CEO Word Q1 2020
This quarter we took an additional step to focus our geographical footprint by closing the sale in Croatia. We saw continued execution in the Baltics and operational progress in Sweden Consumer with the strongest quarterly mobile postpaid net intake in several years. The fixed-mobileconvergence (FMC) strategy in Sweden progressed well, with 232,000 customers now on FMC offers, and we recently took an important next step in our FMC journey with the launch of Comviq broadband.
Maintaining strategic focus in a time of uncertainty
Thanks to the strategic initiatives that Tele2 has taken over the last few years we are now more resilient and stable than ever. We have moved our geographical footprint toward markets where we have scale and consistent cash generation. Our focus has shifted from growth through market share gains and business expansion, towards optimizing the value of our existing customer base through convergence, and we have a structured plan for business transformation and digitalization. This strong foundation supports us as we face the unavoidable challenges of the corona pandemic. The fact that we almost entirely closed down all our offices over a night, and had a fully functioning remote organization the next day, speaks to the level of digitalization we have already achieved in our way of working. Even though the pandemic creates uncertainty near-term, we can still carry on with our existing plan to create sustainable value for the long-term. This year we have launched several new growth drivers in Sweden which will contribute to stable long-term growth. We are rebuilding our enterprise business in Sweden to make it more stable and profitable over time. We continue to drive our mobile centric convergence strategy in the Baltics. We have initiated a business transformation program to deliver opex reduction of at least SEK 1 billion over three years. These pillars of our strategy remain intact and make us confident that we can deliver on our mid-term guidance.
Defending underlying EBITDAaL through cost control
Tele2’s services are now more important than ever as connectivity is a musthave when society rapidly transforms to limit the effects of the pandemic. But even so, our business does face challenges such as decline in store sales, reduced international roaming and lower demand from our business customers as they go through the tough economic times. While our view on the mid-term remains unchanged, the pandemic creates a degree of uncertainty in our near-term forecasts. We are therefore forced to suspend our guidance for 2020 until we gain more clarity on the longevity and impact of the outbreak. Since we cannot count on EUSR growth to support underlying EBITDAaL this year, we will defend our underlying EBITDAaL through cost control instead. By shifting focus away from EUSR growth this year we can free up resources by pausing or temporarily scaling down some initiatives while fast-tracking part of our planned long-term cost reductions. While we continue to execute on our long-term strategy, we will monitor the impact of the pandemic and evaluate mitigating actions to ensure that we defend our underlying EBITDAaL, generate cash and maintain a strong balance sheet even as we face operational headwinds in the near-term.
Temporarily postponing the extraordinary dividend
While we have a strong balance sheet and a resilient business model which is cash generative even in volatile times, the global pandemic creates uncertainty. The Board believes that it is prudent to maintain a financial buffer until we gain more clarity on the length and impact of the outbreak and has therefore decided to withdraw its proposal to the Annual General Meeting in May on distribution of the extraordinary dividend of SEK 3.50 per share, and postpone the decision. This decision is not based on the current state of the company or the balance sheet. In fact, with the SEK 2 billion of proceeds from the sale of Croatia and cash generation of SEK 1.3 billion in the quarter, our leverage has come down to 2.3x, which is below our target level of 2.5x-3.0x. Even if we were to distribute the extraordinary dividend along with the planned first half of the ordinary dividend in May, we would be comfortably within the target range based on the Q1 2020 numbers. However, in light of the current situation where our EUSR outlook for the year is uncertain depending on the length and impact of the pandemic, and we need to focus on cost control to defend our underlying EBITDAaL, there is a merit to maintaining a comfortable buffer. The Board’s proposal to the Annual General Meeting on May 11 concerning ordinary dividend of SEK 5.50 per share to be paid out in two tranches in May and October 2020 remains unchanged. Once we get more clarity on the impact of the pandemic, the Board expects to call for an Extraordinary General Meeting to approve distribution of the extraordinary dividend.
Q1 2020 summary
Group organic end-user service revenue (EUSR) was flat in the quarter with the Baltics growing by 10% while Sweden declined by 1%. Group underlying EBITDAaL declined by 1% organically in the quarter, driven by a 1% decline in Sweden while the Baltics grew by 4%. In Sweden, consumer EUSR was roughly flat as continued growth in mobile postpaid (4%) and fixed broadband (5%) was offset by declining digital TV (-6%), mobile prepaid (-1%) and fixed telephony & DSL (-17%). We saw improvement in mobile postpaid with the strongest quarterly net intake in several years and stable Average Spend Per User (ASPU) supported by high incoming ASPU as the Tele2 family offer incentivized new customers to take unlimited price plans. On the back of product improvements throughout 2019 such as upgrades to broadband speed and mobile data, backbook price adjustments were successfully implemented on part of the fixed broadband and mobile postpaid customer base in the quarter. We expect to see the effect on ASPU starting in Q2 2020 with the full effect in the second half of the year as we execute additional batches, including TV in coming quarters. Swedish business EUSR declined by 6%, driven by an accelerated decline in fixed EUSR. The mobile EUSR decline was similar to previous quarters as the pressure on ASPU continues. Implementation of new contracts within both large enterprise and SME in the quarter led to a strong net intake of 31,000 mobile Revenue Generating Units (RGUs). While we are seeing the benefits from last year’s cost reductions, there are a few headwinds resulting in a dip in underlying EBITDAaL growth. In the quarter we saw the expected benefits from the last years’ synergy program which had a 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 realized roughly SEK 50 million of synergies in Q1 2019, the net effect compared to last year was SEK 150 million this quarter. Strategic initiatives taken in order to secure long-term growth such as launch of Com Hem Play+ and Penny, as well as above normal spend on sales to drive volume momentum in Sweden resulted in roughly SEK 50 million of additional opex in the quarter. Cost savings were further offset by continued EUSR decline in Sweden as we are yet to see effects from price adjustments in Sweden Consumer and support from the Sweden Business turnaround which was set to materialize gradually throughout the year. In addition to these factors which were expected, the Group lost roughly SEK 70 million of underlying EBITDAaL as a result of the pandemic and bad debt provisions, resulting in a 1% decline in underlying EBITDAaL. This was mainly related to lower equipment margins, reduction of international roaming and higher bad debt provisions.
Executing on the next phase of the FMC strategy
In 2019 we initiated the FMC strategy by gradually rolling out FMC offers through all our consumer brands in Sweden, and we now have almost 80% of the total overlapping mobile and fixed customers on FMC bundles, in total 232,000 customers. We have thus largely completed the first phase of the FMC strategy and created a solid base of loyal, full-service customers which will provide stability and potential for growth in the consumer business. In 2020 and onward we will execute on the next phase of the FMC strategy which will be driven by organic FMC sales and ramp up of cross sales among the Tele2 consumer brands. This next phase of the FMC strategy is aligned with our overall business transformation program, rooted in our new vision of becoming the smartest telco in the world, creating a society of unlimited possibilities. The end goal is to cater to every type of customer in the consumer market through distinctly positioned leading brands, providing the right type of service, delivered in the right way, at the right price level for each segment of the market. We have roadmap of initiatives that will help us achieve our targets, some of which have already been launched this year: Our new brand Penny which gives us an FMC-brand in the digital no frills segment, and our OTT service Comhem Play+ which helps us transition our TV offering into the future. In April we took another step toward optimizing our brand portfolio by turning Comviq into an FMC brand. We expect this to reduce churn among Comviq postpaid customers, take additional broadband share in open networks and boost our FMC strategy as we now offer FMC bundles in the mid-tier segment.
While we will have a number of headwinds this year which will make it difficult to achieve our original plan for 2020, we will carry on with strategic initiatives that create value in the long term. This includes the commercial launch of Penny, the ramp up of Comviq broadband, the rollout of Comhem Play+, and the business transformation program to deliver at least SEK 1 billion of cost reduction over three years. We are confident that continued execution on this long-term strategy will help us deliver our mid-term guidance of low-single digit growth in EUSR and mid-single digit growth in underlying EBITDAaL beyond 2020.
President and Group CEO