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Executives

Scott Engebrigtsen – Communications Manager

Jon Fredrik Baksaas – President and CEO

Richard Olav – EVP and CFO

Analysts

Espen Torgersen – Carnegie

Tore Tønseth – SpareBank 1 Markets

Barry Zeitoune – Berenberg

Andy Parnis – UBS

Laurie Fitzjohn – Citigroup

Maurice Patrick – Barclays

Stefan Gauffin – Nordea

Andrew Lee – Goldman Sachs

Peter Nielsen – Cheuvreux

Telenor Group (OTCPK:TELNY) Q1 2012 Earnings Call May 8, 2012 10:00 AM ET

Scott Engebrigtsen

Good morning, ladies and gentlemen, and welcome to the presentation of the results for the second quarter – the first quarter results from 2012 from Telenor. With you who are present here at Fornebu or listening in on the phone or watching this via webcast or mobile video, my name is Scott Engebrigtsen, and I have the pleasure of guiding you through the presentation this morning. And we hope that everybody has the material that we’ve made available. That is the quarterly report, our press release and a copy of the presentation to be used here in a minute. And you can also find this information on our website, telenor.com.

You can watch this presentation live or in recording on either the Internet or on a mobile phone, and during this live transmission, you can also send in your written questions via the Internet and we will try to answer them from that stage. And you can also find information on these alternatives from our website.

As usual, we will have Q&A session directly after the presentation here, and then we’ll start with the ones present here at Fornebu, then from the ones participating on the phone, and we will try to end the session at 10 sharp this morning. So to allow questions from as many as possible of you, we will kindly ask you to limit yourself to one question per person, with a follow-up question if clarification is needed. And after the Q&A session here, we will have the opportunity to do one-to-one interviews with key personnel.

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

Jon Fredrik Baksaas

Thank you, Scott, and good morning to all of you. In the midst of an exciting period from many events around Telenor for the time being, I’m happy to stand here with a solid first quarter reporting package. Operationally, this quarter is as strong as the previous quarters, and in total, second-half of 2011. We see growth both on the top line and in cash flows, and in particular, the growth I mentioned in this quarter coming from the Asian operation stands out as a very good story.

In addition, we have restored the ownership position in VimpelCom, but it’s no doubt that it’s the challenging regulatory situation in India that will be probably on top-of-mind of many of you, as it is in ours. But we will get back to these topics during the presentation.

Let me then start with the Nordic operations. We have initiated a type of new operating model in the Nordic countries, and we’re starting to see results of this. The idea is to bring in new operating concepts in such a way that we can improve the efficiency and again prepare for the new growth primarily identified in the data area. Examples of this is the joint networks ventures that we have had for some years in Sweden, but which we now also have embarked upon in Denmark with a new operating model that we will put in place together with Telia. And we have also introduced a new model to be implemented on customer service.

Operationally though, the most important and most pleasing characteristics in the Scandinavian countries in this period is the trend that we now see in Norway. We have added more customers, and the underlying trend in Norway is as strong as if we had adjusted for the campaign effect from fourth quarter, which there is a tail into this quarter in 2012, then we would have been basically at par with the revenue base from last year. And that’s a strong feature, and it proves also that the re-pricing structures that we have introduced in the mobile market in Norway start to work. And I will come back to that a little bit later.

But on the customer side, there is a small additional element of customers in Norway in the first quarter, 6,000, and in Sweden, 33,000. And this comes despite the pretty aggressive competition environment that has been in Sweden in that specific period. And some of you will remember the three-service offering that was on the streets for a period of time, which really was a price-efficient offer, but which was cut in period in time.

In Norway – in the Scandinavian countries now, we do see a very, very high portion of smartphones. We can roughly say that 50% of the customers based on the postpaid side do carry a smartphone. And this probably – it is not only probably, this is the future, and this brings with it the necessities for revised pricing structures, as it also brings new complexities into the network side. And both we and other operators have experienced a little bit of that.

On the revenue side, despite this aggressive competition period that we’ve had in particular in Sweden, Telenor Sweden shows growth in mobile revenues of plus-9%, and the underlying service revenue in that respect was 3%, meaning that we do see quite a healthy combination in the revenue elements in this period.

The most challenging market is by far Denmark. Here we suffer from the impact of the Onfone wholesale contract that left last year, and the competitive intensity in Denmark is very harsh. And not only we as an operator experience that, others do as well, and it leads to the new cooperation model and new business model, operating model, that we have institutionalized in Denmark together with Telia.

In the Broadcast area, we can record this specific quarter an all-time-high underlying EBITDA figure, which is very strong. And as usual, it tends to be under-described that we have this kind of situation with the Broadcast, and I want to mention in particular at this time that we’re very pleased to see this kind of development in this business area as we stand for first quarter 2012.

Then some more comments on Norway. We are, of course, pleased to see that the continued migration of consumers to the new bundled tariffs seems to work. We can recall 108,000 new customers on those specific packages in their contract family this quarter. And 47% of our postpaid consumer base is now on these tariffs, and we believe that this is the way to go.

We can only take a look in how we use our phones ourselves. It’s not only voice and SMS anymore. It’s Internet, Internet, and Internet in between maybe fewer conversation, what will I know, and fewer SMSs. So the data world is basically there, which means that we need to take the pricing structure into that direction.

If we adjust for the fourth quarter campaign in which we have made an estimate that accounts for roughly SEK7.5 per ARPU minute, the mobile ARPU seems to be stable in this quarter. And that should indicate good prospects moving forward. There is a bit of a more stable competitive environment in Norway this quarter that may be caused by the fact that we are in the last year of this asymmetric mobile termination tariff setup that we’ve had in Norway, and, as you know, this will be leveled off between the operators towards the end of the year.

The fixed-revenue, though, is showing a steady line as well. However, and unfortunately, downwards. The fixed-telephony traffic is reduced roughly NOK100 million quarter-over-quarter, and the number of lines that are disconnected ranges between 20,000 and 25,000 lines per quarter. And again, this kind of trend seems to be impossible to turn around, which means that from a voice purpose, the fixed-line network will have a challenge in the longer-term. And of course we are preparing for those kinds of transitions that will come in the future.

This kind of decline of the revenues in the fixed-line, of course, put efficiency measures and efficiency requirements on our (inaudible) organization, and Marrianne and her team need to address this with the aim of reducing the cost and implement new ways of completing the work processes. Have we been through big transitions before? Yes, but this is also a transition that needs to be addressed.

On the mobile side, now the network swap has been completed in Norway last quarter. We continue to streamline the network and to work on the qualities I mentioned. Here, we are also preparing for building the 4G capacity, and we will launch the 4G later this year, and we will have to come back to the date in question.

In Central and Eastern Europe, we have – let me see, have I missed the page here now? Oh, there we are. Sorry. In Central and Eastern Europe, we are experiencing the most challenging economic environment. However, there are signs here in this reporting package which are worth mentioning.

Despite the fact that the macro seems challenging and the fact that governments are looking for the telecom sector as a source for taxation, we can say that Serbia has developed its path on revenue growth. It is a 7% year-on-year growth factor in Serbia in this quarter, but it’s also, for the first time since 2007, a small plus in Hungary, which in a way gives a little bit of understanding that this industry plays a role in people’s lives and that revenues maybe start to build from here onwards. And this happens despite the fact that there still are interconnect reductions in Hungary.

These kinds of challenges that we see in the industry in this region unfortunately will probably last for a period of time until Europe manages to get back into growth modus. And that question is a bigger question that I intend to address.

Then in VimpelCom, we have restored the ownership position that we had before the Wind transaction of the company, and it’s quite well-known that we were opposing the incoming dilution factor that that transaction meant to us. And we have, through two transactions, moved back into the same position as we had before the Wind merger happened. And from our perspective, these are within the FAS approvals that we were granted in 2010. We still see that there are some viewpoints on this from the Russian side, and we will, of course, work with that issue and get our viewpoints across to the other side.

We have always been long-term in VimpelCom, and we want to continue to carry out the same kind of development path in those companies as we do in the Telenor Group. And the industrial dimension that we bring to the table, we believe, is valuable, also when it comes into the next generation of mobile systems that also will be invested for in Russia.

Then for the very good growth story in the Asian-established operations. In all four markets, we do see significant growth activities going on. Accumulated, for all four of them, it is a 14% organic growth factor. And as you can see, all countries are double-digits. This goes along with still strong operational performance, and we will argue that our companies are basically both keeping and maintaining their market position.

The margin expansion factor is also visible in this reporting for this first quarter, except for DTAC, which had to add a higher revenue share factor which has been increased in this quarter compared to first quarter last year by 5 percentage points from 25% to 30%.

Handsets sales are also contributing to a certain extent to this growth because also in these countries, the handset generations are being changed. And this also – primarily these markets are no subsidy – of no subsidy character. There is a top line factor of handset sales as well, but they, of course, bring with them a very low margin.

Grameenphone is here with another quarter with a healthy revenue growth and margin improvement, as we’ve seen before. The competitive intensity from quarter-to-quarter may vary. I want to highlight, though, the very good performance of our team in Pakistan. A 23% organic growth revenue factor is a very strong figure, and it’s an all-time high EBITDA factor as well, above 40%.

And this, in a way, proves that we’ve done a little bit of the right things for a number of years, and that the team in Pakistan now is on its best part of its S curve. And we all remember that all companies basically have been through that part of the growth curve. And now it’s the turn of Pakistan. So I congratulate the team in Pakistan having reached this level and that we continue to compete for the market position.

I also have to mention that Pakistan is the country that we have comps the deepest and the furthest when it comes to financial services; 3 percentage points of the growth factor in Pakistan this quarter comes from financial services alone, which means that – and there is still a lot of both services and customers to tap into in order to bring financial services to those that don’t have access to that from before.

The network swap with ZTE will start later this year. Then probably one of the most important questions that we will have to discuss today, that is the regulatory situation in India. On the operational side, though, the growth side on both customers and revenues continues. And also on the EBITDA side, there is improvement, despite the fact that from a reporting point of view, there are some accruals that was brought back into the picture in fourth quarter.

But there is a good trend line on the operations. If it hadn’t been for the mess-up on the regulatory side, this business model would have delivered EBITDA breakeven according to plan in the second quarter 2013. However, to come there, frequencies are necessary to have. We can’t do this without access to frequencies and licenses. And the recent recommendation that came out from TRAI didn’t only hit a newcomer like Telenor, it also hit the whole industry in a very dramatic way, and the industry collectively joined in a joint message to the authorities, not only their regulator but also the authorities that are to decide on this during the month of May.

We have met every roll-out obligation that is in our package. However, now, they have added another rollout recommendation from TRAI and we have to say that this package will make it almost impossible for a newcomer like Telenor to stay on in India. And that has been our clear message all the way through since it came a couple of weeks ago.

So in this situation, both we and others urge the government of India to take proper decision in such a way that both newcomers and also the migration to 900 can happen in a more industrial and investment-friendly climate, because this will put a very wet blanket on investments in the very important telecom industry in India for many years to come. If there are decisions coming out of this that we feel they will be possible to work for, then we will maintain our peak funding commitment to the project of INR155 billion as the peak funding figure before we reach breakeven.

Then our priorities for 2012. So a few final remarks on that. We are strong in rate for the time being. There is growth to capture, in particular in the Asian markets and around the transition to data communications in Europe, and we see those trends in our figures that we now report. And the fact that the mobile system stands more importantly when it comes to Internet access in Asia is an extra dimension when these countries are to move to the Internet and data phase.

The most important element now is of course to clarify around India and I guess there will be numerous questions to that today. Lots of them have been addressed by us already, but we will continue to work for a regulatory environment in India that makes it feasible for us to stay in a, I have to say, restricted way in the sense that what we do from here onwards needs to have a solid business case.

Then, finally, the overall challenge of continued efforts on operational excellence will stand here, both now and for many quarters to come. These transitions that the industry goes through are as big and important as we’ve seen before and we need to take them. And the ecosystems are in big changes. We will be looking for new opportunities attached to the service layer in that space based upon both assets and customer bases and billing systems, et cetera, that we are already having in all our markets. And then we need to utilize our scale as the number one base for bringing new efficiency into the group.

So with that, with those words, I’ll leave the floor for the financials to Richard. Richard?

Richard Olav Aa

Thank you, Fredrik. I’ll move straight on to the financial highlights of the quarter. It’s been a special quarter with a lot of focus on India, and therefore, it’s very good also to report that the underlying financials are very strong this quarter. We have 8% growth and a 21% operating cash flow margin. We decided to write-off the remaining book values in India, all NOK3.9 billion on a 100% basis and NOK2.6 billion as our share. If we exclude for that, we have an underlying net income to Telenor of NOK3.2 billion this quarter which is about NOK2 per share. So a quite strong quarter.

Moving onto Norway, a lot of you had questions about our financial performance in Norway towards the second-half last year. We launched the rate campaign, which Fredrik has already mentioned, which really turned things around again in the mobile business in Norway. As you see from the left part of the slide, the ARPU, excluding rate campaign, is stable. We’re able to compensate price pressure with increased data usage, and we expect to see those trends going forward.

On the EBITDA, we have a quite stable EBITDA underlying, but we have two special effects. It’s the NOK70 million on the Q4 campaign, (inaudible), that comes in for the quarter. And we have the storms especially related to Dagmar, with also some spillover from Berit, which accounts NOK64 million. You can say we always have storms in the first quarter in Norway, but we think this is a little bit more than normal.

So we have the fixed business, which is declining NOK150 million, and as already mentioned, we need to take measures, further measures, on the fixed line to turn this trend at least slightly more positive than this. But very positive is the development in the mobile business with the increased subscription and increased data usage takes up the EBITDA, underlying EBITDA with close to NOK120 million in Norway.

Moving on to the revenue side, going in a little bit more detail. 8% organic revenue growth, about 2.3% of that comes from India. So India now is a significant contributor, but still accounts for only one-third of the growth. We’re now at the pace of more than NOK100 billion in revenues the last two quarters.

And if we decompose how the revenue growth is coming in, we see that Denmark has a very weak development in this quarter with almost a NOK0.25 million drop in revenues. Half of that comes from the loss of the wholesale contract with Onfone and currency. And about half of that again comes from reduced interconnect rates. So if you take the revenue drop, it’s about 25% of it that comes from the retail competition end. I’ll come back to the EBITDA effects on that.

Hungary, it’s a decline of NOK113 million. The underlying performance in Hungary is reasonable. This NOK113 million is all currency depreciation between the foreign and the NOK.

And then the big growth comes from Asia. A strong performance in all Asian operations, close to NOK1 billion revenue growth in the four established operations, and that also hides that NOK300 million negative currency development especially related to appreciation towards the taka in Bangladesh. And then India contributing with close to NOK500 million. So the Asian operation, excluding currency, contributes NOK1.5 billion in revenue growth, taking the revenue in the quarter to about NOK25 billion.

Then on the margin side, we have an improvement in the EBITDA of NOK380 million year-on-year. The margin though is about the same, 31%. You can say that improvement in the margin in Uninor is offset with increased revenue shares in DTAC. The revenue share in DTAC has increased from 25% to 30%, and being the second-biggest operation in the group, that has a visible effect. So those two effects nets out each other on the margin side, or else we would have a much higher margin improvement from the improvements in Uninor.

Then we have some dilution on the margin from higher handset sales, but the service revenue margin underlying is increasing, which is very positive. So all these effects result in a stable margin of around 31%. And if you look to the right to see where the EBITDA improvement comes from, we see the decline in Norway, which is done – largely due to the one-time effects of the rate campaign and the storms.

Denmark. I’ve already explained the big revenue drop. And you can say that some of this NOK133 million effect on the EBITDA, some is currency and some is the Onfone contract, about NOK50 million, on Onfone, and about half of it is really the competitive pressure and the price decline in the Danish market.

And then you see the very strong performance from both Uninor, Pakistan and DiGi coming in this quarter, with improvements of more than NOK700 million, taking up the EBITDA to NOK7.7 billion in the quarter.

On the CapEx side, this is in line with 2011, approximately 10% CapEx to sales and about NOK2.5 billion in CapEx. Worth to note is that Norway now accounts for 40% over CapEx. So we’re investing heavily in capacity and coverage in Norway. Excluding Norway, CapEx to sales for the rest of the group is now down to 8%. So we’re really starting to see the effects of the swap coming in on the CapEx to sales. And also, bear in mind that they are in the midst of swapping in both Malaysia and Thailand, and we’re also starting in Pakistan now. So the CapEx to sales outside Norway now is really on a good performance.

Then revenues, EBITDA and cash flow, that results in operating cash flow margin. We have also been able to increase the cash flow with about NOK300 million from about NOK4.9 billion first quarter last year to NOK5.2 billion this quarter. And on a fourth quarter rolling basis, the operating cash flow is up NOK1.3 billion, and we have a pace now, fourth quarter rolling, of NOK19.4 billion operating cash flow. And the cash-flow margin stands at 21%. Excluding Uninor, we have a cash-flow margin of 25%, which benchmarks very well in the telco industry.

Moving on to the very special item this quarter, is the impairment write-down of NOK3.9 billion in India. As many of you recall, we had an impairment in India also in the fourth quarter. Based on the Supreme Court judgment on the February 2, we decided to write-down the remaining goodwill and the licenses of NOK4.1 billion. Then we had expected that the regulator would come out with reasonable recommendations for the auction, which then we could have defended the remaining book values with. That did not happen, and the regulator came out with suggestions for the new auction that will make it almost impossible for Telenor to participate in an auction if they stand as they are.

So as a precautionary measure, we decided to write-off the remaining book values in India of a total of NOK3.9 billion on 100% basis. As we own about two-thirds of the Uninor operation, (inaudible) it will be attributable to the shareholders of Telenor is NOK2.6 billion. We, of course, hope to succeed with changing this recommendation when the politicians in India will make their final decisions on the auction rules, and that these losses will not become a reality.

It’s important to note that we have now written off all assets as of March 31, 2012. As Uninor still is some quarters away from breakeven, there will be operating losses also after March 31. And we are then, of course, trying to limit OpEx and CapEx as much possible while we’re waiting for clarification on the new rules.

Then all of this then I’ll reconcile back to the P&L. I think we have already explained the growth in the revenues and the improvement in the EBITDA. Other items, its workforce reductions in the Nordics severance pay, it’s the biggest item there. On the depreciation, it’s in line with last year, nothing special there. And then we have the impairment loss of India coming in with NOK3.9 billion on the impairment line, but then it reverses back approximately NOK1.3 billion down at minorities, as you see further down.

Worth to mention is associated companies. Low contribution from VimpelCom this quarter due to currency and various accounting effects in the VimpelCom Q4 results. But also that we have a gain from the sale of TV2a in the associated company are present. That contributes about NOK417 million this quarter to the associated lines.

On the financials, as you see, we are positive net financial this quarter with NOK330 million. That is an improvement, with more than NOK700 million from first quarter last year. The big reason there is the change in fair value of financial instruments of NOK789 million. And behind that again is the VimpelCom TRSs, underlying development in the VimpelCom share price, which contributes positively.

So on the tax line, nothing special to note, maybe other than the tax rate in Thailand has reduced, so our underlying effective tax rate is slightly reduced. And we end by that on a net income for Telenor of NOK583 million this quarter, which would then have been more than NOK3.2 billion if it hadn’t been for the impairment loss. And EPS of NOK0.37, and again without the impairment loss, more than NOK2 per share.

On the debt side, the net debt to EBITDA is stable this quarter. Debt at 0.6, net debt stands at around NOK19 billion. I will not go into the detail of the reconciliation of the net debt from year-end until now, but the two line items worth mentioning is that we have paid out significant dividends from DTAC and DiGi as a part of our capital repatriation programs, and that is then also impacting the payout to the minorities in DiGi and DTAC. So about NOK2.8 billion has been paid out in dividends to our co-shareholders in DiGi and DTAC.

Then on the next – on the line under you see NOK2.2 billion purchase of shares in VimpelCom Limited, that is the shares we bought from Weather to restore or voting position in VimpelCom.

More importantly to mention is that we will have significant payouts in the second quarter. We will pay out the yearly dividend of NOK8 billion. We will pay out NOK2.4 million to the government of Norway as they are part of the share purchase program from last year. And we’ll pay- or we have already paid NOK4.1 billion to JPMorgan for the purchase of more common shares in VimpelCom in the second quarter. In total, that’s a payout of NOKkronor14.5 billion coming in the second quarter.

And measured on the ratio we have here net debt to EBITDA, that will take that one up, everything else being equal, approximately 1.0x, but still well below the cap of 2.0x that we imposed on the Capital Markets Day last year.

Then on the guiding. We have decided to guide excluding Uninor based on the high uncertainty about if and how we can continue in India. We think that’s the most prudent to do now. We have improved our revenue guiding slightly. Excluding Uninor, our previous guiding was about 3%,; now we our guiding, about 4% based on what we have seen in the first quarter. The EBITDA margin, we guide at 35% to 36%, which is more or less in line with our earlier guiding. And CapEx to sales we’re taking down further to 10% to 12% based on what we have seen in the first quarter and also excluding Uninor. So I think we’re seeing our outlook for 2012 maintained. I think it could be said maintained with a positive twist.

So that takes me to the end of my presentation, the financial priorities in 2012. India is, of course, in focus, and if we get an acceptable framework, we will be disciplined and have a clear ambition to stay within the NOK155 billion peak-funding ceiling which we have imposed.

Then most importantly is to continue to excel operationally. Telenor is a very strong operator. And it’s the stronger operators, we believe, in the telco industry that has the biggest also improvement potential from embarking on new operating models and leveraging its scale. So we are continuing to working towards our targets of 35% OpEx to sales in 2013, and 10% CapEx to sales. But we are also now introducing new operating models, as we’ve done in Denmark this quarter, leveraging a global partnership market in the various domains Telenor operates, and also utilizing our Group’s scale, especially in procurement.

And on the priority side also, based on the strong performance of Telenor, we target to give a healthy shareholder remuneration. Already mentioned, NOK8 billion will be paid out in dividends in the second quarter. The Board of Directors have proposed to the general meeting a share buyback program up to 5%. Remember, each percentage points we buy back at the share price we have today is about NOK1.6 billion to NOK1.7 billion. We will execute a program similar to the last two years, that will be an additional NOK5 billion. So if you do that, the total shareholder payout in 2012 will reach NOK13 billion, which is fairly strong. Thank you.

Scott Engebrigtsen

Thank you, Richard. And we’re now ready to take your questions. So I invite Mr. Baksaas back on the podium, and we will start with the ones present here. Please wait for the microphone and state your name before asking questions.

Question-and-Answer Session

Scott Engebrigtsen

Anyone? We have a question here from Espen Torgersen.

Espen Torgersen – Carnegie

Hi. It’s Espen Torgersen, Carnegie. Just a simple question relating to India. With the new rollout regulations, excluding reserve prices, auction prices, et cetera, just the rollout requirements, can you still stay within the 155 peak funding with those rollouts?

Jon Fredrik Baksaas

I would say that’s a highly hypothetical type of question, because I don’t think you can exclude the other elements that you referred to. So we are addressing a combination of that and to reach out to all areas where the accumulation of people goes to 2,000 -villages of 2,000. Knowing that varied grid facilities and other things is not in place, the package is not feasible. And if we need to do that with 1,800 in addition, then you won’t get the coverage, the number of base stations needed to do that and the complexities of doing it with the combination that TRAI has set is basically an impossible package. And I don’t think you can exclude it from the two other elements that you referred to.

Espen Torgersen – Carnegie

So if you have those two other elements, it’s impossible?

Jon Fredrik Baksaas

Yes, I think so. And this is not only a statement from a Telenor company that has roughly 35% to 40% population coverage as it stands now. And knowing that incumbents are basically between 70% and 80%, which means that they, too, have been moving in that direction. And normally, it would be incumbents that would do that on their level of frequency bands, as we have had that role in Norway up through the basically 15 years of mobile history in this country.

Scott Engebrigtsen

Any further questions from the audience here? We have one up there, please?

Unidentified Analyst

(Foreign Language)

Scott Engebrigtsen

Could you do it in English, please?

Unidentified Analyst

Okay. I’m from the local paper, and I’m just wondering how do you feel that the things that’s been happening with the (inaudible) how that affects you as the top leader and the organization here?

Jon Fredrik Baksaas

I think that’s a type of question that we can take in other points in time. I think we do concentrate on the performance and we keep focus on the operating side at this session. Thank you.

Scott Engebrigtsen

We have a question up there, please.

Tore Tønseth – SpareBank 1 Markets

Tore Tønseth from SpareBank 1 Markets. You had another relatively weak quarter in Denmark. When you’re up and running on 4G in the joint venture with Telia, what kind of margins do you expect to see? Will we see any improvements on the OpEx side or will this only be a way to lower your capital expenditures in Denmark?

Richard Olav Aa

I think we see significant effects from the network sharing, both on giving the customers a better coverage and a quality, but also on OpEx efficiency and the CapEx efficiency. So you’ll see effects on all the lines in the P&L, and it will be a significant contributor to restoring profitability in Denmark.

Scott Engebrigtsen

Okay, if there are no further questions here, I think we will call upon the call conference host to introduce the first question from the ones participating on the phone. Question from?

Operator

Question from?

Barry Zeitoune – Berenberg

Barry Zeitoune, Berenberg.

Operator

Go ahead, please.

Barry Zeitoune – Berenberg

Hi. Good morning, gentlemen. I’ve got three questions, if that’s okay. The first is on India. Based on the current TRAI recommendations, the cost of you reaching a similar spectrum holding to the 13 circles you have today could run into the multiple-billions of dollars. In addition to the onerous rollout requirement, and you’ve made it clear that under the current structure, you’re unlikely to participate in the auction, but can you tell us whether it is the base price, the rollout requirement, or both that need to change for you to decide to participate in the auctions? My second question’s on Denmark.

Scott Engebrigtsen

I’m sorry. We will have to limit ourselves to one question per person. I’m sorry. So we will take this question first then. And if you have further questions, you could please line up in the queue again. Thank you.

Barry Zeitoune – Berenberg

Okay. Thanks.

Jon Fredrik Baksaas

The rollout, as it stands by itself, is basically one roadblock to our business case, as we see it. If that goes away, then we’re back to the fact that the Supreme Court order basically took back roughly 20 megahertz, on average, in the different circles in India. And they only returned 5 of it, plus potentially 2.5, in this recommendation. And we cannot see why the government is doing – should be doing that, and TRAI tries to basically address the long-term combination on how they want to view the frequencies also in a transition to 3G and 4G. And in sense, basically, we’ve asked the Supreme Court to clarify whether that was the intention. And hopefully, there will be an answer to that this week.

So it’s both the fact that there is a rollout requirement that is very, very extensive, and the fact that there has been created an artificial bottleneck or spectrum, because there are spectrum blocks available at the shelf. And we haven’t seen that kind of holdback of frequencies of this magnitude anywhere else. And then it all flows back into the high-reserve price, if you take that dimension as well. So there are potential road blocks on every element.

If government wants to proceed and create a new investment climate in the industry knowing that the industry investments in India throughout 2011 is basically half of what they were in 2010. And this clearly explains that this regulatory uncertainly basically will reduce investments and consequently, also then hurt the economic growth in the country longer-term. Knowing also that roughly 100 million people will lose connectivity when incumbents are to switch from 900 to 1,800 in their package. So, there are consequences on many thresholds here, which we believe that needs to be highlighted and that’s also why the industry was propelled together in the way we were last week.

Barry Zeitoune – Berenberg

Sorry, can I just ask – can I interrupt that as you saying then that if the rollout requirements, if that today wasn’t there, and if was enough spectrum available, you’d be comfortable with the current reserve prices, or is that not the case?

Jon Fredrik Baksaas

In a way, I thought my answer would cover that. It’s not only the rollout obligation alone. It’s the package, and all three the elements, basically, represents isolated roadblocks for a continuation, but if you combine them, it becomes even worse, right?

Barry Zeitoune – Berenberg

Okay, very clear. Thank you very much.

Scott Engebrigtsen

Next?

Andy Parnis – UBS

Andy Parnis, UBS.

Operator

Go ahead, please.

Andy Parnis – UBS

Yes. Hi, guys. I’ve got a question on India as well. I just wanted to – just to clarify, on the peak funding commitment of NOK155 billion, what assumptions do you have in there for getting any money back from the original license? I think it’s about NOK340 million, NOK350 million in 2008. Does that peak funding cap include that rebate or does that exclude that? Thanks.

Richard Olav Aa

I think it’s not prudent to go into details about exactly how we have set the NOK155 billion cap and what is excluded or not, given the high uncertainty about regulatory environment in India. We just think we are reconfirming that that is our clear ambition to stay within the NOK155 billion peak funding.

Andy Parnis – UBS

Okay. Thank you.

Scott Engebrigtsen

Next?

Laurie Fitzjohn – Citigroup

Laurie Fitzjohn, Citigroup.

Operator

Go ahead, please.

Laurie Fitzjohn – Citigroup

Thank you. One question involving VimpelCom. In respect to the lawsuit from the Russian Antimonopoly Service, could you give some color as to how restrictive are the injunctions put in place in terms of VimpelCom Russia? And therefore, if this lawsuit does drag one for a year or more, in how much of a problem are those injunctions? Thank you.

Jon Fredrik Baksaas

The injunction as it stands – well, first of all, I think that question will be more correct to be raised towards VimpelCom management. However, our comment to that is that from an operating perspective, the injunction doesn’t at this stage play any role in how to operate on a daily basis. So I think that’s my answer.

Laurie Fitzjohn – Citigroup

All right. Thank you.

Scott Engebrigtsen

Next?

Maurice Patrick – Barclays

Maurice Patrick, Barclays.

Operator

Go ahead.

Maurice Patrick – Barclays

Hi, guys. Maurice here from Barclays. Question on just a bit more color on Norway really, just if you could flesh out a bit more about what happened to churn trends when the offer rolled off in authenticity effects as we now got beyond the offer? That’d be great. Thank you.

Jon Fredrik Baksaas

That’s also a stretchy kind of question. But if I got the flavor of it right, I think we can say that since customer behavior basically changes as dramatically, it does, when as many people get the smartphone into their hands, basically usage pattern changes. And that means that since our business mold from history comes from voice and SMS by numbers of voice minutes and numbers of SMS, and since usage basically now is about access to data communication, and what we can do in that, and all the services and all the applications that comes with that, that means that the pricing structure needs to mirror in the long-term underlying cost structures.

That’s for once, but number two, also that the market needs to – we need to bring the pricing structures more in alignment with usage behavior. And that’s what we’re doing. And I think this is an industry phenomenon which is about to set itself among industry players. Of course, there will always be competitive moves on volumes and qualities and other criteria, but pricing structure needs to move in that direction.

And I think we see reasonably good traction in that direction in the figures that we report in this quarter. And I’m also happy to note that what we said about this last autumn in both third quarter and fourth quarter reporting where we had this kind of ambitions, now we’re seeing that the reported figures moves in that direction. And- we consider that as very interesting to see, that the response is positive.

Richard Olav Aa

I could just add to that, Maurice, that we don’t see any significant increase in share after campaign-end. And as you may have seen, add-out coverage is probably more important than ever with the new smartphones than the data coverage that Fredrik alluded, to where we have a very strong position. So we believe we have a very solid offering now in the Norwegian market.

Jon Fredrik Baksaas

And also that the different versions of handset manufacturers seems to get better traction. Samsung has very good machinery for the time being. There are expectations around Nokia to come later this year, and basically they need to get something on the road which competes in these layers if they are going to be there as a significant world player. So these kinds of effects basically we feel it’s for the good for the industry that we get also a competitive situation between the handset manufacturers, and the operating systems for that matter.

Maurice Patrick – Barclays

Thanks, guys.

Scott Engebrigtsen

Next?

Stefan Gauffin – Nordea

Stefan Gauffin, Nordea.

Operator

Go ahead, please.

Stefan Gauffin – Nordea

Yes, I have a follow-up question on India. Could you just state the timeline of events in India now as you see it regarding Supreme Court ruling, decision from Department of Telecom? How long can you keep the license, expected auction timeline, et cetera?

Jon Fredrik Baksaas

Let me begin at the end of your row of questions there. The auction is – Supreme Court has said that the government needs to complete the auction within 200 days after the decision of the Supreme Court in February. So that goes to the September 3, right?

Richard Olav Aa

7th.

Jon Fredrik Baksaas

Okay. Then at the same time, it’s said that old licenses will not be pushed until auction is completed. So there is an alignment in time from that perspective. Then, the timeline that we now have in May, we expect that government of India will, and they have said that they will make a decision on this during the month of May.

There is now a dialogue between TRAI and the government. But we have, of course, seen before, that the timeline is sliding. However, what the Supreme Court has said that a completion of the auction needs to be done within early September. That, we understand, stands reasonably firm. So to be exact on days, which dates, et cetera, I think is a bit – I don’t need to be exact on dates, but the timeframe for decisions from the government of India is end of May.

Stefan Gauffin – Nordea

Okay. Thank you. Very clear.

Scott Engebrigtsen

We will continue for five more minutes. Next?

Andrew Lee – Goldman Sachs

Andrew Lee, Goldman Sachs.

Operator

Go ahead, please.

Andrew Lee – Goldman Sachs

Good morning, everyone. Just another, as you’d described, stretchy question on Norway. I wonder if you could just describe the competitive environment you’re seeing in a bit more detail there, i.e. the price around your phasing from Tele2 Network Norway, have those stabilized or risen? And do you expect the competitive environment to stay relatively benign through the year, and what risk do you see at the MTR symmetry being extended by the regulator into 2013? Thank you.

Jon Fredrik Baksaas

I think that the asymmetrical system was drawn up in a very fixed manner a little bit more than two years ago, and it was given a three-year timeline, until the end of 2012. And I think at that point of time, that was written in stone. But we’ve also seen initiatives from competitors in Norway opting for – trying to get a revised timeline on asymmetrical system. Where the government – this is not for the regulator to decide, it’s a governmental decision. It’s the Ministry of Transportation that takes that position whether there will be any traction on that idea, I cannot, of course, guarantee you.

But on the other hand, I think that the ambitions from a telecommunication policy point of view in Norway has reached its goals by establishing three networks, that of TeliaSonera through NetCom, and that of Network Norway, Tele2, and that of Telenor, of course. So, I think the likelihood of seeing that revised, I will, at least from my perspective, say is low.

On the competitive side, there will, of course, be different initiatives in different periods. So to say, the competition is over in Norway, that’s a definite overstatement. Competition will be there. And as we were charged of being overly aggressive when we revised our pricing structures in the autumn of 2011, there will be other elements of pricing competition going forward. So I think it’s difficult to say that the competition is over. On the other hand, it’s not as having the same kind of structure as we see in Denmark, for example.

Andrew Lee – Goldman Sachs

Thank you very much.

Scott Engebrigtsen

Next.

Peter Nielsen – Cheuvreux

Peter Kurt Nielsen from Cheuvreux.

Operator

Go ahead, please.

Peter Nielsen – Cheuvreux

Thank you. If I may return to your comments about new operating models, new business models, for the Nordic region, highlighting the Danish market, of course, where you’ve announced network sharing agreement. So far we’ve heard very little about this. And you’re now talking about a new business model, which I assume involves a lot more than simple network sharing. You’re also talking about shared customer service. Could you elaborate a little bit on what’s involved here? And also if this is something you see being transported to Sweden as well? Thank you.

Jon Fredrik Baksaas

I have to correct myself a little bit there because I used the word business model. What I meant was the operating model on how we use the different ingredients in the stack when we put all these elements together, and the result is services, all services in the market. So the word business model was a bit incorrect in my presentation. Sorry for that, Peter.

Peter Nielsen – Cheuvreux

But even so, could you elaborate a bit on the new operating model? What does it involve in terms of shared customer service, please?

Jon Fredrik Baksaas

Okay. That I can do. The changes in the operating model is basically that in Denmark we move from being the sole operator of one network. Two operators will use the same network, which obviously should give a little bit of effects that Richard was alluding to.

Then on the customer side, we have written an agreement with a professional customer-service-based company that basically will become our partner for how we source the customer service function in Denmark in the years to come. Knowing that customer service is both necessary, but still your own online customer interface will probably mean – take a bigger portion of how we engage with our customers in the future, which means that customer service in Denmark will be based on a professional partnership as a vendor of the function.

Richard Olav Aa

Just to add there on to your question, I think what we have learned from Uninor the last two, three years on running the partnerships is extremely valuable learning from the Group. We have been able in Uninor to take down the cost per minute on a comparable basis with the biggest operators in India in just two years.

And a big part of that is the new operating models, how we have used partnerships for networks, or used partnerships for the IT and used partnerships for customer service in India in a very professional way. And we see now great opportunities in the group to leverage partnerships in a much bigger way. And Denmark is probably now the most aggressive company in the Nordic stack on the new operating models. We’ll come back to this in great detail on the Capital Markets Day.

Peter Nielsen – Cheuvreux

Super. Thank you.

Scott Engebrigtsen

Thank you. And I’m afraid that’s what we have time for now. Any unanswered questions can be directed to our Investor Relations department. I think that’s all said here. Thank you for attending this morning.

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