CEO Word Q4 2019

This quarter marked the end of a transformative year as we completed the integration of Com Hem and set Tele2 up for its journey to become the smartest telco in the world. We delivered on our financial guidance for 2019, supported by execution of the cost synergies. Completion of the Com Hem integration ahead of the original plan allows us to initiate the next phase of transformation to build growth momentum and reduce cost by at least SEK 1 billion in the next three years. The Baltics continued to deliver this quarter and we are pleased to see Estonia returning to full- year growth. The fixed mobile convergence (FMC) strategy in Sweden is progressing well with 219,000 customers now on FMC-offers.

Q4 2019 and full-year summary

Group organic end-user service revenue (EUSR) was flat in the quarter with the Baltics growing by 8% while Sweden (now including IoT) declined by 1%. Group underlying EBITDA excluding IFRS 16 grew by 10% organically in the quarter, with the Baltics growing by 9% and Sweden by 11% driven by synergies as we concluded the Com Hem integration. We delivered on our full-year guidance with flat EUSR, underlying EBITDA excluding IFRS 16 growth of 6%, and capex excluding spectrum and leases of SEK 2.4 billion.

In Sweden, consumer EUSR was roughly flat as continued growth in mobile postpaid (3%) and fixed broadband (4%) was offset by declining digital TV (-6%), mobile prepaid (-1%) and fixed telephony & DSL (-22%). The operational performance was similar to what we have seen so far this year. We saw steady volume growth in our core services mobile postpaid, fixed broadband and digital TV cable & fiber while declines continued in the legacy services. ASPU-trends also largely continued with flattish devel- opment in mobile postpaid while fixed broadband and digital TV cable & fiber continued to decline as effects of lower backbook price adjustments in 2019 continue.

Within Swedish business we continue to see pressure on EUSR, declining by 2% (including IoT) as the ASPU pressure in the market persists and initia- tives taken to return to growth are yet to have an effect.

Taking steps to solidify our leadership in a changing TV-market

In a changing TV-market where consumption is shifting from traditional linear content delivered through a box toward on-demand content streamed to multiple devices directly over the internet, it is important for TV-distributors to adapt. To secure our position as the leading Swedish TV-provider and capitalize on this market trend we have launched our own standalone OTT-service, Comhem Play+. Given our scale as an aggrega- tor of video content, an OTT-service is a natural next step as we leverage our ability to bundle the best on-demand content to both enhance the experience of our current TV-customers and reach the untapped pool of customers who were never consumers of traditional TV. While we do not expect this to materially affect our near-term growth it will initially serve as an additional puzzle piece in the FMC-strategy, giving us another tool to improve customer satisfaction through the more-for-more strategy. Over time, we think Comhem Play+ could be a powerful tool to take share in a rapidly growing market where we are not currently present.

Entering a new segment in the connectivity market

In the beginning of February 2020, we took a significant step to optimize our brand portfolio and prepare Tele2 for the future by launching a completely new digital brand called Penny. This brand will initially sell mobile postpaid and fixed broadband services, offering the customer a simple, purely dig- ital experience with prices in-line with other brands in this segment of the market. We believe that this type of brand caters to a new generation of customers which our other brands do not fully capture today. It will allow us to fill a gap in our brand portfolio and finally cover all segments of the consumer market, taking part of a growing segment which will become more important over time.

Laying the foundation for growth through multiple growth drivers

The EBITDA growth we achieved in 2019 was almost entirely driven by cost reduction. While we could sustain this for a few more years with the business transformation program we are initiating in 2020, we need to grow revenue to make this sustainable. From 2020 onward we are aiming for growth and we believe that the foundation we laid in 2019 and initiatives launched in 2020 will take us there. We aim to achieve stable low single-digit growth by running several growth drivers in parallel, without pushing any of them too hard, and avoiding actions that may increase cost or disrupt the business.

For 2020, the main driver of additional growth will be price adjustments in our Sweden consumer business, supported by improvements made to customer experience. Looking at the drivers of EUSR in 2019, mobile post- paid and fixed broadband clearly matter the most. In 2019, these services were driven by volume rather than prices as ASPU was flat while volumes increased by 3% and 5% for mobile postpaid and fixed broadband, respec- tively. With the improvements we are making to customer experience and the continued growth in consumption of these services, there is clearly an untapped potential here.

Over the mid-term we expect our two new growth drivers, Comhem Play+ and Penny, to contribute to sustainable growth as well. Perhaps more importantly, the lean and purely digital nature of these services will help Tele2 transform into the next generation telco and remain relevant to the modern consumer.

Our FMC-strategy is another growth driver which is already well under- way. We introduced FMC-benefits to our Comviq customers this quarter and reached a total of 219,000 FMC-customers, covering almost three quarters of the total overlap between our mobile and fixed customers and 15% of the total consumer fixed customer base. This constitutes a growing pool of loyal, happy, full-service customers, providing a solid foundation that creates stability and potential for growth in the consumer business. We see a clear difference in churn for these customers and, as we develop our toolkit even further with services such as Comhem Play+ and make further improvements to our brand portfolio, the FMC-strategy will become increasingly important.

Unlocking SEK 1 billion of opex reduction in the next phase of business transformation

This quarter we concluded the integration of Com Hem - two years ahead of plan. We delivered roughly SEK 200 million of additional synergies in the quarter, reaching SEK 500 million for the full year and an annual run-rate of SEK 800 million at the end of the quarter. The remaining SEK 100 million of the SEK 900 million target will be rolled into the next phase of business transformation where we expect to unlock at least SEK 1 billion in opex reduction over the next three years. These savings will come in addition to the SEK 800 million, meaning that we will have reduced cost by at least SEK 1.8 billion between 2018 and 2022.

While a large portion of the savings will come from removal of legacy IT-systems, this will be a transformation across the entire Swedish orga- nization as we go step-by-step to remove silos, reduce double functions and enable more efficient use of resources. Since these cost reductions are structural in nature, such as including IT transformation, they will be more back-end loaded and will mainly be realized in 2021 and 2022. The net effect of cost savings is expected to be minor in 2020 as we intend to reinvest savings into our two new product launches this year.

Guidance and shareholder remuneration

We reiterate our guidance of low single-digit EUSR growth, mid-single-digit growth in underlying EBITDAaL in 2020 and over the mid-term. We expect capex excluding spectrum and leases of SEK 2.5-3.0 billion in 2020 and SEK 2.8-3.3 billion annually over the mid-term. As proven by the performance in 2019 where EUSR was flat, underlying EBITDA excluding IFRS 16 grew by 6% organically, and underlying EBITDA excluding IFRS 16 minus capex exclud- ing spectrum and leases grew by 13%, this type of model leads to significant cash flow generation, and we intend to distribute that cash to shareholders.

For this year, the Board proposes an ordinary dividend of SEK 5.50 per share (SEK 3.8 billion), a 25% increase compared to the previous year, paid out in two tranches in May and October 2020. In addition, the Board pro- poses an extraordinary dividend of SEK 3.50 per share (SEK 2.4 billion), to be paid out in May 2020.

Looking forward

While 2019 was a year of preparation, laying the foundation for the future with the integration of Com Hem, the launch of the FMC-strategy and opti- mization of the geographical footprint and organizational structure, 2020 and beyond will be about execution. Thanks to the hard work and dedication of the Tele2 employees throughout 2019, we enter 2020 with several new initiatives which will help us both to reignite growth and to turn Tele2 in to a leaner and more digital company over time.

 

Anders Nilsson
President and CEO