Telenor ASA (ADR) (TELNY.PK)

2011 Capital Markets Day Conference Call

September 22, 2011

Executives

Marianne Moe – Head of Investor Relations

Jon Fredrik - Baksaas, Group Chief Executive Officer

Morten Karlsen Sørby – Executive Vice President and Head of Strategy and Regulatory Affairs

Bjørn Harald Brodersen – Head of Group Sourcing

Berit Svendsen – Chief Executive Officer Telenor Norway

Kjell Morten Johnsen – Chief Executive Officer Telenor Serbia

Henrik Clausen – Chief Executive Officer, DiGi, Malaysia

Sigve Brekke – Executive Vice President & Head of the Telenor Asia operatio

Yogesh Malik – Chief Operating Officer Uninor

Richard Olav Aa – Executive Vice President & Chief Financial Officer

Analysts

Peter Kurt Nielsen – Cheuvreux

Maurice Patrick – Barclays Capital LLC

Ulrich Rathe – Jefferies & Co

Jakob Bluestone – Credit Suisse

Andy Parnis – UBS

Barry Zeitoune – Berenberg

James Britton – Nomura

Stefan Gauffin – Nordea Markets

Laurie Fitzjohn-Sykes – Citi

Will Milner – Arete Research

Maurice Patrick – Barclays Capital

Stefan Gauffin – Nordea Bank AB

Peter-Kurt Nielsen – Cheuvreux

Espen Torgersen – Carnegie

Presentation

Marianne Moe

Good morning and welcome to Telenor Group's Capital Markets Day 2011. My name is Marianne Moe, I'm head of Investor Relations, and I have the pleasure of guiding you through the program here today. I hope you all have the presentation materials available, also for you watching the webcast.

The key topic of the Capital Markets Day this year is operational excellence, and as some of you may remember at Capital Markets Day last year, we announced some Group ambitions on operational excellence. This year we will take you into some of the initiatives we are working on to deliver on these ambitions both on business unit level and also on group-wide initiatives. So let’s have a look at the agenda for today. We will start by Group overview and the Group’s strategic direction by the Group’s CEO. After that we will take you into the Telenor Group’s approach to operational excellence how we combine local and group-wide initiatives, and sharing our best practices, and then including a deep thought into sourcing, which is one of the key group-wide initiatives in Telenor.

After the break, we will have presentations from Telenor Norway, Serbia and DiGi. And in the second half of the day, we will have one session on Uninor, also that with an operational excellence, initial approach and what we are doing to become and who is our low cost operator in India. And towards the end of the program, our Group’s CFO, Richard Olav Aa will take you through our financial priorities including the revised dividend policy announced earlier today.

And as last year after the presentation here in the auditorium, we will have breakout sessions with senior management from Telenor Norway, Uninor, Serbia and DiGi.

So, I will not keep you waiting any longer, and I’ll soon leave the floor to our Group’s CEO, Jon Fredrik Baksaas. Please note that the CEO will join the CFO later today for a joint Q&A session, so there will not be a Q&A session after this presentation. Okay, Fredrik.

Jon Fredrik Baksaas

Yeah, good morning, ready to go. Welcome to Fornebu this morning. I have to say that this has been a very, very wet summer and to enter this room in this beautiful autumn weather that is better the changes that this climate on Norway offers us.

But not being disturbed by the climate, I hope that we have some interesting aspects in the Telenor presentations today. We have a great team here both by quality and numbers. So I hope that you can get to know them, get to know the ambitions that we are putting forward through this day.

So let me then start with a bit of the development trends that we have seen in the industry lately and probably which will be part of the picture going forward. Let me start and with where we are over the last periods from a financial perspective. We are a Group now enjoying a bit of the growth factors that we’d see in this industry, and we are not exposed to those economies that basically have a bigger problems with their national economies at least for the time being under these circumstances, one should probably at that.

But on the other hand there is a strong growth momentum in Asia and this has given us through the last quarters and through a couple of years, pretty good growth figures at the top line. And those seeing 2009 pretty meager, everyone in this room probably remember what that year was about. That was developed to handle the consequences and the impact rising from the financial crisis that the peered autumn in 2008 and moving into 2009.

Through that period I think we changed a little bit of the focus in the Telenor Group because we really went into the operations and we’re looking at what is the best way of behaving under those conditions that we are at that time so, and as a consequence we recovered through the operating efforts and delivering on operating results, which has given us this cash flow profile of the Group as you can see at the lower part of this slide.

So through that period coming from $11 billion of operating cash flows back in 2008, the last 12 months figure, when we reported our second quarter figures were 18.6, and whether we can see 20 on the horizon coming up here, rather use sort of up to the future to decide but we don’t shy away from that kind of goal at least.

With this development in the group over the years, we feel now confident that we can adjust the shareholder remuneration approach in the Group. We have the ambition of having a competitive level of shareholder remuneration by the combination of dividends and share buybacks and the record will come back to the details of that.

In growth environments, we have had very strong ambitions over the years in the Telenor Group to grab our fair share or market share. We feel that we have managed to do that reasonably well there are of course some markets that’s struggled to maintain or take their fair shares in faces, but the overall picture is that we have, we’ve been able to capture market share and develop our operations, and that needs to continue. And we do have in the Group a combination of markets, the overall aspects of the international economy is well known in this room, so I won’t drill that very long for that aspect, only to mention that we see and we proceed the Nordic countries being reasonably robust and, and moving quite strongly under the circumstances that we see in Europe for the time being.

We have of course a mixture and very externally directed economy in Norway, but over the years we have also in this country managed to develop the general productivity factor of the society, and we have managed to stay competitive in those things that we make in Norway and produce and deliver to all the markets though they being, of course, very much natural resources-based.

The other markets in Scandinavia have also done reasonably well through this financial crisis. It remains to be seen what kind of consequences that might come next but at least where we stand today. We feel that the Scandinavian part of Europe is a reasonably strong economic platform on how we are operating.

If we then take Southern Europe, Southern Central Europe, where we have three operations, the picture is a bit more varied. It seems like Serbia is sort of on the better side of that equation because that’s where we enjoy a growth factor, pretty strong really, whereas Hungary has been more of a struggle for all three main operators over the last period of times.

Then for Asia, again, we do not see at this point of time a weakening of the Asian economies. I’d say on the contrary, we do see strong economies moving forward, but of course their dependency on international trade and industry, their dependency on the energy prices with potential consequences pouring into food prices is of course something that is constantly there. But where we are today, we don’t see any specific exposure of negative signs for the time being.

And I again have to say on the contrary because when we launched the 3D services from DiGi quite recently, sorry from DTAC in Thailand quite recently, we saw a tremendous uptake immediately. So there is a surge, there is a need in the marketplace for these services.

And then this takes us over to the thriving part of this industry. I think we are all living examples of how we have started to use our connectivity and our handsets differently over the last years. I use to say that make a note that when you start to make use of a new service and how deep and widely you continue to use it because this is sort of a living examples on how we as individuals start to and have and to reap the benefits of modern communications in some way or another.

Some years ago, it wasn’t that obvious that we were sitting in this room with the phones on. We never take them out off when we come here to Telenor, but on the other hand we never take the e-mail off either. So we’re sitting here following the markets and we are following our e-mail account and we’re doing this and that. And I can all see you sort of dipping your head and then moving into the handsets and the connectivity that is there.

So we are living examples on how the society moves into becoming more and more digitalized. And in that sense all we know the beginning, is it so that all the things that has got electric power over the years, now will get communication. Well not necessarily all of them but a lot of them will get a communication attached. So there are different business models arising and we are there to create the connectivity, we are there to partner with those that have good ideas, good ideas that we believe in that can have a market pickup in the longer run and the examples on this slide are plentiful.

And this is of course driven by a number of factors. One of these is the broader bandwidth that is being made available when new frequency plans are coming to the marketplace and when this is done in a standardized and a bigger geographical picture then we have sort of business model potentially taking off and it’s of course also handsets. It’s no doubt that Apple and their success has thrown a lot of new energy into the handset sector and also a lot of new energy into how we utilized these handsets and the way we start to entertain, to be entertained by new services and reaping the benefits of modern communications. And there is a rapid growth in that dimension out there.

Handsets vendors are competing for market positions. Both Samsung and hopefully also Nokia after a while and others will be HTC and others will be competing for positions in this field. And seen from an operated perspective, a varied handsets portfolio out there with a lot of possibilities is something that also will favor utilization and usage of the connectivity factor and also the bandwidth.

So here there is a lot of application and service innovation which will be some of these aspects will appear very close to the operators, whereas other will be part with a broader ecosystem being more distant. And we have to throw our energy into this sphere in such a way that we can position Telenor also in the service part of the digitized economy.

The big megatrend of everything becoming digitalized is sort of an interesting twist on the word in our industry because we’ve fully digitalized sort of the old analog systems back in the 90s more than 15 years here in Norway. But the world becoming digitalized when it comes to services is sort of a big megatrend that is sort of a buzzword in the industry. That doesn’t take away that the operators in Telenor in this case will predominantly remain in mobile operator, providing the connectivity that being voice or that being data. And this connectivity factor will be sort of the main business model in sort of the foreseeable future as we see it.

But on the same side, there are, as I tried to illustrate on the previous slide a lot of things going on in the service field and we need to take certain positions also in that respect and that will give you a couple of examples. The ecosystem here is constantly changing and this is driven by factors which I mentioned on my previous slide. In the Telenor Group, we have taken some initiatives into the service field and we could have taken more but still let me mention a couple.

Financial services is one of these elements of digitalized, of service becoming more digitalized being carried into the hands of the consumers through the mobile phone and enabling customers to participate in financial activity quite differently from what we used to. And this is the case both in Scandinavia as a mature market, as well as in Asia where we can say that these feature to a great resend or emerging.

Here in Scandinavia, we have facilitated in Norway a digital ID to the SIM card, until the end of this year, there will be more than 100,000 users using their mobile phone through their bank ID which we call it embedded to the SIM card which enables me and other users to open your bank account and to do your banking activities from the mobile handsets in a secure way.

And this morning before coming here, I used it to get rid of one of those nasty bills for a period of my mobile phone, just by activating the bank ID. And here we have an example of the trust factor that the mobile operators can bring to the market as well as a convenience factor, because we can sort of handle all financial needs on the run and when there is time to do that.

And how many of you in Scandinavia have been visiting a bank lately? Well, its probably 10 years since I was at least in a bank doing sort of regular banking stuff expect for all the special purposes, maybe.

Now, one more dimension of the financial services. In Asia, we are offering financial services out of our operations to a great number of customers that previously were unbanked. Many of our customers do not have the bank access as such, and then to start offering money transfers as a simple service but very useful service between family members working in a city, living in the countryside through the mobile system as a money transfer using our distribution network, our agents which are used to sell communication services, they can add the extra feature of being distributors of financial funds between individuals. And if you don’t have that service available to you from before, it’s of course a tremendous new service that both brings efficiency, security and convenience to the people.

Another example, which we have had in Asia is to bring about brokering places in the Net where people that have something to share with others, something to sell with to others, can offer their goods, can participate in the marketplace, get to know prices and bring their goods and services to special marketplaces where prices are known.

And again, the modern communications brings new things that one takes for granted in the Western world, but brings new efficiency to new user groups. And it's this micro-activities that really brings the GDP growth and bring more visibility to the GDP growth in these markets.

So what we’re doing is to leverage our position. The brand, the distribution, a good quality network and of course people that understand these marketplaces reasonably well and as well as we are willing to put efforts into creating these kinds of new services.

At the same time, as this is happening there are growth factors, in particular related to mobile data growth that is sort of the strong driver for the time being. In Norway, the data growth and the value add coming from that basically compensate for the existing price pressure on voice and SMS. It does not fully compensate for the reduced termination rates and roaming rates. But generally speaking, in a pretty stable voice minute market in Norway within its existing price pressure attached, the growth in data volumes on mobility is compensating for that price competition in broad terms.

And here we need to change the pricing philosophies, both in the industry and being Telenor, and we need to relate the pricing structures to capacities taken out of the systems, customer by customer or by speed categories. And by this illustration, we are bringing forward sort of the key on how we are thinking about pricing elements for the time being, and this has of course to be tailored to each specific market. But we do believe that the pricing factor will be tilted towards both capacities and speed factors into the future.

And why is that important? Well, the unlimited concept that we had a couple of years ago in the industry proved to be much too expensive in the sense that unlimited users grow the cost sides out of control. And there needs to be a balance between the resources fed into the system as the revenue generated from the system in the long run of course.

In parallel with that, we feel it’s important that there is a balanced device strategy out there. We feel that the industry will be better off with a balanced portfolio of handsets coming from different concepts.

The Android market is one sort of area that crystallizes itself for the time being, Apple is another. And the big question is whether Nokia and Microsoft also will come forward with their historical strengths being combined together in a new set of handsets that hopefully will come during this autumn. And in that sense, I think the Nokia World, which is coming later this autumn might have some newcomers of interest to the industry.

Let me then move to the concept of this Capital Markets Day, which is operational excellence. For a very long time we have had operational excellence as part of our leadership expectations and included in the Telenor way of working, but that doesn’t mean that there is sort an end to that kind of relentless work. This kind of work is ongoing, because technology is moving, competition is moving and markets are moving. So to utilize the new concepts in the industry is of course something that we have to be open towards at all times.

There is no option for us to sit still and wait to do, or to execute on an efficiency measure if it’s available. And if we can do the smart things at the right time and hopefully a little bit earlier than others, we will bring competition efficiency into the structures both of the group and the operating companies. And we used to say that everything that was done yesterday can probably be done smarter tomorrow in some way or another. So, to think alternatively on how work processes and combinations in the IT stack, utilization of spectrum and how these things can be pushed and push several existing imaginary limits into new ways of utilizing the system. And you will hear things of that later today.

And as a group of course, we need to replicate. There are elements that comes out of need in one market that basically challenge how things were done in another market from yesterday. And we need to utilize that for the good of the competitiveness of both the companies that are competing in each market as well as utilizing the scale of the group, standardizing on the right elements, and get the scale to work in the same way as we’ve got it to work in the vendor discussions that led to the network swaps that we are in the midst of executing. So to leverage these scale and to increase these group-wise efforts is a bit of the challenge that we have addressed also by reorganizing the Telenor Group just recently.

And then next two slides, I will be a bit more specific on two very important elements in the portfolio of Telenor’s activities, that of India and that of VimpelCom. And there will be a broad session after lunch on India. So I would limit myself to sort of the broad factors.

We are on track on the business case when it comes to sort of the ultra frameworks. We have of course experience, a much tougher price competition and a regulatory situation, which has sort of developed into almost a (message) for a long period of time, which of course has left us with elements of insecurity when it comes to the general framework of investments in India. But we have managed to navigate through a number of those obstacles that has arisen. And we have also managed to establish a perception of Telenor and Uninor bringing one way of working into the Indian environment with reasonable success.

So on an operating side, Sigve and his team, Yogesh and others, has done a phenomenal job in bringing forward the sales and distribution system, getting the brand visible at street level, and creating now a market position of more than 20 million subscribers after one year plus of operations.

Here to survive in the longer run, we need to take this operating model into a level of slimness that we have never seen in the Telenor Group before. Given the price level of telecoms in India, the cost level sort of needs to find a level that can handle the price level and we are in the midst of that, and Sigve and others will point to our actions in that sense.

The last item in India is of course the clarity on the regulatory framework, in particular when it also comes to consolidation steps in the industry is something that every operator in India is looking to and to get out of the unsecured year-round the license part. We are with clear opinion that the original framework for the licenses offered in 2008 with access to 6.2 megahertz, is part of the promises that the governments offered back then and we have responded to through our investments. And we have reasons to believe that our story telling in that sense is about to be visible among stake holders in India.

Then next VimpelCom. We believe that there is a lot to gain from VimpelCom, becoming more operational-oriented to focus at market activities in each market and to drive the same scale effects that we have demonstrated in the Telenor Group. And we are happy with how the new management in the VimpelCom Group is expressing their ambitions on operating focus going forward. And we believe it will lead to a capital efficiency in that group, which (can) compares betters to others and in that sense, we are talking about moving forward with our competencies more closer to how and what is the needs of the VimpelCom Group moving forward.

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