The Management Board of the Telekom Austria Group talks about the successful stabilisation of the Austrian business, the new majority shareholder América Móvil, the successful capital increase, new trends and its plans for the future.

Der Vorstand der Telekom Austria Group: Hannes Ametsreiter (Generaldirektor), Mitte; Siegfried Mayrhofer (Chief Financial Officer), rechts; Günther Ottendorfer (Chief Technology Officer), links (photo)

The Management Board of Telekom Austria Group
Hannes Ametsreiter (CEO), middle
Siegfried Mayrhofer (CFO), right
Günther Ottendorfer (CTO), left

You have a new majority shareholder, have just successfully executed a capital increase, and have initiated the turnaround of the Austrian business. In contrast, you had to recognise a considerable impairment on your investment in Bulgaria. How do you rate this picture overall?

Hannes Ametsreiter: In many ways we have taken new paths in 2014, both strategically and operationally. And we are heading in the right direction. We have successfully implemented our convergence strategy and significantly strengthened the company with a range of operational measures, M&A activities and cost reductions. Despite further drastic regulatory cuts, we have succeeded in stabilising EBITDA comparable. Everybody in the company can be proud of this. At the same time our individual markets show a diverse picture. Austria is known as one of the most difficult markets in Europe in our sector. The average price level in the mobile and fixed-line business in Austria remains one of the lowest in whole Europe. Nevertheless, after years of decline we achieved a slight increase in EBITDA comparable in 2014. As for our international markets, Belarus and Slovenia show encouraging growth rates, but there are also countries such as Bulgaria and Croatia where we have already implemented specific measures but have not yet achieved stabilisation. However, our new majority shareholder América Móvil and the successful capital increase put us in an excellent position to generate value-enhancing growth by means of a strengthened capital structure and sound investments in the Telekom Austria Group.

Were there surprises in 2014 — with regard to the environment or your business performance? Which highlights shaped the business in particular?

Hannes Ametsreiter: The biggest challenge for us was surely the realignment of the Austrian business. As the market leader we set out on a progressive path with a new tariff structure and are now very happy that high levels of customer acceptance for our products and services have confirmed the validity of this alignment. Unfortunately negative surprises in the form of the impairment in Bulgaria, increased frequency usage fees in Croatia and provisions resulting from an ECJ verdict concerning the status of civil servants in Austria cast a shadow over the inherently positive operational picture.

And how do you assess the 2014 result from a CFO’s perspective?

Siegfried Mayrhofer: The fact that we have managed to achieve stabilisation after six years of declining EBITDA comparable for the Telekom Austria Group is decidedly positive. In purely operational terms, not including non-recurring effects, we even achieved growth again. The aforementioned impairment in Bulgaria does of course have a negative impact on the development of net income, but it has no direct effect on our cash flow, which grew in 2014 and reflects the strong operational trends. The successful implementation of our capital increase, whereby we obtained EUR 1 bn of fresh capital for the company with the support of our core shareholders, is also satisfying. We will now use these funds to continue pursuing our strategy.

What were the main factors for the positive trend in the Austrian business?

Siegfried Mayrhofer: The key element for this success was certainly the consistent focus on high-value customer segments. Here, we succeeded in meeting our customers’ needs through attractive offers with pinpoint accuracy. In doing so it was crucial to distinguish ourselves from the competition via premium services and network quality. At the same time we sustainably lowered our costs by means of efficient market management and an adjustment of the level of handset subsidies. The strict cost discipline, however, did not relate to market management only. We also initiated numerous structural measures, such as for example in purchasing and the IT landscape.

However, our new majority
shareholder América Móvil and the
successful capital increase put us
in an excellent position.
HANNES AMETSREITER

Hannes Ametsreiter (Generaldirektor) (photo)

What are the future plans for Austria now? Are there opportunities for growth? What could potentially endanger the turnaround?

Hannes Ametsreiter: We will continue working intensively on the implementation of our strategy in order to generate sustainable growth in the Austrian market. We believe that we will continue to benefit from the rising demand for data and from our position as network quality leader in future and that we will also continue to win over our customers with attractive convergent products.

Siegfried Mayrhofer: The provider structure of our market is of course also crucial for its development. In particular, we are monitoring potential new MVNOs (mobile virtual network operators) here very closely. However, we are confident that by means of a differentiated market management and attractive products we will remain successful even in an environment with new players.

What does América Móvil’s arrival on the scene mean for the Telekom Austria Group specifically? Together with ÖIAG, it means you now have a very stable shareholder structure …

Hannes Ametsreiter: We have been working with América Móvil in a highly constructive manner since their initial entry in 2012. The successful takeover bid in the reporting year shows that América Móvil believes in our company and our region. Because América Móvil operates in both the mobile and fixed-line businesses and greatly values network quality, we are also strongly aligned with regard to our strategic priorities. In any case the stable shareholder structure makes it easier for us to pursue strategic goals and to make long-term investments in infrastructure.

Talking of strategy: Has anything changed because of América Móvil coming on board or for any other reason? The concept of focusing on convergence has proven successful. Are you sticking to it? And where do you see the greatest potential for growth?

Hannes Ametsreiter: América Móvil is especially supportive of our focus on convergence. We see clear growth potential here. The successful implementation in Austria, Croatia, Bulgaria and most recently the Republic of Macedonia shows that this approach works. Convergence will therefore remain our central strategic focus.

Where is the telecoms sector going? Are there new trends that you consider important? Are new technologies coming our way?

The key element for this
success was certainly the
consistent focus on high-value
customer segments.
SIEGFRIED MAYRHOFER

Siegfried Mayrhofer (Chief Financial Officer) (photo)

Günther Ottendorfer: Our industry remains a very exciting sector dominated by rapid developments in relation to data growth and innovative over-the-top players such as Netflix and Google. Of course dynamic data growth entails growth opportunities for us, too. Moreover, the machine-to-machine business (M2M) also affords potential in manifold ways. In addition, the provision of content and media offers telecommunications companies options for differentiation and growth in the media business too.

In 2013 you spent a lot of money on new frequencies in order to offer your customers even higher network quality. How is the expansion looking at the end of 2014?

Günther Ottendorfer: At the Austrian multiband auction we acquired unique frequency spectrum by European standards. Above all, this makes a rollout in rural areas much more cost efficient. The expansion is progressing very well, and we are also far ahead of the competition in terms of coverage of the LTE network. In Austria we have over 60% coverage as of the end of 2014, but we are also making good progress with the expansion in the CEE region. But ever higher bandwidths are not only increasing in importance in the mobile business. That is why in the fixed-line business we are using technologies such as G.fast which allow us to offer extremely high bandwidths via the existing copper network. This means we can efficiently push ahead with the expansion of ultra-fast broadband services alongside the fibre roll-out.

Your markets in CEE are a mixed bag. Most recently in particular the impairment of Mobiltel in Bulgaria drew attention. Has this solved all the problems there?

Hannes Ametsreiter: A look at our international markets shows a diverse but generally stable picture. Some markets are performing well, and countries like Belarus, Slovenia and the Republic of Serbia offer very good growth rates, which highlight the opportunities of the CEE region. Nevertheless, the business in Belarus is exposed to a substantial currency risk. In other countries like Bulgaria and Croatia, which are struggling economically, our operations also face significant challenges. The impairment in Bulgaria for example is based on a reduction in our expectations both with respect to the company’s operational performance and the economic development of the country. Our task is now to set strategic priorities in order to stabilise these countries too.

Where will you head next in CEE? Can the concept you are successfully implementing in Austria be applied there too? At first glance, the political and economic environment and exchange rate development do not look favourable everywhere …

In particular, we are planning
to push the LTE expansion
and accelerate the fibre rollout
in the years 2015 to 2018.
GÜNTHER OTTENDORFER

Günther Ottendorfer (Chief Technology Officer) (photo)

Siegfried Mayrhofer: We continue to believe in the fundamental growth potential of the CEE region. The people there are well educated and highly motivated, so we see no reason why these economies should not converge to the EU average in the medium term. And we are confident that this catch-up process will also be reflected in the operating performance of our subsidiaries in the medium term. Nevertheless, the political and economic environment in CEE is of course much more fragile than in Austria. Thus we anticipate headwinds for the time being. In Eastern Europe, as in all markets, a healthy market structure and development form the basis for a sustainable business model. With increasing maturity there will be more opportunities for convergent products such as those with which we are already successful in Austria. And increasing data volumes are also a feature in CEE.

How are you progressing with the technological roll-out in CEE — and thus in countries with very different maturity levels?

Günther Ottendorfer: As in Austria we also see high network quality as the key to success in CEE. We are therefore continuously striving to provide ever higher capacity for broadband services in our network footprint. We are, for example, pushing ahead with the expansion of LTE networks in our international markets and already offer LTE services in three countries outside Austria — Croatia, Slovenia and the Republic of Macedonia — with a coverage of more than 27%, 75% and 42% respectively. In the fixed-line business we are continuously optimising our network quality and coverage in CEE also — partly by actively expanding our own infrastructure, partly by acquiring alternative providers.

Operational excellence and cost optimisation feature high up on your agenda. What progress was made here in 2014?

Siegfried Mayrhofer: Cost savings were the greatest driver of the EBITDA comparable stabilisation in 2014. As mentioned before, we initiated a range of structural measures besides increasing cost efficiency in market management. Several strategic efficiency programmes — relating for example to purchasing, IT infrastructure and the simplification of internal processes — resulted in considerable and sustainable cost reductions. These optimisations affected rolling operating expenses as well as our capital expenditure. In total, this generated gross cost savings in OPEX and CAPEX of around EUR 100 mn. Of course we will continue to focus on savings also in the future.

How do Telekom Austria Group’s financial resources and liquidity look following the capital increase?

Siegfried Mayrhofer: The capital increase was very successful and we achieved proceeds of EUR 1 bn. It considerably strengthened both the balance sheet and the liquidity position of our company. This is helping us to secure our target rating of Baa2/BBB, while we have sufficient liquidity to implement our strategic investments.

What is being done with the funds from the capital increase? Are you planning acquisitions or investments in your network quality?

Siegfried Mayrhofer: We will use part of the capital increase to reduce our leverage. In addition, we are now very well equipped to make both strategic acquisitions and investments in our network quality.

Günther Ottendorfer: In particular, we are planning to push the LTE expansion and accelerate the fibre rollout in the years 2015 to 2018. Here we plan to invest an additional amount of around EUR 400 mn. This plan is subject to the annual budget approvals by the Supervisory Board as well as the announced government broadband subsidy programme. Of course, the fact that the government has recognised the high importance of infrastructure for Austria by promising subsidies of up to EUR 1 bn is an important prerequisite for the extensive rollout. These subsidies will of course have a considerable impact on our ability to invest in infrastructure in Austria.

Let’s hazard a look ahead: What is your estimate for development in 2015?

Hannes Ametsreiter: We are confident that we have the right strategy and the right setup for achieving our ambitious goals. In 2015 we aim at revenue growth for the first time in seven years and expect a 2% increase. Also, we will continue to invest in the expansion of our network, in particular into the accelerated fibre rollout in Austria. In total, we want to spend EUR 700 – 750 mn.