TLTZY Tele2 AB (PK)

 

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INTERIM REPORT THIRD QUARTER 2018

Q3 2018 HIGHLIGHTS

■ Mobile end-user service revenue growth of 5 percent and adjusted EBITDA growth of 9 percent, like-for-like ■ Rolling 12 months operating cash flow growth of 14 percent ■ Sweden returns to growth of 1 percent in mobile end-user service revenue, driven by B2B, and adjusted EBITDA growth of 6 percent ■ Continued momentum in our investment markets with like-for-like growth in mobile end-user service revenue of 22 percent in Kazakhstan and 12 percent in Croatia ■ Extraordinary General Meeting and European Commission approved Com Hem merger, with expected closing on November 5 ■ 2018 financial guidance upgraded (see page 5)

 

 

Continuing operations

Figures presented in this report refer to Q3 2018 and continuing operations unless otherwise stated. Figures shown in parentheses refer to the comparable periods in 2017. Tele2 Netherlands is reported as a discontinued operation, with comparative figures represented. Discontinued operations also include the former operations in Austria, Russia and Italy. See Note 11.

 

Non-IFRS measures

This report contains certain non-IFRS measures which are defined and reconciliated to the closest reconcilable line items on pages 14–15.

Tele2 – Interim Report January-September 2018 1 (32)

 

 

CEO Word, Q3 2018

 

The final quarter before the closing of the merger with Com Hem was once again a quarter of solid business trends, allowing us to make another upgrade of our full-year guidance. Mobile end-user service revenue growth was 5 percent and adjusted EBITDA growth was 9 percent, like-for-like. Our investment markets continue to outperform while Sweden remained resilient, returning to mid-single digit EBITDA growth as the drag from Roam Like at Home is now behind us. Operating cash flow for continuing operations grew by 14 percent on a rolling 12-months basis.

 

 

“Tele2 now has a well-defined roadmap to create a leading connectivity provider around the Baltic Sea, with optionality in our investment markets.”

 

In Sweden, the integration planning and the business momentum both made significant progress. Following an eventful first half of the year, competition in the mobile consumer market remained competitive but stable in Q3, as was our consumer mobile end-user service revenue. For the second consecutive year, Comviq was named the strongest telecom brand in the market by Evimetrix Swedish Brand Award, based on an extensive consumer survey. Furthermore, the SKI study published this week ranks Tele2 the main brand with the strongest customer satisfaction in the consumer market, and also making the largest improvement in the B2B market where it is now a close no. 2. Within B2B we are reporting 3 percent mobile end-user service revenue growth as we start to reap the benefits of the consistent customer wins over the past 18 months, despite market pressure. The total adjusted EBITDA in Sweden reverted to a healthy growth of 6 percent, helped by lower marketing expenses and strong network cost efficiency.

In the Baltics, we are now seeing tough comps following the surge in growth during 2017. Despite this, and despite one-off compensation costs for a roaming outage in August, we report like-for-like growth of 3 percent in mobile end-user service revenue and 9 percent in adjusted EBITDA. Excluding the effects of the roaming issue, mobile end-user service revenue grew by 5 percent. The drivers that underpin growth in the Baltics - rising data consumption, 4G smartphone penetration and postpaid penetration – are intact, as are therefore our mid-term growth aspirations.

Our Kazakh JV continues its tremendous journey from having posted adjusted EBITDA losses less than three years ago to a solid 34 percent margin today. Revenue growth remains above 20 percent, like-for-like, and we received another SEK 153 million of repayments on our shareholder loan in the quarter. We are strongly focused on further data monetization and are moving towards increased tariff flexibility for consumers, while at the same time limiting the vast unpaid usage of social media – in particular on video platforms.

In terms of momentum, Croatia is not far behind with a 12 percent growth in mobile end-user service revenue and 20 percent growth in adjusted EBITDA on an underlying basis, driven by our popular Unlimited services for smartphones and mobile broadband, as well as lower spectrum costs benefitting EBITDA.

Together, these two remaining investment markets have produced over SEK 700 million of positive operating cash flow (OCF) over the past 12 months, a significant turnaround from having produced a similar-sized OCF loss less than three years ago.

I am also very proud of our results in Equileap’s recent Gender Equality Global Report, where Tele2 is the 6 ^th highest ranked company in the world on gender equality, and the second highest ranked telecommunications company globally. This is a result of our efforts to make Tele2 a strong, diverse and inclusive culture that gives equal opportunities, which come with equally high expectations, to people of diverse personal backgrounds.

With the closing of the merger with Com Hem only a few weeks away, we will soon be ready to take our customer-focused strategy to an even higher level. Tele2 and Com Hem share a common obsession to drive customer satisfaction through network quality and by adding ever more value to the end user. The merged company is now positioned to leverage these platforms even further by reaching out to a combined, larger, customer base and offer ubiquitous, high-quality connectivity and digital entertainment.

Tele2 now has a well-defined roadmap to create a leading connectivity provider around the Baltic Sea, with optionality in our investment markets. We have driven returns through disciplined asset allocation and focused our efforts on the markets where we can win.

The journey to this point has been exciting and memorable, and as I now hand over to the new leadership I want to express my full gratitude to each and every Tele2 colleague who have been part of my Tele2 journey over the past four plus years. Your vibrant, challenger-oriented spirit is the energy that drives Tele2 forward, to ever stronger achievements. I wish all of you every success in the future, as your mission continues to liberate people to live a more connected life.

 

Allison Kirkby
President and CEO

 

Tele2 – Interim Report January-September 2018 2 (32)

 

 

Financial overview

 

Tele2’s financial performance is driven by a consistent focus on developing mobile services on own infrastructure, complemented in certain countries by fixed broadband services and B2B offerings. In addition, the Group concentrates on maximizing the return from legacy fixed line services.

 

Net customer intake amounted to 171,000 (137,000) customers in Q3 2018. The customer net intake in mobile services amounted to 192,000 (159,000), with better intake in Sweden, Lithuania and Latvia compared to last year. The fixed broadband customer base decreased by –5,000 (–6,000), with declines in both Sweden and Germany. In line with the market trend, the number of fixed telephony customers continued to decline. On September 30, 2018, the total customer base amounted to 15,640,000 (15,379,000).

 

Revenue in Q3 2018 amounted to SEK 6,538 (6,098) million. The increase in revenue is mainly explained by strong mobile end-user service revenue growth in the Baltics, Kazakhstan and Croatia as well as more equipment sales in Sweden and the Baltics.

 

Mobile end-user service revenue in Q3 2018 amounted to SEK 3,651 (3,382) million. The increase compared to last year is primarily related to customer and ASPU growth in the Baltics, Kazakhstan and Croatia.

 

Adjusted EBITDA in Q3 2018 amounted to SEK 1,984 (1,771) million, which is equivalent to an adjusted EBITDA margin of 30 (29) percent. The increase in adjusted EBITDA compared to last year is explained by higher profit levels in Sweden, the Baltics, Kazakhstan and Croatia, driven primarily by revenue growth.

 

Operating profit in Q3 2018 amounted to SEK 1,170 (1,119) million and SEK 1,325 (1,154) million excluding items affecting comparability. Operating profit was negatively affected by items affecting comparability totaling SEK –155 (–35) million, consisting of acquisition costs related to the Com Hem merger and integration costs for Com Hem and TDC in Sweden (Note 3).

 

Profit after financial items in Q3 2018 amounted to SEK 937 (871) million.

 

Net profit in Q3 2018 was SEK 673 (687) million. Reported tax for Q3 2018 amounted to SEK –264 (–184) million, where the lower tax cost last year mainly was related to recognition of a deferred tax asset in Germany of SEK 62 million (Note 4). Tax payments affecting cash flow amounted to SEK –97 (–120) million in the quarter.

 

CAPEX in Q3 2018 amounted to SEK 420 (377) million, as investments were higher in all segments apart from Kazakhstan and Other.

 

Free cash flow from total operations in Q3 2018 amounted to SEK 1,179 (1,290) million. This included a change in working capital of SEK 54 (207) million.

 

Net debt amounted to SEK 11,190 (11,338) million and economic net debt amounted to SEK 10,222 (10,698) million on September 30, 2018 and September 30, 2017 respectively, or 1.49 times 12 months rolling adjusted EBITDA.

 

 

Tele2 – Interim Report January-September 2018 4 (32)

 

 

Financial guidance

 

Full-year financial guidance excluding contribution from Com Hem

Tele2 expects to report full-year and fourth quarter results including contribution from Com Hem for the period November 5 – December 31. The following financial guidance is provided on a stand-alone basis, i.e. excluding the contribution from Com Hem. This is consistent with guidance provided earlier in 2018.

 

Tele2 upgrades the following guidance for 2018 for continuing operations in constant currencies: ■ Mobile end-user service revenue growth of mid-single digits (unchanged) ■ Adjusted EBITDA between SEK 7.0 and 7.2 billion (previously between SEK 6.8 and 7.1 billion) ■ CAPEX between SEK 1.9 and 2.2 billion excluding spectrum investments (previously between SEK 2.1 and 2.4 billion)

Financial leverage target and shareholder remuneration framework for Tele2, post the merger with Com Hem

The financial leverage target and shareholder remuneration framework are as follows:

 

■	Enlarged Tele2 will seek to operate within a net debt/adjusted EBITDA range of between 2.5–3.0x and maintain investment grade credit metrics

 

■	Enlarged Tele2’s policy will aim to maintain target leverage by distributing capital to shareholders through:

 

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An ordinary dividend of at least 80 percent of equity free cash flow; and

 

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Extraordinary dividends and/or share repurchases, based on remaining equity free cash flow, proceeds from asset sales and re-leveraging of adjusted EBITDA growth

 

Based on this policy, Enlarged Tele2 is expected to distribute in excess of 100 percent of equity free cash flow to shareholders, through a combination of dividends and share repurchases.

 

Sweden

Net mobile customer intake was positive at 25,000 (13,000), with improvements in both gross intake and churn within B2B, as well as continued strong performance by Comviq postpaid.

Mobile end-user service revenue grew by 1 percent, with the introduction of Roam Like at Home having no remaining impact on the growth rate in Q3.

Adjusted EBITDA grew by 6 percent, despite the continued revenue decline from fixed services, driven by a reduction of marketing expenses and continued strong network cost efficiency.

CAPEX increased driven mainly by higher investments in network and IT development.

 

Sweden Consumer

The price fighter segment continued to be competitive in Q3, with a focus on sign-on bonuses and large data bundles. In the main brand segment, competition was focused on Unlimited offerings and hardware bundles. Tele2 continued to focus on data monetization, driving upgrades to Unlimited.

Consumer mobile end-user service revenue growth was flat, as growth within Comviq postpaid was offset by declines in prepaid and mobile broadband. Data consumption per postpaid customer increased by approximately 30 percent.

 

Sweden B2B

As expected, competition driven by players challenging the incumbent’s premium pricing position results in continued pressure on market pricing.

In the well known Swedish Quality Index survey, Tele2 was recognized a close no. 2 in B2B customer satisfaction, making the largest progress of all brands in the market.

Revenue was stable, with a decline of 3 percent in end-user service revenue driven by falling revenue from legacy products, offset by growth in mobile and equipment revenue. Mobile end-user service revenue grew for the first time in six quarters, by 3 percent, driven by a consistent growth in the customer base over this period.

Significant contract wins in the third quarter included new contracts with Axfood and the municipalities of Kävlinge, Alvesta, Markaryd and Älmhult, as well as contract renewals with Skatteverket, Visma Retail and Landstinget Västmanland.

 

Lithuania

The market competition has focused on multi-play and no-frills offerings, and Tele2 has continued to successfully leverage its strong dual-brand and mobility first position. In the quarter, Tele2 added several big bucket options to meet demand for more mobile data, and made product and tariff simplifications to meet demand for simplicity and price.

All main segments, including consumer postpaid, mobile broadband and B2B, performed well and contributed to a net customer intake of 35,000 (20,000), supported by strong brand perception and low churn.

Mobile end-user service revenue grew by 10 percent in local currency, on the back of an increase in the postpaid consumer and mobile broadband customer bases, as well as rising ASPU, driven by upselling.

Adjusted EBITDA increased by 22 percent in local currency on the back of higher revenue, and the adjusted EBITDA margin rose to 37 (34) percent.

 

Latvia

Competition was focused on back-to-school campaigns with handset promotions and communication of bundled offers. Tele2 introduced family propositions during the quarter.

In an auction for 3.5 GHz spectrum, Tele2 won another 50 MHz for a price of EUR 6.5 million, and now has a leading position for 5G with an uninterrupted 100 MHz in this band. The investment is expected to be recognized as CAPEX in Q1, 2019, when the spectrum becomes available.

The net customer intake was positive at 22,000 (14,000), with growth in both postpaid and prepaid.

Mobile end-user service revenue grew by 3 percent in local currency, driven by ASPU growth mainly related to data monetization from selling larger bundles.

The adjusted EBITDA margin of 37 (39) percent was sustained at high levels due to the increase in mobile end-user service revenue and successful cost management.

 

Tele2 – Interim Report January-September 2018 6 (32)

 

 

Estonia

Initiatives by the competition included video streaming and content offerings, as well as 5G trial services. Tele2 continued to readjust its commercial model towards higher quality by focusing on retail and online, and by moving away from telemarketing.

The net customer intake was negative, partly driven by the continued decline of Starman-branded mobile broadband customers following its takeover by Elisa.

Mobile end-user service revenue declined by 15 percent as a result of the fierce, telemarketing-driven competition in previous quarters, and also in part due to a roaming outage in August. Excluding the effects of the roaming outage, the mobile end-user service revenue was slightly higher than in Q2.

Adjusted EBITDA of SEK 46 (49) million and the adjusted EBITDA margin of 24 (26) percent both represented a decline compared to the corresponding period last year, but a material improvement compared to the previous quarter.

 

 

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Kazakhstan

The competition in the market was similar to previous quarters. Towards the end of the quarter Tele2 took steps to reduce the amount of zero-rated data on social networks, introducing product offerings allowing customers to redistribute the bundle’s contents between data, voice and SMS allowances, without additional charges. This follows from Tele2’s strategy to pursue data monetization while still providing leading commercial offerings to customers who seek great flexibility to consume mobile voice and data.

The net customer intake was similar to last year at 62,000 (61,000). Mobile end-user service revenue grew by 22 percent in local currency, driven by a 4 percent higher customer base and 17 percent higher ASPU.

The adjusted EBITDA margin reached 34 (26) percent owing mostly to growth in mobile end-user service revenue and strong cost discipline.

Low CAPEX relates to lower rollout activities following high investments during the Tele2/Altel network integration period in 2017.

 

Croatia

The market competition was largely focused on converged offers and promotions for content, value-added services and hardware. Tele2 continued to invest in own stores and focused promotions on the unique Unlimited offer. A positive trend for customer satisfaction seen throughout the year continued in the quarter.

Mobile end-user service revenue grew by 12 percent in local currency due to a 7 percent higher customer base and 5 percent higher ASPU, both related in large part to the success of the Unlimited data offerings for smartphones and mobile broadband.

Adjusted EBITDA grew to SEK 130 million, including a SEK 19 million reversal of a provision. Excluding the reversal, adjusted EBITDA grew by 20 percent due mainly to the growth in mobile end-user service revenue and the reduction of the spectrum cost, which saved SEK 15 million compared to the same period in the previous year.

 

 

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Germany

The decline of the customer base continues, however still slower than expected. Revenue fell by 17 percent, like-for-like, to SEK 135 (150) million.

The continued focus on profitability and cash generation through value-based retention and cost optimization resulted in an adjusted EBITDA of SEK 65 (67) million, representing an adjusted EBITDA margin of 48 (45) percent.

Tele2 – Interim Report January-September 2018 13 (32)

 

 

Non-IFRS measures

 

This report contains certain financial measures that are not defined by IFRS, but are used by Tele2 to assess the financial performance of the business. These measures are included in the report as they are considered important supplementary measures of operating performance and liquidity. They should not be considered a substitute to Tele2’s financial statements prepared in accordance with IFRS. Tele2’s definitions of these measures are described below, but other companies may calculate non-IFRS measures differently and these measures are therefore not always comparable to similar measures used by other companies.

 

Adjusted EBITDA and adjusted EBITDA margin

Tele2 considers adjusted EBITDA and adjusted EBITDA margin to be relevant measures to present in order to illustrate the profitability of the underlying business, and as these are used by management to assess the performance of the business.

 

Adjusted EBITDA: Operating profit/loss from continuing operations before depreciation/amortization and impairment, results from shares in joint ventures and associated companies and items affecting comparability.

 

Items affecting comparability: Impairment losses and transactions from strategic decisions, such as capital gains and losses from sales of operations, acquisition costs, integration costs due to acquisition or merger, restructuring programs from reorganizations (i.e. Challenger program, costs for phasing out operations and personnel redundancy costs), as well as other items with the character of not being part of normal daily operations and that affects comparability.

 

Adjusted EBITDA margin: Adjusted EBITDA in relation to revenue excluding items affecting comparability.

 

CAPEX paid and CAPEX

Tele2 considers CAPEX paid relevant to present as it provides an indication of how much the company invests organically on intangible and tangible assets to maintain and expand its business. Tele2 believes that it is relevant to present CAPEX to provide a view on how much Tele2 invests organically on intangible and tangible assets to maintain and grow its business which is not dependent on the timing of cash payments.

 

CAPEX paid: Cash paid for the additions to intangible and tangible assets net of cash proceeds from sales of intangible and tangible assets.

 

CAPEX: Additions to intangible and tangible assets that are capitalized on the balance sheet.

 

Tele2 – Interim Report January-September 2018 14 (32)

 

 

Free cash flow

Tele2 considers free cash flow to be relevant to present as it provides a view of funds generated from operating activities which also includes investments in intangible and tangible assets. Management believes that free cash flow is meaningful to investors because it is the measure of the Group’s funds available for acquisition related payments, dividends to shareholders, share repurchases and debt repayment.

 

Free cash flow: Cash flow from operating activities less CAPEX paid.

 

SEK million	2018 Jan 1-Sep 30	2017 Jan 1-Sep 30	2018 Jul 1-Sep 30	2017 Jul 1-Sep 30
TOTAL OPERATIONS
Cash flow from operating activities	4,032	4,657	1,938	1,959
CAPEX paid	–2,274	–2,369	–759	–669
Free cash flow	1,758	2,288	1,179	1,290
CONTINUING OPERATIONS
Cash flow from operating activities	3,811	4,221	1,829	1,686
CAPEX paid	–1,390	–1,609	–455	–450
Free cash flow	2,421	2,612	1,374	1,236

Operating cash flow

Tele2 considers operating cash flow a relevant measure to present as it gives an indication of the profitability of the underlying business while also taking into account the investments needed to maintain and grow the business.

 

Operating cash flow: Adjusted EBITDA less CAPEX.

 

SEK million	Oct 1, 2017- Sep 30, 2018	Oct 1, 2016- Sep 30, 2017	2018 Jan 1-Sep 30	2017 Jan 1-Sep 30	2018 Jul 1-Sep 30	2017 Jul 1-Sep 30
CONTINUING OPERATIONS
Adjusted EBITDA	6,951	6,332	5,439	4,928	1,984	1,771
CAPEX	–2,063	–2,037	–1,400	–1,270	–420	–377
Operating cash flow	4,888	4,295	4,039	3,658	1,564	1,394

Net debt and economic net debt

Tele2 believes that net debt is relevant to present as it is useful to illustrate the indebtedness, financial flexibility, and capital structure. Furthermore, economic net debt is considered relevant as it excludes liabilities to Kazakhtelecom, loan guaranteed by Kazakhtelecom and the liability for the earn-out obligation in Kazakhstan, and thereby taking into account the specific contractual arrangements in the Kazakh business.

 

Net debt: Interest-bearing non-current and current liabilities excluding equipment financing, provisions, cash and cash equivalents, current investments, restricted cash and derivatives.

 

Economic net debt: Net debt excluding liabilities to Kazakhtelecom, liability for earn-out obligation in Kazakhstan and loan guaranteed by Kazakhtelecom.

 

Like-for-like

Tele2 believes that like-for-like growth rates are relevant to present as they exclude effects from currency movements as well as divestments and acquisitions, and are therefore providing an indication of the underlying performance.

 

Like-for-like growth rates: Calculated at constant currency, meaning that comparative figures have been recalculated using the currency rates for the current period, and excluding effects of divestments and acquisitions.