Earnings Call: H2 2019

Feb 12, 2020

Good evening. We welcome you to the Digi 2019 results call. I'm on page 3 of the presentation. As you see, we had an outstanding year with revenues reaching EUR 1.2 billion, adjusted EBITDA, without the impact of IFRS 16 adjustments, being at the level of EUR 380 million, as well as RGUs exceeding 16 million. We can't emphasize this enough. This was a great year. We continued the fast-paced growth across our main territories. We realized revenue top line growth of 14%, EBITDA growth of 17%, and RGU growth of 18%. On page 4 of the presentation, you see the split of our revenues. Romania generating EUR three quarters of a billion in revenues. Hungary, as well as Spain and Italy, taken together as clusters, generated revenues of EUR 217 million each. Certainly with Spanish growth overtaking or being bigger than any growth in the rest of the group. Again, we expect Spain to become our second largest market during 2020, based on these outstanding results. As I mentioned earlier, EBITDA, without IFRS 16 numbers, EUR 380 million. Overall profitability at 32% margin. If you notice on the last line of the table, the Romanian margin is over 40%, an outstanding great result, and outstanding achievement for all of us. Page five of the presentation, you see a snapshot of our customers. As I said earlier, more than 16.1 million users, 4.3 in cable, 3.6 in broadband, and 5.7 million across mobile segments. The main segments that we operate, with strong growth coming from Spanish mobile, but as well as Romanian fixed services. Page six of the presentation shows the overview of our results. Revenues increased mainly due to price increases we had at the beginning of the year in Romania and Hungary, but as well as due to robust RGU growth that we experienced across main segments and main geographies. Romania and Spain were main contributors to the revenue growth. EBITDA overall at EUR 446 million, of which EUR 66 million are due to impact of IFRS 16 numbers. EBITDA in the last quarter of 2019 amounted to EUR 100.6 million. EBITDA exceeded EUR 100 million. This is in itself also an outstanding achievement, showing the size and the level of our operations. The last word on this slide, CapEx amounted to EUR 318 million. Similarly to the past periods, most of the funds used in Romania for developing the fixed networks and mobile networks, but as well as in Hungary and Spain. Similarly, for development of fixed networks in both territories and mobile networks in Hungary only. Just a few words on Romania before I pass the presentation to Smaranda. In Romania, I mentioned already, we achieved EBITDA margin of 40% on sales of EUR 756 million. The better profitability is due to higher pricing, so higher revenues due to ARPU, but as well as an increased number of users. We should not ignore the fact that we've managed better certain costs, especially salary expenses did not grow during 2019 at the same pace as they did before. The 40% margin, which again is just an outstanding number for us, is due to both revenue increase and better management, of course, that we had. Achieving this number, we come to the normality of a cable operator here in Romania. We used to generate margins of 40% and more, before 2014, before we have relaunched our mobile telephony and before we've embarked on, let's say, on an adventure to reposition our mobile, which we can say has now successfully ended. We have improved our profitability across all segments. We are meaningfully profitable in mobile, in fixed services, and in everything we do in Romania. Based on this, we were able to achieve these results. Moving on. You see just the amazing operational statistics for Romania. More than 285,000 RGUs in cable, almost 250,000 RGUs in broadband, and 36,000 additions in mobile in the last year. As you see, the quarter is showing similarly strong results. ARPU were higher in cable due to price increases, but as well as in the mobile telephony. In the fixed internet and data, the ARPU is stagnating. However, because the price adjustments we had there was more complex, while we increased the prices of the low-end products, we have decreased the prices of the high-end products. In addition to this, we had more rural broadband customers added to the network during 2019, which overall made the price increase flat. There was a price increase, but due to the mix of consumption, the prices actually did not change. With this, I finish my presentation and I let Smaranda speak about Hungary, Spain, but as well as our financials. Thank you. Good afternoon. On slide nine are the preliminary results of our Hungarian operations. In 2019, they have recorded a total of EUR 217 million, an upside of approximately 14% compared to 2018, achieved with almost flat-adjusted EBITDA, excluding IFRS, of approximately EUR 38 million at a margin of about 18%. The EBITDA variation in 2019 compared to prior year was, on the one hand, influenced by the adoption of IFRS 16, starting from the 1st of January 2019. The impact for Hungary, for instance, was EUR 22.5 million for the year. On the other hand, there was a negative impact coming from salary increases, as well as additional expenses, which come along with the mobile network development from Hungary. Looking now at Q4 numbers. The Hungarian operations recorded a slight decrease in revenues from EUR 56 million in 2019 to EUR 53 million in 2019. A change of approximately 4.5%, which is also influenced by the foreign exchange impact because the forint depreciated relative to euros in that quarter approximately 3%. Moving on. Hungary achieved total RGUs of EUR 2.5 million at the end of the year with upsides for the cable TV and fixed internet and data business lines. In terms of the mobile operations, we have launched in March 2019, the network in the testing phases with an offering aimed at our existing customers in Hungary. In terms of the ARPU, there is a positive evolution for the fixed internet ARPU, which is up to EUR 8.5 in 2019. An increase of 12%, which was caused by price increases made in May 2019. The other business lines have recorded either a flat or slightly decreased evolution due to ongoing promotions and the negative FX variation of the forint compared to euros. Moving on to slide 11 to the operations from Spain and Italy. These territories together have contributed EUR 216.8 million to the group's top line. The main increase is reported by Spain, which has increased 52% year-on-year. This increase was achieved with an EBITDA of EUR 37.5 million, excluding the IFRS 16 impact, and at a margin of approximately 20%, if we're looking only at Spanish operations. The RGUs have increased for the mobile business in Spain 41% up to 1.9 million RGUs at the end of 2019, quite an impressive increase during the year. The fixed services had a very good start in this territory, and they continued their development throughout 2019, having recorded 81,000 RGUs for the Fixed Internet and data business line and 31,000 RGUs for the fixed-line telephony business line in 2019. The Italian operation has also recorded, let's say, flat revenues throughout 2019 of EUR 23 million and had a quite steady evolution similar to the one from the previous period. Moving on to the group's financing structure. On slide 12. We continue the prudential approach for the finance structure. As of 31st December 2019, our total gross debt was EUR 991 million. Our main facilities remain the senior facilities from 2016 and 2019, as well as the senior secured notes from 2016 issuance. In January 2020, RCS & RDS had issued successfully EUR 850 million senior secured notes in two tranches. One tranche is EUR 450 million due 2025, with a coupon of 2.5%, and the second tranche is EUR 400 million due 2028 with a 3.25% coupon. These coupons are quite a very good development compared to the prior 2016 coupon, which was a 5%. The proceeds of these refinancing transactions were used to either repay or prepay the syndicated facilities as follows. We fully repaid and closed the senior facility from 2018, and we partially prepaid the senior facilities from 2016, meaning that we prepaid facilities A1 and A2 and fully prepaid the RCF, which was fully drawn by the end of the year. As you can see on the graph here, the second one, I think it's more relevant, the one after the bond issuance. The maturities after these refinancing transactions were distributed more evenly, and the pressure for the following five years was downsized quite significantly. In terms of the leverage, the preliminary net and gross leverage as per the senior secured notes covenant was 2.6 times at the end of the year, continuing the decreasing trend from 2.8 times in 2018. This being said, we conclude our presentation, and we would like to pass through the Q&A section. Thank you. As a reminder, ladies and gentlemen, to place a question on today's call, please go to the chat option in the web conference. The first question is from Daniela Kilari. Regarding the Spanish market, we have noticed quite an impressive growth in the RGU base this year. What is the market potential that you envisage? One second. What is the market potential that you envisage? Should we expect the same growth rates as in the last period? Well, thank you very much for the question. While we don't offer guidance, it is difficult for us to offer guidance. Probably more than that, in the Spanish market, we are actually a virtual operator, not a network operator like we are in Romania or in Hungary. Being virtual operator, it is even more difficult for us to have certain predictability over the future. Also, having said this, we are quite happy with the growth rate that we are able to achieve in Spain. While it is difficult to say what is the limit, again, the market may change, and we have less control over our pricing, over our infrastructure, over our access to the customers there. What we have noticed that the growth in absolute terms has been steady for us in the last almost three years. Yeah, the intention is to maintain this pace, well, at least throughout 2020. Quite difficult for us to say for a longer period on what can happen, what can achieve. Why was the tax rate so low in the fourth quarter of 2019? It's a question from Catherine Diacono. I think it is difficult for us to comment on the tax rate. If you could be just a bit more specific. I'll move on. Ilya Kiselev, could you please share your CapEx plans for 2020? So thank you, Ilya. We have had the highest CapEx out of the recent years during 2019, with total spending being at EUR 318 million. We are engaged full speed in developing of fixed networks in Romania, mobile in Romania, fixed networks in Hungary and Spain, but as well as mobile in Hungary. At least for the next 6 to 12 months, we do not want to decrease the speed of this development. More or less, we expect CapEx to remain in the same area, be it EUR 300 million-EUR 320 million, so in line with the last year results. This is our estimation now at the beginning of the year. A question back from Catherine Diacono, "What is the updated guidance for 2020, 2021 CapEx?" Sorry, I've mentioned this already. Moving on. Also, Catalin, "What was the Q4 EBITDA margin in Spain, excluding the impact of IFRS 16?" Our EBITDA margin in Spain, both without the impact of IFRS 16, is in the 20%-22% area. "When will the integration of AKTA be visible in results? What is the annual rent to be paid?" We would like not to comment on the annual rent as of now. Also we can't comment on AKTA at this moment because the transaction is being scrutinized by the Romanian Competition Council and we have no visibility on the timing of the result and the result itself, whether it will be positive or negative. We eagerly expect the result of the competition analysis, and probably we will not have the results sooner than three or four months from today. What growth should we expect from Romanian Mobile from now on, given the positive surprise in Q4 2019?" Yes, it's right that you noticed an increase in the RGUs uptake in Q4, more than 30,000 users. This is both the result of an almost two-year period of continuous technical improvement in our networks and the small changes that we were doing in the commercial policy. As a result, we have restarted growth. We are happy with the rate of increase that we have now because we favor good quality customers over bad quality customers, and the mobile segment is more difficult from this point of view as compared to the fixed segment. Our intention is to continue growth in mobile during 2020, in line with Q4 2019. Catalin, again, "Did your legal action against the Hungarian regulator suspend the 5G auction there?" Yes, we are in various parallel streams of contesting the decision of the National Media and Infocommunications Authority to hold the 5G auction. We do not know what the result of our efforts will be. As far as we know so far, the auction has not taken place, but we will see. I think it's a complex legal question, and there's no simple answer to that, and I hope that my answer is helpful. Again, a question from Catalin. What is the net reduction in interest expenses after the recent bonds offering?" Ignoring the costs of the offering itself and ignoring the refinancing cost, because we had to pay an early prepayment fee of half a year coupon in order to be able to refinance the bonds sooner, the saving is estimated between EUR 15 million and EUR 20 million, actually, closer on the higher side of this range. "What is the net debt EBITDA level after the refinancing?" The net debt and EBITDA level after the refinancing is unchanged for two reasons. On one hand, the refinancing transaction used more than 90% of the proceeds to refinance existing indebtedness. The remaining cash remains on our balance sheet. The refinancing itself has not changed our leverage. Laura Homsey has a question, "Can you please comment on the quarterly net losses in Hungary RGUs?" Yes, thank you for the question. We were expecting it because it's a good observation. We have grown our customer base in Hungary year-on-year. However, the last quarter showed negative results overall. This result is the effect of certain cleanup of customer base that we undertook in Invitel areas. In fact, discontinuing some of the offerings which were offered outside of the traditional coverage areas. Also, this is an impact of natural customer loss or churn that we experience in those networks. We will undertake more integration efforts in relation to Invitel and Digi during 2020, and we will aim to stop these losses or not to continue them. A question from Laura Nag. Good afternoon. Thank you for the presentation. I have two questions. Firstly, at what level do you see CapEx in 2020? Well, we mentioned already, but I'll repeat, we expect CapEx to be in the area of EUR 300 million-EUR 320 million. Secondly, if you could update us on the appeal on the Hungarian auction exclusion. Those questions were addressed and yeah, in relation to the second question, we are in several streams of appeals. We have made our appeals to the authority, at the end of last year. These were unsuccessful. The authority rejected them. We have subsequently appealed to the court, and we are also appealing to the higher court or supreme court at this moment. However, the nature of the appeals, there are various appeals, a few of them outstanding at this moment. As I mentioned earlier, they are not all the same. Some of them address some issues, some of them address different issues. From legal point of view, it's a complex matter. We hope that the Hungarian authorities, either let us back into the auction or do not proceed with the auction because we think going forward would be not correct from a legal point of view and would also harm the market, but also us. The next question is from Daniela Kilari. How is the launch of mobile services going so far in Hungary? When will we be able to see meaningful levels of ARPU? As of now, as you probably have seen from the report, we have almost 100,000 mobile RGUs, still benefiting from the promotional offerings that we have, which also, as you Daniela mentioned, does not generate significant ARPU or revenues. As of now, we are consistent with the earlier announcement, and basically, we intend to keep this promotion at least by the middle of 2020. We have not decided whether it can take longer. Again, the main reason is for us to be able to improve the coverage of our network. Once the coverage is higher as compared to where it is today, we will certainly convert the current offering to a proper commercial offering. Are there any updates regarding the 5G auction in Romania? When it is expected to take place? We have not seen official announcements with respect to the auction lately. As most of you are aware, there were certain political changes in Romania in the last weeks. We don't have a permanent government now. We have an interim government, expecting most likely early parliamentary elections to take place somewhere in Q2 this year. Yeah, well, again, we don't have clear indication from the authorities on when the auction can take place. We would not expect or we don't expect the auction to take place before the elections. Most likely the auction should take place somewhere in the third quarter of the year. As a reminder, if you would like to place a question on today's call, please join the web browser and the web conference and place the question in the chat. Yeah, we have more questions. Daniela is asking if we have any guidance for dividend for this year. We have not, as you are perfectly aware, we have not finalized fully our financial results. What we have shown today are still preliminary results. For this reason, well, the management has not had the time to consider the issue of the dividends. For sure, the intention is to at least maintain the level of dividends we had last year. Whether there will be increases or not, we will consider, and we will let the market know in due time as soon as there is such decision. Similarly to last year, when we will be announcing the convocation for the general meeting of shareholders to take place at the end of April, we will also announce the management proposal for dividends. That should come somewhere middle of March. Sorry, Laura Homcy is just coming back with an addition. Just as a follow-up, have the losses of RGUs continued in the current quarter? We are still in the quarter, midway through. It is too early to say. Sorry, we don't have numbers to share at this moment. Apology. Ilya Kiselev is asking same question about dividend distribution. We clearly know that the dividends will be at least the level of the last year dividends. For any changes, we kindly ask you to wait one more month for our full year announcement and statement on dividends. We currently have no more further questions on today's call. Well, in this case, we would like to thank you all for participating. We apologize for the 10 minutes delay or so at the beginning of the call. We hope that you heard us loud and clear, and we hope that we were helpful with our answers. Once again, thank you very much for taking part, and we were very happy to share with you our outstanding result for 2019. Thank you all, and we will hear from each other live when we present our first quarter results later in June. Sorry, May. Excuse me. Thank you. Bye-bye.