Telenor Asa S/Adr

Good morning and welcome to Telenor's second quarter results call. My name is Frank Møø, Head of Investor Relations. And with me today, I have Sigve Brekke, our CEO, and also Acting CFO Kasper Wolk-Årbø. As usual, within the presentation material today, all the references we make to growth rates are made on an organic, like-for-like currency basis. So today, Sigve will give an update on how the Nordic transformation process is going and also give a few comments on progress in Asia. And after this, Kasper will go through our financials and outlook. Then Sigve will sum it all up and open up for questions. Now, on an especially hectic earnings day with overlapping calls, we'll try to keep the session today a bit shorter and make sure everyone has a chance to ask their questions. So given this, we would really appreciate if you could limit yourself to one question today, please, restraining yourself to clarification-only follow-ups. So, Sigve, the floor is yours.

Thank you, Frank, and thanks for tuning in, everyone. I'm pleased with the performance of the second quarter. We continue to deliver on our strategy and this quarter's growth on top line EBITDA and at 2.2 billion free cash flow. I see that that's yet another proof point that our strategy works. In the Nordics, it is encouraging to see how the Nordic transformation is progressing in line with our ambitions. We are delivering yet another quarter with flat OPEX, and now the transformation program is approaching an inflection point. And I will come back to this in a few seconds. Cash flow in Asia is a key part of our strategy. Both Grameenphone and Selcom Digi already have solid cash flows. But to reach our ambition, true in Thailand will be the key. I visited True a few weeks ago and meeting our colleagues there, I continue to be impressed by how far they have come since the merger last year. True has really been gaining traction with growth picking up as well as synergies being ahead of plan. In line with a strategy, and we have talked about this before, on focusing on near core services. and what we call on top of connectivity services. We continue to focus on strengthening our offerings and capabilities within digital security. By the products we have developed both in the B2C segment and in the B2B, we have been able to build a leading market position across the Nordics on a growing security demand for our customers. This quarter, we successfully launched a new security offering to our customers in the business market in Norway. Hence, to further build on our capabilities and serve our business customers, we are also setting up a new cybersecurity company in our business area, AMP. Then coming back to the Nordics. As you know, June was marked by the tragic passing of Jørgen Rostrup, our leader of the Nordic business area. I miss him deeply. But in Jørgen's spirit, we continue to focus on business. And as I mentioned in the first quarter, we would in this quarter give an update on the Nordic transformation. So let me turn into that. I'm very pleased that Jon Omund Grevehaug has taken a new top role, acting as the new head of Nordics. We have a strong pool of experienced and passionate employees and senior leaders in Telenor, and Jon Omund is one of them. His team, together with the business units, are planning and executing on what I call a fairly radical improvement in terms of customer benefits and operating efficiencies. We are driving this within the four functional areas you see on this slide and also across the four Nordic operations. It's in within network and IT, within shared services, in the commercial area, and when it comes to working capital. So let me now in this quarter give a few examples and showing you some tangible results of what we have achieved so far. Starting with network and IT. In this domain, we have an AI-first and cloud-first strategy. We are now migrating operations to the cloud, shutting down legacy platforms and systems, and planning to scale up the use of generative AI. For this year, 2024, we have set an ambition to shut down 200 legacy systems. And so far, we have done 98 of them. They're also building a common Nordic platform within areas such as cloud development, analytics and software defined networks, SDX, which will provide the basis for use of AI and transformed customer experiences going forward. Regarding the shared services, we are off to a good start, but we have just started in this area. A new shared services hub in Portugal has been established. And we are now lifting transactional activities within finance, enterprise, IT and HR functions into a common Nordic organization. We have captured so far this year around 100 million in OPEC savings, and we have a full year ambitions of almost 200 million for this year. We plan for this effect to ramp up significantly in the coming years. In the commercial area, unified Nordic organizations have been set up within TV, managed services and also large enterprise sales. This would be a key area for us both to capture cost efficiencies, but also to enhance the customer experience over time. And the fourth area on the working capital, as mentioned last quarter, we have a common program in place focused on improving capital tie up. This program has already started to yield some results and Kasper will come back to that later. So. I will say we have taken a systematic approach to structuring and executing these initiatives, which will yield progressive benefits over the medium term and beyond. And as you can see from this illustration on the left hand side of the slide, we have the roadmap of both short term and long term initiatives. The majority part of the impact in the beginning is coming from the four individual business units. But over time, more impact will also be generated from the common Nordic activities. The continued modernization and digitalization of the way we work have also led to FTE reductions, averaging 4% in the Nordics over the last eight years. And as an example, we reduced FTEs by 8% in Norway last year. Given the scope of the transformation efforts we now are currently doing, I expect that the level of workforce optimization in the years ahead will be at least on the level that we have seen historically. So when we take all this together, how will this affect our OPEX? Well, for several quarters now, we have been very clear on our ambition of having a stable OPEX for 2024 and then a reduction going into 2025. However, as I mentioned initially, we have now delivered yet another quarter with flat OPEX in the Nordics. And we see additional effects from the transformation will come in later this year. We do therefore expect now to see a slight reduction in OPEX that that could be reached already within this year. Then moving to Asia. In the last quarterly report, True reported a continued pickup in growth and synergy realizations. We are even more confident now that we will receive payment of dividends from True in 2025. Cellcom Digi is also well on track with synergy realisation, and the company recently announced that around 50% of the new integrated and modernised network has been completed. This is on plan. This being said, I see room for further financial improvements in Malaysia, especially on the revenue growth. And we also expect a transparent process for the dual 5G network structure that Malaysian authorities have initiated. Moving to Bangladesh. In Grameenphone, we had a relatively slow start of the year. However, growth is now slowly picking up, and I do expect an improved performance into the second half of the year. Although the country was severely hit by extreme weather in the second quarter, Granvinfond added 2.3 million customers during the quarter. We also expect a closing of our Pakistan divestment towards the end of the year, although there is some uncertainty around the exact timing, which could also slide into 2025. And with this, I hand over to Kasper to take us through the financials.

Thank you, Sigve, and good morning, all. We grew group service revenues by 4.5% and EBITDA by almost 4% in the second quarter. Group capital sales was 15%, while we generated 2.2 billion in free cash flow, adding up to 5.5 billion year-to-date before M&A. I'm happy that we once again are able to report a set of numbers that supports our medium-term ambitions. Let's take a closer look at how we are performing at the group level. In Q2, service revenue growth was quite in line with the trend from recent quarters. Nordics is the main driver of growth due to its size, but Asia also contributes with more than 6% growth. Then let's take a look at group operating expenses. OPEX was up 3.7% year over year, on the back of continued energy cost increases in Asia, which reached 25% this quarter. Higher energy tariffs in Pakistan continues to be the main issue. We saw a broad-based increase in sales and marketing expenses after a bit of a light first quarter. On an overall regional level, Nordics continued to deliver on flat OPEX, which they also did in Q1. The mentioned increase in sales and marketing expenses were offset by continued strong performance on the operations and maintenance side due to our operational efficiency and technology agenda. Moving to Group EBITDA, we continue to see Nordics being the main contributor with 4% organic growth. HS EBITDA growth was held back by inflation, particularly in Pakistan, as well as growth costs this quarter, while infrastructure was stable. The soft trend in AMP continues, causing a 0.8 percentage points drag on the group level. AMP is facing gross margin headwinds and growth costs in several business units. While we expect a similar EBITDA in AMP in the second half of the year compared to the first, I expect the relative drag on the group growth to diminish over the next few quarters. Lastly, we see that other eliminations had an unusually large contribution this quarter. This is mainly explained by increased revenues coming from Telenor Procurement Company, now also providing service to Cellcom Digi and True. This sums up to an overall growth of 3.8% for the group. Zooming further in on the Nordics, where we see solid top-line performance across all business units. The growth of 3.7% was mainly driven by consumer mobile and ARPU growth coming from our more for more price increase execution. DNA was again the main contributor to the top-line growth. delivering another strong quarter and mobile service revenue growth of 10%. In general, we see that the small enterprise segment as a contributor to the growth within B2B. However, we see increasing competition within the large enterprise and public segment in Scandinavia, with some RP erosion in the quarter. That being said, As you heard Sigmund mentioning, we are establishing a common Nordic B2B product efforts and sales organization. This will strengthen our resource pool and ensure that we are commercially set up to meet the demand of large enterprises. All this led to an EBITDA growth of 4% this quarter. As you can see, the strong top line results in DNA trickles through to EBITDA, giving modest cost growth and fueling an EBITDA growth of 9%. In addition, Denmark posted 10% growth. However, note that this was largely due to improved gross margin following the lower handset sales and somewhat lower energy costs. Then a few words on Asia. Overall, we continue to see progress on growth in Asia, as well as on the synergy realization in the two associated companies that are a result of the two large mergers in 2022 and 2023. We continue to see headwinds from energy subsidy cuts in Grameenphone and Telenor Pakistan, in line with what we talked about in previous calls this year. Inflation remains an issue in these markets. Grameenphone grew its customer base nicely in Q2, but performance was held back by energy outages relating to the cyclone Ramal and increased supplementary duty. EBITDA grew only by 1.5% due to a bit of a catch-up effect on cost inflation in Pakistan, following two years of high price growth in the country. In Bangladesh, full effect of lower energy subsidies in Q1 and increased costs relating to the solid supply growth of 2.3 million weighted on EBITDA. As to our associated companies, which we report with one quarter lag, we were quite pleased with True, which saw continued strong effects from its synergy and integration efforts, as well as a nice return to top-line growth in Q1. With EBITDA growth of 21%, I see True as well-placed to deliver on its ambitious full-year and medium-term goals. For Cellcom Digi, the dividend continues to be paid on a quarterly basis. As for performance, we expect the company to work actively on revenue growth and get improving net benefits of the synergies post-integration costs going forward. Next, let me highlight the most notable items affecting the profit and loss statement, as well as our balance sheet and cash flows. Looking at the P&L, we have a quite clean quarter with only a few items to comment on. The EBITDA before other income and expenses landed at 8.8 billion in Q2. On the net financial income and expense line, we have a loss of 0.4 billion this quarter. This was positively impacted by a change in the fair value of the funding arrangement related to the indirect part of our investment in True Corporation, which had a strong share price development in the quarter. For the same reason, we saw an impairment on the second quarter last year, which was also affected by interest costs related to the legal disputes in Bangladesh. Earnings per share came in at 1.83 kroner this quarter, which is more than three times higher than for the comparable period last year, when EPS was unusually low. With our Nordic transformation and synergy benefits in our Asian associates set to have significant effect over time, we continue working to improve also this metric going forward. We generated free cash flow of 5.5 billion in the first half of the year. Rough 2.2 billion in the second quarter. Although we will still see variations between quarters also going forward, we continue to work to obtain a more balanced cash flow profile through the year. As we talked about last time, we have seasonally higher interest payments in Q2 and Q4 and lower in the two other quarters. On the working capital side, we saw a 0.8 billion improvement in the quarter, with around a quarter of this coming from third-party handset financing and some net structural improvements. But the majority is other timing effects, with some major payments happening in July rather than June. We also saw later than usual CapEx payments, where there was a similar phasing into Q3. Of course, it's hard to know precisely how much, as in theory there could be similar effects towards the end of Q3. On Spectrum, we paid 0.5 billion in Pakistan, and some smaller payments in Bangladesh and Denmark. There was a minority leakage of 0.7 billion in Bangladesh, as we repatriated about 50% of the 2023 net profits as dividends in Q2. Note that for Q3, Grameen Fund has declared interim dividend of close to 100% of its net profit for the first half of 2024. This will cause a total cash outflow of 1 billion in the third quarter. This sums up to the total of 2.2 billion in free cash flow. The balance sheet of the group remains strong, with 83 billion in net interest-bearing debt and a net leverage ratio of 2.3 times. Leverage was impacted by the payment of 6.9 billion kroner in dividend and the completion of the 2023 share buyback program. We bought back the government's portion amounting to 1.9 billion kroner and canceled 31 million shares. On the other hand, we saw favorable FX impact of 2.3 billion kroner on the net debt due to NOC strengthening quarter over quarter and the 2.2 billion free cash flow generation we talked about. As always, macro, FX and seasonality factors can lead to a net leverage fluctuations between quarters, including to a level above the leverage range as happened in Q2 last year. This brings us to the financial outlook. After a solid first half, we remained confident in our overall outlook. Based on service revenue growth of 4.5% for the full period, we slightly raised our 2024 service revenue outlook to low to mid single digit growth from low single digits previously. This being said, we do expect a continued tapering of service revenue growth in the Nordics, with lower year over year numbers in the second half as we meet tougher comparables. We reconfirmed the other elements of the 2024 outlook, as well as the mid-term financial ambition that we provided at the Capital Markets Day almost two years back. We continue to expect mid-single-digit EBITDA growth for the Group, despite continued headwinds in AMP, as we expect performance in Grameen Fund to improve in the second half. On free cash flow, we retrade the 9 to 10 billion target. This despite the announced interim dividends in Grameenphone that I mentioned earlier, where we repatriate dividends early, leading to a near one billion kroner minority leakage that we did not have last year and which was not in the original outlook assumptions. With that, I hand over back to you, Sigve, for some concluding remarks.