CEO Word Q3 2019

Nine months into the year we are on track to deliver on the full-year guidance with improving trends in the Sweden Consumer segment and continued execution in the Baltics. We realized an additional SEK 150m of synergies from the Com Hem integration and raise our year-end run- rate target to SEK 750 million. The proceeds from the transactions in Kazakhstan and the Netherlands were distributed to shareholders in August through an extraordinary dividend of SEK 6 per share. Tele2’s mobile network was recognized as best in Sweden in the P3 Mobile Benchmark 2019 test. We made operational progress in the Swedish consumer segment, strengthening our more-for-more strategy with updated Tele2 price plans, and continued to grow our fixed mobile convergence (FMC) base with 141,000 customers now on FMC-offers.

Q3 2019 summary

Group organic end-user service revenue (EUSR) was flat with the Baltics growing 10 percent while Sweden declined by 1 percent. In Sweden, the consumer segment saw slight growth (+0.4%) in EUSR for the first time since Q1 2018. This was driven by strong growth in mobile postpaid (+4%) where we had a second consecutive quarter of strong net intake following the successful rebranding campaign of Tele2 and increased marketing and sales activity. This was partially offset by continued decline in fixed EUSR (-2%) where volume decline in legacy services continued. In addition, EUSR from fixed broadband (+5%) and digital TV cable & fiber (-4%) was affected by lower backbook price increases compared to the previous year which put pressure on ASPU, offsetting effects of continued volume growth. The Swedish business segment remains under pressure with EUSR declining by 4 percent as the ASPU pressure in the market persists and initiatives taken to return to growth are yet to have an effect.

Group underlying EBITDA excluding IFRS 16 grew by 5 percent organically, with the Baltics growing by 6 percent and Sweden by 4 percent driven by synergies which were partially offset by reinvestment into the business and decline in EUSR.

Monetizing customer satisfaction through volume and price

The key to reach our mid-term growth target is to achieve sustainable growth in our largest segment, Sweden Consumer. To do this, we need to strike a balance between growth through volume and price, both of which are driven by our most important KPI – customer satisfaction. All initiatives that we have launched this year such as the FMC-strategy, the launch of Com Hem mobile and rebranding of Tele2, have been done in order to increase customer satisfaction. So far, we see the effect of these initiatives on volume growth with Q3 2019 marking the second consecutive quarter of multi-year record net intake. The success of these initiatives has allowed us to take the next step to monetize customer satisfaction through pricing as we carried out front book price adjustments on Com Hem broadband and Tele2 postpaid in the quarter.

We also took a next important step to enable the full potential of the Tele2 brand by introducing a new family offer. After the successful rebranding campaign, we see the family offer as a way to establish Tele2 as a premium brand for the household. We expect the family offer to support volume growth and encourage data consumption as families are incentivized to take more sim cards and higher data buckets. By launching front book price adjustments simultaneously, we offset the ASPU-dilutive effects of the family offer and aim for stable growth in both volume and ASPU over time. Along with the FMC-strategy and service improvements in our other brands, we expect this to help us drive customer satisfaction which we can monetize as we follow up with future back book price adjustments.

Executing on cost reduction

In parallel with the initiatives to take Tele2 back to sustainable revenue growth we execute on cost reduction to improve profitability and create a more efficient operation. We delivered an additional SEK 150 million of synergies in the quarter, reaching SEK 300 million year-to-date and an annual run-rate of SEK 650 million at the end of the quarter. Due to faster execution, we raise our target to an annualized run-rate of SEK 750 million by the end of 2019. The cost synergies so far are 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 87 million of integration costs this quarter and have so far incurred SEK 679 million of the expected SEK 1 billion of restructuring costs.

On track to deliver on the full-year guidance.

 

Conclusions from the Swedish network audit

Last quarter, we initiated an audit of our network in Sweden to ensure that we have a reliable network, prevent future outages and find potential improvements in our processes. The audit is now finalized, and we find the results reassuring. The main takeaway is that we have excellent quality in the Radio Access Network and that our planned core network upgrades are in-line with audit recommendations, with no need to increase investments beyond our capex guidance. The quality of our network was actually recognized as the best in Sweden by the P3 Mobile Benchmark 2019 recently, and earlier this year, Tele2’s network was also awarded for the best 4G coverage in Sweden in another benchmark by P3.

However, the audit concluded that there is room for further improvement in our routines related to managing changes, incidents and technology life cycles. The good news is that this can be addressed through simplification, standardization and automation of our processes. We have already started addressing these issues and during the summer we started the reorganization of the technology department as part of the integration plan following the merger with Com Hem. Over the next few quarters we will continue making improvements guided by the insights from the audit report in order to ensure that we maintain a reliable and cost-efficient network.

Recognitions for our sustainability efforts

It is encouraging to see the recognition we have received in several recent sustainability rankings. We improved our overall score in RobecoSAM, with especially high scores for our Governance and Privacy protection efforts, representing two of our focus areas.

In the “Walking the Talk”-report by Misum at Stockholm School of Economics, Tele2 got the highest score among all technology and telecommunications companies in the “walk” category, being acknowledged for communication and accountability in terms of actual progress. Our efforts in the “Talk” category, how well strategic direction is set and communicated, were recognized with an equally high score, confirming that we are careful to not overcommunicate our actual efforts.

Finally, we earned a 35th place globally in Equileap’s 2019 Gender Equality Global Ranking & Report. As such, Tele2 ranked second among all Swedish companies and third among telecom companies globally.

Looking forward

We look forward to delivering on our full year guidance for 2019 as we drive further improvements in the Swedish Consumer segment, continue the cost synergy program and maintain momentum in the Baltics. We will build on the positive development in the Sweden Consumer segment by establishing Tele2 as a premium household brand, gain traction with the new family offer, and continue to drive FMC-penetration in our customer base. We will also prepare the company to reignite revenue growth in 2020 and beyond by building and monetizing customer satisfaction in the Sweden Consumer segment, aim at taking market share in the Sweden Business segment and continue executing in the Baltics while solidifying plans for further efficiencies as a truly integrated operator.

 

Anders Nilsson

President and CEO