CEO Word Q2 2019
In the second quarter of 2019 we took additional steps to focus our geographical footprint by closing the sale in Kazakhstan and announcing the sale of our Croatian business. We also propose an extraordinary dividend of SEK 6 per share to distribute the proceeds from the transactions in Kazakhstan and the Netherlands to our shareholders. The Com Hem integration is well under way and we realized an additional SEK 100 million of synergies, reaching our full year run-rate target of SEK 450 million already after six months. In Sweden, we launched a rebranding campaign of the Tele2 brand and continued to see progress on our fixed mobile convergence (FMC) strategy with 93,000 customers now on FMC-offers, paving the way for future revenue growth as we reduce churn and increase pricing power.
Q2 2019 summary
Group organic end-user service revenue (EUSR) declined by 1 percent with the Baltics growing 6 percent while Sweden declined by 2 percent. In Sweden there was pressure on EUSR within both the consumer and business segments. In the consumer segment we saw a 1 percent growth in mobile EUSR while fixed EUSR declined by 3 percent because of lower fixed-line price increases compared to last year and volume decline in legacy services. The business segment had a strong mobile RGU intake in the quarter but pressure on ASPU resulted in continued EUSR decline. Group underlying EBITDA excluding IFRS 16 grew by 3 percent organically, with the Baltics growing by 10 percent and Sweden by 3 percent driven by synergies which were partially offset by reinvestment into the business and pressure on EUSR.
Future growth through a combination of volume and price via FMC
In the Sweden Consumer segment, we see two ways to create revenue growth going forward – through volume growth and price adjustments. During the first half of 2019, our efforts have been aimed at the first part of this equation, and we have made good progress so far. We saw strong volumes in the quarter with net adds for core services (mobile postpaid, fixed broadband and digital TV via cable & fiber) of 34,000 RGUs as a result of
successful rebranding of the Tele2 brand, attractive introductory pricing on broadband and reduced churn due to lower price increases and increased FMC penetration, as well as a widened pricing gap between Tele2 and competitors. While volume growth is positive as we gain a larger customer base providing recurring revenue, we see pressure on ASPU, resulting in a slowdown in EUSR growth to 2 percent in our core services. Combined with decline in EUSR from legacy services, this resulted in negative EUSR growth in the segment this quarter. The key here is to find a balance between volume and price, and our FMCstrategy is a way to do both. We already see signs of reduced churn for FMCcustomers, helping us grow volumes, and we also see strong pricing power among this customer base as customer satisfaction is significantly higher than for non-FMC customers. Over the mid-term, FMC will be key to create revenue growth through reduced churn, and in the near-term we expect it to support price adjustments which we plan already this year.
Continued delivery on cost synergies
The transformation of Tele2 and the integration with Com Hem made great progress this quarter and we realized an additional SEK 100 million of cost synergies, reaching our full year annual run-rate target of SEK 450 million already after six months. We now aim to reach an annual run-rate of SEK 600 million by the end of 2019. The cost synergies were mainly related to headcount reductions across the Swedish organization as well as changes to the organizational structure to improve collaboration across the network, IT and commercial departments. We incurred SEK 227 million of integration costs this quarter and have so far incurred SEK 592 million of the expected SEK 1 billion of restructuring costs. While we realized SEK 100 million of cost synergies in the quarter, the net effect in underlying EBITDA was partly offset by revenue decline as well as investments into the business which will help us return to revenue growth over time, such as the rebranding of Tele2 and product development connected to our FMC offerings. We expect to return to revenue growth as we ramp up revenue synergies next year and execute on price adjustments later this year. Meanwhile we see an opportunity for further cost reduction by turning Tele2 into a truly integrated operator. We are currently planning this second phase of cost reductions and aim to communicate scope and timing later this year.
We see an opportunity for further cost reduction by turning Tele2 into a truly integrated operator.
Taking steps to optimize our network strategy
As a part of our ongoing effort to ensure that we have the most reliable and cost-efficient networks in the countries where we operate, we announced two new initiatives in the quarter. We signed an agreement with the operator Bite to create a network sharing JV in Latvia and Lithuania. Given the success of our network JVs in Sweden, we are confident that this will help us improve network capacity and coverage for our customers, while reducing cost and capex and strengthen our mobile centric convergence strategy. In Sweden we have initiated an audit of our mobile and IP core networks to ensure that we have a reliable network, prevent future outages and find potential improvements in our processes. We see this audit as a prudent step to secure delivery of high-quality services to our customers and we do not expect that this will result in need for additional investments above the levels we guide for.
With the steps taken to optimize our geographical footprint, we can now focus on our core Baltic Sea region where we see a future of sustainable revenue growth and cash flow generation. We will continue to deliver cost synergies in Sweden during the second half of the year, while ramping up our initiatives to return to revenue growth. We expect initiatives taken this quarter, such as the rebranding campaign and introduction of FMC offers to the Boxer customer base, to help us return to revenue growth next year and support price adjustments in the near term. We will continue working towards the announced cost reduction target and take concrete steps towards our vision of Tele2 becoming a truly integrated operator, running an agile operation that can serve our customers even better while operating the business more efficiently.
President and CEO