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Edited Transcript of COMH.ST earnings conference call or presentation 25-Apr-17 8:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Com Hem Holding AB Earnings Call

Stockholm Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Com Hem Holding AB earnings conference call or presentation Tuesday, April 25, 2017 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Nilsson

Com Hem Holding AB (publ) - CEO and Director

* James Lowther

* Mikael Larsson

Com Hem Holding AB (publ) - CFO

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Conference Call Participants

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* Andrew J. Lee

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Daniel Morris

* Henrik Herbst

Crédit Suisse AG, Research Division - Research Analyst

* Irina Idrissova

RBC Capital Markets, LLC, Research Division - Assistant VP

* Lena Osterberg

Carnegie Investment Bank AB, Research Division - Head of Research of Sweden, Head of Technology Hardware and Equipment, and Financial Analyst

* Matthew Charles Bloxham

JP Morgan Chase & Co, Research Division - Analyst

* Peter Nielsen

* Sanvir Dhillon

Exane BNP Paribas, Research Division - Research Analyst

* Siyi He

Berenberg, Research Division - Analyst

* Stefan Gauffin

Nordea Markets, Research Division - Senior Analyst, Telecoms

* Terence Mun-Sion Tsui

Morgan Stanley, Research Division - VP

* Thomas Heath

Danske Bank Markets Equity Research - Analyst

* Victor Höglund

SEB, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen and thank you for standing by. Welcome to today's Com Hem quarter 1 report call. (Operator Instructions) I must advise you that this conference is being recorded today, Tuesday, 25th of April, 2017. I would now like to hand the conference over to your speaker today, Mr. Anders Nilsson. Please go ahead, sir.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [2]

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Thank you very much, Luba, and good morning and welcome to everyone to this report call for the Com Hem Group for Q1 2017. Together with me here today is Mikael Larsson, CFO; and James Lowther, Director of Business to Consumer. And if you haven't already, I suggest you go to www.comhemgroup.com to find the presentation we'll run through now and after that as you already heard, we'll go into a Q&A session as usual. Well, let's kick it off and let's do that on Page 4 to lay out what we have achieved in this quarter. Strong revenue and underlying EBITDA growth at 38% and 18% respectively as we consolidate Boxer. The pricing activity in Q1 worked very well with only 0.5 percent points increase in churn to 13.6%, which was significantly lower than anticipated. We are increasing our addressable households in the SDU market very fast and in Q1, you saw Com Hem adding 60,000 households and Boxer has up until now added 100,000 households. So the whole group now has 400,000 SDU households by the end of Q1. In addition, Boxer actually has access to 700,000 addressable fiber households, both across SDUs and MDUs by the end of the quarter. And Com Hem grew unique customers by 7,000 and broadband RGUs by 11,000 leading to new all-time highest for both. In addition, the B2B integration is already resulting in improved EBITDA and significantly improved operational free cash flow. So what should you expect from us going forward? Well, in Q2, we should see the positive effects of the price increase on revenue and ARPU as well as churn returning to its underlying decrease in trend. On the back of our success in the SDU market, we are upgrading our target for addressable SDU households with 200,000 to 1,000,000 by 2020. And that will give us a total addressable market of 3,000,000 households or 64% of all Swedish households. It is actually an increase of 50% compared to before we started the SDU expansion last summer. We are in the midst of implementing DOCSIS 3.1 which is rolled out this and next year securing that we remain at the forefront of high speeds and high quality services in our market. More focus is put into Com Hem Play as we see it as a very good way to drive customer satisfaction and remain relevant as for our consumers going forward. All in all, I would have to say that we are pleased with our operational performance and the momentum we have which gives us confidence that we will deliver on our guidance. As for shareholder remuneration, SEK 595 million was distributed in Q1 while keeping our leverage ratio stable at 3.7x underlying EBITDA. SEK 2.00 per share was distributed in cash dividends by the end of Q1 and 2.4 million shares were repurchased for SEK 229 million. Another SEK 2.00 will be distributed in cash dividend by end of September. And our buyback program continues where we currently buyback shares for SEK 70 million per month. That could lead to a total shareholder remuneration of more than SEK 1.5 billion, which is a total yield of 7.8% based on the closing price yesterday. Now, there are four key areas I would like to talk through with you, the essence of the Com Hem plan if you will. Starting on Page 5 with the execution of the core Com Hem strategy. We pursue pricing during the quarter in line with our strategy to increase customer satisfaction and adjust prices annually, a well-known scene we now executed for the fourth consecutive year. The pricing did only marginally impact revenue and ARPU in Q1. Still ARPU is higher compared to a year ago and we expect to see the full positive impact on revenue and ARPU in Q2. We did see the vast majority of the churn effect of the re-pricing in Q1 and it was much smaller than we anticipated. Churn increased from 13.1% in Q4 to 13.6% in Q1. That is actually half the increase from Q4 to Q1 compared to what we saw last year on similar pricing changes and only goes to prove that we indeed have pricing power. Even though we saw a churn spike from the pricing, we still added 11,000 broadband RGUs, an increase of 7% from a year ago and reached a new all-time high of 713,000. The number of unique customers grew by 7,000 to a new all-time high of 952,000. We conclude that the core program operational strategy works very well. Next point I want to highlight you find on Page 6. A year ago, before we decided to enter the SDU market and before we acquired Boxer, Com Hem had a footprint of 2,000,000 households. When we launched the SDU expansion plan last summer, we gave you a target to increase our footprint with 800,000 SDUs by 2020. So how far have we come? Well to date, Com Hem has added 300,000 SDUs and Boxer added an incremental 100,000 households to a total of 400,000 addressable SDUs. In other words, three quarters into our SDU expansion, we have already reached half the target we set for 2020. Today we are upgrading that number with 200,000 to a new target of 1,000,000 SDUs and a total footprint of 3,000,000 by 2020. That represents an increase of our footprint of 50%, by any standard a very significantly increase and opportunity. Boxer is a very key point, so please go to Page 7. And Boxer added SEK 436 million of revenue and SEK 83 million of underlying EBITDA, very much contributing to our revenue growth of 38% and underlying EBITDA growth of 18% this quarter. We are confident to deliver a SEK 300 million of underlying EBITDA for the full year as per our guidance. We are transforming Boxer from a digital TV to a broadband-led operator. The transformation is going very well and we are ahead of our plan. During Q1, we have repositioned Boxer to a broadband-led operator in the biggest marketing campaign in company history and by the end of Q1, Boxer can sell fiber-based services to 700,000 Swedish households. And we are already starting to see the momentum building in the KPIs. We added 3,000 broadband RGUs in Q1 to a total of 14,000. And even though churn remains elevated, we saw it starting to decline on a month-by-month basis during the quarter. In addition, ARPU increased and that is partly due to increased number of RGUs per customer. In summary, the transformation of Boxer is going very well. So to the fourth main takeaway which you find on Page 8, the performance in Q1 is consistent with our full year guidance. Underlying EBITDA is set to grow at mid-single digit for the Com Hem segment and Boxer to add approximately SEK 300 million. In Q1, the Com Hem segments grew by 4.3% and Boxer added SEK 83 million. Keep in mind that for the Com Hem segment, growth was mostly due to volume increases in Q1 and the repricing will impact revenue and EBITDA from Q2 alongside volume growth. Group CapEx of SEK 1 billion to SEK 1.1 billion including Boxer and SEK 50 million of CapEx to integrate Boxer is what we target for 2017. And in Q1, group CapEx amounted to SEK 269 million. The cost to serve our debt has fallen from 2.9% last year to 2.4% in Q1, which implies interest expenses below SEK 300 million for the full year. And at the end of Q1, we still have SEK 1.3 billion of net operating losses to offset tax for the Com Hem segment going forward. The cash dividend of SEK 4 and SEK 70 million of buybacks per month would take shareholder remuneration to more than SEK 1.5 billion or 7.8% yield based on the closing price last night. And to summarize before main takeaways: one, the operational execution is there, it works, we have proven that; two, we are increasing the target for addressable market by another 200,000 SDUs by 2020 to 1,000,000. The transformation of Boxer is going very well and is ahead of plan. And we are on track to deliver on our guidance. Now let's look a little bit closer on the Com Hem segments starting on Page 10. We passed 950,000 customers for the first time, as 7,000 unique customers joined us to a total of 952,000. Broadband growth was strong at 11,000 RGUs, DTV grew by 1,000 and telco decreased by 5,000. In total, we grew by 7,000 RGUs during the quarter despite the price related spike in churn. A closer look at the broadband stock on Page 11 reveals that almost 90% of our entire base is on 100 megabits or higher following the speed upgrade we did last year to our 50 megabits customers. The needs to speed remains strong and close to 90% of our new customers chose speeds of 100 megabits or higher in this quarter. And we had a positive developments for DTV with 6,000 new TiVo customers and 1,000 DTV RGUs. Please go to Page 12. Q1 since a couple of years back, the quarter where we conduct our yearly pricing activity and so also this year. James will talk through what we have done in more detail a little bit later, but already now I can say that the scale of the activity is similar in magnitude to last year. However, the effect on churn is only 0.5 percent point compared to 1 percent point to last year, if you look at the churn difference between Q4 and Q1. In other words, half the churn -- of the churn effect this year versus last year which we are very pleased with. This was much lower than what we anticipated and proved that the strategy works very well and we expect the churn to continue to its underlying declining trend in coming quarters. As you can see in the lower graph, ARPU declined compared to Q4. This is largely due to timing of group agreements. We like such agreements and such deals because they give us higher revenue in a block of flats as we sell our services to all customers. But the price per customer and consequently the ARPU is lower than when we sell to individual customers. In addition the pricing activity in Q1 is only partially effecting Q1 ARPU and will be first be fully visible in revenue and ARPU in Q2. I now hand over to James, please.

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James Lowther, [3]

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Thank you, Anders and good morning, everyone. If you turn to Slide 13, you'll see that we continue to innovate with our TV everywhere service, Com Hem Play. Our unique selling point compared with other OTT providers is that we not only have a fantastic line up of on-demand content, but we bring it together with the widest range of TV channels in Sweden into one viewing experience for our customers. To reflect this, we have recently completed the first major redesign of Com Hem Play since it replaced TiVo to go in Q3, 2015. Previously customers could go to different parts of the app to access on-demand content analysed TV. Now we have redesigned the experience to enable customers to discover the best content, both linear and on-demand, as soon as they open the application. Customers are presented with a curated list of the best movies, series and what is live on TV now, making it even easier for customers to get the most out of their TV package wherever they are. And the result of improvements to the app and growing demand from customers, usage of Com Hem Play continues to grow with 41% more customers using the service and 72% more content being streamed than the same time last year. Moving on to broadband on Slide 14, Com Hem continues its speed leadership in Sweden. Com Hem continues to top the Netflix Speed Index having been in first place for 23 consecutive months and comes top of the Google video quality report. In addition, Bredbandskollen, one of the leading speed testing sites in Sweden, has published its latest survey data. We can say from the 128 million measurements that they took in 2016, the Com Hem has the fastest download speeds of all the major providers of a broadband TV and play services. Turning to Slide 15, we have executed the majority of our price adjustments for 2017 in two main batches on the 1st of March and the 1st of April with multi-batches as customers come out of binding throughout the rest of the year. We have increased (inaudible) list prices by up to SEK 30 per month this year and these new list prices remain competitive in the market and create pricing headroom in the base. Like last year, we also reduced the discounts on customers who are paying below list price moving them close to our new list prices with the increase capped at a maximum of SEK 70 per month. These price adjustments have been underpinned while delivering even higher quality services, both on broadband and TV, and this is reflected in the outcome so far exceeding our expectations. With churn of 13.6% in Q1 which is 0.3 percentage points lower than the same period last year. You can expect to see the full impact on customer ARPU in Q2, when we have the full quarter of customers paying the new prices. And now, I hand back to Anders.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [4]

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Thanks, James. And please go to Page 16. B2B is 4% of the group's revenue and as you know we are in the middle of integrating the former standalone B2B operation into Com Hem as we focus on the growing high margin OnNet segment going forward. And OnNet revenues increased by 22% in the quarter, while total B2B revenue declined 8% reflecting decrease in usage of low margin legacy fixed line products. At the same time, we already this quarter saw significant improvement in underlying EBITDA which grew low double digits and OFCF which almost doubled as an effect of the integration and our new focus on net. Let's talk about Boxer starting on Page 18. We are very excited to have Boxer in the group and to see that the plans we have laid out actually work and there are further opportunities to develop these assets which we haven't factored in yet. But first things first. The key challenge is churn which increased further in Q1. When we look at the monthly development during the quarter, we however are seeing a declining trend and the churn in the month of March was actually lower than the churn for the fourth quarter last year. We know that the substantial part of the churn comes from customers who switch from fibre based broadband and IPTV services. We also know from researching our customer base and talking to churning customers that these churning customers would be happy to buy fibre-based broadband and IPT services from Boxer if we only supplied that. Therefore the solution is simple. Connect Boxer to as many networks as possible so we can offer our current and new customers Boxer broadband and transform Boxer into a broadband-led operator. During Q1, we have made significant progress which gives us confidence that we both will deliver on our guidance for Boxer for 2017 and by the end of this year have all the right building blocks in place for long-term success. Already now, we see positive signs in the KPIs. 3,000 broadband RGUs were added during Q1 and ARPU increased partially due to increased number of RGUs per customer. Still the number of RGUs and customers decreased, but over time as we gain momentum in broadband sales, increase our footprint for broadband and get the full effect of the repositioning that trend will turn. So how far have we come? How many of the building blocks are in place? On Page 19, you see some of the marketing material from the Q1 campaign where we repositioned Boxer to a broadband operator. It was the biggest campaign in the history of Boxer and nationwide. The repositioning took place earlier than planned and is now concluded. By end of Q1, Boxer can sell broadband and IPTV services to as many as 700,000 households. This is significantly ahead of plan and there are more nets to be added throughout the year. All in all, we are very pleased with our progress in Boxer. The next section will be presented by our CFO. Please go ahead, Mikael.

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Mikael Larsson, Com Hem Holding AB (publ) - CFO [5]

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Thank you, Anders. Please turn to Slide 21, where we have the summary of the financial highlights for the first quarter. Revenue grew by 38% year-on-year and the underlying EBIDTA by 18% reaching SEK 712 million in the quarter. The main explanation to this very strong increase is that we consolidate Boxer into this year's number. CapEx increased to SEK 269 million in the quarter resulting in the CapEx-to-revenue spend of 15.3%. The strong growth in underlying EBITDA was translated into operating free cash flow growth of 12% reaching SEK 443 million in the quarter. Organically excluding Boxer for both periods, revenue grew by 3.5%, underlying EBITDA by 4.3% and operating free cash flow by more than 2.2% in this quarter affected by the temporary low CapEx we had in Q1 last year. Please move on to Slide 22. While we recorded a year-on-year revenue growth of 3.5% for the Com Hem segment, we saw a sequential decline due to seasonality effect in Q4 with higher sales of devices and SDU connection fee. We expect to return to sequential revenue growth in Q2 (inaudible) as this year's price adjustments take effect. Broadband continue to be the major driver for revenue growth within the Com Hem segment, up 11.5% versus Q1 last year, while revenue from digital TV increased by 2.4%. Most of the growth came from volume in this quarter, since this year's price increases only has a marginal impact on revenue in Q1. Combined, our consumer business grew by 4.7% year-on-year, including the impact from declining revenue within fixed telephony. Network operator revenue increased by 2.1% in the quarter as a result of our expansion into the SDU markets with revenue coming from both our communication operator iTUX as well as single SDU connection fees, offsetting the still negative effects from price pressure in the landlord business, which has however declined over the past quarters. B2B reported an overall revenue decline of 8% in the quarter. However, with only a marginal impact on the group since the business constitutes only 4% of consolidated revenue. Continued strong revenue growth within B2B OnNet, 22% for the quarter, did not offset the revenue decline within the low margin fixed telco OffNet business. Please turn to Page 23 where we have the margin and cash flow development for the Com Hem segment. Expansion into a third-party infrastructure continued to put a slight pressure on gross margin in Q1, which was however fully compensated by operating costs being flat year-on-year leading to underlying EBITDA margin increasing to 47.6% in the quarter. CapEx was SEK 17 million higher than Q1 last year, which resulted in operating free cash flow growing 2.2%.Moving to Boxer on Page 24, we see that the pressure on revenue and gross profit continued in Q1 due to loss of DTT subscribers. But thanks to savings in operating costs, partly explained by synergies now being realized, underlying EBITDA increased by 6.5% compared to Q4 last year and reached SEK 83 million in the quarter. And this is in line with our guidance for Boxer to report approximately SEK 300 million of underlying EBITDA for the full year. Including CapEx of SEK 42 million, Boxer delivered operating free cash flow of SEK 40 million in the quarter. Please turn to Page 25, where we have the consolidated P&L for the full group. As I said, revenue grew by 38% with underlying EBITDA growing by 18% reflecting Boxer's margin structure. In spite of higher D&A following the acquisition of Boxer, EBIT grew by 13% in the quarter, and with the further reduction in financial expenses, this led to a 26% growth in net profit. Moving on to Slide 26, we see that the main explanation to the higher CapEx level than last year in the Com Hem segment is the focus we have on network-related investments, including extension of our own backbone in preparation for upgrade to DOCSIS 3.1. For Boxer, CapEx was temporarily high due to the ongoing 700 band migration with new CPEs being purchased to part of the existing customer base. When comparing this year's CapEx of SEK 227 million for the Com Hem segment with last year's figure, one should bear in mind that we had a temporary very low CapEx level for Q1 last year as well as Q2 and this was due to timing, while we should also for Q2 this year expect to see an uplift in CapEx from last year's level, which was below SEK 200 million in Q2. CapEx guidance for the full year remains unchanged at SEK 1 billion to SEK 1.1 billion for the group plus some SEK 50 million for the ongoing integration of Boxer. Although CapEx increased in the quarter, the strong growth in underlying EBITDA resulted in operating free cash flow increasing by 12% which you may see in the cash flow on Page 27. Equity free cash flow increased by modest 1% negatively affected by tax payments for Boxer and interest payments on senior notes. Equity free cash flow per share is, however, increased close to 7% due to lower number of outstanding shares after the buybacks were made over the past 12 months. Our share buyback program continued in Q1 with 1.3% of the share capital repurchased for some SEK 220 million. In addition, we paid out the first part of this year's cash dividend, SEK 2 out of a total of SEK 4 per share, leading to total shareholder remuneration of SEK 587 million in the quarter. This has been done while maintaining leverage at 3.7x net debt to underlying EBITDA, well within our leverage target of 3.5x to 4x, as you may see on Slide 28. The group is well capitalized with SEK 1.6 billion of cash and unutilized bank facilities end of March and no major refinancing coming up until mid-2019. For Q1, we had a new record low blended interest rate on the debt portfolio of 2.4%, down from 2.9% in 2016. And with that, I would like to hand back to Anders again.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [6]

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Thank you very much, Mikael. And that actually concludes James's, Mikael's, and my remarks on Q1, and we're now happy to go to Q&A. So please, Luba, take it away.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question is coming from the line of San Dhillon from Exane BNP Paribas.

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Sanvir Dhillon, Exane BNP Paribas, Research Division - Research Analyst [2]

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Two questions if I may. You've been huge advocates of NPS in assessing the performance within your Com Hem segment previously. Have you done NPS for Boxer? And if so, how does that compare to what you have at Com Hem? And assuming it's worth, what are the major changes you think are needed to improve that perception? And related to that, at what level do you think you'll be able to stabilize the TV base of Boxer?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [3]

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Thank you very much for your question. So when it comes to Boxer and NPS, we are measuring NPS using the same methodology as we are doing in Com Hem. And the figures that we get back is that Boxer is basically on par with Com Hem roughly. We have roughly the same NPS values for Boxer as we have for Com Hem. And that does reflects that Boxer is a well-known brand and has been managed in a good way for many years. So that's what we see a very good starting point. And we'll obviously treat Boxer going forward to the same kind of treatments we do with the Com Hem customers and initiate the same kind of improvements to NPS for Boxer as we do for Com Hem. So we anticipate overtime the NPS values both for Com Hem and Boxer to continue to increase. When it comes to stabilizing the TV base, I -- just to take a step back and try to explain what we're trying to do here is that the reason why we have such an elevated churn as we do right now is because people are churning out by largest accounts churning to go to buy broadband over fiber. And when we can offer that same customer to buy broadband from us, the customer will stay as TV customer and will be added as a broadband RGU. So the whole goal here is to be able to offer as many as possible the possibility to buy broadband from us. And by doing that, we will both stabilize the TV –- number of TV customers and grow in Boxers in terms of RGUs for broadband. And the way we see that that we are now putting all the building blocks in place and they are gradually coming into play, and they are ahead of plan in terms of how we –- what we set out to achieve. So during this year, I think we will have all the building blocks in place and have then the opportunity actually to turn the business around from a customer perspective or an RGU perspective. And whether that will happen towards the later part of this year or next year, it's very hard to predict because it depends on how customers actually react to what we do. But it's absolutely possible to [ conclude ] that's our current estimate. And therefore we are going down the route with Boxer actually to turn Boxer into a growing company and this is Plan A. Should we, however, fail with that going forward somewhere, we always have the second opportunity, which is to get the profits out of -– get the growing profits out of Boxer by cutting costs, especially done in distribution of the DTT and what have you content cost, but that should be seen as a backup plan and not the (inaudible) which is to (inaudible). And I think that was a probably too long answer to your very precise question, San.

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Operator [4]

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And your next question is coming from the line of Daniel Morris, Barclays.

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Daniel Morris, [5]

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I've also got two. It's great to see the FTTH target and the SDU region upgraded to a 1 million homes. I was just curious as to where the 1 million comes from given that I would estimate there should be more than 2 million SDU fibre homes in the country medium term and so therefore, maybe the target still looks relatively conservative even if there's a quite a lot of execution to of course get done, so it's the first question. And the second question was just a follow up really around the Boxer TV KPI momentum. TV is obviously been building in a fairly steady rate over the last few years in terms of the incremental FTTH coverage and uptake. So I was just curious why the churn has ticked up so significantly over the last couple of quarters? Or your competitors reacting slightly differently ahead of your launch? Or have they able to build more Boxer customers recently versus prior or is it something else?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [6]

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Okay. That was very good question, Daniel. I'll try to address them. So the 1 million household, we have to upgrade it to an increase of 200,000 for SDU by 2020. Is there more to be add? That's the question as far as I interpreted it. And that could be the case but it's -- we are not in a position today to have that outlook. But there could be more coming later, but we are not willing to go there today. From where we sit today, we can see by, yes, adding Boxer, it added a 100,000 incremental SDUs which we would not have been able to catch via Com Hem. So that's 100,000 already in the bag already connected. And then we now see some further opportunities scattered across all the operators we are working together with which takes the forecast another 100,000 upwards. But that could be revised going forward, I'm not ruling that out, but let's come back to that a little bit later. Then the other question, why is the churn elevated in Boxer? And I mean if we look at what happened in Q1, we saw compared to Q4, we saw a churn in January which was very high coming down in February, coming down in March and the figure for March was actually quite much lower than the figure we had for quarter four last year. So what happened in Q1? And the reason or the answer to that is that during the Christmas campaigns last year, I think a lot of the operators went for Boxer customers. And at the same time, this was the quarter when we integrated, took over the ownership of Boxer and aligned everything to work the way we wanted it to work. So that's what gave them an opportunity actually to take RGUs from us at the very much higher extent than has been in the case coming into Q1. And whenever we look at the metrics for saved churned numbers and what have you, they are now performing at the very, very high level which was not the case in Q4. So you can say that we have improved the way we operate, that's one thing. The second thing is that we now actually have the ability to sell broadband to more of our customers than we did in Q4, that obviously also helps. And going forward we will have further opportunity to sell to more of our current customers which will help us even more. So from our standpoint, when we look at churn going forward we believe that they will continue to come down from where we see it in March. It probably not be a straight line exercise. It probably vary a bit from amongst the contingencies that temporarily go up one quarter versus the previous. But the trend now is clearly downwards and we believe we can take it down to a level where we actually overtime can become RGU positive, i.e. growing the number of RGUs in our total Boxer base on a quarterly base at some point in time.

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Operator [7]

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And your next question is coming from the line of Peter Nielsen.

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Peter Nielsen, [8]

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Yes, just returning to the digital TV momentum. So the fairly stable base and slightly declining revenue growth, I assume the price increases would boost that a little bit, but in addition to that is there anything you feel you can do to sort of regain momentum on this side of the business, please? And just secondly, how should we think about the OpEx, the cost related to the SDU rollout? If perhaps you can elaborate a bit on this?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [9]

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Yes. Thank very much, Peter, for those questions. So what you saw in Q1 is a lower intake of DTV standings on Q4 and the reason is that we have a churn spike related to the price increases we put through on DTV. So that offsets the gross intakes so to say, would take the net intake to a lower level than what you would have had otherwise. And as you know from Q2 and onwards, we don't put through price increases. We have done that in Q1 and hence you won't have this negative effect which should help DTV to grow at a better pace than what you saw in Q1. And then when it comes to the margins, (inaudible), we have lower gross margin and EBITDA margin when we sell services through open networks and through unbundled Telia fibre. But -- and that's why we sort of changed our guidance a bit this year versus last year and we tell you that we are going to grow underlying EBITDA by 5%. And when we then go into selling lower margin products, that will imply that we will have higher revenue growth than the mid-single digits we guided you to before in order to deliver the mid-single digit underlying EBITDA growth for the Com Hem segment. So as we come into the SDU market, you will see us taking -- delivering the same kind of EBITDA growth but it will then entail us growing faster top line.

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Operator [10]

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And your next question is coming from the line of Terence Tsui from Morgan Stanley.

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Terence Mun-Sion Tsui, Morgan Stanley, Research Division - VP [11]

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I've got a few questions please. Maybe firstly just switching to the topic of the B2B market, maybe you could spend a bit of time telling us about what you being doing differently to address the corporate segment, maybe give us some color on what this integration cost is being spent on, and whether you're still optimistic that OnNet revenues will one day overtake the OffNet revenues? And then secondly, can you give us also a bit more color on the seasonality of EBITDA within Boxer throughout the year, the SEK 83 million in Q1? Obviously, you are well on track to reach the SEK 300 million target. Just want to be aware if there's any extra OpEx that factor in for the rest of the year? Maybe if I can just squeeze a one last question on your general thoughts around broadband pricing in Sweden. I notice that Telia increased the price of its 100 meg service a couple of weeks ago. And therefore, there's quite a nice gap between Com Hem and Telia. I also notice you're going to change to 100 megabit broadband speed in Q1, so maybe is that something that you can look through -- look out towards also in terms of like an earlier price increase?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [12]

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Thank you very much, Terence. So in B2B, I'll tell you what we are up to. So we have basically two, call it product types we are selling in B2B: one is the legacy OffNet business which predominantly is based on fixed line telephony products or unbundling corporate and these kind of things. They are typically low margin and we see consumption coming down and it's been harder to defend customers in that segment. And then we have the OnNet products which is selling to businesses connected to our fibre coax network for basically businesses residing in our MDUs. And that is high margin and we see a nice growth there, 23% this quarter for instance. So what we decided last year is that we don't believe that over the course of the -- over time, it's worth defending the OffNet low margin business. It will become too expensive and not profitable to defend them. And then we went the whole way into the consequence of that and said, okay, so let's instead move ourselves into a future position where we can grow the business in a good way not only thinking top line but thinking EBITDA and cash flow. And what we then decided to do was to basically integrate the former standalone B2B operation into Com Hem. And that we are doing now and have done the largest part of it. And it's actually for instance, means that about a 100 full time employees has left the company who were formally working in the standalone B2B operation, they are no longer with us. And instead we have the much smaller number working as in part of the integrated business in Com Hem. That releases a lot of operational cost obviously and that return translated into to higher profits. And once we have then concluded the kind of integration, then that's the time where we will start focusing on trying to drive revenues -- revenue growth. But that will then be focused on higher margin products rather than the lower margin products we would like to leave. And hopefully the worst case outcome of this is that we generate higher EBITDA and significantly higher OFCF. If we completely successful that will also end up, we will grow B2B revenue later this year, but let's come back to that, nothing I can promise today. But the higher profitability and cash flow, that's a given nowadays, that's already banked. Then you had questions regarding the EBITDA on Boxer and that should be fairly linear throughout the year. However, I would like to point out that what we are trying to do here is to turn the business around, which means that we will put in extra costs to support turning the business around and growing it. So Q1, we had massive marketing expense in order to transform Boxer and reposition Boxer to a broadband-led operator. You will see us doing other investments throughout the year in order to support the turning around of the business, which means that we are actually not optimizing EBITDA, we are optimizing our opportunity and possibility to turn the business around. But even so, we believe that we can carry to SEK 300 million, which we have guided you to and reiterate today that's what we're going to deliver. So no change there. Then the pricing and maybe that's something for James.

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James Lowther, [13]

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So as you have seen from the Churn rates that we've got in Q1 being significantly better than last year, we clearly got more pricing power within our existing customer base. Unless of course that we have changed led prices on both broadband and on TV and we've had a better than expected outcome so far. (inaudible) points towards having more pricing power going forward than we -- even more pricing power than we previously thought. Obviously, we will look at what the optimal pricing is for us going forward, but we can't share more details than that at this stage.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [14]

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But then coming back to your point on the environment and it's clear that Telia is on the same kind of strategy and as you noted they increased their broadband price 100 Meg. I think they've done some TV -- increases on TV pricing as well. And that's in line with our strategy. So those two go very well hand in hand and hopefully we'll continue to do that.

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Operator [15]

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Your next question is coming from the line of Stefan Gauffin from -- yes, Nordea Bank.

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Stefan Gauffin, Nordea Markets, Research Division - Senior Analyst, Telecoms [16]

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Most of my questions are taken, but maybe we could go back a little bit to the B2B business. When do you expect this business to be able to turnaround on the top line side? And secondly, how much goodwill is allocated to the (inaudible) transaction? And given the weak OffNet performance, is there a risk for a writedown of the goodwill?

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Mikael Larsson, Com Hem Holding AB (publ) - CFO [17]

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It's Mikael here. I can start with question number two in the goodwill. And this is, since it's fully integrated into the Com Hem segment, this -- the goodwill is looked at another light on that level. So for that segment, there is no need for any writedowns. That is the conclusion we have drawn so far. We looked at this here and of course continuously.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [18]

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Yes. And then when it comes to what we see a growing revenue in B2B, it's a little bit early to give a specific time when that will happen, Stefan. But I mean what we aim to do is to have the integration done this summer. And then it's where all the efforts put into growing the business and then we'll see how long time that takes before it turns [bad]. So bear in mind, even when we decline by 8% within this quarter, I think the number for underlying EBITDA was about the (inaudible) number correctly. OFCF increased by 80%. So it's quite good anyhow and something we can live with it, I think (inaudible).

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Operator [19]

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And your next question is coming from the line of Matthew Bloxham, JP Morgan.

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Matthew Charles Bloxham, JP Morgan Chase & Co, Research Division - Analyst [20]

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I just had a question on this 700,000 footprint that you've identified for Boxer which has some overlap with the Com Hem MDU footprint and Com Hem SDU expansion. Could you kind of give us a bit more insight in your commercials just in those areas whether you are kind of pushing both brands or does it pick around [ season 1 ] or the other?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [21]

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Absolutely. Thank you for that question, very good question. So we are the only fixed line operator in our country who has two plans in the market and they are complimentary position. Com Hem is positioned more to the premium market going to Telia prices for instance, trying to have the same kind of position. And Boxer, we position as an entry tier operator and going after the discounters when it comes to broadband, which is the segment growing as fast as the premium segment, but where Com Hem historically has not been able to go and get customers. So for that reason it makes sense actually to have both brands in the same universe. And therefore overlapping is a good thing because we can catch more customers and get a bigger market share with the two brands. We have not, however, taken this to its full potential yet because we have not let Boxer into our coax universe. So we have not opened up to our full universe there, which is a further opportunity which we are evaluating. Maybe we should do that going forward because we know that there are roughly 800,000 to 900,000 broadband customers on the competing all launch which we are over than 5 and those are by to a large extent discounters who get those customers and which we are not fighting for. That's a free debate customer pool to grab with the Boxer brand should we decide to do so going forward. So but right now we are focusing on the SDU market. We are focusing on trying to get every single Boxer customer that has the ability to buy fiber, to be able to buy it from Boxer and that's the way we're going to turn the Boxer business around. And that's progressing very well I have to say.

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Operator [22]

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And your next question is coming from the line of Siyi He from Berenberg.

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Siyi He, Berenberg, Research Division - Analyst [23]

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I have two please. The first one is on your operating leverage. If I look at your core business, it looks like your EBITDA margin now is 47.6% compared to last year is a small expansion. And I was wondering whether this is the time for us to find to see that you can benefit from your operating leverage and going forward we should see a continued expansion in your core business margins. And second question is on boxer. I was just wondering whether you can talk through the rationale behind your price, the Boxer Cyber at SEK 249? This price point looks quite disruptive because it's 50% below [ Pilas ] pricing point. And the question I see two implication on that. First one is that it looks like you could be at best EBITDA neutral or sometimes EBITDA negative with this offer and how it's going to impact your EBITDA for Boxer business going forward? And secondly, what do you think it would impact the pricing environment especially for the low end of the market?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [24]

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Thanks very much for those questions. Good questions, both of them. And when it comes to the operating leverage, I mean when we look at the core common business and if we define that as the MDU business, we do believe that that is around pretty efficiently but I bet you that we'll be able to do better going forward. However, what you will see that when we sell into the SDU markets, that comes at lower margins. So on the blended basis and that's what we report to you, you will see pressure on margin and when we grow faster in the SDU market. So that's what we should expect and that's in the guidance as well. When it comes to Boxer, I mean we are pretty much doing what we said we would do, namely to precision Boxer and Com Hem complementary in the market. So Telia and Com Hem goes for the premium market, Boxer goes from the entry tier market and we compete with the likes of Bahnhof, (inaudible), [Bredbandskollen] and others. And they are basically priced in this region and we are pricing ourselves in order to get broadband customers who are DTT customers. And that way, reduce the churn and stabilize the business. And from that point on, going to the same strategy we have from Com Hem, namely the more for more strategy, increase prices on a yearly basis. So it all falls in hand with the strategy. And so far it seems to play out well. I hope that answered your questions.

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Operator [25]

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And your next question is coming from the line of Thomas Heath, Danske Bank.

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Thomas Heath, Danske Bank Markets Equity Research - Analyst [26]

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Thomas here. Few questions if I may. Firstly, you mentioned the collective agreements where you signed up an entire building. Just curious to know if you offer this type of subscriber, the full suite of services like the app for mobile play and so forth or if you want to keep some sort of distinction between that type of deal and individual consumers? Then secondly on Boxers, when you're in the SDU land, is it correct to see Boxer as a service provider only and Com Hem as a communications provider and service provider where you also switch out to the converter and maybe even dig the fiber?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [27]

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Thank you. So when it comes to collective agreements, we normally do those for broadband and then we upsell other services where the consumer pays individually. And I hope that answers the first point. When it comes to Boxer, Boxer is a service provider. Com Hem is Boxer service provider and the communication operator through iTUX and that's how it's divided.

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Operator [28]

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Your next question is coming from the line of Lena Osterberg from Carnegie.

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Lena Osterberg, Carnegie Investment Bank AB, Research Division - Head of Research of Sweden, Head of Technology Hardware and Equipment, and Financial Analyst [29]

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I was going to ask you about these 700,000 households that you can now address on the broadband basis with Boxer. How -- do you have the ability to deliver to all these already or do you sell in advance? And also I assume since all of these are different multiple network, how do you ensure a quality of service since it will be on a different operators that you deliver to? And then also I was going to ask you we talked a little bit about the B2B segment and the decline there. Could you say a little bit how big is the declining legacy base as a share of revenues compared to the growing part?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [30]

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Okay. Thank you very much, Lena, for those questions. So the 700,000 households we have connected Boxer to, we can't sell and deliver to all of them. They are through different operators, different communication operators and hence the quality of service is different. And that's the same challenge every operator faces who goes into the open network market and sell its services. And something we have been dealing with on the Com Hem side for many years in track and develop quite a lot. So this is an area where we are well versed in how to handle it and we'll obviously transform this knowledge and the way of operating into Boxer as well and that's already done. So that was, I hope answering your first question. Then when it comes to B2B, I'll hand that over to Mikael.

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Mikael Larsson, Com Hem Holding AB (publ) - CFO [31]

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Yes. The split between the high margin more profitable OnNet business versus the OffNet -- declining OffNet business is that with OnNet business is approaching 40% of total B2B sales and OffNet is down of course 60% and declining after share of revenue in Q1. I hope that answered the question.

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Lena Osterberg, Carnegie Investment Bank AB, Research Division - Head of Research of Sweden, Head of Technology Hardware and Equipment, and Financial Analyst [32]

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Do you expect to be able to grow OnNet?

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Mikael Larsson, Com Hem Holding AB (publ) - CFO [33]

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OnNet we added 2000 customers in Q1 and there you see a 20 -- I think it was 22% growth in queue 1 versus last year, so it's growing fast.

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Operator [34]

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Your next question is coming from the line of Henrik, Credit Suisse.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [35]

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I had a few questions. Firstly, on the collective agreement. So I get the whole point with you given a bit of a discount to sign up a larger portion of the house, but so far we've sort of seen ARPU take ahead but there's not much to be seen in terms of subscriber ads. So, I was just wondering a little bit -- if you could give a little bit more detail on these results sort of a lag effect and you'll connect more broadband customers in the coming quarters. And then second, just following up again on the Boxer launch in the same footprint as you're selling Com Hem, I mean in the end 100 megabits broadband speed is the same on Boxer and Com Hem. How do you really differentiate? And I guess OnNet, OffNet or (inaudible) and broadband too in those case, they are quite niche players, they don't have the same sort of marketing platform as you do. It's sort of more precision as no-frills, so I was just a bit interested if you could give a bit more colour on that, please?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [36]

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We'll try to do that, Henrik and thanks for the questions. First, the collective agreements, I think it's something for James.

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James Lowther, [37]

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Yes. So first thing to say is Q1 is not a clean quarter. So you've obviously got all of the pricing activity and the churn related to that which impacts the net adds coming through in the quarter. We do also have an element of a lag effect on the -- more on the revenue impact of group agreement. So it's in a small amount of the growth in Q4 would have been due to group agreement customers coming in and the small diluting effect on ARPU coming in Q1.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [38]

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Okay. That answers that part of the question.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [39]

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Yes. And then when it comes to Boxer and how do you differentiate between a broadband product from Boxer and Com Hem, I mean I'll give you one example, so Com Hem has the fastest router in the Swedish market, much faster than whatever you can get from a competitors and that's what we send out to the Com Hem customers. If you become a Boxer customer on broadband, you will get no router. You have to supply that yourself. Boxer takes no responsibility for the service into your device, whereas that's what exactly what Com Hem is aiming to do. That's one factor which we think plays a large role for instance in making the product different. And there are others like that but it's quite apparent and we have seen that you can have a broadband product to case it to a higher segment, premium segment and to an entity of segment, and price them differently and consumers are willing to pay different price depending on what the extras they get. And that's what we are doing here as well.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [40]

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Can I just follow up on another thing actually? I know you've said in the past that acquiring the city networks is not that interesting because a lot of the ones that come up with sale are of relatively low quality and you can't sort of offer the full range of Com Hem products. But with Boxer in your product portfolio, does that become more interesting now?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [41]

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When city networks come on the market, that is something we are looking at. However, we are not seeing any material networks coming on the market, but I expect that is to change in the future. And I think it is important, it is interesting actually to integrate backwards into the value chain as we get more customers in these networks, absolutely.

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Operator [42]

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Your next question is coming from Irina Idrissova, RBC.

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Irina Idrissova, RBC Capital Markets, LLC, Research Division - Assistant VP [43]

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Irina Idrissova, RBC here. So, just a clarification on SDU expansion plans. First of all, of the 200,000 incremental SDU editions, are all of this household located in the Boxer footprint or is there some incremental footprint that's outside of the existing Boxer territory that you are targeting? And then on the core MDU segment, just question on churn and pricing power, of course, seeing very nice progress on churn this quarter, what's the optimal level that you are looking for longer term? In other words, how low can it get? And second, when you talk about improving pricing power more, can you just give us a bit more color on what are the kind of key areas where you can focus to improve either this service or the brand perception?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [44]

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Thank you very much, Irina, to those questions. So when it comes to the expansion plan for SDUs and the additional 200,000 we talked about today, we believe that those will be both addressable for Boxer and Com Hem. When -- or both of them will be addressable for Boxer, that's what you asked. So that we believe will be the case. The Com Hem churn is as factor of how we go forward as a factor of how we manage to increase customer satisfaction. And how much of that customer satisfaction increase we take out in price, which has an adverse effect on churn obviously. And we believe we can continue to increase customer satisfactions for many years, with a host of initiatives ranging from how we treat customers in customer service, our business rules, stability in the network, stability in third party networks, development of our TV product where much effort now goes into Com Hem Play, which will become the core of our TV product going forward, which we know drives customer satisfaction through the roof when people are actually using it. And our increased effort to have an even better and more stable broadband product, where we take responsibility all the way out to the device is something we also see drives a lot of customer satisfaction. So there are many, many, many parts, which can be addressed and will be addressed. And what we do tactically and that's basically, James, what he does little later this year, is to decide how much of the increases in customer satisfaction, that we're going to take out in price next year and how much we're going to take out in increased or decreased churn. So that becomes a tactical decision. Therefore, we don't have a target for churn. We have a target for growing the company's revenues and other line EBITDA, and that's what we are hoping for. We're actually cash flow, that's what was we're hoping for. And that I think also talks a bit about the pricing question you have. It's all related to how much we can increase our customer satisfaction. That determines the price we can take. And we believe we can continue to take price. And we also believe that the Swedish market is friendly to that because you see Telia on the similar strategy as we talked about earlier on this call. So there is this upward price pressure, which helps us, we're not alone. The whole market moves upward and that's obviously very helpful. I hope that answers the question, Irina, even though it was probably very long and maybe not fully understandable answer.

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Operator [45]

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Your next question is coming from the line of Victor Hoglund from SEB.

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Victor Höglund, SEB, Research Division - Analyst [46]

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Most of my questions have been taken. But I just had one question on how you should conceptually view your strategy on Boxer. Obviously, you are trending above SEK 300 million now, so is it that you are planning marketing and sales activities ahead that should take this down more towards the SEK 300 million or is it then product mix that will maybe a fixed margins or are you just cautious? And secondly, you know MTG very well and I was just wondering, if you've seen their broadband offering in any way affecting you or they pushing their broadband by a play bundle or anything like this or is that may be on a separate universe to what you have? And then thirdly, if you can maybe say something if you feel that the Tele2's unlimited offering might move the broadband market in some way or if you also see that as completely separate offering?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [47]

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Thank you, Victor. Three good questions. So, the SEK 300 million for Boxer, we are cautious for both. We're trying to be cautious in our estimates and we remain cautious. And if we can, we will spend as much money as we think we need in order to turn the business around. And we believe we can do that and still deliver the SEK 300 million in EBITDA. That could be enough side if we didn't try as hard as we're going to do, we will mostly likely generate more than SEK 300 million. What the actual outcome will be, I don't know, but it will at least be SEK 300 million, that's what we continue to say today. When it comes to MTG and their strategies or their sales of broadband, we do not see any impact on Boxer or Com Hem. And we believe there are room for both of us. Bear in mind, the SDU market is a big untapped opportunity. We believe that there will be many players in their selling, and there are room for lot of players. Everybody can succeed without anybody failing, and that remains too. And then when it comes to Tele2 and their unbundled offer or their unlimited offer they revealed the other day, we believe that the mobile broadband is a not a substitute but something we do in addition to having a fixed broadband operation or service. The reason is that if you look at the Tele2 customers resource, I believe that they on average use 5 gigabits per months or little bit less. Whereas our average user uses 200 gigabits of data every month, and that increases by 40% every year. So next year, we'll be close to 300 gigabytes. And if you low down Tele2's network without those kind of volumes from customers, I think, they won't be able to have that many customers on their network at all, the network simply will die. So it's not a substitute, it's something you have in addition and it makes a lot of sense. And going unlimited I think makes sense as well because people use more data. And I guess their view is to take market share from their competitors and probably a good move. I don't know. But it won't affect us. That's the conclusion.

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Victor Höglund, SEB, Research Division - Analyst [48]

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And if possible, maybe I could just add on, on the TV intakes that you have in general, could you say anything on what kind of price packages they are coming on to? Is it the small, medium or large or [silver or M], what they mainly for? Which?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [49]

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Yes. Let James answer that.

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James Lowther, [50]

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Yes, we're taking a variety of different customers. With the market share that we have, we are effective at competing at all different segments. They will bring in a large portion of our intake will come in on our top gold package. But if you want a trial base [lessen] than keeping it longer term, Germany skewed towards families, few one access to all of the content and not compromising. But we are also still competing effectively for the more value end of the market where people want 20 or so premium Pay TV channels in addition to what they get and over analog. So coming more specific [in that way], we basically we pick up across the market.

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Operator [51]

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And your next question is coming from the line of Andrew Lee, Goldman Sachs. Please go ahead.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [52]

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And I'm sorry to have a couple of extra questions on the call but I want to talk about the capital intensity of your group. You are bit further forward in your SDU and Boxer plans and clearly you highlighted that you're getting similar EBITDA growth to revenue growth, is this an operational gearing question picked up on earlier, but could talk us through your expectations on capital intensity in the medium term? Should we continue to [expect that's come down] or I think change so we wouldn't see your ability to grow free cash flow high to the high single-digit to low double-digit? And is there anything else other than the kind of interest notes and the tax payments we have in this quarter that could get in the way of that free cash flow generation?

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [53]

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That -- you want to take it, Mikael?

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Mikael Larsson, Com Hem Holding AB (publ) - CFO [54]

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The second question I can take, the interest payments. We in terms of timing we have changed to the payments. We've lost here when we have new senior notes. So you will see interest payments in the Q1 and Q2 compared to Q4 earlier and that is due to the new senior notes. But that is only a timing over the year.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [55]

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When it comes to CapEx, we believe in SEK 1 billion to SEK 1.1 billion nearly for Boxer and Com Hem combined. This year there is a SEK 50 million extra surcharge for integration of Boxer, but going forward that should not be there, so that's underlying what you should expect. If we however decided to scale up the built experiment trial we are doing in this quarter and that should become a material part of our business going forward, that will take extra CapEx. But that on the other hand will only be done if we can finance it fully through debts through the EBITDA, it generate tier 1 and within our leveraged target ratio. So that should not in any shape perform take out of the money we can distribute back to shareholders. I hope that it's clear as well, Andrew.

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Operator [56]

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Thank you. We have no further questions on this time. Please continue.

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Anders Nilsson, Com Hem Holding AB (publ) - CEO and Director [57]

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Okay. That's in there. I think we will end this call now. And I have to thank you very much for spending all the time and all your good questions. It was great talking to you all again and hope you have a very good day and hope to see you soon. Bye-bye.

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Operator [58]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.