Magyar Telecom B.V. Investor Presentation for the period ended - - PowerPoint PPT Presentation

1

Magyar Telecom B.V. Investor Presentation

for the period ended September 30, 2012 November 21, 2012

2 This presentation of Magyar Telecom B.V. (”the Company”) contains “forward-looking statements”. These and all forward-looking statements are only predictions or statements of current plans that are constantly under review by the Company. Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These forward-looking statements are all based on currently available operating, financial, and competitive information and are subject to various risks and uncertainties. Actual results could differ materially from those expressed in the forward-looking statements for a variety of reasons, including but not limited to: fluctuation in foreign exchange rates and interest rates; changes in Hungarian and Central and Eastern European economic conditions and consumer and business spending; the amount that the Company invests in new business

• pportunities and the timing of those investments; the mix of services sold; competition; management of growth

and expansion; future integration of acquired businesses; the performance of IT Systems; technological changes; the Company's indebtedness; and government regulation. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's financial reports, which are available on the Company’s website, www.invitel.hu. Accordingly, investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. The Company does not undertake to update such statements to reflect the impact of circumstances

• r events that arise after the date the statements are made. Investors should, however, consult any further

disclosures the Company may make in its reports.

Safe Harbor Statement

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Weak macroeconomic environment persists. Voice business continues to decline across both the Residential and Corporate business segments as customers continue to economize, resulting in both line- churn and cost-effective usage in both segments. Growth in Corporate customer base is largely offsetting the negative impact of

• verall price erosion in this segment and provides a platform for continued ICT

services growth. In the Residential segment, rapidly growing fiber sales and a stabilized cable business are not fully compensating for market-driven declines in our traditional copper-based product lines. Operational efficiency programs are in place to reduce cost and redirect resources to customer-facing functions. New tax burdens will increase the adverse impact of government policy on earnings.

Overview

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Macroeconomic Background

EUR/HUF Historical Movement Real GDP

100.0 101.0 101.6 95.2 96.4 98.1 92 94 96 98 100 102 104 2006A 2007A 2008A 2009A 2010A 2011A

In the second quarter of 2012 GDP decreased by 1.2%(Yr/Yr). The National Bank forecasts 2012 Yr/Yr GDP decrease to be at 1.4%. The Hungarian forint has strengthened from 315 HUF/EUR at the beginning of the year to a current range of 280-290. Annual inflation was 6.6% in September 2012. Inflation is forecasted to stay at 5.5-6.0% level in 2012 and to decrease to 3.5-5.0% levels in 2013. In 2012 the National Bank decreased its policy rate from 7.0% to 6.25% in three steps: 25bp in August 2012, 25bp in September 2012 and 25bp in October 2012. Unemployment slightly decreased during the period and currently stands at 10.4% compared to 10.9% in June 2012, 11.7% in March 2012 and 10.7% in December 2011. Company liquidations have gathered pace in the first half of 2012; the number of liquidations for the period ended August 2012 are 35% higher than in the same period of last year.

240 250 260 270 280 290 300 310 320 01-11 03-11 05-11 07-11 09-11 11-11 01-12 03-12 05-12 07-12 09-12

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Government Policy Impact I. – Utility Tax

New tax enacted by Parliament on November 20, 2012, effective January 2013

• Conceptually announced on October 17th as part of a deficit reduction package

Per meter tax on utility networks

• Payable by energy and water utilities, fixed line telcos and cable operators
• Buried pipes/cables as well as lines on utility poles are subject to tax
• ”Last mile” exemption – sections of network connecting a single property are not

subject to the tax

• Liability falls on the owner of the pipes/cables
• Multiple cables/bundles within a single footprint are taxed once per owner

HUF 125 per meter tax rate

• Tax rate is tiered with the HUF 125/m top rate applicable to network >300km
• Other rate reductions may be allowed – still assessing

Invitel network subject to tax is in the range of 20,000-32,000 kilometers Tax has indefinite term & is payable in two installments – March and September each year Tax is payable to the central government

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Government Policy Impact II.

Per-Minute Telco Tax (Existing – in force as of July 2012)

• HUF 2 per minute/SMS/MMS, subject to a per subscriber cap
• Tax caps for 2012 (2013-): HUF 400 (700) per month for residential subscribers and

HUF 1,400 (2,500) per month for business subscribers

• Exemption: 10 minutes per month are tax free for residential customers

Postal Check Fee Recharge Ban (New – in force as of November 2012)

• New amendment to the Electronic Communications Act, passed by Parliament on

November 6, 2012

• Telcos are no longer allowed to charge fees for issuing invoices or for payment of

invoices; however, selective discounts for a given payment method are allowed.

• This forces us to stop our practise of charging customers a fee for bills paid via post
• ffices using the so-called yellow check, the most popular retail payment method.
• Invitel has for years charged customers a fee for bills paid through the Post Office in
• rder to recoup the ~HUF 130 per transaction fee the Post Office charges us for

processing and aggregating those payments. Transaction Tax (New – in force as of January 2013)

• Transaction tax of 20bp, subject to a cap, payable by financial institutions
• Indirect impact on Invitel’s customer bill and supplier invoice transactions
• Impacts us to the extent that financial partners are able pass on the costs

7

Government Policy Impact III. – Looking Ahead

Policy 2013 Impact Crisis Tax

• None. Limited to three years 2010-2012

Per-Minute Telco Tax Full 12 month impact Postal Check Fee Recharge Ban Depends on effectiveness of offsetting measures Transaction Tax Probable indirect impact via higher financial partner charges Utility Tax Range as indicated subject to detailed assessment

8

The functional currency of Magyar Telecom B.V. and its subsidiaries (”the Company”) is the Hungarian

• forint. The Hungarian forint depreciated against the EUR by 7% during the period ended September 30,

2012 compared to the average Hungarian forint/Euro exchange rate in the period ended September 30, 2011. Revenue in EUR decreased by 14% for the period ended September 30, 2012 compared to the same period of the prior year. In HUF terms, revenue decreased by 8% for the period ended September 30, 2012 compared to the same period of the prior year. Segment gross margin in EUR decreased by 14% for the period ended September 30, 2012 compared to the same period of the prior year. In HUF terms, segment gross margin decreased by 7% for the period ended September 30, 2012 compared to the same period of the prior year. Segment gross margin percentage was 83% and 82% for the period ended September 30, 2012 and 2011, respectively.

Financial Highlights for the nine month period ended September 30, 2012

9

Adjusted operating expenses* in EUR increased by 3% for the period ended September 30, 2012 compared to the same period of the prior year. In HUF terms, adjusted operating expenses increased by 11% for the period ended September 30, 2012 compared to the prior year. The increase is mainly due to higher personnel expenses and the new telecom tax introduced from July 2012. Adjusted EBITDA** in EUR decreased by 25% to EUR 53.8 million for the period ended September 30, 2012 compared to the same period of the prior year. Adjusted EBITDA** in HUF decreased by 20% to HUF 15.7 billion for the period ended September 30, 2012 compared to the same period of the prior year. Adjusted EBITDA** margin was 42% and 49% for the period ended September 30, 2012 and 2011, respectively. The Company is implementing a significant headcount reduction and other overhead control measures in the fourth quarter. Non-recurring items for the period ended September 30, 2012 include HUF 410 million (approximately EUR 1 407 thousand) for severance and other expenses related to the restructuring.

Financial Highlights for the nine month period ended September 30, 2012

10 The average HUF/EUR exchange rates were 271.28 HUF/EUR in YTD Q3 2011 and 291.36 HUF/EUR in YTD Q3 2012. (*) Fibernet is consolidated from March 1, 2011 in our income statement for the period ended September 30, 2011. (**) Adjusted Operating Expenses do not include the non-recurring items presented below Adjusted EBITDA. See slide 11. (***) EBITDA and Adjusted EBITDA are non-IFRS financial measures. See the reconciliation on slide 12. (****) EBITDA Margin % and Adjusted EBITDA Margin % are EBITDA and Adjusted EBITDA as a percentage of Revenue.

Financial Information for the nine month period ended September 30, 2012

Change Change Change Change 2012 2011* % 2012 2011* % Revenue 127 403 148 462 (21 059) (14%) 37 120 40 275 (3 155) (8%) Segment Cost of Sales (21 961) (26 439) 4 478 17% (6 399) (7 172) 773 11% Segment Gross Margin 105 442 122 023 (16 581) (14%) 30 721 33 103 (2 382) (7%) Gross Margin % 83% 82% 83% 82% (51 666) (50 015) (1 651) (3%) (15 054) (13 568) (1 486) (11%) Adjusted EBITDA*** 53 776 72 008 (18 232) (25%) 15 667 19 535 (3 868) (20%) Adjusted EBITDA Margin %**** 42% 49% 42% 49% Non-recurring items (11 032) (15 690) 4 658 30% (3 214) (4 256) 1 042 24% EBITDA*** 42 744 56 318 (13 574) (24%) 12 453 15 279 (2 826) (18%) EBITDA Margin %**** 34% 38% 34% 38% Adjusted Operating expenses** (in thousands of EUR) For the period ended September 30, For the period ended September 30, (in millions of HUF)

11

Non recurring items for the nine month period ended September 30, 2012

a. Cost of restructuring is related to reorganizations and mainly includes severance expenses. Cost of restructuring for the period ended September 30, 2011 is mainly related to the reorganization undertaken following the acquisition of Fibernet. b. Crisis tax was introduced by the Hungarian government in 2010 until the end of 2012. c. Management fee includes costs charged by our trustee as well as management fees paid to Mid Europa. d. Consulting expenses relating to strategic projects mainly include non-recurring financial and legal consulting expenses. In 2011, these expenses mainly related to due diligences of cable operators. e. Legal penalty for the period ended September 30, 2011 is related to a legal case with the Competition Office in connection with a breach of the telecoms regulation in 2005 regarding carrier selection by Hungarotel (one of the predecessor companies of Invitel). f. Other items for the period ended September 30, 2012 mainly include vacation accrual of EUR 409 thousand, income from sale of ex-Fibernet receivables amounting to EUR 216 thousand, legal and audit fees related to liquidation of Invitel Holdings A/S and HoldCo I. B.V. companies amounting to EUR 198 thousand and government grant settlement related to ex-Fibernet amounting to EUR 100 thousand.

Change Change Change Change 2012 2011 % 2012 2011 % Cost of restructuring(a) (2 467) (4 601) 2 134 46% (719) (1 248) 529 42% Crisis tax(b) (7 078) (8 397) 1 319 16% (2 062) (2 278) 216 9% Management fee(c) (777) (791) 14 2% (226) (215) (11) (5%) Consulting expenses relating to strategic projects(d) (70) (870) 800 92% (22) (236) 214 91% Legal penalty(e)

• (737)

n/a n/a

• (200)

n/a n/a Other items(f ) (640) (294) (346) (118%) (185) (79) (106) (133%) Total non-recurring items (11 032) (15 690) 4 658 30% (3 214) (4 256) 1 042 24% (in thousands of EUR) For the period ended September 30, For the period ended September 30, (in millions of HUF)

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EBITDA reconciliation to Net Income for the nine month period ended September 30, 2012

• Financing expenses, net include interest income, interest expense, amortization of bond discount, amortization of deferred borrowing

costs and other, net financial expenses. Financing expenses, net in 2011 include a gain of EUR 3.1 million realized on the repurchases of our debt. Financing expenses, net in 2012 include higher amortization of deferred borrowing cost as a result of the refinancing expenses related to the 2011 March refinancing.

• Foreign exchange gains (losses), net mainly include unrealized losses relating to the revaluation of our EUR denominated assets and

liabilities at period end and realized losses on our EUR denominated assets and receivables during the period.

• Other financing expenses relate to the waiving of intercompany receivables and liabilities in connection with the ongoing liquidation of

HTCC Holdco I. B.V. and the closed liquidation of Matel N.V. the currently and former holding companies of Magyar Telecom B.V.

• Gains (losses) on derivatives include realized losses on interest rate swap and forward deals closed and and unrealized losses/gains

related to the mark-to-market revaluation of our open positions at period end..

• Gain on acquisition represents the difference between the fair value of the acquired net assets of Fibernet and the purchase price paid.
• Taxes on net income include local business tax.

(*) Fibernet is consolidated from March 1, 2011 in our income statement for the period ended September 30, 2011. (**) EBITDA is a non-IFRS financial measure. (***) EBITDA Margin % is EBITDA as a percentage of Revenue.

Change Change Change Change 2012 2011* % 2012 2011* % EBITDA** 42 744 56 318 (13 574) (24%) 12 453 15 279 (2 826) (18%) EBITDA Margin %*** 34% 38% 34% 38% Depreciation and amortization (40 233) (43 669) 3 436 8% (11 722) (11 847) 125 1% Financing expenses, net (27 648) (23 807) (3 841) (16%) (8 056) (6 458) (1 598) (25%) Foreign exchange gains (losses), net (1 400) (1 729) 329 19% (408) (469) 61 13% Gains (losses) on derivatives (622) 3 210 (3 832) (119%) (181) 871 (1 052) (121%) Other financing expenses (4 830)

• (4 830)

n/a (1 407)

• (1 407)

n/a Gain on acquisition

• 28 540

(28 540) n/a

• 7 742

(7 742) n/a Taxes on net income (2 516) (2 914) 398 14% (733) (791) 58 7% Net profit / (loss) for the period (34 505) 15 949 (50 454) (316%) (10 054) 4 327 (14 381) (332%) Headcount 1 305 1 285 20 2% (in thousands of EUR) For the period ended September 30, For the period ended September 30, (in millions of HUF)

13 Residential Voice In: decrease in gross margin is mainly due to lower traffic as well as line churn and customers migrating to lower cost packages with a shift towards lower cost off-peak minutes and lower mobile calls. Residential Voice Out: decrease in gross margin is due to a reduction in the number of customers and a reduction in traffic driven in part by very aggressive pricing from competitors. Residential Internet: decrease in gross margin is due to decreasing ADSL ARPU. Cable: Cable segment was included from March 1, 2011 and relates to the gross margin generated by ex-Fibernet. Corporate Voice: gross margin is mainly impacted by a reduction in the traditional voice business and price erosion due to competition on contract renewals. Corporate Data: Corporate Data business remains stable. Wholesale: gross margin is impacted mainly by the decreasing revenue from wholesale small bandwidth leased lines.

Segment Gross Margin for the nine month period ended September 30, 2012

* Fibernet is consolidated from March 1, 2011 in our income statement for the period ended September 30, 2011.

Change Change Change Change 2012 2011* % 2012 2011* % Residential Voice In 21 858 28 454 (6 596) (23%) 6 369 7 719 (1 350) (17%) Residential Voice Out 3 257 5 796 (2 539) (44%) 949 1 572 (623) (40%) Residential Internet 19 436 21 565 (2 129) (10%) 5 663 5 850 (187) (3%) Cable 9 413 8 385 1 028 12% 2 743 2 275 468 21% Corporate Voice 13 333 15 554 (2 221) (14%) 3 885 4 219 (334) (8%) Corporate Data 21 834 23 098 (1 264) (5%) 6 362 6 266 96 2% Wholesale 16 311 19 171 (2 860) (15%) 4 750 5 202 (452) (9%) Total Segment Gross Margin 105 442 122 023 (16 581) (14%) 30 721 33 103 (2 382) (7%) For the period ended September 30, For the period ended September 30,

(in thousands of EUR) (in millions of HUF)

14

Capital Expenditure for the nine month period ended September 30, 2012

Change Change Change Change 2012 2011 % 2012 2011 % Variable Telco Capex 16 022 14 199 1 823 13% 4 668 3 852 816 21% Fixed Telco Capex 2 585 3 628 (1 043) (29%) 753 984 (231) (23%) Telco Capex 18 607 17 827 780 4% 5 421 4 836 585 12% IT Capex 832 1 780 (948) (53%) 242 483 (241) (50%) Miscapex 211 199 12 6% 62 54 8 15% Capitalised OPEX 3 195 3 255 (60) (2%) 931 883 48 5% Total Core CAPEX 22 845 23 061 (216) (1%) 6 656 6 256 400 6% FTTx Build 6 797 168 6 629 3 946% 1 980 46 1 934 4 205% Cable upgrades 781 15 766 5 107% 228 4 224 5 603% Fibernet Integration 224 590 (366) n/a 65 160 (95) n/a Trafficom IRU purchase 448

• 448

n/a 130

• 130

n/a Data center hosting equipment

• 4 131

(4 131) n/a

• 1 121

(1 121) n/a ADSL BOOST

• 2 425

(2 425) n/a

• 658

(658) n/a Other projects 8 250 7 329 921 13% 2 404 1 988 415 21% TOTAL CAPEX 31 095 30 390 705 2% 9 060 8 244 815 10% Capex to Revenue % 24% 20% 24% 20% (in thousands of EUR) (in millions of HUF) For the period ended September For the period ended September

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Financial Information

(1) Third party debt includes long term debt from the 2009 Notes reduced by 2009 Notes repurchased not yet cancelled, liabilities relating to finance leases, but excludes liabilities relating to derivative financial instruments. (2) Annualized Adjusted EBITDA is calculated by multiplying Adjusted EBITDA for the period ended September 30, 2012 by 4/3. See slide 9 for a reconciliation of Adjusted EBITDA to Net Income. (3) Net third party debt equals third party debt less cash and cash equivalents.

Financial Information as of and for the nine month period ended September 30, 2012

(in thousands of EUR) As of and for the period ended September 30, 2012 Balance Sheet Data (at period end): Cash and cash equivalents 29 186 Third party debt (1) 330 506 Other Pro-forma Financial Data: Annualized Adjusted EBITDA (2) 71 701 Net third party debt (3) 301 320 Ratio of Net third party debt to Annualized Adjusted EBITDA 4.2x

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Balance Sheet as of September 30, 2012

Balance Sheet

As of September 30, As of December 31, (in thousands of EUR) 2012 2011 Non-Current Assets Intangible Assets 34 196 32 281 Property, Plant and Equipment 277 789 257 169 Other Non-Current Assets 167 109 312 152 289 559 Current Assets Cash and Cash Equivalents 29 186 35 676 Trade and Other Receivables 25 330 30 386 Other Current Assets 2 633 1 873 57 149 67 935 Total Assets 369 301 357 494 Equity Share Capital 92 201 92 201 Reserves 242 300 239 354 Cumulative Translation Reserve (54 324) (87 114) Accumulated Losses (293 335) (258 830) Non-Controlling Interest 13 13 (13 145) (14 376) Non-Current Liabilities Borrowings 316 519 313 494 Other Non-Current Liabilities 13 806 13 967 330 325 327 461 Current Liabilities Trade and Other Payables 23 870 25 423 Other Current Liabilities 28 251 18 986 52 121 44 409 Total Equity and Liabilities 369 301 357 494

17

Cash Flow Statement for the nine month period ended September 30, 2012

Cash Flow Statement

(in thousands of EUR) 2012 2011 Net cash provided by operating activities exluding interest paid 43 561 55 427 Purchase of tangible and intangible assets (33 394) (33 576) Proceeds from Sale of Property, Plant and Equipment 800 1 018 Purchase of subsidiaries

• (17 604)

Net cash used in investing activities (32 594) (50 162) Cash flow available for debt service 10 967 5 265 Proceeds from Issuance of Additional 2009 Notes

• 79 200

Repurchase of the 2009 Notes

• (13 933)

Repurchase of the 2007 Notes

• (75 634)

Repurchase of the 2006 Notes

• (20 365)

Refinancing cost

• (5 419)

Interest paid (16 996) (19 328) Settlement of derivative financial instruments (276) (2 490) Net cash used in financing activities (17 272) (57 969) Effect of Exchange Rate Changes on Cash and Cash Equivalents (185) (4 055) Cash flow after debt service (6 490) (56 759) Cash and cash equivalents at beginning of period 35 676 109 010 Cash and cash equivalents at end of period 29 186 52 251 Net decrease in cash and cash equivalents (6 490) (56 759) For the period ended September 30,

18 Non-IFRS Financial Measures Magyar Telecom B.V. (”the Company”) has included certain non-IFRS financial measures in this presentation, including EBITDA and Adjusted EBITDA. Reconciliations of the differences between EBITDA and Adjusted EBITDA and the most directly comparable financial measure calculated and presented in accordance with IFRS is included in this presentation. The non-IFRS financial measures presented are by definition not a measure of financial performance or financial condition under IFRS and are not alternatives to operating income or net income/loss reflected in the income statement and statement of comprehensive income (loss) and are not necessarily indicative

• f cash available to fund all cash flow needs. These non-IFRS financial measures used may not be comparable to

similarly titled measures of other companies. Management uses these non-IFRS financial measures for various purposes including: measuring and evaluating the Company’s financial and operational performance and its financial condition; making compensation decisions; planning and budgeting decisions; and financial planning purposes. Magyar Telecom B.V. believes that presentation of these non-IFRS financial measures is useful to investors because it (i) reflects management’s view of core operations and cash flow generation and financial condition upon which management bases financial, operational, compensation and planning decisions and (ii) presents a measurement that equity and debt investors and lending banks have indicated to management is important in assessing the Company's financial performance and financial condition. While Magyar Telecom B.V. utilizes these non-IFRS financial measures in managing its business and believes that they are useful to management and to investors for the reasons described above, these non-IFRS financial measures have certain shortcomings. In particular, these EBITDA and Adjusted EBITDA measurements do not take into account changes in working capital and financial statement items below income from operations, and the resultant effect of these items on the Company’s cash flows. Management compensates for the shortcomings of these measures by utilizing them in conjunction with their comparable IFRS financial measures. The information in this presentation should be read in conjunction with the financial statements and footnotes contained in the Company's financial reports.

Appendix