Report of the Board of Directors
Telenor commands a strong financial position, and the Group delivered its best result ever in 2006. This strong performance was the result of rapid growth in Telenor’s international mobile business and targeted efforts to strengthen its position in the Nordic market. The Company exceeded 115 million mobile subscriptions during the year, confirming its position as a leading international mobile operator.
Subsidiaries of Alfa Group (Storm and Alpren) have taken legal action in Ukraine to have Kyivstar’s choice of auditor disallowed. To date, this has resulted in temporary injunctions preventing Kyivstar from sharing financial information with its auditor and shareholders. As far as Telenor’s consolidated annual financial statements are concerned, this means that the results from Kyivstar are based on estimates. Although Telenor contests the decisions preventing Kyivstar from providing financial information to its auditor and shareholders, the Board has decided to deconsolidate Kyivstar temporarily with effect from 29 December 2006, as the prevailing conditions prevent Telenor from controlling or exercising significant influence over Kyivstar. Management is working hard to have these temporary injunctions lifted.
Telenor is changing. A growing percentage of the Group’s earnings is generated by operations outside the Nordic region. In 2006, the Board continued to pursue the adopted strategy of developing Telenor as an international mobile operator with a strong growth profile. Telenor has also retained its leading position in the Nordic region with respect to both mobile and broadband services as well as TV distribution.
In the Telenor model, each company builds local competitiveness through cooperation and competence-sharing between operations, countries and regions. A common management structure has been introduced for the Group’s mobile operations. In February 2006, the Telenor Group presented its new logo and common visual profile. This makes Telenor a more powerful industry player and enables the Company to stand out from the growing international competition. Most of Telenor’s operations have now introduced the new logo, while local brand names have been retained. The new logo is a symbol of Telenor changing and signals the ongoing effort to strengthen customer focus in every part of the business. It also contributes to profiling Telenor as a group of companies.
Telenor saw very strong customer growth within mobile in 2006, and is currently the world’s 12th largest mobile operator. The number of mobile subscriptions within companies in which Telenor has ownership interests grew by 32 million to 115 million during the year. Total revenues grew by 37%, driven primarily by the international mobile operations’ strong customer growth. The Board has evaluated new markets and mobile operations in regions where Telenor is already represented, with the aim of maintaining the Group’s growth profile. Telenor acquired the mobile operations Vodafone Sweden and Mobi63 in Serbia, both of which have changed their brand to Telenor and introduced the Group’s new visual profile and logo.
In the Nordic operations, efforts have been focused on creating a customer-oriented business and on improving cash flow and earnings. The Nordic markets were driven by the migration of voice traffic from traditional fixed-line telephony to mobile and broadband telephony. In the Norwegian market, Telenor focused on retaining its market share in mobile and broadband, and on increasing its market share in broadband telephony. At year-end, Telenor had 55% of the mobile market and 57% of the broadband market, which is comparable with the situation at the end of 2005. In June, Telenor launched second-generation broadband (ADSL 2+) in Norway. Telenor became market leader in broadband telephony in 2006, with a market share of 28% at year-end. The Norwegian fixed-line operation is generating decreasing revenues. Constant efforts to reduce costs are undertaken to stabilise the annual cash flow in the fixed-line operation.
In the Swedish market, Telenor looked to strengthen its mobile operation through the acquisition of Vodafone. With the takeover of broadband provider Glocalnet in February 2006, Telenor also gained a stronger presence in the Swedish broadband market. With its position in the low-cost segment, Glocalnet is a good supplement to Bredbandsbolaget. Telenor now offers broadband services to all market segments.
In Denmark, work on coordinating the mobile operation Sonofon and the broadband operation Cybercity continued, and a common transmission network for use by both operations was completed. Sonofon opened its UMTS network for commercial use in September, nine months after it was awarded a UMTS licence.
Broadcast retained its leading position in the Nordic market for distribution of TV services in 2006. Through a jointly-owned company – Norges televisjon (NTV) – Telenor, TV2 Gruppen and the Norwegian Broadcasting Corporation were awarded a licence in June 2006 for development and operation of a digital TV terrestrial network in Norway. Norkring will be responsible for developing the transmitter network, and the outphasing of the analogue network will commence in autumn 2007.
The Board endeavours to simplify the Company’s organisation in order to strengthen its core business. In 2006, Telenor opened a regional office in Bangkok for its Asian operations, entered into an agreement for the sale of Telenor Satellite Services, and sold its minority interests in Bravida and Inmarsat. Telenor also stepped up its research and innovation efforts during the year. The R&D (Research and Development) and New Business departments were brought together under a single management team and renamed R&I (Research and Innovation). In January 2006, Telenor opened a new research and innovation centre in Malaysia in order to gain market expertise in Asia and boost the competitiveness of Telenor’s mobile operations.
Telenor’s shares are listed on the Oslo Stock Exchange and Nasdaq, and were among the most heavily traded shares in Oslo in 2006. The share price climbed 76% during the year, which is more than the average for the sector and the OSE Benchmark Index. The Dow Jones European Telecom Index gained 16% in 2006, while the OSE Benchmark gained 32%. Telenor’s share price was NOK 117.25 on 31 December 2006, which corresponds to a market value of NOK 197 billion.
At year-end 2006, Telenor’s share capital was NOK 10.1 billion, divided into 1,680,274,570 shares held by 40,253 shareholders. The ten largest shareholders held 71.1% of the shares in issue. Telenor ASA shall create value for its shareholders. Given Telenor’s financial position and anticipated capital needs, it is Telenor’s policy to pay an annual dividend to shareholders of 40–60% of normalised annual profits. The Company’s aims to generate relatively stable growth in annual ordinary dividend per share.
The Board proposes to the AGM that a dividend of NOK 2.50 per share be paid for the 2006 financial year, against NOK 2.00 per share for 2005. The dividend will be approved by the AGM on 15 May 2007, and will be paid on 29 May 2007 to shareholders in the company. As from Wednesday 16 May, Telenor shares will be quoted ex-dividend on the Oslo Stock Exchange.
Telenor was active in channelling information to the financial markets and shareholders in 2006, thus ensuring that all significant information material required for an external evaluation of the Company was published in accordance with applicable rules and guidelines.
The Board kept a close eye on the Company’s strategic work during 2006. The Board also paid particular attention to monitoring performance, initiatives to reduce costs, internal controls and investment-related issues. Previous investments were followed up through separate evaluation reports.
Results
Telenor’s net income in 2006 was NOK 15,920 million, corresponding to NOK 9.44 per share. The corresponding figures for 2005 were NOK 7,646 million and NOK 4.47 per share. Net income was positively affected by a tax receipt of NOK 2.4 billion and sales gains of around NOK 2.3 billion.
In 2006, profit before taxes and minority interests was NOK 21,528 million, compared to NOK 12,319 million in 2005. The 2006 figure was positively affected by special items (gains and losses on disposals, costs related to workforce reductions, loss contracts and write-downs) amounting to NOK 1.8 billion. In 2005, special items had an adverse effect on profit before taxes and minority interests of NOK 0.5 billion. Excluding special items, profit before taxes and minority interests grew by NOK 6.9 billion to NOK 19.7 billion in 2006. The increase was largely related to the growth in revenues in 2006 and the effects of acquisitions made in 2005 and 2006. DTAC was consolidated from November 2005, while Vodafone Sweden and Mobi63 were consolidated from January and September 2006, respectively.
Operating profit in 2006 was NOK 17.7 billion, compared to NOK 11.4 billion in 2005.
Cash flow from operating activities grew by NOK 8.3 billion in 2005 to NOK 30.6 billion in 2006. The increase is related to the growth in operating revenues and the acquisition of Vodafone Sweden and Mobi63 in Serbia. In 2006, Telenor’s total investments amounted to NOK 41.2 billion, of which NOK 22.1 billion was investments in businesses. Capital expenditure increased by NOK 2.6 billion to NOK 19.0 billion. The increase was due largely to extensive network rollout in the international mobile operations in order to meet strong customer growth.
At year-end 2006, Telenor’s total assets amounted to NOK 148.4 billion, and the equity ratio (including minority interests) was 42.3%, compared to NOK 124.3 billion and 43.1%, respectively, at year-end 2005. Net interest-bearing liabilities were NOK 43.3 billion, which represents an increase of NOK 12.4 billion during the year, caused by high levels of capital expenditure and new acquisitions. The Board is of the opinion that Telenor’s financial position is satisfactory.
Pursuant to section 3-3 of the Norwegian Accounting Act, we confirm that the financial statements have been prepared on a going concern basis.
Telenor’s operations
Mobile Operations
Revenue growth was high in 2006, driven primarily by growth in subscriptions and usage in emerging markets. Grameenphone in Bangladesh and Kyivstar in Ukraine saw a revenue growth of 45% and 51%, respectively. In mature markets, Telenor Mobile in Norway generated a growth of 7% in 2006, against 4% in 2005, while Sonofon in Denmark posted a growth of 8% in 2006.
All mobile operations increased their operating profit in 2006, with the exception of a slight decrease for the Swedish operation.
Fixed
Total revenues grew by 3% in 2006, due largely to the acquisition of operations in Sweden and Denmark in July 2005. The Norwegian operation generated decreasing revenues as a result of reduced revenues from telephony. The Swedish and Danish operations generated good growth in 2006, driven by growth in broadband customers.
Operating profit increased by NOK 0.9 billion in 2006, due mainly to write-downs undertaken in 2005.
Broadcast
Total revenues grew by 12% in 2006, as a result of subscriber growth. Operating profit was NOK 966 million, against NOK 1,015 million in 2005. The decrease was due to increased costs relating to new content rights, and to costs relating to the introduction of HDTV.
Other Units
Total revenues grew by NOK 668 million to NOK 8,274 million in 2006, due primarily to acquisitions at EDB Business Partner.
Allocations
Following the receipt of group contributions of NOK 1,500 million, Telenor ASA generated a net profit for the year of NOK 2,796 million. The Board proposes the following allocation:
Transferred to retained earnings: NOK 2,796 million
Following this allocation, Telenor ASA’s distributable equity was NOK 18,515 million on 31 December 2006.
At the AGM, the Board will propose a dividend for 2006 of NOK 2.50 per share to be paid out in 2007. In total, the proposed dividend will amount to NOK 4.2 billion.
Non-financial information
Health, environment and safety (HES)
In 2006, Telenor again worked proactively and systematically to ensure continuous improvements in the working environment at all levels in the Group. Special attention was given to absence due to illness and rehabilitation, ergonomics, personal safety and crisis management.
A total of 34 HES reviews were carried out, including 19 in the Norwegian part of the business, as part of the follow-up of these areas in the Group’s operations. During the year, 538 employees took part in HES training programmes, including 282 in the Norwegian part of the business.
Absence due to illness in the Norwegian part of Telenor’s operation was 4.70%, an increase of 0.17 percentage points from 2005. At the other companies abroad, sickness absence ranged from 0.5% to 2.9%. A total of 35 injuries resulting in absence from work, none of them serious, were registered in 2006. A further 14 injuries which did not involve any absence from work and 11 near-accidents were also registered. The corresponding figures for the Norwegian part of the business were ten injuries involving absence, five other injuries and six near-accidents.
In April 2003, together with a number of other major enterprises in Norway, Telenor entered into an agreement relating to a more inclusive working life. The purpose of this agreement is to reduce the extent of absence due to illness, ensure better adaptation of working conditions for employees with special needs, and increase the actual retirement age within the Group. Telenor has renewed the agreement for the period 2006–2009.
External environment
Telenor is taking active steps to reduce the Group’s environmental impact, with a special focus on energy consumption, travel and installations.
Telenor’s environmental accounts show total energy consumption, excluding transport, of 1,040 GWh in 2006. Of this, 490 GWh was related to the management of buildings and facilities and 550 GWh to network operation. Energy consumption, excluding transport, per man-year was 40,000 kWh. Additionally, there was energy consumption related to transport and business travel of 180 GWh. Emissions of CO2 from Telenor’s stationary activities totalled 9,000 tons. Business travel generated an additional 45,000 tons.
In 2006, an environmental bonus scheme was introduced for employees with company cars. This is an incentive scheme which rewards those who choose cars with low emissions, and more than half of those choosing a new company car in Telenor’s Norwegian operations have made use of the scheme.
Corporate responsibility
Telenor’s activities and commitment to ethics, the environment and society – our corporate responsibility – resulted in an even stronger position among the world’s top performers in 2006 according to Dow Jones Sustainability Indexes, which ranked Telenor as the number two mobile operator.
Diversity and equal opportunities
Telenor is keen to promote diversity and has achieved good results in this area. Our work on diversity includes women, ethnic minorities, older people and those with disabilities.
Telenor has developed requirements for diversity in both recruitment and our management development programmes. We believe that a good balance between work and private life is becoming increasingly important for today’s talents and managers, male and female. In Norway, Telenor’s Handicapped Programme is pioneering in it’s securement of employment for the disabled.
Experience from this programme will also help support Telenor’s work to increase the proportion of employees from different ethnic backgrounds.
Equal opportunities statistics show that, in the Norwegian part of the Group’s operations, women accounted for 40% of the overall workforce and 27% of managerial staff. In both cases, this represents an increase of three percentage points from 2005. Telenor ASA’s Board of Directors consisted of 40% women and 60% men in 2006. Based on the principles for equal opportunities adopted by the Board, steps have been taken to improve the composition of the boards of the Group’s companies in terms of both gender and competence. All representatives appointed to Telenor’s various boards are offered training in board work.
Competence and training
Telenor recognises the importance of attracting and retaining talented and motivated managers and other employees who display a strong passion for business in line with Telenor’s Codes of Conduct and who are capable of motivating their colleagues to give their best. Two global processes – Telenor Development Process (TDP) and Internal Value Creation (IVC) – were developed further in 2006. TDP is a tool for systematic evaluation, development and remuneration of employees, while IVC measures the capacity of both the individual and the organisation to create value for customers.
Organisation and personnel
At the end of 2006, Telenor had 35,600 employees (34,350 man-years), of whom 11,100 were employed in Norway and 24,500 abroad. This is an increase of 7,100 employees since the end of 2005. The increase in the number of employees is due primarily to strong growth in our international operations and significant acquisitions in Sweden and Serbia.
At the beginning of 2005, Telenor adjusted its organisational structure with the aim of reinforcing and developing its activities in the Nordic region and ensuring continued international growth in the mobile market. In order to simplify and strengthen its position in the Nordic market, Telenor established a separate management area for mobile and fixed-line services in the Nordic region with effect from 26 January 2005. At the beginning of 2006, the international mobile business was split into two regional areas of responsibility: one for Asia and one for Central and Eastern Europe. The heads of each regional area are members of Telenor’s Group Management.
Based on the Group’s strategy for long-term industrial development, Telenor has given greater priority to the process of extracting synergies and developing its mobile operations across the Group through the Global Coordination programme. In view of the great importance of this work, the head of Global Coordination joined the Group Management at the outset of 2006.
It is also important to Telenor that each operation builds up local competitive strength through cooperation and exchange of competence between companies, countries and regions. To provide the necessary support for this work, the head of Human Resources also joined the Group Management in 2006.
Regulatory aspects
Telenor’s companies operate in compliance with the regulatory conditions that apply to the Group in individual markets, both within and outside Norway. The development of equal and fair competition is a key challenge for authorities in all countries, and Telenor seeks to play an active role in the development of robustly competitive markets.
At the same time, changing regulatory conditions and market intervention could potentially affect Telenor’s revenues and profitability, and thus represent a regulatory risk.
The authorities are very interested in the telecoms sector, both with a view to influencing the structure of the industry and as a source of taxation. We are now seeing a growing interest in security issues in all our markets, and requirements for storage of data and registration of customers are introduced in more and more countries.
In 2002, the EU introduced a new regulatory framework. We are now seeing the full effect of its implementation in our European markets. In Norway, the authorities have adopted new prices for key access products in the fixed-line and mobile networks. In the Norwegian mobile market, Telenor operates under different terms than those imposed on smaller operators. This practice is different from that in other markets where we are present, which are moving towards equal terms for all operators, partly by making interconnect prices symmetrical.
All of our Asian markets are enjoying very strong growth, and the sector will attract increased attention from the authorities. This may lead to greater regulation, for example when it comes to universal service obligations in Norway, mobile number portability and the regulation of interconnections. Several of our Asian markets have allocated, or are about to allocate, 3G spectrum.
Risk factors
Telenor’s activities are exposed to a number of commercial, operational, regulatory, legal, financial and political risks. If Telenor’s growth strategy in emerging markets in Central and Eastern Europe as well as Asia is to be successful and inspire the necessary confidence among shareholders and investors, then risk assessments and risk management must form part of the Group’s core expertise. Work on this was stepped up in 2006 through the creation of a dedicated Risk Manager function in the Group.
From the Board’s perspective, it is important that the Group and its operations take the necessary steps to manage and reduce risk factors, thereby ensuring that the overall risk is always kept within acceptable commercial limits.
Risk factors of this kind are thoroughly assessed by the Board and Management in connection with new investments, and they are an ongoing consideration in relation to existing investments. The Group has gradually acquired considerable practical experience in the establishment and operation of activities in economically less-developed areas. Combined with a broad network of contacts, including authorities at home and abroad, the Board believes that this provides a sound basis for undertaking proper risk assessments. The Group has also carried out systematic reviews and evaluations of the Company’s investments in order to assess the development of individual activities in light of an updated risk scenario.
Telenor has sought to balance the risk associated with its investments outside Norway by dividing its portfolio between mature and emerging markets.
Telenor is exposed to financial market risks related to changes in interest and exchange rates. Financial instruments are used to hedge against risks of this kind. The Group has taken the necessary steps to maintain adequate financial flexibility.
Corporate governance
The Board places great emphasis on maintaining good corporate governance in all parts of Telenor, in line with Norwegian and international rules and recommendations. For further information on corporate governance, please refer to Telenor’s website.
Composition and work of the Board
Telenor’s Board of Directors has a diverse composition and competence tailored to the Company’s needs. None of the members of the Board, other than those elected by Telenor’s employees, are employed by the Company or have performed services for Telenor. The Board’s work complies with Telenor’s Instructions for Board Members and applicable guidelines and procedures. The Board has also performed a self-assessment of its activities and competence. A total of 11 Board meetings were held in 2006.
Outlook for 2007
This outlook for 2007 is based on the current organisational structure and assumes that Kyivstar is not consolidated in 2007:
- We expect reported revenues to be 0–5% higher than in 2006.
- We expect the EBITDA margin before other income and expenses to be around 32%.
- We expect capital expenditure to amount to around 20% of revenues in 2007, due largely to customer growth in our international mobile operations.
- The effects of the implementation of an interconnect regime in Thailand, in terms of both timing and scope, are the greatest source of uncertainty in the outlook for 2007.
- A growing share of Telenor’s operating revenues and earnings are being generated by operations outside Norway. Fluctuations in exchange rates may increasingly affect the figures reported in NOK. Political risks, including regulatory conditions, may also affect earnings, and we anticipate seasonal variations from quarter to quarter.