Date: / 18 October 2012
Speaker: / Lars Torstensson
Mats Granryd
Lars Nilsson
Call Duration: / 01:16:06
LARS TORSTENSSON: Good morning everyone and a warm welcome to Tele2’s third quarter 2012 conference call. The reason for the slight delay was because of a technical snag. It’s now solved. We feel very comfortable about that. So let’s continue. My name is Lars Torstensson, and together with me today I have our President and CEO, Mats Granryd, and our CFO, Lars Nilsson. Now we are able to send this presentation live over our dedicated web page, so I also would like to take the opportunity to welcome everyone that has joined us via internet.
After the formal presentation - as always - there will be a chance to ask questions, either over the phone or it’s also possible to send questions via the web format as well. But enough said by me. Mats, could you walk us through the third quarter?
MATS GRANRYD: Yes, thank you very much, Lars. Good morning, everyone, from a rainy Stockholm. I would like to present the third quarter results. We feel that this is a robust quarter, robust results, and very much in line with the second quarter result. We had an intake of 1.4 million new customers, so we’re almost at 38 million customers, customer base.
Sales grew with 9% to just shy of SEK 11 billion, EBITDA just about SEK 3 million, and then margin is down 28%. Worth noting is that we have never been as high as SEK 3 billion before, so this is a record quarter from that perspective. CAPEX SEK 1.2 billion, SEK 1.3 billion.
So let’s move over then to Russia. Russia stands for 30% of our sales in the quarter. Some of the highlights: we added 710,000 new customers, which is a very good customer intake; EBITDA margin up 1% from the second quarter. It’s 37% up to 38%. I would also like to highlight the fact that ARPU is growing, and the growth rate is 4% year over year. (inaudible) is up 7%. Revenue, as I said, grew with 8% in the quarter. New regions margins is up to 14%, old regions is at 47%. So, all in all, a very stable quarter with a very good customer intake and you can see on the upper left-hand graph, market share is now at 9.5%. The ARPU development RUB234 per month and that is equivalent to the 4% growth, as I said.
Last quarter we added an astonishing 40% of all net adds. This quarter we don’t know yet, but we have a good chunk of 710,000 to start with and we will see what the other competitors come in with. Also encouraging is to see that the annualised churn rate is still on a low level. We are at just shy of 8% per quarter, so it’s around 30%, 32% on an annualised basis, which is significantly lower than our competitors. And that is one of the positive signs and positive impacts that make our net editions so very strong.
If we move on then to our sources of revenue in Russia: 92% comes from voice, 8% from data and, if you look at the year over year growth rate, data grew with 12% and voice with 8%. Of course we’re happy with the 12%, no doubt, and as you all know we are only on 2G data on edge, so with 12% we’re happy with that. However, our competitors are of course growing significantly faster on data. They might be up to double percentage points than what we have, but 12% on edge is a good result on data growth.
Moving on to the regulatory update, as you know, we are disappointed on the no decision on 2 October, or the technology neutrality. There will be another meeting in December we believe, and there will be further studies conducted between now and that meeting. We do not think that there will be a decision at that meeting, and when techno neutrality will happen is still written in the stars. However, we believe firmly that it will happen. The question mark is when.
We have also chosen to put in the new regional licences, so it is nine new licences, so on the 1800 band. They will be distributed some time in the future. We don’t know exactly when and we do not know exactly the principle if it is going to be a beauty contest or a paid auction. These are in good regions, regions where we are not present today, but it is not a whole lot of megahertz. I think it is up to 10 MHz in a region, and then it can be down to just a couple of megahertz in other regions.
Worth noting as well is that in LTE development EIKS Consulting has done a study on what percentage of the Russian population that will have LTE by 2015. If you remember we did a similar study in Sweden and we think that by 2015 roughly 20% of the Swedish population with have LTE or a 4G subscription, and the same number in Russia is 5%. We can sort of conquer with that we think. That is a fair assumption: Sweden 20%, Russia 5% on 4G subscription by 2015. So with those words I -- you know, we are disappointed but it is not a falling off the cliff event by no means. We have plenty, plenty of time to make sure that we get the data licence.
Moving on then to the forward looking statement. In Russia we have increased our subscriber base slightly from 22 to 22.5. ARPU is still 3% to 5%. EBITDA 37% to 39% and CAPEX we expect that to be between SEK 1.3 billion and SEK 1.5 billion.
Okay, so let’s move over then to the Nordic region: 40% of our revenue comes from the Nordic, which is Sweden and Norway. Let’s look at Sweden firstly. We had a service revenue growth of 4% year over year, which we’re very proud of, and you should also know that SEK 966 million in EBITDA is the highest ever in Sweden. So that’s another first and another high which we’re also very proud of. The EBITDA margin is 33% and of course is affected by the introduction of iPhone 5, and I’ll go through some of the sales numbers on iPhone 5 later on. We believe that we have increased our market share slightly on post-paid, and we believe that we have lost slightly on pre-paid, but very small changes in the market. We have added 60,000 on post-paid customers and we have lost 30,000 on pre-paid, so we have added 34,000 mobile subscribers in total, post and pre-paid.
Just a slide on what we believe is going to be the future. We are strong believers in the bucket price plan, and on 15 August we launched Convik(?) post-paid, where everything will be on line and it’s only a SIM only offer. You can see that our volume products, the low, medium and large, has continued in good demand going forward. I think that with this, what we would like to say is that we believe in bucket price plans where you include data, voice and SMS in one bucket.
Moving on then to some of the developments on the 4G and 2G networks, we have today a population coverage of 80% in Sweden and we are committed to do 99% by yearend on 4G. As you might be aware, we are now moving over all our networks to the shared network, something called MOCN, Multiple Operator Core Network. We have activated that in two regions of Sweden and in a couple of weeks’ time or actually sooner than that, in a week’s time we will move the east coast over as well, so we will be in a combined network together with Telenor in our joint venture net formability. By doing this we are saving quite a lot of money and we estimate it to be around SEK 300 million, SEK 350 million. Now this is gross. This is nothing that we will see on the bottom line. You can argue that by doing this we are actually getting one network free of charge. You can also see that the SEK 300 million, SEK350 million and saving on gross means that we will continue to focus on our marketing activities and continue to be pushing good offerings out to the market. This is the typical Tele2 way of doing things, of being brutal on costs and making sure that we have money over to do interesting stuff in the marketplace.
The next slide on the Smart Phone development. I think if you start with the graph you can see that in April you had a little jump up, and that was the 345 campaign, and after that it has been a fairly stable growth rate on Smart Phones. We have now an installed base of little more than 70%. It is worth also noting that iPhone 5 have taken a number three position, and that is only after three days of sales in the third quarter, which I think is pretty astonishing. This is then a combined top ten list of our stores, post-paid subscriptions in our stores.
Good. So then moving on to the forward looking statement in Sweden. We believe that service revenue growth will be around 3% to 4% and the EBITDA margin will be between 30% and 32% but do need to say, as well, we believe it is going to be in the lower end of 30% to 32%.
Moving on to Norway. We have a strong focus on our network rollout in Norway. Today we have roughly 45% of Norway being built out on our own network and roughly 30% of the traffic volume is on our network, and we’re aiming for 75% of Norway to be built out over the third network. We had a good intake of new customers, 14,000 new customers. Our market share in Norway has increased slightly. I shouldn’t over emphasise that, but from 18.5% or so up to 19%. As you can see later on, that we have had -- we are guiding for significantly less CAPEX expenditure in Norway and that is due to two things: one is that there is a 4G licence that has been postponed to the future; and the second is that we have had some difficulties in being able to co-locate our base stations in our competitor sites. This is something that we have made the NRA aware of, and it’s not our intent not to spend but it is our inability, if you would like, to push forward there. So that is something we are focusing on to continue to build out the network.
Looking at the forward looking statement, the revenue we believe will be in the lower end of the guidance of 4.8 billion to 5 billion EBITDA. We have increased that from 2%-3% to 4%-6%, and as I said CAPEX we have reduced the guidance down to SEK 450 million to SEK 550 million.
Okay. Moving over to Western Europe, 16% of our sales come from Western Europe. Starting with the Netherlands, I would say a stable financial performance. Net intake on the mobile of our plan 51,000, so areas that are going well for us is the mobile as well as business to business. We have in the quarter attracted -- continued some strong brand names. Accor is one. A couple of water companies, the Dutch railway and many more have joined us in the business to business segment. Where we are feeling pressure is on the residential side. We have historically been strong with our single and double play offering. Now lately triple play is becoming more and more important, and we are not competitive enough throughout the market on our copper lines there. So fixed is under pressure, residential is under pressure. The mobile side and the business to business side are going very well for us. So it’s a little bit of a mixed bag in the Netherlands. Financially it’s stable.
Moving over to Germany and Austria. Germany I think is a fantastic example of how to milk out as much as one can. We are now at 30% EBITDA margin, pretty much where we were a year ago from now. This is despite the fact that we have lost almost 20% - or actually somewhat more - in fact, 3% of our subscriber base, but we still managed to keep our EBITDA margin up, which I think is a very encouraging sign. In Austria we are doing a lot of good activities. We’re focusing on consumers and on the SME side, on the business to business, and we have seen improved sales in the Vienna region after we acquired the Silver Server company, and that is yielding good results for us in Austria. The EBITDA margin, as you can see in the graph, is slightly improved quarter over quarter.
Moving then over to Central Europe and Eurasia, 13% of our sales is coming from that region. I will not spend too much time on these, but Estonia a very stable financial performance, positive net intake of roughly 10,000 customers, and we are modernising our network and rolling out 4G. Moving over to Latvia, tough competition in the market, EBITDA margin 34%, customer intake strong with 21,000 new customers, and we will launch 4G when we see that it is commercially attractive for us. Lithuania then 38,000 mobile customers added in the quarter. EBITDA margin of 35% and, yes, there is a continued strong performance of Lithuania. Then if we take the next slide you can see that this is a true success story. One should know that we started this operation by ourselves ten years ago in 2002, with only licences, nothing, and now ten years later we are the undisputed number one, literally, regardless of how we measure. We have a market share of subscribers of 53%. We have a revenue market share that is -- yes, it’s very close to being number one if we’re not number one, and on EBITDA we are also number one on market share. So, regardless of how you measure, Lithuania is a true success story. Croatia is not that much of a success story yet. We have however had a good quarter of positive intake of 33,000 customers in the quarter, and we are focusing to maintain the positive cash flow. As I think you are all aware, we have changed the management. It is still very early days but we are seeing positive trends in the market. So a lot of focus and a lot of hard work need to go into Croatia. The forward looking statement in Croatia is that we believe the EBITDA margin will be between 4% and 6% for 2012. The last country is Kazakhstan. A very good strong customer intake of 589,000 customers. We now have 3.1 million customers in the country and we are continuing to focus on a rapid rollout of new base stations. One should note as well that we have a very good data network. We have pushed ourselves further out in the region and we can see now that ARPU is decreasing slightly. Due to that fact we see the purchasing power out in the regions is slightly less than the bigger cities, which is to be expected. The revenue growth over the first nine months is astonishing, 134% which I think is fantastic, and we are focusing and continue to take a lot of subscribers in Kazakhstan. The market share now is around 10.5% in the second quarter, and that is after 18 months of operations or so. I think that is a very good development. The last quarter, as you can see, we added 55% of all net adds. This quarter we still don’t know. Beeline, Kcell added slightly more than what we did but we will still have a good chunk of the net adds in the quarter. So I think we are doing -- posting on very nicely in Kazakhstan. The forward looking statement is pretty much the same. We have moved up the subscriber base from 3 million to 3.4 million. We have the same EBITDA contribution. We have lowered our CAPEX expenditure slightly, from 550 million to 600 million down to 450 million to 500 million. We are committed to have an EBITDA break even in the second half of 2013, so basically a year from now. Of course we believe that we will be able to reach a 30% market share at one-third of the market in a more longer term perspective in Kazakhstan.