Earnings Call: Q1 2020

May 15, 2020

Ladies and gentlemen, we are happy to announce our first quarter 2020 results, and we would like to walk you through the presentation and walk you through the highlights of the quarter. As you see, we have closed a very good and outstanding three months period ending March, with revenues of EUR 330 million for the group, and EBITDA at EUR 115 million, 11% and 26% growth respectively. RGUs during this period increased 9% year-over-year to 16.5 million units. As two particular highlights, you see that our EBITDA margin surpassed 47% in Romania, IFRS 16 included, and 41% without the impact of IFRS. While Spain reached the 2 million mark for the mobile RGUs and effectively, as anticipated during our previous calls, became the second-largest operation in our group, overtaking Hungary from this point of view. I'll move on to the next slide. Unfortunately, and despite outstanding achievements, we are all going through a difficult period already for the second month after mid-March, of course, the COVID pandemic. You may appreciate that we are, I don't know, lucky enough to be in a sector that is both defensive and that keeps well during the crisis. Telecommunications are basic necessity service, be it mobile, be it TV at home, or be it broadband internet. During this time, we have seen an increased usage of our services by our customers. We have experienced. Well, we were happy and able to accommodate all these necessities. As you see on the fourth slide in the presentation, in all our main markets, Romania, Hungary, Spain, users have consumed more bandwidth, have spoken more on the telephone, but we successfully met the demand. Our big particular concern during this period was making sure that our employees, our customers, our partners are safe, that we provide as much and as necessary protective equipment as we can. That we also have changed and reshaped our operations to make sure that we can have business continuity and as little disruption as possible during this time. As of today, we have the first day in Romania of a relaxation in the emergency regime. Same goes for Spain, with the difference that already for about 10 days, we have a softer environment over there. We will gradually start resuming our operations starting Monday. Although we do not expect this to happen quickly. Certainly, it will take not weeks, but probably months, to come to the previous levels of activity. This is all somewhat conditional on the epidemic not coming back and the general health and safety situation remaining under control in all our markets. Maybe one last comment. The crisis itself did not have as much impact on our historical performance and financials. We continue servicing our customers as we are, as I mentioned a bit earlier. However, our ability to sell new services, our ability to build networks, to develop networks during this time has been affected and continues to be so. We will have to monitor the situation going forward, too, and at this moment there's no perfect visibility when the old levels of growth and expansion will be possible. However, yeah, as I said, we are quite positive so far with our performance. Yeah, we will continue monitoring things further. Moving on and coming back to our traditional numbers. Again, overall the group has achieved EUR 313 million in revenues. Romania contributed with EUR 190 million to this number. Spain contributed EUR 62 million, and Hungary contributed EUR 52 million. We've achieved 16.5 million users during the month. As I mentioned, EBITDA profitability was outstanding in Romania, 47% including IFRS numbers and over 41% excluding IFRS 16 numbers. With this, I'll let Smaranda walk you through the highlights of our quarter, and then we will resume the presentation with the Q&A. Good afternoon, everyone. We will continue the presentation by focusing a bit more to the main highlights that the Q1 reporting has had for the Digi Communications Group. The first financial highlight that we would like to draw your attention upon is the strong overall performance that the Digi Group has delivered in Q1 2020. Restrictive measures, as Sergey has already presented, were implemented in all our territories where we have operations, but the implementation affected only the second part of March, which for the Q1 results, was too short of a period to have significant impact in our numbers. Revenues were up 11% in Q1 2020 compared to previous period. Our revenues, consolidated group revenues, were up to EUR 313 million. Now, if you look at the quarterly evolution, you see that the growing pace has been maintained over the past reporting periods. In terms of the factors that contributed to this increase, the main and the most important one was our RGUs base, which continued to expand in the majority of the territories where we operate. We will get into more details a bit later about RGUs in particular. Now, looking at the evolution of the group revenues by territories, you can see that the main contributors to the overall group's revenues were Romania and Spain. Some of our territories were affected more by the depreciation of the functional currencies in Q1 2020 compared to prior period. It's the case of Hungary, for instance, where the forint to euro exchange rate depreciated with 6.6%, which negatively impacted the revenues presented in euros. In terms of the operational performance, the group's EBITDA increased with 26% compared to Q1 2019. Our total EBITDA for the quarter is EUR 115 million, including the impact of IFRS 16, and the EBITDA margin is 37% compared to 32% in Q1 2019. Again, the main contributors here for these very good results were Romania and Spain. The basis for this evolution was an improved operational performance in best cases. In terms of CapEx in Q1 2020, our total CapEx consolidated was EUR 84 million, which is in line with the quarterly evolution presented here on the slide. I would like to draw your attention to the CapEx to revenues percentage, which was 27% in the current period, in line with the trend of this key indicator in the last reported periods. Moving on to the RGUs. Our total group RGUs increased to 6.5 million at the consolidated number, an increase of 9% compared to prior year. The first presentation is for business line. As you can see, our main fixed and mobile services increased by 8%, 11% and 14% respectively. In terms of cable TV, we reached 4.4 million RGUs at group level. Fixed internet and data RGUs are 3.7, and the mobile RGUs at group level are almost 5.9 million. The presentation per country shows a positive evolution of our total RGUs base. The main highlight that we would like to draw your attention upon is especially a very robust growth in Romania for the fixed services, cable TV and internet, and data RGUs. The cable TV RGUs grew by 9.5%, up to 3.7 million in Romania, and the internet RGUs grew by 11%, up to 2.9 million, which is one of the most historic levels that we reached so far. In Spain, in Q1 2020, we are happy to report an important milestone, namely the reach of 2 million RGUs of mobile services in Spain. Now, this increase comes in the period prior to the implementation of the portability restrictions that were enacted in this country, started with the second part of March. Because of these restrictive measures implemented, the pace of growth was impacted in this territory mainly. Moving on to our last highlight of the presentation, meaning the fact that Spain has managed to increase its contribution to the overall group revenues and the overall group EBITDA, reaching the second place in our reported numbers for this period. Now, our operations in Spain started in 2008 when we launched MVNO services there. The first phase of the business was initially targeted at the large Romanian communities. After several years, the commercial offer was reshuffled and the focus was extended to targeting other customer segments of the Spanish market. As I was previously saying, in Q1 2020, we reached one of the important milestones in this respect, namely 2 million RGUs. Moving one step forward in offering convergence services on the Spanish market, in 2018, we rolled out a fixed internet data and fixed line telephony offering through Telefónica's local network and our own GPON FTTH network. In Q1 2020, we reached 100,000 RGUs for fixed services. On this slide, you can see the evolution of the mobile and the fixed services for the Spanish market. On the mobile side, we reached currently 4% market share, and one of the most important KPIs for us is the net gain portability, Digi Spain being one of the top three net gain operators in this respect. In terms of the fixed services, we are in continuous development there. New provinces were added to our footprint at the end of 2019, and we plan to continue the expansion. Now, these results achieved so far are based on the shared best practices of the convergent Romanian business model. Value for money offerings and focus on distribution channel are some of our key success factors in this territory. One of the last point that we would like to cover in this presentation is the leverage profile, an important measure that we always touch upon during our conference calls. At the end of Q1 2020, our total net debt was close to EUR 1 billion, which is made up mainly of the new bonds that we issued in February 2020, senior secured notes of EUR 850 million. This issuance included two tranches, one EUR 450 million tranche with 2.50% coupon, which is due in 2025, and the second tranche of EUR 400 million with a coupon of 3.25%, which is due in 2028. At that point in time, we would like to remind you that we used the proceeds of this offering to redeem the entire outstanding amount of our previous senior secured notes of EUR 550 million, and we also used the proceeds to prepay or repay partially some of our syndicated facilities agreement. The surviving facility agreement after this refinancing exercise was the 2016 Senior Facility, which you already see here in the presentation. The leverage profile at the end of Q1 is presented on the right-hand side of the slide. The gross leverage is at 2.8 times and net leverage is at 2.6 times, which is pretty much in line with Q1 2019 leverage profile. This being said, we would like to invite you to address questions using the chat box facilities. Thank you. Yes. Sorry, and maybe one small addition. We did not mention it specifically on the presentation, but most of you are certainly aware that the general meeting of the shareholders that took place on April 30 has awarded a dividend for the results of the year 2019 of 65 RON, so 0.65 RON per share, which amounts in total to approximately EUR 12 million. This is expected to be paid by the end of this month. Yes, as Smaranda said, we're happy to start the Q&A. We have the first question from Ilya Kiselev. Could you please explain a bit more what was the reason of high net finance expense in the first quarter of 2020? I will briefly outline this and Smaranda will complete the question. There were two main reasons for the increase in the financial costs during the first quarter. On one hand, we had the refinancing, and second, this was the impact of the currency levels in Romania and Hungary on our results. To continue the answer. The majority of the amount recorded as net finance expense, as Serghei said, referred to the refinancing exercise from February 2020. At that point in time, when we repaid the senior secured notes from 2016, we paid penalties for early repayment in amount of EUR 13.8 million. When those bonds were closed, in our accounting records, we needed to derecognize an embedded derivative asset, which according to IFRS, is recycled through P&L. Meaning that the entire fair value that was recognized on the balance sheet of approximately EUR 40 million was included as a net finance expense of the period. Apart from these two significant numbers, the third important explanation is, as Serghei mentioned, the loss from the foreign exchange devaluation of the exchange rates for the functional currencies of HUF and zlotys. That amounted to almost EUR 25 million in the period. Just to complete Smaranda's answer, the EUR 40 million depreciation of the embedded derivative asset that was on our balance sheet is a pure non-cash item, so there's no cash expense associated with it, neither now nor in the future. The next question is from Nora Lang. "Good afternoon. Thank you for the presentation. I would have two questions. Could you please explain the EUR 60 million other financial expenses booked in the first quarter 2020?" We believe we touched this question and, yeah, maybe we go on. "And the second question is your CapEx plan of EUR 300 million-EUR 320 million still valid for 2020? Or do you see a possibility for any changes as a response to the pandemic?" Yes. It's one of the difficult questions. As you have seen from the presentation, from the slides presented by Smaranda, we have spent EUR 83.6 million for CapEx in the first quarter. A level that is comparable to what we used to spend during last year. Certainly, based on the performance of the first quarter, we did expect our CapEx for this year to be in line with the one from the previous year. At around EUR 320 million, just as mentioned earlier. However, the crisis has affected us only in the last 2 weeks of the first quarter. The additional 1.5 months took place in the second quarter. Certainly, as I mentioned, there was a decline in CapEx related and growth related activities during this period. However, it's important to mention that some of the CapEx is originated in the previous years, 2018, 2019, and the cash payments follow through in 2020. Not all CapEx can be stopped, and some of it has to be continued, which we successfully did. Coming back to probably the main question, it's difficult to see whether we're still maintaining the 320 target for this year. If we are able to come out of the crisis relatively quickly in the coming weeks or maybe one or two months, then yes, we're still aiming for EUR 300 million-EUR 320 million. Thank you. Jonathan Schroeder, "Have you seen any changes in demand for fixed to mobile products since the beginning of the pandemic? Do you have any subscriber or market share targets in Spain in the coming years?" I think the question is certainly a very valid one. However, the way it is asked. Well, sorry. I think the proper way to see things is a bit different. It's not about our customers, people, needing our services or wanting our services more or less during this period. It's in certain markets, be it Spain, Italy, and Romania, mainly. We did not have the issue of market demand. However, we had the issue of restrictions basically related to the social distancing and the fact that people could not leave their homes in most of the cases and could not freely walk away, advised by the authorities to stay at home as much as possible, with slight variations between these three countries, made our sales decline. Again, we don't think it's an effect of demand. It's not an effect of customers desiring our services less or more, but it was simple physical inability to contact us and to take more of the services. Of course, we tried to counterbalance that as much as we could, opening our call centers in a more active fashion as compared to the previous periods, encouraging online contracting. However, these were not able to basically compensate or complement what is missing, and we see a decline in sales. Coming back to the second part of the question, we don't really have a target in mind. Our operations in Spain and Italy face more difficult environment as compared to Romania and Hungary because we depend on host infrastructures of Telefónica or Telecom Italia in Italy mainly, and that makes predictions of this kind quite difficult. We try to enjoy our growth as much as we could, but very difficult for us both to set targets or to say that we will be able to achieve certain targets in the future. Oliver Burke, have you seen any major issues in collecting payments from customers since COVID began in consumer or B2B? And linked to that, roughly what percentage of your customers still pay in-store in Romania? Yeah, this is a very sharp question in this context. As I already mentioned a few moments ago, social distancing, inability to continue lives as previously is basically the main change that this crisis brought to us as an operator. Certainly, collections were the first impacted mostly in Romania because in Spain and Italy, we run a prepaid business and our traditional distributors have not stopped operating. They were open to our customers just like they were open to all other customers they service. However, in Romania, we have seen less people walking through our stores during this period. Again, as we said earlier, we have encouraged all our customers to use as much as possible the online channel, which is extremely convenient and extremely handy, lets you make payments within a minute or so, and the only thing you have to have is a debit card or a credit card. Based on that, we have seen a decline in collections. The decline is still in the rather low percentage figures. We hope that this decline will disappear or will be compensated in the coming weeks or months, as I mentioned, because the restrictions are being slowly lifted in all our markets. I didn't mention Hungary because Hungary has had a milder crisis as compared to the rest of our markets, Romania, Spain, Italy, and we have seen less disruption from most points of view in Hungary. The second question is, could you possibly disclose your exposure to mobile roaming revenues? Well, we generate revenues from mobile roaming. I wouldn't have the numbers handy to share with you. On the other hand, we don't understand the emphasis of the question because, oh, sorry, probably I do understand. There is no travel at this moment, neither incoming nor outgoing, and certainly people consume less. However, we don't see this as a loss. Certainly not as a loss of EBITDA because for us roaming was mostly a pass-through service. Whatever we charged our customers, we had to share with the roaming partners that allow this traffic on the network. If there is impact on our EBITDA, the impact is not that material. Sorry, I wouldn't be able to tell you more precise numbers now. What is the outlook for price increase in Romania this year following the increase in March 2019? Has this been affected by COVID? Yes. That's true that we increased the prices in March 2019, both in Romania and in Hungary. What is not true, what is not correct, there is no intention on our side to increase the prices in Romania this year. Yeah, no impact of the virus or regardless of the virus, we were not planning to increase our pricing now anyway. I'll move on. We have a question from Daniela Kilari. What should be the expected level of reductions in interest expenses due to more favorable bond refinancing? We used to pay 5% coupon on the old bond. Our blended coupon is in the area of 2.8%. As you see, we have a 2.2% saving right away which is a good basis for the number estimation. Ilya Kiselev is coming back. Are you considering to develop more of your fixed fiber cable operations in Spain? How are mobile operations doing in Hungary? Yes, as Smaranda was saying, we are extremely happy with all the achievements in Spain. The fact that we generated more than EUR 60 million of revenues, the fact that we've surpassed 2 million marks of the mobile customers, and last but certainly not least, the fact that we have over 100,000 broadband users in Spain. This is the result of one year and a half of operations. Certainly, the numbers are not as high as what we're able to achieve in Romania and Hungary, but also in these markets, we have histories of 20-27 years of operations. The results so far are quite encouraging for us, the market response, and our ability to roll out the services. Yes, we will certainly continue our growth in the broadband area. As I mentioned a bit earlier, definitely it is difficult for us to set targets and to target certain metrics. Regardless of that, we see our achievements as very positive, and we certainly want to continue this growth. Speaking of the Hungarian operations, as you see from our presentation and our results, we have over 120,000 mobile users at this moment. They continue to enjoy our promotional offer as we continue to develop our mobile infrastructure. At this moment, we have over 1,700 mobile towers active, operating. We continue building out further the network, and we intend to add another 500 or so sites in the second part of this year, beginning of next year. Despite not being able to participate in the mobile auction, which unfortunately took place in April, and which unfortunately was closed without our participation. As we mentioned previously, we are not canceling our market participation. We're not withdrawing, certainly. However, we have to recognize that our ability to roll out the services will be slowed, and we will have a less successful rollout as compared to what we were hoping for previously. Again, I'm coming to all the previous discussions we had. We still aim to get a certain market share, be it 5%, be it 10%, in that market. It's just quite difficult for us to predict the speed of this rollout. We will wait a few more minutes on the line to see if there are other questions. If not, in a couple of minutes, we will close the line. There's one more question from Ilya. "How is the regulatory situation developing in Romania? Any risks of extra taxes on telecoms given budget conditions?" Yeah, this is a good question, probably not only for Romania, but for most territories. So far, we have seen the authorities being rather helpful to the businesses, and allowing various schemes supporting the employees that do not have the work. We understand that all these items and all these support costs, we don't know if the communication authority will tax our revenues this year. Last year, the level of the tax was effectively 0%. This year, by law, the ability of the regulator is to charge between 0% and 2%. However, we don't know, and what we have seen in the last budget proposal from them, still the amount envisaged by them was zero. This was during the crisis. This was not pre-crisis information. Again, we are expecting, we will see what the final decision is. So far we have not seen any indication of extra taxation. Yes, with this, we would like to thank you very much for attending our call. Thank you very much for being able to share with us these great results. Yes, we sincerely hope that you are all safe and that we hear from each other in good health during our next call when we present the second quarter results. Thank you very much and all the best. Bye-bye.