Earnings Call: H2 2021

Feb 28, 2022

Good afternoon, ladies and gentlemen, and welcome to the Digi Communications N.V. Investors 2021 Preliminary Financial Results Presentation. A copy of the corresponding report is posted in the investor relations section of Digi's website at digi-communications.ro. The conference is being recorded today, and a replay will be available shortly after. Details of the replay will also be posted on our website at digi-communications.ro, together with the presentation. For today's call, please submit your questions for the Q&A session at the end of the presentation using the chat box. Before we can start, you are advised that certain statements in this conference call are forward-looking and subject to material risks and uncertainties. Actual results could differ materially from those stated or implied by such forward-looking statements due to the risks and uncertainties associated with Digi Communications N.V., which include, among others, various risks related to our business, risks related to regulatory matters and litigation, risks related to investment in emerging markets, risks related to our financial position, as well as risks related to the notes and the related guarantee. I will now hand over to Serghei Bulgac, the CEO of Digi Communications N.V. to begin the call. This meeting is being recorded. Good afternoon, ladies and gentlemen. Thank you very much for joining our full year 2021 presentation. We had a good quarter and a good year to put it very shortly, despite the problems everyone is going through, both in 2020 and 2021 in relation to COVID, and most recently to the big geopolitical problems that we all face, unfortunately. Well, in any case, I'll come back to our normal day-to-day stuff, and I will present you shortly the numbers, and we will be ready pretty quickly for the discussion. Revenues for the group approached EUR 1.5 billion, 13% growth year-on-year in comparison to 2020. As you see, the revenue growth was fueled primarily or mostly by the RGU growth, which also increased by 13% during this time. EBITDA year-on-year grew by 8% to EUR 439 million, and this result excludes the impact of IFRS 16 treatment. This is the old school number we are mostly used to judge in terms of financial performance. These numbers, and we will repeat it for a few times during our presentation, are full numbers comparable to the performance in 2020. Out of these numbers, there are certain numbers, like revenues of approximately EUR 200 million, EBITDA of approximately EUR 30 million, excluding IFRS, that belong to Hungary, and as of 2022, will not be part of our results. However, this is the last year when we'll be presenting these results both including and for comparison reason, excluding the Hungarian operations. Moving on, Romania and Spain have had very good performance, as you see, in our legacy market, in our home market, we grew 10%, primarily in internet and mobile, and also in Pay TV services. In Spain, we grew by 39% year-on-year, 37% in mobile services, and we've more than doubled our customer base in broadband services. The two important changes or significant developments that took place both in Q4 but also the entire 2021, was, of course, the sale of Hungary, which we'll mention briefly thereafter. Similarly important, we acquired additional spectrum and extended our spectrum rights in Romania in 800 MHz band, 2,600 MHz band, but as well as we've extended the legacy, our oldest license, the 2,100 MHz frequency license, and we've extended it up until 2029. At this moment, all our spectrum rights are secured for long-term, and we are building and expanding the mobile networks, taking advantage also of these additional spectrum rights. Of course, we acquired finally, after almost a year of trial, not error, just trial, we acquired the spectrum rights in Portugal, and we will start developing the network first during this year, and we will follow with the services. However, at this moment, it's difficult to foresee the exact launch date of this, but certainly nothing of this kind in 2022. Moving on, you see the breakdown of revenues by markets, and you see Sorry, the revenues, EBITDA, and RGU evolution. As I mentioned already, Hungary is a discontinued operation for us. Almost EUR 200 million will be gone from the revenues. Nevertheless, the main two markets, Romania and Spain, had an outstanding performance, with Romania reaching almost EUR 900 million in revenues and Spain exceeding EUR 360 million in revenues. EBITDA for continued operations, EUR 410 million, and overall EUR 439 million during the year. As I mentioned just a bit earlier, this is probably by far the largest event of 2021. It's certainly a one-off. We sold our Hungarian operations to 4iG in Hungary. The sale value was approximately EUR 625 million. The closing of transaction took place on January 3. Also, the price was fully cashed. We basically parted with our Hungarian operations with 3,000 employees and 2.5 million RGUs. It's a painful moment from this point of view. However, we are moving on. Just to clarify my words, not painful as in pain, but still a difficult moment of separating from something we were building, we were developing for more than 20 years in that market. We wish all the success to 4iG, and we are pretty sure they are well-positioned to continue the good work that we have started in Hungary. Part of the proceeds, part of the EUR 625 million, was used to repay financial debt in January. We paid a total of EUR 270 million, and these are various bank facilities that were outstanding in Romania and that were borrowed by RCS & RDS. Okay. We have this complex slide showing as a summary, the whole picture, revenues, EBITDA, CapEx. Some of the numbers I've mentioned already, so I'll be repeating myself. Revenues of EUR 1.47 billion, up from EUR 1.3 billion a year ago. EBITDA excluding IFRS 16, EUR 439 million. Total CapEx, including the payments that we made for frequencies, both in Romania and Portugal, are over EUR 555 million, so EUR 556 million. As you see, CapEx in Q4 was EUR 121 million on a normalized basis and EUR 101 million for the frequencies. On the right-hand side, the top part, you see the breakdown of revenues. Romania at almost EUR 900 million, Spain EUR 360 million. In the red rectangle on the right-hand side, the discontinued part of Hungary, EUR 195 million. You have a similar analysis of EBITDA, and basically the continued EBITDA that stays with us is EUR 410 million, excluding IFRS 16 and an extra EUR 62 million, the impact of IFRS 16 numbers. We will move on and just have a few words on RGU development. Growth in RGUs was very good, 13% at the group level. We've exceeded 20 million RGUs, including Hungary. Without Hungary, we are at approximately 18 million RGUs. Again, the biggest drivers of growth were Spain on a relative basis, followed by Romania. We are extremely happy and proud about this performance, but also very grateful to our customers for choosing our services, also our employees for helping us to make this happen, because it's quite an intensive work. Very briefly, the last. Basically, you see the financial profile of Digi Group as of December 2021. In a way, this is yesterday's paper. This is not today's paper, because out of the total of EUR 1,335,000,000 that you see total debt on the balance sheet, there were two developments. On one hand, EUR 270 million were paid down. The remaining debt is slightly over EUR 1 billion. However, most importantly, the rest of the cash is still on the balance sheet. On a net basis, our financial profile looks significantly better than what we see here. Basically what I've anticipated will be somewhat obvious and clear when we discuss in early May our Q1 results, because just repeating myself, the closing of the transaction took place on January 3, and all these subsequent developments happened in the first quarter of 2022. Basically this is the presentation with our main numbers, with our main indicators. We will follow in a few months with the final report for 2021, having all the proper numbers, the full balance sheet and so on. For sure, we will have the chance to discuss these numbers once again if it will be necessary. Having said this, we do invite you to ask questions and kindly please use our chat box to do so. The first question comes from Piotr Raciborski. Do you plan to roll out your own network in Portugal? Yeah, that is the idea. We've acquired spectrum. We will be, or we are set to be a fully fledged mobile network operator. For this reason, we have to build our own network. A question from FB. Hi, thank you for the presentation. Do you have any update on the phasing of your CapEx plan in Portugal? Sorry, not yet. I know that I was indicating during our previous discussions that we may have this information available as we enter into Q1. Unfortunately, we're still more or less there. We're still in the preparation phase, and we don't have better information as of today. Laura Hussey, can you please comment on the margin decline year on year in EBITDA? Sorry, if I understand properly the question, is it in relation to discontinued operations, and what's the IFRS 16 impact? Yes. Well, it's fairly simple. We have a high margin territory, which is Romania, which comprises the bulk of our results and bulk of our operations. Ignoring Italy for now because it's small and insignificant, we used to have two operations with smaller profitability, Hungary and Spain. Now it's Spain only. Sorry, in 2022, it will be Spain only from this point of view. Now the idea is the following. In Spain, we are operating primarily as an MVNO on Telefónica's mobile network, and the EBITDA margins of virtual operators are certainly lower in comparison to the margins of the classical network operators. Also, that is somewhat a normality. In addition to that, during the launch phase of our fixed services, we've encountered certain, let's say, starting costs, which were recorded in the P&L. As this segment continues to grow, we do expect in the future, an improvement in the profitability of our Spanish operations. This is a broad expectation, and we will see how the numbers work out. Otherwise, IFRS has no impact because we somehow analyze mostly the EBITDA number excluding IFRS 16 numbers. A question from Vlad Popa on the guidance for CapEx for this year. Last year, we had a record with over EUR 555 million spent in CapEx. We do expect CapEx to be, let's say, high, certainly not at 550 level, but somewhere in the area of 450-500. Yeah, this is our expectation at this moment. Another question from Laura Hussey, can you please confirm what debt you repaid with the proceeds? Smaranda will help me. Thank you very much. Hello. In January 2022, we used a substantive part of the proceeds that we received following the closing of the sale transaction in Hungary to repay the majority of long-term debt and part of the short-term debt in Romania. Namely, we repaid in full our senior facility agreement from 2020, all of the lines, both the ones, facility A, facility B, but also the incremental facility that we drew in late 2021. That was an amount of EUR 216 million at the end of 2021. This was the outstanding balance. The rest of the amount repaid working capital facilities like overdraft and other sort of short-term facilities that we have in Romania. Thank you, Smaranda. The next question comes from Tony. Hi, could you please share some comments on the geopolitical context? Are you preparing some protective measures in case Romania gets concerned by conflict by extension? Any other comments on this topic? Well, sorry. That's a way too difficult question. I don't have any answer. We hope and we pray that this terrible war stops as quickly as possible. We hope and we pray that as little people die as possible. I don't know, none of them, excuse me for the wording. In relation to preparations and measures, look, we are a local business. We operate in our territories, so whatever affects our territories will affect us just as much. Nothing of this kind. A question from Nora. Thank you for the presentation. Two questions. Could you share an EBITDA breakdown per geographies in 2021? What is the CapEx outlook for full year 2022? Sorry. We still run a preliminary report, and in our numbers, you see the numbers from continuing operations and from discontinued operations. In effect, you see the EBITDA of the Hungarian operations, both excluding and including IFRS 16 numbers. However, at this moment, we are not ready to share the rest of the breakdown. Just kindly, we will come back with this information in our next report when we report the full-year numbers. On CapEx, I've mentioned already, it's somewhere in between EUR 450 million and EUR 500 million. A question from Juan. If we have a number on CapEx for Spain? Yeah, we do in our plans. We would rather not share, and I hope you understand, and thank you very much. Hello. The next question is from Radu. What is the budget for CapEx plus OpEx for developing the business in Portugal? Sorry, these numbers, we have not started spending yet, and we will share the relevant information with the market, as soon as we make these decisions. A question from Matthias. Could you comment your pricing policies in different markets in light of increased inflation? We discussed this question also during our last call, and the answer is we are monitoring the inflation, but so far we have no interest, no reason, no need to adjust our pricing. We see our main markets, Romania and Spain, being quite competitive. Yeah, we believe that with the current result, with the current returns, we are pretty much okay. Once again, never say never. If things change significantly, we'll revisit this decision. So far, so good. Next question is, if you can clarify, when do we target the launch of MNO services in Portugal, and if it's happening in 2022? Well, certainly not in 2022. It's difficult to promise for 2023 as well, so we don't give any guidance. For sure, not 2022. A question from Radu, one more question. If we plan to pay back more of the debt in the next period. Well, look, thank you for the question, and the idea is pretty simple. The covenants that we have with the bondholders allow for two main. The covenants are complex, but I will just speak of the most relevant items there. Allow and require two main uses for proceeds from sale. On one hand, it's equivalent CapEx or CapEx of equivalent quality, or it's repayment of debt. We've repaid the debt that we could pay in a straightforward manner. For the rest, whether it will be CapEx or repayment of debt or let's say other uses, we will have still to think. We have 12 months in accordance with the covenants, but at this moment there is no final decision. A question from Vlad, if we can disclose the gain booked in relation to the sale of the Hungarian operation. I think a clarification is necessary here. In 2022, 2021 excuse me, there is no gain booked and there will be no, because technically the sale took place on January 3rd, 2022. It's an event of Q1, and we will follow with all these numbers in our Q1 presentation around mid-May. Just one further clarification, if I may. That means that the accounting deconsolidation of the Hungarian operations will take place in Q1 2022, because technically, according to all the criteria of the relevant IFRSs, the sale closed and the loss of control happened on 3rd of January 2022. That is why the technical accounting treatment of the consolidation takes place in this period. As at the end of 2021, Hungary is still present in our numbers, and when we will issue the final report, the final consolidated financial statement, you will see their results, their assets and liabilities there. There is a specific presentation that needs to be done in these certain situations, meaning that in the profit and loss account, we highlight the results of this operation as discontinued operation, so that anyone can easily see what are the numbers for the continuing operation, and which are the numbers that will be discontinued starting with 2022. In the balance sheet for assets and liabilities, they will be accounted as part of the consolidated statement, but they will be separately presented as assets and liabilities respectively held for sale. A specific role, a distinct role in the balance sheet, both for assets and liabilities. Next question comes from Vicky. The question is whether we can comment on the plans for Portugal as we acquire the spectrum and how quickly can we become operational? Well, we are still in the R&D and development phase for setting up the network. We will start deploying CapEx later on in the year, and when we do so, we will come to the market and we will provide broad indications on the level of spending. The last part of the question, I mentioned this and I just repeat myself. We will certainly not be operational in the first 12 months, but whether it's 18 or 24 or beyond that, it's difficult for us to see now. We will update the market and maybe not only once, maybe for a few times during this broad range, broad timeline in the future. A question from Zeynep, if we could clarify the planned use of proceeds for the remaining EUR 350 million cash from the Hungarian sale. It's good that this question came again. We will use part of this cash for CapEx. Now how much and what will happen to the rest, whether we will repay debt or not, we do not know at this moment. We are still evaluating our options. The next question comes from Tony. What is our medium and long-term target in terms of leverage? Well, it's kind of difficult to answer this question now. Certainly we would like to go towards the 2x zone, from approximately 3, where we used to be at the end of the year. Now, the main reason for going up to 3x was the fact that we acquired spectrum both in Romania and Hungary, and spectrum assets per se on day one do not generate any EBITDA. You need to deploy networks. You need to sign up extra customers to really benefit from these payments. Now we continue to be expansionary. We continue to develop our networks in Romania, fixed networks in Romania, mobile networks. We continue to grow our fixed networks in Spain, and we will start expanding in mobile in Portugal. We will see whether technically, if we could stop an important part of the CapEx, we would be pretty quickly at 2x. However, I do not expect this to happen 3x soon, so we probably will be in the 2-2.5x range in the next 12 months, let's put it this way. Unless, of course, something bigger happens, I don't know. Does the CapEx guidance of EUR 450-EUR 500 include CapEx for Portugal and the network being built there? Yes, it does. Yes. The question about 2021 EBITDA for Spanish operations, and yeah, kindly, we'll revert with these numbers when we report the full year as a final report. Another question from Tony, whether we have a credit rating target. We don't. We've been just upgraded by Moody's to Ba3 level. Sorry for the delay. Look, I believe we have different priorities in our operations. We certainly like and do want to run our operations on a very prudent manner. We have certain rules, internal guidelines, certain priorities, including also the leverage, the intended leverage ratio, the leverage policy. However, once we fulfill our internal constraints or internally imposed constraints, our main reason is to grow both in our existing but also in our, let's say, more recent or new markets like Portugal. From this point of view, we will not sacrifice growth in exchange for a certain credit rating metric. Again, having said this, I hope you do appreciate that we are on the low spectrum of leverage in comparison to most other peers, and we do not intend to change this significantly in the future. Will Digi report a one-off P&L gain related to the sale of Hungary in Q4 2021 or Q1 2022? We will deconsolidate the Hungarian operations in Q1 2022. We will report the gain. Yeah. Considering the energy activity is now presented on a gross basis, can you tell us what the related revenues and expenses are? It would be especially helpful to have the figures for the fourth quarter, but full-year figures are also fine. We can just throw at you a broad figure of approximately EUR 20 million in revenues for the full year. That's roughly the size of our energy business. As you might appreciate, it's very, very small. It's in the area of 2% from our entire activity in Romania. It is almost insignificant. Sorry. Do you have any target KPIs for 2022 for mobile segment and for any other segments as well? We don't. Look, I think the best predictor of the performance is just yesterday's result or the results for the period T minus one. That's certainly a good indication of. Q4 performance is a good indication of Q1 performance with certain variations. Having said this, we do expect the mobile segment in Romania to be the focus of our growth and development, especially due to the fact that we have just acquired a lot of spectrum we did not have before. We are putting the spectrum into function, we are putting the spectrum to work, and certainly our customers will feel an important difference in the coming months and in the coming quarters. Apart from this, we do not expect, let's say, significant changes or deviations from our past performance. However, one should also mention that in Romania, we are quite sizable, and we operate in a mature market, so we will not be able to generate similar growth rates for an indefinite period. The next question comes from Laura. If we could just say how much we paid for spectrum in 2021. We paid roughly EUR 101 million, of which almost EUR 34 million were in Portugal and almost EUR 68 million were in Romania. The 68 million in Romania are also split into two. 25 of these were for the continuation of the 2,100 megahertz spectrum up until 2029, and the remaining almost EUR 43 million were used for the acquisition of 800 and 2,600 spectrum rights. A question from Matthias. What do you think of your current valuation and how could you boost it? There's a huge gap between listed Digi and Hungarian asset that you sold. Well, look, thank you for the question. I honestly do not know how to answer it. We are not setting the price on the market. We're not setting the liquidity. It's really up to the investors. We do our best to run our operations. We do our best to inform you of our results. But if people, I don't know, are not prepared to pay more, it's their choice. I don't know. Sorry if I'm defensive. Just a comeback question from Tony. You said that the leverage will probably be in the 2-2.5 times range in the next 12 months unless something big happens. What could be these big project scenarios B that would make you deviate from this trajectory? Look, indeed, there was a hidden notion in those words. Certainly, if any M&A happens, this may derail us from our intention, let's say, on a relatively short-term basis. However, there's a big disclaimer, and I'm not hiding anything, or not even, I don't know, keeping anything for myself. We are not involved in any of the M&A at this moment. It's really a theoretical discussion. A question from Laura. The total amount in Portugal was EUR 67 million. When do you have to pay the remainder if you only pay 34? You're absolutely right. The Portuguese authorities have allowed splitting the payment in two parts, with 50% paid upfront and the remaining 50% paid over the next seven years, if I remember this correctly. It's roughly a EUR 5 million payment year on year. It looks pretty silent here. No more questions. Oh, no, I was wrong. Can you give an indication on when you expect to reach break-even EBITDA in Portugal? Oh, no, that's a different. No. We still have to define our CapEx plans. We still have to define our launch and the launch parameters. This is really an impossible question. For sure, not in the next three to four years. A question from Tony Lebon. Some comments on the shareholder remuneration policy. We do not expect any changes or any significant changes to the shareholder remuneration. However, having said this, we do expect that what was happening last year and before will continue, but we will certainly come with more precise announcements at the moment when we announce the full-year results and we announce also the general shareholder meeting for approving these. Just to finish my thought, we will wait on the line for a couple more minutes. If there'll be no other questions, we will close the line. Thank you very much for this very interactive and very active discussion. One more question. When do you think you are going to publish the full results for 2021? This year, as per our financial calendar that we announced to the market, we are going to issue the annual report and the consolidated IFRS financial statements for the group at the end of April, on the 29th of April, I believe, is the last day. Yeah. Can you give us an update on the outlook impacts on rising energy costs? Did you hedge in 2022 and beyond? Well, yes. That's another quite difficult question. The energy impact is twofold in our case. On one hand, we have this relatively small, tiny business of energy supply, and we've shared with you the revenue numbers. It used to be approximately EUR 20 million in 2021. In addition to this, we, as an operator, are a large consumer of energy. This indeed is a relevant question. Having said this, we are somewhat of an advantage, in comparison to our competitors in the Romanian market, because we rely mostly on fiber optic networks, and these are much more efficient in comparison to older HFC infrastructure or copper infrastructure than the two, our largest competitors, continue using. We have somewhat a technological edge in comparison to them, from this point of view. Nevertheless, all of us will pay for the energy more than we used to pay. So far, these prices more than doubled. Where will they go? That's an impossible question because, for all of us in Romania and outside of Romania, it's a national question, but also it's an international question. Also in relation to what is happening now in Ukraine and in Russia, and EU as well. In any case, we have acquired for important quantities, more than 50% of our energy requirement for both 2022 and 2023 on a bilateral basis. It's not really a hedging, it's a forward purchase. We are, let's say, partially settled here. For the rest, we will follow the market like everybody else does. In any case, it's a difficult development in this area, which affects all industries and all operators. The next question is: Should we take your comments not to increase pricing in 2022 in competitive Romanian, Spanish markets as suggesting market share gains may be sufficient to offset higher costs? That's an impossible question to answer. We will focus more on market gains than on costs, using the same words. Sorry. The next question is from Juan, if we can share the number of the total employees in Spain in 2021. Apologies, we don't have this number handy. Hopefully it will be presented in our full year report. Well, once again, thank you all very, very much. It's been very interactive. We will hear from each other later in May. Thank you, and all the best.