TLSNF - Telia Company AB (publ) (TLSNF) Q4 2022 Earnings Call Transcript

Telia Company AB (publ) (TLSNF)

Q4 2022 Earnings Conference Call

January 26, 2023 3:30 A.M. ET

Company Participants

Erik Strandin Pers - Head of Investor Relations

Allison Kirkby - President and Chief Executive Officer

Per Christian Morland - Chief Financial Officer

Rainer Deutschmann - Senior Vice President and Group Chief Operating Officer

Conference Call Participants

Andrew Lee - Goldman Sachs

Titus Krahn - Bank of America

Peter Nielsen - ABG

Stefan Gauffin - DNB

Luis Lecaroz - Credit Suisse

Maurice Patrick - Barclays

Ondrej Cabejsek - UBS

Steve Malcolm - Redburn

Keval Khiroya - Deutsche Bank

Nick Lyall - Societe Generale

Adam Fox-Rumley - HSBC

Presentation

Operator

Welcome everyone to Telia Company's Q4 2022 Results Presentation and Strategy Progress Update. And with that, I will hand over to Telia Company's Head of Investor Relations, Erik Strandin Pers. Please go ahead. The floor is yours.

Erik Strandin Pers

Thank you, Sam. Welcome everyone to the Q4 call and the strategy progress update. We will start with Allison Kirkby, our President and CEO; and Per Christian Morland, our CFO, taking us through the Q4 results. Thereafter, they will be joined by our COO, Rainer Deutschmann, to take us through the annual strategy update. I expect this call to take about – the presentation to take about [45 minutes] [ph], and then we will go to Q&A. So, no time to waste. Allison, please go ahead.

Allison Kirkby

Good morning, everyone. So, as you have seen this morning, our full-year financials show that we continue to make good progress on our plan to make Telia a better company for all its stakeholders, but at the same time, it's clear that it has been a challenging year with significant macro headwinds and a few disappointments that means we did end the year with what I would say is a mixed set of results.

So, let's start with a run-through of the quarter, which did contain some of those macro-driven challenges that we saw last quarter as well. Service revenue growth continued, but at a slower rate of 0.7%. Most markets did continue to grow, and we were positive in both the consumer and enterprise segments.

Mobile was again strong with a 3.1% growth for the group and growth in all our markets for mobile, but core 3 in B2C and TV media were sold. Transformation efficiencies continue to materialize, and in the quarter, we managed to reduce OpEx, excluding energy, just shy of 1%.

EBITDA declined 2%, driven by higher energy costs and softer trends in the aforementioned TV/Media and Swedish units. Operational free cash flow was weak coming in at SEK 400 million and materially below last year's level, explained mainly by a lower contribution from working capital, which PC will get back to. The structural part of cash flow was high however rather unchanged versus last year as EBITDA was flattish, and we remained at peak levels of CapEx investments in the quarter.

The stricter cash generation, combined with the second tranche of the dividend and the end of the share buyback program, leverage increased to 2.35x. The majority of the weaker cash generation in the quarter is, however, due to macro impacts that will subside or be mitigated over time.

And in addition, we had some phasing of inventory and investments across the year-end. And so, because of that and because we still remain on track with our strategy, our financial framework for substantial value creation remains even if it's a bit delayed, and the Board, therefore, intends to vote a dividend of SEK 2 per share, in-line with the flow of our dividend policy.

Now, let's look at the market now and start with [indiscernible]. As you can see here, revenue remained some turn slightly negative as growth in mobile, TV, and broadband was not enough this quarter to offset the continued legacy fixed telephony pressure and also there was a temporary weakening in business solutions in the enterprise space. TV as to some extent, also broadband this quarter included a negative impact from the black screen situation with Viaplay, a situation that was resolved during December.

Despite legacy headwinds continued an uncured pace and the Viaplay situation, we still saw underlying service revenue growth of around 1%, but EBITDA was down quarter driven by the softer revenues, higher energy costs, and a lower pension refund that we were expecting. These unfortunately offset another good quarter of cost transformation and OpEx reduction.

Moving to the KPIs for Sweden, you see here a continued growth in mobile ARPU, supported by pricing initiatives, but there's less roaming and insurance upside this quarter and a slightly smaller subscriber base, mainly driven by the loss of some seasonal mobile broadband subscribers.

The broadband subscriber base increased on the back of very strong growth in fiber, especially in our own network, and more than compensated for the decline in DSL. And by the end of the quarter, we will only have – we only had 100,000 subscribers left on this network, keeping us well on track for the shutdown by the end of 2026.

In TV, we continue to see a solid subscriber base development, but the ARPU declined from the already mentioned black screen situation Viaplay. With that dispute now behind us, we now have a broader set of content for our aggregator position and the support from SEK 150 price increase on our sports package introduced during this quarter, we should see an improved ARPU development going forward.

Moving to Finland. We Had another quarter of improved service revenue development with mobile growing 3.8%. This marks the sixth consecutive quarter of improvement in our Finnish mobile business. In addition to its mobile development, we also had an improved situation on the fixed side in the quarter.

EBITDA, however, continued to be negative as higher energy resulted in a SEK 90 million headwind in the quarter. Underlying EBITDA growth was slightly positive, which is an improvement from a to what we've seen for the past few quarters and increased proof point that the turnaround in segment is having an impact by spend.

The mobile subscriber base declined slightly as we continue to focus less on the low end of the market and ARPU continued to improve the quarter by our chosen value focus strategy. And finally, enterprise also improved for the fourth consecutive quarter and even [indiscernible] for slight growth.

Moving to Norway. Norway with another quarter, solid service revenue development, increasing 3.2% with mobile fixating at similar weeks, and enterprise is another impressive quarter, growing by 7.4%. EBITDA increased supported by the top line momentum, which more than compensated for a higher cost level of attributable to energy. So, continued good service revenue and financial momentum in Norway that will be further supported in 2023 from the recently announced transaction with Pure Craft under, which there are 143,000 mobile customers who move to our network during the second quarter.

The LED market had another excellent quarter with top and bottom line groups across all three units. In Lithuania, mobile grew double-digits and fixed grew almost 5%, and the flow-through to EBITDA was excellent moving more than 13%, despite continued headwinds from higher energy.

In Estonia, performance was also strong, with service revenues growing 5% and like with Lithuania it was broad-based with mobile growing almost 8% and fixed growing almost 4%. And as you can see, EBITDA growth similar to Lithuania exceeded the service revenue growth, despite inflationary and energy cost headwinds.

Ending with Denmark, you keep a flat service revenue development, but suitable mobile growth and significant cost takeout, resulting in an impressive EBITDA growth of 21% for the quarter, and we were particularly pleased with [indiscernible] recognizing Telia's mobile network as the best in Denmark's Top 4 cities.

Finally, to the TV and Media unit, where service revenues decreased by 2.7%, advertising was slightly down, despite double-digit growth rate in digital advertising, but we do continue to have a challenging development in paid, declining almost 9% from a challenging competitive environment. EBITDA declined by 103 million, reflecting mainly the decline in revenues and to some extent, a somewhat higher content cost level, compared to the same quarter last year, but this was all in the paid segment and in fact, TV4 had its most profitable year ever in 2022.

Our full focus for this business unit now going forward is to consolidate C More into TV4 Sweden and NCD in Finland in the coming 12 to 18 months, so that we, in the end, have fewer TV assets with a lower-cost content site that is focused on leveraging the growth potential in the digital ad space where we continue to grow at a double-digit rate.

But now, I will hand over to PC to take you through the quarter's financials.

Per Christian Morland

Thank you, Allison. Let me quickly take you through the Q4 and I'll come back on the outlook later in the presentation. Starting with gross revenue, as Alison has gone through, we had service revenue growth of 0.7% from all units except Sweden and TV media in this quarter. Core Telco service revenue growth is 1.2%, driven by growth both in the consumer segment, but also in the enterprise segment. TV and Media [Technical Difficulty] 2.7% from lower paid revenues, taking total growth down to the mentioned 0.7% for the quarter. Total sales revenue growth for 2022 ended at 2.1%, well in-line with our outlook of low single-digit growth.

Moving to OpEx, OpEx is reduced by 0.9%, as mentioned, or SEK 58 million in the quarter. If we exclude the effect from pension refund, OpEx decline is minus 2.5% or 155 million in the quarter. The reduction is driven by lower resource costs from 700 fewer resources since the fourth quarter last year. Despite inflationary pressure, we have two years into a transformation journey, reduced our net OpEx by 1.1 billion.

Total EBITDA is negative 2% in the quarter, driven by a decline in Sweden, Finland and TV/Media, partly [offset] [ph] by growth in Norway, Denmark and the Baltics. Core telco EBITDA is minus 0.6%, but if we exclude the 280 million increased energy cost in the quarter, Core Telco growth is actually 3.1%.

TV/Media EBITDA is negative 105 million in the quarter for service revenue pressure driving down total EBITDA last quarter group to minus 2.0%. Total EBITDA for 2022 ended flat versus last year, in-line with the outlook given in Q3. If we exclude the increased energy costs, EBITDA growth would have been plus 2.5% well in-line with the low single-digit outlook.

Total cash CapEx in Q4 is 5.3 billion, in-line with Q4 last year. Elevated CapEx in Q4 is due to spacing of around 0.5 billion of investments from 2023 into 2022. This relates mainly to mobile network modernization and 5G rollout, transformation, and security investments. Despite a continued challenging global supply chain situation, we have been able to stay on track and actually now slightly ahead of our investment program to modernize our mobile network, dismantle our legacy infrastructure and to transform Telia into a much more digital company.

Cash CapEx on a rolling basis has increased slightly to 15.4 million or 16.9% of net sales. Cash CapEx, excluding a 0.4 billion impact from FX ended at the high-end of the range at 15.0 billion.

Moving to cash flow. Operational free cash flow ended at 0.4 billion in Q4, down from 1.4 billion in Q4 last year. Reported EBITDA minus CapEx is flat versus last year. Cash is lower due to spacing with interest costs being quite stable. Other in the graph is as expected impacted by lower pension contribution versus the very high level recorded in Q4 last year.

Working capital was slightly positive in the quarter, but less than what we expected. This is mainly driven by two factors. Inventory levels are unfortunately still at elevated levels due to lower sales than expected, combined with some higher income and inventory. The global supply situation has made inventory planning and pairing much more challenged. The second factor is vendor financing.

Our vendor financing balance ended slightly lower than expected due to longer time to onboard new suppliers. Both of these effects are phasing between 2022 and 2023 Total cash flow from 2022 million ended at 5.7 billion with the structural partial cash flow at 6.5 billion. Total cash flow has been on a declining trend due to increased CapEx elevated inventory levels and lower contribution from vendor financing. As guided in Q3, we were not able to generate total cash flow to cover the minimum dividend commitment of 7.9 billion. This is driven by macro implications with the biggest item being the 0.8 billion increase in energy costs. This is combined with more than a billion of phasing of investments in working capital, as mentioned, between 2022 and 2023.

On leverage, total net debt increased 8.9 billion in the quarter. This is a result of our limited cash flow contribution in the quarter combined that we completed the final part of the share buyback of 1.8 billion. We executed on the second tranche of the dividend payment of 4.2 billion. We have reduced our hybrid capacities impacting net debt by 1.2 billion in addition to leasing and FX effect on our debt. Due to these factors, net debt ratio has increased to 2.35x well within the target range of 2.0x to 2.5x.

And with that, I hand back to you, Allison.

Allison Kirkby

Thanks, PC, and let's now move directly into our annual strategy progress update as we now enter the third year of our Better Telia strategy and Rainer will follow me and then PC on outlook at the end.

As a reminder, two years ago, almost to the day, we launched our new purpose and strategy in order that Telia will become consistently and sustainably better for all our stakeholders, customers, employees, owners, and ultimately, the societies in the Nordics and the Baltics.

We believe then, and even more so now, that as the market leader in one of the world's most digitalized regions, the demand for safe, reliable high-speed networks would remain high, and that going forward, Telia would play a fundamental role in the digitalization of society in a space and secure way.

Our strategy, therefore, set out to build a more agile and more resilient Telia that would reinforce our position as the most trusted and secure digital infrastructure and service provider in the region.

Back then, we shared a set of growth levers and a resulting financial framework that would lead to substantial value creation. And coming from a situation with multi-year decline in revenues in all our Nordic markets, we share the [levers] [ph] that would return us to a low single-digit revenue growth.

We also share how our bold digital transformation, will simplify, digitalize, and automate our operations and deliver 2 billion of OpEx reduction in the first phase. And how we were going to modernize our network and our technology platforms, and combine with the other levers after a period of investment lead us to a growing EBITDA, and later on, a growing structural and operational cash flow.

So, how are we doing two years into the journey? Well, despite a multitude of headwinds that we could not predict at the time and unfortunately hitting us in the peak investment year of 2022, we do believe that our strategy is delivering. I'll get back to the headwinds in a minute, but let's first look at what our strategy has delivered so far.

The ambition of the inspiring our customer pillar of our strategy was about returning Telia to growth, and we have. We've returned all our Nordic markets to growth after a multiyear decline. Mobile growth have accelerated to 4%, with Finland contributing to that growth after years of decline.

Our fiber revenue base growing at a double-digit rate per annum is now 25% higher than it was 2 years ago. And [convergence] [ph] is progressing, especially in our home market with triple player households up almost 20% in 2 years, and we are now the aggregator of choice to more than a million TV subscribers. And rare [indiscernible] telco enterprise is now growing across the group with Sweden enterprise posting its first full year of revenue growth in two decades.

Rainer will talk you through what we're doing within our infrastructure and our transformation under the connect and transform pillars, but I want to mention that we're ahead of our 5G rollout plan, our fiber and coax will pass keep growing. The legacy network from betting has accelerated in enterprise mobile networks, one route to monetizing 5G, where we're the clear market leader.

And as you know, we've set up the leading Nordic Telia platform in partnership with [indiscernible]. On transformation, I'll let Rainer share the progress, but we remain on track towards our 2 billion OpEx take out by 2023, with 1.1 billion already realized, and that's despite inflationary headwinds that we didn't predict at the time.

And finally, we're delivering sustainably. We now have a group-wide approach to making pricing work in a high inflation environment. We've reduced OpEx not least by workforce reductions that are [at 2,000] [ph] or 10% of our workforce. And sustainability is fully integrated into our strategy, and we've made substantial progress. For example, our CDP score at A minus is up from D in 2018. 35% of our supply chain emissions are covered by science-based targets.

We've exceeded our target for digital inclusion one year early and received an EcoVadis platinum medal. But more important, we are the leading digitalization partner, the energy sector, the defense sector, and the many civil contingency agencies, proving that Telia is increasingly the most trusted and secure digital infrastructure provider in the region in an era for sustainability, security and digitalization are the key societal needs.

However, while we're happy with that progress we have, as you know, also faced some significant challenges, which I do want to touch on. The Pay TV landscape has been very difficult, and we have also scored some own goals, sorry about the pun, by feeling to fully monetize our rather expensive champions in price. We've been challenged by rising inflation across our cost and CapEx base setting us back around 1 billion in energy cost of loans.

Supply chain disruptions have caused difficulties in planning, executing customer projects, investments earned on inventories. And rising interest rate means both higher financing costs and short-term fluctuations in our vendor financing program, which has been a significant tailwind to cash flow in an earlier year at Telia. It's also been a barrier to completing some of the infrastructure deals we're working on, but I have no doubt those deals will come back on the table again. And let's just reflect, all of this hit in a period where we were at our peak investment of the modernization and transformation area. So, we didn't have a lot of wiggle room.

So looking forward, what are we doing to now mitigate the challenges? Well, in October, we announced that we are merging our loss-making streaming business C More into TV4, our ever-stronger market here in Sweden and into MTV in Finland. This will save significant content costs and restore profitability in TV and media starting in 2024, and make it very clear that our Core Telco business is only an aggregator going forward.

We are accelerating our pricing initiatives and our transformation to offset inflation, both in our revenue base and in our cost base. And just so you know, our pricing, we've already announced increases across mobile broadband and TV, both here in Sweden and Norway, which are kicking in already during the quarter. And to gain actual momentum, we've also before initiated the next round of workforce reductions of 1,000 FTEs and STCs, and for the full year, we're therefore targeting a total reduction of 1,500, which is a 50% increase on the last two years.

On supply chain, more bottlenecks and these times are still an issue. We are taking actions, and we expect to drive down the inventory that has built up. And on financing, we've already done all of our near-term refinancing needs and secured most of our vendor financing volume for next year.

So, all-in-all, despite the 2022 did not become the year we took for, our strategy remains. We're continuing to execute on our plan. And I know Rainer will now share as we've done before how we're progressing on the underlying operational KPIs and lead you through our progress that's transforming Telia towards a more lean and efficient digital telco.

Rainer Deutschmann

Thank you, Allison. Let me lead you to the progress in our transformation. As in the past two updates, I've always shared with you transparently also the underlying drivers, you can see where we are heading and where we are. We are ahead in our network modernization. Recall in late 2020, we have embarked on a major renovation concurrently modernizing our 4G network and deploying 5G coverage in a single flight business approach and with standard configurations across our footprint for best CapEx efficiency.

We are proud that we have been able to safeguard the modernization, overcoming COVID and supply chain-related challenges. In fact, we have frontloaded our rollout, and thus we have in 2022, crossed the peak rollout as you can see on the left-hand side of the chart. In the further years, we will reduce the intensity and focus on Sweden we saw, as you know, a late 5G auction and hence a later start on the [year] [ph]. As a result, we are actually happy, very happy with our network quality, providing across the group's 70% 5G coverage and even ahead of plan.

In Sweden, we have crossed 50%; in Norway and Finland and Lithuania, we even crossed the 80% population coverage mark. We are the clear network leader in our region with Number 1 positions in Sweden, Lithuania, Estonia, and further improving positions in our [telco] [ph] markets. In Norway, we are the clear 5G leader. And as Allison said earlier, in Denmark, we very recently gained network leadership in the most important four cities.

So, as you can see, we have still a strong network foundation to monetize based on our capacity, and the leading 5G spectrum position that we have gained in the region. [Finnish networks] [ph] are only as useful as they are used and monetized, and we actively drive key productivity products and we leverage our digital sales and service capabilities.

As you can see on the left, we have increased the 5G devices on our network to now 30%. And with about 80% of all new devices being sold and our markets being 5G, we see significant potential in the next year. Likewise, our strategy to complement our fixed broadband network with fixed wireless offerings paid-off, demonstrated by a 59% increase of fixed wireless users to now almost 400,000. And we built on our digital connectivity foundation.

We have seen, as Allison also mentioned, that pioneered since early days in enterprise mobile networks combining high throughput, low latency, with utmost reliability, and security. We have to date commercially contracted more than 55 sites, and we do serve critical customers with critical applications such as in mining, public transportation and so on. Likewise, we have also doubled our connected devices on IoT. We see steady growth in value-added IoT services beyond connectivity, and we continue to grow our leading position in smart public transport.

Our transformation delivered steady improvements in our digital sales and service capabilities, as you can see on the right-hand side, essential to monetize our products at lower cost to serve. For example, based on our tenure-wise customer value management platform that we have launched, we have tripled our targeted and auto-based campaigns, which is essential to stabilize and increase the ARPU with our products and services.

Our program to reduce reasons to call and to improve agent efficiency call center agent efficiency, they show material effect now, for example, in Sweden, which is obviously the most important we see in the consumer segment, a 20% reduced customer core volume, directly translating to cost savings.

Now reducing technical debt is a key driver for efficiency and quality, as you know. I've shown exactly the same chart over the past two years, and you can see we have made steady progress in all our key programs, which we have updated you consistently on. Copper in Sweden is down to 1,500 central offices and we keep driving out the long tail until 2023.

Likewise, we are now down to 5G – sorry, to 5% of 3G voice traffic share on the total voice. And we've already shut down our 3G networks in Norway and Lithuania, and all our 3G networks will be shut down by 2024, unlocking not only the cost efficiencies, but especially also enabling us to reaffirm the value of the 5G spectrum – the 3G spectrum to 5G. And on the right side, you see that we have now retired about 70% of our legacy network systems, and our program will complete by the end of 2024, resulting in a fully virtualized and future-proof network infrastructure.

On the transformation itself, we have updated you last year, transformed among our 5Ps: products, processes, platforms, people, and partners. The direction is straightforward, to simplify, automate and scale. We consistently measure and report our progress through KPIs, which drives efficiency and quality. Simplifying scale products, legacy out, target in.

To date, we have reduced the number of legacy products by 42%, and we are underway towards our 100% reduction target. At the same time, we already have more than 50% of our target products deployed on common platforms. This enables efficient real across the group note that already now more than two-third of our common products are being reused in more than 1 market.

We improve and automate our processes to enable zero touch journey with better quality and efficiency. Through our group-wide operational excellence program, the systematic drive continuous improvement, which has now materially improved our incidents by 18%. So, reduced incidents by 18%. At the same time, to our automation initiative, we have increased the number of our sales through automation and [indiscernible] by 65%, and this is only the start.

Our platform, same as in products, we drive legacy out and target in. We've kept our patent legacy drive-out with 47% reduction now, while at the same time, we've increased the share of target platforms to 32%. The most evident success is in the launch of our transformed B2B operations in Sweden, which enables us to reduce the order profit in time from weeks to minutes. In 2023, we can now scale those products, processes, and platforms for full realization.

Key to our transformation success are our people and partners. Upskill and empower our people, we invested to tools and training, and we give tires access to analytics for data-driven decisioning, covering more than one-fourth of all our people, an increase of 55%. And at the same time, we increased our near insurance workforce by 47%, and we took ownership of critical software skills, which previously had been outsourced into our own workforce, especially on the nearshore locations, which obviously much increases the efficiency.

We have delivered on our plan to drastically reduce the number of different system integrators now down 70% to reduce fragmentation and increased scale. We have realized to date SEK 200 million gross savings. And as we have updated earlier, we're ramping up to the earlier committed SEK 750 million by 2025 cost savings in that area.

At the same time, our strengthened strategic partnerships support our transformation and value realization even enjoying go-to-market activities. This is hard work. I can definitely confirm our statements that we have embarked on one of the industry's most ambitious transformations here. But we have built a solid foundation, which will carry us forward to scale revenues and efficiencies sustainably.

With this, I hand over to my dear colleague, PC, who will show us how our revenue and efficiency drivers support our financial plan.

Per Christian Morland

Thank you, Rainer. Let me quickly take you through how all of this both Allison and Rainer has talked about come together from a financial perspective. Starting with our growth agenda and a quick update on the key growth levers that Allison touched on. COVID rebound on roaming and media that we talked about three years ago, it's mostly behind us now and less of a growth lever going forward. Legacy burden is still a drag, but it is expected to ease going forward, especially beyond 2023.

Our core growth levers that we have talked about remains unchanged, including driving our efforts by improving mobile experience and monetizing 5G, reducing churn and improve upsell from conversion and gradually build more momentum from new revenue streams like IoT and EMM. In addition, we have, as we have discussed before, significantly stepped up and structured our approach to pricing in the new high inflationary environment.

Our clear ambition is to be able to assess inflationary pressure for pricing measures for all our units. This includes building in CPI linkages at intra-B2B contracts, combined with bigger and more recent price increases, both front and back books across our entire product portfolio.

Service revenue growth has gradually improved and ended at 2.1% in 2022. Our outlook for 2023 is to grow further service revenue by low single digits, enabled by maintaining and strengthening our current commercial momentum, gradually build more strength from pricing initiatives, and get more impact on new revenue streams like IoT and EMM.

Moving to the cost agenda. The key drivers, the ongoing digital transformation of our business is on track as we have mentioned. The key drivers in forming our cost base remains the same. Two years into our transformation journey, we have seen the biggest impact on the total cost from a selective driver. Let me mention a few. Reducing and digitalizing our customer interaction, removing legacy and building common technology platform, moving to fewer strategic partners, as Rainer mentioned.

Reduction in overhead costs, both on group level, but also in the business unit. If we look going forward, we expect continued impact from these drivers and gradually gain more impact from cleaning up our legacy product portfolio and consolidate into a few common products across all our markets, but also by gradually removing more manual work through simplifying, standardizing and digitizing our processes.

These drivers have despite inflationary pressure, named a net OpEx reduction by 1.1 billion, resource costs over the two years is now reduced by 0.7 billion, enabled by 2,000 peer resources. In addition, IT cost has been reduced following the initiatives that Rainer had totaled about 0.4 billion.

Our ambition remains to deliver 2 billion net OpEx reduction by end of 2023 enabled by further reduction in number of resources by 1,500 in 2023 with 1,000 already being executed now during the first quarter, combined with further cost reductions in IT and also in marketing.

On CapEx, the investment agenda that we presented 2 years ago are intact with some updated phasing as we have discussed earlier today. Key components as Rainer has talked about, has been to modernize our mobile network and roll out 5G, negative reduction, and transformed agenda to a more digital company.

CapEx in 2023 is expected to reduce between SEK 13 billion to SEK 14 billion. This is enabled by a reduced pace of network modernization after having achieved 70% to 80% population coverage from 5G in many of our key markets. Lower investments in product and IT, following the high level that we booked in 2022. Our aim is to be at the mid or the low end of this targeted range.

On cash flow, structural cash flow is expected to grow from 6.5 billion in 2022 to between 7 billion to 9 billion in 2023. Our ambition is to generate low to mid-single-digit EBITDA growth on a yearly basis, but given the volatile and uncertain macroeconomic landscape, we choose to be a bit conservative and have 2023 outlook at plus to low single-digit growth.

CapEx is expected to come down from the peak level in 2022 – interest costs are expected to end around 1 billion higher following the higher interest rates that we saw and expect for 2023. If we still remain on working capital, our ambition and our aim is clearly to keep it stable for the year. Inventory is expected to come down significantly from the elevated levels in 2022. And on vendor financing, our ambition is to maintain the balance on level with 2022.

We have already secured three quarters of this with the remaining one quarter being work in progress and targeted to be secured in the coming months. Due to pacing, we will see a quite negative impact from vendor financing in Q1 2023 before the mitigation started at full effect.

To summarize our outlook, service revenue to grow low single digits. EBITDA to be flat to grow low single digits, CapEx in the range of 13 billion to 14 billion and the structural part of cash flow to be between 7 billion and 9 billion.

On balance sheet and dividend, management and the board are fully committed to maintain a strong balance sheet and maintain the targeted leverage range and rating targets. Further, the board stay committed to the dividend policy and propose to the AGM to distribute an ordinary dividend of SEK 2.00 paid in 4 tranches.

And with that, I hand back to you, Allison, to summarize the presentation.

Allison Kirkby

Thanks, PC. So, I will try to summarize our progress and way forward without repeating myself. Basically, we are a large complex business in what has become a challenging market environment. We've known from the start that achieving our ambitious goals with demand correct, determination, focus and perseverance, and today is a reminder of that.

However, having returned Telia to growth, expanded our digital infrastructure and especially 5G faster than the others, past our investment fee, and build the foundations for improved operational momentum, and cash conversion going forward. I remain absolutely confident that we're on the right track with the right plan to create substantial value for our owners in the coming years.

So, let's now move to questions.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] And we'll go to our first question from Andrew Lee with Goldman Sachs.

Andrew Lee

Yeah, good morning everyone. I had a couple of questions. One, just on Sweden and your outlook for that market, you see yourselves in that market? And then secondly, on the free cash flow drags below structural free cash flow. Just on Sweden, just service revenue growth, as you highlighted, was impacted by the Viaplay outage in the fourth quarter. What's your outlook for growth in Sweden for your business in 2023, specifically taking into account competition? Do you still expect to be able to put through more meaningful price rises this year to offset cost inflation and drive growth? That's the Sweden question. And then on the free cash flow drags centering around vendor financing and hybrid cattle refinancing, you went some way to doing this PC in the last couple of slides, but how can you or give us confidence that we don’t see free cash flow drag some of these 2023? Thank you.

Allison Kirkby

Thanks Andrew, I’ll take the Sweden question and leave the free cash flow question to RC. To the outlook for Sweden, [indiscernible] did cause some disruption to our underlying momentum in the quarter and some of that will still be an impact in Q1, but outside of Q1, we expect to get that to low single digit revenue development in Sweden again like [indiscernible], you know there is very continued underlying momentum in the broadband business as you see, another [indiscernible] pricing increased going out now, which starts to play and [indiscernible] during March and into April. The TV momentum we’ve got more content now in our [indiscernible] platform, but taking 150, 200 pricing in the quarter, so that will benefit us coming out of this quarter as well.

Looking at the opportunity to bet our monetized mobile as we get some pricing moves going on in mobile as well. So, I expect that Q1 would still be a bit soft, but we’ll build momentum in Q2 onwards as all the pricing kicks in as we start to really monetize 5G because we are well above 50% top coverage now and we can continue the great momentum that we have in the enterprise business where we are sailing in a broader range of digitization services and I said, [indiscernible] is the more the energy in the defense sector, where we're seeing great demand. So, low single-digit development, but it will be from Q2 onwards.

Per Christian Morland

Yes. So, then I can take the working capital question. Just to be very clear, our ambition and our aim is to keep this flat in 2023. So, it doesn't become a drag. But if you note on the slide, we say equal or potentially down. The reason for having that is, we just want to be very open and transparent that we haven't fully secured everything at this point in time. That doesn't say that we are not working to close the remaining uncertainty and deliver working capital that doesn't become a drag on the total cash flow. And the fact to be able to be confident that data is, number one, the inventory.

I think we have quite good control. It just takes some time to get the effects out, and we'll be working with that systematically throughout the year. So that should be a positive development. There are no other elements of the working capital that we expect any big movements on so you can enjoin to the vendor financing and development on that.

As you know, when the interest rates peaked up during 2022, it gave us a challenge that we've done a shortening of our payment terms. And we have been mitigating this for two things. One is, of course, to go back and renegotiate the discounts on existing to private. This is going quite well. We have progress on that, but it takes some time to get through all of those contracts.

The second part is, of course, to onboard new supplies to the program, and we also have good traction on that. So, if you combine those two, we ended a balance of 11.4 billion in 2022, slightly higher than 2021. And we actually expect now to maintain that balance, and we have already secured three quarters of that balance when we exit 2023. And now we have, sort of a clear portfolio initiatives to close the remaining one quarter.

If we do that, we don't expect any drag on working capital, and we can keep you updated during the year on this. But also, as I said, there will be a phasing in the year in 2023, but there will be a negative development in the first quarter and then gradually see the litigation go back to full effect and end at the end of the year on the balance similar to this year.

Allison Kirkby

We're much in control of this situation now, much more visibility. We are ahead of where we were this time last year, instituting the balance. And so, our aim is for a neutral effect over the course of the year, that's our aim.

Andrew Lee

That's much appreciated. Can I just ask a quick follow-up? So, just one on the hybrid capital refinancing, how should we think about any kind of process of that in 2023 because that was also a drag on net debt. And then, PC, you mentioned that the vendor financing was being managed by a mixture of renegotiations and adding more vendor financing. What's the kind of mix in terms of the support to the vendor financing balance? Is it more renegotiations and less additional vendor financing, or the other way around? How can we think about that? Thanks.

Per Christian Morland

On the biggest portion on the financing is to renegotiation of the existing vendors and contract and then we are able to secure some new vendors coming into the program. On the hybrid, you should not look at that in 2023. So, the leverage effect is already done. There's no further changes planned on our hybrid capacity. We just adjusted it down to make sure we get full credit from the rating agencies on our hybrid capacity after some of the structural changes that we have done in the past few years. So, no changes going forward.

Andrew Lee

Great. Thanks.

Question-and-Answer Session

Operator

We will take our next question from Titus Krahn with Bank of America. Please go ahead. Your line is open.

Titus Krahn

Good morning everyone and thanks a lot for detailed communication and for taking my question. Just maybe following up very quickly on the operational free cash flow outlook, and I definitely understand that the current macro situation is quite challenging to really guide on some elements that still feels like the range relative to [ride] [ph]. And maybe could you talk a bit on where you would expect the largest fluctuation between the different elements? And then maybe also on the EBITDA guidance for the next year, and again, this is quite difficult to really assess all the impacts that, could you maybe give us an updated outlook of what energy impact you see in 2023? I don't think, you kind of updated that as part of the presentation. And on the wage side, how are negotiations going with the unions and what's in place maybe to expect?

Allison Kirkby

Okay, why don't I kick-off and then once we get to know structural cash flow, I'm going to give you to PC. So, yes, we've given a wide range on structural cash flow guidance for the year, and that is very much driven by, you know we are still in uncertain times. Our ambition is clear. Our ambition is to grow service revenue low-single-digit, EBITDA low-single-digit, we're coming off with peak investment levels, and that's why you get a range of 7 to 9 on structural cash flow.

Why are we being cautious? Well, if you look at EBITDA, our outlook is flat to low single digits. As whilst we have an ambition to grow single and very much low single in Core Telco, we have to recognize that it's still not – we're still in an environment where there could be a major recession. We don't know yet, and that could particularly impact our advertising business.

And that and if there is an impact on consumer, we need to recognize that in our guidance, and we need to plan for a scenario that the consumer environment might be [tough] [ph]. And so, we need to plan for flat EBITDA, even although our ambition is clearly to grow it and our underlying plans are to clearly grow it.

At the same time, now that we're all of our reinvestment levels, we are – we will now be [indiscernible] down CapEx because we're ahead of plan on our 5G rollout and a number of the transformation initiatives are now kicking in. So, the big benefit in our cash flow generation next year is really coming off of those peak levels of CapEx.

From an energy point of view, the outlook is better than it was three months ago, and we have assumed in our plan that it will be higher than this year over the course of the full-year to the tune of 300 million. If you recall, three months ago, it was 600 million, but it's still volatile. We still don't know what the winter will look like, we still don't know what the war in Ukraine might do next.

And again, that's all factored in to this full 7 billion to 9 billion range. And then on the wage side, what you're seeing in the Nordic market is a much more reasonable set of expectations from the [unions] [ph]. We are seeing in the range of 3% to 4.5% is the starting point of a negotiation. Baltics clearly higher because they're living with higher inflationary rates, but no worse than last year, high single digits.

Those negotiations kick in, in the spring. And we are well covered for those ranges in our plan going forward. And PC, I don't know whether you want to pick up on other elements of operating cash flow.

Per Christian Morland

No, I think you covered it. And if you combine with my answer to Andrew, I think we have covered it. I can just add on the salaries. We've been guiding earlier that we in 2022 have around 400 million pressure on the salaries, and we expect in 2023 to have around 600 million, and that is still like you kind of estimate of where we end up, even if we don't have all the answers at this point in time.

Titus Krahn

Okay, very, very clear. Thanks a lot for that. Maybe a very, very brief follow-up just on the CapEx guidance. How should we think about cash CapEx where it's reported one? Because I think now you guide on reported one, compared to the cash you guided for in 2022.

Per Christian Morland

Yes, so maybe I can take that. You're right, we are changing now the guidance. But we have also introduced an outlook statement on structural cash flow, which, of course, includes the cash CapEx component of it. So, I think in a way, the cash CapEx is still a part of our outlook set as such. We have a few hundred million difference on – between the cash and 2022, and we don't expect any material difference for 2023. So, we just want to align with the industry and make sure that we have a CapEx outflow which is in-line with the activities in the year. And since we annually capture the CapEx component in our structural cash, we felt it was more easier to move to book CapEx going forward.

Titus Krahn

Great. Thanks so much.

Question-and-Answer Session

Operator

We’ll take our next question from Peter Nielsen with ABG. Please go ahead.

Peter Nielsen

Thank you very much and good morning guys. Alison, just a question. Your comments on – you're making some fairly strong comments on your failure to monetize the Champions League rights in particular and [indiscernible] to focus on being a content aggregator going forward. Could you elaborate a bit on why do you think you have failed to monetize these rights? Is it simply not possible or is it an internal sort of a failure by Telia? And what are the broader consequences of this? And your comment Alison, sounds like you will not bid for the rights the next time now for renewal, but does this have any broader implications for your TV and content strategy? And then can I just ask a follow-up, a short question on the cash flow for next year to the CFO. The pension fund contribution, what should we expect going forward here? Thank you very much.

Allison Kirkby

Thanks, Peter. Thanks for the questions. Yes, since the very beginning, I was clear that I wanted to understand whether we could monetize the TV/media asset and its investment in Champions League. And why have we failed to monetize Champions League, it is a very expensive right in the beginning. And I am not sure that Telia is best at monetizing content, if I'm really honest.

Our TV/media unit is good at monetizing content, but monetizing content at an investment level that they can get a return on. And that's why we have made the decision to consolidate C More into the very in success of TV4 and MTV business going forward to expand TV4 and MTV into offering HVOD, AVOD and SVOD services, but with the right content costs going forward so that we can return that business to the level of profitability it was going off before it go into some of these rights. And by making that strategy very clear, I can focus Telia on being a great aggregator.

What does it mean for, what's the broader implications? I think it's no different from what you've seen in other markets. You see us focus more and more on building the right long-term partnerships with distributors and owners of content and making that content easily available on our platform so that customers can pick and choose the content that they want to watch on whatever streaming service or whatever AVOD server or whatever linear server at any point that they want to, and that is our priority and the trend that you've seen in other markets, that's what we will continue to do. And we'll focus TV4 and MTV on having the right content for their domestic champion, national champion data.

As you will have seen, sorry, just I want to add, in the final agreement we made with Viaplay, we're now offering some of our champions that matches to Viaplay. So, we're starting to move away from that exclusivity that Telia tried to monetize [indiscernible]. And that's also showing that we want to build a broader relationship and a better long-term relationship with these content owners. And PC on cash flow.

Per Christian Morland

Yes. Hi Peter. We you should expect and we expect to have vendor contributions of 900 million, in-line with what we saw in 2022.

Peter Nielsen

Super. Thank you very much both. Thank you.

Question-and-Answer Session

Operator

We’ll take our next question from Stefan Gauffin with DNB. Please go ahead.

Stefan Gauffin

Yes, hello. I would like to stick with the TV media business, which are reporting very weak numbers. I mean, you had – or this business had 1.5 billion in EBITDA before Telia acquired this business and now ends with an EBITDA below 300 million. Still the TV4 business is doing better than ever, so the problem is clearly on the Pay TV side, which you also alluded to. So, a little bit on, first of all, is it clear that owning the TV and Media business is beneficial for the overall Core Telia business?

Secondly, what savings will you see from consolidating the Pay TV business into the linear TV business? And then can you also explain what you mean with just a content aggregation focus? Does that mean you will not really invest in owning content going forward.

Allison Kirkby

Good question. Thank you, Stefan, and good questions. Is it clear that Telia is beneficial for Telia to own a few TV/media units? I think, first of all, we just need to get that business back to the, kind of EBITDA it was going off before it made an investment in very expensive content rights that has not been able to monetize. And that is what is driving the big shift in the EBITDA development because as you rightly said, TV4 is better than ever.

And that's why our strategy now is a future-proof TV4 for the future by giving it the right level of content to put on to AVOD, HVOD, and SVOD proposition so it continue to capture some of that digital growth and get more recurring revenue from customers going forward. I think once we've done that consolidation and got the EBITDA and cash generation outlook improving again, then time will tell whether I can extract more value by owning the TV media business or reconnect the TV media business.

In terms of the savings, because the savings don't really come in until 2024, Stefan, I don't want to overpromise at this stage, but clearly, we will – the end of the very expensive rights that we have in the spring of 2024, and let's see how we evolve our content slate between now and then. But that will be the big benefit of the savings along by some OpEx developments that will come in the latter part of this year and going into next year. Because this year, it's a leader transition.

We're investing in retail platforms. We still have the C More brand support until it is fully merged into the TV4 and MTV business. So, it's a 2024 benefit, not 2023. And what I mean by constant aggregation, I said that it's like all other markets system, and will be no different from other incumbent telcos that have the biggest reach and the biggest distribution and the best play for all of these streamers to actually be able to reach customers through.

Stefan Gauffin

Okay. Thank you.

Operator

And we will take our next question from Luis Lecaroz with Credit Suisse. Please go ahead.

Luis Lecaroz

Hi, thank you for taking my questions. First one is on Finland. I'm just trying to understand how market dynamics are evolving. We have seen an acceleration in service revenues, mainly driven by mobile and specifically by ARPU. Just trying to understand how you saw the quarter in terms of market dynamics. And now that we are one month into Q1, what you have seen and your expectations into 2023? And the second one is, just trying to understand earlier your decision on cutting the dividend at all. I mean, that is basically 2.5%, which is basically material. And just, I'm just willing to understand what drove your decision on making the move? Thanks.

Allison Kirkby

Let me take this. I think the market dynamics haven't really changed so much in the last quarter. I guess, we've just had particular softening in TV/media and as mentioned, the Viaplay dispute in Sweden. I think as we look into next year, we will continue to take the action that we've been taking this year to drive ARPU development across mobile broadband and TV.

We'll continue to push convergence and growth of new services, particularly in the enterprise space with security and IoT. And so, over the course of the year, we expect to be low single-digit similar service revenue development to what we've seen this year. We do, however, expect it to improve during the course of the year because we've annualized some pricing, and as I said, we ended the year with a soft Sweden consumer that probably we will start to see recovering until March onwards because of the pricing action that we've taken.

Just very quickly across our markets we have not yet seen any consumer impact from rising accretion. We monitor it very closely. Q4, there's always less roaming, so we didn't see the roaming uplift that we had in Q3. And we have clearly seen a little bit less VAS services like insurance coming through in the quarter. But our underlying strategy and considering no yet significant change in consumer spending power in markets says that we expect very similar market dynamics for this year.

And then what you will see during the course of the year is obviously our inflation related contracts will start to benefit our enterprise segment where we've already got contracts rolled out on a material basis, and that's particularly in the Norway Enterprise segment. In terms of the dividend, our policy is clear.

It's a slow to and an aim to grow in line with underlying earnings development because our earnings did not grow and our cash flow clearly went down this year because of peak investments and some of the, kind of supply chain phasing that we mentioned earlier. And the decision was taken that it was right to go with the flow of our dividends rather than to show growth in the dividend because clearly, we want to like the dividend to underlying cash generation going forward.

Operator

We'll take our next question from Maurice Patrick with Barclays.

Maurice Patrick

Now the CapEx outlook may be for the medium-term. If I recall at the time of the strategy that you give…

Allison Kirkby

Maurice, if you could start the question again. We missed the beginning of it.

Maurice Patrick

No worries, it's a regular problem for me. So, if we think about CapEx into the medium term, not just 2023. If I recall, you talked about 15% CapEx to sales once we were through the peak of the transformation investment. And now you're talking about 13 billion to 14 billion, maybe even the lower end of that. And it seems there's still some transformation assets still going on. I mean, how should we think about like the medium-term CapEx level, is 13 to 14 in the sort of the right number for the next few years? I can't imagine it's any dramatic new products and services coming out a bit early for 6G and the replacement of fiber. So, how do we think about CapEx over the next few years? That would be helpful.

Per Christian Morland

Hi Maurice, I can answer that. I think you basically answered your question. I think the 13 to 14 is a good range to also have beyond 2023 even if you don’t have the same level of details for those years. And that's kind of been part of our plan already. We are now because we spend a bit more than we thought we will be able to do in 2022. We are able to take down 2023 a bit more than what we have been guiding on before. And as you then go below the kind of 15% of sales that we have been guiding you towards. And then we expect to stay on that level also in 2024.

Maurice Patrick

And just a very quick one for Rainer, if I may. You talked about a 7x capacity increase of 5G versus 4G, is that a special efficiency or is that just total capacity?

Rainer Deutschmann

Yes, thanks Maurice for the question. Remember the network capacity increase is actually not only coming from the 5G but also we have modernized the 4G into a much more state-of-the-art network. So, it's a combination. But clearly, clearly, the spectrum efficiency is the key driver for the capacity increase. And I think they have even more room because the spectrum acquisition that we have done, obviously, is even larger than what we have now deployed.

So, going forward, if we need more capacity, there is still room to even further increase. But the 7x capacity increase is available. We see to the point of fixed wireless, that's a bit of a link because the fixed wireless business is growing actually fairly nicely with – the update also we have given in Norway new propositions. We launched the itself is also that capacity will be also required to complement the fixed network into using the mobile. But yes, it's specifically the spectrum efficiency that's helping us with.

Maurice Patrick

Thank you very much indeed.

Operator

We'll take the next question from Ondrej Cabejsek with UBS. Please go ahead.

Ondrej Cabejsek

Hi, and thanks for the presentation. I've got two clarifications on one question, please. In terms of the clarifications I wanted to ask in terms of the content renewal. So, you mentioned that you will have more clarity on these in 2024. So, I was just wondering because the wafer concern, the champion, you acquired exactly years ago for 3 years, so I was wondering that the auction must be very imminent. So, if you could confirm that, please? And then what would the content renewals in 2024 exactly be related to it?

The second clarification just on CapEx, so you mentioned 13 billion, 14 billion is roughly the outlook beyond 2023. I was just wondering if that the absolute number that you're targeting or is the implied, kind of stay 14% of sales as the level because of this we have a medium-term ambition of growing service revenue. So, just a clarity in terms of the absolute versus relative would be helpful.

And then my question really on Sweden Consumer. So, you basically spoke about inflation really yet having an impact as far as you can see on the consumer in Sweden, if you just understand as the softness that you've seen in the fourth quarter, especially, I guess, in terms of mobile really more to the competitive environment, I know for example, you were talking about good traction with the unlimited tariffs. So, it is more of a competitive situation that you think you'll be able to correct with 5G, you mentioned it being a big driver in price increases or what exactly is a source of that softness in Sweden in particular? Thank you.

Allison Kirkby

Okay, thanks Ondrej. I'll try to take with clarification questions [indiscernible] on CapEx, I'll pass it back to PC. Just content – the big one is Champions League in spring of 2024 for us. I imagine the auctions for that next round of Champions League, I guess will happen at some point during this year, but the timetable is varying by market. And I'm sure they will want to pick a moment where they think they can extract the most value. So, yes, it will be soon, but let's see how it’s going.

The CapEx at this point in time, we're aiming for an absolute 13 billion to 14 billion range outside of – we made that clear for 2023. And based on the outer years, we see it has already clarified that is a good level for us to assume looking forward at this point in time. And I'll let him finish off on CapEx after I've answered your last question on Sweden B2B.

Yes, what really happened to us in the fourth quarter is there was a distortion in our underlying broadband and TV trends because of the Viaplay dispute. If you look at mobile, we didn't really see a lot of change in the quarter versus prior quarters. And not surprised that Telia is seeing good traction on unlimited. Unlimited in the popular tariff for us as well, but our focus continues to be much more a convergent focus. And the big opportunity for us is to continue to cross-sell mobile into our fixed base and continue to get more services by household and by individual.

So yes, 5G unlimited plays a role in our mobile strategy as pricing, but convergence plays a very important role because of the best network status we have on both mobile and on our fixed infrastructure, and also with having a broader range of content aggregation. And yet, no sign of – living between Sweden and the U.K. gives me a very good insight into the consumer sentiment between the two countries.

It's a very different environment here in Sweden. There is much less dialogue about consumer squeeze, recessionary pressure. It seems to be a population just get on with it, which is very, very different from the U.K. population. So, but that being said, we were super sensitive to the macro environment around us, and that's why we're being quite cautious on our guidance for next year. And PC, do you want to follow up on the CapEx?

Per Christian Morland

Maybe just to give some flavor and connected also to the question from Maurice, why do we believe that the 13 to 14 is a feasible range even beyond 2023? If you build on what Rainer has been talking about, by the end of 2023, we have most of the network modernization of the mobile and the tile rollout behind us, meaning that we don't have – we have done a massive modernization and a front loading of the mobile network investment in these three years that we have been talking about for a long time. And that we also added a lot of capacity in our network. That means that we can continue to reduce our investment into the mobile network until there, at some point, becomes a technology shift, and – but that was just further up.

The second thing is, Rainier also talked about our progress of building – reducing the legacy and building common products and platforms will enable us to be more CapEx efficient going forward than what we have been in the past. But keep in mind, what we are doing now, we are actually also investing to remove that legacy and to build those common platforms.

So, that will help us over time. And then as before, there are no big footprint expansion in our plan. If there is any opportunities, we would then pursue that together with partners or more kind of other structured vehicles and not to put investments on our own. So, a combination of those, we still think that, that's a good run rate beyond 2023.

Ondrej Cabejsek

It’s helpful. Thank you very much.

Operator

We will take our next question from Steve Malcolm with Redburn. Please go ahead.

Steve Malcolm

Yes. Good morning and thanks for taking the questions. Three if I may. On interest cost, PC, can you – I think you said that interest costs would be up SEK 1 billion year-on-year in 2023, can you just clarify that? And also remind us what proportion of your debt is exposed to floating and kind of what the interest rate assumptions are behind that SEK 1 billion is in 2023. And then a couple on working capital.

First, I'm still a little bit unclear just looking at Slide 32 of the guidance is to be the same as 2022, which looks like on Slide 32, I think what you said is that you expect the league will be neutral or slightly down. So, maybe just clarify that. And then within working capital, I'm kind of curious on the vendor financing picture. Maybe you could help me a little bit here. If you keep vendor financing flat in 2023, given that your CapEx is coming down [2 billion] [ph], obviously means that you're going to be steady allocating more of your CapEx and your OpEx going down towards vendor financing. So, is that correct?

And then interesting about the cost of vendor financing, historically, it's cost you nothing because suppliers have basically taken a very small haircut to be paid early. Is that still what you're seeing? Is it still costing you practically nothing? I know you are reminding your suppliers to take bigger discounts in a rising interest rate environment that is paid early? Is that the future? Are you having to share some of the costs that would be super helpful? Thanks.

Per Christian Morland

Yes. So, I'll take those, Allison. On the interest rate, yes, you are correct. The expectation is around [1 billion] [ph] higher cost following the interest rates that we saw increasing in 2022 and the expectations that we have in the market 2023 and beyond. We can – I think we are in that outlook, reasonably conservative. There could be upside if the interest rates start to come down, but it's way too early to speculate on that.

The balance between fixed and closing is at the moment and in-line with our policy to be 50/50 fixed and closing. [Technical Difficulty] total cash flow. And the biggest component of that is to make sure that vendor financing doesn't become a drag, because as you talk about and I fully [indiscernible], there is with a high interest, there is an exposure that we need to mitigate. And then we are very well on track on that mitigation as I talked about before.

And if we're going to keep that balance, you're also right that if we are ramping down CapEx as we are now guiding on, that means that we need to add some more, let's say, spend of vendors on our CapEx. So that is a component of it, but we don't – it's not that massive. There are some elements of it here and there. And you're also right that our – we don't want – we don't think we should and we don't think we need to pay for vendor financing.

We are at the kind of a dialogue between the suppliers and the banks and the discounts that they are willing to give to get the page in 7 days. So that is our and then there might be [one odd] [ph] case, whether it's discussions on how to deal with it. In any case, we would definitely not have a downside that is higher than our alternative cost of borrowing. So that is the strong, kind of guideline that we are using.

Steve Malcolm

Okay. So PC, just to be clear you're assuming that your suppliers will – instead of taking maybe a 50 basis point or 100 basis point discount to be paid early, they're now going to take maybe a 3% discount given more rates have moved in the last 12 months?

Per Christian Morland

Yes, because I mean, the discount is quite small when the interest rates are very low. When the interest is high now, it has a bigger value. And many of our suppliers are willing to give a bigger discount to get paid early. And we also in this uncertain environment, have money in the bank has a bigger value than the board.

Steve Malcolm

Yes. But I guess it's going to hit their margins a bit harder. It's the downside to that, right?

Per Christian Morland

Yes, but that's on their side, right? It depends on how they look at it. If you're looking from a complete financial perspective, but when we have some vendors that are really interested and active looking for it, and we have some lenders that see the concerns that you have as they don't want to hurt their margin. And in those cases, we go into that or going to find a solution.

Steve Malcolm

Okay, great. Thanks very much.

Operator

And we’ll take our next question from Keval Khiroya with Deutsche Bank. Please go ahead.

Keval Khiroya

Thank you. Two questions, please. So, firstly, I wanted to just go back on the dividend. You mentioned that natural deleveraging is a priority, but equally the 2022 BPS is still a full payout of free cash flow for 2023 at the midpoint, on around the Swedish spectrum auction on top. So, what will drive the leverage reduction in 2023? And can the Board consider any merits of a lower dividend from which it would be easier to go from?

And secondly, I think you suggested rising interest rates have also been about concluding InfraDeals, but can you elaborate a bit more on this, we've still seen pretty healthy multiples for deals over the past few months? But it's a bit more pressure on the multiple for your potential rooftop transaction? Thank you.

Allison Kirkby

Hi, Keval. I'll try and take those questions and [indiscernible] if there's anything outstanding I'll pass to PC. Deleveraging is a priority, absolutely, but we decided with the Board to support that whilst we were still able to stay within the 2 to 2.5 range, out with maybe the old quarter going out of that, we should stick with our current dividend policy because that supports the strategy. And we would not impact our dividend in this period when we have a plan to mitigate all of the structural macro headwinds that we saw during the last year, and they all take us during peak investment period.

So, the plan is to de-lever over time. You're right, the dividend might not be fully covered in 2023, but we believe we have the flexibility within our 2 to 2.5 range to manage that, albeit we might be at the higher end of that or slightly out of it in any one quarter, but we have built in what the speed of spectrum auction might be during the course of this year. So, we factored that in. So, I wouldn't – it's a priority for us to de-lever. I think the reality in 2023 might be that we'll be in the upper end of the 2 to 2.5 range rather than seeing any movement downwards. But clearly, moving out of 2023 and with a lower CapEx investment, with some of the macro headwinds. And as I mentioned, some of the pay TV pressure subsiding as well, we'll be in good shape for – in 2024 for us to start to see a de-levering, and that's why the Board did not want to impact the dividend.

In terms of multiples, we've just seen them drift down a bit, and we decided that we want to wait until they drift back up again for our rooftop transaction. That's not to say that we're not continuing dialogue. We will, but we're not going to do deals when we don't believe that it makes financial sense. And it was – it just came a little bit too marginal for us at that point in time, but I do expect that once there's more stability in the market, once we gathered actually a little bit more information on the value of those, that it will be an asset that will be available to consolidate into our current platform at a future date. But we're not going to do deals if we don't believe it to be economical to.

Keval Khiroya

Excellent. Thank you.

Operator

We'll go next Nick Lyall with Societe Generale. Please go ahead.

Nick Lyall

[Indiscernible] I had a couple of questions, please, Allison. Firstly, one in Norway and on cable, please. Your subs look pretty solid, your broadband subs, but could you give us an update on how much of the network has been overbuilt by fiber providers in the Norwegian market? And from your comments on CapEx, it doesn't seem like you've got any plans to overlay with fiber, but could you correct me if that's wrong, if you're thinking it may do doing some on the network technology here?

And then second, just to come back to Keval’s point on the dividend in that last question. If you're out of that range, the 2x to 2.5x range at the end of the year, is that sort of the – that's the sort of red light for the dividend, the sort of warning sign for the board? Or would you be given sort of credit that changes becoming potentially in TV and media as you see? But is that the sort of a be all end all, the range of full-year, that's the end of the dividend policy to? Thanks very much.

Allison Kirkby

Thanks Nick. On Norway, we have no intention to roll-out fiber. I think there's enough fiber being rolled-out. And our broadband business from a cable point of view, holding up pretty well. And Rainer picked on the growth that we're seeing in fixed access as well. So, no intention to get into any fiber, sort of investment in Norway, and happy with our fixed wireless access is now complementing our cable business. And what we're doing a very good job is building the number of partners that we sell our full range of connectivity services into in Norway.

In terms of the dividend, clearly, I can't comment on what the board might want to consider this time next year, but we made the decision at the world meeting yesterday, looking at how our leverage will evolve over the course of the next year and into next year with the range of sensitivities around that. And they got comfortable that SEK 2 was still the right level and that we will be moving into 2024 in a stronger position from a cash generation point of view.

Nick Lyall

Okay. Thanks very much, Allison.

Operator

We'll take our next question from Adam Fox-Rumley with HSBC. Please go ahead.

Adam Fox-Rumley

Thank you very much to everyone. I have two quick questions on the transformation program, please. As we've outlined, [indiscernible], ambitions, I was wondering if you have any details on benchmarking versus competitors, where you are now and where you think you'll end up again at the end of next year, I suppose [indiscernible]? And then your second question was on workforce engagement and whether or not you've had any business surveys internally and there's something you can say about the moving of the staff.

Allison Kirkby

So, let me take the workforce engagement. I'll pass the first question to Rainer. Workforce engagement, we have a highly engaged workforce. We’d score at the – in the upper end of any companies that we compete against. We were at an engagement level of 78% before we went into the transformation. We've gone down to 77%. So, engagement remains really, really high. And we've actually – that's not to say that there's no impact from the ongoing transformation and workforce reduction. And we monitor that very closely. But overall, engagement is good.

We're actually going through a big refresh of our values and our culture at the moment. We're doing it from the ground up. So, we've got our organization, telling us how we could better bring our values and our culture to life. So, overall, I'm super proud of how engaged and passionate our people are despite the many headwinds and it's our role to keep those high levels of engagement. And now, I'm passing to PC on the first question.

Per Christian Morland

Yes. But maybe just [start] [ph], as mentioned to your question, if you take it from a cost and efficiency perspective, we did a very comprehensive benchmark two years ago that we also set the scene and identify the areas that we really need to address with our transformation program. And this goes because across the cost agenda, but also the investment agenda, where there was clearly inefficiencies in the group as a whole and a lot in Sweden and a lot in our kind of product tech area and path forward where we are now, we start to see the efficiencies that we take out for [indiscernible] is, sort of closing in on those gaps.

So, but both the good and the bad thing is that we still have a lot of more work to do, but I see that as more opportunities becoming even more efficient than we do to our cost and our investments going forward. So, maybe, Rainer, you can elaborate a little bit from your perspective.

Rainer Deutschmann

Yes, just to complement. So, the benchmarking is obviously the driver for looking at the right areas. If I look at the transformation from an approach and a vision perspective, a bit more comparing other telcos from an own experience, as well as what we hear from some of our partners and peers. We are fairly, I would say on the forefront of the ambition, especially also looking at the structural change we have made when we started to consolidate [indiscernible] into a common team that gives us that leverage of creating synergy and scale.

So that's clearly we see coming through. So, the common technology cost [indiscernible] which represents a fair share of the OpEx and CapEx agenda has delivered meaningful and net savings both on OpEx and CapEx.

So, typically when we see that we take in, added a platform of product [indiscernible] into a common delivery, we realized [indiscernible] and a 20% on that particular area and one of the examples that we have for visiting here in Telia is that we have a common single operations team, where we're operating all our networks which already are harmonized and run, as well as down to the core network. And that has proven exactly that method that we have separate teams before.

We are consolidating and realize those 10% to 20% savings. But as PC said, this is part from done. So, we have those elements and the foundation that we outlined earlier yet to scale to put the pressure. That is exactly now what we are doing in 2023, 2024 and 2025, which is our horizon of the transformation.

Allison Kirkby

Thank you. So, I think on that final comment from Rainer, we should probably end the call. And I just want to say, clearly, 2022 was not the year we expected. We did make the strategic progress, but we were thrown a few extra challenges along the way. We've taken steps to strengthen our strategy to mitigate those headwinds and we're now stepping up the pace of our transformation agenda so that as we look forward, we'll get back to our original value creation plan and get back to the top, bottom line, and cash flow growth that we always imagined and still believed in.

So, thank you all for your questions today. Look forward to seeing many of you in the coming days and weeks and thank you.

Operator

Thank you. This does conclude today's program. Thank you for your participations. You may disconnect at any time.

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Telia Company AB (publ) (TLSNF) Q4 2022 Earnings Call Transcript