Telia Company AB (publ)

Welcome, everyone, to Telia Company's Q3 2022 results presentation. And with that, I will hand over to Telia Company's Head of Investor Relations, Erik Strandenpets. Please go ahead. The floor is yours.

Thank you, and good morning, everyone, and welcome to our Q3 call. On the call today, we have Alison Kirkby, our President of DEO. I'm Christian Nordahl, our CFO, and myself and Anders Nilsson from Investrelation. Alison, please go ahead.

Good morning, everyone. And as you've seen in our report this morning, macro challenges increased significantly during the quarter. And those of you that have followed us lately know that we've expected to be able to largely mitigate these macro efforts. As we progress through the quarter and now summarising both the quarter and the outlook, we do see larger macro effects than previously and have decided to be more cautious as we look forward. We understand this is painful in the short term for everyone, but it's the right thing to do because we're very much focused on building the long-term value creation of this company. And on that note, it's encouraging to see the continued commercial and operational momentum that we saw in the first half of this year continues. Proof that we are showing resilience in a difficult environment and proof that our plan to create a better telia is on track. Service revenue growth, digital transformation momentum, OPEX reduction and underlying EBITDA are all developing in line with our mid-term ambitions, which are low single-digit revenue development and mid-single-digit EBITDA development. On service revenues, growth continued at a pace similar to last quarter at 2.3%, supported by all our units for the first time since Telia moved to a country-based organisational structure some 10 years ago. Excluding the hit from higher energy costs, which almost tripled in the quarter, efficiencies are continuing to come through as we transform Telia, and in the quarter we managed to reduce the underlying OPEX by just over 2%. EBITDA increased by 1% as service revenue growth and efficiencies compensated for higher energy costs. And excluding the impact from energy, we had a strong underlying growth of 4.9%. So our underlying performance is sustained. Operational free cash flow came in at 2.1 billion kroner, which is 0.9 billion reduction versus the same period last year, driven mainly by a different timing of content payments and slightly higher capex, but both in line with our plan. And if you look at the structural part of our cash flow, i.e. cash flow excluding changes in working capital, it was fairly unchanged year on year at 2.7 billion crore compared to 3 billion last year. Our balance sheet remains healthy with a slight increase driven mainly on leverage, driven mainly by our shared buyback programme. And we've so far bought back approximately 100 million shares by the end of the quarter. And as of earlier this week, we're now 76% through the buyback programme. Finally, considering the macro headwinds around us, we're rightly being more cautious as we look forward And so we have reflected the known energy and interest rate headwinds and some additional caution into our forward-looking statements. But while the macro environment poses some short-term challenges, our strategy is still intact and we will continue to execute on it at speed. Moving to our strategy, as I said, all countries had positive service revenue growth and it was broad-based with mobile growth 4.1%, fixed services growing in all markets except for Finland, and we had another strong quarter for advertising. Our total enterprise segment was again strong and positive, growing 1.5%. Our pricing momentum is building with much more potential as we look systematically in all parts of our service portfolio and in all markets, and this will clearly give us more top-line benefits next year and the following year. Network modernisation is on track with 5G coverage increasing fast and now reaching 63% of the Nordic and Baltic population, up from 49% last quarter. Norway, Finland and Denmark are now all above 70% coverage and Lithuania is already at 80%. Digital transformation is also progressing with product and platform portfolio simplification on track. Another 10 IT systems were decommissioned in the quarter. and IT costs continue to decline despite underlying wage inflation. All of these efforts are designed to create long-term benefits and sustainable economics, although in the short term they cannot compensate, of course, for the dramatic increases in energy prices we've seen. After the end of the quarter, we also announced our intent to consolidate all our linear and streaming content under the TV4 and MTV brands in Sweden and Finland respectively, which means they will each span linear, AVOD, HVOD and FVOD. strengthening their national champion status by all one platform, and fundamental for them to take further advantage of changing viewer habits towards on-demand digital platforms and enabling us to offer richer, targeted inventory to our advertisers. Finally, on sustainability, I'm super proud that Telia was awarded the Platinum Medal by EcoValues, putting us in the top 1% of 75,000 companies assessed worldwide for strong sustainability management, fully integrated, into our policies, our actions, and our results. Moving to Sweden, we again had a solid quarter with service revenue growing 1.2%, mobile growing 2.3% from a continued positive ARPU development, broadband growing 4.1% from pricing initiatives, and again, a strong development in Telia TV services going 15%. Our enterprise business continues to show a solid development even with a slight decline this quarter due to some elevated levels of IoT revenues this quarter last year. So underlying, we're still seeing a stable to growing development and so far no signs of decline in spend amongst our enterprise customers as they continue to digitalise to meet the opportunities of tomorrow. A great example of which is Alibio in making their energy grid smarter and a great proof point of how we can support our enterprise customers on their digitalisation journeys at the same time as we contribute to a more sustainable society. Excluding the impact from legacy and the recovery of rolling revenues, underlying service revenue growth was again very healthy at 3.4%. EBITDA grew 1.2%, somewhat lower than Q2, but fully explained by a one-off write-down of inventory. So again, a solid operational performance by our Swedish team, especially if looking at underlying revenue and EBITDA development. Moving on to the operational KPIs, we're seeing a stable mobile customer base and a continued growth in ARPUs, supported by an improving NPS, and that's the SPI pricing initiative on both the Telia and the Halobot brands that we took earlier. This meeting is being recorded. Not yet fully followed. On broadband subscribers, we're not able to fully compensate the loss of XCSL customers this quarter, but as you can see, ARPU accelerated on the back of price increases on both copper and fibre. And in TV, we again saw a strong subscriber base, and importantly, we saw another strong ARPU quarter, supported by both pricing and a higher share of premium sports packages in the base. During the quarter, we entered into a partnership with Discovery on the streaming rights for the Swedish Football League of Svensson to build on our aggregator position. However, as you know, right at the end of the quarter, we were not able to agree with BioPlay on a new agreement that makes financial sense for us or for our customers. Moving now to Finland, we saw a slight pickup for service revenues, very much driven by mobile, which despite interconnecting increased by 3.5% and made a good start to the sports season on TV. That being said, the progress on mobile was largely offset by continued pressure on fixed revenues that relate mainly to legacy data comm services. The turnaround of mobile is on track and so is our cost transformation, especially in digitalisation and in the move to online with an underlying 2% reduction this quarter. Admittedly, it is, however, difficult to see the cost transformation this quarter and Finland is particularly hard hit by energy cost increases, which were 80 million kronor higher. Subscriber base grew slightly in the quarter, driven to some extent by consumer, but mainly by the enterprise segment, and you're seeing R2 increase by 2%, helped by continued migration to 5G. With these trends, continued network modernization, pop coverage is now 75%, and a range of cost initiatives, we remain committed to improve Finland in a structural way, But we do recognise that we've got a bit more to do, considering the magnitude of the current headwinds. Norway had another quarter of very strong momentum. Service revenue increased just shy of 6%, driven by an almost 6.5% increase in mobile, on the back of a growing subscriber base, poor ARPU expansion, higher wholesale revenues and a strong recovery in rolling. Enterprise grew by an impressive 8%. This strong service revenue development was also confirmed by the regulator, which confirmed that Telia was the fastest-growing mobile operator in both B2B and B2B segments in the first half of this year from a value point of view. We also had strong development on fixed services, with excellent broadband developments growing 4.3% and TV growing 5.7% on the back of pricing. And you might have seen we announced some new additional broadband pricing in Norway this morning. EBITDA grew 4.5% as higher service revenues more than offset a 50 million negative impact on increased energy costs. The mobile subscriber base continues its positive trajectory in both our brands, but mainly in Finero this quarter, and ARTE was again strong with a 2.6% increase, helped partly by Roman's recovery. Moving to the lead market, in Lithuania we grew mobile 10.8%, which is in line with Q2, And we've taken a clear lead in 5G with an excellent commercial launch and see strong initial demand. The development for fixed service was a bit softer year on year, resulting in total service revenue growth at 5%. And the flow through to EBITDA this quarter from the higher service revenues was weak as a result of the energy headwind for 40 million kroner. Hedging in the Baltics is less straightforward than in the Nordics, but we are taking other mitigating actions in this inflationary environment, including a number of significant price increases, which are taking place now. In Estonia, performance is again strong, with service revenues going 5%, and as you can see, EBITDA growth in line with service revenues, despite the energy headwinds, which have been held by historical PPAs that we have in that market. This is another strong achievement for Estonia, alongside excellent NPS development too. And finally, in Denmark, We have service revenue growth driven by mobile growing at 2.8%, but energy headwinds were especially strong in the quarter. Our shared network does not hedge, but revenue growth, an easy call from the cost side, and generally excellent turnaround momentum resulted in just over 8% EBITDA growth. Finally, moving to TV and media, we had a record high third quarter in mass advertising, despite that we had the Euros last year, and this compensated for a challenging development in pace. The shift to digital continues, and we saw a 20% growth in Swedish digital ad revenues. Pay had a soft quarter, driven mainly by the loss of Formula One in Finland, and continued headwinds from a wholesale agreement in Denmark that expired in the fourth quarter last year. EBITDA increased by 24%, driven by mainly lower sports, as last year contained both Football Euro and World Cup qualifiers. And if you look at the pay TV customer base, we saw an increase of 28,000 in the quarter, driven mainly by strong high-tier sports growth in Sweden, driven by the Swedish Hockey League, UCL and other sports fund-links. Looking ahead, we're now starting the work I mentioned in the strategy highlights to simplify our TV and media setup. We've seen more premium content to be transferred into the TV4 and MTV streaming services. and offering a more focused slate of premium Nordic content, including both AVOD, HVOD and SVOD services. These changes will be implemented during the course of next year and will build on the strengths of the TV4 and MTV brands. And regarding the output for advertising revenues in these tough macro times, we continue to see strong demand from advertisers, but clearly after four quarters of advertising revenue goals ranging from 4% to 11%, We cannot expect a high growth rate going forward at this time. But that's enough from me, and I'll now hand over to PC. Thank you, Alison.

Let me quickly take you through the Q3 financials and the updated outlook. Starting with service revenue, as Alison has gone through, we have a solid growth of 2.3%. We've grown in four units, partly on the back of a continued rolling rebound. The service revenue growth of 2.3% is driven by capital growth, both in the consumer segment of 2.6%, but also in the enterprise segment with 1.5%. TV and media is quite stable year-on-year with growth in advertising and setting low-pay revenue. We have a good momentum with several quarters of low single-billion growth and are well on track to deliver on the outlook both for 2022 and for 2023. Let's move to OPEX. OPEC's excluding energy is reduced by 2.1% or $111 million in the quarter. The reduction is driven by lower resource costs of $152 million from the more than $700 FTE and FTC reduction since Q3 last year. Despite inflationary pressure, we have seven quarters into our transformation journey reduced our OPEC excluding energy by $1.0 billion. The ongoing digital transformation of our business is on track and has enabled a significant reduction in number of resources, marketing efficiencies, and lower IT costs. Looking into 2023, we plan to set the cost agenda and especially the pace of FTE and FTC reduction even further. As stated, our transformation agenda is moving forward and we are on track to deliver at least 2 billion net production objects, excluding energy, by 2023. Next, an update on energy cost development. Our general hedging policy is to hedge 70% of all consumption short-term with gradual reductions following quarters. This equals to around 60% hedge levels for the next 12 months. Total effective hedging is around 50% as part of our consumption is currently unhedged. And this includes consumption for landlords in all our markets, our joint network with Telenor in Denmark, Lithuania, Latvia, but also the data center in Finland. Energy prices during Q3, or in Q3, was an average three times higher than last year. This week's close Q2, both the actual prices and the market expectations for the coming quarters have increased significantly. Our hedges and BPAs for Q4 of this year, 23 and 24, are all in the range of 400 to 500 megawatts per hour. Significantly below the current and expected levels. And now, currently, we are placing most of our hedges for 2024 and 2025 at quite reasonable prices, at least compared to the current levels. Despite the significant hedge levels, the very high prices in Q3 has led to a 300 million increase in energy costs year over year. Using the current market expectations and our current edges, the outlook is that the energy cost for 2022 is going to end $900 million higher than last year, with another $600 million increase in 2023. We recently signed a PPA at very attractive terms in Estonia, starting Q1 next year, and in Denmark starting Q1 2024. And we're also working on further potential PPAs in the future. In addition, we are working across our footprint on initiatives to reduce energy consumption, including legacy shutdown, network modernization, and also implementing more advanced software features. Let's move to EBITDA. Total EBITDA grew 1.0% in the quarter, driven by growth in Sweden, Norway, and TV media. Finland is negatively impacted by the mentioned increased energy costs. EBITDA excluding energy costs increased, grew 4.9% in Q3 from higher sales revenue and lower costs. EBITDA outlook for 2022 is updated to end around flat versus last year due to the 900 million higher energy costs, mainly from the second half of this year. If we exclude the increase in energy costs, EBITDA is still expected to grow low single digits. Our midterm EBITDA... for 21 to 23 has also been updated to reflect the significantly higher energy cost levels expected both in 22 and 23. Excluding the energy cost increase, EBITDA is still expected to grow low to mid-singer digits. Moving to cash cap rates, total cash cap rates in Q3 is $3.4 billion, slightly higher than Q3 last year. CapEx on a quarterly basis tends to spend, say, around $3 to $4 billion, with Q4 last year being an outlier with more than $5.2 billion in cash CapEx. Despite the continued challenge of global supply chain situation, we are able to stay on track with our investment program to modernize our mobile network, including 5G rollout, dismantle our legacy infrastructure, and transform Telnet to a much more digital company. Cash capex on a rolling 12-month basis has increased slightly to $15.3 billion for 7.0% on net sales. Cash capex is expected to reduce on a rolling 12-month basis in Q4 due to analyzing the outlier in Q4 last year, bringing cash capex within the 2022 guidance of $14-15 billion, and further down in 2023 to be in line with the mid-term outlook of 15% on net sales. On cash flow, operational fee cash flow ended at $2.1 billion in Q3, down from $2.9 billion in Q3 last year. EBITDA growth are offset by somewhat higher cash capex and negative working capital. Negative change in working capital is mainly driven by basing on content payments related to Champions League. Our Champions League cost is paid in two equal installments in Q1 and Q3, hence with no payments in Q2 and also not any payments in Q4 this year. If you compare it to last year, please note that in 21, we did not have any payments on Champions League, as this was already prepaid in 2020. Vendor financing is slightly positive in Q3 and also year-to-date. Total cash flow on a rolling 12-month basis is an somewhat declining trend due to increased cash cashback and lower contribution from vendor finance. Despite solid momentum in our underlying business, due to the macroeconomic environment, we are in 22, not likely to meet our ambition of covering the minimum dividend commitment of $7.9 billion. This is a combination of the recent increases in energy and interest costs combined with a more prudent approach regarding pension contribution and a decision not to force a reduction in inventory levels to support our business beyond 2022. We are, however, building up a strong portfolio of pricing initiatives across all our business units. We are stepping up and moving parts of our cost agenda forward. We are working on several energy consumption reduction initiatives, and we are also taking in full reviews of our cap expenses. But it takes some time before these mitigation initiatives gain full momentum, and short-term, we are not able to mitigate the full impact in a sustainable way. We will come back in January with more guidance regarding 2023, once we have closed the year and with a full set of financial outlooks backed by a completed and approved financial plan. Moving to net debt and leverage. Total net debt increased, as expected, by 2.5 billion due to the share buyback of 3.3 billion in the quarter. Balance sheet remained healthy with leverage at 2.07 times at the low end of the targeted range of 2.0 to 2.5 times. During the quarter, we are very happy to have signed a new sustainability link, 1.2 billion euro revolving credit facilities, replacing the current facility of 1.5 billion euros. And despite a very challenging market, we have now completed most of our refinancing needs, both for 2022 and 2023, with two benchmark hybrid bonds performed in Q1 and also now in Q3. As mentioned, we have updated our EBITDA outlook for 2022 to be a round flat, but excluding energies increased at still low single digits. with a similar update to a mid-term 21 to 23 condition on EBITDA. And with that, I hand over to you, Alison, to summarize before we go into Q&A.

Thanks, PC. So, to summarize the quarter, commercial momentum continues, helped by an improving customer experience and broad-based pricing initiatives enabling solid momentum in both core telco and advertising businesses. Network modernization, digital transformation and structural cost reductions all continues in line with our plan. And we're now simplifying and refocusing our TV and media assets, preparing it for the next phase of digitalisation and richer, broader inventory for advertisers. Our balance sheet remains healthy and well within the two to two and a half range. Hence, our dividend policy remains unchanged as the business is showing its resilience with no sign of customers pulling back on spending at this time. However, as we've said, the macro challenges were dramatic this quarter and that has put pressure on our EBITDA and our cash flow outlook for this year and next. We are taking action and we will take more if needed, but these actions that we take are structural and sustainable in nature and cannot offset such an extreme move on energy in any one quarter. As you would expect with such volatility, therefore, we decided to hold off until January to provide and outlook for next year. But stepping back, thanks to the choices we've made these past two years on capital allocation, on a more focused Nordic Baltic portfolio, in the strengthening of our balance sheet and in building the foundations for a return to sustainable growth, I'm absolutely confident that if we remain focused on the execution of our strategy, but now at a more accelerated pace by the additional measures we're taking, we will be an even better failure when the macroeconomic headwinds are safe. And with that, we are now ready to take your questions.

Thank you. Ladies and gentlemen, joining today over the phones, if you would like to ask a question at this time, please press star and 1 on your telephone keypad. If you would like to remove yourself from the queue, simply press the pound key. Once again, ladies and gentlemen, that is star and 1. If you would like to ask a question today... We'll hear first from the line of Andrew Lee with Goldman Sachs.

Yeah, good morning, everyone. I had two questions. First was just on vendor financing and other incremental free cash flow drags or potential curveballs going forward versus the incremental drags you've laid out today. Obviously, today you laid out Many more headwinds from macro than maybe we might have expected, like lost pension contributions. Obviously, interest costs might have been expected too. But what about vendor financing, which is obviously a key investor concern? How confident are you that this can stay flat next year and therefore not be a drag on working capital? What exactly are you doing to mitigate the headwinds to vendor financing on working capital from rising interest rates? That kind of part B to that question would be, are there any other kind of incremental macro sensitivities that you haven't laid out today that you're keeping an eye on? And then second is a big, big, big question. So really related to price rises to pass through cost pressures. You had previously highlighted confidence. that price rises can mitigate cost headwinds. Cost headwinds have gone up and totally understand that it's too late for price rises to mitigate those headwinds to 2022. But has your confidence essentially reduced on your ability to pass through higher costs to customers as we look into 2023, i.e. the mitigation of higher costs with the price rises you're doing now? Thank you.

So why don't I take the second question first, Andrew, and then I'll pass over to PC on the vendor financing. Our confidence has not changed at all about our ability to pass on the pricing. What happened during the course of the quarter, Andrew, and I was with you during the quarter, is the energy prices got increasingly higher. And as we saw that coming through, we had to reflect on what does this mean for the balance of this year and into next. And when you see a doubling of price of costs in one quarter and see that go through into Q4 as well, no sustainable pricing could have offset that in the quarter or in Q4 either. The price rises are continuing. You will have seen we took 40 to 50 kroner in Norway broadband this morning. We took action in Finland just yesterday following the market lead in the consumer segment yesterday. And all of our pricing initiatives are going to plan and we're continuing to plan to look at taking even more if the inflation environment continues. So no change in our confidence. The only issue is that Pricing takes time and you can't compensate for the short-term energy volatility that we had this quarter and will be next quarter as well. But absolutely confident still. And there's no sign of consumers pulling back. And as you've seen, we had another very strong advertising revenue quarter as well. So we see this as short-term pain, but for long-term gain in terms of the pricing news we're making. And, you know, we have now CPI-linked contracts in all of our... in all countries, in any new enterprise contract being struck now, and they're already in existence in Norway for a number of years. And on the benefit financing, PC?

Yes, hello, Andrew. So let me give you a bit of extensive responses. I know you're very much on top of it, but just make sure everybody are fully up to date. Vendor financing has been very positive, you know, over the last couple of years, contributed significantly on the cash flow and on the working capital. We were quite clear that going forward, we will see a more kind of neutral situation. And that's actually also what we see now with in Q3 and year to date, you know, it's slightly positive, but not at the levels that we have seen before. And also for 22, we expect, you know, vendor financing to be slightly positive. So that's kind of the financial guidance as it expands now. And then sort of take a step back, what it is, right, is that, you know, we go into a dialogue with our suppliers and our banks and where the suppliers are able to get their, you know, payments in seven days versus our standard 90 days. And then the discount that the suppliers give gives us an extension on the payment terms. And then how this affects both now and going forward depends on three things. First, how many suppliers and how much spend do we have in the program? Second, how big discounts are the suppliers willing to give, you know, to get paid seven versus 90 days? And third, you know, what are the terms the banks are willing to give us? And, of course, this is depending on the general interest rate. So it's important to understand that the program can be beneficial to both in a low-interest environment where it's easy to get very long extension of the payment term, but also in a high-interest environment where you can, you know, the higher interest actually increase the value of getting paid in seven versus 90 days. Also, you know, getting paid early can be useful for some of our suppliers in the challenging times that we're in. So, you're right to say everything is equal, higher interest rate reduces the payment term and become a negative drag on working capital. So the way we mitigate this is either by, you know, expanding the program with new vendors or new additional spend, or, which is actually more important, is to go back to our current suppliers and to, you know, negotiate better discounts because the interest rates now have moved. So that is what we're doing, and that's also why we are quite, even if the interest rate has moved, we are quite stable so far this year and also for the remaining part of the year. So what happens going forward, you know, depends on how we, you know, decide to get away as a supplier, you know, to do this. I think what's important to do is that we will only use it if it makes financial sense for us. You know, we are, you know, prudent and we want to make sure that whatever we do generates financial value. So I think that's some perspectives on the program and where do we stand. And then, of course, when we come back in January, we'll give you a more complete update on the cash flow and the working capital outlook. Once we have completed this year, we have a full financial outlook based on a financial plan, and also we have some more visibility on the macro situation.

Thank you very much. Bye, Sujit.

Our next question will come from Maurice Patrick at Barclays.

Yeah, good morning, guys. Thanks for taking the question today. Just one for me on to the balance sheet positioning cash flow dividend sort of related items. So clearly you've reduced the cash flow guidance due to higher energy in EBITDA and indicated the dividend won't be covered by structural cash flow until you come back next year. So I'm sure you don't really want to get into a debate about what's the right cash flow number to plug into the model for next year. But the dividend is a big question for investors given it's not covered this year now. You talked about it being covered structurally going forwards. So maybe just if you can sort of articulate some of the levers and how you think about, you know, if two to two and a half times leverage to the right leverage ratio, would you be happy having another year of uncovered dividend if energy prices remain where they are? You know, you obviously have some initiatives around reducing the share count via buybacks, so the towers you've done already and those potentially rooftops that can reduce that share count to help with overall dividend coverage. So sort of what bigger bits of the picture dividends cash should be very helpful given where we are at the moment. Thank you.

Thanks, Maurice. There's a lot of questions in there. Let me try and start kind of high level and then I'll pass over to PC for detail. The way we look at it is our underlying plan and strategy is delivering in line with what we expected. We are just seeing at this point in time some heightened macroeconomic pressure that is making us be a little bit more cautious on pension elements, on supply chain elements, and clearly we have a short-term impact from energy costs that we cannot offset in a structural sustainable way with pricing and costs at any point in time. But our underlying plan is intact and our balance sheet is very helpful. And we've got lots of headroom in that balance sheet to cope with this short-term macro pressure. And that's why the board are very committed to the dividend policy that we set out on and willing to take a little bit of increased leverage in the short term. because they and we believe in the underlying plan and the underlying health of the business. So hopefully that gives the context. And then TC, is there anything else that you want to give Morris as he tries to work out his model?

Yeah, no, I think you addressed most of it, but just sort of to summarise, right? So you are now in the second half of this year really hit by the factors that Alice went through, and they are to a large extent unmitigated. But working now systematically on pricing on cost and energy consumption reduction and no capex, we will gradually be able to assess more of this pressure, even if it's not going to reverse dramatically. And also, as we have guided you on, we are now steering down cashback in line with our plan towards 15% of sales. So all of these just sort of give you at least a positive outlook on how our structural part of our cash flow and our business is delivering in the right direction.

Great. Can I just double check on something you said earlier? Did you say you were striking hedges at 400 to 500 for 23 and lower beyond that? Is that what you said earlier in the talk, James?

Yeah, our average hedging is at 400 to 500 kroner per megawatt hour for 2020.

Yeah, exactly. That's quite stable, both looking at the fourth quarter and also looking at, you know, the quarterly hedges we have for next year in 2024. You know, it's a little bit different by quarter in my market, but the fall tends to be within that 400 to 500 kroner megawatt per hour, which is significantly lower than the, you know, several thousands that we've been experiencing in Q3.

And, you know, you have seen pricing come down in the last couple of weeks. But, you know, I think we need to get through the winter months to get confident that they're going to go sustainably down.

And what's important, Maurice, is that we are not placing hedges now on very high levels. So the hedges we are putting down, 24 and 25, you know, they are more expensive than they were before, but they are kind of 1,500-kroner levels. So keeping it in a good mixed cost level.

And if you see that chart we showed earlier, you know, we were seeing spot rates at 10 times the 400 to 500 at seven points in the quarter. And that's what caused the extreme volatility.

Perfect. Thank you.

Thanks, Lauren.

Our next question today comes from Andre Kavishek with UBS. I hope I said your name correctly. Your line is open, sir.

Good morning. Thank you. Thanks for the presentation. I have a follow-up on working capital. If you could maybe talk a bit about inventories as well, because they've been a drag about $600 million this year, and we've seen from your peers as well the build-up of inventory because of supply chain issues, CapEx expectations, etc. If you could talk about whether that is a plateau or whether we can expect maybe that winding down or maybe an incremental drag going into the fourth quarter, that would be helpful. And then a bigger picture question on just various parts of the P&L going into next year, please. So I think you've laid out very well what the energy impacts are by Florida and next year, but then can you talk a bit about, because I think there's been some confusion around the conference communication from September around personnel and interest, if you could just give us color on the moving parts on those two specific items. That obviously also impacts the fruit capsule application for next year. That would be helpful. Thank you very much.

Okay, Andrew, you've got quite a bad line, but I'll try and take that off on your second question on the outlook for next year, and then I'll pass over to TC on your inventory question and working capital question. We'll be very clear that our outlook is still intact for this year and next year if you exclude the energy impacts. And that's been reinforced by the underlying development that we've seen in the business so far this year. And this quarter, you know, low single digits on the top line, 2.3% this quarter, and mid-single digits on the bottom line at 4.9%. And so that was absolutely our ambition going into next year. And that still stands, but we're adjusting it down for what we're seeing at the moment, an additional 600 million in energy year on year as we look at it. So that's the only adjustment that we're making to our EBITDA outlook at this point in time.

Yeah, and then just to build on the sort of second question, on interest, I think there was a question there. So we start to see some increased costs on the interest already in Q3, and this will continue to build into Q4. So for the year of 2022, we're looking at around 300 million higher interest costs than what we expected. And then there is a delayed effect, right? So that will continue into next year. You know, there's another few hundred million increasing interest rates if the sort of market is correct at the moment. As a rule of thumb, you can think that one percentage point increase in interest gives us around 400 million higher interest costs for a year, you know, because we have a big part of our leverage portfolio is locked in and not really impacted by the short-term volatility. And then we, of course, also have a part which is floating. If I heard correctly, there was also a mention of pension. Last year, we had 1.3 billion of positive contributions from pension. We have been hoping to sustain that level this year. That is quite a high level. It also is a look historically. That was also what we expected when we talked to you in Q2, but we have taken a real look, and year-to-date, the pension fund has lost 8.5% of the value. Luckily, also the liability of the pension has gone actually down even more than that. But we have taken a quite prudent approach. It's well covered. But we want to wait a little bit and see how the market develops. So what we are now, you know, in the out of planning to do, it's been formally decided, is to do $900 million this year. We have already taken $400 in Q1 and then do another $500 in Q4. So you should not expect that to continue being a big issue going forward. I think we should have that kind of 900 million level as a sort of a baseline looking ahead. Then specifically on working capital. So in Q3, we are minus 700 million. That is almost entirely driven in the quarter by the phasing of content payments that I took you through in my presentation. If you look here today, we are then, you know, I think a little bit shy of a billion negative, 900 million. That's also, you know, basically the facing of constant payments. Because if we move into Q4, we're not going to have any payments to Champions League. So then that will normalize quite a bit. Inventory levels are at a quite high level already in Q3. We hope to be able to sort of reduce that, but we expect now that that will actually continue and actually also slightly increase a little bit going into Q4, but not dramatically so. And then I talked about this in a minute ago, that we expect to be relatively neutral also going forward. In totality, working capital is not expected to change dramatically. So we were hoping earlier to have lower inventory levels and also have somewhat more positive contribution from the vendor financing program that we don't see at the moment.

And just to summarize, Andre, the pension and the inventory decisions that we've taken, they were active choices that we made. When we were considering the macro environment, you know, we could have pushed more pricing into this year and we could have run down our inventory. But running down our inventory when the global supply chain situation is still a problem would not have been good for the continued rollout of our network. And so that's, you know, wrong decision if you're planning for the long term. And the pension decision is absolute choice that we've made because we don't think it's the right time to be taking money out of the pension fund. So they were proactive decisions and back up the point of we've taken a cautious approach to our outlook considering the macro environment.

That's very comprehensive. Thank you very much. If I may, one very quick follow-up on the pension. You said $900 million going forward. Is that a flat number, therefore, going forward, or is that a repeated $900 every year?

No, of course, the decision is taken on an annual basis, right? But that's a sort of recurring annual effect.

Okay. Thank you so much.

Luis Lekaros with Credit Suisse. Your line is open.

Hi. Thank you for taking my questions. I have two, please. The first one is on Sweden, on mobile service revenues specifically. I have seen that your Sorry, your post-paid net ads, excluding machine-to-machine, slowed down in the quarter. And when I look at your post-paid ARPU, it slowed down as well, despite the price increases you pursued on the Halibut brand, which I think they came in in August or mid-August. I am interested in getting your thoughts on how you have seen competitive dynamics evolving in Q3, and specifically if you are seeing any impact from the new tenant shoes and limited speed to tariffs, and any color you could keep on Q4, that would be helpful. And the second one, on Finland, I have seen that you have posted a good recovery in terms of MSR. and now you are announcing that you are following another competitor with price increases. One of your competitors was mentioning yesterday that supply into Q4, they were not seeing a value approach by peers in the market. Is this announcement signaling that you are expecting a more rational environment going forward? And finally, if I may squeeze a follow-up on your comments on price increases. You mentioned price increases in Norway and in terms of broadband. now following on Finland, but Telenor announced they will be pursuing price increases on mobile. What are your thoughts there? Are you going to follow? Thank you.

Well, that was a long question, Luis, but I will try and answer it as quickly as possible. So on Sweden, we are very happy with how we're holding up. in a competitive environment in Sweden. We look at PostpaidNet as pretty much neutral. Postpaid are developing more positively than competition than they posted yesterday. And so I would say we are sustaining our market leadership position. We are being very rational. We took a number of pricing moves pre-summer. We are waiting to see competition fall. And no, the new Teletubbies Unlimited tariff is not having an impact on us at the moment. I think it's a bigger threat to them, actually, in terms of a downgrade point of view than it is to us. On Finland, yeah, happy with the recovery we're seeing in mobile service revenue. Happy to see that there has been market movements and pricing and clearly not being the market leader in Finland, we will be happy to follow them, which we did yesterday. And yes, we are also hoping that the Finnish market is now going to be more rational. But there is still some of these vouchers around in the market that the key competition sends out on a regular basis. But certainly all the movements are very positive at the moment. And as I've said, we aim to grow in line with the market in Finland, and that's what we will do. Norway, yes, some new pricing this morning on broadband. And we are clearly looking at our mobile tariffs as well and looking at what happens in the market dynamics. We have got a very comprehensive, systematic approach to pricing going on in all segments. in all markets and that will continue to benefit us in the following quarters and years ahead.

And maybe you started your question a little bit around the mobile service revenue in ARPU. Is there a more technical question you can follow up with IR? Because in general, what we see is a solid ARPU development, basically across our footprint, on the back of Roman Rebound, but also on the back of the pricing moves that we already have done.

That's helpful. Thank you.

Our next question comes from Titus Cron at Bank of America.

Good morning, everyone. Thanks a lot for taking my questions. I have just two more strategic ones, but rather topical ones, I think, if I may. First one, on consolidation, and I'm sure you saw yesterday's EU card statement on the O2 hutch deal in the U.K., Just maybe, could you give some thoughts on how you view the statement? To what extent do you believe this is actually relevant for the markets you're in, for example, in Denmark? And would you say this remains a market-by-market decision? And maybe are you following the current attempts in other markets, such as Spain, actually more closely than this EU court decision? And the second question on the infrastructure ownership, I mean, you already showed with the Tower Deal that you're quite open to share ownership of some of the infrastructure and with potentially more to come. I just wondered now on those fixed impasses that you have in the Nordic market, would that be on the table for you as well, looking at Telenor, which achieved quite a high valuation last month or so? I assume that's not a top priority at the moment, but would you be generally open to similar deals?

Thanks, Titus. Let me take those questions. Consolidation views, I think yesterday's announcement doesn't change my opinion that these decisions are very much clearly taken on a market by market situation. And so I don't think that decision would have any impact on our markets. Clearly, we are following what will happen in Spain and what will happen in the UK with the Hutch Vodafone decision as well. But, you know, Denmark is its own market. But clearly, in these times, where we have more financial pressures, we will take advantage of consolidation as and when it comes along for Telia. But I don't think SD's decision changes that. In terms of infra initiatives, yes, we're very happy with the deals we've struck. We're continuing to look at our rooftops. We've been quite open on that. In terms of fixed assets, we don't need to sell our assets for leverage reasons. We've done it because of the valuation differences, but we've maintained control so that we can work with partners that bring commercial and operational value-add beyond just the check they are writing to get a minority stake. In terms of our fixed assets, we see them as strategic. And I've been quite open in the past that I don't need to sell a minority state for any financial balance sheet reasons, but I would be willing to look at creating vehicles that allow me to consolidate further the Swedish market. And so, for example, you know, create a venture in partnership with somebody else to consolidate city networks. and I've been quite open about that in the past. So it's not a priority at the moment, but if some assets become available that allow us to build our fixed infrastructure further, I'd be very welcome to do that in partnership with other players.

Thank you very much.

Thank you, Jonathan. Next question. Our next question today will come from Nick Lyle at Suxtian.

Hi, everybody. Hi, Alison. Hi, PC. There's a couple of questions, if I could, Alison. Just coming back to the... Hi, Nick. Just on the unlimited pricing first in Sweden, I'm surprised you're so relaxed about it from Tele2. Just given SEC 399 for unlimited is about the price of your 15 gig package. So why wouldn't that limit upside to pricing for consumers? Can you tell me sort of what I'm missing there and why you'd be more relaxed about it? And then secondly, just to come back to Maurice's point on the divvy, how long do you think you've got with an uncovered divvy before you have to question, either from the board or from yourselves, before you have to question the floor, the two-sec floor, please? Thank you.

We've been living with a significant difference to Teletubbies pricing for quite some time. And, you know, as we continue to build out 5G well ahead of competition and sustain our best network, best coverage, highest speed position, we are as yet not seeing it having an impact. on our business. Clearly, it's something we're looking at, but to date, we haven't seen any impact on our business. In fact, those that are willing to pay a significant amount of outlay for a tariff tend to want to be more with the market leader in our market anyway. And it's actually the low-tier brands with the lower tariffs that are, you know, something we monitor more in this time when customers are more likely to go to neutral options. And then in terms of the dividend policy, certainly, you know, we have a clear mid-long-term plan that our board remains very committed to. And we believe the dividend policy is aligned with that plan. So there is absolutely no dialogue about reconsidering that dividend policy at this time.

Okay. Okay. Thanks very much.

Okay. We'll hear next from Peter Nelson with ABG.

Thank you very much. Hello, everyone. Alison, I have a question related to comments made earlier by both Peter Christian and yourself on looking to review your cap expense for next year in relation to the sort of the cash flow questions earlier. Now, you told us several times today that You're seeing no impact or changes to consumer spending. You're following the long-term strategy, and you just stressed the importance of having premium networks. So my question is, why would you consider reviewing your CapEx plans? And if so, which areas of the CapEx would you be looking to potentially reduce? Thank you.

I'll pass over to PC in a minute, but just to be clear, you know, we always plan to to come off of peak spending this year. And so we revert to 15% of service revenue as our metric for CapEx next year. And that has always been the plan and still is the plan. And as you know, our network rollout is, you know, we're now above 70% in a number of our markets and 80% in Lithuania and Sweden is, you know, 40% done. But PC, it was you that said that earlier.

Yeah, yeah, yeah. Maybe I can give some, let's say, favour on what I meant. Our general agenda remains, and we are not planning to do any sort of dramatic changes on that. We need to complete our network modernization. We need to transform to a digital company, and then those will continue. But, of course, a changing kind of business and macro environment, we should sort of take a real look into our investment agenda and see what are the investments that we actually need to protect, you know, maybe even more, and make sure we get the value out of that. And what are the investments that we actually need to look at, whether we should, you know, face it differently or actually also cut out. So that's what I meant with reviewing. So you shouldn't expect that. And actually, one of the things, we haven't talked so much about it, We are not actively cutting down significant capex now to protect cash flow this year because we mean that the investment that we are doing is a very important element of building, you know, a sustainable teller going forward. So what we will be doing, we will take a full review of what we are doing. We are currently doing that as part of our financial planning for next year. The ambition is to have an overall capex plan, you know, that is in line with 15% in itself.

Okay, good. Thank you.

Next, we'll hear from the line of Adil Kiroya at Deutsche Bank.

Thank you. Two questions, please. So, firstly, you've talked about potential consolidation opportunities in TV in the past. What are your latest thoughts on the opportunities and what exposure you would ideally like to have to TV and media in the future? And then secondly, a question, how do you think about core telco enterprise trends for 2023? It sounds like we haven't seen much change across the behavior, but we have seen a slowdown in enterprise service revenue growth over the last three quarters. Do you expect a further slowdown into next year, or do you expect trends to be similar to the 1.5% growth we saw most recently? Thank you.

Thanks, Carol. So, you know, consolidation of TV and media, yes, I still believe it will happen at one point, but our focus at the moment is simplifying what we have, consolidating around the TV4 and MTV brands that are very strong national champions, making them stronger for changing viewer habits and increased demand for targeted industry from advertisers. to make that business a better business so that it either throws off more cash to Telia or creates value creation if the right opportunity comes along. But first and foremost, it's making the business stronger as it stands today. And then core Telco trends, you know, we are, yes, enterprise was a bit softer this quarter, but as I said, some of that was kind of, you know, one of IoT revenues in Sweden last year and a little bit of acceleration of Datacom legacy decline in Finland this year. We're very happy. with how our enterprise business is performing. We're seeing increasingly demand from the public sector and the private sector for us to help them with their digitalization journeys. And as I said, I think, to one of the media earlier this morning, as enterprises look for more efficiencies, and are under more pressure from a sustainability point of view, we are the perfect partner to be with them. And so no concerns, but clearly, you know, monitoring the economic environment, but no indications that we would slip next year.

Thank you so much.

And maybe we've got time for one final question. Yeah, or we've got three. Okay, so let's see how we get on this.

Next, we'll hear from Stefan Goffen at D&B.

Yes, hello. Just a couple of follow-ups on earlier questions. First of all, you stated that inventory level would remain at this level for now, but we're almost 1 billion higher on inventory in Q3 2022 versus Q3 2021. What is a fair level once supply chain issues are removed? Are we coming back to the situation one year ago? Secondly, just a clarification on your assumptions on energy cost for next year. Have you assumed that the Q3 spot prices remain throughout 2023 in these assumptions? Thank you.

I guess those are for me, Alison. Go ahead, energy expert. I'll start on the energy part. No, absolutely not. You know, so whenever we give an output, it is based on two things. It is based on the market quote rate, you know, and that's what we showed in the graph. So that's what the output is based on. And then, of course, we combine that with whatever hedges we have placed. And you saw also our, you know, hedge levels for 2023 and also then the average hedge prices that we have in the range of 400 to 500 per megawatt hour. So that's an important policy that we have followed throughout this year and we will continue to do going forward. Then on inventory, yeah, you are right that it has increased quite dramatically, you know, and this is, you know, mostly linked to conscious choices, right, where we, because of the situation we are in, we need to place orders, you know, often more than a year on certain critical components, both where we resell and, you know, to our B2B customers, but also for our own commercial business and also our own kind of transformation and network rollout. So we have chosen, you know, to protect the business and allow this inventory buildup. Then we have this maybe, you know, a bit ambitious to, you know, how fast can we scale it down? But I think you should, you know, I'm not going to give you an exact number of what it's going to be, but it's several hundred millions lower than what you have today. That it will be a more normal level, even if there will be, you know, kind of a shaky situation probably in the years to come.

I think it would be time for one last question. And our final question will come from the line of Adam Fox Rumley at HSBC.

Thank you very much. I wondered if you could talk a bit about how you're planning to set your budgets next year, given the inflationary and energy backdrops we discussed today. Is this a time for zero-based budgeting? Are you tasking local management to find an extra reduction on their X energy costs? Just be interested to hear about the process and whether it's changing in light of the current circumstances. Thanks.

I'll start and then I'll pass over to PP. Clearly, because of the underlying inflationary pressure, we're expecting them all to take more pricings than they planned. We're starting to get good visibility on wage negotiations. um and so that gives us a good understanding of what that impact might be next year and how that compares to the underlying cost agenda um but we are still pushing our organizations to offset as much as they possibly can through additional pricing and we are now front waiting Next year's plan, headcount reductions. As you know, our plan was to reduce headcount by 1,000 a year. We will upgrade that, and it will probably be more like 1,500 next year is the headcount reduction, and that's all we've worked through at this time. IPC, anything you want to add?

Yeah, the fact that our underlying business is progressing very well and we want to continue with our transformation agenda, we don't want to take a sort of pull we take and throw everything up in the air. So that will continue. Of course, in certain areas like in support functions and so on, we take a more deeper look at what is the cost structure, what can we do without, how can we really challenge that? But it comes back to the main changes is related to putting pricing, as Alison said, both in terms of passing on to our customers, making sure that we use CPI linkages wherever we can, transfer prices, backward batch migration, and also improve on channel execution, reduce below-the-line pricing and sort of aggressive discounting. Then you mentioned the cost agenda that we are now moving forward, and we will do more in the first half of next year to get full effect of that. We talked about the capex, where we're spending more time now reviewing our current plans to see should we adjust it or should we change anything. So, of course, more work going into it, but the base plan and the base process is pretty much the same.

So with those comments, that rounds off the Q3 call. Thank you, everyone, for listening, and you're very welcome to contact us if you have further questions, and we look forward to speaking again in January. Thank you, and goodbye.

Ladies and gentlemen, this does conclude today's teleconference, and we thank you all for your participation. You may now disconnect your...