Tele2 AB (publ) (OTCPK:TLTZF) Q3 2022 Results Conference Call October 20, 2022 4:00 AM ET
Company Participants
Kjell Morten Johnsen – President and Group CEO
Charlotte Hansson – Executive VP and Group CFO
Hendrik De Groot – Executive VP and Chief Commercial Officer
Stefan Trampus – EVP of Tele2 B2B
Conference Call Participants
Andrew Lee – Goldman Sachs
Maurice Patrick – Barclays
Ondrej Cabejšek – UBS
Luis Lecaroz – Crédit Suisse
Nick Lyall – Societe Generale
Stefan Gauffin – DNB
Clara Ng – JPMorgan
Siyi He – Citi
Adam Fox-Rumley – HSBC
Kjell Morten Johnsen
Thank you very much, and good morning, everyone. Welcome to Tele2’s presentation of the results for the third quarter of ’22. With me here in Kista today, I have Charlotte Hansson, our Group CFO, Hendrik De Groot, our Chief Commercial Officer; and Stefan Trampus, our Head of B2B.
If I can ask you to turn to Slide 2 for our quarterly highlights. So when looking into the development during the third quarter, I’m very pleased to see that we’re able to continue delivering profitable growth despite the challenging environment. The strategy we have implemented is proving very helpful in navigating this new landscape that provides challenges to both businesses and society at large.
During the third quarter, end-user service revenues grew by 3.5% on an organic basis. And it’s great to see that all countries are contributing to this growth. Although we have seen a significant increase in energy prices and inflation, we have been able to convert the strong end-user service revenue growth coupled with the execution of the business transformation program to an underlying EBITDAaL growth of 1.5% for the group. If we adjust for the increase in energy costs, approximately SEK 80 million higher in the quarter, the growth in underlying EBITDAaL would have been around 4.5% in the quarter.
In Sweden, B2C, I’m happy to see that mobile postpaid continues to show a strong net intake this quarter. And at the same time, we were able to maintain our mobile postpaid ASPU on a similar level as last year. In fixed broadband, we saw an increase in the quarter as the Viaplay deal started to come through with all eligible customers now migrated to the new TV proposition. In Sweden B2B, the good momentum has continued during the third quarter. End-user service revenue increased 4%, driven by volume growth in mobile, a stabilized ASPU and a slight tailwind from roaming, which is more than offsetting the decline in legacy business. Supply chain disturbances do, however, continue to impact our businesses during the quarter.
In the Baltics, we experienced yet another quarter of good performance, both in terms of top line and bottom line growth. So far, we’ve been able to mitigate most of the sharp increase in electricity cost and inflation rates, and all 3 countries are showing good results. During the quarter, we have successfully acquired spectrum in Estonia, and are now focusing on rolling out 5G as fast as possible in all our markets. I should add, we actually bought more spectrum in Latvia and Lithuania. We can clarify that more if you want afterwards.
Turning please to Slide 4. Commercial activity in Sweden consumer was solid during the quarter with our new speed-based 5G mobile portfolio being the major new offering in the market. End-user service revenue increased by 2%, driven by a strong net intake in mobile postpaid, in line with our FMC bundling strategy. In fixed broadband, we see continued good volume growth, which contributed to higher revenues in the quarter. In the digital TV cable and fiber business, we are seeing some positive impact from the new entertainment packages that include Viaplay. At the end of September, all eligible customers have been migrated to the new proposition, which was 1 factor contributing to digital TV, fiber and cable, showing growth in the quarter. However, the overall customer base continues to decline, which reduces our end-user service revenue growth.
And moving to Slide 5, mobile postpaid end-user service revenue grew by 2% in the quarter, driven by both prepaid and postpaid. We see continued end-user service revenue growth in fixed broadband of 1%, primarily driven by a larger customer base. Total end-user service revenue for digital TV declined by 1% in the quarter, primarily driven by continued decline in the legacy DTT TV terrestrial due to a decline in customer base, while digital TV cable and fiber grew 2%.
So with that, let’s move to Sweden B2B on the next slide. Mobile net intake continued to be strong in the quarter, driven by new contracts within both the SME and large segments with 17,000 new mobile RGUs. The mobile ASPU in absolute numbers continues to be on similar levels as previous quarters, driven by the volume mix within SME and the profitability focus within large private and public. Continued mobile volume growth was able to fully offset the decline in the legacy fixed business, resulting in B2B growing end-user service revenue by 4% in the quarter.
And then let’s take an overview of Sweden on Slide 7. The end user service revenue increased 2% in Sweden, driven by a solid performance in both Sweden consumer and Sweden B2B. International roaming had a positive effect of SEK 24 million in Sweden in the quarter. Underlying EBITDAaL was on the same level as last year as higher end-user service revenues and positive effects from the business transformation program were consumed primarily by higher cost for energy, external handset financing and content. We continue to see strong cash conversion of 67%.
And then let’s continue with the Baltics. We see similar trends to previous quarters in the Baltics, with strong volume and ASPU growth across all markets. Roaming continues to come back in a meaningful way, and we are also able to monetize data through our successful more-for-more strategy.
Going to Page 10. This ASPU and volume growth led to an end-user service revenue growth for all markets, and we saw the Baltics grow by 13% in total. Despite the significant increase in energy costs and inflation this year, we have so far been able to mitigate the development by implementing price adjustments and executing the more-for-more strategy. In the third quarter, underlying EBITDAaL grew by 6%. We continue to see a high cash conversion for the Baltics due to the strong performance and relatively low CapEx levels so far in the early stage of the 5G rollout.
And with that, I’d like to hand it over to Charlotte to take the financial overview.
Charlotte Hansson
Thank you, Kjell, and good morning, everyone. Please turn to Page 12 in the presentation. During third quarter, we saw a 2% organic growth in underlying EBITDA. This was mainly driven by higher end-user service revenue in all countries and positive effects from our business transformation program in Sweden. At the same time, we have continued to see pressure on our margins due to a sharp increase in energy prices and rising inflation. Associated companies and JVs show a decrease compared to Q3 2021 as this no longer includes results from the divested T-Mobile Netherlands.
Net interest and other financial items increased to SEK 159 million due to higher interest costs. Net profit, discontinued operations decreased since last year included a settled dispute from previously divested operations. And let’s continue with the cash flow on Slide 13. CapEx paid was higher in Q3 2022 compared to last year, mainly due to timing in payments. Changes in working capital was negative in the quarter, driven by higher inventory levels compared to previously lower levels and an increase of network equipment related to the ongoing rollout of 5G.
Taxes paid increased in Q3 2022 compared to last year, driven by improved operational performance. And we continue to see good equity free cash flow generation of SEK 1.3 billion in the quarter, yielding an equity free cash flow from continuing operation of SEK 4.8 billion in the last 12 months, corresponding to SEK 6.90 per share.
Please move to Slide 14 to go through the capital structure. At the end of the quarter, we saw economic net debt decreased to SEK 23.7 billion due to continued good cash generation in the quarter. Leverage was at 2.4x at the end of September, which is just below our target range of 2.5 to 3x ahead of the second tranche of the ordinary dividend that was paid on October 14. Should the dividends have been paid before closing of the third quarter, our leverage would have been at 2.6x.
Please turn to Slide 15, where we will update you on the progress of business transformation program. During the quarter, we continued to execute on the business transformation program and made improvements primarily within our combined IT and tech organization, both in terms of network optimization and savings in external spend. This led to an annual run rate savings of SEK 725 million by the end of the quarter. The P&L effect of this was SEK 170 million in the quarter, with a net effect of SEK 80 million compared to Q3 2021.
And with that, I hand over to Kjell to go through our key priorities going forward.
Kjell Morten Johnsen
Thank you very much, Charlotte. And let’s then turn to Slide 16 for a summary. So with 2/3 of the year concluded, I’m happy to see that we are on a steady course to deliver on our 2022 guidance. We are delivering well on our top line growth in terms of the guidance. And we are also within the framework of the range that you would expect on EBITDAaL. Although I should be very clear that we will be at the bottom end of the range that people would expect from mid-level, mid-single-digit growth. And we’re somewhere in the mid-to-lower range on the CapEx. So that’s kind of the guidance situation.
With the dividend for this year, we have been able to significantly remunerate our shareholders in 2002 in accordance with our midterm ambition. On the back of this, we want to reiterate what we said in the Q2 report that we are prudent in the way we look at our balance sheet as we have done historically. This meant that even if we have room to relever our balance sheet, we want to be cautious and make sure that we keep our financial strength going forward while keeping our current leverage and dividend policy in the long term.
In Sweden, we continue to roll out 5G with some bumps on the way, driven by supply chain challenges and semiconductor shortage. However, we are still committed to our goal of covering 90% of the population in Sweden by the end of 2023, and to have a CapEx range of SEK 2.8 billion to SEK 3.3 billion during ’22 and the midterm. Similarly, on the fixed side, we continue to roll out remote PHY devices in order to gain the benefits from the investment as soon as possible. Both projects are key for us in order to increase customer satisfaction, which will support our more-for-more strategy for years to come. We will continue executing on the business transformation program to deliver SEK 1 billion of savings by end of Q2 2023.
In Sweden Consumer, we will continue to balance volume and value in order to build sustainable growth while gearing up our capabilities to address the 1.3 million non-FMC households. We will also continue to build our premium brand in order to increase customer satisfaction that we can monetize through reduced churn or price adjustments on the back of product improvements. The improved entertainment offering that now includes Viaplay is a key part in this strategy, and we have now a more competitive offer out in the market. By the end of Q3, all eligible customers have been migrated to the new entertainment TV proposition.
In Sweden business, we have seen an uplift in numbers since the new strategy was launched last year, which also continued in Q3. It all comes down to a focused work that aims to support our customers long term. Although fluctuations should always be expected, we are witnessing a very important and sustainable shift within B2B.
In the Baltics, we experienced more pressure on the cost side than in Sweden due to exceptionally high electricity prices as well as general inflation rates that are over 20% now. So far, we have been able to mitigate this from the incredible top line growth, which filters down to underlying EBITDAaL. Going forward, we’ll build on this momentum while we are conducting nationwide rollouts of 5G networks.
With less than 3 months before we close this year, we look at the rest of the year and beyond. I have expressed many times before that Tele2 is a growth company at heart, and we continue to show this quarter after quarter as we execute on our strategy to reach our guidance for 2022 and in the midterm.
So with that, I would like to hand it over to Q&A — to the operator for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Now we’re going to take our first question from the line of Andrew Lee from Goldman Sachs.
Andrew Lee
I have two questions, 1 on working capital and 1 on or ASPU development. On the working capital side, obviously, investors have seen a number of companies deliver the reasonably meaningful working capital outflows. And I think the SEK 200 million working capital outflow this quarter surprised some investors negatively. You’ve talked about how it’s basically in the attempt to build up inventory, given supply chain blockages at the start of the year.
But I wonder if you could talk about how that should unwind — the pace at which those outflows should unwind, given it should be temporary factors. Should we see the working capital outflows over the last two quarters fully unwind in the fourth quarter or should we see that into the first half of 2023? That’s question number one.
Question number two. Obviously, a good improvement in revenue trends this quarter. However, as your slides highlight, your ASPU have not grown across most of your key businesses in Sweden in the quarter. So how do we bridge your ambitions or optimism that you can offset higher cost headwinds into 2023 with the fact that at the moment at least, your ASPUs are not rising at all.
Kjell Morten Johnsen
Thank you very much, Andrew. We will share that between us here. I can start a little bit on the working capital. I think it’s clear that when we came out of last year, we came out with empty stores basically. There was — if you go back 8 months in time, we had completely different discussions. We were talking about how can we make sure we can fuel our business, make our business run with supply shortages that actually, to some extent, still exist but are much less of an issue than they were before.
So at that time, it was about securing the business by getting the supplies that we needed. It was 5G, it was Cisco routers, it was all kinds of things, it was terminals — I mean, handsets. So now we are in a more natural state on the supplies. We are able to run our 5G rollout now. We have a unique setup, as you know very well, with Net4Mobility. And one of the very few side effects we have on that is that it can be a little bit more cumbersome when we go through the billing of the services because we have 2 companies operating through 1. And that is something that we will work with our partner to try to smooth even more out from where we are today, but that has held some capital now in the starting phase of 5G.
I should also point out that due to these supply shortages, we have had a situation where our vendors, with the best of intentions, have delivered to us systems that have not been fully complete. You can be missing some part of a radio antenna or something like that, that has held up some of the goods in storage. So as the process moves on now, it is running more smooth, and we are working very hard to invoice these things, and we expect to invoice quite a bit of this in Q4. But of course, as we ramp up 5G, [Technical Difficulty] expected to increase in a significant way.
When it comes to the second component, we are, of course, a company that delivers a lot of handsets to customers in binding or in other kinds of setups. And that’s when handset prices going up, particularly iPhone is becoming very expensive here and interest rates going up, that is something that has had a certain impact because we haven’t always sold everything to our banking partner. That is an issue that we are devoting quite a lot of attention to, and we’ll be working on over the next weeks, in the next 1 month or 2 to find that right balance in terms of working capital and the cost element of the factoring.
But in short, there are some of these things that have piled up a little bit in working capital, and that is something that we have full attention to and some of this invoicing will — is already underway to mitigate some of those concerns. Should we talk a little bit about ASPU in the two sort of big. Hendrik, first, maybe.
Hendrik De Groot
Yes. So on ASPU, Andrew, for the Swedish consumer side, I would say the following. You know that we have been driving to return to growth, which I’m very happy to see that we are delivering in this third quarter, and we’ve very much been emphasizing our entertainment portfolio as the first stage. So as you can see, ASPU clearly has been moving on the entertainment side. And I think that has been a first good step, helping us to stabilize the product line and also drive the overall B2C business back to growth. If you look at prepaid, we also see quite healthy ASPU trending there with a plus 6% growth on ASPU through refills and the trending we see there. So I think that’s also very positive.
If you then look at the core connectivity side on broadband and mobile postpaid, then on broadband, you see that we are at the moment flat. And there’s also a reason for that. I think we’re trending pretty okay in the market with — on the RGUs and also the reason why we have not been able to drive ASPU as we would have liked. And some of you have sort of picked up also on the commentaries I’ve seen is that we’ve made a conscious choice, with a lot of customers having entertainment and broadband, that we will do less of the price adjustments on broadband this year. Now of course, most of the migration has been done. So looking into next year, we clearly see that we can go back to business as usual also on the broadband side.
On mobile postpaid I would say the — there’s a couple of things playing into a stable ASPU on the mobile postpaid side. First of all, of course, we have seen a positive effect of roaming, but it has been offset also by some variable revenue weaknesses around international calling and variable voice revenues, for example. So that has been offsetting itself. At the same time, you may remember that we said earlier in the year, we have FMC IT migration to do, which will limit a little bit the price adjustment potential we have on the mobile side for the year. And also, we have been holding back a little bit with the launch of the new 5G front book. So also there, I would say, looking forward, I think we can do more as we go into next year.
And as Kjell was already saying, with the inflationary environment and also looking at, for example, handsets, but also our overall business, we do believe that we have the right portfolio now and the right circumstances in terms of where we had to hold back this year to do more as we go into next year.
Kjell Morten Johnsen
And before we hand it over to Stefan, I would really like to emphasize this point about the change we’re going on now with 4G to 5G. The thinking needs to change a little bit around the industry here because we’re going from basically a mobile product with a bundle to a broadband product with mobility. And the pricing structure that we have put out to the market is a 5G pricing structure. What we see from many others is the 4G pricing structure with a 5G add-on. I think this needs to, in a way, settle itself in the market and people need to see how that is different from the regime we had before, and stop treating 5G as a 5G add-on that you hand away in some kind of campaign activities. Stefan, maybe a little bit on ASPU B2B?
Stefan Trampus
Yes. And the ASPU that we’re reporting externally then is the mobile one, so let’s focus on that one. The first thing I want to say is that we trying to find a balance between both the ASPU and the volume, and volume being a combination of the churn and also gross adds, et cetera. I think when you look at the figures as such, we are having that good balance. We’re posting 11% growth on the mobile side. So I think we are on a good level in finding that balance at the moment. So it works well for us in the mobile domain.
And if you look historically how the development has been in B2B in regards to ASPU, we can go back not many, many quarters quite price — I mean, end of 2020, beginning of ’21, we had quite a big of a decline in the ASPU in the B2B sector and in the segment. And with the efforts that we’ve done on pricing guidelines, governance and taking a responsible stance to the market in regards to pricing, we’ve been able to level out that decline that we saw in the past. So at the moment, we’re in a good position, and we will continue to balance this approach going forward.
Andrew Lee
That’s really helpful color. I guess we just wait to see the broadband and mobile postpaid efforts rally into next year and, obviously, forward seeing your invoicing on the working capital side.
Operator
And the next question comes from the line of Maurice Patrick from Barclays.
Maurice Patrick
Maurice here from Barclays. A question on balance sheet and leverage more widely, please. You ended the quarter, I think, 2.4x leverage, that’s below your 2.5x to 3x target. You do point out, of course, that post the dividend, that was 2.6. But I’m just thinking, given your sort of comments in the prepared remarks around rising interest rates, rising inflation, some pressure on the profitability levels coming through, wonder whether you think it is time to maybe be more prudent, not 2.5 to 3x, or whether you think that’s still an appropriate level of leverage going forward. It clearly has implications to special dividends.
And I guess linked to that, Tele has been quite active selling or monetizing much of its portfolio of towers and they’ve done Sweden towers, and I think Sweden rooftops are in the offering. Just wondered your thoughts, now you started to see that change in tower ownership taking place a bit across the Nordic markets. Whether you’re attitude towards them monetizing towers has changed at all or in fact, even using some of the Tele towers?
Kjell Morten Johnsen
So we are not changing our policy, of course, in this meeting. We are still with the range that we have. We decided to be prudent, as you correctly point out. We are now currently at around 2.6x after paying the dividend. And of course, we are having a dialogue with the Board on a regular basis about what is the optimum level to be at. But I don’t think it’s very complicated. We all look around us. We see what’s happening. It’s uncertain times. We are in good shape with our balance sheet. We generate cash from the business. We have growth on the top line.
So when some of these negative external factors start abating or disappearing, we are coming out with a bigger base to generate cash flows from. So I’m kind of positive about that. The only thing we don’t really know is the timing of these external factors. And your guess is as good or better than mine in terms of those things. So there is no change to the policy. But I think you can expect us to be relatively prudent as long as we have this high level of uncertainty in — I mean, around us in the macro climate.
Towers is something we speak about on a regular basis. You should remember that Tele2, and I’m sure you know this very well, is relatively infrastructure-light compared to many other operators. We are completely pragmatic about whether we own the towers ourselves or we have a different structure as long as it serves our long-term needs and represents a good opportunity. My personal opinion around this, as I’ve said before, is that I think some of the operators in Europe, and I’m not referring to any — to our competitor in Sweden by this comment, but I’m talking about some of the others, they were probably in a situation where this was balance sheet related due to expensive spectrum auctions.
And in our case, we don’t need to do these kind of moves. And with a higher inflation rate probably being built into these contracts as well as a higher cost of capital due to higher interest rates, this is not a top priority from our side at this point of time. But it could be something that we decided to do at a later point of time. And we are spending a little bit of time following the events there, but it’s not a top priority.
Operator
And the next question comes from the line of Ondrej Cabejšek from UBS.
Ondrej Cabejšek
I had a bit of a broader question, I guess, around EBITDA guidance. So for this year, in order to get to, I guess, mid-single digits, everyone expects to be kind of U-shape to form up in the fourth quarter. Can you remind us of all the kind of puts and takes that we have going into the final quarter of the year? I know we had a Baltics one-off last year. Some of the new costs, I guess, mostly in the second and third quarters around the TV launch. Energy, I guess, peaking in the Baltics in the third quarter, it would be very useful if you could give us a bit of a laundry list in terms of what we’re looking at into the fourth quarter.
And then around 2023 EBITDA guidance. Can you, first of all, define for us, I guess, what qualifies as mid-single digits in your view. Is that, for example, a rounded 4% — as a kind of 4% to meet that guidance? Is it the mid-single-digit kind of growth in EBITDA that you have for the midterm should apply in every single year, and are you very happy with that already kind of confirming that or is this something that still will be reassessed as you get to the full year results and you, I guess, have a better view in terms of the cost-cutting, the energy situation, et cetera?
Kjell Morten Johnsen
Yes. That’s a pretty broad question, but that’s a good question. So if we take a little bit — step back in time,to when we were planning this year, typically, when you make budgets in these things, if I look at what we were talking about at that time, and I look at the performance we have as a business, then I’m happy to say that, overall, all things included, we are actually trending slightly better than we forecast in December.
There is one caveat, and that is — and I highlighted it in my CEO letter that I do take an adjustment for the external factor represented by energy cost. That was something that no one predicted. And with the numbers that we get when we include energy costs, everything in there, I can just be very clear that when you hear us not changing our guidance, you should not put into your model what does it take to get Tele2 to deliver 5% of EBITDA for the year because we will not do that. We will be delivering the lower end of what you would expect when you talk about mid-single-digit EBITDA, all included.
If you adjust for the energy cost, will be a very solid mid-single-digit EBITDA growth. And then it’s anyone’s guess how long that external element will be with us, but my key message to you is that we are continuing to be a growing business. We were not a growing business 2 or 3 years ago. We are a growing business. We come out of this with a stronger base to capitalize on. And of course, that cost will roll off. So that’s the ambition level that we are setting. So I just wanted to be very clear so that people are not misunderstanding the thinking. And when it comes to 2023, we will guide for 2023 in February. So at this point in time, I don’t want to say anything about what we are going to say in February ’23. I hope that explains that the EBITDA for 2022 in a reasonable way.
Ondrej Cabejšek
If I may have 1 quick follow-up just on energy. Is there any kind of guidance that you can give us? I know we’ve had like SEK 30 million headwind in both of the first quarters of the year, now SEK 80 million this year. Is there any guidance that you can give us, given what we know now in terms of the forward curve, et cetera, for both the remainder of the year and what you see as a headwind in addition to what we’ve seen this year in 2023?
Kjell Morten Johnsen
Yes, I will do that. It is a little tricky because governments have different kinds of initiatives ongoing that are not fully implemented and may not be implemented. So when I say this, I say that with a level of uncertainty to decisions that are outside the control of this company. But just to give you my gut feeling around it, I think you should expect the impact in the fourth quarter to be broadly similar to what you see in the third quarter. And that’s my best estimate now, subject to a lot of other factors.
And then let us talk more about what our expectations are for ’23 and onwards when we meet in February because that’s the right time for that discussion. But we are not just to — I got this question from a Swedish newspaper today based on Telenor’s numbers. And of course, we are not going to talk about numbers like that. They talked about NOK 1 million I guess, in their operations. We are far below those numbers.
Operator
And the next question comes from the line of Luis Lecaroz from Crédit Suisse.
Luis Lecaroz
I just wanted to follow up on the question about the EBITDA guidance. I guess that when we refer to mid-single-digit growth, there’s an ample range there. So considering what we are seeing in Q3 that there’s a drag from energy of 3 percentage points, considering that the run rate on the 9 months for EBITDA growth at 3.5% and that we will see a similar — a broadly similar impact from energy into Q4, I would like to understand a little bit better if you consider 3% also a mid-single-digit growth for the full year? Or how do you see the range of mid-single-digit growth?
Kjell Morten Johnsen
Yes, that’s an interesting academic discussion. I actually — I would almost ask you for advice on that. I think my answer to that is that, that is the lower range of what people would expect, I guess, a number like that. So this becomes a game of words. 1 or 2 is definitely single digits, low single digit, I guess. But where do we draw all these lines? So what I’m saying to you being very, very transparent, is that we will be in the lower range for the full year of what you expect when you say mid-single digits. I can’t give you the exact number because I just told you on the — I just said you the thing. There are variables. So there’s an element of uncertainty also on this side. So we would like to be transparent, but there are limits to what we can do.
Operator
And the next question comes from the line of Nick Lyall from Societe Generale.
Nick Lyall
Just quickly, just to come back to this EBITDA growth point, apologies, but your mid-single-digit you’re referring to sort of this low end of the mid-single digits, whatever that may be, just to be clear, that’s the headline number you’re referring to. You’re not also adjusting for that excess energy costs in that. That’s going to be the headline number, let’s say, a 3% growth or 4% growth or whatever, you decide the low end is, can I just clarify that? Sorry for being a bit thick.
And then secondly, can I just ask one on ARPU as well. Just to mention — sorry, on the new speed-based tariffs as well. Can you just discuss how they’ve been received and why you choose to go with unlimited speed-based tariffs. And whether you think that limits your upside on ARPU or there’s some other reason why you’ve gone for that?
Kjell Morten Johnsen
Question 1 answer, yes. Question two, my friend, Hendrik?
Hendrik De Groot
Yes. So we see — so the answer is yes, we see a good take-up in the market. And maybe I can sort of paint it like this. We launched the portfolio end of August. So of course, it’s limited effect in the Q3 numbers. We have not done any forced migrations yet. And that was what I was alluding to before in terms of what potential we have. So we just launched it for new customers. And what we’re basically seeing is that where we had before in the old portfolio 50-plus percent of the volume go to the lower end of the portfolio, we now have 50-plus percent of the volume going to the higher end of the portfolio, which means the unlimited tariffs. Hope that helps.
Operator
[Operator Instructions] And the next question comes from the line of Stefan Gauffin from DNB.
Stefan Gauffin
Just a couple of questions. First of all, on EBITDA in Sweden, can you just clarify how much impact you had from handset financing? I guess it’s the
U.S. dollar movement that is hurting. And how fast can you adjust your price plans to get the correct handset margin? I mean, is this a temporary Q3 issue? Or how should we think about that?
Secondly, I’ve seen that Elisa, Telenor, Telia, they have entered long-term power purchasing agreements to secure low energy prices. I have not seen anything of that from you. Have you looked into that? Is it too late to do anything right now? Would you just have to live with the spot prices? I know that you have hedges for the Swedish operation, but just some comments around that.
Hendrik De Groot
So Stefan, it’s Hendrik here. I’ll take the first one and then hand over. On the Sweden handset financing and what it does to our margin and what is our outlook to it. So there are — as Kjell was alluding to, there is some effect of handset financing as, of course, we have been seeing interest rates going up, and we have not changed our market model as such. So basically, that has sort of a cost that has come in that I think we can sort of say it in the tens of millions in the quarter.
Looking forward, we, of course, are looking to adjust our market model as we move forward, which means that we will see what is the right balance of — on how we deal with this going forward as we also look to price it into the market. And all these preparations are ongoing, and they will be implemented pretty soon as we move into the fourth quarter in the new year, probably closer to the new year.
And whether we will then, therefore, fully offset all of the interest increases or part of it, that is a very, again, careful balance between, of course, also a market that maybe has some more recessionary pressures. We, of course, still want to serve the market. We still want to have long-term relationships with our customers. We also need to take into account, of course, our competitive context. So that’s a judgment and assessment we’re doing as we speak.
Kjell Morten Johnsen
And to those power deals, I’d say our priorities are clear. We’re working on trying to reduce consumption because that’s a sustainable effort, and that goes in several ways. Optimizing our network is one way of doing it. And we are experimenting in different ways with that. But of course, we don’t want to risk the customer experience. So that’s a fine line we tread there.
And then, of course, we’ve been hedging some of our power needs. But as you run out of these hedges, of course, you come into a new level, and that’s what you’ve seen that the hedges in a way start running out, so then the costs are coming into it. We don’t, at heart, see ourselves as someone who is investing into power utilities, although it can make sense to have a cooperation, but we think the business case now for using solar for — to help running base stations is there. The costs have come down to a level where that actually is something that we can be doing. We are doing it.
We’re starting this in a limited scale that serves many needs, more independence, less needs for battery times, sustainability objectives are met by that, and it’s, of course, the business case for it. We have looked into working with power generating initiatives within wind. But again, I don’t think the perfect time to buy an oil refinery is when the oil price is $150. The same way here, I think maybe it’s not the right timing for it. I think it’s more something that we have to look into down the road when the world stabilizes, if the cost and benefit is good. So that’s where we are. There are multiple — it’s a multifaceted issue that we are approaching from different angles.
Operator
[Operator Instructions] And the next question comes from the line of Clara Ng from JPMorgan.
Clara Ng
Just had 2 questions. The first one is on Sweden B2B. It showed very well growth in the past 2 quarters, 10% to 11%. So how sustainable is this do you think going into the next few quarters? And then the second question is just on the higher interest cost. I think last quarter, you said that it would increase gradually after showing about a SEK 30 million increase last quarter. Do you think that the current level is going to stay or do you think it’s going to increase further? Maybe just some color on that if you have any.
Stefan Trampus
Clara, it’s Stefan here. The line was breaking up a little bit, but I think the question was in lines of can we sustain the growth that we’ve seen in the past couple of quarters. And I would say, I mean, with all the turmoil and the macro environment happening, of course, that affects our customers as it affects us. But we are not seeing our customers disengaging in projects or dialogues around solutions and discussions around that. And I think basically, that’s a trend that’s going for us. The services that we deliver is actually supporting our customers in transforming their businesses in different ways and then very much linked to the digitalization. So there’s many trends working for us in the market as such. That will continue us having dialogues on solutions, which I truly believe that we will see a continued growth from the B2B perspective. So the fundamentals in the market is there. So that’s really good.
Secondly, I would say we have the right capabilities in place to support these customers, both from a portfolio perspective, both with the infrastructure parts that we have, both the fixed network, but also everything that we’re doing around the mobile 5G modernization and what have you that comes with that. And then, of course, we have a good position in the market as such in these segments and being a trusted adviser to our customers, and topping up that with the capabilities that we have internally from a competence perspective. So I think we are well positioned to support our customers going forward in the turmoil that we’re seeing at the moment. Hope that clarifies your questions, Clara.
Clara Ng
Just 1 follow-up on that, sorry. So the contracts for solutions and connectivity, I thought that would kind of fall more on like fixed side and solutions, but the mobile side, like what are you doing there that’s going mobile by like 10%?
Stefan Trampus
Did you ask about the solution revenues or the mobile revenues now?
Clara Ng
Mobile.
Stefan Trampus
Mobile. What we’re doing there?
Clara Ng
Yes, like…
Stefan Trampus
So in the mobile side, I mean, we have growth coming from different perspectives. We have growth coming from existing customers moving from fixed services to mobile services, engaging more in solutions that drive mobile data, mobile voice. We see an increase going from customer equipped UC solutions to more cloud-based solutions and where we combine cloud-based solutions on PBXs with mobile solutions. We see an increase in the IoT domain, with good growth where our customers are connecting more and more devices. We see a really good development and have continued throughout the whole year with good churn development on the base that we have.
And of course, that is supporting the growth on RGUs as well. And that is based on that we have satisfied customers, who appreciate the services that we deliver and the network that we have. So it’s a combination of a lot of things that is supporting this growth. And the growth is not just coming from new customers. I want to emphasize that. It comes also from existing customers and them wanting to engage more and driving the development of the businesses.
Clara Ng
Okay. And on the interest cost?
Charlotte Hansson
Yes, I can take that. Charlotte here. And of course, we are impacted of the macro environment in this aspect as well. And it’s very difficult to speculate where are we going to end up on interest rates. At least I’m not an expert on that. We will see what’s going to happen going forward. But we are — when looking at our debt, we have a stable level and in our finances in general. And I think that what we could say is that in the current mix that we’re having today, the 1% increase of the interest rate would actually have — would have an impact of about SEK 100 million. But then what is going to end up as an actual number, then that’s — I think your guess is as good as mine.
Operator
And the next question comes from the line of Siyi He from Citi.
Siyi He
Siyi from Citi Group. Just 2 questions. The first question is on your midterm EBITDA target. I’m just looking at the numbers, if we ignore the energy cost impact, so by the end of the business transformation program, that your EBITDA and cash flow margin are already quite high compared to some of the incumbents. And you mentioned about there could be additional efficiencies that you could deliver. And I wonder if you can talk us through about where you see the efficiency come from? And for the midterm, do you have a margin target in your mind that you want to achieve? And my second question is on Baltics. And just given the inflation in the Baltics, I wonder if you can talk us through how easy is it for you to actually pass through those inflation to the end users from price increases?
Kjell Morten Johnsen
Okay. The first question is quite broad and very interesting. I think when you look beyond the business transformation program, I’ve said several times before that we want to guide on a set of targets like we do today, maybe not the cost program per se. What we’re going to have to do then and also the industry is to change our go-to-market quite a bit. We need to get out of quite expensive physical retail, where there are now very high commission levels. And this is not really building any loyalty to customers at all because that’s a pure transactional business.
So it doesn’t develop a relationship between us and the customers at all. It’s much better that if they buy it in our stores or even better in the long run if they buy it online with us in a very smooth way. And that’s why we’re doing the IT transformation. And in doing so, by having great self-care apps and having an online model that can cater for a substantial part of the customers, not for all, but for quite many, you build more loyalty, and it becomes easier for them to relate to us, which has a secondary effect of the online offering and the improvements we do in our delivery capabilities should reduce the need for customer care costs.
So some of these channel costs will be very important when we get out of this tightly defined business transformation program. And that’s going to be ongoing. It’s not like it’s going to be done in a year. But that is something we can tap into, and this industry needs to tap into it because the way we are structured today is really not efficient at all. It is a little bit too much of how things were run 10 years ago. And we clearly want to move out of that. And there are significant savings there. And we will have to detail them out over the course of the next couple of years as we proceed.
And in the Baltics, I think we should be all very clear that they have done a great job in terms of protecting their profitability, and of course, they cannot protect themselves against the energy cost. That is just not possible. But they are able to actually keep up a good pace also on profitability despite the very high general inflation that we have there.
So for us at Tele2, whether it’s Sweden or the Baltics, one of the main objectives is to keep up the growth momentum. And then when we come out of these external shocks that we have now, that’s going to show that we have a quite unique position in Europe as a company with a decent growth rate and a very efficient capital structure through our network partnership.
Operator
And the next question comes from the line of Adam Fox-Rumley from HSBC.
Adam M. Fox-Rumley
Kjell, I appreciate your direct answers to the questions today. So I want to just kind of challenge you a little bit on the 4G to 5G migration, I guess, just thinking from an end customer, particularly consumer perspective. Yes, speeds go up, latency might improve, but does the experience really warrant a kind of full change of approach? Or how are you thinking about justifying that other than just tariff structure? I’d be interested to hear your thoughts.
Kjell Morten Johnsen
Yes, I can start on this, and Hendrik is definitely the expert here on this. But I think when you look at those who succeed with launching 5G, they are able to take the customer base on a journey where you’re able to increase value over time by getting more usage of the platforms. I don’t want to name specific operators, but there are some who are able to take customers on that ride. In addition, we are an integrated operator with FMC offerings. We have broadband, we have TV. We can make these things interplay. They can be a part of service reliability, in the rare case that we have an issue with our systems, of course.
And it’s also about, of course, the genuine mobile experience when you are in nomadic behavior when you — but we should treat it more like a broadband product with yearly price increases and then driving — getting the usage to go up so that there is a scope for extracting value. Something that I will freely admit that this industry has not been the best in the world to do over the last 20 years, but as this realization thinks in and some are showing the way, I think there is an opportunity. Hendrik?
Hendrik De Groot
Yes, I can just sort of add some more color to it from what Kjell was saying. So I think the key transition we’re trying to make moving from 4G to 5G in terms of the customer is to basically make a limited way more available than it is. If you look at the real customer, and any customer behavior, being — sitting in a tiered portfolio and a limited tiered portfolio for us is unlimited, unlimited is basically what everyone wants. You don’t need to worry anymore. It’s just there, and you can just use it, right? That’s the key premise of what the consumer basically is angling for.
Now certainly, in the Swedish market, the limited portfolio has been sort of quite a highly priced portfolio and has been limited to the upper end of the market. And with the move we’re doing now, we’re sort of democratizing unlimited, and we bring it much closer to a much bigger part of the market.
Now this will, of course, allow us first of all, to basically satisfy a much larger part of the population with an unlimited promise and an unlimited availability; but secondly also to hopefully move quite a bit of our base into that unlimited proposition. The key thing here with how we have put into the market is clearly that we need to get the speed tiering to work in the eyes of the consumer, right? So that’s very important. So we have now basically put in SEK 399 kept at 100 megabits, typical 4G speeds are around 60 megabits. So there is already more availability on 5G as it becomes fully available. And most of the handsets today are already 5G enabled anyway.
So then the usage can sort of kick in. But then, of course, we have put these other speed tiers in to allow basically for up to 1 gig of full usage. And ultimately, in the network, we will prioritize traffic to basically make a difference. So it’s not that only commercials play. It’s, of course, also a network and experience play. And to allow it to settle into the market, if you look at our bundles, we have clearly also put some value more than just the speed tiering into the bundle. So for it to enable settling into the market that people feel they get the unlimited promise, but they get also some additional value as they choose the higher packages.
So I think we’re well set. It is very important, of course, also to see how the rest of the market acts on the opportunity here because, the risk is here, like it’s always been in telecom that you go to a next G, and we end up not doing much with it in terms of its monetization potential. So hopefully, we’ve certainly made the right step, I believe, and let’s see how the market in itself fully develops. We do see our customers certainly, as I said before, being very interested in the take-up. Hope it helps.
Operator
Thank you. There are no further questions. I would like now to hand the conference over to speaker Kjell-Morten Johnsen for closing remarks. Please go ahead.
Kjell Morten Johnsen
Thank you very much, and thank you to everyone for participating, asking good questions and sharing this time with us. And in my wrap, I just want to say that at Tele2, our priorities are now to continue our profitable growth. We have shown over time that we are able to sustain this momentum, and we will do it also through this tricky time that we have around us. We will continue to balance value and volume and that is something that you have to do actively. It depends on what’s happening around you, but we really are sure we are balancing these things.
We have secured the spectrum we need for 5G and in all our operations, except 700 in Estonia. We expect that to happen very soon. And we have secured the spectrum in the Baltics at very attractive price levels, I would say. And we are ready for the whole 5G wave that is coming there. So our task as the management now is to navigate this landscape of inflation, interest rates and electricity prices in a good way. I am quite confident we will keep up the growth momentum, and that we’ll come out of these external influences, that will come back in again as you’ve profitability and with our cash conversion to equity free cash flow [Technical Difficulty] also for the future. But again, thank you for joining, and have a great day.
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