CEO Word Q2 2020
Thanks to our efforts to refocus the company to defend underlying EBITDAaL, Tele2 faired relatively well in a quarter that has been difficult for the sector and society as a whole. We took a major step to assert our position as a leading telecommunications provider as we launched Sweden’s first public 5G network in the quarter. We saw continued progress on our fixed mobile convergence (FMC) strategy with 242,000 customers now on FMC-offers and we continued to execute on the planned backbook price adjustments in Sweden. With a better view of the pandemic impact and a solid plan of mitigations we are reinstating our guidance for 2020 and planned extraordinary dividend.
Q2 2020 summary
We saw a full quarter of the COVID-19 impact which had a negative effect of SEK 135 million on underlying EBITDAaL on a Group level (SEK 95 million in Sweden and SEK 40 million in the Baltics). The impact was largely as expected with the main headwinds coming from lower international roaming, declining equipment and mobile prepaid sales and suspension of premium sports in TV. At the same, time we have refused to stay reactive during the pandemic. Instead, we have pushed some parts of our transformation program forward, and we have launched our first 5G sites, as the only Swedish operator being able to provide real 5G speeds.
Despite the headwinds from COVID-19, we were able to grow underlying EBITDAaL by 4% on a Group level with 3% in Sweden and 8% in the Baltics. Underlying EBITDAaL was supported by last year’s synergies which had an annualized run-rate of SEK 800 million at the end of 2019, translating into SEK 200 million of underlying EBITDAaL on a quarterly basis. Since we reinvested some of the roughly SEK 100 million of synergies that we realized in Q2 2019, the net effect compared to last year was more than SEK 100 million this quarter. In addition, we were able to do some short-term mitigating actions.
Group organic end-user service revenue (EUSR) declined by 2% in the quarter with the Baltics growing by 6% while Sweden declined by 3%. In Sweden, consumer EUSR declined by 2% as continued growth in mobile postpaid (4%) and fixed broadband (5%) was offset by declining mobile prepaid (-11%), digital TV (-12%), and fixed telephony & DSL (-21%). Consumer mobile postpaid remained resilient with solid net intake of 18,000 revenue generating units (RGUs). Average spend per user (ASPU) declined by only 1% compared to Q2 2019 despite a ~3 percentage point headwind from roaming. Similarly, fixed broadband showed solid results in the quarter with net intake of 10,000 RGUs and slight ASPU growth, in-line with pre pandemic trends. Mobile prepaid volumes deteriorated significantly with a net intake of -41,000 as lower traffic to retailers and lack of tourism had a negative effect on sales. The decline in EUSR from digital TV accelerated due to lower sales and suspension of premium sports packages leading to an ASPU decline of 8%. We expect TV trends to improve in the second half of the year as sports return and price adjustments take effect.
On the back of product improvements throughout 2019 such as upgrades to broadband speed and mobile data, we continued to implement backbook price adjustments on part of the fixed broadband and mobile postpaid customer base in the quarter. We reached roughly half of the total expected effect from price adjustments in the Q2 results and we expect to reach the full effect in Q3. We have notified almost all affected customers already and see a limited impact on churn levels, giving us comfort that the more-for-more strategy works.
Swedish business EUSR declined by 6%, driven by continued price pressure, lower international roaming revenue, lower contract activation during the pandemic and continued decline in legacy fixed services.
As we now have greater clarity on the impact of the pandemic and our ability to mitigate through cost reductions, we reinstate our guidance for 2020. Our focus for 2020 will be to defend underlying EBITDAaL. We base this on the assumption that the negative effect on underlying EBTIDAaL from COVID-19 will be approximately SEK 100-120 million per quarter throughout the year. As the incremental benefit from last year’s cost reductions abate in the second half of 2020, we will compensate the drop in underlying EBITDAaL through additional cost reductions. We enter Q3 2020 with an annualized run-rate of SEK 100 million in structural cost reductions and will initiate further savings to reach our 2020 guidance.
We expect capex excluding spectrum and leases to be SEK 2.5-3.0 billion in 2020 as we begin the rollout of 5G and upgrade our fixed network in Sweden. With our long-term strategy intact, we reiterate our guidance of low single-digit EUSR growth, mid-single-digit growth in underlying EBITDAaL and annual capex excluding spectrum and leases of SEK 2.8-3.3 billion for the mid-term.
Reinstating the extraordinary dividend
With more certainty in our ability to defend underlying EBITDAaL this year and return to growth next year, the Board has decided to bring back its proposal to distribute an extraordinary dividend of SEK 3.50 per share this year. The Board expects to call for an Extraordinary General Meeting, to be held in early September 2020. Pending shareholder approval, the extraordinary dividend will be distributed on October 7 along with the second tranche of the ordinary dividend. Barring any unexpected deterioration in the market during the second half of the year, we expect to be comfortably within our target leverage range of 2.5-3.0x underlying EBITDAaL by the end of the year after the distribution of the extraordinary dividend and the second tranche of the ordinary dividend.
Over the next few months, Tele2 will continue to monitor the impact of the pandemic and execute on mitigating actions to defend the underlying EBITDAaL, generate cash and maintain a strong balance sheet. Doing so successfully will enable Tele2 to pick up where we left off before the pandemic and continue executing on the mid-term growth strategy and business transformation program.
This is my last quarter as President and CEO of Tele2. Leaving was not an easy decision for me and there is no good time to leave a great company, but we have a highly capable and motivated team to make the next chapter of our strategy happen and I will cheer them on from the sideline. The sign of a resilient company is its ability to adapt quickly. Tele2’s progress so far during these difficult times, switching focus away from growth, toward defending underlying EBITDAaL, demonstrates that this company is resilient and will remain so. I would like to extend my sincere gratitude to everyone who made this journey possible and supported the team and me. It has been a true honor.
President and Group CEO