Telenor ASA ADR Earnings Call Insights: Trends in Sweden and Upcoming Auctions in Mumbai

Telenor ASA ADR (TELNY) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Trends in Sweden

Jon Fredrik Baksaas – President and CEO: Specific, when you ask a question like that, you probably want figures, but I won’t give you figures on it, but I will give you the rationale behind it. Norway is a country where the households are placed in a very rural pattern. That means that, a new cable structure needs to address a certain type of density and the twisted-pair technology, as we know from the history, is gradually losing its potential. Then we have the core structures, which reach out to roughly 1 million households out of 2.2 million altogether. So in a way, the country is having high capacity cable on core structures to the amount of 1 million out of 2.2 million. Then gradually the fibre connectivity will stretch out to the remaining part and also to a certain extent substituting at least the access side of the core structures; and this is what’s happening really in these times. We need then in all to be really efficient long-term and access also to 800 spectrum so that we can use LTE in the real rural areas for higher capacity Internet access. As we know that 800 spectrum is still pending from the government. So this is a pretty complicated package if you look at it holistically. As we speak, we are then rolling out fibre in those areas, where the density is sufficient to give us a certain payback structure on how we build it up. So we were not rolling out uncritically fibre to rural structured areas.

Ulrich Rathe – Jefferies: Ulrich Rathe, Jefferies. I was just wondering on Sweden. The revenue downturn that we’ve seen on the fourth quarter compared to the third quarter and second quarter trend, is this now sort of what’s going to happen over the next four quarters at this rate until the like-for-like results normalize or how do we look at this 2.5% service revenue decline that you reported in the quarter and also in a similar sort of vein, is the impact on the margin that we are now seeing in the quarter, is this sort of the normal level? Is the first quarter sort of the first normal given the shifted tariff structure?

Richard Olav Aa – EVP and CFO: I think this – the shift in how we do the hands, going from a handset subsidy to a discount on the service revenue, as you say, they create some confusion in the numbers. But we’ve seen a good trend in underlying service revenue growths in Sweden in 2012 and we’ve kept revenue market share and we estimate the service revenue growth to be about 2%. So I think mostly importantly now, given that this – you are comparing a little bit apples to bananas when you look at the numbers historically. I think you have to look at the development in the gross margin, so more importantly is to see that we have been able to grow the gross profit and also follow the OpEx in Sweden until this washes itself out. As you recall this was down then in fourth quarter of 2011 the first time and the Swedish customers typically have a two-year contract, so it will take about 24 months before this kind of normalize itself entirely, but this is how the accounting standards kind of forces us to do this. We do what we think is right for the market and then the accounting will follow, it’s not the other way round, but this is how we feel ii’s most prudent to account for it, but we can also take this offline with our IR to go in detail on this. But main message focus on the underlying gross margin and development in Sweden for this period and the next period.

Ulrich Rathe – Jefferies: Can I just clarify, if this happened in the fourth quarter of 2011, obviously year-on-year impact should have been there in some material way already in the second and third quarter. But we are now seeing that the reported – I understand it is apples to oranges, but still the reported service revenue decline has sort of dropped by 3 percentage point, which is a sort of a stark drop in trends, despite the fact that in prior quarters, the effect was – principally was there. So what is this? Is it a big step change in the fourth quarter in the mix or how do I interpret this?

Richard Olav Aa – EVP and CFO: Yeah, you are right that the fourth quarter is a little weaker on the underlying service revenue growth than the previous three quarters. There are effects on – among other things roaming in this quarter and also the volume of messaging. But I think it’s way too early to preclude any trends on this. As you recall, we had a very strong third quarter in Sweden. So I don’t think you should bake in any trends one or the other way, it’s quarterly variations and what have you.

Jon Fredrik Baksaas – President and CEO: And fourth quarter 2011, they have very high handsets portion.

Richard Olav Aa – EVP and CFO: Absolutely.

Upcoming Auctions in Mumbai

Terence Tsui – Morgan Stanley: Terence Tsui, Morgan Stanley. Can I ask about the upcoming auctions in India and in Mumbai in particular? You’ve said in the past that you wanted a 50% reduction in the reserve price and so far as I understand you’ve got a 30% reduction in Mumbai. Is that enough and (do the other sectors) interest you? The follow-up on that is just where you think potential consolidation (persuasion) is more likely and what form could this take?

Jon Fredrik Baksaas – President and CEO: We’ve been very clear with what’s required in for the new auction in Mumbai. We have voiced a 50% reduction in the same alignment with what is anticipated to happen around the CDMA licenses. So we believe there is a rationale for why it should be 50%. There are two prerequisites that needs to be in place and that is that the reserve price comes down to a level where the business case can fly. Number two, that the promised refunds of the licensee fee from 2008 is actually also coming through. This is from our point of view two needed requirements of both from a profitability level in Mumbai as such, that’s also from a cash flow approach looking at the INR155 billion peak funding. As for the consolidation, I have nothing more to bring. One can speculate in many directions, many players have much more clarified regulatory regime where people or players and the different companies will sort of know their position. So one can only guess what can happen and I don’t want to sort of add fuel to that speculation, but that things will happen. We’re pretty sure about that.

Andrew Lee – Goldman Sachs: Andrew Lee, Goldman Sachs. Just question around CapEx. Given your analysis of the underlying CapEx to sales in 2013 earlier in the presentation, and the acceleration you’re doing in Norway and Asian network swaps, should we expect reported CapEx to sales to snap down in 2014? How quickly now do you we can get your medium term target of around 10%?

Richard Olav Aa – EVP and CFO: The underlying mobile business is already at 10%. So this will depend a lot on how we migrate in Thailand from the concession network to the license network and the pickup of fibre in Norway. Both those two programs are not done in one year. But obviously we have further shorter ambitions to reduce also the CapEx on the underlying mobile operation, but I think we’re not going into any guiding here for 2014 on this, because we need to see more clarity, both in Thailand and Norway on the market demand and migration and regulatory in Thailand before we kind of firm up these plans 100%.

Andrew Lee – Goldman Sachs: It seems like there is a large kind of timing effects here. Can I just ask a follow-on question that is totally unrelated unfortunately? Just on your buyback, should we expect the buyback reload in 2013, given you have got more certainty around India and potentially around Russia on your net debt as you said is just a one-times EBITDA, should we expect you to use the full 5% buyback allowance in 2013 if you get it?

Richard Olav Aa – EVP and CFO: Yes, first of all, the buyback has not been discussed with the Board. That comes later, before the general meeting and is also to be approved by the general meeting. So we kind of have no use on that, but I would say, given now that India losses are coming to an end, we see a very strong pickup in the normalized earnings per share due to that. As you know, we have not normalized for India losses earlier. So that could cater for very solid growth in the dividend going forward. So that could give you maybe some indication on how we are looking at this slightly more on the longer-term basis that I think most of the growth should come on the dividend side. I would also note one more thing that this is a concern to us, is that you see now that we are 82% complete on the buyback program and we are now in February. So the liquidity also in the world stock markets are drying up. So it makes it more complicated to buy back share and it’s also with this program we have bought back around 9% of the shares. I think we also should be a little careful how much of the shares we buy back on Telenor just due to not disturb the liquidity even further in the share.

James Britton – Nomura: James Britton, Nomura. I’ve got a question on your margin target, please. The 34% target seems to imply about a 50 basis point contraction for the Group if you strip out India. So I just wondered how this was consistent with the 2013 OpEx target, which you have already stated and which seemed to imply a margin expansion of more than 100 basis points in 2013. Then secondly, I just wanted to ask whether the strategic decision to accelerate investment to market share was broad-based across all markets or quite specifically targeted at a few markets and whether it was a 2013 strategy or very much a medium strategy?

Richard Olav Aa – EVP and CFO: As I said on the margin, we are still early in the year and we don’t have full visibility on all the OE initiatives for the year, so that may outturn to be on the conservative side, that will – the year will show. But of course our ambition is to deliver on the operational excellence agenda. Secondly, we see handsets being a big part of revenue coming in with lower margins so that’s also an effect as we see a very – visibly in DTAC figures this year. When it comes to the CapEx to sales, we see us be lower of the swaps in Malaysia and Pakistan into 2013 that should – you should adjust for when you say that. I think again, I’m repeating myself a little bit. It’s a lot about Norway and it’s a lot about Thailand, very discretionary investments targeting a reduction in regulatory cost in Thailand in monetizing on the data demand and in Norway, strong investment also on the mobile side, but then specifically attacking the very diverse household structure in Norway with modern fixed technologies.

James Britton – Nomura: So just to be clear, the higher investment strategy and market share strategy is pretty much related to those markets, you are not going after an ambitious market share push in other markets?

Jon Fredrik Baksaas – President and CEO: No, I mean we have a strategy that we want to at least maintain our market share that goes to sort of KPI throughout entire group. But we have not in a big aggressive market share angles in any market around the world that in Thailand it’s basically to capture the data demand and reduce regulatory cost. The only exception I would say on that when you asked your question that way, James, is on the fibre in Norway. Fibre in Norway, we’re very careful so far because we haven’t seen the profitability. So we have a market share on consumer today about 16% on fibre. We said in the Capital Markets Day that we want to grow that to 32% and maybe we want to growth that even further as we see profitability coming in there and we really need to take a position, so I would say, all-in-all maintain, maybe slightly grow market position is the kind of key message to all the business units with the exception of fibre, where we probably want to go more aggressive.

Barry Zeitoune – Berenberg: Barry Zeitoune, Berenberg. I’d like to ask a question about Thailand specifically and about handset or the lack of handset subsidies. Why do you think it is that on our handset subsidies in Thailand versus other market? Do you think it’s a risk that handset subsidies are introduced because you push for 3G in Thailand?

Jon Fredrik Baksaas – President and CEO: Well, the main reason for not – that subsidies is not a means that are being used in countries in Asia is at a prepaid level of every market. In prepaid markets handsets are usually sold separately from the connectivity part, so that’s a reason for that.

Barry Zeitoune – Berenberg: Do you see a risk that you push more for postpaid with 3G in Thailand?

Jon Fredrik Baksaas – President and CEO: That’s a longer transition, because it involves – or in Thailand that wouldn’t be that kind of a problem, but the general fact is that they – the cash portion of the economy is so strong that the turnover of monthly revenues for – monthly income for people is based on cash more than based on bank accounts as we know in the West.

Richard Olav Aa – EVP and CFO: I would say also to add on that. I think in Thailand what we more are focused on there is bundling with services. On the prepaid side, we are bundling now new six services and we’re bundling Facebook and we have other types of arrangement with big global partners to bundle prepaid services where you can buy smaller structures of connectivity bundling services. That is very successful and probably a better recipe to monetizing data than bundling with handsets.

Thomas Heath – Handelsbanken: Thomas Heath, Handelsbanken. Two questions, if I may. Firstly, on Norway, when 4G is sort of becoming a reality, do you see sort of further potential to differentiate the 4G offering and to earn more on 4G? In the neighboring countries, there has been no premium at all, in Sweden, in Denmark, that would be interesting also if there has any margin impact. Then secondly, if you could have some thoughts on financial services in Pakistan, you seem to be doing very well. If you could share maybe some penetration figure or a penetration target there.