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Edited Transcript of MTELEKOM.BU earnings conference call or presentation 23-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Magyar Telekom Tavkozlesi Nyrt Earnings Call

Budapest Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Magyar Telekom Tavkozlesi Nyrt earnings conference call or presentation Thursday, February 23, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Linda Laszlo

Magyar Telekom Telecommunications PLC - IR Consultant

* Christopher Mattheisen

Magyar Telekom Telecommunications PLC - CEO

* Janos Szabo

Magyar Telekom Telecommunications PLC - CFO

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Conference Call Participants

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* Ivan Kim

VTB Capital - Analyst

* Vera Sutedja

Erste Group Bank - Analyst

* Herve Drouet

HSBC - Analyst

* Andre Senir

Bloomberg - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good afternoon and welcome to Magyar Telekom Quarter Four 2016 Financial Results. We have just a few announcements before we begin today's presentation. This event will last for approximately one hour. The slides will advance automatically through the presentation. (Operator Instructions) Your host today will be Mr. Christopher Mattheisen, Chief Executive Officer; Janos Szabo, Chief Financial Officer and Linda Laszlo, Investor Relations Consultant. I will now hand over to Ms. Linda Laszlo. Please go ahead.

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Linda Laszlo, Magyar Telekom Telecommunications PLC - IR Consultant [2]

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Good afternoon everyone. I am Linda Laszlo, Magyar Telekom's Head of Investor Relations, I would like to welcome you to our fourth quarter 2016 conference call. Please note that our presentation can be accessed via the link within the conference call invitation, and is also available in the Investor Relations section of our website. Before we get started, I would like to draw your attention to the disclaimer on the last slide. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties.

Now, let me introduce today's speakers who will take you through the presentation and answer any questions you may have. Mr. Christopher Mattheisen, our CEO, will start with an overview of our full year results and outlook for 2017. Following that, Mr. Janos Szabo, our CFO, will talk about the fourth quarter performance of each of our business segments.

And now it is my pleasure to turn the call over to Chris to open the presentation.

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [3]

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Thank you, Linda. Good afternoon everybody. Let's start today's call with a brief summary of what we have achieved financially at Group level during 2016. I am pleased to report a strong set of financial results for the full-year 2016. Revenue performance exceeded our previously-announced guidance, driven by a favorable fourth quarter in Hungary, where our increased marketing activities and higher level of subsidies led to a better-than-anticipated sales growth of both mobile handsets and data packages. Although our total revenue witnessed an 8% decline compared to 2015, as you can see on Slide 2, this was primarily due to our decisions regarding the energy business, as well as a decline in systems integration and IT revenues following a temporary slowdown in EU fund inflows and a very strong fourth quarter 2015 comparative.

EBITDA grew by 5% during the year, again outperforming our guidance. This positive result can be attributed to lower severance expenses, significant savings in employee-related expenses, one off gains from the sale of Infopark building G and Origo, as well as a rise in profitability at our systems integration and IT services in Hungary due to a strategic focus on higher margin projects. CapEx, excluding spectrum license fees totaled close to HUF105 billion, exceeding our target of around HUF100 billion. At the same time, I am pleased to report that thanks to EBITDA growth and lower interest payments, our free cash flow increased by 87% compared to 2015, thereby reaching our target of HUF50 billion free cash flow a year earlier than expected.

On Slide 3, you can see our new public targets for 2017. Moving forward, competition is expected to intensify in both mobile and fixed line. Digi is expected to enter the mobile market, and prepaid and business mobile segments are likely to remain very tight. In terms of the fixed line market, increasingly competitive regional triple-play offers are undoubtedly intensified by the rollout of optical networks by Digi and UPC. Regulatory risks to growth also continue, with an ongoing obligation to register prepaid SIMs as well as further cuts in EU roaming rates. As an integrated operator, we believe that our quadruple-play Magenta 1 bundled offer differentiates us from our competitors and allows us to address these challenges in Hungary through maximizing the telecommunication share of the household spending wallet.

Taking into account these headwinds, as well as stripping out any contribution from our Montenegrin business, whose sale was finalized in January this year, we now expect revenues to decrease to around HUF560 billion for 2017. We expect EBITDA to remain broadly stable, excluding the one-off profits from the sale of Infopark building G and Origo at around HUF182 billion due to our focus on additional operational efficiencies. Although CapEx for 2016 excluding spectrum acquisitions was higher than originally guided, we still expect a decline to around HUF85 billion in 2017.

Investments in programs related to our mobile network and roll-out of high speed internet access will be less capital intensive than in the preceding two years. Furthermore, as we are nearing the completion of a number of efficiency-enhancing projects, CapEx related to the IP migration and other IT projects will also be lower. We expect free cash flow to increase to around HUF55 billion, excluding the transaction price received for the disposal of our majority ownership in Crnogorski Telekom.

Based on the current operating and regulatory environment and outlook, we expect the Company to pay HUF25 dividend per share in relation to 2017 earnings, keeping a stable dividend level compared to 2016 earnings.

Continuing with the quarterly results, on Slide 4, you can see contributions to revenue and EBITDA performance by segment. The revenue drop was principally driven by the Hungarian segment, due to the absence of the business energy revenues and the slowdown in EU funded systems integration and IT projects. EBITDA in Hungary improved, despite slightly lower gross profit, as a result of savings on employee-related expenses due to lower headcount and lower severance expenses.

I am very pleased to report that in Macedonia, following the EBITDA improvement achieved in the third quarter, excluding severance expenses related to the headcount reduction program, EBITDA increased by more than 3% in the fourth quarter. At the same time, revenues declined by 2% driven by a decline in fixed voice retail, wholesale and ICT revenues, offsetting the strong mobile performance. In Montenegro, the slight revenue drop was due to intense competition both in fixed line and mobile, whilst regulatory pressures with regards to voice and broadband pricing continued. Montenegrin EBITDA was down by 10%, as a result of sustained pressures on margins and higher other operating expenses largely driven by the reversal of one-off tax accrual in the previous year.

I will now hand over to Janos to provide you with further detail on the performance of each of our business segments.

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [4]

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Thank you Chris and good afternoon ladies and gentlemen. Let me start with MT-Hungary on Slide 5. Overall revenues declined by 15% during the fourth quarter compared to the same period of 2015, driven by both a significant reduction in the contribution from energy, and a fall in system integration and IT revenues due to a very strong fourth quarter 2015 comparative.

Mobile revenues in the quarter remained broadly stable, as increased mobile broadband revenues, significantly higher smartphone sales and increased third-party export sales were offset by lower voice revenues. Fixed revenues declined, driven by lower ARPUs in voice, fixed broadband and TV segments due to tough regional triple-play competition. Annual net adds in these segments were lower compared to previous quarters of 2016 as a result of portfolio cleansing, where longstanding non-paying customers were forced to disconnect in the fourth quarter of 2016. Other fixed revenues declined due to the deconsolidation of Origo.

EBITDA in the MT-Hungary segment increased by 3%, mainly driven by a significant year-on-year decline in employee related expenses due to a drop in severance expenses and underlying efficiency savings resulting from the headcount reduction program carried out over the past couple of years. These savings more than offset the significantly higher other operating expenses, which were driven by higher network maintenance, repairs and remedial work expenses, increased rental, marketing and sponsorship fees.

On Slide 6, you can see developments in the Hungarian mobile market. We witnessed a more aggressive approach by Vodafone aimed at increasing market share in both retail and business mobile markets. The retail market was affected by the introduction of low priced prepaid offers, while the business mobile market continued to face very strong price competition. Despite these headwinds, we managed to increase our postpaid ratio by 3 percentage points to 59%. This improvement in the customer mix resulted in a higher blended ARPU. Magenta 1, our flagship product, also performed very well. More than 113,000 customers have chosen this high-value 4-Play package as of the end of December 2016 versus 28,000 at the end of 2015. The number of 4G customers continued to increase; by the end of December 2016, 57% of our mobile broadband subscribers had a 4G package, which also led to higher usage.

As can be seen on Slide 7, we continued to increase our fixed broadband and TV customer base compared to December 2015. However, customer numbers declined compared to September 2016, driven by the forced disconnections I mentioned earlier. Despite the increasing subscriber base, broadband retail and TV revenues slightly declined, as the intense local competition resulted in slightly lower ARPUs. At the same time, we maintained our position as market leader in both segments, and increased the share of high bandwidth tariff plans, 36% of our customers now subscribe to high speed internet capable of a speed of at least 30 megabits per second.

This, and the high demand for our 1 gigabit per second fixed network offer validates the intensive fixed network rollout conducted over the last two years. We currently cover 2.8 million households with high speed Internet, and plan for this number to exceed 3 million by the end of 2018, with the support of EU funding. Despite fierce regional triple-play competition, mainly driven by our two biggest competitors, Digi and UPC, we aim to increase our penetration on these networks.

Turning to Slide 8, you can see that almost our entire fixed customer base is on an IP based network and we are very close to concluding the PSTN migration, enabling the shutdown of the legacy platform. Competitive pressures from cable operators were felt in the fixed voice segment as well, thus fixed voice ARPU declined by 7%. Although the fixed voice market is fully saturated and the inactive ratio is increasing, we remain focused on mitigating revenue decline through migration of our high-end residential fixed voice customer base to our flat rate packages.

Briefly on our energy business, it comes as no real surprise that our revenues have declined compared to the same period last year, following the transfer of most of our B2B clients into the joint venture in January 2016. It is still our intention to exit the residential electricity business, and we now expect that this will happen sometime in Q3 2017.

Turning to Slide 9, let me draw your attention to the results of our efforts in bundling our services, which continues to be a cornerstone of our strategy. As an integrated service provider, with an integrated IP network and highly valued brand, we are in a very advantageous position to maximize the telecommunication share of household wallet spend through selling additional services to subscribers. Our Magenta 1 subscribers represent our most valuable, high-end customer base in Hungary with flat mobile and fixed plans, as well as high bandwidth fixed broadband packages. Thanks to the popularity of Magenta 1 and successful cross-selling activities, our blended household fixed line ARPU improved by 2% in the quarter.

If we turn to Slide 10, you can see the great opportunities in application development and integration services driven by overall market growth. We are by far the market leader with a 14% share of this highly fragmented market. In Q4 2015 systems integration and IT revenues were heavily boosted by mostly low-margin infrastructure projects connected to the end of the recent EU funding cycle. Since then, inflow of EU funds into Hungary has temporarily slowed, which was only partially offset by new assignments in Q4 2016, resulting in a 30% revenue decline for this segment. Exceptionally high revenues related to a governmental system integration and IT project were not repeated in Macedonia, further contributing to the revenue fall.

At the same time, both system integration and IT gross profit and gross margin ratio improved in the fourth quarter, thanks to major project wins in the Hungarian public sector. We believe that the systems integration and IT market will grow significantly in 2017, underpinned by higher EU fund inflows, and we intend to increase our market share through a greater focus on high-margin system integration projects.

Moving on to our foreign subsidiaries, starting with Macedonia on Slide 11, I am very pleased to report that revenues for the quarter slightly declined, while EBITDA declined only due to one-off severance expenses. Mobile revenues have increased for the fourth consecutive quarter, supported by the success of our Christmas sales, the continuing popularity of our Magenta 1 offer, and significant growth in mobile broadband and equipment revenues thanks to the 4G push. Our mobile market share continued to increase, exceeding 50% at the end of December 2016, while almost 42% of our customers base subscribes to a postpaid package compared to 37% a year ago. Despite an improvement in postpaid ARPU and subscriber base, blended overall ARPU slightly increased despite the decline in the prepaid business line.

In the fixed segment, revenues fell by 7% compared to the same period last year, due to lower voice revenues, reflecting a shrinking customer base and usage, coupled with a decline in wholesale revenues due to lower incoming international traffic volume and prices. Excluding a technical adjustment related to the break-down of fixed mobile convergence products, fixed broadband revenues marginally decreased, while TV revenues improved by 14%, driven by higher ARPUs and an increased customer base. System integration and IT revenues were significantly down, due to exceptionally high revenues related to a governmental project in the fourth quarter of 2015 that were not repeated this year.

As mentioned earlier, following the EBITDA improvement in the previous quarter, excluding the severance expenses related to the voluntary headcount reduction program, EBITDA increased by more than 3%, driven by savings stemming from the lower headcount. At the same time, gross profit increased by 2% as a result of a significant decline in bad debt expenses, owing to a recent collection campaign and annual review of impairment rates, while other direct costs declined in line with lower sales of fixed equipment. Looking forward, we believe that stabilization in revenue and cost efficiency improvements shall soon lead to a sustainable turnaround in EBITDA.

At our Montenegrin subsidiary, total revenues declined by 2% compared to the fourth quarter of 2015, due to continuing competitive and regulatory pressures across all major revenue lines, as you can see from Slide 12. Mobile revenues increased by 11% due to higher equipment sales and data revenues, both driven by one-off events, counterbalancing the effect of lower Balkan roaming prices. Equipment revenues increased thanks to one-time wholesale deal, while a rise in data revenues was driven by a negative technical billing correction that took place in the same period of 2015.

We continued to enlarge our 4-Play [Magenta 1] subscriber base which had a positive impact on mobile ARPUs and subscriber growth, resulting in a 19% increase in our postpaid customer base. Fixed line revenues declined by 16% in Q4 due to regulatory price caps, affecting fixed voice and broadband revenues, more aggressive competition from cable companies offering triple-play packages, and continued mobile substitution. Fixed wholesale revenues declined due to lower levels of incoming domestic and international traffic, while revenues from fixed equipment sales marginally increased. Systems integration and IT revenues increased by 38%, due to an exceptionally low Q4 2015 comparison figure. EBITDA declined by 10% in the fourth quarter, as the decline in gross profit could not be offset by savings in employee-related expenses. The fall in gross profit reflects shrinking total revenue, due to ongoing competitive pressures across all business lines, coupled with higher direct costs. As announced, Magyar Telekom has disposed of its majority stake in Crnogorski Telekom, therefore, as of end-January 2017, Montenegrin operations will no longer be consolidated into Magyar Telekom Group's financials. Chris?

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [5]

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At this point, we are ready to answer any questions that we can hear at the other end of the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions).

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Linda Laszlo, Magyar Telekom Telecommunications PLC - IR Consultant [2]

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Hi, Ivan, please go ahead with your question.

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Ivan Kim, VTB Capital - Analyst [3]

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Hi. I just wanted to ask about the dividend guidance for next year. Basically 2016 was obviously quite strong, 2017 probably will be net-net kind of worse. I understand that you anticipate Digi to enter, I understand that there is more competition in broadband than pay TV on the 3Play offers, but at the same time, the free cash flow that you expect to generate is still quite hefty at HUF55 billion. There is lot of room basically to both deleverage and pay a higher dividend than HUF25 a share. So my question is, why don't you want to increase that? And again, I understand that there is the caution and certain degree of uncertainty obviously. But at the same time, I would have expected then for you to guide for lower free cash flow if you know what I mean. So I'm just wondering where you stand on this shareholder return? Thank you.

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [4]

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I am not entirely surprised by that question. I think you stated a couple of things in the question itself. We do expect a more difficult year ahead of us this year. There are at least two to three factors that together add up to a bit more uncertainty than we've seen in other years. And it has to be -- I think we have to repeat that we have a policy, a dividend policy and the policy is that we stay in this range between 30% and 40% net debt ratio. And really we've just gotten below the 40%, we are just hugging at about 39.3%. So the dividend that we've stated here takes us into the 30% to 40% range. It is a balance sheet driven dividend policy that we have.

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Ivan Kim, VTB Capital - Analyst [5]

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May I have quick follow-up on this? So if I just plug in your guidance, I am getting you at 35% net debt-to-total capital at the year-end 2017, which is again -- I mean, it's not 30% obviously, but it gives you, from what I would expect, a lot of flexibility, right. If you are in mid-range of your target of 30% to 40%, I would think that you can spend most of your free cash flow for dividends versus deleveraging. So, is that correct thinking or you would probably want to deleverage to like 30% net debt-to-total capital? Thank you.

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [6]

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Maybe, Janos, you --

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [7]

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I think what we have to bear in mind that we also have a long-term consideration of this, that we want to maintain long-term this comfortable mid-range view on the leverage on one hand. And, however, we only talk about financial result for 2017. But in our internal planning, we have to consider later years as well and what other impacts might come in later years, either coming from competition or from other external impacts. So when we really plan and we do this cautious or maybe conservative planning on dividend, that takes also into consideration the longer-term vision of what we can expect in terms of the impacts, also on the market impacts from other angles.

That's based on these two considerations. And then maybe it's conflicting the current outlook to the fact that still we have a relatively ambitious target on 2017 in comparison to the fact that competition is increasing, the fourth operator is coming to the market which usually has a very heavy impact on the market. We see and experienced that in Austria and France and other countries when it happened. Compared to that I think we have an ambitious financial target on short-term. But therefore we also have to build a longer -- in a longer-term vision some more conservative approach, starting with a leverage and having some reserve there as well.

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Linda Laszlo, Magyar Telekom Telecommunications PLC - IR Consultant [8]

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Vera, please go ahead with your question.

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Vera Sutedja, Erste Group Bank - Analyst [9]

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My question is follow-up from the dividend question. Let's just say down in the next couple of quarters you would see the impact of Digi competition on the market and so forth, would you reconsider your dividend per share for 2017 or is this set in stone for sure for 2017?

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [10]

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First of all then, probably let's just be clear. This is a management view at the moment what we see based on the current outlook. At the end of the day, dividend is not in the scope of authority of the management to decide about final dividends, but this is a shareholders' decision based on the Board proposal and, yes, I will give therefore the real final call for the shareholders to decide about what the final dividend is going to be. That's the current management view and for the time being from this perspective that's what we are going to stick to.

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Vera Sutedja, Erste Group Bank - Analyst [11]

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My next question will be on Digi, there was I think a news that there was negotiation regarding the collocation agreement. What's the latest update on that? And if you could also maybe update if there is so far also any national roaming agreement being discussed? Thank you.

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [12]

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Discussions on things like collocation and interconnects, those are happening, those are underway. I have no indication at all that any sort of national roaming agreement would be considered. Our underlying assumption has been and continues to be that there will be no national roaming.

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Linda Laszlo, Magyar Telekom Telecommunications PLC - IR Consultant [13]

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Herve, please go ahead.

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Herve Drouet, HSBC - Analyst [14]

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Just a quick question. I'm sorry, I missed out on your -- I think your (inaudible) what your guidance for 2017. I really want to understand what -- the first question is, what pushed you to -- what are the driving factors behind the -- on the revenue side going to the bottom end of the previous guidance? And second of all, just on the EBITDA margin, while EBITDA guidance implies a margin of 32.5%, knowing that energy revenues would be lower, or be nil from this year onwards, that should have a (inaudible) to have a positive EBITDA impact. So what drives you to be more conservative, if I may?

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [15]

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Okay. In terms of the revenue guidance, on one hand we believe that the revenue is partly positively is still driven by the [belated] energy exit which I was just talking about a couple of minutes ago in my speech as well, and Digi might come later. On the other hand what we see is, even without Digi MT on the mobile market, there is more fierce competition what we already see on the fixed market. Note, I also indicated, it was indicated already, UPC and Digi are already rolling out new networks and then there is a more fierce price competition even on 3Play and 4Play offers especially from UPC on 4Play offers as well.

And we see Vodafone to be really boosting further the competition on -- and this is very much driven by the pricing. So from that perspective these are the key elements, which we consider. That certainly coupled with some smaller roaming elements as well, which we consider, but -- and on the top of that, we don't expect that the same one-time impact of roughly HUF5 billion will come on the third-party mobile sales, export sales, which was very high in 2016. That was rather an inventory cleaning. And this is not something we will repeat. So out of this revenue decline, I think, therefore the most important which has no impact on the margin will be this equipment sales, but all the rest has also certainly a strong impact on the revenue part.

For the EBITDA outlook, what we see on the top of that, as already mentioned in my comments as well, that in the other operating income, we have some increasing revenue coming from rentals and this is a bit restructuring partly or investment curbs, coming from investment curbs as we are moving from owned real estate to rented real estates on a constant basis for the next two years. And also we have some increased network rentals in our books as well. So that's on one hand a stronger increase on the operating costs. Meanwhile, we have currently a kind of slowdown on the potential of saving on personnel costs. In the last two to three years, there was a significant contribution from personnel cost reduction in the company, but this is not a constantly repeatable activity.

So altogether, therefore, I don't expect other operating costs to improve to that degree as it was improving in the total in the last period. So these two together is adding up to the EBITDA outlook as well, which is still together with this one is about a 3% decline at the moment.

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Linda Laszlo, Magyar Telekom Telecommunications PLC - IR Consultant [16]

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Andre, please go ahead.

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Andre Senir, Bloomberg - Analyst [17]

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I have a question about free cash flow and the dividend as well. So it seems like you are targeting some sort of sustainability or paying out in what you see as a sustainable level. I just want to ask, what assumptions you have beyond 2017 in terms of free cash flow, first of all, the impact of Digi, it seems like you're quite cautious there?

And then second, whether you are factoring in any buffer for the 700 megahertz auction that's supposed to come quite soon in Hungary? And second question, if you could elaborate a bit on what part of the 6% year-over-year decline in prepaid ARPU was due to competition and what part of this was due to just upselling people from prepaid to postpaid? Thank you.

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [18]

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On the dividend question, yes, we are trying to prepare for developments that we expect to happen not just in 2017 but beyond. And, yes, the competitive environment that we're expecting from market behavior such as Digi, but also the other factor you mentioned that is, the frequency is one of the things that we are keeping in mind as a longer term development that we should be prudent and be prepared for. Janos?

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [19]

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And I think, I would still consider that at least on 2017 outlook, I would be cautious taking the fact that the disruptive players coming to the market and usually we see much worse performance of operators facing with a disruptive player. We here believe and I think we have some ambition to consider that despite the entry of a disruptive player, we are able to really mitigate, if not fully, but major part of this impact we are able to mitigate by other activities and that's why our revenue decline is planned to be 2% and EBITDA 3% only compared to this situation. On the other hand, I think, the rest was already answered.

On prepaid ARPU decline, yes, the 6% ARPU decline is coming primarily from the current price competition. In September last year, Vodafone launched a strong price driven campaign, which significantly reduced the, let's say, the public prices was reduced from the average of MUF30, MUF35 to MUF19. So it's about 40% [less price] decline on which certainly last [adjustment] to the market by all operators and that's the major contribution to the prepaid ARPU decline. And, however, on the other hand, I think still what we are pretty proud of that we are able to offset it by the very stronger pre to post migration and therefore, the total blended ARPU on the mobile market for us is still 1.5%.

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Andre Senir, Bloomberg - Analyst [20]

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And if I may follow-up there, on the free cash flow, is it fair to assume that, from your point of view, 2017 will be the peak year from which free cash flow assuming that CapEx at around 85 billion per year stays constant, is it fair to assume that you see beyond 2017 a free cash flow contraction?

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [21]

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Look, it's difficult still -- certainly it's a bit of a question mark at the moment when these standards, which you also raised come, which at the moment not properly scheduled. But we are certainly on the cautious part despite the fact that timing is not yet defined by the regulator, but we expect that and seeing this period of 2018 to 2020, there will be this 700 tender coming up and also there might be -- there will be some other tenders coming on the high-end bandwidths as well.

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Linda Laszlo, Magyar Telekom Telecommunications PLC - IR Consultant [22]

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[Gava], the floor is yours.

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Unidentified Participant [23]

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Can you anticipate the effective tax rate following the reduction of the statutory rate in Hungary? So is it fair to assume that your effective tax rate might decline by roughly two times in 2017? Thanks.

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [24]

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I am sorry, (inaudible) I didn't -- the transmission wasn't very clear. I honestly just didn't understand the question.

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Unidentified Participant [25]

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Yeah, I was asking about the effective income tax rate in 2017 on the consolidated group level. So given the reduction of the tax rates in Hungary, is it fair to assume that roughly your effective tax rate might decline by around two times in 2017 and going forward?

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [26]

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I don't think so. I mean, the -- I think it's -- probably it's too much to consider, because one element is that the corporate tax has declined and [actually cut] half in Hungary, but still we have another tax which is the so-called local tax and that impact is unchanged. And that represents almost half of this total 22% effective tax rate environment. So I would consider that there is a drop and also we should consider that in Macedonia the corporate tax rate is -- which is 20% of our total business is also higher, it's 14.5%. So, I think that the effective tax rate will not drop that significant as you suspect at the moment.

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Operator [27]

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We have no other questions at this time. (Operator Instructions).

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Linda Laszlo, Magyar Telekom Telecommunications PLC - IR Consultant [28]

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Okay. I see there is one more question, please go ahead.

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Unidentified Participant [29]

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(inaudible) I have a question. What's your estimated impact of mandatory prepaid registration on your results?

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [30]

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Yeah. Well, we certainly expect that if -- net-net, it will be a damper on the market certainly. I think some of the things that will impact us here is that what is being targeted with this new regulation is in practice it's going to work out to be some of the very, very low usage prepaid users that exist in the market. So what I do expect is that the introduction of this kind of regulation, it will probably have -- it will have a dampening effect on the number of cards out there and the number of RPCs.

But the per unit, so the actual ARPU level of the cards we expect to disappear from the market, those are among the lowest ARPU users that we see in the market. It's probably still too early to say what the impact is going to be. Since the deadline is June 30, we expect the majority of registrations to happen in the May-June timeframe. Probably too early right now in February to be able to give anything more accurate regarding that.

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Unidentified Participant [31]

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Okay. Thank you. I have another question. As you have presented in your report like 97% of fixed voice customers are using the voice-over-IP technology, so do you expect to exit PSTN soon? And what are the potential cost savings from exiting the old technology?

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [32]

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First, yes, we would likely close down the platform finally. On the other hand, savings are already potentially flowing in as we do the migration. So wherever -- in the regions and the areas where we need to complete migration, we already started to shut down the service and therefore the potential saving will not be a one-time hit at the end of the period when we shut down the platform, but we are already benefiting from this migration on a constant basis since 2015 when we started the major part of the migration. So it's mainly coming in energy costs and then also in some operational costs and maintenance costs, but major probably savings at the moment.

There could be some real estate cost saving as well, however, we have to admit here that this is because the unfortunate situation that most of the cities are in real estate where we cannot completely rent out or sell out those real estate, because still we have some technology remaining on those places. So, we are also divesting here a bit whatever is possible, but this is limited for the time being. The benefits are coming and will come, but it won't be one big bang that you'll get from a single big event before we retire something it will be -- it will come in gradual bits and spurts.

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Unidentified Participant [33]

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My last question concerning dividend, because you've sold Montenegrin business for like over HUF38 billion, is there a possibility of paying out some special dividend because of this huge one-off cash inflow?

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [34]

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As we announced at the time of the sale of this asset, this proceed is used primarily for repayment of currently expiring financing facilities. So that was the primary purpose, that was also contributing to improvement of our leverage.

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Operator [35]

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(Operator Instructions).

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Christopher Mattheisen, Magyar Telekom Telecommunications PLC - CEO [36]

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If there are no other questions for today, I would just add that if you have any follow-up questions after the call, please do contact our Investor Relations department. Please also note that the transcript of the call today will shortly be available on our website. Thank you again for joining us today and for your continued interest in Magyar Telekom.

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Janos Szabo, Magyar Telekom Telecommunications PLC - CFO [37]

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Bye.

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Operator [38]

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This concludes today's conference call. Thank you for your participation. You may now disconnect.