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Telenor ASA (OTCPK:TELNY))

Q4 2011 Earnings Call

February 8, 2012 12:00 pm ET

Executives

Scott Engebrigtsen - Communication Manager

Jon Fredrik Baksaas - President & CEO

Richard Olav - EVP & CFO

Analysts

Espen Torgersen - Carnegie

Arild Nysæther - Fondsfinans

Harald Øyen - Swedbank First Securities

Andy Parnis - UBS

Andrew Lee - Goldman Sachs

Dominik Klarmann - HSBC

Barry Zeitoune - Berenberg

Peter Kurt Nielsen - Cheuvreux

James Britton - Nomura

Maurice Patrick - Barclays Capital

Soomit Datta - New Street Research

Ulrich Rathe - Jefferies

Scott Engebrigtsen

Good morning and welcome to Telenor and the presentation of the results for the fourth quarter of 2011. 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 you have the material that was made available that would be our press release, the quarterly report and a copy of the presentation which will be used here any minute.

You can watch this presentation live or in recording on either the internet or on a mobile phone and you may also during this transmission, send in your written questions via the internet and you will find alternatives on these options as well as the material I just mentioned on our website telenor.com.

We will have Q&A session directly after the presentation here and we will then start with the audience present and then continue with the ones participating on the phone and as we will try to end this session before 10:15 that will be quarter past 10, we kindly ask you to limit your questions to one per person and if necessary a follow-up question in the Q&A session. And after the Q&A session here, we will have the opportunity to give individual interviews with key personnel, but I also stress that these interviews will be rather short today.

To present the figures we have our CEO, Jon Fredrik Baksaas; and our CFO Richard Olav. And first, I leave the floor to you, Mr. Baksaas.

Jon Fredrik Baksaas

Thank you, Scott and welcome to this day where we are going to present the figures for 2011. Naturally though a lot of these presentation will concentrate on the last week’s events coming out of India. And I guess that is sort of the main topic, but nonetheless we have a pretty good set of figures from the full operation of both fourth quarter and the full-year 2011. So you have to bear with us to get through those before we address also many of those questions that you will be concerned about relating to India in particular.

The growth factor of the Telenor Group continued in the fourth quarter and I have to say that all-in-all, when you are looking at a quarterly growth this quarter of 6.7% and the organic revenue growth figure, this is equal to the year as such. So we both have 6.7% in the fourth quarter and in the year as such.

And this tallies well with what we achieved the year before. Because in 2010, we had a slightly lower annual growth figure on top line of Telenor. So the growth dimension that started to show in 2010 has continued into 2011. With this top line growth element, we have also achieved the cash flow margin somewhat. On an annual basis, this has grown to 19.4% which is up from 18.6% the year before. And if you add this all altogether and take a look at the quality of the balance sheet, the Board yesterday made the decision to go to the general assembly with the proposal for the dividends for the 2011 to be paid in 2012 of 5 kroner per share.

The number one growth driver in this quarter is again Asia. Asia, the four established operations in Bangladesh, Thailand, Malaysia and Pakistan relates for as much as 10.8% organic growth in fourth quarter alone, which is slightly below annual average of 12.6%.

If we include Uninor in that figure, the factors grow to 17.2% and on annual basis, 19.2%. So as you can see, the general optimism on the economies in Asia has continued and has given us strong growth momentum for the full year. We have now reached 140 million subscribers, all-in-all, for all consolidated operations.

We then move on to the Nordic market, the picture is a bit varied. We’ve continued to invest both in networks and on marketing activities. We’re seeing a significant transition from voice and SMS services to data services and we’ve taken the bite on that one and we’re moving towards a different pricing structures including bundles to a much higher extent in our pricing philosophy and I will come back to this.

I am happy to note that what we achieved in fourth quarter, when we see a customer growth of 51,000 in Norway, this stands up on what we had to register in the first quarter of 2011 when we saw a decline in the customer base. So, we feel that we have a got a good momentum back in to the game with these new price bundles. But there is a price tag attached to this and I will also come back to that.

There is a still a solid demand for smartphones in the Nordic countries and this smartphone generation which now accounts for roughly 50% of all handsets in the network in Norway and Sweden in particular whereas it is somewhat lower in Denmark. This creates a new network complexity. These machines, these handsets they put other new strains on the system and the so-called signaling volumes that this generation of handsets are creating really needs to be taken seriously. That’s the learning curve through the year and as you obviously know I am referring to what happened back in June and what we learned afterwards on that score.

Revenue wise, Sweden is the country in Scandinavia that really beefs up the figures with 19% growth in the quarter alone. However we should add that two-thirds of this growth relate to handset sales, but still one-third of that growth is coming from services of the handset as we know them by bundles or connectivity price services. So there is an underlying growth in the Swedish market as we probably also can see from others that have reported just recently.

Having said that about Sweden, it is more or less the opposite in Denmark where competition is high and we also of course suffer because of the fact that Onfone is no longer with us in this fourth quarter. So there is a minus on our top line coming from that element.

And when you then we go to Norway where we see a strong campaign for taking the price bundles into the direction that I described, we do have a lower EBITDA factor in the Nordics that we should depreciate it. But on the other hand we are building the future and we are building a market position based upon a new pricing philosophy, which I will give you some indication in this panel.

The revised pricing structures come as a necessity really and consumers will be more and more dedicated on data usage and what we have done here is to establish and roll out a price structure, which should have the aim of bringing customers higher up in the usage staircase if you like. And we have introduced bundles that basically should be able to track different usage patterns among customers.

And what we have been trying to achieve here is to get a good value proposition into the high and top end users, as well as bringing new curiosity from the other side of the user segments. And we are trying to build a platform here where we also can utilize the future service layer, different service call qualities and capacity volumes into the future, which we strongly believe will be among those carriers that all and many operators will lean to in the years to come.

We’ve now achieved as much as 40% roughly in all our prospect customer base to become active data users. This percentage is significantly up from previous quarter. And as you can see to the right side of this panel the blue part of that column really shows what kind of development were seeing on the customer base being linked to this new price bundles.

There is a negative impact on this two, our financial figures in fourth quarter in particular we are roughly three percentage points of the EBITDA factor being reduced comes from this campaign alone. This campaign was in closed towards end of the year and we have to follow the year compared to the situation in which market place is going on from here.

I’ll be brief on Central Europe this time, basically two dimension to pay attention to Serbia continuing its positive development from previous quarters. ARPU is up driven by the increased usage and higher subscriptions fees. So it’s more or less the same picture as before.

Whereas in Hungary, again a little bit of the opposite picture. The economy still struggling and there is a lot of macro activities from the government in that respect and I am sure you are aware of many of these elements that one has to struggle within the Hungary economy for the time being. What’s good here though is that the Telenor Hungary has managed to build its customer base slightly and there is a positive ARPU element for the first time in many quarters.

So let’s hope that our colleagues in Telenor Hungary really has got something new that can point to a bit of a different message being given into the future here but remember the economic growth factors for both countries are very low. On Serbia its positive, anticipated 1% to 1.5% economic growth next year, whereas Hungary is probably still on the minus side between 0.5% and 1% negative GDP growth.

Then Asia, Asia is basically where the optimism is on many flanks for the time being. Asia is a driver of the global economies and we see continued organic growth in all markets. The growth factor in fourth quarter is not as strong as it has been in couple of the other quarters but we also have to note that we are comparing steadily towards sort of higher performing figures four quarters back.

11% organic growth year-on-year and established operations in 70 as I said, with Uninor included. These all strong figures and it is driven by customer uptake and high usage and various parameters of changes into also the data phase of the mobile communications history. In particular in Malaysia but we also see these trends being picked up rapidly in Thailand.

In Thailand data has really been the key driver after we launched the data offering on 3G however, we have to register that, the revenue share principle with CAT then also changed to 5% upwards, which was anticipated from first of September. So that specific factor hits of course the margin in DTAC by minus 4.5 percentage points this quarter. But we will continue to drive the 3G service offering in Thailand and we’re looking forward to the 2.1 gigahertz auction that is expected last year. If you remember, that one was the one that collapsed more than one year ago.

3G, moving forward steadily as before and here the data generation basically falls in two [berths] us and the two competitors and 3G performs well in that respect.

Grameenphone, another strong quarter, healthy revenue growth and margin growth, I should say. And of course, in this country, we are expecting a final decision on the 2G license renewal process. As you may remember and recall, we have paid what's needed. However, there are disputes on how to practice the pricing back on the licenses that was given out in 2008. So there is an idea of bringing also, the market adjustment factor in to that art of the frequency spectrum with a retroactive consequence and of course we are disputing that.

Pakistan, a couple of words on Pakistan. Pakistan has a phenomenal underlying growth factor and it’s in a way a pity that a huge flow from the country is dominated by more challenging factors. Once again we have to see that there was a criminal attack shooting in a franchise some few days ago and as much as three people were shot dead in a Telenor franchise and of course are news that we really are disturbed about and we are trying to increase security as much as we can and we cooperate with authorities on that aspect. This happened in the Karachi region and when speaking to the authorities on this there, this part of the economy in Pakistan really disturbs everyone.

From an operating perspective Telenor Pakistan moves forward and ones again it is a very strong growth factor and coupled with margin expansion. So here the underlying development of the economy is moving in the right direction and hopefully also there will a security situation that will move positively in 2012.

Looking forward and reflecting upon Asia’s position in the global economy, this is where the optimism continues. Manufactures are feeding into this, of course both, from the positive side and the negative side and we have to watch out for energy prices, potential consequences into food prices and inflation in general. And these are the parameters that normally impact our operations the most.

We solemnly believe that the Asian economies will basically be the driver of the global economy also for 2012. I think that is a pretty strong conclusion if there are conclusions from Davos that’s at least one of them.

And then for the topic that I really mentioned when we started. And 14 days ago when we knew little about what may come out of Supreme Court. We would have shown this panel with pride. There is a phenomenal operating performance in Uninor in fourth quarter and as you can see, we are taking both revenues and we are reducing the EBITDA loss significantly. I have to say that there is a one-timer on the EBITDA side of roughly NOK 50 million which has to do with reconciliation of fuel and energy prices in the operation.

But still the operation as it moves forward with a low cost focus, with a competitive mindset at street level, being best on basic services, really has given us facts and figures to talk about when it comes to fourth quarter. Then it is of course on the extreme unfortunate fact that the Supreme Court came out with their ruling only some few days ago.

And I have to add that if we take the market share of Uninor in the geography that we are launched, we have now a market share in that geography of 5.5% and this is according to the TRAI statistics. If we concentrate on the Telenor way of accounting we have now reached 28.3 million customers, which is up 4.1 in Q4 and as you also have seen just recently, despite the fact that it came out from the Supreme Court, we are adding customers at high rate still with in parallel seeing competitors being very aggressive on seeing Uninor going down on the radar screen.

It was highly unexpected that the Supreme Court came to a conclusion the way it did that all licenses awarded at a specific date in 2008, not reflecting to the licenses that were issued in the years before based on the same principles that all these licenses 122 by number, 22 of Uninor were cancelled. And we will of course do everything that we can to protect what has been done and what is under development and we will also investigate what kind of part we can take on this.

At the same time, we have to evaluate all options when we are thinking of what’s the future in India. And we have to build-up our view points and get them presented to the decision makers that now it’s going to formulate how all these vacancies are going find its way back into the marketplace.

Priorities then for 2012, the growth dimension in Asia, we need to nurture this one from all our operations and we will go forward both maintaining and building market share in the local marketplaces. To capture this growth and also to nurture it is in the genes of the Telenor companies and we will continue this.

The penetration will grow still and user intensity will grow and they will be associated to services that will come on top of this; in particular, financial services which already constituted part of the average revenue per user in Pakistan. We see as a promising additional type of service that the Telecom operators are very well fit to deliver.

We also need to execute on operational excellence. We have a bit of too high cost structures towards the end of 2008 and 2011, primarily though related to market activities. But that doesn’t, we must not fall in trap of not focusing on the cost structures in general. So we will continue that push and target what we said in 2013 on that part.

And the data growth will continue; no doubt about that. And the relationship in the eco-systems with the OTT players and the operation, the OS systems on the smartphones will become very vital elements on how this type of system will move forward. And if you couple with regulation, there are many parameters that plays into this.

We also need to secure and utilize the new modernized network. We have a phenomenal new modern network generation deployed now completely in Norway. We need to tune it a bit more and to raise the quality level, but the position is there to handle the growing data traffic that we know will come.

There are a lot of opportunities in this industry. There are lots of challenges also. We have taken some best to make partnerships with OTT players. Most notably, the agreement that we launched before Christmas with Google and there might be others to come in 2012 as well. And so, the transition to data is coming, the transition to services will also be there in the future.

Well, I am leaving the floor to Richard, who will take us through the details on the financial side and then we’re ready for Q&A afterwards. Thank you.

Richard Olav

Thank you, Fredrik. I’ll just start with comparing our results with our guiding. And I am proud to say that 2012 the underlying performance was strong and we delivered inline with our outlook.

On the chart here, you see both India and for the Group and Uninor, as Fredrik said actually came in better than the outlook. The EBITDA loss was 3.4 billion, while we have guided negative 3.5 to 4, so just to reiterate what Fredrik said about the performance.

The Group itself came in precisely on the revenue growth and been running at this rate now for the last six quarter. EBITDA margin 31% due to high market activities especially in Norway in the fourth quarter and CapEx to sales right in outlook.

And let’s turn directly to Norway. And I explained you the effects of the campaign. As you see, on the left there, you have the ARPU development and the right you have the EBITDA development. And the message on the ARPU is that we have a stable ARPU development on the mobile from fourth quarter 2010 to fourth quarter 2011.

You have to adjust for the termination rates that’s a drop of NOK 11 or per sub and the Q4 campaign where there were two months free subscription to signing-up for the new data plans. The rest of the facts are more or less netting each other and the underlying ARPU is stable. And that’s why we also can say that we expect the margin recovery in Norway from Q1-Q2 this year as that effects the campaign will fade out during the first quarter.

When we look at the EBITDA impact from the campaign, we see that this translate into 90 million of reduced EBITDA; actually reduced revenue that transfers directly into the EBITDA. Then sales and marketing expenses in Norway was 240 million higher last quarter in 2011 compared to the year before; not all of that is related to the campaign, because sales and marketing was quite low in Q4 2010, but if you assume our own 150 million plus I think you are on a fair assumption. So we can say that the campaign roughly has an extra EBITDA effect of 250 million.

And then other is basically continued decline on the fixed side and some one-off related the cable prices, which was decided by the (inaudible) number. And important note as also on the cost side, you see on the fixed we have not this quarter been able to compensate the reduction in revenue and fixed with cost reduction. So cost reductions and delivering on OpEx to sales targets in Norway is of crucial importance in 2012.

Then on the growth side, the 7% growth. I will not spend a long time of reconciling that, but just showing the slide there that the Asian units contributes approximately 1.5 billion of revenue growth before currency adjustments. But then the weak, not the weak Asian currencies, I should rather say the strong Norwegian kroner drags that down by approximately 580 million.

So that reduces the organic growth from 6.7% to reported growth of 2.3%. The effects in Norway are already covered and the effects in Sweden is like Fredrik said two-thirds is related to the change in the way we sell handsets in Sweden, which gives a revenue boost. But there is also strong underlying growth in traffic.

I think I will leave the rest for the comparison to the Q&A or directly to the IR. On the EBITDA, we see that we have EBITDA this quarter of 7.4 billion approximately which is up some 250 million NOK compared to one year earlier. We have the 500 million reduction in Norway. That we have already explained. Then DTAC, it is down 178, but the underlying performance in DTAC is actually 80 million better than last year because you have reduction in currency of 80 and the revenue share is about 170 reduction on the EBITDA and also remember we had a network outage in DTAC in December. So I would say that October and November were very strong months from DTAC and now it will be very interesting to see how we cope with DTAC in the first quarter after the network outages and the flooding in Thailand.

Hungary is basically related to that we booked the full telco tax in 2010, while this quarter we only have a quarter effect. Pakistan is probably the brightest spot and a general strong report in my opinion, but fantastic underlying performance in Pakistan, an improvement of 223 million on EBITDA.

Uninor, we have commented on earlier, an improvement of more than 400 million and other units strong underlying performance in Malaysia and also Bangladesh with more than 200 million, but somehow it is eaten up by currency.

On the CapEx, we have a CapEx of about 3 point, so slightly north of NOK3.6 billion this quarter, down from the same quarter in 2010. Despite that we are in the midst of the network swaps in many of the Asian and Central Eastern European countries. You see the growth in the CapEx there, both on Hungary and DTAC, while Norway actually finalized its network swap in October 2011. So there’s a reduction there on the swap side going forward, but I will come back to the CapEx a little bit on the outlook.

I’ll also say that these swaps are in general very successful, but as also Fredrik said, very demanding and challenging. We are moving over to full IP network with all the signaling also coming in from the smartphones. So that is high on the attention. Then the cash flow and that is just a residual of the EBITDA and the CapEx and we can see now that we are at a rolling cash flow of slightly more than NOK19 billion and the cash flow is up approximately 11% year-on-year. And Asia is also the main driver of the cash flow. As now the CapEx in traditional high CapEx countries for Telenor like Pakistan and Bangladesh has come down significantly.

Then VimpelCom and I show here two slides on VimpelCom, both net income and dividends. And as you see the net income is reduced significantly in the third quarter in VimpelCom. These are mainly related to currency effects. VimpelCom has some $25 billion plus in gross debt in the various currencies and as currencies have moved, you can have gains and losses on that debt and that kicks in with some $300 million plus in this quarter.

Underlying I would say that the new operations that VimpelCom acquired from Wind, they are contributing significantly through revenue in EBITDA, but they also carry high debt burden with interest cost. So that in a way takes down the net income with approximately equal amounts. So we should expect in my opinion that the net income adjusted for these one-off effects on currency come back to the normal level you saw in Q3, Q4, 2010.

VimpelCom also introduced at their Investor Day in November 3 overriding goals, profitable growth, operational excellence and capital efficiency, which we very much support as these good targets and the good goals for VimpelCom.

Also, that the dividend keep coming from VimpelCom. $0.45 per share came in the fourth quarter 2011, which translate into $1.3 billion. And all in all, we received NOK2.2 billion in 2011. And with the dividend policy of VimpelCom of $0.80 per share as a minimum going forward the next three years, we should expect some growth also in 2012 on the dividend, of course depending on the US dollar NOK exchange rate.

Then, returning to India. We made a write-down over Indian investment of NOK4.1 billion on Friday last week, related to the Supreme Court ruling. We wrote off the licenses and goodwill on our balance sheet.

And I think it’s important to use some time on the numbers there. So the market fully understands these numbers. We have invested in equity NOK8.9 billion. We have taken through the P&L accumulated losses of 12.5. That is the NOK4.1 billion write-down and NOK8.4 billion losses that we’ve already taken through the P&L since we started late 2009, earlier 2010.

That takes the equity on Telenor’s books down do minus NOK3.6 billion. On Uninor’s books, the equity is even lower down this as we had a higher value of some of the assets on our books than Uninor. So negative equity of 3.6. Then on Telenor books we also have guaranteed debt of NOK8.1 billion to international banks.

And we have a guarantee to the State Bank of India that is related to rollout obligations in India. As a part of the license, we’ve also committed to a certain rollout and that has to be guaranteed versus Department of Telecom in India and that has to be done by an Indian Bank, the State bank of India which is then guaranteed back to back to Telenor. If we don’t get any solution to the license problem in India, we certainly don’t expect to be held to that guarantee as then there will be no license to have rollout commitments on.

So our take on this is that the exposure to Telenor as of now is the equity injection of NOK$8.1 billion, NOK8.9 billion and the guaranteed debt of NOK8.1 billion and we have taken away NOK12.5 billion of that. So the remaining exposure on our books now is approximately NOK2.4 billion of the tax and that is basically related to the remaining portion of the guaranteed debt of the tax. I am sure there will be more questions on this through the IR as, on the next following days.

Then moving to the income statement for the fourth quarter. We passed revenues now of NOK25 billion for the first time on comparable basis. The EBITDA of 7.4 we have already explained. Other items continued were forced reductions in the Nordics and also some scraping-related for example in Pakistan, an area where we cannot really go into due to various reasons in that region, so that's written off.

EBITDA then slightly better than Q4 last year and depreciation significantly lower as we are not depreciating so much on the network, the main part of accelerated depreciations came in at 2010. Then the impairment of India of 4.1 coming into impairment resulting in EBIT loss of approximately 1 billion in the quarter.

VimpelCom we have commented on, significantly lower contribution, due to the one-time effects of currencies and then in net financials you see that that is increasing negatively, that's because of when they enter India we hedged some of the investments of rupee. That was taken to equity as a part of the IFRS accounting when we overwrote on the licenses and the goodwill to which it’s hedged was related to. The loss was already taken to equities and there's no cash effect, that has to be recycled now through the P&L, that's about 350 million.

Taxes are on a normal level this quarter. The underlying tax rate is in line with previous quarters, actually little down from 2010. I don't think I will spend much time on the full year income statement as this is mainly a quarterly report.

Then on the balance sheet side. Our debt level is stable at 18.2 down from 18.6 and we still have net debt to EBITDA ratio of about 0.6. The big effects in this quarter is of course that you have the EBITDA coming in with 7.1, we have significant income taxes this quarter, basically related to the Asian operation which are now in solid tax position.

CapEx paid, you see, is higher on CapEx booked that’s also because we have prepaid 50% of the license in Bangladesh that is part of all the CapEx there. We have the dividends from EBIT that the went through earlier 1.3 additional share buybacks in the fourth quarter of a billion. And then the revenue share in DTAC is paid in the fourth quarter, it accrued during the first three quarter and comes in now with minus 1.7. So all these effects result in the net change of the debt of 400 million, taking the net debt to 18.2.

Then on the dividend, the Board yesterday decided to propose the dividend of 5 NOK, a total pay out of 8 billion, which is all time high for Telenor and its around 70% plus all the underlying earnings per share. We have a dividend policy of 50 to 80% and this is a little bit higher than 70%. And it’s a 32% increase compared to 2010. And this is to be approved by the shareholders on the general meeting in 31st of May.

We can also see on the right side that the combination of dividends and buyback for last year reached $12.4 billion which is the record high remuneration to Telenor shareholders. That was a 3% share buyback. That was done at approximately 91 NOK per share.

We are also aiming for buybacks in 2012 but that is something management will then have to propose to the Board and the Board again have to propose through the shareholders.

Then on the outlook and I can openly admit that making an outlook for India is not so easy when the license is cancelled. But we have decided to make an outlook as going concern even though that is with great uncertainty of what will happen in India. And the figures you see here is that we are targeting an EBITDA loss of around $2 billion and a CapEx of around $1 billion, total $3 billion in further investments into India. These numbers are well in line with a cash flow profile that they haven’t reached EBITDA breakeven within first half 2013 and within the $155 billion peak funding target we have laid out.

However, we now have to spend our time very well in the next weeks and months to see how things can be resolved in India. So we have to take this outlook with great caution.

When it comes to the group, we are guiding revenue growth above 5% and to help a little bit out on what effects if India for some reason could not continue, that constitutes about 2% at this point of the growth expectations in 2012.

We’re expecting the EBITDA margin to improve from 31% to a range of 32% to 33% and CapEx to sales we expect in the range 12% to 13%. We have still a heavy network swap period ahead of us in 2012. Pakistan is coming in with a network swap and we have several of our operations that will finalize their swaps in 2012.

In addition, we see that the fiber investments in Norway is increasing in 2012. Both Fiber on backhaul from base stations but also fiber to the home.

In addition, we are also investing in better 3G coverage in Norway to cater further big growth and the data demand also in the rural districts.

So, that’s the outlook and then before we open for Q&A, just the financial priorities as we see them for 2012. First, we have to find a good solution to India and as Fredrik said, we are considering all options and if we get into a situation where we have the possibility to get the license continuation, we will be certainly disciplined in what we can offer for such license.

Then we have the arbitration in VimpelCom that is going on and we just have to wait and see what the arbitration panel finally rules and then evaluate what kind of execution we can do from that.

Probably, most importantly seeing from a CFO but also our company perspective is to continue to progress on operational excellence in the wide context and everything from how we excel in the operation in the consumer fronts to how we manage our cost levels., We are now about 37% of fixed sales. We are on a way to the target of reaching 35 but it is a challenge and 2012 will be a very important year to solidify that, we can reach the 35% in 2013.

We will continue to maintain a solid balance sheet. We see the importance of that hearing turbulent financial times as we are now, but at the same time we have a strong enough balance sheet, so we can have healthy and competitive share holder remuneration.

And finally here, I think we can solidly say that we have the management capacity and the financial capacity to go after these financial priorities but we will also say given the current uncertainties both in India and also in VimpelCom, that mature M&A activity is now currently not on the agenda.

So by that I open up for Q&A.

Scott Engebrigtsen

Thank you. We will start with the audience present here and please wait for the microphone to be passed over to you and state your name and company and also as I said in my introduction please limit yourself to one question per person and eventually and a follow up question if that is needed. That is to allow questions from as many as possible within the given time.

Question-and-Answer Session

Scott Engebrigtsen

Okay. And questions from the audience here.

Espen Torgersen - Carnegie

Hi, it’s Espen Torgersen, Carnegie. Do you have any idea when the regulator will disclose the conditions concerning a possible reallocation of licenses and spectrum? And I know it’s a second question, but are you willing to re-communicate your financial targets in India depending on the outcome of the license situation?

Jon Fredrik Baksaas

Yeah that was two if’s, we hope of course that the government of India will be swift in their clarification of this. We have to recognize though that things take time, but we have started the dialogue and we will of course present our views on this and as you can imagine others will do that as well and interests are different from where you are in the marketplace. So we have to sort of get ourselves through that period and I cannot have a specific idea as to when they come forward with such a clarification. And to your second question, we have to take a look on that outcome of course before we address your second question.

Scott Engebrigtsen

Any further questions from the audience?

Arild Nysæther - Fondsfinans

Hi, Arild Nysæther from Fondsfinans. I guess everything will depend on the terms of how the licenses will reenter the market, whether they will be confined to the existing operators or but can you say from your point of view where, how, what would you consider to be say a good set of terms from the Uninor perspective; what would you consider to be a sort of a fair way to do it as would sort of be beneficial to you and what would be say the opposite that there would be terms that you would not like to see come out of this possibly?

Jon Fredrik Baksaas

I think we can say the following; the licenses that were issued in 2008, were put to the market with the ambition of broadening the market activities in India. And four licenses were issued based on the same principle size of other licenses had been issued in that decade. And Telenor through its later and fit to Uninor have, we have responded to every corner basically and bits and pieces of that regularity framework and put our operation into motion. And we have achieved a market presence to which I presented just now.

So in the sense of what the government wanted to achieve with the licenses in 2008 we have delivered. Telenor is the one of the four that got licenses at that point in time. That has gone deepest into the response to that platform. Then comes the 3G licenses which were issued in different principle, because then the government say there is a market here for 3G, spectrum comes and I have to add, in 2G licenses in 2008 only new comers as a consequence were allowed to participate in the new licenses; whereas on the 3G side, spectrum comes as additional spectrum on top of incumbents that are pushed for capacities in there network and their willingness and ability to pay for 3G is of course very much different from a new comer that comes in two years before.

So it’s two principles basically in these two processes that collide, because now the Supreme Court say that the way things were distributed in 2008 were not optimal seen from just other states of India. And then it’s a bid peculiar that they only look at the licenses that we issued in 2008, and not licenses that were issued a couple of years before, because it could apply the same way of thinking there of course.

So what’s the most likely outcome here? The outcome, if they still want to maintain a broader package of operators in India, then you need to allocate a bit of the spectrum to Greenfield’s players like Uninor. If they offer it to the whole of the market, then you have another probably willingness to pay and ability to pay if you consider everything as additional spectrum to incumbents.

So then I think I have indicated a little bit on what the preferred solution from our perspective should be, most, sort of a type of best case. The licenses are returned, license fee are returned and you payback to get a new license on the future, so to speak. And then sort of on the opposite side, on the opposite scale, you can say maximized auction structure to incumbent players and that will probably rule out [rangier] players like ourselves.

Scott Engebrigtsen

Any further questions here? Yes please.

Harald Øyen - Swedbank First Securities

Harald Øyen, Swedbank First Securities. Just to clarify the negative cash flow effect by leaving India. Are there any further obligations or is the NOK 8.1 billion your best estimate of the negative cash flow effect?

Richard Olav

Yes. As of today, that’s what Telenor has guaranteed. There are no further obligations outside the Uninor.

Jon Fredrik Baksaas

I can add on this, that we’ve had a meeting with the regulator and we’ve had a meeting with the ministers as you probably noticed yesterday. And there is at least a timeline here that TRAI asks for in a bid for this process that to which you asked within 15th of February.

Scott Engebrigtsen

Okay. I think we’ll also include a question that we have received in writing from, it’s on India, from Nikhil Pahwa in MediaNama, asks what kind of base price for 2G spectrum in India would you be comfortable with? What price would be a deal breaker for you?

Jon Fredrik Baksaas

That’s more or less the same question as I got just recently. I think if will roll forward from where we are, it would be okay and if it is an auction based upon the whole of the market, then newcomers will not have the ability to follow up. That’s my guess. But I think that’s the best way we can answer at this point.

Scott Engebrigtsen

Okay. Then we will turn to the call conference host to introduce the first question from the ones participating on the phone I think.

Operator

A question from Andy Parnis of UBS. Go ahead please.

Andy Parnis - UBS

I have got just one question just a quick follow-up, can I just, what exactly do you have to submit or does have to be submitted or should we expect to hear on the 15th of February in India? And then the second question is on Norway, what have you seen in terms of promotional activity in Q1 in Norwegian mobile and what makes you so confident, I guess that we’re not going to see sort of another period of intense price competition I guess that we saw in 2011 or towards the end of 2011? Thank you.

Jon Fredrik Baksaas

What we have to submit, I don’t think that we have to, but we want to submit is more to the question here. And of course, we have never seen any ruling from any court which moves up against the principles upon which a government have distributed licenses that we have never seen.

And throughout the investigations and due diligence and the process here, we have cooperated with the Indian authorities on every examination, on the license process which happened before we came in and we have qualified on every criteria that Indian authorities has put forward for foreign investors into telecom. And we also got an FIPB approval to extend our ownership beyond 50% to the present 67%.

So this is done on all proper sort of terms and conditions that has been set forward by Indian authorities. And then we now count this threshold, we will of course use that platform when we present what is to be presented within this timeline. And for Norway.

Richard Olav

Well for Norway you can say that we have certainly stopped our campaigns by the end of last year. There will be some spillover effect into the first quarter as the packages we sold during the fourth quarter will have some financial effects. But the campaign in itself has stopped and we see a more quiet competition picture and we think that this needed in Norway now as the price level has come down significantly.

Jon Fredrik Baksaas

But you know what competitors will do and we still have an asymmetrical termination regime in Norway which will last though with a smaller effect relatively this year than previous years. But that asymmetrical system did spur a price competition last year and we will have to see what kind of activity others will play, put into the marketplace, but for the time being it stands as Richard is describing.

Andrew Lee - Goldman Sachs

A question on Norwegian mobile as well from me. And if we strip out the effect of the fourth quarter promotions, your underlying ARPU trends look to have improved and are you starting to see stemming of customer spindown into 2012 and secondly what proportion of customers do you expect to be on the new price bundles by the end of 2012. Thank you.

Richard Olav

Well I can say that certainly as we have said before, our longer-term targets on the mobile side is of course to grow the ARPU as the services and packages we now offer to the consumers on the smartphones are comprehensive. However it has been a challenging ride in 2011 to do that on the backend of mobile of the asymmetrical termination rates. But if you have the more level playing field I think the ARPU picture for the mobile would have looked very differently in the consumer. Having said that in the corporate segment is tough competition. So we really have to watch out on the corporate segment in 2012.

Jon Fredrik Baksaas

And when it comes to the price plan, I don’t think we will sort of describe that percentages are such, but given the weight that we have put on these kind of new pricing philosophy or pricing structures, it’s obvious that we want to grow that kind of percentage throughout the year. And we also see this as a pretty important retention activity in the marketplace?

Dominik Klarmann - HSBC

On your mobile pricing strategy, I can well pretty much understand your bundling strategy in Norway, but looking at your office in Denmark I am wondering why you are bundling too much data in your lowest tiers there. So some color around what’s driving your pricing strategy in the Nordic markets would be interesting. Is it mainly driven by market share targets some. Now offsetting the Onfone loss in Denmark or what kind of signals do you think that your pricing is sending to your competitors?

Jon Fredrik Baksaas

Yes, I think the Nordic markets are quite different in nature. We have already commented on Sweden being probably most healthy market the last quarters with a good underlying service revenue. The Danish market is hampered by fierce competition and it did not really help that Onfone was acquired by TDC which just continues to encourage the growth of virtual network operators. When it comes to Denmark, there is a clearly over capacity in the market and that is driving prices down and for Telenor to just continue to sit and loose market share is not really an option. So I would say in Denmark we more a price follower.

Barry Zeitoune - Berenberg

It is Barry Zeitoune from Berenberg. Just a couple of questions. Can I, just a point of clarification, you said that it will be difficult to participate in the auction. If it is open to all participants, not just newcomers, so as a newcomer, do you think it will be difficult for you to participate in the auction if it is open to everybody in the market. And if that is the case, do you feel that you have some sort of legal recourse, but in India to get some of the money back that you invested there?

And then the second question is also on India. I am just wondering if you do invest in India, does that affect your thinking about whether you exercise your preemptive rights on VimpelCom given that you could have one large cash cost, would you be willing to swallow two large cash costs if it comes to it? Thank you.

Jon Fredrik Baksaas

Well, on the auction side, the supreme court has ruled that the auction mechanism is going to be utilized on the revised distribution of the 2008 licenses. Whether this court ruling will result in to investigations towards previous license processes in the same decade, that remains to be seen. But it is a bit odd that this specific ruling only targets the principles applied in 2008, which were equal to previous license processes. That’s number one.

Number two, if the auction principle is utilized or that the whole package is addressed to the whole of the market, then incumbents will have a better position to grab additional spectrum than green fields and that will probably escalate spectrum process too high for a newcomer.

Number three, legal action, we will have to see what kind of legal action that could be taken based upon international conventions and treaties after this but that is too early to have a direct opinion today. But we will be asking a review by the Supreme Court of its own ruling, whether there is an opening for in the system in India.

Barry Zeitoune - Berenberg

And what are you thinking in terms of excising preemptive rights in VimpelCom. I mean, if you are going to reinvest in India, what about impact to your decision on what you do at VimpelCom?

Jon Fredrik Baksaas

No. Like I said, towards the end of my presentation is that our balance sheet and financial position has more than enough strength both to give a healthy shareholder remuneration also follow our rights in the telecom if we elect to do that and I would also say that we will be disciplined when it comes to India. As you all know we have said repeatedly that our business case cannot tolerate huge extra costs in India. So in the overall strength of the Telenor balance sheet I don’t see that as a real concern that we have to do any trade offs there.

Operator

Peter Kurt Nielsen from Cheuvreux.

Peter Kurt Nielsen - Cheuvreux

Just a question and turning back to Norway in fact you made a number of comments about the new network, you were talking about strengths on the network and need for fine tuning and raising quality and signaling problems and extra CapEx on 3G for that. Were these factors not sort of anticipated when the new network has been built and are you not fully happy with the way its turned out the network swap in Norway has turned up?

And if I may just add the second question, when would you expect an announcement from the U.K. administration court on the VimpelCom case? Thank you.

Scott Engebrigtsen

I am sorry we will only take one question now, please. So I am pleased to address the first one.

Jon Fredrik Baksaas

First the new network in Norway, on the radio side and that I will say, fundamental success both from the vendor side and as for the deployment into their geography I think it is 10,600 base stations that has got the new radio equipment. Then bear in mind that we had spent probably 10 to 15 years tuning in the networks to the quality level that it had when we started this off. And this new radio equipment needs some tuning in the geography, so as a consequence there are tuning works to be done and have been done through these Autumn and we are probably towards the end of that period.

Then the smartphone generation builds actually more signaling traffic in the network than anyone in the industry had anticipated and here also the GSMA is working actively with the OS vendors with them trying to optimize network resources utilization while in play. I mean to put it more simply can we have smartphones that do not use network resources while we are all sitting still in this room or is it enough that they pull into the system when we as customers activate the service and this is something that concerns in the industry to a great extent, because normally signaling capacity has been considered as part of the main frame and not being part of the of what you charge when you connect customers. So here I think there is a bit of new work to be done and I think this will be a topic also in Barcelona later this month. There was a second question.

Richard Olav

Yeah. On the VimpelCom arbitration we are bound by the arbitration panel to disclose any details on when ruling can be expected. So we can only reiterate what we have said before that we hope that the ruling will be given within the first half of this year.

Operator

James Britton, Nomura. Go ahead please.

James Britton - Nomura

Hi, I have a question on India; are you ready consider the business case your Indian operation is almost circle by circle basis or you committed to pursuing activities across the whole footprint if you can secure licenses at reasonable cost? Thanks.

Jon Fredrik Baksaas

I think we will have a priority on the way we have been successful in the circles that we already are.

Scott Engebrigtsen

Next.

Operator

Maurice Patrick, Barclays Capital. Go ahead please.

Maurice Patrick - Barclays Capital

Yeah, Maurice here, on the signaling issue, presumably I mean I think AT&T was talking about this I think 18 months, it is something that’s accelerating in terms of the growth in signaling. And it is more a question fine tuning of networks rather than higher spend to solve it, as always thought was the case. So a bit of commentary on that would be very helpful? Thank you.

Jon Fredrik Baksaas

Its actually an accelerating type of question. And it accelerates because of the shared number of smartphones being out there and in Scandinavia that portion is probably the highest among any network population in any other countries. But I think we are getting a little bit of this challenge; the first as industry players. But bear in mind, this is not something that basically ruins the business model. So let’s get it into proper portions here, but on the other hand it puts new efforts into how you allocate network resources. That’s what’s important.

Operator

Soomit Datta, New Street Research

Soomit Datta - New Street Research

Hi Soomit with New Street Research, just a clarification on the prior question on Indian circle, is there anything and to the best of your knowledge which would prevent you bidding for spectrum on a circle-by-circle basis, what do you envisage having to bid on a nation-wide basis? Thank you.

Jon Fredrik Baksaas

There is, I have no sort of qualified opinion on that question. I think this will be quite flexible really. That has been the picture on what has been the case on previous auctions.

Operator

Ulrich Rathe, Jefferies. Go ahead please.

Ulrich Rathe - Jefferies

On India, you are saying your guidance is sort of based on business as usual. Now obviously there is a lot of press, general press and general media on the license issue. So I was just wondering how do you think about potentially the more serious customers in particulars of the highest spending ones who really want the service and really want Uninor, how would they think about this, how have you bagged that into your guidance in India, because this of course is a risk that they’ll look at the figures, this is the company and in four months time, they might want to sign up with them?

Jon Fredrik Baksaas

I am very afraid to have any sort of clear -- I don’t think I have a clear answer to that question really. I think our concern now is to establish our viewpoint on how they can move forward with the regulatory mess in India and to safeguard the investments that has been done. I think there is a lot of discussions on what kind of consequences will such a ruling have for investments in general and foreign direct investment in particular in India.

And if we take a look at international media, that kind of question is and then Indian media, that kind of question is easily coming forward. So we will concentrate on that phase now in this very short term and then we will concentrate on keeping the wheels and the machinery warm as we have performed since the ruling came. And then we have to take a judgment call on the process when we will see it from the government in this four month period hopefully.

Richard Olav

But the question is very good; I mean we have to have clarifications sooner than later as Fredrik said, the machinery here is vulnerable if this clarification don’t happen very quickly.

Scott Engebrigtsen

Okay, thank you. Any unanswered questions could be referred to our Investor Relations Department and I think that concludes the session here this morning and I would like to thank you all for participating. Thank you.

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