefore the comprehensive network modernization would be a key driver for realizing the company's ambition of raising the capital (sale) ratio below 10% in line with overall goals of Telenor.
Then on IS and IT the course of billing and related functionality and processes constitute close to 50% on all IT-related costs in DiGi. And at the same time, complexities in the area tend to reduce time to market the new services.
To address these challenges and they’re appealing a competitive edge, DiGi with all the Telenor sister companies in Asia has initiated a joint project to leverage the group scale and global expertise, targeting a full swap to a common billing platform. The project is well under way, on-track for vendor selection this year and subsequent implementation next year.
Besides billing, benchmarks and further analysis have revealed significant consolidation opportunities and associated savings in the (IT rate across) infrastructure, applications and vendors. We plan to address the potential comprehensively, by leveraging local competence as well as group scale and expertise.
And finally on distribution, control will and data (inaudible) of distribution has been as still as the course scale and a competitive edge for DiGi. But we have distribution structure of managing more than 30,000 individual dealers in touch phones and the new data services creating opportunities as well as challenges. We see a need for and an opportunity in automating distribution management as well as point of sale and commissioned processors. As already mentioned (inaudible) has a very solid capability in the distribution area. At the same time, we will leverage Telenor experiences and capabilities from mass market distribution in India and Bangladesh, as well as overall group scales and partnerships.
On a specific note, we are currently actively exploring opportunity for a combination logistics partner. The data services and device marketing becoming an important part of our business. We see a need for bringing our retail capabilities to the next level. We are currently upgrading our existing 20 retail outlets, based on our initial experiences as well as group’s best practices. The exercise will be completed by the end of this year. Parts of this that we’re adjusting different formats to consistently support an upgrade the 100 plus outlets that are on by independent dealers who work as closely with us and then the final work on online.
We believe that efforts in generally across the industry in Malaysia are still relatively immature. Going forward, we believe and we expect that online service and sales will play a much more prominent role in the industry and we plan to take a lead role based on the experiences we have throughout the group. And then, so where as the current strong performance and the transformational efforts will lead us. What kind of performance, what kind of numbers should you expect from DiGi going forward?
We have outgrown our competition in the last 10 years to concurrently grow faster than the industry overall and we intend to keep it like that. We believe that we have the right efforts in place to support our ambition for superior growth. In addition, we have as I described today, efforts in place to further improve the efficiency rate of the company. Delivering on the planned actions, we’ll secure very decent OpEx to sale ratio below 26% in 2013, current level being between 27% and 28%.
And finally, based on strong operational efficiency and unique competitive cost structure through the transformational efforts, DiGi, will be a company that going forward will continue to deliver substantial shareholder value. Thank you.
Thank you, Fredrik. I guess there are some questions for Henrik as well. You have Peter-Kurt and after that it’s Ulrich Rathe.
Kjell Morten Johnsen
Peter-Kurt Nielsen – Cheuvreux
Peter-Kurt (inaudible) like the network operate, we should implementing to be competing next year will still leave you with significantly poor coverage than your main competitors. Why you’re not when you are swapping the network achieving or reaching for same, similar coverage, is this from a purely incremental return perspective? And then, how does it jeopardize your CapEx, OpEx targets? Thank you.
I mean, first, we have an overall game plan for closing the gap to competitors from a coverage perspective. Think our history has proved that though it will be important to do that, if you execute well in the meantime in the competitive way you are you can still outgrow the industry. So that gives us a certain comfort in that we can do this the right way. And what we do with the network swap across the corporation of this outcome is we create a much lower cost base going forward. So the investments needed to catch up will be much lower than before the swap and before the sharing arrangement. So it’s basically a timing thing. So we will be aggressively building throughout the next year and the year after based on the new cost structure.
Okay. Ulrich Rathe, Jefferies.
Ulrich Rathe – Jefferies
Yeah. Thanks very much. My first question is, I mean Malaysia has sort of 30% minorities. I’m not sure this is relevant or not, but are you particularly exposed or not exposed to the minorities in terms of your sort of brand profile? That’s my first question. Second question is, vis-à-vis the 2.6 gigahertz process, I mean, that 3G process was tainted by some, I guess political issues, right? Is there any sort of repeat of history or was it a more transparent process now? And my last question is, is there any indications of press reports or discussion of the ownership structure at this point?
Very, very different questions, but we’ll start with the first one. If you look to the Malaysian population overall and say around 50% plus would be Malays, if you go back around then you will have Chinese (have engine) and you would have a big population of migrant workers. And it is fair to say that historically DiGi has had a very strong hold in Chinese, Malay and migrant. So part of the strategy over the last year and actually the reason why we have managed to sustain our voice revenues is that we are making inroads in the Malay segment by specific, if you think distribution, and that’s nothing from what you see from an executional level that makes us uncomfortable that we will build enough presence with then the Malay communities. And that’s a plus point.
In terms of processes around spectrum, I mean, coming from Scandinavia and then Scandinavia was not being sort of the perfect place in the world, but at least a certain level of transparency around the processes and we use in Scandinavia auctions or the types of very (transparent) means for distributing spectrum. That’s not being the case historically in Malaysia and that led to just going to the bond up. We historically didn’t get our 3G license at the same time as the other guys we bought all way in later, right. Now in terms of the process, we believe that we understand the process and that we engage with key stake holders. It will not be a clear cut transformed format like an auction, but we have a hope that now we are not going to see a history repeat itself.
In terms of ownership, I’m not sure I’m the only one the right one to answer that. But I think with the performance of the company in Malaysia and synergies that we see with other OpCos I think it should be a clear-cut thing to stay put out there.
Yeah. Hope you’re right, Henrik. I think that’s the question which should be addressed to the group COO or CFO later today. Yes. I have a question from Andy Parnis and I think that will have to be the last question before the lunch break. There will also be an opportunity to ask question in the break-out session later today
Andy Parnis – UBS
Yeah. Hi. It’s Andy Parnis at UBS. I’ve got a question on the Network Sharing with Cellcom. You talk about 2.2 billion combined savings over 10 years. I mean, firstly, are the savings like to be split 50:50 between Trinity party? And then also, I will take it by the fact you’ve given quite a long time, timeline on it that the vast majority of the savings can be back-end loaded.
I mean, on the first question is that that is pretty much 50:50. And in terms of where you would see savings, you would see savings kick in significantly from next year. Initially majority of savings would be on CapEx and CapEx avoidance. In the longer years most will be OpEx. And what we have guided on is that we will see combined run rate savings of between 150 million to 250 million a year.
Okay. Thank you, Henrik.
There will now be a break and (allowed) lunch will be served upstairs and we will be back here in approximately 45 minutes. Right.
Then continuing with presentations from Uninor
Okay, welcome back I hope you enjoyed the lunch. And I also hope that you will enjoy the second part of the program hear in the auditorium. We’ll start by session with Uninor with Managing Director, Sigve Brekke; and COO, Yogesh Malik. But before seeing this presentation, we will like to – and especially for those who haven’t been to India yet, we would like to show you a glimpse of the Indian mobile market and how it actually works on the street?
Well, good afternoon to all you. I hope you had a good break. And I hope that this short intro kind of shift you from a lunch break mode in a more active prepaid market mode. Just one word about myself first, I had been in Uninor. I am Managing Director of Uninor for the last one year. And spent most of my time in India, but also try to serve my other duty, which is heading the Asian region, at the same time. It’s been a little bit challenging, I must admit that, but at the same time it has been good to have real hands on the operation experience to then bring into the other Asian operations and trying to take also synergies and not talking also about taking this to the executive management and use some other things we have learned from India to drive performance in other companies.
It’s one year ago, I was standing in front of you on the Capital Markets Day to talk about our strategy, so the strategy we planned to deploy in India. And looking back that one-year – and we actually haven’t been in the market more than one year plus. And then looking back, that strategy is now being implemented. It has been quite right, I must say, not only because of the very, very tough competition, but also because of the external environment. It has not made it ease for us to kind of stay focused on what we came to India to do.
But now one year later, I will say that the machine is working. I call the Uninor operation a machine. It’s working in 13 circles, (which are the) blue areas here, which basically cover around 75% of the industry revenues in the country. We are operating in circles in that size. This machine is put together with best practices from Telenor, (not least) from Telenor in Asia, but of course is also adapted to a very, very competitive way of working in India and it’s adapted to an outsource model, which we don’t have in the same way in our other Telenor companies.
This is a machine where you see the organization being very flat, it’s a machine where you see that the whole organization is driven by daily targets from top to the very bottom, also to the ones being out in the market every day. It’s a machine, which is very, very marketing focused, because it basically have outsourced everything else. So in that sense, you will see that the management, the entire organization is out in the markets almost constantly to drive this machine towards the strategy that they have.
What we – the main strategy to summarize was to build organization, then to take market share on subscribers, then to move into revenue growth, and then now, really move into cutting costs to be able to break-even or getting a return on investments. All this is done in one year. Most other operations will do this in a period of several years. So (of course) this has been quite tough.
But I must say that, where we are today, I will say that this organization has proven to deliver on the strategy. And if I should use a little bit more popular words, I will say, so far so good. But of course to make this also a profitable machine is yet to come. And that’s what I’m going to talk about in our presentation. But before that, let me just talk a little bit about the market and their external situation. 852 million customers in the Indian market, but don’t get fooled with number of customers. We estimate that there are lot of double SIMs, triple SIMs even four, five, six SIMs per customer. So our estimate is that the real penetration is probably in the range of 50%. So as an new comer, there is more growth to come, and we don’t think that we are too late into this market. And also remember that this is a young population. So, there are more and more kids coming into what I would call (Mandatory Mobile H), we are not picking up a mobile phone.
Secondly, this is a market with much higher churn level, than what we see in most other markets. We are talking industry churn in a range of 7% to 9%, which is another way for an new comer to come in and grab this churning customers. We don’t necessarily have to be out in the real rural areas, where the wording customers are, we can actually capture unhappy customers also in the more city like population.
However, this market is still very competitive, I don’t really like to talk about competition on the pan-India level, doesn’t really make sense to look at the number of operators on the pan-India level, because the real competition happens down on the ground. So, if I look at the turf in circles where we are operating. You would see around six to seven real operators that are competing and that’s why I have said several times that we need to be among those six, if we want to build a sustainable business. We need to move up to that six.
Earlier signs of rationality on the price, yeah the short answer to that is yes. There has not been any price reduction from annual incumbents over the last five quarters, stable price and you also see this curve dramatic full and then it is flattening up. Lately as you know, the biggest operator Airtel moved up their based prices with 20%, that has now been followed by three, four of the other incumbents.
However, this is not to move up to the price for entire base. It’s to take up the price in the new SIM card of being sold. So if you go to the market today and you buy a new SIM card the base tariff in that SIM card will be 20% higher than the base tariff on most of their prepaid base. So, it will take time before this 20% price hike is really influencing the big number of customers. Secondly, there is a lot of what you call in India SPV special vouchers, which is on top of this, where you are giving a gold bucket pricing, you are giving away on pricing, you are giving away free minutes. So, it will take time before this 20% price hike is really driving up their overall price in the market. The real competition forever is not about this, is not about the tariff, it’s about the acquisition what’s happening in the customer front. And in the customer front, the real competition today is about volume commissions as we are (inaudible) commissions to the retailers for them to try to increase certain volume limits and it’s about giving free airtime.
So, if you go into a shop today as a customer, just to use one example, the SIM card that you are buying might cost you 20 rupees, 10 rupees or 20 rupees, that’s the cost. In that SIM card there is between 40 rupees to 60 rupees free talk time. So you invest 10 rupees or 20 rupees what you get back is value of 50 rupees, 60 rupees. This is creating a lot of rotational churn. So, as a customer today, I go in there and I invest 10 rupees, I call up to 50 rupees, 60 rupees throw the SIM card away and go back and buy another SIM card. This is creating a very, very high rotational churn. And if any of my competitors are listening to this presentation my strong advice is that you should also make a move on this, not only on the tariffs. If we can, as in industry make a move on actually reducing this free airtime that will have a significant effect on both reducing the cost that are being used on acquisition, but also have a significant revenue effect.
Regulatory unclearness continues. I expect that the National Telecom plan is being put forward from the Minister in the end of this year or early part on next year. There is a lot of different policies coming out of that Telecom plan, I have focused on the three most important. There has been two three rounds of hearings with operators where we have been able to put in our views and on these three areas there is more or less an agreement from the industry.
The first one is on Spectrum Policy. And the main issue here is, what is the definition on the startup spectrum, is it 4.4 megahertz or is it 6.2 megahertz? And as you know in our business plan we need 6.2 megahertz. For us to continue the growth that we currently have we need that. As the regulator has come out and said that they agree that the definition of a startup spectrum is 6.2 megahertz. So, if you ask about my view on this, I think it is likely that in the new Telecom Policy, the definition of startup spectrum will be 60 megahertz without you having to pay more.
The second issue is about rollout obligation. Currently, the obligation is that within three years after you go to spectrum you need to rollout and have a service in 50% of the district headquarters. There have been suggestions that you should increase this coverage into much smaller groups of population. Again the industry have told the ministry and the regulator, let the industry fix this, let’s corporate a network rather than building out highways into each and one of the small villages. And if you ask me about my guess again, I hope that the ministry is listening to that input from the industry.
And the third one is to relax the M&A rules. Currently, you’re not allowed to merge if there is a cross-shareholding above 10%. I think that this is the third point, which the ministry will come out in their new policy, which will then enable consolidation moving forward.
The two last points is interconnection rates, currently 20 paise’s. The incumbents are heavily lobbing for increasing it, the smaller players are heavily lobbing to decrease it, and it will come out in a matter of some few weeks what the regulator is going to do. My view on that also, I don’t think you’ll see an increase; it’s either staying at 20 paise’s or a slight decrease. The last one is exit policy (make as a) creating a policy where unused spectrum can be returned to the regulator, which gives an exit route for smaller operators that have not launched and are currently sitting on unused spectrum.
It’s almost one year ago now where the 2G scam started, and that actually started as a political scam, I will say, where the whole industry withdrawn into political discussion between the opposition and the ruling party. One year after, I will say that there are still, most of these issues are being unsolved. I don’t know what the end of this would be, but I see much more rationality now into the discussion, I see much more fact based discussions and fact based thing moving forward.
We have tried our best to stay focused on operations in the middle of all this and we have tried through various initiatives towards the different authorities, legal system and so on to explain that Uninor is Telenor, Telenor is the majority owner of Uninor; Telenor has provided most of the funding to Uninor; Telenor is a long-term player; and we invested here based on the license that was granted from the Government of India and we are a long-term investor in this country.
And I think that those arguments on top of us, as you know, being a sizable operator starting to pay off. And I see that in the discussion we have with the various shareholders, stakeholders, there are as I said more and more people willing to listen. So again lot of risk for this, I cannot promise at all that all this will just pave the way. But at least I will say that the sky is a little bit clearer now than it was some few months ago.
Then to the operation, the target we have had every month for the last year is it take our fair share of the growth in the market. So we have tried every month to be between 12% to 15% of the net ads in the market. And overall now, I think we have a 12% market share in the 13 circles that we operate on subscribers. On top of that, the target has also been to take our 12% to 13%, 14% of the industry growth on revenues, and if I look at the second quarter, the whole industry growth in the second quarter of the incremental growth in the second quarter compared with the first quarter, Uninor took 15% of that growth.
So you see here that the revenue growth is a little bit better than the subscriber growth and that’s why we have been able to have a stable ARPU, while the industry ARPU has slightly gone down the last few quarters. So that has been the strategy.
We have also added around four million net subscribers every quarter for the first half of this year and also the last quarter of last year. The third quarter this year is going to be a little bit lower. And some of you may have seen the net subscriber figures from August, they are lower than they have been in the previous month. The reason for that is, the biggest reason for that is a change in the number allocation policy from the government. That will change next in February and it really caused us difficulties, because we have less churn than the big guys. So we have fewer numbers that we can recircle it.
So we manage then to get to the ministry, the Telecom Ministry to adjust those new policies, and that adjustment was then implemented in August. So for the last three months, we have been very, very tight on number allocations. So the biggest circles have basically not been able to grow. In September, we are back on the growth pace.
This is to then break things down on the circle levels, to give you a little bit flavor on what is our competitive position on the circle level. And as I said, we are competing in circles, we are not competing plainly India. And we are then watching this picture every month. You see the percentages there; it’s subscriber market share whereby the numbers in green there is the revenue market share. And for every month or every quarter that we are passing another competitor and moving up the level, of course, there is a big celebration. So this is really being used as a competitive tool to drive performance in the circles.
Their best performing circles now, you see that they have market share coming up to 6.5%. That starts now to give us a little bit prolific; meaning our brand is now being known in the market and people come and ask for Uninor. So our brand position is being clear. It also gives us some push effect in the sense that the volume now with the retailers and with the distributor is such that now they are pushing Uninor. We in this circles, we have passed all the smaller guys because in most of the circles when we enter, it will be entered as number 12 or 13 or 14. We have passed the smaller guys. We have also passed some of the mid sized guys. In some of the circles, we have passed Docomo, some of the circles we have passed Aircel, some of the circles we have passed BSNL, some of the circles we have passed Reliance GSM. So step by step we are moving up. I think when I present this same picture on the third quarter, you will see that some of this number is coming up to being number six and being even number five in the revenue market rate in the circles.
Cash flow profile according to the plan, we hope to close this year with revenues around 25 billion rupees. We see that some of the cost initiatives that you now have is gradually going to reduce the negative EBITDA. And on the CapEx side, you see that coming down. That’s because of two things, one is that we overall did a fantastic job with getting better equipment prices, as we explained in the procurement session this morning. But two, it’s also because we have decided to really concentrate our network rollout. And on top of that, which Yogesh is going to explain later, we are spending less money on capacity that originally planned. I’m coming a little bit back to that.
When we entered into India, this is October 2008, we said that we had some quite clear financial objectives or targets. We talked about being EBITDA positive in three years into operations, we talked about five years cash flow positive, and we talked about a peak funding of 155 billion rupees. That was on the 250 ARPU assumptions. And that has somewhat changed as you know. Today that’s less than half of that. Still I need to disappoint you, if you think that I’m today going to revise these targets, we are not.
We are going to keep these targets, which means that we need now to compensate for that fold in ARPU and we need to extremely good on both taken market share, but also being cost efficient. This is not, I’m absolutely not going to guarantee this, but this is a clear target for both me as a MD of Uninor, but also for Telenor. So we keep these targets and in practice means that three years into operation is that’s during 2013, we need to bring a breakeven. Not on the full year basis, but in some of the quarters in 2013, we need to be breakeven, if this plan or if these targets are to be followed.
Then into what are we doing now? Of course if you want to be an view and since number 13 in a market like India, extreme competition very, very low prices, you need to be very, very, very focused. And what we have said to ourselves is that, the only chance we have here is to really be focused on finding our place in this crowded market. And in addition, we cannot be a copy cat. We cannot copy what other guys are doing. We need to find our position and our way of doing it. And this is the structure Uninor. There is no paper behind this. There is no long PowerPoint presentation behind this strategy, its basically three points.
And this strategy is really communicated in the whole organization even don’t to what we call the feet on the street, which a lot of people visiting the retailers. If being best the most market distribution among coming back to why we think distribution is so important. Yeah, by the way, this strategy also of course tells a lot about what you’re not doing. So when I’m saying best of mass market distribution its mass market, there is no segmentation mobiles in Uninor. We want to be a mass market focused operator.
Being best on basic services, which in India is basic voice, basic SMS. There is no postpaid in Uninor, only prepaid. There is no 3G in Uninor, its voice and basic best services, and it’s about being low cost. And the low cost for Uninor its trying to implement the organizational culture where every cost is being questioned. Every waste is being questioned. And innovation for Uninor is not to have a product department, but is to have an organizational which constantly is innovating costs I’m not coming back to that.
Just plan a little bit better what that means in practice. I’ll put up these choices, because if you want to be true to such a strategy you need to make choices. And on the right hand is a typical incumbent or a typical big operator. On the left hand is what Uninor try to be. Let me just briefly go through it.
We want to be basic on the services that wireline incumbent are broad and these incumbents have lot of different value added services offers in the market. We have postpaid. We have a lot of segmented offers in the market. We are very, very focused on being best on voice and local voice.
Clusters was expensive, and I’m going to explain that in a second. But we are not present in the entire India. And we are not going to be aggressively rolling out over network either. We are going to focus on clusters and going to be competitive in clusters and coming back to that in a second.
Volume versus premium services, for us to be able to drive cost we need to be able to drive a lot of static volume. And in a way, where we still have a certain level of quality, customer experience, but that we’re able to pump more traffic into the network for (inaudible) invested rupee in capacity than some of the premium service operator would be.
Multi-SIM versus single SIM, around 30% of their customers in the market today have a multi-SIM telephone handset. We did a two or three SIM cards. And this works in such a way that you can have two SIM cards alive at the same time and both these two SIM cards will be taking incoming calls and you can make outgoing calls.
Around 50% of the new handsets that being sold are dual-SIM phones. So overtime, it will be 50%, 60% of the customers having phones with two SIM cards in. And of course people are taking advantage of this, which I also would come back to. We want to take this as an opportunity rather an effect. And we don’t have to be the number one SIM. We are okay with being the number two SIM, if they use us in the areas where we have coverage.
And the last one, functional versus emotional. We have done market studies, which shows that people think that some of our marketing is boring, and I’m very happy when I see that, because it’s supposed to be a boring. It’s supposed to be a very functional oriented. It’s supposed to selling our message, which is best on basic pricing within the basic services. So you will not see us spending a lot of time on building up emotional brands, very, very focused on functional marketing of our basic services. To do all this we need to be good as simplifications, standardization and we need to have this continuous improvement mentality.
I said that we want to be best on mass market distribution. I would claim that if you look at this, probably the most important success factor in all our Asian operations is that we overtime have been really building a system on distribution. Why are we doing that? It’s because we see that the Telecom sector is changing from a traditional pull mode into more a push mode and that’s what I mean. Traditionally you were pulling customers to the retail shop with advertising and you see that most telecoms are number one in the countries where they operate with market spending on above the line of TV advertising, newspaper advertising and so on. That doesn’t really work anymore because the number of services in such a crowded market makes the consumers quite confused.
Our estimate is that 50% of the customers, when they come to a retail shop, they’re asking for advice. 50% know what they’re buying, what they want to buy. 50% will be referring to the advice they get from them, the seller in that shop. That’s why it’s so important to have a distribution system where you can influence that advice or influence that push. So what we have done is basically set up a system an IP system, which is used by people, processes and system, enabling you as an operator to go directly down to the retail level. And for Uninor’s case, we are talking about 330,000 retailers.
So we are able to pay them directly, their commission when they are selling a SIM Card. We’re able to stimulate them with promotions with sales campaign directly, not through a distributor chain. And we are able to also drive daily targets down to the retail level, not only in our own organization. And we’re able to measure the performance of the retailers such that really good ones that are bringing in good customers. We can promote or reward and (inaudible) with the low performance.
So this is something that we have developed in other Asian companies, which we now are even going some more advance level within Uninor and then taking it back to the other Asian companies, Morten talked that today about this now being a group wide project. And I think that this is not only an advantage we are having in India, but across the Telenor group.
This one I need to spend a little bit time on. I am talking about cluster versus a big rollout. I am not an expert in India, but there are two, three things I have learned, the first thing, is of course that India is a big, big country. And it doesn’t really make sense for you to look at India that there’s no way that you need to cover the entire territory.
The second one is that the mass market in India is less mobile than it would be in typical smaller countries where we operate. And if I look at the numbers, the industry numbers 80% of the revenues for any operators, it’s coming from local calls, not even call within the state, but local calls within what we call there the community center.
The third one is what I just said about the multiple SIM. A lot of customers in India, keeping combined SIM for incoming calls, keeping combined SIM when they move out in very remote areas, and they use pack of SIM for calls in areas where that network has coverage.
So our plan is then to move into these clusters and the cluster can be a city, a cluster can be a group of villages, and basically the definition of a cluster is geographical area where most people move within that area. So our plan is then to take some of the base stations that we already have deployed, and move into these clusters. And then be very competitive on network within those clusters. And with that of course have a very competitive network offering and then having a price offering, which is very competitive.
And I claim when people say that and you come alike Uninor and we never be able to have scale in India and some of our competitors are saying that the numbers of customers we have then building some minutes that we have pump in, you will never be able to be cost competitive with that.
I think differently. I think that you don’t have to have scale in India, but you have to have scale in clusters. And you need scale and clusters to bring down the costs and using the clusters that you are competing. Then with this clusters strategy being very competitive on network within these clusters, then we wanted to position ourselves as best on local voice. That’s the very straight forward, simple basis offering you will have from Telenor, from Uninor sorry.
And the way we do that is to build on the communities and our price promotions now are very focusing on it. It’s to be the preferred second SIM within this cluster, so I live in this cluster, I work in this cluster, I used Uninor. I moved out of that cluster, I might use an incumbent SIM. Is to have very basic services on that and not least to use our dynamic pricing concept to have a capacity based pricing.
We are able now to measure traffic on each on one base station. So I will start, if there is a base station, which is underutilized in terms of over traffic, we can have a promotions to boost up the capacity. And if we do this in the way I trying to explain now we think we can have the scale and a competitive advantage.
This is the biggest of course challenge we have, churn and sec. And I am going to spend a little bit time on explaining what we are going to do with this. On the sec side, we are now gradually moving from pre-sec to post-sec, as pre-sec is what you use to sell a SIM card as commission it may be, the time we put in the SIM card, distribution cost and so on. We start to move that to post-sec which is acquisition of cost you are using every time a customer come and restart, is trying to them push to restart, so that’s the first thing they do move from pre-sec, acquisition sec to post-sec which is much more uses based or recharted based sec.
The second thing we try to do is to use our distribution system, the IT system as I said to really drive down targets on the retail level, such as we can reward retailers we thought bringing us good subs and we can built volumes with this retailers and enabling us to take down the sec. And the third thing is then to now when we have volume with the retailers and the distributors slowly take back some of this report that we are currently giving them. So that they we can reduce the overall distribution costs. This is what we do on sec. I of course for competitive reasons, I cannot give you a number on these bars, but this is the actual reduction that have been set over the last year than what we plan to bring forward in 2012.
And of course over time, although sec need to be coming down to the ARPU levels, so you get paid back much, much quicker on the customers that we invest in. On the churn, industry churn as I said, 7% to 9% per month, not per year, very, very high. Currently our churn is higher. But step-by-step, we try to bring the churn down through the quality, improving the quality of new customers coming in and I've talked a little bit about that already through a market position, which is very clearly understood by the customers. So it should be pure reasons for leaving us. And again through using experience from the either Asian markets, a business intelligence system, where you basically combine all the information you have on customers into a system and you can run micro campaigns as you can run the, line micro campaigns.
So, with this we hope that we can take down our churn to industry level. In some of the best performing circles we have, we have actually churn down to 8% to 9% already and we hope to take the rest of the circles over time down to the same level.
Our biggest OpEx cost is on the network side. And we need to bring that down and Yogesh is going to talk more about that. But to do so, I think there are a couple of advantages that we have as a newcomer. One, there is no legacy. Two, we have very, very basic simple strategy. We can take away a lot of the complexity that we'll have in the IT system for example.
So what we are really looking at now is to do something on capacity and sales enhancement, energy efficiency, transmission optimization and so on and so forth. What we have done in Uninor so far is also trying to challenge some of the conventional wisdom. I have told to Yogesh and his team that we have 4.4 Mhz spectrum. We will get 6.2 later but we don't know when. And you’d basically need to utilize what you already have and you need to do that without investing a lot in capacity. So go and think untraditionally. And Yogesh and his team have done that and they’ve also engaged our vendors in a little bit different thinking. And I leave that to Yogesh to explain what we have done.
This is my last slide and what this is about and the real measurement in the end of the day is what is your cost per minute, average cost per minute and what is your average price per minute. That's what we really look at the end of the day. And of course we need average cost per minute to come down to the industry level and we need average price per minute to gradually go up. It will take time for us to get that up to the industry levels, of course as a new comer. But what we try to illustrate here, its actual numbers. In Q2, our average cost per minute was 52 paisa, that’s 0.52 rupees.
And in 2013, we need to get down to what is the average cost per minute in the industry. And again, we plan to do that with being cluster based, and building scale in the clusters. I must have met that on sticking my neck outer, because this is a very, very ambitious target that we can compensate for the scale disadvantage we have with this cluster structure that I just explained.
But if you are not able to do that, we will not be able to breakeven either. So with the trend line I now see on reduced costs, we think that there is a realistic that we will able to continue to drive down to the industry level.
So their short story, focusing on three strategic pillar, low cost, massive market distribution and basic services, and stay within the financial targets being key funding and being breakeven. Then I want to leave the word two or three I’ll guess, which is then running our operations not only the technical part of it, but also the IT part of it including also the call center operations.
Good afternoon, before I start the presentation I’d just like to give a bit of a background. I have prior to this assignment, I was heading the group Technology and Sourcing working with Morten. I’ve had positions and he started as CTO, and then Grameenphone, which is our operation in Bangladesh as a CTO as well. What I’m going to run through today is, how do we drive cost innovation within Uninor? What concretely do we do, what concepts do we have so that you get a brief of the concept and then we go into concrete examples.
Before we start that, I would say it’s good to look at the scale we have in Uninor. So if you compare ourselves within the Telenor Group, of course the scale is enormous, because we are operating the three times more sites, we have a data traffic of 7 terabytes a day. So it’s a very good scale, but when we compare within India as well, we are able to scale up our systems to have 5 million gross activations every month. And that’s a pretty sizable scale as well.
Going apart from scale and looking into the cost structure, I don’t think Uninor cost structure is any different than any other telecom company maybe the energy cost is more because the grid is not very strong, so if you compare it to the developed market, of course energy costs are going to be different, but in general network composites of a good cost structure, and in our case, it’s around 35%. And the reason I’m trying to put the slide on is because when I talk about concepts, I talk about things we are doing. I don’t think it is any different if I take any other business unit as well.
In India, we do not have a lot of time, so the time is scarce, resources, spectrum is really scarce. I don’t know if you know that.4.4 MHz is like 22 frequencies, and if any one knows RF here, it’s actually one of the lowest spectrum I have ever seen myself. An intense competition, so hence what drives us is the need. The need for driving innovation is not any fancy products, which is driving us, but it’s how do we innovate the basic cost structure premise, which telecom is based on.
So if I look at the next slide, which shows a traditional model and the Uninor model. How do we take the scaling of the cost and scaling of traffic in a very different way? Normally traffic scales and then the cost also scales very fast along with that. In Uninor case, we want to decouple that, the three things we do different from a traditional telco, the first one is that we do not just rely on unit cost negotiations and kind of a threat based approach. I think that’s hygiene that’s been done. What we need to look more into is process, into architecture where most of the costs preside.
The second thing we do is, it’s not enough to just share the risks with your vendors or partners and then have a tight SLA. I think that can just take you so far. We want to actually move into gain sharing. And I will take a concrete example later in this presentation. The third one is, we start with the clean sheet, every operations starts with a very clean sheet then new development happens, new business requirement comes, it becomes complex. And then, we say we are modernizing and transforming. It’s true to some aspect when you talk about 3G/LTE. But when you look at IP you spend so much money in transforming the whole architecture and which actually hampers the time to market. So what we want to do is actually control the core of our architecture very solid, and do a continuous simplification and continuous focus on improvement.
What this demands from us is a very different way to work with the vendors and our partners. I have shown here actually three steps, a basic model, which means a vendor or a supplier will deliver and you have SLA. Most of the companies reside there who are operating in telecom and the reason being they feel they can do it better.
Then you have the second step where the outsourcing environment has developed, and India is being the home of outsourcing from that point of view. So yes, a lot of business units within our group and a lot of companies have moved to that, which means that the vendor can run services for yourself, but the efficiency is going to be capped with the vendor ability or partner ability. So that cannot take you to the next level either. What Uninor does is, we take it to the next level by engaging the partner into (true) transformation, which means out of the box thinking, which means that really taking the cost of the whole value chain down, which means for us it is not enough that we just get the arbitrage on the outsourcing, but we want to simplify the process and the vendor or the partner also needs to transform along with us. That’s the difference. This is not an easy task, because this is being first in the industry in my view.
Concrete examples as Sigve mentioned, it was a clear kind of need that we do not have more spectrum, what do we do now. We cannot really stop the growth and we cannot really add more capacity sites, just because we happen to grab a very good on net position and we are moving on. So we have to think very differently. Here what we have done with 4.4 megahertz, we are able to pump 100 airlines per site. With the conventional planning, you could go up to 40 airlines per site. What does that this mean in a user friendly manner? Without traffic profile, if there were only 1,200 subscribers on a site, now we can have up to 3,000 subscribers on a site. This gives us the leverage that without adding more sites, we can jack up the capacity in the network, which means we can really grab the on net position without adding more cost structure in the network. I will come to that how we exactly do that.
In financial terms, it’s important that we can put it into some prospective. Within this year itself, we would have added around 3,000 more sites to our base if we stuck with the conventional planning. Clearly, that cost has been avoided. And if you look at any operation, capacity sites of 5%, 10% incremental comes year-over-year and it is not a question at all. And the reason is because it’s supposed to be hygiene. In our case, that’s not true. So we are avoiding this cost going forward.
Some of the imitative which we’re taking concretely in this area. Before I go to the initiative, I have to say there is a organization behind it. Our lead RF engineer, actually he comes from the U.S. So he has the iPhone experience, the whole capacity experience from the U.S. What we completely do is, we do not resolve through conventional method or frequency planning. We take it to the next level. We do it, automated. Not only that, we are using all the spectrum efficiency features and not hiding behind increasing quality, but actually leveraging those features to gain maximum spectrum efficiency.
On top of that, we are using capacity antennae, and this antennas are actually used for the data services to club the iPhone traffic. The same antennas we are using as well. And including all these things, along with the organization and along with rigorous planning we are able to increase the traffic. Increasing a traffic is good, but how the traffic is going to be utilized, I think that’s even more important. Example of UP East, where the traffic was increased, but got consumed very quickly. And then we analyzed what really happened, and it was on net offer, which was actually one to two hours during the day which is consuming the traffic.
Of course this can be linked to us as our behavior when people come home in the evening, they call more, fine. But what we do is, work between pricing and technology is a very, very strong team work. So we meet regularly. We look at the traffic patterns, and in this case we introduced a peak charging. In the peak charging, what we saw the traffic started getting spread in the other hours of the day. And hence, what you see is the bucket which was actually being utilized only in one slot of the day is actually being homogenously utilized over time. And this is not a one-time thing, we need to continuously observe this and make sure we do the right modifications. And towards the customer also proactively send messages to make sure that they are indicative of what is happening and they can utilize the network, when the network is more free.
Doing all this, the question would be how do we stack up ourselves in spectrum efficiency. Before comparing ourselves within the group, I would like to compare ourselves with our competition within India, because that’s where the real competition is. Within India, if I compare our spectrum efficiency, we are 30% more spectrum efficient. That is with the spectrum we have which is almost 30% less than other incumbents. So, actually if we had that kind of spectrum, which our incumbents have then we would be even more efficient.
Comparing within the group, comparing to other business units, of course we have a huge potential, it is a huge opportunity to harvest and this will be applicable not only for the voice world, this will be applicable for the data world as well, because resource is a resource, frequency is frequency, spectrum is spectrum.
Looking further into the next area which is very, very cost consuming is energy. Energy actually drives the biggest cost because the grid is not stable. What we also see is that energy is being consumed in diesel so frequently that some of the BTSs are running over 16 hours a day. So what we do is, I’ll try to explain in some simple steps. The first thing we do is as Sigve mentioned, there is no legacy equipment, so there are new equipments and we activate features in a way that we do not use all the capacity during the night time.
As traffic goes down, the capacity of the site goes down, we switch off additional TRSs and we save on energy. We work with our IP providers in a very concrete manner to make sure that we do not incur additional air conditioning hours, additional DG consumption by utilizing free cooling from the ambiance in the winter season, to increase the temperature of the shelter to utilize fuel catalyst to increase the combustion of the diesel. On top of that we have a no tolerance policy when it comes to the waste in the energy area. So every engineer looks at the trend (inaudible) sites which belong to that engineer and see that if the trend is going other ways, need to focus on it what happened. By the control mindset you can also drive a lot of inefficiency out in this area.
Our target is very clear, we want to be very efficient in this and you see that I’ve marked here, to 25% within one year.
Network area is not finished. I would say that we have certain other things which are ongoing, simplification on value added services, managed service opportunity on a pan India basis, active sharing possibilities, lien processors and this all work is ongoing right now.
The next topic is my favorite topic, is IT. It’s a very complicated topic and I will advice that it might be difficult for everyone to decipher what’s going on. So I’ll try to make it simple. IT in a common knowledge is sort of don’t disturb, don’t touch. So you give a business requirement, you get output, you don’t question on the CapEx, you don’t question, otherwise it’s going to affect the time to market. That’s the approach. And if the IT costs are between 2% to 8%, 3% to 8%, that’s fine, keep going, because that’s okay. We cannot afford that, because if we do like that, I’ll show you on the next slide that it would be not helpful for the cost structure. What we look in IT is how do we drive the average cost per minute down, because IT is actually enabling a lot of the processes.
The second thing we do is, we do not have domain competence in IT only. Domain competence is good, but what we need is actually a business process competence within IT, because that is where now the cost reside, it's not in the unit cost only. If your processes are going to be lean, you see the costs going down.
The third one is often we give a huge contract to one of the system integrator and we think he will give it to Oracle or some other third-parties, (Avaya) or whatever and then we are safe. We have outsourced and the efficiency will be brought in. It doesn’t work like that, because there is inefficiency in each part of this chain. The way we work is we work in a very collaborative manner. We need to drive the cost down not only of the partner, but actually the whole chain where the partner is procuring those products from, and whether we need all those products or not or whether we just need part of those products.
Here I show you how we work with our IT partner. We had a contract with our IT partner, where we were going to give a fixed development fee, fixed capacity fee, fixed O&M fee year-over-year. And of course, if you take this equation and revenue growth, the IT cost for revenue will come down. And then we could be happy about that. But the way we thought right upfront is this contract structure will not really work with the strategy we have. And what we need to focus on, when we talk about development we cannot have a development, which is ongoing all the time. We need to have very tight prioritization on development. When we talk about hardware, our server cannot host an application on every server, virtualization needs to be in the ratio of 10:1.
When we talk about operation, the processes need to be very lean. When we talk about prices of hardware, they need to be openly benchmarked. Concretely, what we discussed with our partner is that we need to run our operation with 40% less resources. And we need to be able to scale up the same hardware to 70% more capacity using virtualization. And you can see on the other column how the cost structure would look like. That is very, very different. I don’t think it is very normal that the partner comes on the table really discusses and takes that initiative. The reason why they did that is because this is the first time in the industry. And what we see is that, if they can take this model further, they are going to gain share and that’s fine. And if they find more efficiencies within this chain, there will be a gain share participant.
IT being so central to us, the two other things which IT drives is cost optimization, cost simplification, and the second one in market differentiation. So I’ll show you two examples here our processes. And I’ll link them to cost, so that you can see how much cost does each process contribute. Here I show a process, which is a customer acquisition process. We are having five million customers every month. Five million customers approx. each customer acquisition takes Rs. 9. The form gets filled at the distributor and there is an agency which is called address verification agency, this scan the form. Then the form goes into the back office system.
Now this process takes Rs. 9 per customer. What we think we had to think very differently. So what we think now and we have tried this and it works, that the scanning should be moved at the distributor level. This will help us to make the whole process of scanning very light. The address verification agencies do not need office structures in every zone, hence their cost is reduced. They will focus more on quality, hence our customer base or forms will be of a better quality.
This new process will allow us to reduce the cost from Rs 9 per customer to Rs. 5. Distributor gains in this AVCV agency or address verification agency gains in this, and we gain in this. And this was turned around within three months, and that is execution. On the other hand, what we see is as Sigve mentioned, mass market distribution is a key competitive ability. And IT-enabled that as well. So not only a distribution system which allow us to track a SIM card to the point of retail and payment to point of retail, but also to layer it up with the geographical interface in a way that we can measure the performance of the every distributor, that is the way we think. So this is the next level of distribution we are into right now.
Summarizing what I would say and being Uninor, being who we are, we will be in the forefront of driving innovation, we are open to every concept, every idea. I don’t think I have all the answers, but I can say that if you have a better idea, I’ll take that as well. Two things, we will drive down the network and system cost by 40%. And on top of that, we will also share all these learning within the group because all these learnings are equally applicable to other BUs in the group as well. Thank you.
Thank you, Yogesh. I would now invite Sigve back to the stage for a joint Q&A session. And there are probably many questions to these guys. So I have to remind you that there is also a breakout session later today. I think the first one was this side.
Thank you, Thomas (inaudible). Two questions, if I may. Firstly, when you compare the circles that you do really well in, the ones that are more challenging, what would you single out as the main difference? And is it mainly because of your internal work or the competitive landscape? That’s my first question. Thank you.
Okay. Well, it’s more our ability to get the machine work than it is the competition. And the costly competition of course, varies from circle to circle, different players that are good in different circles. But it’s not the reason, it’s basically how good are you to build the distribution machine, how good are you to set those right targets, how good are you to have an organization, which work the way I just said. So I think, I have said before that we have struggled in the Southern part of India, four of our circles in the south. That need to change, turn them around and now we see the growth coming. So it’s a combination on our own organization and deployment of the distribution strategy. And frankly, that’s also a little bit of reason why we now keep focus on our 13 circles. And because we see that this is a continent, it’s not a country. And we really, really need to be good where we are. And we really need to demonstrate that we are able to not only build skill set, but also turn profitable into this very crowded market.
Thank you. Second question is you mentioned constraints on the numbers that can take us a bit low. What has happened to churn and ARPUs and so the quality subscribers during this period?
The ARPU is, during the last six, seven, eight months, ARPU has been flat, around 100 rupees ARPU. So no change in that. What has basically happened the two month, I will say, is that our three or four biggest circles have had number constraint. The rest have been okay. So what we have done in these circles is two things. One, we have been less aggressive in the market because we did the numbers. Two, we have forced out a lot of churn. So even though the rules in India is such that you can keep one customer, it’s allowed for six month. We are now down to probably closer to 30 days. If you are not active in 30 days, we will force you out.
So I will call this more a temporary problem. Moving forward I think you are now both good at cleaning up customer base to allocate new (inaudible) and as I also said, we manage to get an adjustment in a policy starting from August and so, I wouldn’t say that this is a problem moving forward.
Next line is Espen Torgersen and after that it’s Barry Zeitoune.
Espen Torgersen – Carnegie
Hi. Espen Torgersen, Carnegie. You are upholding your financial targets. It’s obviously is good. But you haven’t told anything about market share. So obviously my question is, have you, in effect done a risk assessment of the additional business case? Furthermore you haven’t said anything specific about the eight remaining circles. And going back to 2008, looking at your return on your investment, how do you see that given what you’ve presented today?
Just let me take the easiest one first, the remaining eight circles. Yes, you are right that we are operating in 13. We have license in another eight circles. Some of these circles, we are lacking spectrum and we are lacking spectrum in (all) the major cities. However, in all these eight circles we are fulfilling the wallet obligations. So we have this 50% network also 50% toward district headquarters. We have fulfilled that. And, so there is no issues around maintaining our license. But, as I said, we are not going to aggressive go into these circles, not at all. We want to keep license and have that as an opportunity, but right now then focus on the 13 circles that we have. That’s the plan.
The other questions about, have we looked at the return on investments and all that, I think that what we are doing right now is really to make sure that we have a goal to the market is active where we are and making sure that we are turning this circles profitable and that’s why I’m actually happy that Fredrik keep this financial targets because putting pressure on me don’t, now moving to investments that are not giving you the return. And I think we have the luxury of time now, because what I see is that the penetration is 50%, the churn is high. There are a lot of regulatory uncertainty and if we have to wait a little bit before, we can answer some of the bigger questions, I think that’s okay. But in the meantime, we need to demonstrate that what is said that we are able to do that and that’s why we right now are focusing on turning profitable in these 13 circles.
Okay, it was Barry and after that it’s Erik Pers.
Barry Zeitoune – Berenberg
Thank you. It’s Barry Zeitoune from Berenberg. Can you hear me?
Three questions, the first on churn. Where does churn need to fall relative to where it is today to meet your business plans? So how much of the dropping churn do you need to be able to successfully meet your business plan? My second question is on SMS interconnect. I heard proposals over the course of the last week some of the other operators asking for, (inaudible) Indian rupees. How does that impact your business plan? Can you quantify what the impact of that will be? And then my final question is, if there is a favorable change in the regulatory environment with regards consolidation, what would you see as the optimal number of operators in the Indian market?
Okay, first of all, of course I would sure need to come down to the industry churn in the longer run. When that happen, I don’t want to commit any dates on. But gradually, we need to come down to the industry churn. That’s obviously, and I also think that the current industry churn of 7% to 9% has to come down, because that’s very much effective what I explained to you this rotational churn, also people coming and buying a SIM, throwing it away and coming back. So for us to be fulfilling our targets, that’s where we have to come. The SMS interconnect, yeah, currently we are, I will say, spending a lot of effort on SMS on the net to trying to build up an on net community, and you’ll also see that we stand quite, have a good position among the youth, and overall, I will say now that our data percentage as a part of the total revenue is probably 8% to 9%, by the industry, it’s only 11% to 12%. So I think we do quite well. But of course, if that are going to increase being the interconnect or the termination rates on the SMS or on voice, that will affect our ability to send SMS or voice calls across the network. But I don’t really think the incumbents will be able to convince the regulatable types because the regulator is really focused on bringing competition further into the market.
The third one on consolidation, well, the regulator has said that long-term this market should have six, seven players. They have said that in some of their documents and I will agree to that. That, that’s the type of level that maybe sustainable long-term in this big market.
Okay, thank you.
Yes (inaudible) markets. Just you had an interesting slide on the average cost per minutes, and I was just wondering what is included there? Is all network cost including depreciation and so on, can you split it up?
Yeah, the answer is yes. There is an inter connecting full network cost is basically. Yes.
Okay, we have time for one more question, before the break.
You need to ask all your questions to this guy..
No that’s all right.
And I think, I think it is (inaudible)
Hey (inaudible) my question is actually also about cost per minute. And your new financial model way of keeping the same target, but you need to reduce cost per minute to be able to achieve them. I think you also said something about market rate, i.e., the price per minute which is the other side of that question. So my question is really, do you need the market rates to come up to be able to achieve your targets, do you need do you need help from the market or would you be able to do it on your own so to speak?
While to bring down the cost per minute it’s relatively easy, because it allows you to use that word, because they are more or less in control of that yourself. But of course to bring it down to the levels I was talking about, you really need to do everything that Yogesh talked about plus probably another 30% more. So, but at least that’s something that it’s a little bit manageable. And that’s why we think that we will be able to do, bring that down to the industry level. When it comes to the price per minute that’s a little bit more challenging, of course you can do some of that with your own pricing, which we are currently doing.
So what you see we are doing now, we are taking positions on building our net community with net very attractive offers and then we kind of bring that up as long as they’ve capacity in the network and when the capacity is still then we start being a little bit more sophisticated on the pricing. So some of this you can do yourself to bring it up. But to really take this up to the industry level, yes, we also need some rationality in the market. So, it would be very hard to that to be very upfront on that, if the irrationality continues. So our plan is kind of linked with the assumption that there will be some rationality in the market.
Thank you, Sigve and Yogesh.
So far so good as you say.
Espen Torgersen – Carnegie
You said that I couldn’t say that...
There will now be a 10 minutes break before the last presentation, which is financial priorities.
Okay, welcome back. Please find your seats. We are now approaching the end of the program here in the auditorium. And well, I guess we have to wait. The final presentation here today is on financial priorities by our Group’s CFO, Richard Olav.
Richard Olav Aa
Thank you, Marianne, and good afternoon to you. I have two goals with this presentation. I want to explain to you how we in Telenor look upon financial value creation based upon what we have had today and I want to explain to you the adjustments to our capital allocation priorities.
Let’s start with financial value creation. In Telenor, we measure that on total shareholder return. That is the ultimate target. And total shareholder return, maybe you know what that is, but maybe a short explanation. That is the sum of how we develop the share price plus the pay out to the shareholders on an annualized return basis.
And I would also say that very many of the people working in Telenor today, they have bonus programs linked to the total shareholder return. So this is not only a measurement for the sake of a measurement, it’s also linked to paying the (inaudible).
So how have we done on top of shareholder return? And last year, when I was still here, we had 10 years under registry on the stock exchange, so I explained it in a 10-year perspective. We have done fairly and (read up) the foreign competition.
This here shows a shorter picture on the five-year horizon, a three-year horizon and a one-year horizon, and pretty much we have outperformed the competition, meaning the other European telcos by a wide margin and especially in the later years.
So why is that? And I think the answer to that you got during today’s presentation. We’re growing faster, and we’re keeping the cost and the CapEx under control and actually reducing it at the same time through the operational expense initiatives, thereby growing the underlying figures.
But if you look at the absolute level, our total shareholder return of 6% to 8% whether you measure it the last five years, or one year, whatever, that’s not particularly high and it’s clearly lower than our ambitions. And why is that? Well, we have of course some issues about our entry into India as you are well aware, and also, all the uncertainties around VimpelCom has taken the toll on the share price development. So, we have to work on what we have explained earlier today, and also further on VimpelCom going forward.
But the total shareholder return measures the financial value equation, but then it's really important to look what is behind that again. And if we start then with the big numbers from the financial side, the revenue growth, we have already dealt with today in several of the presentations.
But Fredrik also alluded this morning to the underlying cash flow development because ultimately this is about creating cash and it's about creating net income. And if we start with the cash flow development, we are now approaching 19 billion underlying cash flow, including India. But I think, it's crucial to understand the trends also excluding India, since India is a major startup investment for Telenor.
And excluding India, we see no trend towards the 25 billion. And 25 billion cash flow on total revenue of about 100 billion and the balance sheet we have today, equity and capital employed, you really start to see some very interesting return on capital employed figures coming out of that which should indicate therefore a higher TSR if we are able to continue those trends.
Many investor meetings, we also challenged this cash flow the right measure, isn't it? And other than net income where you also have to take in the cost of spectrum, cost of taxes, cost of interest and so on, yes, and of course we also look on that.
And what you see from this slide is rather flat development the last years and also the last 12 months, around 10 billion. But that is due to India. India is really taking a big hit to our net income, both on operating losses, but also on the depreciation on the interest coming out and tax effects coming out to India.
And then it's also crucial to analyze without India. And there you see a underlying trend towards 14 billion plus. And then you convert that into earnings per share you can easily understand that it could be good grounds to hope for a better total shareholder return going forward if we're able to continue those trends.
Okay, moving forward what's behind these numbers? Well, the answer to that is what you have been explained today. And we have put a lot of focus today on operational excellence. And it's very important for me to say in this sum up of the day that operational excellence targets we have set out is not all about cost. Those are relative targets, it’s cost over revenue.
So it is increasingly important to lever on this target to be able to increase the revenues, but we need to control the costs. And that's actually what has happened in the Nordics and the CE operations, we have taken down the costs, and in the Asian operations we have been able to hold the cost at bay and reduce CapEx while growing the revenues significantly.
I will not go into detail again on some of the major initiatives that are behind the cost reductions and you see from the short-term it’s also explained well earlier today that we are on the right track or meeting our targets of (35) and 10%. Bjørn Harald explained you in a very good way the effects on group sourcing and also he touched upon the network modernization, which is also being covered by the presentations of the three business units today.
I would also say that we have a constant not very high profile reduction of manpower in the group continues rightsizing and efficiency, and the last 12 months we have reduced approximately 1,700 man-years approximately 5%, all the manpower days. We have spent a lot of this today about the remaining potential within IT standardization and consolidation of functions. And like Fredrik said this morning and also that came very well true in Morten’s presentation is how we work on these initiative as a group in order to take our cross border effects, but at the same time and they build even better local execution in the marketplace. I think you will never see us go for Deutsche Telekom or an Orange, where the market decisions are centralized. They have a total different approach, you want to centralize and standardize the system behind that can deliver an even better market execution.
So that’s about the big efforts and operational excellence, but I would also like to spend a little bit time than going even further on operational excellence that drives the returns and then drives the financial value creation, and that is on continuous improvement. In Telenor, we have a strong set of values, and also Fredrik alluded to that this morning that in those values, we build clear leadership expectations. And continuous improvement and excellent execution is at core of the leadership expectations, and this is a prime example on continuous improvement and excellent execution.
Last year the CEO of Telenor Pakistan stood here and said I will deliver more than 25% cash flow in 2013. Did he have all the integrated details on how he would deliver on that, not at all. But coming back to Pakistan, we’re doing these global benchmarks to really identify where we can have savings potentials on a detail levels. We get these heat maps. We participate in big service with all our major competitors and we get up the heat map to find the potential. But then more important that also Morten explained, then we build cross functional team from the business units from other units with subject matter expertise and the group functions and really a deep dive into selected areas with strong financial support often with the CFO in a crucial role in these projects. And really going to the detail all the way down to the individual level of target setting and tight follow up, and here are the core of financial value creation in Telenor.
It’s really to have our 30,000 plus people working with this detailed every day analysis, and improvement in a very systematic and a rigorous way. And this is driven by the line organization, it’s driven by the CEO it’s not driven by any stat function the stat functions are there to support.
Out of this project that we ran then in Pakistan, it came significantly savings. 7% cost cap reduction and a big reduction in power costs and maintenance of the network, which were two panel red flags on the heat map. I guess what Pakistan now delivered 24% cash flow in the first half of 2011, only one percentage point less to reach to 25% target almost two years ahead of time.
It’s about continuous improvement and engaging the whole organization in the values and leadership principles of Telenor. That ends kind of the presentation on the core business. Then we have two major assets, which are somewhat different, which I will also comment on and also Fredrik will comment on this morning. I will comment more from a financial perspective.
In India, you’ve been today get a very thorough presentation from Sigve and Yogesh on the operational story and the importance to get until the low costs position, and a cost per minute equal to the incumbents. I will not go into detail in that.
But the goals here the peak funding of 155 billion rupees and the EBITDA break-even, first half 2013 they are have in my opinion being crucial. And Sigve talk today about goals being driven all the way down to the street level in India, but what is interesting is that if you visit our operation in India and you ask the people at the street level of these goals are slow. If you ask a guy out in retail working for Uninor saying when should we break-even? He said it’s first half 2013. There is no doubt, this is thrilled on and everybody knows how crucial it is to meet these targets.
And we start to build a very credible roadmap in my opinion to reach these targets. And like the Yogesh also said, need is the mother of inventions and really the innovation that’s coming out of Uninor now that can also drive further operational excellence in the rest of Telenor is very, very important.
Finally, on India I will comment on the funding side, there has been a lot of newspaper articles, on the funding. To that is to comment that the Board of Uninor approved rights issue process earlier this year of 82.5 billion. That is to replace a lot of the short-term loans that Uninor now has taken up. That was set in motion earlier this year. That has been disputed by our partner Unitech, but we’re now back on track and we really think it’s important to get this equity in place in Uninor for the long-term funding of the long-term project. And feel free to ask questions on that later as well, but those are the real facts.
Then on VimpelCom; also from a financial perspective, VimpelCom, when you also read the newspapers, you could always think that VimpelCom has been a very bad investment for Telenor, highlighting conflicts and so on. This has actually been one of the best investments Telenor ever has made, almost regardless from which period you’re looking it from and the level of disputes is not about how to operate VimpelCom, the level of disputes is going on a different level, right now it’s about how many shares Telenor should be able to subscribe out of the (inaudible) transaction.
And also if you look at the pure dividend Telenor gets from VimpelCom, on average the last seven years, we got 1.3 billion every year. Last year, we got 2.3 billion and if we use the stated dividend policy now for VimpelCom, we should receive minimum 2.3 billion in the years ahead of us.
At today’s share price, VimpelCom around $10, $11 per share, that is a direct yield of some 7%, 8%. Maybe even more important about VimpelCom, we saw from the slide of Fredrik earlier today about performance development in Russia with EBITDA decline and the revenue market share under pressure. To relive operational excellence initiatives and the focus on operational excellence in VimpelCom has to be in focus and it is in focus now, and we are doing whatever we can to support VimpelCom on that. And also there is a lot of good people in VimpelCom that we can share experiences the other way.
So that really ends my presentation or should I say on the asset side of the balance sheet. Now I’ll move over to the capital side of the balance sheet. And these authorities for capital allocation were developed in 2009 after our entry into India. And I think there was solid work behind it and I think there is no reason to change these authorities. But the world has developed considerably since 2009 and also Telenor has developed considerably. So there are some adjustments that we would like to inform you about today behind each of the two first sections.
But just to sum up first and foremost, the most important thing for Telenor is to maintain a solid balance sheet and you could probably appreciate that during these uncertain financial times. Secondly, we want to give a competitive shareholder remuneration I’ll come back to what we put into that. And then thirdly, when we have fulfilled those two goals disciplined and selective M&A could be considered.
Then starting with number one, maintaining a solid balance sheet. We put out a cap on our leverage of 1.6 net debt-to-EBITDA, after the launch into India. We have done this spring and summer a professional exercise with professional external advice, what should the right cap be now. Without MA (agenda) or what we should use that cap for, there are no hidden plans or no concrete plans to actually increase the leverage, but we felt it was prudent now and two years have passed to look at from a professional level, what is the right cap while we still would maintain our investment grade rating.
And the key points for us revising that cap is actually when we stood in 2009 and developed 1.6, we were uncertain whole recession resilient Telenor’s cash flows where, but what we saw from the financial crisis, but we were actually quite recession resilient. Remember that the mobile industry hasn’t really on a large scale been through a recession before. In the dot.com bubble in 2001, it was really inflated values, but the growth or the big growth of the mobile industry was not that impacted because it was probably disguised by the strong S curve development. So this was actually the first real test for recession resilient telecom was and we saw that we were able actually to increase our cash flows in Asia and pretty much maintain our cash flows in the Nordic during the financial crisis or in 2008 and 2009.
Secondly in 2009, we had just started in India. We didn’t really know what was ahead of us. We have now much more clarity on the picture. And about two-thirds of the peak funding is already spent.
And then thirdly, VimpelCom actually our shares in Ukraine in Kyivstar, they were under arrest and was uncertain for dividend payments. Now we have the VimpleCom shares in a Western controlled company with a clear dividend policy, which gives more certainty on the funds coming out to VimpleCom. So from a professional point of view we have elected them to increase the leverage cap from 1.6 to 2.0. But again, there is no concrete M&A plan or whatever behind that. But having said, by the increasing the leverage cap up to 2.0 that of course can (cap) there for more payout to the shareholders and I will come to that.
But that also is a very important play and now this a little bit a of housekeeping issue that I will inform you about, but it’s important because here we also see the growth in the cash flows in our Asian subsidiaries, growing from basically zero to now an underlying cash flow close to 12 billion, which is actually higher than they have in the Nordics. Of course these are 300 control entities and 100 controlled entities in Pakistan and this is excluding India.
And, at the same time, we see that the net debt in these four subsidiaries has grown from 5.5 billion in net debt. That actually now are possibly at cash position of 3.8 billion. So it’s extremely important that the mother meaning the ASA is not putting itself in a position of the poor mother with the wealthy daughters. So we have now, over the last year, really worked hard on establishing clear capital targets in our Asian subsidiaries and clear dividend policies that should reverse this trend and of course we want to gather the resources at the ASA level and not in the subsidiaries. And that’s also important for the risk level or the group leverage because it doesn’t help with a good net debt position on the group if the mother is (debt) and daughters is return on cash.
So back to the shareholder remuneration and how we think about that. As we see from this slide, there has been a steady growth in the shareholder remuneration since Telenor was launched on Oslo Stock Exchange. We’re not happy that happy with the blank spot in 2009, but we feel that is behind us now and they were (inaudible) back in 2010, actually one year ahead of plan with a record payout to shareholders, both with a combination of dividend and share buybacks equalled to 8.7 billion. This year we increased the dividend further, up to 6.3 billion and we launched a 3% share buyback program, which are both 50% through as we speak. And that takes the total remuneration this year, a little bit, not all the 10 billion, which is a record year on the back of record cash flows. But you could argue that we are still behind the sector because the telecom sector is a peculiar sector these days. Actually many of the operators are paying out a lot more than their net income. So last year, I think the sector average in payout was around 7%, and this year we will have a payout of 7%, but actually then this whole sector moves and we see a lot of our peers have moved up their payout policies, and all the average, all the sector is above 9%.
So we’re still, we’re still somewhat behind the sector. But on the right-hand side, you can see the difference in growth between us and some of the major European competitors from a capital market perspective; we have definitely a much higher growth around 7%, well a little bit more then 3% of the competitors. And of course growth is costly, in fact CapEx (inaudible) even though we heard today, how we tried to control that in the best possible way.
So by being competitive, we need to find a balance and not just run after the maximum dividend and buyback yield, but find the right balance and the right strategy. I’d like to share with you a conversation I had with one significant shareholder, names to be undisclosed, he told me, you know Richard last year I bought into these European telco they gave me 8% dividend yield, and they bought back 6% of their shares, that’s 14%; still I lost 15% of the stock. I mean it doesn't make sense, I mean it’s really how you manage the asset side, that really matters. And if you do this well, this picture should not be too far for being okay, but we realized that being also competitive in this area, but not having the exact on the benchmark could be a good strategy.
But having said that, we also realized on the backdrop of an increased leveraged target, and our strong financials that we need to revise the dividend policy. So we have decided together with our board to increase the payout ratio from 40% to 60% to 50 to 80% of the normalized net income. And at the same time we’re maintaining the target of having a year-on-year nominal increase. So we’re increasing the bar, but at the same time we want to go from that increased number.
And we also say that the share buyback that we now are implementing for the second year in a row that, that should continue to be a supplement to the dividend to deliver a competitive field. Then I covered the first two boxes on the capital allocation, moving down then to the M&A. Well, really no change to our M&A policy today, and that's really important for me to underline, but again this increased leverage cap has nothing to do with a new M&A strategy.
We have a disciplined and selective approach to M&A. I head the investment committee in Telenor, and I was saying 95% of time spent in that investment committee the last couple of years, is we learn in-market opportunities.
We discuss how we can acquire spectrum more effectively. How we optimize our spectrum. How we do network sharing and we’ve done it now in Sweden. We have done it in Denmark. We are doing it in Malaysia as you heard. We're sharing our towers in Pakistan and Bangladesh and we’re entering into other towers in India.
So there are lot of activity on network and spectrum sharing and also spectrum acquisitions coming up to keep different more growth in the volume and especially on the data side. When it comes to opportunities outside the market we’re in, but may be before I go to that I can comment a little bit on consolidation, of course in-market consolidation is almost a no-brainer from a paper exercise, but when it comes to the fact there are so many cultural issues, personality issues, pricing issues, but they are very hard to get executional. Then look at the opportunities without the in-market opportunities on a regional level. Of course we are not with a discipline and selective approach. We are not going around knocking on doors, but we are of course looking when there are events and opportunities coming up, but otherwise it would be a sin.
We have to look when things are happening, when there should be opportunities for Telenor. We'll never disclose what actually we are doing, but there should be no secret that we are looking. Then on the disposal side there should be assets in Telenor and that could find over time a better industrial owner than Telenor not many but a few. Do we have any rush of realizing that? Do we realize them without the potential new home paying for that additional advantage they can give to the business? Definitely no, so we take our time and wait until we see that there is a good opportunity and that we get the right price.
So, then I can sum up the capital allocation priorities. We are again from a professional point of view increasing the leverage cap from 1.6 to 2, net-debt-to-EBITDA and on the backdrop of that we see that we can tolerate the higher pay out ratio to the shareholders. So the dividend policies then increased 40 to 60 to 50 to 80 on normalized net income. While on the M&A we continue as we have done in the last couple of years. So, that I think brings me to the end of my presentation. And I end with a slide, the same slide as Fredrik ended with earlier today because we didn't have a Q&A on that session. So we’ll do a Q&A together, which really to sum up, what is really than the high end of value creation going forward in Telonor.
Continue the revenue growth through operational excellence and other initiatives. Bring Uninor to a break even position; I think if you achieve that with Uninor with tremendous difference strategic position than it is today.
Value creation of VimpelCom, which is a lot about operational efficiencies in the Russia in particular and underlying all this is a length less focus on operational excellence, which I hope we have enabled to convey it to you today during the presentation. Thank you.
Thank you, Richard. I will now invite Fredrick to join Richard for a Q&A session. (inaudible).
James Britton – Nomura
Hello, James Britton from Nomura. Can you clarify whether you would be prepared to use total cash return to actually inject additional leverage into the balance sheet towards your new target, or will it just be acquisition deals that would get you towards the two times target? And the second question, just to clarify how you go about with your new opportunities. Can you just explain to us what puts you against on going ahead with your program deal, looking at (inaudible)? Thank you.
Richard Olav Aa
Thank you, James. As I said, I mean we found it very prudent to take a revision of leveraged cap and it’s not the target, it’s just cap and that we’ve seen from the last couple of years, we’ve been significantly below the cap. So there is no specific agenda to kind of go up to this cap, because as you’ve seen over the last years were steadily improved our shareholder remuneration policy.
And we will not see big moves from Telenor, it will be stone by stone taking step-by-step and if we see the world as we hope it will develop going forward with continuous growth earnings momentum and so on, we should work further on those policies. When it comes to your question about Polkomtel, we never comment specifically on the M&A. Sorry.
Next one is Maurice
Maurice Patrick – Barclays Capital
Hi. It’s Maurice from Barclays. So, you spend a little time today talking about execution, focus on free cash flow. You’ve communicated a new dividend policy topping up your buyback (activities), give a capacity yield. Should you continue to execute the way you do, should the losses in India meet your expectations? You just still see the group deleveraging. In that scenario where you do see a continued deleveraging, can you kind of share your thoughts on what you see in terms of how you will approach shareholder remuneration because sticking with the new targets may well still see you de-lever.
Richard Olav Aa
Well you are pointing to a scenario where sort of everything is going pull in and not pull out to give you sort of the sports expressions here. And I think that we experienced a bit of an anxiety, total fee until 2008 when the financial crisis and the liquidity crunch, basically also suddenly became visible to Telenor. Coming from also into 2007 a pretty strong balance sheet situation, but with a weakening Kroner and what happened throughout 2008. Suddenly we were also, we were there. We got what we needed, but not necessarily easily.
So to look at us sort of putting ourselves up against the new ceiling here being a cap, we’re not sort of pointing to 1.8 or something like that. And you remember there is a bit of flexibility needed here also to handle what may come out of the arbitration with VimpelCom. And in that sense, and before that is clarify, I think we have a luxury if that well turns out in the way you’re pointing and I’m happy to answer that question at that point of time.
Next one Soomit Datta, New Street. And then Andy Parnis, UBS.
Soomit Datta – New Street Research LLP
Hi. Hello. Soomit Datta from New Street. And just a point of clarification on the balance sheet again. I thought historically one of the reasons for 1.6 leverage target was because the rating agencies applied the slide a more primitive approach in terms of looking at EBITDAR and net debt. So is that changed and if you were to say hypothetically lever up to two times at the end of this year, would you know what the rating agencies would then say in their world the equivalent leverage was? That’s the first question.
And then a second question, which just ties a bit into India that the peak funding losses, again hypothetically let's say you were issued with 6.2 megahertz of spectrum overnight, would that change that number, and if so would it, in terms of the CapEx savings, which presumably would result from it, would that have a material impact on those losses? Thanks very much.
Richard Olav Aa
Yeah, you're correct that the capital 1.6 that was also derived from an analysis for where you could be without impairing your credit profile. But having said that we also want to become a little bit more independent upon the rating agencies because it's sometimes hard to follow the logic. But I would also say that on the 2.0, we had had very constructive discussions with the rating agencies on that and also explained to them the way I explained to you today how the world has changed on the cash flow profile, the risks in India, the risks in their profile and so on.
I think that those have been very good discussions to set the new caps. I think our relationships have improved quite a bit the last year and a half. Leading up, I think that cap should really not be a problem. But of course, they say all reservations or kind of what they call the earnings will look like if you were to go to the 2.0. That's another matter, but no problem with the cap in itself.
As to the second part of your question, that funding question and the 6.2 coming through, well, we would love to see the 6.2 coming through because actually that gives us a cheaper way of handling the traffic growth that comes from those operations and in those circles that already are at the peak of what we can handle traffic wise at 4.4.
So here actually, to get 6.2, according to the original license terms will be more helpful than harmful to the business case assets stated. And not getting it for free would of course definitely give the change, and then you have a choice either to entertain the client from 4.4 to 6.2 or to have a little bit more base stations and that is a calculation.
Okay. It’s now its first Andy Parnis UBS after that it’s (inaudible) and the third one (inaudible). And that might be the end of the list we’ll see.
Andy Parnis – UBS
Thanks. This is, Andy Parnis UBS. Two questions, the first one is just on end market consolidation opportunity in Pakistan and Bangladesh. Have you had any conversations with VimpelCom regarding sort of combining operations there on network sharing in all of those two markets. And the second question on India given M&A restrictions I expect it to be relaxed with the end of the year. I think you spoke earlier about that six operators. Can you just run through how you think about Uninors place I guess in any sort of market consolidation in 2012?
Richard Olav Aa
I’ll start with the first one, the operations started, the Telenor Group Hold in Pakistan and Bangladesh complete sufficiently in the marketplace in those two markets irrespectively of who holds the other operations that we will become or all those for practical purpose. In Bangladesh Grameenphone is a market leader. And it could hardly be proceed us being an active consolidator. In Pakistan that might be different, but probably not with the market leader, which is Mobilink. So in a way you have quite some challenges combination to see the two groups doing something together. And the framework is definitely set in such a way that these two groups will compete in the local market base and that’s way it stands. Whether there will be other combinations that both groups in a way can develop on their merits that’s another question.
Then when it comes to India, under the circumstances that no clarity to the frequency situation when and if consolidation happens, then I think speculations will be high and people and everyone will be talking to everyone. And in that sense through sort of diving to that questions more than us being pragmatic as to what might happen when that becomes clear is something we have expressed previously and expressed today. But in the meantime, we’re executing the way you’ve heard Sigve and Yogesh describing Uninor getting that market position and showing visibility and having impact in the local markets in the different circles that we operate.
Stefan Gauffin – Nordea Markets
Stefan Gauffin, Nordea. My main question was actually around the consolidation in India, but to follow-up on that and I know you’ve been talking about Uninor at the moment you say such 2G business case. But markets evolve, how long time do you believe do you need to have a 3G license to compete in India?
Richard Olav Aa
There will be voice and SMS services in India for many, many years to come. So whether you in a way need it in parallel and when I think that we’re rising is quite long really. So the foreseeable future, say two to three years, I don’t see that need as we stand it now. Of course, there is a segment in India that will be active with their smartphones and enjoy the entry to internet on the broader bandwidth. But still as we’ve seen and used to edge another as an entry for internet usage, in other markets we can do that for a period of time if we need in India as well.
And remember we came to the marketplace one year late with 3G as Henrik has described earlier today in Malaysia and we are at par if even not par plus to the market share of DiGi in Malaysia. So I think in a way we demonstrate that despite not having 3G for a period of time, we can do things that moves in the right direction. And then of course, the segment the basic services is huge in India for many years.
Last question goes to Will Milner, Arete.
Will Milner – Arete Research
Thank you. So, Will, Arete. Just you mentioned in the presentation, but assuming Unitech continue to drop their heels, taking up their share of the Uninor rights issue that’s being proposed. Can you explain what your options are and if there’s any potential impact on net debts as a result of taking any of those options. And then the second question is just, I guess in general would you be supportive of VimpelCom leading consolidation potentially in Italy, combining with wind, what’s your thought on that?
Richard Olav Aa
Yeah, let me take the first question and maybe Fredrik take the second. On the Unitech side is correct, but they have been trying to install the rights offering process. But the shareholder agreement is quite clear; we start at the end of the day, if Unitech doesn’t subscribe their part of the issue. We are entitled to offer those shares to another Indian partner because we need an Indian partner taking up at least 26% of the shareholding in the Indian venture.
And lastly, the second part of your question, I think that is a question that we’ll have to be prepared over the release within the ranks of VimpelCom and whatever is presented at board level we will address. So for us to comment upon VimpelCom questions at that level, would not be correct at this stage.
Jon Fredrik Baksaas
I’ll just add another point to your question about Uninor. I think today we have a situation where Telenor is really guaranteeing the short-term terming financing of Uninor, leaving us really with unsymmetrical upside and onside in that venture and that has to be tilted through the rights issue process.
Thank you, Richard and Fredrik. That concludes the presentations here today. However it’s not the end because in few minutes the breakout sessions will start with senior management, the speakers here today from Norway, Serbia, DiGi and Uninor. And, but for those of you leaving us now, I would like to thank you for attending the Capital Markets Day 2011.
Jon Fredrik Baksaas
And that goes for me as well. Thank you very much for coming here this 22nd of September. Thank you also to, all my colleagues and Sigve and Yogesh in particular have traveled with their story telling and rushing back to handle daily business tomorrow. So thank you everyone and to Marianne, and to your colleagues for organizing the whole set up. Thank you.
Just a bit of practical information. The breakout sessions will take place in the café area upstairs. Same procedure as last year. You don’t have to sign out. You can walk around, peek a little bit here and there as you like. Thank you.
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