Earnings Call: Q1 2021

May 17, 2021

Welcome to our first quarter conference call. We, Smaranda and I, are happy to guide you through our results, and we hope you will enjoy this time as well. First quarter of 2021, revenues of EUR 340 million, EBITDA of EUR 123 million, EBITDA adjusted for IFRS 16, EUR 102 million. Growth of 8.6% in revenues year-over-year, growth of almost 7% for EBITDA year-over-year. In terms of RGUs, we approach 19 million at 18.7 million units, 13% increase year-over-year. As most of you know, this is the basis of our success. This is the basis of our operations, growth, and expansion in the number of users that access our services. Romania and Spain continue contributing most of our growth and deliver this outstanding performance. Just as a quick reminder and recap, at the end of March, we, so the RCS & RDS Group, or Digi Group, excuse me, signed with 4iG from Hungary, a preliminary non-binding agreement regarding the possible acquisition of Digi Hungary and its subsidiaries, Invitel and i-TV. At this moment, the parties are involved in a due diligence process, and at the end, so towards the end of the summer, beginning of September, the parties expect to finalize this transaction. Moving on to slide five of our presentation. You see our results in more detail. Once again, we have positive development across all geographies, with few exceptions. Romania generated revenues of EUR 209 million. Spain, almost EUR 78 million. Hungary EUR 48 million, and Italy, over EUR 5.6 million. As you see, we have generated an EBITDA margin of 30%, excluding IFRS 16. The bigger number, the EBITDA including IFRS 16 numbers is 36%. Again, the drivers of our profitability, the drivers of our growth continue to be Romania and Spain with almost 43% margin and almost 14% margin in each market. Moving on to page 6 of the presentation. You see in more detail the general financial profile of the group. As I mentioned already, revenues of EUR 340 million. EBITDA, including IFRS 16 numbers, EUR 123 million. CapEx, EUR 105 million in the first quarter. All numbers are higher in comparison to the first quarter of 2020. They're also higher, except for EBITDA, in comparison to Q4 2020. The main contributor of growth continues to be Romania, and Spain. I repeat myself, excuse me. No, sorry. Let's go on. There's not too much to say about these numbers on this slide. On page seven, you see the RGUs, reaching 18.7 million units, 13% year-over-year increase. The main segment that contributed to growth is broadband, with 19% increase from 3.7 million RGUs to 4.4 million RGUs. Followed by mobile segment, 15% increase, to a total of over 6.7 million RGUs. Pay TV, which on a group level is 5.8 million, and in Romania it's close to 4.9 million RGUs. Countrywide, on a relative basis, Spain performed best with a 30% year-over-year increase, followed by Romania with 13% increase. Hungary is flat, as you see here. However, the results are impacted by the sale of certain parts of Invitel, which occurred in June 2020 in accordance with the agreements that we had with the Hungarian Competition Authority in relation to the authorization of the Invitel acquisition. With this, I will hand over to Smaranda just to present you briefly the financial profile of Digi, and we will continue with the questions. Hello, good afternoon. At the end of the first quarter of the year, we had a total net debt of approximately EUR 1 billion. We've had little variance compared to the end of the fiscal year 2020, meaning that our two main debt instruments that we have on the balance sheet are the senior secured notes, which were issued in 2020 in amount of EUR 850 million, and the senior facility that was signed in December 2020, which now has a balance of almost EUR 91 million. You can see here on the slide the maturity profiles, how they are scheduled on years, and the split yearly of these repayments that are due. In terms of the leverage, the leverage at the end of the quarter is 2.6 times, both in terms of gross and net covenants, which is slightly decreasing compared to one year ago, and which is quite in line with the results at the end of 2020. In terms of the financial expenses or the net finance cost that was recorded in Q1 2021, as you saw, that was more stable in magnitude compared to Q1 2020, when we had the impact of financial expenses at the refinancing exercise that we did at that point in time. Now, having said that, we move forward and invite you to Q&As, which you may ask by writing directly in the chat box available on Zoom. Thank you. We will subsequently read the questions and answer them. The first question comes from Giovanni Raicimbach. Hi, so what is the amount of RCF undrawn at the end of first quarter? It's a relatively simple question. We have not used RCF in the first quarter, so it remains unused and fully available at EUR 50 million. In addition to that, we have a few, we call them local facilities, so the ones that are not part of the bigger club loan that we have at RCS level. Those are also exceeding roughly EUR 20 million at this moment. They are uncommitted, but they can be used as well. The RCF position has not changed at all during the Q1 of 2021. What is the price consideration for the disposal in Hungary? Well, this information we cannot make available at this moment, and we cannot comment on the price. It's a work in progress at this moment. We will certainly revert to the market once we have achieved certainty in this transaction and once we can announce this price. Sorry, there's one more question from Giovanni. In the cash flow statement, the item payment of lease liabilities was positive at EUR 9.2 million. Can you explain why that is the case? Sorry, that's a bit too detailed for us now. We could probably answer this question at a later stage. Next question is from João Fermoselle. Following the sale plans of Digi Hungary and its subsidiaries, are there any plans of expansion to new markets? Well, thank you for the question. We continue to focus on our existing core markets. We continue our projects across all geographies, including Romania, Hungary, and Spain. We do not stop at this moment in any of these. If it is possible for us to look at new markets, well, the broad answer is yes. We are available, or we would consider opportunities either in our markets, but also new markets. Next question is from François Beaudet. Well, sorry. The question is repetitive. It's the same question on how much funds do we expect from the sale in Hungary. Unfortunately, as I mentioned already before, we cannot comment on this, so we skip. Can you share your CapEx strategy going forward? Expected to stay elevated? It's a question from Esita. Well, the short answer is yes. We do not intend to decrease our CapEx at this stage. I think in our last discussion, we mentioned that we expect 2021 to be in the area of EUR 350 million-EUR 400 million. Looking at Q1 and also looking at the projects available to us ahead, we are certainly in the higher bracket of this number. On the other hand, and I don't know, in defense of our strategy, as you can appreciate, we are growing at a rate of 9% per year at this moment. Subscriber-wise, we are growing at a rate of exceeding 10%, so 13% rate at this moment. This is an extremely healthy development, and we are thrilled and happy to have this opportunity in all our markets, in Romania, in Hungary, and certainly in Spain. It would be, from our point of view, both wrong and a pity to stop these projects or not to value them to the maximum extent. Yes. Well, next question is slightly different. It's also on a Hungarian topic. What do you intend to do with the proceeds? It refers to the Hungarian sale. Once again, not having enough information on the sale at this moment, it's difficult for us to make plans. We will certainly announce the market at a later stage when the transaction crystallizes. Ivan Kim. Hi. What would be the use of proceeds? Sorry, excuse me, I'm repeating the same question, so I'll just skip it over. Question from Jonathan. How much do you expect CapEx to be for the year, and how much of this will be spectrum? I already mentioned a bit earlier that we are in the EUR 400 million CapEx spending area. However, this number does not include spectrum. If we are to add funds or amounts for spectrum, this will come on top of this figure. How much? Difficult to say. We also decline to comment. I think in the last 1 year and a half and 2 years, we've consistently refused to answer this question. Once again, it's a looming auction process that is supposed to come in the coming quarters. We would like not to anticipate, and we would like not to be very open about this process. The third question from François Beaudet. Do you have more visibility on the 5G spectrum auction? Well, nothing new in comparison to our last discussion in February. Basically the broad expectation of the market is that the auction will take place somewhere in the second part of the year. It's quite public information, but apart from this, we don't have more visibility or more news. Sorry, just for you to understand, we are skipping the repeating questions and just looking for new ones. A question from Nora Nag. How much CapEx did you spend in Q1 2021? It was EUR 105 million. Could you share, please, the breakdown between fixed line and mobile segment? Yes, certainly. We spent on fixed networks approximately one half of our CapEx, and we spent on mobile networks approximately 20% of our CapEx. Sorry, was the progress of your Hungarian mobile tariffs slower than expected, which led to the agreement with 4iG? Well, you force me to comment, and certainly I will not comment on 4iG. However, I will address the mobile transition. We here at Digi believe that we had a very positive response from the market at the beginning of the year. As most of you know, we have run promotion for one year and a half, whereby the customers enjoyed a very accessible, not free, but very accessible broadband and mobile telephony usage on our network. We have fully stopped that promotion at the end of last year, so beginning January 1, 2021. As a result, we have converted most of our customers, and basically we have 168,000 paying users. Sorry, 165,000 paying users at the end of Q1 2021. Quite positive and a good result for us. Oliver Burke from CreditSights. I appreciate you cannot disclose the price for Hungary, but how are you thinking about the proceeds? Well, so sorry, it's a repeat. We will certainly decide, analyze, and discuss the proceeds once the transaction is clear to us. The question follows: would you consider a large dividend, or would you look to keep the proceeds for reinvestment, be it to fund the Romanian spectrum auction, M&A, or CapEx? Once again, thank you very much for these leading and guiding questions. I don't think they are wrong, and they are good as both discussion topics and as possible usage for these funds. At this moment, for us, it's premature to decide on any of these. Thank you. It's a valid discussion. We'll just postpone it for some time. There's a question from Jean-Baptiste Teissier. How big is the asset you are contemplating to buy in Hungary? Revenue, EBITDA. I think it's a confusion. We are selling our Hungarian operations. We are not buying any assets. Okay. What is the outlook for revenue and EBITDA growth in Spain? Why EBITDA in Spain did not grow in the first quarter of 2021? Well, thank you very much. It's a good question. The idea is that we certainly do not want to promise. On the other hand, we believe that the sales we reached at this moment, EUR 78 million per quarter, are continuous sales. Sorry. We do not expect sales to decrease or decline in the coming quarters, at least in the short run. In terms of EBITDA, your observation is correct. Our EBITDA was flat in absolute terms, Q1 2021 in comparison with Q1 2020. It declined as a margin. The main reasons for that are also the price adjustments that we did in March and some other changes that came into force due to the new Telefónica agreement. It's related to the recent changes that took place in Spain. Okay. We have a question from Matt Seto. Why did the EBITDA margin decline? Well, looking at the numbers without IFRS 16, we have an increase in Romania. We have a decrease in Spain. Sorry. We are flat in Romania. We have a decrease in Spain. We have a decrease in Hungary. This mix contributed to the overall result. Again, in absolute terms, our EBITDA is higher in Q1 2021 as compared to 2020. Our EBITDA, although looks a little bit lower in comparison with Q4, is in fact on par with Q4 numbers. Simply accounting-wise, we are forced, we have to recognize certain ad expenses in Hungary in Q1 for the entire year without the ability to normalize these costs. Ignoring this normalization, our EBITDA would have been higher in Hungary. Spain and Hungary have contributed to this EBITDA margin decrease. A question from Peter Raciborski. Excuse me. Could you please provide us with some updates on fixed line network rollout in Spain? What is the current and target coverage of fixed network in Spain? Well, I think what we mentioned earlier holds. We are investing in certain coverage in Spain. However, our main and most important channel to distribute our services and to provide our services is and will continue to be Telefónica's fixed network. Yeah, at this moment, I think we would not comment on the size of our fixed network because it's simply misleading. Once again, we are, I don't know how to say, in fact, able to market to the entire Spanish population using Telefónica's network. We do this effectively. A question from Jonathan. Has your product strategy in Spain changed, and do you think the consolidation of MásMóvil-Euskaltel changes anything for you? Well, first of all, our product strategy has not changed. We continue providing mobile and fixed services. There are from time to time minor adjustment in pricing, which we have to do in line with the changes in the market. As we have many times previously said, we are primarily an MVNO operator in Spain, and we depend very much both on strategy of Telefónica but also on strategy of other operators. So we have to be very careful in the way we run our operations there. Speaking of the MásMóvil and Euskaltel consolidation. I'm not sure if this will impact us because I don't think we were particularly strong in the geographic areas that are subject of this merger. From our point of view, we simply continue operations as we did before. Question from Sophia. Sorry, excuse me. It's just a repeating question, so we ignore it for now. A question from Oliver Burke. It looks like you had a net loss of 8,000 mobile RGUs in Hungary in the first quarter. I understand you moved away from the free promotion and started charging customers, so that would explain the churn of existing customers. Can you talk about gross additions in the quarter? Well, certainly we can dissect this in much more detail. Unfortunately, I don't have precise numbers in front of me. More than 80%-85% of old customers continued with us. Yeah, we gained 15%-20% customers more during the period. These are just approximations. I don't have exact numbers in front of me. Again, a question from Oliver Burke. Can you remind us of your target net leverage ratio? You're currently at 2.6. Are you comfortable around the mid-2 times area? Certainly, we are. We prefer lower leverage. However, there is no, let's say, except for our preference, for broad preference for less debt, there is no particular need or necessity to go there. However, I must somehow emphasize that we keep the liberty, so from time to time, if we believe we have strategic opportunities in front, either spectrum acquisition or some M&A, to go closer to 3 times, however, not significantly higher than that. So anywhere in between 2 and 3 times, we are comfortable. 2.5 is not bad. If it was lower, we would be happier. Yeah. Can you please elaborate on the changes to Telefónica agreement in Spain? It's a question from Ivan Kim. Sorry, we cannot disclose more information than what we mentioned at this moment. We have an agreement which runs into autumn of 2026. It allows us to use Telefónica's mobile network for MVNO services. We are able to market fixed broadband to fixed telephony services on Telefónica's fiber network throughout the country, which we effectively do. I think pricing or other elements would be too much disclosed, so sorry for that. So far we have run out of the questions, but we do invite you to ask more. We have a question from Matt Seto. How are you thinking about pricing in Romanian competition? We don't see the Romanian competition being on price. I think at least in our case, pricing is set for quite a long time. We have modified our pricing last time at the beginning of 2019. That was a price increase of about 5%, which we did for the first time in approximately 10 years for our main services including cable television, including broadband. Once again, I think the market is competing a lot on technology, on the availability of services, on the quality of services. There's not too much one can do about the pricing. Question from Sophia. Are you thinking on participating in 5G spectrum auctions in Spain or other new countries? We remain open to this opportunity. However, we could possibly very easily exclude Spain. Participating in such an auction would be way too expensive and counterproductive to us in that market. We keep our other options opened. We'll wait a couple more minutes if there are more questions online. If not, we will close the line. Question from François. Sorry to insist, but during the last call, you said that you would probably fund the 5G spectrum auction with a new debt. Should we now assume that the proceeds from the sale of Hungarian subsidiary will be used to fund the 5G spectrum? Well, to me, it's a repeating question. Before the Hungarian sale is finalized, we will not consider the use of the proceeds at all. Again, before that, any new 5G auction for us is a matter of new debt. We are just thinking in very simple terms. Thank you very much. We have exhausted the questions today. Once again, it was a lively discussion, and we appreciate your participation. We will close the line now, and we will happily discuss with you again in mid-August about our first half results. Thank you very much. All the best. Bye-bye.