Tele2 (TLTZF) CEO Allison Kirkby on Q1 2018 Results - Earnings Call Transcript

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About: Tele2 AB (TLTZF)
by: SA Transcripts

Tele2 AB (OTCPK:TLTZF) Q1 2018 Earnings Conference Call April 23, 2018 4:00 AM ET

Executives

Allison Kirkby - President and Chief Executive Officer

Lars Nordmark - Chief Financial Officer

Analysts

Terrence Tsui - Morgan Stanley

Johanna Ahlqvist - SEB

Thomas Heath - Danske Bank

Ulrich Rathe - Jefferies

Lena Osterberg - Carnegie

Usman Ghazi - Berenberg

Irina Idrissova - RBC Capital Markets

Peter Neilson - ABG

Sunil Patel - Bank of America Merrill Lynch

Andrew Lee - Goldman Sachs

Unidentified Company Representative

Welcome everyone to the call. As usual you will find the slide presentation on our website. And I have with me here, Allison Kirkby, our CEO, and Lars Nordmark, our CFO and I start by handing the call to Allison. Please go ahead.

Allison Kirkby

Good morning everyone from a very stormy Stockholm and welcome to our first quarter results and what would be a year of major transformation for Tele2. So, looking at the numbers, liberating a more connected life remains our ultimate priority and we saw this drive another quarter of solid growth.

Net sales amounted to SEK6.2 billion up 5% on a like-for-like basis driven by strong data monetization particularly in our international markets and higher equipment sales. Adjusting for the two non-cash one-offs, we saw mobile [indiscernible] service revenue also grew 5% with excellent growth in the Baltics and also in our investment market.

On the same basis, EBITDA was up by 9% mainly driven by the topline growth which flowed through to a 26% increase in rolling 12 months operating cash flow. And as you know by now, having agreed to combine our Dutch operation at T-Mobile in Q4 last year, Netherland has now reported a discontinued and exclusive from our reported numbers but very much you can see the detail in the reported sales.

Before getting into each market, I believe it's worth highlighting some key successes during the quarter. Starting with our Baltic Sea Challenger market, Sweden as expected showed positive underlying trends despite the [indiscernible] competition.

In the Baltics, we continue to deliver strong revenue and EBITDA goals with both up by 8% in local currency. As a result, our Baltic Sea Challenger business has collectively achieved a 9% increase in OCS on a rolling 12 months basis, amounting to SEK4.5 billion as our ability for strategy continues to serve as well with outstanding cash conversion.

In our investment market, we have expert momentum thanks to 4G roll out, improving network call to perfection, fearless commercial offering and our customers' insatiable thirst for data. Kazakhstan delivered another excellent quarter with mobile end user service revenue up 21% in local currency on the back of growing ARPU and a growing customer base. As a consequence, a secondary payment of the shareholder loans were also seen during the quarter.

And Croatia, our other investment market also delivered an excellent mobile end user service revenue growth of 11%. Our cost structure also improved in the quarter from a number of cost and synergy initiatives. In Sweden the TDC synergies reached their target run rate level well ahead of plan and in the quarter, we announced outsourcing of IT services to Cognizant and Hexaw allowing us to access the right competence and scales as it supports our digital transformation strategy and further IT operating cost reduction in the future.

And the topline momentum and increasing sale in our CapEx business filtered through to the 30% EBITDA margin, allowing them to reach our mid-term ambition one year early. The first quarter this quarter also marks the beginning of a year of major transformation for our group and preparations for the two transactions in Sweden and Netherlands are well underway.

The regulatory approval processes are on track and we’re in the pre-notification phase with constructive dialogues with the European Commission and looking forward to filing the formal merger [ph] notification during the second quarter.

Looking forward to the merger with Com Hem, we will be combining two highly cash generative businesses with clear synergies to create a leading connectivity provider in the Baltic Sea region and as a reflection of it, we are today announcing an updated and more specific financial leverage target and shareholder remuneration framework for the combined company, which I’ll get into in a bit more detail later.

So, let's get into the markets in more detail and first our Baltic Sea Challengers. The Swedish market saw increased competition in the consumer price side of segment, in particular with new price plans launched by several brands in the quarter. The main brand segment was however less eventual. As we said in our release this morning, affecting the Swedish numbers is a non-cash adjustment of SEK46 million which has been made to both mobile end use of service revenue and impacted EBITDA.

Underlying however after adjusting for Roam Like at Home and one-off mobile end user service revenue was up 1% and EBITDA contribution was up 3% driven by solid progress in the consumer segment and excellent network economics with mobile network costs flat year-on-year despite [indiscernible] of nearly 50%.

At 26% the EBITDA margin in the quarter was slightly lower than the Q1 last year due to higher equipment sales particularly in the B2B segment. However, our rolling 12 months cash conversion continues to be outstanding and sustained above the 80% level. Despite strong competition, consumer mobile end user service revenue showed an underlying solid trend of 3% driven by continued strong growth in Comviq postpaid as we continue to successfully migrate away from prepaid.

Yes, intense competition continued in price side of segment, but both Tele2 and Comviq ASPUs increased as we continue to encourage our customers to take larger data buckets and liberate dataability [ph] to connect whatever and whenever they want to. These customer focused strategic choices and a number of new commercial positions continue to improve our customer satisfaction with Comviq net promoter score reaching an all-time record high.

As expected the B2B market continued to also be price competitive affecting both fixed and mobile service revenues. However net sales were only slightly down this quarter as high equipment sales almost fully offset the declines in service revenue. And after adjusting for the non-cash receivable write-down, service revenues were down 5%, an improvement versus prior quarters due to the sales momentum we have seen since combining the sales teams and the product offering of both Tele 2 and TDC.

We also had yet another quarter of successfully winning new contracts including [indiscernible], the Swedish Tax Agency and Siemens as well as extended contracts with Visma, FG and PostNord. Looking forward we now expect the improved B2B trends to continue to despite this pricing pressure, however, the solid performance in customer retention and acquisition in recent months and the annualization of Roam Like at Home will offset this pressure during the second half of the year and we’re on track to return to positive growth rates in the second half.

Moving to the Baltics, commercialization and monetization of our 4G investments continued to drive excellent top-line and bottom-line development. Mobile end user service revenue growth was up 8% in local currency, driven by quite excellent growth in Lithuania and Latvia by 11% and 14% respectively. This was partly offset by a decline in Estonia where we did suffer from aggressive competition and loss of revenue from a third-party service provider. However, in both Lithuania and Latvia, we saw stable EBITDA margins of 33% and 35% respectively, filtering through rolling 12-month operating cash flow of 14%.

In the quarter, we saw again a strong development of 7% of the transition from prepaid to postpaid subscription continue and customers trade up to larger data bucket. As in previous quarters, smartphone penetration continues to increase which supports uptake of larger data bundles and movement was also visited by great progress in the B2B segment across the region.

Our Baltic teams are always fearless accretive when it comes to advertising and we saw some great new campaigns including the [indiscernible] campaign which is taking Tele2 into the home with high speed mobile broadband. And as for customer satisfaction, it continues to grow and we saw NPS reach record levels in Lithuania.

Now moving east to our investment markets. In Kazakhstan, mobile end-user service revenue was up 21% in local currency driven by strong customer growth and increasingly large data buckets. EBITDA almost doubled in local currency and [indiscernible] one year ahead of plan thanks to the benefits from higher ASPUs, increased scale and integration synergies.

As a result of this excellent momentum, Tele2 Kazakhstan cash generation continues to improve as a second repayment to Tele2 Group of KZT 5 billion or approximately SEK 125 million was made in the quarter against the shareholder loan.

Accumulated repayments up until March are approximately SEK 200 million and the outstanding balance is SEK 2.9 billion.

Looking at the Kazakh results in just a bit more detail, our customer base grew by 6% year-on-year and ARPU was up by 13% driven by our 4G advantage, improved network quality perception, our dual brand strategies with new price plans on both brands and the speed differentiated unlimited mobile broadband price plan on our premium brand Altel.

As more and more Kazakh systems discover the benefits of the connected life through our market leading 4G coverage and our great value for money prepositions, we are thrilled to see net promoter scores improving and paving the way for further growth.

Now let me hand over to Lars who can take you through some of the financials in a bit more detail.

Lars Nordmark

Thank you, Allison. I will start by making a few comments on the P&L this quarter. We had a 5% growth in net sales driven of course by mobile end-user service revenues but also by strong equipment sales more than offsetting the decline in fixed revenue.

We do not have any net impact from FX on Group net sales due to stronger euro and Croatian kuna offset the weaker Kazakh tenge.

At the EBITDA level, the [indiscernible] was higher EBITDA in CapEx fund with Croatia and Baltic also contributing significantly. This was driven mainly by rising mobile end user service revenue in these markets and more than offset the slightly declining contribution from fixed services and Roam Like at Home effect and the write-down in Sweden.

Moving further down in P&L we had some items affecting comparability below EBITDA. These are mainly related to the Com Hem merger this quarter, but still lower than in Q1 of last year as the Challenger program and a large part of the TDC integration is behind us.

On the line, other financial items, we reported changes to the valuation of the earn-up obligation for Kazakhstan every quarter. In Q1, the value has increased again to around SEK 500 [ph] million due to the good performance of our Kazakh business. This resulted in 72 million loan cash cost in our P&L as the value of our liability increased.

If we then move on to the next slide, you can see the changes in the cash flow as compared to the same quarter last year. The cash flow statement is on a total operations basis. Here let me just make a few short comments. The reason for the financial items paid was major related to the FX effects last year. Changes in working capital are also negative in the first quarter, among other things we paid spectrum fees in Croatia in Q1.

When it comes to CapEx, the main difference versus the balance sheet CapEx is of course that the cash flow statement is on a total operations basis for the Dutch CapEx is included here. And at the bottom of the chart which did the cash flow in the continuing business part and the discontinued part, as you can see the overall cash flow for our continued operations is reasonably stable compared to last year.

Moving on to slide 16 which is a familiar picture now, as you also operating cash flow is the final EBITDA in the CapEx on a rolling 12 months basis. Our Baltic Sea Challenger businesses and our smaller business units continued to generate a solid cash flow of well over SEK4 billion. The remaining aftermarkets, CapEx in Croatia are now meaningfully producing operating cash flow with a contribution of over 350 million over the past 12 months. So together we are now with an operating cash flow contribution in continued operation of SEK4.6 billion but in Netherlands continues to be cash flow negative, albeit less so than 12 months ago.

Moving on to the balance sheet on slide 17, our balance sheet is solid with an economic net debt-to-EBITDA of 1.5. The proposed dividend of SEK4 per share is expected to be paid in till May to amounting to a total of SEK2 billion. Looking at the right-hand side of the page, on the past 12 months, we are generating cash flow of 2.4 billion, in addition to a cash contribution from M&A which is mainly related to the sale of Tele2 share. Against this we paid dividends of SEK2.6 billion in May ’17 still leaving us with a stronger balance sheet than 12 months ago.

Let’s turn to the next page where we touch on our financial guidance. We reiterate our guidance for the full year to mid-single digits mobile end user service revenue growth and EBITDA of 6.5 to 6.8 billion and a CapEx envelope of 2.1 to 2.4 billion. And on the last item, our CapEx was low in the first quarter but we do expect it to pick up in the coming quarters.

And with that, I’d like to hand back to Allison for an update on the merger of Com Hem [ph].

Allison Kirkby

Yes, thanks Lars. So, before we round up the call, let me just talk briefly about the out coming merger with Com Hem and the new financial framework that we issued this morning.

First-of-all, the merge process is going according to plan. We are preparing the filings of both the European and US [indiscernible] as well as being in active dialogue with European Commission during this pre-notification phase ahead of regulatory filings which will be in this quarter, the second quarter.

The integration planning process is also going according to plan with great collaboration in the various work streams and we’re therefore confident that we’ll hit the ground running on Day 1 of the enlarge Tele2 which we still expected to be during the second half of the year.

Moving on to the updated shareholder remuneration framework, if you recall in January we announced the preliminary framework. Since then, we have done further analysis and we have engaged with both company's shareholders.

As a result, this morning we announced the decision by the Tele2 Board of Directors in agreement with the Com Hem Board of Directors to update the financial leverage target and shareholder remuneration framework for the combined company as summarized here on page 20.

First of all, our target leverage will be raised to 2.5 to 3 times, reflecting the robustness of the cash generation of the combined company. We will also seek to maintain investment grade credit metrics at this level. These targets will be the guiding principle for distribution of capital to shareholders through multiple components.

First, we will distribute an ordinary dividend of at least 80% of equity free cash flow. And then secondly, we will distribute extraordinary dividends and/or share repurchases based on any remaining available equity free cash flow, proceeds from asset sales and re-leveraging of the growth in underlying EBITDA which we expect as a result of the combination of these two assets, particularly as they realize their synergy plans. With this policy we now expect for the combined company will distribute in excess of 100% of equity free cash flow to shareholders through a combination of dividends and share repurchases and that the prospects for return to shareholders for every invested krona of combined company under this policy are stronger than what could be expected for holders of either Tele2 or Com Hem on a standalone basis.

So, to conclude, let me end with our forward-looking priorities to ensure we can continue to deliver sustainable and growing shareholder value alongside the transformation agenda. First and foremost, it all starts with our purpose to fearlessly liberate people to live a more connected life, enabled by the four key strategic pillars that you see at the bottom of this slide.

By continuing to leverage these strategic pillars, we will return to [into growth] despite headwinds and B2B and Roam Like at Home in the second half of this year. We will continue to fuel industry-leading momentum in the Baltics and Kazakhstan and will prefer to close both mergers and Netherlands and in Sweden also in the second half. As a result, we will continue to deliver sustainable and growing shareholder value while not losing focus on driving excellence in financial discipline and operational execution in order that our top line momentum continues to flow down to bottom-line momentum and improved cash generation. These priorities, the transformation agenda ahead and the new financial framework excite me about potential of Tele2 for both customers and shareholders alike in the coming months and years. So just to say, I am very proud that despite the transformation agenda which is [indiscernible] the whole Tele2 team continues to deliver quarter-after-quarter of solid progress and I want to say a huge thank you to all of them, but now we’re ready to take your questions.

Unidentified Company Representative

Operator, can we have the first question please?

Question-and-Answer Session

Operator

We've got the question from Terrence Tsui from Morgan Stanley. Please go ahead, your line is open.

Terrence Tsui

Yeah, thank you. Good morning. I’ve got a couple of questions please. So firstly, just looking at the leverage target at the enlarged Tele2 and Com Hem in the new financial framework. If I just look at the two-standalone company's EBITDA, is it as simple as adding Com Hem's EBITDA to Tele2’s EBITDA or I think there are some accounting differences in accounting policy in maybe around capitalized sales commissions, so if you could share any details on that, that will be quite interesting.

And then secondly on Sweden, so you mentioned Roam Like at Home a few times, what are your expectations for usage this summer? And then also on Sweden, there has been a lot of focus at the level [ph] of competition, and I'm just wondered that at the high-end, where that you see any responses from the market following your Unlimited Together proposition? Thank you.

Allison Kirkby

Thank you, Terrence. I'll pass over to Lars for the accounting piece of your question. So, in terms of the leverage target, obviously, it's not as simple as just adding our key EBITDAs together because we'll also be adding synergies on top. So, don’t forget the synergies when you do that addition. Lars, any comment on the accounting?

Lars Nordmark

Yes. So, we do treat the capitalization slightly differently. So, it’s about a SEK200 million impact on the Com Hem EBITDA if it would not capitalize those.

Allison Kirkby

Okay. And then on your other questions, Roam Like at Home, so certainly in the first quarter it was very much in line with our expectations. We said this year would be 100 million to 150 million for the whole year, it was about 80 million impact in the quarter, 51 million of that in Sweden. I expect you to increase this summer as we saw last summer. Consumers are increasingly enjoying the freedom to roam domestically thanks to unlimited and to roam internationally thanks to the freedom of Roam Like at Home. As we see roaming increase in Europe, we are also seeing roaming increase with the European footprint and there are no restrictions on the pricing of that roaming. So, let’s see what happens in the summer as that continued growth.

In terms of competition in Sweden, yes, there’s been a lot of commentary on the price side of segment. Comviq remains very strong within that and some new propositions in the quarter. We don't feel we need to match the competition every level. We have the stronger brand in that segment. We have the stronger network coverage in that segment. We’ve got the strongest distribution as well.

But in the main brand segment, it’s been a fairly neutral quarter for the main brand. No reaction to unlimited together yet, we are really starting to market that now unlike fee but remains it's fair to see average actors in the market, the unlimited proposition is still well ahead of that. If you think unlimited is SEK 500, our average ASPUs are still today only around SEK 200. So, this unlimited together offer is a fantastic opportunity to continue to drive ARPUs up in the market and our unique network economics really helps us supply that extra deep demand at very minimal incremental cost.

Terrence Tsui

Thank you. If I could just also really quick follow up on the dividend distribution. Do you think that dividend payout will be on day one will be based on the full run rate on the synergies or that the dividend payout be based on as the run rate of the synergies are realized? Thank you.

Allison Kirkby

It will be based on the equity free cash flow of the company at that point in time and obviously the new Board of Directors will be able to get some more clarification around that when it’s formed late during the year. But it’s very much linked to underlying equity free cash flow that is the ordinary dividend objective.

Terrence Tsui

Okay.

Allison Kirkby

Just to be clear, we have got the integration teams up and running already now, so that we can already start to realize benefits from the synergies on day one.

Lars Nordmark

Yes, and just wanted to add the target range for leverage, just a guiding principle, so depending on where we are in that, that would decide how much cash distribution there can be.

Operator

Thank you. We will now take our next question from Johanna Ahlqvist from SEB. Please go ahead.

Johanna Ahlqvist

Yes, thank you. A few questions from my side if possible. First of all, you touched upon the sort of the increased competition in the Swedish market and how -- I guess you haven’t seen sort of the impact yet. But I am more referring to how April sort has started on the B2C side? If you see some impact on the increased competition. and then secondly related to the Dutch joint venture, I was wondering if you do expect any remedies related to this and also, I know there is a slight retail intake and increased competition in the Dutch market. So, when do you foresee that, that Dutch mobile will be free cash flow breakeven, any change to that? I think that’s it, thank you.

Allison Kirkby

Thanks Joanna. Yes, you’re right, the new price plans came in to play towards the end of the core [trends driven]. So, it might be a bit too early to draw any definite conclusions from it. We’ve however launched a full range of new pricing for Com Hem and as I said to Terrence you know Com Hem remains a very strong brand with great network quality, great brand protection and very strong distribution which means that for Com Hem we don’t need to increase price discounting in the market to stay very strong and our unlimited together proposition is just really starting to be marketed now as well. So, it's too early to say but you know we’ve got strong positions in both the price side of segment and the value end of the market and we got new news coming to the market all the time.

In terms of the Dutch JV, obviously we are in a regulatory process and so it would be inappropriate for me to comment on anything related to remedies or anything. You are right that the intake was slightly weaker in the quarter, you know the Dutch market has been and is a tough market. It has become a bit bigger in this recent quarter due to S&P bundles very much driven by the Dutch dual play and then releasing pressure from the NVNOs. So that obviously meets the quarter a bit tougher than prior quarter. But we’re still growing mobile end user service revenues on a like-for-like basis.

In terms of looking forward and going to free cash flow breakeven, you know because we’ re in a regulatory process, again very limited to talk about future guidance in that market. We’re very much focused on getting the deal closed at the moment, we’re in good dialogue with the EU and the T-Mobile. But just to be clear that in whatever scenario we wouldn’t expect continued cash flow within the Dutch business anyway.

Operator

We will now take our next question from Thomas Heath of Danske Bank. Please go ahead.

Thomas Heath

Thank you. I think you answered my question on the Netherlands in the last question. Thanks.

Allison Kirkby

Thanks Thomas.

Operator

Thank you. [Operator Instructions]. Our next question comes from Ulrich Rathe of Jefferies. Please go ahead.

Ulrich Rathe

Yeah, thank you. I have three questions if I may. The first one is following up on the discussion of Swedish mobile prices, in particular in the sort of [indiscernible] type competition. How do you interpret this in terms of modulations? Why do you think this has sort of kicked off now, is this and to flush out consolidation or is it just a usual back and forth, is it just to address market share issues or how would you interpret this?

And the second question is related to this, I think its been asked whether you’ve seen any effect in April. I’m wondering how you would sort of see this looking forward? How likely you think it is [indiscernible] for us, price is just sort of effect the main brand?

Then I would like to ask about the financial framework, what’s the motive to change this. I understand the initial outlook was indicative and now sort of you are nailing it down, I was just wondering whether you can talk a bit about the motive of sort of raising particularly the leverage range?

And my last question would be on the quarter, it’s a bit of nitty-gritty one, but I noticed that the other operations in mobile had a quite high EBITDA was up SEK30 million year-on-year, what’s going on there, what’s driving the SEK30 million higher EBITDA on the year-on-year basis in other? Thank you.

Allison Kirkby

Thank you. It’s my goodness, you've given us a lot of questions this quarter, but taking them from the top, Swedish mobile, how do I interpret it, listen, this segment has been very competitive for quite some time. Hallon and Vimla have all been trying to fight, to win new customers and – but we remain very strong, do I see as I’m trying to flush out consolidation of competition, not really. It’s just their latest campaigns. Probably partly driven by the strong campaign that we put into the market last year when we doubled the date/data on Comviq as we really re-pushed to liberate more connectivity through our customers. So, I think it’s just the another push and we are happy so far how our brands are defending themselves against that.

How likely do we see any effects in the main brands, well, I said that the main brands are seeing strong, the main brands we haven’t seen any major push yet? Obviously, we’re now focused on how do we offer more for more on the Tele2 brand, we’re doing that this quarter with the unlimited together campaign and as we look forward into the future with Com Hem, we will be looking at the range of additional services that we can offer to get that more for more concepts that allows us to differentiate the main brand and the main brand segment away from the price factor segment, but it’s very much focused on mobile only.

In terms of the motive for the financial framework, it was very much a preliminary framework that we announced in January. We all has had the intention to make it more specific and we wanted to do that after we have had the chance to engage with not just our shareholders, but also the shareholders of Com Hem post the announcement. So, the analysis was done. That proves that we are going to get highly cash generative asset with attractive synergies that can only enhance that going forward. We will increasingly be a Baltics Sea Challenger, there’s more robust with a more diversified sale of cash flows and we therefore know that we can maintain investment grades at credit rating after leverage of 2.5 to 3 which then determines the financial framework for the shareholder remuneration of Baltics going forward. Hence, there has been good dialogue between our Board of Directors and the Com Hem Board of Directors to agree on this as well.

And finally, on other operations. Lars you want to pick up on that?

Lars Nordmark

Yeah. On the operations, on the EBITDA --- two components, one is the IoT business, which is growing nicely from the topline perspective. We also have some one-off recognitions coming in from a revenue perspective but healthy EBITDA. We are still estimating this business to be at about 100 million EBITDA negative for the year, so we are not looking away from that. And then the other line item being out there is very much related to our Group H2 and the shared operations, and they will be in around 60 million to 70 million I would say, and they fluctuate somewhat from quarter-to-quarter depending on when the charge takes out again.

Operator

Thank you. We will now move to next question from Lena Osterberg of Carnegie. Please go ahead.

Lena Osterberg

Good morning. I will ask on Kazakhstan because I think that’s the only thing we haven’t touched this one.

Allison Kirkby

Thank you, Lena.

Lena Osterberg

I think that I mean you already reached your target on reaching a third-party which is just say one year ahead of target. So, I was wondering, where do you think that the margin can go from here? And also, I was wondering if you could potentially comment on Telia’s disposal of [indiscernible] there’s been some pressure for your partner Kazakhtelecom as one of the entrants did this. I was just wondering how would that put call option early, is that now a successful bid by them for Telia’s asset? And then just finally also on Swedish mobile business you had for quite some time now, very little CapEx to sales ratios, and that’s of course because you are dealing together in Telenor. But I was wondering do you see any need sort of any step up in that CapEx to sales in the next two to three years?

Allison Kirkby

Thank you, Lena. So, on Kazakhstan, yes, delighted that we’ve hit our 30% EBITDA margin target and rest assured we will not stop at that. We will aim to go higher. We have businesses today that consistently hit 35% in the Baltics, and we will continue to develop that business for as long as we are running it. So excited to go higher, I am not going to give you a number.

On Telia’s disposal, lots of rumors in the market. Kazakhstan seems to be a rumor mongering market. I can’t comment on the accuracy of those rumors around Telia’s disposal. But as you would expect our shareholder agreement has customary non-compete clauses in it and obviously we would stick to the terms of that contract should those rumors come into fruition.

And then finally on Swedish mobile, yes, we had low CapEx to sales ratio for quite some time and the network is performing brilliantly considering that we’ve seen data growth increase by almost 50% in the last year.

Any need to set up, we are preparing for 5% but really 5G is we’ve seen in recent quarters from some of the vendors is going to be much more of an evolution from 4G rather than a revolution. 4G there is no consumer use cases out there at the moment, that say that we’ll aiming immediate need from massive small-scale deployment which was bought some rumors there. So, I think over the next couple of years you will just see us continue to invest in capacity upgrades and invest in upgrading our network for 5G readiness but it will be more evolutionary than revolutionary. at the same time, you know we’ll be moving towards the end of using the 3G network and that’s something that we’re actively looking at, at the moment as well, as we aim to focus on 2G and 4G for the long-term and aim to have not just the most efficient network but also reduce the amount of energy that we have in our network as well. So, there is no immediate step up required in the next couple of years.

Operator

Thank you. We will now move to our next question from Stephan [indiscernible] of DNB Bank. Please go ahead.

Unidentified Analyst

Yes, couple of questions. First of all, very strong numbers in the Baltic, but seems to be increased price competition in Estonia. Just wonder how this has been ongoing throughout the quarter or when this start and also if you can say what is the kind of measures you are taking in Estonia. And secondly on Kazakh [storms], there is a slowdown in subscriber intake. Is this intentionally or is this due to competition. And then finally just you mentioned that your integration team is already up and running relating to the Tele2 Com Hans merger. Can you say anything about your view on the expected synergies?

Allison Kirkby

Okay, thanks Stephan. Yes, very strong results in the Baltics. Now the increased pressure in Estonia has been there for quite some time, what you see is you know telemarketing and very aggressive selling has been going on for quite some time and it kind of ebbs and flows and it is quite worked throughout the quarter and what you’re also seeing is that we are starting to lose the service revenue that we have when we selling, we were providing [indiscernible] with our mobile broadband products obviously [indiscernible] last year and we are gradually losing those customers as a result of that.

We’re taking a number of measure, we have a new CEO arrive on April 1st, and he is using that as an opportunity to do a full strategic review of the Estonian business, not just our pricing but also competitive practices in the market is looking at what marketing and discounting and we at Estonia especially review in the next few weeks to see what his plans are. But we won't expect these trends for much longer and the team are actively looking to reverse the trends.

Kazakhstan, yes there is a fall down in intake, but we are really focused in revenue growth in Kazakhstan and not going after short-term NPA target. But you know we have a fabulous run in Kazakhstan, we are seeing the number two in the market being more competitive again particularly at the 4G coverage as such we further ruled out, but our net promoter score is very high, our brand quality perception is very high and we’re very happy with the EBITDA and the revenue generations that we’re getting despite a slightly slow intake in the quarter.

And then on the integration teams, yes. The great thing we're seeing is culturally these two organizations are very similar. And that's why we believe these companies would work so well together when they brought Tele2 and Com Hem and we announced the deal earlier this year. Yet we have work streams on every key area of cost and revenue synergy. It's early base. They are obviously being targeted with a number that is higher than we've announced externally. And both Anderson and I are very happy with the progress so far. But, obviously too early to talk about specific new number.

Operator

We’ll now take our next question from Usman Ghazi of Berenberg. Please go ahead.

Usman Ghazi

Hello, thank you for tanking my questions. I’ve got three please. Firstly, just on the network costs, could you perhaps give a bit more detail on how that’s being managed to kept flat despite the data growth? Is it just lower spending to vendors or is there something more structural going on there? My next question was on Kazakhstan, so as your view about the put option, kind of, changed given the margin dynamics that you’re seeing and obviously the revenue growth continues to stay quite healthy, so that is there anything that would change your mind on an exit out of this market?

And then the third question was just on the Baltics again, I mean, the operational gearing this quarter was weaker, I mean, Q4 we saw 200 basis points improvement in margin on broadly the same amount of service revenue growth. So, if you could comment on that, that would be helpful. Thank you.

Allison Kirkby

Okay. On the network costs, no, it’s not lower spending. It’s actually structural. We started to and quantify and virtualize our network in readiness of 5G, but also part of our Challenger program a couple of years ago and we’re starting to see the benefits of that because we are able to run the network increasingly with software, where previously it was hardware that was required. So yes, a structural move in anticipation of the future is one of the reasons for us managing the network so well. We’ve also got one of the best spectrum portfolio in Sweden and when you’ve got increasing demand for data, having a great spectrum portfolio is critical.

On Kazakhstan, no, our view of the two options has not changed. We are in active dialogue with Kazakhstan Telecom about what happens in March 2019.

Obviously, we’re very happy with the dynamics that we’ve seen in the business and how that will help us realize great return for our shareholders at and when we start the put out the two options. And Baltics margins? Lars…

A – Lars Nordmark

And the Baltics margins, I mean it’s very stable in Estonia last year, but this year in Estonia because of quite intensive competitive pressure on telemarketing and also win back campaigns, the margin went down in Estonia and as alluded to earlier I mean, we’ve got ongoing measures to be implemented which we would expect to take effect in the second half of the year.

Usman Ghazi

Okay. Thank you. Can I perhaps ask a follow-up, in Sweden, I mean -- how much of the spectrum that you have is actually being utilized? I mean you have a lot of -- do you have a lot of spare capacity on that or?

Allison Kirkby

We still have capacity absolutely at this point in time but we are always looking ahead as well. So, I can’t comment on the specific number, I think Tom, my wonderful Chief Technology Officer participating alongside, but we are in a great position in our network are very strong in Sweden and proving to be very strong despite increased data demand.

Operator

Thank you. We will now move to our next question from Nick Lyall from Société Générale. Please go ahead.

Nick Lyall

Good morning. Could I maybe ask two please obviously? On the much business you’ve mentioned the -- it was a bit weak on subs, but also EBITDA too. Is there anything -- you can’t give us guidance as you say but is there anything you could tell us about the speed of savings is absolute down or marketing had to increase in the quarter, because trend seemed a little bit more difficult with EBITDA? And then secondly just on Dutch cable regulation and the potential for that, what’s your expectations there and what sort of regulation would you need to see to make a material difference to your broadband business in particular? Thank you.

Allison Kirkby

Okay. Thank you, Nick. So yes, EBITDA was a bit weaker in the quarter. There was a bit of issues on moving on to our own network with high end iPhones but that is now being resolved. But the best thing in the quarter that’s not been in there previously is we’ve now got a retention bonus that is flowing through the quarterly numbers, obviously which we expect as we try to retain key talent during the regulatory approval process. So, John and the team are -- have a stream of initiatives that are always working on to improve the underlying performance of the business.

In terms of Dutch cable, obviously we are appreciative that the regulator has clearly acknowledged that the Dutch market is a dual play which is very much consistent with our view of the market and T-Mobile’s view of the market. However, we are of the opinion that the draft regulation you would feel effectively a drag in the native competition that has resulted from the dual play. We are in the process of putting together our response to shortcoming in the ongoing competition.

So really, we don’t believe it’s enough and that’s why we believe that our view with T-Mobile has the best chance of reigniting competition in the Dutch market.

Operator

We will now take our next question from Irina Idrissova of RBC Capital Markets. Please go ahead.

Irina Idrissova

Good morning. I have just a couple of questions. So, on the new leverage policy, could you just talk about the outlook of sustainability of over 100% equity free cash flow payout? Clearly you expect EBITDA growth be supportive but is this is a mid-term growth over the next two, three years as you’re delivering synergies or you think as an even longer-term expectation? And on a related note, how important is it for you to maintain the investment grade rating and why I guess?

And my second question is on Swedish B2B, so if you could just talk about the competitive dynamics in the markets in the quarter that will be great? Thank you.

Allison Kirkby

Okay. Obviously, it will be for the new board and the new CEO to talk about the long-term potential but if you look at the potential for sustainability of a 100% of emergency cash flow payout in the next few years it very clearly coming from the combination of two businesses that both have underlying and growing positive momentum in the EBITDAs today. On top of that, you have got a couple of clear asset sales in the Tele2 segment and I think that alone will clearly justify the policy that we introduced this morning.

How important is investment grade, you know the new company will have a significant amount of debt? It’s important that we’re able to go to the market in good times and bad times and be able to access some things easily and at competitive rates and that’s the intention of this new policy and we do believe at 3.5 to 3 we’ll be able to maintain the underlying investment grade that Tele2 has today and will again be access the right amount of funding not just from the Swedish market to also European markets as well.

And then Sweden B2B, yes trends are getting better, you know it's still a very competitive market, underlying voice and data still have price and pressure. But we are really starting to see the benefits of the converged offer of combining Tele2 and [TDC] to take that to customer and we’ve had very successful wins in recent quarters and haven’t had any major turns in recent quarter either, and that gives us a confidence once we’ll make a home is behind us in the second half of the year we’ll be returning to positive territory again.

Operator

Thank you. Our next question comes from Peter Neilson of ABG, please go ahead.

Peter Neilson

Thank you. Just one question please relates to Sweden’s EBITDA reached even adjusted for the high equipment sales and looks a bit weak on the margin side. Anything you can add on the underlying cost levels turning the B2B synergies have now being achieved. You’ve obviously talked about the roaming impact but anything else you can tell us about the underlying OpEx development and why the margin still looks a bit like in Sweden, that will be appreciated. Thank you.

Allison Kirkby

Yeah, it was a particularly strong quarter for the equipment sale Peter and except we have one major [indiscernible] in the enterprise segment by significantly upgrade it basically all of their employees' phones in the quarter. So that really skewed it. You’ve got the one-off, you’ve got the 46 million one-off that we mentioned and you’ve got Roam Like a Home. but if you look underlying, Sweden mobile EBITDA is above the 30% level and of course the Swedish team are continuing to look at rising cost efficiency and synergies going forward. We also in this quarter have quite heavy marketing investments in the B2B segment as we launched the Aimed-Up campaign and we haven’t had any real marketing investment in the B2B segment for quite some time. So those are some of the reasons for the quarter being slightly richer than normal, Peter. But, very much in line with what we expected and very much on track for improved momentum in the second half once we have some of the headwinds behind us.

Operator

Our next question comes from Sunil Patel of Bank of America Merrill Lynch. Please go ahead.

Sunil Patel

Yes, thank you for taking my question. Just one question please on timeline for the Netherlands here. Has the deal actually being filed, I believe it’s T-Mobile, who does the filing, but has it had actually happened yet or you still in the discussion phase and what are the milestones from here where we get to hear around whether it’s Phase 1 review, Phase 2 review and so on? Thank you.

Allison Kirkby

Thanks, Sunil. Yeah, as you said, this is very much a T-Mobile on process that we are in active dialogue with them and the commission. We’re in the prenotification phase, filing has not yet happened, but it will happen this quarter. And obviously after filing the commission have a few weeks to get back to us with an indication as to whether it will move into Phase 2 or not. So, you should be hearing something over the summer, I would expect.

Sunil Patel

Thank you.

A – Allison Kirkby

But in terms of a dialogue, it's all pretty much going according to plan. So, no.

Operator

Yes. So, we will now take our final question in the queue from Andrew Lee of Goldman Sachs. Please go ahead.

Q – Andrew Lee

Yes, good morning and thanks for taking my questions. I just had two. One on fixed line – consolidation and then secondly on the spectrum auction. So, on fixed line consolidation, in

the municipalities that has inside the network, Telia has talked about the potential to consolidate some of those assets, is that possible in your view and can Tele2 be involved – get involved here in anyway? And then just secondly on the upcoming spectrum auction, three ready appears to be struggling with customer perception. If it doesn’t get an allocation spectrum when this auction comes about I think -- especially during the third quarter, what do you think happens then? Is this something where the regulator will have to step in and support it, do you think this is a market that that could actually undergo consolidation to become a three-plan market, just any thoughts you have around that will be really great. Thank you.

Allison Kirkby

So, first of all, fixed line consolidation, obviously [indiscernible] talk about any M&A. There are a lot of smaller players there -- out there, they are small in nature, but I can’t really comment. We’re very much focused on the Com Hem merger at the moment and not looking at anything else and that gives us the real -- that gives us the real scale in the fixed line market.

In terms of the spectrum auction, again I can’t comment on the implications for one of my competitors. We are all of us in the market, however, in deep dialogue with PTS at the moment to ensure that the spectrum auction is done in a way that continues to encourage investment and competition in the Swedish market. So, it’s still an active dialogue with the regulator on that upcoming auction.

Operator

There are no further questions in the queue.

Unidentified Company Representative

Thank you, everyone. That concludes the call. Thanks everyone for listening in and good bye.