Earnings Call: Q1 2018

Apr 23, 2018

And welcome to the Tele2 Q1 Interim Report 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Erik Strandin Persch, Head of Investor Relations. Please go ahead, sir. Thank you, and welcome, everyone, to the call. As usual, you will find the slide presentation on our website. I have here with me Alison Kurpi, our CEO and Lars Nordmark, our CFO. And I start by handing the word over to Alison. Please go ahead. Hi, good morning, everyone, from a very sunny Stockholm, and welcome to our first quarter results in what will be a year of major transformation for Tele2. So looking at the numbers, 2,000,000,000, 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 2 non cash one offs, we saw mobile end user service revenue also grow 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 top line growth, which flow through to a 26% increase in rolling 12 months operating cash flow. And as you know by now, having agreed to combine our Dutch operations with T Mobile in Q4 last year, Netherlands is now reported as discontinued and excluded from our reported numbers, but very much you can see the detail in the report itself. 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 Roam Like Home headwinds and vibrant competition. In the Baltics, we continue to deliver strong revenue and EBITDA growth with both up by 8% in local currency. As a result, our Baltic Sea Challenger businesses collectively achieved a 9% increase in OCF on a rolling 12 month basis, amounting to DKK4.5 billion as our mobility for our strategy continues to serve us well with outstanding cash conversion. In our investment markets, we have excellent momentum, thanks to 4 gs rollout, improving network quality perception, fearless commercial offerings and our customers' insatiable search for data. Kazakhstan delivered another excellent quarter with mobile end user service revenue up 21% in local currency on the back of growing ASPU and a growing customer base. As a consequence, a second repayment of the shareholder loan was received during the quarter. And Croatia, our other investment market, also delivered an excellent mobile end user service revenue growth of 11%. Our winning cost structure also improved in the quarter from a number of costs 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 Hexaware, allowing us to access the right competence and skills as a support to our digital transformation strategy and further IT operating cost reduction in the future. And top line momentum and increasing scale in our CapEx business filtered through to a 30% EBITDA margin, allowing us to reach our midterm ambition 1 year early. The Q1 of this year also marks the beginning of a year of major transformation for our group and preparations for the 2 transactions in Sweden and Netherlands are well underway. The regulatory approval processes are on track and we are in the pre notification phase with constructive dialogues with the European Commission and looking forward to filing the formal merger notifications during this quarter. Looking forward to the merger with Com Hem, we will be combining 2 highly cash generative businesses with clear synergies to create a leading connectivity provider in the Baltic Sea region. As a reflection of this, 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 Fighter segment in particular with new price plans launched by several brands in the quarter. The main brand segment was however less eventful. As we said in our release this morning, affecting the Swedish numbers is a non cash adjustment of DKK 46,000,000, which has been made to both mobile end user service revenue and impact to EBITDA. Underlying, however, after adjusting for Roam Like Home and the 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 data growth of nearly 50%. At 26%, the EBITDA margin in the quarter was slightly lower than Q1 last year due to higher equipment sales, particularly in the B2B segment. However, our rolling 12 month 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, up 3%, driven by continued strong growth in Combi postpaid as we continue to successfully migrate away from prepaid. Yes, intense competition continued in the Price Cytra segment, but both Tele2 and Combiq ASPUs increased as we continue to encourage our customers to take larger data buckets and liberate their ability to connect wherever and whenever they want to. These customer focused strategic choices and a number of new commercial propositions continue to improve our customer satisfaction with Combiq 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 Tele2 and TDC. We also had yet another quarter of successfully winning new contracts, including ECA, SCB, the Swedish Tax Agency and Siemens, as well as extended contracts with Bisma, SJ and PostNord. Looking forward, we now expect the improved B2B trends continue despite this pricing pressure. However, the solid performance in customer retention and acquisition in recent months and the annualization of Home Like 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 4 gs investments continue to drive excellent top 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% 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% 35%, respectively, filtering through to a rolling 12 month operating cash flow up 14%. In the quarter, we saw again a strong ASPU development of 7% as the transition from prepaid to postpaid subscriptions continue and customers trade up to larger data buckets. As in previous quarters, smartphone penetration continues to increase, which supports uptake of larger data bundles. And momentum was also boosted by great progress in the B2B segment across the region. Our Baltic team are always fearless advertising and we saw some great new campaigns including the flying house 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 we've now reached our 5% margin ambition 1 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 and a second repayment to Tele2 Group DKK5 billion or approximately DKK125 million was made in the quarter against the shareholder loan. Accumulated repayments up until March are approximately DKK 200,000,000 and the outstanding balance is now DKK 2,900,000,000. Looking at the CASBET results in just a bit more detail, our customer base grew by 6% year on year and ABPU was up by 13%, driven by our 4 gs advantage, improved network quality perception, our dual brand strategy with new price plans on both brands and a speed differentiated unlimited mobile broadband price plan on our premium brand Altel. As more and more CapEx citizens discover the benefits of the connected life through our market leading 4 gs coverage and our great value for money propositions, we are thrilled to see Net Promoter Scores improving and paving the way for further growth. So now, let me hand over to Lars, who can take you through some of the financials in a bit more detail. Thank you, Alton. I'll start by making a few comments on the P and L this quarter. We had a 5% growth in net sales, driven, of course, by mobile end user service revenue, but also by strong equipment sales, more than offsetting the decline in fixed revenue. We did not have any net impact from FX from group net sales since the stronger euro and Croatian kuna offset the weaker Kazakh Tenge. At the EBITDA level, the largest driver was higher EBITDA in Kazakhstan, with Croatia and Baltics 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, the Roam Like at Home effect and the write down in Sweden. Moving further down the P and L, we have 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 other financial items, we reported change to the valuation of the earn up obligation for Kazakhstan every quarter. In Q1, the value has increased again to around SEK 500,000,000 due to the good performance of our Catac business. This resulted in a SEK 72,000,000 non cash cost in our P and 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 change in financial items paid was mainly related to an FX effect last year. Changes in working capital are often negative in the Q1. 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, so the Dutch CapEx is included here. And at the bottom of the chart, we split the cash flow in the continuing business part and the discontinued part. As you can see, the overall cash flow for our continuing operations is reasonably stable compared to last year. Moving on to Slide 16, which is a familiar picture by now. It shows our operating cash flow, defined as EBITDA less CapEx on a rolling 12 month basis. Our Baltic Sea Challenger businesses and our smaller business units continue to generate a solid cash flow of well over SEK 4,000,000,000. The remaining investment markets, Kazakhstan and Croatia, are now meaningfully producing operating cash flow with a contribution of over SEK 350,000,000 over the past 12 months. So together, we are now at an operating cash flow contribution in continuing operation of SEK 4,600,000,000 while the 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 SEK 1.5 billion. The proposed dividend of SEK 4 per share is expected to be paid in May, amounting to a total of SEK 2,000,000,000. Looking at the right hand side of the page, over the past 12 months, we have generated cash flow of SEK 2,400,000,000 in addition to a cash contribution from M and A, which is mainly related to the sale of Tele2 Austria. Against this, we paid dividends of SEK 2,600,000,000 in May 2017, 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, mid single digit mobile end user service revenue growth and EBITDA of $6,500,000,000 to 6,800,000,000 and a CapEx envelope of $2,100,000,000 to $2,400,000,000 And on the last item, our CapEx was low in the Q1, but we do expect it to pick up in the coming quarters. And with that, I'd like to hand back to Alison for an update on the merger as far as conclusions. Yes. Thanks, Lars. So before we round off, let me just talk briefly about the upcoming merger with Com Hem and the new financial framework that we issued this morning. First of all, the merger process is going according to plan. We are preparing the filings of both the European and U. S. Prospectuses as well as being in active dialogue with the European Commission during quarter, Q2. 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 enlarged Tele2, which is still expected to be during the second half of this year. Moving on to the updated shareholder remuneration framework. If you recall in January, we announced a preliminary framework. Since then, we have done further analysis and we have engaged with both companies' shareholders. As a result, this morning, we announced a 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 times 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 that the combined company will distribute in excess of 100 percent of equity free cash flow to shareholders through our combination of dividends and share repurchases and that the prospects for return to shareholders for every invested kroner of the 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. 1st and foremost, it all starts with our purpose to feel if we liberate people to live a more connected life, enabled by the 4 key strategic pillars that you see at the bottom of this slide. By continuing to leverage these strategic pillars, we will return Sweden to growth despite headwinds in B2B and Road Market Home in the second half of this year. We continue to fuel industry leading momentum in the Baltics and Kazakhstan, and we'll prepare to close both mergers in 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 and 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 the potential of Tele2 for both customers and shareholders alike in the coming months years. So just to say, I am very proud that despite the transformation agenda, which is at full speed, 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. Operator, can we have the first question please? Certainly. We've got the question from Terence Tsui from Morgan Stanley. Please go ahead. Your line is open. Yes. 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 2 stand alone companies' 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, maybe around capitalized sales commissions. So if you could share any details on that, that will be quite interesting. And then secondly, Sweden. So you mentioned Rome Like Home a few times. What are your expectations for usage this summer? And then also on Sweden, just there's been a lot of focus at the low end competition. I just wondered at the high end whether you've seen any responses from the market following your Unlimited Together proposition? Thank you. Thank you, Terence. I'll pass over to Lars for the accounting piece of your question. But in terms of the leverage target, obviously, it's not as simple as just adding our key EBITDA 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 that? Yes, on the accounting, so we do treat the capitalization slightly differently. So it's about a $200,000,000 impact on the Com and EBITDA if they would not capitalize those. Okay. And then on your other questions room like at home, so certainly in the Q1, it was very much in line with our expectations. In the quarter, dollars 51,000,000 of that in Sweden. In the quarter, dollars 51 of that in Sweden. I expect usage 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 room like at home. But as we see roaming increase in Europe, we're also seeing roaming increase with the European footprint. And there is no restrictions on the pricing of that roaming. So let's see what happens in the summer, but expect continued growth. In terms of competition in Sweden, yes, there's been a lot of commentary on the price fighter segment. Comvite remains very strong within that and we launched some new propositions in the quarter. We don't feel we need to match the competition at every level. We have the stronger brand in that segment. We have stronger network coverage in that segment. We've got the strongest distribution as well. But in the main brand segment, no, it's been a fairly neutral quarter for the main brands. No reaction to Unlimited Together yet. We've only we're only really starting to market that now. And let's see, but remember, it's first of the average app booze in the market, the unlimited proposition is still well ahead of that. And if you think unlimited is kroner. Our average ASPs are still today only around kroner. 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 data demand at very minimal incremental costs. Thank you. If I could just ask a real quick follow-up on the dividend distribution. Do you think the dividend payout will be on day 1 will be based on the full run rate of the synergies or will that the dividend payout be based on as the run rate of synergies are realized? Thank you. 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 later in the year. But it's very much linked to underlying equity free cash flow. That is the ordinary dividend objective. Okay. And the leverage Terence, 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 1. Yes. I just wanted to add, Tejas, the target range for leverage is the guiding principle. So depending on where we are on that, then that will decide how much extraordinary cash distribution there can be. Thank you. Thank you. We will now take our next question from Johanna Alquist of SEB. Please go ahead. 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'm more referring to how April sort of has started on the B2C side, if you see some impact from 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's a slightly weaker intake and increased competition in the Dutch market. So when do you foresee that Dutch mobile will be free cash flow breakeven and it changed to that? I think I've stopped there. Thank you. Thanks, Joanna. Yes, you're right. The new price plans came in to play towards the end of the quarter in Sweden. 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 Comvik. And as I said to Terrence, Comvik remains a very strong brand with great network quality, great brand perception and very strong distribution, which means that for Convoy, we don't need to lead 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 too early to say, but we've got strong positions in both the price cycle segment and the value end of the market, and we've got new news coming to the market all the time. In terms of the Dutch JV, obviously, we're 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. The Dutch market has been and is a tough market. It has become a bit stiffer in this recent quarter due to FMC bundles, very much driven by the Dutch 2 alkali and escalating pressure from the MVNOs. So that obviously made the quarter a bit tougher than prior quarter. But we're still growing mobile end user service revenue on a like for like basis. In terms of looking forward and getting to free cash flow breakeven, because we're in a regulatory process, again, I'm very limited to talk about future guidance in that market. We are very much focused on getting the deal closed at the moment. We're in good dialogue with the EU and with T Mobile. But just to be clear that in whatever scenario, we wouldn't accept continued cash losses in the Dutch business anyway. Perfect. Thank you very much. Thank you. We will now take our next question from Thomas Heath of Danske Bank. Please go ahead. Thank you. I think you answered my question on the Netherlands in the last response. Thanks. Thanks, Thomas. Thomas. Thank you. If you Our next question comes from Ulrich Rathe of Jefferies. Please go ahead. Yes, thank you. I have three questions, if I may. The first one is following up on the discussion of Swedish mobile prices, particular in this sort of this Halland, Wimlar type competition. How do you interpret this in terms of motivations? Why do you think this has kicked off now? Is this an attempt to flush out consolidation? Is it just the 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 you've been asked whether you're seeing any effects in April. I'm wondering how you would sort of see this going looking forward. How likely do you think it is that these snowflakes price issues sort of affect the main brands? Then I'd 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're 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 a nitty gritty one, but I noticed that the other operations in mobile had a quite high EBITDA, was up SEK 30,000,000 year on year. What's going on there? What's driving the SEK30 1,000,000 higher EBITDA on a year on year basis than other? Thank you. Thanks, Ulrich. My goodness, you've given us a lot of questions this quarter, but taking them from the top. Swedish mobile, how do I service it? Listen, this segment has been very competitive for quite some time. Halon and VIMLA have always 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 or 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 on Comvik, as we really push to liberate more connectivity to our customers. So I think it's just yet another push and we are happy so far how our brands are defending themselves against that. How likely do we see any effect in the main brands? Well, as I said, the main brands are staying strong. The main brands, we haven't seen any major push yet. Obviously, we are 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'll be looking at the range of additional services that we can offer to give that more for more concepts that allows us to differentiate the main brand and the main brand segment away from the Price Fighter segment that is 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 always had the intention to make it more specific, and we wanted to do that after we had had the chance to engage with not just our shareholders, but also the shareholders of Com Hem post the announcement. So the analysis were done that proves that we are going to be a highly cash generative asset with attractive synergies that can only enhance that going forward. We will increasingly be a Baltic Sea challenger that is more robust with a more diversified set of cash flows. And we therefore know that we can maintain investment grade credit rating at a leverage of 2.5 to 3, which then determines the financial framework for the shareholder remuneration policy going forward. And there's 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? Yes. So on the other operations on the EBITDA, Ulrich, it's obviously 2 components there. 1 is the IoT business, which is growing nicely from a top line perspective. We also had some one off recognitions coming in from a revenue perspective that helped the EBITDA. We are still estimating this business to be at about $100,000,000 EBITDA negative for the year, so we're not walking away from that. And then the other line item there now there is very much related to our group HQ and the shared operations. And they will be around $60,000,000 to $70,000,000 I would say. And they also fluctuate somewhat from quarter to quarter depending on when we charge things out to the countries. Chemicals. We will now move to our next question from Lena Osterberg of Carnegie. Please go ahead. Good morning. I'll ask on Kazakhstan then because I think that's the only thing we haven't touched upon. Thank you, Lena. No, I think that you I mean, you already reached your target on reaching a 30 percent margin, which is, you say, 1 year ahead of target. So I was wondering where do you think that the margin can go from here? Also, I was wondering if you could potentially comment on Telia's disposal of Kcell. There's been some press reports that your partner, Tezak Telecom, is one of the interested bidders. I was just wondering how would that go would that trigger your put call option early if that's a successful bid by them for Telias asset? And then maybe finally also on Swedish mobile business, you've had for quite some time now very low CapEx to sales ratio. So that's, of course, because you're building together with Telenor. But I was wondering, do you see any need sort of in a step up in that CapEx to sales in the next 2 to 3 years? Thank you, Lena. So on CapExane, 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 throw off 35% in the Baltics, And we will continue to develop that business for as long as we are running it. So expected to go higher, but I'm 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 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've had low CapEx to sales ratio for quite some time and the network is performing brilliantly considering that we've seen data growth increased by almost 50% in the last year. Any need to step up? We're preparing for 5 gs, but really 5 gs, as you'll have seen in recent reports from some of the vendors, it's going to be much more of an evolution from 4 gs rather than a revolution of 4 gs. There is no consumer use cases out there at the moment that says that there will be any immediate need for massive small cell deployment, which was what some rumors were. So I think over the next couple of years, you'll just see us continue to invest in capacity upgrades, invest in upgrading our network for 5 gs readiness, but it will be more evolutionary than revolutionary. At the same time, we will be moving toward the end of meeting the 3 gs network. And that's something that we're actively looking at the moment as well as we aim to focus on 2 gs and 4 gs for the long term and aim to have not just the most efficient network, but also reduce the need for the amount of energy that we have in our networks as well. So, no immediate setup required in the next couple of years. Okay. Thank you. Thank you. We will now move to our next question from Stefan Gauffelin of DNB Bank. Please go ahead. Yes. A couple of questions. First of all, very strong numbers in the Baltics, but there seems to be increased price competition in Estonia. Just wonder, has this been ongoing throughout the quarter? Or when did this start? And also if you could say what kind of measures you are taking in Estonia? Then secondly, on Kazakhstan, there's a slowdown in subscriber intake. Is this intentionally? Or is this due and running relating to the Tele2 Com Hem merger. Can you say anything about your view on the expected synergies? Okay. Thanks, Stefan. Yes, very strong results in the Baltics. Now the increased pressure in Estonia has been there for quite some time. What you see is telemarketing and very aggressive selling has been going on for quite a period and it kind of ebbs and flows and it was quite high in the quarter, but it was throughout the quarter. And what you're also seeing is that we are starting to lose the service revenue that we had when we were selling we were providing Starman with a mobile broadband product. Obviously, Alisa bought Starman last year and we are gradually losing those customers as a result of that. We're taking a number of measures. We have a new CEO arrive on April 1, and he's using that as an opportunity to do a full strategic review over Estonian business, not just our pricing, but also competitive practices in the market is looking at marketing and discounting and we are actually going there for strategy review in the next few weeks to see what his plans are. But no, we won't accept these trends for much longer, and the team are actively looking to reverse the trends. Cabozant, yes, the slowdown in intake, but we're really focused in revenue growth in Kazakhstan and not going after short term intake targets. But we've had a fabulous run-in Kazakhstan. We are seeing the number 2 in the market be more competitive again, particularly as the 4 gs coverage starts to be further rolled 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 generation 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 we brought Taylor to and Com Hem when we announced the deal earlier this year. Yes, we have work streams on every key area of cost and revenue synergies. It's early days. They're obviously being targeted with a number that is higher than what we've announced externally. And both Anders and I are very happy with the progress so far. But obviously, it's too early to talk about a specific new number. Okay. Thank you very much. We will now take our next question from Usman Ghazi of Berenberg. Please go ahead. Hello. Thank you for taking my questions. I've got 3, please. Firstly, just on the network costs. Could you perhaps give a bit more detail on how that's being managed to be 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 has 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 would 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 weak. I mean in 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. Okay. On the network costs, no, it's not lower spending. It's actually structural. We started to cloudify and virtualize our network in readiness of 5 gs, but also part of our Challenger program a couple of years ago. And we're starting to see the benefits of that, because we're 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 2 option has not changed. We are in active dialogue with Kazakhstan 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 a great return for our shareholders as and when we serve the 2 options. And finally, the Baltic margins And the Baltic margins, I mean, it's very stable in Lithuania and Latvia. But what we did see in Estonia, because of quite intensive competitive pressure around telemarketing and also win back campaigns, the margin went down in Estonia. And as Allison 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. Okay. Could I perhaps ask a follow-up? In Sweden, I mean, the 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? We still have capacity absolutely at this point in time, but we're always looking ahead as well. So I can't comment on the specific number. I think I'd need Tom Palmer, my wonderful Chief Network Officer or Chief Technology Officer to be sitting alongside me. But no, we're in a great position. Our networks are very strong in Sweden and proving to be very strong despite the increased data demand. Okay. Thank you very much. Thank you. We will now move to our next question from Nick Lyall of Societe Generale. Please go ahead. Good morning. Could I maybe ask 2, please, Allison. On the Dutch business, you had mentioned the intake was a bit weak on subs, but also the EBITDA looks a bit weak too. Is there anything you can't give us guidance as you say, but is there anything you could tell us about maybe the speed of savings? Has that slowed down? Or has marketing had to increase in the quarter because China 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? What sort of regulation would you need to see to make a material difference to your broadband business do you think? Thanks. Okay. Thank you, Nick. So yes, EBITDA was a bit weaker in the quarter. There were a bit of issues on offload on loading onto our own network with some high end iPhone phones, but that is now being resolved. But the big thing in the quarter that's not been there previously is we've now got a retention bonus that is flowing through the quarterly numbers. Obviously, what you would expect as we try to retain key talent during the regulatory approval process. So but John and the team are have a stream of initiatives that they're 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 duopoly, which is very much consistent with our view of the market and T Mobile's view of the market. However, we're of the opinion that the draft regulation really failed to effectively address the nice competition that has resulted from the DUOPLIE. We're in the process of pulling together our response to the shortcomings in the ongoing consultation. So really, we don't believe it's enough. And that's why we believe that our deal with T Mobile has the best chance of reigniting competition in the Dutch market. That's great. Thank you. Thanks, Nick. We'll now take our next question from Edina Driscilla of RBC Capital Markets. Please go ahead. Hi, good morning. I just have a couple of questions. So on the new leverage policy, could you just talk about the outlook of sustainability of the over 100% equity free cash flow payout? Clearly, you expect EBITDA growth to support this. But is this a mid term goal, say, over the next 2, 3 years as you're delivering synergies? Or are you thinking about it 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. If you could just talk about the competitive dynamics in the SME market in the quarter, that would be great. Thank you. Okay. Well, 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 100 percent of equity free cash flow payout in the next few years, it's very clearly coming from the combination of 2 businesses that both have underlying and growing positive momentum in their EBITDA today. On top of that, you will have the synergy realization. On top of that, you've got a couple of clear asset sales in the Tele2 footprint. And I think that alone will clearly justifies the policy that we introduced this morning. How important is investment grade? 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 funding easily and at competitive rates. And that's the intention of this new policy. And we do believe that 2.5 to 3, we'll be able to maintain the underlying investment grade that Tele2 has today. And we'll be able to access the right amount of funding, not just from the Swedish market, but also from European markets as well. And then Sweden B2B, yes, trends are getting better. It's still a very competitive market. Underlying voice and data still has price pressure within it. But we are really starting to see the benefits of the converge offer of combining Tele2 and TDC to take that to customers. And we've had very successful wins in recent quarters and haven't had any major churn in recent quarters either. And that gives us the confidence that once Room Like Home is behind us in the second half of the year, we'll be returning to positive territory again. All right. Thank you. Thank you. Thank you. Our next question comes from Peter Nielsen of ABG. Please go ahead. Thank you. Just one question please relates to Swedish EBITDA, which even adjusted for the equipment high equipment sales, it looks a bit weak on the margin side. Anything you can add on the underlying cost levels? I mean, the B2B synergies have now been achieved. You've obviously talked about the roaming impact, but anything else you can tell us about the underlying OpEx developments and why the margin still looks a bit light in Sweden? That will be appreciated. Thank you. Yes. Well, it was a particularly strong quarter for equipment sales, Peter, and expect we had one major account in the enterprise segment by quite a significant they upgraded basically all of their employees' phones in the quarter. So that really skewed it. You've got the one off, you've got the $46,000,000 one offs that we mentioned. You've got room 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 driving out cost efficiency and synergies going forward. We also in this quarter had quite heavy marketing investment in the B2B segment as we launched the end 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 weaker 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. Okay, that's helpful. Thank you, Alison. Thanks, Peter. Our next question comes from Sunil Patel of Bank of America Merrill Lynch. Please go ahead. Yes. Thank you for taking my question. Just one question please on timeline for the Netherlands deal. CLM. Has the deal actually been filed? And I believe it's T Mobile who does the filing. But has it actually happened yet? Or are you still in the discussion phase? And what are the milestones from here where we get to hear around whether it's a Phase I review, Phase II review and so on? Thank you. Thanks, Sunil. Yes, as you said, this is very much a T Mobile owned process, but we are in active dialogue with them and the commission. We're in the pre notification 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. Thank you. But in terms of the dialogue, it's all very much going according to plan signals. Thank you. Operator, we are approaching the end of the call time. I think we have time for one more question, please. Yes. We will now take our final question in the queue from Andrew Lee of Goldman Sachs. Please go ahead. Good morning, everyone, and thanks for taking my questions. I just had 2, 1 on fixed line, call it, consolidation and then secondly on the spectrum auction. So on fixed line consolidation and municipalities that have fiber network, Telia has talked about the potential to consolidate some of those assets. Is that possible in your view? And could Tele2 be involved get involved here in any way? And then just secondly on the upcoming spectrum auction, 3 already appears to be struggling with customer perception. If it doesn't get an allocation of spectrum when this auction comes about, I think it's still expected to be in the Q3. 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 could actually undergo cold consolidation to become a 3 player market? Just any thoughts you have around that would be really great. Thank you. So first of all, fixed line consolidation, obviously, neither ourselves or Telia talk about any M and 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 a 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 still an active dialogue with the regulator on that upcoming auction. Thank you, Andrew. There are no further questions in the queue. Thank you, everyone. That concludes the call. Thanks, everyone, for listening in, and goodbye. Thank you. That will conclude today's Tele2 Q1 interim report 2018 conference call. Thank you for your participation, ladies and gentlemen. You may