Earnings Call: Q3 2021

Nov 12, 2021

Good afternoon, ladies and gentlemen. Thank you very much for joining our third quarter investor call. We would like to guide you through our results and numbers, and we hope to listen to your questions and ask them in the best way we can. Without further delay, we go to the first slide of our presentation. In the third quarter, our group generated revenues of EUR 368 million, almost 370. A 12% growth year-over-year, based on a 12% growth in RGUs, and we have grown our RGUs across all our geographies in this quarter. EBITDA, adjusted for IFRS 16, has increased to EUR 114 million, a 7% increase year-over-year, which is an outstanding result. Romania and Spain are the main contributors to top-line growth and also our profitability. In Romania, we continued our expansion in the fixed services areas, but as well as the mobile area. While in Spain, we had strong results both in mobile and in fixed segments. Going on, just to discuss briefly the recent developments that took place after closing the third quarter. At the end of October, a couple of weeks ago, the Portuguese Telecommunications Authority, ANACOM, has finalized a long auction, an almost 1-year auction, to license 5G and other spectrum. The auction that was favoring new entrant or new entrants to the Portuguese market, which so far has had only three operators, three players. As a result of this auction, we were able to win a few frequency packages. One block in 900 megahertz, one block in 1,800 megahertz, a block in 2,600 megahertz FDD, and a block in the same spectrum TDD, and four blocks in 3,600 megahertz band. The total price of these packages is EUR 67 million. We expect the authority to issue the final frequency licenses by the end of this year. Remaining here in the operational segment, we are extremely proud to have launched the first in three markets where we offer fixed services, Spain, Romania, and Hungary, Fiberlink 10 Gbps broadband services. As I said, we are extremely happy to be able, through our networks, to offer these services to most of our customers, by the end of this year, again, being the first and being the most advanced operator from this point of view in these markets. Going on, the snapshot of our results, and I mentioned already the quarterly result. During the first nine months, we generated sales of over 1 billion, EUR 1,060 million, and EBITDA adjusted for IFRS 16 of EUR 325 million. The group margin stood at approximately 31%, both in the quarter and in the first nine months of the operations. We will discuss each market later in more detail. I'll again switch slides. We still see a summary of the group operations. As you see, 12% growth in revenues to EUR 368 million from EUR 328 million a year ago. EBITDA, EUR 114 million, and CapEx, EUR 111 million. As you see, we're quite neutral in the EBITDA less CapEx equation. To put it otherwise, we currently use all our internal sources for investing into growth and into expansion of our activities. Romania, contributing approximately 69% of our revenues, is certainly the largest market, followed by Spain, which generated EUR 95 million of revenues in the third quarter, up from EUR 72 million a year ago. Spain continues to enjoy strong growth and to be a large contributor of both revenues and growth in our group. EBITDA increased from EUR 106 million a year ago to EUR 114 million in the quarter. RGUs have reached 19.9 million units, almost 20 million units in this third quarter, from 17.6 million units a year ago. Similarly, Romania contributes 69% of our RGUs, and Spain is the second-largest market with 3.3 million RGUs. These two markets, I repeat myself, are the biggest contributor of growth, the biggest contributor to top line, as well as to profitability. Certainly Spain enjoys much higher growth as compared to the remaining entities in the group. On the next page in the presentation, you see that we have reached 2.8 million mobile users. You see it in the graph in the bottom left corner of the page, up from 2.2 million users a year ago or 2.6, 2.7 million users in the previous quarter. In the fixed services, we're extremely happy to show you almost 400,000 broadband users. Similarly, a notable growth from 170,000 users a year ago. This shows the successful strategy, the good services, the high-quality services that we offer to our Spanish customers, but also an affordable pricing policy, which makes our proposition quite attractive. On the right-hand side, you see another angle of our activity or another result of our operations. We have five consecutive quarters of being number one operator in terms of mobile portability. In the second quarter and third quarter of 2021, the results were amazing at 90,000-100,000 users ported during these two quarters. This being net gain, not gross gain. The results are amazing in absolute terms, but also in comparison to the remaining players in the market. Moving on, I'll let Smaranda say a few words about our debt profile. Good afternoon. At the end of the third quarter, the total net debt was EUR 1.1 billion, quite similar to previous quarter as well. The big-ticket items on our debt profile are, besides the bonds issued in 2020 and the Senior Facility closed in December 2020, the new facility that was signed in Spain in July in 2021, a senior facility in amount of EUR 132 million. Now, let me give you only the highlights of this third quarter in terms of our financing. In July, we drew the revolver facility, so Facility B, from our Senior Facility 2020. That was in amount of EUR 50 million equivalent in RON. At the same time, as already mentioned, in July, we also signed a different senior facility in Spain with a local syndicate of banks, and that is in amount of EUR 132 million. By the end of the quarter, the balance of this facility was EUR 87 million. Also in July, so July was a very active month for our financings, we signed an incremental facility under the umbrella of the Senior Facility 2020 in amount of EUR 100 million equivalent in RON. This facility was drawn now in November 2020, so by the end of the quarter, it was still unused. In terms of the maturity profile, on the right-hand side of the slide, you can see the captions by years, and also the leverage. The leverage is quite similar to previous quarter, it's 2.6x net leverage and 2.7x gross leverage. With this, we have finished our short snapshot, short presentation, and we kindly ask you to write the questions in the chat box and we will continue answering. Thank you. We have the first question coming from Ivan Kim. "Hello, can you please let us know the expected leverage impact of Portugal business expansion?" Well, thank you very much. It's a good question, and it's a complex question because it addresses both the strategy but also the financial profile related to expansion. We're quite early in this venture from what point of view. As I mentioned, the auction has taken place for a very long time, almost a year. More than 10 months or so since December last year up until now. However, we have only recently heard the final result, and we are doing our business case just now. We are not really ready to share the, let's say, more concrete assumptions or more clear assumptions in relation to this topic. However, it is clear that we will certainly start mobile operations as an MNO. We will develop our network. We will try to be as efficient as possible to manage the CapEx and the growth and expansion so that our, let's say, broad financial equation is not changed. Somehow, the opportunity, we believe, comes at the right moment because in the coming, let's say, couple of years, Romania would have finished its, let's say, biggest peak investment cycle, and that would allow us to invest the remaining or the available sources into the Portuguese market. This is our very, very broad thinking, and we will have to come back with more detailed or more complete information later on as we start operations, as we develop our use case. There's a similar question from Clara. In relation to Portugal, could you share your reasons for entering Portugal in the first place, followed by what your ambitions are in Portugal, and timeline, please. As I said, it's a bit too early for us. We have not even been issued the license at this moment to go into, let's say, more ambitious targets and timings. Maybe we are not very good at this anyway. However, just to repeat what I mentioned a bit earlier. In a few years' time, not many, we will be at the end of the peak investment cycle in Romania, and that leaves us with available funds to grow elsewhere. We think from this point of view that Portugal is a good target. Yes. Smaranda will take the next question. Please, can you give me more color on negative impacts on financial results in the third quarter? There were a couple of items that impacted our bottom line results during this quarter. On the one hand, we had a negative impact coming from foreign exchange losses, so depreciation of FX, mainly from Romania. During this quarter, we had a loss coming from this area in amount of roughly EUR 11 million, which really hit the bottom line, as I already mentioned. Secondly, the income tax expense, where we see blend of the current income tax and the deferred income tax impact, was also around EUR 20 million this quarter. These two elements together had the negative result at the end. Hello. Thank you for the presentation. Could you please explain what caused the high income tax charge in the third quarter? As I already mentioned, the income tax expense from the P&L, it's a blend of current income tax and deferred income tax. For this quarter, the main expense came from the current income tax part. What CapEx do you foresee in Portugal for the next three years? Well, so far we'll have to refuse this question. We have not drawn our plans so closely to announce the number. Yes. Question from Giovanni Reichenbach. Good afternoon. Could you please comment on the margin attrition in Spain? I think there's a slight margin decrease this year in comparison to last year overall. This is in relation to the somewhat changed conditions that we enjoy from Telefónica, which is not necessarily worsening of the terms. However, based on the conditions that we have from Telefónica, we've also adjusted the offering. All in all, in the end, coming with higher cost per subscriber, and that is the main reason for margin decline. A question from Ekaterina Birich. Hi, can you provide any information on the discussions that you have with 4iG in Hungary regarding your operations there? Thank you for the question. Indeed, we have announced in March the memorandum of understanding with 4iG for a possible sale of our Hungarian operations. The broad expectation was that somewhere in the early summer, the due diligence will be finished and that possibly an SPA would be signed during the second part of the summer. This process continues. It has not been finished. It has not been closed. However, we don't have other updates in addition to this. We are not in position to comment on the success of this process or on the timing as, again, we are still in the process. A question from Giona Levegi. "Hello. Given the EUR 70 million invested in Portugal auction, are we aiming to make Portugal another core market?" Well, in the end, yes. Hopefully, yes. We think strategically that to be efficient, we have to run a standard model across all our geographies, quite similar to the one that we have today in Romania, Hungary, or Spain. There may be certainly slight variations, whereby in Spain, we are an MVNO, not an MNO. However, again, we believe that the model should be the same. Yes, if we have a bit of luck and ability, maybe Portugal will become one day another core market for us. In any case, we will try our best to do that. A question from Piotr Raciborski from Wood: "Do you plan to build your own mobile towers or rent them from other companies in Portugal?" It's an open question, and probably, yeah I saw that I will not go into further details on Portugal. Again, there's a general answer. To my knowledge, there are two operators in Portugal offering their infrastructure for rental. There is a real opportunity in that market to exploit that model as well. Whether we build or we rent, we will still decide. Unlike other markets, there's a real possibility in Portugal to do both. Thank you very much for the question. Question from Matthias Carle. "In the third quarter, OpEx level in Spain a new normality? Do you see that the administrative size in Spain has reached its sufficient level to provide further growth with current OpEx?" I'm not sure we can generalize based on the third quarter results. We continue our growth and expansion, and we do not see our model as being settled in Spain. We still, let's say, foresee changes. Hopefully, more positive, but who knows? The simple answer would be no. Yeah. Again, Giona Levegi: "Is the Portugal strategy going to mobile only, or is it going to include other divisions?" No announcement at this stage, but we will look at all options. We will certainly look at all options. A question from Nora Neac: "What are your plans on the Portuguese market? When do you plan to launch your business there? Are there any agreements in place with other operators? Any details would be appreciated. When can we expect the control of expenses in Spain? Thank you." Sorry. Well, thank you very much for the question, but I think we addressed it earlier, so hopefully it was a sufficient discussion. A question from Thomas Chair: "What sort of network build-out obligation came with the required frequencies in Portugal?" We do not have an undertaking in terms of coverage. "The sale of Hungarian operation to 4iG is not closed yet. It is expected by the end of September. What is the current status?" Yes, we addressed this question earlier. Thank you very much. I will skip the questions which are the same. I will not read them all. A question from Giovanni Reichenbach: "What is the maturity of new RON 500 million incremental facility?" I'll let Smaranda discuss. It is the same as for the Facility from 2020, three years. A question from Rebecca Mota. "Hello. Can you please give us an update on the upcoming spectrum auctions in your markets?" Thank you very much, Rebecca, for the question. Indeed, the most important spectrum auctions for us are still coming. During this November, we are renewing the 2100 MHz frequency in Romania, the 15 MHz block that we use since 2007, and which comes up for expiry at the beginning of next year. There is no auction in place. It's being prolonged due to a government decision that was passed approximately a year ago, and which prolongs this spectrum for a fee of EUR 25 million up until 2029. This is number one, and this is a certainty. We are going to extend this spectrum block. Number 2, the authority will start a new auction this coming Monday, so on November 15, which we do intend to participate in. This auction will aim to sell a spectrum in 800, 2600, and 3600 bands. Briefly, we are interested to participate in this. In addition to this, there's one more auction expected, a 5G auction, whereby 700 MHz spectrum and 3600 MHz licenses will be sold. However, there's no visibility for the last one, so it may come either in one year time or even later. Again, at this moment, there's no visibility to that. Question from Ekaterina again. In the current inflationary environment, do you intend to start inflation indexation for your products? We are watching closely the markets, which are indeed. Well, let's put it differently. I think there is an inflationary boost across all markets where we operate, both on the pricing side, but also on the cost side. We are looking at this carefully. However, at this moment, no intention to increase. We will let the market know if we make a decision later on, but not now, certainly. The next question is from Giovanni. Is the new debt facility in Spain ranking pari passu with the existing SFA and bond debt? Yes, it is. The next question is from Daniel. To confirm EUR 87 million of the EUR 132 million in Spain was drawn. By the end of the third quarter, yes, the balance of that facility is EUR 87 million out of the EUR 132 million, which is the maximum available. A question from Valdur Jartt. When we could expect your revised business strategy to be published and more color on the Portugal plans? Well, a simple answer to that would be in the first half of next year. Certainly when we will decide to allocate proper capital to Portugal, and by this I mean CapEx in addition to the CapEx spend for the frequency license. We will announce our plans in better fashion. Question from Ivan Kim. For auction that starts on November 15, what is the amount of spectrum being offered in each of the bands? 800 MHz, 2,600 megahertz, and 3,600 megahertz. So it's in the public domain. I think it's one frequency block of 5 megahertz in 800. I think it's eight frequency blocks of 5 megahertz in 2.6 FDD. I don't really remember. Four or five frequency blocks in Yeah, sorry, 5 or 10 frequency blocks in 3,600 megahertz frequency band. Question from Matthias Carle. Do you plan to acquire Home Telecom's mobile business which belongs to Orange at the moment? Well, no. That's a question we cannot answer. Supposedly you ask, what is our attitude vis-à-vis possible sale of such business. We are not aware of such process and when it will come due, we will make our decision, but not now. A question from Ivan Kim. Would you be interested in the 5 megahertz in 800 MHz spectrum? Well, look, despite how easy or how reasonable this question may be, we will refuse to answer because the auction is coming now in few days, and we want to keep our competitive position reserved. We clearly will participate at the auction. How successful we'll be and for which block, we will see at the end, and we'll certainly share it with everyone. Well, thank you very much. We see there's no activity on the questions anymore. We hope we've satisfied your curiosity. We will see you all on our next call discussing the fourth quarter results in February 2022. All the best until then, and thank you very much.