Good morning, and welcome to the presentation of Telenor's results for the second quarter of 2012. We welcome you, whether you are here in the room, listening on the phone, watching the webcast, or using mobile video. My name is Tor Odland. As usual, there will be a Q&A session directly after the presentation. I will come back with how we conduct that. We aim to end the action here on stage around 10:00 A.M., including the Q&A. To present the figures today, we have our CEO, Jon Fredrik Baksaas, and our CFO, Richard Aa. First, I'll leave the floor to Mr. Baksaas.
Yeah, Tor, thank you, and good morning to everyone. I hope you got here dry this morning. It's been a wet summer in many ways. This second quarter, 2012, we are having another good quarter in Telenor. Operationally, we are quite pleased to present a quarter with continued growth and solid margins also this time. The growth is somewhat slower than previous quarters, but still, it's strong in the sector. And cash flows in this quarter amounts to NOK 5.1 billion, which is roughly 20% cash flow margin.
The performance in Norway is quite strong this quarter, and, given the period that we've been through some quarters, some quarters back, we're quite pleased that we can show signs of improvement and growth again, after a period where we were a bit late in the competitive response to the marketplace. The situation in India remains undecided from a regulatory perspective. The final auction and conditions are not yet confirmed. And in order to reduce this risk going forward, and also to reduce the cost level, we have decided to restructure the Indian operation to focus on the nine best-performing circles. And we will get back to this more in detail throughout this presentation.
To follow up on the ambitions of the group to meet with expectations on attractive shareholder remuneration. Also, this year, we are launching a 3% share buyback program, and Richard will do the details on this when it's his turn. If we then take a deeper dive into the Norwegian performance this year, this quarter, we are very glad that the migration to bundle mobile tariffs has been working the way we intended. It seems to work nice for us. The EBITDA margin has recovered, and we saw these trends in the first quarter, and they are more or less confirmed in this quarter. 52% of our post-paid consumer base is now on the bundled tariff structure.
This means that the majority of our active data users are now enjoying data traffic from these bundled traffics. This, we claim, will reduce the risk of the cannibalization from IP-based services, from voice and SMS moving in that direction in the periods to come. However, that work is not over yet. Total revenues in Norway increased by 2%, driven by 8% of mobile revenue in mobile revenues, and adjusted for one-time effects in second quarter last year, mobile revenues increased by 5%. Standing here last year, you may recall that that was after the network failure. So far this year, we have seen a more rational, competitive market and environment in the mobile sector.
However, in the pricing structure that we now have adopted better reflect the underlying usage pattern from customers. And that needs to be strengthened also in the future because of the heavy investments that we are undertaking at the same time as we are seeing the very strong shift from voice and SMS to data services. The fixed revenues continues decline to decline more or less at a regular speed. However, not as fast this quarter, you may argue, compared to previous quarters. But for the first time, we are recording the number of lines connected in the fixed line for telephony services below 1 million lines connected. And, those of you have better follow statistics, this was close to 2.5 million at its peak.
So it's really a big transition that has been going on and still is ongoing. Of course, this will also have implications on the future structural in the group, as we move, we'll move along and don't see this kind of development stop here. We are continuing to make significant investments into the high speed both fixed and mobile networks, and in order to deliver the superior coverage and capacity service that we do in Norway. So far this year, we have spent NOK 2 billion to modernize our networks, to bring capacities deeper into the networks, and to strengthen the high-speed data, and also prepare for 4G to be launched later this year.
Throughout this year, all in all, we expect that the CapEx figure will end roughly at NOK 4 billion for the full year. Then, if I move on to Europe, Kjell-Morten Johnsen was recently appointed the Regional Director of a new set of countries, of a new combination in the Telenor Group. We have decided to combine Sweden and Denmark with that of Central and Eastern Europe, seeing these operations more of a similar structure. And we anticipate, and have the ambition to, grow the ability to drive the industrialized agenda in these countries going forward from here. From a per-performance perspective, it's a bit varied picture. Sweden and Serbia show strong development this quarter. Subscriber growth, 47,000 in Sweden and 22,000 in Serbia.
Handsets and tablet sales dilute the margins to a certain extent, as these handsets distribution has become part of the go-to-market strategy. There is a good OpEx development, both in Sweden and Serbia as well. Migration from prepaid to postpaid continues in Serbia, and results in an ARPU growth. Handset subsidies is now also becoming a part of this strategy. The reported EBITDA in Sweden includes a provision of regulatory costs from previous periods of NOK 48 million. Adjusted for this small time one-off, the margin is slightly up year-on-year in Sweden, from 24%-25%. I said varied picture. If we then address the Danish market, it continues to be very tough.
It's an intense competition there, price pressure, and in combination with loss of wholesale revenues, this resulted in a weak revenue development and also reduced profitability. In Hungary and Montenegro, there are new sales tactics reflecting the overall economic situation of these two countries. Telecoms, as an industry, has been targeted to cover some of these revenue shortages that the governments are looking for. The new telecom tax in Hungary comes in addition to the one that we already have, but which is assumed to end by the end of 2012. So, we are in a half year period where we have a double taxation set up in Hungary. If I then make some comments to VimpelCom.
Through two transactions this spring, Telenor has re-established the ownership position in VimpelCom that we had before the dilution that took place after the Wind transaction was completed. The Russian anti-monopoly service, FAS, argues that our deal with Wind is in violation with the Russian Strategic Investment Law. There is a court hearing scheduled over the issue at the seventeenth of October. In the meantime, there is an injunction in place which blocks upstream of dividends from VimpelCom in Russia to VimpelCom Limited, and this has made VimpelCom Limited to postpone final dividend payouts for 2011. Of course, Telenor has been in Russia for many years, and we know our whereabouts when it comes to the Russian law, and of course, respect any national law in any country.
However, in this one, we solidly believe that the claim is without merit, and in that, we have at the end that we are in full compliance with the FAS approval that was granted in 2010. The FAS even said last month that it was pushing for an out-of-court settlement between shareholders of VimpelCom. And as always, we are ready to engage in such discussions if the opportunity arises. However, as we have indicated and emphasized on many occasions, the operational performance of VimpelCom is to our great concern. And we believe that the operational improvements in the group could create visible value creation. We are continuing to follow up on these issues and push for an improved operation and performance in the group.
As we saw in first quarter 2012, we saw some improved performance in Russia, showing that VimpelCom might be back on track when it comes to go-to-market activities. And this, coupled with the recent announcement of LTE licenses in Russia as well, seems to position the company quite well. We have a long-term perspective in VimpelCom. We've always been, and we want to impact the operational development of the group. Asia still for Telenor represents the source of growth. It's in the Asian economies that we see ongoing growth and ongoing usage patterns changing in the different market places. We're 9% organic this quarter in all our four established markets.
We have a high activity level in all operations, with network swaps and network improvements in the region. In particular, in these days, when we embark on the swaps in Pakistan and dtac and Digi. Digi soon being finished, dtac more or less halfway. In the two of our biggest Asian markets, Digi and dtac, there is strong growth, I'd say, on seeing the market moving to data activities. And also, new devices will be very important going forward. And we see also here, handset manufacturers opting for new smartphones below $100.
For those of you that has followed the industry over quite a period in time, the real explosion in Asia for mobile activity has happened when we saw handsets on the 2G generation coming down below 50, and even reaching 20-30, the $20-$30 bracket for handset prices. So we believe that this, we will see a similar kind of development also in the smartphone area and believe that the mobile operations in Asia is fantastically well positioned to entertain that kind of development trend. However, in Grameenphone this quarter, we have a too soft revenue growth compared to market in general. So there are things that we need to come to grip with in Grameenphone, in the periods to come.
We do see signs of that already. The subscriber growth was now 16% higher than than last year. And the competitive situation in in Bangladesh, where the penetration is the lowest compared to the other operations has intensified. We have several initiatives then to to turn this trend and anticipate that second half will be showing improvements from where we are today. In Pakistan, we have another solid quarter, strong top line growth, 18% in local currency, driven by a higher usage as well as increased subscriber base. And also in this quarter, we see that financial services really takes a big portion of that growth element, 4% this quarter. </transcript
We have here started the swap with the ZTE, and we hope that we will be able to carry through as much as possible throughout this year, as this will be a good contributor to improved energy efficiency in the network, where energy distribution is quite a challenge for all operators. Generally speaking, the grid was having only half-time deliveries for the time being, and that means that we have to run base stations on diesel to a large extent. The new network generation will alter that quite considerably. Coming then to India and Uninor. Let's refer a little bit to the operational performance of Uninor in the second quarter.
Once again, I have to say that we're impressed of the Uninor management and their ability to keep on the work under these challenging conditions in the regulatory field. We see 2.2 million new subscribers this quarter, and we continue to take market share. According to the regulator, we took 18% of net adds in India in May, in the month of May. This has taken us to straight below five percent market share pan-India. In addition to this, we are reducing the operational cost base, and as a consequence, the operational losses is gradually being reduced as well, as you can see from this slide.
However, due to the high uncertainty on the regulatory side, we have decided to expense all our investments in Uninor, in Uninor this quarter. That means that we do not take anything of what we usually account for as CapEx. We take everything of that into the P&L. So we are showing, compared to previous periods, somewhat weaker EBITDA development in Uninor this quarter, but this is, this comes from this change of accounting principles. With the continued subscriber upgrade and cost efficiency measures that we have done, we have now decided to focus on the best-performing circles. And some of these will also reach a bit of break even towards the end of the year and beginning of first or the fourth quarter.
On the restructuring of this, we have made some decisions of quite importance. With the regulatory uncertainty in India, and, as you know, both the timing and the framework of 2G is still unclear, we have decided to restructure the operations and focus on the best-performing circles. We will then gradually scale down operations in four circles. That will be Kerala, Karnataka, Tamil Nadu, and Orissa. And these four circles, they represent 14% of Uninor's revenues in Q2, and also 14% of the subscriber base in June. However, they do account for a much higher relative proportion of the EBITDA losses in the same period. We then plan to reallocate the resources within our Indian footprint from these circles to other areas.
By doing this, we believe that we can make Uninor self-financing. That means cash flow break even within the end of 2013. In our previous business plan, this previous target was in first half of 2015. So really, we are taking cash flow break even one and a half year earlier on a more concentrated, in a more concentrated geography. As before, we are firmly committed to the peak funding limit of INR 155 billion. And of course, we urgently wait for clarity on the auction framework and the timeline on that one. To conclude my presentations on this second quarter of 2012 reporting, I'd like to mention three things.
We want to move forward on what we see in the Nordic countries when it comes to how to handle the transition from voice to data. In this under these challenges, we need to adopt new pricing principles and apply pricing structures that better reflects the change in user behavior from voice to data and IP services. And the examples of this are plentiful by the people in this room, because we are all part of this change. We want to make sure that we utilize the modern networks in a way that gives us a competitive edge and makes it possible to monetize on these investments in the longer run.
Coupled with this, there will be initiatives also from the Telenor Group to take positions and explore opportunities on the service side of the new ecosystem that are digital services. Secondly, we will execute on operational excellence. We need to see more and continued progress towards targets we've set for 2013, and focus on execution and closely follow up on our targets for 2013. Here we are—we will see a combination of local efficiency initiatives in combination with group-wide initiatives based upon the scale of the group and the competencies that we have in the different opcos.
Here, we are also thinking about new operating models, and at the center of everything that we're going to do, we need to think about how we go to market and how we treat the customer side. And finally, and very important as well, make the operation in India self-financing within the new time limit that we've set for ourselves, and execute on the restructuring plan that we have announced today. And having spoken to Sigve Brekke already, he is there speaking at the same time as we are speaking here. And with these comments, a strong quarter, lot of good prospects, and possibilities going forward. I hand over to Richard, who will guide us through the financials. Richard?
Thank you, Fredrik. I will do four things. I will take you in more detail into the financial performance. I'll update you on the funding of the group, including the financial restructuring also of Uninor. I'll go through the share buyback program and finally the guidance for the group. Let's start with the financial performance and the revenues... We have an organic revenue growth of 5.4% this quarter. Reported is 4.1%. Difference being a weakening of the currencies in Central and Eastern Europe. Both the Serbian dinars and the Hungarian forints are at a significantly lower level than last year. Anyhow, we added NOK 1 billion of revenues year-on-year this quarter driven by Asia, as Fredrik said. If you look at the various operating units, there are large differences.
Denmark, being definitely the weakest one in the group, with a decline of NOK 387 million, and that requires some more detailed explanation. About NOK 89 million of that is a drop in the mobile service revenues, which is most important long term. 129 is related to the loss of the Onfone wholesale contract, and the rest is a mix of interconnect currency and continuous decline in the fixed business. Hungary, a decline of NOK 196 million, 75% of that is due to the weakening of the forint, and 25% of that is due to interconnect. Underlying revenues are stable. Then the Asian units contributes to close to NOK 1.1 billion in growth this quarter, and that really is all from Digi, dtac, and Pakistan.
Grameenphone in local currency is more or less—no, in Norwegian kroner, is more or less flat. Then India, flat ARPU, but still, subscriber growth, but a weakening rupee gives us NOK 336 million extra revenue. In other, it's Norway contributing most of the NOK 163 million in increased revenues. Then how does this translate into margins? The EBITDA is up by NOK 584 million, and stands above NOK 8 billion this quarter. The margin is 31.7% this quarter, compared to 30.6% last year, an underlying margin improvement of 1.1 percentage points. That is mainly driven by reduced operating losses in Uninor.
If we exclude Uninor, the operating margin of the group is 35.7, which is more or less in line with second quarter last year, a small improvement. However, we know that we absorbed an increased 5% revenue share in our second biggest mobile operation, dtac. That is about 0.7% on the margin. So adjusting for that, there is an underlying margin improvement on 0.8-0.9 percentage points in the quarter. But again, big differences between the various business units. We're very happy to see that Norway contributes an additional NOK 200 million in EBITDA, but we have to remember that we have a NOK 100 million extra expense for second quarter last year due to the network outage. But strong mobile figures in Norway this quarter.
Denmark, the currency development and interconnect doesn't translate into reduced EBITDA, so what you see here of NOK 222 million is the sum of the mobile, fixed, and, the wholesale revenues going down in Denmark. Strong performance in Digi and Pakistan, improved margins. Good growth, close to, or more than NOK 300 million in EBITDA growth from those two operations. And then India, reduced, cash burn, given the new accounting definition of NOK 340 million. And here we have also expensed approximately NOK 100 million that normally would have been treated as CapEx. Other units, more or less stable. Moving on to the CapEx. This quarter, it's higher than second quarter last year, with some NOK 226 million. About NOK 458 million of that is related to higher CapEx in Digi and DTAC.
dtac, due to the 3G rollout on 850 and the network swap. Digi, due to the network swap. We are NOK 200 million lower in Uninor, both due to a re-reduced investment level, but also due to the new accounting of CapEx. Norway is still at a high level, NOK 2 billion CapEx in the first half year, and we expect that to be the same in the second half year. As you see from the pie chart, Norway now constitutes about one third of the CapEx in the group. This results then in an annual operating cash flow, as Frederick said, approaching NOK 20 billion on a 12-month rolling basis. It's now NOK 19.7 billion, including the cash burn in India.
Year-on-year, the cash flow is up NOK 370 million due to the explanations I've been through, but the main contributor is, of course, the reduced cash burn in Uninor. Then, going through the P&L. We have already explained the development in revenues and EBITDA. Other items, in line with last year, we have a significant manning reduction in the Swedish operation this quarter. We have accrued for about 140 people leaving the company. On the depreciation, we have significantly lower depreciation due that we had a higher acceleration of depreciations last year due to the network swaps. So EBIT comes in approximately NOK 1 billion higher than last year, due to lower depreciation and higher EBITDA. Then we have a couple of line items that require some explanation.
We have the associated companies, which largely is VimpelCom. Last year, we had several one-offs that in sum was quite positive, accounting-wise. We had accounting gain of NOK 1.6 billion related to the dilution of our shares in VimpelCom, following the Wind transaction going, and we had the C More impairment. So net of that, there is a decline in associated companies from NOK 1.4 billion to NOK 700 million, approximately. That NOK 700 million drop is all related to VimpelCom, and there are two big effects. VimpelCom had a currency gain in second quarter last year that is not impacting this year. That is about NOK 380 million impact.
And the other one is that we owned close to 40% economic of VimpelCom in the second quarter last year, and before we bought the common shares, this quarter, our ownership was down to approximately 32% economic. And that dilution effect, VimpelCom still makes good profit, is about NOK 280 million. So underlying, there's not that much change, but there are these, special, explanations that, bridge the NOK 2.6 billion to the NOK 700 million. Net financials, we also have a big swing, of about NOK 1.3 billion kroner, from last year to this year. And there are really three explanations behind that. First, the net interest expense of the group is NOK 280 million, not higher, this quarter.
That is all related to increased proportion of rupee debt in, the group, which is very expensive. I'll come back to how we deal with that. Then currency gains was, 354 million positive, last year, and we have a currency loss of 180 million losses this quarter. That is on hedging instruments that we cannot, book as hedging due to IFRS, and it's really driven by an increased dollar in the quarter. So that explains about 540 million of the delta between second quarter last year and this year. Then finally, on financial instruments, we had a gain last year and a loss this year, and the loss this year is related to the TRS in VimpelCom.
We had a big gain in the first quarter, then, the share price of VimpelCom dropped until we terminated the TRS, and that resulted in a loss in the second quarter of about NOK 285 million. And all these million VimpelCom shares are then accounted for as associated with a share of of profits going forward. On the tax line, NOK 1.5 billion in tax expense, about 10% of that, or NOK 150 million, is a one-off. So an underlying tax expense this quarter is about NOK 1.35 billion. Minorities stands higher due to strong results in DTAC and Digi, where we don't have 100% ownership. So net income to Telenor this quarter is around NOK 2.1 billion, and EPS NOK 1.31. Then moving on to the balance sheet.
Net debt stands at NOK 28.6 billion at the end of this quarter. That is up NOK 9.3 billion from first quarter. This is as expected. There are two main drivers behind this: It's the dividend payout to Telenor shareholders and minorities in our Asian subsidiaries, of NOK 8.5 billion, and it's the purchase of common shares in VIP of NOK 4.2 billion. Total, NOK 12.7 billion on those two items, driving up the net debt to EBITDA. The ratio, net debt to EBITDA, stands at 0.93. And as you recall, that is well below our self-imposed cap of 2.0, and still among the lowest leveraged telecom group in groups in Europe.
Then, on the Indian side, it's not only operational restructuring, it's also a financial restructuring, which have an impact on the financing of the total Telenor Group. Since the license cancellation in India, second of February, the loans of Uninor have been in default. And we have, and Uninor have been in discussions with the lenders since this happened, and this has resulted in that the lenders have decided to accelerate the loans and asked Telenor to largely pay up on the guaranteed debt. This is not unexpected to us. This, as we have informed, all along since the license cancellation. And the impact to Telenor is that it has zero impact on our exposure.
This is already consolidated as a part of the debt and the risk we've had all along since we started to guarantee for the debt. I would rather put it very positively, that this will enable us to reduce our interest costs significantly going forward. The repay loans are very expensive, with rates from 12%-13%, and we're able to refinance that at a much lower cost at group level. It also enable us to draw the debt in the currencies that makes more sense to us, which basically will be euros and dollars. We don't need that much rupee exposure, given Uninor's size of the total group. We're also now working on various funding options for Uninor until completion of that company.
We have decided to bid in the auction, if we get that far, through NewCo, and we're also then working on how to finance NewCo. Of course, payout of dividends by buying of VimpelCom shares, share buyback program, and also, restructuring of the debt in Uninor, where Telenor steps in as a creditor, requires a lot of liquidity. So, we have worked a lot of that in the second quarter. We have issued 2 bonds, each of EUR 500 million. First one with maturity 5.5 years, and a coupon of 1.75. Second one of a maturity of 9.5 years, and a coupon of 2.75.
I'm proud to say that these coupons are the lowest ever issued by a European corporate, which shows the strength of the group. Also on backup financing, we have replaced one of our revolving credit facilities that was maturing next year with the new credit facilities with Nordic banks, maturing in 2017. The backup facility now stands at NOK 2.8 billion with maturities in 2016 and 2017, and these are all undrawn. We have good liquidity and good, good lines and with the restructuring of the rupee debt, also the interest cost should come significantly down.
Then, the buyback program, Frederick said, third year in a row, 3% buyback, so we will bought back close to 9% of the shares in the group. That equals about 47 million shares, 2%. Twenty-two million of that will be aimed at buying be bought back in the market. And then we have an agreement with the main shareholder, Norwegian State, that they will sell down proportionally, and that will equals about 25 million shares. And when this, this is all done, these shares will then be put forward to the general meeting next spring for cancellation, and then target to be canceled third quarter next year.
As you see from the bar chart, a total approved payout to shareholders this year of Telenor is 12.6 billion NOK, up from 10.7 billion NOK last year, and 8.8 billion NOK the year before. So the shareholder remuneration is growing steadily and is at a healthy level. Approaching the end here, the guiding. We are still guiding ex India, given the regulatory uncertainty and, if we get an auction and how we will get through an auction, there's so much uncertainty about the figures, so we think it's prudent to guide without India. We are basically maintaining or guiding that we released in the first quarter, organic revenue growth, still above 4%.
That requires a recovery in GP and also continued strong mobile performance in Norway. EBITDA margin, 35%-36%. That is an underlying improvement from last year, when we look at increased handset sales diluting margins and the revenue share in dtac; the margin on the service revenues is going up. CapEx to sales, a slight adjustment. Previous guiding was 10%-12%. Nothing mysterious about that, other than that we are six months through the year, and that we have high activity level on 3G in Thailand, swaps in Thailand, swaps in Digi, and now starting swaps in Pakistan. Finally, September 19 is a great day for Telenor. That's the Capital Markets Day. We will have five business units presenting this year.
The obvious one, Uninor and Norway. In addition, Sweden will present their strategies, how they tackle the data revolution. Pakistan, midst of the growth curve, combined with financial services, and dtac now approaching becoming the biggest mobile operation in Telenor. In addition, you will learn more about our key initiatives on digital services and group industrial development. So I wish you all a hearty welcome to the Capital Markets Day on nineteenth September. Then Q&A.
Thank you, Richard. We are ready to take your questions, so I invite Mr. Baksaas back to the podium. To allow questions from as many as possible, we ask you to limit yourself to one question per person and one follow-up question if a clarification is needed. Please wait for the microphone to be handed to you before you ask. We want everyone also on the webcast to be able to hear your question. So let's start with here in the room, and I will take questions on the phone or from the Internet afterwards. I have a hand over here.
Hi, it's Jostein Torgersen, Carnegie. Just a quick question on India. Should we understand it the following way, that you have taken a formal decision to bid for somewhere in the region of 9 licenses and spectrum on the basis of how the regulatory situation is looking today? The way the decisions on the regulatory area in India is taken is difficult to predict, and you cannot read into this that as a consequence, we will automatically go for license in in these circles. On the other hand, we have now concentrated resources in the best performing circles, numbered them by 9, 9, and take the restructuring now.
Of course, the answer to your question will solely depend on what kind of regulatory framework that ultimately will be on the table for all nine of them. In that equation, we will evaluate existing spectrum positions by existing players, and reference price will be very central. It's all going to be wrapped up within the 155 peak funding set up that we've set for ourselves.
Over here.
Thanks. Christoffer from DNB. Just a quick question on the financial restructuring in India. How does that affect your bargaining power towards Unitech? And how far away are you in your view in terms of a settlement?
I couldn't fully hear you, Christoffer.
Sorry, I'll try again. In terms of the financial restructuring in India, how does that affect your bargaining power against Unitech, and how far away are you from a settlement with Unitech in terms of ownership?
I think we never comment on any discussions we may or may not have on the M&A side. So I can, I can only decline to comment on that.
Any more questions from the audience here in, at Fornebu? No further questions, means we can switch to callers, please.
First question, Andrew Lee, Goldman Sachs. Go ahead, please.
Good morning, everyone. A question on India, please, and just around that your peak funding target of INR 155 billion rupee. Does this exclude deferred payments for spectrum? And if it does exclude deferred payments, how can you give us comfort about the maximum you might pay to stay in the market? Thank you.
I think, the first payment is, one of the, main features we need to see in this, auction, coming up, as, we need to control, the risk, of our Indian investment. And that is, of course, an important part of the, the peak funding discussion.
Yeah.
There are four, or there were four, real elements feeding into the overall framework for the next phase in India. That was the rollout. It was the number of frequencies available. It was the payment profile, and it was the reserve price. And all these four elements, both by one by one, and accumulatively, spell out the platform, and we don't know as to whether how the two last ones will be decided, and that's what we and others are waiting for.
Understood. Just to clarify, if you are given deferred payment, if you are allowed to make deferred payments, if we kind of bundled all the deferred payments over the next 10 years into one payment at the start, would that push—could that push you above the INR 155 billion? Could this take us above that kind of peak funding target if we accelerated it all into one overall payment?
Take that one?
Yeah.
No, you cannot look at it this way. Obviously, we have a target now, we're reaching cash flow break-even of Uninor next year, and then, Uninor will start to generate cash. The NOK 155 billion is how much operational cash flow we are willing to expose in India. So obviously, we would assume that the positive cash flow after 2013 would be able to pay down any deferred payment without increasing the NOK 155 billion that is on the table.
Having said that, we also strongly state that we need a good return on new money that we put into India, so the deferred payment is not in any way compromising on the returns we are seeking on any new money we will put into Uninor, or sorry, into a new co, or Uninor, until completion and through an auction.
Okay. Thank you very much.
Next caller.
Yeah. Next caller, please.
Andy Parnis, UBS.
Go ahead, please.
Yeah. Hi, guys. I've got one question as well, actually, on India. I just wanted to know what your current assumption or understanding around getting the sort of original $350 million you invested or Uninor invested in 2G spectrum back in 2008? Is that—should we think of that as being an incremental sort of cash to be spent in India on top of the INR 155 billion peak funding requirement? Thanks.
The original NOK 155 million, that is, we have to be very precise, that is always been stated as operational losses plus CapEx, because that is what we report every day. What is obviously where you have to make a bridge is obviously that what is being approved of funds into Uninor is both our equity investments that take care of some of that original investment in license, and also interest costs going forward, the equity investment and the guaranteed debt. And those numbers will not be the same.
... but INR 155 billion has been defined as EBITDA losses plus CapEx since we invested in the company.
Just to clarify, the $350 million that you originally invested in Spectrum, would that be used in India if you got that back to fund your Indian operation, or wouldn't that go elsewhere in the group, as you know, as it would fall above the NOK 155 billion peak funding?
The claim there is, obviously, that it's Uninor that has that claim on the Indian government. There is also a debate in India whether or not that claim is valid. We see some statements from Indian authorities. We think Uninor has a valid claim on that, but obviously, that is a part of Uninor.
Okay, thank you.
Next?
Jakob Bluestone from Credit Suisse.
Go ahead, please.
Hi there. Could you possibly talk us through a little bit, what were the criteria for selecting the regions that you chose to exit? You obviously alluded earlier to that it was a relatively low share of revenues and a higher share of the losses. Was that basically how you made the decision where to stay and where to exit? Or is there anything else you could maybe share with us in terms of the thought process? Thank you.
Well, the decision profile on who's in and who's out is an evaluation of what we have achieved so far, the competitive situation in those areas, and our own judgment on how can we recover or how can we not recover. And all in all, and with the need of also reducing the risk factor to a certain extent, we have taken this decision today. And, of course, this is also a difficult decision to our colleagues in Uninor, because we are, on the one hand, putting more efforts into some circles and leaving other circles, and there are consequences on the individual level.
However, given the uncertainty in the regulatory framework, and the constant postponement on decisions coming through, we think this is a prudent way of how to think on how to move forward, and then make ourselves as independent on other decisions as soon as possible, namely, to take it to break even as soon as possible. Knowing that, in that period, there will be a - hopefully, there will be a decision and an auction, and then we have to evaluate the detailed parameters at that point in time.
If I can just ask a follow-up. Could you just talk about what happens to those four exits that you reach, and do you pull the plug, or is the plan to sell the subscriber bases in the network?
The assets in these circles that we will gradually scale down will, on the network side, gradually be deployed in other circles. So we will take base stations down and move them into the cluster philosophy that we have in other circles that we want to continue. So in that sense, we have roughly 6,000 base stations that can be reused in other parts of India. On the sale of the customer base, since this is a prepaid market and we—you have a high churn figure, the value and the possibility of such a sale is very limited. We're more talking about a port...
An agreement of portability, rather than sale of a customer base. I think we have to be as realistic as that.
That's very helpful. Thank you.
Next.
Barry Zeitoune, Berenberg.
Go ahead, please.
Hi, good morning. Just two questions on India, please. The first is whether you can be a bit more specific on what the actual EBITDA loss in the four regions you're leaving was in Q2? Or at least give us some idea of the proportion of your total India EBITDA loss that it represents. And then second question is really looking at, you know, the current consensus on spectrum pricing seems to be a 20% discount to the TRAI recommendation, and the consensus on the payment profile seems to be the EGoM recommendation, which was a 35% upfront payment and then a deferral over a 10-year period. Now, when I apply that to the TRAI recommendation, what you basically get is about $500 million out of total spectrum costs upfront.
That's the 35%, of which about INR 200 million is in Mumbai. Now, on my math, that would take you over your peak funding, based on 5 MHz in each circle. So I'm really interested in how you believe you can stay in Mumbai, and why you've kept Mumbai within the 9 circles you're remaining in, and whether you're confident staying in Mumbai will be possible while keeping within the INR 155 billion peak funding target. Thank you.
I think you have sort of dived into one of the this might be spreadsheet number 25. I think we are at a detailed level that we can't take at this stage. And I also have to say that, yes, despite rumors and speculations that both the reserve price and the pay, the deferred payment issue has been on the agenda of media in India over the last couple of weeks, I don't think we should preempt that that will end up as being the final decision. So I think we have to wait until the decision really has been seen.
And knowing that, this is not only an EGoM issue, after all, this is also now to be confirmed by government, after it becomes after that, and it's only after that that it will become a decision. So, I, I'm, I'm not prepared to walk into those, that detail level of on Mumbai that you ask.
Maybe, if I ask it in a different way, then. Was Mumbai a region you were definitely dead set on, that you want to stay in? Or was it borderline, were you tempted to include it with, on top of the four that you're currently leaving?
We have an interconnected arrangement, a roaming arrangement with another player in the Mumbai area. That makes us think a bit differently for that specific region. Knowing also that we've had reasonably good traction on how to go to market, and maybe that can be utilized for some good purpose in the next round.
Okay. And just on the EBITDA question, can you give us an idea of the proportion of the EBITDA loss that came from the four circles that you're planning to scale down your operations in?
I think you're able to analyze that yourself. However, it's definitely more than double the percentage of revenue.
Okay.
We'll take one or two more questions from the-
Thank you.
From the phone side, please.
Next?
Maurice Patrick, Barclays.
Go ahead, please.
Oh, hi, guys. A quick question around inflation, whether it's input price or impact of, commodities. Are you seeing any major changes at all that are impacting your numbers at all, whether it's demand or cost? Would love to get a sense of that. Thank you very much indeed.
In Asia in particular?
Yes.
Well, we don't have an inflationary element to sort of point to when it comes to how network capacities are being used by customers for the time being. Since the oil price basically is where it is, we haven't had the energy side, except for our own cost side of being an energy consumer ourselves. But it seems quite okay. And if you take a look at Thailand and Malaysia in particular, the intensity on how people use digital services is growing strongly. And knowing that 3G has only just started in Thailand, we already at this point can say we have above 1 million users on our 3G offering.
So we have good and great expectations really on how this can move forward if, as you indicate, the economies can stay the course.
I could also add that in Thailand and Malaysia, we have seen strengthening of both baht and the ringgit, which of course also put down inflationary pressure on imports. So, this quarter, we have not seen any signs of import inflation in those countries.
Okay, thank you.
Okay, we will take two more callers, and then we will round off here.
Terence Tsui, Morgan Stanley.
Go ahead, please.
Thanks very much. Good morning, everyone. My question is on Bangladesh. Maybe you can just give us a bit more color on your turnaround strategy there, and be a bit more specific where you saw the increase in competition. Thank you.
Yeah. What we saw in the second quarter was that some of our competitors were able to take a big share on net adds. That's been done, as we see it, due to pushing pricing, due to pushing higher commission levels in the trade. We, as a market leader, cannot sit still and look at that, so we are taking actions now, especially in the trade and the distribution, to contract that development as the clear market leader in Bangladesh.
I think we should be, in a way, open and register that Grameenphone has usually been very, very clever on how to judge the speed in the market when it comes to new segments coming in. Need to get back in that position. Penetration still stands low in Bangladesh, and there we will probably see the growth into new user segments in Bangladesh, as we've seen in other countries. Grameenphone should be as best positioned to handle that as anyone, anyone else. It's that attitude that needs to get back on the table. Next.
One last question.
Thomas Heath, Handelsbanken.
Go ahead, please.
Hello. Thank you. One last question here on India, perhaps. On a similar math to Barry's earlier, it looks like if we go through region by region, the suggested cost with a 20% cost cut on 3G prices, that it's very far from possible without deferred funding and hardly possible with deferred funding. Would it be correct to say that deferred funding is a prerequisite to stay around in India? Thank you.
Then we're in a way back to a previous question that we had on this session, and you're absolutely right in the fact that deferred payments will make a continuation more possible than if it's not there. And that's been our clear message all the way through as well. So deferred payment and a level of reserve price, that those are the two decisions that we're waiting for. Whereas, there is another element in this discussion as well, which probably delays decisions in India, and that is how to reform or how to get the whole of the market, all players, onto one platform on how to pay for spectrum, mainly that refarming.
And I guess that that question is of, of a very high importance to incumbents, as it doesn't hit a newcomer like Uninor in the same way.
Okay, thank you.
Thank you, everyone, for questions. That concludes the session here today. Thank you, everyone, for joining us online or here in the room. We are open to conduct interviews here on stage. I maintain a list for the media, so come to me first, and give it a few minutes before we start, so we can freshen up here. Thank you, everyone.