NOS SGPS SA

ELI:NOS

Earnings Call Transcript

[Maria João Moura Landau, executive]

Hi, good afternoon. Welcome to our second quarter 2023 results conference call. I have the executive team in the room with me. We'll be going over a brief presentation led by Jose Pedro Faria da Costa summarizing the results and then we're available for your questions immediately after.

[José Costa, executive]

Okay. Good morning, everyone. Let's start by the key highlights of the quarter as usual. We are happy with a very strong set of financial results we are presenting this quarter. The very positive momentum in the Telco unit and the continued recovery in Cinema and Audiovisuals allowed consolidated revenue growth of 6.8%, Telco units growing in the quarter 6.2%. Consolidated EBITDA grew double digit or 10% year-on-year in the quarter, and consolidated EBITDA after leasing also grew year-on-year by 9.7%, showing operational leverage and strong cost discipline.

Total CapEx in the quarter came in line with the last quarter as expected with EUR 98 million, confirming the strong deceleration in deployment of 5G. This quarter, we have achieved 90% population coverage with our best-in-class 5G network. Finally, and also in line with last quarter, we continue to post significant free cash flow generation of EUR 36 million or EUR 46 million, if adjusted for the nonrecurring cash tax payment related with the tower sale.

Now moving to the operational review and starting fixed. We have posted solid fixed Pay TV and fixed broadband net adds of 5,000 each service, benefiting mainly from increased uptake in new greenfield FTTH areas. The numbers this quarter are slightly below the numbers of last quarter, reflecting some market-wide slowdown in commercial activity following the price adjustments in the beginning of the year. Still, we continue to grow high-value fixed RGUs at over 2% year-on-year.

On the convergence front, we have continued to have this quarter 10,000 convergent customers, ending the quarter with 1,114 convergent and integrated customers representing now over 68% of the fixed place. This represents over 5.8 million total conversion RGUs with net adds in the quarter of around 70,000.

On the mobile front, again, very positive core value posted by mobile members, mostly driven by the take-up of conversion packages. We have posted this quarter, 52,000 postpaid mobile net adds. Prepaid in the quarter was affected by a seasonal decline in low ARPU mobile cards with minimal impact in terms of revenues and margin. Still, we were able to continue growing mobile RGUs at over 5% year-on-year, and therefore, we continue gaining share in mobile.

In terms of our Cinema operations, we had our best quarter post pandemic, again in relative terms versus 2019 with attendance and revenues posting very good results. Versus 2019, attendance was only down by 10% and revenues almost flat with [ FastCam ] impacting very positively in particular, May and June numbers. Both months, we have higher revenues than in the same months of 2019. Also, a quick note that May was our first month post pandemic, where we have attendance levels of attendance higher than in May 2019. A note to this quarter, we are having -- right now, we are releasing very promising titles like Indiana Jones and Mission Impossible. Still, we have to recall that the third quarter of 2019 was the best quarter ever. So we will have a very tough comp this quarter.

Now moving to a strategy update and following our significant investment and accelerated 5G rollout. North Mobile network continues to be recognized as the best network in Portugal with the highest coverage in terms of 5G, 90% of the Portuguese population. This quarter, we got a number of recognitions the DECO PROTESTE Award for the Best Mobile Internet service for the third consecutive time, the OOKLA Speedtest Award for the fastest 5G mobile network also for the third consecutive time. And finally, the Speedchecker Award, where NOS came out with the fastest mobile network in terms of speed and latency and best mobile coverage.

On the FTTH network front, our FTTH deployment continues at a good pace, reaching a total of 3.8 million home passed, that is close to 70% of total coverage as we have been saying. Over 200,000 FTTH homes passed added in the quarter, of which over 80,000 were greenfield home test.

In terms of ESG progress, we continue to execute our strategy. This quarter, we would like to highlight our commitment to circularity targets for mobile devices. In fact, NOS and other 12 leading mobile operators and GSMA, we have signed up to a new set of targets aimed at reducing waste and boost circularity of mobile handsets.

First target is about increasing take back whereby in 2030, we commit to have at least 20% of new mobile devices distributed to customers being collected from customers through take-back schemes. The second target being by the same time line to have 100% of this taking back mobile devices repaired to be used or transferred to control recycling organizations, preventing devices to landfill or incineration.

Now moving on to the financial review. We have had this quarter, as we said, a very strong set of financial results. In terms of top line, we have delivered strong group revenue growth of 6.8% benefiting from the 6.2% growth in the Telco unit. The Consumer segment posted an impressive 7.1% year-on-year growth on the back of RGU and ARPU growth of 5.1%, slightly same level as last quarter and continuing to show a very positive trend.

The B2B segment increased revenues by 2.8% in the quarter. As in the last quarter, performance in SMEs was again very positive, very similar to the Consumer segment. We had single-digit growth in the quarter, while the performance in large corporates was not so positive, not being impacted by any relevant price increase and still impacted by a one-off large project.

The Wholesale segment posted 6.6% year-on-year growth, continuing to benefit from roaming in recovery and also some increase in low-margin mass calling services. In terms of consolidated EBITDA in the quarter, we have grew an impressive 10% driven by strong Telco EBITDA growth of 10.8%, well above last quarter growth benefiting, as we said, from operating leverage, but also helped by cost contention efforts and efficiency gains, which are mitigating the overall inflationary pressures that we are seeing in a number of areas.

Cinema and Audiovisual EBITDA decreased 1.3%, but adjusting for the rent discount effect, this EBITDA would have grown 8.4%. A quick note in terms of energy, we are now taking advantage of our energy provisioning strategy as we have been saying, with 35% of assumption and the long-term PPA contract that's very attractive.

Prices also, we were able during the first quarter, transferred the remaining 65% of energy to the spot market. So we are now benefiting from current much lower energy prices. We said that last quarter, we had the energy decrease impacted EBITDA by around 1.3% in a positive way. The second quarter was -- this number was even slightly higher. We expect for the second half of this year with the increase that was already approved and announced by the energy regulator in the excess tariffs, reducing the level of subsidization that will increase energy prices going forward. Still, we expect energy to continue to represent tailwinds to EBITDA in the second half of this year, but of smaller magnitude than in the first half.

In terms of consolidated EBITDA after leasing in the quarter, we grew a very solid 9.7% as Telco EBITDA after leasing growing 9.9% despite the increase in leasing costs as a result of the additional tower sales executed in 2022 and to the inflationary environment in the case of tower leasing costs, inflation adjustments are kept at 2%.

In terms of net income, we have reached in the last quarter a net income level of EUR 46 million despite strong performance at the EBITDA level. Net income increased marginally as a result of a number of impacts below the EBITDA line, which we have been flagging out. We continue to have a substantially higher level of depreciation following the strong levels of CapEx in the last 2 years. Also, as expected, we had a relevant financial expenses increase given the interest rate context, this quarter, particularly relevant since we repaid in the beginning of May, the EUR 300 million DCM bond paying a coupon of [ 1.125% ] which was refinanced by bank debt contracted spreads but, of course, higher base rate.

Finally, the share of JV results also based in a relevant way despite the positive performance -- operational performance of that. The decrease was due to a very sharp 40% devaluation of the local currency that took place last quarter.

As expected, in terms of CapEx, total group CapEx in the quarter remained more or less the same level of the first quarter around EUR 98 million. The strong year-on-year decrease reflects, first, a strong deceleration in technical Telco CapEx to around EUR 59 million in the quarter, reflecting particularly the deceleration in 5G deployment. We continue to be considerably ahead our direct competitors in terms of 5G rollout which we continue to lead versus peers.

There was also some decrease in customer-related CapEx reaching close to EUR 34 million, lower level than last quarter, reflecting the slowdown in commercial activity in the quarter and also the continuing low levels of churn and efficiency gains achieved which are helping to mitigate the inflationary pressures in terms of equipment unit costs.

Following the strong EBITDA increase and also the strong CapEx reduction, EBITDA minus CapEx reached over EUR 80 million. Operational cash flow after leases also a very solid EUR 55 million. And finally, free cash flow after interest and taxes reaching EUR 36 million. As we said, this quarter, we paid out a significantly high level of taxes, mostly related to the tower sale executed in 2022 for the recurrent level of free cash flow in the quarter should have been EUR 46 million.

And finally, in terms of capital structure, the payment of the EUR 220 million dividend in May and despite the strong free cash flow generation in the quarter, led net financial debt to grow up to EUR 1,150 million, representing close to 2x the EBITDA after leasing number around our stated budget of 2x. We expect to reduce this towards the end of the year with free cash flow generation expected for the second half.

Average cost of debt increased to 3.3% as expected, following the already referred repayment in May of the DCM bonds and the current interest rate context. And finally, liquidity remains at healthy levels, around EUR 285 million at the end of the quarter. And at this point, we conclude the presentation. And operator, we are now ready to start the Q&A session.

[Operator]

[Operator Instructions] Your first question today is from the line of Martin Hammerschmidt from Citi.

[Martin Michael Hammerschmidt, analyst]

I have 2, please. The first one is on the EBITDA growth. So could you give us a bit more sort of detail on the drivers? And to what extent they contributed to that growth? In particular, so the energy cost, how much of a tailwind was that of the 10.8% growth? And how should we think about it for the second half of the year?

And the second question is on the free cash flow. And again, could you sort of give us some details on the various sort of moving parts here, especially so how we should think about the level of cash interest for the year and the cash taxes especially the cash taxes going forward once you stop paying interest on the -- to taxes on the tower sales.

[José Costa, executive]

Okay. Thank you, Martin, for your questions. In terms of -- well, in terms of EBITDA growth, there is not much more we can add at this stage. Of course, the fact that we are growing north of 6% helps in turning out EBITDA growth of double digit as we speak. There is a certain degree of operational leverage. There is, of course, the cost contention and efficiency gains. Energy plays a role. So we said in the first quarter, it helped to improve EBITDA by 1.3% in the second quarter, it was higher than that. It was around 2%.

For the second half, we expect energy to continue to be a tailwind, although as we said, of smaller magnitude. But I'd say that overall, we are quite comfortable in getting in the second half the same type of EBITDA growth that we have achieved during the first half of the year. So around the 9% growth seems given the current trends perfectly achievable from our standpoint which is, as you know, a considerably higher number than the consensus number, but that's what it is, and that's our -- right now our expectation.

In terms of free cash flow, again, operational free cash flow is driven by EBITDA growth and CapEx decline. In terms of CapEx, we have been guiding CapEx to be below EUR 400 million. So the level of CapEx we are posting every quarter is more or less what we expect for the rest of the year, so EUR 97 million, EUR 98 million per quarter. And then in terms of cash back, cash taxes and cash interest. Cash taxes, it should increase during the second half. Typically, we look at trying to pay in terms of cash taxes typically around 15% of earnings before tax of the previous year. So we have to consider that last year earnings before tax was substantially increased by the tower sale.

And in terms of payments per quarter, it's going to be much more towards the third quarter in terms of cash taxes than in the fourth quarter. In terms of cash interest, I'd say the second quarter number cash interest is a good pace to project the third and the fourth quarter. Just bear in mind that the second quarter was still effective since we have repaid the bond in May, we have benefited a month of a seasonably lower level of cash interest related to the bonds. So we should expect third and fourth quarter to increase still a bit more compared to the second quarter cash interest.

[Operator]

This is from the line of Roshan Ranjit from Deutsche Bank.

[Roshan Ranjit, analyst]

I've got 3, please. On B2B, we saw a good performance this quarter when we compare it to the underlying performance in Q1. What has driven that? You previously talked about the reselling of services which, again, you've highlighted as low margin, being volatile. Are we through that now? And therefore, we should see a more recurring trajectory in B2B?

Secondly, you did flag the pre pay mobile KPIs reverse in this quarter? I think last time that happened seemed to be 2 years ago. So that anything different in the market there. Again, I acknowledge it is a lower value prepaid subs, but has there been a change or shift in the dynamic in the market. And secondly, I was a bit surprised by the overall consumer performance given that there is the benefit of an additional month of the 7.8% price increase. Your 7.1% growth was the same as what you delivered in Q1. So why didn't the extra month of price increase benefit the trend? Is there something else going on within the mix in consumer.

[José Costa, executive]

Okay. Thank you, Roshan. Well, starting with the first question is easy to answer. So of course, the resale effect that has contaminated a lot the first quarter numbers. we have tried to give out a more recurrent level of revenue growth for the first quarter, taking out this resale effect and what we are seeing in terms of recurrent revenues is more or less the same trend that we've seen in the first quarter. So we continue to see SMEs growing at very strong pace, pretty much in line with consumer. Corporate and large corporates with flat or relatively marginal growth, not being impacted by any relevant price increase and that's more or less what we have.

In terms of -- ahead of us in terms of resale numbers, there's not anything particularly relevant going forward. So we should compare well third quarter and fourth quarter, maybe in the fourth quarter, there's a bit of this resale revenues, but not a very significant scale as we have in the fourth quarter and first quarter of this year.

In terms of prepaid mobile, as you said, this is low-value mobile cards. So we don't care too much about the performance in this segment. So the -- as we said, there's not a lot of revenue and margin involved in that. But we said that this is a seasonal impact, and we should see some reversion during the third quarter of this year, so during the current quarter.

And finally, in terms of consumer, there's not much more to add. So I think we have a good performance, the 7%. This compares to the 7% in this first quarter. You have to take into account that last year, the price adjustments, the monthly fee adjustments were not implemented in February, so they were implemented a bit later. So they affected more the second quarter than the first quarter. So in terms of year-on-year comparison, there's an element of that and also something which we are seeing in terms of the components of the consumer segment. We are seeing some slowdown in terms of equipment revenues. So equipment revenues in the second quarter didn't grow at the same pace, and that's something also that we expect for the rest of the year.

[Roshan Ranjit, analyst]

Great. That's very helpful. If I may just follow up...

[José Costa, executive]

Also not being a high-margin business being in fact of a low-margin business.

[Roshan Ranjit, analyst]

Understood. And just quickly, is that scope for further price increase through the year? I mean, are you allowed to -- there's nothing preventing you from put into another price increase if you wanted to?

[José Costa, executive]

There's nothing planned for this year.

[Operator]

[Operator Instructions] And this is from the line of Martin Hammerschmidt from Citi.

[Martin Michael Hammerschmidt, analyst]

You probably get tired of the question, but on new entrants in Digi, I mean, they said they're going to -- or planning to launch services, I think, at the beginning of next year. How far from your perspective are there in terms of what you are seeing in terms of natural roaming agreement, in terms of sort of rolling out the 5G network, the fiber network? Just trying to get your perspective from where you think they are?

[José Costa, executive]

Well, actually, our perspective is as good as your perspective. What we know is what we hear coming from headquarters because here, in Portugal, we don't see, we don't hear, and so we don't know what is happening. What we expect to happen is according to your expectation, which is we believe they will come into the market probably first quarter next year. But we don't have any information other than what is public.

[Martin Michael Hammerschmidt, analyst]

So you don't really see them digging fiber that we're building it by themselves, et cetera.

[José Costa, executive]

We have -- we see them, but not very much.

[Operator]

Thank you. And there are no further questions. So I will now hand back to the speakers. Thank you.

[Maria João Moura Landau, executive]

Okay. Well, thank you, everybody, for listening into the call. As always, please feel free to get in touch if you have any follow-up questions or like to put that meeting. And in the meantime, have a great holiday break, if that's the case.