Telenor ASA

OSE:TEL

Earnings Call Transcript 2018-Q3

[Marianne Moe]

Good morning, everyone, and welcome to the presentation of Telenor Group's results for the third quarter. My name is Marianne Moe. I'm head of Investor Relations, and I have the pleasure of guiding you through the session here today. As usual, the results will be presented by our Group CEO, Sigve Brekke; and Group CFO, Jørgen Rostrup. And I hope you all have the presentation material available. There will as usual be a Q&A session after the presentation. And after that, there will also be a separate media session for media present here today. That presentation -- that media session will take place in the Future Lounge at Floor 4.But without much further ado, I leave the floor to our CEO, Sigve Brekke, to take you through the highlights of the quarter.

[Sigve Brekke, President & CEO]

Well, thanks, Marianne. And good morning to all of you. Actually, we have more people now than we are used to. So I'm pleased to welcome you all. The third quarter is a quarter that shows that we continued to execute on the strategy we laid out at the Capital Markets Day in 2017. It's also a quarter with some significant milestones, the first one being the end of the concession in Thailand. It [ brought ] us the spectrum strategy we laid out in 2015 already when we decided not to participate in the auction back then and now that finally had come to an end. With broad spectrum portfolio we now have in Thailand, we have a solid platform for future growth. Another milestone in the quarter was the completion of our sale of the Central Eastern Europe assets. The completion was in accordance with the plan, and it now allows us to put more focus on the business units and the markets where we think we can create the most value. The revenue development in the quarter is somewhat softer than expected. The main reason for that it's very tough competition in Myanmar, which I will come back to. However, I'm pleased to see the improved growth in Pakistan and in Bangladesh, also after a little bit slow start of the year. And I'm also very pleased to see that for the first time in 3 years we have a net positive mobile subscriber growth in Norway.Our transformation and cost-efficiency agenda continues. So far this year, we have taken out NOK 1.3 billion additional currency costs, and that represent around 4% of our OpEx base, so we are ahead of our programs. There's more to be done, and we still believe that becoming a leaner company position ourself for capturing future growth. And as usual, I'm going to go through some of the markets before I leave the stage to Jørgen.Starting with Norway. In Norway, coverage and quality of our mobile networks is now really showing that it gives us a competitive advantage. And after several years of investment into our 4G network, I'm pleased -- actually a bit proud, to see that we won the Ookla test as the fastest network in the world, not in Norway. And there are not that many markets that can show and demonstrate an average 72 megabyte per second speed in their network. And this is now giving us a competitive advantage. In addition to that, in the quarter, we also launched a narrowband IoT network, and we put that on all our 4G base stations, so we have it nationwide. And we will, in a couple of weeks, launch a pilot 5G in the city of Kongsberg. As I said, the mobile subscribers turned positive for the first time in 3 years. Quite an achievement for our Norwegian team. This is driven by our Flexi product, which is becoming very popular in the market. And as you may recall, the Flexi product starts at NOK 449, and it's targeting the high-end consumer market. We also continue to have success on the up-sell of our existing customers into richer data packages.In the business segment, we now see that the position we are taking on IoT products and services and also security services give us a very strong value proposition, and we now integrate those types of services into our offerings.Within our fixed business in Norway, we added 9,000 new fiber customers in the quarter. Now we're up to the speed that we need to be. Again, a little bit slow start to the year due to weather and also to get the machinery going, but now we see that we are capturing market share on fiber connections. Yesterday, we also announced a rebranding of our cable operator Canal Digital into Telenor. That will enable us to use the Telenor brand across all our platforms and give a stronger and more focused customer proposition. On the EBITDA side in Norway, the underlying EBITDA is stable, and the cost reductions in Norway, which we are continuing with in the efficiency agenda, is now able to offset the decline in the cover-based legacy business.Short comment on Denmark and Sweden. Both markets continue the transformation agenda. They have solid cost development. We took out 3% OpEx in Sweden and actually 9% OpEx in Denmark. And despite that, we are able to stay competitive in the market.Moving to Thailand. As I said, the third quarter was a very special quarter for us in Thailand. It marked the end of all the uncertainties we have had the last 3, 4 years and when it comes to the end of the concession. It has been painful after not participating in the 2015 auction, where we decided to stay out because of very, very high pricing. And that's been painful to then execute on the strategy we laid out back then. But now we have acquired a solid Spectrum portfolio, which is significantly cheaper than it otherwise could -- we could have ended up with. As you know, we signed a lease deal with TOT to give us access to the 2,300 spectrum earlier this year. We are now focused on full speed on the rollout on this spectrum. We have 6,000 sites installed already. And at the end of the year, we hope to have at least 10,000 sites rolled out utilizing the 2.3 spectrum. Already, 30% of our 4G traffic is now carried by the 2.3 spectrum, and we see a significant improvement both in quality and in data speed for customers using, then, the 2.3. Furthermore, as you know, we acquired in 1,800 spectrum in August, and we also announced that we will participate in the 900 auction that will happen in a couple of weeks.The prices are high, but with the conditions we now saw at the 1,800 auction and we see at the coming 900 auction, we think that it can create value out of buying this spectrum. And we are also helped by being allowed to continue to use the concessionary 1,800 spectrum and 850 spectrum in the transition period. In addition, we recently signed a lease agreement with CIT that gives us access to fiber and towers in the years to come.Despite significant challenges and uncertainties in the market due to the spectrum situation, I'm pleased with the financial result that DTAC is delivering in the third quarter. They continue the strategy of migrating prepaid customers into postpaid, and with that, getting customers into data bundles. And that has continued to give us higher ARPU growth when people start using data bundles. We're also continuing the digital transformation agenda, and I'm pleased to see that the cost control also in Thailand is in place, a 40% EBITDA margin despite us now starting to pay the monthly fee for -- to TOT utilizing the 2.3 spectrum band.With the regulatory uncertainties now behind us, I think DTAC is very well positioned to take the fair share of the market growth going forward.Then to what we call the emerging Asia cluster, starting with Bangladesh. When we met last time in the second quarter, we talked about a little bit disappointment for the first half of the year when it came to growth. Now we see a much stronger performance in Bangladesh, 8% growth in subs and traffic and an impressive 62% EBITDA margin in this market. The growth is driven both with voice and data usage. We added 2.2 million new subscribers in Bangladesh in the quarter. And as we have talked about before, the penetration is not -- is yet to be fully penetrated in the market. We still estimate around 55% to 60% mobile penetration. So there are still lots of customers out in the rural market that do not even have access to the basic services. In addition to that, we continue to focus on existing customers starting to utilize data. And in this quarter, we are now having around 50% of our customer base using data. Powered by the leading position we have on both 3G and 4G in this market and with the growth in new subscribers and existing subscribers using data, we see that the growth in Bangladesh will continue in the coming quarters.In Pakistan, also a slow start of the year when it comes -- when it came to the growth. However, now we see the growth picking up. 10% growth in subs and traffic and an underlying impressive 23% growth in EBITDA.Then Myanmar. The competition in Myanmar has become tougher than what we expected. We knew that the fourth entrant, which launched some few months back, were going to be aggressive, but it has been even tougher than what we planned for. The new entrant was allowed to price way below the price floor set by the regulator. However, the new entrant was allowed to do that only for the first 90 days. Now everyone will have to comply with the price regulations. However, the price floor is set a bit lower than it was in the past, and now all the operators are having taken their prices down to the price floor. But at least, there is no difference now in regulations, and we all have to compete with the same conditions. Our strategy then is to continue to build a leading position on network, is to continue to build a leading position on the widest distribution and to be competitive in our product offers.Then I will talk a little bit about our transformation agenda. And this time, I will talk about what we do on -- with our networks. Investing in future-proof networks, it's a very important priority for us because it improves customer experience, and it supports the data-driven growth and it reduces our costs. And beyond that, because of that, investing significantly into modernizing our network. And what you see on the left-hand side of this slide is that, that is also needed. The throughput or the year-on-year growth on average in our network, it's 63%. And in the 3 emerging Asia assets we have, we are actually growing 92% data year-on-year. And of course, with that huge data growth, we need to do something on our cost base, and we need to make sure that we are as efficient as possible. And to do that, we are ensuring cost efficiency in everything we do. We are leveraging standardization to a much larger extent than we have done before. We are implementing new operating models, and we are utilizing our global scale. Now let me go a little bit more into detail on those 3 main points.Starting with leveraging the standardization. Again, as you see on the left-hand side of this slide, we are now taking the data traffic into hybrid cloud. And we have so far -- 50% of data traffic is now on hybrid cloud. And that gives us a reduced total cost of ownership of 40%. This migration is happening faster than what we expected. And we now see that during 2019 we should be able to take that 50% up to 80% of all data traffic being managed by the hybrid cloud and a significant cost reduction coming out of that.Then the one in the middle is talking about a new operating model, where we basically leverage on partner scales. We are outsourcing the management of our network to partners. That has been implemented in Myanmar, Malaysia and Pakistan already. And there are more BUs to follow. And when we do that, we see that we can improve the process efficiency with approximately 30%, but we also see that we can automate the networks such that we can increase function-ability and flexibility.Last but not the least and then to the right hand of this slide, we are leveraging now the global scale in centralized procurement. This -- we set up a company in Singapore a while back to take buy position on this. Has led already to significant savings in total around NOK 3 billion of savings in '18 compared with '17 on the overall procurement area. If we look at the network category, we see that we have realized prices in '18 which are 25% lower than the '17 prices. This is one of the reasons why you will have Jørgen also talking about that the CapEx number on the group level is somewhat lower than what we expected when the year started. It's a result of what we do on this area.Then let me finish up with the operational priorities going forward. As you know, in '17 Capital Markets Day, we talked about 3 operational strategies. One was growth, two was efficiency, and three was simplification. We are very satisfied with what we have done on the simplification of the portfolio so far. We have executed on VEON. We have executed on India. We have executed on online classifieds. We also had some smaller other transactions. We are almost done on the simplification area, almost done. We're also pleased why -- with the efficiency agenda we said when '17 started, that our plan is to take out about 1% to 3% OpEx year by year. It was a 4-year program, and we are in the midst of that 4 year now. We are actually a little bit ahead of our ambition goals, but we'll continue. There's more to be done on this.What we've done so far, of course, is to reduce costs on areas which has been, you can call it, low-hanging fruits, but now we are also way into areas which are more structured.When it comes to the growth, we will continue to focus on growth and what we call revenue renewal. And we see potential for doing that in all our markets. The main priority in the months to come is to return to growth in Thailand, is to monetize the continued data growth we see in our emerging Asia assets and is to strengthen our position on B2B, not only Norway or in Scandinavia, but also throughout our portfolio and IoT. In addition, we focus on fiber rollout in Norway, and we see that, that gives us a good profitability.With that, I will hand over to Jørgen to go through the financials. Thanks.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Thank you, Sigve. Okay. Let's start on revenues. We see stable subscription and traffic revenues in the quarter, and we see a year-to-date increase of 0.5 percentage points. During the quarter, we have seen, as we said we expected at second quarter, positive development both in Pakistan as well as in Bangladesh compared to what we saw the first half of 2018.The group's growth rate in total is, as Sigve was alluding to, somewhat hampered by tougher-than-anticipated competition environment in Myanmar. And then as Sigve said, we have learned that the fourth operator was granted, should we call it, an asymmetric price regulation for the first 90 days of operation. From beginning of September, we should all be on equal terms versus the regulator on this one. Then from a good and stable quarter on the main elements for Norway, we still see that fixed revenue growth in Norway is being a little bit under pressure from continued loss of legacy revenues. We see growth somewhat lower this year partly due to also annualization of a price increase for broadband that we implemented last year. DTAC, as Sigve said, been through a tremendously important transition this quarter from concession to license arrangement. Leading up to this, obviously, the organization, the business and the revenue line has been under somewhat pressure, and now there is more clarity. We believe there is solid foundation to take part in the mid-digit growth the market in Thailand is experiencing.If we adjust gross profit for the approximate NOK 300 million payment in spectrum lease to TOT in Thailand that we have talked about before in the quarter and also the loss of wholesale revenues and special numbers in Norway, we see gross profit follows the slight growth in the subs and traffic revenues.Efficiency improvement is high in our priority list. We have managed to reduce the cost base year-to-date NOK 1.3 billion or 4%. And if I may, this in spite of meeting the tougher -- much tougher comparables that we saw since we had significant reduction from second quarter 2017 onwards. So we are building on top of the effort that we did last year.If you look at onetime items this year as well as last year, they are more or less offsetting each other, and we have close to 0 currency effects. So the reported OpEx that we show here gives a good picture of the development. We are delivering more on the structural OpEx reductions. The low-hanging fruits that Sigve was referring to were not low-hanging last year. They were coupled with a cultural change toward more efficiency. But obviously, they were different in nature than the more structural OpEx reductions that we now are having.Reduced call center volumes and a leaner, more efficient organization is visible now through lower personnel cost. Regulatory cost reduction is, as before, driven by Thailand.And then the structural initiatives by nature takes longer time to realize, and we are starting then to see them also in operation and maintenance, which is, of course, a very important category for us to succeed in. Two effects that Sigve talked about is contributing to this, the new operating model for network and IT and the hybrid cloud solution. And then on the other side, site rental and also network expansion or energy related to network expansion, 50% each on those 2 elements related to the Asian business and network expansion there.So we are talking about a 6% increase in EBITDA in the quarter. If we take a little bit closer look at this and adjust for one -- for a few onetime items both last year as well as this year, if we also adjust for the TOT payment and the Phonero wholesale and 3 to 5-digit regulation in Norway, we have an underlying growth of 4% in EBITDA this quarter, similar also to the underlying growth for the year in total. This is then cost improvement, efficiency improvement of NOK 0.3 billion and half and half split between interconnect, gross profit and slight growth in subs and traffic on the last NOK 0.1 billion.CapEx. CapEx was NOK 4.2 billion in the quarter, around 15% of sales. In particular, the increased speed on the 23 megahertz rollout in Thailand is lifting CapEx for the group and obviously for developed Asia. Norway continues to be below our ambition level in the -- on the fixed side, on the fiber side. Year-to-date, CapEx is still somewhat lower than planned for, and that is why we have chosen to revise our guidance to NOK 16 billion to NOK 17 billion for the year from previously communicated NOK 17 billion to NOK 18 billion.Let's have a brief look at that P&L. Net income ended at NOK 5.8 billion for the quarter, equivalent to NOK 3.96 per share. As you can see, we have NOK 262 million charge on other items, preliminarily related to workforce reduction. Depreciation increased on EUR 600 million year-on-year. 50% of that is explained by higher amortization of concession assets before the end of concession in Thailand, as we have talked about before. That will come significantly down in fourth quarter.Net financial income and expenses this quarter is negative NOK 359 million. Financial expenses in that is in line with trend, so the difference is financial revenues was impacted by VEON dividend of NOK 253 million. Other than that, it is not much to mention on the P&L statement. Maybe I should just comment on the right-hand side with the IFRS 15. We continue to see marginal P&L impact for Telenor with this implementation.Free cash flow in the quarter was NOK 26.5 billion. However, then NOK 22 billion of that is a result of the sale of Central Eastern Europe assets, and the remaining EUR 400 million of the total proceeds, so considerations of that sale, will be down payments over the next couple of years. If you exclude M&A activity, the free cash flow was NOK 4.7 billion in the quarter, a decrease of NOK 1.3 billion compared to last year. So on one side, we had improved EBITDA, and we had somewhat lower CapEx, but this did not fully compensate for pre-payments to CAT, the agreement that Sigve talked about, and for license deposit for the 1,800 megahertz spectrum acquisition that we did, NOK 0.6 billion in Thailand. There are also some higher minority dividends in the quarter.Year-to-date, this gives us cash flow totaling NOK 32 billion, or NOK 11 billion if you exclude the M&A activity.Net debt this quarter is positively impacted then by the proceeds from the sales of operations in Central and Eastern Europe, which results in a net debt-to-EBITDA ratio of 0.5. But if we then take a few things into considerations, we have in October paid out special dividend related to the disposal of the CEE assets. We have almost completed the market part of the buyback program. And we will shortly, as a third element, pay the second tranche of the ordinary dividend. So in total, this means that we will return approximately some NOK 23 billion to shareholders in 2018, which is a record high. And adjusted for these payouts, the net debt-to-EBIT ratio is around 0.9.Our priorities for capital allocation remain unchanged. We want to maintain a strong balance sheet. We are very committed to year-on-year growth in the ordinary dividend, and we will, from time to time. Take a look at inorganic opportunities within our core businesses and core geographies. And I can assure you with a value-driven approach to it.We are approaching year-end, and we are fine-tuning the outlooks a little bit. So far this year, subscription and traffic revenue growth is, as I said earlier, 0.5%, and we therefore now expect the full year growth to be in that range. We are guiding on 0% to 1% growth for the year on subs and traffic. The main change from second quarter is the intensified competition in Myanmar. On the other hand, we are then increasing the outlook slightly for EBITDA growth from previously 2% to 3% to now 3% to 4%. There are 2 elements to that. It is primarily on the back of an increased visibility, and if I may say, good execution in Thailand, but also the positive one-offs in the third quarter.Regarding CapEx, we have very good traction on our planned investments in the markets, and then the CapEx spend so far is a little bit lower than anticipated, also supported by the CapEx efficiency achieved that Sigve talked about. We now expect total CapEx will end up slightly lower at around NOK 16 billion to NOK 17 billion.To summarize, we believe we are delivering according to plan and according to how we have delivered over the last few quarters, stable and good and consistent performance. And our -- in a quarter, by the way, with a lot of milestones. And our focus remains the same, on value creation, on efficiency growth and simplification.Marianne, should we check if there are Q&A?

[Marianne Moe]

Thank you, Jørgen. Yes, we will now as usual have a Q&A session, and we will start with the audience present here at Fornebu before we open up for the conference call participants. Are there any questions in the audience today?

[Marianne Moe]

I think the first one is coming from Frank Maaø.

[Frank Maaø, Analyst]

Yes. I have 2 questions, if I may. The first is to the CFO and the second one is to the CEO. So you said that operational efficiencies are high on your priority list. But when you think about financial efficiencies, we know that cost of equity is far higher than cost of debt. And with that in mind, and your very low financial leverage for a long time now, have the administration and board quantified and discussed what -- how much this recurring capital structure is actually costing shareholders, I mean, in terms of nominal figures, [ billions ] per years and so on by means of a high capital charge. So that's the first question. If there is any process around that? The second one is related to ESG actually. ESG is an important topic for a growing number of investors. And while Telenor is arguably having perhaps an ethical dilemma in Myanmar, you're also looking at a country like the Philippines and evaluating if that could be an interesting option. And given the moral and financial corruption of the regime in the Philippines, including credible reports of death squads and so on, killings of journalists, why is this country not pre-excluded on an ESG basis from relevant geographies that Telenor should look at? So that's my question.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Should I go first?

[Sigve Brekke, President & CEO]

Yes, you take the difficult one.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Frank, I don't think I should go into the details of the board and administration discussions. But I can assure you that my clear experiences that the board and the administration are discussing all issues thoroughly also on the financial arena. So yes, we are discussing efficiency, development of values and value creation, balance sheet and all other issues. And I would, however, like to say -- and we are focused on the total set of good conduct in the financial area. But we're also working in a systematic way the way we kind of made a contract with you guys in January 2017. We are working along those elements that we have talked about the whole time, and we are ahead of that program. We are ahead on all elements, and we are also ahead on the shareholder remuneration part of that program, with the 3 elements, 2 buyback programs and 1 extraordinary dividend. And that is where we are going to continue. We are maintaining the priorities of a strong balance sheet we have agreed before. We can always discuss what a strong balance sheet is, and we have a very strong balance sheet now. But we also have things to do going forward. We have a payment for spectrum in Thailand. We have an IFRS 16 implementation that will change the ratios a little bit. That goes for the whole industry, but we want to come through that and see how that is playing out. And we will make sure we are continuing also with extraordinary remuneration to shareholders when and if the board concludes that, that is a good time for it. Our prime objective is to stay very predictable on this and to be very competitive in the business that we are operating in.

[Sigve Brekke, President & CEO]

To your second question, yes, this is very high on our agenda. And as you know, we have learned some lessons on this. I think the VimpelCom and VEON history was a lesson that we have taken with us. So when we entered Myanmar, for example, this was the main discussion in the management and in the board, will we be able to operate in such a country? That's why we have chosen Myanmar to go alone. We don't have a partner. And what we have learned over the years is that if you want to operate with our standards in these types of markets, you have to be in operational control. That's why in the Philippines we are looking at the condition for the upcoming license award. However, we have made it very, very clear that this is a market we cannot operate if we are not in control. Currently, the foreign ownership rules doesn't allow that. So we have said that if those rules are not changed and if we are not allowed to be the majority vote shareholder and in full control, we will not enter a market like that.

[Marianne Moe]

Next question, please.

[Henriette Trondsen, Research Analyst]

Henriette Trondsen from Arctic. In Norway first, congrats with the positive net adds on mobile, first time in 3 years. And that's impressive also considering Telia's results last Friday. But revenues on fixed, they were quite weak this quarter. Can you give any color on this and what we can expect here going forward? And the second question, if I may, on Bangladesh. The new voice tariffs might be more visible in Q4. But how much of the year-over-year growth in Bangladesh is, do you think, is driven by these new tariffs?

[Sigve Brekke, President & CEO]

I will take the...

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Which one you are going to have, you are into the first.

[Sigve Brekke, President & CEO]

Go with Norway.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Can I go with Norway?

[Sigve Brekke, President & CEO]

You can go with Norway, and then I can prepare on Bangladesh.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

First of all, for us, the performance in Norway, on top line, on acquisition and also on the costs and structural work this quarter is good, solid and follows the trends that we have anticipated that we are working on. And the mobile side on the revenue line is good. So you are right, the potential weak element in this total picture is the fixed revenues. The reason is, of course, the continued decrease in the legacy revenues on the fixed side, not fully compensated by the new fixed activities, including the fiber and the fiber rollout. We have a good rollout in third quarter compared to the previous 2 quarters, but we haven't seen the revenue stream fully reflecting that. Second, we also had the price adjustment a year ago, so we have benefiting from that price adjustment in the fixed side throughout a year now, but now we are on year-on-year comparables. And that is actually the whole picture of it.

[Sigve Brekke, President & CEO]

Just want to add one comment to Norway, because I think this is more than just being present out in the trade. It's also that we have been able to constantly innovate new services for our customers, and the latest security service is an example of that or that smart program that we came with is an example of that or the Flexi project is an example of that. So I think that is what is enabling us now to be net on the subscribers. We also see that Norwegian customers still want to go to physical distribution points. So we also have expanded our presence in third-party distribution. So I'm very pleased to see how that innovation drive is continuing in Norway. To your Bangladesh question, yes, it's correct that there has been a reduction of uniform call tariffs and VAT from 15% down to 5%. And we are benefiting out of that. I think that's what you're referring to. How much of the growth that is coming from that reduction, I don't have a number on that. However, the main growth there is our ability to add 2.2 million new subscribers and also the ability then to drive ARPU to getting the people to start using data. And as I said, 50% -- we have crossed now the 50% data percentage. So I expect the growth figures that you see from Bangladesh in this quarter, the 8%, to be in the range of what you will see also in the coming quarters.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

On Pakistan, it might be that, that tax element is coming back. We regard it as a temporary relief, but it remains to be seen what the authorities are going to do. However, the underlying business are developing, continues, as we talked about also in second quarter, so we see a positive development on the underlying business. But in this quarter, there is a significant element of the tax effect.

[Marianne Moe]

Just to supplement on the Bangladeshi question, we believe that the new price regulation has a positive impact of 3 to 4 percentage points this quarter. So -- but that means that there is also an underlying improvement in the revenue trends.

[Henrik Mawby, Senior Analyst]

And one other question, if I may. In Malaysia, with the new government, do you have any indications that this will impact the spectrum prices, also considering that allocation of the 700 MHz spectrum was supposed to happen this spring was postponed?

[Sigve Brekke, President & CEO]

Yes. It's, of course, a little bit too early to say. But what I've heard so far both from the Minister, but also from the new regulator, they are both new, is that they want to continue the spectrum allocation processes that they have had in the past, including then the 700 MHz, their awarding on the 700 MHz spectrum. So there is no sign that, that would be changed.

[Marianne Moe]

Next question, please. If there are no more questions from the audience here at Fornebu. We are now ready to open up for questions from the conference call participants. Operator, please.

[Operator]

[Operator Instructions] We will now take our next question from Mr. Peter Nielsen from ABG.

[Peter-Kurt Nielsen]

Just a question, why the -- 2 quick questions on Norway, please. As you've enjoyed very strong momentum on the high-end customer side in Norway for the last 2 quarters, there has also been a corresponding impact on the margins, I guess. And could you -- is this a strategy which we can expect you will continue to push for the coming quarters as well, i.e., we should perhaps also anticipate some margin pressures because of extra marketing spend? And can I just ask, why the rebranding of Canal Digital now after all these years? Is it to do with an increased focus on your fiber TV business? And should we anticipate that there will be sort of material rebranding cost in Q4 as, for instance, we saw earlier in the year in Sweden?

[Sigve Brekke, President & CEO]

Yes. I think, I can address that. Yes, you're right. We are using more third-party distributions, so there are some commission costs related to the very successful sales of the Flexi product. But however, we are done very, very attractive in the high-end segment, NOK 449 and up. We will continue with that strategy, and we will then also continue to then spend some commission in getting those figures. However, I think that you will see that Telenor Norway is continuing to really have a focus on efficiency, trying to reduce cost elements in other parts of the business. So I do not expect any margin pressure because of that strategy. When it comes to the rebranding, I do not expect a huge revenue cost. I don't have exactly the number, but -- sorry, different from Sweden. The reason why we do it is just to simplify the offers. And our customers, they know Telenor. And some of them are a little bit confused with what is Telenor Digital. Now we want to make it simpler and then use that simplicity to also look at the -- can we give good bundled offers. We are not moving heavily into the fixed mobile conversion, but we do see that, for example, the family offerings that we have is very popular.

[Operator]

We will now take our next question from Maurice Patrick from Barclays.

[Maurice Graham Patrick, Managing Director]

Maurice here from Barclays. So quick question on innovative new services. You made a point earlier I think around IoT and 5G, and in fact Telia was indicating one of the reasons why you are likely doing better than they were in Norway was due to your more innovative approaches around services and that's driving differentiation. So I guess, is it mainly Norway we're seeing this? Or can you see other markets where you can also see such innovative services like IoT being delivered? And just as a side point, you haven't really talked about it today, but convergence in Sweden, I believe you do have conversion products in Sweden. I think, you're going pretty well in the marketplace. Perhaps, just your view in terms of how popular are your conversion tariffs, how is the momentum going, how you're seeing it just quite topical ahead of the impending Tele2-Com Hem merger.

[Sigve Brekke, President & CEO]

I do Norway and you do Sweden. Norway, I think we are -- I'm pleased with the innovation both on the consumer segment, and I used some examples on that, but also on the business segment. And we are maintaining our 70% market share on business due to those innovative services. So what is happening is that, in the business segment, we are able to move now from only the price competition into more integrated solutions. And we have done that very successfully. And I think that the size of Telenor and the innovation resources that we have in Telenor in Norway, we are able to do that very well in a competition. Now we will start to take some of those learnings also to our other markets, starting with Sweden and then also go from Sweden into Denmark and also see if some of these services can be adopted into the Asian markets. We are, as I said in my introduction, we are now looking at can we build a B2B position also in Asia, where we mostly so far have focused on the consumer segment. And with that B2B, also then take some of these innovation approaches, especially on the SME segment, and we are more looking at that outside of Norway and Sweden, that also then into IoT. So yes, the innovation that we're able to do in Norway, we will try to copy and paste into other markets. I think, we have been -- there are many areas we have in Norway on this. It's in the smart buildings, it's in health, and it's in smart cities and smart municipalities. So it's still early days. We are not spending a lot of money on this yet. We will -- we want to grow and to learn and to work a little bit agile to build this business up.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Maurice, Sweden was convergent place, wasn't it?

[Maurice Graham Patrick, Managing Director]

Yes.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Thanks. So Sigve was pointing to the rebranding that we did in Norway. And we also mentioned we had the same in the spring in Sweden. In Sweden, it is also definitely related to being able to play forcefully in the fixed-mobile conversion area. We probably see Sweden ahead of Norway in this. We haven't seen anything close to it in Norway, and it's still probably in the beginning in Sweden. And we launched -- when we rebranded, we launched a more for same type of product. So we didn't do, and we will hesitate to do discount plays, but we offer the more for same in Sweden. And that has been good. We also see that we have a good starting point in a way because we have, to a certain degree, a low overlap in our 2 customer base on the fixed and mobile side. So that gives us an opportunity to make the overlap bigger, should this develop -- should this be the trend in the market. Obviously, Tele2, Com Hem could allude to this, and they have been vocal on it and also Telia, but it has been more talk than action so far. We are ready.

[Marianne Moe]

So what we did in Sweden...

[Maurice Graham Patrick, Managing Director]

That's very clear.

[Marianne Moe]

Yes. Maurice, what we did in Sweden was not to launch specific convergent tariffs. We haven't done anything with the price points, but what we did in connection with the rebranding was that we offered benefits for customers who take both fixed and mobile offerings. If you take both fixed and mobile, you can get either some more mobile data, as Jørgen explained, or you can get higher speed on your broadband connection, but no changes to pricing. But we continue to see a good uptake, and these offerings are popular among our customers.

[Operator]

We will now take our next question from Henrik Herbst of Crédit Suisse.

[Henrik Herbst, Research Analyst]

I had -- I just want to follow up on Norwegian fixed. You said, you're gaining a little bit more traction with your fiber build. I was just wondering where you're actually building. I know you've been overbuilding your cable network. So how much of the new fiber footprint is in sort of your cable areas? And also, if you think about your legacy base, which continues to be a drag on your business, what can you sort of do to maybe improve the trends a little bit? I mean, Telia, for example, in Sweden is now trying to resell challenged fiber networks. Have you looked at that? Could you maybe build fixed wireless access in OS where you have been overbuilt by fiber and compete without those products? So maybe your thoughts on that. And then also maybe if you could clarify on your CapEx guidance. It sounds like a bit of a delay in terms of you're quite slow in starting building fiber in Norway beginning of the year and then this -- its high spectrum allocation, but you're also doing things more efficiently now. So maybe if you can clarify how much of the reduction in CapEx guidance is just Telenor just doing things more efficient and how much is timing?

[Sigve Brekke, President & CEO]

Yes. On fixed, I think the overall objective is trying to compensate for the reduction of the Kongsberg legacy business with fiber rollout. That's the overall ambition. We're not able to do that in the third quarter. But going forward, when we have got a larger speed on fiber rollout, that's ambition. And the fiber rollout, it's mainly focusing on what I call virgin areas where there is no fiber, but we are also now starting to roll into areas where we have had cable or cover connection ourselves. Exactly that split, I don't have a number on that. And we see that there is willingness to pay for fiber in Norway, and fiber is the future-proof access that our customers see. Of course, we want to sweat the legacy assets -- fixed legacy assets we have as long as possible, but there is real demand in the market for fiber. Then we will also experiment with fixed mobile solutions when we're starting to get really into more rural part of the segment, but it's -- we are not there yet. There is more than enough land grabbing on fiber before we have to start implementing also other type of solutions, but we are trying that out.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

On the CapEx side, this is not a massive adjustment. It is on average NOK 1 billion down, if you want. And I would at least say that we see strong traction now on the efficiency part in our portfolio. So we are able to invest more on networks for the same amount, and we have ample capacity for that. So that is the significant part of it. Then as you said, Thailand is up compared to our original plans for good reasons. And we see good traction on that in the quarter. And Norway is slightly down on fiber. It's not massive. It -- third quarter was a good quarter. We assume fourth quarter will be even stronger. So in the numbers, there's also significant pickup in -- on the fiber side in Norway. So it's predominantly that we have gone -- got the effects of the efficiency work and the procurement company in Singapore on the global price book and new negotiations that is taking it down. And then it is a little bit Thailand and Norway, a little bit up against each other on the numbers.

[Marianne Moe]

The 2,300 rollout in Thailand -- sorry, please go ahead.

[Henrik Herbst, Research Analyst]

No, sorry. I just want to follow up on the Norwegian fixed part. So you didn't follow up with the price increase this year. Should we read out that as it's now becoming more difficult to raise pricing? Or can you still sort of continue to put better pricing on fixed line?

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

I don't think I want to comment on that. The price increase you're referring to. I think we executed quite well, and there were also willingness to pay for that. But moving forward, I don't want to comment on what we do on the pricing. Our main focus now is to get the speed up, the rollout speed up, and I'm pleased now to see that after a slow start to the year, we are now into the territory where we want to be.

[Operator]

We will now take our next question from Usman Ghazi from Berenberg.

[Usman Ghazi, Analyst of Telecom]

I've just got 2, please. Firstly, on Norway mobile and subscription traffic revenue trends. Obviously, you're doing very well on the volume side, but on the actual revenue for mobile, it was down 1.7%. Do you -- I'm just trying to understand if you up -- are in the stage where you're prioritizing volume over revenue growth for the time being? And how we should see this going forward? The second question was just on CapEx, but on a slightly different note. I mean, do you see any impact from the -- from these Trump kind of tariffs on Chinese equipment makers in terms of read across for CapEx?

[Sigve Brekke, President & CEO]

On the third question, no, we are not prioritizing volumes over revenue growth. We're trying to do both at the same time. That's why we're so focused on the Flexi product, which is then bringing in more high-end customers. And you will see that in the very price-sensitive prepaid segment, we are continuing to lose customers. So our focus is definitely on the value-creative customers or the high-end customers. The revenues you are referring to, if you look at the underlying revenues, you have to adjust for the 3 and the 5-digit numbers effect. That's about NOK 50 million, isn't it, in the quarter, if I remember it right?

[Marianne Moe]

Yes.

[Sigve Brekke, President & CEO]

And that effect will go away when we go into next year. So if you adjust for that, you will see that the underlying ARPU is at flat. And also, the underlying revenue development is -- it's very stable.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

On CapEx, no, we don't see any effects of discussions around Chinese vendors. We have the Chinese vendors, which we work well with. And we also have other vendors, European vendors. And we have a global approach to all of these, and we see no effects of that.

[Sigve Brekke, President & CEO]

Maybe one more point on the revenues. We also did some price increases on the consumer segment -- mobile consumer segment a year ago. And now those effects are then annualized this 1 year after we did it. That's also something to take into account.

[Operator]

We will now take our next question from Keval Khiroya, Deutsche Bank.

[Keval Khiroya, Research Analyst]

First, some questions on Myanmar, please. We've now had symmetric price regulation in Myanmar since September. So can you talk a bit how that's affected your trends since that's come into effect? And secondly, when you launched in Myanmar, you had initial target of long-term operating cash flow margin of around 30%. Can you remind us of when you expect to reach that?

[Sigve Brekke, President & CEO]

Yes. On the first question, yes, you're right. The price floor is now -- everyone need to comply with that. However, the price floor, as I said, it's lower compared with what it was. So at least now, there are the same rules in the market. Of course, we hope that we will be able then to stabilize the revenue drop we saw during those 3 months when they were allowed to have very, very aggressive price offers, but it's yet to be seen, I will say, when this market will be stabilized. So I don't want to give any forecast or any views on that, but we will do our very best to stay competitive with both offers, the distribution and the network. On the second question...

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

I think you've answered it. We have a pressure now on the EBITDA margin compared to last year for 2 reasons. The main reason is, of course, the competition. And then you also have the currency. And to do any prognosis on this, we won't do. It's been a very solid and good business. It came very quickly and cash flow positive. So it's been a tremendous value creation. And right now, we are only focused on doing what Sigve is saying.

[Marianne Moe]

I think we have time for 2 to 3 more questions. May we have the next caller, please?

[Operator]

We'll now take our next question from Andrew Lee of Goldman Sachs.

[Andrew J. Lee, Equity Analyst]

Firstly, on cost cutting. Your execution has been strong, and you mentioned you've done more than the expected so far during the full year program. Just wondered how you think about the sustainability of cost cutting outside of the 4-year period now that have come almost halfway through? And is there a change in the type of cost reduction as we get to the end of that 4-year guided period? And then just secondly follow-up question on the -- questions on the Norwegian mobile. Just wondered if you could give us any updates or color on the competitive landscape, are you seeing greater competitive intensity from the smaller players? Any color, that will be very helpful.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Yes. On the efficiency part, we are halfway through the program that we announced and significantly ahead of that program. The program was flat, stabilizing in '17 and then 1% to 3% the next 3 years. And you know what we did last year, and we are doing similar size this year. So well ahead. We are just concentrating where we are now, and we are concentrating on moving it more into, as has been said, the structural part and adapting on the marketing side in a good way, which we're really pleased with the development on the sale, it's a marketing effort, not only the reduction of cost, but also the implication it has on how we work and how we high grade and become more precise in our efforts. And now we see those effects also into operation and maintenance. And we will continue to work through a more structural program, and we will probably revert it during the winter and maybe fourth quarter talking a little bit more about our thoughts for the next couple of years in that respect and then later on -- we'll call later on.

[Sigve Brekke, President & CEO]

And just to add what Jørgen is saying, coming from 10 years or 20 years history of growth, this is also about mindset. And I think we -- when this cost program started, we also used that opportunity to kind of change the mindset. And mindset that is not only looking on number of subscribers and top line, is looking at also the cash flow generation. And fortunately, the digitalization opportunity also came along. So now we're trying to both, use digitalization of our core business to improve cost and also customer satisfaction, but also get the entire machinery to have a mindset that lean is good and that efficiency is good because you prepare yourself for the future growth. So a lot of this has actually also been to work with our leaders, work with our organization and change the way we historically has -- have been working. On the second question, the Norwegian market has been competitive and is -- there is a real competition among the 3 network providers, but we also have several MVNOs or service providers both in the consumer segment and also in the business segment. And I don't see any change to their competition. You have to be awake. You have to be out there and fight for every customer. And that's what we do. And then very -- just repeating myself for the third time, very happy with the innovation driver. This is not only about price and not only about fueling distribution. It's about also focusing on new type of services to our customers.

[Operator]

We will take our next question from Ulrich Rathe from Jefferies.

[Ulrich Rathe, Senior European Telecommunications Analyst]

I realize you usually don't guide for 2019, so I'm not asking for you to guide. But I'm just wondering when you sort of build scenarios for 2019, and given what's now going on to the cost in Thailand, also the potential to the situation in Myanmar going forward, is there even a possibility of EBITDA growth in 2019? Or is this really something that sort of has to be debated very closely given trends in those 2 countries? And the second question I have is just a clarification. And I apologize -- so I had trouble getting on the call, so you might have answered it, then please ignore the question. But the other line item in the EBITDA mix was strongly positive this quarter, I think that was the first quarter since 2014 where it had a positive contribution. And I realized there was a one-off in there, so take the one-off out. But even then it is materially positive. Is there any particular explanation for this? Or is this underlying cost cutting in the group overhead?

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Well, first, on the EBITDA growth. No, you're right. We're not guiding on that, and we will, of course, give you our view at fourth quarter. It's more natural to take it then. But as we have tried to leave as a message today, first of all, we have come through a fairly turbulent period in Thailand, which we long prepared for and have worked on and prepared for, for several years and discussed a lot with you guys. And we believe that we have come through that in a very advantageous way, including how much money we've spent, how we've spent it and how we have handled operation in that period. And there is an underlying growth in the Thai market. And hopefully, we will take our share, as Sigve said, of that development going forward. And by the way, if you follow what we have said and what DTAC have said about this year, we are very much in line with the guiding that they have set out all the way. So then Myanmar, right now, there is low visibility. And we will just have just to come back to that, but we've taken that fight every day in the streets and are building on our strong position. And then we'll give you the guidance for '19 when we get to fourth quarter. When it comes to other and the development there, first of all, you will see quite large effects on the cost changes under the others segments. And this is also real cost reduction, valuable cost reduction and significant efficiency and simplification work taking place, both on group level and also in a portfolio of important and good company's inside activities which are supporting the total telco effort of Telenor. And there is an element more that we have talked about before mentioned, we are now charging out more of the overhead cost of the group than ever before. It makes sense because the services are reflecting that and voting for that. It is also prudent to do from a tax point of view and so on. So the reduction in cost that you see in the BUs are actually also, it is a net number after they have taken a significant higher charge from the group. From a CFO point of view, it's also good because it creates a good balance between the business line and the group when it comes to activity levels and these costs and service qualities and so on. So this is a change in the strategy on the digital side. It is higher charges of group cost out in the business units and it's also efficiency and leaner activities, so high-grading activities of businesses and corporate staffs and service organizations in that cluster. Very valuable for the group, right, both now and in terms of money and in the longer perspective in terms of being agile and taking new development on board.

[Marianne Moe]

I understand there are still many waiting to ask their questions, so I suggest that we take 2 more questions. Next question, please.

[Operator]

We will now take our next question from Roman Arbuzov, JPMorgan.

[Roman Arbuzov, Analyst]

Actually, all my questions have been answered. Thank you, so much.

[Marianne Moe]

Okay. Then to the final question, please.

[Operator]

We will now take our next question from Terence Tsui of Morgan Stanley, London.

[Terence Mun-Sion Tsui]

I just have a quick follow up on Myanmar. You mentioned throughout that the price competition is being a bit more aggressive than you expected. But just on the regulated price, you mentioned it's come down. Can you just tell us how much it's come down by and whether you think that if all operators continue to operate at this new lower regulated price floor, this is really sustainable in the longer term?

[Marianne Moe]

Terence, before the new entrant came in, there was -- there has for a year or so being a price floor regulation. There is a fixed price per minute and megabytes and so on. And then the regulation said that operators could go max 40% below this floor in promotions. After a period of asymmetric regulation between the 3 existing players and the new player, we are now back to symmetric regulation that the absolute price floor on per minute price and megabyte is the same as before. The new thing now is that operators can go max 55% below in promotions. And you know, the way that this market works is that operators are constantly running promotions. So the fact that we are down more or less at this 55% promotion level.

[Sigve Brekke, President & CEO]

And to your second question, is it sustainable? It's impossible to answer that question but so far, so good. After 90 days, they\ are fourth entrant. It's also then complying so far with the new price regulations. And all of us, the 3 existing players, of course, would like to -- that regulation to stand.

[Marianne Moe]

And that completes the presentation and the Q&A here today. Thank you all for attending. As indicated at the beginning of the session, there will now be a separate media session for media present here at Fornebu. You will have the opportunity to ask questions to Sigve and to Bjørn Ivar Moen, Acting Head of Telenor, Norway. That session will take place at the fourth floor at that Future Lounge, and my colleagues in the communication department will take you there. Thank you. Thank you all for attending. If you have any further questions to the financial, please don't hesitate to contact Investor Relations. Thank you.

[Sigve Brekke, President & CEO]

Thanks.

[Jørgen C. Arentz Rostrup, Executive VP & CFO]

Thank you.

[Operator]

That concludes today's call. You may now disconnect.