CEO Word Q4 2018
In Q4 the transformation of the Group which was initiated in the beginning of 2018 was concluded through the approval of the Dutch merger, conclusion of the merger with Com Hem and the exercise of the put option in Kazakhstan. All this paving the way for the next step in Tele2’s evolution and immediately following the merger with Com Hem we took the first step towards becoming an integrated operator through the launch of FMC offers in Sweden. The restructuring process has started with a 100 percent upgrade to the cost reduction target, to be realized faster than originally expected. Both Tele2 and Com Hem delivered on full-year guidance and we now announce guidance for 2019 and the mid-term for the combined company.
Q4 2018 and full year summary
Group organic end-user service revenue (EUSR) grew by 1 percent for the quarter with the Baltics growing 7 percent while Sweden declined by 1 percent. Group adjusted EBITDA grew by 11 percent, or 4 percent adjusting for certain non underlying items in Sweden and Croatia, with the Baltics growing by 10 percent and Sweden by 3 percent, excluding SEK –46 million of provisions mainly related to a court case regarding copy right levies. We delivered on our full year guidance for both Tele2 and Com Hem with Tele2 EUSR growth of 5 percent, adjusted EBITDA of SEK 7.2 billion and capex of SEK 2.1 billion (including Kazakhstan), while Com Hem grew underlying EBITDA by 4 percent and had capex of SEK 1.1 billion (based on old Com Hem reporting).
In the Sweden Consumer segment, total EUSR was flat as growth in core services was offset by decline in legacy services and Landlord & other. Core services grew by 5 percent, with Mobile Postpaid growing 4 percent, Fixed broadband growing 10 percent and Digital TV via Cable & Fiber flat. We see great opportunity to enhance this growth in coming years as we launch Com Hem mobile and migrate customers into FMC benefit plans through the more-for-more strategy. Legacy services, including Mobile Prepaid, DTT and Fixed telephony & DSL, remain a drag on overall growth with a combined decline of 12 percent. The strategy for these services is to maximize profitability by taking out cost while gradually moving customers into core services which will improve customers satisfaction, reduce churn, increase ASPU and make them eligible for FMC benefits.
Taking steps to focus our geographical footprint
After approval by the competition authorities we closed the merger in the Netherlands. The EUR 190 million consideration was received in January and we now look forward to being a 25 percent shareholder in a strong Dutch challenger as the business improves profitability in coming years. We exercised the put option in Kazakhstan and expect the deal to close around mid-2019. These transactions are not only financially beneficial but will also enable us to focus on our core Baltic sea region and reduce organizational complexity in the entire Group.
With the combined talent of two great companies and a roadmap of exciting initiatives, I see a bright future for Tele2 in 2019 and beyond
As we reduce our geographical footprint, most of our revenue comes from Sweden which is a mature market where growth does not come easy. The goal is to grow top line slightly faster than the market, reduce cost through the announced synergies, restructuring and future cost reduction programs to deliver higher adjusted EBITDA growth, while keeping capex at low levels to deliver attractive cash flow growth which can be distributed to shareholders.
Strategy initiatives to deliver above-market growth
In the Baltics, we will largely stay the course and capitalize on growing data consumption and smartphone penetration, while looking at options to further strengthen our mobile-centric product portfolio.
In the Sweden Consumer segment we will ramp up the SEK 450 million of revenue synergies over the next five years by driving FMC through the more-for-more strategy to increase customer satisfaction. We will do this in three main ways. 1) Reducing churn by giving existing customers an incentive to stay, such as higher data or speed, simply by opting in to an FMC benefit plan. 2) Increasing RGU/customer by selling mobile to fixed customers through the new Com Hem mobile service. This will boost customer ASPU and reduce churn as customers can opt into a FMC benefit plan. As this involves taking market share we want to be careful and not compete aggressively on price and therefore expect a gradual penetration in the fixed base over time. 3) Selling fixed services into the mobile base. Similarly, this will likely be a gradual ramp up to increase customer ASPU and reduce churn over time.
The foundation of the more-for-more strategy is customer satisfaction. By giving customers more of something that they value, such as product upgrades, more services or other enhancements, we increase customers satisfaction. We can then get a higher return from the customer, either through reduction in churn, or through price adjustments as more satisfied customers are willing to pay more for a better experience. In addition, a more-for-more FMC strategy with focus on churn reduction and ASPU growth in the existing customer base will, over time, make us less dependent on gross adds, and reduce sensitivity to aggressive pricing moves by competitors.
In the Sweden Business segment we will apply a different strategy, aimed at growing revenue through market share gains. As a number three in the segments of the business market that we mainly target, there is room to take share and drive growth through volumes rather than price. In parallel, we will make structural cost savings and rationalize the product portfolio to focus on profitable OnNet revenue growth.
Cost reduction to deliver mid-single adjusted EBITDA growth
Through the integration process which started after the merger with Com Hem we have identified additional cost savings and now aim for an annual run rate of SEK 900 million, double the previous target. We also aim to deliver this faster than previously expected, now within three years instead of five, and half to be realized by the end of 2019 on a run rate basis. In addition to improving profitability, these structural changes will help create a more agile and efficient organization that can move quickly and adapt to changing market environments and shifts in technology.
Further down the line there is a potential opportunity for more structural changes involving areas such as network, IT and brand portfolio. This potential next step is more transformational and would turn Tele2 into what it needs to be in the future – a truly integrated FMC challenger.
New guidance and shareholder remuneration
The aforementioned commercial strategy initiatives and cost transformation is how we arrive at the new guidance for 2019 and the mid-term. We guide to flat EUSR growth in 2019, ramping up to low-single digit in the mid-term as we gradually deliver revenue synergies. We guide to mid-single digit adjusted EBITDA growth, mainly driven by opex reduction in the near term, and a mix of revenue growth and continued cost reduction mid-term. Combined with a capex guidance of SEK 2.9 3.2 billion in 2019 and SEK 3.0-3.5 billion annually mid-term, cash generation should increase over time and we intend to distribute that cash to shareholders.
For this year, the Board intends to propose an ordinary dividend of SEK 4.40 per share (SEK 3.0 billion) paid out in two tranches in May and October. In addition, the Board intends to distribute available proceeds from the transactions in the Netherlands and Kazakhstan once the Kazakhstan sale is closed.
We are in the beginning of transformational period for Tele2 with the start of many ambitious initiatives. We see a year full of positive change ahead of us as we execute on the cost synergies, establish Tele2 as an FMC player in the Swedish consumer market, launch Com Hem mobile, and start the transformation of the Sweden Business segment. With the combined talent of two great companies and a roadmap of exciting initiatives, I see a bright future for Tele2 in 2019 and beyond.
President and CEO