Telenor Group's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.26.11 | About: Telenor ASA (TELNY)

Telenor Group (OTCPK:TELNY) Q3 2011 Earnings Call October 26, 2011 3:00 AM ET

Executives

Scott Engebrigtsen – Communications Manager

Jon Fredrik Baksaas – President and CEO

Richard Olav – EVP and CFO

Analysts

Espen Torgersen – Carnegie

Christer Roth – D&B

Laurie Fitzjohn – Sykes

Andrew Lee – Goldman Sachs

Barry Zeitoune – Berenberg

Jakob Bluestone – Credit Suisse

Stefan Gauffin – Nordea

Will Milner – Arete Research

Maurice Patrick – Barclays Capital

James Britton – Nomura

Scott Engebrigtsen

Good morning, everyone and welcome to the presentation of Telenor’s Results for the Third Quarter of 2011, whether you are present here at Fornebu listening in on the phone or watching this via Webcast or on the mobile phone. My name is Scott Engebrigtsen and I have the pleasure of guiding you through the presentation this morning. We hope that everybody has the material that we have made available for you this morning and this can also be found on our Web site, telnor.com, that’s our press release, the quarterly report, and the copy of the PowerPoint presentation to be used here in a minute.

You can watch this presentation live or in recording on either the Internet or on a mobile phone and during the presentation, you may also send in your written questions as you will find the instructions on these alternatives on our Web site.

We will have Q&A session directly after the presentation here and then we will start with the audience present here at Fornebu, then switch over to the ones participating on the phone. And today, we will try to keep this session within one hour so I will kindly ask you to limit your questions to one per person and a follow-up questions if clarification is needed. There will also be opportunities to do individual interviews after the session here.

And to present the figures today, we have our CEO, Mr. Jon Fredrik Baksaas; and our CFO, Mr. Richard Olav.

And first, I leave the floor to you, Mr. Baksaas.

Jon Fredrik Baksaas

Thank you, Scott and good morning to everyone. And I’m of course, very happy to stand here today with this quarter results. They come forward very strong, they are solid. They build upon what we have achieved over the last couple of quarters, I have to say. And once again, I think, under quite difficult circumstances in many areas of the world, the economic area for the time being, we are coming through with some strong results.

And we can be proud that our systems, our people and our company basically have found their way through this quarter, where competition is tough and where there are growth in some areas of the world and where the growth is being searched for in other areas of the world.

At the same time, we have to think of those countries that have their practical problems for the time being. Primarily thinking of Thailand, in this respect, where the water problem, the flooding is so severe. And it’s assumed that it will take weeks before the effects of this has come to its full visibility and that society starts to work again.

In the midst of this, we are delivering a quarter which is characterized by very strong operational performance across the group, really. The organic growth rate continues at 7%, which was in line with the first half of 2011. We have connected 5 1/2 million new subscribers in this quarter, primarily in Asia. But also in some European countries, we have come back into building new customer base.

Along with this, we have been able also to improve the EBITDA margin and as a consequence also, the operating cash flow. And so, you’re getting to the figures here as I forgot to push the button. Sorry for that.

But with the solid EBITDA margin that we have been able to build through this quarter, we can now see a NOK5.5 billion operating cash flow in third quarter alone and that is all-time high. And it counts NOK15.3 billion of operating cash flow for the nine months of this year’s operation.

Based upon this strong performance throughout this quarter, we have also adjusted our guidance for the year and Richard will come back to this more in detail.

Let me then continue to the operating units and I want to start with Norway. Here we have in this quarter managed to get back into the marketplace and build the market position by adding 31,000 new customers in this quarter. That means that the negative trend that they had for the two previous quarters have turned and we’ve – based upon the revised service offerings that we came to the market within the second quarter, we now see a positive development in this third quarter.

And as of the end of September, we had roughly 380,000 subscribers on these new price plans. And these new price plans, we believe, is important to relate between the bundles between data and SMS and voice in this new setup.

The mobile ARPU figure in Norway is stable when we exclude the effect of the reduced termination rate that we embark upon beginning of this year. And really the growth in data both traffic and volumes are all setting the price erosion that we can see on voice and SMS at this stage.

The revenue decline now close to NOK300 million compared to third quarter last year, is explained by reduced revenues from fixed voice roughly 100 million interconnect around 90 million and non-mobile revenues related to handsets et cetera, are also roughly NOK90 million. So, that explained the reduction from third quarter last year to third quarter this year.

And I have to say it’s a good cost control that has been active also in this quarter. And the OpEx reduction of 109 million year-on-year is a result of steady work on the cost side. And it slightly also improves the EBITDA margin for the quarter.

The mobile network swap in Norway is now completed. That was done in October. And I’m very pleased to see that project has went through this year as it has, despite the hiccups that we had in June which was not a direct effect of this. But the overall swap is not done on 2G and 3G, and we are well prepared to also implement the LTE technologies later on.

This embraces 6,500 base stations and there is 9,500 sites altogether in Norway. So it’s quite a significant work over a pretty short period of time.

We will of course continue to build on the good quality network that we now have and we will reach out for the LTE generation and that will of course again improve the capacities moving forward in parallel with 3G, as well as more fiber connection to base stations.

In this sense, we are investing strongly into mobile capacities into the networks and from that base we also need to arrange for the new pricing models in such a way that the rational pricing level can continue and that the long-term profitability of these investments stands out in the same way as previous investments had done in our industry.

If I then take a look on the rest of the Nordic operations, and I’ll be brief on this one. But in all three countries we have noted this quarter, an increase of the customer position that we have in each and every market. 38,000 new customers in Sweden, 37,000 in Denmark, and this was also really needed because we’ve had a couple of quarters in Denmark in particular where we’ve seen a reduction in the customer base. So, it’s good to see that also Sweden and Denmark have come back into with good, new activities that get response in the marketplace.

Regarding Denmark, we have to note that the service provider ON Phone will leave the Telenor network in Denmark in September, which means that the fourth quarter will be the first quarter into which that wholesale player will be on another operator’s network.

All in all, I think we can say that the third quarter is a good quarter in the Nordic region. There is an EBITDA improvement in all operations and it’s in fact an all-time EBITDA margin in – all time high in both Broadcast in Telenor Demark.

Finally, I want to just mention that during the license auction process for 1,800 megahertz finally in Sweden, the Net4Mobility cooperation with Tele2 achieved a good position at reasonable and acceptable terms for the spectrum resources lasting for 25 years.

Let’s then move Southern Europe, and Central and Eastern Europe. The economic parameters in the country stands a little bit differently and somewhat weaker than what they do in the Nordics. Telenor Serbia, once again, a very good quarter, follow the trends from last year, there is sort of – from last quarter, there is the same development trend on basically all parameters. There’s a 5% ARPU lift. There is a larger subscriber base, and we then also managed to keep track of euro call structures. The EBITDA margin also moves slightly upwards.

Also Telenor Serbia is in the network swap, generally considered to be 75% into that process. And as in other countries, we expect this to be – to benefit cost structures longer term.

In Hungary, a bit more challenging macro environment, still challenging. However, the revenue trend is not that negative as it has been in previous quarters. So, if we adjust for the tax, the crisis tax and some other elements, we are in a stable EBITDA margin at 44%. But of course, it looks rather dramatically registering a positive one-off in third quarter 2010, up against this tax burden that has come in – for 2010 and 2011.

The EU has requested Hungary to abolish this crisis tax and of course we welcome the initiative on that. And there is a hearing on the issue and of course, we expect some results to come out of that process later on.

Some few words on VimpelCom. The Q2 results of VimpelCom was slightly lower than previous quarters. And this was impacted by the integration of the incoming activities from bid on Orascom. And although there is, over the last quarters, some improvement in the market share in Russia, we believe that there is still a need to significantly strengthen the operational focus of the group.

And of course, it’s very well aligned with our view the way the VimpelCom management now express the same needs going forward for that group. We also have explored together some areas of cooperation between the Telenor Group and the VimpelCom Limited where there could be benefits to both us of an industry corporation.

There is an interim dividend declare US$0.45 per share which we assume will be paid out in fourth quarter. On the arbitration process, there is really nothing that much new to report, and we don’t have any extra or any new details on this at this stage.

And then to the jewel in the reporting package this quarter, Asia. I really have to give compliments to all the CEOs, the teams and our colleagues in the four established operations and not to leave India. Also, I will come back to some comments on India after having taken some comments to the four established operations in Asia.

There is actually a 12% organic growth level in these four countries and four operations and all of them are above 10%.We here record 7% on Thailand, but there was a one-off on settlement with CAT in the third quarter last year which built the figure a little bit artificially, so adjusting for that also Thailand is above 10%.

And this happens in a very fast-growing economic environment in all four countries, but there are also, as you know, challenges on many corners in every country, not to mention the regulatory situation both in Thailand, which has been – which was very much challenged through change of government but now seems to be better on track. And also, of course, the license renewal process that is ongoing in Bangladesh, where we had some surprises or claims coming up, closing very close to the expiry of the license, which is 10th of November just a couple of weeks ahead.

In the midst of this we have to think of Thailand, which have practical problems that might create sort of disturbances also to the economic development of the country as well as disposal incomes with many people in that country. We haven’t seen those effects as of yet, but we will have to be prepared for some consequences in that direction.

In the Bangladesh license renewal process, I think we can say that we have managed to separate the claim that came forward in the beginning of October from the license or award process, license renewal process. And I think that there will be a longer period of discussions with the regulator over the claims issue that has appeared.

Closing in then on India and Mr. Brekke has heard that I gave some positive words to the four CEOs and the teams in the four other countries. I also have to give some recognition to the Indian management team this quarter.

In a competitive environment Uninor managed to build customer base were the one that build the most – the highest number of new customers in this quarter or in September month which is the latest statistics from TRAI. And gradually we can now see that the EBITDA has been – the EBITDA losses has been declining. And this is the result of the efficiency measures that we have introduced and the more focused strategy on how to go to market.

We are still on the track to EBITDA breakeven in 2013 and we maintained the 155 billion peak funding that we have had for the project all along. There is a long awaited new telecom policy underway and we definitely urge the government to come forward to this, commit to the industry so that the industry can develop more in – on a framework that is more known, transparent and a level playing field for all operators.

To summarize the whole thing, it’s a solid quarter. We have confirmed our positions as sort of one of the European fast growing – telecoms also for this quarter driven by the growth in Asia. There is of course a lot of headwinds in the macroeconomic environment but we also believe that this industry and Telenor in particular has a good position to face consequences that might come out of this.

The operational focus will continue to keep on the good work so to speak. We want to manage the transition from voice to data in a smart way as we possibly can.

We will continue to develop Uninor towards an ultra-low cost operator, an initial operator which are very focused in its go-to market strategy and we will drive the operational excellence initiatives in the group with the ambition of being a bit more impactful across all our operations given also the organizational changes that we introduced previously this autumn.

And with this – with the execution that we so far have managed to do in 2011, I think we can also aspire towards good performance on the ambitions that we’ve said and the revised strategy and the revised organization.

With these words, I’ll leave the floor to Richard which will – who will take us through the financials as well as the adjusted guidance. Richard?

Richard Olav

Thank you. Good morning also from me. Yeah, I will take you through the financials in more detail. I will update you on the share buyback program and I will go through the revised guiding.

Let’s just then start with the financials. I’ll not repeat what Fredrik has said, but I would just like to point out that we’re particularly pleased with the margin this quarter. The 33.7% EBITDA margin is actually an underlying improvement of almost 3 percentage points to the third quarter 2010. I’ll come back to the explanation of that. And also that we’re in the midst of the network swaps, maintain our CapEx to sales of around 10%, 11% is quite good. So that explains the strong cash flow of 5.5 billion from a financial point of view.

Moving then on to the revenue growth, and it’s important to point out that although our organic revenue growth is around 7%, the reported revenue growth is slightly above 2%. And the reason for that is the strong appreciation of the Norwegian kroner so far this year compared to the same period last year. So reporting a revenue growth of slightly more than NOK0.5 billion, while appreciation of the kroner constitutes about NOK1 billion compared to the Asian currencies in the third quarter. On same currency basis, our revenues would be actually NOK1 billion higher in the third quarter.

You can look at the breakdown to the right in the slide and you see that the one unit that contributes negatively to the revenue and that is Norway. That’s already explained by Fredrik. It’s knocked down the mobile ARPU decline and we adjust for the mobile termination rate. And I think it’s so important to kind of like stress this. This is related to the continued decline in the fixed, the termination rates and handset sales and also that we sold Televista to (inaudible) earlier.

And then on the reported side, you see that it’s India now that’s contributing. The rupee has kind of been stable towards the Norwegian kroner quarter-on-quarter. So the big part of our reported the revenue growth is due to India.

Then on the margin side, 33.7% and as – on the reported basis, it’s 1 percentage point up from the same quarter last year. But I said that underlying it was close to 3%. And that is related to some of the same one-offs that predict – reported on that we have a significant one-off in DTAC Q3 last year related to the interconnect. We had a crisis tax in Hungary this quarter and also a bad debt provision in Hungary Q3 last year, reversal, and also a one-off in GP. And all of those constitutes about one percentage point on the EBTIDA margin.

And then the currency movement in itself also constitutes about 1% on the margin, on stable currency and without one-offs. It’s really an underlying improvement about three percentage points on the margin. And it’s across the board. This quarter it’s not only the Asian units, but you’ll also see that the Nordic units have lifted their margins.

On the CapEx we have increased the CapEx by 376 million this quarter compared to the same quarter last year. The headline on that is network swaps. It’s all related to the network modernization with the exception of GP, but we also launched the dynamic pricing concept quite successfully and spend some CapEx on that. The cash flow or sorry the CapEx is stable Q3 compared to Q2.

The cash flow, and the cash flow margin is just a function of the EBITDA and the CapEx, we don’t have to go in detail here. But it’s important to point out that in all the Asian units and also the improvement in Uninor has lifted the 12 months rolling in cash flow up to close to 19 billion, and that’s quite strong in the middle of the India rollout and the network swaps. And excluding India, we are now at 27% cash flow margin year-to-date and 28% for this quarter.

So, then we can take a look at P&L. We have a net income this quarter of 2.6 billion at approximately 900 million from same quarter last year. Already taking it through the revenues and the EBITDA before other items where we see an improvement of close to 400 million. Then on other items, we have very small net effect on other items this quarter, so I don’t go into detail there. But the EBITDA then goes up very close to 600 million on a reported basis.

Depreciation is 200 million lower. That’s due to reduced depreciation in the Nordics largely due to other network swaps are now coming to an end. So the EBIT is almost 800 – now 750 million stronger than same quarter last year. Then we see the VimpelCom effect, which is quite big this quarter, that the contribution from associates goes down for more than 1 billion to slightly above 600 million. And Fredrik has already been through the explanations for that.

Our net financials are stable despite our debt level has come down and that is due to the mix of the debt, that there are more debt now in Indian rupee than euro-related currencies.

So, profit before tax stands at 4.7 billion, approximately and then we see that we have a reduced tax expense this quarter but I have to point out that the accrued 814 million in third quarter last year related to a claim from the Norwegian tax authorities on a swap arrangement we had earlier.

So but I should also point out that the tax rate this quarter is slightly higher and that is due to the reduced contribution from associate entities, VimpelCom because that is an after tax number we take in that – there and when we calculate the effective tax rate, the lower the contribution, from the associates, the higher the effective tax rate. So, I think that reconciles the change in the net income of approximately 900 million.

And then on the balance sheet, we have a reduced the debt level of 3.6 billion this quarter. And the net debt to EBITDA now stands at 0.6 down from 0.7 in the previous quarter. And as you recall, on the Capital Markets Day, we introduced a cap on the net debt to EBITDA of 2.0. That is based on a research we did, what should be an appropriate cap for a company like Telenor and it’s more in line with the rest of the telecom sector. And like we did on the Capital Markets Day, I would also like to stress now, we have no concrete plans to kind of utilize the headroom between where we are now on the balance sheet and – introduce, pick up the market play.

When it comes to the specific changes in the net debt, these are quite straightforward this quarter, but I would just like to point out that we now have significant dividend payments to minorities in Asia, in Thailand, Bangladesh and Malaysia. And there are also have significant tax payments to the governments in the same countries.

I think you can see some of the issues we are facing now in the regulatory side, comes from the fact that these units are financially quite strong. But anyhow, the Telenor Group balance sheet’s stands very strong and it’s now among one of the strongest in the telecom industry.

Then I take you through on the share buyback program, because I think, there has been some questions and confusions on this. There are really two programs that are kicking in with financial effect this year. It’s the program we launched July last year and the program we launched July this year. And the reason for the small confusion is of course this system where we also buy back the pro rata amount from the Norwegian state.

So, last year we bought the 23 million shares in the market, then the Norwegian state also sell us but after the shareholder meeting the year after, their pro rata number of shares to their ownership rate. So that took care of 50 million shares that was cancelled August this year. But from a cash flow perspective, we paid 2.1 billion in the market last autumn and a 2.5 billion we paid this summer and a total 4.6 billion spent on this program, but only 2.1 hitting the cash flow in 2010.

Then we launched a similar program July this year and now we have all the 22 million shares we should buy in the market. They are a little bit more than 50% through a little bit more than 11 million shares. That we aim to have completed by year-end and then we’ll go through the same procedure. I will go to the shareholders’ meeting in the spring and then after that we will buy back shares from the Norwegian state and then cancel the shares.

So the cash flow effect this year will be the Norwegian government, the shares both from Norwegian government state that arise from the 2010 program and shares we buy in the market this autumn. And then the 26 million shares to be cancelled and purchased from the state will come into the cash flow in 2012.

So I hope that explain the mechanics there and if not, our excellent IR team can help you further on that. Then towards the end, the outlook for 2011. We’re approaching now the end of the year and based on the better Q3, I think we are just – are guiding on three parameters, it’s India. We have a lower cost in India, so we take down the EBITDA lost in India from 3.5 billion to 4 billion to – sorry, from previous around 4 billion to an EBITDA loss of 3.5 billion to 4 billion. Not a big adjustment, but it’s important in India to all the way find ways to reduce the cost and improve operations, so we’re proud that we can take it down also small notch this quarter.

Secondly based on the third quarter we can increase EBITDA margin slightly. Previously it was about 31%, now we say that it should come in about 31% for the year. And the third which is not really as strengthening in my view but it’s more, that it could be more precise that we have been guiding revenues about 5% all year and they have been running close to 7%, between 6% and 7%. We say now that based that there’re only a couple of months left on the year. We can state that organic revenue growth will be around 6% to 7%.

So based on what we have reported and our outlook and our financial position, I could just also end like Fredrik that we are quite well prepared for the times ahead. Thank you.

Scott Engebrigtsen

Thank you, Richard. And we are now ready to take your questions. So Mr. Baksaas may enter the podium. We’ll start as I said with the ones present here. And please wait for a microphone and also please introduce yourself before asking your question.

Anyone? Can you please, Espen Torgersen?

Question-and-Answer Session

Espen Torgersen – Carnegie

Hi, it’s Espen Torgersen, Carnegie. Just a question, you related to the clarification regarding the regulation in India. Could you highlight which part of the regulation you’re most focused on? And could changes to legislation impact your future strategy in India?

Jon Fredrik Baksaas

The most important part from our point of view is that the terms of the license that were awarded in 2008 stands firm and it comes to the frequency allocation from 4.4 to 6.2. Our business case needs that capacity in order to handle the traffic, good growth that we are able to create, as well as volumes needed to build the revenue side of the business. Number two – and that had happened at the terms that was ambitious back then in 2008.

And number two is also to clarify the spectrum consequences each player in the industry consolidate. That was expected to come through three years after the license award in 2008, namely in March 2011. As you know, the ongoing process have not given any clarity on this kind of questions despite the fact that the regulator had given some loss statements and some of those sort of combinations at this stage. But it remains to be seen how the telecom industry ultimately decide for those parameters.

And of course, the result coming out of the processes so we will have to relate to and ask ourselves question on how we’re going to handle them. Yeah, I think that answered the question.

Scott Engebrigtsen

Question here, please?

Christer Roth – D&B

Yeah, hi. Christer Roth from D&B. Just a quick question on the quite aggressive campaigns you’re running in Norway with respect to mobile at the moment. What kind of ARPU impact do you expect this to have for Q4?

Jon Fredrik Baksaas

Well, the idea with the price revision is, of course, that’s there is a transition from voice and SMS to data. And if the pricing structures do not follow that transitions, you might lose out on getting the new volumes in the data area. Price sufficiently up against the investments done in order to realize that data grip to happen. And I think we have taken a firm direction on the pricing structures in that sense where bundles have become more visible. And Norway is a competitive marketplace and we’ve seen that before and also that when you revise pricing structure like this, we also entertain a little bit of usage growth going forward.

Scott Engebrigtsen

Any further questions from the audience here? Doesn’t look like we have any further questions here so I turn our focus to the – a quite Tuesday morning. Phone conference host, please introduce the first questions.

Operator

Laurie Fitzjohn, Citigroup. Go ahead, please.

Laurie Fitzjohn – Sykes

Hi, good morning. Thank you. One question on the strong margins in the Nordic region. I was wondering, has that been a significant or a positive impact from the last when iPhone launched this quarter in lowering marketing expenses and therefore should expected slightly seasonally weak Q4 as you have as the iPhone launches in that quarter rather than in Q3? Thank you.

Richard Olav

You were hacking unfortunately, a little bit in the initial phase of your question. Could you repeat the first part of it, please?

Laurie Fitzjohn – Sykes

Sure. Sure. I’d like – I was wondering if there’s been a positive impact from – because the lack of an iPhone launch this quarter on margins in the Nordic region?

Richard Olav

I see no – we can’t see any impacts of that as of yet. This is – the period for that is far too short. But of course the new functionality of the new handsets coming forward that integrates SMS into messaging platforms and then becomes part of the data connectivity rather than sort of the traditional voice and SMS connectivity part. It has also to do with our initiatives on how to revise prices and to meet that kind of development. So where we stand now, we do not see sort of volume changes. We have probably been at the peak of SMS’s as such, but we do not see any deterioration on the minutes for voice at this stage in the Scandinavian countries.

Laurie Fitzjohn – Sykes

Thank you.

Scott Engebrigtsen

Next, Andrew Lee, Goldman Sachs. Go ahead, please.

Andrew Lee – Goldman Sachs

Thank you. I’ve got two questions on Norwegian mobile and then one on fixed, if that’s okay. On mobile, your Norwegian mobile revenue declines appear to be abating a little. So I wondered if you could talk about whether the level of competition you’re seeing from Tele2 and Network Norway has changed at all given the acquisition of Network Norway. And how do you expect competition intensity to shift next year if the regulator upholds the MTR symmetry? And do you think it’s too early to talk about return to growth in Norwegian mobile at some point in 2012? And then just lastly on Norwegian fixed, what do you think is driving the small improvement in revenue trends that we saw in the third quarter and is that improvement sustainable? Thank you.

Jon Fredrik Baksaas

The competition intensity driven by the asymmetrical system that presently the smaller players enjoy. There’s no doubt that an asymmetrical system, I said it before and I say it now, leads to price competition more than network deployments in Norway. The symmetry is expected to last another nine – the asymmetry is expected to last for another nine months. And when that happens, one should of course hope that everything moves back to normal. But on the other hand, I think there are so many factors that play into what is creating this competitive landscape that we have in Norway. That might be difficult to say.

But generally speaking, one should anticipate that the telco part of the Norwegian society basically should be able to build rather than to reduce the overall value creation in the Norwegian marketplace because of the megatrend of things moving into the digital area like that.

Then on fixed; well, the improvement that you see is that definitely reduction factor is not as strong as it was on previous quarters, reduced from being minus three to five, now being minus three. So whether that is a long-term feature or not, I’m not really sure of that. But one could probably argue that they – the number lines might in fact lean on a certain level here, but I wouldn’t interpret that much of a – of sort of a long-term signal into that 3%. We are of course happy seeing that the fact they are small as we possibly can.

Andrew Lee – Goldman Sachs

Thank you. And just to clarify this kind of shift or changing intensity of competition Norwegian Mobile, have you seen that become – have you seen prices come down even further in Q3 and in Q4 or we’re seeing some elements of price stabilization from your competitors specifically in network Norway and Tele2.

Richard Olav

I think we will see a competitive area where bundles with the different contents and different combinations trying to target specific segments, the user groups in the marketplace will characterize the competitive area going forward.

Andrew Lee – Goldman Sachs

Thank you.

Scott Engebrigtsen

Next Barry Zeitoune, Berenberg. Go ahead please.

Barry Zeitoune – Berenberg

Hi, good morning. It’s Barry Zeitoune from Berenberg. I’m going to try and push my luck with two questions as well. On Norway, the underlying ARPU trend was stable. At the Capital Markets Day you mentioned two different impacts of the high-end customers potentially trading down, having a negative impact partially offset with the bulk of other subscribers actually trading up, so that they can get more data. I was just wondering given that 12% of your base now have the new subscriptions, how far along in that process is each of those user groups? For example is the user group that is high-end trading down further along in that process than the bulk of other customers? So, that you could expect a positive ARPU trend going forward, underlying ARPU trend going forward.

And the second question is on taxes. You’re now guiding to a 31% tax rate for this year versus 30% previously. I was just wondering whether going forward to 31% is a rate that we should be thinking of or are you expecting a rebound in associate income to drive a lower tax rate going forward? Thank you.

Jon Fredrik Baksaas

To the first part of – to your first question, we have roughly slightly below 400,000 customers on the new price plans, which is roughly one-third of the postpaid base that we all in all have. So, whether we can say that we are at the balancing point where sort of the high consumers and the low consumers start to balance each other or I think it’s a little bit early to sort of state some of it that we have reached a crossing point on that. But it’s – it was of course our ambition to reach such a crossing point where we can build revenue again.

Richard Olav

Maybe I should answer the tax part. Yes, you’re right, as said on VimpelCom that drives up the effective tax rate. What have been communicated from VimpelCom in connection with the Wind merger is that it would take approximately two years to get accredited effect on the – I think that the cash flow, EPS in VimpelCom, if you should translate that back to the EPS. So there is a couple of year’s transition period there, where there should be impact on the tax rate of Telenor due to lower contribution from VimpelCom. But of course, that is the statement VimpleCom made that we just refer to.

On the other operations, there are not really any significant changes in the taxes. There are some adjustments, in the tax level in Thailand that will come in later and that will have some effect.

Barry Zeitoune – Berenberg

Excellent. Thanks very much.

Jon Fredrik Baksaas

And next questions, please, limit yourself to one question each. Thanks you. Next question please.

Scott Engebrigtsen

Next, Jakob Bluestone, Credit Suisse. Go ahead please.

Jakob Bluestone – Credit Suisse

Hi there. I was just trying to understand the development in your Pakistani business a little bit better. It looks like you’ve got slowdown in subscriber growth, revenue growth instead of picking up and ARPU growth the fact that you’re accelerating as well. And I just want to – can you maybe give us a little bit of insight into what’s going on in that business and perhaps, in that context. How sustainable is the strong mid-30s margin that you’re delivering in Pakistan?

Jon Fredrik Baksaas

I think we can say that the Telenor Pakistan operation has done very well in order to position the Telenor service offering. Also, Pakistan being characterized by pretty strong competition because one could anticipate that in particular the China Mobile or some would have strong ambitions and have been building customer base at a pretty high base, but earning also customers, with the lower ARPU stand the two market – between – than the market leader and Telenor being number two.

We have also to recognize that the subscriber growth in Pakistan has been quite strong for quite a long period and penetration has come high and in that sense, one cold expect that there are sort of thresholds here before you unleash demand in new segments. So, that’s happened in market before and it maybe, that Pakistan is at such a level in this time. Then we also have to correct for the fact that third quarter is lower – low activity type of quarter because of Ramadan, et cetera. So I think there is a number of area – factors playing in here.

But Telenor Pakistan has moved very well over the last year. The economic development in Pakistan is quite different from what you see from the security side of it, so from an operating perspective, we are rather positive on the Telenor Pakistan position. I think I’ll leave it at that.

Jakob Bluestone – Credit Suisse

I just have a quick follow-up. Is any of that growth coming from non-voice revenue or is it all voice?

Jon Fredrik Baksaas

No. Also in Pakistan, there is – there are value-added services and also the, in the financial services section will be part of that non-voice revenue stream. Not that it builds significant revenues at this stage, but it creates, it’s a churn prevention thing, it adds new functionality to the Telenor Pakistan customers and it brings financial services to people that are, generally speaking, not part of the financial community in an efficient way.

So when you can reach a digital solution on these things, there are more things happening at local micro economic activity level.

Jakob Bluestone – Credit Suisse

That’s very helpful. Thank you.

Richard Olav

Just to comment that if you look at the Pakistan figures, it’s really three things. It’s the subscriber growth, it’s the ARPU growth and the rest is the financial services. So financial services are starting to have an impact on the top line as well in Pakistan.

Operator

Next, Stefan Gauffin, Nordea. Go ahead, please.

Stefan Gauffin – Nordea

Yes. Good morning. I would like to ask a question regarding Denmark. This quarter you lost at least part of the Onfone high margin wholesale revenues and also you recorded a significantly stronger subscriber intake and despite this you reported a 28% EBITDA margin. Can you give some information regarding the EBITDA margin development given your change in market strategy in Denmark stopping – subsidizing handsets et cetera?

Jon Fredrik Baksaas

Yeah. I think the effect on the wholesale customer leaving our network was not very big in the third quarter but will have effect from the fourth quarter. And indeed Denmark is a competitive market. I think going forward we have to reduce cost even further and we are looking into some quite ambitious initiatives in Denmark to be able to maintain or – hopefully also we’re trying to improve our margin in Denmark.

The Onfone in itself was added 2 percentage point to the improved margin in the third quarter.

Stefan Gauffin – Nordea

Okay. Thank you.

Operator

Next, Will Milner, Arete Research. Go ahead please.

Will Milner – Arete Research

Thanks. I just want to pick up on an earlier question on Asia. But just looking at the revenue growth rates particularly in Thailand, Malaysia and Bangladesh, it seems that it’s really being driven by very high, still high subscriber growth rates rather than ARPU. And I just wonder if you can talk anything in those three markets about the remaining growth potential coming in terms of an expansion of subscriber growth, how long that will continue? And whether this is coming from new users to mobile multiple SIMs, just how you see that penetration growth potential remaining?

Jon Fredrik Baksaas

Well I think the picture is a bit more varied than what you said because both Thailand and Malaysia and Malaysia in particular really is moving very rapidly into data services. And DiGi as you might remember got access to 3G one later – one year later than the two other players. But despite that has managed to really come up with data offerings that has been attractive obviously to the marketplace and have been able to sort of establish a fair share and growing data service offering in Malaysia.

And data is also sort of on the minds of the Thai people. When we launched the 800 3G service just this summer, we have seen a phenomenal response on how of course segments of our user groups moves rapidly to data and embrace the data connectivity that mobile systems offers. So we are quite optimistic on how that can move forward, but of course it’s also linked to the general economic climate thinking of some potential negative effects on the economy in Thailand in particular because of the floods.

Richard Olav

And maybe just to add that the real underlying penetration in Bangladesh and Pakistan stands at probably around 30% and 60%. And that some of the ARPU affects you see in Malaysia and Bangladesh in particular is that they target new segments in the rural area, which naturally have a lower ARPU. This is segment ARPU development, the picture is somewhat different.

Will Milner – Arete Research

Okay. Thank you.

Scott Engebrigtsen

Next, Maurice Patrick, Barclays Capital. Go ahead please.

Maurice Patrick – Barclays Capital

Yeah, hi. It’s Maurice from Barclays. On India, you’ve seen an improvement in the EBITDA trajectory. You talked about increased volumes, scale efficiencies, cost optimization. Can you just help us understand a bit more about some of the fact in the churn dynamics in the quarter? That certainly was an area at the Capital Markets Day, where you highlighted that was an area that needs to improve. So some more clarity on that would be great. Thank you.

Jon Fredrik Baksaas

I’m afraid I can’t sort of give you facts and figures on that. But generally speaking, I think all operators would love to get rid of their churn. However, since there is competitive feel out there, churn is unavoidable. But of course, to reduce that via adding services to the mobile handsets in such a way that the loyalty and the trust factor can play positively between the service provider and the customer base is of course what we all want.

So – and in particular, the most important country and operation to get our hands around that one is for India. But the churn will definitely not go away in India, but on the other hand, we – when we have been in the marketplace for a longer period and sort of establishing your name. One should also anticipate that we manage to re-tend our – on our customers at a higher rate than we what do today.

But remember also that these markets are all multiple-theme areas where users have phones that can automatically maintain more than one SIM which means that the customers will be in constant search for what kind of efficiency they get. Is it spreading their calls according to the offerings from the operators. So this is sort of a dynamic field where we always need to be on the search for higher efficiencies. But to sort of be very clear on whether we are sort of unilaterally successful on that, I think that’s a too strong statement. I think this has to be worked out with an ambition and a direction.

Maurice Patrick – Barclays Capital

Great. Thank you.

Richard Olav

We have time for one more question and other questions may also be directed to our Investor Relations department.

Operator

Last question, James Britton, Nomura. Go ahead, please.

James Britton – Nomura

Thanks very much. My first question is actually on the financial service opportunity, but I think that’s basically been addressed. So can I just ask about the margin guidance. Given where you stand after nine months the margin guidance of above 31% doesn’t really allow for much increase in seasonal customer investments in Q4. So I mean is there any reason why there should obviously be a flat margin in Q4 other than the less aggressive in marketing investment strategy for that seasonal push on customer growth?

Jon Fredrik Baksaas

Yes, I think we have improved our margin guidance like you say, James. But I think there are really three affects you need to be aware of going into the fourth quarter. It’s the seasonal effect like you said, but also the loss on Onfone in Denmark and also that the revenue share in Thailand will increase.

Richard Olav

Has increased.

Jon Fredrik Baksaas

Has increased.

Scott Engebrigtsen

Okay. I think that leaves us through the hour as stipulated. That concludes the session here, yeah. Thank you all for participating.

Jon Fredrik Baksaas

Thank you.

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