Ladies and gentlemen, thank you all for standing by. Welcome to today's Tele2 Q1 interim report 2020. At this time, all participants will be on a listen-only mode. There will be a presentation followed by question and answer session. At which time, if you do wish to ask a question, you're going to press star and the number one on your telephone and wait for your name to be announced. Please be advised that our speakers will entertain only one question per participant. I must advise you all that this conference is being recorded today, Tuesday the 21st of April, 2020. Without any further delay, I would like to hand the conference over to the first speaker of the day, Mr. Anders Nilsson. Please go ahead, sir.
Thank you very much, operator. Good morning, everyone, and welcome to the Q1 2020 report call for Tele2. With me, as usual, on this end, we have Mikael Larsson, our CFO, and Samuel Skott, Chief Commercial Officer. Today we will talk about the results for the quarter and address your questions at the end of the call, pretty much as usual. In addition to that, we will discuss how the global pandemic affects us and how we plan to mitigate the near-term effects on our business. One impact which you may be able to notice today is that we are socially distancing. We are all calling in from different locations. Hopefully, we will sound just as clear and coordinated as usual. Please bear with us in case we experience any technical difficulty or delay.
Let's get into it and turn to slide two for an overview of how we think about the outbreak of COVID-19. Well, first of all, I think we should take a step back and look at the characteristics of our business and how it's changed over the last few years. Tele2 is now more resilient than it has ever been, thanks to the strategic direction of the last years. We have moved our geographical footprint towards stable markets where we have scale. Our business is much less reliant on market share gains and business expansion than it has been historically. In our existing markets, we have stable subscription businesses, where we get much of our growth by increasing the value of our existing customer base. We have a strong balance sheet with no major near-term need for financing or M&A to achieve our financial targets.
This gives us operational flexibility in volatile times. We have an organization and staff that is able to easily adapt. This was proven over the last few weeks as we closed down most of our offices overnight and had fully functioning remote organization the next day. I must say that I'm very proud of the dedication and professionalism of our employees in the face of these obstacles. While we are pleased with the shape of our business today and continue to see a bright future as we make progress on our strategic initiatives, the pandemic creates a degree of uncertainty in our near-term forecasts. We are therefore forced to suspend our guidance for 2020 until we gain more clarity on the longevity and impact of the outbreak.
In 2020, our job is to adapt to the situation and sort out how we can best defend our EBITDA and cash flow in the near term while keeping our long-term strategy intact. What is the impact and how much of it can we mitigate? I think it is useful to look at the potential impact of the pandemic by putting the effects into three buckets. There is the known impact, which we can estimate from what we have seen so far. On top of that, there is an unknown impact from areas we can assume will be affected going forward. The third bucket is our ability to mitigate the impacts and defend underlying EBITDA through cost control. Let's look at the known impact first.
Extrapolating what we saw in part of March, we see a known impact of roughly SEK 50 million per month in underlying EBITDA, which we can reasonably assume will continue throughout the duration of the pandemic. This is mainly related to international roaming and equipment margins. On top of this, there are effects which are hard to qualify at the moment since we are still in the early days of the pandemic. This includes the impact on volume growth, pricing, and B2B revenue. As you know, our business depends on both volume growth and price adjustments to reach our targets. While we will continue pricing in Sweden B2C largely as planned, the outcome is much less certain now. In the Baltics, we depend on pricing to achieve the type of goals we have had historically.
Given the market conditions we see there now, we expect that our ability to grow through price in the Baltics will be limited. We should expect growth rates to come down during the pandemic. The part of our business which is likely most affected is Swedish B2B, where we had counted on a gradual improvement throughout the year. Given the economic environment, we now have to expect delayed deliveries, fewer new sales, and more churn as customers cut costs, and some even go out of business. What can we do to mitigate this impact? We have a number of levers to pull, and our number one focus right now is to determine which ones to pull, when to pull them, and how hard we should pull them. This will be informed by the development we see over the next weeks and months.
As we now pause our growth ambitions for 2020, we can shift focus away from growth and free up resources by reducing sales-driven costs, pausing or temporarily scaling down some initiatives, while fast-tracking part of our planned long-term cost reduction. To maintain a financial buffer while we monitor the impact and evaluate potential mitigating actions, we are postponing the distribution of the extraordinary dividend. We intend to call for an EGM and distribute the dividend once we have more clarity on the situation. Since we have a strong balance sheet, we will distribute the ordinary dividend as planned. We now shift near-term focus towards defending underlying EBITDA and cash flow, we do so to make sure that the company is in good shape once we are at the other end of the crisis and can continue where we left off to achieve our guidance for 2021 and the midterm.
We are still confident in our midterm guidance. Our strategy remains intact. It is, in fact, more relevant than ever since our goal is to create an even more resilient and cash generative asset. Our FMC More for More strategy in Sweden is more relevant than ever, as it allows us to extract more value from our existing customer base by using increased customer satisfaction to reduce churn and increase pricing power. This creates stability and reduces the need for market share gains. We have launched several new growth drivers this year, which are intended to ramp up over several years to create growth over the long term. We are rebuilding our enterprise business in Sweden to make it more stable and profitable over time. We continue to drive our mobile-centric convergence strategy in the Baltics.
We have initiated a business transformation program to deliver OpEx reduction of at least SEK 1 billion over three years. These pillars of our strategy remain intact and make us confident that we can deliver on our midterm guidance. Now, let's look at the summary of Q1 on slide three. The Tele2 Group end-user service revenue was flat in the quarter as positive momentum in Sweden B2C and the Baltics was offset by continued decline in Sweden B2B and Germany. Underlying EBITDA declined by 1% in the quarter. While we expected underlying EBITDA growth to be a bit weaker than normal due to investments in growth initiatives. In Sweden B2C, we saw the strongest quarterly mobile postpaid net intake in several years, as we see continued success in our effort to drive volume growth ahead of seeing the effects of price increases to support end-user service revenue.
We have continued progress on our FMC strategy with almost 80% of the overlapping mobile and fixed customers now on FMC benefits. We have thus largely completed the first phase of the FMC strategy with a solid base of loyal full-service customers, which will provide stability and potential for growth in the customer business over the long term. As part of the next phase in the FMC strategy to grow FMC organically and cross-sell services among our customer brands, we launched Comviq Broadband in the quarter. We now finally cover all three segments of the consumer market with FMC offers. On the back of product developments or improvements throughout 2019, we implemented backbook price adjustments on part of the fixed broadband and mobile postpaid customer base in the quarter.
We expect to see the effect on ASPU starting in Q2 2020, with a full effect in the second half of the year as we execute additional batches in the coming quarters. In the Baltics, we see continued strong performance with a 10% growth in end-user service revenue and 4% growth in underlying EBITDA, in spite of the SEK 20 million negative impact from the pandemic. We have now launched TV services over the mobile network in all three countries to further strengthen our mobile-centric convergence strategy. Sweden B2B remains challenging with price pressure in the market and continued decline in legacy fixed services. We saw strong volume growth in the quarter with intake in both SME and large enterprise. In SME, we launched our first FMC More for More offers in March.
We completed the sale of Croatia and received SEK 2 billion proceeds, which, combined with the underlying cash generation of the business, resulted in SEK 3.3 billion of cash coming in during the quarter. As a result, our balance sheet is very strong, with a leverage that is below our target range. This gives us comfort that we can proceed with our proposed ordinary dividend while still remaining comfortably within our range. The business transformation program is on track to deliver at least SEK 1 billion of OpEx reduction over three years. As you know, this is expected to be back-end loaded, and we are now in the preparation stage, but so far, everything is on track. Now, let's look at the performance of the Sweden consumer business on slide five.
Ahead of the effect of backbook price adjustments, we continued to focus on volume growth in Q1 and successfully so with the strongest net intake of mobile postpaid in several years and continued strong net intake in fixed broadband. Net intake of digital TV, cable, and fiber was temporarily weak as we saw elevated churn from the temporary shutdown of the TV4 channels in December 2019. Total end-user service revenue growth was roughly flat as volume-driven growth in mobile postpaid and fixed broadband was offset by declines in digital TV and fixed telephony and DSL. Let's look at B2B on the next slide. Net intake was very strong in the quarter as we implemented new contracts within both large enterprise and SME. End-user service revenue continued to decline due to continued mobile price pressure, less roaming due to COVID-19, as well as continued decline in fixed legacy services.
We also saw a slight decline in solutions where new sales did not make up for lost revenue from an expiring contract in the quarter. Please turn to slide seven for an overview of Sweden as a whole. End-user service revenue declined by 1% as a slight improvement in B2C was offset by declines in B2B. Underlying EBITDA declined by 1% as cost savings were offset by declining end-user service revenue, investment into growth initiatives. An impact of roughly SEK 50 million from the pandemic and bad debt provisions. We continue to see strong cash conversion of 74% as CapEx spend is relatively low now in between investment cycles. Let's look at the Baltics. You'll find that on slide nine. Net intake was negative in the quarter in all three countries due to the seasonal churn in mobile prepaid.
However, continued growth in ASPU led to growth in end-user service revenue, which you can see on slide 10. End-user service revenue increased by 10% organically, which drove a 4% growth in underlying EBITDA. We saw a SEK 20 million negative impact on underlying EBITDA due to the global pandemic. Continued EBITDA growth and low capital intensity led to strong cash flow generation of 80%. With that, I hand over to Mikael.
Thank you, Anders. Good morning, everyone. Please turn to slide 12 where you will find a breakdown of revenue for the quarter. As international roaming is down to close to zero during second half of March due to the pandemic, it has been reported on a separate line in this summary to show the underlying trend in each revenue bucket without roaming, as it will continue to be negatively affected as long as travel restrictions remain. International roaming represents roughly SEK 400 million in end-user service revenue and SEK 300 million in underlying EBITDA for the Tele2 Group on an annual basis. Sweden consumer revenue continued to be stable in the first quarter. Volume-driven growth in mobile postpaid and fixed broadband, both growing 5%, was offset by decline in legacy fixed services, DSL, fixed telephony, and DTT.
Cable and fiber TV revenue, declining 5% in the quarter, was negatively affected by one-off effects following the TV4 dispute in December last year. Within B2B, mobile end-user service revenue, excluding roaming, was flat year-on-year, while total B2B end-user service revenue declined due to declines in fixed and solutions services. Baltics continued to show strong growth at 11%, while our small legacy business in Germany continued to decline. For the group, this led to slight growth of SEK 34 million in end-user service revenue in the quarter, then excluding roaming. Please turn to slide 13. Underlying EBITDA declined 1% organically year-on-year at SEK 150 million of net benefits from 2019 synergy program was offset by the following three items. A, approximately SEK 50 million investment into growth initiatives such as Penny, Comh em Play+, expanded sales organization within SME, and increased sales cost in Sweden B2C.
Item B, decline in Sweden B2B fixed end-user service revenue. C, roughly SEK 70 million impact from COVID-19 and bad debt provisions in March. As long as the negative effects from the pandemic remain, the today known effects are expected to be about SEK 50 million per month for the group, mainly related to roaming and lower equipment margin. Items affecting comparability relating to the business transformation program amounted to SEK 39 million in the quarter, which was more than SEK 200 million lower than last year, while both depreciation and amortization, as well as financial costs increased in the quarter due to negative exchange rate effects, as well as a non-cash reassessment of financial liabilities. This all led to net profit of SEK 822 million in the quarter for continuing operations, up 14% compared to Q1 last year. Please turn to slide 14, cash flow.
CapEx paid of SEK 600 million was considerably lower than last year due to low investing activity at head of the rollout of 5G, as well as spectrum payments of SEK 799 million in Q1 2019. Stable underlying EBITDA and lower CapEx paid led to strong equity-free cash flow from continuing operations of SEK 1.3 billion or SEK 1.9 per share, up 18% also when excluding effects from spectrum payments last year. Over the last 12 months, our continuing operations generated SEK 5.3 billion in equity-free cash flow or SEK 7.7 per share. Please move to slide 15. Economic net debt was reduced by SEK 3.3 billion in the quarter, driven by strong cash generation in the business and proceeds of SEK 2 billion from the sale of our business in Croatia. This resulted in leverage of 2.3 end of March, which is below our target range of 2.5-3 times.
This is ahead of dividend payment in May. Given the uncertainty of the global pandemic rate, we intend to keep leverage at the lower end or even slightly below the target range until we have clarity around the impact and length of the pandemic. Once we have more clarity, it is the board intention to call for an EGM to approve on the earlier announced extra dividend of SEK 350 per share. With that, I would like to hand back to you, Anders.
Thank you very much, Mikael. Please turn to slide 17 for our key priorities going forward. For the duration of the pandemic, our number one priority is to monitor the impact and calibrate our mitigating actions to descend underlying EBITDA and cash flow. We will look at opportunities to fast-track part of the business transformation program. We will optimize our sales effort to reduce costs and only focus on sales channels where we can get a return in this environment. Since we cannot rely on end-user service revenue growth to support underlying EBITDA near term, we will look at ways to reduce spending on growth projects. While we do this, it's important not to lose focus on the strategy and to avoid actions that make us stray away from our long-term goals.
Since our long-term goals are aimed at achieving stability and cash generation, it is now more clear than ever that we have the right strategic priorities to create a sustainable business long term. We will continue driving FMC in Sweden and address the remaining overlapping mobile and fixed customer base while preparing to execute on the next phase in the FMC strategy to grow FMC organically. We will continue steering our B2B business towards more profitable segments, such as the private large enterprise sector and SME. Our business transformation program is on track, and we will continue executing to deliver at least SEK 1 billion over three years. We will continue executing on our mobile-centric convergence strategy in the Baltics. We will prepare our networks for the future and upgrade both our mobile and fixed networks to the next generation technology.
All this will lead to consistently growing cash flow, which we aim to distribute to shareholders. With that, I hand over to the operator for Q&A.
Ladies and gentlemen, we will now begin the question and answer session. As a reminder, should you wish to ask a question, please press star and the number one on your telephone keypad and wait for your name to be announced. Please be advised that we will entertain only one question per participant. Once again, if you wish to ask a question, please press star and one. First question comes from the line of Lena Österberg. The line is now open. Please ask your question.
Yes, good morning. My question is on bad debt, and the provisions you've taken in this quarter. Could you explain to us how you come up with this number? Is it just based on what you're seeing in this quarter, or is it also forward-looking, estimating the COVID-19 impact for the rest of the year?
Hi, Lena. Good morning. Thank you very much for your question, which I think we should hand over to Mikael.
Thank you. This is only forward-looking. In March, it was far too early to make any assessment or see any signs of customers not paying to us, and also now in the beginning of April. It's only forward-looking. What we have done is to go back to other similar crises like this. We have looked back to the crisis 2008, Sweden and Baltics, and looked at what happens in both the consumer segment and also for B2B, small and large companies, and separated the three buckets, and made a proper assessment on what we could expect going forward. This is, and we emphasize that in the report as well, it's only provisions. Nothing has been realized or written off so far, but to be cautious and prudent, we have made higher provisions for going forward. I hope that explains the question.
Just to clarify, this is what the full year impact pretty much based on what you think will be the impact.
This is the expected impact of what we have in the balance sheet today. It's on the receivables we have in the balance sheet today. That effect is of course larger since we do it on the full balance sheet now, and then going forward, we will try to mitigate this and so you should not expect us to do bad debt provisions of these amounts every month going forward. It will hopefully be much smaller.
What's the average duration of your receivables today?
The average duration is between 30 and 40 days.
Okay. Just so I understand it, so pretty much we should expect that there will come, if the scenario is as bad as it is in 2008, there is likely to come more provisions in the next coming quarters because it is just based on what you have in the books today.
Yeah. It might come more. On the other hand, if this materializes, you will see some customers go out of business in the sectors that are badly hurt by the pandemic. Of course, that effect will diminish over time. You should not expect us to make provisions of SEK 35 million per month. Far from that. It's a one-off catch-up of the provisions, if you say so.
I'm sorry. We can take it afterwards. I don't think I understand, because if your duration is a couple of months, then you can only take a reservation for what you have in the books now. Right?
We also mitigate by being more careful on these customers going forward.
Okay. All right. Thank you.
Thank you.
Thank you, Lena.
Thank you. Our next question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead, Andrew. Your line is now open.
Good morning, everyone. I had a question, just trying to get a better view on the mitigation of the COVID impact at the EBITDA level. We've heard from a few telcos so far that have spoken on the COVID impact and have highlighted revenue pressure, but a relatively limited EBITDA impact, or even none at all, with the revenue pressure at least partially offset by lower churn, in particular, maybe some cost-cutting. Your commentary today is relatively light on the mitigation benefits of churn. The specific question is, as you see the run rate today, the SEK 50 million per month headwind or slightly higher, how much of that can be offset by lower churn, i.e. sales and marketing costs? As a follow-up on how much can it be offset by cost-cutting? Thank you.
Thank you, Andrew, for that question. I think it's going to be split between both me, Mikael, and Samuel. This situation is very unique, as you may understand, and we're only in the beginning of it. It's quite hard to see what will happen both to churn and to customer demand. Therefore, we have to play it as it comes. What we do see, however, is that certain sales channels are not performing the way they have done historically, and we cannot probably rely on them going forward. We see an environmental churn, especially on postpaid mobile, where you see higher churn, which is driven by the family packages, which are introduced throughout the market and where people basically are gathering their subscriptions with their operator of choice. This may pause a bit, but we haven't seen that yet.
That could be an effect which goes in the right direction, where we see a lower churn over time. Therefore, it's pretty uncertain. What we will have to do and what we pointed to during the presentation is that we will look at all initiatives we have on the cost side, both in terms of growth drivers, to see if we think it makes sense to push them as hard as we thought initially before the pandemic, if we should scale them down a bit, if we should pause them. Also look at our transformation program to see if we should basically scale it up and see if we can do it faster, and look at other possible cost savings in order to mitigate what comes our way so we can defend our EBITDA and cash flow. That's the general idea.
Let's head over to Samuel for some flavor on the market, if that's okay.
Thank you, Anders. Good morning, everyone. Well, I think the market is more of the same currently. It is a competitive market, but not more competitive than it's been before. We see main brands working continuously with FMC and family packages, and we see the no-frills brands continuing to work with price, but no major news there. I think just to comment on the churn piece, we have been and are currently doing great on volumes. As we are punching well above our weight in terms of volume, that will have, of course, an impact on us. The main thing right now is that it's a bit too early to say exactly how this will play out. We have the levers, both in terms of growth initiatives, but also cost initiatives to play this very wisely going forward.
Yeah. Maybe Mikael wants to add something on the cost side.
I think you described it pretty well. It will come out of different buckets, where less sales cost, if you compare to Q1, will definitely be one saving. In addition, try to speed up some of the long-term initiatives as well, which we have in the business transformation program. With the new direction we will take to focus more on to defend underlying EBITDA, we can realize these cost savings earlier than we anticipated before.
Thank you. I guess you probably can't answer this, Of the SEK 50 million known impact that you see today, this is not thinking about the extra impact you might see, of the SEK 50 million, do you have any idea so far of the extent to which you can mitigate that with lower costs? Maybe too early.
No. I think we should be clear here. The known impact and the anticipated coming impact, we estimate to be able to mitigate that through cost reductions to end up at an EBITDA in line with last year. That's what we estimate currently.
That's very helpful. Thank you.
Thank you very much, Andrew.
Thank you, Andrew. Next question comes from the line of Nick Lyall from SocGen. Please go ahead.
Morning, everybody. It was just a quick one on the back book price rises, please, Anders. Could you describe where you've put the price rises in place, please, for the quarter, and what sort of effect that means for 2Q, if you can give us a bit of a steer? Secondly, is there any sort of risk with that? It doesn't seem like the sort of environment where you really want to be doing this. How confident are you of not creating churn by putting price rises through now, please? Thank you.
Okay. Thank you very much, Nick. I think we'll hand over to Samuel to address these two issues.
Sure. On the price rises, I think the reason we're continuing with the price rises in B2C in Sweden is that they're on the back of a program. These are not opportunistic price rises, just because. They come on the back of us improving customer satisfaction, utilizing the more for more principle. The customers that are getting a price rise have also gotten something more before. Could be more content, could be more data, higher speed. That's why we're confident in continuing with this. Due to the sensitivity of all these price rises, of course, we're not going to guide specifically on what would happen in Q2, but you will see an effect in Q2. Of course, there is more uncertainty now on the price rises, but given that we're doing them on the back of something really good we've done for our customers, we feel confident to continue.
Sorry, which products were they specifically on, if you don't mind me asking?
We are doing price rises mainly on mobile and broadband, some on TV, but mainly on mobile and broadband.
Great. Thanks very much.
Thank you, Nick.
Thank you. Our next question comes from the line of Maurice Patrick from Barclays. Please go ahead, Maurice.
Morning, guys. It is Maurice here from Barclays. Picking up on the price increase question following up from Nick's question. My understanding is that in Q1, much of the price increase was on the mobile side, Q2 probably more the fixed line side. You say in the release, less anticipated impact from price increases. Is that because you see customers, I guess, why less? It seems from your commentary now, you are still targeting, still anticipating putting through the price rise as you had planned at the start of the year. Is your view you are just not sure yet, hence the slightly more cautious tone? Thank you.
Thank you very much, Maurice. It's a new environment, and therefore it's very hard to predict whether we'll have the same effects now as we thought we would initially. We're a bit cautious, and that's in the light for how you should read the commentary. When it comes to the sequence of pricing, I'll let Samuel discuss that.
Yes. In Q1, we did both mobile and broadband predominantly. There's no big change in the mix going into Q2. I think it's exactly like that. These things we've started to implement late Q1 has worked very well. At least those are the initial findings. It was also during that period that this pandemic hit, and we're now in new uncertain times. That's why we're saying and being prudent to say we cannot know exactly how this will play out, but we're confident to continue given that we're doing it on the back of good things we've done for our customers.
Great. Super clear. Thank you, guys.
Thank you, Maurice.
Thank you. Next question comes from the line of Terence from Morgan Stanley. Please go ahead, Terence.
Morning, Anders. Thanks for the question. Can you talk a little bit more around the trends that you're seeing in B2B? Just being based in the U.K., it's interesting to see the Swedish approach to the lockdown. It does seem that business continues as usual, more so in Sweden than, say, elsewhere in Europe. I'm just wondering what sort of ranges that you see for the trajectory in your B2B business going forward, depending on the various stages of the global pandemic. Related to that, just one clarification around your equipment sales, yeah, and why they are lower margin now than in previous quarters. Thank you.
Okay. Thank you very much, Terence, and good morning to you as well. The equipment question, we're going to go to Mikael for. First, a couple of words on the B2B sector. I think you're right that Sweden has not gone into a lockdown mode in the same way as has happened in many other countries. This is more of an informal lockdown where the government and authorities give recommendations, and people tend to follow them to quite a large degree, which means that many companies have actually closed their offices, and many companies are working from home. For instance, we started many weeks ago to work from home and did the transition overnight, and that went very well.
This has also meant that we see a lot of business coming in actually from companies who need new type of IT solutions and telco solutions while they move their businesses from offices to home. This is positive. Another thing which we historically have seen as negative, which is our big exposure to the public sector, now actually becomes a strength because they are obviously not very likely to go out of business and become bad payers. Whereas the private sector may be more in that camp. I think that the business sector in Sweden will be hit by the pandemic, but possibly not as much as in other countries, but we'll have to wait and see. That's what I can give you in terms of flavor now, Terence, on that one. Let's go over to Mikael for the equipment sales and why the margin is lower.
Yes. There are two different explanations for this. The first one is B2B Sweden, where we have had to replace some equipment sold to larger customers by more expensive equipment due to delivery problems from Asia. This we saw already in Q1. After the lockdown in China. This is probably part that is a temporary effect since it was unexpected, and we had to continue to deliver to B2B customers. This is, of course, something we address and work on continuously to ensure to minimize this negative impact going forward. The second effect is the Baltics, where we If you compare the three Baltic countries to Sweden, we have closed down all our shops in the Baltics while they are open in Sweden. As a result, we have seen lower equipment sales in general in the Baltics.
This usually comes with or normally comes with a positive margin, of course. Those are the two main explanations.
Okay. That's great. Thanks, Anders. Thanks, Mikael.
Thank you.
Thank you, Terence. Bye.
Thank you. Our next question comes from the line of Peter Nielsen from ABG. Please go ahead, Peter.
Yeah, thanks a lot. Mikael, you've just commented on the equipment sales. You actually have positive margins on those, even for consumers. Anders, you suspended your outlook this morning, but you are saying that you are targeting a flat EBITDA this year versus last year. Is that sort of official guidance we should assume? Along the same lines, one of your measures to preserve cash flow, et cetera, could you envision keeping further back on your CapEx for this year than planned? Thank you.
Hi, Peter. Good morning. Thank you for your question. What we're saying is that we are targeting to defend the EBITDA as of last year, and that is our target. Whether you call that guidance or target, I don't know, but it's what we're aiming at. If we deliver that, then we think we have done a good job operationally given the circumstances. We're at the mercy of the pandemic here, so it depends pretty much how that develops. If it becomes less, if the longevity, if it's not as long as we may anticipate, then we can do better. If it's longer, then we'll do worse. It's kind of a moving target.
That's what we're aiming at right now, given what we know at this point in time. When it comes to CapEx, we do want to keep on investing in building for the future of the company. We have no idea or thoughts right now of scaling down CapEx when it comes to key initiatives such as 5G rollout and Remote PHY in order to build the networks of the future, both fixed and mobile. That we're going to do.
We are going to continue to transform the company into the telco of the future by taking out legacy IT systems and all this good stuff, which will make us a better operating company and drive out a lot of costs. We have the target of SEK 1 billion over three years. All of that is intact. In the scenario we operate under now, we have no idea of cutting CapEx. I hope that answers your question, Peter.
It does. Thank you, Anders. That's helpful. Thank you.
Thank you.
Thank you. Next question comes from line of Johanna from SEB. Please go ahead, Johanna.
Just a follow-up question. You mentioned less sales cost to mitigate. I fully understand that. I guess what I'm looking for is the confidence in cutting sort of the longer-term initiatives. As you mentioned, the SEK 1 billion program you stated before is three years and it's back-end loaded. I'm just wondering what are the real possibilities here to sort of take parts of that and do it already this year? That's my first question. A second question relates to TV. I guess one of your main competitors seems to be acquiring, it's not confirmed yet, but potentially acquiring sports rights and having a different sort of approach to TV, also owning content. I'm just wondering how you look upon the competitive landscape on the TV side going forward. Thank you.
Thank you very much, Johanna. When it comes to cost savings here, the long-term initiatives, the transformation program, the SEK 1 billion cost-saving program or transformative program, which will lead to SEK 1 billion in cost savings over three years, that we're going to try to fast-forward or fast track it. It's not clear right now to what extent that can be done. My gut feeling tells me that it's going to be pretty much as laid out before. What we'll do then is that we'll turn every stone and look at all the other initiatives we do to see whether we should go ahead as planned now or if we should pause them or discontinue them. We also look at our general setup to see if there are improvements to be made there.
Our initial estimate is that we're confident that we can mitigate the shortfall in revenue and defend our EBITDA for this year and come in at the level of roughly last year. That's what we estimate right now. I think we will be able to give you more flavor on this as we go along. I have to stress that this work is ongoing. It's not finalized. It's something that we are working on right now, so therefore, I cannot give you much detail on it.
When it comes to TV, yes, I understand that there are rumors that one of our competitors have bought sport rights. Yet to be confirmed. Our stance remains the same. We believe that we should stay out of owning content as long as we get access to content we think we need in order to deliver good service to our customers. If that turns out not to be the case, we'll have to revisit this question of owning content. Right now, that's not the case. Rather the opposite. We are pushing full speed ahead on our Comhem Play+ initiative, which is our own OTT service, which we launched in Q1. It's doing very well. It's going according to plan. That's where we put our focus. We believe that this is our TV product of the future.
That's what I can give you right now, Johanna. I hope that helps you a bit.
Absolutely. Thank you.
Thank you.
Thank you. Next question comes from the line of Roman Arbuzov from JP Morgan. Please go ahead, Roman. Are you on mute, Roman? Mr. Roman Arbuzov?
I am on mute. I'm sorry. I'm here. Thank you for the opportunity to ask a question. I'm calling from Skype, and unfortunately, I believe that I'm on 59 minutes of the call, and I've got a feeling that I may be cut off at 60. I'll ask the question and hopefully read the transcript in case I do get cut off. My question is just first on the flat EBITDA. I just wanted to make sure that you're not assuming some pretty gloomy scenario. I just wanted to make sure that it's not ultra-conservative. For example, in targeting flat EBITDA for 2020, you're not assuming that the SEK 50 million monthly impact carries on right through December, for example, or that the lockdowns extend until the end of the year, something like that.
Also, I just wanted to check whether the mitigating measures, are they already in place? Have they been in place since March? Are they in place since April? When we think about the second quarter earnings, maybe we're going to have the three months of COVID impact. What happens to the mitigating measures? Does that kick in in April or?
I don't know what you think, but it sounds like Roman was cut off there by Skype. 59 minutes is up, I guess. I'll answer the two questions he asked before being cut off. The first one was about flat EBITDA. Do we have a super gloomy scenario where the COVID-19 effects will go on for a very, very long time? In our estimates, no, we don't. We do not have a super gloomy scenario. We think that the situation will gradually become better during the fall. That's what we expect in our scenario currently. In line with what we can read from the experts and from the market. That may change, as we all know. We don't know how this is going to end, we do expect things to gradually become better during the fall.
The second question was, are the mitigating actions in place already, or when will they come in place? They will come gradually in place during Q2, I think is the answer. For more flavor on that one, as much as we can guess, we should probably go to Mikael. This is Mikael's territory, so I don't say anything stupid, or you can give even better information.
I don't think we should go into much more details, but you're right. If they are being put in place, have been put in place now during April, and then it will follow in May and possibly June as well.
Okay. That's what we have for you, Roman. Thanks for placing the questions.
Our next question comes from the line of Siyi He from Citigroup. Please go ahead, Siyi.
Hello. Good morning. Thanks for taking my questions. Just have a question on special dividend. You have decided to postpone it, and I was wondering, when do you think could be opportunity for you to rethink whether to pay out a special dividend? Whether you think that the pandemic could potentially change your mid to long-term view on the leverage targets. Also, I want to ask whether on your mitigating factors, will you consider to take the furlough plans for employees? If so, would that impact your ability to pay out special dividends? Thank you.
Thank you very much for your question. The special dividend our estimates, given the forecast we have right now and the outlook we have, is that we can pay out a special dividend. This is just a question of being prudent in our mind currently. I would envision us to look at the situation post-summer again. If the outlook then looks as we think right now, I wouldn't be surprised if the board calls for an Extra General Meeting during the fall and then possibly pay out the special dividend at the same time as the second tranche of the ordinary dividend, which is scheduled for October. As I said, things can change, so we have to follow this very carefully.
I do have to stress it's not canceled, it's postponed, and it's a question of being prudent. When it comes to leverage targets. As Mikael said before, we operate now below our leverage target, 2.3 at the end of Q1. Our target is 2.5 to 3. We're going to operate at the lower end until we have a certainty on where the pandemic is heading. We do not entertain any questions of, or ideas of changing our leverage zone at this point in time. When it comes to the mitigating factors, do we anticipate using furloughs? No, we're not. We have a composition of our staff where we have lots of consultants, which means that we are not eligible for these kind of schemes. That's not in place. Mikael, anything you want to add?
No, nothing more.
Okay. I hope that answers your question.
Yes, it does. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Jörgen from Nordea. The line is now open. Please go ahead, Jörgen.
Yes, good morning. Thank you for taking my question. I have two questions. One relates to the fixed mobile convergence. You added quite a lot of new customers there and have 80% of your overlapping base. Could you tell us a little bit about the progress outside the overlapping base and how that relates to your long-term strategy goal for B2C? The second question is relating to CapEx in Sweden, how we should think about either ramp up or ramp down of CapEx relating to the 5G spectrum auctions. Would you consider starting before the spectrum auctions, or should we think that it happens after the auctions that are now planned for November? Thank you.
Thank you very much, Jörgen. Let's go to Samuel for the first question on FMC, and Mikael for the second one on CapEx in Sweden relating to 5G.
Yes. On FMC, the focus for the last year have been twofold, you can say. One is to start loyalizing the overlap with the benefit program we have. There we're now in a situation where we have 80% of that overlap on the benefit program, and we can see clearly that it has a loyalizing effect on all products. That's very good. In the meantime, we've also been working on the initiatives of getting FMC drivers in all segments of the market. Where we can cross-sell and bring new customers into FMC. That's the next phase, I would say, to use these levers. Com Hem Mobile was first out, you could say, and that's been successfully running according to plan or actually slightly better than plan.
We worked with selling fixed Com Hem products in Tele2 channels. That has been ramping up as well in the period. We have launched Penny, which is a no-frill FMC offer. Now lastly then, also introducing broadband for Comviq. You could say that the first phase is over, which has been loyalizing the majority of the overlap. We'll continue to work with them and introduce FMC drivers across the brands and segments. The next phase now will be utilizing these new drivers in order to drive FMC even further.
Just to follow up on that, have you seen any material subscriber additions from those initiatives, or is that too early?
No, we definitely see, I think the clearest example is Com Hem mobile. That has been very well received. Selling fixed products in Tele2 channels has taken somewhat more time, but pre the pandemic, we saw that picking up really well in both customer service and stores, but that takes a bit longer time, and we knew that beforehand. But we're absolutely seeing positive results of all these initiatives.
Good. Thank you, Samuel. Mikael, let's talk CapEx and 5G.
CapEx. Yes. CapEx and 5G. This is a delicate balance. On the one hand, we don't want to invest into equipment which we need to have the license in order to build the 5G network. On the other hand, we continue, of course, to invest into building capacity right now. We build capacity now. We invest into 5G-ready equipment. Not to waste anything, but still to build capacity for the customers, which is needed now, especially in these days. Then after the auction is done, then we will continue and ramp up the rollout.
Okay.
I hope that answers the question. The conclusion is that the delayed auction has an impact on CapEx for the year. Yes. It's somewhat delayed, but we still build capacity.
Thank you very much.
Thank you, Jörgen.
Thank you. The next question comes from the line of Keval Khiroya from Deutsche Bank. Please go ahead.
Thank you. Just had a question on the Q1 Swedish B2B trends. You have saw quite a sharp deterioration from -2% year-on-year in Q4 to -6% in Q1. You did talk about some of the impacts, including, for example, roaming, which I think was about a one percentage point drag. Could you just help explain a little bit more on just how much of this deterioration was COVID driven, and how much you think was really driven by just trends getting weaker in the overall division? Thank you.
Thank you very much. Mikael, do you want to take a stab at this one?
Sure. Sorry, I missed the beginning of your question. Can you please repeat it?
Yeah, sure. When we look at the Swedish B2B trends, in Q4, they're minus 2% on revenue year-on-year, and Q1 was minus 6%. You did talk about some of the impacts like roaming, which is a one percentage point drag. Could you just help split out how much of that deterioration you think was COVID driven, and how much of it was driven by actually the B2B trends getting worse on an underlying basis? Thank you.
Sure. Sorry, I missed the first part of the question and then was lost. It's mainly related to the rest of the deterioration is due to, first one, we have lost one service contract within solutions, low margin, and it's a one-off. Secondly, the deterioration is due to fixed services within B2B. Mobile, if you exclude the effect from COVID-19 roaming, less roaming, Mobile was actually flat year-on-year, within B2B. Fixed and partly solutions.
Okay, what's driving the fixed deterioration?
It's both price pressure in the market, and then we lost some contracts. It's mainly price pressure in the market.
Perfect. Thank you.
I could note on the other hand, that we have seen quite a good order intake during Q1, in large enterprise. That is not yet seen in the P&L, obviously, because you have long lead times. The effects you see in the P&L for Q1 is probably not a leading indicator to us how this business would have delivered or fared over the medium term, if we didn't have COVID coming in.
Okay, that's clear. Thank you.
Thank you.
Okay, the next question comes from the line of Ulrich from Jefferies. Your line is now open. Please ask your question.
Thank you. You have sort of suspended the guidance. You're giving some indications, which you call targets. I was just wondering, what was the thinking behind keeping that degree of flexibility at this point? Is it really just the uncertainty that you simply cannot quantify the impact, with any degree of certainty, even further down towards free cash flow, where obviously you have a lot of levers between revenues and delivering free cash flow? Is it that you are storing up maybe some ammunition if everybody hunkers down, there might even be an opportunity for you. Is there any other consideration why you're not willing to sort of maybe not guide on revenues, but I think everybody would understand that by giving you some indications, sort of really that are official guidance further down the line. The thinking behind that would be of interest. Thank you.
Thank you very much, Ulrich. What we have done here is to really think about what we can do which is best for the company, so we can come out on the other end of this in as strong shape as possible and continue the journey, and deliver on our midterm guidance. The first realization is that, during the pandemic, we don't think it's reasonable that we can grow end-user service revenue. That's the first realization. That will have some impact on our EBITDA targets and our EBITDA performance for the year. The logical conclusion is to defend the EBITDA as much as we can, and then we have set the targets for that. We think it's reasonable, that we should achieve a flat EBITDA versus last year.
Provided that the scenario plays out as we have anticipated it, and we do not have a doom and gloom scenario, and we do not have an over-optimistic scenario. We're in between. Life slowly goes back to some form of new normal during the fall. Obviously, we have not changed our CapEx guidance. If you hear Mikael talking, you hear him saying that we find it somewhat delayed. I would not be surprised if we, during Q2 or when we release Q2, come with some form of update on our CapEx guidance. I would assume that it is within the range we have guided you to. Possibly towards the lower end of the range. When it comes to cash flow, I don't see any reason why we should not be able to defend the cash flow either.
That's where I come from. Mikael, I'm happy to hear your perspective on it as well. If Mikael is around.
Yes, here. Sorry, I was on mute. We have given one number today, which is very specific, and that's the roaming impact. If you look at that impact on an annual basis and compare it with the detail. We have a rather narrow band on EBITDA growth in our guidance. That also implies that the length of this pandemic and how long it will take for things to go back to normal, if roaming will come back to the same levels again, that creates a lot of uncertainty. Given these numbers, I think it's prudent of us to suspend guidance. Once we have more clarity around the situation and how the next phase of this pandemic, when we go back to more normal life again, how that develops, then we come back with new short-term guidance. Over the midterm, this doesn't change anything.
Okay. Thank you very much for the clarification.
Thanks, Ulrich.
Next on the line is Stephen Malcolm from Redburn. The line is now open. Please go ahead, Steve.
Yeah. Guys, just a question on your roaming. I was taken by the fact that it looks like you've got a 75% gross margin on your roaming revenues. Is that right? Is that roaming revenue of SEK 400, is that across Europe and the rest of the world? I guess your sort of European roaming is broadly neutral. Does it include inbound in Sweden as well? Just curious as to sort of the phasing of that through the year, where you're particularly exposed and where you see the biggest impact. Just to clarify, I know we're all sort of guessing here at the moment and trying to figure out exactly how the pandemic plays out, but do you expect Q2 to perhaps see a more severe impact than Q1 before you begin to see a recovery in Q3 and Q4? Thank you.
Thank you very much, Stephen. I think we'll go to Mikael to start with for the roaming question and also the phasing one. I think that's what we should do.
Then for the roaming, it's a bit more complicated than just taking the margin, the SEK 400 and the SEK 300, since we also have inbound roaming. Please don't calculate the margin on that.
Okay. Does the SEK 400 include inbound roaming, though?
That is the total in that.
But it implies-
No, it doesn't.
Okay. Inbound roaming's on top of that?
Yeah.
Presumably the impact would be bigger, because you're getting no inbound roaming, right?
Yeah.
Okay. Your gross margin on international roaming from all your customers is 75%, so that seems like a high margin.
Yeah.
Okay, great. Thank you.
The margin is SEK 300 million. That's correct.
Okay.
Some seasonality to roaming, but rather even throughout the year. You have due to international travel to our countries, then of course it varies somewhat, but it is rather even.
Is it right that you'd be sort of neutral in Europe, given Roam Like at Home and stuff like that, but implying that the gross margin is even higher for your business customers going to China, South America, North America, stuff like that?
Yeah, it's rather neutral in Europe. That's correct.
Okay. Right. Thanks.
On your second question on Q2 versus Q1, obviously in Q1 we had roughly one month of impact of COVID-19. In Q2 we'll have three months, or hopefully not three months, but as we estimate three months, that will obviously have a bigger impact in Q2. Hopefully life will slowly go back to normal during the fall. We have to wait and see.
Just on the equipment margin and the profile. Obviously, the lockdown in the Baltics, is the margin on handset sales higher in the Baltics than the rest of the group? Just out of curiosity, or is it fairly normal?
It might be. Mikael?
Yeah. It varies between countries in the Baltics and between customer segments. In general, it's higher in the Baltics than in Sweden. B2C.
Okay.
Yes.
Perfect. Thanks, guys.
Thank you.
Thank you. Next question comes from the line of Stefan Gauffin from DNB Bank. Please go ahead.
Most of my questions have already been answered. Just a clarification on the equipment margin. You said that you have been replacing some equipment for your B2B customers. Can you quantify that impact?
Thank you, Stefan. We'll go over to Mikael.
You should start with the SEK 70 million impact we have had so far, and then half of it is bad debt provision, roughly, and then this is a smaller portion of the remaining SEK 35. I don't think I want to be more specific than that. This is also more of one-off nature, since we try to avoid this going forward, of course.
Yes, that was my conclusion as well.
Yeah.
Yeah. Thank you.
Thank you. Thank you, Stefan.
Our next question comes from the line of Frederic Boulan . Please go ahead.
Hi. Good morning. Thanks for taking question. It's Fred at Bank of America. Just on your 2020 guidance, you gave us an update on the EBITDA, CapEx, some good color on where we could end up. Just on the revenue side, you're suspending the existing 2020 guidance. Can you give us a bit of color on the parameters and where we could end up versus the current guidance, if you have anything to share? In particular, on business, just to follow up on the previous question, after the drop we've seen in Q1, I understand some of that is a bit one-off in nature, but if you can help us on where we could see that business developing in the next quarter. Thanks.
Good morning. I do understand your question and sympathize for the need of clarity, but I don't think we're in a position to give that to you right now. Not that we don't want to, but it's too uncertain, I would say. It's something we will have to come back to you with over time, I would say, as we see more the progression of what's happening in B2B, for instance. That's exactly why we are not giving any guidance on sales or revenue or end-user service revenue for 2020. It's too uncertain. I think we should leave it there, unfortunately.
Okay. Thank you. Understood.
Thank you.
Thank you. Next question comes from the line of Fredrik Lithell from Danske Bank. Please go ahead. Line is now open.
Yeah. Thank you for taking a question so far into the conference call. Can I just ask a little bit on prices? First and foremost, on the B2C side, have you seen any indications that the consumers want to trade down in order to sort of save some money if we are seeing unemployment rising, all that stuff? On the B2B side, have you seen any of your clients reaching out to you in order to try and sort of renegotiate a little bit? How would you sort of meet that kind of action? Thank you.
Okay. Thank you. That's a very good question also. We'll go to Samuel for the first one, the trading down question in B2C, and then to Mikael for B2B and if customers have contacted us for renegotiation.
Yes. On B2C, of course, we were contacted by some customers, looking over their kind of economic situation. No big changes yet on the small portions of customers. Let's see, right now, not much.
Thank you.
It's Mikael here. For B2B, renegotiations, of course, some customers have contacted us about payment terms, and these are customers which are heavily affected by the pandemic. These are a few customers within large enterprise, and then we try to work it out in the best possible way for both them and also to ensure us that the long-term relationship continue with these customers. It's a discussion which has to benefit both of us. I would say for some B2B customers, they are upgrading in these times since they need more capacity, mobile, and fixed services from us. These are mainly the kind of discussions we have so far with B2B customers.
Okay. Thank you.
Thank you, Frederik.
Thank you. No further question at this time. Please continue, Mr. Nilsson.
Okay. Thank you everyone for participating in this call today. I wish you all a very good day, and above all, let's stay safe. Bye for now.
Thank you. That does conclude our conference for today. Speakers, please stand by. Participants, you may all disconnect. Stay safe. Thank you for joining.