Report of the Board of Directors
2007 was a good year for Telenor, and the company achieved a financial result for the year of NOK 18 billion (majority interest’s share). The result is driven by continued high growth in the international mobile operations. During the year, mobile subscriptions passed 143 million and the company is now one of the industry’s largest players.
2007 has been characterised by active development of Telenor’s total portfolio. Effective operations in the individual companies have been enhanced through best practice sharing across companies, countries and regions, with effective utilisation of the group’s skills base. By doing so, Telenor has become one of the most recognised brand names originating in Norway. With DTAC’s rebranding in October 2007, Telenor’s logo and visual profile are now used in nine markets with a total of around 400 million people.
Telenor experienced high customer growth within the mobile business area also in 2007 and is now the seventh largest mobile operator in the world in terms of subscription numbers, according to GSMA statistics. In 2007, the number of mobile subscriptions increased by 30 million to 143 million in companies where Telenor has ownership interests. Customer growth was particularly strong in Telenor Pakistan, with an increase of 8 million subscriptions from 2006 to 2007.
The 15th anniversary of Telenor’s presence in Russia was celebrated in December 2007. During this time, Telenor has significantly contributed to create value for Russian society, and the company is now one of the five largest foreign investors the country. At the end of 2007, Telenor’s ownership share in Russia consisted of VimpelCom (33.6%) and Golden Telecom (18.3%) and was valued at more than NOK 60 billion. Telenor’s stake in Golden Telecom was sold to VimpelCom in February 2008 for NOK 4.1 billion.
Telenor has an ownership share of 56.5% in the Ukrainian mobile operator Kyivstar. Through the subsidiaries Storm and Alpren, Alfa Group initiated legal proceedings in Ukraine in 2006 to have Kyivstar’s choice of auditor disallowed. As a result of an interim court order, Kyivstar was prevented from submitting financial information to its owners and international auditors, which led to Telenor’s Board of Directors deciding to deconsolidate Kyivstar with effect from 29 December 2006. Since the most recent interim court order was revoked in November 2007, Telenor has regained access to financial information from Kyivstar. However, Alfa Group has still not appeared at any general meetings and these meetings have not therefore formed the required quorum. Alfa Group’s failure to appear at general meetings is also preventing a board from being appointed and payment of dividends from Kyivstar. For the time being, Telenor’s financial reporting will refer to Kyivstar as an associated company. Legal proceedings and arbitration negotiations are being held in New York between Telenor and four subsidiaries of Alfa Group in relation to Kyivstar’s shareholder agreement and company management situation. On 23 January 2008, Telenor, Storm and its subsidiaries were summoned to appear at the United States District Court in New York (SDNY). Reference is also made to note 25 of the group accounts for more details on the disputes with Alfa Group.
The Nordic markets are still driven by the migration of voice traffic from traditional fixed-line telephony to mobile and broadband telephony. A growing interest has also been registered in new mobile broadband services. From an operational perspective, an increasingly closer integration of mobile and fixed-line operations has taken place in the Nordic markets throughout the year.
In the Norwegian market, Telenor has focussed on maintaining market share in mobile and broadband. At the end of the year, the company had market shares of 53% and 50% for mobile and broadband respectively.
The Board of Directors of Telenor is working on simplifying the organisation of the company in order to strengthen the core activity and adapt the activity to the changing conditions. In 2007, Telenor sold Telenor Satellite Services and its minority share in the Austrian mobile operator One. Through – Opplysningen AS’s (Directory Enquiries) acquisition of Carrot Communications, the group’s ownership share in Opplysningen fell from 42,8% to 27.1%. In Malaysia, Telenor has reduced its ownership share in DiGi through a transaction with the Malaysian company TimedotCom. DiGi will simultaneously acquire a 3G licence through this transaction. Telenor’s ownership share, which was originally 61%, will be reduced to 49% during 2008 in accordance with local requirements.
The Telenor share is listed on the Oslo Stock Exchange and was one of the most traded shares on the Oslo Stock Exchange in 2007. The share price rose by 11% in 2007, and thereby had the same rate of growth as the Dow Jones European Telecom Index. By comparison, the Oslo Stock Exchange’s main index climbed 10% during the year. Telenor’s share price was listed at NOK 129.75 as at 31 December 2007, which corresponds to a market value of NOK 218 billion.
The Telenor share was de-listed from Nasdaq with effect from September 2007.
At year-end 2007, Telenor’s share capital was NOK 10 billion, divided into 1,680,274,570 shares. The company had 44,477 shareholders at year-end. The 20 largest shareholders held 79.1% of the outstanding shares. At the end of 2007, Telenor held 2,931,222 own shares. Based on Telenor’s financial position and anticipated capital needs, it is Telenor’s policy to enable an annual dividend to be paid to the company’s shareholders of 40-60% of the normalised profit for the year.
The Board proposes to the AGM a dividend of NOK 3.40 per share for the financial year 2007, compared with NOK 2.50 per share for 2006. The dividend will be determined by the AGM on 8 May, and will be paid to the company’s shareholders on 22 May. The share on the Oslo Stock Exchange will be traded exclusive of dividends from Friday 9 May.
Telenor was active in channelling information to the capital markets and shareholders in 2007, thus ensuring that all significant information material required for an external evaluation of the company was published in accordance with applicable rules and guidelines.
Results
Reported operating revenues were NOK 92.5 billion in 2007, compared with NOK 91.1 billion in 2006. The 1.5% revenue growth in 2007 was in line with the expectation of 0-5% growth as outlined in the annual report for 2006. The main reason for the moderate revenue growth was that Kyivstar was reported as a consolidated company in 2006, but as an associated company in 2007.
The EBITDA margin was 31% in 2007, compared with 35.9% in 2006. The EBITDA margin was, however, in line with the expectation of around 32%. The reduction in the EBITDA margin from 2006 to 2007 is mainly due to Kyivstar being reported as an associated company in 2007, in addition to lower margins in DTAC, Grameenphone and Mobil Norge.
Profit before tax was NOK 20 billion in 2007, compared with NOK 21.5 billion in 2006. Operating profit in 2007 reached NOK 15 billion, compared to NOK 17.6 billion in 2006. Telenor’s profit after tax and minority interests in 2007 was NOK 18.0 billion, corresponding to NOK 10.72 per share. The corresponding figures for 2006 were NOK 15.9 billion and NOK 9.44 per share.
Telenor invested NOK 25.5 billion in 2007, of which NOK 19.5 billion was capital expenditure and NOK 6.0 billion was investments in operations. Around NOK 4.5 billion was linked to the increased ownership share in VimpelCom from 29.9% to 33.6%. The capital expenditure increased by NOK 0.3 billion to NOK 19.5 billion and was mainly related to the network expansion in the international mobile operations as a result of strong customer growth, as well as the expansion of 3G and HSPA in the Nordic markets. Capital expenditure was 21.1% of operating revenues in 2007, and was thereby in line with the expectation of around 20% that was outlined in the annual report for 2006.
Net cash flow from operating activities was NOK 23.7 billion in 2007 compared to NOK 30.6 billion in 2006. The fall in relation to 2006 is mainly related to the fact that Kyivstar was reported as an associated company in 2007.
Research and development expenses included in the profit and loss account amounted to NOK 585 million in 2007 Total cost related to research and development activities is estimated at NOK 1.5 billion.
At the end of 2007, Telenor’s total balance was NOK 160.8 billion and the equity ratio (including minority interests) was 46.4% compared to NOK 148.6 billion and 42.2% respectively in 2006. Net interest-bearing liabilities were NOK 39.9 billion, which is a reduction of NOK 3.4 billion during the year. The disposal of Telenor Satellite Services and the ownership share in the Austrian mobile operator One made a positive contribution to the development in net interest-bearing liabilities, while the increased ownership share in VimpelCom had a negative effect. In the Board’s view, Telenor holds a satisfactory financial position.
In accordance with section 3-3 of the Accounting Act (Norway), we confirm that the accounts have been drawn up based on the going concern principle.
Telenor’s operations
Mobile Operations
Revenue growth in Telenor’s mobile operations in 2007 was mainly driven by customer growth and increased use of mobile services in emerging markets. Telenor Pakistan more than doubled its number of subscriptions with a net growth of 8 million, and reported an increase in operating revenues of 163% from 2006. Operating revenues in DiGi in Malaysia increased by 17%. Grameenphone in Bangladesh reported an increase in operating revenues of 7% compared with 2006, despite increasing competition and significant price pressure. The introduction of an interconnection scheme in Thailand made a major contribution to DTAC’s revenue growth of 47%. Excluding interconnection revenues, the revenue growth in Thailand was around 7% in local currency.
The revenue development in a number of mature markets in 2007 was affected by an increase in competition and price pressure. In Pannon, reduced interconnection and roaming prices and a poor development in the Hungarian economy resulted in revenue growth of only 3%.
Revenues in Mobil Norge increased in 2007 by 1% compared to 7% in 2006. In addition to price reductions, the development in the Norwegian mobile operations was negatively affected by the loss of the wholesaler agreement with Tele2. Sonofon in Denmark had revenue growth of 4% from 2006 to 2007. Following the acquisition of Tele2 Danmark Sonofon grew its market share from 24% to 27%. Revenues in Telenor’s mobile operations in Sweden increased by 10% from 2006 to 2007. Both customer growth and increased usage contributed positively to this development.
Fixed-line operations
Operating revenues in Telenor’s Nordic fixed-line operations increased by 0.6% in 2007 compared to 2006. Operating profit in 2007 was NOK 3,172 million compared to NOK 2,901 million in 2006.
In the Norwegian operation, increased revenues from broadband and the wholesale product did not fully compensate for lower revenues from telephony. The fall in revenues of 4.0% in 2007 was, however, less than the fall in 2006 of 6.2%. The aim to reduce the cost base by NOK 1.5 billion by the end of 2007 compared with the 2004 level was achieved according to plan.
Revenues in the Danish fixed-line operation increased in 2007 by 65%, primarily as a result of the acquisition of Tele2 Danmark, but also through organic growth within broadband and IP telephony. In the Swedish fixed-line operation, the service provider Spray was acquired in January 2007, resulting in an increase in Telenor’s market share in broadband in Sweden of four percentage points. At the end of 2007, the market share was around 25%.
Broadcasting services
Telenor Broadcast maintained its leading position in the Nordic market for distribution of TV services. Revenues in 2007 grew by 13%, partly due to customer growth and an increase in the number of customers buying additional services. Considerable investments were made in the Nordic market in the digital terrestrial network, and the first services in this network were launched in the third quarter of 2007. The services are provided by RiksTV, 33% of which is owned by Telenor.
Operating profit in 2007 was NOK 1,041 million compared to NOK 966 million in 2006. Telenor Broadcast enters 2008 with a new management structure, with operational activities and content development activities separated into two different units.
Other Units
Operating revenues from other units increased by NOK 716 million to NOK 8,990 million in 2007. The disposal of Telenor Satellite Services and the reduced stake in Opplysningen AS (Directory Enquiries) were more than compensated for by the acquisition and organic growth in EDB Business Partner.
For supplementary segment information, reference is made to note 3 of the group accounts.
Allocations
The result for the year for Telenor ASA in 2007 was NOK 5,060 million, after receipt of a group contribution of NOK 2,000 million. The Board proposes the following allocation:
Transferred to retained earnings: NOK 5,060 million.
After this allocation, Telenor ASA’s distributable equity totalled NOK 24,369 million as at 31 December 2007.
At the AGM, the Board will propose a dividend of NOK 3.40 per share for 2007 to be paid in May 2008, which is a total of NOK 5.7 billion.
Non-financial information
Health, environment and safety (HES)
In 2007, Telenor worked proactively and systematically on the continuous improvement of the working environment at all levels in the group. Focus has been placed on absence due to illness and rehabilitation, leadership training, ergonomics, personal safety and crisis management.
A total of 40 HSE reviews were carried out, including 13 in the Norwegian part of the business, as part of the follow-up of these areas in the group’s companies. During the year, 5,781 employees took part in HSE training programmes, including 648 in the Norwegian part of the operation.
Absence due to illness in the Norwegian part of Telenor was 4.75%; a marginal change of 0.05% in relation to 2006. Absence due to illness in the other companies varied from 0.07% to 6.82% in 2007.
A total of 51 injuries resulting in absence from work were registered in 2007 among Telenor employees. A total of 40 injuries not resulting in absence from work and 28 near accidents were also registered. Three deaths were reported among contractors working for Telenor. Corresponding figures for the Norwegian part of the operation are 6 injuries with absence, 7 without absence, 4 near accidents and no fatal accidents.
In April 2003, together with a number of other major businesses in Norway, Telenor entered into an agreement relating to a more inclusive working life. The agreement has been extended to the end of 2009. The agreement shall help to reduce absence due to illness, ensure better adaptation of working conditions for employees with special needs, and raise the actual retirement age in the group. The principles for inclusion and initiatives as described in the agreement relating to a more inclusive working life have been adhered to by Telenor ever since the mid 1990s.
Since 1996, Telenor has had a course and work training programme for the physically disabled, and the visually impaired and hard of hearing: Telenor Open Mind (formerly known as Telenor HCP). The programme, which consists of a qualifying period of 3 months and 21 months work training, has given participants the opportunity to be included in regular working life through relevant work training and experience.
During the 10 years that the programme has been in existence, 75% of participants have entered the regular labour market after completing the programme. An external evaluation (Sintef 2006) estimated that Telenor Open Mind led to socio-economic savings of at least NOK 100 million in the period 1996-2006. In 2007, similar activities were initiated in DiGi (Malaysia) and in Telenor AB (Sweden).
Social responsibility
Telenor’s business is an integrated part of society in the countries in which the group is established. This requires keen awareness and extensive insight into and respect for these countries’ distinctive character and culture. Telenor aims to make a positive contribution to the economic growth, welfare and development of all our markets through our service offering, and to ensure sustainability in all aspects of our business.
Telenor has therefore always attached importance to establishing trusting relations with the different countries’ authorities, organisations and people. Over the years, we have built and maintained good dialogue with all important stakeholders.
In 2007, a number of group-wide initiatives were implemented in order to create a network to further develop Telenor’s relations with authorities and wider society within a common framework. Telenor’s work on social responsibility issues is integrated in the group’s business development.
A number of studies show that mobile communication contributes to employment and economic growth. Communication, which is Telenor’s core expertise, produces major gains in the form of increased efficiency and better flow of information. This applies in all markets but is most easily observed in emerging markets. Together with our partners, Telenor develops strategic projects in areas and regions that have not previously had access to communications solutions.
Telenor achieved the number one position on the Dow Jones Sustainability Indexes in 2007 for the first time, within the category of mobile communication. This confirms that our focus on social responsibility is recognised. Telenor received particularly good reviews for our focus on introducing increasing numbers of people
to the digital world.
Climate and environment
In 2007, Telenor initiated efforts to develop a radical climate strategy. The main emphasis has been on our potential for reducing our own emissions and developing and supplying solutions that can make a positive contribution to reduce the threat of climate change.
As a basis for Telenor’s climate strategy, extensive efforts were
made in all companies in 2007 to map Telenor’s total CO2 emissions. Also included in these figures are CO2 emissions caused by the production of electricity bought from the electric power plants in the countries in which we operate, in addition to our own electricity production. Total emissions are estimated to be approximately 500,000 tonnes of CO2. Network operations account for 70% of emissions, while buildings account for 15% and the figure for transport and business travel is 15%. Total energy consumption was 1,600 GWh, divided into 950 GWh for network operations, 300 GWh for buildings and 250 GWh for transport and business travel. Efforts to set targets and specific measures for reducing Telenor’s CO2 emissions are well underway.
In order to reduce the need for work-related travel, a project has been initiated to assess the possibilities for increasing work efficiency by using forward-looking technology and simultaneously reducing the need for travel. This creates a major potential for reducing CO2 emissions.
As part of Telenor’s work to reduce the group’s impact on the environment, Telenor in Norway entered into an agreement in 2007 with Fair Recycling for the reuse of ICT equipment. The equipment, around 2,300 computers a year, will be donated to schools in third world countries.
Diversity and equal opportunities
Telenor is committed to ensuring diversity in the group and can demonstrate good results in this area. The work focuses on women, ethnic minorities, senior employees and those with disabilities.
Telenor sets requirements for diversity in recruitment and management development programmes. We recognise that a good balance between work and private life is becoming increasingly important for today’s talents and managers, both male and female.
Equal opportunities statistics show that 37% of the total workforce is made up of women in the Norwegian part of the group. The corresponding figure for managers is 26%. In 2007, the Board of Telenor ASA was made up of 40% women and 60% men. In accordance with the principles for equal opportunities drawn up by the Board, measures have been implemented to improve the composition of the Board with regard to gender and expertise in the group’s own companies.
Organisation and personnel
At the end of 2007, Telenor had 35,800 employees (34,420 man-labour years), of which 10,200 were in Norway and 25,600 outside Norway. This is a reduction of slightly less than 1,000 employees in Norway, partly as a result of the reduced ownership share in Opplysningen AS (Directory Enquiries) and the disposal of Telenor Satellite Services, as well as an increase in international operations of approximately 1,000 employees since 2006. The board gratefully recognises the substantial effort contributed by all employees to secure the further development and growth of Telenor.
In Norway, the mobile and fixed-line operations were joined as one organisation in December 2007; Telenor Norge. The organisational change is in line with similar changes already made in Sweden in Denmark, and is expected to contribute to a more market-oriented organisation.
Telenor recognises the importance of attracting and retaining skilled and motivated employees and managers with a strong commitment to the business in line with Telenor’s ethical guidelines and values. In 2007, the group continued the global Telenor Development Process (TDP). TDP consists of a number of sub-processes such as strategy breakdown, employee performance reviews, talent assessments and employee surveys. The joint effect of the process is an organisation, managers and employees that develop and produce results in accordance with Telenor’s strategy. The introduction of the process is supported by a number of development initiatives both locally and at group level, in the same way that the results of the process are worked on both locally and at group level.
Regulatory matters
Telenor’s companies operate in compliance with the prevailing regulatory conditions that the group is subject to in individual markets, both within and outside Norway. Developing equal and fair competition is a major challenge for the 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 affect Telenor’s revenues and profitability and thus represent a regulatory risk.
The authorities are very interested in and set a number of requirements for the telecoms sector both in order to influence the industrial structure and as a source of taxation. We are now seeing an increased interest in security in all of our markets. This means that requirements for storing data and registering customers are being introduced in a growing number of markets.
The authorities in Norway have set new prices for key access products in fixed-line and mobile. In the Norwegian mobile market, Telenor operates under different terms than those imposed on smaller operators. The development differs from that in other markets in which we are present, which are moving towards equal terms for all operators, partly by making interconnection prices symmetrical.
All our markets are experiencing strong growth and the sector will attract increased attention from national authorities. This may lead to greater regulation, for example with regard to services demanded by society, mobile number portability and interconnection. In several of our Asian markets 3G spectrum has either been allocated, or a process to allocate such 3G spectrum has been initiated.
A new regulatory framework for interconnection was introduced in Thailand in 2007. Disputes are ongoing between DTAC and TOT Public Company Limited (formerly Telephone Organisation of Thailand) and CAT Telecom Public Company Limited (formerly Communication Authority of Thailand) concerning interconnection agreements. In Bangladesh, the national regulator BTRC recently initiated a follow-up inquiry into Grameenphone in connection with the company’s involvement in a matter concerning international termination of telephone calls via Voice over IP. Reference is made to note 25 of the group accounts for further details on these matters.
Risk factors
Telenor’s activities are exposed to a number of regulatory, legal, financial and political risks. If Telenor’s growth strategy in new markets in Central and East Europe and Asia is to be successful and inspire the necessary confidence among shareholders and investors, risk assessment and risk management must form part of the group’s core expertise.
It is important for the Board to ensure that the group undertakes the steps needed to control and reduce the risks so that the total risk is always within acceptable commercial limits.
The Board and management assess such risk thoroughly in connection with new investments, and on an ongoing basis in relation to existing investments. The group has gradually acquired considerable practical experience in establishing and managing activities in economically less-developed areas. Combined with a large network of contacts, including the authorities in Norway and abroad, the Board believes this forms a good basis for proper risk assessment. The Board has also carried out systematic reviews and evaluated the company’s investments in order to assess the development of the individual projects in light of an updated risk factor.
The company has tried to balance the risk relating to foreign investments in its international focus by splitting the portfolio between mature and emerging markets.
Telenor is exposed to financial market risks linked to changes in interest rates and foreign exchange rate fluctuations. In order to manage interest rate fluctuations, financial instruments are used, such as fixed rate loans and interest rate swaps. Supplementary information is given and a sensitivity analysis has been conducted in connection with financial risks in note 22 of the annual accounts.
Telenor is also exposed to credit risks linked to accounts receivable and investments in financial institutions. Stringent requirements have been set for the counter parties’ creditworthiness and restrictions have been set on aggregated credit exposure for each individual counter party. Telenor attaches importance to financial manoeuvring room, and the group has taken the steps needed to maintain satisfactory financial flexibility.
Corporate governance
The Board places emphasis on Telenor maintaining a high standard of corporate governance in line with Norwegian and international rules and recommendations. A detailed report on Telenor’s practice and management of these issues is available at http://www.telenor.no/om/virksomhet/hvordan/selskapsstyring and http://www.telenor.com/ir/company/cg/.
Telenor operates in accordance with Norwegian recommendations on corporate governance with the exception of point 14 on the drawing up of main principles for takeover bids. The background for this exception is the state’s ownership share of 54% in the company and that any reduction in stake by the state will require a special resolution in the Storting and public processing that will safeguard the intentions set down in the recommendations.
With regard to the Board’s use of sub-committees and the Board’s work with risk management and internal control, which in accordance with the recommendation will be quoted in the annual report, a more in-depth description of this is given on Telenor’s website together with the other description of corporate governance in Telenor.
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 Board members, apart from the employee representatives, are employees of Telenor or have carried out work for Telenor. The Board’s work complies with Telenor’s instructions for Board members and the applicable guidelines and procedures. The Board has also carried out a self-assessment of its own activities and competence. The Board of Directors held 11 Board meetings in 2007.
Harald Norvik was appointed Chairman of the Board at an ordinary general meeting in May 2007, and Kjersti Kleven and Olav Volldal were voted in as new shareholder representatives. In addition, Bjørg Ven, Paul Bergqvist, John Giverholt and Liselott Kilaas were re-elected. May Krosby and Rune Andre Anderssen were voted onto the Board as new employee representatives at the autumn vote, while Harald Stavn was re-elected.
Transactions after the balance sheet date
Telenor’s 18.3% block of shares in Golden Telecom was sold to VimpelCom on 27 February 2008 for USD 105 per share, which corresponds to NOK 4.1 billion. Sales gains after elimination of the share of gains linked to Telenor’s ownership share in VimpelCom are estimated at NOK 1.6 billion.
EDB Business Partner’s acquisition of 100% of the shares in IS Partner for a total sum of NOK 1.3 billion, was carried out on 11 February 2008. For further details, refer to note 36 of the group accounts.
Outlook for 2008
Expectations for 2008 are based on the organisation structure as at 31 December 2007, when Kyivstar was reported as an associated company:
Growth of around 5% is estimated for reported operating revenues, the EBITDA margin before other revenues and costs is expected to exceed 31%. The capital expenditure will be around 20% of operating revenues, mainly as a result of customer growth in Telenor’s international mobile operations.
Considerable uncertainty is normally associated with assessments of future conditions. Among other things, the market development and changes in the competitive situation can affect Telenor’s financial results. An increasing share of Telenor’s operating revenues and profits are being generated from operations outside Norway. Changes in foreign exchange rates can to an increasing extent affect the reported figures in NOK. Political risk, including regulatory conditions can also affect the results.