Youngwoo Kim – Investor Relations Officer Gwang-Seok Shin – Chief Financial Officer.

Jong-in Yang – Korea Investment & Securities Neil Anderson - HSBC Dan Kong - Deutsche Bank.

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 2016 fourth quarter preliminary earnings results by KT. We would like to have welcoming remarks from Mr. Youngwoo Kim, KT IRO, and then Mr.

Gwang-Seok Shin, CFO, will present earnings results and entertain your questions. [Operator Instructions] Now we would like to turn the conference over to Mr. Youngwoo Kim, KT IRO..

Good afternoon, I am Youngwoo Kim, KT's IRO. Let's begin the presentation of 2016 full year earnings results. Our call is being webcasted via the Company's website and please refer to the presentation slides as we present. And please note that we have been releasing consolidated numbers under the IFRS standards since the first quarter of 2011.

We will begin with our CFO, Gwang-Seok Shin remarks on full year results including Q4 2016 performance..

Good afternoon, I am Gwang-Seok Shin, KT's CFO.

Over the past three years KT presented a new vision, regained competitiveness and it's telecom business, improved the way customer see us which led to a successful earnings turnaround in 2015 and over 10% year-over-year operating profit growth in 2016 proving that KT has successfully laid the basis for a sustainable growth.

For the wireless business we discovered a new segment such as the Y24 and GiGA LTE offered a line-up of variety of second device models, providing differentiated services for the changing market and catering to the specific customer segments based on which we sustained growth and quality reaching 18.9 million cumulative wireless subscribers with a net addition of 850,000 year-over-year.

For the internet business GiGA Internet has taken root as the market mainstream. KT's GiGA Internet with it's unrivaled speed, quality and coverage was loved by the customers with it's subscriber base reaching above 2.5 million most recently.

For the IPTV business we were the first to achieve 7 million subscribers in the PayTV segment and we expect IPTV revenue to be above annual BET [ph] this year and look forward to a significant bottom line contribution.

In terms of the future business since the first commercialization of LTEM nationwide network in 2016, Katie has seen a growth in a number of partners and products for Internet of small things such as smart [indiscernible] making KT number one in net addition market share for wireless IoT last year.

This year we are targeting 1 trillion in revenue from future businesses and we’re focused on three main strategy implementations which are aggressive pursuit of energy and security business, making our core platform into the so called big business and taking our internally owned solutions to the global market.

We were able to experience only on through the world's first launch of AI, artificial intelligence TV, GiGa Genie, how the convergence between KT's fixed and wireless infrastructure and future technologies like the AI and big data will transform and innovate the world.

Based on KT's flagship platforms like its IPTV and its new business capabilities built to-date and our network assets. We plan to introduce a completely new converged services and products ahead of others. So as to pioneer new markets and solidify our market leadership.

Also KBank which is Korea's first Internet based specialized bank will start it's business this year, it will be offering true financial services from opening accounts to extending loans, anytime, anywhere 365 days a year based on the convergence of finance and fintech and will completely change the existing financial paradigm.

Last year our official guidance was consolidated revenue of over KRW22 trillion and standalone CapEx of KRW2.5 trillion.

Despite uncertainties in the global economy and unfavorable external environment we offered differentiated product and services in both technology and marketing recording consolidated revenue KRW22.7 trillion in 2016 meeting our guidance. For CapEx we spent KRW2.3 trillion on efforts to save and make spending efficient.

This year we present our guidance of consolidated revenue of over KRW22 trillion and standalone CapEx of KRW2.4 trillion. With the new perspective on our core business and future businesses we will overcome the limitations of group thereby supporting top line growth.

And through innovating the fundamentals of business infrastructure in terms of customer distribution and corporate culture we were focused on bringing an upgraded performance. With that let me move on to 2016 earnings results. 2016 operating revenue was up 2.1% year-over-year to KRW22.7437 billion.

In particular service revenue went above the 20 trillion mark since changing to IFRS standards back in 2011 driven by sustained growth and subscribers and revenue from the core business. Operating profit was up 11.4% year-over-year to KRW1.440 billion driven by overall betterment of [indiscernible] thanks to good top line and cost innovation.

Net income came in at KRW797.8 billion thanks to cost innovations efforts so far Q4 net income came in at KRW93 billion reversing the net loss trend we have seen every fourth quarter since the Q4 of 2013. EBITDA recorded KRW4.7852 trillion.

Next is on operating expenses, 2016 operating expense was KRW21.3037 trillion recording an year-over-year increase of 1.5%.

Marketing expense declined 3.5% year-over-year on the back of a change from a push to a pull marketing methodology made feasible by launch of fixed wireless product and services that are customized to meet customer needs and thanks to our corporate-wide efforts to improve the way customers perceive us.

Next is on the financial position, Q4 debt to equity ratio was 139.1% down 2.1 percentage points year-over-year. Net debt ratio was 40.8% down by 9.1 percentage points year-over-year. Next is on CapEx, total 2016 CapEx was KRW2.359 trillion. We expect CapEx to be gradually stable downwards until 5G investments come under full swing.

Next is by business line, wireless revenue was up 0.6% year-over-year to KRW7.4183 trillion. Wireless service revenue recorded KRW6.6584 trillion growing 2.1% year-over-year. We achieved over 2% annual growth for wireless service revenue which was the 2016 target.

Q4 LTE subscribers expanded to account for 75.5% of the total base with 2016 wireless ARPU growing 0.6% per annum to reach KRW35.524. Next is on fixed line business, fixed line revenue declined 1.8% year-over-year on decline in PSTN subscriber and traffic.

On the other hand for the internet business driven by good GiGA internet performance the revenue excluding inter-connect increased 4.3% per annum continuing on with internet revenue growth for six consecutive quarters and as a result we achieved 2016 target of 2 million GiGA internet subscribers and 4% internet revenue growth.

Next is on media and contents business, media and content revenue was up 15.8% year-over-year to KRW1.925 trillion. KT has the biggest IPTV subscriber base in Korea underpinned by a competitive edge from GiGA internet and sourcing a variety of content, we sell a net addition of 490,000 last year and standalone revenue growth of 23.9% year over year.

Once again we achieved our 2016 target of IPTV net addition of 500,000 and separate basis revenue growth of 20%. Next is on financial and other services, financial revenue was up 0.5% year-over-year to KRW3.4278 trillion on good CC card revenue performance driven by growth and credit card usage.

Other services revenue was up 13.6% year over year to KRW2.1709 trillion thanks to contributions from real estate and other affiliates. For more details please refer to the materials that we have circulated previously. Now we will entertain questions..

[Operator Instructions]. The first questions will be provided Kim Hoe Jae [ph] from Daishin Securities and the next question will be provided by [indiscernible]..

My first question has to do with the second term of CEO Hwang, if we were to look forward to 2017 and 2020 what do you believe is going to be his key business direction.

Second question has to do with dividends, you have paid out KRW800 per share and if you want to convert that figure into a payout ratio excluding the one-off understand that it would be based off of your separate basis net income, what is the payout ratio and do you have plans to increase the payout ratio going forward what is your overall dividend plan?.

Responding to your first question the CEO appointment will be finalized in the month of March when we have our general shareholders meeting. So I would have to say that it is a bit too early for us to be providing any specific information with respect to the coming three years business management direction.

Having said that over the past three years we have endeavored and focused greatly on improving the corporate structure, innovating the business infrastructure and the cost structure and regaining the competitiveness in our core businesses and also focus on discovering future growth businesses and therefore based on those approaches of the past we think that 2017 business strategy will be an extension to the efforts that we have exerted so far.

To provide a little bit more of a color in terms of our core business we would be equipped with a new perspective and really try to overcome the limitations of growth.

In terms of the future business we will go a step further from merely looking for new opportunities but based on the capabilities that we have built so far we will focus on select and we will employ select and focused strategy so that we would pursue growth.

Once the second term of our CEO is confirmed I would say though with a bit of a caution that the future three years business direction that we’re currently envisioning will not be a big departure from the current framework.

Responding to the second quarter the 2016 payout ratio if you address the one-off it is quite similar to the previous year at around 30%. You also asked about our future payout stand, even after 2017 we will continuously decide on the size of the shareholder return in light of the annual financial performance as well as our capital management plan.

We believe that as we continuously improve on profitability as well as cash flow and those are going to be our priority activities we would think that naturally that will help to expand the size of the shareholder return..

The next questions will be presented by Jong-in Yang from Korea Investment & Securities and the following question will be presented by [indiscernible]. Mr. Jong-in Yang, please go ahead, sir..

I would like to pose two questions, the first has to do with the 2017 mobile ARPU with the trend that we’re seeing in the second device, take-up of the second device and increase the number of subscribers taking the discount plan as well as increase in subscribers and traffic for unlimited data packages.

How do you forecast your 2017 ARPU? Do you think that there will be a positive growth or a negative growth? Second question has to do with Internet of Things, as we have heard from newspaper articles once the [indiscernible] IoT's network is well prepared by April what changes should we expect from KT in terms of its IoT related strategies and what are your forecast in terms of number of subscribers, your top line and your bottom line?.

Responding to your question about our ARPU forecast, looking at the existing handset subscriber base just as in 2016 we're seeing increase in the data usage and the impact of an improvement in the [indiscernible] profiles and the database multimedia service expansion. We expect ARPU growth to continue.

Having said that because of the second device trend and the growth in the number of IoT lines and inflow of low ARPU customers as we further segment the customer segment we think that wireless ARPU it will be difficult for wireless ARPU to grow compared to 2016 therefore we are not presenting any separate wireless ARPU targets but we will be focusing our business implementation on the -- rather than ARPU on the overall service revenue growth target.

Just like 2016, in 2017 we are going to focus and making our customer base more higher quality and also further segmenting those customer base and our target is growing more than 2% in terms of service revenue.

Responding to your second question, we have seen commercialization of LTE back in 2016 and in 2017 in June in the IoT nationwide network is going to be completed and commercialized service will begin.

Thereby KT would try to lead the facilitation of the overall IoT service on the low power and that high-band IoT segment and also you know lead the efforts in creating the rightful ecosystem. We will be utilizing the dual network going forward of LTEM and the NVIoT [ph] and implementing IoT our businesses.

We will be using LTEM to respond to for instance voice, video image or the multimedia and high end terrace requirements and we'll be using NBIoT in order to respond to low power small quantity and low end tariff requirements.

We will really focus on getting a solution for different industries that bring together the IoT and the different industry solutions and also we will try to introduce a new business model that is closely connected to the platform and also discover business opportunities in the arena of convergence.

We will also focus in entering into more agreements with global leading automakers so that we can have a better influence in the connected car segment. To that end in the first half of the year we’re planning to introduce a rate plan that caters to Internet of small things services.

In 2017 based on the new network and the services we think that this will be a great timing for us to expand the foundational base of IoT therefore rather than setting a specific subscriber target or revenue target we want to be responding to the market in a flexible manner and laying the basis so that we can solidify our leadership. .

The next questions will be presented by [indiscernible] and the following question will be presented by Mr. Neil Anderson from HSBC. Please go ahead, sir..

I have two questions first is on your marketing costs, it fell slightly to about 2.7 trillion in 2016, what are your expectations for 2017, can we expect the marketing cost decline to continue or should you be concerned about handset subsidy cap removal scheduled for fourth quarter of this year.

My second question is a follow up on the previous dividend question. I understand you're expecting shareholder returns to increase naturally with the earnings improvement but it will be helpful if you could share with us your thought process in terms of setting the dividends.

Your balance sheet has strengthened quite a bit, I think you previously mentioned a target of consolidated gearing of net debt to EBITDA going to 1.5 times which you've already achieved in 2016 and with the CapEx stabilizing I think your cash flows should be strong as well.

So with these factors in mind can we now expect a meaningful increase in your dividend payout going forward and if you could share with us what are the factors you're considering in making this decision? Thank you..

Responding to your question about 2017 marketing, we expect annual 2017 marketing cost to be quite similar to that of 2016. We want to control it at around KRW2.5 trillion.

Considering the fact that the handset upgrade market is being well-established and with a higher penetration of LTE and decline in churn ratio we think that in terms of the existing handset sales, conventional type of handset sale practice will continue to show a declining trend.

However there will be new markets and expansion into different customer segments. So there would be some marketing expense to be spent on those areas.

Yes some are concerned about the possible on the more you overheating of competition after the removal of the subsidy cap but in light of the fact that the three companies, three operators their competitiveness there is no big difference and also LTE penetration is already hitting about 80%.

It's actually and realistically difficult to expand one's market share based on simply the subsidy.

Therefore we expect to be stabilizing trend to continue as we have seen back in 2016 and also the trend in the telecom market is that there is more focus on focusing on the second device the IoT and discovering new markets rather than competing based off of the existing subscriber base so there are new attempts at different new segments of the market.

So we think that there will be competition based on service benefits and rates rather than excessive subsidy. Responding to your follow-up question on divided, because in 2017 we expect a better financial position more stable position that is compared to 2016.

So we think that we can be more flexible in allocating the resources that we have based on the improved profitability as well as reasonable allocation of the resources, we judged that we will be able to satisfy the expectations of our shareholders..

The next questions will be presented by Mr. Neil Anderson from HSBC and the following questions will be presented Dan Kong from Deutsche Bank. Mr. Neil Anderson, please go ahead, sir..

I had a question on the IPTV profitability so it's great to hear providing more significant profit contribution this year. I wanted to try and get some more details on the drivers of IPTV profitability. I understand for KT that your margin is probably more of an exercising cost allocation.

So would it be possible to say is there -- to what degree of operating leverage you see in this business are any types of media and content service is more profitable or higher margin that is and just how you feel the outlook for profits in this part of the business is developing? Thank you..

Responding to your question about IPTV, thanks to continuous increase in the platform related revenue as well as increase in the basic fees and also with our efforts to control the profitability. We think that we would be able to attain annual BET [ph] in 2017.

Although I won't be able to provide you with a specific target figure we think that within a year or two we will be able to attain an operating profit margin level that is representative of what is quite average in the existing incumbent telco business.

From a more mid to long term perspective with improving the quality of our subscribers and achieving cost efficiencies in terms of sourcing of contents and other cost innovations. We think that we will be able to continue the improvement and the profitability.

Although it's difficult to provide you with a specific figure we believe that by leveraging the unique competitive edge that IPTV has we want to use that into making a solid platform and if we could really bring about additional revenue opportunities then compared to other Pay TV operators we would be more equipped in generating high quality revenue and bottom line..

The next questions will be presented by Mr. Dan Kong from Deutsche Bank. Mr. Dan Kong please go ahead, sir..

I have some questions on your wireless business, your [indiscernible] subscriber figure has recorded a Q-o-Q decline in the fourth quarter whereas the subscribers for the wearables and the remote command and control areas have seen a significant increase.

I would like to understand what your strategy is in terms of the subscriber mix going forward and subscriber growth.

In terms of the new areas like the IoT meaning how are you going to be marketing in this space? Would it be more based on the subsidy aspect or would you be employing new approaches in marketing for new segments like the IoT and recently there was a so called KRCT spectrum plan that was announced.

I think it includes some of the spectrum related schedules and I understand that it is a product of different discussions between different operators including KT would like to understand what KT is preparing and what it is expecting in terms of the schedule for spectrum..

Responding to your first question about the decline in Q4 about the wireless subscribers, in all of the three operators because of ex-officio [ph] churns for the non-name based subscribers all three companies have experienced on a Q-o-Q basis net reduction. So you've seen in terms of the M&O subscribers the net edition had declined.

In 2017 what is our strategy going forward for the existing base of handset subscribers rather than trying to expand the number of subscribers over a short period.

We will be focusing more on improving the quality of those subscribers so it will be a two track approach because for the second device the IoT and B2B segment we will be quite aggressive and wanting to expand our subscriber base by providing a unique and differentiated services so that we can maintain our leadership.

So having said that in 2017 our M&O net edition we’re targeting it that it should be more than 2016. Responding to your second question on the spectrum aspect, it is too premature for us to be announcing a definitive position of the company at this point.

We will be responding appropriately in light of the subscriber trends, the data traffic as well as the government announced spectrum auction schedules as well as the next generation network buildout situation..

With no further questions we would like to close the Q&A session. Thank you very much for your questions and your interest and thank you for joining us despite your busy schedules. This brings us to the end of the 2016 Annual Earnings Presentation. Thank you..