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Edited Transcript of CPS.WA earnings conference call or presentation 29-Aug-19 2:00pm GMT

Half Year 2019 Cyfrowy Polsat SA Earnings Call

Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Cyfrowy Polsat SA earnings conference call or presentation Thursday, August 29, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Katarzyna Ostap-Tomann

Cyfrowy Polsat S.A. - CFO & Member of the Management Board

* Maciej Stec

Cyfrowy Polsat S.A. - Vice Chairman of the Management Board

* Miroslaw Blaszczyk

Cyfrowy Polsat S.A. - Chairman of the Management Board

* Stanislaw Janowski

Telewizja Polsat Sp. z o.o. - CEO

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Conference Call Participants

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* Nora Nagy

Erste Group Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Cyfrowy Polsat Second Quarter 2019 Results Conference Call. I will now hand you over to our CEO, Mr. Miroslaw Blaszczyk, who will take you through the presentation. Dear speakers, please go ahead.

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Miroslaw Blaszczyk, Cyfrowy Polsat S.A. - Chairman of the Management Board [2]

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Good morning, good afternoon, and welcome to our usual quarterly results call. As for today, the agenda of the call has been presented on the Slide #3. As usually, we will summarize the quarter and discuss our operating and financial results.

A novelty is that our presenting team has been extended by Stanislaw Janowski, the newly appointed CEO of TV Polsat, newly appointed but well known, as Stanislaw works with Polsat family since 2006. For many years, he has been responsible for running our Polsat Media ad brokerage house. Right now, he's responsible for running our TV broadcasting business as a whole, and I believe the results he achieved in his first quarter as the CEO prove that he's the right person in the right place. Naturally, Maciej and Kacha have also a successful quarter to talk about.

But before I hand the floor to the team, let me summarize the quarter briefly. Last time, Maciej announced to you a new pay TV solution based on OTT concept. And actually, we've got it live. Our EVOBOX IP set-top box was launched in July. It seems to be a very interesting alternative for the customers who seek for a flexible solution. It can be connected to any Internet of any provider, cable, WiFi, mobile. All technologies can be used. We believe it is a revolutionary solution as the customer does not have any strings attached. He can flexibly switch, select the channels on and off whenever he wants. He can take device with him to his summer cottage or holidays, find any reasonable Internet connection and start enjoying his preferred content. When the summer is over, he can change his programming or decide to switch it off. As said last time, our claim is TV for everybody, everywhere, and this OTT product is a proof.

Another topic worth mentioning is that we were successful in buying PKO Ekstraklasa, which is a Polish premiership. Customers of Cyfrowy Polsat can watch this content on Canal+ Sport 3 and 4 channels available for additional fee. But of course, PKO Ekstraklasa is just one league, whereas Cyfrowy Polsat offers currently much more to football fans. Within the recent 2 years, we were successful in building a very broad offering for our customers. Champions League, Europe League, Spanish, German and Italian football create a very interesting offer. What's also important, even though sports content is not a cheap one, the deal that we have concluded had minor, if any, impact of our financial results so far. But the monetization potential is still in front of us.

The fact that we've developed our business smoothly with high attention paid to our profitability (inaudible) the reflection also in positive decision of Moody's Investors Service, one of the rating agencies that we cooperate with. Moody's has upgraded our rating to Ba1, which is just one notch below at investment grade. I believe our target for deleveraging is executed very fast.

But first of all, let me give the floor to for Staszek, who will present the results of our broadcast income.

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Stanislaw Janowski, Telewizja Polsat Sp. z o.o. - CEO [3]

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Good afternoon. As I have been introduced by Mirek already, I can only say that it's my pleasure to join the team involved in describing our results to investors community, especially but the second quarter looks really good.

First of all, TV Polsat, our major channel with viewership of 11.4%, has returned to #1 position among Polish channels in the commercial group. Moreover, a combined viewership of our channels amounted to almost 25%, which means we are at the high end of our strategic targets which remains unchanged. I mean, TV Polsat's long-term strategy assumes maintaining a viewership of 23%, 25% with strict cost control. And under my leadership, these targets remain unchanged.

When we switch to the next slide, you will see our monetization results look really good as well. As expected, the whole market was slightly down because of challenging base effect. Nevertheless, in this environment, TV Polsat was successful in adding revenue to our top line. Our TV advertising and sponsorship revenue grew by 1%, which resulted in our market share going up to 27.2%.

The next slide summarizes our 6 months' performance. Also, in this perspective, TV Polsat remains the #1 choice of the Polish viewers, while our 34 channels together generated stable 24% viewership, which is just in the very median of our target corridor.

And to make it short, let's switch to the next slide. In slightly unfavorable market conditions, we were successful in growing our ad revenues by almost 1%, fast increasing our market share to 27.6%, which I find as a success. In this period, the market was down by almost 2%, which was resulting from a high base effect. The scale of decline was not very significant. Hence, our full year guidance of low one-digit growth of TV ad market seems still realistic.

So to sum it up, strong viewership and healthy top line growth make me very satisfied. It encouraged us to invest a bit more in our content for the second half of the year as we seek for better market conditions in the months to come.

Thank you very much for this conference. And now I give the floor to Maciej, who will tell you more about our retail business.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [4]

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Thank you, Staszek, and congratulations on your strong execution.

In retail business, as usually, I will start with the smartDOM program. Our multiplay base goes up gradually with 15% year-on-year growth rate. As a result, in June '19, already 1.9 million of our customers benefited from our bundling programs. These customers use 5.7 million services jointly. And the churn, over the last few quarters, we keep on repeating that the churn ratio is record low. However, each following quarter proves we can do even better. This time, the churn ratio is low at 7.0% only. I believe it's clear proof that our multiplay strategy works efficiently and makes our customers satisfied with our offer and our service levels.

Low churn is very helpful in retaining our services. However, strong sales need to be added in order to grow the scale of our business. And it's shown on Slide #14, where, again, we can report a very strong net additions of our contracted RGUs. We provide almost 14.5 million contracted services already. In 12 months' perspective, our RGU base went up by 522,000. At the moment, the biggest growth is generated in mobile telephony segment. However, our pay TV is also healthy with the number of services provided of 5.1 million. This growth is the result of upselling of our Multiroom and video online products to our DTH and mobile customers.

It's worth mentioning this quarter does not include any positive impact of our new OTT box product that Mirek was talking about. We intend to talk with you about OTT set-top boxes sales results next quarter. Finally, our contract mobile Internet is stable at 1.8 million RGU level. Given the market seems fully saturated with this product, maintaining a stable leadership position is a strong result, I believe.

If we switch to ARPU slide, I'm happy to report to you another quarter of our growth. Our ARPU went up by PLN 0.50 year-on-year. And as you can see, our customers use on average 2.56 services each. With the growing portfolio of our services, we expect this ratio to grow further.

And last but not least, let's look at prepaid segment. You still need to remember, in 2018, we decided to sell our low-end brand, a2mobile, to one of our MVNOs, which still explains year-on-year RGU base decline as presented. However, in Q-on-Q perspective, you can see that our prepaid base shows very stable result of over 2.6 million RGUs. Please also pay attention to our ARPU. Usually, we expect a stable level of this KPI. But this time, we achieved 2% growth, up to almost PLN 21.

That concludes my presentation this time. What makes me happy in Q2 is the continued growth of our multiplay base translated into very low churn and growing ARPU. Moreover, I'm very satisfied with the new Internet TV product that we intend to focus on in the future.

Now I will give the floor to Kacha, who will present to you the financial results of our business initiatives.

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Katarzyna Ostap-Tomann, Cyfrowy Polsat S.A. - CFO & Member of the Management Board [5]

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Good afternoon, everyone. Today, I have the pleasure of presenting you with Q2 results. Please note that as of January 2019, we have booked at IFRS 16 reporting standard. Therefore, 2019 financial results are not comparable to 2018 results. For your convenience, we're presenting the results for 2019 in 2 versions, with and without IFRS 16.

So passing to the results. Excluding IFRS 16, our revenue grew by almost 12% to PLN 2.9 billion. The next slide will show you that this growth is generated on both operating segments. Our EBITDA grew by 1.4% year-on-year to PLN 960 million. And if we adopt IFRS 16, EBITDA results reaches almost PLN 1.1 billion. Free cash flow of PLN 1.4 billion is very comparable to one we presented last time as it is fully in line with our expectations. Leverage ratio as presented excludes IFRS 16 and is down to 2.57 from 2.73 6 months ago. On both free cash flow and leverage ratio, I will elaborate on the next slides.

So passing to the next slides. If we decompose the growth by segment, you can see that almost 70% of the top line growth comes from retail segment, but our smaller TV broadcasting segment add another PLN 107 million to consolidated revenue. At the EBITDA level, both segments grew slightly as well.

As far as the free cash flow is concerned, the value generated in the second quarter is almost exactly the same as the one reported a year ago. Even though CapEx cost to share is noticeably higher, as mentioned here, the last 12 months result is just in the middle of my guidance for 2019. Nevertheless, I want to flag here that we see a very strong demand for the customers' equipment share, which encourages us to increase our inventories for the months to come. Please remember, a significant part of the customer equipment is sold in installments, which impacts our working capital. Therefore, if the customer demand is maintained going forward, I might consider reviewing my free cash flow guidance in November.

Now passing to the cash flow. First of all, you will notice that we spent almost PLN 100 million for some acquisitions this time, including another payment for the rest of Eleven Sports Network. We're happy with this performance of this company so we decided to increase our stake to almost 100%. Secondly, the CapEx revenue ratio is in line with my full year guidance, and I believe it should not change much in the second part of the year. Thirdly, over the first part of the year, we have repaid PLN 850 million of our bank credit facilities, while bond refinancing has not impacted our cash position at this stage but will contribute positively to our free cash flow going forward.

And now passing to debt. Please note that our net debt was again below PLN 10 billion. Revolving facility utilization was exactly the same as 3 months ago and amounted to PLN 270 million, which is the revolving facility of Netia. As previously, we present you with the leverage ratio both including and excluding the impact of IFRS 16. The leverage ratio under our SFA definition declined to 2.57, while the one including IFRS 16 amounted to 2.77. Our weighted average interest cost remains at 3.3%. And given we decided to pay almost PLN 600 million of dividend in the second half of 2019, you should not expect that our cost of debt will be changed for quarters to come.

And this would have been now as far as financials are concerned. This time, I'm especially satisfied with the very dynamic top line growth in both segments as well as strong deleveraging path, which gives me a comfort ensuring our profit with the shareholders.

And now for the summary, I'm passing to Mirek.

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Miroslaw Blaszczyk, Cyfrowy Polsat S.A. - Chairman of the Management Board [6]

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Thank you, Kacha. As you can see, our results continue to be very sound, so I can only summarize this successful quarter.

First of all, new long-awaited product. We worked on that for a longer time with the design of the equipment, development of the software, building a library of the content rights, constructing the offer, et cetera. But finally, we have it in our point of sales, and the first set of results are very promising.

Secondly, I've opened the presentation with football, but football (inaudible) a part of our sports offering. Our marketing (inaudible) sports in Cyfrowy Polsat, and this is not empty advertising slogan. We have many football leagues and tournaments, whole volleyball events, Formula 1 with Robert Kubica on board again, boxing and MMA tournaments, speedway, tennis and many more. I believe I can claim currently Cyfrowy Polsat has got the broadest offer of sports for Polish customers.

If operation are concerned, we were successful in building our RGU base and ARPU while reducing churn further down. TV Polsat has a very successful quarter under the new management team and interesting content scheduling.

And finally, I'm very glad that with our recent dividend policy, we have found the correct balance between shareholders' remuneration and lender safety. The rating upgrade shortly after a new dividend policy announcement is the best proof, I believe.

This concludes our presentation and takes us to Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Nora Nagy, Erste Group Bank AG, Research Division - Research Analyst [2]

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I'm Nora Nagy from Erste Group. I would have a couple of questions. First of all, we've seen an increase in OpEx year-on-year. And I would like to ask you, are there any cost control measures in place or plan to (inaudible) for the second half of the year? Here, I would rather refer to content and technical costs.

And the second would be about the price increase that you are planning to do this autumn. And you mentioned also the new Internet product that this is somehow related to the price increase. So you would increase the prices only after the implementation of these new Internet products. And are there any updates in [some]?

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Katarzyna Ostap-Tomann, Cyfrowy Polsat S.A. - CFO & Member of the Management Board [3]

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It's Kacha Ostap speaking, I would like to answer your question about the increase in OpEx as possible cost control measures. Basically, these 2 periods are not comparable in full because we made some acquisitions last year, like Eleven Sports, which were not presented in the pro forma, and which including also some other companies, which we'll not -- so first to comparability, that's the first thing.

The other thing is we had in costs some unavoidable costs that are actually beyond our control in short term, which, for example, is the cost of electricity that is supporting our DT assets. And this is -- for this, apart from what we do for many years now, which is in reinstalling the energy saving equipment, is beyond our control because the cost of energy is regulated in Poland.

So as for cost control measures, what you could see in costs is, for example, the increasing cost of manpower, which basically is the reason of our in-sourcing of some functions, and you'll see the decrease in some other costs. You should see the decrease in some other costs.

Basically, we save whatever we can in OpEx. And you cannot expect any cost control initiatives because basically what we are, we are a cost-controlling company. We always say we have it imprinted in our DNA.

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Miroslaw Blaszczyk, Cyfrowy Polsat S.A. - Chairman of the Management Board [4]

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Okay. So this is my part about how like -- about like changes in pricing. So the timing of potential changes in our offering is tightly related with our major IT restructuring project that we initiated a few years ago. So in fact, we are replacing our sales system and CRM platforms in Cyfrowy Polsat and Polkomtel. And it means that we need to migrate over 10 million contracts and few thousand various price plans created in the past. The project is currently in its final testing phase. But as of today, an outcome is still unknown for us. So introducing major pricing changes at this stage can either delay the IT project or cause significant incremental costs that we would like to avoid, in fact.

So our project manager has planned that within 2, 3 weeks from now, we should know whether the initially planned autumn launch date is realistic or we should rather expect a delay until early 2020. We need to be -- we're -- we are getting close to Q4 peak sales season. In this context, late autumn implementation will not be taken into consideration. So we have a backup plan in case the product is delayed, and some changes in our offers are still applicable. But we need to wait few weeks for a final decision, to be honest. So this is about the pricing.

And about our Internet TV box, so we launched the product early July. We are very satisfied with the results. We will know more about the product next 3, 4 months. So probably, we will have more information about the sales like on next conference, so it's like November. This is like revolutionary, spectacular product because this is like Internet TV with set-top box. So you can connect set-top box to any Internet you have, at home, you can connect to mobile Internet, to cable Internet via WiFi wherever.

And the second thing is that product, this is elastic. So you pay for packages when you watch on 30 days subscription. So in fact, you buy set-top box or you rent set-top box because there are 2 ways of having this TV offer, and then you create your offering on monthly basis. You watch what you like and what you need to watch. So this is really great product, and the first set of results are very good for us. We are very satisfied. This product is offered with 3 months' open window. So everything what is accessible in the set-top box is open for a few months. So in fact, we believe that this product will build our ARPU. But we need to wait like 'til October, November so then we know exactly how this elastic offer works, so what people, in fact, choose from our offering. And you can buy, in fact, 9 packages. So there are 3 basic packages, so then 3 premium packages and then 3 thematic packages just to choose. So this is really great product, and we are really excited. Just look at first results of our flexible Internet TV offer with set-top box. So in fact, we have like TV user experience with, I can say, flexibility of Internet solutions. So this is great.

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Nora Nagy, Erste Group Bank AG, Research Division - Research Analyst [5]

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I would also have a follow-up question to the first one. So basically, you mentioned that the EBITDA would remain stable from this quarter to the next based on the higher energy prices. This is my first question.

And then the second would be about the further information about your guidance on revenue and CapEx.

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Katarzyna Ostap-Tomann, Cyfrowy Polsat S.A. - CFO & Member of the Management Board [6]

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As far as energy is concerned, in the second half of 2019, we already have higher cost of energy. So I suppose the impact -- the negative impact will be the first half.

As far as the CapEx is concerned, we're expecting 11%.

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Operator [7]

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(Operator Instructions) We have no further questions at the moment. Dear speakers, back to you for the conclusion.

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Miroslaw Blaszczyk, Cyfrowy Polsat S.A. - Chairman of the Management Board [8]

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Thank you for the conference today, and we are indeed inviting you for the next call conference to be held in November this year.

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Stanislaw Janowski, Telewizja Polsat Sp. z o.o. - CEO [9]

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Thank you very much.

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Maciej Stec, Cyfrowy Polsat S.A. - Vice Chairman of the Management Board [10]

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Thank you very much. Thank you.

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Operator [11]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.