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Edited Transcript of TELIA.ST earnings conference call or presentation 20-Jul-17 7:30am GMT

Thomson Reuters StreetEvents

Q2 2017 Telia Company AB Earnings Call

Stockholm Aug 13, 2017 (Thomson StreetEvents) -- Edited Transcript of Telia Company AB earnings conference call or presentation Thursday, July 20, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andreas Joelsson

Telia Company AB - Head of IR

* Christian Luiga

Telia Company AB - CFO and EVP

* Johan Eric Dennelind

Telia Company AB - CEO and President

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Conference Call Participants

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* Andrew J. Lee

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Henrik Herbst

Crédit Suisse AG, Research Division - Research Analyst

* Irina Idrissova

RBC Capital Markets, LLC, Research Division - Assistant VP

* Keval Khiroya

Deutsche Bank AG, Research Division - Research Analyst

* Lena Osterberg

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

* Maurice Patrick

Barclays PLC, Research Division - MD

* Peter Kurt Nielsen

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Russell Waller

New Street Research LLP - Founding Partner

* Sanvir Dhillon

Exane BNP Paribas, Research Division - Executive Director & Senior Telecom Analyst

* Sunil Praful Patel

BofA Merrill Lynch, Research Division - VP

* Terence Mun-Sion Tsui

Morgan Stanley, Research Division - VP

* Thomas Heath

Danske Bank Markets Equity Research - Analyst

* Ulrich Rathe

Jefferies LLC, Research Division - Senior European Telecommunications Analyst

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Presentation

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Andreas Joelsson, Telia Company AB - Head of IR [1]

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We have a slightly new setting for the presentation, only having a webcast. So if we could try that out in the middle of the Swedish summer. Besides that, the process is, as usual, first, we start with our CEO and President, Johan Dennelind, giving his thoughts on the quarter. And then we have our CFO, Christian Luiga, taking us through the numbers. But without further ado, Johan, please, the floor is yours.

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Johan Eric Dennelind, Telia Company AB - CEO and President [2]

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Thank you, Andreas. It's been so lonely here in the studio, that I hope you can see us in here as well out there. Let me take you to a summary straight away, starting with what we think is the focus of the quarter, which is the cost side of our business.

We have launched earlier in the years and also earlier this year cost initiatives to keep our position through the transition years, but we also now launched new cost initiatives that will have effect in H2 and 2018. I'll talk a lot more about that in a while.

The other key note for the quarter, I'm sure you have seen that the fiber one-off revenues in Sweden are lower, quite a bit lower than last Q2, which has a big impact on Sweden and, therefore, also on the group. But we also had positive things in the quarter, which we'll also mention. I bring up Finland, where we feel good and have a good trend on the mobile side and also improving EBITDA. You have seen us talking and doing things around our associates earlier in the quarter, coming through a dividend decision in Turkcell, obviously, very important for our cash flow but also for the dynamics in Turkcell. We also had a dividend decision in the MegaFon, which I'll come back to. And as you know, we divested the part of our direct stake in Turkcell during the quarter, which had a positive cash flow but negative P&L impact.

On the Eurasia side, let me say what I can say. I know there's a lot of attention and interest here. What I can say is the following. The sales process is progressing well. We have a structured process. We have a common view with our partner, Turkcell, in the (inaudible) process. We have an interest from several parties. And we have no reason to change our indication from being able to bring this to closure later in the year.

On the DoJ and the Uzbekistan side of things, we have no reason to change our provision that we lowered in Q1 to USD 1 billion. And we have no reason to change our view that this is nearing the final of this chapter. The exact timing and the details around the settlement proposals is nothing we really can talk more about as of now. But you have to take comfort in what we say that we think this is coming to close and to end soon.

And then you saw we took some write-downs notably so in Uzbekistan due to uncertainty, currency and the interest in the Uzbek business. And the valuation, therefore, lower than we previously thought, announced on Friday, which obviously has a negative impact in the quarter.

The positive thing, ending with that on the summary slide, is the cash flow. We have a very strong focus on the cash flow side for the year, and that's yielding. We are able to up our outlook on the cash flow for the year to about SEK 7.5 billion rather than SEK 7 billion mainly through strong execution on the working capital and the CapEx discipline. That's really the highlights.

Let me take a few more moments and then go through some of the key numbers. We are in negative growth then territory due to the Swedish -- mainly fiber, one-off fiber impact. Without that, we would be approximately 0.5% service revenue growth. EBITDA, negatively impacted by that or from that, but also due to somewhat higher cost base than we wanted in Sweden, which I'll certainly come back to in a while.

Just to put that in context on the cost side. We launched in '14 our invest to save program, bringing gross savings of about SEK 2 billion for the group and SEK 1.3 billion for Sweden. At the same time, we have had increased costs for investments and other areas in the business, so the net effect is not as reasonable as we would like it. We have then complemented this earlier this year with our cash flow activities, which also includes OpEx, obviously. But we're now more explicit on the second half for Sweden. I'll tell you the numbers shortly. But we also launched structural initiatives to have an impact in '18 before we get the full benefit from all the activities that we have been doing in mainly the Finnish and the Swedish operations transformation-wise into '19.

What that means in terms of numbers is that Sweden OpEx, be very concrete, is -- we said early this year, it trended high in the first half than in the second half. Now we put a number on it. It's going to come down around 5% in the second half versus the second half of '16. So that's a strong comfort around that. A lot of that coming from resources and consultants. Part of that is already in the plan that was -- that our activities that are coming to an end and that most are coming to an end. And the [closures] of legacy there are being done, and therefore, we can let go of some of the people. Some are accelerated cost savings around resource costs as well in order to meet our financial targets.

If you then go to the 2018 focus, and now let's go from gross to net. We're talking net savings here, and we are addressing the full portfolio in the continuing operations. And we have put out a clear ambition and a target for ourselves to be at least 3% reduction on the cost base or targeted cost base, which is the SEK 38 billion for the year. But it's the full cost base, COGS OpEx minus equipment costs. So nothing will be left untouched. And we are aiming for at least 3% in effect in '18, and it's net.

So if you take all these initiatives into a summary slide, when it comes to the 2017 and '18 then, we are going to have to take out around 850 resources in total, and we are adjusting the structural cost base before we get the full benefit of transformation. And for Sweden, specifically, it is a 5%, as I said, H2 effect, with about 650 resources, roughly 50-50 employees and consultants. That's around 8% of the total resources in Sweden. What it means for EBITDA this year is that we are comfortable maintaining our EBITDA outlook. And for '18 and '19, it is to drive further cost reductions in order to take us through the coming years with stability around profitability.

And the operational free cash flow, you'll see that we have actually up-ed our guidance slightly for the year, and it's thanks to strong execution, working capital improvement and the CapEx discipline that we now have better visibility on that. And that's also important now heading into '18 so we can support an operational free cash flow growth. So clear activities, strong focus and comfort on our previous guidance.

On the fiber side in Sweden, as we have talked about already, there is very a big impact when we miss on delivery of fiber. It is not connected to the fiber demand so much at this point, it is the delivery that we're struggling with. And it's a lot around permits and also around the new dynamics. The further out you go with the installation and implementation, you need new type of areas and intermediates that we need also to deal with.

Of course, in general, we are coming towards the end of the big pent-up demand in fiber in Sweden, even if we -- there's still a lot to be done. And we're sticking to our previous target of 1.9 million end of 2018, and the mix we can talk more about later. But we feel still that we are executing on what we said earlier in this -- in the context 2014.

Let's turn to Norway, where a strong Norway is performing even better. We have an improvement both on revenues and EBITDA. On top of this, we're including now, going from Q2 onwards, the Phonero acquisition that will come with about SEK 400 million synergy impact into '18. We have, as you know, invested heavily in Norway over the years, creating a superb platform for growth and the best network for second year in a row, very important part of our value proposition to enterprises, obviously, and we feel good about the Norwegian execution and the Norwegian prospects.

In Finland, we are seeing improvements. We have around 5% growth on mobile service revenue, which is solid or strong. We are also improving on our profitability side, even if Q2 is somewhat impacted by still higher rebranding costs, and that goes away. So we should see an improvement in Finnish profitability second half of the year as well. Now also including the recent acquisition, Nebula, which is a strong ICT player, which will very much strengthen our SME/SoHo position as the leading enterprise player in Finland. Of course, it comes with good financial accretive measures to the P&L for Finland. So feel good about Finland.

Then I will not take more time. I will certainly come back for questions later, but I'll leave this floor for our CFO, Christian Luiga. Thank you.

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Christian Luiga, Telia Company AB - CFO and EVP [3]

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Thank you very much, Johan, and good morning, everyone. I will take you through the cash flow and the impact from the CapEx that has decreased and will further decrease. I will also talk a little bit about the strong balance sheet. But before I go there, I like to talk a little bit more about Swedish result.

And in Sweden, we have seen a decline in service revenue in quarter 2, 2.7%. And before I get into the consumer side, which is probably the most interesting one, I think it's very important to note and point out that the B2B segment is continuing to do well. It's 2.6% down. It's the third consecutive quarter where we see a decrease of 2.5% to 3%. We had around 5% in the past. And the trend is there with SoHo/SME continuing to grow and the larger segment being down around 5%.

On the 2.7% down, it's primarily from the fiber, SEK 164 million down, 2 percentage points on the service revenue. We also see a somewhat lower growth in the mobile side, mobile consumer, and it relates to the VAS, value-added services growth is somewhat lower in this quarter.

The TV pricing, we should also remember, was increased in quarter 1 2016. And that is now, on a comparison level, coming out. And that means we need to look at the pricing over time in TV if we want to compensate for that as well. TVC MVNO, we know that, that has moved. And it was a decline of SEK 25 million in the quarter and will continue to be a decline for a couple of more quarters.

Fixed telephony went down SEK 119 million compared to last year. It was bigger last quarter, but still on a percentage point, it is around the same level, somewhat better.

We gained 45,000 new customers in the consumer side in this quarter. That is important for 2 reasons to understand. It came very late in the quarter but also did drive costs, and it's part of why the cost was somewhat higher in the second quarter compared to last year.

And then moving into costs, Johan talked a little bit about that, because increase in quarter 2 comes from marketing sales, but also we have continued to have higher costs in service operation. With now the program of 650 resources, half internal employees and half the external resources taken out, it's already been people leaving in July and will continue throughout the quarter and the bulk more at the end of the quarter due to union negotiations. It will be a 5% decline in the second half compared to last year. That means also that the profitability profile will materially change in the second half compared to the first half.

Moving into our countries in Baltics and Denmark. Denmark continues to be a little bit negative, but the 11%, SEK 150 million profitability is on a low level but doesn't change that much. And in a low level, the percentage becomes bigger. The big thing this quarter is to say I think the market is quite stable on the larger players. The prepaid business had been taken out from Denmark. We have taken that out deliberately. It was not profitable, and then you should not continue with that, and also small sized part of our business, 86,000 customers, therefore, was taken out from our business.

Estonia, stable. Mobile compensating for fixed, slight increase in profitability. Lithuania do have a good growth in mobile, and it is also impacted by a low-margin transit business, which will be taken out. And that taken out, the revenue growth is around 2% in Lithuania.

Overall, these countries are doing fairly stable. And we see also here, like we do in the rest of the group, that there's potential for efficiency. And cost will, therefore, also be an element in the agenda for these countries in the second half and 2018.

When it comes to Eurasia, we have said in the last 2 quarters that we see the trend shift. We have seen the turnaround. And the picture here, we look at -- gives us the proof that, that continues. The operations in Azerbaijan is flattish on EBITDA. Very well the development in Georgia, Moldova. Kazakhstan is still on negative, but the trend is very good. We feel cautiously optimistic for Kcell in the second half, and we think that they are doing a good job. The market is improving, and the prices are increasing. So that is very positive.

The profitability in Uzbekistan has been somewhat negatively impacted by a legal regulatory fee that we have been charged, and -- but that has not been -- still to be decided how that will end up with in the end.

CapEx is very important. We have talked about CapEx for the last 2 years. We have been in a peak in 2016. We said we will come down in 2017. We said that the CapEx, excluding fiber, should come down in '17, and we have good visibility and good discipline on that.

CapEx is down SEK 600 million the first half compared to last year. Half of that is Spain. Half of that comes from the continued operations. The SEK 300 million then that's remaining is primarily also related to Norway, where network has been a heavy investment and now has come down. And we should see further -- this trend continue further in the second half.

Another thing that we have booked in this quarter is the Liiga CapEx of around SEK 1 billion. That is a content live in Finland for the hockey rights, and it is to be paid from 2018 and 6 years forward. We do estimate and we plan for having a decrease in CapEx next year as well, and we have said that CapEx should go down over a couple of years, and it will. And when we do that estimate, we include the cash CapEx and the cash CapEx from Liiga starting from next year. And I think that is also important for you to understand when you try to estimate our future.

Operational free cash flow, SEK 7.8 billion run rate right now, last 12 months. Quarter 2, impacted by dividend. EBITDA, slightly down, compensated by CapEx, working capital. We are doing what we are supposed to do. The dividend has now been decided in MegaFon and in Turkcell. MegaFon, SEK 700 million, to be paid in the end of July, beginning of August. And for Turkcell, it's SEK 2.1 billion, to be paid in 3 tranches. The first one paid already now in quarter 2, and the other 2 coming in quarter 3 and quarter 4 and before the end of the year, total SEK 2.8 billion. And that gives us a good visibility on the cash flow also coming for the full cash flow, including the dividends being then SEK 2.8 billion higher. So I'll come back to that.

Before that, on the leverage side, we are at 1.36 at the end of the quarter. The most important elements and the ones we know about is the Nebula acquisition, taking that into account; also taking into account the dividend I just spoke about; and then also the Uzbek legal settlement of SEK 1 billion that we have made a provision for; and not the least, the SEK 1 dividend that we will pay to our shareholders in October. That, in total, gives us still a healthy level of 1.8x net debt-to-EBITDA on the pro forma June numbers. So a healthy balance sheet, including what we have decided on and what has been decided that impacts our numbers.

EPS, it has been a difficult picture to look at in Telia over the last years. And one reason is the takeout of the discontinued operation, also the impact of our sales and divestments in both Eurasia and outside Eurasia. We also have write-down that we have had the previous years and this year. And in quarter 2, we had a couple of more write-downs, the largest one in Uzbekistan. We adjusted the value of the Uzbek asset from SEK 3.3 billion to around SEK 1.5 billion. And that is primarily based on what we see in the development in the country, FX risks and also regulatory risks, but also what we have thought as indications on market valuations.

Discontinued operations was impacted, of course, of this write-down, but it's not so visible on this page, and that is because we had an impact from Nepal sales last year. A big impact, though, we have from Turkcell, which we made a loss of SEK 3.3 billion in FX losses when we sold the stake of 7%, which gave us SEK 4.4 billion in cash but the recycle of FX of SEK 3.3 billion, which made a loss in the profit and loss but did not affect equity. So complicated, but most importantly, we do continue to have somewhat better position than on our continued operations when it comes to the EPS development.

Finally, supported by our cost agenda, we do reiterate our EBITDA guidance for the full year to be delivering on the 2016 level. With better visibility, and Johan mentioned on both CapEx and working capital, we are sharpening our operational free cash flow guidance to the above SEK 7.5 billion. And together with the dividend from associates, it should cover dividend around 2016 level.

Thank you, Andreas. I think I'm done there.

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Andreas Joelsson, Telia Company AB - Head of IR [4]

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Thank you, Christian. And if Johan joins us back again, we can open up for the Q&A. Operator, may we have the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Terence Tsui.

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Terence Mun-Sion Tsui, Morgan Stanley, Research Division - VP [2]

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I've got a couple of questions on Sweden, please. Can you talk about the trajectory to get to the 1.9 million households by the end of 2018? Obviously, Q2 was a bit of a setback. But what are the reasons for it to rebound and also to accelerate to hit the target? And then secondly, just looking specifically at the Swedish headcount reductions, what sort of restructuring charges should we expect from this? And when should we expect it to be (inaudible)?

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Christian Luiga, Telia Company AB - CFO and EVP [3]

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Okay. Thank you, Terence. Thank you for the question. The 1.9 million households, we still see that they will continue to build fiber even if there are certain delays and the timing effects may be more material in the past. But we do have still an ambition and we see the potential to build -- further build up to 1.9 million, including, we should say, the M&A activities that we're doing. We did acquire some businesses in the first half, and we'll continue to do that. The restructuring charges, I can't give you a clear guidance yet until we have passed through the summer and have a dialogue with our unions also what it means. On the consultant side, of course, there is no restructuring charge, but on the employee side, it could be.

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Operator [4]

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Your next question comes from the line of San Dhillon.

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Sanvir Dhillon, Exane BNP Paribas, Research Division - Executive Director & Senior Telecom Analyst [5]

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Two, if I may. So my first question is on cost cutting. You and the sector at large seem to be in a perpetual state of cost cutting, which is a good thing, but for Telia, it just doesn't seem to have result in sustainable EBITDA growth. Are you saying based on these new initiatives that post 2017 that you will be on a track to really deliver sustainable group EBITDA growth? And secondly, on fiber connection, Com Hem, its results even seem to suggest that the problem was not permitting, but it was finding that operators were competing the way the actual size of the fiber connection fee. Is that what you're seeing in rural areas?

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Johan Eric Dennelind, Telia Company AB - CEO and President [6]

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Thanks, San. On the savings side, I mean, everything equal, which is never the case really, but this is net saving we're talking about for 2018. So the -- at least 3% of the SEK 38 billion that we're aiming for 2018 should be filling that in the net reduction. And then, of course, we need to come back to you on the guidance for EBITDA in '18 onwards. We do remind you, though, that we are still in the legacy pressure in the major part of the operation in Telia, which is Sweden and that we're not through yet. So as long as we have the legacy pressure, it takes a lot to get to growth on service revenue and, therefore, also on EBITDA. That's why we need to fix the initiatives in this transition phase. On the fiber, I think it's the dynamics that we did describe. For us, it is about the delays and a lot related to permits and less about the actual competitions. Of course, as further along that we go and further out we go, the competition increases much really. But in this quarter, it's mainly the delays.

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Operator [7]

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Your next question comes from the line of Lena Osterberg.

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Lena Osterberg, Carnegie Investment Bank AB, Research Division - Head of Research of Sweden, Head of Technology Hardware Equipment, & Financial Analyst [8]

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Just a few questions. First of all, you mentioned something that you see now a lower interest in the Uzbek asset, and that's one of the reasons for the write-down. Could you maybe elaborate a little bit on what your options are if you find now acceptable buyers for that asset and how much that would cost? Also, if you could touch a little bit on EU roaming effects into the second half of the year. You haven't really specified any guidance, so maybe if you could say something about what the sort of early indications are in terms of volumes, how much had they come up and what you think the impact will be in the second half. And also, you talked about a decreasing CapEx in 2018, but could we maybe have a more specific number on that, please?

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Johan Eric Dennelind, Telia Company AB - CEO and President [9]

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Thank you, Lena. Let me start, and maybe CapEx goes Christian's way, take it from the top. Ucell, well, as we said, there is -- we have had an interest before, and we've had the indicative value, which has been in our books. And we have written down, as you know, Ucell along the way. So we've kept it at a value where we thought we would be able to divest it out. That has now been reduced, and what's remaining is around SEK 1.5-ish billion. We think we can then get that value from one of the buyers that we're talking to. If we don't, if it goes the other way, if we don't, well then, worse comes to worst, then we have SEK 1.5 billion that we can't realize. But at this point, we think we can. So that's why we have that in the books. Roaming, very positive for our customers, great feedback, and we are the most generous offerers in most of our markets for a customer basis. We should be a competitive edge. Obviously, it also comes with higher traffic. We have very good agreements that take care of a lot of the risk mitigation. However, we had said that it may have a slight negative impact on the EBITDA as such, but it's included in our guidance for the year. So we're not taking that out separately in any way. No need for that. CapEx '18, we're not going to give you a firm number on, but take Christian's comfort that it's coming down further from this year, where it's already coming down from last year. And that's the trajectory that we have set out, and that's what we're delivering on.

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Lena Osterberg, Carnegie Investment Bank AB, Research Division - Head of Research of Sweden, Head of Technology Hardware Equipment, & Financial Analyst [10]

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Yes, maybe just a follow-up on Uzbekistan. If you can't find a buyer and you have to close it down, will you incur closing down costs? Or have you sort of provisioned for that in your write-downs as well?

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Johan Eric Dennelind, Telia Company AB - CEO and President [11]

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Well, nothing as such is provisioned for, and we don't believe that needs to happen. Otherwise, we would have taken a different type of approach on the impairment or reassessment of value. So let's not get ahead of the situation. We think we can divest. We think the value is SEK 1.5 billion. It does take longer than we expect because it also has at least a perceived impact related to the ongoing investigations that we have. So once we get that closed, then I think we also will be able to get Ucell into new hands.

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Operator [12]

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Next question comes from Peter Nielsen.

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Peter Kurt Nielsen, ABG Sundal Collier Holding ASA, Research Division - Analyst [13]

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I'll take 2 questions, please. Firstly, you're obviously extrapolating, so to speak, your cost reductions and mentioning the invest to save program, which included quite significant CapEx investments. Can I just ask, the new programs sort of further cost reductions to come in '18 and '19, will they also involve some incremental CapEx investments compared to your previous plans? And then just secondly, if I can return to the fiber, you stick with your 1.9 million target. Is your own internal target for Telia connections also unchanged?

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Johan Eric Dennelind, Telia Company AB - CEO and President [14]

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Thanks, Peter. On the cost side, no, these are not invest to save, and there is no incremental or additional CapEx that we're announcing for this cost program. These are part of the things that we have invested in that will also bear fruit, but it's also more structural cost OpEx, COGS reductions that we can -- that we see that we can take out without risking the business at this stage. So that's net savings, no extra CapEx that we need to talk about. On the fiber, we haven't disclosed any more internal target, if you want. This 1.9 million is an important one because it sets the investment pace, clearly, to the market and also to ourselves and our partners. And we are on track, as we spoke of earlier, of the 1.9 million.

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Peter Kurt Nielsen, ABG Sundal Collier Holding ASA, Research Division - Analyst [15]

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But there's also been a 1.1 million sort of target for Telia connections. Is that correct?

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Johan Eric Dennelind, Telia Company AB - CEO and President [16]

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That's the number that we had in the CMD.

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Christian Luiga, Telia Company AB - CFO and EVP [17]

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And we haven't changed any of those.

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Johan Eric Dennelind, Telia Company AB - CEO and President [18]

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No.

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Operator [19]

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Your next question comes from the line of Maurice Patrick.

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Maurice Patrick, Barclays PLC, Research Division - MD [20]

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On the Eurasia, given the improvement in EBITDA trajectory that you're seeing in the recent quarters, does the urgency of needing to sell it decline? I guess what I mean by that is given the assets are performing better, maybe you're not in such a rush as you may have been in the past to sell it.

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Johan Eric Dennelind, Telia Company AB - CEO and President [21]

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We have never been in a rush as such. We've always said that we will reduce our presence all the time, find the balance of risk and value and the timing. Then we have made an assessment that we think it can happen within this year. We still think so. And the performance is actually only helping improving the prospects of getting a better mix of those 3 risk components that I mentioned. So what Christian showed you in the slide earlier is a very important part of our sales story, obviously, and we're happy that we're able to maintain the focus and improve the businesses in difficult times out there. So very pleased with the team's performance in rough times.

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Maurice Patrick, Barclays PLC, Research Division - MD [22]

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I just would like to touch, if I may, you've made the decision to sell down stakes of some of your associates' positions. Is that something we should expect to see more of?

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Johan Eric Dennelind, Telia Company AB - CEO and President [23]

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I think we've been clear on the Turkcell side that we debundle or decouple the 2 holdings we have there. One is the direct stake, which is now reduced to around 6.5%, 7%. And one is the indirect stake, which is around 25%. So it should be no surprise that we have divested that. And also, if we decide to do so in the future, it should be no surprise. For MegaFon, we have said that that's an asset we are -- it's a different type of asset. Even if we see in the future that could possibly also leave MegaFon, but that's nothing that we will speak about ahead of actions.

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Operator [24]

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Your next question is from Ulrich Rathe.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [25]

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I have a number of questions, if I may. The first one is on the cost reductions both for Sweden for the second half and for 2018, '19. Could you describe separately for the 2 the visibility you have on this, i.e. where you are in identifying measures, maybe even executing, having executed measures already? Just be interested to see at what stage of the planning we are. Is it the top-down goal without sort of specific measures have been agreed with the operating units and so on? Second question would be Eurasia on the sales process. Seems that sort of you have these write-downs from time to time, pretty regular fashion. At what point would it stop being completely (inaudible) to think that you might actually keep these operations if the value you're discussing with potential buyers simply aren't there? Is this politically completely unacceptable and you just got to get rid of it? Or is there a point of which you would decide to even keep it? Third point is roaming comment. I understand you don't want to give figures for the costs, would you be willing to share volume trends that you are seeing? And the last question is, again, on the fiber. What I don't fully understand about sort of these permitting issues and the lead time is that there should be an interest on the side of the municipalities to actually get this done because I guess I assume there's some sort of demand, and if they stand in the way between end customers getting a higher broadband speed service, then they are sort of the party to blame. So I'm just wondering how that politics plays out. Why do they have the luxury to sit there with their constituents and essentially hold this up?

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Johan Eric Dennelind, Telia Company AB - CEO and President [26]

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Thanks for your comprehensive list of questions here. Let me talk then to agree with you on the fiber side and for those of you who not made in the Swedish context in media every day, this is hot potato that's being discussed and driven from all players, not just us, because this is a lost opportunity and a lost potential for the Swedish digitalization and leading Europe or the world even in penetration of high-speed connection. So this is something we are very vocal on, but we still have some issues to deal with on local levels, which we are pushing. And that's one part of the (inaudible), not all of this but one part. But I agree, it should be the same incentive for all players here. Now let me go back in the list of order -- in order of your questions. Well, costs, Chris will come back to -- the sales, Eurasia sales, first of all, it is not a political decision. This is our decision to divest and reduce the presence in Eurasia over time. And we are behind that. We are not panicking and running away. We are taking the time that's needed to get that balance of risk, value and timing that we said. And if -- that's why we also haven't sold some of these good assets yet because we haven't been happy with some of the -- those parameters. So we have no reason to change our view on our exit strategy. On roaming, we're not going to give you details more than that. We say that it's a great consumer offering in our countries now where we are taking a lead in the way this is being offered in terms of the bundles and the opportunity to be roaming on the go and also in the Swedish context with free social media surfing, which is very much appreciated. And as I said, this has a slight negative impact for the total group for the year but nothing that needs to be guided separately on. Christian?

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Christian Luiga, Telia Company AB - CFO and EVP [27]

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Thank you. Thank you, Ulrich, for the question. Needless to say, we've been very hard work during the first and second quarter coming up with the identified commitment to our shareholders and to ourselves on a cost reduction. The cost reduction for the second half, of course, we have very good visibility on them, and these are things that have been initiated and started. And there, we will deliver on our reduction in second half without any issues. The 2018 are identified. If we wouldn't have identified them, we wouldn't have come out with a commitment of 3% down on the SEK 38 billion cost base. The sort of -- these are identified, and some have started and some have not started. Some are more difficult and some are very easy. So that's how it is in nature when you do this kind of programs. And therefore, the longer you go, the visibility is less on how you're going to achieve it. But of course, we feel very comfortable to deliver 3% down on the SEK 38 billion cost base. Otherwise, we would not have announced it today.

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Operator [28]

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The next question is from Henrik Herbst.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [29]

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Firstly, I just -- can I ask 2 questions, if that's okay. The first one is on fiber regulation and the PTS review of how to regulate fiber and, in particular, the SDU areas. Just wanted to hear your thoughts really how likely you think it is that they will start to look at it on a more sort of regional or network-by-network basis and what that would mean for you and your bill out plans. The second question, I just want to ask if you could give any -- I mean, your new roaming tariffs, how popular have they been? Have you -- is it mainly with new customers or are you seeing your existing base upgrade as well? Because I think you got a bit more data, but you pay a little bit more as well. So just wondering if you could give any color on that.

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Johan Eric Dennelind, Telia Company AB - CEO and President [30]

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Thank you, Henrik. Just on the fiber regulation, reminding as we did have a deregulation on price for wholesale in December last year. And of course, this is a market that will always be monitored. The fiber market is quite fragmented with different structure of city networks and players like us. So it's not an easy overview, and we're working, of course, closely with the PTS to give our views on that. But as you know, risk is such a negative -- on the negative side for Telia in this regulation process as of now. And I think that's important to mention. On the roaming, yes, we are upgrading, migrating our customer base to higher brackets in the Swedish context, and the other ones are slightly different process and strategies per market. But all in all, we are able to price up many of our bundles and offers on the postpaid side as they include more generous roaming.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [31]

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Can I just follow up, actually, on the fiber regulation. So I mean, would you -- I guess what you're looking at is the regulator or the city networks as well. I mean, could that be possibly and how likely do you think it is that they will actually go ahead and do it that way?

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Johan Eric Dennelind, Telia Company AB - CEO and President [32]

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So I don't want to speculate and go ahead of -- be ahead of the curve of the regulator. We have the discussions. And as I said, we don't see a negative impact of potential regulation on the fiber side in the near and medium term in the Swedish market.

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Operator [33]

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Next question is from Sunil Patel.

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Sunil Praful Patel, BofA Merrill Lynch, Research Division - VP [34]

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Just one question for me. On Sweden EBITDA evolution in the second half, I mean, I know that your, I think, 5% cost reduction on the SEK 4 billion base would give you a SEK 2 million tailwind. But it seems to me that Sweden EBITDA will still be down for the full year year-on-year, which basically a struggle to sort of hit the group guidance of flat EBITDA. Is that sort of down trajectory what your internal thinking is? Or do you think we're going to get quite a strong rebound in the second half of the year in Sweden?

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Christian Luiga, Telia Company AB - CFO and EVP [35]

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Well, we don't guide that, Sunil. So unfortunately, I can't give a clear answer to your question. Sweden will improve second half, as we all understand. And we reiterate our guidance for the full year, and we have a portfolio of companies also in our group, of course. So that's the only thing I can say, unfortunately.

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Operator [36]

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Next question is from Keval Khiroya.

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Keval Khiroya, Deutsche Bank AG, Research Division - Research Analyst [37]

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Two questions, one on Denmark and also one on Norway. In Denmark, as you alluded to, the margin performance is a little bit weak. Just from an organic basis, do you feel there's anything you can do to improve the profitability of this asset? And Telenor, for example, has seen quite a good margin improvement. And if not, how close are you to finding some form of strategic solution for the Danish asset? And then on Norway, could I just ask, how much are you earning today from national roaming payments from Ice? And how should we think about how these payments are [brought] going forward?

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Johan Eric Dennelind, Telia Company AB - CEO and President [38]

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Thanks. On Norway, the quarter and the year so far has been helped, clearly, by the wholesale revenues from Ice. It's been part of our guidance, in general. But we also see now good trajectory and support on the retail, which is, of course, more important for us going forward, with the rationalization advance and also the inclusion of Phonero in the business. So at one -- some point, of course, those improvements of wholesale revenues, which we have seen year-to-date, will start to reduce, which then will be overtaken by improvements in retail and all this. That's how you should think about it. On Denmark strategically, we have got on our list for the year to come back to you on what we -- what our plans are. We need the solution that puts us in a better position in Denmark where we can create value one way or another. That's a lot of work on that going on. Meanwhile, we focus on improving the operations this quarter, hampered by the B2B mainly. We see some signs of stabilization in the consumer side but nothing that would excite us or you to talk about at this stage.

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Keval Khiroya, Deutsche Bank AG, Research Division - Research Analyst [39]

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And sir, may I just ask, so within the other mobile service revenue line in Norway, so the SEK 166 million growth in the first half, is it fair to say most of that is due to Ice?

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Johan Eric Dennelind, Telia Company AB - CEO and President [40]

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That line -- which line did you refer to?

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Keval Khiroya, Deutsche Bank AG, Research Division - Research Analyst [41]

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Other mobile service revenues within Norway.

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Christian Luiga, Telia Company AB - CFO and EVP [42]

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It should be -- maybe we have to come back to you, Keval, on this just to make sure we actually answer this right.

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Operator [43]

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Your next question is from Irina Idrissova.

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Irina Idrissova, RBC Capital Markets, LLC, Research Division - Assistant VP [44]

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Just a follow-up on the new cost saving initiatives for me, please. When you compare the new structural cost initiatives that you are planning for 2018, 2019 versus the original items in the invest to save program, could you just maybe give us more color or perhaps some examples on what's changed since 2014 launch of the program that brought to why these new opportunities? And then also in terms of timing, how should we think about the pace of the savings through 2018? Are you able to tell us at this point whether you expect most of these to come through in the first half or is this more back-weighted?

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Christian Luiga, Telia Company AB - CFO and EVP [45]

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Thank you, Irina, for the question on cost saving. This is a continuation partly, and there's partly new things coming through. The invest to save program was, again, as we talked about earlier, connected also to quite large investment in Sweden and Finland and they have been made, and that platform will help us going forward as well. I have mentioned before that our new mass market platform will be ready during 2018 in Sweden where we can have all our consumer customers on one platform. That will, of course, be part of earlier investment that has started to give some savings but can give more savings. And then we have also looked at other means coming through both the -- you can say, the robotics and process site. This is something that has developed quite rapidly in the last 2 years in -- not only in our company but in other companies. We can also see the continuation of working with service operation based on our new platforms but other elements as well, including near shoring that could help that and product side. The guidance for '18 on this, I want to wait until we get closer to the end of the year and we guide for next year. And we leave it that right now.

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Operator [46]

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Next question is from Thomas Heath.

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Thomas Heath, Danske Bank Markets Equity Research - Analyst [47]

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Two questions, if I may. Firstly, if you can clarify a little bit, you made some comments about when the employee reductions will kick in during this year. Was it correctly understood that most will be at the end of Q3? And if so, are the cost savings in this year more related to reduction in transformation projects, IT and so forth, with the employee reductions benefiting 2018? Or are the employee reductions that close for H2 being lower in terms of costs as well? Just to understand what sort of impacts were. And then the second question on fiber. If we're seeing slower fiber additions, what do you expect full CapEx? Or put differently, as you now expand into rural areas, is the CapEx per sub, if you like, increasing or decreasing as you reach further out?

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Christian Luiga, Telia Company AB - CFO and EVP [48]

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I take both questions, you want? Yes, I'll do that. I'll start with the last one then. On CapEx side. The -- if we would have a lower -- with a lower fiber installation fee, we'll also have a lower CapEx, and that compensates definitely for the lower profitability. So cash flow should not be affected. When we talk about the reduction, the reduction of both employees and external resources of 850 is impacting '17 as well, of course, giving a good headwind in 2018. But it will be impacting '17. The external resources, of course, much easier to move out of the cost base, and that is why that can start earlier. The others, we have respect for the union negotiations and dealing with those. And that is why it takes a little bit longer time.

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Thomas Heath, Danske Bank Markets Equity Research - Analyst [49]

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And for installation fees -- or sorry, for CapEx relating to fiber, is that -- basically, could we see CapEx falling before EBITDA contribution as infill connections and places where you've already expand the CapEx or network is already done and you just add the occasional home?

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Christian Luiga, Telia Company AB - CFO and EVP [50]

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Well, when we go into an area, we already have built the home spot. There is no CapEx per se. And on your other question, just to answer it, when you said if CapEx becoming more challenging, yes, it becomes more challenged when you go out to smaller areas, rural areas, but we have a very clear business case model, and we work within that. And as long as we can keep the numbers within that model, we will continue to build.

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Thomas Heath, Danske Bank Markets Equity Research - Analyst [51]

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So it sounds like it's a fair assumptions that CapEx and EBITDA go relatively hand-in-hand as it sort of tails off a little bit.

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Christian Luiga, Telia Company AB - CFO and EVP [52]

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Yes, we will not have a negative impact on cash flow from a -- if we would get a lower OTC.

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Operator [53]

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Next question is from Andrew Lee.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [54]

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It's Andrew from Goldman. Just -- I would just want to ask some questions around your cost cutting. This is Com Hem and correct. You had couple of your peers also stressing out cost cutting targets, beating the EBITDA. Can you talk about your -- the cost cutting targets and kind of what's changed to unlock this? I mean, an 8% reduction in total resources is pretty sizable. What are the current fundamental shifts in your current economic model that's changing that and unlocking your ability to reduce costs? Second, I wondered if you can just talk about labor force flexibility. What happens when you take out the resource? What's the timing of that? And how much flexibility do you have to do more of it? And then just thirdly, I wondered if you could just talk about management incentives and how this -- how the kind of free cash flow generation correlates with management incentives. I know that changed over the last couple of years. And any kind of -- any input into the consequence of that on your strategic decision-making would be great.

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Johan Eric Dennelind, Telia Company AB - CEO and President [55]

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All right, Andrew, thanks. I think we have close to summer as (inaudible) already said on your 2 -- the first questions on resource, costs and timing. Part of the reductions that we're doing are already in the card. It's already in the plans because of projects coming to an end, investment coming to closure, systems closing down, et cetera. So that we can take out as planned. But we're also accelerating some of the takeout and terminating consultants earlier, accelerating some projects, close -- taking slightly higher risk, but that's a calculated risk we're taking in order to also give comfort to our run rate mainly into '18 because '17 EBITDA we feel good about. And timing, of course, employees a bit more difficult, and as Christian pointed out, negotiations, but also finding the right balance, where to go, and that we know now. So it's not like we're starting today and thinking what should we do. This has been planned. The notice had already been given to the unions early in the quarter. So this is already being executed on. But that comes slightly later, as Christian pointed out, and the consultants are kind of when you terminate and the contracts run out, they leave on the day. All in all, for H2, that is about 650 people or resources/consultants. 50-50 we would estimate today, 50% consultants, 50% employees. And then the cost impact reduction of 5% on the OpEx as a consequence H2 versus H2. Incentives, we haven't changed our incentive models for managers and employees. Managers are clearly measured on EBITDA and cash flow. Those are our key components of our bonus and the incentive programs for level 2 and below -- sorry, level 3 and below, I should say, because my team and I, of course, don't have that financial incentive, but okay, we have the same targets as the rest of the teams. So that's how we measure. Nothing has changed. It's just increased focus on the cash flow, as we talked about earlier this year.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [56]

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Can I just -- the one follow-up will be, I guess you're suggesting there's quite a few one-off projects that are coming to an end. Is that the case? Or is it there's certainly more structural going on with your ability to reduce reliance on headcount?

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Johan Eric Dennelind, Telia Company AB - CEO and President [57]

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It's a mix, Andrew. I think when you look into the '18 program, the 3% of the SEK 38 billion, that will be a structural reset of some of the things that we have been doing and we can stop doing -- start doing differently. In the short term, it's a mix of them, projects coming to an end and accelerating some of the savings that we need to have to get the right run rate into next year.

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Operator [58]

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Next question is from Russell Waller.

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Russell Waller, New Street Research LLP - Founding Partner [59]

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First of all, just on Norway, looks like the billed service revenue trends has split. Is that to do with roaming? And if it is, can you tell us what sort of underlying trends are doing, please? And then secondly, just on the cost cutting, you've said that the program for the second half year in Sweden is -- some of it's new and some of it is sort of an extension of a previous plan. Can you try and quantify that, please? And I suppose what I'm really asking is, has your expectations for EBITDA generation in Sweden gone up, everything else being equal, as a result? And then finally, just on the cost cutting plan for 2018, should we think about margins rising domestically as a result of the overall group cost cutting plan?

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Johan Eric Dennelind, Telia Company AB - CEO and President [60]

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Well, thanks. On '18, we haven't gone further to say that the at least 3% of the SEK 38 billion cost base of net savings when you look at your numbers and model, what it means for margins, let's come back to that. And we, by the way, don't guide on revenues and margins, so that's something we probably won't do for '18 either. But let's speak more about '18 as we go through the year or close in on that year. On '17, we're not going to break down the mix of what's new, what's old. I think you need to take comfort in our plan for the second half for Sweden. And the cost is coming down 5% versus H2 '16. Some of it is already in the card. Like we talked about in Q1 and Q4 already that the shape of the year is higher cost in H1 and lower in H2, and that's what we're executing on. But we're accelerating some of those takeouts and savings because as you'll see and now we have expressed, it's one, for Sweden, the costs were slightly too high versus our expectations. And therefore, we need to accelerate the savings. On Norway, Christian?

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Christian Luiga, Telia Company AB - CFO and EVP [61]

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On Norway B2B, maybe, Andreas, you want to answer the question.

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Andreas Joelsson, Telia Company AB - Head of IR [62]

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I would love to, but we are actually happy with the Phonero acquisition and strengthening our position on the B2B side. And so far, so good, we must say. Underlying Phonero is doing quite well. So we are pleased with our improved market position and look forward to further integrate Phonero and realize the synergies.

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Christian Luiga, Telia Company AB - CFO and EVP [63]

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And we can say that we stick to our SEK 400 million, around SEK 400 million in synergies for next year and that we have a clear but tough half -- second half of moving over the customers to our own base. But...

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Russell Waller, New Street Research LLP - Founding Partner [64]

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Okay. Sorry, I was asking about billed service revenues. Are you saying that the slowdown is because of B2B? And on the B2C side, things are actually much better?

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Johan Eric Dennelind, Telia Company AB - CEO and President [65]

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No.

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Christian Luiga, Telia Company AB - CFO and EVP [66]

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No. It's -- actually, the B2C side is a little bit weaker than the B2B. And that comes from a continuous dropping customer base to Ice and others. And we have increased ARPU, and we have compensated that quite well. And we do continue to compensate with, of course, the wholesale we get. As we said before, we lose a customer, maybe another player lose a customer, we get the wholesale back. But it's more than we lose up. And that formula still matches, but we have been also growing in the past before on base, but we're not doing that any longer.

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Andreas Joelsson, Telia Company AB - Head of IR [67]

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That is unfortunately what we had time for. If you have further questions or more questions, reach out to the IR team. We will be here to support you and serve you. And with that, we wish you a pleasant summer, and we will be back in the Q3 report in October. Thanks a lot.

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Johan Eric Dennelind, Telia Company AB - CEO and President [68]

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Thank you.

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Christian Luiga, Telia Company AB - CFO and EVP [69]

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Thank you very much.

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Operator [70]

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Ladies and gentlemen, this does conclude our conference for today. Thank you very much for participating. You may now disconnect.