Telia Company AB

STO:TELIA

Earnings Call Transcript 2022-Q3

[Operator]

Welcome, everyone, to Telia Company's Q3 2022 Results Presentation. And with that, I will hand over to Telia Company's Head of Investor Relations, Erik Strandin Pers. Please go ahead. The floor is yours.

[Erik Strandin Pers, executive]

Thank you, and good morning, everyone, and welcome to our Q3 call. On the call today, we have Allison Kirkby, our President and CEO; Per Christian Morland, our CFO; and myself and Anders Nilsson from Investor Relations. Allison, please go ahead.

[Allison Kirkby, executive]

Good morning, everyone. And as you've seen in our report this morning, macro challenges increased significantly during the quarter. And those of you that have followed us lately know that we'd expect to be able to largely mitigate these macro efforts. As we progressed through the quarter and now summarizing both the quarter and the outlook, we do see larger macro effects than previously and have decided to be more cautious as we look forward. We understand this is painful short term for everyone, but it's the right thing to do because we're very much focused on building the long-term value creation of this company.

And on that note, it's encouraging to see the continued commercial and operational momentum that we saw in the first half of this year continued, proof that we are showing resilience in a difficult environment and proof that our plan to create better career is on track. Service revenue growth, digital transformation momentum, OpEx reduction and underlying EBITDA are all developing in line with our midterm ambitions, which are low single-digit revenue development and mid-single-digit EBITDA development. On service revenues, the growth continued at a pace similar to last quarter at 2.8%, supported by all our units for the first time since Telia moved to country-based organizational structure some 10 years ago. Excluding the hit from higher energy costs, which almost tripled in the quarter, efficiencies are continuing to come through as we transform Telia. And in the quarter, we managed to reduce underlying OpEx by just over 2%. EBITDA increased by 1% as service revenue growth and efficiencies compensated for higher energy costs. And excluding the impact from energy, we had a strong underlying growth of 4.9%. So our underlying performance is sustained. Operational free cash flow came in at SEK 2.1 billion, which is SEK 0.9 million reduction versus the same period last year, driven mainly by a different timing of content payments and slightly higher CapEx, but both in line with our plans. And if you look at the structural part of our cash flow, cash flow, excluding changes in working capital, it was fairly unchanged year-on-year at SEK 2.7 billion compared to SEK 3 billion last year. Our balance sheet remains healthy, with a slight increase driven mainly on leverage, driven mainly by our share buyback program. And we so far, bought back approximately 100 million shares by the end of the quarter. And as of earlier this week, we're now 76% through the buyback program. Finally, considering the macro headwinds around those, we're rightly being more cautious as we look forward. Also we have reflected the known energy and interest rate headwinds and some additional caution into our forward-looking statements. But while the macro environment pulls some short-term challenges, our strategy is still intact and we will continue to execute on its speed. Moving to our strategy. As I said, all countries have positive service revenue growth and it was broad-based with mobile growth, 4.1%; fixed services growing in all markets, except for Finland; and we had another strong quarter for advertising. Our total Enterprise segment was again strong and positive growing 1.5%. Our pricing momentum is building with much more potential as we look systematically in all parts of our service portfolio and in all markets, and this will clearly give us more top line benefits next year and the following year. Network modernization is on track with 5G coverage increasing fast and now reaching 63% of the Nordic and Baltic population, up from 49% last quarter. Norway, Finland and Denmark are all above 70% coverage and Lithuania and Latvia at 80%. Digital transformation is also progressing with product and platform portfolio certification on track. Another 10 IT systems were decommissioned in the quarter and IT costs continue to decline despite underlying wage inflation. All of these efforts are designed to create long-term benefits and sustainable economics. Although in the short term, we cannot compensate a quarter for the dramatic increases in the energy prices we've seen. After the end of the quarter, we also announced our intents to consolidate all our linear and streaming content under the TV4 and MTV brands in Sweden and Finland, respectively, which means they will each span linear, AVOD, HVOD, and SVOD strengthening their national champion status via a one platform and fundamental for them to take further advantage of changing pure habits towards on-demand digital platforms and enabling us to offer a richer targeted inventory to our advertisers. Finally, on sustainability. I'm super proud that Telia was awarded the Platinum medal by EcoVadis, putting us in the top 1% of 75,000 companies at best worldwide for strong sustainability management fully integrated into our policies, our actions and our results. Moving to Sweden. We again had a solid quarter with service revenue growing 1.2%, mobile growing 2.3% from a continued positive ARPU development, broadband growing by 4.1% from pricing initiatives and again, a strong development in Telia TV services growing 15%. Our Enterprise business continues to show a solid development even with a slight decline this quarter due to some elevated levels of IoT revenues this quarter last year. So underlying we're still seeing a stable to growing development and so far, no signs of decline in band amongst our enterprise customers as we continue to digitalize to meet the opportunities of tomorrow. A great example of which is Ellevio in making their energy grid smarter and a great proof point of how we can support our Enterprise customers on their digitalization journey at the same time as we contribute to a more sustainable society. Excluding the impact from legacy and the recovery of broken revenues, underlying service revenue growth was again very healthy at 3.4%. EBITDA grew 1.2%, somewhat lower than Q2, but fully explained by a one-off write-down of inventory. So again, a solid operational performance by our Swedish team, especially as looking at underlying revenue and EBITDA development. Moving on to the operational KPIs. We're seeing a stable mobile customer base and continued growth in ARPU supported by an improving NPA and that's despite pricing initiatives on both Telia and Hillerød brands that we took earlier [indiscernible] forward. Our broadband subscribers were not able to fully compensate, no loss of xDSL customers this quarter. But as you can see, ARPU accelerated on back of price increases on both copper and fiber. And in TV, we again saw a strong subscriber base. And importantly, we saw another strong ARPU quarter, supported by both pricing and a higher share of premium sports packages in the base. During the quarter, we entered into our partnership with discovery on the streaming rights for the Swedish group holding out Benson to build on our aggregator position. However, as you know right at the end of the quarter, we are not able to agree the buyer price on a new agreement that makes financial sense for us or for our customers. Moving then now to Finland. We saw a slight pickup of service revenues, very much driven by mobile, which despite Interconnect increased by 3.5% and we had a good start for The Four Season on TV. That being said, the progress of mobile was largely offset by continued pressure on fixed revenues that relate mainly to legacy datacom services. The turnaround of mobile is on track and still is our cost transformation, especially in digitalization and in the new to online with an underlying 2% reduction this quarter. Admittedly, it is, however, difficult to see the cost transformation this quarter as Finland is particularly hard hit by energy cost increases, which were SEK 80 million higher. Subscriber rates grew slightly in the quarter, driven to some extent by consumer, but mainly by the Enterprise segment, and you're seeing ARPU increase by 2%, helped by continued migration to 5G. With these trends, continued network modernization, coverage is now and a range of cost initiatives, we remain committed to improve Finland in a structural way, but we do recognize that we've got a bit more to do considering the magnitude of the current headwinds. Norway had another quarter of very strong momentum. Service revenue increased just shy of 6%, driven by almost 6.5% increase in mobile on the back of a growing subscriber base, core ARPU expansion, higher wholesale revenues and a strong recovery in roaming. Enterprise grew by 8%. This strong service revenue development was also confirmed by the regulator, which confirm that Telia is the fastest-growing mobile operator in both B2C and B2B segment in the first half of this year from a value point of view. We also had strong development on sales services with excellent broadband development growing 4.3% and TV growing 5.7% on the back of pricing. And you might have seen we announced some new additional broadband prices in Norway this morning. EBITDA grew 4.5% as higher service revenues more than offset a SEK 50 million negative impact from increased energy costs. The mobile subscriber base continued its positive trajectory in both our brands, but mainly [indiscernible] this quarter, and ARPU was again strong with 2.6% increase, helped partly by moment recovering. Moving to the LED market. In Lithuania, we grew mobile 10.8%, which is in line with Q2, and we've taken a clear lead in 5G with an excellent commercial launch and see strong initial demand. The development for fixed service was a bit softer year-on-year, resulting in total service revenue growth at 5%. And the flow-through to EBITDA this quarter from the revenue this week as a result of Energy headwind worth SEK 40 million. Hedging in the Baltics is less straightforward than in the Nordics, but we are taking other mitigating actions in this inflationary environment, including a number of significant price increases, which are taking place later. In Estonia, performance was again strong, with service revenue growing 5% and as you can see EBITDA growth in line with Service revenues despite the energy headwinds, which has been helped by historical PPAs that we have in that market. This is another strong achievement for Estonia alongside excellent NPS development too. And finally Denmark, we had service revenue growth driven by mobile growing at 2.8% but energy headwinds were especially strong in the quarter. Our shared network does not hedged, but revenue growth and easy growth on the cost side and generally excellent turnaround momentum resulted in just over 8% EBITDA growth. Finally, moving to TV and Media. We had a record high third quarter in mass advertising despite that we had last year, and this compensated for a challenging development in pay. The shift to digital continues, and with that we saw a 20% growth in Swedish digital ad revenue. Pay had a soft quarter driven mainly by the loss of formula on in Finland and continued headwinds from our wholesale agreement in Denmark that expired in the fourth quarter last year. EBITDA increased by 24%, driven by mainly lower sport as last year contained both football euros and world cup qualifiers. And if you look at the Pay TV customer base, we saw an increase of 28,000 in the quarter, driven mainly by strong high-tier sports growth in Sweden, driven by the Swedish Hockey League, UCL and other sports online. Looking ahead, we're now starting the work as I mentioned in the strategy highlights to simplify our TV and media set up. We've seen more premium content to be transferred into the TV4 and MTV streaming therapists and offering a more focused slate of premium Nordic content, including both AVOD, HVOD and SVOD services. These changes will be implemented during the course of next year, and we'll build on the strength of the TV4 and MTV brand. And regarding the outlook for advertising revenue in these tough macro times, we continue to see strong demand from advertisers, but clearly after fourth quarter of advertising revenue growth ranging from 4% to 11%, we cannot expect as high growth risks going forward at this time. But that's enough for me, and I'll now hand over to PC.

[Per Morland, executive]

Thank you, Allison. Let me quickly take you through the Q3 financials and the updated outlook. Starting with service revenue. As Allison has gone through, we have a solid growth of 2.3%, but growth in all units partly on the back of a continued roaming rebound. The service revenue growth of 2.3% is driven by telco growth, both in the Consumer segment of 2.6% and also in Enterprise segment with 1.5%. TV and Media is quite stable year-over-year with growth in advertising offsetting lower pay revenue. We have a good momentum with several quarters of low single-digit growth and are well on track to deliver on the outlook both for '22 and for '23. Let's move to OpEx. OpEx, excluding energy, is reduced by 2.1% or SEK 111 million in the quarter. The reduction is driven by lower resource cost of SEK 152 million from the more than FTE/FTC reduction since Q3 last year. Despite inflationary pressure, we had 7 quarters into our transformation journey reduce our OpEx, excluding energies with SEK 1.0 billion. The ongoing digital transformation of our business is on track and has enabled a significant reduction in number of resources, marketing efficiencies and lower IT costs. Looking into '23, we plan to set the cost agenda and especially the pace of FTE and FTC reduction even further. As stated, our transformation agenda is moving forward, and we are on track to deliver at least SEK 2 billion net production in OpEx, excluding energy by '23. Next, an update on energy cost development. Our general hedging policy is to hedge 70% of all consumption short term, with gradual reduction following quarters. This equals to around 60% hedge levels for the next 12 months. Total effective hedging is around 50% as part of our consumption is currently unhedged. And this includes consumption for landlords in all our markets, our joint network with Telia Denmark, Lithuania, Latvia but also the data center in Finland. Energy prices during Q3 -- or in Q3 was an average 3x higher than last year. As we closed Q2 both the actual prices and the market expectations for the coming quarters has increased significantly. Our hedges and PPAs for Q4 of this year, '23 and '24 are all in the range of 400 to 500 megawatts per hour, significantly below the current and expected levels. And now currently, we are placing most of our hedges for '24 and '25 at quite reasonable prices, at least compared to the current level.

Despite the significant hedge levels, the very high prices in Q3 has led to a SEK 300 million increase in energy costs year-over-year. Using the current market expectation and our current hedges the outlook is that the energy cost for '22 is going to end SEK 900 million higher than last year with another SEK 800 million increase in '23. We have recently signed a PPA at very attractive terms in Estonia, starting Q1 next year and in Denmark starting Q1 '24. And we are also working on further potential PPAs in the future. In addition, we are working across our footprint on initiatives to reduce energy consumption, including legacy shutdowns, network modernization and also implementing more advanced software features. Let's move to EBITDA. Total EBITDA grew 1.0% in the quarter, driven by growth in Sweden, Norway and TV and Media. Finland is negative heavily impacted by the mentioned increased energy costs. EBITDA, excluding energy cost increase, grew by 4.9% in Q3, from higher service revenue and lower costs. EBITDA outlook for '22 is updated to end around flat versus last year due to the SEK 900 million high energy costs, mainly from the second half of this year. If we exclude the increase in energy costs, EBITDA is still expected to grow low single digits. Our midterm EBITDA position for '21 to '23 has also been updated to reflect the significantly higher energy cost level expected both in '22 and '23. Excluding the energy cost increase, EBITDA is still expected to grow low to mid-single digits. Moving to cash CapEx. Total cash CapEx in Q3 is SEK 3.4 billion, slightly higher than Q3 last year. CapEx on a quarterly basis, 10%, say, around SEK 3 billion to SEK 4 billion, with Q4 last year being an outlier with more than SEK 5.2 billion in cash CapEx. Despite the continued challenge global supply chain situation, we are able to stay on track with our investment program to modernize our mobile networks, including 5G rollout, dismantle our legacy infrastructure and transform Telia to much more digital company. Cash CapEx on a rolling 12-month basis has increased slightly to SEK 15.3 million or 7.0% of net sale. Cash CapEx is expected to reduce on a rolling 12-month basis in Q4 due to annualizing the outlier in Q4 last year, bringing cash CapEx within the '22 guidance of SEK 14 billion to SEK 15 billion and further down in '23 to be in line with the midterm outlook of 15% on net sales.

On cash flow, operational free cash flow ended at SEK 2.1 billion in Q3, down from SEK 2.9 billion in Q3 last year. The EBITDA growth are offset by somewhat higher cash CapEx and negative working capital. Negative change in working capital is mainly driven by phasing of content payments related to Champions League. Our Champions League cost is paid in 2 equal installments in Q1 and Q3 and so no payments in Q2 and also not any payment in Q4 this year. If you compare it to last year, please note that in '21, we did not have any payments on Champions League, as this was already prepaid in 2020. Vendor financing is slightly positive in Q3 and also year-to-date. Total cash flow on a rolling 12-month basis is on a somewhat declining trend due to increased cash CapEx and lower contribution from vendor finance. Despite solid momentum in our online business, due to the macroeconomic environment, we are in '22, not likely to meet our ambition of covering the minimum building commitment of SEK 7.9 million. This is a combination of the recent increases in energy and interest costs combined with a more prudent approach regarding hedging contribution and a decision not to support a reduction in inventory levels to support our business beyond 2022. We are, however, building up a strong portfolio of pricing initiatives across all our business units. We are stepping up and moving parts across agenda forward. We are working on several energy consumption reduction initiatives and we are also taking a full review of our CapEx spend. But it takes some time before these mitigation initiatives gain full momentum and short term, we are not able to mitigate the full impact in a sustainable way. We will come back in January with more guidance regarding '23 once we have closed the year and we posted the financial outlook backed by and approved financial plan. Moving to net debt and leverage. Total net debt increased, as expected, by SEK 2.5 billion due to the share buyback of SEK 3.3 billion in the quarter. Balance sheet remained healthy with leverage at 2.07x at the lower end of the targeted range of 2.0 to 2.5x. During the quarter, we are very happy to have signed a new sustainability link EUR 1.2 billion revolving credit facilities, replacing the current facility of EUR 1.5 billion. And despite a very challenging market, we have now completed most of our refinancing needs, both for '22 and '23 with 2 benchmark hybrid bonds performed in Q1 and also now in Q3. As mentioned, we have updated our outlook -- EBITDA outlook for '22 to be around flat, but excluding energy increase still low single digits, with a similar update to a midterm '21 to '23 ambition on EBITDA. And with that, I hand over to you, Allison, to summary before we go into Q&A.

[Allison Kirkby, executive]

Thanks, PC. So to summarize the quarter, commercial momentum continues to help by an improving customer experience and broad-based pricing initiatives enabling solid momentum in both core telco and advertising businesses. Network modernization, digital transformation and structural cost reduction all continues in line with plan. And we're now simplifying and refocusing our TV and Media asset preparing it for the next phase of digitalization and richer, broader inventory for advertisers. Our balance sheet remains healthy and well within the 2 to 2.5 range. Hence, our dividend policy remains unchanged as the business is showing its resilience with no sign of customers pulling back on spending at this time. However, as we said, the macro challenges were dramatic this quarter, and that has put pressure on our EBITDA and our cash flow outlook for this year and next. We are taking action, and we will take more if needed, but these actions that we take are structural and sustainable in nature and cannot offset such an extreme move on energy in any one quarter. As you would expect, with such volatility and therefore, we've decided to hold off on to provide an outlook for next year. But stepping back, thanks to the choices we've made these past 2 years on capital allocation on a more focused Nordic/Baltic portfolio and the strengthening of our balance sheet and in building the foundation for a return to sustainable codes, I'm absolutely confident that we remain focused on the execution of our strategy but now at a more accelerated pace by the additional measures we are taking, we will be an even Better Telia when the macroeconomic headwinds reside. And with that, we are now ready to take your questions.

[Operator]

[Operator Instructions] We'll hear first from the line of Andrew Lee with Goldman Sachs.

[Andrew Lee, analyst]

I had 2 questions. First was just on the vendor financing and other incremental free cash flow drags or potential [indiscernible] versus going forward versus incremental drags you've laid out today. Obviously, today, you laid out many more headwinds from macro than maybe we might have expected, like lost pension contributions, obviously interest costs have been expected too. But what about vendor financing, which is obviously a key investor concern? How confident are you that this going to stay flat next year and therefore, not be a drag on working capital? What exactly are you doing to mitigate the headwinds to vendor financing on working capital from rising interest rates? That kind of part B to that question would be, are there any other kind of incremental macro sensitivities that you haven't laid out today that you're keeping an eye on? And then second is a big picture question. So it really relates to price rises to pass through cost pressures. You had previously highlighted confidence that price rises can mitigate cost headwinds. Cost headwinds have gone up and totally understand that it's too late for price rises to mitigate those headwinds for 2022. But has your confidence essentially reduced on your ability to pass through higher costs to customers as we look into 2023, i.e., the mitigation of higher costs with the price rises you're doing now?

[Allison Kirkby, executive]

So why don't I take the second question first, Andrew, and then I'll pass over to PC on the vendor financing. Our confidence has not changed at all about our ability to pass on the pricing. What happened during the course of the quarter, Andrew, and I was with you during the quarter, is the energy prices got increasingly higher. And as we saw that coming through, we had to reflect on what does this mean for the balance of this year and into next. And when you see a doubling of price of cost in one quarter and see that go through into Q4 as well, no sustainable pricing should have offset that in the quarter or in Q4 either. The price rises are continuing. You will have seen we took SEK 40 to SEK 50 in Norway broadband performing. We have -- we took action in Finland just yesterday following the market lead in consumer segment yesterday. And all of our pricing initiatives are going per plan, and we're continuing to plan to look at taking even more if the inflation environment continues. So no change in our confidence. The only issue is that pricing takes time and you can't compensate from a short-term energy volatility that we had this quarter and will be next quarter as well. But absolutely confident. So there's no sign of consumers pulling back. And as you've seen, we had a very -- another very strong advertising revenue quarter as well. So we see this as a short-term pain, but for a long-term gain in terms of the pricing moves we're making. And we have now CPI-linked contracts in all countries in any new enterprise contracts being struck now, and they're already in existence in Norway for a number of years. And on the vendor financing, PC?

[Per Morland, executive]

Yes, Andrew. So let me give you a bit sort of extensive responses. I know you are very much on top of it, but just to make sure everybody are fully up-to-date. So vendor financing has been very positive over the last couple of years, contributed significantly on the cash flow and on the working capital. We were quite clear that going forward, we will see a more kind of neutral situation. And that's actually also what we see now with in Q3 and year-to-date, it's slightly positive, but not at the levels that we have seen before. And also for '22, we expect that vendor financing to be slightly positive. So that's the kind of the financial guidance as it stands now. And then sort of take a step back, what it is, right, is that we go into a dialogue with our suppliers and the banks and where the suppliers are able to get their payment in 7 days versus our standard 90 days. And then the discount that the suppliers gives us an extension on the payment terms. And then how this affect both now and going forward depends on 3 things: first, how many suppliers and how much spend do we have in the program; second, how big discounts are the suppliers willing to give in order to get paid 7 versus 90 days; and third, what are the terms the banks are willing to give up? And of course, this is depending on the general interest rate. So it's important to understand that the program can be beneficial to both in a low-interest environment where it's easy to get very long extension of the payment terms, but also in a high-interest environment, where you can the higher interest increase the value you're getting paid in 7 versus 90 days. Also getting paid early, it can be useful for some of other providers in the challenging times that we're in. So -- but as you rightfully say, everything else equal, higher interest rates reduced the amend term and become a negative drag on working capital. So the way we mitigate this is either by expanding the program with new vendors or new additional spend or which is actually more importantly is to go back to our current suppliers and to just negotiate better discounts because the interest rates now have moved. So that is what we're doing. And then also why we are quite -- even if the interest has moved, we are quite stable so far this year and also for the remaining part of the year. So what happens going forward, it depends on how we decide to get with supplier in order to do this. I think what's important to do that we will only use it if it makes financial central. We are prudent, and we want to make sure that whenever we do generate financial value. So I think that's some perspectives on the program and where do we stand. And then, of course, when we come back in January, we will give you more complete update on the cash flow and the working capital outlook once we have completed this year, we have full financial outlook based back on the financial plan. And also, we have some more visibility on the macro situation.

[Operator]

Our next question will come from Maurice Patrick at Barclays.

[Maurice Patrick, analyst]

Just 1 for me on to the balance sheet positioning, cash flow, dividends sort of related items. So clearly, you've reduced the cash flow guidance due to higher energy and EBITDA and indicated the dividend won't be covered by structural cash flow. And you said you'll come back next year. So I'm sure you don't really want to get into a debate about what was the right cash flow number to plug into the model for next year, but the dividend is a big question for investors given it's not this year now. You talked about it being covered structurally going forwards.

So maybe just if you could sort of articulate some bundles and how you're thinking about is 2 to 2.5x leverage to the right leverage ratio? Would you be happy having another year of uncapped dividend if energy prices remain where they are? You obviously have some initiatives around reducing the share count by buybacks or the towers you've done already and has particularly moved to that can produce that share count to help with overall dividend coverage. So sort of what if the bigger picture thoughts in terms of the balance sheet positioning, dividends, cash would be very helpful given where we have at the moment?

[Allison Kirkby, executive]

Thanks, Morris, there's a lot of questions in there. Let me try and start kind of high level, and then I'll pass over to PC for details. The way we look at it is our underlying plan and strategy is delivering in line with what we expected. We are just seeing at this point in time some heightened macroeconomic pressure that is making us be a little bit more cautious on pension elements, on supply chain elements. And clearly, we have a short-term impact from energy costs that we cannot offset in a structural sustainable way with pricing and cost at any point in time. But our underlying plan is intact and therefore -- and our balance sheet is very helpful and we've got lots of headroom in that balance sheet to cope with its short-term macro pressure. And that's why the Board are very committed to the dividend policy that we set out on and willing to take a little bit of increased leverage in the short term because they and we believe in the underlying plan and the underlying health of the business. So hopefully, that gives the context and then PC, is there anything else that you want to give more as try to work out a model.

[Per Morland, executive]

Yes. I think you addressed most of it. But just sort of to summarize, right? So we are now in the second half of this year, really hit by these factors that run through. And they are large unmitigated. But working now systematically on pricing and cost and energy consumption reduction and we will gradually be able to offset more of this pressure even if it's not going to reverse a dramatically. And also, as we have guided you on, we are now steering down CapEx in line with our plan towards 15% of sales. So all of these is sort of give you at least a positive outlook on how our structural part of our cash flow and our business is delivering in the right direction.

[Maurice Patrick, analyst]

And just some -- you said earlier, did you say you are trying to hedge at 400 to 500 for '23 and lower beyond that? Is that what you said earlier in your commentary?

[Allison Kirkby, executive]

Yes. Our average hedging is at SEK 400 to SEK 500 per megawatt hour for...

[Per Morland, executive]

Yes, exactly. It's quite stable, both looking at the fourth quarter and also looking at the quarterly hedges we have for next year in '24 in order to deliver the business by quarter in my market, but all tend to be within that SEK 400 to SEK 500 megawatt per hour, which is significantly lower than the several thousands that we've been experiencing in Q3.

[Allison Kirkby, executive]

And you have seen pricing come down in the last couple of weeks, but I think we need to get through the winter months to get confident that they're going to go sustainably done.

[Per Morland, executive]

And what's important, Morris, is that we are not placing hedges now on very high levels, right? So the hedges we are putting down '24 and '25, they are more expensive than they were before, but they are kind of SEK 1000, SEK 1500 level. So keeping it in a good mix cost level.

[Allison Kirkby, executive]

If you see that chart we showed earlier, we were seeing spot rates at 10x the SEK 400 to SEK 500 at 7 points for the quarter. And that's what caused the extreme volatility.

[Operator]

Our next question today comes from Ondrej Cabejšek with UBS.

[Ondrej Cabejšek, analyst]

I have a follow-up on working capital. If you could maybe talk a bit about inventories as well as because they've been out about SEK 600 million this year, and we've seen from your peers as well the buildup of inventory because of the supply chain issues, CapEx expectations, et cetera. So if you could talk about whether that is a plateau or whether we can expect maybe that winding down or maybe an incremental drag going into the fourth quarter, that would be helpful? And then a bigger picture question on just various types of P&L going into next year, please. So I think you've laid out very well what the energy impacts are by quarter and next year. But then can you talk a bit about -- because I think there's been some confusion around the conference communication from -- around personnel and interest. If you could just give us color on the moving parts on those 2 specific items that obviously also impacts the free cash flow expectation for next year, that would be helpful?

[Allison Kirkby, executive]

Okay, Ondrej, I will -- you've quite a bad line, but I'll try and pick that off on your second question on the outlook for next year, and then I'll pass over to PC on your inventory question and working capital question. We'd be very clear that our outlook is still intact for this year and next year if you exclude the energy impact. And that's been reinforced by the underlying development that we've seen in the business so far this year, and this quarter, at low single digits on the top line, 2.3% this quarter and mid-single digits on the bottom line at 4.9%. And so that was absolutely our ambition going into next year, and that still stands, but we're adjusting it down for what will be -- what we're seeing at the moment, an additional SEK 600 million in energy year-on-year as we look at it. So that's the only adjustment that we're making to our EBITDA outlook at this point in time.

[Per Morland, executive]

Yes. And then just to build on the sort of second question, on interest, I think there was a question there. So we started to see some increased cost on interest already in Q3, and this will continue to build into Q4. So for the year of '22, we're looking at around SEK 300 million higher interest costs and what we expected. And then there is a delayed effect, so that will continue into next year. And there's another few hundred million increase in interest rates if the sort of market is correct at the moment. As a rule of thumb, you can say that 1 percentage point increase in the interest is around SEK 400 million higher interest costs for the year because we have a big part of our leverage portfolio is locked in and not really impacted by the short-term volatility. And then we, of course, also have a cost which is floating.

If I heard correctly, there was also a mention of pension. Last year, we had SEK 1.3 billion of positive contribution from pension. We have been hoping to sustain that level this year. That is quite high level in order to look historically. That was also what we expected when we talked to you in Q2, but we have taken a real look And year-to-date, the pension fund has lost 8% to 8.5% of the value. Luckily, also the liability, the pension has gone actually down even more than that, but we have taken a quite prudent approach is well covered, but we want to wait it out a little bit and see how the market develops. So what we're now in the outlook planning is not probably decided is to do the similar policies, it's about SEK 900 million this year. We have already taken SEK 400 million in Q1, and that do another SEK 500 million in Q4. So now a couple -- we should not expect that to continue being a big issue going forward. I think we should have that kind of SEK 900 million level as a sort of a baseline looking ahead. Then specifically on working capital. So here in Q3, we are minus SEK 700 million. That is almost highly driven in the quarter by the phasing of content payments that I took you through in my presentation. If you look year-to-date, that's also we are on, I think, a little bit shy of SEK 1 billion negative, SEK 900 million. That's also basically taking our constant payment because if you move into Q4, we're not going to have any payments to Champions League so then that will normalize quite a bit.

Inventory levels are at the quite high level already in Q3. We hope they'll be able to sort of reduce that, but we expect now that, that will actually continue and actually also slightly increase a little bit going into Q4, but not dramatically so. And then I talked about there in a minute ago, that we expect to be relatively neutral also going forward. So in totality, working capital is not expected to change dramatically. So we're hoping earlier to have lower inventory levels and also have somewhat more positive contribution from the vendor financing programs that we don't see at the moment.

[Allison Kirkby, executive]

And just to summarize, Ondrej, the pension and the inventory decisions that we've taken, they were active choices that we made when we were considering the macro environment. We could have pushed more pricing into this year. And we could have run down our inventory, but running down our inventory when the global supply chain situation is still a problem. It would not been good for the continued rollout of our network. And so that wrong decision if you're planning for the long term. And the pension division is absolute choice that we need because we don't think it's the right time to be taking money out of the pension fund. So they were proactive decisions and back up the point of we've taken a cautious approach to our outlook considering the macro environment.

[Ondrej Cabejšek, analyst]

If I may just 1 very quick follow-up on the pension. You said SEK 900 million going forward. Is that an annual kind of -- or is that a flat number, therefore, going forward? Or is that a repeat at SEK 900 million every year?

[Per Morland, executive]

No, of course, it is taken on an annual basis, right, but that is a recurring annual effect.

[Operator]

Luis Lecaroz with Credit Suisse.

[Luis Sanchez-Lecaroz, analyst]

I have 2 please. The first one is on Sweden on mobile service revenues specifically. I have seen that your postpaid net adds, excluding machine to machine slowed down in the quarter. And when I look at your postpaid ARPU, it slowed down as well despite the back book price increases you pursued on the Hillerød brand, which I think they came in August or mid-August. I am interested in getting your thoughts on how you have seen competitive dynamics evolving in Q3?

And specifically, if you are seeing any impact from the new Telia unlimited speed to your tariffs. And any color you could give on Q4. That would be helpful.

And the second one on Finland. I have seen that you have posted a good recovery in terms of MSR. And now you are announcing that you are following another competitor with price increases. One of your competitors was mentioning yesterday that supply into Q4, they were not seeing a value approach by peers in the market. Is this announcement signaling that you are expecting a more rational environment going forward?

And finally, if I may squeeze a follow-up on your comments on price increases, you mentioned price increases in Norway and in terms of broadband, now following on Finland. But Telenor announced they will be pursuing price increases on mobile, and that will kick in, in Q4. What are your thoughts there? Are you going to follow?

[Allison Kirkby, executive]

Well, that was a long question, Luis, but I will try and answer as quickly as possible. So on Sweden, we are very happy with our -- how we're holding up in a competitive environment in Sweden. We look at postpaid net adds pretty much neutral, postpaid ARPU developing more positively than competition that they posted yesterday. And so I would say we are sustaining our market leadership position. We are being very rational, which is a number of pricing moves the summer. We are meeting to competition follow. And no, the new Tele2 unlimited tariff is not having an impact on us at the moment. I think it's a bigger threat to them actually in terms of a downgrade point of view than it is to us.

On Finland, happy with the recovery we're seeing in mobile service revenue. Happy to see that there has been market movements in pricing and clearly not being the market leader in Finland, we will be happy to follow which we did yesterday. And yes, we are also hoping that the Finnish market is now going to be more rational, but there is still some these vouchers around in the market that key competition on a regular basis. But certainly, all the movements are very positive at the moment.

And as I said, we aim to grow in line with the market in Finland, and that's what we will do. Norway, yes new pricing morning on broadband, and we are clearly looking at our mobile tariffs as well and looking at what happens in the market dynamics. We have got a very comprehensive systematic approach to pricing going on in all segments, in all markets, and that will continue to benefit us in the following quarters and years ahead.

[Per Morland, executive]

And maybe you started your question on a little bit around the mobile service revenue and ARPU, is there a more technical question, you can follow up with IR because in general, what we see is a solid ARPU development basically across our footprint on the back of growing rebound, but also on the back of the pricing moves that we already have done.

[Operator]

Our next question comes from Titus Krahn at Bank of America.

[Titus Krahn, analyst]

I have just 2 more strategic ones that rather topical ones, I think. If I may, just one on consumer data, and I'm sure you saw yesterday's statement on O2 Hutch deal in the U.K. Just maybe could you give some thoughts on how you view the statements, to what extent do you believe this is actually relevant for the markets you're in, for example, in Denmark? And would you say this remains a market-by-market decision? And maybe are you following the current attempt in other markets such as Spain actually not closely than this EU the cost decision. And the second question on the infrastructure ownership. I mean, you already showed the totality that you're quite open to share ownership and up some of the infrastructure and with potentially more to come. I just wondered now on the fixed impact that you have in the Nordic market, would that be on the table for you as well, looking at Telenor which achieved quite a high valuation last month or so. And I assume it's not a top priority at the moment, but would you generally open to similar deal?

[Allison Kirkby, executive]

Thanks, Titus. Let me take the question on consolidation views, I think yesterday's announcement doesn't change my opinion. These decisions are very much clearly taken on a market-by-market situation. And so I don't think that decision would have any impact on our market. Clearly, we are following what will happen in Spain and what will happen in the U.K. with the Hutch-Vodafone decision as well. And -- but Denmark has its own market. But clearly, in these times, where we have more financial pressures, we will take advantage of consolidation as and when it comes along for Telia. But I don't think this decision changes that. In terms of infra initiatives, yes we're very happy with the deals we struck. We're continuing to look at our rooftops have been quite open on that. In terms of fixed assets, so we don't need to fail our assets for leverage reasons. We have done it because of the valuation differences but we've maintained control so that we can work with partners that bring commercial and operational value add beyond just the checks they are writing to get a minority stake. In terms of our fixed assets, we see them as strategic. And I've been quite open in the past, but I don't need to sell a minority state for any financial balance sheet reasons but I would be willing to look at creating vehicles that allow me to consolidate further the Swedish market. And so for example, create a venture in partnership with somebody else to consolidate the network. And I've been quite open about that in the past. So it's not a priority at the moment, but if some assets become available that allow us to build our fixed infrastructure further, I'd be very welcome to do that in partnership with other players.

[Operator]

Our next question today will come from Nick Lyall at Societe.

[Nick Lyall, analyst]

I have a couple of questions, if I could, Allison. Just going back to the -- just on the unlimited pricing first in Sweden. I'm surprised you're still relaxed about it from Tele2. So just given SEK 399 for unlimited is about the price of your 15 gig package. So why wouldn't that limit upside to pricing for consumers? Can you tell me sort of what I'm missing there? And why you've been more relaxed about it? And then secondly, just to come back to Morris' point on the divi. How long do you think you've got with an uncovered divi before you have to question, either from the Board or from yourselves to a question that the floor, the SEK 2 floor, please?

[Allison Kirkby, executive]

We've been living with a significant difference to Tele2's pricing for quite some time. And as we continue to build out 5G well ahead of competition and sustain our best network, best coverage, high-speed position, we are as yet not seen it having an impact on our business. Clearly, it's something we're looking at. But to date, we haven't seen any impact on our business. In fact, the thing is those are willing to pay a significant amount of overlay for a tariff and to all to be more with the market leader in our market anyway. And it's actually -- it's the low-tier brands, with the lower tariffs that are something we monitor more at this time when customers are more likely to go to no frills option. And then in terms of the dividend policy, certainly, we have a clear mid-long-term plan that our Board remains very committed to, and we believe the dividend policy is aligned with that plan. So there's absolutely no dialogue about reconsidering that dividend policy at this time.

[Operator]

We'll hear next from Peter Nielsen with ABG.

[Peter Nielsen, analyst]

Allison, I have a question related to comments made earlier by both Per Christian and yourself on looking to review your CapEx spend for next year in relation to the sort of the cash flow questions earlier. Now you told us several times today that you're seeing no impact changes to consumer spending. You're following the long-term strategy and you just stressed the importance of having premium network. So my question is, why would you consider reviewing your CapEx plans? And if so, which areas of the CapEx would you be looking to potentially reduce?

[Allison Kirkby, executive]

I'll pass over to PC in a minute, but just to be clear, we have always planned to come off of peak spending this year. And so we reversed to 15% of service revenue as our metric for CapEx next year, and that has always been the plan and still is the plan. And as you know, our network rollout is -- we're now up 70% in a number of our markets and 80% in Lithuania and Sweden 40% and PC, you said at that earlier.

[Per Morland, executive]

Yes, I mean I can give some, let's say, flavor on what I meant is that our general agenda remains, and we are not planning to any sort of dramatic changes on that. We need to complete our network modernization. We need to transform to a digital company and then those will continue. But of course, a changing kind of business and macro environment, we should sort of take a relook into our investment agenda and see all our investments that we actually need to protect, maybe even more and make sure we get the value out of that. And what are the investments that we actually need to look at whether we should face like a differently or actually also cut out. So that's what I meant by reviewing. So you shouldn't expect that. And actually, one of the things we haven't talked so much about it, we are not actively cutting down significant CapEx now to protect cash flow this year because we mean that the investment that we are doing is very important element of building in our sustainable Telia going forward. So what we will be doing, we will take a full review of what we are doing. We are currently doing that as part of our financial planning for next year. The ambition is to have an overall CapEx plan that is in line with 15% to net sales.

[Operator]

Next, we'll hear from the line of Keval Khiroya at Deutsche Bank.

[Keval Khiroya, analyst]

Two questions, please. So firstly, you've talked about potential consolidation opportunities in TV in the past, what are your latest thoughts and opportunities and what exposure you would ideally like to have to even media in the future? And then secondly, a question, how we should think about core telco enterprise trends for 2023? It sounds like you haven't seen much change cost of behavior that we have seen a slowdown in enterprise service revenue growth over the last 3 quarters. Do you expect further slowdown into next year? Or do you expect trends to be in there to the 1.5% growth we saw most recently.

[Allison Kirkby, executive]

Thanks, Keval. So consolidated TV and Media, yes, I don't believe it will happen at one point. But our focus at the moment is simplifying what we have, consolidating around the TV4 and MTV brands that are very strong national champions, making them stronger for changing viewer habit and increased demand for targeted energy from advertisers to make that business a better business so that it either throws off more cash to Telia or create value creation if the right opportunity comes along. But first and foremost, it's making the business stronger as it stands today. And then core telco trends, we are -- yes, enterprise was a bit softer this quarter. But as I said, some of that was kind of one of IoT revenues in Sweden last year and a little bit of acceleration of datacom legacy decline in Finland this year. We're very happy with how our enterprise business is performing. We're seeing increasing demand from the public sector and the private sector for us to help them with the digitalization journey. And as I said, I think to one of the media area this morning, as enterprises look for more efficiencies and are under more pressure from a sustainability point of view, we are the perfect partner to be with them. And so no concerns, but clearly monitoring the economic environment, but no indications that we would flip next year.

[Operator]

Next, we'll hear from Stefan Gauffin at DNB.

[Stefan Gauffin, analyst]

Yes. Just a couple of follow-ups on earlier questions. First of all, you stated that inventory level would remain at this level for now, but we're almost SEK 1 billion higher on inventory in Q3 2022 versus Q3 2021. What is a fair level once supply chain issues are removed? Are we coming back to the situation 1 year ago? Secondly, just a clarification on your assumptions on energy cost for next year, have you assumed that the Q3 spot prices remain throughout 2023 in these assumptions?

[Per Morland, executive]

I guess those are for me, Allison.

[Allison Kirkby, executive]

Go ahead, energy experts.

[Per Morland, executive]

Yes. I'll start on the energy cost. No, absolutely not. So whenever we give an outlook, it is based on 2 things. It is based on the market forward rates, and that's what we showed in the graph. So that's what the outlook is based on. And then, of course, we combine that with whatever hedges we have faced. And we saw also our hedge levels for '23 and also then the average hedge prices that we have in the range of SEK 400 to SEK 500 per megawatt hour. So that's an important policy that we have followed throughout this year, and we will continue to do going forward. Then on inventory, yes, you are right that we have increased that quite dramatically. And this is mostly linked to conscious choices, right, where we -- because of the situation we are in, we need to place orders up to more than a year on certain critical components both where we resell and to our B2B customers, but also for our commercial business and also all kind of transformation and network rollout. So we have chosen in order to protect the business and allow this inventory buildup. Then we have been maybe a bit ambitious to how fast can we scale it down. But I think you should -- I'm not going to give you an exact number of what it's going to be, but it's several hundred million lower than what you have today that it will be a more normal level, even if there will be kind of a shape is the guidance situation probably in the years to come.

[Operator]

And our final question will come from the line of Adam Fox-Rumley at HSBC.

[Adam Rumley, analyst]

I wondered if you could talk a bit about how you're planning to set your budgets next year given the inflationary and energy backdrops we've discussed today? I mean, are you -- is this a time to zero-based budgeting? Are your local management clients an ex reduction on that, ex energy costs? Just be interested to hear about the process and whether it's changing in light of the current circumstances?

[Allison Kirkby, executive]

I'll start and then I'll pass over to PC. Well, clearly, because of the underlying inflation pressure we're expecting them all to take more pricing than they plan. We're starting to get good visibility on wage negotiations. And so that gives us a good understanding of what that impact might be next year and how that compares to the underlying cost agenda. But we are still pushing our organization to offset as much of the cost as we can to additional pricing. And we are now waiting next year's planned headcount reductions. As you know, our plan was to reduce headcount by 1,000 a year. We will upgrade that and it will probably be more like 1,500 next year is the headcount reduction and that's all we work through at this time. And PC anything you want to add?

[Per Morland, executive]

Yes. No, but the fact that our underlying business is progressing very well, and we want to continue with our transformation agenda, we don't want to take for retake and throw everything up in the air. So that is kind of the outlook will continue. Of course, in certain areas like in support functions and so on, we take a more deeper look at what is the cost structure, what can really without, how can we really challenge that. But it comes back to the main changes is related to pushing pricing, as Allison said, and important in terms of passing on to our customers making sure that we use CPI linkages wherever we can, frontbook prices, backward fast migration and also improve on channel execution reduce below the line pricing and sort of aggressive discounting. Then you mentioned the cost agenda that we are now moving forward, and we will do more in the first half of next year to get full effect of that. We talked about the CapEx, where we're spending more time now reviewing our current plan that should be adjusted as should we change anything. So of course, more work going into it, but the base plan and the base process is pretty much to that.

[Erik Strandin Pers, executive]

So with those comments that rounds off the Q3 call. Thank you, everyone, for listening, and you're very welcome to contact us if you have further questions, and we look forward to speak again in January. Thank you, and goodbye.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference, and we thank you all for your participation. You may now disconnect your lines.