KT Corp (KT) 2005 Q1 法說會逐字稿

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the 2005 first quarter preliminary earnings results by KT. [OPERATOR INSTRUCTIONS]. Now, we shall commence the presentation on the 2005 first quarter preliminary earnings results by KT's CFO, Mr. Haing Ming Kwon.

Good afternoon, my name is Kwon Haing Ming, the CFO of KT. Thank you for joining us at KT's earnings conference on the first quarter of 2005.

Let me begin with the performance of the first quarter of 2005. In order to secure a stable basis for future revenues, in the first quarter KT has focused on gaining and ensuring subscriber base. As a result, we have gained net additions of 240,000 PCS resale subscribers, 56,000 broadband and 16,000 fixed line subscribers and 340,000 Ann subscribers.

Due to a tougher competition than year 2004, marketing expenses rose. So operating income increased from 4Q of last year, but decreased year-on-year basis to KRW609.4b. Despite the fall in operating income, net income increased by KRW23.3b to record KRW364.8b. This is mainly due to the improvement in KTF's operating performance and reduction in the goodwill amortization that arose from acquiring M.com.

Next, I would like to talk about the WiBro business. WiBro data service has an advantage in transmitting large capacity wireless data at a reasonable cost. Therefore, it is the service that can be leveraged to win the wireless data market, which is growing at an annual rate of 20%, particularly targeting the heavy data user-centric wireless data market in the urban areas. And so KT will grow WiBro business as a core growth business for the future, while others are giving up the business or taking a passive stance.

Already we are engaged in discussions with companies to find ways to cooperate in various different areas, such as service and content. For example, on April 27 we held a conference to strengthen mutual cooperation in WiBro, with 500 different mobile content-related companies. KT will prepare diligently to start the pilot service on first quarter of 2006, and to provide the world's first commercial service on April 2006.

Let me now talk about the investigation by the Fair Trade Commission, which recently received some coverage by the media. FTC is investigating whether there was any unfair collective action taken by the fixed -- taken by all of the fixed line and mobile operators. And on May 11 at the General Meeting of FTC, there will be a deliberation on the issues relating to local telephony and leased lines for net cafes.

KT is strongly making its case known that these have been the results of KT's policies to protect late entrants and curb excessive competition on price discount. Since the investigation is ongoing at this point, please understand that we cannot disclose any further details at this moment. But we will make the information available as soon as things are confirmed.

That being a brief overview of the performance and some of the issues, from now on we would like to take questions.

Now Q&A session will begin. [OPERATOR INSTRUCTIONS]. The first question will be given by [Jung Ing Yan] from Dolman Securities. Please go ahead sir.

I have two questions. If you look at page eight, it seems like there has been improvement in the equity method gains and loss line items. And if you look at the other line items, in the past it used to be about minus KRW3.7b, but it turned into plus KRW1.8b. So, can you explain as to which subsidiaries are attributable to the -- attributable in the improvement of the equity method evaluation?

And also, if you look at the month of April, it seems like the net additions for KTF resale have dropped significantly. Is this actually intended to moderate the speed? And with respect to that also, there has been some people who think that the resale portion has been taken out deliberately from the calculation, is that true?

And also, based on your target of 310k, you have achieved 240k. Is there any change in the target going forward?

Let me answer your first question. If you look at our other subsidiaries, last year our subsidiaries undertook stringent restructuring and they took a lot of effort for early retirement as well. And all that effort was reflected in the last number. But this year there was good results.

And also, because we have many subsidiaries, it's difficult to pinpoint one or two. But as one of the major improvements, I could say that Linkus is a case in point. They recorded a net income of KRW3.9b, so they turned -- they made profit. So, it's not only Freetel but their subsidiaries that have made such improvement. And that's why there have been improvements compared to 4Q of last year.

On your second question, yes, it is true that net additions on the PCS resale portions did decrease. And the reason is because, as you rightly pointed out, we have taken out the handset sale portion from our valuation.

Our staff are very much sensitive to the actual indices for management and really have come up with the decision to focus on retention of the subscriber base in this year. And also, there is no change in our target of 310,000 net adds.

[OPERATOR INSTRUCTIONS]. The following question is given by [Hu Chong] from Goldman Sachs. Please go ahead sir.

I know it will be difficult for you to give us the [extend of] that, but with respect to the potential for fines, if you are levied with this fine your net profit may become lower. In that case, how would that affect your nominal dividend payout?

The second question is with respect to WiBro and particularly the CapEx expenditure. You have mentioned that you will commercialize your service by April of next year. So, up to that point in time, how much of CapEx are you planning to use?

And also, SK Telecom they're continuing with the technological development of HSVPA standard. And do you believe that HSVPA and WiBro can co-exist in this wireless state [so well]?

Haing Ming Kwon; Yes, at this point we cannot know the actual amount of fine that FTC may levy. However, one thing that's for certain is that it is not going to affect the fundamental of the Company.

So, as we have made the announcement with respect to our dividend principles, there is not going to be any changes in our dividend policy. And even a couple of days ago our CEO has told the media that that is the case. Of course, the net profit can be impacted slightly, to some extent, but once again there is not going to be any change in our dividend policies.

With respect to WiBro CapEx, we are planning to use KRW200b this year. And, of course, we will control the overall CapEx amount under KRW2.2 trillion, which we have stated previously by adjusting other portions.

Yes, we do believe, and we do think that HSVPA will co-exist with WiBro. That's because of the characteristics of the technology. WiBro is more suited towards data centric users, whereas if you look at HSVPA it seems inevitable that the evolution path is going to take towards EVDA, because Powercom has decided that it will stop manufacturing the EVDV chip from now.

And so at this point, it seems a very natural evolution path into HSVPA, in terms of services and network. And for HSVPA their voice and -- their voice services, and if you look at their speed, its for subscribers who do not require heavy or traffic centric services, whereas WiBro is best suited for heavy data users. So, we believe that the Phase II will co-exist.

So, just one confirmation on that dividend then. Can we assume that this year you will also payout around KRW630b as a -- just like you did last year?

Yes, that is correct.

The following question is by Alex Scott from Merrill Lynch. Please go ahead sir.

Thank you very much indeed for the call, two or three questions please. First of all, could you just quantify the effect in the first quarter of the labor item that you mentioned in terms of the retirement benefit, and what -- so what -- the effect would that have in terms of increasing your first quarter labor cost, and therefore what we could expect to see as a reduction in the second quarter? That would be a help -- help us understand the trend.

The second one is a more general cost question about expenses. Obviously, there's a shift between the sales commissions promotions line items. When -- as you look forward say 12 months when a number of the former employees are taken off contract, what level of savings would you be looking for in those line items? So, what margin expansion would you like to see in 2006 as a result of those line items decreasing?

And the final question is in terms of fixed rate plans on your telephone side, I understand that a number of subscribers have been coming off those plans as a result of greater clarificational disclosure from you on the benefits of those plans. Is that going to have any effect on your telephony revenues going forward? Thank you.

On your first question, by advancing the timing for payment on the performance bonuses, yes the effect was reflected on first quarter as an increase in the retirement payment allowances by a margin of KRW30b. So, in the second quarter this cost to expense will decrease.

On the second question, yes there was significant increase in the sales and commissions line item by about KRW26.6b. This is because we rehired our retired employees as sale -- contract sales agents. And they have a term of 1 year. And they started September of last year. So, it will end September this year. But on a yearly basis this brought about an increase of expense in the amount of KRW75.1b. So, after next year this expense will, of course, be slowed down.

Just let me now talk about the fixed rate plan on the local telephony services. Based on the guidelines that were stipulated by the Government, we are to disclose the actual rate plan for the fixed line, as well as the actual usage on the statement of the telephone bills. So, the consumers found that because of reduction in the traffic uses that their actual usage was also lowered. So, they -- some people actually churned out of the -- this program or plan. But the Company is -- took a -- is going to continue to facilitate the use of this lease plan, and maintain and retain our subscriber base.

At end of first quarter the actual number of subscribers is about, for local telephony, is about 5.2m. And we believe that the fixed rate plan contributed to KT's revenue in the amount of KRW300b per year.

Okay, thank you very much. Can I just follow up with one question on the labor costs? Just looking at the break up of costs, if we look at salary and wages, those are up 4.9% year on year, and 2.4% quarter on quarter with the number of employees actually coming down. I wonder are you happy with that trend, or would you expect to see actual -- the salary and wages component of your labor cost coming down ahead -- in the year or two ahead? Or do you think that that has got to continue to rise?

If you look at the total number of employees there was not a big change, but a slight increase. And as the year goes by where an employee's working period or working year is increasing there is, of course, a natural increase in their wages.

If you look at the wage line item based on quarter on quarter numbers, it did record 2.4% growth. However, if you look at the other line item, it says growth there reduced by 10.3%. So, it's a combined effect of 1 or 2% increase in wages, which I believe is a natural increase.

KT is very well aware of the fact that the labor cost is the biggest expense item that KT carries. Therefore the management and the labor fully -- in the situation when the top and bottom lines are flat and stagnant, the management and the labor are very closely looking at the trend of this labor cost, and we're doing our best to reasonably control that level.

Okay, thank you very much. Thank you.

The following question is by Mitchell Kim from Morgan Stanley. Please go ahead sir.

Yes, thanks for this opportunity. And one -- the first question I would like to ask is your view on EBITDA margin. First quarter EBITDA margin came in at 37%. In order for you to hit your -- meet your annual target of KRW4.4 trillion you would have to sustain that EBITDA margin pretty much throughout the quarters -- remaining quarters. And if you look at in the past first quarter margin tended to be the best, probably about 300 to 1,100 bits higher than full year average.

So, I was wondering whether you think this -- you will be able to hit target, and what is required for you to maintain EBITDA margin at first quarter level for remaining quarters?

My second question is on cost control, are you -- I assumed that you did a pretty good job of controlling the costs this quarter. And I'm just wondering how sustainable this sales promotion and the fact expense will be going to future quarters?

And a last question is on non operating cost. Non operating costs fell pretty significantly by about 32% quarter on quarter. And if you look at last year non operating costs on average was around KRW400b. Do you expect first -- this first quarter non-operating cost to meet the normal levels for this year or will this return to more of the normal last year level? Those are the three questions, thank you.

First to answer your question of EBITDA margin, it is true that customarily in KT the EBITDA margin for the first quarter was higher. It's a little shame, but it's attributable to the fact that in the first quarter we would spend less -- we were executing less expenditure, and also for most of the telecom companies there's a seasonality factor. So, it's a better season to -- it's a good season in terms of the fact that we record higher revenues in the first quarter.

So, that attributed to a relatively higher EBITDA margin. But this year the situation is slightly different due to our efforts to control seasonality starting last year. The first -- the expenses that must be executed in the first quarter have been reflected in the expense item. And so, we do not think that this first quarter expense number is -- will grow any higher. And we will do our best to make sure that we meet the annual target. That's how we reduce things, so that we can control, the sales commissions, and that expense line item quite well.

The biggest change in the normal operating expense line item is because of the change in the FX rate. Last quarter it was not only the non operating expense that was large, but also non operating income recorded a large amount as well, because of the volatile FX rate. But as the foreign exchange rate stabilized, we believe that these two expenses income line items, so non operating portion, will also stabilize. So, if there is no significant volatility in the FX rate, we believe that this level can be maintained going forward.

I'd just like to ask a little question to question number 3. And I know that you've mentioned that you -- that the equity method loss coming from your subsidiaries was much lower this quarter. Do you expect this to be more of a sustainable effect throughout the quarters, or is this more of a seasonal effect?

The factor that affected the equity method loss number was the amortization of the goodwill that arised -- that arose from the merger of M.Com. The goodwill amortization had two aspects, one with the effects from the frequency, and the other with the subscribers.

The amortization on the subscriber goodwill has a 4 year period, and that period ended. So, we're no longer going to see any further amortization on the subscriber side of the goodwill. So, I can say, for certain, that this trend is sustainable.

Thank you very much.

The following question is by Matt Evans from CLSA. Please go ahead.

Thank you very much. And the first question is on depreciation, just following up on Mitchell's question on the seasonality of costs. What explains the fact that depreciation is so low? In the past you've explained this volatility in reference -- by referencing the seasonality of CapEx. But it seems that this year the CapEx has been high in the first quarter.

And secondly, in terms of the WiBro service roll out you mentioned that there would be a commercialization of the service in April. Could you help us understand your definition of a commercial service? So, for example, if you look at WCDMA in theory there is a commercial WCDMA service being operated in Korea, and now it has been for some time but in reality it's meaningless in terms of the number of subscribers. So, if you just have 1,000 or 2,000 subscribers paying for that service until the middle of '07, for example, would you consider that to meet the definition of a commercial service?

And the third question is on the resale subscribers. In terms of outgoing MOU at KTF itself there's not been any substantial increase in outgoing MOU year on year, I think, I'm gladly recalling. Is that the same for the resale subscribers as well? Thank you.

Our depreciation, the seasonality factor for our accounting of our numbers has been talked about very frequently. And, as you know, we are in the process of stabilizing the seasonality factor. So, if you look at our CapEx number for this quarter compared to the same period last year, it did increase. So, we're doing all we can to execute the investment on a more evenly basis over the year. So, the fluctuation for the depreciation will stabilize, together with the stabilization of the CapEx.

On WiBro commercialization, yes we are targeting April of next year. Our target for subscribers is 160,000. We will concentrate our acquisition effort in the Seoul and surrounding metropolitan area. So, as you correctly mentioned, we're not going to say that we have commercialized this service when we only have 1,000 or 2,000 subscribers.

If you look at the overall trend for subscriber acquisition by KTF and by KT leasehold effort, they are showing a same and similar trend, mostly because these subscribers are churned out subscribers from other competitors. And there's a slight difference in the target segment that KTF and KT have. KTF target younger segment whereas KT targets a little more -- older segment than KTF. So if you look at relative MOU, KTF's MOU is a little higher than KT's resale MOU. But as far as the trend goes, we believe that the trend will be similar for both.

Yes, sorry, if I could just follow up on those questions. Could I just clarify that for the full year 2005, you do not expect a material change in the depreciation expense versus 2004?

And secondly, on WiBro is that 160,000 target for the year end '06? And on the KTF rate if there's been no substantial change in the MOU year on year, why is the resale cost per subscriber up 15%?

At this minute we do not have the exact or projected depreciation number for year 2005. But because there is not a big change in the book value of the tangible assets, we believe that the level is going to be quite similar to year 2004.

Regarding the 60,000 WiBro subscribers is the figure at end of year 2006. Yes, there is no big difference in terms of MOU. But the total number of subscribers did increase. So, the absolute cost that we have to pay to keep here for this increase. And also, there is an interconnection rate as well. And this just like -- I'm sorry, just like the interconnection rate line item there is both projection and settlement that you have to think about. So, even if the quarter on quarter subscriber number does increase, it does not really reflect the core relation in terms of bigger interconnection fees or lower interconnection fees. So, we really ask that you take that into consideration.

Thanks very much.

The following question is [Bill Sun] from UBS. Please go ahead sir.

Thanks very much. The first question relates to your resale arrangement with KTF. I understand that you set that once a year. When is the next date for resetting the resale arrangement and do you expect any significant change to that arrangement?

The second question relates to handset subsidies, the Government is broadly discussing whether they will re-enter these handset subsidies to the market as we launch WiBro, D&B and WiBand CDMA next year. Does KT wish to see the handset subsidy reintroduced? It seems it could be a useful mechanism to attain your subscriber targets in '06.

And thirdly Powercom, there's discussion of Powercom's entry into the retail broadband market in July. They've been lobbying for close to 3 to 5 years. I'm just wondering if you have confidence in your full year targets given we could see the second half somewhat impacted by a new competitive landscape, particularly in one of your core business by then. Thanks.

First, on the resale arrangement with KTF, it is right that it is renewed every year. But the actual settlement is determined based on KTF's cost. So, if there is no big change in the cost of KTF, there is not going to be any big change in the arrangement either. And the new -- the update of the whole renewal of the arrangement, and the negotiation was signed after the second quarter of this year when they complete their analysis on the cost structure. But at this point, we do not expect any significant changes, as there are no significant factors that could change the cost.

If you ask a question about how KT sees the Government subsidy, in the wireless market, as you know, KT is not a dominant player or a dominant carrier. So, this subsidy is allowed in the WiBro and D&B realm, we believe that it will be helpful to KT. And also, since KT is making a leading initiative in the development of the WiBro business it will be beneficial.

And also, we're making numerous requests to the Government so that [LNB] satellite D&B business of -- all the carriers can trade at an equal footing. And so, if you consider KT's relatively weaker status in this market, we believe that deduction of the subsidy could play to the benefit of KT.

It seems like Hong Kong is making moves into the retail market. But we believe that the competition is not going to head on with KT, but there will be more competition with the cable T.V. operators.

Of course, if Powercom enter the [said] market, there will be some impact to KT. However, as you know, KT has faired very well in competing against the cable T.V. operators. So, even if Powercom enters in the market, we believe that the impact could be little.

Could I just ask one follow up question? So, assuming -- if we were to assume that Powercom to launch with pricings that are much closer to the cable SO pricing, would you not alter your ARPU, or your pricing that you currently have on your existing Megapass pricing plans?

None, as of yet.

Thank you.

The following question is given by [Dun Sop] Lee from Vision Securities. Please go ahead sir.

I have three questions, the first one being hearing your schedule for IPTV, and the current technological development on that area.

The second being interim and dividend payout, is it going to be at the same level and same timing as last year?

The third question is about the Powercom, aren't you a little too optimistic about if Powercom's entering this market. Do you have specific counter measures?

With respect to IPTV, KT has completed the preparation for this, but the Government policy is not yet finalized. So, we're not at a point to really show the actual [up count].

For the interim dividend payment, it will be around the same time as last year, and about the same level as last year, which means KRW1,000 per share and it will be a cash payout.

And, as you know, KT has been very successful [and gauged] very fierce competition with cable T.V. operators. And we were successful. So, we believe even against the companies like Powercom -- well, the name implies that it has a lot of power, and I believe that this company is quite powerful. But because we have competitive advantage already accumulated in competing with the cable T.V. operators, I am convinced that it's not going to be a big problem.

[OPERATOR INSTRUCTIONS]. The following question is given by [Chou Mo Kim] from Media [Event] Securities. Please go ahead sir.

I would like to know the churn rate for the first quarter on PCS resale subscribers and broadband subscribers. And how does this compare with the last year's efforts? And what do you think is going to be the trend starting from the second quarter which was a [strike].

And the second question is about the actual size of foreign currency dominated debt as of end of March? Can we expect some change in that amount?

We feel the churn rate for broadband in the first quarter yes it was higher compared to other quarters. And in January it was about 2%, February 1.7% and in March, because of children going back to school, there was very fierce marketing competition by the different carriers. So, the churn rate for broadband was 2.4%. We're going to put in all our efforts to make sure that we can control this churn rate below 2%.

The churn rate for PCS was 2.7%. In the first quarter because of the full adoption of M&P, there were many subscribers were waiting to subscribe and put their numbers to a different carrier. So, there was a lot of movement. But in the second half of the year, we are sure that we can contain this number.

As of end of March the total borrowing, based on foreign currency, is DRWK1.611b, and it's $28m. And the net position is KRW1.6b. And it's over 70% cancellation. So, for every KRW -- hedged, I'm sorry, 70% is hedged -- excuse me. And for every KRW1 there is KRW500m correlation, either to net FX [inflation] gain or FX loss.

[Those] years, do you really think that you can maintain the churning [below] 2% broadband even after Powercom enters the market in July?

Probably come July or August and if Powercom receives the license for the retail business, they will probably launch a very aggressive marketing initiative. But if you look at this market, at the other SOs, and [Daycom], [Dunet] and Powercom even is up there doing their business based on the niche line that they got from [the contracts] that they got from Powercom.

So, we believe that too much competition is going to be adverse to all of the players in this market. So, our target is to control this churning below 2% on an annual basis. But this number may increase depending on how aggressive Powercom is in its marketing effort.

And considering the current saturation in the market, and stagnation in the market, if Powercom receives this license for the Vitro business, we do not believe, or we do not think that it's going to trigger a competition overnight, a very fierce competition overnight. We are hoping for a more gradual and service centric competition.

KT as well as other service providers when they're acquiring new subscribers, they tend to execute long term contracts. So, the average contract period for about 2 to 3 years. So, this market it seems to be there are a lot of service providers, so it seems overheated. But we believe if you look at the overall market, we can replace and control the churning figure of 2%.

The following question is by Henry Cobb from Thames River Capital. Please go ahead sir.

Hello there, thanks very much for the call, just a couple of questions and apologies if they've already been asked. And the first is on the effective tax rate for the year, it looks like the tax rate came in about 33% in the first quarter. What's your guidance for the full year?

The second question, just what's your guidance for the depreciation expense for the full year?

Next, third question, just on the total number of employees as at end December '04 and end March '05.

And then final question just on the dividend, could you just repeat the targets for the payout this year in terms of cash dividend and buyback in billions of KRW. Thank you.

We're expecting 27% effective tax rate for this year. For depreciation expense, they are similar to last year's level, KRW2.2 to KRW2.3 trillion.

And our number of employees increased slightly from last December. Last December it was 37,703 whereas as end of March this year, it was 37,759.

For the interim dividend payout, so we're considering cash payment. And KT, because it already owns a lot of Treasury shares, we think buyback will be difficult.

The following question is given by [Jose Kim, Mehoa] Securities. Please go ahead sir.

The first question is about FTTH [indiscernible], can you elaborate on that one?

And the second one is about IPTV service, you have a slight conflict with the Broadcasting Commission, can you tell us about that and when you will distribute the launch?

The third question is about it seems like there is a significant increase in your broadband subscribers. Do you think that you can meet the target of 6.6m?

First on the FTTH services, we will start the build out in the year 2005. So, our plan is to grow gradually because when it comes to the build part of the line, it's -- very highly costly and we would like to wait for how the market responds. And so we want to look at the outcome at the second half of 2005, and make decisions thereafter.

On IPTV there has been some friction amongst different Government authorities. And it seems like they are making some agreement these days. So, as a service provider it's quite desirable that they are coming to some common ground. But it will take significant time for the broadcasting and telecommunication PFT -- TPFT to operate fully, and to really commence with all the work that they have to do.

But KT is fully prepared to provide the service once all the regulatory problems are resolved. So, from KT's prospective we want that timing to be sooner than later. And also, we are shooting for a pilot service early next year for the BCN portion.

To answer your question about whether we can meet the year end target of 6.6m subscribers, I would like to give you background information, which I should have told you previously. But when we set the target of 6.6m this includes the check line portion, domestic check line. This is about settlement of credit card transaction. Previously, such settlements were done through telephone lines, but ADSL lines are used. So, this check line portion was included in 6.6m subscriber target.

So, the target after taking out the check line portion at this point, is difficult to provide to you. But in future opportunities I will make sure that we can communicate the target to you, when we have this number available. And just for your information, the fact sheet that we are providing to you, starting January, the broadband subscriber number does not include the check line proportion.

The following question is given [Powup] Yang from Lehman Brothers. Please go ahead sir.

My question is about the LM margin which is revenue minus the LM cost. It seems like your first quarter number is around 50%, which is similar to the 4Q of last year, but last year's first half number -- the margin number was better than this one. So, when we do analysis for this year it seems like the profitability is going to fall, because of this LM margin, and because there's also a fluctuation factor in the -- for each of the quarters, when it comes to [even these] LM margin. So, can you give us your full year guidance on the revenue and cost side of the band mobile interconnect, and also what you think the year 2005 LM margin is going to be like?

When it comes to LM margin it's about the same level, there is actually a slight increase. The increase is attributable to a difference between the LM share production and the interconnect rate reduction, because of that difference.

And due to -- in the first quarter due to the reduction in the traffic, the actual amount actually fell slightly, but as far as the LM margin rate goes, it's going to be about the same level. And LM margin side is going to reduce slightly.

Just a follow up question, why -- because last year your total LM margin was, according to the number that I have, KRW1.13 trillion. And this quarter -- the first quarter, you recorded KRW210b net, and if you -- if this trend continues then the upheld amount is going to be KRW850b. And so, this is about KRW450b less than last year. So, that's about 15% lower, so can you give us some more information on that?

As I said, the LM margin -- the absolute amount of LM margin will decrease. And when it comes to how much then will it decrease. I can't give you the exact figure but it will be somewhere around KRW900b.

The following question is by Matt Evans from CLSA. Please go ahead sir.

Two follow up questions, firstly on the employee number. In the past the Company has indicated that the attrition rate on the headcount was about 7% a year. And you would seek to hire at a rate of 3 or 4% a year. So, there should be a 3 or 4% annual reduction in the headcount just through attrition, which I think would mean something like 1,000 employees. But we haven't really seen any sign of that over the last couple of years. And, as you just mentioned, in the quarter the headcount went up.

So, could you give us some long term guidance on how you think the attrition will work to your advantage, or will every employee leaving be replaced by a new employee?

And secondly, just to follow up on the question with the KTF resale agreement. Perhaps I'm taking you too literally, but you make it sound like KTF comes up with a number that they believe is the cost of their network. They present that to you and then that's what you pay. Could you give us some reassurance that you will negotiate with KTF as aggressively and squeeze them as much as you would any other supplier, such as your equipment suppliers?

The number of employees will be around 37,000. Now, it's because we have new business areas that we have to consider, like WiBro, and KT being more aggressive in the IP, and also the [indiscernible] initiative.

So, we need new employees with the right capabilities and competencies for these new business areas. So, the Company policy at this point is to maintain the number of employees at 37,000 level. So, the number of employees going out will be replaced by new employees coming into the Company.

KT has been significantly cutting its workforce at the expense of cost restricting management and the labor. So, at this point within the Company there are very little employees who are full age. So, if you look at our -- each profile, we do not have that many people nearing the retirement age. So, for the new future we believe 37,000 employee level will be maintained. But after that 5 years that 7% attrition rate will naturally come to be.

On your second question, determining the rate by KTF, it's -- it goes the following way. First of all, KTF takes the total network cost that's included in its business line. And divide that with the total traffic of the previous year. Then you get the cost. And KT and KTF are both engaged in using the fair method to calculate and not charge this rate. So, I assure you that you do not have to worry about the concern you have voiced. And just to add on that note, that business plan is the one that reported to the Ministry of Information and Communication, MIC, and that number is verified and confirmed by MIC.

One correction, it's not a business plan but business report. That had information about the revenue and the cost. And these revenue and cost items undergo verification procedures by other independent accountant and outside special experts.

[OPERATOR INSTRUCTIONS]. The following question is by Henry Cobb from Thames River Capital. Please go ahead sir.

Hello there again, it's probably been asked but could you basically give the CapEx for 2005 and 2006 on an unconsolidated basis?

[I'm sorry], unconsolidated.

On consolidated basis for year 2005, it's KRW3.1 to KRW3.2 trillion. And for year 2006, please understand that business plans of our subsidiaries are not yet confirmed. So, it's very difficult for us to give you a guidance at this point.

And the CapEx on a non consolidated basis, on a standalone company only, for 2005 for KT?

For KT parent company only, under KRW2.2 trillion.

Okay, okay. And again then Matt then asked a question, but just on the KT resale rate and it seems like KT Freetel's margins on resale have improved substantially in the first quarter. And so it seems surprising that you're happy to allow them to use extra benefits. And would you be looking to negotiate more aggressively on the cost of the resale provided?

Once again, KT and -- the rate between KT and KTF is set in a very fair manner. If you look at July 2 of last year there was a rate adjustment. Before change the rate was KRW89.39 per minute. After change the rate was KRW87.09 per minute.

So, based on the cost the rate actually fell. But because of the increase in the number of subscribers the absolute amount increased, and therefore the profit increased. And also on a quarter on quarter basis there could be a time lag. So, irregardless of the increase of subscribers or the core traffic, you must understand that the margins for KT and KTF can either increase or decrease on a quarter on quarter basis.

And once again, every year we go through a very objective procedure to set the cost. And once again the costs are verified by outside parties, and the rate is set. So, this is done in the most fair way. So, you need not worry about one party taking more profits from such a -- the rate set between KT and KTF.

Okay, may I ask one last question on dividends in the more -- longer term. You mentioned the KRW3,000 for this year, and I'm looking forward on a recurring basis, are you still targeting a 50% payout ratio of net earnings, or would it be fair to assume that you'll be maintaining dividends at KRW3,000 on a recurring basis, or indeed are you hoping to increase dividends from KRW3,000 year on year, given that you've managed to increase dividends each year for the last 2 years?

What was the percentage you said, 15%?

50%.

Well, our dividend policy stays the same. It is to return to the shareholders in excess of 50% based on the adjusted earnings. And in order for us to change the dividend policy, we have to get agreement from the Board of Directors, as well as other stakeholders. So, our dividend policy stays the same at this point.

Okay. And how do you calculate adjusted earnings?

What we do -- what we take as a starting point is 50% of net income taking out the honorary retirement expense or special gains from, for instance, if there's a sell off SKT shares, or a significant amount of gain or loss, or FX translation.

So taking all of that out, we take 50% of the net income as the starting point, but it's 50% or more as the basis. Then we calculate the free cash flow. Then we look at the following year's business plan, and mid to long term business strategy in determining the final amount. So, for the past 3 years we have sustained the level of KRW630b, and we will continue to make -- we will put our efforts so that we can maintain it at that level.

Thank you very much.

[OPERATOR INSTRUCTIONS]. The following question is by Mitchell Kim from Morgan Stanley. Please go ahead sir.

Yes, hello. I'd like to ask a very quick question about last week you announced that you will change your depreciation method schedule from 6 years to 3 years. I was just wondering whether you could give us a figure in terms of what impact that will have on your annual depreciation. And also whether the first quarter results already reflect that, or if not, when will you start reflecting that in your future earning releases?

It will bring about an impact of increase in depreciation number by KRW51.5b. And the first quarter numbers don't reflect that change.

Thank you.

There are no further questions.

Thank you very much for joining us. We wished we could have given you, or provided you with a better performance of the first quarter. But, unfortunately, that was not the case. We will do better next quarter and we'll provide you with a better performance we hope. Thank you very much.