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Edited Transcript of TEL.OL earnings conference call or presentation 16-Jul-19 7:00am GMT

Q2 2019 Telenor ASA Earnings Call

Fornebu Jul 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Telenor ASA earnings conference call or presentation Tuesday, July 16, 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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* Adam M. Fox-Rumley

HSBC, Research Division - Analyst, Global Telecoms, Media and Technology Research

* Andrew J. Lee

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Frank Maaø

DNB Markets, Research Division - Analyst

* Johanna Ahlqvist

SEB, Research Division - Analyst

* Mandeep Singh

Redburn (Europe) Limited, Research Division - TMT Specialist Sales

* Maurice Graham Patrick

Barclays Bank PLC, Research Division - MD

* Peter-Kurt Nielsen

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Roman Arbuzov

JP Morgan Chase & Co, Research Division - Analyst

* Terence Mun-Sion Tsui

Morgan Stanley, Research Division - VP

* Ulrich Rathe

Jefferies LLC, Research Division - Senior European Telecommunications Analyst

* 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 to everyone and let me welcome you to the Q2 presentation for the Telenor Group. I will start off with some highlights, followed by our CFO, Jørgen, and then we will open up for a Q&A, and the whole session will take around 1 hour.

Okay. The result for the second quarter is confirming our effort and our ability to execute on our strategy, a strategy that is driven by modernizing our company. And it's a strategy where we are building value through our core business in the 2 geographical platforms we have in the Nordics and in Southeast Asia. Therefore, this quarter, we also took several steps on the M&A side, which I will talk about later.

But first, some operational highlights. We see a continued strong performance in Norway. The fiber growth momentum continues, 20% year-on-year growth on fiber for this quarter. I'm also pleased to see that we are continuing to drive growth through increased ARPU on our consumer business, 2% ARPU increased this quarter.

We also see that the recovery in Thailand and Myanmar is on track, a clear quarter-on-quarter -- Q-on-Q revenue growth, and we are targeting a year-on-year growth in the fourth quarter of this year for both these 2 operations. The growth markets in Bangladesh and Pakistan are also continuing to deliver: double-digit growth in Bangladesh coming from new subscribers and data growth, and a 9% underlying growth also in Pakistan. However, due to tax reversals, we are reporting a flat revenue development.

Let me dig a little bit more into Norway first. This second quarter in Norway reflects a steady progress on efficiency and our revenue renewal agenda. As a result, we see that the S&T revenues remain stable despite continued decline in the fixed legacy revenues. I'm pleased to see, as I already said, a 2% ARPU growth in the mobile business. This is coming from a continued up-sell logic that we have where we take customers into price plans with more data. We also see that we are getting clear effects of these investments we have done over many years now into our mobile network. And the superior position we have on our mobile network is paying off. The same growth we also see coming through in the fixed broadband business, a 2% ARPU growth also there, and we see a 3% growth in the TV revenues.

In addition, we also see a steady progress on the efficiency agenda. After several years with making our Norwegian operation more efficient, this is now becoming a way of work, systematically attacking all efficiency potentials in our operation and also doing that with continuing digitalizing our core business. And if we adjust for the transfer of business from group to Telenor Norway this year, the OpEx continued to decrease, 1% reduction this quarter, and this is mainly coming from improvements in sales and marketing and in operation and maintenance.

As we talked about in the last quarter, we are planning to decommission our copper network, and this is a very important part of our modernization strategy. The ambition is to sunset the copper network within 4 years. To do that, we will then migrate our customers to fiber and mobile replacement products. And now we have detailed plans on how we are going to do that.

So let me explain a little bit more in detail what the plans are. On the left-hand side of this slide, you see that we are increasing our fiber rollout. This quarter, we added 11,000 new fiber subscribers. And in the second half of this year, we are going to ramp that up further.

In the mid of this slide, you see what we do on the wireless broadband access. Outside the cities, in more remote areas, we think that the fixed wireless product, it's very suitable to provide broadband access to our customers. This is then to use the excess capacity we have in these areas. A fixed wireless product on 4G was launched a month ago, and we now have more than 2,000 customers using this product. It's, as the picture shows, coming with an outside antenna and which has a geo lock. We have launched 3 price plans, 10, 30 and 100 megabit per second. The 10 megabit per second, it's approximately the same speed you will get on a copper network, and the price is also approximately the same. But with a much better experience you have with our mobile network, there is an opportunity here than to do up-selling for these customers.

The yearly cost for our copper network, it's approximately NOK 1.2 billion. This is 2018 numbers. And over the 4 coming years, we are gradually then slowing -- shutting down the local exchanges, and we have more than 4,000 of those exchanges, and with that reducing the cost. This is what we are illustrating on the right-hand side of this slide. However, in the period, the 4-year period, we will also have some costs to migrate our customers to alternative products, and you can see the illustration of that. Expect that the CapEx level in Norway will be somewhat higher in the years to come compared with the previous years, but it will be within the overall group guiding of around 15% of sales.

We have talked about now for the last few quarters about our recovery efforts in Myanmar and in Thailand. I'm very encouraged to see how things now are developing in accordance with plan. Both operations has since the end of last year, seen a steady growth in subscription and traffic revenues. And in both operations, we are now expecting to come back to a positive year-on-year growth in the fourth quarter.

In Myanmar, the recovery started in the first quarter of this year, and it continued into the second quarter. And in the second quarter, we added 1.4 million new subscribers. And the total subscriber base now in Myanmar, it's close to 20 million, 19.8 million. Our strategy in Myanmar in this recovery period has been to continue to build our strength in distribution, our strength in brand, and also our strength in network. And we see now that this is paying off. The year-on-year growth is still negative due to ARPU effects that we got from price regulations last year in September. However, this will be annualized then in September this year.

In Thailand, since we secured more spectrum last year, our strategy has been to use that spectrum, roll out a new network, and with that improve customer service. And this is a strategy that our management in dtac in Thailand explained when they had their Capital Markets Day in June. And we see that these strategic efforts are now paying off. There are clear signs of recovery. I actually want to take the opportunity to send a little bit of a greeting to our team in Thailand. I'm very pleased to see now that the energy and the fighting spirit is back in the organization.

The long-term strategy in Thailand has been to transform a prepaid very promotion and high churn-driven business into more postpaid data and service bundled packages. And then because of that, also pleased to see that the solid postpaid revenues growth is now continuing, a 5% growth -- revenue growth in the second quarter. It's also good to see that we have a positive trend in uptake of new postpaid subscribers, and we are now taking customers from our -- from other operators. In addition, we continue to migrate prepaid customers into postpaid data bundles. This is now more possible because of that the most aggressive prepaid offers are no longer in the market.

As I said in the beginning, Q2 has also been an eventful quarter when it comes to our portfolio development. In April, we announced a transaction in Finland. And in May, we announced a discussion we have with Axiata. You may remember that back in 2017 when we actually laid out our strategy that we are currently following, we said that we want to simplify Telenor with selling off some noncore assets and focus the future Telenor on core telecom businesses in the Nordics and in Southeast Asia. And during the last 2.5 years, this is exactly what we had done. And we now believe that we have the capacity to engage in transactions with significant value potential. And we believe that both the Finnish transaction and the potential Asian transaction is creating the value and being a good fit for the future Telenor.

In Finland, we announced to buy 54% of the Finnish operator, DNA. As you may be aware of, yesterday, we got an approval from the EU Commission. And after some customary approvals in Finland that we also need, we will then close this transaction. We expect that closure to happen in August. After closing, we will have to launch a mandatory tender offer of the remaining shares. This will happen at the same price as we paid the 2 main shareholders when we bought the 54%, EUR 20.9. We believe that the MTO price of EUR 20.9 is very attractive, and we anticipate that many of the shareholders will take the opportunity to tender their shares.

Then early May, as I said, we announced that we are in discussions with Axiata regarding a noncash merger of our Asian operations. We believe that this is an opportunity that will create significant value through estimated synergies of USD 5 billion. We are currently in discussions with Axiata, doing negotiations and doing the due diligence. We aim to conclude an agreement in the third quarter. We are hopeful to reach an agreement. And when we do or if we do, we estimate that it will take around 9 to 12 months before the necessary regulatory approvals has been achieved in the various markets.

And with that, I hand over to the CFO, 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 to everyone from me as well. Modernization is, as we have previously said many times, a word that embraces more or less everything of what we do in Telenor right now and what we believe we will continue to do in the years ahead. I believe modernization we now are doing is critical if we want to stay relevant for customers if we want to stay agile and competitive. Growth, efficiency, simplification are all our most important elements in this modernization journey and a prerequisite for us to become more digital.

While the financials for the quarter is impacted by some special effects, and I could apologize for that, the underlying performance remains, in our view, very steady. And we continue to make progress on our modernization program across the group. We see clear signs of revenue recovery in Thailand and Myanmar. We see continued underlying cost improvements and also good traction in planning of future structural initiatives. Network modernization happens in several markets, including, but not with only, the copper decommissioning in Norway. In addition, as Sigve said, we have taken important steps towards developing our portfolio also in this quarter. The portfolio development we have been working on the last couple of years is again for Telenor an important part of the modernization journey and will, we believe, create an even better foundation for future value creation for shareholders.

If we look at the group figures, total revenue increased by NOK 0.5 billion, approximately 2%, of which 1% was a result of favorable FX movements in relation to the Norwegian kroner. This quarter, we see a slight decline in subs and traffic revenues, or stable if we exclude Thailand as per our current guiding. During the quarter, as Sigve said, we continued to see strong subscription and traffic revenue momentum in Bangladesh of 13%. And as you will see from this slide, continued robust performance in Norway from fiber revenue growth of 20% and solid results also in the mobile consumer segment.

In Pakistan, the underlying growth remains strong at 9%. Reported growth, however, was flat in this quarter. This is explained by a service charge of 10%, which the industry in Pakistan reintroduced when the telecom taxes came back in April. According to Pakistani Court, the operators are not allowed to add this extra charge. We believe that despite the disallowance of the service fee, we see continued growth potential in Pakistan, in particular from monetizing the increased data usage and the interest in buying our services more and more.

The group's growth continues to be somewhat negatively impacted by fixed legacy, developed Asia and Myanmar. However, both Thailand and Myanmar are now seeing sequential improvement in revenues. And their growth rates will improve further going into second half of 2019 as the operational momentum is improving and also, the comps, by the way, from last year are getting somewhat easier. Fixed legacy decline, primarily in Norway, continues along the lines of previous trends this quarter, pulling down the group's growth by 1 percentage point.

If we then look at the next slide, modernization and efficiency improvements continues to be, as I said, a top priority to us. This quarter, FX-adjusted OpEx decreased by 1% if you exclude a one-off in Bangladesh related to commission payments. Due to the materiality of this effect, Grameenphone has chosen to restate their financials for last year, while we at Telenor Group level take this as a onetime correction this quarter.

We have positive one-offs in Myanmar and Malaysia this quarter, but that is more or less offset by higher project costs related to ongoing M&A transactions and also some external support for the copper decommissioning in Norway. The underlying decrease is, in my view, in line with the communicated ambition of OpEx reduction of 1% to 3% per year at 2020. Going forward the next few quarters, we anticipate the OpEx development to be somewhat impacted by cost related to the ongoing M&A activities.

If we take a look at the OpEx by category, there is an improvement in sales, marketing and commissions. We also see salaries and personnel cost coming in lower, as expected, and site rental cost the same for this quarter. Site rental is mainly driven by a positive settlement in Myanmar and then renegotiation of lease contracts in Malaysia.

In Asia, in particular, we see an increased energy cost in 2019 mostly due to higher prices, Pakistan and Myanmar predominantly impacted by currency devaluation versus U.S. dollar and energy prices in U.S. dollar, but also, of course, from increased network footprint. And the latter effect also result in slighter -- slightly higher operation and maintenance costs this quarter.

If we take a quick look at the end at the development per business unit, we see the result of efficiency improvements within corporate functions, as we have discussed before, coming from continuing simplification effort and structural changes across all staff units. In addition, we see continued solid efficiency gains in Sweden, slightly offset by increase in Pakistan and Thailand. So we continue to see strong efforts toward the ambition of OpEx reduction 1% to 3% per year through 2020. We believe there is significant efficiency potential left.

Quick look at the EBITDA development. We have had some extraordinary items this quarter, which I have now mentioned already, impacting negatively 4 percentage points. Underlying development is then stable. And if you exclude Thailand from the numbers, again referring to the guiding we have had up until now, the growth on EBITDA is 3%. Solid improvement from efficiency initiatives in corporate functions is yielding significant improvement in Q2. We also expect further benefits from this in second half. The negative EBITDA performance in Thailand is primarily then explained by reduced S&T revenues, of course, and as we have talked about before, 1 month extra TOT lease cost this quarter. We see sequential improvements in both Thailand and Myanmar, which we believe will ease the drag on EBITDA growth in the second half of 2019.

Net income to Telenor equity holders this quarter ended at NOK 3.1 billion or NOK 2.12 earnings per share. This is NOK 0.5 billion higher than last year, and it was primarily due to NOK 1.1 billion lower net financials due to currency as well as lower depreciation after the end of concession in Thailand, somewhat offset by higher taxes in the period. In addition, please bear in mind that the net profit from the discontinued Central/Eastern Europe operations was still included last year.

Free cash flow was negative in the quarter NOK 0.9 billion. So far this year, we have free cash flow of NOK 1.6 billion, lower than last year, of course. The free cash flow was negatively impacted compared to last year with approximately NOK 2 billion in a different phasing of CapEx payments due to higher CapEx or investments in fourth quarter and first quarter this year. As opposed to same period previous year, we have paid more CapEx or have a higher CapEx expenditure earlier in the period. It is also NOK 2.3 billion settlement for CAT in Thailand and also then Central/Eastern Europe operation included last year in group cash flow with NOK 1.8 billion. These 3 effects accounted for approximately NOK 6 billion altogether.

Net debt/EBITDA this quarter increased with 0.1x EBITDA from previous quarter, primarily as a result of paying out the first tranche of the ordinary dividend to shareholders as well as the start of the buyback program. Altogether, this accounts for NOK 7.3 billion. We will have a couple of elements, all other things equal, that will bring up the ratio further. We will have the acquisition of the 54% of DNA in Finland, we will have the last tranche of ordinary dividends and we will continue our share buyback program. All in all, this will give a factor of 0.6 to the EBITDA -- net debt/EBITDA ratio. Then we have the MTO, the mandatory tender offer for DNA in addition, and then we have ordinary cash generation for the group.

Let's then go to the outlook. As you know, we chose to exclude the operation in Thailand from our guidance previously due to lack of visibility. dtac hosted then, as promised, a Capital Markets Day in June where they presented an outlook for 2019. As such, we are now including Thailand in the group's guidance from this quarter onwards. The new outlook for 2019 is organic growth in subs and traffic revenues around 2018 level or stable; organic EBITDA, low single-digit decline; and CapEx, excluding license, in the range of NOK 16 billion to NOK 17 billion, which is unchanged from the previous guiding.

In addition to a more technical inclusion of Thailand, the guidance also includes a couple of other items, which I will take you through. So just to explain a bit the rationale for the new guidance. Including Thailand in revenue -- takes the revenue growth slightly down, as expected. In addition, Malaysia has, this quarter, revised their guidance for 2019 from flat to low single-digit decline. Adding these 2 elements result in a guidance for Telenor Group of stable subs and traffic year-on-year for 2019.

Then if we look at the EBITDA, including Thailand, takes the growth down to around stable. We also have the one-off in Bangladesh this quarter and the revised guidance for Malaysia from low single-digit EBITDA growth to low single-digit EBITDA decline. In addition, we have a couple of other new elements this quarter which has a negative impact. This is the impact from the service charge regulation hitting revenues in Pakistan in Q2, termination of an MVNO contract and further regulation on special numbers in Norway. All in all, this takes the EBITDA growth, in our view, down to low single-digit decline.

And then I would like to remind us that we have very tough year for comparables in 2019. We have NOK 700 million in positive onetime effects in Q3 last year that needs to be catered for. We have NOK 400 million then in higher cost related to TOT payment this year. We have the NOK 300 million negative one-off in Bangladesh this quarter. These factors alone has more than 3 percentage points negative impact on EBITDA growth. In addition, we have the transition from concession to license in Thailand and new entrant and price regulation in Myanmar affecting the numbers significantly. So we believe that looking beyond these effects, the EBITDA development remains robust in 2019.

So to summarize, it's been another quarter where we have focused on executing on our strategic priorities. However, they are somewhat less the numbers coming out this quarter, less visible than previous quarters due to a few one-offs and tax-related effects. Our priorities remain firm. As Sigve was saying, we will continue to modernize Telenor and assure continue value creation for both customers and shareholders.

Sigve, join me for Q&A.

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

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Sure.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [4]

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Then we are ready for a Q&A session. Moderator, may I have the -- may we have the first question? Moderator, are you there? We'll see if we get the system to work properly. Moderator? Thank you.

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Questions and Answers

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Operator [1]

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We will now take our first question from Peter Nielsen of ABG.

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

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Jørgen and Sigve, just a question related to Norway, please. As you highlighted, there's been a slight acceleration in the decline in the fixed legacy revenues. How should we view developments in these revenues, which of course are profitable revenues, going forward now that you're embarking on the copper decommissioning? Would this sharply sort of accelerate the decline? How should we think about this? And how do you think you're -- the scope you have for balancing this in the near term in terms of the -- when you shut down on the copper network?

And if I may just ask my follow-up, any updates on your deliberations on the real estate and towers, which you mentioned 3 months ago? You haven't sort of commented on them today.

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

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Yes. I can take the first one and then you can take the real estate, Jørgen. No, we don't have any exact numbers to give you on that. But as you know, over the last few years, we have seen a kind of quite steady decline of the legacy business and also the legacy copper business, and that will continue. We don't think you will see a sharp decline. It's more that the line will continue. And then we will get more and more experience, especially on the fixed wireless product, and how that is working and to which extent we can roll that out further. So I don't have any more updates or figures to give you on that.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [4]

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Yes. Peter, for the real estate initiative, we are, as we said, conducting a review of our real estate portfolio. It’s related to the fact that we have several properties and buildings around, which are also operationally less important going forward with the copper initiative that Sigve were talking to -- talking about. So we are in the midst of that review. You should anticipate that we will gradually and stepwise reduce that portfolio, but I'm not prepared to say anything more about it. We are also looking into optimizing the way we operate our towers in Norway. We will also revert to that when we are ready to say anything.

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Operator [5]

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We will now take our next question from Maurice Patrick of Barclays.

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Maurice Graham Patrick, Barclays Bank PLC, Research Division - MD [6]

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Maurice here. Quick question on Pakistan, please, and the slowdown you've seen in the quarter because of the service tax. How should we expect the progression of the impact for the next few quarters? I mean you saw a huge or significant sequential slowdown due to the service tax. Should we consider that will continue for the coming quarters? I know, Jørgen, in your comments, you made some statements around how you'd expect to still see growth come through data monetization, but I guess that's more gradual. So I guess the phasing of Pakistan for the rest of the year would be helpful.

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Sigve Brekke, Telenor ASA - President & CEO [7]

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Yes. Again, I cannot give you an exact forecast on that. But we see a continuous strong underlying growth, also the 9% underlying we saw in the quarter. And we see that coming from both new customers that never had any mobile subscription before, but we, first of all, see it from customers starting to use data. And the percentage of our customers that are using data, it's still around 50%, and the smartphone penetration is still quite low. So we are now looking at, I think we called it mitigating actions for how we can mitigate some of the 10% tax effect. And we are hopeful that we'll mitigate some of that as such that the underlying growth also can come out as a revenue growth. But I don't think I want to be more specific than that.

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Operator [8]

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Our next question comes from Johanna Ahlqvist of SEB.

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Johanna Ahlqvist, SEB, Research Division - Analyst [9]

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Two quick questions, if I may. First of all, related to VEON, I think it expires in September if I'm not wrong. And what are your view on -- or what you will do with it at the time? Do you want cash? And what do you want to do with those cash?

And the second question actually relates to competition. In Sweden, we're seeing some intense competition from Three. I guess you don't see anything in the quarter. It doesn't seem like it. Or have that made an impact? And in Norway, do you see any change in competition in the quarter?

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Sigve Brekke, Telenor ASA - President & CEO [10]

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You should take VEON first.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [11]

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Yes. Johanna, thanks for the question on VEON, but we don't have any particular comments. It's due in September, and we will follow the procedures related to these convertible bonds, which means that there are some timelines upfront that need to be respected and then you go into the execution according to the September timeline. So you should just follow what we are doing.

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Sigve Brekke, Telenor ASA - President & CEO [12]

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Now on the competition in Norway and in Sweden, I don't think we see any major changes there. Both these 2 markets are competitive. We have an attacker in Sweden, Three. We have an attacker in Norway with ICE. But I wouldn't say that the competitive landscape is materially changing. So what we are really focusing on in Norway is then to continue to give our customers more value. And that's not only with filling those up-sell price plans with more data, it's also to fill them with some new top-up services, for example, the security services, the ID theft insurance that we are giving them, some family offers and so on and so forth. So we don't see that that landscape did change in the second quarter, and we don't expect that to change significantly in the quarters to come as well.

There -- both in Norway and Sweden, we see that there is quite tough price competition on some of the public tenders on B2B, especially in the public sector. And some of them, we lose because we don't think they are profitable, and you will see some of the effects of that both in Norway and in Sweden in the second quarter. But that's how it has been and how it is. However, we are trying to position our B2B business now on more up-selling services, more integrated services to stay away from only a price competition.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [13]

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And which also belong to the preferences with a lot of our customers to advance their business.

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Sigve Brekke, Telenor ASA - President & CEO [14]

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Yes. Exactly.

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Operator [15]

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Our next question comes from Ulrich Rathe of Jefferies.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [16]

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I would like to just come back to the first question on the legacy revenues in a different way. The fiber rollout you're saying is sort of ticking along according to your plans, and you want to accelerate it. But it does seem, based on regulatory data, that the sort of the old net, the utilities are actually taking share in fiber. So the question I suppose is, where do you see this settling down? What part of the country are you going to be an incumbent, assuming that they are not going to really overbuild head to head with the likes of Lucent and others, given your current fiber rollout and the plans, how you want to accelerate that? Where is this going to settle? What's the endgame there?

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Sigve Brekke, Telenor ASA - President & CEO [17]

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I think let's take a little bit holistic view on that first. I think there is another 2 years at least with the land grabbing on fiber, and that's why we did decide last year to speed up our fiber rollout. And I think that what we are doing now and we'll speed it up even further in the second half of the year, I don't think we are losing market share now in that land-grabbing race, and that will continue for the next couple of years. There, the competition on fiber is very different from region to region, even more local than that. So it's difficult to answer your question.

We don't see our self being the incumbent in that way. But we are now rolling out fiber in the areas where there is no fiber at all, but we are also rolling out fiber now in areas where we have the copper connection. We are yet to kind of go in and rollout fiber where that is already in the ground. So I think the aim here is that the current market share we have in fiber is probably 22%, 23%, in that range. And the aim is to at least keep that and hopefully also increase that, but also then to take really share on the fixed wireless broadband products that I talked about.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [18]

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And the combination of fiber and the fixed mobile broadband, as Sigve explained, talked about earlier is, of course, our way to maintain as much as we can of the customers that are then stopping their use of the copper setup. So -- and there will be other competitors also coming into that area, and it should because that would be, in some cases, efficient. But we think we will do a very good coverage with the combination of fixed mobile broadbands and the fiber rollout.

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Sigve Brekke, Telenor ASA - President & CEO [19]

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And we are quite bullish actually on the fixed wireless access broadband replacement product. And that is due to our very good coverage in Norway, and it's due to the spectrum position we have and then the excess capacity we have out in these more remote areas. So the 2,000 customers that are signed up already in 1 month, we expect to increase quite significantly.

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Operator [20]

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Our next question comes from Terence Tsui of Morgan Stanley.

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Terence Mun-Sion Tsui, Morgan Stanley, Research Division - VP [21]

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I had a big-picture question around your general thinking on the Asian portfolio. Just given some of the challenging market dynamics and importantly from the one-off surprises like you had in the quarter around Bangladesh and Pakistan, why do you feel confident about increasing your presence in the region and entering some of the new markets if the merger with Axiata were to go ahead? And then related to that, how do you assess some of the corporate governance risks that comes with entering potentially some of these new territories?

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

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Yes, 2 different questions. We believe that there is more growth to combination markets. And the 13% growth you see in Bangladesh, the 9% underlying growth you see in Pakistan, coming back to growth in Myanmar, so these are markets with where -- which is not saturated in terms of data penetration yet. They start to be saturated on mobile connectivity but not on the data. And we see that when the smartphone prices comes down, we see people have both the appetite but also the affordability to pay for data. So that's what we believe we have, and that is also going into the potential Axiata markets like, for example, Indonesia as a big also growth market.

So we believe that that growth journey we want to be a part of. At the same time, we believe that there is an efficiency journey in these markets. And that's why you see that if you look at the EBITDA margins we have, for example, in Grameenphone with 54%, 55% margin, good margins in Pakistan as well, we also think that it could add some value on the cash flow growth, not only on the revenue growth.

On the governance side, I think that after having operated 20 years in Asia, I think we have developed the governance model which enable us to be close to both the market competition but also how to handle somewhat those risk elements that we have in this market. And that is the same governance model we then intend to use in a potential setup with the new company.

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Operator [23]

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Our next question comes from Andrew Lee of Goldman Sachs.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [24]

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I had 2 follow-up questions, one on Sweden, one on towers. So on Sweden, you've highlighted trends got worse. That's in spite of the fixed line price rises that we saw in the market. And I think [on interesting], you haven't yet at least followed previous price rises in mobile. I wonder if you could just comment on why not? And how should we think about the growth rate going forward in Sweden on the consumer side as a balance to B2B?

And then secondly, on towers, the Axiata presentation, when you announced the negotiation, suggested that the plan will be to spin out towers in Asia post the deal. You didn't include that in your presentation. But do you think this has logic with or without an Axiata deal with your Asian assets? And is spinning the Nordic towers something you would even entertain?

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

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Yes. In Sweden first, and then you can take the towers, we are not commenting obviously on price moves or things that we may do on that. But in all markets where we operate, of course, we're also looking at how the competition is allowing growth to happen from an industry point of view. And that we will do in Sweden and that we will do in other markets as well. Some of the markets, we are a market leader. In some of the markets, we are a market follower. So I think I would -- don't want to elaborate more on it than that.

We hope that Sweden can overall be a growth market. We see that Sweden is also relatively low on data consumption. There should be more to do on that one. And we also think that Sweden is a place where you should be able to demonstrate growth both on the consumers but also on fixed and not least on the B2B segment. So -- but we are small in Sweden, so we are dependent on what the other market players also are doing.

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

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Yes. Thanks, Andrew. Let me comment on towers a little bit. So first, Axiata discussions and edotco in that context. So Axiata has a joint venture with some other partners in the company, edotco, which has had a strong development in Asia. Obviously, that is a part of the discussions that we are having now. It's included in the design of the potential future company. And in that regard, combining our towers into such a JV would probably be the most likely development should the JV, joint venture or should the company materialize. And regardless, we have been looking for different setups in Asia simply to modernize and become more efficient. If you don't do it in a large scale, you probably then will seek in-market opportunities also related to the significant scaleup and modernization build-out of 4G and eventually, in the future, also 5G that probably will happen also in Asia.

If we go to the Nordics, I think we should divide Norway from Sweden and Denmark a little bit. In Sweden and in Denmark, we have collaborations and partnerships that today, which are very strong and good for us. We share some spectrum. We share networks. We share towers. And these are long-functioning and well-functioning joint ventures already. So whatever we do there to take it to the next step will have to be seen in context of the setups that we have today. But we have no reason to not continue with what we have started on, namely to be as efficient we can in this area also for our business.

In Norway, we have a very strong network that we have built up over years and has been carefully developed in an environment and in a landscape which is demanding with mountains and lakes and fjords and so on. And we have a 99.5% 4G coverage. And as Sigve was saying, this is also an important element in being able to sunset the copper. We will look at future models also in Norway. Right now, we are mostly occupied with the fact that we have operational -- 3 different operational environments in Norway. We will probably bring that into one, and then we'll see where we go from there also when we're coming out from the copper actions that we are doing.

I would warn a little bit against thinking that we will do something in a hurry on the towers side. We work industrially with these issues. We work from an efficiency and business upgrade point of view. And we are not working from generating significant cash on the balance sheet type of thinking right now.

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

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And just to add on the last comment, I also think that we don't think there is one size fit all here. This is very market-dependent. That's why we have to have different solutions in different markets.

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

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Yes. But we can promise you, we will stay as efficient and strong as we can on this. And we see ample opportunities for collaborating also in, as I said, in a 5G context going forward in several of our markets.

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Operator [29]

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Our next question comes from Usman Ghazi of Berenberg.

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Usman Ghazi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [30]

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I've just got a few on Norway, please. The first one was just on the -- some of these additional items that you've highlighted that will have an impact for sort of the loss of wholesale revenue and this additional regulation on special numbers in Norway. I mean how -- could you quantify how big the impact is on revenues or EBITDA? And then related to Norway as well, I mean you pointed to a higher CapEx in Norway for the next few years. I mean is that solely related to the copper network switch-off? Or is there something else going on there as well?

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Sigve Brekke, Telenor ASA - President & CEO [31]

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Yes. The last one is -- my comment on the last one was related to the copper modernization program that we had. And I said that it will be somewhat higher than what you have seen in the previous years, but still within the group guiding of 15% CapEx to sales. So it is related to that.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [32]

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Yes. I don't think we have brought any numbers out on the 2 items, in particular, the wholesale and the special numbers. It's the last -- the second element is a new directive from the regulator preventing us from taking an extra premium on those products. They are wanted by the customers, but we cannot take an extra premium anymore. So -- but these are not large effects, but you will notice them in the analysis going forward, of course.

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Operator [33]

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Our next question comes from Frank Maaø of DNB.

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Frank Maaø, DNB Markets, Research Division - Analyst [34]

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So first, a quick question on fixed wireless access, which you said you would be deploying in Norway. Do you see any opportunities outside of Norway for fixed wireless access and business opportunities for that present in Sweden or elsewhere? That's my first question.

And the second question is more on a higher level with regards to the Axiata discussions and the due diligence. So given the experience that you've had with earlier partners with regards to anticorruption work and HFC, do you see a risk that that could be a difficult hurdle to pass in the Axiata process?

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Sigve Brekke, Telenor ASA - President & CEO [35]

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Yes. I can take the last one first. Of course, this is a part of the due diligence that we are doing, and knowing that we are potentially going into new markets like Sri Lanka, like Cambodia, like in Nepal, like Indonesia. And that this is -- here, we are going to draw on our 20-years' experience from Bangladesh, Pakistan, Myanmar and so on and so forth. So this is an important part of the review we are doing now and the discussion we also are having. I don't think I want to say more than that. And of course, this is a very important part of what Telenor are doing to deliver on our agenda of being compliant, being corruption or being other parts of our compliance program.

The other question you had, it's maybe on the fixed wireless product in other markets. Now we are rolling it out in Norway. And in a way, we are testing how far we can drive that. We are testing a bit on how the geo lock is working. And in areas where you don't have enough spectrum and you have then underutilized capacity in your network, this, we believe, is a very interesting product. We are also going actually to pilot this on 5G to see if 5G also could be a cheaper way of delivering data over a mobile network versus a fixed network. So I don't want to say that we have plans in other markets as of now. But of course, this is something we are going to look at going forward on broadband access also in other markets.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [36]

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Okay. I think we are down to 1 or 2 questions. Maybe, moderator, we should end it after the 1 or the 2 questions that you probably have left.

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Operator [37]

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Our next question comes from Adam Fox-Rumley of HSBC.

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Adam M. Fox-Rumley, HSBC, Research Division - Analyst, Global Telecoms, Media and Technology Research [38]

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I just wanted to follow up on one of the earlier questions. I wonder what your thoughts are on the changes you might need to make to the organization and management structures in light of that prospective Axiata combination. You mentioned the simplification that has happened over the last couple of years, but the portfolio is going to become decidedly more complex in Asia should that deal complete. So just any help you could give us on the constants that your systems are sufficiently robust there.

And then a quick clarification. I'm sorry, I may have misunderstood this, but you mentioned the CapEx levels in Norway going forward will be a bit higher related to the copper switch-off. Did you say that Norwegian CapEx to sales wouldn't be above 15% or that the group guidance wouldn't change?

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [39]

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Yes, I can take the latter. No, we remain with the guiding of NOK 16 billion to NOK 17 billion for this year, and the medium-term indication has been 15% approximately to revenue. We don't see that that will change. So we are confirming now then that we will -- we still think that a medium-term level is approximately 15% to the revenue for the group. And then -- and we shouldn't make a big thing out of this. I think we just meant to indicate that due to the copper decommissioning, we probably need to fuel it in a short period, a little bit extra in Norway, but we have ample capacity for doing this in the investment budget for the group.

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Sigve Brekke, Telenor ASA - President & CEO [40]

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And then to the Axiata question, we believe that this is a very good -- it's actually a rare opportunity. It's a rare opportunity where we can build scale without using cash. It's a rare opportunity where you can do a merger and consolidate a company without using cash. And it's quite rare also to find a USD 5 billion synergy opportunity. So that's the reason why we believe that this is really creating value for the company and for you as shareholders.

Having said that, of course, we cannot do this if we don't think we have the money or the capacity to implement our policies or to extract the synergy potentials. And of course, we cannot do this either if we don't think that our compliance program and what is very important for us in the way we conduct business is not achievable. So this is -- this -- I cannot answer your questions more than that. But this, of course, is one of the big issues that we are discussing internally in relation with now seeing the potential agreement and the potential setup.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [41]

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Okay. Moderator, we probably have one question left? Or...

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Operator [42]

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We will take the next question from Roman Arbuzov of JPMorgan.

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Roman Arbuzov, JP Morgan Chase & Co, Research Division - Analyst [43]

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I just had one, hopefully relatively simple one, and it's on cost-cutting in Norway. Is the right way to interpret your chart on this slide, on Slide 5 in the presentation, the chart on cost, is the right way to interpret it that cost-cutting momentum in Norway is going to slow down further from the levels that we've been seeing over the last few quarters because of the additional migration costs?

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Sigve Brekke, Telenor ASA - President & CEO [44]

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You're referring to the slide I had, I think, on the copper decommissioning, and that was a slide showing that we are, over the 4 years, we are taking out the NOK 1.2 billion cost that we currently have on copper. But in that 4-year period, we will also add some costs on replacing the copper with replacement products. So over time, of course, the cost will be reduced. That's the way you should look at that slide without kind of being very exact on timing and on figures.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [45]

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Yes. And I...

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Roman Arbuzov, JP Morgan Chase & Co, Research Division - Analyst [46]

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Right. Okay. Can I just follow up?

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [47]

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Go ahead.

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Roman Arbuzov, JP Morgan Chase & Co, Research Division - Analyst [48]

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I guess the way you explained it just now, it sounds like the cost-cutting is going to be incremental, right? So you are taking out additional costs within copper on top of what you've been doing already and currently -- the current pipeline of the cost-cutting projects, right? And then some of it is offset or eaten up by the migration cost, but it still sounds like it's incremental, so as in the pace is actually going to accelerate. Is that the correct way to interpret it?

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [49]

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Yes. I think we should be careful guiding too much on this. But what we are trying to do with the copper decommissioning slide and our comments to that is to come back to what we said when we announced this in fourth quarter. We said there will be a gradual reduction of the NOK 1.2 billion cost base related to copper, and we said that the major bulk of that will come towards the latter part of the period. And now we try to reconfirm that, show the level without being too detailed on numbers that the curves are still somewhat representative. And you will see there that the migration cost is making, what we said in fourth quarter, it is due to the migration cost coming during that period and obviously dropping when most customers are migrated. So the profile is the same. We are confirming the profile from fourth quarter.

Then we have a continuous underlying efficiency effort in Telenor Norway as in all other business units. There, we had an underlying 1% reduction this quarter if you adjust for some activities they had taken over on behalf of group. And that work will continue in Telenor Norway in parallel or over and above the cost profile you saw on copper. We wouldn't like to kind of give a more detailed number, but it falls into the ambition of 1% to 3% reduction for the group every year, including next year. And then we have already indicated that at least the efficiency work will continue after 2020 due to more structural work that we are now initiating.

Then moderator, great questions we have received. There is one more question, I think, and then we end this session after that. But one more question, please.

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Operator [50]

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Our final question is from Mandeep Singh of Redburn.

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Mandeep Singh, Redburn (Europe) Limited, Research Division - TMT Specialist Sales [51]

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I just wanted to come back briefly to the Swedish market. You've obviously talked about pricing pressure in the public sector, but you I think gave a more constructive answer to Andrew's question on consumer. I just wanted to know if you're seeing any early signs of sort of quad-play or bundling moves from Tele2, Com Hem. What sort of -- what are you actually seeing in the market in terms of them trying to target quad-play customers or push convergence? Is that having any impact do you think yet? Or is it just too early to say?

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Sigve Brekke, Telenor ASA - President & CEO [52]

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Yes, we see some bundling. However, we don't see, what shall I call it, destructive bundling. We don't see bundling as a way to actually reduce the prices. It's more to increase the convenience with the customers. And I think both Tele2, Telia, but also our self are in a position to do that. Three is the one that are a little bit left out with only having a mobile network. So hopefully, you will see that to continue, which is basically bundling in the sense of the consumer convenience but also bundling in the sense of potential early uplift. That play we want to be a part of. And I don't expect, neither Norway nor Sweden, to go into more discounting bundling game we have seen in some of the other European markets.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [53]

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Thank you, everybody, for participating and for engaging in second quarter for Telenor. We appreciate that. Håkon and Marianne, our IR team, is ready to follow up with you if there are any questions or comments.

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Sigve Brekke, Telenor ASA - President & CEO [54]

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Have a good summer to all of you in Europe.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [55]

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Thank you very much.

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Sigve Brekke, Telenor ASA - President & CEO [56]

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Thanks.