Good day, welcome to the Tele2 Q2 Interim Report 2016 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Louise Tjeder, Head of IR. Please go ahead.
Thank you. Good morning, everyone. A warm welcome to our second quarter 2016 results presentation. Speaking is Louise, with me today I have our President and CEO, Allison Kirkby, and our CFO, Lars Nordmark. Allison will start by going through the highlights of the quarter as usual, followed by Lars, who will present some further Q2 financials. After this, as normal procedure, we will open up for questions, where you have the possibility to ask your questions, either over the phone or via the web. With this, I will hand over to you, Allison.
Good morning, everyone, thank you for joining us as we present our second quarter of the year. Let's start with the highlights. As customer-focused value champions, we saw Sweden consumer postpaid and large enterprise return to mid-single-digit growth. In the Netherlands, the positive customer growth trend that we built up during Q1 continued, we achieved a net intake of 57,000, almost double the intake compared to Q1, 50,000 more than the same period last year. We were also excited to announce the planned acquisition of TDC Sweden to create a unique customer champion in the Swedish B2B market. As I said at the time of our announcement, this acquisition gives us an even stronger platform for sustainable value creation in our most important market. In terms of technological developments, our 4G position has strengthened throughout our footprint.
In Sweden, we were awarded with having the best 4G coverage out of all operators in the Nordics by Opensignal as our geographic coverage moved towards 90%, outdoor population coverage is now above 97% in both the Netherlands and across the Baltic region. On productivity, the integration of Altel and Tele2 in Kazakhstan is progressing well, with cost and revenue synergies starting to kick in. Data monetization is successfully flowing through to the bottom line in the Baltics, the Challenger program is developing in line with expectations and well on track for our 2018 target. In terms of people and culture, the Dutch marketing team made us immensely proud when they were awarded for having the best advertising campaign of the year recently.
I was delighted to welcome two new members to our leadership team in early July when Guillaume van Gaver joined as EVP International, overseeing all of our markets outside of Sweden and the Netherlands, and Richard Peers joined as Chief People and Change Officer. Both are veteran telecom industry experts. Let's get into the financials. The headlines are as follows. Monetization of data remains our key priority. We do continue to see growth in the quarter despite some headwinds. Mobile end-user service revenue was up 2% on a like-for-like basis, which, to be clear, includes Altel pro forma and is on a constant currency basis. Net sales amounted to SEK 6.7 billion, up 1% on a like-for-like basis due to lower revenues from fixed telephony and fixed broadband.
EBITDA was down, as expected, by around SEK 300 million as a result of increased sales and marketing investments in both the Netherlands and in Sweden, partly offset by good positive developments in Kazakhstan, Baltics, and in Germany. Let's look at the markets. First, Sweden. In Sweden, we saw total revenue was negatively impacted by our fixed telephony business and lower operating revenues, leading to a decline of 3%. Mobile end-user service revenue was flat year-on-year, but if you exclude the change in accounting treatment for prepaid vouchers, underlying mobile end-user service revenue was up 1.5%, sequentially better than we have seen in recent quarters. Both consumer postpaid and B2B large enterprise were up mid to high single digits, very much driven by Comviq and continued strength in large enterprise, where we added some important new customers in the quarter.
In the B2B SME segment, we have seen some of the recent competitive pressure subside, but year-on-year trends are still negative. EBITDA was down as it was affected by both the accounting treatment change for prepaid vouchers and a claim for music royalties, which combined totaled SEK 51 million. As communicated last quarter, investments into sales and marketing activities, particularly in the Tele2 brand, also had an impact. That being said, our trends are improving. Our dual brand strategy continues to drive positive postpaid net intake and positive mobile end-user service revenue, with it growing 5% year-on-year. As I said, very much driven by Comviq market share development, but we are now also seeing some improved momentum in the Tele2 brand. Our value champion strategy continues to attract higher ARPU customers to the larger data buckets.
This strategy, in addition to our increased network coverage, is driving our network experience and customer satisfaction to best-in-class levels, as was also proven by the Opensignal report. We recently upgraded the connectivity for our customers through launching 4G+, but also improved the coverage we provide alongside the rail network. Having now reached 87% geographic coverage, we are increasingly providing our customers with a great connectivity experience no matter where they are in the Swedish country. Moving to the Baltics, commercialization and monetization of our 4G investments continued to drive good top and bottom line development. Net sales growth of 3% continues to be strong, thanks to an ever-increasing demand for data and of course, handset sales. Mobile end-user service revenue was impacted by the new roaming regulations, which we did expect.
Adjusting for this, our underlying growth was up 4% and in line with our mid-single-digit objective. EBITDA growth, however, was better at +8%, driven by Lithuania, where we achieved a 38% margin, as we are seeing data monetization in that market successfully flow to the bottom line. This strong data monetization has been driven very much by the ongoing prepaid-to-postpaid transition, our data-centric pricing models, and increased 4G coverage. ARPU development is solid at 3%, supported by an increasing share of 4G smartphones in our base. With still only 28% of smartphones being 4G-enabled, there is still room for much more data growth and data monetization across the region. 4G coverage is now above 97%. In Lithuania, we are seeing for the first time the usage of 4G surpass the usage of 3G. Which now takes me into the Netherlands.
We saw the momentum we built in March continue throughout the second quarter. For the quarter, net sales were up 4%, driven by increased equipment sales and mobile revenues, offset by declines in fixed broadband and telephony. Mobile end-user service revenue was up 1% as revenues from a higher mobile customer base was offset by the disruptive propositions that we put into the market at the end of February and the doubling of data that we gave to our existing base when we launched the MNO back in November. EBITDA was as expected, impacted by the sales and marketing investments that are part of our mobile launch strategy and a decline in fixed. Let me just take you through a little bit more of what we've been focusing on in the Netherlands as we continue to build momentum in that market.
During the second quarter, our main focus has been to continue the positive growth trend that we built up during the first quarter. At the outset of the quarter, we had all components in place. A disruptively priced handset lineup, including the iPhone, an aggressive SIM-only offer with extra launch discount, and a high-speed broadband VULA offer. Based on this, we achieved a solid mobile postpaid net intake of 57,000, almost double the net intake compared to Q1 and the highest level of net intake that we've seen since 2013. On the fixed consumer side, we continued the positive net intake trend from Q1, where we returned to growth after several quarters of decline. Our fun rebel brand platform, based on a drown yourself in data carefree message, was not only recognized by a growing customer base, but it also won two prestigious awards.
Tele2 won the SAN Accent Award for the best advertising campaign of the year, and also the ADCN Award for the best creative campaign of a service company. It's this brand campaign and now an increased focus on larger data buckets that's helping drive continued progress in brand awareness, brand consideration, and market share development. We continued to take above 20% of the postpaid switchers market during the quarter, including 35% of handset switchers, proving that we are becoming the preeminent challenger in the market. On the network side, we continued to expand our LTE Advanced 4G network, which has now reached above 97% outdoor population coverage and indoor population coverage of 81%. Our 4G onloading reached 67%. As for VoLTE, we continue with the aim of rolling out the entire base during the second half of the year. A good quarter of continued momentum.
Our disciplined investment strategy is delivering as we further establish ourselves as the preeminent challenger in the Dutch market. Moving to the other end of Europe now, Kazakhstan, where we saw strong underlying mobile end-user service revenue growth of 19% from an increased customer base and new pricing propositions. EBITDA developed significantly in the quarter from improved operating leverage. This is early proof that the JV will enable a much stronger and more sustainable platform for growth in the future. The strong financial performance has been driven by three things. A competitive advantage in 4G, as our competitors are yet to be able to launch 4G commercially. An increase in customer base, despite the significant changes that we've made to the propositions in the market. Our focus now is very much on building quality and driving ARPU and not necessarily on intake in the short term.
Thirdly, a comprehensive integration synergy plan that is being executed with discipline. More than half of the integration milestones have been achieved already, which we are now seeing synergies start to filter through. Finally, let me just quickly update you on the Challenger program, which is very much developing in line with expectations and well on track for our 2018 targets. In the quarter, our product simplification initiative progressed, with 700 products closed in total and an additional 1,000 products to be closed during 2016. We've defined new ways of doing product development throughout the group and are on our way to harmonize around half of our products. We've also started to execute on simplifying our portfolio and expect to see the results of this next year. Strategic procurement continues to expand into new categories.
During the quarter, we integrated most of the Dutch network and IT organization into shared operations, enabling a platform for further consolidation and transformation in the future. We now have around 100 FTEs working in our outsource provider in India. We're very much on track, and these benefits are allowing us to reinvest selectively and in a disciplined manner to ensure that we develop sustainable top and bottom-line growth into the future. On that note, I'd like to pass over to Lars.
Thank you, Allison. Let's turn to page 14 for an overview of the mobile end-user service revenue development. On the left-hand side, you see the reported figures for the last five quarters, showing a year-over-year increase of 1%. Looking at the quarter from a constant currency and pro forma perspective, we saw a growth of 2% year-over-year. On the right-hand side and looking at the individual operations, we've had strong development in Kazakhstan, driven by an increased customer base. In the Baltics, continued data monetization is driving the growth, which is offset by the new roaming regulation. Sweden is impacted by a non-recurring item related to adjustment on prepaid service balances. Excluding this adjustment, Sweden was up 1.5% versus the same period last year. Moving to EBITDA, we report a decline of 22% year-over-year.
In Sweden, as communicated in Q1, we have increased our variable investments related to sales and marketing to regain momentum and top-line growth. In addition, EBITDA in Sweden was also impacted negatively in the amount of SEK 51 million by the adjustments mentioned earlier by Allison. As expected, the Dutch operations were impacted by the costs related to the commercial launch and decline in fixed revenue. In Baltics and Kazakhstan, we've seen strong positive results driven by data monetization and improved operating leverage respectively. The other segment is down due to increased headquarter project spend as well as investments into the M2M arena. On the CapEx side, we saw a decline of 20% versus the same period last year, driven by less investments in Sweden and the Netherlands.
For free cash flow, we see a significant increase, primarily driven by positive development in working capital related to the handset financing in Sweden and the lower levels of CapEx spend. Let's move on to our debt and leverage. Our economic debt CDCA was at 2.26 at the end of the quarter, driven by the dividend payment and Dutch investments. As previously communicated, we will be above our target range of 1.5-2 during the investment phase in the Netherlands. The definition of economic debt is net debt excluding liabilities from Kazakhtelecom and liabilities guaranteed by Kazakhtelecom. This reflects the fact that we will not be required to provide funding to the Kazakh business in the foreseeable future. The next page shows our portfolio and where we play.
As we have laid out before, the way we look at our business is that we divide our footprint into two categories. The first category is established markets made up of Sweden and Baltics. These markets generate significant cash, and data monetization is at the core of what we do. Let me also add that the cash flow that we generate in these markets more than cover the dividend. The second category is our investment markets of Kazakhstan and the Netherlands. In Kazakhstan, the focus is very much on JV integration and does not consume cash as a result of our JV agreement. In the Netherlands, we are currently in an investment phase where we grow our customer base and have a negative cash flow, which is funded by a low interest rate environment.
On guidance, we confirm our guidance for 2016, which we communicated at the beginning of the year. Please note that the mobile end-user service revenue is based on constant FX and pro forma. With that, I'll hand back to Allison.
Thank you, Lars. In summary, momentum is building, our key priorities remain very much focused on the following: Maximizing our dual-brand strategy in Sweden to sustain momentum in our core market and return it to top and bottom line growth. Monetizing 4G in the Netherlands, Baltics, and Croatia, and establishing ourselves as a preeminent challenger, especially in the Netherlands. Integrating our JV in Kazakhstan, driving both cost and revenue synergies. Continuing to execute on the Challenger program. Of course, it's with great excitement that we're now preparing for the closing of the acquisition of TDC, an acquisition that will step change our growth strategy in our most important market. In summary, we remain absolutely focused on further data monetization across our businesses and delivering long-term shareholder value. That brings us to the end of our presentation.
Myself, Louise, Lars will be very happy to take any questions that you might have.
Thank you. If you'd like to ask a question, please press the star or asterisk key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will now take our first question from Nick Lyall from Société Générale. Please go ahead.
Yeah, morning. It's Nick from Soc Gen. Could I ask two, please? I think you've made some comments this morning, Allison, on the wires about heavy investment to continue next year in the Netherlands. Also, given where consensus is at about SEK 270 million positive for next year in the Netherlands in total and SEK 400 million loss for mobile, is that a hint that maybe that's just too high? Then secondly, on the VULA and the fixed margin. Fixed margin did look a bit depressed in the Netherlands this year. Is that because of one-off costs on VULA, or is that the sort of run rate we should expect from now on, please? Thanks.
Thanks, Nick. I think what I said on the interview this morning that our Dutch investments will continue into next year, as we've always said, as we build up our market share. We're not giving any guidance for next year yet at all, but as you're seeing, the marketing investments that we're putting into the Dutch market are giving us good traction. We're getting over 20% of the available market and around 35% of the handset switchers market. We're happy with how that's developing, and it's very much developing in line with what we expected. We've always said that the investment years would be 2016 and 2017, and that's the guidance we've been giving for quite some time, but not yet ready to say what the implications are for our total group yet for 2017. Lars, do you want to take the VULA piece?
On the VULA, we are investing into the rollout, and we are progressing on making sure that we can offer a competitive offer of 100 megabit per second. We're currently around 60% of coverage through the KPN agreement, and we're looking to increase that towards north of 80% by the end of the year. I think from a commercial proposition perspective on upgrading the customers that we have and also new intake, we should see an improved level of ASP development on us targeting the upper kind of bandwidth that we can offer the customers.
Is there quite a lot of one-off OPEX still in the EBITDA margin there, so we can get back towards previous levels? Or is this a sort of level to expect now at VULA? Or is it just as you raise the ASP, you actually get some more margin through, but costs are set?
There are no one-offs in the VULA if you look at the fixed segment in Holland.
There is a modem. As we put VULA out there's modems that have to be invested in, but that's mainly CapEx.
Yeah. That's part of the rollout and investing in getting the ports.
Yeah. What we're seeing is good traction towards our VULA product. You've seen as KPN and Ziggo have taken pricing up in the market, we are seeing more traction to our fixed offer again. We're probably getting more traction to the VULA product.
I think if you've seen the last two quarters, we've been slightly positive on the customer intake on the net adds, you should not expect a step change in that development.
Yeah.
That's great. Thank you.
Right. Thanks.
Thank you, Nick. Operator, can we have the next question, please?
Take our next question from Sunil Patel from Bank of America. Please go ahead.
Hi, thank you. I just have two questions. One is on Sweden mobile margins. I just want to understand a little bit what the additional expansion costs exactly are, and how much of it will fall away as we roll through the rest of this year. How much of it effectively is like a one-off investment versus just the ongoing investment of having to compete into the market as it stands today? My second question is just around the Netherlands, just around the top line. I still need to sort of work back, but it seems implied there. I just wanted to know if you could share any sort of numbers of what the ASPU is for a 3G customer and what it is for a 4G customer, and how that evolves as you migrate your base and bring new 4G customers on board as well.
Thank you.
Okay, thanks. On Sweden mobile margin, as we said last quarter, we put around SEK 20 million per quarter, on top of our normal investment levels back into the market. That was particularly focused on third-party channels, because we had become uncompetitive in third-party channels during the course of last year. That is third-party channels, not just for consumer, but particularly for SME and SOHO ends of B2B. We expect those to continue in the second half. We are getting some traction from it, particularly in the Tele2 residential brand. We're seeing it helping trade up the average bucket size, and that's why we're seeing ever-increasing more customer base moving into 5G and above, which is very positive from an ASPU development point of view of Tele2. I think that additional investment will be in the third quarter.
The fourth quarter is always a heavy investment quarter for us anyway. It will be in the fourth quarter where we'll be doing some repositioning of the Tele2 brand as well. In terms of Netherlands top line, yes, the ASPU is muted, but if you think about what we have done since we launched in November. First of all, when we launched, we doubled the data for our existing customer base. This time last year, we were getting more top-up revenues for customers that were consuming data outside of their base on 3G, on buckets. Obviously at the end of February, we launched a more disruptive offer on the iPhone or behind the iPhone and we had a launch phase with SIM-only where we were discounting SIM-only by around 10% through until the end of May.
All of those impacts have taken ASPU down. In terms of 3G versus 4G evolution, it is quite difficult to give that because we were only 3G in the past and we doubled data and we put so much more into both the 3G and the 4G bundles. We just have one price. We do not have a different price for 3G versus 4G. As we have been launching disruptive offers and transitioning the base and giving them that more, obviously ASPU has gone down in some areas. Overall, and as we have been going through the quarter and we have removed the launch proposition on SIM-only, and we have also started to steer our promotions and our marketing campaigns to 4G, we are actually starting to see ASPU starting to develop on a more positive trend.
Thank you.
We will now take our next question from Henrik Herbst from Credit Suisse. Please go ahead.
Thanks very much. If I can just firstly follow up on the ASPU development in the Netherlands. Just wondering where you are seeing kind of the iPhone customers, what type of bundles do they come in on. If I back it out, it looks like your ASPU now is around EUR 10, which implies customers are on very small bundles. Where do you think that could trend towards? Secondly, I think you have
said in the past you expect to be EBITDA breakeven sometime in 2017. I was just wondering if that's still what you're targeting. Thanks very much.
Okay. We're very much seeing the majority of our intake coming still in the one gig and the one and a half gig bundles. What we have seen since we started promoting the four-gig bundle is we're starting to trade people up, as I just said there. I don't know where you're getting the EUR 10 ASPU from. Maybe Louise can take that offline with you, because certainly it's not as low as that at all. It's significantly more than that. Louise will handle that offline. In terms of expectation to breakeven, we are very much focused on building out the business and building good momentum at the moment. We're obviously still doing it in a very disciplined way.
At this stage, I'm not yet committing to whether it will be breakeven during 2017 or not, because it's still very early days, but we're happy with the momentum.
Okay. Thanks very much.
Thank you. I think we can take the next question, please.
We will now take next question from Andreas Joelsson from DNB. Please go ahead.
Yes. Good morning. A question on the Challenger program. You showed a slide on the progress, but I'm a little bit curious on when we could see some effects on the profitability, actually, because if we compare the 2014 level with the implicit level that the guidance applies for 2016, it's roughly the same EBITDA margin if we exclude the mobile business in the Netherlands. Secondly, maybe a follow-up on the Netherlands. The run rate of intake that you have now, would you say that that is enough in order to reduce losses for 2017? Thanks.
Okay. First of all, on Challenger, the benefits are definitely coming through, we're seeing that in customer service costs across the group. We're seeing it in lower network and IT costs. What that, as you say, it's been offset very much by the investments that we're putting into the markets at the moment in the Netherlands, partly offset by Sweden. Obviously, Kazakhstan, now that it's a much larger business, distorts the overall group as well. We are delivering in line with what we expected from Challenger. It's allowing us to invest back where we need to maintain momentum and ensure we have sustainable top and bottom-line growth going forward. As I said, we're very much on track. It's just there's so many moving parts, you can't just see it at a total level.
In terms of Netherlands run rate, we are taking around 20% in the quarter. We took 22% of the available postpaid switchers markets. As I said, around 35% of the available handset switchers market. We're very much on track towards the 20% market share target that we set out to achieve by 2020.
May I have a follow-up on the Challenger program? Would you expect that to give a net cost reduction effect by, let's say, 2018?
Well, absolutely. It is aimed to have a margin impact on all of our businesses. It's one of the key drivers in driving Sweden from a 30-ish margin up towards a 35-ish margin. It's one of the key drivers that is helping to drive Baltics margin development. It's one of the key drivers that have seen us extract a lot more cash and profit out of Germany, and you will see in other markets going forward. What you can't see, obviously, is it happening in the Netherlands at the moment because of the investments that we've put in there, not just into mobile, but we're obviously having to put some investments into fixed to sustain that as well. We've only just recently moved just under 300 employees in the Dutch organization into the shared operations organization to enable further consolidation their future.
That all kicks in in 2017, as does the product simplification and harmonization. It's all about driving margin development in our core markets, and you will see that between now and 2018.
Very good. Thank you.
Thank you, Andreas.
We will now take our next question from Ulrich Rathe from Jefferies. Please go ahead.
Thanks very much. I have several, if it is okay. I would like to start with a follow-up to Nick's initial question on the Dutch broadband market. Expectations there seem to be consistently sort of different from what you report. I have sort of looked back, and for five quarters in a row, there is a double-digit % sort of difference between what you report and what the market expects. I was just wondering whether it is worth maybe to disaggregate the drivers of that margin between, I understand there is no one else, but between the migration and the sort of migration cost and the underlying margin that you might sort of eventually expect once the transition to VULA sort of has finalized. Give any other sort of color that might decrease this, because most of the group in some way can be attributed to that relatively small business, I suppose.
The second question is on Kazakhstan. You talk about the synergies coming through. I was just wondering whether you'd be willing to comment a bit more on the phasing of these synergies coming through, raising the margins towards the midterm ambitions, which you have stated in Kazakhstan. Third question is, you mentioned the roaming impact. Could you quantify that either for Sweden separately or for the group, or however you want to do this? Those would be my three questions. Thank you.
Okay. On the first question on the VULA, we will not break that down into the migration margin. I think what we are seeing is that on the top line, it has been a challenge. What we are doing on the VULA is we are rolling out that, or KPN is helping us obviously doing that. We are doing two things. One is obviously migrating up the base that we're having to an offer that is significantly better from a customer experience, where they're currently having about 20 megabit per second to 100 megabit per second. The way we do upgrade there is obviously to try to increase the ASPU and then go after new customers. Like I said before, the broadband market on the consumer is a tough market in Holland, so you should not expect a step change.
What I would hope to see is a improved deceleration in the negative margin that we've seen in the last quarters. I think we're seeing some early signs on the net intake, and it's important that we are focusing also on getting a stabilization in the base at a profitable level. That's what we're focusing on.
I think we take on board your feedback on expectation setting in that area.
Yeah.
We'll take that on board for the future. Will do. In terms of Kazakhstan synergies, this is just very early days and the integration plan is a 2 to 3-year program, that will start to kick in more materially in next year and the following year. Then roaming impact, we're still sticking to our guidance for the year of around SEK 100 million impact across the group. You started to see some impact of that on the top line, in particular in Baltics in the quarter. We expect a bigger impact in the third quarter, but very much still in line with the guidance that we gave at the beginning of this year. There's nothing in the early stages of the roaming changes to say that we're not stepping away from that guidance.
That's great. Thank you very much.
We will now take our next question from Johanna Almqvist from SEB. Please go ahead.
Yes. Two question, if I may. The first one related to the Netherlands once again, if you can say something about the ARPU difference on your existing base versus new intake. The second question relates to the EBITDA margin in Sweden. If we exclude the one-offs in this quarter, it's around 31% EBITDA margin. Should we expect this to increase due to normal seasonality in the second half? Thank you.
The ARPU difference on the existing base versus new intake. Again, there's not a huge difference between the two. Obviously, when we're starting to sell the higher buckets, then that is positive versus our existing base. But the low-end buckets, when they were being sold on promotion, was probably quite similar to our existing base. But as we trade people up and as we have taken away the SIM-only discount, we're starting to see positive development in the ASPU that we're bringing in the Netherlands. In terms of Sweden EBITDA margin, yes, you're right, it's closer to 31%, if you strip out the one-offs. Q3 is always seasonally a higher margin quarter, and then Q4 goes back down again because of investments and launches of new iPhones and Samsungs and whatever. I'd expect that trend that we see every year to continue.
Obviously, every year we're aiming to be stepping up the margin that bit more. When Challenger properly kicks off, it will help it kick in even more as well. Obviously this year's investments mean it will be more limited in kicking up this year.
Just a follow-up on the Netherlands. Given that there's no, as I interpreted you, no main difference between existing and new intake, do you expect ARPU to sort of stabilize around the level that we see right now, or do you expect it to continue to deteriorate year-over-year?
No, we expect it to go up because we've now taken away the SIM-only promotional offer, and we are now steering our promotions and our advertising to the bigger buckets. We are expecting it to go up.
Okay. Thank you.
We will now take our next question from Terence Flynn from Morgan Stanley. Please go ahead.
Thanks. Morning, everyone. I've got a couple of questions on Sweden, please. In the past, you spoke about end user service revenue ambition to grow potentially 2%-3%. I'm just wondering if you can walk us through what needs to change now in order to get to that target, and maybe when do you expect to get to that target eventually? Secondly, just a clarification. I'm interested in the adjustments to the financials in Sweden. Maybe you can just remind us all about the adjustments on the prepaid balances. Also just wondering how recurring the one-off is with Comviq. Thank you.
Hi, Terence. I'll take the first question, Lars will take the second one. In terms of Sweden, 2%-3% end user service revenue ambition, yeah, that very much remains our ambition. In the quarter, if you strip out the prepaid adjustment, we were at 1.5%. What do we need to change to get to that 2%-3% sustainably? First, get SME back to growth again. It's still a negative drag in the quarter. Secondly, getting Tele2 residential, not just ARPU development, but also some customer development going there as well. Those are the two key areas. Total consumer postpaid at mid-single digits, that very much driven by Comviq. It's Tele2 that will help improve that, it's the SME segment that will help us improve the overall business.
Both of those are frankly achievable, but I don't see them being all achievable in this year because we still have quite a drag from SME because it continued to decline during the course of last year.
On your second question on the adjustments, there's two ones. The SEK 35 million related to the Comviq brand on the prepaid cut-off. Basically, in the past, we had allocated customers that came in around the 20th of the month, their top-up completed to that month, and we had not corrected for that. We only allocate the usage that is pertaining to that particular month. That's the SEK 35 million that you see. The SEK 16 million is related to STIM, which is basically royalties to musicians and artists. That is a retroactive adjustment that we have made for periods going back several years. The going forward adjustment there will be significantly lower because then we would just do it on a monthly basis.
Thanks. That's really clear.
Yeah. All the way back to 2009.
Yeah.
It's a very small amount going forward.
Thank you. We will now take our next question from Maurice Patrick from Barclays. Please go ahead. Your line is open.
Hi, guys. Maurice here. On the wholesale costs in the Netherlands, you've said you've got, I think it's two-thirds of data traffic on your net now, I suppose not using your partner. I think you'd spoken in the past about the wholesale costs spiking and peaking rather in Q2 and therefore easing off in the second half. Is that still the plan?
Yes, two-thirds of our data is on net, obviously all of our voice, the majority of our voice is still off net because VoLTE is only being rolled out properly in the second half of the year. What we are seeing is the cost of that wholesale, the NRA cost is basically fairly flat quarter on quarter. It's still around the €15 million per quarter.
That's likely to continue for the next few quarters or ease off at all?
Yeah, I kind of expect it to be at that level for the next few quarters as we start to ramp up VoLTE.
Understood.
It would decline next year.
Got it. In terms of the SEK 250 million-SEK 300 million quarterly losses, are we still on track for that for the rest of the year?
Yes, very much. I think it was just under SEK 280 million in the quarter. That's very much where we're spending at and will continue at.
Sorry, one quick follow-up. Per the previous question, I think it was Ulrich asking about sort of trajectory into the following years, just to understand the moving parts. Presumably, whilst you see an opportunity for taking market share and continue to do so at the marketplace, that'll dominate how you run the business and therefore the sort of EBITDA growth or losses will sort of goal seek from that as opposed to guiding towards an EBITDA number for next year.
Absolutely. We are looking at how we develop this business in the best way to create value over the medium to long term. We will invest in a disciplined way to make sure that we're generating good top-line momentum that we see turning into good bottom-line development over time.
Great. Very clear. Thank you so much.
Again, as a reminder to ask a question today, please press star one. We will now take our next question from Keval Khiroya from Deutsche Bank. Please go ahead.
Thanks. I've got two questions and also on the Netherlands, please. Firstly, if we annualized your net adds in Q2, it implied that you're adding roughly one percentage points of market share for the full year. Are you happy with this rate of development, bearing in mind your long-term targets for market share? Secondly, if the Vodafone-Ziggo merger in the Netherlands does go through, do you expect that to impact your prospects at all? Are you seeking any remedies as part of that deal? Thank you.
Okay. As I said, the net intake we are taking is equivalent to us taking around 22% of the available market on postpaid because we don't have a prepaid offer. We're just focused on postpaid. That is very much in line with our objective, and that's what we'd like to see being sustained. In terms of the Ziggo-Vodafone merger, we are responding to the EU questionnaires on that. We obviously have serious concerns about the consolidation implications of that in the market. We are proactively seeking remedies as a result.
Thank you.
We will now take our next question from Roman Arbuzov from UBS. Please go ahead.
Thank you very much for taking the question. On the SME segment in Sweden, could you just remind us what is the impact in terms of the drag on growth in percentage points, please, that's coming out of that business segment? Also, when do you expect to see improvements in the SME? Is it towards the year-end, or is it perhaps earlier than that, or maybe in early 2017? Also in terms of net adds in Sweden, you've mentioned that you would like to improve Tele2 residential momentum, but you already are spending some extra resources on the marketing side in Sweden. What do you think needs to change for you to improve momentum in Tele2 residential?
Perhaps as part of that answer, you could just also give us an update on how you've progressed with the various initiatives you've outlined in Q1 to fix the business.
In the SME segment, I guess the way to look at it, Roman, is ideally we'd be in the 2%-3% growth range for Sweden, sustainably. This quarter, if you strip out the one-off, we're at 1.5%. If we get SME to positive again, and we get more intake momentum in Tele2, we would be in the 2%-3% range, because Comviq and large enterprise perform very strong. I think that's the best way to look at it without me giving you an exact percentage of the drag. In terms of net adds in Sweden, yes, it's predominantly Comviq positive. What needs to change in Tele2? Well, we're doing a great job of trading up customers and bringing new customers in the higher ASPU bundles.
That was one of the objectives of the incremental investment that we put into the market in Q1, and that's what we are seeing positively. What needs to change? As I've been saying for several quarters, the brand communication needs to be clearer. Frank the Sheep selling lots of data is probably not the nicest of campaigns for Tele2, and we have been working on a new campaign for the fourth quarter when we always bring a new campaign into the market. I think it's much more of a communication situation with Tele2 rather than anything fundamental, because we've got great propositions out there, and we are increasingly giving a much better experience than some of our competitors, as Opensignal have just proven. How we're progressing with the Q1 initiatives.
The Q1 initiatives, one was getting the messaging out on Tele2 that really drove the data and the trading up of data, and that's working. The additional investment was putting money back into third-party channels for both residential and SME, and we have seen some traction there. As I said, what we've managed to do is stabilize SME. Year-on-year, it is still negative and will remain negative for the balance of the year, Roman.
Okay. Thank you very much.
We will now take our next question from Lena Österberg from Carnegie. Please go ahead.
Hello. Yes, I have a follow-up question on the Challenger program. When you announced it, you said that for this year you actually have higher investment costs because you have, I think, SEK 500 million of costs, and you have accumulated efficiencies of SEK 400 million. Next year, you expect to have accumulated efficiencies of, I think, SEK 800 million, and the costs will go down for implementation to SEK 300 million. Going back to the earlier question, as it's a big step change in the difference of accumulated savings and costs for extracting the savings, do you expect a net of SEK 500 million to be achieved on a run rate by the year-end 2017?
As I said, we're still on track with our original objectives, Lena. Quite a lot of the consolidation of roles and the product simplification benefits really starts to kick in next year with lower investments than in this year. A lot of those investments spike up in the second half of this year so that we can reap the benefits in next year. Very much the numbers are in line with our original trajectory.
Okay. Can I also ask a question on just how many 4G-enabled phones or VoLTE-enabled phones do you have in The Netherlands now?
What, in our base?
Yeah.
Well, basically, all of the handsets that we have been selling since launch are 4G VoLTE enabled, and we probably have about 50%-60% of our base has 4G VoLTE-enabled handsets, in that range.
Assuming that you migrate those customers relatively fast, is that sort of the full effect of the lower OpEx from T-Mobile, the roaming costs? Or Now if they are data-heavy and they are, I guess the 3G customers are more voice-heavy, how much will you get of this cost by migrating these customers that are now on VoLTE-enabled phones? Because you will have the rest of the base still on T-Mobile's network.
Yeah. As I said, those benefits, we're expecting those to come in next year as we're still rolling out VoLTE. Samsung, we can switch on VoLTE immediately. The iPhone, it takes that little bit longer. We're also a bit at the behest of the handset manufacturers. Although the handset is VoLTE enabled, it requires them to put some software upgrades in as well. That's why we weren't expecting any reduction in the NRE costs in 2016, but it will definitely kick in 2017, Lena.
The cost that you've said, are those for that 50%-60% of the base, or do they assume that you migrate the entire base?
That EUR 15 million that we spend per quarter is the cost of all of our voice on all of our customers, and today, around 30% of the data that's not consumed on our net.
Okay. Thank you.
Yeah. I'd expect that the data consumption will continue to increase, and then the voice bit will start to kick in during the fourth quarter, but will be much more material in next year, particularly when we have the iPhone software upgraded to be able to use VoLTE on the iPhone.
Yep.
We probably still have around 300,000 customers that are on 3G handsets that we're proactively working to move over to 4G.
Yep.
We will now take our next question from Thomas Heath from Danske Bank. Please go ahead.
Thank you. Thomas Heath here with Danske Bank. Two questions, if I may. Firstly, on Challenger program, you mentioned a lot of moving parts, but in Sweden, there aren't that many moving parts. As Lena alluded to before, there's a step-up of savings from the Challenger program in your forecasts, and you say things are going on track. What are the other cost items that you foresee might grow next year that would offset some of the gains from the Challenger program? Or should we expect a sort of full trickle down to EBITDA? It sounds maybe a little aggressive. My second question again on the net add in the Netherlands. I think market expectations have a higher rate of net intake than you have on a quarterly basis now. Would you be happier with consensus at 57 per quarter? Thank you.
Why don't I take the net adds and then you can take the Challenger questions.
Sure.
I think we were slightly ahead of consensus in the quarter for our net adds. Considering that translates to around 22% of the available postpaid switcher market, I think that's a fairly good assumption to take forward.
On the Challenger program, again, we'll see benefits coming through, but we will also reinvest a portion of that benefit into the market in order to be competitive from a sales and marketing perspective. We're not giving guidance on exactly how much of that will actually end up on your EBITDA margin line.
It's fair to say that there'd be some net positive impact.
Yeah.
Absolutely.
There should be some, yeah.
Absolutely.
Thank you.
We will now take our next question from Peter Nielsen from ABG. Please go ahead.
Thank you. Just a question related to the planned acquisition of TDC Sweden, or rather, the funding side of it, please. Have you had any further deliberations on the funding options for this? Are you committed to the rights issue, and do you see any likelihood or chance of that being changed? Thank you.
No, we still plan to use the rights issue to fund the acquisition, although as we said at the time of the announcement, we have the available financing available through a range of financing that we have. We don't have to use it, but it's still our intention to use the rights issue.
Okay, thank you.
We will now take our next question from Russell Waller from New Street Research. Please go ahead.
Yeah. Hello, thank you. It's Russell from New Street. Just a quick one on the EBITDA losses at other, which are up quite heavily year-over-year, which I think you said due to machine-to-machine investment. Can we take that as sort of one-off in nature or will that be ongoing? What sort of level should we expect for the full year, please, at other EBITDA losses? Thank you.
We're not going to give guidance on other EBITDA losses. We are very optimistic about what Tele2 can achieve in the IoT arena. We will continue to invest behind M2M IoT going forward.
Okay, thanks.
We will now take our next question from Ulrich Rathe from Jefferies. Please go ahead.
Yeah, thanks. This is a follow-up. Allison, I think twice now in this call, you mentioned a coming repositioning of the Tele2 brand in the fourth quarter of this year. Just one question on that. It sounded the first time you mentioned it as if you're sort of mentioning this to sort of highlight incremental costs coming to make us all sort of reflect that in our numbers. Is that really the main message or just highlighting this in the context of your efforts to improve trends there? Is a particular cost issue that we should take into account in the fourth quarter because of something happening there? Thank you.
No, the main message, Ulrich, is we've been saying for quite some time that we needed to improve the communication and the proposition of Tele2 Residential. It's always been planned for the fourth quarter. I'm not messaging anything else than we need a bit of a refresh of the brand advertising.
Great. Thank you.
We will now take our next question from Anna Oldendrer from Citibank. Please go ahead.
Yeah. Hi, my question was answered, but maybe I could just ask on the pricing level in Sweden right now and what you just said on the branding repositioning. Are you happy with the levels there, or will you try to move pricing in some way for upselling in Sweden with the new brand repositioning? Thank you.
We are always trying to encourage upselling in all of our brands. As more and more data gets consumed, we see an opportunity to trade customers up on the back of that, and that will very much be part of any propositions on both the Tele2 brand and the Comviq brand going forward for customers that want to consume more and more data.
Okay, thank you.
As there are no further questions in the queue, that will conclude today's question and answer session. I would now like to turn you back to your host for any additional or closing remarks.
Thank you very much, and we don't seem to have any questions from the web. This concludes our presentation for the Q2 results 2016. Thank you all for listening in, and have a very nice summer. Thank you.