Telenor Asa S/Adr

Good morning, and welcome to Telenor's first quarter earnings call. My name is Frank Møø, Head of Investor Relations, and I'm joined here by our Group CEO, Benedicte Skidbjel Fasmer, and our Group CFO, Torbjørn Vist. Before we kick off, a couple of things to mention. On this call, all numbers are in Norwegian crowner, and the growth rates are referred to on an organic, like-for-like basis, unless otherwise stated. And for simplicity, comments relating to EBITDA on this call are referring to adjusted EBITDA. For those who wish to ask questions, after our prepared remarks, please limit yourself to one question and the related follow-up. So, without further housekeeping, we'll jump straight into the CEO section of today's agenda. Benedicte, the floor is yours.

Thank you so much, Frank, and good morning to everyone participating on this call. We really appreciate you taking the time to join us today. In a time with geopolitical turbulence and with trade and tariff policies evolving almost daily, our stakeholders have substantial need for basic elements of stability and security. And as a provider of critical infrastructure, that's actually Telenor's key priority. With that as a backdrop, I'm pleased to say that Telenor Group continued its steadfast execution in Q1. While far from immune, the telecom industry is more resilient than most to tariff shocks and other forms of increasing protectionism. As the focus on stable, resilient and secure national infrastructure is on the rise, we keep developing the quality and robustness of our critical digital infrastructure. We are also noticing an emerging demand for sovereign and mission critical solutions enabled by new technology. And technology is also a prerequisite not only to secure the digital infrastructure that makes our societies tick, but it's also a key element of our transformation agenda in the group. These efforts continued to bear fruit in the first quarter, enabling us to launch new services such as Split in the Nordics, which have been appreciated by our customers. At the same time, transformation was also a strong contributor to OPEC's decline of 1% for Telenor Nordics. Combined with mobile service revenue growth of 3.9%, this was key in driving EBITDA growth to 5.8% for our largest business area, the Nordics. We also made good progress in other business areas as Asia infrastructure and for service revenues, also for AMP, which I'll get back to a little bit later. All in all, Q1 was a good financial quarter for us. We generated a free cash flow before M&A of 3 billion. And with this, we are reaffirming our financial outlook for the year. Then let me move to some business area highlights. In the Nordics, I'm proud to say that we have world-class networks, which we leverage on to offer excellent and secure customer experiences. As a testament to this, Telenor's four Nordic mobile networks were awarded Best in Nordics in all six categories in OpenSignal's Global Award. In Norway, Ukla once again recognized Telenor as the fastest mobile network overall, as well as the fastest 5G network. And we have modernized our networks over time, making them not only best in class in terms of customer experience, but also operationally more efficient. This positions Telenor well in terms of performance, and we continue to pursue areas of improvement. In the first quarter, this enabled a service revenue growth of 2.3% year on year. And without a provision related to a news channels VAT case, this growth would have been 3.1%. And this was supported by mobile service revenue growth of 3.9%. And as mentioned, our transformational efforts across the Nordics continue to yield results. The mentioned OPEX decline of 1% in the quarter reflects our relentless focus on efficiency. Given this focused execution, we saw a bitter growth of 5.8%. And note that this would have been 7.5% in the absence of the mentioned VAT case in Norway. Then I'll give a couple of points on our Asian businesses where we have a bit more of a mixed picture. Starting with the positives. We saw encouraging progress in Grameen Phone in Q1. Although still negative, year-on-year growth climbed from negative 7.6% in Q4 to negative 2.2% in Q1. True in Thailand and Telenor Pakistan also performed well, quite strongly actually, and for the periods that we report. True grew a bit by 12% in Q4 and upgraded its midterm ambitions. And I remind you that they lag, we report a little bit differently time-wise, so they are one quarter behind us in reporting. True's leadership team is further strengthened with Sigve Brekke's appointment as the new CEO. And then over to the more challenging aspects in Asia. The macro environment in Bangladesh remains challenging, a situation not helped by the uncertainty around the tariffs. And while we remain hopeful, it would be premature to talk about a recovery. In Malaysia, continued tough competition led to somewhat soft quarter for Telkom Digi. We are working with the company as owners to ensure that the appropriate measures are taken. And finally, a word on Pakistan. Obtaining the necessary regulatory go-ahead for the planned divestment has taken more time than we anticipated. We are engaged with the authorities to resolve this and considering the strong merits of the case for all stakeholders, we still anticipate receiving approvals in the coming months. With these ticked off, we would be in a position to close the transaction during the second half of 2025. Despite unrest also in this area, Pakistan's macroeconomic situation has been on an improving trend. And we were very pleased with Telenor Pakistan's business performance in Q1. And then I'll take you back to the topic of evolving customer needs. In this moment, customers turn to Telenor as a trusted provider. And for us, it's second to nature really to provide the infrastructure for a secure and digitalized society. And I'd like to give you three examples from Q1 that actually illustrate this. A recent survey showed that 67% of consumers in Norway worry about their pictures being stored abroad. In this context, we merged our Norwegian B2C cloud storage business, Minxi, with Jotta Cloud, a local provider. And this will provide the scale needed to build a secure, locally controlled and profitable alternative. But it's actually not only the consumers who are thinking where critical information ought to be stored and handled. We now see an accelerated demand for business solutions that enable critical data processes to stay within local borders. Our AI Factory is the first sovereign and secure platform in Norway that enabled this as a service for AI use cases. We have recently signed and onboarded the first customers, and we plan to scale this further, based on a recent shift in demand amid the rapid geopolitical and technological development. So, while we continue to take a prudent milestone-based approach, we have decided to expand GPU capacity further. And we see clear potential for the Telenor AI Factory to support our customers' most critical AI workloads going forward. And the third and last example today is Telenor Amp's business subsidiary KNL, who recently signed a breakthrough contract with the Finnish and Swedish defence forces. What we offer here is proprietary and ultra-secure tactical defense communication. KNL solutions are built to withstand extreme disruption and signal interference, and we see significant scaling potential both within the Nordics and more broadly within NATO. KNL has the potential to carve out a leading position in a high value and rapidly expanding niche market. And this will help to spearhead our growing capabilities within mission critical services in the defense segment. Finally, we do more within defence across the Nordics and we see many opportunities both in this segment and mission critical more broadly in the years ahead. And of course, the scaling of all these efforts across Telenor will be driven by visibility of demand and the ability to drive the return on capital over time. So next, I will leave to Torbjörn to guide you through the financials.

Thank you, Benedicte, and good morning, everyone. Let's jump straight into the Q1 financial highlights for the group. In Q1, the service revenues of the group came in at 16.1 billion, which is up 2.1% year on year. EBITDA came in at 8.6 billion, which is growing 2% year on year. This growth was mainly driven by Telenor Nordics, while the macro setback in Bangladesh continues to weigh on our numbers. The VAT case in Norway, as mentioned by Benedicte, and which incidentally we dispute, is also a slight drag on the numbers. In the absence of the VAT case and a minor reversal of a provision in Pakistan, the growth in EBITDA would have been around 3%. From this quarter, we have also introduced adjusted EPS as a new alternative performance measure, allowing investors and analysts to track our EPS development on a more comparable basis. In Q1, the adjusted EPS came in at 1.96 Norwegian kroners. This is 4% higher than the same period last year, and the growth is lower than we would have liked owing to the VAT case impact in Norway, as well as the macro headwinds a year on year in Grameenphone just mentioned. The free cash flow before M&A came in at 3 billion, which is a solid start to the year. Our capex to sales ratio was 12.8%, which is lower than in previous quarters. This is in line with our full year outlook for the Nordics and reflective of the prudent approach to investments we have taken in Asia. The leverage ratio ended at 2.2 times within our target range. This was down from 2.4 times in the previous quarter, supported both by the free cash flow generation as well as favorable end of quarter currency movements. As you know from what Benedict and I have said previously, we are highly focused on return on capital. Our key external metric for this is return on capital employed, which came in at 8% for the last four quarters. This was six percentage points lower than the number we reported in Q4, and the reason for this decline is that the rocky number we reported in the previous quarter included a 7 billion positive impairment reversal for True that was reported in Q1 2024. It is a fact that the inclusion of our associated companies within this metric caused a little bit of noise. And just for your information, if we were to strip out the associated companies, the return on capital employed of our controlled entities would have been 12%. Then let me move to the 16.1 billion in group service revenues. Nordics achieved growth according to plan and served as the main driver for overall group growth. Asia swung back to positive growth on the back of a strong performance in Pakistan. AMP also grew service revenues, but its contribution remains relatively small. Overall, the group demonstrated solid performance, leading to a service revenue growth of 2.1%. Turning to OPEX, this quarter, Group OPEX increased 1.9%. This was mainly driven by increased costs in AMP and Asia. In terms of category, the main cost driver was sales and marketing, which increased both in the Nordics and in Asia. As for the Nordics, however, OPEX came down 1% on the back of our transformation efforts and overall efficiency improvements. And these more than offset the sales and marketing cost increases in the Nordics. Turning to EBITDA, our EBITDA was up 2 percentage points in Q1, as always, on an adjusted organic basis. Excluding the VAT case and the Pakistan reversal, this number would have been around 3%. This growth was driven by the strong performance in the Nordics, while Grameenphone and AMP affected growth negatively. As I will come back to in a minute, we saw the strongest contribution from Norway, Finland, and Pakistan. AMP's performance drag on the numbers is mainly due to the performance in Telenor links due to the structural decline within the A2P messaging business. In addition, there was a particular year-on-year headwind owing to a provision reversal north of 50 million in Q1 last year. Also within the other category, year-on-year growth was impacted by an updated cost allocation in the group and somewhat increased HQ costs. In addition, we had a minor one-time positive revenue effect relating to a brand-free from Cellcom Digi in Q1 last year. Then turning to the Nordics, our backyard. In the Nordics, we grew service revenues by 2.3%. And again, this number would have been 3.1% in the absence of provision for the news channel VAT case in Norway. Based on our more for more strategy, we were able to grow mobile ARPUs across the region and notably 5% in both Norway and Denmark. In Norway, fixed ARPU also saw an improved growth compared to recent periods, reaching six percentage points in the quarter. This being said, we also faced some commercial headwinds in Q1. While we were able to add subscribers in Sweden and in Denmark, we did lose some customers in Norway and in Finland in the quarter. But all in all, we continue the trend of growing our mobile service revenues in the mid-single digits led by Denmark and Finland. Then turning to EBITDA for the Nordics. Here we saw close to 6% growth this quarter, which would actually have been 7.5% excluding the VAT case. Norway and Finland were the main contributors to this number. Telenor Denmark lagged the other units somewhat with a 3% EBITDA growth due to higher OPEX growth. For Denmark, this was mainly related to the ongoing BSS transformation as well as sales and marketing spend. And with that, let me move to Asia. In Asia, we generated service revenues of 4.4 billion, representing 1% growth. The swing back to positive growth was driven by improvement in Grameenphone and even stronger performance in Telenor Pakistan. With a 53% margin, Asia EBITDA came in at 2.6 billion, which was down 1% for the year. Telenor Pakistan continued its successful monetization strategy, generating solid revenue and EBITDA growth of 14% and 19% respectively. As Benedicte said, the top-line growth in Grameenphone improved quarter over quarter. Still, high inflation remains a challenge in Bangladesh, and OPEX increased 8%, leading to an 8% EBITDA reduction. In Thailand, True delivered a strong fourth quarter and is due to report Q1 on Friday this week. In Q4, True also notably upgraded its medium-term targets and posted a one-turn reduction of the leverage ratio. We continue to expect True to be in a position to declare a meaningful dividend in the second half of this year. We also received the quarterly dividend from Cellcom Digi during the quarter. However, the recent performance in Cellcom has been below our expectations and we believe there is more potential to be unlocked in the company. Then moving back up to the group level and let us take a look at the P&L cash flows and leverage and starting with some details around our earnings. Looking at the P&L, it's fair to say that Q1 was a fairly clean quarter, especially compared to last year, where a couple of material items impacted the figures. The main effects back then were the gain from the satellite divestment as well as the positive true valuation reversal effects. For Q1 this year, we had two effects that I would like to highlight. First, we had a negative impact of 282 million from the quarterly fair value adjustment of the shareholder loan provided to our JV, which is funding the indirect ownership of our shares in True. This similar impact was a positive 1 billion last year. And this materialized as a fair value adjustment on the financial items line. Second, the VAT ruling that we have talked about not only lowered the service revenues and EBITDA numbers in Norway, but it also hit another element further down in the P&L. We made a provision for 182 million NOKIs on the discontinued business line. This is also related to News Channel VAT, but for Kanal Digital's TV business in Norway, which was merged into Alente in 2020. The two mentioned items in Q1.25, however, did not affect our adjusted EPS of 1.96 kroners. Adjusted EPS was up 4% with the development in Grameen form being the main drag. Then to free cash flow. The free cash flow in Q1 was driven by strong operational performance both in the Nordics and in Asia. This was supported by positive working capital timing effects, particularly in Asia, as well as seasonally low interest payments in Q1. Please note that from this quarter's report, we also provide a breakdown of the free cash flow by business area. But let me just briefly explain the main moving parts here, given the keen interest in understanding our performance on this metric. CapEx, both paid and booked, were lower than last year because of lower capital intensity and in accordance with typical seasonality. Operating working capital contributed positively by half a billion, mainly driven by less than 0.2 billion of handset financing in the Nordics and 0.3 billion in working capital inflow in Asia caused by backend loaded recharging due to EED, VAT and other payables. We also made the usual first quarter spectrum payment for Norway during the first quarter. Lease payments total 1 billion, a figure quite consistent with the average level we have talked about for this year. A quick word on other cash items, which was half a billion this quarter. This broad category typically includes things like restructuring payments, pension payments, as well as part of commission payments that deviate from the level we charge against EBITDA. All in all, this led to the free cash flow coming in at 3 billion in the first quarter of the year, quite in line with our ambitions. Then, moving to the main highlights from the balance sheet. Our financial position remains strong. We had 81.5 billion in net interest-bearing debt as of Q1, of which 91.2 billion in gross debt excluding license obligations, as well as 9.7 billion in cash. Our leverage ratio was 2.2 times, helped by the 3 billion in free cash flow, as well as favorable end-of-quarter FX movements of 2.3 billion Norwegian kroners. This represented a slight reduction of financial gearing compared to year end of 24, bringing it back within our target range. I can tell you, given the recent market turmoil, we were extremely pleased with the timing of our 750 million euro bond issue under our EMTN program at the beginning of April. This seven-year bond was priced tightly with a fixed coupon rate of 3.4%. With this, we have pre-funded the 650 million euro bond maturity later this month, and we have also repaid the 250 million DNA bond in March. Note that in June, we will pay the first tranche of our dividends for 2024 of 6.8 billion Norwegian kroners. As we have mentioned in the past, our leverage ratio may fluctuate between quarters depending on seasonality of dividend payments, currency fluctuations, and other factors. Then, moving on to our outlook. As Benedicte mentioned initially, we are pleased to reiterate our outlook for the year. As you can see from this slide, the Q1 actuals broadly support the guidance we have provided. The Nordics capex to sales ratio of 12.4% is a bit below our full year level, but this is mainly due to seasonality. We expect the three remaining quarters of the year to have more of a backend loaded tilt, particularly for group EBITDA and free cash flow. In the Nordics in Q2, we expect to pay roughly 300 million related to the VAT case provisions. In Asia, we had a very strong cash flow quarter generating 1.9 billion in Q1. This was boosted by the mentioned working capital inflow in Asia of about 300 million, modest capex, as well as the absence of spectrum and payments to non-controlling interest, in essence, the minorities we have in Grameenphone. In the second quarter of this year, on the other hand, we expect that Grameen Fon will pay dividends to its shareholders as a result of which we will see an outflow of about a billion to the minorities in Grameen Fon, as well as a 10% withholding tax reduction for our portion. The mentioned working capital inflow in Asia in Q1 was in large part relating to phasing between quarter one and two. We will also make the usual spectrum payments in Gruminfond in Q2. Please also note that we expect to receive dividends from True in the second half of 2025. With that, I hand the word back to you, Benedicte, for the concluding remarks.