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Edited Transcript of TEL.OL earnings conference call or presentation 23-Oct-19 7:00am GMT

Q3 2019 Telenor ASA Earnings Call

Fornebu Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Telenor ASA earnings conference call or presentation Wednesday, October 23, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jørgen C. Arentz Rostrup

Telenor ASA - Executive VP & CFO

* Sigve Brekke

Telenor ASA - President & CEO

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Conference Call Participants

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* Andrew J. Lee

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Frank Maaø

DNB Markets, Research Division - Analyst

* Henriette Trondsen

Arctic Securities AS, Research Division - Research Analyst

* Henrik Herbst

Crédit Suisse AG, Research Division - Research Analyst

* Johanna Ahlqvist

SEB, Research Division - Analyst

* Nick Lyall

Societe Generale Cross Asset Research - Equity Analyst

* Peter-Kurt Nielsen

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Roman Arbuzov

JP Morgan Chase & Co, Research Division - Analyst

* Siyi He

Citigroup Inc, Research Division - VP

* Terence Mun-Sion Tsui

Morgan Stanley, Research Division - VP

* Usman Ghazi

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Sigve Brekke, Telenor ASA - President & CEO [1]

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Good morning, everybody, and welcome to Telenor Group's Third Quarter Results Presentation. The third quarter was another quarter where we delivered on the strategy we have followed the last 3 years.

Let me give you some highlights. We continue to modernize our operation in Norway. And from that, we see a good customer response from both the modernization of infrastructure but also what we do on our services. This resulted in -- resulting in 5% ARPU growth coming from both continuous up-sell into data packages but also introduction of new services. With this, we see that we have been able to continue to grow the customer ARPU in Norway.

In Thailand, after 6 quarters with revenue decline, we now finally see some growth. And as we said in the beginning of the year, this is what we had planned for. This growth is now coming from our network investments but also the turnaround we have had in our distribution.

Myanmar, pretty much the same picture. Also now coming back to growth, 2% S&T growth in this quarter on the back of increasing number of customers with 1.8 million.

However, we are having a challenging position in Pakistan, and we are not pleased with the negative development we have seen in the quarter in Pakistan. This is due both to macro factors but also our own performance, and I'm coming back to that later.

Lastly, the portfolio development. It's continuing. This quarter, we completed the acquisition in Finland of DNA. And as you have seen, we also yesterday announced a merger of our satellite-based entertainment business with the Nordic Entertainment Group.

Let me go then into some of our markets, starting with Norway. We see a solid performance in all the segments in Norway. And this is then coming as a result of the modernization of our operation. In the quarter, we saw 12,000 new fiber connections. We also saw 6,000 new connections of our fixed wireless access product. This resulted then in 1.4% sales and traffic growth. And as you see in the middle of this slide, we were able to compensate for the decline in the fixed legacy business in the quarter. However, we also saw a slightly increase in the development of the fixed legacy business in the quarter.

We saw then a solid ARPU growth, 5% ARPU growth on mobile and 7% ARPU growth on the fixed broadband. This is on the back on the quality and the speed in the network that we have invested in. The mobile ARPU increase is driven by continuous up-sell into richer data packages as we have done now for many quarters, but we also now see that partially ARPU is coming from the introduction of new services such as insurance and security. On the fixed side, the ARPU increase of 7% is driven by stronger growth in fiber connections, up-sell to higher speed and also price increase in the consumer segment.

On the cost side, Norway has delivered on cost reductions for several years and they have done so with focusing on digitalization of the core business. And efficiency has been -- become a way of working in Norway. 5% OpEx reduction in this quarter. This 5% is mainly coming from reduction in sales and marketing, operation and maintenance cost. And I am pleased with the Norwegian team that they are showing their ability in a very competitive market as we have in Norway to both modernize organization, take out costs and at the same time being customer-focused with new products and services.

Moving to Thailand. dtac has been through quite a journey over the last 1.5 years. As you remember, first, it was to go from concession to license, then it was a massive network rollout, then we have also focused on making the distribution more efficient and also increase the distribution spread. And we have also then continued as we have talked about several quarters to reposition the company from a more technical prepaid type of customer offers into more postpaid service basis. And after the 1.5 years, we have seen -- after the heavy lifting, we see now that the customer satisfaction is increasing and they are measuring that through the Net Promoter Score. We also see an improved customer survival rate, which is reducing the churn. And as a result of all this, we also see higher gross add. So we are coming back to growth, but there is more to be done. And the Thailand team, dtac team, is continuing to focus both on the modernization but also continuing to add customers and grow the ARPU.

Going to Myanmar. We also said that -- when the year started that our ambition was to return to growth in the fourth quarter in Myanmar. This is now happening one quarter before the plan. So in the third quarter, we grew our S&T revenues with 2%. That growth is a combination of new additions. And in the quarter, we added 1.8 million new subscribers. And remember that this is on the back of the second quarter where we added 1.4 million. So we now have a record high subscriber base in Myanmar of 21.6 million customers.

We see that the competition is continuing to be tough on the voice tariffs, and we see that we have a significant price reduction on voice. However, we see that our customers are demanding more and more data. And in this sense, our operation in Myanmar is different from what we see in Pakistan and Bangladesh. The uptake of data services are much higher. 60% of our customers are now active data users and their average monthly consumption is 3.5 gigabyte per month per customer.

With this development, we are then focusing on data growth going forward, and we are then also focusing on building a data network, an efficient data network. We have now implemented a fully virtualized core and we've also implemented what we say -- call a common delivery center for both IT and network. This is giving us cost advantages, but is also a way for us to modernize the network and the IT infrastructure and with that give us advantages. We also have the same approach now rolling out in our other Asian operations.

Then to Pakistan. As I said, we have a quite challenging situation in Pakistan behind us. This is coming from both macro factors. And in this slide, we are showing how much the Pakistani rupee has been devaluating over the last 2 years, more than 30%. It's also coming from the introduction of new telecom taxes. And when this happens, you see how our consumers, our customers are being affected by that. One example that is shown in this slide is the increase in the electricity prices and in the fuel prices. And at the same time, we see that salaries have increased only 8%. This is then hitting all the consumers in Pakistan and maybe us a little bit more than our competitors due to the position we have out in the mass market and in the more remote areas.

If you adjust then for the tax introduction and if you adjust also for the reversals, the underlying growth in Pakistan is 4%. But as I said, we are not happy with that 4%. So we aim to do better than that, and we have initiated activities, especially focused on the cluster-based model that we have had success with in the other Asian markets. However, this can take some time, so I'm not able to give any clear guidance on the coming few months.

Let me close up with this slide. In the Capital Markets Day we had in 2017, now almost 3 years ago, we set out a strategic agenda. And one of the areas we were -- said we were going to focus on was to simplify our asset portfolio. This then to create a leaner, simpler and more focused Telenor. And this is exactly what we have done. And as you can see here, we have done several things over these last 2.5 years. This had then given us a platform, an ability to also look at new M&A opportunities. This is exactly why we approached DNA in Finland, and we have now concluded that transaction and we are now owning 28% of DNA. And it's worth mentioning, without paying much premium. We have now started integration in DNA and also focused on the synergies that we announced when we announced this transaction.

It was with this background we also started negotiations with Axiata in Asia. And we got good feedback from the market that I saw this also as a value-creative opportunity. However, we knew that this was a very complex transaction. And in the end, as you also know, we were not able to conclude. And yesterday, as I mentioned, we also announced merging of our DTH business with the Nordic Entertainment Group.

And with that, I hand over to Jørgen can explain also a little bit more in detail that transaction we announced yesterday. So please, Jørgen.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [2]

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Thank you, Sigve, and good morning, everyone. Appreciate that you are following us this morning at 3Q release.

Third quarter has indeed been an eventful quarter also when it comes to portfolio development. So let's pick up where Sigve left us. After having bought 54% of DNA from the 2 largest shareholder in August, we are very pleased to see that also the MTO, the mandatory offer, has resulted -- has gone well and resulted in an ownership share of close to 98%. And given that we now own more than 90% of the outstanding shares, it is natural for us to redeem the remaining shares and start the process of delisting the company. We expect this delisting to take place in Q1 2020, but we will spend the time that is natural in order to have a thorough and well-defined process on this.

On the operational side, we have started onboarding DNA to our procurement platform to materialize synergies, and we are now also looking, of course, for opportunities to expand service offerings to our Finnish business customers. So we are glad to have DNA in our numbers from 21st August onwards this year.

Then last night, we announced that we will be entering into a joint venture with Nordic Entertainment Group, in short called NENT, combining our Canal Digital satellite-based DTH businesses between Viasat Consumer's DTH and broadband TV business as well. And that is an important part to notice, the broadband TV business from NENT is also included in the transaction. It's a noncash merger where the parties will have 50% ownership. The DTH business is declining slowly but steady declining business, as we know, but we believe that by combining our expertise and our operations that we should be able to deliver enhanced customer experience first and make an even more valuable product for the customer as well as attracting meaningful synergies for the owners. The peak run rate of synergies is estimated to be in the range of NOK 600 million, approximately a full year run from 2022 and will come in 3 main areas. It's the transponder business, so we are moving traffic to the Telenor satellite in its full. It's IT, both support system and core systems, but also customer interface systems. And it's, of course, sales, general and administrative costs, including headcount. Integration costs could be in the range of NOK 800 million on this. The transaction is, of course, subject to regulatory approval by the EU. We expect closing to happen in the first half of 2020.

If we then have a look at the group figures. First, total revenue increased by approximately NOK 2 billion this quarter or 7% compared to last year, of which half of it, approximately NOK 1 billion, was a result of including DNA, and as I said, from the 21st August this quarter, while the other half, approximately NOK 1 billion again, was a result of favorable FX movements in relation to the Norwegian kroner. The Norwegian kroner depreciated to all other currency in the quarter.

This quarter, we see almost stable organic subscription and traffic revenues. It's slightly negative of 0.5 percentage point. And during the quarter, within these numbers, we have continued to see subscription and traffic revenues growing in Bangladesh with 7%. But also, as you can see from the slide, solid performance in Norway, as Sigve was alluding to, of approximately 1.5%, driven by fiber revenue growth of 25% and solid mobile ARPU development in the quarter.

Thailand and Myanmar, the sequential improvement in revenues continued this quarter and both operations have now returned to growth in the third quarter. And we are obviously very pleased with that development, a little bit ahead of what we had communicated earlier.

And then in Pakistan, the growth saw a material slowdown as Sigve pointed to it. It is partly the reintroduction of the telecom taxes. And then also, please remember the very tough comparables we have in this quarter due to reversal of accrual last year. So these 2 elements together put an 18% -- percentage points headwind on subs and traffic revenues developed in local currency. Underlying from this, growth was around 4% positive on subs and traffic in Pakistan, which is a slowdown compared to last quarter and it is driven by ARPU being increasingly under pressure, as Sigve said. And to repeat also his words, the performance we now see is below what we should expect from a market like Pakistan.

A couple of comments, 2 more. The growth in the group continues to be negatively impacted in total due to fixed legacy, which is a recurring item primarily in -- from Norway. The impact is pulling down the group's growth by 1 -- approximately 1 percentage point in Q3. The increased churn we observed within the fixed legacy in Norway is in line with expected trend.

Let's look a little bit at OpEx then. Our modernization and efficiency work is steadily progressing. Nothing has changed. If we adjust for the inclusion of DNA cost this quarter, including the cost base of DNA from 21st August and also nonrecurring M&A costs, approximately NOK 110 million, the OpEx base remained stable in the quarter. So far this year, excluding the M&A costs and also the Grameen one-off that we had in Q2, the decrease is 1 percentage point, which is in line with what we have communicated, the communicated admission of OpEx reductions of 1% to 3% per year to 2020.

Looking at the categories to the left in the slide, there is an improvement in sales, marketing and commission. There is an improvement in regulatory and site rental costs. Marketing and commissions is primarily driven by Norway, while the improvement in regulatory costs is mainly a result of reduced revenue share payments in Thailand after transition from concession to license according with previous quarters. And as you probably remember, this is offset -- this element is offset by lease of infrastructure from CAT in the other OpEx line.

In Asia in particular, we continue throughout this year to see increased energy costs, also in the third quarter, mostly due to higher prices, but also from increased network footprint as we have explained before. The latter again also results in higher operation and maintenance costs.

If we then look at the development per business unit. We see solid cost improvement materialized in Scandinavia with OpEx reductions of 5%, 6% and 9% in Norway, Sweden and Denmark, respectively. It's a very good performance this quarter on this slide. Efficiency improvements within corporate functions is following the latest initiative, the one we named [Epsilon] and talked about in the second quarter. This is yielding the results we have anticipated, and we have also mentioned a full year run rate next year of NOK 0.5 billion. However, this quarter, it's somewhat masked by the commented M&A costs that I talked about.

Going forward, we continue with strong efforts within this area. We believe it is useful for us from an earnings perspective but also from a modernization and agility perspective. So we will continue with efforts and ambition of OpEx reduction of 1% to 3% per year to 2020. We believe there is significant efficiency potential left.

Looking at EBITDA growth. It's important then to keep in mind that we had 2 nonrecurring items last year third quarter 2018, Pakistan with an effect of NOK 500 million and global wholesale in the other units segment with, I believe, NOK 163 million. These 2 elements are impacting the growth on EBITDA negatively by 5 percentage points this quarter. In addition, as mentioned, we had M&A costs this quarter impacting another 1 percentage point. So the underlying decrease in EBITDA is 1.6% and is primarily driven by weak performance in Pakistan. Other units, the negative 2.3 percentage points that you see in the slide is stable when adjusting for one-offs in global wholesale last year and M&A costs. However, contributing underlying to the negative development of 1.5% is also a soft top line development in Sweden and a little bit cost increase in Thailand participating on that.

Reported net income to equity holders of Telenor ASA in the third quarter was negative NOK 0.4 billion, which is a decrease of NOK 6.3 billion. There are 3 explanations that -- for this: High net currency losses of NOK 1.8 billion due to a weakening, as I said, of the Norwegian kroner against all other currencies. Then we have earlier informed the market that we are doing a recognition of an income tax expense of NOK 2.5 billion related to losses of guarantees in India. Norwegian tax authorities disagree with us. They disagreed for this to be tax deductible. We still believe we should have a tax deduction on it, and we will contest their view, but P&L effect comes in this quarter. In addition, if we go 1 year back, we had a gain on disposal of the Central and Eastern Europe assets in the third quarter last year of NOK 1.7 billion that was recognized in the third quarter last year. So these 3 elements are explaining in total the difference in net income between last year third quarter and this year's third quarter.

The ratio of net debt-to-EBITDA this quarter increased by 0.8x EBITDA from previous quarter, primarily as a result of acquiring DNA in Finland. And in this ratio now, we have included 100% ownership and financial effect from DNA in Finland. And of the 0.8x multiple it gives of change, 0.65 is contributed to the DNA transaction.

We also have buyback of shares in the market in the third quarter continued with that. We are now 86% done with that program. That is NOK 1.9 billion. And then we have buying back the proportionate number of shares from the Norwegian State related to the 2018 buyback program of NOK 2.4 billion. These 2 latter elements have a total impact of 0.1x EBITDA. This takes us into the guided range on the leverage side of 1.5 to 2x EBITDA.

Free cash flow in the third quarter was negative NOK 11.6 billion due to the payment of NOK 14.8 billion for the acquisition of the 54 first percent of the shares in DNA in August. Free cash flow before M&A activities was NOK 2.8 billion, which is a decrease of NOK 1.9 billion compared to last year. This decrease is primarily due to the license deposit related to spectrum renewal in Pakistan of approximately NOK 2.1 billion.

Then a quick look at our outlook. One quarter left of the year, we maintain our guidance for 2019. Organic growth in subs and traffic revenues around 2018 level. Organic EBITDA growth, excluding then the M&A costs, low single-digit decline. And CapEx, excluding licenses, in the range of NOK 16 billion to NOK 17 billion.

Even though we see Pakistan coming in somewhat weaker than anticipated, we have on the other side gained good traction in Myanmar, Thailand and Norway this quarter, and we believe that gives reasons to maintain the outlook.

Then let me finish up with an invitation. As you know, we had Capital Markets Day back in 2017, where we set out the strategy and financial ambition for 2017 to '20. We believe that the strategic direction we set out back then has been instrumental in how we have worked in the last couple of years as Telenor Group. We are now fast approaching the end of this strategic period. And we are, as we speak, running a strategy process for the coming years. We believe and hope we have some interesting years of modernization ahead of us with, for instance, the copper decommissioning and modernization in Norway, 5G launches in several markets, new approaches to customers, new offerings and new products, new services. And we will very much like you -- to update you and to discuss this with you regarding the next phase and also set some financial ambitions for the medium term. We hope that as many of you would like to join us for this event, which will be held the same day as we present the 4Q result.

Then Sigve, maybe we should see if there are any questions.

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Sigve Brekke, Telenor ASA - President & CEO [3]

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I guess so.

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Questions and Answers

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Operator [1]

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We'll take our first question from Peter Nielsen in ABG.

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Peter-Kurt Nielsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [2]

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Just a question in Norway. Obviously, you're performing very strongly in Norway. You're indicating that the modernization initiatives are having a positive impact on the top line. But if I understand your comments correctly you have made, the OpEx reductions for this quarter are mainly sort of temporary of nature. Could you perhaps elaborate a little bit on how these modernization initiatives will impact OpEx in the near term, good or bad? Then I don't know if I may take a second one, but could you comment a bit on how you see Sweden? You're struggling a bit to regain growth. Your B2B position seems to be on the assault. Could you give us any comments on how you see the Swedish market now?

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [3]

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Thanks a lot. Do you want me to take the first one?

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Sigve Brekke, Telenor ASA - President & CEO [4]

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Yes. You take the first one and I take Sweden.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [5]

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Yes. So -- thank you. Yes. What we are doing in Norway, as we are also doing in the other business units by the way, is to try to move more and more of our focus and effort on the efficiency modernization side into a more structural approach. And we have talked earlier about the fact that we will have longer lead items in this work because that has to do with the development in how we work and with the challenges and opportunities we see.

So this quarter, Norway came in strong on costs as well as top line development, very good. But obviously, we shouldn't see that kind of jumps every quarter as the natural part for us. We are a lot more focused on seeing that the continued work is taking place in the organization and then we'll get the financial elements into the quarters the way they develop.

We will, of course, have cost consequences of the copper decommissioning. As we have said before, we have indicated a cost base north of NOK 1 billion on that. We have also indicated that, that will come -- most of that will come in the latter part of the 4 years that we set out to work on this, but we will probably see some along the way. We also will see in other part of the modernization in Norway both on the organizational side, on the IT side, et cetera, that we will have effects.

But I'm hesitating to kind of put it into quarters and a time line. The headline then should be that we will continue for 2020 with our 1%, 2%, 3% cost reduction for the group as an ambition. And we will, of course, at Capital Markets Day, come back and talk about the somewhat longer perspective. Sweden?

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Sigve Brekke, Telenor ASA - President & CEO [6]

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Yes. Let me just add a little bit to Norway because you also asked about the top line. And modernization in Norway is not only about reducing costs. It's also about taking a position with growing revenues. So when we now are increasing the fiber a lot, that comes back as a revenue growth. When we are introducing the fixed wireless product on 4G, that is a part of creating revenue growth, but also when we are digitalizing the consumer journeys, simplifying the customer journeys and making it more convenient for a customer to deal with us also digitally. That enable us to do the up-sell into richer packages, but that also enable us, as I said in my introduction, to implement new type of services, like for example, security services that we do now both for consumers and also for the business segment. So modernization is both. So -- and we are happy that the Norwegian team have been able to -- have 2 thoughts at the same time, both on the cost side and on the revenue side.

On Sweden, yes, you are right. It is a competitive market in Sweden, especially on the B2B segment, but also in the consumer segment. I think we are -- of course, we are #3 in Sweden, so we will follow the development also from our competitors. So we want to stay competitive. And we want to make sure that we are offering the very best services to both the consumer segment and to the business segment. But we have seen over the last few quarters that especially the business segment has been challenging. So -- I cannot say anything more about how we see the coming quarters in Sweden.

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Operator [7]

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Our next question comes from Henriette Trondsen in Arctic Securities.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [8]

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Three questions from me, if I may. The first one is, can you give any more color on your strategic review for your total assets?

And also, the second one is on the end of deal with Axiata. Will you now look into other acquisitions or consolidation in Asia? I guess you can say, give any more color on why your discussion ended.

And the last one for me, if I may. The continued weakness in Pakistan. Can you do anything to offset this going forward as your competitors seems to have not pushed over the increased taxes to customers? And what to expect into the next quarter?

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Sigve Brekke, Telenor ASA - President & CEO [9]

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Yes. I can say a little bit about Pakistan and also about M&A. And then Jørgen can cover the third part of your question. Now in Pakistan, as I said, it is a de facto (inaudible). And I think the -- our competitors are also having the same macro effects as we see, but also the effect of that we are not able to pass on the 10% service tax to our consumers. So that I think is an industry issue. What we then are trying to do, as I said, is then trying to be more granular, go into the smaller clusters, go into the villages, trying to utilize the strength we have in distribution and the strength we have in network. And that's why we're saying that I don't want to only talk about the macro effect in Pakistan. I also am not pleased with our own performance. And that's what we are going to do here. And that's exactly what we did in Myanmar to turn that operation around and as we also have done in Thailand. So we have some experiences from doing that. However, I cannot give any guidance on when we will return back to better growth in Pakistan. We will target this as best as we can, and we have now initiated several new activities to see if we can improve the performance.

On the Axiata deal, no, I cannot comment more than what we already have done. It was a complicated deal, and it was due to those complications that we were not able to conclude that deal either. Having said that, we started on a journey when we announced DNA. And it was on back of that, we also said that let's see if we can explore opportunities in Asia. So over the last 2.5 years, we have focused on these 2 regions, in strengthening our position in Nordics, strengthening our position in Southeast Asia. So of course, I cannot give you any comments on are we looking at new things, but we will be looking at value-creative opportunities as we have said all along. But more than that, I cannot comment.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [10]

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Henriette, just a short comment on towers. We are bundling the environments and the business in Norway as we speak, so that is taking place. And we obviously are working on these issues in several of our markets, but we have nothing more to comment at this point. Maybe just remind that we will take a stepwise approach, regardless. We will work from an industrial perspective on this and not a shorter-term financial optimalization perspective. And we are probably, as we have said earlier, going to work on it more in market to market or region at the most perspective because we believe there are distinct differences in the different regions and markets. And as you can also understand, it has had -- the discussions we carried out with Axiata in the summer, of course, included one perspective on the Asian tower opportunity. And now we'll just have to see what we do since those discussions in general stopped.

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Operator [11]

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Next question from Henrik Herbst in Credit Suisse.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [12]

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I think the main question I had was on Norway where quite a lot of the improvement in your service revenue trend seems to be driven by price increases. You didn't do much in prices. Last year, you've done 2 on DSL. Given the subscriber trend, it seems like price increase has gone down quite well. Just wondering how you think about your ability to continue to raise pricing? That was it.

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Sigve Brekke, Telenor ASA - President & CEO [13]

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Yes. I can obviously not comment on that question. Norway is a competitive market. And even though we are a market leader, of course, we need to see what our -- how the competitive landscape -- it's the situation there. But I don't think it's correct to say that the growth is coming from -- only from price increases. I think the consumer growth is coming from the ability to continue to up-sell. And that is actually driven by the digitalization we had over the distribution, meaning that we talked to the customers digitally. And the customers are willing to pay a little bit more when we move them into richer data bundles. But in addition to that, we also see that the customers are appreciating the new type of services that we are giving them. And the ID theft services have become very popular. The family bundle offer that we have where we also are working together with other parties to make the family calendar richer. For example, the Soccer Federation in Norway is one example of that. So I think the Norwegian team have been able then to create more value to our customers. And with that, the customers are willing to pay for that.

On the fixed side, it's very much the same, also increased fiber connections. And also then with that comes the TV offering. So it's a combination of these 3 -- of these things that are driving the ARPU both on consumer and also on the fixed side.

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Operator [14]

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Next question comes from Frank Maaø in DNB.

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Frank Maaø, DNB Markets, Research Division - Analyst [15]

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So my main question really is -- I have a couple of ones actually for me. So in Sweden, just to follow up on that, although you did answer quite detailed on Sweden. We see that in terms of service revenue growth, you're actually lagging Tele2 and Telia by 4 and 2 percentage points in terms of year-over-year growth, respectively, so -- and the ARPU is down 5% year-on-year, whereas, for instance, Tele2 has had a positive [development] of quite flat to positive. So could you help us up with some more explanation as to why you see your ARPU coming up especially more than the competition? Is it the price adjustment that you're doing or different exposure to segments? That will be helpful.

And then on your financial leverage position, buybacks are now nearing completion for the market part. Around 75% has been done. So do you plan on completing the buybacks for this year now that you have reached 1.8 leverage? And is it likely that you will not be that eager to propose a new buyback program for next year given that you are now in -- within the targeted range? I don't know if you can answer that, but any color on that would be helpful.

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Sigve Brekke, Telenor ASA - President & CEO [16]

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Yes. Let me take Sweden. I don't think I'm able to answer very much more in detail than what I already did. But of course, this is something we are looking at. It's mainly on the business segment that we have seen some challenges over the last few quarters, but we are also seeing the pressure on the consumer segment. So what we are trying to do is to focus then on the same customer offerings as we have benefited out of in Norway. We are trying to also digitalize the core operations in Sweden, and we have a lot of focus now on the IT infrastructure and also modernizing our network in Sweden as we have in Norway. But there is also a competitive market. So we see the same trends as you are describing. And the way Telenor works is that when we see opportunities or when we see challenges, we put our efforts to it and our focus to it as we have done in several other markets. So hopefully, we will be able to also perform better in Sweden in the future. But again, I don't want to give any guidance or any comments on that other than we see the challenges and we are focused on trying to solve them.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [17]

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Frank, on leverage and buybacks, first of all, I think the number is approximately 86% or something bought back, if I'm not mistaken. So I think we are in the high 80s. This buyback program, when we put it in execution, it's totally outside Sigve and my influence. We have arranged it so that is within a set of mandates. It's others that are executing on it. But you could assume -- I would think that we are in the high 80s, so there could be a fair chance that this is over by New Year. But I'm in no influence and no insight into what the daily rate will be going forward. And I'm glad I'm not. It's much easier.

Then going further, I think the Board has expressed and also executed on a very, very clear ambition to share the values, the financial values in Telenor in a good and consistent way with its owners. But we have also said that, that is an extra tool in the toolbox. I think we should let the Board carry out their discussions, which I indicated in my presentation, they are in the midst of now on strategy, including of course the financial strategy and see how they want to express this for going forward at, for example, the Capital Markets Day in January.

But I -- so I do not want to comment on that specifically, but I do want to comment that management of Telenor and as far as I've heard also the Board of Telenor is very focused on continuing being a value-creating company to the best of the shareholders as well as other stakeholders, of course. And then we'll see how they want to play it out when we have the Capital Markets Day.

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Operator [18]

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Next question from Andrew Lee in Goldman Sachs.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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I had -- I just wanted to just ask a few more questions around your plans for your Asian assets. And I understand some of it you may not wish to or be able to answer, but I was going to ask anyway. First question was on Axiata specifically. So I didn't quite catch what you're able to say on that, but any more color you could give on why that deal collapsed and on whether it's even possible for you to come back to the table with Axiata with a reduced deal not including any markets that were problematic, that will be helpful.

And then secondly, the proposed Axiata deal included a separate listing for the Asian assets. I'm sure you've heard over the past few months how positively that was received by Telenor investors or noninvestors looking to look at the stock in more detail because it simplifies valuation. And given the current complexity, it either makes Telenor so difficult to value for many. So I was wondering if a separate listing made sense as part of the Axiata deal, could it make sense anyway for your Asian assets?

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Sigve Brekke, Telenor ASA - President & CEO [20]

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Yes. It's a nice try, but several of you have asked the same question after we called off the Axiata deal. And I cannot say more than what we already have said. It was due to the complexity of the deal that made us not able to conclude. However, we read you. As you said, you thought that it was strategically right for us. You said that you like the synergy part of this and you also like the listed Asian assets. So we heard you, but I cannot comment more on what we then do when we are not able to conclude that deal. The only thing I can say is that we have said all along that we are value-driven in whatever we do on M&A. We were value-driven when we bought the DNA. We were value-driven when we looked at Axiata. And we will be value-driven if we look at other things. But that's the only thing I can say. And we will continue to look at our assets, and we will continue to look at what could value-created opportunities look like, but I need to leave it at that.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [21]

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And maybe we should make it 100% clear that it wasn't the deal itself that was too complex. There were some complexities in the project. So that's why it...

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Sigve Brekke, Telenor ASA - President & CEO [22]

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You only took it one step further.

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Operator [23]

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Our next question Roman Arbuzov in JPMorgan.

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Roman Arbuzov, JP Morgan Chase & Co, Research Division - Analyst [24]

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I have 3 quick ones, hopefully. The first one is just around partnerships; you've attempted and executed 2 partnerships, noncash deals. So I'm just wondering what could be the other areas which are ripe for similar partnerships, perhaps some areas where you're not satisfied with the current returns you're getting out of the assets or where you think it's kind of -- there's low-hanging fruit? So for example, would you be open to infrastructure sharing deal in Malaysia post the Axiata collapse? And also can you do more, for example, on network sharing in Sweden and Denmark, and M&A more generally kind of -- so that's the first one.

Second is just a very quick clarification on Pakistan, whether you've actually raised prices at all on the back of the new taxes or you haven't done it? And then how should we think about it going forward? Is there any potential for this or we should just write it off?

And the third one is just on Thailand. So last quarter, I believe, was the first quarter where you've taken market share for quite some time. So that was a very big achievement. And I was just wondering what are you seeing in terms of current trends? Do you continue to take share? And how sustainable do you think that is?

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Sigve Brekke, Telenor ASA - President & CEO [25]

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Yes. Let me start on Thailand. We don't know if we have taken share in the third quarter because we haven't seen our competitors' results. So that we don't know. And our focus now is actually to make sure that the network experience is significantly improved. That's why we are tracking the NPS on network every day. Our focus is on ramping the distribution to make sure that we take our fair share of the new subscriber out to the market. And our focus is then also to make sure that we are transforming the company, modernizing the company also to be more a typical service-based postpaid player. I think that's the focus, more than looking at the share part of it. And I think that is what's coming through now in the revenue growth. And that's also what we are going to look at going forward. This is a market now with 3 players. It is a market which has reduced a little bit some of the very aggressive competitive moves we saw a year ago. So the handset subsidies are much less. The unlimited offers on prepaid are basically gone. So it is a market which we think has the opportunity to grow as an industry. So that's our focus, and we don't want to disturb that with doing something that could trigger another spin of various competition.

On Pakistan, now there have been very -- we tried to take some of the 10% service tax and pass it on to consumers, but this is what the court then said that we are not allowed to do. So because of that we have had a very marginal price change in Pakistan. Going forward, we -- of course, this is hitting the whole industry. It's not only us. So going forward, we need -- in a competitive landscape, we need to see on how do we deal with this if there are any opportunities to do something with the prices or if there are opportunities to also -- to do something with our offerings. But bear in mind the macro effect of this. When their electricity prices are going up 23%, when the fuel prices are going up 25% and when the currency is -- has come down 30%, it is definitely less purchasing power among the people. So it's a combination of this we need to look at. And that's where we have learned from other markets that if you go very granular, there are potential pocket for growth out in certain areas where we have a very strong position, being on distribution and our network. So -- but I cannot give you any guidance on how this will look like in the coming few months, but we are definitely having focused on Pakistan from the group level as well, for me and Jørgen, as we did on Thailand, as we did on Myanmar to turn those operations around.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [26]

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Should we also comment on the partnership thing?

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Sigve Brekke, Telenor ASA - President & CEO [27]

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Yes.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [28]

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We understand from your question you are talking about predominantly structural partnerships and on the kind of M&A business structure side, but let's take one step back. We said and have said throughout the last couple of years in management of Telenor that we need to continue to develop our ability to be a good partner and to work and attract good partnerships. And that goes much further in the company than on the financial side and a joint venture here and there, but it means through partnerships. I think where you see the best is probably within the technology and operational side where we have the dual-vendor principles, where we work on the CDC setups that Sigve talked about this morning and has talked about before, where we're really going to very strong partnerships with our vendors. And we think simply as a telco company that attracting and working well with partners, first of all, is not always easy, so we need to be good at it. But it is important, if not critical, for us to create good value going forward.

And then to your question on the structural financial side. We have applied a few different models. Central and Eastern Europe, we went out of simply because it was subscale and there were a few other things in there and we wanted to concentrate on the Nordics and on Asia. And we then went into DNA, which we, by the way, were able -- willing, more than willing to be in a kind of partnership on keeping it listed. And now the voice from the other minority shareholders has been so that we are going to own it 100% ourselves.

Financial services, we have been fortunate to attract strong partners in the digitalization journey of that. It wouldn't be as easy to do it by ourselves. It's not easy anyway, but do it ourselves was not what we should do. We have for many years had the practices that you said in Sweden and Denmark on the tower side and on the spectrum side and so on. So I think we don't have any new thing to inform about. But in general, we have been there for a long time. We have done a lot now. We are constantly talking and discussing about how we can be a better partner and develop strong and good value-creating partnerships. And we will also, from an ownership perspective, seek the most valuable value-enhancing solutions for it. And then it is also difficult from time to time to be partners, so also that will give us challenges.

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Operator [29]

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Next question from Terence Tsui in Morgan Stanley.

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Terence Mun-Sion Tsui, Morgan Stanley, Research Division - VP [30]

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I had a question around the transaction of Nordic Entertainment Group. Maybe you can just give us a bit of background behind the deal. Why now? For example, how did you get to the 50-50 ownership agreement? And what are your plans now? Or does this change your view around content and owning content?

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [31]

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Yes. So why now? I believe that this has been a combination that I assume many have thought about for many years, and it is a combination that makes very much sense. And it makes sense obviously for the 2 owners, but it also makes sense for the customers and for the services that are delivered. In particular, when you get in a business in predominantly decline, the ability to have enough size to continue to renew the product offerings and to stay innovative in customer solutions is critical, but you need size to defend that.

Why now or not 2 years ago and why not in 3 years? That is -- well, first of all, a little bit about, I guess, company's priorities. We have started in a different end of the list. This is then more wrapping up the list as we set it out in 2017. NENT has, as you know, become a more focused company. Sigve and I, I guess, would like to also to recommend Anders Jensen for his hard work in making this happen on their side. So we have had a good chemistry and made things work. So that is probably the reason behind that.

Then the IPTV solution of NENT is included in the transaction, which obviously from a financial point of view have a different kind of multiple, different kind of growth prospects. It's also a very interesting business that the joint venture thing can be developed further. And then there are several agreements fitting up to this, the satellite content into it, et cetera. So it all boils well together, and we are very pleased with the ratio and with the setup of the company.

We -- as I said, this is one unit in a large market with fierce competition. And we really think that this will enable those who want to continue with the satellite setup and who perhaps even needs that in lack of fiber or other solutions. We really think that this a very good thing to do to keep giving them good offerings and, as I said, innovative products going forward. We assume around one evaluation in the EU, but we don't know. And we have said first half 2020, hopefully, we should be able to conclude it by then. But we are very excited about it and Anders sounded excited as well. So that was good.

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Operator [32]

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Next question from Johanna Ahlqvist in SEB.

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Johanna Ahlqvist, SEB, Research Division - Analyst [33]

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Two short questions, if I may. First one is related to CapEx, because most of your Nordic peers have guided that CapEx is expected to increase in 2020 driven by the 5G network upgrade, what you can say, and I guess, you're facing the same network upgrade in the Nordics. So do you also foresee that CapEx will increase from current level?

And then my second question, basically a follow-up of the previous one related to the NENT transaction. I know that you've been talking about that you're sort of reviewing your previous strategy. And I was wondering should we -- is this NENT joint venture a first step in -- that will leave you also entering into content? Or are you firm in your previous statement that Telenor should not own content yourself? I'm just wondering.

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Sigve Brekke, Telenor ASA - President & CEO [34]

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Yes. I can answer the content question, and then Jørgen can take CapEx. No, you should not read that into the NENT deal. This is a transaction, as Jørgen said, that is value created out of the synergies in a business that we see is slowly declining going forward. We remain having a strategy where we do not believe that we should be owning content. We see ourself more as a distributor of content. So there's no change in what we have said before on that.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [35]

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On the CapEx number, we would prefer to wait until we meet again in January. We have so far said that the 5G as such -- early phase of 5G, we should be able to capture most of that into our existing CapEx frames. We think this is a granular and very surgical, specific exercise in order to do this value creating. And by the way, the network modernization in general and the cloud-based systems that we are anyway putting up will be a key part of a 5G structure in some of our markets.

But then we have the modernization and the copper sunsetting on top of this, so we have a very packed program in particular in Norway right now, as you can see. Still, we think we should cater for most of this within our frame. So that is what we are alluding to.

I think we can take 2 or 3 more questions and then we have to end the session.

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Operator [36]

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Next one is from Nick Lyall in SocGen.

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Nick Lyall, Societe Generale Cross Asset Research - Equity Analyst [37]

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Just one for me, please, on Grameen, if that's okay. It's still your main growth driver on the service revenue side. And it looks like it slowed by 3 to 4 percentage points this quarter because of the uniform rates. But are you concerned that the further pressure from the Finance Act and regulatory measures are coming? Should we be concerned that growth is going to slow further? And secondly, will all that disappear if you just pay up on the BTRC audit? Could you just explain how the 2, if they do combine, could be offset and avoided?

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Sigve Brekke, Telenor ASA - President & CEO [38]

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Yes. I don't think those 2 issues are related. So let me take the growth issue first. Yes, you see a little bit slow growth in the third quarter than you saw in the first half of the year, but that's coming from a couple of issues. One is that the comparables are more tougher, looking at the comparable we had in the third quarter last year. And the second one is also introduction of a SIM tax and that was done in the middle of the quarter and -- which basically means that the new subscribers need to pay more to get a SIM card than they did in the past. That's why you see that the new subscribers is slowing a bit down. Having said that, we are continuing to drive the market on being competitive of voice. But more importantly, see how we can drive the data consumption. And still, it's less than 50% of our customers that are using data. Still, the penetration of smartphones are relatively low. And that's where we see that we can grow the ARPU, where we get people to start moving from voice into data. So going forward, we see that there is good growth potentially in Bangladesh or in Grameenphone without giving you any guidance on the number.

The other issue, it's the audit with BTRC or with the regulator. Of course, we take this serious. However, we have seen also similar things to happen in the past. So we hope now that we can move that issue into a dialogue and trying to find a solution on it. And this is not only for us. This is also an industry issue where at least one of our competitors are involved in the same discussions.

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Operator [39]

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Next one from Usman Ghazi in Berenberg.

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Usman Ghazi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [40]

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It's Usman here from Berenberg. I have 2 questions, please. Firstly, just with all of these -- with all of this slowdown in China and the Chinese economy feeding through into the Southeast Asian region, I mean, are you kind of seeing any impact on usage trends for data or on voice usage or anything of the like that might be giving you an indication that there could be kind of macro pressures on growth more broadly in the region going forward?

And my second question is just a bit of housekeeping. I mean, on the deal announced yesterday, are the assets being contributed on a debt and cash-free basis? And on -- I read the release saying that the cash flow will be distributed back and dividends to the JV partners. Is that going to be 100% of the cash flow being distributed back?

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Sigve Brekke, Telenor ASA - President & CEO [41]

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On your first question, no. It's very difficult to answer that question, of course, but I think we more see macro issues in the various countries. For example, Pakistan, which is more due to the devaluation of the currency and also due to the need to raise taxes as part of the IMF deal. And you can say -- see the same in Malaysia where we see that there are fewer immigrants now than there have been in the past. And traditionally, we have been strong in the immigrant segment. But other than that, I think it's difficult to say that the development in Chinese economy is influencing the growth perspective in our markets.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [42]

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The answer on the second question is 2x yes. Although when it comes to distribution of cash back, yes, I wouldn't say 100% because they will -- first of all, this will be an arm length basis company with a clear policy on dividend and so on. But as I also have said, we want to develop good solutions for customers and continue to be an attractive offering in that company from a value-creation perspective. So it won't be so that we are taking out cash to the extent that the company is not able to give good customer offerings. But except from that, yes, cash back.

Is that the final question? Or are we through the list?

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Operator [43]

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We have more questions.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [44]

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Yes. I think we can take one more and then we need to stop.

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Operator [45]

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We'll take our final question from Siyi He in Citi.

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Siyi He, Citigroup Inc, Research Division - VP [46]

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I just have one question, please. Just a follow-up on your CapEx comments. I mean if I look at Thailand, you clearly have benefited from the high CapEx investments with better customer growth and NPS. And you have been running CapEx at NOK 16 billion to NOK 17 billion for the last 2 years. I was just wondering, based on the Thailand experience, whether you have -- if you're thinking of your CapEx strategy going forward, assuming if you could get better customer loyalty and NPS, especially in your Asian footprint.

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Sigve Brekke, Telenor ASA - President & CEO [47]

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No. I think the CapEx we have used in Thailand in the last year, of course, is due to their new license or the new spectrum that we got. And I think when you look at CapEx at the group level, we really look at the balance between CapEx and the amount of spectrum that we have, but we also now see clear effects of the centralized recruitment company that we setup, so we -- the company that is based in Singapore and the ability we now have to use group leverage to actually take down the prices. We really see benefits out of that. And I also think we see some benefits out of some of the modernization we have done in our networks. So it's a part of that. Having said that, we are measuring now the Net Promoter Score, NPS, the network part of that in every market. And we see that this is by far the most important part of making a customer satisfied. So this is something we stay very close to. And we are then deploying CapEx accordingly to make sure that we have that position in all the markets.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [48]

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Thank you very much for listening into our third quarter results, everybody. Thank you.

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Sigve Brekke, Telenor ASA - President & CEO [49]

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Thank you.