Telia Company AB (publ) (TELIA) Earnings Call Transcript & Summary

Welcome, everyone, to Telia Company's Q2 results presentation. And with that, I will now hand over to Telia Company Head of Investor Relations, Erik Strandin Pers. Please go ahead, the floor is yours.

Thank you, and good morning, everyone. Welcome to the call. We have, as usual, CEO, Patrik Hofbauer; and CFO, Eric Hageman here. And I hand the word over to you, Patrik.

Thank you, Erik, and good morning, everyone. We continue to see good commercial momentum in the business with strong performance in our core operations. I will take you through the key areas. Starting with customer. So the customer satisfaction is improving and our Net Promoter Score continues to increase. This helps to drive growth in the customer base, and we had positive mobile net adds across our 3 biggest markets this quarter. We delivered high-quality experience to fans during the FIFA World Cup, and our network supported record data traffic and streaming volumes. Protecting our customers, equally important, and we blocked tens of millions of scam calls in the quarter. Our management of asset portfolio remains very active, and we are driving -- targeting consolidation in our markets. After closing the Bredband2 deal last quarter, we have agreed to 2 smaller bolt-on acquisitions in Sweden, adding a city network and a niche B2B MVNO. Work on the mobile RAN sharing agreement with [ Ice ] in Norway is progressing well, although taking slightly longer than initially estimated. In July, we also completed the stake increase, a new partnership in our Finnish fiber JV, Valokuitunen. Simplification is fundamental to our strategy. We recently closed the Halebop mobile brand in Sweden, and we have agreed to transfer part of our ICT business in Finland to a partner, including around 250 employees. This will help us to focus even more on our core business. We are using AI and other technologies to improve customer journeys, which saves time both for us and our customers. Turning to innovation. We have agreed to form a partnership with KTH, Royal Institute of Technology and Brookfield, where we will work together to develop Sovereign AI capabilities. We launched a service called Telia Critical IoT Connectivity, which is the first commercial available service in Sweden to use 5G stand-alone. [indiscernible] has demonstrated a modular solution that enables mobile coverage in emergency situations. Let's now look at the financial highlights for the quarter. Service revenue growth accelerated to 2.8%, the highest in 4 years, supported by continued strength in Sweden consumer and high demand for business and mission-critical services. Lithuania was again strong, and Norway's growth accelerated to 4.1% as the wholesale headwind faded in the quarter and is now behind us. EBITDA grew by 3.4% with solid contributions from Sweden and the Baltics, while Norway was slightly negative due to a tough cost comparison on the content -- TV content side. CapEx remained disciplined at around SEK 12.5 billion on a rolling 12-month basis, remaining below our full -- our outlook for less than SEK 13 billion. Free cash flow, once again stronger than we expected, driven mostly by phasing, and came in at SEK 2.2 billion for the quarter and SEK 4.1 billion year-to-date. And leverage ended at 2.06x, more or less unchanged from the last quarter. Let's now move into Sweden, where we had solid customer trends supported by convergence. This is a clear strength for us since we have more than 1 million converged households. Customers buying multiple service improve both loyalty and economics, which can be seen in our financial performance. Double-digit TV growth is the most obvious example. Growth in consumer continued to be strong and demand for mission and business-critical services remained solid. As I mentioned, the Halebop mobile brand was discontinued in the quarter. This is part of our simplification agenda and can improve both channel mix and operational efficiency over time. The integration and synergies from Bredband2 are developing according to plan. The broadband ARPU decline of 9% is to around half driven by the addition of Bredband2 customers, which had a lower ARPUs, and partly because we are in a phase with more volume growth, having grown the base for 4 consecutive quarters, but less pricing. The balance between volume and pricing will shift from time to time, and there is working is going on to strengthen the ARPU. And as you know, we have a full household approach currently doing more pricing on TV. Financially, Sweden continued to deliver healthy results with service revenue growth remaining strong at 2.6% and EBITDA growth of above 5%, supported by lower OpEx. EBITDA less CapEx continued to improve and is now on comfortable levels of SEK 10 billion. In Finland, we saw an increase in mobile customer base, driven by growth in enterprise and stable development in consumer. The consumer mobile segment remains challenging, but intake ARPU is slowly moving in the right direction, and we continue to focus on retention and loyalty. The share of our consumer mobile customer in binding contracts has steadily increased from very low numbers 2 years ago and now represent a majority. As I mentioned, we signed an agreement to transfer part of our ICT business to our partner. This is part of our strategy to sharpen focus on our core business. For the same reason, we left the e-invoicing, web hosting and alarm business in recent years because it makes Telia Finland less complex and more agile. Around 250 people will be part of this transfer, which will result in approximately EUR 40 million lower revenue for us per year, but hardly no change to EBITDA. We also finalized our new partnership and increased our ownership in Valokuitunen, the fiber infra JV joint venture from 40% to 49%. Service revenue growth was slightly positive overall. The revenue mix this quarter included some low-margin components, but this was offset by strong effects from cost savings, especially on resource cost, so that EBITDA growth overall was flat. Norway delivered a visible improvement in revenue growth, supported by pricing, improving customer trends and to some extent, an easy comp on TV since we had higher discounts last year during the black screen situation with TV2. ARPU has increased across all products and the mobile subscriber development improved, with the quarter ending strongly. EBITDA growth was, however, held back by a tough year-on-year cost comparison on content cost, which resulted in a decline of 2%. We had a strong road map to strengthen our infrastructure, the amount of fiber upgrades that what we have sold in SDU customers follow our plan. And next thing is to get the RAN sharing with [ Ice ] started since this will create both better network for our customers and stronger economics. We did not quite get it up on running in Q2 as originally planned, but we are making good progress on this complex transaction and are working towards finalizing it soon. Lithuania again delivered a strong quarter. Service revenue growth remained solid across both mobile and fixed, and EBITDA growth accelerated to almost 9% due to good top line momentum and cost control. The new data center announced last quarter is progressing well, and we secured important spectrum at an attractive price in a multiband auction, adding as much as 40 megahertz in the 1,500 megahertz band. This was important auction, and it will help us to retain our 5G leadership. We also renewed our spectrum in 2,100 megahertz band. In summary, we continue to deliver a great financial performance while strengthening our network position and expanding our capabilities in secure and robust infrastructure services. In Estonia, growth also accelerated, driven mainly by mobile ARPUs, which had helped by reduced discount levels overall. Enterprise ICT deliveries also returned to grow as some of the supply chain constraints that we saw last quarter have been easing. Our fiber build-out continues, and we are reducing legacy infrastructure at the same time, and are well in line with our plan. Overall, Estonia continues to show solid execution and healthy development in the core business. And with that, I hand over to Eric, who will go through the financial development in more detail.

Thank you, Patrik. Let me now take you through the financial development in the quarter, starting as usual with service revenue and EBITDA. Service revenue growth accelerated in Q2 to 2.8%, which is comfortably above our full year ambition of around 2%. Across the group, consumer revenue had the fastest growth. And as you just saw, the country units with the strongest momentum was Sweden and Lithuania, with also a clear improvement in Norway. Finland managed to stay flat in terms of service revenue growth despite pressure on mobile, helped in part by relatively low margin project and licensing revenue in the quarter. From a product perspective, growth was driven by strong TV performance in Sweden and Norway, good mobile growth in the Baltics, and continued demand for business and mission-critical services in Sweden. Overall, this more than compensated for continued pressure on legacy revenue in Sweden and the mobile development in Finland. Turning to EBITDA. Growth came in at 3.4%, which is broadly in line with our ambition for the full year of around 3%. The main drivers were again Sweden and the Baltics. Finland also contributed through strong cost control in the quarter, while EBITDA in Norway was held back by a tough year on content cost comparison. So overall, we had a quarter where profitable growth and cost discipline resulted in earnings growth and margin expansion, with EBITDA margin expanding to 40.5%. Looking forward to the second half of the year, in terms of EBITDA growth, you can see on the far right of this page that we currently expect EBITDA growth in Q3 to be below 2%, driven mainly by limited growth in Sweden, due to phasing and the margin profile of some customer projects. In Q4, we then expect a reacceleration again in Sweden and also in Finland, which has a relatively easy Q4 EBITDA comparison. Overall, we expect our EBITDA growth for the second half to be in line with consensus and to deliver on our full year guidance of around 3%. Looking at operating expenses. We continue to maintain good cost control in the quarter. Resource costs were again down, largely driven by Finland, and we also saw a reduction in IT costs and bad debt for the group, which more than compensated for increased marketing spend, mainly in Norway, to drive mobile growth. Together, this resulted in OpEx declining by around 1%. OpEx as a percentage of service revenue continued to trend down, ending at 29.1% compared to 30.2% in the same quarter last year. Moving on to the middle graph, you can see from the green bluish line that we also remain disciplined with our capital expenditures. On a rolling 12-month basis, CapEx was stable at SEK 12.5 billion, comfortably below our full year outlook of less than SEK 13 billion. This reflects our continued capital allocation discipline and supports our ambition to improve cash flow generation over time. As a result, EBITDA less CapEx continued to expand this quarter, reaching SEK 20 billion, a healthy 5% increase over last year. On the right-hand side of this page, you can see that ROCE has been steadily trending upwards, ending the quarter at 10.6%, up from 9.3% a year ago, a direct consequence from both increased profitability and improved capital allocation. Let's now have a look at our free cash flow statement. Free cash flow in the second quarter was SEK 2.2 billion, and year-to-date, we are just above SEK 4 billion. This is ahead of our early expectations that about 1/3 of the full year free cash flow was to be generated in H1. In addition to better-than-expected profitability and lower interest paid, we also saw some phasing of cash CapEx and working capital. As you can see from the table, cash CapEx is significantly lower than last year and lower than our budget for the year, driven by some rephasing into the second half. As for working capital, we did expect a reversal this quarter following the strong positive contribution in previous quarters, but the reversal was smaller than anticipated as we benefited from mission-critical payments. In the second half of this year, we also expect to make a circa [ SEK 400 million ] tax payment in Norway, following a recent court verdict in the long-running case regarding historical [ VAT ] rates on new services, which impacts everyone in the industry. In summary, Q2 free cash flow was above plan, mainly because of phasing, and hence, we keep the full year ambition of around SEK 9 billion. This implies a stronger second half, but is now less back-end loaded than previously expected. Our SEK 9 billion ambition for the full year now also includes the [ 400 million Norwegian ] tax payment I just mentioned. Let's now have a brief look at how leverage has developed on the next page. As you can see on the right-hand side, leverage decreased marginally compared to the first quarter to just over 2x, driven by expanding EBITDA that more than compensated for the net debt increase of around SEK 700 million. The main reason for the net debt increase this quarter is the negative impact we had from FX movements, mainly NOK versus SEK, which impacted both debt and derivatives values. Overall, we can say in the first half that despite paying for the BB2 acquisition and reducing the level of hybrids, we are comfortably in the lower end of the leverage target range. Looking back at the value creation agenda we laid out at the investor update, we continue to make good progress. We are delivering profitable growth and margin expansion, and we are staying disciplined on CapEx. The first half of 2026 has been particularly active on the M&A front, where we have signed several MOUs and also closed some deals that simplify the business, strengthen our infrastructure portfolio and drive in-market consolidation through smaller bolt-on acquisitions, particularly in Sweden. As I said, our balance sheet is healthy, with limited refinancing needs in the year. And in April, we paid the first tranche of a now increased dividend per share. And with that, I hand back to Patrik for our closing remarks.

Thank you, Eric. To summarize, Q2 showed continued solid momentum with good service revenue and EBITDA growth, with disciplined capital allocation. Sweden and Lithuania remained strong. Norway and Estonia improved, and Finland showed stabilization supported by solid cost control. We remain focused on customer satisfaction, profitable growth and becoming even simpler, faster and more efficient. This all supports our outlook for the full year as well as our midterm ambitions. Thank you.

Yes. And with that, I think we're ready to take your questions.

[Operator Instructions] Our first question comes from Andrew Lee with Goldman Sachs.

You actually have [ Sofia ] from the team. Two quick questions from us. The first one, there have been weaker results across the Nordics this quarter with operators fighting competition as one of the reasons, which has made investors question structural growth outlook of all Nordic markets. Do you think that outlook has deteriorated in any of the markets? Or do you see any changes when it comes to structural growth? That's the first question. And the second one is you had slightly weaker mobile and broadband trends in Sweden this quarter. Can you just go a little bit more into detail as to what is driving that?

So thank you, Sofia. I can start. It's Patrik here. Let's look at the competitive situation. We don't feel a change in the competitive landscape in the Nordics. We see a slightly stabilization in Finland, which we have had quite a tough situation now in the last 2, 3 quarters. But we see a more [ stabilization ] there, and we hope that, that will continue, of course, going forward, that, that market is a bit more rational. In Sweden, we see a similar situation that we've seen before. Consumer is, for us, strong. It's a good market for consumer. We see B2B still some -- but no change from previous quarters, some competition in large and public accounts, but no change. Mission-critical is strong for us. And if [ now ], we see actually an improvement. But if you look at the market situation, I don't see a big different shift compared to the previous quarter. So we foresee it will be continued rational and stable throughout the rest of the year.

Mobile Sweden. That's the first question.

Yes. So in Mobile Sweden -- what's the first question?

Yes. Mobile service revenue growth.

Yes, mobile service revenue growth. So if you look at the mobile service revenue growth in Sweden, we have been now -- this is a similar trend that we have seen in the last quarter. So nothing has changed from our side. We have a household focus. So we -- if we look at consumer mobile in Sweden, we have much more focus on the household. And we see that we have now more than 1 million converged households that have at least 2 services from us. And this is an important play for us and it has been that for the last years. And we see a clearly benefit with that. We see lower churn, and we see higher financial performance. If you look at the revenue per household, that's actually increasing. So we don't see a major trend shift from our perspective in that one.

Our next question comes from Derek Laliberte with ABG Sundal Collier.

I have 2 questions. You highlighted first, the lower EBITDA growth in Q3 coming up and then a stronger growth in Q4 due to project phasing. And I was wondering if you could elaborate a bit on what's driving that phasing and how much confidence you have in the pretty significant Q4 acceleration? And then I was wondering if you could update us on the Halebop migration, whether you've seen any increase in churn or competitive activity following this closure? And is the simplification delivering the commercial benefit you expected so far?

So I'll start with the second one regarding Halebop. Well, this migration has to plan for almost a year or a bit more than a year. So it's the right decision to simplify the portfolio, as I said, in Sweden, and make it much clear also on the customer proposition in the market. The Halebop migration went very well according to plan and no surprises, no increased churn, and we migrated these customers over the Telia brand, and it was very successfully done. So well executed by the Swedish team.

Yes. And on the first question with regards to the profile in the second half of this year. So we currently expect EBITDA growth in Q3 to be below 2% and then above our sort of trend rate in Q4 to accelerate, and is driven by the expected limited growth in Sweden. We mentioned 2 things in the analyst presentation. One is the phasing and the other one is the margin profile of what we're selling. So what is the phasing? So we had higher mission-critical Q3 last year than we expect this year in the same quarter, but then we expect that to accelerate again in Q4, so more mission-critical in Q4 than the same period last year. Then with regards to the margin profile, because that obviously is what impacts is EBITDA, is that we're doing proportionally more ICT in that third quarter and last mission critical, which has a higher margin. With regards to the confidence of that, we have full confidence in it. And I think it's also important that we have a slightly different profile for EBITDA than for service revenue because basically, we don't see that impact on service revenue and because we -- the compensation of the less mission-critical is there by more ICT revenues in the quarter in Sweden.

Our next question comes from the line of Andreas Joelsson with DNB Carnegie.

One question from my side, but it's a bit long. I know it's difficult to compare products and talk about households, but it would still be interesting to hear your thoughts on the Swedish ARPU development on TV and the corresponding service revenue growth that you see in TV versus the lack of ARPU growth in mobile and corresponding lack of mobile service revenue growth. And yes, I know I'm living in an Excel world and you live in a real world, and there are differences. But can you take some learnings from what you have done on the pricing on TV into mobile in order to accelerate mobile services as well?

Andreas, I can try to start what's going on, on the market -- no, just joking, but I'm going to try to explain our situation. So we have a very strong TV product, the best -- absolutely best in the market. And this has been a situation for a number of quarters, and we continue to have good development there. Look, our play in Sweden, as I tried to say before as well, we are trying to focus on a household perspective. So getting more broadband customers was strategically important for us. That's the reason why we acquired the 500,000 broadband Bredband2 customers as well because that gives us a good base to sell more services on top, so like mobile and TV. So the reason why TV -- the pricing power has been so good in TVs because we have the absolutely best product. No one can compare our product with anyone else in the market. That is the reason. And then we're looking -- when we look in our KPIs, we look into, okay, how is the revenue per household developing. And that is important for us because, a, we have a significantly lower churn on those customers and we want to sell more to existing customers and building that base. And that we have done successfully, and we have now more than 1 million households that are converted. They have at least 2 services for us. That is 20% roughly on the -- from the Swedish households. So that's the total house of Sweden. So that's building a solid position for us. Then of course, going -- looking forward, we're looking to always -- how we can continue to grow ARPU in mobile, both postpaid and on broadband. We think that there's still opportunity to increase prices going forward. But let's see when the timing is right.

Our next question comes from the line of Ondrej Cabejšek from UBS.

I have 2 questions, maybe more of a follow-up on the Halebop migration or the impact of the discontinuation of the brand. We've heard from one of your competitors that this has created a little of, I guess, attempted [ stealing ], I guess, market share during this migration period. But at the same time, you guys also had a very good result in some of the net ads. So if you could please comment on those 2 -- or those 3 pieces of information? How they square up from your perspective? And then the second comment, I guess, I would appreciate if you could give us on the comments from again, your biggest competitor in Norway, where the -- what the situation was painted as basically much more competition in the higher-end unlimited segment and specifically from MVNOs. But again, you don't seem to be too concerned. If you could please comment on that from your perspective.

Yes. Thank you. Let's start with the first question, Halebop. Well, as I said, previous on the piece of questions, the Halebop migration went according to our plan. We're actually a bit better than planned with extremely low churn. So remember, again, we took all these customers and moved them into the Telia brand, and that worked very well. If you look at the market, yes, we have seen more activities on the value-based segment, the no frills brand. And that is, I would say, pretty natural. It's not like we have seen historically aggressiveness. I wouldn't -- we would not subscribe to that one. But we have, of course, seen more activities. Of course, our competitors are trying to steal customers from us, but we have not seen that in our base. People stayed with us. They are happy with the services that we are delivering to them, and the migration for Halebop was extremely successful. So I'm super, super happy to see that. Then when it comes to the Norwegian case, well, I would say the market has been somewhat tougher in Q2. But we -- remember, we performed well in this market. And there were some positive also developments in June. We see ATL prices, for example, that we have observed in the market that several brands have increased the prices. And we are acting rationally in the market. We haven't seen an increase, so much intense competition in Norwegian market. It's fairly similar compared to previous quarters. So we are not recognized in that comment on your question. We see the market a bit different. So a fairly healthy market. Competition is there. It will continue, of course, but it's not unusual compared to previous quarters.

Our next question comes from Fredrik Lithell with [ SHB ].

Just a follow-up on the Halebop. If you could describe a little bit if you have some cost benefit now when you close down platforms or FTEs or something and if that was part of Q2 already, if that is the case. And secondly, if we could get a little bit more details on how to view net working capital changes in the coming quarters? How we should sort of trim that in our models?

Yes. So that's -- I can answer the first question on Halebop. Well, we don't see a big impact in the numbers. This is a part of our simplification work that is ongoing to support the outlook and the target up until 2027 that we have already communicated. So there is nothing on top. This has been planned for more than a year and very sensitive and very successfully executed, I would say. So -- and this is -- but it will, of course, be beneficial for us because it will be easier for the customer to understand the difference between the Telia brand and the Fello brand. Now Halebop was a bit stuck in the middle. That now we take away. And we continue to build a premium position with the Telia brand. And the customers are obviously very happy with that situation, and we are growing in the Telia brand, which is very positive for us. So I think we are in a good commercial momentum there, and that will continue. And that is, again, supported by the convergence that is a very attractive play in that it's very appreciated by the customers as well.

Yes. With regards to your second question on capital, Fredrik, yes, we highlighted today the rolling 12 month, which is at around 12.5 billion coming from 16 billion 2 years ago. That trend continues. So today, we reiterate the guidance that we are going to be below that 13 billion for 2026. We don't see any reason why that would change. So if you think about it as a percentage of sales with the strong performance in top line that you've seen this quarter, we'll see that continuing to [ run ] down. So relatively flat in absolute terms, trending down as a percentage.

Our next question comes from Max Findlay with Rothschild & Co.

Patrik and Eric, you mentioned that the majority of Finnish customers are now on fixed home contracts. A couple of questions on this. Was there a sudden ramp-up during the second half of last year? And if so, how significant was this? And should we expect the trend of fixed contracts to continue or should this temper from here? Then secondly, both your competitors have explained how they expect pricing over time to recover in the Finnish market. But it seems to me there's a risk to pricing. A lot of these fixed contracts will come to an end during Q4 and operators will be wanting to defend their volumes, which you mentioned remains your focus in Finland. Given these subs will no doubt have like their cheaper tariff, MVNOs are launching new tariffs and there's been commentary on softer consumer sentiment, it is the backdrop for significant pricing improvement in Q4 is tough. So it'd be really useful to get your view on how you see the pricing environment evolving in Finland.

Thank you, Max. This is Erik. The other Erik at IR here. I will take the question on fixed-term contracts. So we've actually had, over quite a long time, a couple of years, a gradual buildup of the share of fixed-term contracts in the base from levels, very, very low levels of low single digits, almost to a majority now. So that's one of the things we do to build engagement and loyalty in the base. There isn't a big bump in terms -- in that curve in Q4 of the year. So it's been a longer-term effort. And yes, there's a lot of turnover in Q4 seasonally. And is there an opportunity to raise prices when those contracts expire in Q4 this year? It probably is. But let's see, and we can't really forecast what the other players and the MVNOs will do, I think. Anything to add, Patrik or Eric?

No. And I think, I mean, the buildup of fixed-term contracts is also good for the market and it stabilizes the market. And we had just an imbalance in our base to more than 2 years ago, where we have everything with outside the contract. So this has been -- this is the right play for telecom operators to run, so yes.

Our next question comes from Nick Lyall, Berenberg.

Yes. I hope you can hear me this time. Just a quick question on cost please, on the Finnish market and the Norwegian market. I think Patrik, in your presentation, you mentioned that customer [indiscernible] was solid, and it looks as if OpEx is about flat. But is that where you want to be and how quickly could you ramp up savings that you talked about was margins in the Finnish market [ leases ]. Is that more of a revenue effect as prices start to rise again? Or are there more savings you can take out and when? And in the Norwegian market, maybe cost is around 3% underlying in terms of growth, and you mentioned some marketing spend in the quarter. Is there a big initiative you can start as that depends on the brand share and when do you expect the savings in those markets to take in, if possible?

Yes, as I always think it wasn't always so we called about 75% of that, but we won't make that comment again. But I think we got -- we got the -- we got the gist. So it's a margin expansion in those markets. So no, actually, in Finland, OpEx is down quite a lot. From memory, it's about 90 million, but Erik or Anders can confirm that outside the call. And it is because of what we flagged earlier. It was a business which had less than 30% EBITDA margin, and it should get to -- let's call it, 40% or so have we said many interactions with you guys and investors. And we are all on that path. And part of that is taking out the cost. You saw the FTE reductions that we've done. The second one is by divesting noncore businesses is also helping with that, hence the acquisition or the sale to CGI that we highlighted in the report is super important in that context. Good progress made, quite a bit yet to go in that market. And to your sort of your second question is, obviously, improved pricing will help with that. We already see a better market in Q2 than in Q1, and Q1 was a lot better than Q4. So I think we're going in the right direction there in terms of Finland. In terms of Norway, what we've done there is that, that increased commercial momentum that we called out in the presentation today is partly driven by the increased focus on mobile. And for the first time, you see us actually winning customers there again. In combination with very strong ARPU increases following the price adjustments that we have. You see that mobile momentum growing. And that's partly also because we invested in sales and marketing. So there is -- is there more opportunity for cost there? Absolutely, not just in Norway and Finland, but across the board for the organization. But we're very happy with what we've seen in the OpEx development, 1% down compared to last year. And as a percentage of revenue, our OpEx continues to go down. It is a fundamental part of our profitable growth story is margin expansion, and we see that coming through certainly also in Finland now.

Our next question comes from Felix Henriksson with Nordea.