KT Corp (KT) 2002 Q2 法說會逐字稿

Welcome to the preliminary earnings release conference call hosted by Korean Telecom. For the duration of the presentation, all lines will be in listen-only mode. There will be an opportunity to ask questions at the end of the presentation, and I will provide instructions on how to register for a question at that time. This conference is being recorded at the request of Korean Telecom. If you have any objections, you may disconnect at this time. If you need any assistance during the call please press star, then zero and I will be with you. I would now like to hand the call over today's moderator Mr. Chang Kung Gin, and I will standing by for the Q&A session. Please begin sir. Thank you.

Good morning and good afternoon participants, welcome to KT second quarter year 2002 preliminary earnings conference call. The conference call will be led by Mr. Soo-Do Han, CFO and Executive Vice President and Mr. Hong-Koo , Managing Director of Accounting and Finance. The conference will proceed in Korean and English, and Soo-Do Han now will make the opening remarks in Korean followed by the English remark to accommodate both domestic and foreign shareholders. I will now turn it over to Soo-Do Han now for the opening remark.

Good morning and good afternoon ladies and gentlemen. My name is Soo-Do Han CFO of group KT. In the second quarter of this year, a number of important changes took place including complete privatization, which was successfully completed in May. More recently, the CEO recommendation committee has nominated a strong candidate, the current CEO of KT, Miss Sang Chul Lee, to lead initial stage for KT post privatization. I would l like to comment on the second quarter operational performance. Second quarter revenue grew 0.5 percent year-over-year to 2.9 trillion Korean Won while operating profit was up 46.2 percent year-over-year to 456 billion and net profit was up 436 percent to 480 billion Korean Won. Reflecting slower growth in revenues, KT's management focused on the operating expense side of the equation to improve operational performance. In the second quarter, KT managed to reduce total operating expenses by 5 percent year-over-year to 2.4 Trillion Korean Won, mainly due to stringent emphasis on CAPEX saving, that was recommended by our shareholders.

In addition to the 46.2 percent year-over-year increase in operating profits, the non-operating side supported the bottom line. Non-operating income rose 254.6 percent year-over-year to 495 billion Korean Won aided by gains on the disposal of one million shares in SK Telecom in April, and foreign exchange depletion gains due to the stronger Korean Won. Regarding revenues, second quarter performance was affected by the LM interconnection Telecom. However, KT continues to experience stronger growth in the broadband business, which should help dispel the concern that the market may be saturated. KT captured 63 percent of industry's net addition in June. This momentum reported the broadband revenue of 386 billion in the second quarter, up 43 percent compared to the same period last year, and up 9 percent versus the first quarter of this year. At the same time, I highlight that the profitability in the broadband business continues to improve. In the fixed line telephony side, we are pleased to report that we continue to see signs of several additions as telephony revenue grew one percent from the first quarter and the healthy 4 percent year-over-year. In closing, amidst the tough and volatile global market condition, KT will strengthen its focus on improving profitability by cutting operating expenses and managing a tighter control over CAPEX. This concludes my comment on the second quarter performance. Thank you for your kind attention. I will now open the floor for questions. Okay we will open the session for the Q and A session.

Thank you. At this time, I would like to invite your calls to ask questions. To ask a question, please press 1 star 1 in your telephone keypad. To cancel the question, please press the pound key.

Our first question come from Mr. Mathew Jamieson from Korea. Please go ahead Sir.

Hi. I'm Matthew Jamieson from Goldman Sachs. I was just wondering if you could, I have three questions. The first one if you could just throw light on what your second half of the year. What your priorities will be with your free cash flow, and the potential any potential, I have to say, shares with SK Telecom occurring in the second half. Secondly, could you give us some updated guidance on your target numbers for the full year including revenue, EBITDA, and CAPEX, you just mentioned that you expect the first you've achieved cost savings through depreciation coming down, perhaps that means your CAPEX could come under your full year 3 trillion Won target and also just wondering if you still feel that you'll be able to meet your year end, broadband subscriber target, which I think from my recollection is about five million subscribers.

(Audio Gap)

Mr. Jamieson, does that conclude your question?

Yes, but I'm waiting for an answer.

Okay. I will take the number 3 question first. Our target of broadband subscriber for full year is then 5 million and our rule will focus on the new broadband business - the WLL business, while also we are focusing traditional areas as substitute. So, we will do our best to meet our year-end target, 5 million. SPEAKER - I will answer for you second question about the guidance for the target as well as guidance for second half of the year. When we announced the year 2000 target of 12.6 trillion Won for this year. But, I didn't count the reduction of 17.7 percent was reflected. At this point, we have not changed our target number, because if target number is tied with our physical asset. However, the period deflects the entire deduction the realistic revenue our estimated guidance will be around 12 trillion Won. For operating income side, we tried to have operating income of above 1.9 trillion Won and EBITDA of about 4.9 trillion Won. As Soo-Do Han has already mentioned in the opening remarks, given the slow growth in revenue, KT will be more focused on tight control on the operating side in the second half. So, we will do our best efforts to improve our profitability.

To answer your question, regarding the use for free-cash flow, there are three options that we are considering at this moment.

First is the share buy back, second is the Dividend Pay-out, and third is debt repayment. Because of our strategic focus and certain regulatory issues, we will focus on the third more than the first two. After the EB issue early this year, our debt-equity ratio has increased and we will focus on reducing other debt on our balance sheet going forward.

Going to next year, and moving forward, we will focus on share buy back and increasing our dividend pay out opportunistically.

We firmly believe that for benefit of all SKT and KT shareholders, share swap between SKT and KT is beneficial. We continue to negotiate with SKT to resolve the KT – SKT share swap issue, and we hope for good news in the future.

Did that answer your question?

Can I just sense there is a change in strategy because, I remember in the lead up to the privatization, you were saying that once the privatization is done, you will be a lot more forward in doing things between increasing share holder value such as share buy back. Now you are saying that the focus is on to the second half repaying debt which I guess many wouldn't consider as necessary particularly because it is exchangeable bonds, which are converting to equity. It seems like you have pushed back your strategy to do things in the short term to improve shareholder value. Am I correct?

To be clear there is no difference between what we are, what we stated before privatization and what we are stating now. Clearly, our preference remains to buy back shares and are potentially careful shares as well. But, there are certain regulatory issues that can create loss, at this moment including foreign shareholder limits, and so, we have clearly laid out our preferences, but at this moment because of certain restrictions and regulatory issues, we will focus on debt repayment position.

With regard to increasing dividend pay out ratio, one covenant in the EB issued earlier this year stipulates that maximum dividend pay out ratio be limited to 20 percent. So, as soon as we encourage conversion of the intangible into equity, we will be able to lift the covenant, and after that we will be free to increase dividend going forward.

Again the strategy on the use of free cash flow has not changed. Our clear objective remains to buy that shares and increase dividend because of certain regulatory issues that we cannot overcome at the moment; we will be focusing on judging payments in the second half.

Thank you very much.

One minor correction in translation. That the EB covenant, the maximum increase of dividend is 20 percent, not the pay out ratio of 20 percent.

Okay thanks very much.

Thank you our next question comes from from Singapore, please go ahead sir.

Thank you very much, just wondering whether you could shed some light on your CAPEX for the second quarter and your depreciation charge for second quarter, I guess normally that depreciation charge rises gradually during the year. This quarter there did not seem to be much of an increase, so I guess that implies that you did not spend too much on CAPEX and certainly less than your depreciation charge for the quarter. On the other hand, I notice that your tax charge in the second quarter was lower and the explanation for that, so there was some tax rebates on CAPEX. Can you tell me what the second quarter CAPEX figure was? What it is likely to be going forward and why your depreciation charge did not increase, like it normally does quarter on quarter? Thank you.

Okay, the second quarter of this year, we expect around one trillion Won of CAPEX is spent. For the first quarter, we have spent about 500 billion of CAPEX, that too we will have to wait announcing the first conference call. In the second half the expectation, we do not expect much CAPEX than last year may be steps of guideline one I can give you right now,

Sorry did you say,

Did you get one trillion one for first half?

One trillion Won for the first half, all right.I will just ask a follow up question there, I think the last time I saw KTs management, which was only last month or so, you were talking there about a CAPEX to sales figure of around 21 percent for 2002 with your reduced revenue guidance, does that still hold?

As for the revenue guidance, I said that for the first two questions, we have not changed the target yet, because the target is target but as for the revenue guidance, we said because reflecting any interconnection rate, reasonable realistic number for revenue for this year will be around 7 trillion won.

All right.

So we will try to save CAPEX going forward and then 21 percent is kind of the estimation, but we will try to make the better ratio high end of this year.

Is that 21 percent based on 12.6 or 12?

Same the ratio is same.

All right. And just a follow up question on the tax charge was that reduced just because of timing differences or is there another reason why the tax charge was a little bit lower than the first quarter?

Okay in the first quarter, the effective tax rate is around 28.1 percent and for the second quarter the effective tax rate is 26.8 percent. The big reason is we spent less on the CAPEX amount in the first quarter than the second quarter. According to Korea tax laws, we can get some tax credit from CAPEX spending around 10 percent just remain with them.

Great thank you very much.

Thank you our next question comes from Kevin from Korea, please go ahead sir.

Thanks. The first question, I have two questions, first question, are you still keeping your net profit guidance of 1.08 trillion for fiscal 2002 and second question is regards to the 10 free minutes on the LM interconnections. How do you account for the 10 free minutes? Do you account it in the deductions from the revenue or do you make an expense item for that 10 free minutes. That's it.

Let me take your first question with the regards to net income item, I mean, please understand that it is very difficult to keep the guidance of the bottom line number, but however we will do our best to exceed those net target when we give the 1.08 trillion Won. The 10 free minutes is taken care of by our sales discount, so the revenue of man to mobile as you can see from the conference call material is okay, if I let you do just 10 minutes to a free call.

Right but considering that you for the first half your net profit has already reached close to a trillion Won already. Since that you know the guidance for 1.08 seems you know quite low?

That's right. However there are various factors, so I mean it is bit difficult to keep the guidance on the bottom line. I think please understand our situation because we have has not determined the full amount and some of the amounts are still pending, but it is difficult to give those exact items on the bottom line number. Only thing we can say and the only thing we can make sure is that we will do our best to reach our original target 1.08 trillion Won.

Right thanks.

Thank you. Our next question comes from Mr. Jeff Carl, please go ahead sir.

Hi this is Jeff Carl from Chesapeake. I have got two questions, one on the regulatory environment, two on the wireless LAN. One on the regulatory changes, we are seeing that the pricing price cut system is going to be introduced in the local business, is there something that we could expect as early as second half or if company has any guidance or the plan for the price cut system that will be appreciated, also in terms of the wireless LAN, we have got some June subscriber numbers and I think the company has mentioned that the broadband subscriber target of 5 million includes the wireless LAN, what is the guidance for the total wireless LAN subscribers by year end and can you give us some guidance in some inaudible number?

In 50 regions, we started giving wireless LAN services, so as to provide a more reliable guidance for year-end subscriber wireless LAN, I believe that we need one or two months more to wait and monitor market development and the air time of the wireless LAN was about 50001 and above. However, we will charge just 10,000 or more compared to normal agency services for this wireless LAN, so going forward we expect around 40,000 won as the air time. You asked of the composition of 5 million breaking into ADSL and wireless LAN. Once again, it is difficult to provide this breakdown, so overall we will try to meet 5 million combining ADSL and wireless LAN services together. Okay, As for your first question with regard to, when will be the implementation of the price care system, we don't have the time table yet. The only thing we do know at this moment is MIC and other research institute is probing on this issue and once they announce a price care system we will let you know as soon as possible.

Thank you.

Speaker - Thank You. Our next question comes from Mr Stanley Hon from Singapore, please go ahead Sir.

Hi This is Stanley Hon from Standard & Poors Asia Ex Research. – I have only one simple question. In the second quarter balance sheet, which is page six on your press release. Investment assets, your long-term loans in the second quarter rose by 867 billion Won from the first quarter. Can you shed some light on the sharp increase of this long-term loan? Thank You

Through complete privatization, KT provides a subsidy to employees to purchase 5.7 per cent Government stake. This subsidy will be collected for seven years. And every month we deduct some subsidy every month. So the total subsidy was 957 billion Won. Among 957 billion Won, 68 billion Won is bracketed under short-term loan and then rest of it is bracketed under long-term loan. That is the main reason why the long-term loan increased compared to the first quarter of this year.

Ok, Thank you.

Thank you. Our next question comes from Mr Matt Givens of Korea. Please go ahead, Sir.

Thanks for having the call. Three questions. Firstly, I apologize if I missed this because the call quality wasn't very good when you were talking about guidance. But I think you said 1.9 trillion Won for operating income, 4.9 for EBITDA. That implies that the depreciation charge for this year would be about 3 trillion. My thinking would be that you charged 1.2 today, so, that would mean we are going to see about 900 in the next two quarters. Could you confirm that my understanding is correct from that. Secondly, thanks very much for leading to cost cutting. That's great. Could you clarify what cash costs at the operating level, you are, would treat to cut in the next 6 to 12 months. And the third question is with regards to the negotiations with SKT, As you don't have a CEO in place for the next couple of months, coming to see those negotiations are going to be in limbo until the new CEO is in his office. Is that nice?

Okay let me answer your first question. Like you said, if you consider our low operating income and EBIDTA margin, yes right, we also expect 3 trillion depreciation costs; however, like I said before, we are trying to reduce our Toughtek flow, I am not sure about what is the exact amount of CAPEX flow, end of this year, so I think it is too early to mention of us to what is the exact amount of depreciation cost cuts. I guess your guess is right and then I want to make clear on some of these kind of issues. KT has not provided any guidance for the operating income and EBIDTA margin and revenue. Please understand that by the, according to our management system, we had received a year-end target by the non-standing directors. That was said only this year and approved by shareholder meeting. The management only tried to meet the management target. So, this is the kind of target that is to any guidance or focus.

To answer your last question regarding negotiations with SKT, despite the absence of the CEO at this moment, we expect the appointment of the new CEO by August 20th and despite his absence we continue to negotiate effectively with SKT regarding the share swap and if just in case SKT does not agree on principle with the share swap. We are considering many other options including is the less best option of selling the entire portion to a third party. Did I answer your question?

Yes. it does except on the other cost cutting measures. Are there any other cost cutting measures apart from CAPEX and that with depreciation, that you can point to particularly on labor costs.

It is very difficult to pinpoint out which kind of cost items that we can save the cost, but we can tell you for sure, that we will try to do our best to save the cost as we have done during the first half.

Can we assume that at least by 2002 the labor agreement will increase the cut in labor expenses?

Would you repeat your question? We missed it.

Can we assume that the labor agreement that you negotiated 3 months ago, at least the labor line cannot be reduced, the labor cost cannot be reduced for this year?

Well, the labor cost, we already affected the salary increase for this year and then the

Okay, we already increased our salary about 3.1 percent for this year, however, comparing to last year, in the last second half, we came up so around 1300 employees is out of our KT joint company and in those times, some of the you know lot of 70 billion almost happened before one time, so we think of 2 things at the present time, we expect even though 3.1 percent labor increase, may be by the end of this year, labor cost is almost same as last year.

Thank you.

Thank you. Our next question comes from Mr.Mitchell Gibbs from Korea. Please go ahead Sir.

Yes,I have two probable questions. First one is on your depreciation methods. It seems to, given that the depreciation came in almost similar to the first quarter level and you indicated that CAPEX in second quarter was also similar to first quarter. Does this indicate that the you are poking depreciation almost immediately within the quarter. That is, the second quarter of CAPEX really gets recorded in second quarter. In the past, I thought, there was some lagging effect of that. And second question is, if you could just give us an expectation for your network integration and service integration revenue for second half of the year. I will appreciate that.

To answer your second question, we have tried our best to increase the SG&A revenue, compared to (inaudible) revenue. And for depreciation, the, we are using double declining methods by monthly depreciation base. So, when we purchase the equipments and recognize it as assets, we right away start to proceed. However, there is a cause of the construction in progress by them. So, in other words, if we do not finish to install or make the CAPEX into the asset to be utilized to generating the revenue, we've put it under the construction in progress. The sum CAPEX is rightaway depreciative. Some CAPEX is little bit delayed until the finish of the construction in progress.

We have a follow up question. It 's Sandy, also from Morgan Stanley. By the way, for those of us who are dialing in from Hong Kong, we could not get through to your call in number, so I am connected through Mitchell, my colleague in Seoul. You may have answered this question up front. So, forgive me, for being repetitive. Can we just get a sense for what is the process or what are the events that need to happen for share buyback programs to be initiated, That is the first question. And second, can we get a little bit of visibility on how the tax is calculated? What are the long-term sustainable tax rates, given your CAPEX profile?

Okay, for your first question it is very difficult how much is for limiting our effective tax rate because it relates, it is directly relative to our CAPEX spending, I am sorry, I think it is not the right time to talk about effective tax rate. Did I answer your question?

No. The first question was related to the events that are related to, that need to happen before we see a share buyback program or the decision process, your current thinking?

Let me reiterate that point, that priority for the use of free cash flow remains buyback of our own shares. A couple of limitations, regulatory limitations that prevent us from executing the strategy to the full. First of all, if share cancellation of our own shares remains limited to shares that we buy back from the market, The Korea Stock Exchange. And secondly, there is a foreign ownership limit that hinders us from our further share cancellation, so there are movements within regulatory bodies that will, get rid of some of these regulations, but at this point of certain timing and the method has not been certified at the moment.

Thanks for your answer, just to be clear on that last point the foreign ownership limits, does that mean from a regulatory perspective you are saying that you cannot buy back shares that are foreign owned?

Let me answer your question. First of all the treasury stock must be purchased through Korea Stock exchange. This is decided by the regulation. So, we can purchase from foreign or domestic investors, if we purchase through the Korea Stock Exchange. However, if we cancel it the affording limit will decline 49 percent. That's the main thing that's limiting us to implement our share buy back strategy.

I understand that, but you can buy back shares that are owned by foreigners as well.

Well they simply say, if we purchase ADR it is okay. But it is not recorded as the treasury stock, so that creates a kind of critical problem against the regulation.

Okay so that you are saying this not applicable to ADRs even though they can be converted into local shares.

Well so there is some limitation in regular regulation. So government we believe that government is working on some changes in regulation.

Thank you very much.

Thank you, our next question comes from Mr. Yong-Won Suh from Korea; please go ahead sir.

Thank you for your conference, I have two questions. First question is regarding leaders of service or litigation compensation. The government announced that they will increase the competitive race, so your company is expecting the revenue from the leaders of service compensation from other operator, the 168, you want this year. My question is when do you reflect the higher revenue in your income statement in fourth quarter or first quarter? First quarter. And second question is the, could you repeat the CAPEX target for full year, year 2002 full year once again. Thank you.

I'll answer your first question. As we explained in the conference call of , the amount has not been finalized yet. So the amount of debt describing the conference call material is estimation. It depends of course it depends on when the government officially announced and finalized the amount. However, we are thinking of recognize equally through Q2,Q3, and Q4.

And your second question?

Yeah our CAPEX target this year is 3 trillion Won like we said before target is just target. Our expectation is last year, we spent 2.73 trillion Won, our expectation is we want to spend less than last years number.

Thank you.

Thank you.

Thank you our next question comes from Mr. James Kim from Hong Kong. Please go ahead, Sir

Good afternoon. James Kim from Salomon Smith Barney. Two questions. First on the USO. Does the company expect USO to be expanded to cover broadband. And the second question is on number portability. What are the companies expectation on number portability for fixed line. Thank you.

The, as we privatized the, our net government provide the 400 percent of loss if it possibly occurs for broad band as the USO. It is difficult for us to provide the broad band services as the USO in the very remote areas. But as government announced on July 30th, government has the plan to increase the compensation rate from 50 percent in year 2002 to 400 percent by year 2005. We believe that government will make a very rationality policy on the USO service obligation.

As for your first question for the number portability, for low cost service number portability, it will be implemented in the next year. And starting from low cost service and costly service, and we expect the first number for the facility for all service for low cost, will be completed as the year 2004. Before this local number possibility can be implemented, we have to solve the important issue, regarding the cost of implementation has been reserved for (inaudible) operating KT's local switch. As per mobile number possibility, it has not determined yet.

Okay. Thank you very much.

Thank you. You have a follow up question from Mr.Mathew Jamieson from Korea. Please go ahead Sir.

If you could, with your EGM is coming in schedule for the 20th August, besides shareholders are cruising the new CEO. I was wondering if you could just tell us, what other key items are on the agenda, has changes in the board structure, or anything else that is interesting developments that would, scheduled to take place at this EGM.

Well, as we described in the conference call material, we decide and finalize in appointing the new CEO increasing the number of outstanding director from 7 to 9 and then adopting (inaudible) this is the main agenda. We have not yet finalized the main, the details of the agenda yet but as long as long as we will finalize and ready for shareholder, we will distribute it by the public notice and IR news.

Thank very much.

Thank you. Our next question comes from Mr. Julius of Korea. Please go ahead sir.

Hi, How are you doing. Just a quick question on the profitability of broadband. You guys have been mentioning that the profitability of broadband has been increasing. . What is percentage of profitability on following quarter over the first quarter, second quarter and then what do you expect in third and fourth quarter? The second question is repair and maintenance expense for the first half, has it been completely allocated in the first half, the money shown in the second quarter? Can we expect even now of a repairing and maintenance expense in the third and fourth quarter? The third question is that the sales commission has been, it had increased because of outsourcing. Can we expect the same level for the third and fourth quarter and the last thing, last question to , you gave a volume discount for . Can we expect the same type of volume discount to be maintained going forward? That is it.

Operating margin of broadband business in first quarter was a 14.5 percent and EBITDA margin was 46.7 percent and second quarter, we estimate 17 percent in operating margin and EBITDA margin of 49 percent and the, for the full year, we expect operating margin of 18 percent and EBITDA margin of 52 percent. And if the settlement of volume discount implemented in second quarter if the total subscriber number is maintained same, we expect about same level of revenue in our product today. And the first time of this year, we spend our 130 billion Won for repairs and maintenance cost and by the end of this year, we are expecting 320 billion Won for repairs and maintenance cost. And for the sales promotion, this cost item is cyclically linked to the we have just stated in the business. So, it may be increased from the first half level or decreased it. However we expect that this seems to be originally marketing our services and etc, may be sales promotion expense in second half are increased slightly compared to first half level.

Just a follow-up on the repair maintenance, did you say 320 billion by year end, meaning second half or is it full year?

Full year.

Full year, thank you.

Yeah.

Thank you. Once again, to ask a question please press one star one on your telephone key pad.

We will take any number of question, one needs a translation, may be one or two. And if there is no further question, we will stop it here.

Once again to ask as question please press one star one on your telephone keypad. We have a follow up question from the (inaudible) from Hong Kong. Please go ahead Sir.

Hi, just one question on the non-operating level. Last year there was a think there was a light on a coupled network, relatively big amount coming in, I think it was the first quarter, something similar should we expect it to be similar for this year?

Okay we fully understand that we had some complaints about that fluctuation for last year, so we are trying to smoothing our fluctuating cost items such as repairs and maintenance cost, so we don't think there is big surprise for the second half of this year outside.

For your reference, we expect total write-off for the full year is 130 billion Won.

Thank you

Thank you, our next question come from Mr.San Min Chao from Korea, please go ahead sir

I just have one quick question. Your broadband output in the second quarter is set to increase from the first quarter. Can you explain why that is and what do you expect going forward into second half?

Fifty mostly user are increasing. So, we believe that, that is how it helps to maintain our ART level about 30000 Won

Sorry, I couldn't hear you answer. Can you say that again, please?

See, our Multi- subscribers are increasing, that's the reason.

So you have finally transferred some numbers for second quarter?

Its about 1.4 percent

What was the number for first quarter?

It's about 1.9 percent.

So the trend has actually decreased in second quarter from first quarter..

That's right.

Okay. Thank you

There seems to be no further questions.

Thanks for joining for the teleconference call. We look forward to seeing next conference call. Thank you for joining.

Thank you. At this time the conference call has concluded I would like to thank everyone for participating in this Korea Telecom Conference Call. Thank you for using Worldcom conferencing in Hong Kong. All participants may disconnect at this time.