Telia Company AB

STO:TELIA

Earnings Call Transcript 2018-Q1

[Andreas Joelsson, Head of Investor Relations]

I can tell you that it's sunny and warm outside here in Stockholm, and I think it's reflecting the mood inside our office in Solna, Stockholm. We do as usual, Johan Dennelind, our President and CEO, will start, followed by Christian Luiga, our CFO. Johan? I'm not stealing any thunder this time, so all yours. All yours.

[Johan Eric Dennelind, President & CEO]

So why didn't you take the chance. Good morning, everyone, and good morning to you online. We are here for our Q1. And it's very dark in here, but it is very bright outside. And I think in the recent AGM, I gave you the hint that we feel like it's spring in the air also for Telia Company. And hopefully we can convince you in the presentation today that, that's how we feel and that's also what's in the numbers.So let us try, and Christian will come soon, so bear with me for a few minutes. The summary for the quarter is really in this slide for me. We have mobile growth in 6 out of our 7 markets. That's not always the case. This of course between consumer and enterprise shifts a bit, but it's a super important part for us to go back to growth in top line overall. So this is good job across -- on the back of a lot of new propositions and the new pricing.The number that sticks out probably for us as well for you is the 7.4% reported EBITDA improvement Q-on-Q. And yes, there is a bit of FX in there, and I'll leave it for Christian to explain that. Also, on the cash flow side, very strong start of the year, slightly stronger than last year's start. So we feel very good about our cash flow, and we'll come back to that later on. In the quarter, we have continued our reshaping of the group from Eurasia to the Nordic Baltics and also from divesting noncore. We got a dividend decision in Turkcell, which means about SEK 900 million coming to Telia Company in 3 installments through the rest of the year. And then we are through 2 more of the Eurasian assets in the quarter or -- and also divested Spotify before they went public, as you know. But maybe the biggest news today, I'm sure you've seen, is the announcement of the buyback program with the ambition to, over 3 years, buy back shares at a value of SEK 5 billion per year, totaling SEK 15 billion. So let's go to that straight away because that's probably where we will share some more color both here and afterwards. As you know, we've got a mandate in our AGM a couple of weeks ago for 10%, max 10% buyback. We aim to do SEK 5 billion up to next AGM. And then there is a new AGM that we have to approve, another hopefully mandate for the years to come. But if we get that through the next 2 AGMs, then we will have a program running for 3 years with the SEK 15 billion ambition. This is and then will be 9% of the outstanding shares of Telia Company. In the total equivalent of around SEK 3.45 per share, so per year SEK 1.15. All in all, the full program, when it gets executed and if it is approved all the way, it will have an impact on our leverage of around 0.5x. So we believe this is the best way to address our too strong balance sheet, but maintaining capability and flexibility to continue to execute on our very important M&A agenda in the Nordic Baltics, and that we have with this program. So a bit on the operations. This is on the group level. We have a changed, somewhat more stable revenue trend, approaching the 0 line if you take away the fiber installation fees. And our goal is, of course, to get above the 0 line. But as you know, there are many negative forces pushing our legacy revenue down. But we are fairly good in compensating that with our mobile TV fiber offerings across our market. So we will get there one day and that will be a big day.On the EBITDA side, as you see, the shape of the EBITDA improvements year-on-year for the last 5 quarters. And now if you remove the [ end ] FX part to down to 4.2% improvement on EBITDA, but that's also very strong, stronger than in the long time. It's of course supported by our cost focus for the year, but also some lessened pressure on some key revenue lines. So all in all, we are pleased with the 4.2 EBITDA improvement for the year.Pleasing as well is that the mobile service revenues across the group are growing 1.5%. I think that's around 160 -- 127, thank you, for stealing the thunder, you've got your chance, SEK 127 million in extra revenue on the mobile side. So it's also a slight trend up, which we think also will be possible to continue with the right execution.More importantly here to see in the underlying drivers for ARPU growth: Sweden, 4%; Finland, 5%; the Baltics, 4%. Flat in Norway only due to some regulatory changes in Norway that have pushed out the special numbers from the market and that has quite a big effect in -- during some quarters as we flush through those numbers. Otherwise, the Norwegian business is very healthy, I'll come back to that.On the Swedish side, we are growing our postpaid base, not hugely so, as you see, but more importantly, the ARPU growth is there. And the ARPU growth in Sweden is now less of non-ARPU growth. Still, ARPU growth driven by VAS and those things in that. But it's less of that and more core ARPU growth. And when I say core ARPU growth, it's the pricing of the bundles or upping the bundles, taking bigger bundles. That's where you have the core ARPU growth that we are looking for, and that's more healthy this quarter in Sweden.Finland, and if you are waiting for the numbers, Christian is going to come to a lot of numbers, so bear with me. The convergence in Finland, it's a place where we really have taken our strategy into action and demonstrating that we can do this. On the enterprise side, if I start there, 4 important acquisitions in the year. Yes, they are not on top line, groundbreaking, but they are small, medium acquisitions, billions and hundreds of millions acquisitions, but together have taken the finished B2B organizations and the way they go to market with the propositions needed by customers into a completely new level. We are so much more attractive to our business customers in Finland now than a year ago, and that will show. We're already this quarter seeing a better, stable uplift on the B2B, for instance, mobile, not because these companies had both mobile, but because we can sell the full portfolio in a better way. That is convergence strategy where we've talked about since 2014.On the left side, you have the consumer convergence that we've also been talk talking about for a long time. We have both [ copyrights ] we believe strongly in the business case, and we are now launching. We just last week launched some of the bundles for the hockey fans in Finland to be out early to know where it is, and our presales is already above our expectations on this stack. And then we haven't yet launched the most interesting package, which is coming very soon. So stay tuned for more hockey -- fantastic products in Finland over the coming days.So moving to Norway. Norway consumer, remember the one-off effects I talked about, the regulatory fees. Apart from that, the monthly fee, the revenue we get our core ARPU is growing, is growing healthy, 6%. So even if consumer looks soft, the underlying drivers to consumer in Norway is there. And I'm sure we'll speak about the market dynamics later, but we are -- have a new consumer value proposition in there, and we are very confident about the way we go to market and the right products that we have out now and during this thing. So more to look forward to also in the consumer space in Norway. More importantly, for Norway, this quarter, is the effects of the acquisition of Phonero, which has also 1 acquisition that we are very pleased with, the way we had executed it, the way we put it out to you, we put out the synergy estimates, and we have delivered on it. And that's how we have delivered on it information about this. The customers have been migrated carefully, taking care of them, making sure there is no disruption and that will now in Q1, they're all migrated. So the full run-rate, NOK 400 million, was still a number we wanted you to remember and is the number that you now fully have got them. And it's about NOK 100 million every quarter, I believe. Then on the cost side, last summer we put out our clear ambition that we needed to reduce our cost base before we get into post transformation in key markets, where we have further structural cost-reduction potential. But in this phase here now, we are addressing our cost base with SEK 1.1 billion net savings, net savings, reporting -- repeating that, of course, that's really the uniqueness of this program is that these are numbers that you will see net coming through. Q1, we are on track. We are delivering our reduction of around SEK 200 million and broken down, as you see, something is clear savings in the operations that we have sold and bought some companies, so we are adjusting for those, not to keep it away from you, very transparent, but this is how it looks. And it's SEK 200 million net reductions in Q1 versus Q1 last year. It's going to be SEK 1.1 billion through the year, so it is back-end heavy. We will do and have to do more through the rest of the year, but we have no reason to change our view that this will be delivered and completed by the end of the year.A few words on our integrated approach to sustainability. We tend to update you now and then when things happen. This is more of just remind you that this is part of the way we work. So the framework and the targets, the way we have visualized, the way we work with this, with the [ STGs ] are very important statement of materiality that we, as a very early company in the world put out to the market, saying that sustainability prerequisite for profitability and long-term shareholder value creation. Our board stands firmly behind that, and we have gained and received a lot of positive feedback on that decision. So hopefully, we can get all investors to be sustainability investors. These are examples of some of the things we do. We have, I must say, a very transparent, good annual report, which is a combined annual and sustainability report. Please read it.Let me end on a note for the rest of 2018. We are not changing our EBITDA guidance, but we are adjusting our free cash flow guidance. We have before said that we are going to be around SEK 9.7 billion. We are very confident that we will be above SEK 9.7 billion for the full year. And now, you have been waiting for him, here is Christian Luiga.

[Christian Luiga, Executive VP & CFO]

Thank you very much. Good morning, everyone. I'd like to start with some general statements about this quarter report and the status of the company. I want to reiterate then and talk about our strategy and our thinking, and I think this quarter really shows what we're trying to achieve. We have an organic and M&A-driven EBITDA. We have a development of our cash flow, which we have an ambition to strengthen over time. We have a strong balance sheet. And we are trying to find a -- the right balance between M&A and shareholder return. And that is, in essence, what we have as a goal and what I think our quarter report proves that we are delivering on.If we start with EBITDA development, 4.2% organic. The 4.2% stems from a growth in all countries, except for -- in Denmark where it's flattish, it is negative SEK 4 million, but SEK 4 million is a very strong number, so I dare to say it's around flattish, to be a little bit positive. And the part that is driving this most, of course, is the cost program. We have a decline of 0.9% organic revenue, and we need to compensate for that. And to grow EBITDA, then, we need to work on our cost agenda, and I'll come back on that in a second. On top of that we have another 2 percentage points, pretty much coming from M&A. And then another percentage point on the strong euro primarily. That gives us 7.4% in the quarter. Good start.Cost program is something we all work with in this company, and that started back in 2017 in December, where we increased our focus, also declared our ambition to all of you. The SEK 1.1 billion net saving is a program that is very clear for this year as a number, but it's also very clear internally that this is an ongoing thing for the rest of our life. We need to get the DNA to change to be -- to become-- that cost becomes part of our DNA in this company. And that is also a very important part of the cost journey.The biggest part of the cost program will come from resource cost and COGS. COGS, we see both the [ across board ] of the synergies we work with, we work on the vendor side, and we also work with the network and IT cost. On the resource cost side is the new way working, and it is also how we are becoming more efficient in our operations. We have talked about near-shoring before, we talked about robotics. For example, we are also reducing the number of calls in our call centers, 10% in Sweden. That gives us also a good impact on the resource cost. We are continuously reporting on reduction of our employee base. But as you know, since before, we talked about resource cost because we both have consultants or resource consultants and our own employees, and we look at it in the total of how to drive the resources used for driving this operation.The program also includes an acquisition and disposal, as you can see, and that may be a little bit a question mark. But we have said, whatever we owned last year, whatever how we looked like, we should include that. And in this quarter was a slight difference between the disposals, mainly Azercell and the Nebula, Phonero acquisitions. On full year level, that will be pretty much flat. So that's how you should view that number.On Sweden, we have a service revenue growth in B2C, which Johan talked about, also driven by mobile, 5% up, very promising. TV is also growing, both on subscriber and the ARPU side. The fixed legacy is declining and somewhat less because of the price increases. And then we have the broadband side, where the xDSL is not compensated on the fiber side, so it is also declining somewhat. On the B2B side, we have a continuous small growth in the SoHo/SME segment. It's been ongoing now for 2 years, so it's becoming a status that we are familiar with. And we continue to find new ways of working to drive customer excitement around our services. The B2B Large is back on the 5 percent-ish negative in this quarter. And that gives us a 2.5% pretty much decline in the B2B area. And Large continues to be a segment where we work very hard towards both the change in services, but also the price pressure.Fiber revenues, down 40%. Here we have declared a 60% to 90% decline as a guidance. I know that is a wide range, but it is still an uncertain area. So even if we have an ambition to deliver, we see uncertainties, and we see problems in the permit area. And as this also may have an impact on EBITDA, it also has an impact on cash flow. The lower EBITDA we get, the better cash flow we get from lower CapEx.And finally, EBITDA growth is solid in this quarter. We also know that the cost-saving programs in Sweden will actually be even better coming through in the next quarters. So even though we have some revenue challenges, we also have some good momentum in our cost programs.Finland, happy to see a flattish service revenue driven by a strong mobile side. B2B in Finland, in comparison with Sweden, is actually growing, where the mobile side is compensating more than enough than the fixed side, they have a slight growth. The mobile B2B is growing 3.2%. And in the consumer side, we're also growing. And total mobile development is, therefore, then 2.5%. The Finnish year-on-year EBITDA is somewhat helped by the rebranding we did in quarter 1 last year. I think you remember, we talked about that. So we had a cost of that in quarter 1. Still, it's encouraging to see the development organically and without that and to see a 9% growth in EBITDA.Johan talked briefly about Norway. Norway is, then, proving that we grow organically 5%, single-digit and then double digit with our M&A agenda, 17%. FX has been a little bit against us in the Norwegian kroner, but not much. The special numbers which is impacting the market had an impact of SEK 30 million in the quarter and will be around SEK 100 million in the year. It's not exact numbers, but it's around those numbers. And we are also working very hard on our cost structure in this country as well. We are doing that everywhere. And we can see a more efficient customer operation, and we also see a digitalization that helps us driving the cost in Norway. We also closed down the [ Chess brand ] in Norway, which helped the -- will help the cost structure, but also gives some turbulence initially. But I must say it's been handled in a very good way and the effect has been as we expected or better, and we feel good about that change. It's always painful to close down a brand.Baltics, solid. Starting with Denmark. As I said, it's down 7%, but it's NOK 4 million. The decline in revenue is compensated both on the COGS and in the OpEx side. They are driving a more efficient operation. Denmark also was cash flow positive in quarter 1, even if it was slight. There is no drama in that operation, and they are working hard to improve it. Very good to see that both fixed and mobile in Lithuania and in Estonia is growing. It's strong markets right now. And so the combination of the revenue growth and the cost programs are delivering high organic EBITDA growth.Cash CapEx continues to trend down, as we have talked about. Since '16 when we peaked, we had said that '17 and '18 should trend down in cash CapEx, both on the fiber side and on the other CapEx. We are continuing on that route, and I feel comfortable about our work we are doing here. I would like to remind that it is allocation process internally, it is our cross-border synergies and it's how we work with vendor management that drives this down in this company. And on top of that, we had a good starting point with a lot of CapEx spent on coverage that we are not doing right now. Net debt-to-EBIT DA on a pretty much all-time low in last 10 years. Strong balance sheet. We have some pro forma items. We have the Turkcell dividend coming. We have the remaining part of the DOJ payment to be made before end of quarter 1 next year, we don't know when yet. And then we have some M&A proceeds that we have received in our joint company with Turkcell, but doesn't belong to us, we just illustrate that and take that out so you can have a better visibility on our cash. With that around 1.3x in pro forma.Net working capital is important. I have said and I reiterate that I believe we have a SEK 5 billion gap that we should be able to close, to benchmark, and we have a program for that and we have monthly follow-ups and everyone also have this on their agenda. We did get a breakthrough last year and started this journey. Here we illustrate on the dates of payment outstanding that we have been moved 6 days each year from '15 to '16 and '16 to '17. Each day, or these 6 days, actually gives us approximately SEK 800 million, to give you a feeling. So these are not insignificant improvements for us from a working capital perspective. And as you can see, on the trend line on the side, we are slowly moving downwards towards the peer, and the peer group is chosen, not selectively by me, but those are the ones that actually report numbers that we can follow. So that's how we selected them, I guess you wonder why otherwise. And we should be able to close part of that gap within the next years.Free cash flow trend rolling 12 months right now SEK 10 billion. We have guided this year that the operational free cash flow related to EBITDA, net working capital and CapEx is that part that will go up, and we will have a decline in the tax interest and pensions. And this is exactly what we see in quarter 1, and this is what we will see for the year. And we have a strong focus in the operation to drive the EBITDA, net working capital and CapEx, and that is what we believe is the fundamental of the company to make it strong over time.Finally, cash flow and leverage support buybacks. We have launched a buyback program this morning. We have chosen this model because we think it is flexible. We think it is improving yield on a sustainable basis, and it gives us opportunity to continue on a very important M&A agenda. The share buyback program details are in the press release, and I ask you to come back to the Investor Relations department if you have any questions on it. But it's, as you can see, it is constructed to purchase back over the full year until the next AGM. And we have the ambition and intention to cancel the shares in -- at the next AGM. That's all for me. Thank you.

[Andreas Joelsson, Head of Investor Relations]

Thank you both. And let's open up for questions. We can start in the room and then go to the conference call afterwards. Robert, hang on, you need a microphone.

[Robert Slorach, Research Analyst]

When it comes to the pressure on large corporates in Sweden, what -- how far are we from kind of stabilization of that, it's still a pretty big negative number. And is it volumes that are going down, but are there players taking contracts? Or is it pricing pressure? I'm just thinking about the Danish situation where the prices have been going on for a long time, especially on the wireless side.

[Johan Eric Dennelind, President & CEO]

Thank you, Robert. I just want to refresh our memories a bit from few years back. We were in negative territory, 6%, 7%, 8% on the B2B side. We are now more in the range of 3%, 4%. This quarter, I think, it's 2% negative. So we have stabilized the negative trend. That's the first good news. But on the other hand, -- the second good news is that we are not losing customers. We are actually maintaining and taking customers, maintaining our market share through these years. But what is happening, it is a lot of partly new services and products that the companies and customers are buying and procuring, which comes with a different type of price and margin. But there is also strong price pressures on the core and increasing so, of course, in a market like ours. And that is my final point, the reason for our strategy to protect ourselves stronger in the ICT space, not just to be a part of the price pressure segment in the telecom. But I have say, it's on track, it's according to expectations. And we are working to pass also that line of 0 over time.

[Andreas Joelsson, Head of Investor Relations]

Okay, thank you, Robert. And we have another question in the room? Crystal clear. Lena?

[Lena Osterberg]

Yes. I was wondering a little bit about -- if you could say the business solutions, if you look at the growth underlying and take away the fiber decline, where are we there on that? And also Phonero, as you said, you got the synergies through very, very fast, and I was wondering, do you see more potential for synergies now that you've moved the traffic? And in that case, how much? And on your buyback, so back of the envelope it seems, given the net debt-to-EBITDA you have now and the buyback you would be in 3 years’ time, maybe at 1.9x. So you would still have room to do M&A. So I was wondering a little bit, can you -- you've been in an interview saying that you're looking at most things across your footprint. So what is your priority there?

[Johan Eric Dennelind, President & CEO]

So if you take the first question, I'll take the 2 last ones. On the Phonero side, we committed SEK 400 million on synergies on Phonero acquisition, that it's delivered. There may be some smaller synergies on top of that from also the recently acquired mobile base from NextGenTel. But it's not on the same level that we have been talking about on those big numbers. So this is what we have. Now it's more operational improvements and efficiencies that we go for in the mobile value chain. But then it's a good segue over to the acquisition agenda. We think the design of the buyback program gives us good flexibility to execute on the M&A strategies that we have in the Nordic/Baltics. So that's how it should be seen. And as I said, that we are looking at a few things across our markets to strengthen us in ICT, to strengthen us in fixed in Norway. And then there's also the partnership agenda that we've been talking about in EMEA, see how one way can solve that. We have now bought content rights in Finland. That's one way to do it and we're exploring other ways to address the consumer demand for us to be more than just a distributor in TV. So those are the areas where we are zooming in. And on top of that, of course, we have Denmark where we need to find a good solution. Final thing then, final, final thing on the M&A agenda, we are doing targeted smaller acquisitions in and around the IoT space to strengthen the step-up that we need in order to succeed with our very ambitious and so far very good IoT play in Telia Company.

[Christian Luiga, Executive VP & CFO]

If I may step in on the business solution question, I guess you refer to business solution in Sweden. You don't have any impact on fiber on that line, so the reported growth levels is what you see. And it's impacted then by the price pressure that we see in the B2B side that we talked about in the earlier question.

[Andreas Joelsson, Head of Investor Relations]

Thomas, please?

[Thomas Heath, Analyst]

Two questions, if I may. Firstly, you mentioned Denmark, you had that under review for a while. What are the options there? And are you willing to give it more time awaiting what the incumbent might plan before you sort of sit down to figure what to do with that asset? And then related to that, the assets in the Baltics where you have other dominant shareholders, what's the status there? I think it was moved to other and then we haven't heard much about it. And then lastly on, I think, you press released trials in Finland for next-generation emergency services over commercial networks with vendor partners, whereas in Sweden I believe the government is planning to waste taxpayers' money through their own network. So any update on Sweden there?

[Johan Eric Dennelind, President & CEO]

Well, I can't add so much more color to your last question then which yourself did in your statement. But your question became a good statement. But on the Baltics, you refer to Latvia, I presume. And Latvia is a place where we have 2 companies, 1 fixed, 1 mobile. We have seen the great benefits of convergence in all our countries. So we, of course, would like to explore that as a proposition in Latvia. But that is not possible without engagement on the shareholder level. And there, we are talking with the Republic of Latvia in order to find a solution that's future-proof and takes care of the various parties' interests. It's a constructive dialogue nowadays. And I'm hopeful that we will be able to take steps forward in the years to come. Nothing being sold today, though, which is another thing on the list that is not solved today, which is Denmark. Denmark is a long-standing act to find a formula that creates a financially sustainable future for that company. As I said, it might be -- it's probably the fighting spirit of the group in many aspects in a tough market. Morten and the team are really doing a lot of great things, even if you don't see it in the numbers. But we need to do, to focus that operation for the future, if it's a stand-alone operation, it's still tough. Even if we do really well or excellent in our standalone, we would not really move the needle on the value creation onto the company. Therefore, we have said we are looking into options how to strengthen us through partnerships or acquisitions. And there are a few options being explored still. If we can't find a solution that we think is good for us and the shareholders, then we have said that we also need to consider the exit path if that's needed. But we are not there yet. So we are still working on our own solutions to try to work out the stay solution.

[Andreas Joelsson, Head of Investor Relations]

Thank you, Thomas. Could we have some questions from the conference call, please?

[Operator]

[Operator Instructions] The first question we have today comes from the line of Peter Nielsen.

[Peter-Kurt Nielsen]

A couple questions, please. First one, on Norway, Johan, you have made no secret of the fact over the past few months, and I guess today as well, that getting access to a fixed business in Norway is higher on your M&A agenda. The Broadnet sales process recently ended obviously with Telia not acquiring Broadnet. How should we view the fact that you did not acquire Broadnet at least in this round? And how do you view your prospects of getting access to a fixed business in Norway here? That would be much appreciated. And secondly, also I guess for you, Johan, you have recently taken, at least temporary, control of the Swedish business. And I guess you've had a lot of issues with the Swedish business over the past few years. How -- what is your assessment of the Swedish business today? And how long it will take you to get it where you want it to be after the progress you've made in Norway, Finland, et cetera? And do you think, considering the contribution from the pension fund this year that, that break-even, reaching break-even only with Sweden this year is realistic? And if I may just sneak in a third one on Turkcell. I think your past sort of cautious optimism on Turkcell progress has proven correct. How much significance should we put on the fact that you are now back on the board with your other owners of Turkcell in relation to talks between the 3 owners of finally exiting from -- finding a solution to Turkcell?

[Johan Eric Dennelind, President & CEO]

Only 3, Peter?

[Peter-Kurt Nielsen]

Yes.

[Johan Eric Dennelind, President & CEO]

I'll take them one by one. Norway, yes, we are keen to come into the fixed value chain one way or another. I mean the team there, obviously, working on the organic and the partnership side to build capacity and capabilities to go to customers with converged proposition. That happens with or without M&A. But if we can find a good piece of fixed assets and customers and employees that could complement that, of course, can move faster with that. And that's why I've said we look at everything that moves in Norway in terms of fixed assets. And you mentioned one that it's not on the table. There are others that we are looking at and talking to. So hopefully, we will be speaking more about this here, because I still say it's an important part of our strategy, and it's an important market in Norway. So it totally makes sense to follow our convert strategy also in Norway. So no surprises really. The Swedish side, yes, it's great to have 2 jobs for a while and really keen to get closer to the Swedish team, which is a great team. Already full engagements and the company is running well, it's running according to our plans for the transformation. We are flagging and we have been flagging that Sweden needs to go through transformation before you see the full potential of Sweden. And that's the same statement, it's my statement before, it's my statement today. We'll see if there are other things that we can move in a different pace around some of the key priorities. But it's really about sticking to the agenda. It's my agenda before, it's my agenda now. And we have great team engagements and things are fully under control. So it's full speed ahead. But this year, we already told you, don't expect EBITDA to come up in Sweden this year. It's still under pressure. Turkcell is -- we are glad every time we get solutions on the table or we can make progress on dividend. And, obviously, the dividend here was fantastic, I think we saw six-figure last full year. It's SEK 8 billion of dividend over the last 5 years that we've been managed to secure this side, although they don't come easy, as you know. But this time we also had the opportunity to solve another outstanding item between the shareholders, which was the board representation. We're very glad that we are on the board, and we have appointed [ Ingrid Steermar ] to be on the board on our behalf and she's really full speed in the board and contributing, making sure that Turkcell becomes even better. And with regards to the remaining outstanding issue then between the shareholders is a long-standing discussion and conflict, and I don't think we should expect it to be an imminent solution, even if I feel that there are definitely windows also this year where we will be talking to each other and see if we can find a common path for that.

[Christian Luiga, Executive VP & CFO]

And then your fourth question that was embedded there in your discussion, Peter, is that the timing and the impact was uncertain on the SEK 164 million impact of the special employer contribution tax. We do not believe it will be a quarter 1 effect, but it will be a recurring effect in the Swedish operation.

[Andreas Joelsson, Head of Investor Relations]

[indiscernible] could we have the next question from the line, please?

[Operator]

The next question today comes from the line of [indiscernible].

[Unknown Analyst]

It's [indiscernible] from JPMorgan. The first question is on the free cash flow. So the SEK 700 million of the pension-related free cash flow, that is new, right? Just wanted to check this, because when we were talking about your guidance and projections for free cash flow at the beginning of the year, and when you guided to around about 9.7, presumably that was not part of the equation. So I appreciate you probably don't want to guide on a very precise level, but broadly speaking, our free cash flow projection should, therefore, be higher by around about SEK 700 million. Is that right? And then secondly, just wanted to check on the buybacks and M&A. Do you still see potentially a scenario where you may end up with no M&A, no value-creating M&A, as you say, and therefore, you will look to potentially increase the shareholder returns further? Is that still a potential scenario? Or do you think there is some -- the funds have essentially been -- the rest of the balance sheet has been earmarked essentially for M&A, which is reasonably probable?

[Johan Eric Dennelind, President & CEO]

You take the last one, Christian, I can take the first one. No, I mean, we think this is the right balance between a buyback over the years to come, the SEK 15 billion, leaving us with good room to execute on the M&A agenda that we have, which we strongly believe we will do and which is needed to do in order to live up to our full strategy and to get to our full potential. So the focus is very much on the M&A side in order to get that done.

[Christian Luiga, Executive VP & CFO]

And as we said, on the cash flow guidance for this year that the tax interest and pension should go down with around SEK 1 billion and the other part would go up with SEK 1 billion. In that number, the timing impact was uncertain of the pension. But now we have clarity, and we have then somewhat a positive impact from that.

[Unknown Analyst]

Okay. So it's more about just additional confidence from having one more quarter of good execution and that's what's driving the cash flow upgrades, right? Which incremental, though?

[Christian Luiga, Executive VP & CFO]

Yes. It's the progress in the working capital and CapEx and the confidence and then it's the pension.

[Operator]

The next question comes from the line of Andrew Lee.

[Andrew J. Lee, Equity Analyst]

Just had a question on cost-cutting and then one on M&A. On the cost-cutting side, can you just give us some color as to what visibility you have on this? Like can you see the execution already in place to deliver your 2018 targets? And what does that suggest for 2019? I guess what I'm trying to think about is the sustainability of the cost cutting here? And as a supplementary question, if you have any statistics on how introduction of your chat box have gone in Sweden? That would be great. And then just secondly on M&A. So I mean, the number of questions on it and the buyback obviously is a limiting factor potentially for it. So if I could just ask the question that's previously asked in a different way. Can you cancel the buyback if all the potential M&A opportunities arise that you're looking at? And does this rule out any interest in MTG given what the TDC share price reaction was at its attempted MTG acquisition? How does that make you think about things?

[Johan Eric Dennelind, President & CEO]

I'll take the M&A one first. And -- no, I'll give the same answer, but in a different way since you gave the question in a different way. So we believe that the program is designed to be for 3 years, SEK 5 billion per year. Of course, it needs to be approved. The mandate from the AGM needs to be approved every year, of course, but we believe that's good prospect for that to be approved. And we see no reasons as of now why that has to change, because we have enough strong cash flow and improving. We have still a strong balance sheet even after the buyback and, hopefully gone through, good value accretive, cash-accretive M&A will be supporting that further. That's the general story. And when you're looking at specific targets, I think I won't go into specific targets. I highlighted to you our strategic road map, where we are zooming in on partnerships and/or acquisitions, and I don't want you to be surprised when we do M&A. So far, you have been all with us on the M&A, barring Spotify, I admit, but it went well anyway. And then we are sticking to our framework for how we do things. So you should not be surprised when we come out with our M&A.

[Christian Luiga, Executive VP & CFO]

And on that same topic, we have a clear leverage target that is between then 1.5x and 2.5x. The -- and we still have a strong balance sheet, and this is a 3-year program. I would like to just say a comment on the cost-cutting and the cost program. As I've said, the cost program is bringing in a new culture and drive for how we measure and look at costs. We measure the initiatives, and we have follow-up on initiatives and we have both systems and meetings and programs for that. We have good clarity and clarity enough to feel comfort in all cost programs. There are things that happen and things that don't happen and then you find new things and things go better and things go worse. But overall, we have a good visibility going into this year. This started already last summer. I think I said clearly that we have a certain part, a smaller part in the beginning of last summer already identified. And we have still work to add, and we have been adding initiative to this program as we go along. For next year, the most important thing is to continue to drive costs where we should drive cost. And before we declare a guidance on what we think we can do next year, we also need to see how we're going to grow in ICT and other areas. Because this is a net program on all costs. So we will come back with that.

[Andreas Joelsson, Head of Investor Relations]

We have a couple of more questions on the line. So please, operator?

[Operator]

The next question comes from the line of Terence Tsui.

[Terence Mun-Sion Tsui]

I just had a question on the fiber installation in Sweden. Just given the delays and the grant of permits and also some uncertainty around the SDU regulation, does this make you feel potentially to scale back significantly the projects? Or now scale down some of the targets? Just interested on your thoughts around that.

[Johan Eric Dennelind, President & CEO]

Thanks, Terence. You're onto an area where we have less certainty. We are in a situation where we still have problems, not to say big problems to get the permits through the authorities. We're working very hard to make them understand the impact and the consequences of not getting the permits through, not just for Telia, of course, but for the broader society. Not enough progress in this. So it's a cry for help when you have a chance, here is a chance I want to ask for more help from our good Swedish authorities to get that going. And that's also currently the reason why we have a bit of uncertainty on the delivery capacity for the rest of the year. As you know, OTC is important for the one-off effects on EBITDA revenues for the Swedish operations. So we are -- we may even be further disappointed on the delivery pace for the rest of the year in Sweden.

[Christian Luiga, Executive VP & CFO]

[indiscernible] aside , I think we are not seeing that as a hindrance, rather the opposite.

[Johan Eric Dennelind, President & CEO]

Yes.

[Operator]

The next question comes from the line of Irina Idrissova.

[Irina Idrissova, Assistant Vice President]

So my question is also on the SDU market in Sweden. Beyond permitting delays, what do you see in the competitive situation in SDU fiber? And also, as you are pushing to more rural areas, do you find that you need to also discount installation fees more than in previous areas perhaps? And also do you have any updated thoughts on perhaps consolidating the Swedish fiber operators?

[Johan Eric Dennelind, President & CEO]

Yes. So thanks, Irina. We are not in a deep discounting game on fiber. There is still a high demand. We are not able to deliver all -- to all that demand and, therefore, I think the price level is fairly intact. So that's good, it's more a delivery game than anything else. On the competitive side, I think, hasn't changed in any significant way on the fiber space. Possibly the fact that we are getting into more Open City Networks, which is a positive for us. We are addressing more end users that were not in our space before. That's an important number to keep an eye on. And on the kind of more general retail market, mobile, consumer and fixed consumer, then, I think, it's pretty much the same, possibly a slight touch of increased competition in the low-end segments, low-end price segments, I should say, of the Swedish mobile where a lot of campaigning is going on. But on the main brands in the Swedish side, I think it's fairly, fairly intact, fairly stable, fairly rational.

[Operator]

The next question comes from the line of Henrik Herbst.

[Henrik Herbst, Research Analyst]

So it's quite an impressive rebound in mobile service revenue growth. You did explain it a little bit in terms of it being core bundled upgrades rather than VAS. But can you explain a little bit more? Is it on Telia brand? Or the Halebop brand? Or is there anything in particular that's sort of triggered more upgrades, do you think? Then in terms of the broadband market as well, broadband ads. You've lost subscribers for a few quarters now. In terms of as you go into more open networks, do you think you can turn around that trend and start to grow broadband subscribers again? And then also in terms of the pricing, it's not much of a gap down to the others now, if there is any, actually, on fiber pricing. Do you see scope to continue to put pricing up?

[Johan Eric Dennelind, President & CEO]

Yes. So starting on the pricing, Henrik, we are always looking to rightsize pricing or optimize pricing, and that means both ways. I mean there are maybe pockets where we are not optimally priced on the high side or, on the contrary, on the low side. So that's a constant thing that I want us, as an organization, to be extremely good at. And there is more for us to do here. So that's why I keep saying that we are not optimally priced. And I see areas clearly, where we are able to move pricing up, where customers are responding positively, and we have done that over the years and we will continue to do that over the years. So the general answer is yes, there are more opportunities to price changes. On the broadband side, you're onto something important following my short answer on the OCN, the Open City Networks. Yes, that is a way to change the trend on getting broadband customers on Telia as a service provider, even if we don't have the full fiber value chain that we've had in most other cases. So certainly, we expect those numbers to be able to improve and go up. And then it was the upgrades. I -- a little missed that one on the mobile service revenue side in Sweden. Is it Telia brand or brand or Halebop brand?

[Christian Luiga, Executive VP & CFO]

[indiscernible]

[Johan Eric Dennelind, President & CEO]

Yes, that's what I missed it because we don't break it down on Halebop and Telia and keeping them in different segments, in different type of propositions. We are not really commenting on details between the 2 brands as such.

[Operator]

The next question comes from the line of [ Morris Norris ].

[Unknown Analyst]

It's [ Morris ] here. Couple of quick ones for me, please. First of all, on the state of Finland competition, we've seen elevated churn in the Finnish market over recent quarters. Everyone seemed to blame you and higher subsidies. But your thoughts about Finland SAC costs, marketing costs, competition over the coming quarters, especially in the context of the hockey rights would be very helpful? And then just a second question, very sort of strong ARPU growth in the mobile side driven by very strong data growth. Do you see any sort of rising congestion, network congestion issues in any of your markets? I'm just wondering what your thoughts on the core networks given that strong growth in data?

[Johan Eric Dennelind, President & CEO]

Morris Norris, thank you. We have no congestion. We have a smart and well-disciplined investment process looking very much at the data and the insight we get from our various data lakes when we plan and investment in CapEx. And I think we are well ahead of congestions normally. We can, I'm sure, be better how we do that on every cell at every time, and that is also part of our technology road map going forward into the virtualized world. But generally, no. On the Finnish side, very, very intense consumer space. Very, very much driven by our competitors starting up, not us. But of course, we are quick to follow when need be, and we do so. We are campaigning when we have to, but we would like to stay rational and disciplined and focus on our existing customer base: getting them on the right plans, getting them happy, getting them to be promoters. But of course, we also need to look at the intake of customers. And I think our view is that we have a good position in the market. We have strengthened our brand, going quickly after the awareness of the new Telia brand in a very short space going from awareness to liking and leading many indicators into being the beloved brand in Finland. That is a great start leading into the hockey season where, as I mentioned, the hockey package is coming out. Stand-alone so far. But they will of course also be bundled into our core services as we approach summer and into the real hockey season. So we have high hopes that, that will be a good consumer proposition that will help us improve metrics across the consumer space.

[Andreas Joelsson, Head of Investor Relations]

We have time for one more short question from the line, please.

[Operator]

And our last question comes from the line of Ulrich Rathe.

[Ulrich Rathe, Senior European Telecommunications Analyst]

On the share buyback relating to the dividend. Obviously, the dividend coverage isn't the very strong, and I think there are sort of investors out there who are looking at the dividend coverage. Obviously, when you screen things, you see the multiple and the coverage not being very high. So the fact that you're now starting a share buyback presumably sort of is a signal here also with regards to sustainability of the dividend. But I was just wondering whether you were willing to sort of give a bit more confidence specifically on the dividend sustainability from here at these levels to investors who are sort of looking at that? And then if I may just squeeze in one. On the Swedish mobile situation, Johan, you mentioned on the margin, sort of, I think, on a question of fiber that there is a little bit more competition in over its segment at the moment. What do you think is the motivation of the instigators of this? Where are the heading of this in your view and what is the risk that this competition impacts the main brands as well? Do you see any signs of that? Or are you concerned about this could possibly happen during 2018?

[Johan Eric Dennelind, President & CEO]

No, I'm not concerned it will happen short term, but we're definitely concerned that if it continues and grows, the motives for these changes and it spreads into other segments, then, of course, it can have an impact. But we are not there yet, it's quite isolated. And if it stays that way, I'm not worried. But something we definitely will keep an eye on and have our responses to in the right way, in a rational way. And also I'm sure something we will be speaking about through the year to monitor the Swedish mobile. Let me just cover then the dividend question as well. We are very confident -- comfortable with the outlook for our cash flow. We have told you that before that it should, based on today's change guidance, we said it's going to be the same this year as last year, now it's going to be higher. And before those statements, you know that we have said we have further cash flow improvement potential '19, '20 and onwards. And that still stays. There are more room -- as Christian pointed out, there are more room on working capital to be improved, our CapEx is still at a level where it can come down further. And then we also will see EBITDA improvements in good times. So there are more to come -- to cover the existing dividend policy, yes.

[Christian Luiga, Executive VP & CFO]

Can I just also add that the above 9.7 plus associates is what we guide on for the dividend base, and that means around 9.7 plus $1 billion plus, and that's up to SEK 11 billion. And that is 90% dividend on current base for dividend. So I think we covered it quite well. That's it.

[Andreas Joelsson, Head of Investor Relations]

That's a good note to end on. Thank you, both, and we look forward to meet you all during the quarter, and if not before in July at the Q2 presentation.

[Johan Eric Dennelind, President & CEO]

Thank you.

[Operator]

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.