NOS SGPS SA

ELI:NOS

Earnings Call Transcript

[Unknown Executive]

Okay. Hi. Good afternoon. Welcome to our first quarter results conference call for 2024. We have the management team in the room today. We'll do a very brief presentation with our CFO, Jose Alexandre Ferreira, and then we'll jump into Q&A. Thanks.

[Jose Alexandre Ferreira, executive]

Good morning, everyone. Thank you for joining. Today on the presentation, we'll focus on the key highlights for the quarter, and I invite you to go through our extended earnings report for further information. But obviously, during the Q&A, open to any questions you might have. So going back to the review of the quarter, I think 3 key messages for today. Firstly, in line with what we said in the previous quarter, we continue to be a base of growth in value. We are still building on the strategic decisions we made in the past and that is really pushing our technology advantage and the customer experience that we are able to provide. I think the second important message is around revenue growth for the quarter. We really did a very solid -- we've had a very solid performance on all segments, highlighting here B2B, and we continue to drive important free cash flow generation. And then finally, on that front as well, not only from the revenue side, but I think also on our operational momentum, showing great results and continuing our trends in terms of CapEx. So I think that's very positive for the overall outcome. So maybe let's go a bit deeper on some key operational metrics. I won't go through all of them, but maybe highlighting, I mean, overall consolidated revenues grew at 5.7% to EUR 403 million. EBITDA after leases grew at 6.3% to EUR 155 million. And again, highlighting here the CapEx, we continue our downward trend in terms of CapEx on all fronts, and we reduced debt in the quarter of 5.2% year-on-year. We'll go through a bit the -- some one-off effects of the quarter. But in general, net income grew at 30.8%, underlying free cash flow at 52.6% and return on capital employed for the quarter stood at 11.1%. So very positive results overall. If we go in into the breakdown, I mentioned before the consolidated growth of 5.7% in revenues. I would now break it down a little bit. In terms of Telco, the growth stayed at 5.4%. In terms of our audiovisuals and cinema business, the growth went to 11.6%. So overall, very positive. We're very happy with the results. When we look at B2C, in particular, we had a growth of 4.9%. B2B, as I mentioned before, very positive overall 7.6%, although I would highlight corporate segments, which grew at 9.3%. Maybe let's now do a double-click on EBITDA after leases. Obviously, revenue played a very important part, but I would highlight our strong ongoing cost management. So when we look at the overall results, as I mentioned in the highlights, we grew EBITDA after leases to $155 million, a growth of 6.3%. When we break it down in the Telco and the other visuals business, 6% growth in the Telco side, 12.3% in the visuals business. In terms of margins, overall improvements across both consolidated and per-business performance. Now maybe going into the CapEx side of things. As we mentioned before, we reached big CapEx already. So we are on a downward trend and paying a lot of attention to it. So when we look at overall performance, minus 5.2% in terms of CapEx year-on-year. And looking at each one of the components, especially Telco on the expansion side, we reduced 14.1% our costs, also applying some of that reduction to our baseline Telco costs and also on the customer-related side, a lot of it driven by the CPEs performance that we've been having in the recent past. Looking at it from a consolidated perspective. We reduced our CapEx -- or we increased CapEx, apologies. That's 5.3%. Several drivers contributed to this. I think our cost management ability has been able to mitigate some of the headwinds or inflationary pressures that we have on the cost base. So we're quite satisfied with the results. We also have some increases on the leases. This is driven by more number of sites with Cellnex and some of the cost adjustments to it which is in our contract also related to inflation, which for your reference is capped at 2% in our case. But overall, all of these factors combined, we have a very solid performance in terms of EBITDA after leases minus CapEx of 29% growth to $63.4 million.So I think that summarizes a bit the performance. Maybe let's go into a bit of the operational drivers behind this. To give you an update in terms of network, we've been continuing to expand, as you know, our FTTH coverage. We added 170,000 households during the quarter, and now we stand at roughly 77% of FTTH coverage. In addition to that, we continue our path of increasing the 5G coverage, which now reaches roughly 96% of the population. So again, in line with what we've been providing guidance. When we look at the commercial momentum and maybe let's go one by one. On the mobile side, we continue to grow in terms of overall net adds. So our market share also continues to grow. We are roughly now at 30% as per the regulator's Q4 results. I would say we need to deaverage the numbers on the postpaid. Again, very strong momentum. We've been able to push some of our clients to convergent packages and grow on that front. On the prepaid, there's -- well, firstly, we need to deaverage the effect. On one hand, some of the customers that we are migrating to the postpaid are reflected here. But we also have some seasonal effects from the lower value nonrecurrent prepaid subs, and that's what we're seeing here in the numbers. So something that we were already expecting in some way. On the other components, both pay TV and broadband, we continue to expand our base. Of course, as you know, in Portugal, pay TV penetration stands today at roughly 98% of family residence penetration. So it's natural that it becomes a steeper curve to address in terms of penetration. But overall, a year-on-year increase of 1.8% in total RGUs. We are very satisfied with the performance. And also in that line, maybe we can move to the cinemas and audiovisual business, maybe doing a bit of deep dive in the cinema itself. Again, very solid results, especially when we compare to our record year, which was 2019, so we surpassed that level. This quarter, we had a 14.7% growth in terms of tickets sold and 15.8% growth in terms of cinema revenue itself. So quite an interesting boost and obviously driven by some of the blockbusters, but also a positive calendar outlook for the quarter. So to summarize and going through a bit the main KPIs in terms of financial performance. Our consolidated net income or underlying consolidated net income grew 31% for the quarter to EUR 45.7 million. If we take in consideration the activity fees post-tax, it was actually 67.8%, so a growth of 94%. When we break it down, obviously, EBITDA played a very important role. Also, we have an uplift from some tax incentives that we were able to capture in the quarter, which are represented here at 9.3%. Obviously, this has multiple effects, but those tax incentives were a very important one. On the financing side, as expected, some headwinds in terms of interest growth. I'll go into that in a little bit. But in any case, this is what impacted our overall performance. When we look at free cash flow, overall, a very interesting growth on EBITDA side, $9.2 million. We also have quite a good improvement in terms of working capital. This reflects the decrease in the peak CapEx that I mentioned before, namely some payouts that we had in the first quarter of '23 that were related to the last quarter of '22. So they are a good uplift as well. And again, some of the tax incentives as well playing a part here. If we take in consideration the activity post fees, we stood at EUR 79.3 million for overall free cash flow for the quarter. Finally, looking at our balance sheet, I mean, very solid balance sheet as we -- it is our historical performance. At the end of the quarter, net financial debt to EBITDA after leases stood at 1.66% -- or times, which demonstrates our very strong balance sheet management, well below our target of 2x. In terms of debt, the average cost of debt now holds at 4.1%. We expected in the upcoming months to have roughly the same level of debt, so we don't see many changes in the market. And for the year, we have taken our positions. We have a very strong liquidity position at roughly EUR 360 million, roughly 28% is at fixed rates. We have 37% of that with interest rate colors and an average maturity roughly of 2 years and 8 months. And 90% of our debt is linked to ESG targets, which is, as you know, very -- it's something we are very committed to overall within our business strategy. So with that, maybe we could go to Q&A.

[Operator]

[Operator Instructions] We will now take our first question. The first question is from the line of Roshan Ranjit from Deutsche Bank.

[Roshan Ranjit, analyst]

Got 3, please. Firstly, on the consumer revenue line. So a strong performance, I guess, slightly down from what we saw in Q4. I note the price increase for '24 is lower than 23% given CPI. So my question is how can we expect the kind of ups and in process that you guys -- or how do you drive the upsell process to maintain that top-line growth given that the price and benefit will kind of weigh through the year? Secondly, on the B2B side, a very strong performance. You sit in the corporate recurring business. Now in previous quarters, you were talking about the kind of lower-margin project-based contributions, which impacted the top line. Has that now all kind of been done? And have you laid the foundations for this stronger recurring business going forward? And finally, on EBITDA, again, you previously highlighted the benefits of the transformation program have largely been completed, but we saw another quarter year-on-year margin expansion. I think you -- last quarter, you kind of not given guidance, but in terms of the outlook for '24 guiding to margin expansion. Could we expect some of the near double-digit EBITDA growth this year?

[Jose Alexandre Ferreira, executive]

Thank you so much for the questions, maybe going on the order that you just posted them. So in terms of the consumer revenue, namely the upselling process, I think as we mentioned in the previous quarter, firstly, we've been doing it and the slower RGU growth, I would say, comes mostly from, as I mentioned, very high penetration levels. So our strategy in the past and still going forward will be really around this being much smarter and efficient in doing this upselling within our base. And this is done through, I would say, 2 different dimensions. One is really around innovative services, better quality services. And we feel that we are very well positioned in that front. We have, as we mentioned, a leading network, both on the fixed and the mobile side. Not only that, but we've been pushing a lot of different components to our customers, both on mobile and fixed services. And that plays a very important role. On the other hand, we've been investing quite a lot. I would say within the context of the transformation overall, but with a particular focus on AI, on being able to drive that growth in a much more efficient way. So we are able to be much better at providing offers really tailored to the needs of our customer base. And that actually, we are seeing a lot of stickiness on the offers that we're making more recently. So I think between a solid product itself and a much better way to address and target the customers that will be the driver of the engine for growth in this segment going forward. Now when you look at B2B performance, you mentioned the specific one-off or recent businesses that in the past we've been discussing. I think it's -- again, we've been operating on 2 dimensions here. One is we've been much more strict on the way we price and structure these deals in order to make sure that the margins are there and that we're able to drive them with healthy, although obviously smaller than the typical Telco business, but they are there. On the other hand, we -- I mean, some of these businesses are driven by the recurring revenues themselves. So some customers for us to sign the contracts in terms of the recurring Telco and managed services deals, we also need to provide some of these more one-off and resale projects. So those will continue to exist. We don't expect them to play again. They don't play an important role in our strategy going forward. So our focus is on the core business. But we are being much more strict on the way we manage those to ensure that when we need to do them, the margins are there and very solid. Then finally, regarding EBITDA. I think you mentioned the end of the transformation program. I mean the way we look at transformation is really an ongoing process, I would say, for sure, that transformation has different flavors in the past. Going forward, I would say there are 2 key dimensions or pillars that will drive the transformation. On one hand, I would say, pure efficiency programs. So we are looking very seriously at every part of the business in terms of where can we take out any less-efficient components and optimize our CapEx and OpEx. On the other hand, we will be doubling down on, if you'd like, AI-centric transformation going forward. So leveraging on not only generative AI, which obviously is very important but also on the solid foundations that we built in the past, we expect our AI transformation to be able to drive very significant efficiencies going forward as well. So I think that's going to impact very significantly EBITDA in terms of what would be our historical trajectory. In terms of the results themselves, we don't have any specific guidance to provide at this point.

[Roshan Ranjit, analyst]

That's great. Just on the B2B side, you mentioned in pricing that I hear correct saying that the price increases weren't as high as on the consumer side. If so, we kind of -- I don't know talking about kind of kind of 2% type price increases on the B2B side then. Is that fair?

[Jose Alexandre Ferreira, executive]

I didn't specifically mention that. B2B pricing, as you know, has different dynamics from the consumer side or the SME side of the business. So on the consumer side and residential-like contracts, we do the price increases as per inflation, Obviously, on the corporate and large enterprise segments, we have multiyear contracts in which we establish pricing and we review them as per market dynamics. So we don't have a specific percentage target increase. It really depends on the competitive landscape on the new clients coming in. So that just follows normal market dynamics.

[Operator]

We'll now take our next question. This is from Nuno Gontardo from Bernstein.

[Nuno Gontardo Vaz, analyst]

I had also three from my side. Two sort of financial questions and the third one is more on the strategy side. So first one, you mentioned this quarter, you had some impact from energy costs and increase in the regulated tariffs. Just wondering if you could talk a little bit about it and what was the impact, if you could say that. And whether do you expect this to be a similar impact throughout the rest of the year? Then second on CapEx. We saw, as you mentioned, a decline in CapEx. Should we assume 9 million tons for the rest of the year? Or is that a bit too pushy and most likely you might see a bit of an increase in CapEx towards the end of the year to fall more in line with last year CapEx? And then the strategy question, you should soon have a new entrant that I think it's sort of fair to say that they're planning to rely quite a bit on social media, sort of word of mouth to potentially market their products and less on sales force or call centers. Just wondering on your thoughts on how easy it may be to target the average consumer like this. And what do you see on your side? Do you still see a big proportion of sales happening in retail stores through call centers and through your sales force? If there are any big differences when it comes to mobile or fixed on how they're sold to the average consumer.

[Jose Alexandre Ferreira, executive]

Thank you very much for the questions. Again, let's follow maybe the order that you just asked them. So on the energy cost side, I would say that, I mean, this year, we definitely had some headwinds on the values themselves, namely with what you just mentioned around the increase of the year's tariffs. Our expectation is for that increase to increase the levels of the tariffs to maintain or a slight increase, but to stabilize, I would say. What I can also say is that we are looking at -- we've been tapping into the energy prices in the market. And actually, what we see is some sort of short-term decrease in the overall cost of energy. So I would say in general, our expectation is between the decrease in energy costs and the decrease in energy costs and the increase in the tariffs to be able to sustain more or less the levels that we've been seeing today. But obviously, we'll update you as we go along. As you know, the energy component has some volatility that we don't control outright. On the CapEx side, as we mentioned before, we have an expectation to continue our downward trend in terms of CapEx. We target medium-term CapEx of EUR 350 million a year. And obviously, post that, we'll continue to do a push in that sense. So I think that's a bit of the guidance that we gave in that regard. I won't provide any more specific details to the year-end. But in general, I mean, as we mentioned, expansion CapEx is decreasing, as you see from the numbers, we've been able to contain also baseline CapEx due to, again, operational efficiency and some more intelligence that we're able to put on the way we operate. And so that's, I would say, the baseline is 350. Finally, on the competitive landscape. Yes, it's true that what we see in other markets has been a very word-of-mouth social media kind of approach. We feel that, that has a very limited ability to expense. So if we think of the way we see our customers acquiring, yes, retail plays a very important component. But not only that, but the overall operations that we have, both on digital and on call centers also play a very relevant role. But I think it's the combination of assets that really drives the market dynamics. We see that across our competitors or established competitors as well. So we feel that naturally, there is some word of mouth and more organic dynamics, but that has very limited -- or we expect it to have limited traction.

[Operator]

We'll now take our next question. This is from Antonio Seladas from AS Independent Research.

[António Seladas, analyst]

I have a few. The first one is still related to the first quarter's performance. And I don't like if would like to give guidance, but maybe you can help us to elaborate a little bit expand little bit what could be different in the coming quarters from the performance that we saw in the first quarter because the economy is stable and the competitive environment is also seems also very stable. So the first idea is that performance could repeat over the rest of the year. That's the first question. The second question is related with your customer base. Apparently, nothing has really changed. But nevertheless, we are all worried about customers just started to ask for broadband and mobile data and canceling or switching off the TV box. I don't know if you can elaborate or explain a little bit if something of this is already happening or not, thank you very much.

[Jose Alexandre Ferreira, executive]

Thank you for your question. I mean overall performance, when you look at our numbers and the quarter performance, obviously, you see some slight changes. That's due to typical seasonality and market dynamics. And I think those changes will continue, that pattern will continue to exist. Having said that, our expectation across the board is to keep the trajectory that we've been showing at least in this quarter. So for the remainder of the year to follow the same path of strong mobile performance, continued growth on the pay TV and broadband side, and continue to push as someone asked before, this upsell trajectory that we've been able to sustain in the past quarters. Regarding the customer base, we don't see a trend of cord-cutting or switching off. So what we -- as you know, the Portuguese market is one of those that has the highest pay TV penetration. It continues to do so. So the clients value that offering. And we continue, even in the, if you like, in the lowest segments or what you could call in typical markets, very naked offerings, we still see from those segments a request for TV products, be it the ones we have today or even simpler offerings. But I mean, our market research suggests that this is very important to the play and then building on market dynamics. We also feel that that's going to be an important aspect in terms of any market disruption because the fact is that this market likes and wants pay TV with all the premium components that it has, the TV experience itself, as you know, in Portugal, is very advanced. So all of those factors are and we believe that will continue to be critical for the success in the market. Okay.

[Operator]

We'll now take our next question. [Operator Instructions] The next question is from Luigi Minerva from HSBC.

[Luigi Minerva, analyst]

I have 3. So the first one is on 5G CapEx. I mean we are one of the most advanced operators in Europe with a 5G deployment. And I suppose there is, firstly, a coverage phase in the 5G CapEx cycle. But then what follows is a capacity phase which may go for longer. So I was wondering how advanced are you. I mean, because obviously, the coverage statistics are very good, but what about the capacity kind of CapEx? And secondly, related to 5G. I think in the past, you mentioned about your ability to charge some kind of premium for 5G services. And I would just want to check whether you still think that's viable and sustainable as 5G becomes more widespread. And then perhaps a follow-up on the last question from the previous analyst. I understand that TV is very important in Portugal and that the experience is very advanced. Still if we think about the new entrant, I struggle to see why they cannot launch a content-free product where they offer over the top on broadband connectivity.

[Jose Alexandre Ferreira, executive]

Thanks for the questions. On the first one related to 5G and the CapEx itself. The capacity component has already been made. So in the medium term, we don't expect any further capacity increases on the network based on the projections that we have in terms of customer demand and expectations. So we haven't just rolled out coverage, but we have already rolled out capacity dimensions. So we don't expect any further capacity CapEx cycle regarding this component in the foreseeable future. On if you like, the 5G monetization, which I guess it was a bit the question that you were having -- what we still expect -- I mean, the market hasn't evolved -- hasn't involved in that sense, we haven't seen additional offerings. What we do expect is for us to be able to move into if you like, value-added services on 5G. So as 5G becomes the norm, as the customer base has the devices to support it, we expect to be able to provide, let's say, 5G boosters. So specific bandwidth capabilities on specific situations in which clients want to sustain that. We want to experiment and test some added value, especially on the consumer side, some added value use cases in which consumers would be able to pay more for the ability that we provide them. That's on the B2C side. On the B2B front, there are very concrete enterprise-grade solutions that we can deploy on 5G. As an example, but of course, there are more. We can think of backup redundancy that typically is done on fixed networks with an additional redundancy in the 5G side, which clients will definitely pay to have more security and enhanced connectivity on their premises. So in all of these fronts, we are exploring that, and we expect to have some upsell on that front. Finally, on the competitive dynamics. So again, an additional data point. If we look at the hours of TV watched in Portugal, they haven't decreased at all. That's not something you can just, if you like, provide on the OTT front. Obviously, OTT plays a role like in our current base. Obviously, our clients also have OTT. But when you think of premium content, when you think of local content, all of these components are key to a large base of customers across the port. So again, obviously, we know that there is a limited component of the market that wants simpler solutions and skinnier solutions. And those already have that. So not only with a potential new entrant, but also with NOS. So our brand already provides that type of solution. So again, coming back, if we think of the overall market, I think there is a small component that wants that type of solution. We have that for our customers. On the other, more material and a bigger chunk of the market. Pay TV will continue to play an important role.

[Operator]

There are no further questions at this time. I will hand it back to the speakers for closing.

[Unknown Executive]

Okay. Well, thanks very much, everybody, on the call and listening. As usual, we're available to take your follow-up questions and look forward to speaking to you next quarter. Bye.