Earnings Call: H1 2020

Aug 14, 2020

Good afternoon, ladies and gentlemen. Thank you very much for joining our second quarter results presentation. Without further ado, we will go to the slides. I invite you to see the first slide in the presentation with our financial highlights. As you see, we have had an outstanding quarter with sales of approximately EUR 310 million, 5% growth year-on-year as compared to the second quarter of 2019. RGUs continued rapid growth. We've added 9% to our customer base in the last one year, reaching 16.9, almost 17 million RGUs. EBITDA adjusted for IFRS 16 was more or less flat at EUR 96 million, while total EBITDA with IFRS 16 impact increased by 6% to EUR 115 million in this quarter. Notable numbers, notable figures. Romania continues having high EBITDA margin, generating high EBITDA margin of 46%, while Spain is already, for a number of quarters, our strongest growing market and our second-largest market with 21% contribution to the group revenues and 12% contribution to group EBITDA. Moving on to the next slide. Just a few words on COVID update. Unfortunately, we in Romania, as well as most other parts in the world, continue to be affected by this disease. We do hope for a quick medical resolution, finding of vaccine or of medicine or treatments which would help our life to come to normality. Despite the general situation, we are anyway back somewhat to normality since mid-May, as general regimes in all our territories have relaxed. There is a small risk of this to be tightened again, at least in some areas of Romania and Spain as we speak. However, the situation is under control from us operationally. We do not see the risks or the issues that we saw in early spring, and we were sort of concerned with. Our operations continue, I would say, as normal, both in terms of sales rollout, in terms of construction speed, in terms of general achievements, as well as general servicing of our customers and our operations. Nevertheless, we have had an impact in the second quarter. I mentioned earlier growth in revenues and flat EBITDA. We have a feeling that without the effect of COVID on our operations, our results could be slightly better. So we certainly have seen a small impact. However, again, it was insignificant. Last but not least, we continue to be extremely concerned with the safety and health of our employees, but as well as of our customers. We try to maintain the high standard of providing protective equipment, but as well trying to manage the operations locally in the most optimal or adapted manner to make sure that we put as little risk as possible, both on our colleagues but as well as on our clients. All in all, we unfortunately see the impact on our operations and activities. Fortunately, it is insignificant, and as we go along, at least for now, we see the operations and the results coming to normality. We will discuss this a bit more later in details, but you will see that the growth results are quite positive, especially in late May and beginning of June. We have really come back to our normal growth patterns and operations. As a recent important development, at the end of July, the Competition Council authorized, gave its merger clearance in our transaction with ATTP, AKTA, DCS, with the three companies. As you may remember, we've entered into operations and rental agreement with these three entities in November last year. The merger clearance took about eight months. It was a large transaction, and significant analysis has been done by the authorities. In the end, we have received clearance with certain conditions that we have to fulfill and respect. These are the obligation on our side to upgrade most, if not all, the networks of DCS-AKTA and bring them to our standard, which is fiber to the home. The obligation to let all customers of DCS-AKTA to have access to our pricing and our packages, which in most cases is more favorable and better for our new coming customers. Third, an obligation to cooperate with content providers, and in case we cannot reach certain agreements with some of them, because maybe we believe that their demands for pricing are too high. In this, let's say, rare cases, to let these operators run their channels as a pay TV proposition on our networks, which we agreed to. All these three conditions have been asked by the authority, and we agreed to this. As we speak now, we are in the early days of starting to integrate these new operations into our activities. As I mentioned earlier, it's a three-year rental agreement with an option to buy these customers at the end of this period. We are, again, as we speak, taking over the majority of the customers into our operational standards, making sure that we provide the highest quality of services and best pricing as we speak or as soon as we can. Soon thereafter, we will start upgrading the DCS-AKTA networks, as I mentioned, to our very high technical standard of fiber to the home. Moving on, we will come back to our operations. On the next slide, you see that we have generated EUR 623 million of revenues in the first six months. We have generated EBITDA excluding IFRS 16 impact of EUR 193 million. Total EBITDA with IFRS 16 impact was EUR 230 million. Again, we'll repeat it maybe a couple more times. Spain is the highest growing entity in our portfolio, and Romania by far the biggest contributor in terms of revenues and profitability. With this, I will let Smaranda discuss in more details our financials and our results. Good afternoon. Moving on to the next slide. Overall, Digi as a group delivered a strong performance during the second quarter, despite the economic challenges caused by the restrictions imposed in each territory. Despite this unpredictability in the environment, Digi's operations in all markets were able to continue to deliver stable results, and thus confirmed the need that we all have for connectivity and telecommunication services during these hard times. Consolidated revenues increased by 5% in Q2 compared to Q2 2019, up to EUR 310 million. The adjusted EBITDA, including IFRS 16, was up to EUR 115 million, a 6% increase compared to previous period, but a stable EBITDA margin of 37%. As you can see in the first graph, the CapEx level for Q2 was EUR 88 million, pretty much similar to previous quarters. Even though investment pace decreased during April and beginning of May because of the restrictive measures, afterwards, towards the end of Q2, the investment projects continued close to a normal business pace. The main CapEx projects that we were involved in each territory were: for Romania, we continued the rollout of fixed networks to rural areas, this being one of the important pocket of growth for our business in the mature market, as well as continuous improvements made for the mobile network in this territory. In Hungary, we continued the development of our mobile network, now having a presence in 500 settlements. In Spain, we continued investing in footprint of Digi Fiber services and expanding our reach. In terms of revenues per territories, as you can see on the right-hand side of the slide, the operational revenues for Romania, the service revenues that is, in functional currencies, increased mainly due to the growth in RGUs for fixed services. Now, this increase was partially offset by currency depreciation in the period. The RON to euro foreign exchange rate increased by almost 2% in Q2 2020 compared to previous year, which negatively impacted the revenues translated from RON to euros. Spain's revenues increased with 42%, the highest increase for the group, primarily due to the new customers acquisitions, and this is the result of the attractive and affordable offerings that we have in that territory, as well as the expansion of fixed services rollout in the region. In Hungary, the operational revenues were flat year-on-year in functional currency, having only a minor fluctuation due to the natural churn of Invitel's customers. Now, the decrease that you can see in revenues in euros is due to the negative impact by the depreciation of the forints compared to euros in Q2. There was an increase in the exchange rate of 8.8% compared to previous year. Moving on to the RGUs. At the end of the quarter, Digi achieved 16.9 million RGUs, an increase of 9% compared to 2019. The main segments of increase were the fixed internet and cable TV at group level, and Romania was the driver for this increase. At the group level, the cable TV RGUs were 4.5 million, but the fixed internet RGUs were 3.9 million. Again, Romania was the main contributor to this increase. As you can see, in Romania, we are now at 11.9 million RGUs, up by 7% compared to previous year. Mobile services RGUs reached at group level 6 million, which is an important milestone for us. In Spain, the RGUs for the mobile business increased up to 2.1 million. In Romania, the RGUs increasing trend picked up after several quarters where this was flat or even decreasing. Now, we added 142,000 RGUs year-on-year for the mobile business, up to 3.5 million in Romania. In Hungary, digital mobile service became, as I was saying, accessible to more than 500 settlements, and we have reached a coverage of 50% of the population within only one year of its launch. The RGUs for mobile business in Hungary are 136,000. Moving on to another highlight of our financial results. As we were saying, Spain had a strong performance again during this quarter. Following the relaxation measures that were implemented in May, the RGUs growth pace picked up and operations continued to deliver strong results. The pace of growth returns to the levels seen before the pandemic wave. Digi Spain succeeded in the second quarter to exceed the threshold of 2.1 million RGUs for the mobile voice and data services, and thus its contribution to the group's revenues and EBITDA improved. They are contributing 21% of total group revenue and 12% of EBITDA revenue. All of these were achieved with an increase in EBITDA level of 62%, as you can see here shown over the last six quarters. From the number of portabilities point of view, Digi Spain also reconfirmed the upward trend, following the lifting of the restrictions imposed by the pandemic wave from May. Thus, in July, they were number one net gain operator for mobile number portability in Spain. With regard to the expansion of the network of fixed services, the Spanish subsidiary marked further progress in June, increasing the footprint of Digi Fiber services to more provinces. We are now present in 25 out of 50 regions in Spain, the last eight regions being added in Q2. Further footprint expansion is planned for 2020 going forward. In terms of the financial liabilities of the group at the end of June 2020, our net debt is at EUR 1 billion, with a gross leverage of 2.9x and a net leverage of 2.6x. This being said, we are now receiving questions, if you have any. Please record your questions in the chat box, and we will address it one by one. Thank you. The first question coming from Cosmin Mizof. "Looking in your report this morning, I could not figure out the ARPU number for Hungary in the mobile segment. Can you give me more color on that?" Starting from May last year, as I was saying, we launched a promotional offer to our existing customers as a testing phase of our mobile network. Thus, at this point in time, the ARPU number for this segment of business in Hungary is not relevant since it is not reflecting a price for an offer that we have there on the market. This is just a promotional package for our existing customers. In this way, we can test our network for further development. Yeah. Basically the price is more or less insignificant, and that's why you don't see it in the report. We have a series of questions coming from Cristina Chibotaru. "Growth in RGUs in Romania was all organic. What was the timing of additions of RGUs during Q2?" It's a good question. During the second quarter, we have had a number of organic additions as well as a number of additions that came through small, insignificant acquisitions. We're not referring to AKTA, DCS, or ATTP here. Again, the vast majority of additions were organic. Yes, this is also a correct angle to this question. We had more additions during the second part of May and June, just because the dynamic of sales was impacted by COVID for us, but as well as for the most operators in the market. We had relatively less activity during the initial virus outbreak. What is the revised guidance for CapEx for 2020? We have achieved a number of approximately EUR 170 million during the first six months. However, our guidance remains as it was earlier in the year at approximately EUR 320 million ±, or maybe a small plus. We have seen CapEx somewhat higher in the first quarter, despite the virus outbreak. We see it moderated or slightly down on a relative basis in the second quarter, so that all in all, we still remain in the EUR 320 million area. What is the current status of the 5G auction? Well, I think the situation is unchanged here for the last several months. We have had recent announcements by the communications regulator, who, to our understanding, would like to run the auction towards the end of the year. However, it needs the government to pass certain decisions before such auction can take place. These decisions refer both to the pricing of the possible auction, but also to the general adoption of a new security framework by Romania, especially in the context of, I'd say, a common decision about this issue of the European authorities and European countries. The regulator is expecting the government to make a decision on these two aspects, and once this is done, probably we will all have more visibility on the upcoming auction. The next question is what is the impact of the Competition Council's recent decision on a future decision to buy AKTA portfolio altogether? The question is a bit unclear to me. We see the decision as favorable. It allowed us to control the AKTA portfolio operations, starting basically now with August. Going forward, we will make the appropriate decision at a later stage whether to finally buy the network or not. This has not been decided at this stage. Again, the contents of the Competition Council decision do not impact this decision. Irrespective of our decision to buy or not, at this stage, we are committed to run the operations. At this stage, we are committed to improve the quality of the networks. If we make the decision to buy, also to buy these networks and to integrate them fully into our operations, we will inform the market accordingly at a later stage. When could Digi start mitigating the recent depreciation of RON and HUF? Yes, we have seen depreciation in RON and HUF. However, we do not see volatility, and we stick to our policy of not implementing short-term hedges, but rather to monitor the market developments in the medium and long term. Eventually, if the market stays here or becomes weaker, both in Romania or Hungary. Sorry. At a certain stage, we will have to adjust the pricing. Again, it's not a decision for now. At this moment, we do not intend to address this as such. We will continue absorbing the currency shock for now. Yeah, as a follow-up, when could we hope to see price increases? No such decision on our side. At this moment, we do not see this necessary. When would mobile services in Hungary get out of beta testing and start charging fees? Yeah, that's a good question. This is something we continue looking for and monitoring. Again, we have only made a decision to run this beta stage till the end of the year. We have not made a decision about change in our operations. As soon as we reach one, we'll let you know. We will wait a few more minutes, a couple more minutes, and if there'll be no questions, we will close the call. Otherwise, we do invite you to raise. Well, we would like to close our call for today. Thank you all very much for the participation. We will happily see you back again mid-November in discussing our Q3 results. Until then, if you still have vacation, please do enjoy. Thank you very much. Bye-bye.