TeliaSonera AB (OTCPK:TLSNF) Q3 2013 Earnings Call October 17, 2013 3:30 AM ET
Johan Dennelind - President and CEO
Per-Arne Blomquist – EVP and CFO
Jesper Wilgodt – Head, IR
Erik Strandin Pers - Danske Markets
Lena Österberg - Carnegie
Andrew Lee - Goldman Sachs
Maurice Patrick - Barclays Capital
Nick Lyall – UBS
Peter-Kurt Nielsen – CAI Cheuvreux
Jakob Bluestone – Credit Suisse
Stefan Gauffin – Nordea
Sven Sköld - Swedbank Markets
Barry Zeitoune – Berenberg
Ulrich Rathe - Jefferies & Co.
Thomas Heath – Handelsbanken
Laurie Fitzjohn-Sykes – Citi
All right. Good morning all and welcome to the presentation of TeliaSonera’s third quarter results. I’m Jesper Wilgodt, Head of Investor Relations. With me today to present, I have our CEO, Johan Dennelind, and also our CFO, Per-Arne Blomquist. After those presentations, we will also have a Q&A session.
The intention is close the event within one hour, so just to let you know that. And if there is anyone from the press that would like to have individual interviews, please contact Salomon Bekele, or Iréne Krohn after this presentation.
So by that, I would like to hand over to Johan.
Thank you, Jesper and good morning all of you. I’m pleased to be here presenting my first quarter results with TeliaSonera – not my first quarter report but my first with TeliaSonera. Also, pleased to have Per-Arne with me, who is handing over a robust TeliaSonera.
I was going to give a quick overview of the quarter, but I am also going to take the opportunity to give you a couple of observations that I have made during my initial days as CEO of the company.
But first, the traditional summary, where we are reporting a relatively okay quarter, I put it. But it’s a mixed bag and I will come back to what I mean with that. First of all, revenues are flat in organic with a pretty strong margin and even stronger cash flow for the quarter over 7 billion.
We see some positive trends when it comes to the billed revenues in mobility. We will get back to that both me and Per-Arne. We see the effects coming through now of the efficiency measures and the restructuring program, a strong contributor for the margins for the quarter.
We’re talking a bit about our upgrade of the internet experience across our group where we’re investing heavily in both fiber and 4G, also 3G, of course, where we don’t have 4G yet. This is the core part of our future. And needless to say there is strong focus on governance and sustainability where I’ve personally taken a strong involvement from day one. We shall share some news with you later.
And then on the general side on the observations I will give you some plus and minuses from what I have seen so far. I won’t get into too much details in the numbers but bear with me for couple of slides just to give you a brief overview.
As I said, our net sales are flat in local but as you have seen, the net sales is down when you take into consideration the full effect of currency and disposals as well. But the margins as you see 37.1%, which is very solid supported, of course, by the restructuring programs ongoing but also by the margin expansion in Eurasia.
Our free cash for this quarter looks very, very strong and it is but it’s also dependent on a few items. One, of course, the dividend from MegaFon of almost SEK 2 billion net but also some big movements on the working capital side, which we’ll get back to in details with Per-Arne. So overall a relatively okay quarter.
If you will look then deeper into some of the business areas before I move on. The mobility side, we do have also in local currency a negative growth where, on the other hand, the margins are expanding. There is a correlation, of course, a little bit here with the interconnect effect, which is pressure on top line but also strengthening some of the margins.
On the CapEx, we are, in the third quarter, delivering slightly higher CapEx to sales ratio in the last quarter and we are also catching up a little bit on our investment programs where were a bit behind in the first two quarters, and Per-Arne will guide you on the full CapEx later on but it’s ongoing head on.
Moving to some of the key developments underneath the numbers in mobility. This slide is very important, because it gives you a couple of key points. One key point to the left is where we have launched our new data-centric models in Denmark, Sweden and Norway, we’re actually starting to see a positive growth on billed revenues. And digging even deeper into that, you will see that actually it is the key component of the growth in billed for these markets and especially glad to see them of course coming out positively year-on-year.
But also take a look at the bottom there on the left, where some of the markets are still struggling with the billed revenues, both, of course, economic development in the markets but also the way we are putting out our offerings and competing in the local markets.
To the right, an important ratio that we have been talking about through the previous quarters is to measure the proxy, how well we are able to capture and monetize the data growth. We are now at a ratio of about 50%. So out of the data growth in the upper 60s, we’re able to get about 33%, 44% revenue growth out of data. So that we want to narrow further in the next few quarters hopefully.
Moving into broadband services. We clearly see the revenue pressure either way you look at it, in local organic or in a reported, we still are in the shifts of industry shift and technology shift, the consumer behavior shift but I would like to stress that the underlying demand for fiber in our key markets is very strong and needless to say, fixed is increasingly important in our mobile lifestyle and in the mobile world.
Still fairly okay margins on the broadband side even if they are declining in the quarter. CapEx to sales, we’re investing heavily now moving into the next few quarters to try to catch up on some of the things that we haven’t delivered on in the past quarters, especially related to Swedish CapEx which I shall get back to.
Our growth engine is still growing, 11% growth in local currency in Eurasia, mainly driven by Nepal, Uzbekistan and also Kazakhstan where Kcell yesterday reported their third quarter as a listed entity and has a strong set of number. We’re glad to see that data is becoming a core part of the growth, I think about a third of the growth in Eurasia is now driven by data. And it accounts for over 10% of total service revenue. So data is increasingly important and also, of course, leading to an upgrade of our CapEx, mainly driven by the three countries that I mentioned earlier. So this is positive.
Quick look slightly differently into country, where Sweden is delivering strong margins, improvements in mobile mobility Sweden and defending fairly well in the broadband side in Sweden and the margin to the right. So overall the Swedish market is quite strong for us and yet very competitive. We recently this week launched new data pricing models in Sweden called Complate [ph] which is the next step of the previous proposition Dela system where we know also including individuals and not just families to be able to enjoy the bucket pricing where you have free texts, free SMS and fee voice and then you pay for various buckets of data. That’s what we mean when we talk about data centric models.
A quick look at Finland, where the picture is not as bright. We have a very committed team in Finland that are working on kind of the turnaround in some of the key numbers. There are some positive signs underneath this pretty gloomy picture, where the revenues are down both on mobility and fixed, but where the margins are strengthening on the mobility side and decreasing on the broadband side. The positive signs we’re seeing is on the consumer segment where we see some stabilization in the competitive dynamics but also our ability to capture our fair share or more of the respective segments. That is all I am going to say about the numbers at this stage. We will get more into the details with Per-Arne.
I am going to now shift gear a bit and get into a bit of my observations and a bit of wrap-up. I am going to start with our sustainability and governance agenda. Needless to say this is as I mentioned part of my initial priorities. I met with the majority of our largest – 10 largest shareholders and a common theme is clearly that we need to demonstrate that we can act responsibly and sustainably in the long run. The burden of proof is on us. And there is a high interest and demand for us to talk about what we are actually doing here. That’s why – that’s one reason why I bring it up in this forum otherwise it is a lot of work that we are doing internally.
My view on this when it comes to the three dimensions that will enable a secured ethical decision-making throughout. Of course, we have the compliance to the legal frameworks where we act and that goes without saying but it needs to be mentioned. Then we have the adherence to the ethical standards and values across our markets in our countries, which is more – it’s seen as guidelines. An example of that is the UN Global Compact, OECD instructions and guidelines for multinationals, is the International Labor Organization guidelines et cetera. Those are also things that we need to relate to and compliant to and adhere to.
Then of course, I think more importantly than the two above is how we build our current culture and values around ethical framework. There is a lot of good things ongoing, but we need to take a holistic approach and be able to measure this and talk about it in a structured way.
I have already established a compliance function reporting to me from September 1 led by Mikhail Albert [ph] and basically what the compliance function is supposed to do, they are supposed to make sure we do what we say, in short. And that is now being rolled out across the company. Example is the cold of ethics and conduct that we are rolling out to all our employees, which has not been done before, which is ongoing and now we are leveraging that even more.
Also established the CEO office, which is headed by the previous acting CFO Christian Luiga, where we also have a strong involvement in the review of the ongoing transactions in Eurasia, where we’re not just participating and making sure that we do that proper, but we also learn from the things that we find in this area and strengthen our framework around the two first points and also the third point, on building the right values and culture in the company.
And thirdly and lastly on this slide is to establish measurable KPIs – well, KPI should be measurable – and report them in this kind of forum to the key stakeholders that we have. And this will become the two points that I talked about initially -- the burden of proof is on us to show you that we are running our business in a sustainable way.
Let me then move to some observations. I have not been here too long but I have traveled quite a bit and met quite a lot of people. I have been six of our countries and that I have to say that we have a very robust platform -- foundation to move into the future.
We have 70 million over on customers, 170 something in the consolidated in our group with the associates. We have 550,000 shareholders, we have 27,000 engaged and motivated employees with a broad experience and a good mix. Of courses, there is the mix – we need to make sure that the mix comes together and we get the most out of all the people in the group.
We have mobile and fixed, then we have TV in various degrees. And you can see that in each of those areas we are somewhere leading the development in the industry. For instance, in Sweden, we are actually number two on TV – the TV market. We see that this is a strong platform moving into the future.
Just when we are on the map, of course, Turkcell and MegaFon are our associates to us, very important associates contributing a lot to our financials. Clearly we are acting as in a responsible owner here and we will continue to show and upgrade to focus on these areas. The market cap of these two is around 65 billion to 67 somewhere billion for our part of the equity in these companies and of course, the net income is impacted of the performance of these companies and we need to monitor and follow and act as well as we can in a [indiscernible] major shareholder, not majority but a major shareholder in these two important good companies.
Then when I look at some of the things that are – where I think we need to do even better, we are as I mentioned to a few of you already, we are losing a bit of competitiveness in market share in too many of our markets, as well picked up by the analysts. We need to understand why we are losing competitiveness and we need to start addressing that with force, and that's ongoing.
Then in that analysis and finding, the answers to those questions, we also need to take a closer look on customers, how do we actually understand our customers, do we understand our customers? We can be better in that aspect. We need to find a way of reducing the complexity in the group both in terms of operating model but also in terms of our legacies. This is a big area where we are now spending quite a bit of time to get under the skin of the complexity. And underneath this, we need to have a culture that relies on good values, not just ethically but also in terms of driving the business forward in an innovative way, where I think we have quite a bit of work to do to revive our innovation spirit that is so well known for Telia and Sonera and also the combined TeliaSonera. So these are areas where we will focus on a program journey ahead, which is something that is reporting straight into me and the CEO office coordinating this program.
Then I will just quickly summarize and then I will hand over to Per-Arne. We have, as I mentioned, strengthened margins, stable revenues and strong cash flow. But we are not growing and we don’t see the growth trends well enough or clear enough in our key areas, we will make sure we also get the focus on how to start growing. But it is a tough environment, both economically. We are, industry as you know is in a big change and we need to make sure that we change with it or lead the change in some aspects of our industry. And that’s very easy to say and very tough to do but we have to try, we don’t have to try harder.
Our data centric pricing models are clearly getting some traction in the markets where we have launched. Now we need to learn from them. We need to implement them in more markets but I am also glad to see that we are being followed of many of our competitors where they are launched. That's a good sign that we are doing the right thing. I we spoke about the sustainability side. We are embedding sustainability into the way we are working and the journey ahead looks very promising and very exciting but we need to make sure that we strengthen our competitiveness where we operate and where we compete otherwise we will not create long-term sustainable profits.
Thank you very much. Per-Arne, could you please take us through the numbers in more detail.
Thank you very much. So I will try to avoid to repeat too much of what Johan said and focus more on the nine months and also the trends that we have seen during the last couple of quarters.
If we look at the nine months, I would say that it’s a okay result given the environment that we are living in and also given sort of the situation that the company has been in for a while. If I start from the bottom, I could say it’s good. Cash flow was good, strong cash flow. We are defending our earnings per share more or less. We are improving the margins and we have been increasing our EBITDA in local organic terms. I think the issue Johan correctly pointed out is the top line where we are flattish, we – moving ahead that you might wish have us a big company.
And if you then look at the third quarter, we have had certain movements but it’s still more or less more of the same, not a flattish, somewhat down in Eurasia, as I said before, Uzbekistan, we have somewhat better in broadband but is mainly connected to international carrier and we are somewhat down in mobility but that’s also connected to Spain. But they are pretty small movements.
We have – also to remember that we have seen this trend for quite a while and that’s why we actually initiated the cost program close to a year ago. We saw that the gap and the spread between the cost side and total development started to narrow. That was the reason why we then initiated the cost cutting program a year ago.
Now you could see that we have a better spread between these two areas. But the issue I would say is the top line. I think we have pretty good control on the cost side but the issue is the total.
One of the issues is the interconnect. If we deduct the interconnect changes we are not down 3% in mobility, we are actually up with close to 1%. And that will sort of disappear over time but what will not disappear is sort of the billed revenue. And once again we are working very hard with the billed revenue as such, sometimes I feel that this industry feel too much [indiscernible] we are talking about – it’s down on voice, it’s down on messaging et cetera as we know that.
But at the same time, mobile data is growing with 65, 66%, there is very few industries that has kind of growth. And it’s our duty to make sure that we can price this and that will help us to come back into growth. And that’s why we spend so much time on new pricing models while we talk much about the – what we try to do things to improve.
The cost side that we have started to address has also given us an opportunity to actually increase some audience, as you can see here, we had a pretty weak 2012 where more is deteriorating. We have now turned that, more has gone up for the last three quarters, we are not currently closer or even about 35% on 12 months rolling, I think that you would probably also later on, can you do more, can you have a higher margin? Well, it’s difficult, I think just to defend 35% is very tough, it’s an achievement of sort. We will try to protect them but to increase it to further more and expand it further more might be a bit tough.
If you look at the different areas, we see a different trend. I am very happy to say that broadband has been working very hard with the cost cutting initiatives and now yielding results. I have said to you many times that you will see the effects from broadband in the second half of 2013 and that actually starts to happen right now. And I think (inaudible) this 6% in this quarter down 2% of the nine months. It will be a little slightly different down with 7% but in the quarter just down with 5%. We have to guard this that they are not picking up again to make sure that we could reach our cost target.
Eurasia, have a good cost control, have initiatives, quite a lot of initiatives and is actually achievement such to have declining cost when they are living in the current environment that they do with value placement.
This has also affected the margin overall, if you take mobility services they have sort of for the first year now started to rate base increase their margin. Today five out of eight business areas are improving in the quarter six is improving and we have the old Nordic countries improving the margins within mobility.
When it comes to broadband it’s still a challenge. What we see in the third quarter is that broadband Sweden is decreased in the gap paid to last year. They are not up to the same old loss last year but they are sort of closing the gap given the cost initiatives that they have started to work with. In Eurasia, very good and sound margin, five out of seven of the – are above 50%.
The cost initiatives that we have started through deal and that saved 2 billion, the aim to come down at 5 billion, excluding Spain in 2014. We have gone down last year 6.1 from the 27. We will see what happens in the fourth quarter, difficult to judge because it’s partly depending on how much sales we will have in different campaigns, so it might differ 6, it might be 25.5 or whatever but that’s rounded number will be sort of the aimed result of this year.
What is important for us is then also the pace – the cost base, especially the salary level that we have in the next year and that will help us to come down to the 25 –
We continue to – we have been a bit behind during the first six months, we are now speeding up. Reason for being a bit behind has been – weather was a bit cold, that was partly a reason but we also have been much more thorough in the I would say investigation on what we should invest in and we have created some delays ourselves –not just have the autopilot investing in things that we don’t need. We will try to catch up, I don’t see any reason for us not to try to do that, whether we will come up exactly to the 14% remains to be seen but this is anyway our ambition for this year.
You can now that we have a different level of investments in the different business areas, mobility roughly around 10%, broadband roughly around 15% and Eurasia roughly 10% and I would say over time we would expect Eurasia to come down below the 20%. And that’s something that we will invest less but we want to growing at a bit high pace. So I think these markets will be more mature and they have to come down below the 20% perhaps even during the coming year.
Cash flow, strong, I don’t know, if you remember last year was a bit upset about Norway where we had implemented a ERP system, we have prepaid all the supplier which amounted lot of cash flow out, that was roughly 150 million, now that it’s back in the positive way and also that we have payments earlier this year roughly 500 million. So 1 billion of the working capital is facing issues but even if you deduct that, we have a strong underlying cash flow and I think that is good. Good to see that there are dividends coming from MegaFone is coming to end, that of course leads to an improved net debt situation, going down from 66 billion to 67 during the quarter.
And automatically down – our net debt to EBITDA will improve, it has to improve, so we are down to 1.58, that will of course raise the questions about dividends, as I usually say we stick to our dividend policy and we will come back with the dividends later on in Q4 but to look at only this is almost thing that we look at when we talk about dividends. It’s Eurasia here, yes we are at the lower end of our preferred ratio but we are also looking at the future needs, future investment needs and future potential cash flows, so that is just a part of that discussion about dividends.
When it comes to the outlook, it remains unchanged, flattish, on net sales, we will improve the EBITDA margin and CapEx to sales ratio around 14%.
And it’s time to open up for questions and I think we start here with the audience to see if there is anyone there, if we can have some microphones.
Erik Strandin Pers - Danske Markets
Two questions please. Broadband ARPU very strong quarter in Sweden. Could you help us understand the drivers and the effects from each driver please? Secondly, you have created a new group function called strategy and M&A, the CEO words in the beginning of the report. Could you help us explain the significance of that and what is expected from it?
Let me start with the second one and then I will leave with Per-Arne, to take the second one. The new function strategy business development M&A innovation is a central function. As I mentioned in my initial words that I think we need to find a way of making sure that innovation becomes a core part of our agenda everywhere in the company. We also need to take a holistic view on our strategy connected to our investments and M&A activities. So that’s why we are combining that in one unit. On the ARPU question?
Yes, on that one, it’s a little bit – when you look at the order numbers and it includes also the installation fees on the fiber, so that’s the main explanation here. If you look down the line it’s still positive on the broadband ARPU but not as much as in –
The positive thing about is that we have speeded up the implementation of the fiber, so we have all time high in the week – it’s something that we hopefully to improve.
Two questions, the increasing competitiveness, can you explain a little bit more how you think you are going to handle that issue and that potentially also if there is going to be a cost related to that? And secondly, how easy is it to implement data centric models in the countries where you haven’t that done yet?
I think it’s a good question on the competitiveness. I mean the observation I have is and also the fact that we have is that we have lost ground relatively in too many market units. I think we counted it to 14 out of 20 business units in the last four, five years have lost market share relatively in the respective markets. That of course is not sustainable in a long-term and when we talk about finding growth I think we have growth where we are if we do things right and if we get the right propositions to the customers and start winning in the respective markets.
So that’s kind of the general side, specifically what that means of course I don’t have the answers to that but I know the questions to ask and we have initiated a program that we now structurally work with in order to find the answers. So that I have at least we will make sure that we understand why and then we will see how we address it. Of course, growth comes with cost but it needs to be balanced.
If you look at the initiatives we have taken in the Nordic countries, I mean it has not the same, higher cost just to changing your model and even though we have been the number two and number three player in Denmark, Norway, the other players have slightly followed. So the question is that if you do the right thing it’s that not that difficult but you need to have some guts to do it.
So competiveness is not only around the data pricing models, it also goes across our markets, it’s not just the Nordics, it’s actually everywhere we operate is more or less. To your second question then when it comes to data centric models where we have implemented, as Per Arne also mentioned, we see positive traction and we also see competitors following. Where and when we will launch another markets we will get back to but I think the general theme behind it is that people have an increasing need for internet and consuming internet more and more in a different way and are prepared to pay for it in different ways. And of course, the commodity part of people and consumers now tell us that the old way of calling and SMSing is becoming less relevant, therefore data is more relevant. So there is a mix on the shift. The dynamics is different in every markets so therefore we don’t have a general answer for every market and I think that goes with our operating model also, that the local entities are responsible for the implementation.
Lena Österberg - Carnegie
One strategic question and then one financial also. I was wondering a little bit on product innovation in emerging markets, we look at other competitors – launching products in terms of mobile payments and other things. And so you lagged a little bit behind. What do you see that you can do in those areas to drive revenues further? And then one question on cash flows. As you have the positive changes quarter you released in the fourth quarter that you get caught about, what should we expect in terms of working capital for Q4?
Let me start. It’s a good observation that we in some markets have not been launching innovative products in new areas, we are in some areas very innovative around our core business today. And as I mentioned data is growing heavily in Eurasia now, so that way I think we are relevant. When it comes to new propositions in adjacencies like financial services we are aware that there are great opportunities in emerging markets. I have seen them in my previous roles and I know there is great demand for it in any of these markets. We will see what if we can be relevant in that space going forward.
Well, when it comes to working capital it’s very difficult to judge but given that we have had some timing issues in Q3 was sort of in the favour – we will see more slightly negative working capital in the fourth quarter, that’s my guess right now.
Well first of all, I was wondering about – what are you doing now and how long is he going to stay – the other question is about knowing your customers, actually what – which way you don’t go, what are you doing to do to find out what they actually want from you? And the third question is about consolidation in the Nordic countries. Do you have any chances in participating?
Let me start from the bottom. Consolidation, of course, we are observing what’s going on. But my clear message is that we are where we are and we need to make sure we can operate where we are in an efficient way and competitive way. And when it comes to the consumer and customer insight, I think it’s a general known fact that we as an industry broadly are not world class on customer experience and also customer insight. That goes with TeliaSonera as well. I have lot of ideas what to do better but it needs to be done in a structured way with its relevant for TeliaSonera and the respective markets. But I think you can ask yourself if we are world class insight company, understanding your needs, understanding what you want and what offers we are giving at the given moment. I think that’s where our focus is to make sure that we understand what you want and what you need when. When it comes to Tero [ph] he is right now having a break and we are talking about what he should do going forward.
All right. Maybe we should open up some questions from the conference call
(Operator Instructions) Your first question comes from Karen Su [ph].
I’ve just got two questions on your ratio, firstly on Kazakhstan there has been some proposals to have much sharper reductions of mobile termination rates, I understand that’s going through an appeals process in the supreme court, just wondered if you can give us any update on timing around that? And secondly, on Turkcell again around timing, just some any news out on regarding the lawsuits at the New York court of appeal and – $933 million that you are due, just on that based on that would be great.
Okay. Let’s start with the Turkcell issue. No, we have no news, I think not the big momentum, while we are still waiting for the 27th of September in the previous council but given that we had a hearing in New York, they actually stop to talk more or less. Now we are waiting for to hear from them, I have heard different rumors all the time but it’s very, very difficult to know when. So I have stopped to guess actually. [indiscernible] the last couple hours but we will see. We can just wait.
When it comes to the termination rate in – it is a discussion and we will see what happen, it’s something – I don’t think we have the timing on that right now. So that will happen when it happens.
Your next question comes from Nick Lyall.
Nick Lyall – UBS
Again on your strengthening competitiveness have you done any work so far on the quality of networks and more point, do you think you need to spend CapEx maybe to raise capacity on networks as you focus more and more on data? And second, I am just interested in your thoughts initially on the Spain as well, the numbers are weak, granted, there’s an MTR cut that’s very, very aggressive in Spain but the margin is still single-digit as well and you’ve cut a lot of cost down. So what’s the future for Spain, is this sort of performance sustainable?
Morning Nick. I think I will start with Spain. We see that we have still a good potential in Spain. As you know, we recently announced the partnership with Telefonica with regard to offering a converge proposition which I think it's important in the Spanish market whereas some of the key competitors are offering that. But we also know that the market is increasingly competitive when it comes to the well-known [ph] players. So therefore we need to make sure that we commit to the company and drive this forward, which we are doing. So Spain is part of the family.
When it comes to the competitiveness clearly a key part of competing well in our industry is to have a strong network. And we have that as a core part of our strategy today to have the best network experience. The shift is of course that we need to invest heavily in the internet experience as I mentioned and we are doing that. And lot of the CapEx now are shifting towards the improved internet experience both in the mobile lifestyle but also delivering that through our fixed networks. And that will be core going forward. That’s we’re reiterating our appetite to invest in the internet experience.
We have taken sort of an active decision in Sweden to have the same coverage on 4G as we have on 2G which means we will have the geographical coverage about 90%, and no one can beat that. The good thing with that is that it doesn’t necessarily means that CapEx will explode because we produce up to 70%, 80% of this all day when it comes to towers et cetera. But I think that’s important.
Your next question comes from Peter Nielsen.
Peter-Kurt Nielsen – CAI Cheuvreux
Just two questions, please. Firstly, you talked about particularly in the mobile basically is improved gross margins in the Nordic mobile businesses. Is it possible to elaborate a bit on what’s driving these better gross margins, obviously we have seen some – any sort of elaboration on this would be appreciated. Plus, just to be honest when it comes to Turkcell, obviously are you in a holding position? There has been a change in the both structure at Turkcell. Is that something you have any comments or thoughts on any – on their perspective?
Well, thanks Peter. I will leave it to Per-Arne to comment on the first on. On Turkcell, what we have said and we reiterated we want to be a part of the board and have our representation with our large owner. We also realize that the CMB has chosen to point – which we have nominated and we will follow that closely.
When it comes to the gross margin, Peter, it’s basically two things. First of all, the cost cuts which hit us on the top number but also gross margin, so that is helping and also the importance of handsets. When we look at the cost as such it was a question of whether we had 2Q – down the costs, but it’s (inaudible) IT and marketing on the OpEx side.
Your next question comes from Jakob Bluestone.
Jakob Bluestone – Credit Suisse
You talked a bit about trying to address some of the underperforming assets and would you be willing to exit some of those assets or is it priority more about engineering an organic turnaround? And then secondly, just following on some Nick’s questions about stepping up investing to deliver the growth that you are looking to achieve? You talked a lot about CapEx, I mean could we see a step-up in OpEx, higher marketing costs to something to rebound to some of the brands?
Yes, so I think the internet experience again will require investments when it comes to growing in our respective markets, I think as I mentioned we are where we are and we are going to make sure that we find growth where we are and I think it’s possible to find growth where we are and I think it’s possible to find growth where we are if we step up our competitive activities and excel towards the customer and in our propositions. And that’s the generic answer at this point of time.
When it comes to guidance, and we are not changing our guidance, when it comes to growing in the future of course, it will require investment both on the OpEx and CapEx side but it needs to be carried out responsibly of course.
Yes, but as I mentioned also there, we are where we are and I want to make sure we can compete where we are. So that’s part of our family today.
Stefan Gauffin – Nordea
Regarding – you’ve had a quite week fiber intake and now revenue growth is negative, billed revenues are low single digits. You have a new cooperation with Telefonica. Could you give some indication on how that will improve OpEx going forward and help expansion in that market?
I think we have new agreement with them – that is, we won’t go into the details but I think it’s favorable to what we have had before. What we also give here is an opportunity to have a bundle offering which has been extremely popular during sort of the last two quarters. So we have to be able to compete for that. We are doing that right now. We have sold off our towers, it always means that we have improved the cash situation. So I think that overall we have done quite lot of things that will help us to be interesting.
But on the other hand, we have had a tremendous competition from the MVNOs which actually started off in the first quarter on price pressure and that has been – we have been suffering on that.
Stefan Gauffin – Nordea
But you are talking about sort of improving competitiveness but will you also see sort of step-up in margins from this new agreement with Telefonica?
Yes, hopefully we are doing that, because it should be better improvement hopefully that means that where we can also even promote, which I think we need to do in Spain, given that we are operating on a pretty low level right now.
Sven Sköld - Swedbank Markets
Looking at the mobile subscriber base generally in the Nordic region it seems to relatively flat, not only in this quarter but over the whole year. Do you think we are in a phase now where a number of (inaudible) same phase as we have seen in the last few years? And second, just a detail question, I noted that churn rate was up in Sweden quite a lot.
Quite a lot, 18%, has been 15, 15, 16, and now 18.
Sven Sköld - Swedbank Markets
It’s the highest number in the number of years.
But 18% is very low still.
Sven Sköld - Swedbank Markets
And I thought this was a real calm market in Q3.
I think Per-Arne answered the second question straight away. But maybe want to elaborate. On the first one, I think that we will see a continued penetration the same side, because the number of devices start to increasing by the day. So our role is to make sure that we get SIMs into more of these devices, one way to do is that is to launch what we just launched, the complex in Sweden, where we offer that opportunity to more devices in the families and beyond. So I think you can’t see a soft on number of SIMs at this point in time.
Sven Sköld - Swedbank Markets
When it comes to Mac, to your question I mean I don’t see that this is a big shift, it’s still on a very low level and of course, it’s a tough competition, it’s a very mature market, and we are now trying to develop that with new offerings and we will see what happens moving forward. But it’s still – I am not so concerned about that. We have other more where we have tougher competition and high churn rates.
Your next question comes from Barry Zeitoune.
Barry Zeitoune - Berenberg
I’ve got three questions and on the first one, I'm just going to try and press you on Spain again actually. Given that we've got a deal going on in Germany at the moment, given that Yoigo was for sale in the recent past, obviously you need to manage the business as if you're going to be keeping it. However would you be open to selling it if you believe that the EC takes a more favorable view to in-market consolidation? And then my second question is on the trends that we're seeing in mobility, and specifically the billed revenue trends. It seems to be coming from the markets where you changed your pricing to the bucket pricing, where you're offering a limited voice and SMS as standard. Is that likely to push you to change the pricing model in your other markets in that direction? And is this something you're planning on doing soon?
And then my final question is just really on Per-Arne's comments on margins, and that it will be difficult to get above the current level of margins. Given that we're seeing -- this is the second quarter of improved billed revenue trend, we're seeing improvement in the cost base. It looks like another SEK1 billion improvement next year versus this year. Why are you not a bit more bullish on margins? What's going against that that makes you more cautious?
I will cover the first and then second, you will take the third one. With regard to Spain again, just to reiterate what I have said, it was for sale. Right now it is part of our family and we are now focusing on creating value in Spain by examples that we mentioned, partnership with Telefonica, both on the converge side but also on the network side. So I am looking to first of all, go to Spain to meet the operations, I haven’t been there and then to develop this further.
On the data centric models, I’d also reiterate what I have said before. This is something that each market will have to take a look at, and judge and implement according to the local dynamics and the local competition. But what we have seen, where we have launched, and it’s very positive and I think the customers are responding very well to the propositions that we are putting out, and I think it’s just confirming our views on the changing behaviors in our industry, which is also confirmed by some of our competitors joining the bandwagon.
What I have tried to say is that we are operating on a very high level right now and if you compare ourselves to other peers in the market with similar structure. We are perhaps told. We will continue to take down the costs, but I don't think that we should try to push up optimally at any price. If it means that we need to invest for future growth we must be able to do that as well. So therefore it’s not self-evident that we should try to put it up another unit. We have to balance this and that’s what I said, instead of just waiting that everything should continue to go up, just to check to continue to be at that level is challenging up and down. We will make sure that we can balance both the cost efficiency and growth potentials.
Barry Zeitoune - Berenberg
Okay. Wonderful, so basically you see the cost savings are likely to be implemented in improving your competitiveness in markets where you might be losing market share.
Just a quick comment on that. When I talk about competitiveness, it's of course not the jus revenue market share, it's also our EBITDA market share and our profitability in the respective markets. So what I'm saying it’s a balanced approach on competitiveness where we need to make sure that we are long term producing profits.
But also comment upon this, because when you talk about less cost sometimes it could mean also more, but take an example, we have now consolidated the marketing operations in Sweden and have one organization for whole of Sweden, that means that they are more coordinated and I think that they can take out more or less money today, so that is also not always automatically, so the less cost will be worse. This is also a question of how you are efficient in your operations.
Thank you very much. Your next question comes from Ulrich Rathe.
Ulrich Rathe - Jefferies & Co.
I have two questions please; one is on Eurasia. On the margin level, generally speaking I do remember Tero talking at a couple of Markets Day about the 50% level or above 50% not being sustainable. Now you are reporting 53.9% this quarter. I'm just wondering what is your view on sustainable margins in Eurasia, sort of in the near and then in the medium term, i.e., how long can it stay that high, if Tero's comments from then are still valid?
My second question is on the cost cutting. There was a perception that your cost cutting benefit would be a bit back-end loaded even in the second half, i.e., really coming through only in the fourth quarter. And I am now observing the relatively good margin in the fixed business as well in the third quarter, which opens two scenarios, I suppose. One is that really these perceptions were simply wrong, and the cost cuts have come through as planned in the third quarter. Or that indeed, there is a lot of upside coming through in the fourth quarter as these delayed cuts actually take hold. Could you just shed a bit of light on that question, on the timing of this compared to your original plans? Thank you.
Okay. I'll take the first and Per-Arne will take the second. Yes. Looking at the margins for this quarter they look exceptionally strong. I remember that they are driven by a couple of very high margin operations like the Nepal and Uzbekistan where we actually also expect a different dynamics in the competition, over the next year or so. So I don't think those margins are sustainable and I will also then adjust the overall margin picture for Eurasia.
Well, when it comes to the cost I think you tend to forget that we are talking about the 2 billion program and we are taking down one, the so of course we have a certain run rate into the next year and if we have taken out as we have done 1400 people we will see more and more effects of that. What we have said was that, especially in roll they will be back end loaded and have the second half of the year effects and of course we are happy to see that we’ve started and I hope to see more in the fourth quarter. Because otherwise we won't reach 25 very simple as that.
Thomas Heath – Handelsbanken
Firstly you are talking in Eurasia about more growth coming from mobile data. When we think that, that also comes with smartphone growth and perhaps smartphone subsidies, could you say something about what you think around that and how that's developing if we would – were to expect margin pressure from those smartphones as these markets develop.
Secondly on Norway, [Netcomm] have had some very aggressive offers during the quarter sort of stepping away from the norm of try and contain the charge for data, is that the slip up by a local marketing manager or hear something more strategic there. And then thirdly, on the group structure as a whole, the CEO predecessor talked a little bit about the complications of having mobility broadband as units rather than country based operations that said this is the business as it look and let's not change just change it. What's your impression of this organization rather than running things on a country basis and which might seem easier? Thank you.
Thank you very much to see if I remember all the question, I'll start from last one, it's easiest to remember. I think, that's the correct observation that I was heard and doing my first initial time and that is not making life easier to deliver on the consumer behaviour that is much more integrated and we are organized. Having said that, it's not just about organization, it's about how we work, the processors, et cetera, but remembering what I talked about on the slides earlier the complexity part is something we are addressing in the program I also mentioned about the journey ahead.
Norway proposition, it was a launch for a campaign of I think it was 20 years in the country. We are happy about 20 years, we are not as happiness necessarily about the proposition and the message is sent to our strategic agenda, but the consumers like it, it's only 20 days and it's been removed as we speak. I don't think that is going to be a very frequent proposition in our respective market, put it that way.
Yes. I'm quite diplomatic today. When it comes to the Eurasia smartphone penetration, yes it's a very low level today and it's predominately a prepaid market and regardless of that and in spite of that we are seeing a strong data growth. So internet is finding its way into the hands of the people in these countries. We'll see how that moves forward, because we know that the key part of that driving data is the device, but we also now have the opportunity to design the proposition with the right level of subsidies to make sure that we don't create the same dependence that we have around subsidy and some of other markets.
And here we have the opportunity to learn from the shore markets into the more developing areas, we see if we get it right. Right now we are quite excited about the date on the internet opportunities in these countries.
Good. So we move back to the conference call do you have any questions there?
Your next question comes from Andrew Lee. Please ask you question.
Andrew Lee - Goldman Sachs
A couple of question for Johan. Firstly, I wonder if you could give us your thoughts on your Nordic operations underperformance. They performed well this quarter, but over the past year or two, they've been relatively weak. Why do you think this was and what can you do to improve it going forward? And then I wondered if you could comment on the importance of Denmark to your pan-Nordic ambitions. Do you think this is a market that you could help to consolidate either through acquisition or your exit?
Yes. On the Denmark side, our customers want us to be in Denmark. We want to be in Denmark and we are now seemed positive trends in the initial operations which put on high likelihood. Let's build on that and let's see if we can get to sustainable levels also in the margins and profitability. On the overall Nordic level, I think we have some really, really strong performing assets in the Nordic aspect. We also have some weaker areas. We are now digging deeper as I said into trying to find answers to why we're not able to complete efficiently in some of the segments and the segments mostly exposed as you have seen is on the fixed and on the B2B side, where we have seen strong margin, sorry strong price pressure in notion through very, very intense competition.
But it has also forced us to rethink the way we work and we are now stepping up our offerings and [indiscernible] who is leading the B2B imitative have a great team, making great progress there now.
Thank you. Your next question comes from Maurice Patrick.
Maurice Patrick - Barclays Capital
Just a quick one, just sorry, as a follow-up on the data-centric pricing that you've obviously spoken about across all the markets where you've put it that bill revenue has gone up. Are there any particular themes that you can dive into? Are there certain segments that it's been appealing to? Is there some up spin and some down spin? Is usage for these guys generally going up? So some more color around how these things are trending would be
Yes. I will leave to Per-Arne because I actually don't know the details. I can just say one thing about the Swedish proposition that was just launched, it was based on insights on the first dealer product that didn’t penetrate deeply and broadly enough but it got us to a market situation where we now can take the next step and we are also including not just families but also individuals. So that’s the kind of the segment shift in the way we put it out in the Swedish market.
Even more detail about the Swedish, we had two higher price points. So I mean we have changed that to attract more customers. If you had sort of high price prints [ph], it was not attractive now. So that what we have learned. Also learned that we need to have it for individuals but I think basically it’s a question of price points and also the buckets, and what I see, [indiscernible] still pretty low when it was an average to take at least Sweden, we are talking about half a gig in the usage in average. And I think this will increase dramatically. I usually say when I use my phone here and watching TV for an average, one hour one gig. And you could see yourself how much I think the volume will increase going forward.
Your next question comes from Laurie Fitzjohn.
Laurie Fitzjohn-Sykes – Citi
One question. Johan, you mention that fixed is an increasingly important part of your mobile operation, but in the past, I mean Telia's strategy has not put that much weight on the benefit of fixed and mobile together, as shown by selling the Norwegian fixed asset a while ago. I'm just wondering what are your initial thoughts on this strategic question.
Well, thank you and I am not going to comment on the Nordic disposal but going forward. I think that fixed has a crucial part to play in our value chain, when we are delivering on your mobile lifestyle. So the high quality, high speed internet needs, fixed in the value chain somewhere, sometimes not all the way out to the consumer and consumer, sometimes we do with fiber all the way. And I think also confirmed by some of the trends that we are seeing in Europe on the consolidation, we also see that fixed will be very, very important in our future – in our core markets.
Then you could ask, do we need fiber everywhere? Do we need fixed in our mobile only operations? And an example of that is saying where we now at least make sure that we can offer a converged offering in fixed and mobile. Will that lead to in respective markets, we will have to come back to. But generally speaking fixed and fiber are very important components of our future.
Thank you. We have no further questions at this time. Please continue.
That’s perfect, because that’s exactly one hour. So I want to thank and conclude.
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