Earnings Call: H1 2021

Aug 13, 2021

Ladies and gentlemen, Serghei here. Welcome to our meeting and discussion. We would like to thank you very much for joining our call. We will start the presentation and just move on through the slides. We are extremely happy to announce the outstanding achievements and results. Revenues of EUR 355 million in the second quarter, more than 14% increase year-on-year. RGUs at the group level of more than 90 million, a 15% increase, and EBITDA of EUR 108.5 million, excluding the impact of IFRS 16 results, and a growth of 12% year-on-year. As you see, I can't emphasize enough, this has been an outstanding quarter. This has been an outstanding year for us, despite difficulties related to the global pandemic and the difficulties faced by our colleagues in all our markets due to the health crisis. We were lucky to be in a resilient, robust business that is necessary during these times, and our services have been in demand and in favor with our customers. Moving on, we generated an EBITDA margin of 41% in Romania, excluding the results of IFRS 16. As a highlight, Spain has contributed with a significant growth, reaching 3.1 million RGUs overall in the market. The next slide just presents briefly the most recent developments, the results of July 2021. We have signed up two facilities, an incremental facility in Romania of RON 500 million or EUR 100 million, that we intend to use for CapEx, and partially for the frequency payments that come due later this year in Romania. In Spain, we signed up a loan of EUR 132 million, which is also partially used for refinancing of some smaller facilities, but mostly will be used for our CapEx expenditure in that market. The overview table shows a lot of numbers. Just a few highlights. Romania reached EUR 425 million in sales during the last six months, Spain EUR 162 million, and Hungary almost EUR 97 million. Overall sales were almost EUR 700 million, so EUR 695 million in the last six months, and the group EBITDA EUR 210 million excluding the impact of IFRS 16 numbers. Overall EBITDA margin 30.3%, and the Romanian EBITDA margin as high as 42% in the first six months of the year. The next slide shows the quarters in evolution. As you see, we grew 14%, quarter-on-quarter our sales, to EUR 354 million. We have grown our EBITDA, again, including IFRS 16 numbers, to EUR 128 million, excluding the IFRS 16 numbers, EUR 108 million, and the CapEx amounted to EUR 117 million, almost EUR 118 million in comparison to EUR 105 million the quarter before, and EUR 115 million a year before. Our revenues were helped mostly by expansion of our customer base in Spain, Romania, Hungary. Our EBITDA was helped by positive evolution across all markets, Hungary, Spain, Romania, during this period. Just a few words on customers. Mobile segment added most customers in the year to the end of second quarter. We added more than 1.1 million mobile users in Spain and Romania and Hungary. We have also grown our Pay TV and broadband markets. Again, all in all, we surpassed 19.3 million RGUs. As you see on the right-hand side, the breakdown, Romania has more than 13 million RGUs, Spain 3.1 million, Hungary 2.5 million, and in Italy, we have 300,000 mobile users as of today. We had an outstanding quarter. We had a very good year. Our results are strong, both operationally and financially, with good generation of EBITDA, net income, and also very robust growth in sales. Having said this, just a few words on our growing customer base in Spain. As you see, we've increased our broadband users from 136,000 users a year ago to 327,000 users as of the end of second quarter. Similarly, we have grown the number of mobile users from 2.1 million users to almost 2.7 million users. An almost 30% increase. We can't be happy enough with these results, because the achievements of our colleagues in Spain allow us to expand both our revenue base, but also to contribute to future very good EBITDA generation in that market. For many quarters in a row, we are the number one or number two portability winner in the Spanish market. As you see on the right-hand side, in the second quarter, we gained 97,000 customers, just through portability. With this, I will let Smaranda comment a little bit on our financial profile, and we'll move on with Q&A. Good afternoon. Digi's consolidated net debt was around EUR 1 billion at 30th June 2021. Besides the senior secured notes and the 2020 syndicated facility balances, we had additional loans that you can see as other long-term and other short-term debt, especially drawn by Digi Spain and Romania. As already presented in recent developments, in July, Digi Spain signed a syndicated facility with the local syndicated banks, for an amount of EUR 132 million, which partially was used to refinance some of the existing debt that you see here in balance at 30 June, and partially is and will be used for investing in CapEx. In Romania, in July, we drew the revolver available to us from the syndicated facility signed in 2020 in amount of EUR 50 million. Additionally, we signed an incremental facility of EUR 100 million equivalent in RON, which is currently not drawn. This is just an available commitment that we have. The net leverage, according to the bond covenants requirements, is down at 2.5x, which is in line with our conservative and disciplined approach to debt. Just as an important fact, this is the first time we recorded a net leverage of this level since 2013. We are quite close to our strategy of lowering this leverage as much as possible, not hindering also the growth opportunities that the group has. This being said. We kindly invite you to ask questions, and we will start shortly to answer. Again, please write your questions in the chat box and we will read them through. We have a question from Tamas Cser. The first question from Tamas is, "What proportion of year-on-year Romanian revenue RGU growth came from Akta?" We don't have the number handy, but indeed this is a valid point. We've added a number of Akta RGUs to our portfolio. However, just to make a very short estimation as we speak, on the group level, it's an insignificant number, generating 1% or less of the additions. Second question from Tamas is, if we can provide an update on the Romanian 5G auction. This discussion is a bit more complex. In what way? The 5G auction has been postponed possibly to 2022 or later. We don't have yet clear visibility on the 5G auction. However, what the authority has done is something different. They basically split the portfolio of available spectrum into 5G spectrum, which includes the 700 MHz frequencies and the 3,500 MHz frequencies. These are the ones that are expected to be auctioned later in 2022 or even thereafter. Other frequencies that still remain available and can be currently used for 4G, 3G, or 2G operations. These frequencies include 800 MHz spectrum, 2,600 MHz spectrum, and so on. It is expected that these frequencies are auctioned by the end of this year. In fact, today is the last day of the public consultation that was launched by ANCOM, the regulator, about six weeks ago. Yeah, based on this public consultation, again, the broad expectation is that this partial sale should take place before the end of the year. The third question from Tamas is, when do you expect Spain high revenue growth to turn into EBITDA growth? Well, I think it's a valid point. Despite significant growth quarter-over-quarter, during the last years, we have a short stagnation at the beginning of 2021 in comparison with 2020. This stagnation is temporary, also due to the fact that we have run an important marketing campaign in the second quarter, which decreased a little bit the EBITDA. Otherwise, EBITDA is connected to sales, and the sales growth will translate to EBITDA in the following quarters accordingly. Question number four. Please elaborate on 2021 CapEx budget level and country allocation. Well, I'm not sure I can comment easily now on country allocation, except for broadly. In terms of overall CapEx, we have spent, in the first six months, roughly EUR 225 million for CapEx. During our last call, we were discussing that our expectation for this year is in the EUR 400 million area. We have looked at our numbers carefully again, and it's certain that we are going towards EUR 450 million or maybe slightly above. I think this number will have to be revisited. On the other hand, despite the fact that the figure is high, we sincerely view this as a very positive fact because we have clear possibility to expand our networks in Romania, to improve our networks in Romania and Hungary, but also to expand our networks in Spain. As you all see, this translates into significant RGU growth and similarly into important revenue growth. We have revisited our CapEx expectation, as I said. In terms of allocations, roughly 60%-70% go to Romania. Maybe 25%-30% go to Spain, and the rest is split between Hungary and Italy. A question from Beze. Please inform us when the transaction of Digi Hungary will be disclosed. We have little to add to what we have communicated publicly in spring. Just to repeat on the available information, we have signed a non-binding exploratory term sheet with 4iG to analyze and to understand the opportunity of them buying our Hungarian subsidiary. The due diligence process is still on track, is still continuing, and we have no updates at this moment. When we will have more information, we'll certainly inform the market. Sorry. The next question is from Ferenc. Youssef, are you selling Digi Hungary to 4iG? When transaction commence? I think we just mentioned previously, so the same answer applies. Question from Adrian Cosmin Petrut. How much CapEx did you make in the first six months of 2021? What is the CapEx guidance for 2021? I repeat, roughly EUR 225 million were spent in the first six months, and we have revisited our CapEx guidance in the area of EUR 450 million for this year. This figure, EUR 450 million, would not include spectrum fees. Second question, what percent of this year CapEx is allocated for the Hungarian operations? Yeah, around 10%-15% is allocated to our Hungarian operations. What percent from total group assets is represented by the Hungarian subsidiary? Sorry, this is a detailed question, and we have the information available in our segment report. I kindly advise you to look there, and if you have issues, just let us know via email and we'll respond to you. We will guide you again. What net debt to EBITDA ratio do you have in mind for long term? Just as Smaranda was saying, we are happy among other things, that our leverage decreased towards 2.5x area. On long term, we are much more comfortable in the 2x area. However, we are in expansionary mode. The good thing is that this expansionary mode is almost entirely organic. Certainly during expansion, we are tolerant, and we could allow for higher leverage on a short-term basis. Just for you to understand what I'm trying to say, if we acquire spectrum today and pay for it, whatever, let's say EUR 10 million, it's just an example. It's not a reference of any kind. It will increase our leverage without any immediate improvement in EBITDA and so on. This will have a short-term negative impact on EBITDA. However, as you see, we are on positive growth trajectory in Romania, in terms of mobile users, and we certainly expect to recover the spectrum costs, so EBITDA increase in the following quarters. We expect such impacts to be short-term. The same thing would apply theoretically to M&A, although again, this discussion is theoretical. We are open to M&A opportunities, but we are not pursuing at this moment any. Regarding Spain, I know you are an MVNO, but can you tell us what infrastructure you want to build? Do you want to have your own network in a few years? I'm thinking especially of the fixed network, considering that for mobile you will need spectrum, and it's very expensive in Spain. I think it's a good summary of our operations and our approach to Spain. We are an MVNO operator, and we will continue to operate as an MVNO operator. Indeed, it's very expensive and certainly not achievable for us to participate in Spanish spectrum auctions. It's also expensive to build a radio network in Spain. However, we are trying to see if we are able to develop fixed networks along the lines of the Telefónica local loop agreement that we're using, and just to see whether we can also be an MNO. Sorry, not MNO, a fixed network operator in Spain as well. Yes, we are trying to do this. However, most of our fixed line users are and will be in the foreseeable future on Telefónica's network. We are using Telefónica's fixed network in a similar fashion to Telefónica's mobile network. A question from Ferenc Joseph. Digi Hungary is financially underwater and producing nothing but deficits for years now. What is your opinion regarding? I'm not sure I do understand the question. We are running our operations in Hungary. They are EBITDA positive, despite the fact that certain operations are underperforming, and I refer clearly to mobile here. Yeah, we in the context of sale, without the context of sale, will continue. If sale happens, we'll certainly exit that market. If sale doesn't happen, we will not continue operating in that market. Sorry, we will continue operating in that market, and we'll continue our investments similarly. Question from Ivan Kim. Is there any update on the progress of Hungarian business sale? Thank you. Sorry. We mentioned this. I hope that our messages intersect. If you did not catch our response earlier, we are in the due diligence process, and we cannot comment more at this stage. A question from Laura Hormozi. What caused the EBITDA decline in Spain in the second quarter of 2021? Sorry. I'll read the questions one by one. First of all, EBITDA did not decrease. Or how shall I put it? If I were to compare the EBITDA in the second quarter to EBITDA in the first quarter of 2021, the EBITDA did not decrease. The EBITDA was rather stagnating on a very small increase. We generated EUR 10.7 million in EBITDA in comparison to EUR 10.6 million a quarter before. Now, on the other hand, your question is right, because the margin has declined slightly, and I think we mentioned this, but I'll just come back to my answer again. The EBITDA decline is generated rather by certain items that took place at the end of Q1, like certain price readjustment, and the advertising campaign that we ran during the Q2 2021, which brought significant cost that didn't exist before. You can consider it as one-off item, which did not continue in Q3, for example. We will continue with marketing campaigns later. Again, what took place in the second quarter was a focused exercise, and it was more expensive. Other than that, we certainly expect the EBITDA to pick up and run along with the sales. The next question relates to the expected proceeds from the sale of the Hungarian operations. As mentioned during our previous call, but also earlier today, we are not commenting on this, as we are not able to disclose these figures now, and as soon as we will have relevant information, we will inform the market. What were the RCF drawings used for, and do you expect to use the new EUR 100 million loan facility in the near term, especially given the expected proceeds from Hungary? Well, there's a principal issue here. There are no expected proceeds from Hungary before the transaction is completed, and this is very important for us. As I mentioned, we have a non-binding exploratory arrangement with 4iG which has no clear expectations attached, at least from our side. If the transaction happens, it will be a separate announcement later, about which we'll let the market know. Before that, we are not considering any of the proceeds to be certain, even with 1% probability. That framework makes no sense for us. Coming back to your main question, what are we using the EUR 100 million loan facility for? It's mostly the extra CapEx that we are doing, and it's payment for spectrum fees. Irrespective of the frequency options, we have to pay to the Romanian state a EUR 25 million fee for extending the 2100 spectrum that we are currently using in Romania later this year. Part of the EUR 100 million loan will be used for that as well. The next question is, I understand there is also a new EUR 132 million facility in Spain. Has this been used yet? Yes, it has been used partially. Partially for refinancing of some of our smaller loans in that market, and partially for CapEx. It's also partially on our balance sheet. The next question is from Sophia. "Hello. After the success in Spain, are you thinking on expanding the successful business model to other European countries?" Well, thank you for the question, and thank you for praising us and our results. It's a valid line of thinking for us. While we do not have certain plans at this moment, we try to keep our eyes and ears open, and if opportunities arise, we certainly may consider them. Yes, and indeed, the experience in Romania and the experience in other markets, including Hungary and Spain, in building networks, in expanding the networks, in doing sales, puts us in, let's say, a good position to try other markets as well. The question from Parikshit Budhe, "CapEx. Can we see similar levels observed during last few quarters, around 26%-30% of revenue? Yeah, it's a good observation. 28% was CapEx to revenue in Q2 2021. The high 20s is certainly a good reference for us. It remains to be a good reference for us. Again, strategically, I repeat myself, but we are just glad and happy we have these opportunities. We have this capacity and the resources to make these investments and to be able to continue growing our business. The second question is, "Just to confirm, is EUR 15 million remains drawn in July from the credit facility?" I'm not sure I follow the question. The new facility, the EUR 100 million that we signed up in Romania, we did not use. We have drawn most of the Spanish facility. I'm not sure if this answered your question. A question from Yvonne Kim. "What is the amount of 800 megahertz and 2.6 gigahertz that will be available in Romania? Thank you." Sorry, I believe the available spectrum in the auction in the 800 megahertz band is around, so it's a 5 megahertz package. Excuse me, I'm lacking this memory now. I certainly look at the numbers. There are 30 or 40 megahertz in 2.6 thousand. Yeah, in 2.6 gigahertz bandwidth. But we can check this as we speak, and we'll come back in a few minutes. I can take the following question. "Can you confirm on the drawn portion of credit facility after the reporting period from July onwards?" In July, as we were mentioning during the presentation, a couple of things happened. In Romania, we drew the available revolver from our syndicated facility signed in 2020, and that was in amount of EUR 50 million in RON equivalent. On the other hand, also in July, Spain entered into the syndicated facility of EUR 132 million, out of which, only partially remains still undrawn. I can take the other one as well. Vlad Popa. "Hello. Can we expect further significant releases of deferred tax in the next quarters? Thank you." Since RCS & RDS has shifted to reporting the statutory accounts according to OMFP 2844/2016, so based on IFRS, basically. Indeed, the accounting base has changed compared to the previous reporting under the Romanian statutory regulations. Therefore, we are experiencing releases of deferred tax that was computed in previous period. I can't really make an estimation or an accurate estimation of how the deferred tax will move in the following quarters, but what I can say is that the differences between the accounting and the tax base have now been significantly reduced. Yes, I can take this one as well. Thanks. From Mahomzi Laura, "You drew the EUR 50 million of the RCF, can you remind me of the total size of the RCF?" This was the total size of the RCF, so we drew it in full. Yes, most of it still remains unused on our balance sheet. While we drew the RCF, we still have the funds available on our balance sheet. In July, I mean currently. Yes. Yeah. Today. Today, sorry. We are in August already. Yes. Time flies. Yeah. So far we reached the end of the list. We certainly welcome other questions as well. Just a question from Parikshit Budhe: "Apologize, but there is a bit of confusion with RCF. Can you reiterate your comments?" Maybe just to clarify this and mention what drawings took place during most recent times. In July, we have fully drawn our RCF of EUR 50 million, and as I mentioned, most of it remains on the balance sheet unused today. Also in July, we have signed up a new facility of EUR 100 million, which is not drawn, which is not used today. In July, we have signed up Spanish facility of EUR 132 million, which is mostly drawn, but only partially used today. This is the full summary of our credit related activity in the last one month or so. Just to come back on the frequencies. As I said, before the end of the year, the government intends to sell 5 MHz in the 800 MHz bandwidth. 40 MHz. This is 5 MHz duplex. 40 MHz duplex in 2,600 MHz bandwidth, and 18 channels of 5 MHz each. This is not duplex. These are TDD types of channels in the 3,500 MHz bandwidth. However, the last package, it can be used only up to 2025, while the first packages, the 800 and 2,600 megahertz, can be used up until April 2029. By selling this spectrum, the authority is aligning all spectrum frequencies for general expiration in April 2029. Well, it looks like this is it. We thank you very much for your active participation. We sincerely hope you clear us well and loudly, and this be also helpful. We look forward to speak again when we will discuss the third quarter results in mid-November. Thank you very much, and see you also.