Telia Company AB (publ) (OTCPK:TLSNF) Q3 2022 Results Earnings Conference Call October 21, 2022 4:00 AM ET
Company Participants
Erik Strandin Pers – Head of Investor Relations
Allison Kirkby – President and Chief Executive Officer
Per Christian Mørland – Executive Vice President and Group Chief Financial Officer
Conference Call Participants
Andrew Lee – Goldman Sachs
Maurice Patrick – Barclays Capital
Ondrej Cabejsek – UBS
Luis Lecaroz – Credit Suisse
Titus Krahn – Bank of America Merrill Lynch
Nick Lyall – Société Générale
Peter Kurt Nielsen – ABG Sundal Collier
Keval Khiroya – Deutsche Bank
Stefan Gauffin – DNB
Adam Fox-Rumley – HSBC
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
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 Mørland, our CFO, and myself and Anders Nilsson from Investor Relations. Allison, please go ahead.
Allison Kirkby
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’ve expected to be able to largely mitigate these macro efforts.
As we progressed through the quarter – I’m 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 in the 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 continue. Proof that we are showing resilience in a difficult environment and proof that our plan to create a better Telia 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, growth continued at a pace similar to last quarter at 2.3%, supported by all our units for the first time since Telia moved to a 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 billion 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 plan.
And if you look at the structural part of our cash flow, i.e. 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 on leverage, driven mainly by our share buyback program. And we’ve 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 us, we’re rightly being more cautious as we look forward, and so we have reflected the known energy and interest rate headwinds and some additional caution into our forward-looking statements.
But although the macro environment poses some short-term challenges, our strategy is still intact and we will continue to execute on it at speed.
Moving from strategy. As I said, all countries have posted service revenue growth and it was broad based with mobile growth 4.1%, fixed services growing in all markets except for Finland, and with 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 move 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 are now reaching 53% of the Nordic and Baltic population, up from 49% last quarter, Norway, Finland and Denmark [indiscernible] (3:26) coverage, and Lithuania is already 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, of course, for the dramatic increases in energy prices we’ve seen.
After the end of the quarter, we also announced our intent 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 the national champion status via one platform and fundamental for them to take further advantage of changing viewer habits towards on-demand digital platforms and enabling us to offer 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 assessed 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 continuous positive ARPU development, broadband growing 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 spend amongst our enterprise customers as they continue to digitalize to meet the opportunities of tomorrow.
A great example of which was 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 roaming 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 if looking at underlying revenue and EBITDA development.
Moving on to the operational KPIs, we’re seeing a stable mobile customer base and a continued growth in ARPU, supported by improving NPS, and that’s despite pricing initiatives on both the Telia and Halebop brands that we took earlier [Technical Difficulty] not yet really followed.
On broadband subscribers, we’re not able to fully compensate the loss of SDSL customers this quarter. But as you can see, ARPU accelerated on the 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 a partnership with Discovery on the streaming rights for the Swedish football league Allsvenskan to build on our aggregator position. However, as you know, right at the end of the quarter, we were not able to agree with Viaplay on a new agreement that makes financial sense for us or for our customers.
Moving to Finland, we saw a slight pickup for service revenues, very much driven by mobile, which despite interconnect increased by 3.5% and made a good start to the sports season on TV. That being said, the progress on 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 so is our cost transformation, especially in digitalization and in the move to online, with an underlying to prevent reduction in 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 base grew slightly in the quarter, driven to some extent by consumer, but mainly by the enterprise segments and you’re seeing ARPU increase by 2%, helped by continued migration to 5G. With these trends, continued network modernization, pop coverage is now 75% 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 backs of a growing subscriber base, core ARPU expansion, higher wholesale revenues and a strong recovery in roaming.
Enterprise grew by an impressive 8%. This strong service revenue development was also confirmed by the regulator which confirmed that Telia was the fastest growing mobile operator in both B2C and B2B segments in the first half of this year from a value point of view.
We also had strong development on fixed 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 pricing in Norway this morning.
EBITDA grew 4.5% and 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 in Phonero this quarter, and our ARPU again strong with a 2.6% increase, helped partly by roaming recovery.
Moving to the LED markets, in Lithuania, we grew mobile 10.8%, which was in alignment with Q2, and we’ve taken a clearly defined deal with an excellent financial 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 higher service revenues was weak as a result of the energy headwinds of about 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 now.
In Estonia, performance was again strong with service revenues growing 5%. And as you can see, EBITDA growth in line with service revenues despite the energy headwind, which has been held by historical PPAs that we have in that market. This was another strong achievement for Estonia alongside excellent NPS development too.
And finally, in Denmark, we have service revenue growth driven by mobile growing at 2.8%, but energy headwinds were especially strong in the quarter. Our shared network does not hedge, but revenue growth and easy comps 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 advertising despite that we had the year of 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 revenues.
Pay in the third quarter driven mainly by the loss of Formula One 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 sports as last year contained both Football Euro and World Cup Qualifiers.
And if you look to 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 [indiscernible].
Looking ahead, we’re now starting the work I mentioned in the strategy highlights to simplify our TV and media setup to see more premium content to be transferred into the TV4 and MTV streaming services 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 will build on the strength of the TV4 and MTV brands.
And regarding the outlook for advertising revenues in these tough macro times, we continue to see strong demand from advertisers. But, clearly, after four quarters of advertising revenue growth ranging from 4% to 11%, we cannot expect this high growth rate going forward at this time.
But that’s enough for me, and I’ll now hand over to PC.
Per Christian Mørland
Thank you, Alison. Let me quickly take you through the Q3 financials and the updated outlook. Starting with service revenue. As Allison has gone through, we had a solid growth of 2.3%, with growth at all units, partly on the back of a continued roaming rebound.
The service revenue growth of 2.3% was driven by telco growth, both in the consumer segment of 2.6% and also in the enterprise segment with 1.5%. TV and media is quite stable year-on-year, with growth in advertising of [indiscernible] revenue.
We had a good momentum with several quarters of low-single digit growth and are well on track to deliver on the outlook both for 2022 and for 2023.
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 700 FTE and FTC reduction since Q3 last year.
Despite inflationary pressure, we have – seven quarters into our transformation journey – reduced our OpEx excluding energy 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 2023, [indiscernible] 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 reduction in OpEx excluding energy by 2023.
Next, an update on energy cost development. Our general hedging policy is to hedge 70% of all consumption short term, with gradual reduction in following quarters. This equals to around 60% hedge level for the next 12 months.
Total expected 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 Telenor in Denmark, Lithuania, Latvia, but also the data center in Finland.
Energy prices during in Q3 was on average 3 times higher than last year. As we close Q2, both the actual prices and the market expectation for the coming quarters has increased significantly.
Our hedges on PPA for Q4 of this year, 2023 and 2024 are all in the range of 400 to 500 megawatts per hour, significantly below the current and expected level. And now, currently, we are placing most of our hedges for 2024 and 2025 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 SEK 300 million increase in energy costs year-over-year. Using the current market expectation and our current hedge, the outlook is that the energy costs for 2022 is going to end SEK 900 million higher than last year, with another SEK 800 million increase in 2023.
We have recently signed a PPA at very attractive terms in Estonia starting Q1 next year and in Denmark starting Q1 2024. And we’re 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 [indiscernible], 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 costs increased, grew 4.9% in Q3 from higher service revenues and lower costs. EBITDA outlook for 2022 is updated to end around flat versus last year due to the SEK 900 million higher 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 digit.
Our mid-term EBITDA expectation for 2021 to 2023 has also been updated to reflect the significantly higher energy cost levels expected both in 2022 and 2023. 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 tend to stay 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 challenged global supply chain situation, we are able to stay on track with our investment program to modernize our mobile network, including 5G rollout, dismantle our legacy infrastructure and transform Telia to a much more digital company.
Cash CapEx on a rolling 12-month basis has increased slightly to SEK 15.3 billion or 7.0% of net sales. Cash CapEx is expected to reduce on a rolling 12-month basis in Q4 due to annualizing [indiscernible] in Q4 last year, bringing cash CapEx within the 2022 guidance of SEK 14 billion to SEK 15 billion. And further down in 2023, to be in line with the midterm outlook of 15% of 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. EBITDA growth are offset by somewhat higher cash CapEx and negative working capital. Negative change in working capital is mainly driven by phasing and content payments related to Champions League. Our Champions League cost is paid in two equal installments in Q1 and Q3, hence with no payments in Q2 and also any payment in Q4 this year. If you compare it to last year, please note that, in 2021, 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 underlying business, due to the macroeconomic environment, we are in 2022 not likely to meet our ambition of covering the minimum dividend 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 pension contribution and a decision not to force a reduction in inventory levels to support our business beyond 2022.
We are, however, building up a strong portfolio of pricing initiatives across all of our business units. We are stepping up and moving fast our cost 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 2023 once we have closed the year and we have full set of financial outlook backed by completed 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 remains healthy, with leverage at 2.07 times, at the low end of the targeted range of 2.0 to 2.5 times.
During the quarter, we were very happy to have signed a new sustainability linked €1.2 billion revolving credit facilities replacing the current facility of €1.5 billion. And despite a very challenging market, we have now completed most of our refinancing needs, both for 2022 and 2023 with two benchmark hybrid bonds performed in Q1 and also now in Q3.
As mentioned, we have updated our EBITDA outlook for 2022 to be around flat, but excluding energy increase, still low-single digit, with a similar update for midterm 2021 to 2023 ambition on EBITDA.
And with that, I hand over to you, Allison, to summarize before we go into Q&A.
Allison Kirkby
Thanks, PC. So to summarize the quarter, commercial momentum continues, helped 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 continued in line with our plan. And we’re now simplifying and refocusing our TV and media assets, preparing it for the next phase of digitalization and richer, broader inventory for advertisers.
Our balance sheet remains healthy and well within the 2.0 to 2.5 times 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’ve 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, therefore, we decided to hold off until January to provide an outlook for next year.
But stepping back, thanks to the choices we’ve made these past two years on capital allocation on a more focused Nordic/Baltic portfolio and the strengthening of our balance sheet and in building the foundations for a return to sustainable growth, I’m absolutely confident that if we remain focused on the execution of our strategy, but now at a more accelerated pace by the additional measures we’re taking, we will be an even better carrier when the macroeconomic headwinds subside.
And with that, we are now ready to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions]. We’ll hear first from the line of Andrew Lee with Goldman Sachs.
Andrew Lee
I had two questions. First was just on vendor financing and other incremental free cash flow drags or potential curveballs 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 loss pension contributions, obviously, interest costs more than expected too. But what about vendor financing which is obviously a key investor concern? How confident are you that this can 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?
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. Costs headwinds have gone up and totally understand that it’s too late for price rises to mitigate those headwinds to 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
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 were 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 could have offset that in the quarter or in Q4 either.
The price rises are continuing. You will have seen with the SEK 40 to SEK 50 in Norway broadband this morning. We took action in Finland just yesterday following the market lead in consumer segment yesterday. And all of our pricing initiatives are going to 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 compensate for the short-term energy volatility that we have this quarter and will be next quarter as well, but absolutely confident there. There’s no sign of consumers pulling back. And as you’ve seen, we had another very strong advertising revenue quarter as well.
So we see this as short-term pain, but for the 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 Christian Mørland
Let me give you a bit of extensive response because I know you’re very much on top of it, but just 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 2022, we expect 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 bank, and where the suppliers are able to get their payments in seven days versus our standard 90 days. And then the discount that the supplier gives us on extension on the payment terms.
And then how this affects both now and going forward depends on three things. First, how many suppliers and how much spend we have in the program. Second, how big discounts are the suppliers willing to give to get paid in 7 versus 90 days? And third, what are the terms the banks are willing to give us? And of course, this is depending on the general interest rate.
So, it is 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 I think creates a value of getting paid in 7 versus 90 days. Also getting paid early, it can be useful for some of our suppliers in the challenging times that we’re in.
So, [indiscernible] higher interest rate reduces the payment terms 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, if you go back to our current suppliers and negotiate better discounts because the interest rates now have moved. So that is what we’re doing. And that’s 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 depends on how we decide together with our suppliers in order to do this. I think it was important to do that and we will only use it if it makes financial sense for us. We are prudent and we want to make sure that whatever we do generates 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’ll give you a more complete update on the cash flow and the working capital outlook once we have completed this year, we have full financial outlooked backed on a 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
Just one for me on to the balance sheet positioning, cash flow, dividend 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’s 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 covered this year now. You talked about it being covered structurally going forwards. So, maybe just if you could sort of articulate [indiscernible] and how you think about – if 2.0 to 2.5 times leverage ratio, would you be happy having another year of uncovered dividends if energy prices remain where they are? You obviously have some initiatives around reducing the share count via buybacks [indiscernible] potentially rooftop that can reduce that share count, but help with the overall dividend coverage. Sort of what [indiscernible] in terms of the balance sheet positioning, dividends, cash will be very helpful, given where we are at the moment.
Allison Kirkby
Let me try and start kind of high level and then I’ll pass it 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 inflation 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 costs at any point in time.
But our underlying plan is intact, and therefore – and our balance sheet is very helpful [Technical Difficulty]. And we’ve got lots of headroom in that balance sheet to cope with this 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 Maurice as he tries to work out his model?
Per Christian Mørland
I think you addressed most of it, but just sort of to summarize, right? So, we’re now in the second half of this year really hit by these factors that Allison went through. And they are to a large extent unmitigated. But working now systematically on pricing, on cost and energy consumption reduction and our CapEx, we will gradually be able to offset more of this pressure, even if it’s not going to reverse 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 should sort of give you a little positive outlook on how our structural part of our cash flow and our businesses is delivering in the right direction.
Maurice Patrick
But just want to check you said earlier, did you say your striking hedge is at SEK 400 to SEK 500 for 2023 and lower beyond that. Is that what you said earlier in the commentary?
Allison Kirkby
Yeah. Our average hedging is at SEK 400 to SEK 500 per megawatt hour for…
Per Christian Mørland
Exactly. It’s actually quite stable, both looking at the fourth quarter and also looking at the quarterly hedges we have for next year and 2024. It’s just a little bit different by quarter and by 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
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 down.
Per Christian Mørland
And what’s important, Maurice, is that we are not placing hedges now on very high level, right? So, the hedges we’re putting now on 2024 and 2025, they’re more expensive than they were before, but they are kind of SEK 1,000, SEK 1,500 level, but we’re keeping it in a good mix cost level.
Allison Kirkby
And if you see that chart we showed earlier, we’re seeing spot rates at 10 times the SEK 400 to SEK 500 at certain points in the quarter. And that’s what caused the extreme volatility.
Operator
Our next question today comes from Ondrej Cabejsek with UBS.
Ondrej Cabejsek
I have a follow up on working capital, if you could maybe talk a bit about inventories as well, because they’ve been a drag about SEK 600 million this year. And we’ve seen, from your peers as well, the buildup of inventory because of supply chain issues, CapEx expectations, et cetera. So, if you could talk about whether that is a plateau or whether we can expect that winding down or maybe an even incremental drag going into the fourth quarter, that would be helpful.
And then, a bigger picture question on just various parts of the P&L going into next year, please. So, I think you’ve laid out very well what the energy impacts are [indiscernible] and next year? But then can you talk a bit about – because I think there’s been some confusion around the conference communication, something you said there around personnel and interest, if you could just give us color on the moving parts on those two specific items that that obviously also impacts the free cash flow expectations for next year, that would be helpful.
Allison Kirkby
I’ll try and take 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’ve been very clear that our outlook is still intact for this year and next year, if you exclude the energy impacts. And that’s been reinforced by the underlying development that we’ve seen in the business so far this year. And this quarter, 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 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 at this point in time.
Per Christian Mørland
Just to build on the sort of second question, on interest, I think there was a question there. So, we start to see some increased costs on interest already in Q3. And this will continue to build into Q4. So for the year of 2022, we’re looking at around SEK 300 million higher interest costs than what we expected. And then there is a delayed effect, right? So that will continue into next year. And there’s another few hundred million increasing interest rate if the sort of market is correct at the moment.
As a rule of thumb, you can take that 1 percentage point increase in the interest gives us 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 had [indiscernible] 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 a quite high level also if you look historically. That was also what we expected when we talked to you in Q2. But we have taken a real look. And yesterday, the pension fund has lost 8%, 8.5% of the value. Luckily, also the liabilities of pension has gone actually down even more than that. But we’ve taken a quite prudent approach. It’s well covered. But we want to wait it out a little bit and see how the market develops. So what we now – in the outlook planning to do, it is formally decided, is to do SEK 900 million this year. But we have already taken SEK 400 million in Q1 and then do another SEK 500 million in Q4. You 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 at it.
Then specifically on working capital. So in Q3, we are minus SEK 700 million. That is almost entirely driven in the quarter by the pacing of content payments that I took you through in my presentation. If you look year-to-date, we’re I think a little bit shy of a billion negative, SEK 900 million. That’s also basically the pacing of content payments because if we 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 a quite high level already in Q3. We hope to be able to sort of reduce that. But we expect now that to actually continue and, in fact, to also slightly increase a little bit going into Q4, but not dramatically so. And then I talked about this 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, but we were hoping earlier to have lower inventory levels and also have somewhat more positive contribution from the vendor financing programs that we don’t need see at the moment.
Allison Kirkby
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 macroenvironment. 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 would not have been good for the continued rollout of our network. And so, that roll decision if you’re planning for the long term and the pension decision is an absolute choice that we’ve made because we don’t think it’s the right time to be taking money out of the pension funds. So, they were proactive decisions and back up the point of we’ve taken a cautious approach to our outlook considering the macroenvironment.
Ondrej Cabejsek
If I may, one very quick follow up on the pension. You said SEK 900 million going forward. Is that an annual kind of – is that a flat number on cash flow going forward or is that it would peak at SEK 900 million every year?
Per Christian Mørland
The decision is taken on an annual basis, right? So that is our recurring annual effect.
Operator
Luis Lecaroz with Credit Suisse, your line is open.
Luis Lecaroz
I have two Qs. 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 drastic price increases you pursued on the Halebop brand, which I think they came in 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 Tele2’s unlimited speed tariffs and any color you could give on Q4, that will be helpful.
And the second one on Finland. I assume 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, so far 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 may squeeze a follow-up on your comment on price increases, you mentioned price increases in Norway in terms of broadband, now following on Finland. But Telenor announced they will be pursuing price increases on mobile and that will peak in Q4. What are your thoughts there? Are you going to follow?
Allison Kirkby
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 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 our own number of pricing moves pre-summer. We are waiting to see 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, yeah, happy with the recovery we’re seeing in mobile service revenue, happy to see that there has been market movements on pricing. And clearly, not being the market leader in Finland, we’ll be happy to follow them, 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 of these vouchers around in the market that the key competition sends out on a regular basis, but then all the movements are very positive at the moment. And as I’ve said, we aim to grow in line with the market in Finland. And that’s what we will do.
Norway, yes, new prices this 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 Christian Mørland
And maybe just on your question a little bit around the mobile service revenue and ARPU, if there are more technical questions, 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 roaming rebound, but also on the back of the pricing moves that we already have there.
Operator
Our next question comes from Titus Krahn at Bank of America.
Titus Krahn
I have two more strategic ones, but rather topical ones, I think. If I may, first one on consolidation, I’m sure you saw yesterday’s EU court statement on the O2/Hutch deal in the UK. Can you give any thoughts on how you view the statement? To what extent do you believe this is actually relevant for the markets you’re in, for example, in Denmark? And would you say it remains a market by market decision? And maybe are you following the current attempts in other markets such as Spain actually more closely than this EU court decision?
And the second question on the infrastructure ownership. You already showed with the tower deals that you’re quite open to share ownership of some of your infrastructure and with potentially more to come. I just wondered now on those fixed and passives 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? I assume that’s not a top priority at the moment, but would you be generally open to a similar deal?
Allison Kirkby
Let me take your first two. Consolidation views, I think yesterday’s announcement doesn’t change my opinion that these decisions are very much clearly taken on a market by market situation. And so, I don’t think decision would have any impact on our market. Clearly, we are following what will happen in Spain and what will happen in the UK with the Hutch/Vodafone decision as well. But Denmark is 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’ve struck. We’re continuing to look to our rooftops and be quite open on that. In terms of fixed assets, we don’t need to sell our asset for leverage reasons. We’ve 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 check they’re 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 stake or any financial balance sheet reason, 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 two networks. 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 SocGen.
Nick Lyall
Just a couple of questions, if I could, Allison. Just on the unlimited pricing first in Sweden, I’m surprised you’re so relaxed about it from Tele2, just given SEK 3.99 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 and why you’d be more relaxed about it?
And then secondly, just to come back to Maurice’s 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, before you have to question the floor, SEK 2 floor, please.
Allison Kirkby
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, highest speed position, we are as yet not seeing 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 your business. In fact, the biggest – those that are willing to pay a significant amount of outlay for a tariff tend to want 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 in this time when customers are more likely to go to low fare options.
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 Kurt Nielsen
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 see no impact or changes to consumer spending. You’re following the long-term strategy and you just stressed the importance of having premium networks. 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
I’ll pass over to PC in a minute. But just to be clear, we always planned to come off of peak spending this year. And so, we revert 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 above 70% in a number of our markets and 80% in Lithuania and Sweden. And, PC, it was you that said…
Per Christian Mørland
Maybe I can give some, let’s say, flavor on what I meant is that our general agenda remains and we are not planning to do any sort of dramatic changes on that. We need to complete our network modernization, we need to transform Telia as a company and those will continue. But, of course, a changing kind of business and macroenvironment, we should sort of take a relook into our investment agenda and see what are 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 pace slightly differently or actually also cut out. So, that’s what I meant reviewing. So you shouldn’t expect that.
And, actually, one of the things we haven’t talked too much about it, we’re not actively cutting down significant CapEx now to protect cash flow this year because we mean that the investments that we’re doing is very important elements of building a sustainable Telia going forward. So, what we will be doing, we will take a thorough review of what we are doing. We are currently doing that as part of our financial planning for next year. The mission is to have an overall CapEx plan that is in line with 15% the next year.
Operator
Next we’ll hear from the line of as Keval Khiroya at Deutsche Bank.
Keval Khiroya
Two questions, please. So, firstly, you’ve talked about potential consolidation opportunities in TV in the past? What are your latest thoughts on the opportunities and what exposure you would ideally like to have to TV and media in the future?
And then, secondly, a question on how we should think about core telco enterprise trends for 2023. It sounds like we haven’t seen much change in [indiscernible] behavior, but we have seen a slowdown in enterprise service revenue growth over the last three quarters. Do you expect further slowdown into next year? Or do you expect trends to be similar to the 1.5% growth we saw most recently?
Allison Kirkby
Yes, consolidation of TV and media, yes, I still 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 inventory from advertiser, 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 core telco trends, we are – enterprise was a bit softer this quarter. But as I said, some of that was kind of a lot 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 [indiscernible] demand from the public sector and the private sector for us to help them with their digitalization journeys. And as I said I think to one of the media [indiscernible] 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 indication that we would slip next year.
Operator
Next, we’ll hear from Stefan Gauffin at DNB.
Stefan Gauffin
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 you’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 one 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 Christian Mørland
I guess those are for me, Allison. I’ll start on the energy costs. No, absolutely not. And also, whenever we’ve given outlook, it is based on two things. It is based on the market spot rate, and that’s what we showed in the graph, but that’s what the outlook is based on. And then, of course, we combine that with whatever hedges we have placed. And as you saw also our hedge levels for 2023 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, yeah, you’re right that we have increased quite dramatically. This is mostly linked to conscious choices, right, where we – because of the situation we are in, we need to place orders often more than a year on certain critical components, both where we resell to our B2B customers, but also for our own commercial business and also our own kind of transformation and network rollout. So, we have chosen in order to protect the business and allow this inventory buildup.
Then we have – it may be a bit ambitious to – how fast can we scale it down. But I think you should – I’m not going to give an exact number what it’s going to be, but it is several hundred million lower than what you have today, that it will be at more normal level, even if there will be kind of a shaky supply chain situation probably in the years to come.
Operator
And our final question will come from the line of Adam Fox-Rumley at HSBC.
Adam Fox-Rumley
I wonder if you could talk a bit about how you’re planning to set your budgets next year, given the inflationary energy backdrops we’ve discussed today. Is it a time [indiscernible] budgeting, are you tasking local management to find an x percent reduction on their ex-energy costs, just be interested to hear about the process and whether it’s changing in light of the current circumstances?
Allison Kirkby
I’ll start and then I’ll pass over to PC. Clearly, because of the underlying inflationary pressure, we’re expecting them all to take more pricing than they planned. We’re starting to get good visibility on wage negotiation, 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 as they possibly can through additional pricing and we are now front-weighting next year’s planned headcount reduction. 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 being worked through at this time. And, PC, anything you want to add?
Per Christian Mørland
The fact that our underlying business is progressing very well and we want to continue with our transformation agenda, we don’t want to [indiscernible] throw everything up in the air. So that is kind of – that 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 we live without, how can we really challenge that? But it comes back to – the main changes is related to pushing pricing, as Allison said, both in terms of passing on to our customers, making sure that we use CPI linkages wherever we can, [indiscernible] migration and also improve on channel execution, reduce the 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 the full effect of that. We talked about the CapEx where we’re spending more time now reviewing our current plan to see, should we adjust it and should we change anything. So, of course, more work going into it. But the base plan and the base process is pretty much [indiscernible].
Erik Strandin Pers
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.
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