Telia Company AB (publ)

Welcome everyone to the company's Q3. This meeting is being recorded. Results presentation and with that, I will hand over to tell you company's head of investor relations, Eric Strandon-Peers. Please go ahead, the floor is yours.

Thank you and welcome everyone to this call. We have here in the room, our president CEO, Alison Kirkby and our CFO, Eric Hagerman. And I hand over to you, Alison. Thanks

Eric and good morning and a warm welcome everyone to our third quarter results. And in addition to being very pleased with the progress that we've made since we last met, I'm also delighted to have Eric here today, our new group CFO, welcome Eric. And what a great quarter to start. As you all know, our focus this year has been very much on restoring profitable growth momentum in our tail cooperation and the third quarter results are proof that we're making the progress we promised. We're also making progress on the restructuring of our TV and media business. However, we are still in the midst of a relatively challenging advertising market. As you've seen this morning, telco service revenue growth accelerated to 3.9%, which is the eighth consecutive quarter of growth. And like previous quarters, growth is broad based across all markets, across both. For example, now almost closing the historical network perception gap in Finland. This clear progress on the network leadership side across the group supports NPS trends, which have been positive throughout the year with significant improvements in this quarter for Sweden, Finland and Lithuania. And finally, we also saw enterprise digital services that I like to call beyond connectivity, its growth also continuing to accelerate. On improving capital allocation, another strategic priority for us, the divestment of Telia Denmark entered its final phase following the signing of a binding SPA. And we continue to expect the deal to close in the first quarter next year at the latest with the net proceeds to be used for deleveraging purposes. Hence bringing our leverage down to be comfortably within the target range of two to two and a half. And finally, our outlook metrics are updated, which I'll come back to at the end of the presentation. Here are the four key priorities we set out to drive sustainable growth. And based on what we're seeing in the quarter in terms of our financial, commercial and operational performance, I'm absolutely certain that this four-pronged approach to building a better Telia is delivering and is the right strategy for us to continue to pursue. Let's move to Sweden, where we continue to be far ahead of competition with 5G rollout and network modernization. Population coverage improved to 77% and further on the network side, as I mentioned, we're absolutely delighted with the outcome of the recent spectrum auction. Despite a tough economic environment in the country at the moment, we remain very resilient. Service revenue growth accelerated to 2.2%, driven predominantly by enterprise, where we saw a .4% increase, the highest growth rate ever recorded in Sweden enterprise, with connectivity going 5% and digital services, including security, going 14%. Telia Saige had an excellent quarter with 42% growth, albeit partly on the back of providing new digitalization services to Sweden's biggest region. In the consumer segment, we saw a continued solid development for both broadband and TV. Mobile was stable as price increases were offset by a continued mix impact, but importantly, despite the economic environment and despite sustaining premium price levels in the market, we are growing our subscriber base. Excluding the impact from legacy and roaming, underlying service revenue growth continued to stay very healthy at 4%. And we saw a slight reduction in legacy pressure as the drop for both fixed telephony and broadband eased somewhat compared to last year. EBITDA growth improved to 4%, supported by the growth in service revenue and was further amplified by lower marketing spend from an improved channel mix. Positive FX gains and an easy cost comparison from an inventory write down last year also contributed. Moving on to the operational side of things, mobile subs grew by 8,000 in each of the consumer and enterprise segments, supported by a record low churn level now below 13%. ARPU remained unchanged, owing to growth in Telia's family proposition and in the fellow brands. And the consumer NPS, and that's the Telia consumer NPS, continue to gradually move in the right direction, supported by the aforementioned network modernization, 5G rollout and the commercialization of it. Our broadband subscriber base remained stable as growth in fiber and fixed wireless access compensated for the ongoing decline in DSL subs, of which we now only have 61,000 remaining. A new fiber pricing taken earlier this year resulted in another quarter with fiber revenue growing around the 10% mark. And in TV, Telia was again awarded for having the best TV service, and we also continue to grow our subscriber base both in the MDU and SDU segments. ARPU increased only slightly due to a somewhat negative mix, but we expect this to improve in the fourth quarter and onwards following the September implemented price increases, which were in the range of 16 to 25% for our basic TV services. Turning to Finland, where we're seeing our focus on network quality having a positive impact. First, our 5G network has now reached 90% pop coverage. Second, the share of modernized sites now exceeds 50%. And finally, we saw our network perception improve to a level almost on par with the market leader. The improved network perception is also benefiting our NPS, which continues to improve across all product categories and reached an all time high in both consumer and enterprise. Mobile revenue growth continued to trend positively with an almost 3% increase for the quarter and acceleration from the second quarter driven by continued strong development in consumer ARPU. EBITDA growth accelerated sharply and reached double digit growth.

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It's going 11%. And despite inflation, the flow through to EBITDA was to say the least excellent resulting in EBITDA growth of 90% for the quarter. The energy tailwind was only about five percentage points of this growth. Finally, our NPS hit an all time high during the quarter, evidence of our strategy having a broad impact for all our stakeholders. Estonia also had an excellent quarter with both mobile and fixed revenue growing 7%. And like in Lithuania, EBITDA growth clearly outpaced inflation, growing 15% and still strong, excluding energy growing 13%. Finally, to TV and media, where we continue to be impacted by a very weak ad market, especially here in Sweden. Advertising revenue declined 16% in the quarter, which was sequentially worse than Q2, but in line with what we expected. Meanwhile, pay TV was stronger with direct to consumer OTT revenue growing 9%. EBITDA declined in the quarter by 44%, which is equal to just over a hundred million Kronor, driven by the drop in advertising revenue and only partly mitigated by lower operational expenses and some positive effects as a rare tailwind this quarter. The restructuring to refocus this business around the TV4 and MTV platforms continues, focusing it more on stronger digital capabilities, a more focused premium sports offering and a leaner cost base. And in the quarter, the Seymour content offering was merged into TV4 and MTV, and the new TV4 Play Plus service was launched. And just last week, we had a similar launch for MTV Katsumo in Finland. Looking at the subscriber base, we see an increase driven mainly by sports seasonality and the recently launched TV4 Play HVOD service, which is off to a positive start. And with that, Erik, I'm going to let you summarize the financials.

Thank you, thank you, Alison. Let me briefly summarize those third quarter financials. And starting with service revenue, which Alison already mentioned, improves further to 2.6%, with Telco growth of 3.9%. All Telco units grew nicely, with Sweden and Norway making the largest contributions. Telco service revenue is driven by a healthy growth of .8% in consumer, and a particularly strong growth in enterprise, up .7% year on year. Looking at EBITDA, it's a strong quarter with .6% growth, and Telco even better at 9.3%. In Q3, all Telco units grew EBITDA by double digits, except for Sweden, which grew 4%. Part of this EBITDA up list is explained by energy costs, which turned to a tailwind, as expected, and were 120 million stack lower than in Q3 last year. TV and media had a decline in EBITDA, but as you can see from the chart, it is much less of a direct to group performance than in Q2, declining around 100 million in the third quarter, versus about 350 million in the previous quarter. As this strong Telco performance is also why we upgraded the outlook to low single digit growth for the full year. Moving now to the next page to OPEX, which despite their healthy top line growth, reverted to a decline of .1% year over year. The two main call outs are resource costs, the cost were kept flat, as employees salary inflation could be upset through savings on costs for consultants, and sales and marketing savings materialized nicely, mostly as a direct result structural channel efficiencies across the units. The net OPEX saving from the transformation measured against our baseline stands at around 1 billion. As you all know, the 2 billion net savings targets were set in 2021, in a different non-inflationary market environment, and will not be reached by the end of year three, as originally envisaged, but the transformation agenda continues nevertheless, and continues to deliver efficiencies. Now looking at CapEx, it was 2.9 billion in the third quarter, from 600 million lower year over year, for one because while 5G investment continues, at 87% pop coverage, we now have passed 5G peak investment. For Q4, we will again see a material year over year decline, and we now expect full year CapEx of around 13.5 billion. Moving to the cash flow table on the next page. The structural part of operational free cash flow in the quarter was 3.7 billion, 1.1 billion higher than last year, and on track to be around 7.5 billion for the full year, as you have heard us guide today. This was mainly driven by the 1.7 billion higher EBITDA, and the 0.3 billion lower cash CapEx. Cash interest was kept flat, despite higher market rates, due to the positive impact of phasing, and also since we have around 100 million higher interest received on cash balances, versus the same period last year. Looking at working capital, there was a slight negative contribution in the

quarter. The upgrade to low single digit growth for the full year, despite TV and media dragging us down to flat for the first half, as we've now seen an accelerated telco momentum this quarter. CapEx expected to end the year at around 13.5 billion, in line with previous guidance, but exiting Denmark now. And the structural part of operating free cash flow is expected to be around 7.5 billion, in line with what we said last quarter, when we guided you to the lower part of the 7-9 range, and despite the fact that we've removed Denmark. In fact, with this guidance now in place, and if you include Denmark structural cash flow, the structural part of operating free cash flow for the year will be broadly in line with our dividends for the year. And that is a slight upgrade versus what we indicated last quarter, due to again, the underlying strength of the momentum we're seeing in our telco operations. So summarizing the quarter, the year so far, and the outlook, we're clearly successfully executing on our strategy, and delivering on what we set out to achieve when we started on our journey to create a better Celia three years ago. Telco growth is restored and further improving, supported by pricing and improving NPS, solid consumer trends, and continued strong enterprise services beyond connectivity. And as a result of the many structural cost interventions we've made, and despite heightened inflation, and having passed peak CapEx, there is now an improving flow through to both EBITDA and cash flow. This is by far, Telia's best telco quarter in modern times. Network modernization and 5G rollout on track and well ahead of competition, strengthening our leadership positions and underpinning our premium market positions, which combined with our leadership in digital services is enabling in particular the enterprise momentum. And having now secured the leading spectrum position in Sweden for the next 25 years, we're in great shape for Telia to be the undisputed network leader for the foreseeable future. TV media, well, it's still tough, but we acted early and restructuring and brand consolidations well underway, putting us in a stronger position for next year onwards when market conditions improve. Our second half cashflow turnaround is on track, despite the TV media headwinds, and working capital is expected to rebound in the fourth quarter in line with the profile we've been showing you since the start of the year. The Denmark sale is progressing. It's on track to close early next year, which will of course strengthen our balance sheet going forward. So all in all, it's been a busy quarter and a busy year, but I couldn't be prouder of the rather excellent outcome of all of our hard work to create a better Telia. So with that, let's now take your questions.

We will now move to the Q&A portion of the call. To join the queue to ask a question, please press star five on your telephone. Again, that's star five on your telephone to ask a question. The first question is from Andrew Lee at Goldman Sachs.

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ahead.

Good morning, Alison, and welcome, Eric. Obviously, like improved trends across the board. And so just wanted to kind of dig in a little deeper because this year has been kind of very turbulent in terms of inflation and rates. And so I guess what investors are trying to understand is what are the two underlying trends and how should we think about them? So first question was just on your telco operations. Clearly you've seen structural and underlying improvement and you mentioned that, Alison, in your sign off comments. Do you think your telco operations are now delivering what the structural quality should, you expect them to deliver from their structural quality? And clearly you've got inflation and effects and energy turbulence in numbers at the moment. But how should we think about what the structural growth should be for those operations going forward? Should we expect further underlying improvement? And you tell it to, for example, guides to kind of mid single digit EBITDA growth on an underlying basis. Is that kind of commensurate with how you think about things? Just any help you can give us in terms of, yeah. Yeah,

yeah, yeah, no, great question, Andrew. And thanks for the question. Yeah, clearly it was a blow away quarter at 9.3%. But if you just kind of step back a bit and look at how has this business been performing excluding some of the energy fluctuations and excluding energy fluctuations and a little bit of effects one off the here and there. It's been consistently growing two to 4% on the top line and it's now consistently growing four to 6% on the bottom line. And it was always our ambition when we set out on our journey three years ago. Yeah, Nick, we're never going to separate that out. We sell a bundled product with all of the premium sports and subject to whoever wins the rights. Tellia has a big customer base that that rights owner will want to continue to sell to because they'll need to.

This quarter, but in some of the future quarters, so just sort of helping understand a little bit what's going on with other costs aside from energy and you obviously made a reference to salaries. And then just secondly, maybe a question for Eric, just be interested, first of all, welcome. And secondly, we'd be interested in hearing what your priorities are coming on as CFO of the group. Thank you.

Thanks, Jacob. So I think just building on the answer I gave earlier to Andrew, if you strip out energy from the .3% EBITDA development, you get to 7.6%. And then if you take out some of the one-offs we had from FX or some one-offs last year in Sweden, that probably takes you closer to a 6% underlying development. Why is it so strong this quarter? Well, a lot of that revenue development is coming from pricing and in Norway in particular, it's coming from very high value wholesale growth. And so it's a very positive pricing and mix effect. And in fact, we've got .2% growth in the Swedish wholesale business as well. So that comes with very high growth margin. And the operational expenses, as you saw, we're not dramatically down year on year. We're doing a decent job of setting the inflationary pressure. But I'd say, as I said to Andrew, stripping out energy, stripping out one-off, if the revenue momentum is coming from core telco, which it is, you can easily see that low single digit on the top line converting into mid single digit in the bottom line. And that's why you can see a sustainable 4 to 6%. As you look forward, as I said, we've already struck our salary deals in Sweden and Finland next year. And they are going to be in the two and a half to three and a half range, whereas this year they were closer to four and a half to five percent. So that will take a little bit of pressure off of next year, but we're going to continue to be very disciplined and structured on how we take pricing into next year as well. And with a big wholesale business and an enterprise business that's increasing the index link, we'll still benefit from slightly higher heights in inflation for the foreseeable future. And over to you, Eric.

Thank you. So I guess what we see today is that we have the right strategy. So one of my priorities is to make sure that the business, also in this transitionary phase, remains totally focused on execution of the strategy. And what that ultimately means is we need to keep momentum over profitable growth and a strong profitable growth that we printed today. And I think there is an opportunity to improve cash conversion. And if you look specifically what that means is there is some improvement to be done on working capital, but I guess we come back to that next year. More specifically, if you think about priorities, it's about delivering the 2023 numbers versus the guidance that we've upgraded today, coming with a robust, solid plan for 2024. And I think another one is making sure we get at a deal in Denmark up.

Very clear. Thank you. If I can just follow up on one point on Alison's comments. I mean, if I look at your gross margins, they look flat year on year, and maybe I'm calculating it wrong, just doing revenues minus cost. Is there maybe that some of the higher margin activities are somehow flowing through to things below and maybe that's the wrong way to look at it?

I don't really, haven't looked at that level of detail, but as we look at the business, like for like, stripping out all of the effects, there's probably a bit of effects, you know, conversion of non-Swedish revenues coming through, I don't know now, but as we look at it, 60 to 70% of our growth is coming through pricing, and that just goes straight to the bottom line. And we've, as I said, a very strong wholesale mix. So maybe you can spend a bit of time offline with the IR guys. After

the call

and get into it in more detail.

Perfect, I appreciate that. Thank you very much and good luck as well on the new role. Thanks Jacob.

Our next question is from Eric Lindholm at SEB. Your line is now open, please ask your question.

Good morning and thank you for taking my questions. So two questions from me, if I may. So energy of course, very nice tailwind in the quarter, but still a much smaller tailwind than the headwind of last year.