KT Corp (KT) 2009 Q2 法說會逐字稿

(Interpreted) Good morning and good evening. First of all, thank you all for joining this conference call and now begin the conference of the 2009 second quarter preliminary earnings results by KT. This conference will start with a presentation followed by a Q&A session. Consecutive interpretation will be provided for your convenience.

(Operator Instructions)

Now we shall commence the presentation on the 2009 second quarter preliminary earnings results by KT's CFO, Mr. Yeon-Hak Kim.

(Interpreted) Good afternoon, I am CFO Kim Yeon-Hak of KT. As you are all well aware, June 1 was the day that a combined KT was launched. Integrated KT with a new management direction for a second wave of business operations and create new customer value based on reversed and innovative thinking.

Reflecting such a commitment, we have changed our CI to olleh KT and we promise that all of our subsidiaries will maximize synergies under the olleh spirit.

We will now begin 2009's second quarter earnings presentation. You can listen in on the conference call and also via the webcasting at our website. Before we begin, let me briefly talk about the materials that we have circulated before the call. The data in the document is based both on accounting criteria and guidance criteria.

For the month of April and May, KGAAP based number numbers only reflect KT's performance excluding former KTF number. Data for the month of June reflects that of the combined KT.

Guidance based material was developed for the convenience of the investors and analysts so that the results can be easily analyzed therefore all the data in the document was internally developed based on the corporate accounting standards and have not been subject to either the audit or the review of an independent auditor.

We will first start with the accounting based performance results and then move on to guidance based numbers.

On KGAAP our accounting based business highlights for combined KT's second quarter are as follows. Revenue as the June results from the mobile business was added from the merger increased 17.7% year-on-year to KRW3,564.3b. Operating profit declined 1.1% year-on-year to KRW363.5 billion due to the rise in marketing expenses. Net income increased 184.1% to KRW456.1b thanks to the reduction in FX translation loss due to foreign exchange stabilization.

Also, increases in net income post merger and a minimal level of treasury share cancellations and rights issuance during the merger process drove up EPS 182.5% year-on-year to KRW2,226. On the other hand, net liability ratio stands at 63.6% which is 3.3 percentage points higher from the previous quarter. This is due to the fact that after the merger, increases in assets were commensurate to the remaining shareholding at KTF whereas all of the liabilities were transferred to the combined entity.

Let me now move on to the guidance based pro forma numbers for the second quarter that assumes the merger date as January 1 last year for a more accurate comparison.

Revenue increased 7.9% quarter on quarter to KRW4,872.5b due to increases in wireless, internet, and data revenue. On a year-on-year basis, it fell 2.7% due to a decline in telephony subscribers and increases in discounts on wireless revenue. Total aggregate revenue for the first half stands at KRW9,387b which is 49.4% against this year's KRW19 trillion guidance.

Operating profit fell 19.2% quarter on quarter due to increases in marketing spend as the market overheated and one-off welfare payment in line with the collective bargaining decisions which increased the labor cost. Compared to the same period of the previous year thanks to a company-wide cost cutting effort, OP increased 49.9% to KRW483.4b. So operating profit total for the first half stands at KRW1,081.6b which is 60.1% against the original guidance.

Going forward, we will continue with our cost cutting efforts and maximize synergies from the merger.

Net income which is used as the basis for dividend calculation due to stabilization in exchange rate and reduction in the foreign exchange translation losses increased 155% quarter-over-quarter and 245% year-on-year to KRW504.2b with the first half total reaching KRW701.9 billion. EPS increased 155% QoQ and 245% YoY to record KRW2,148.

Next, I will move on to the respective business areas. First is on the wireless business. Voice revenue increased to 2.7% QoQ to KRW1,037.9b due to subscriber increases and seasonality factors. On a year-on-year basis, despite the rise in bundled packages and price discounts on mandatory contract plans, revenue rose 0.3% with the rise in subscriber numbers. With increases in messaging usage and data flat rate subscribers, data revenue increased 4.6% quarter on quarter and 8.6% year-on-year to KRW288b.

Next is the telephony business. Telephony revenue with declines in PSTN subscribers and LM revenue fell 8.5% year-on-year but with increases in internet phone subscribers, it only fell 0.5% QoQ to KRW1,234.1b.

Internet phone revenue increased 136.8% year-on-year and 22.7% quarter on quarter to KRW50.9b due to service and handset revenue increases that accompanied the rise in new subscribers. Going forward, we will defend our PSTN subscriber attrition with our internet phone subscription so that we can retain 20 million telephone subscriber base as much as possible.

For the internet business, in terms of the internet access revenue with stagnant QOOK Internet subscriber trends and price discounts to long term subscribers, the number fell 2.7% year-on-year. However with the rise in WiBro revenue, it edged up 1.1% QoQ to KRW524.1b.

Internet application revenue fell 17.2% year-on-year and 0.3% quarter on quarter to KRW122.1b due to declines in some one-off revenue factors in the IDC business.

If you look at the different service areas for QOOK Internet, subscribers increased by 23,689 quarter-over-quarter to 6.738m. However, revenue fell 0.6% due to a more bundled and long term usage discount. In the second half, we will continue to retain our subscriber base through the bundled products and the renewal of long term contracts which would drive down churn rate.

Thanks to the popularity of netbooks, WiBro subscribers increased by 34,439 quarter on quarter to 218,000. Revenue also increased 28.9% to KRW35.3b. In the second half, WiBro embedded netbooks and TVTN based smartphones that enable WCDMA and WiFi will be launched. Through such differentiated handsets and services, we plan to further expand the subscriber base.

QOOK TV subscribers increased by 29,646 from the previous quarter to mark 724,000. Thanks to the rise in subscribers and ARPU, revenue increased 6.3% quarter-over-quarter and 120% year-on-year to KRW21.1b. For QOOK TV during the first half of the year, we added news and sports channels and launched value price plans on July 1 enhancing product completeness and price competitiveness.

Also on August 1, QOOK TV SkyLife which brings together SkyLife channels and VOD was launched and during the second half of the year, we will introduced high end and optional price plans to offer diverse choice to the customers through which we plan to actively secure subscribers.

Meanwhile KT has continued on with the company-wide cost cutting efforts to improve our operating profit. As a result, second quarter operating expenses fell 6.3% year-on-year to KRW4,389.1b. On a half year basis, there has been a saving of KRW739.1b compared to last year's first half. On a quarter-on-quarter basis, because of deepened market competition and rise in marketing spend in line with new subscriber increases, the figure is 12.1% higher.

For non-operating expenses, declines in exchange rate in the end of the second quarter compared to that of the first quarter significantly reduce the size of translation losses and foreign currency denominated bonds. As a result, on a QoQ basis, non-operating expenses fell 93.6% to mark KRW35.8b.

For more details, please refer to the earnings document that we have circulated. This marks the end of the second quarter earnings highlight presentation, we will now begin the Q&A session.

(Interpreted) Now, the Q&A session will begin. (Operator Instructions)

The first question will be provided by Song Jae Kyoung from KTB Investment Securities and the next question will be provided by Josh Bae from UBS.

Song Jae Kyoung, please go ahead with your question.

(Interpreted) I would like to ask a simple question. First being -- based on your combined guidance based numbers, when it comes to the LM interconnection, it seems like the transactions between KTF and KT regarding the LM interconnection is reflected on the revenue side but not reflected on the expense side. Is my understanding correct? I would like a confirmation on that.

And regarding the non-operating side due to the strong exchange rate, you were able to significantly reduce the FX translation loss but it still seems that compared to the past five quarter -- compared to the direction of the past five quarters, this quarter, we have seen a much more stronger reduction. So has there been any significant change in the hedging ratio for the foreign currency denominated bonds?

And the second question is with regards to the iPhone, in the second half, can you provide some color as to the direction or the trend with regards to the iPhone?

(Interpreted) Yes, regarding the first question, if we eliminate the internal transactions between the two entities, the amount will be around KRW295b. From a KT perspective, if you look at the LM related incurred revenue, LM interconnection revenue is in the amount of around KRW20b whereas for the lease lines, it is about KRW80b. In terms of the expense side with regards to the payment regarding the resells -- for the usage of the network for the resale activities, the expense is about KRW130b whereas the LM interconnection expense amounts to around KRW55m.

Regarding the FX translation, no, there has not been any significant change with regards to the hedging ratio. If you were to remember, at the end of last year, won to dollar exchange rate stood at about KRW1,258 per dollar, but at the end of the first quarter, the figure was KRW1,377 per dollar so there has been a significant increase at that point in time.

Also, the interest rate moved unfavorably towards us and that is the reason behind the loss that incurred in the amount of KRW170b. But as you know, at the end of June, there has been about KRW100 depreciation in the exchange rate and it stood at KRW1,284 against the dollar and also the interest rate moved favorable towards our favor.

So in the first quarter, we incurred KRW170b of losses arising from these factors and up to now, we were able to recover about KRW90b and we still have about KRW80b more to recover. But going forward in the second half of the year, we still think that the direction is going to be quite optimistic because at this point, the exchange rate stands at KRW1,221 whereas at the end of June, it was KRW1,284.

Once again, there has not been any significant changes in the hedging ratio.

And if you look at our company as of the end of the second quarter, foreign currency denominated bonds are in the amount of $2.67b and out of those 68.9% is hedged. And also the exchangeable bonds or EBs in the amount of $250m does not create any translation losses. So if you were to exclude that, the hedge ratio would stand at 76.1%.

With regard to the exchange rate forecast, of course, there are different views for the future but mostly, people think that it will be in the range of KRW1,150 to KRW1,250. So compared to the second quarter, there is a higher possibility that things will turn for the better going forward and also when it comes to the FX related interest rate, it is also going to move in a favorable direction, more towards a higher interest rate trend so there is really a small possibility that the translation loss related item will aggravate in the future.

Regarding your third question, when the iPhone gets into the market, it will be a good opportunity to really provide momentum to the smartphone segment in the market so it will positively contribute to really promoting the wireless data usage and also increases in ARPU.

However, even if the iPhone gets launched, once again, you need to keep in mind that this is just one of the various products smartphone line items that we are going to have. There seems to be a lot of talk around the iPhone issue but it is simply one of the product line items that we will introduce. At this point, please understand that we will not be able to share with you more specific details on the iPhone.

(Interpreted) The next question will be presented by Josh Bae from UBS and the following question will be presented by Hong-shik Kim from NH Investment Securities.

Mr. Josh Bae, please go ahead with your question.

Yes, hi. Thank you for the opportunity. My question is on your guidance for the year, looking at the first half results, I'm a bit concerned about the revenue and EBITDA guidance that it may be a bit tough to meet considering the second half has seasonally been weaker for KT and potential more aggressive VoIP promotions from your competitors in the second half. Could you please share with us how confident you are about your annual guidance at this stage?

The second question is regarding your net profit and shareholder returns. When you announced the merger, I think you discussed your expectations for this year's net profit or the EPS, you mentioned FX-related gains and losses just now. Assuming the FX rates are stable, could you please give us an update on where you expect this year's net profit to be?

Also regarding the shareholder returns, you mentioned the 50% payout ratio, should we expect this to all be paid out in dividends or will it be in a mix of dividends and share buybacks? Thank you.

(Interpreted) Regarding your question on whether we will be able to meet the revenue and EBITDA guidance, as you know for EBITDA we have achieved 52% of the guidance provided, KRW2.6 trillion and revenue we have obtained 49.4% out of the guidance that was presented.

And as you understand in the first quarter our revenue numbers were quite disappointing. Of course, due to the organizational reshuffling and the personnel reshuffling and in the second quarter we are now seeing momentum with regards to these line items.

So I would like to very clearly voice that the management is fully committed in attaining the guidance for the revenue and the EBITDA that we have communicated.

Your second question on the net income projections and our dividend policy, as you know at the beginning of the year we did not share with you a specific guidance on these numbers, and the reason is because it was hard to forecast how the FX rate was going to move and also different line items under non-operating expenses. And the current situation is also same as that of the beginning of the year.

It would be too rash to, at this point, fix and forecast the net income for the year end and also the potential dividendable amount. But we believe that if we were able to attain operating profit guidance of KRW1.8 trillion then we would be able to provide dividend payout at the level that's similar to the past year.

And if the -- if per share, if the dividendable income is more than KRW2,000, then we will consider various aspects and determine what types of payment is going to be entailed. But we will think more and review and once we come to a decision we will communicate with you the decisions that we have made.

And just a quick follow up question, between your guidance for revenue and profits, which would you consider as more important?

(Interpreted) I mean both are important and we will, of course, keep or attain the targets for both of those items. However, from the CEO and CFO's perspective we place profit first and we will be executing, implementing different spending within the operating profit range that we set for ourselves.

Thank you.

(Interpreted) The next question will be presented by Hong-shik Kim from NH Investment Securities. And the following question will be presented by Mitchell Kim from Morgan Stanley.

Mr. Hong-shik Kim, please go ahead with your question.

(Interpreted) I have two questions. I would like to request if you could provide us with more detailed data based on the guidance numbers. Regarding the mobile business for the first quarter and the second quarter, what is your acquisition cost and retention cost for the subscriber and what will be your handset margin? It seems like your subscriber acquisition cost in ASP is trending up, so can you share with us some information or data on that?

Second question is with regards to the competition, there has been a fierce marketing competition in the mobile and in the broadband segment. It seems that KT has not been as aggressive in countering the competition in the broadband segment, whereas it was very aggressively countering and responding to competition in the mobile space. So what is the reason behind such a difference in your strategy?

(Interpreted) On your first question, let me first apologize that we weren't able to provide you with the more detailed and granular breakdown regarding the mobile business. Please understand that at KT and KTF -- the former KTF we used two different systems and we also used different categorization approach. So at this point we do have the former KTF number for the questions that you have asked.

But regarding KT's resale number, that number is inclusive of various other marketing costs. And also we are in the process of combining the IT systems between the two entities so by the end of the year we will be able to provide you with more granular data and information that you have just requested.

But just looking at KTF on a standalone basis, in the second quarter compared to the first quarter, both the acquisition and retention costs put together, there has been an increase of about KRW84.7b.

Just for your reference, the competitors have experienced an increase of KRW270b and KRW107.7b. And considering the size of the subscribers at KTF, not much cost was increased in the second quarter as compared to the first.

Also your question on whether KT's counter-measure strategies for mobile and broadband differs. First of all, the short answer to that is no, it is not different. We are consistently implementing the marketing budgets that we have set for ourselves.

In the second quarter to be more specific, let's say, a competitor was very much engaging in fierce competition. For instance they were providing handset subsidies in the amounts of KRW210,000, KRW220,000.

However, at KT we have never went over the KRW200,000 mark. We have provided KRW170,000 and when the market competitions got heated up, we did provide up to KRW180,000 or KRW190,000 but never over the KRW200,000 mark. So in the second quarter up to July and even thereafter, we are maintaining KRW170,000 subsidy level.

For the competitors after July, they started to lower the amount of subsidy that it provided. So on a relative basis it seems like we have provided more, but that is not the case. We have always stuck with KRW170,000 of subsidies for the handsets.

Same goes for the broadband. We have set for ourselves an internal marketing budget and we have very much consistently stuck with that budget and the spending within that budget. So KT stance may have looked more aggressive, depending on the level of marketing expenditure that the competitors were putting in, but once again we have been very consistent in complying with the marketing budget that we set for ourselves.

And we are very much focused on enhancing our core competitive edge. We will not compete based on the subsidy platform, and even after July -- and after July we are seeing some recovery even in the number of subscribers for the broadband business.

(Interpreted) The next question will be presented by Mitchell Kim from Morgan Stanley and the following question will be presented by [Yu Jae-Hyuk] from Merrill Lynch.

Mitchell Kim, please go ahead with your question.

Yes, thank you. If you don't mind I'd like to ask you two and a half questions. First question is related to VoiP. With one day portability enforcement coming up in July -- sorry September, I'm just wondering what kind of losses -- telephone line losses you expect once that is implemented. And how do you defend against it?

As a reference I noticed that in second quarter, you've done a fairly good job of defending, given that you did lose 400,000 in telephone lines, but you recovered through 300,000 additions in VOiP. So your thoughts on that would be very helpful.

Secondly, I was just wondering what your free cash flow projection for this year is? And it looks like it could be anywhere from 15% to 20% of free cash flow yield considering your KRW5 trillion in EBITDA guidance and about KRW3 trillion in CapEx. So given that, is there -- you certainly have room to increase your payout to shareholders and I'm just wondering whether that's something that you would be willing to revisit? And if so, if not, then what would you do with the remaining 10% to 15% of free cash flow yield that you would have in terms of cash?

And lastly, just clarification on, now this guidance version, the pro forma you provided, does that include your other subsidiaries, other than KT parent and KTF because the reason why I ask that is in a consolidated statement, income statement typically, if you add subsidiaries you tend to have about KRW200b to KRW300b more in EBITDA on an annual basis. So if you could clarify that that would be very helpful. Thank you.

No, actually KRW200b to KRW300 in EBITDA.

(Interpreted) According to the conditions for the merger approval, the VOiP number portability process is going to be more simplified. So come September the period that it took for number portability to take place in the past was an average of 4.7 days but it will be reduced to an average of 2 days.

So July 10 the TC step or the tele checker or the TC step had been eliminated, but the impact from that we think is not too big. The reason is because those who want to port their numbers are going to port their numbers anyway so regardless of the procedure and the days that it's going to take. So what's more important than the simplified process is the marketing competition by different competitors to attract the subscribers and KT will do its best to maintain its fixed line subscriber base.

Okay, so at KT our basic plan is to continue and sustain our 20m subscriber base, combining both the PST and VOiP subscribers. Of course when PST subscribers convert to VOiP then initially the ARPU is going to decline, that is inevitable. But if you look at the experience from Japan, at the very beginning people will of course be attracted to VOiP because of the cheap price, so they will convert from PSTN to VOiP.

But VOiP is a platform that enables also video telephony and also various different types of data services possible. So there is ample room for increases in ARPU. So the first movers into VOiP will be of course motivated because of the cheap price, but the late movers or the users that come on board later, for those types of users we will have room to increase our ARPU and therefore it will contribute to our business.

So if we can maintain 20 million subscriber base, then we will be also able to have opportunity to enhance the ARPU and our revenue base.

Regarding your second question, you asked about the free cash flow projections, and I will have to once again ask your understanding that we do not provide guidances on free cash flow projections. Of course we do have internal numbers, but please understand that we won't be able to share with you that specific number.

However, there is no change whatsoever on our shareholder return policy of giving out in excess of 50% of our net income, either in the form of share cancellation or in the form of a dividend payout.

On top of having shareholders we also have debt investors. So for free cash flow, more than 50% of our net income will be paid out as a dividend but during the merger process there has been increases in the debt and liability and of course we have obligation to repay those debts, so we will employ a very balanced approach to satisfy both ends.

To answer your question regarding the subsidiary companies, we evaluate the sub companies by equity method, and it is put into or below the operating line, and at this time there is no connection with the EBITDA of the subsidiary companies.

Thank you.

(Interpreted) The next question will be presented by Yu Jae-Hyuk from Merrill Lynch, and the following question will be presented by Gina Kim from ABN Amro.

Mr. Yu Jae-Hyuk, please go ahead with your question.

(Interpreted) I have one question. If you look at the news flow, it seems that there is going to be some future changes in the management and employee relations -- labor relations at KT. You have previously mentioned that you will be saving about KRW100b of labor and labor related costs over the period of five years. Would this labor and management relationship change will impact this plan in any way? And what kind of impact would it have on your productivity?

(Interpreted) As you know from the year 2002 to 2008 we had not engaged in any type of disputes or any strikes by the laborers without such interventions we were able to successfully come to agreement with the labor, so it is quite stable.

And KT's labor union has been also very positively supporting KT and KTF merger process. And because we are facing a very difficult business trend of PSTN revenue falling, we expect that the labor union will also provide very positive cooperation in enhancing the productivity and also in our efforts to reduce the labor and related costs. So we will be providing various training, education and also reshuffling in line with the changes within KT's organization.

As we communicated at the beginning of the year, our management is committed to realizing that plan of KRW100b or more of saving on an annual basis with regard to labor and labor related costs over the period of the coming five years. And we are committed to that and we believe that our labor relations is also going to have a very positive contribution in attaining that goal.

(Interpreted) The next question will be presented by Gina Kim from ABN Amro, and the following question will be presented by [Chun Youngwan] from (inaudible) Securities.

Gina Kim, please go ahead with your question.

Yes, thank you. I just have one simple question. Your effective tax rate was only 16% for second quarter and I'm guessing that it has something to do with your FX translation gains to a certain extent. Can I ask what your full year effective tax rate expectations are?

We are expecting this year's effective tax rate to be anywhere between 15% and 17% down from our second quarter. And this is due to tax reduction, temporary tax reduction.

Thank you.

(Interpreted) The next question will be presented by Chun Yongwan from (inaudible) Securities. And the following question will be presented by Neale Anderson from HSBC. Mr. Chun Yongwan, please go ahead with your question.

(Interpreted) The first question is on the clarification of some numbers, and the second is regarding the dividend policy. With regards to your CapEx it seems to me the number is much lower than we had expected. So can you provide a breakdown between KT and KTF? And also regarding the depreciation, how much of depreciation was reflected for KT and KTF respectively?

And you've mentioned regarding the shareholder return policy you will provide 50% of net income, either in the form of a share cancellation or in the form of a dividend, but your net income is significantly impacted by the FX rate. So do you have a plan to exclude that FX rate faster and provide a benchmark that does not include the impact of the FX rate?

(Interpreted) In the first half of CapEx for Wireless we have expended KRW254.7b and for the fixed line it was KRW367.2b. And please understand that we cannot provide the specific depreciation number at this point.

On your second question on the dividend policy, as you know during the privatization process of KT in the past, because the local market was not able to digest the entire portion, what we did was we borrowed money denominated in foreign currency and we bought our shares back. So that's why we have dollar denominated -- a significant amount of dollar denominated liabilities and that of course has an impact on the level of dividend that is paid out.

So that is the reason behind the fluctuation in the dividend related area. So yes, we do have a plan to stabilize that. But of course we cannot control the FX rate per se. The first thing of course that we hope is the stable exchange rate, foreign exchange rate. And also when it comes to hedging, already 70% of our foreign currency denominated debt is already hedged. So if you want additional hedging then that's going to entail additional cost. Therefore we are not very fond of that option.

But FX exchange rate is the one factor that impacts this, but also there is the interest rate that also plays into the picture. Interest rate also impacts the amount of loss or gain that we get from the FX translation. So we will wait and look for the best timing when it comes to the interest rate trend and we will find that timing and hedge accordingly.

(Interpreted) The next question will be presented by Neale Anderson from HSBC and the following question will be presented by Wu Wei Shi from Deutsche Bank. Mr. Neale Anderson, please go ahead with your question.

Thank you very much. I also wanted to ask about CapEx. I have two questions. The first goes back to your comments on the first quarter call. Again in the first quarter CapEx was quite low considering the guidance for the full year and what management stated on the call is that there was some delay in approving projects because of management changes at the end of the previous year, and that also you were looking at revisiting some of those projects to see if the CapEx was actually necessary.

So given that we've again in the second quarter we've had low CapEx, can we assume that some of the projects are not going ahead or have been reduced? Or are we going to see a significant amount of CapEx in the second half to come in line with full year guidance?

My second question was about your relative priorities in CapEx. Again on the first quarter call you mentioned on the wireless side, looking to build out the wideband CDMA network to support 15 million users by year end. Can I ask where you are against that and whether you plan to spend more CapEx on the fixed line side, on perhaps fiber to the premises, or on wireless network expansion. Thanks very much.

(Interpreted) Yes, on your first question I mean the answer that I would give today would be pretty similar to what I have said in the first quarter. In the first quarter due to the significant management reshuffling and reshuffling of also the employees and personnel and also the restructuring of the organization we weren't able to really fully implement the investment projects that we had envisioned.

And also in the second quarter there was a merger between KT and KTF so we were intent on generating synergies between the two entities. That's why we revisited the projects that we have planned previously. So that's why in the first half of the year the CapEx spending was much lower.

As of now we do not have any plans to change the CapEx guidance that we communicated at the beginning of the year. So we will spend within the CapEx guidance level, so we will implement the projects that we have planned, but we will not go over the CapEx guidance level.

If you look at our operating profit, up to the third quarter we usually attain more than KRW1 trillion. In the second half of the year most of the capital expenditures are concentrated thereby bringing down the operating profit level, this is in a typical year for KT. So that is the reason why we have provided some conservative guidelines or guidances regarding the operating profit of KRW1.8 trillion. That is why we did not provide a higher number.

And so the projects that were somewhat postponed or delayed in the first half will be implemented and deployed in the second half of the year. But once again we will not go over the CapEx target or guidance that we communicated.

And in the third and the fourth quarter regarding the breakdown of the CapEx, as you have correctly mentioned in wideband CDMA capacity enhancement we will be spending about KRW500b and this will be the biggest single line item for the CapEx. For QOOK TV, CapEx we expect about KRW280b. For QOOK internet, including FTTH it will be around KRW300b, for lease lines and satellites it will be around KRW220b.

Thank you very much.

(Interpreted) The next question will be presented by Wei Shi Wu from Deutsche Bank. And the following question will be presented by Dung Sop Lee from (inaudible) Securities. Ms. Wei Shi, please go ahead with your question.

Thank you. I just had one simple question. Can you remind us again what other non-operating income and other non-operating expenses consist of? And how much are these one-off items? Thank you.

Can you hold on one second? We'll get right to you. Just clarify your question, are you asking for other operating costs or other non-operating costs?

Other non-operating costs as well as income.

Okay, let me get it. There is two items I guess for -- of your interest. There is the derivative transaction as well as there was a refund on a penalty that we incurred a couple of years ago. Those would be a couple of the items. And the amount of the refund of the penalty is out of KRW113 trillion that we were fined, there was interest paid back to us of KRW16.5b. There was also reduction in that [KRW113b] which came out to be KRW18b. And those were both plus side on the operating income.

Thank you.

(Interpreted) The next question will be presented by Dung Sop Lee from (inaudible) Securities. And the following question will be presented by [Yeo Lee Ping] from Schroders. Mr. Dung Sop Lee, please go ahead with your question.

(Interpreted) Yes, I have three questions. The first, we are hearing news flows on enabling voice on top of WiBro. So what will be KT's 4G strategy and 4G network related strategy?

Second question is that it seems like the government is coming up with some type of a plan regarding the MVNO 2.0. What is KT's strategy against this?

And also the third question is that there's going to be reallocation of the frequency spectrum of 800 megahertz to 900 megahertz. So what is KT's strategy when it comes to frequency distribution of allocation? And what do you think is the amount of cost that will be needed or incurred?

(Interpreted) When it comes to the WiBro enabling voice, our strategy is focused on providing a low end or low cost voice handset to a niche market. So it will not have a significant impact on the mass market. We would provide on a limited basis that has the WiBro coverage. We will be providing WiBro voice phones on specific areas or regions. So the impact on the mass market is not going to be big and it's not going to have a big -- for the time being, it's not going to have any big bearing on our next generation strategies.

But of course, when the mobile VOIP is launched, of course we would need to also think about fresh approaches in terms of strategy.

(Interpreted) And is it correct for me to understand that because of WiBro voice, there is not going to be any increases in your plans for WiBro CapEx or investment?

(Interpreted) Yes, when it comes to WiBro investment, there is a WiBro investment plan that we submitted to the government. And we are following that plan. And we do not have any significant changes in the stance.

The government, in order to foster competition in the market and also to drive down the price, has continuously pushed for an MVNO business model. However, as you know, the domestic market, the competition is extremely fierce and penetration is near 100%. So the operators, the current operators have a doubt as to whether a voice-centric MVNO could actually be viable in the market.

Of course KT has a very strong open-minded stance. If there is an MVNO candidate that wants to use our fixed line and voice network, we are more than happy to welcome that opportunity and negotiate good terms and conditions for both parties. But we are more interested in the data service MVNO. We believe that the voice side is already saturated but there is -- on the other hand there is plenty of room to facilitate and really promote the data service like it. So if there is any candidate that wishes to make use of these facilities and infrastructure that KT has, to really kick start the data market by using KT's network, we more than welcome that.

And when it comes to the frequency redistribution, the frequency spectrum that LGT returned, which is 2.1 gigahertz and the ones that SKT used, 800 megahertz and 900 megahertz, the government currently is going to come up with a more detailed plan in the second half of the year. And KT's very much interested in the low frequency band and we wish to be allocated the low frequency band so that we can provide 3G and upward generation services by using those frequency spectrum.

But at this point the allocation conditions have not been set by the government. So at this point we cannot disclose any specific plans that we have internally. Of course we do have internal scenarios but we are once -- but I can say that we are interested in the low frequency band and we will make use of that frequency band for 3G and 4G, that I can say.

(Interpreted) And what is your projection for the potential cost that may be incurred?

(Interpreted) As regarding the cost, because the government has not yet laid a specific guideline with respect to the cost, we cannot just second guess what's going to happen. So please be understanding that we won't be able to make anything specific at this moment.

(Interpreted) The next question will be presented by Yeo Lee Ping from Shroders. And the following question will be presented by [Sam Min] from BNP Paribas. Ms. Yeo Lee Ping, please go ahead with your question.

Hi, good afternoon. Just to -- we all acknowledge that competition in Korea is very tight. And you can also see that you're growing your global business. So just wondering in the mid-term outlook, do you have any target in terms of revenue or earnings to be generated from global business?

And if there is, I'm just wondering also in terms of budget wise, how much would you allocate for overseas expansion?

(Interpreted) Overseas business, yes, admittedly it provides good growth opportunity. But at the same time it entails significant amount of risk. So when we view overseas business, we use similar type of criteria when we want to introduce new business in the domestic market.

So when it comes to overseas business, we do not have a plan specifically with regards to the target or the amount of budget that we will allocate for certain projects. But at KT we have a Global Business division who will develop a business plan and that we have an Investment Deliberation Committee that will review the feasibility of that business plan that's been submitted. So if the Deliberation Committee decides that there is a business feasibility then the committee will approve of it. If not, they will reject it. However, when it comes to the overseas business, because the entailing risk is much higher, the hurdle rate for that business is going to be set at a higher level. And we very rigorously deliberate on it before making an approval.

Okay, thank you very much.

(Interpreted) The last question will be presented by Sam Min from BNP Paribas. Mr. Sam Min, please go ahead with your question.

Yes, hi, thank you. My first question is I just wanted to clarify that your dividend policy of a 50% payout is based on the guidance version of your earnings release, not the accounting version? If you look at the net income, there's about KRW100b difference in the first half.

My second question is on cost cutting. And I was wondering if management can really go over the four areas you've been focusing in terms of cost-cutting, first in the labor area, and secondly on marketing. Because you talked about the bundled marketing, hoping to reduce promotion and commissions. Also if you can mention network costs and overhead costs. And given those cost savings, can we expect that your OP margin will likely go up and perhaps offset the declining PSTN profitability? Thank you.

(Interpreted) On your first question, I will clarify that our dividend policy of more than 50% against a net income is on the pro forma guidance base. It is not on an accounting base.

And secondly on cost savings, yes, we promised the market that we would save costs. And all of this process is going on quite smoothly. But such cost saving numbers already reflected in the OP numbers that we are sharing with you. But the management is going to put in more effort so that we can over-achieve that amount.

Can I maybe follow up on that, ask you how much do you foresee in terms of profitability declining? If you can mention some specific numbers coming from PSTN. And some of the cost-cuttings from other areas that you plan to link up, and that's embedded within your guidance. Thank you.

(Interpreted) It is very difficult to accurately forecast the amount of revenue decline arising from PSTN because it's closely dependent on the marketing competition and depending on the competitive landscape that's going to have a significant impact on the extent of the decline. So we have many scenarios within the company. If PSTN revenue falls faster than we expected, then we will strengthen our efforts to save cost. So these two factors are interrelated.

Thank you.

(Interpreted) I would like to extend my appreciation for your questions and for your interest. This has been the first earnings presentation since the merger of KT. Because the second quarter results on an accounting basis only reflect June performance of the combined entity, we based our explanations on the pro forma numbers based on the guidance. Starting from the third quarter we will be able to come back to you with a one single number for the combined KT.

Merger synergies will continue to expand gradually with time. The KT management and employees will continue to innovate to create customer value. We will not be a giant KT, but a small KT, enabling unhindered communication with the customers based on which we can realize the customer's dream and become a global ICT convergence leader.

Lastly, I would like to thank all of you for joining us today. This marks the end of the 2009 second quarter earnings conference call for olleh KT. Thank you.

Portions of this transcript that are noted "interpreted" were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.