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Edited Transcript of MAS.MC earnings conference call or presentation 30-Oct-19 10:59am GMT

Q3 2019 Masmovil Ibercom SA Earnings Call

Madrid Jan 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Masmovil Ibercom SA earnings conference call or presentation Wednesday, October 30, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Javier Marín

MásMóvil Ibercom, S.A. - Chief IR & Corporate Finance

* Meinrad Spenger

MásMóvil Ibercom, S.A. - CEO & Executive Director

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Conference Call Participants

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* Joshua Andrew Mills

Exane BNP Paribas, Research Division - Research Analyst

* Luigi Minerva

HSBC, Research Division - Senior Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Simon Alexander Arulraj Coles

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Javier Marín, MásMóvil Ibercom, S.A. - Chief IR & Corporate Finance [1]

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Hello, hi. Good morning, everybody. This is Javier Marin, I'm the Chief Investor Relations and Corporate Finance Officer, and welcome to our third quarter 2019 conference call. We have with us Meinrad Spenger, our CEO. Also supporting the team on the call will be José Maria Del Corro, our CFO and the rest of the IR team. So we are glad to welcome you to the call. First with the numbers. In my view, obviously, not (inaudible) with the guidance, Meinrad's fairly upset with me I think so because he's really proud of the commercial performance of the company in the third quarter. But I'll let Meinrad to show why I'm completely wrong. Thank you very much. Meinrad?

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Meinrad Spenger, MásMóvil Ibercom, S.A. - CEO & Executive Director [2]

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Good morning, everybody. Well, thank you, Javier, and I'm happy to present you another record quarter results. Growth momentum continues in Q3 2019. Service revenues are up by 23% year-on-year. We have exceeded the EUR 1 billion mark already this year. We reached an EBITDA EUR 337 million, 40% up. And in Q3, EUR 120 million. If you just recall, in 2016, the EBITDA of the whole MASMOVIL Group was EUR 190 million. So in 1 quarter, we are above what we did just 3 years ago.

EBITDA margin also improved to demonstrate there's still room for additional operating leverage.

In terms of clients, we reached 8.6 million lines and have a strong net add momentum, both in broadband as well as in mobile postpaid. Broadband had a strong quarter with 131,000 additional lines, which means basically record during -- in the last 2 years. And in mobile postpaid, also superb results with 242,000 lines.

Our fiber footprint also increasing significantly, basically to the fact that we opened up the Telefónica network. Basically, we have all access to the whole Telefónica network as well.

In addition, we increased our own network and our cost-optimized network with user [growth] with Orange to around 30 million homes pro forma. This improved to 5.2 million homes that we announced in the [news] very recently and which uses already 1 million homes that we are planning to sell in the next few weeks. Overall, obviously, after 2 weeks after the guidance update, we can confirm that we updated and decreased guidance. And today, we can announce also that we officially launched a repricing process for our TLB loan structure.

If we move on, on Page 3, we see the slide regarding our guidance. Main message. We can't [be caught being incomplete] with our guidance.

On Page 4, the revenue evolution. Strong growth momentum. First 9 months, we had a growth of 23% in service revenues and 22% in net revenues.

On Page 5, similar picture with a 21% growth in service revenues for the third quarter year-on-year.

If you go to Page 6 on our presentation, we see the EBITDA evolution. Strong growth, 41% year-on-year in quarters. And if we compare first 9 months, it's a 40% growth. We evolved also from 23% EBITDA margin to 28%. As we mentioned here, we are good track to reach our guidance of EUR 465 million of EBITDA this year.

Before we move to the client figures, just a few updates. We are very proud that our client satisfaction grades are improving, continuously improving. We have just received the NPS figures for Q3. All our brands improved in this quarter. Especially exciting is the result for Pepephone, 68 points on the -- in that scale, while all major competitors have negative scores. All our plans improved, and all our major competitors have negative scores. And in addition also to demonstrate our social commitment, we have just received the prestigious [FE Brand] prize for MASMOVIL for initiatives that we did with our Yoigo brands. And social entrepreneurs we present and we invite people to support those initiatives. We have been awarded the #1 sole prize for this initiative at the recent marketing awards.

If you move to the clients and the client figures, we have a clear growth, again, in Q3 of 373,000 clients, 131,000 broadband, 242,000 in mobile postpaid. Basically, records since Q1 2018.

And if you look at the details on Page 8, broadband lines evolutions. We see that we reached almost 1.4 million broadband lines already, and it means that we grew in the last 12 months over 500,000 lines.

If you look at our fiber footprint expansion. As mentioned, we have been able to increase significantly. We have grown the footprint, the total footprint, by over 50% in the last 12 months. We have the 22 million homes that we can cover right now. And of these 22 million homes, 13 are owned -- our cost-optimized owned right now are 7.8 million homes.

This evolution in coverage also reflects in the share of fiber in our client base. And 81% of our broadband clients are already on fiber base, the rest is ADSL or other WiMAX, et cetera. So a continuous evolution towards quality also in our client base.

On Page 11, we see the CapEx figures for the first 9 months. 74% of our CapEx is clearly growth orientated. And we see that we are in line with what is our expectations, having invested more or less half of our CapEx in the fiber deployment.

If we go on Page 12, cash flow from operations. We see a strong operating cash flow generation, above EUR 200 million in the first 9 months. We see also a second quarter in a row with positive cash flow from operations and that's in spite of heavy investments. And therefore, so no surprise, we're in line of what we forecasted before.

In change -- in the net debt, we are at EUR 1.8 billion of net debt, slight increase in comparison with Q2 because of smaller M&A and financing activities. But also the major part -- the major increase of around EUR 900 million is due to the repurchase of the convertible of providence where we have the second tranche due in December this year.

A new product or service and that we proudly present is content. As you know, we are enabler for (inaudible) good content of others. We are not producing content, and we are not(inaudible) operator, but we distribute quite successfully, content. We just closed the Netflix deal. We have a deal with Amazon Prime, with Sky, et cetera. And all our clients have access to -- all content clients have access to movies, free movies by Rakuten.

What we see is, basically, we see really (inaudible) commercialization in the month of August. We multiplied by then the sales versus June. And we see also positive impact in ARPU and value creation. Basically, we have been meeting clients with television services and the share of the high-value tariff increases by 32%. So it's fantastic news and upside that makes us optimistic for the future.

In the next 2 pages, we just reiterate what we said before. So no changes within the last 2 weeks. Positive news in terms of guidance, both in EBITDA of EUR 465 million for this year and up to EUR 700 million by 2021.

And on Page 16, we reiterate also reduction of CapEx that we foresee for the next few years.

And on Page 17, we see also quite clear that we will be able to reduce the leverage. We announced 3.7 by the end of the year. We believe it will be slightly better, especially if we consider that we can sell the fiber network before the end of the year.

So that's all from my side, and we are happy to respond to your questions.

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Javier Marín, MásMóvil Ibercom, S.A. - Chief IR & Corporate Finance [3]

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Operator, please, let's move to Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first question from Simon Coles from Barclays.

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Simon Alexander Arulraj Coles, Barclays Bank PLC, Research Division - Research Analyst [2]

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One is just on unit to CapEx for broadband net. You said in the release that remains stable and in line with your expectations. I would have seen that, that's probably been going up over time as you add more fiber customers compared to customers in the past. So I was just wondering if you can provide us a little bit more color about how that's trending and how you see that moving going forward.

And then secondly, just quickly on competition. We obviously hear different views and different operators in the market in Spain. So I was just wondering if you can give us a little bit more color on how you see the market progressing going forward.

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Meinrad Spenger, MásMóvil Ibercom, S.A. - CEO & Executive Director [3]

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Well, I'll start with the second question, and the first one, I'll pass to Javier to see those number. For competition, we have -- clearly had in Q3 and with less aggressive promotions than last year. Last year, we had this shift that Vodafone didn't buy the content -- the football rights or part of the football rights. And that was very [crazy] promoting to capture these clients. This year, it was more moderate. MASMOVIL also did not participate in significant promotional activity. We are -- fair prices every day is our logic. So we see that -- we played it quite reasonable.

We still believe Telefónica will continue to focus on premium clients. Orange, as well, announced that they're looking for value and not for quantity. And well, your questions about Vodafone, Vodafone seems to move or to assume ultra-low-cost strategy, at least in part of -- or a significant part of the clients. This is not our game. We are not moving to exist in that area. We still continue to work on value, and you see for content the example that we gave. Regarding television, it's a clear sign that we are able to increase ARPU and value in the future.

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Javier Marín, MásMóvil Ibercom, S.A. - Chief IR & Corporate Finance [4]

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Yes. Simon, this is Javier. Regarding the CapEx, yes, you're absolutely right. I mean we feel really proud to see that number being contained. Remember that includes the installation as well as the customer process equipment. There is a mathematical impact on that, which is the higher rate of the FTTH gross adds versus ADSL that we show in one of the slides, how we have been shifting completely the rate of ADSL into FTTH. And that mathematical effect is that before we used to be below 200 (inaudible) per gross add and now we are slightly 205 (inaudible) on gross adds. And as you said, that the underlying numbers have not changed, and that's why we feel really proud that our commercial success in broadband is done with very contained CapEx [set]

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Operator [5]

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Next question from Michael Bishop from Goldman Sachs.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Just a 3 quick questions from me. Just following up on the competition and also your own guidance. And clearly, you need a little bit of a step-up in the fourth quarter to get to the 24% service revenue growth guidance. And I appreciate there's a bigger base but I was just wondering if you could sort of comment on the, the tractions through September and into October, and what you're seeing? And whether you are seeing the market as slightly more rational in October given it felt like at least [Euskalte] pulled some of the very, very aggressive promotions at the end of the quarter?

And then the second question is just quickly, what sort of level of refinancing benefits do you think you might possibly be able to attain? There was a mention in the press around 50 basis points?

And then thirdly, on your traction on TV. I was just wondering whether you're thinking about adding anything else into the portfolio and particularly thinking about how customers might be able to buy OTT sports via your approach?

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Meinrad Spenger, MásMóvil Ibercom, S.A. - CEO & Executive Director [7]

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Thank you, Mike. Well, in terms of our evolution, et cetera, revenue guidance, I mean, we have had a stronger client growth in Q3 as expected. Now if you compare it to last year, we grew 30,000 broadband lines more net than last year. So it's a fantastic figure and that allows us also to be optimistic in recurring the revenue growth for Q3, Q4 and to fulfill our guidance.

October looks very good, very positive for us. So our growth momentum clearly continues, and we see lower promotional activity already in October, and what we expect is that we'd slow down even more in November. That's what our competitors announced, and we see it also not only in official above-the-line offering, but also in below-the-line promotional activity. And we think the growth, the push for growing client numbers via ultra-low-cost offering while -- may be a good idea in the short term, in fact, if we move to increase clients. But probably it's not sustainable on the long term. And we don't see that this will be the future of the Spanish market.

It's true that there are different markets. Now we have the broadband market and we have the mobile-only market. Mobile-only is probably more competitive now than 1 year ago, but there is not the real value of the market. And so when we think of the peak value chunk and we think about convergence in the broadband, and here, we don't see success of this ultra-low-cost offering.

In terms of repricing, we -- as we mentioned before, we launched officially the process today. We have tomorrow a call. We can expect that we can improve leverage around 50 basis points, our cost of financing. What does it mean -- that it means that we can improve our equity-free cash flow or the current equity-free cash flow by about EUR 7 million a year? That would be a reasonable expectations for the process.

In terms of content, well, we are an enabler. So we don't produce our own content. We don't buy a purchase content rights. We are an enabler of third-party content, very successful third-party content. So we have 3 channels, which are important in the Spanish market. We have all major OTTs. Basically, we have Netflix. We have Sky. We have -- let's say, our clients have access to all the major OTTs. And obviously, we are open to offer additional content once it's available. Of course, we see as an open platform that the clients decide what they use and for what they pay. We believe this is -- it's a future growth model. It will work because it doesn't make us lose money.

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Operator [8]

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Next question from Joshua Mills from Exane.

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Joshua Andrew Mills, Exane BNP Paribas, Research Division - Research Analyst [9]

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Just 2 questions for me, please. So the first is just on overall broadband volumes in the Spanish market. Orange commented yesterday that -- and data volumes down 40% year-on-year and I'm a bit more cautious about broadband expansion story, which has supported a number of operators over the last few years. I'd just be interested in your view on whether anything is really changing there or whether you believe there is still scoped increase broadband penetration quite significantly in Spain.

The second question, just in terms of band strategy. So as you touched upon, there is now quite a lot of fragmentation amongst the 3 network owners, realize (inaudible) on their banding. We have a high-, medium- and low-end band for every operator. I just want to ask whether you thought there was scope for planned consolidation within your own portfolio over the next 12 months just to try and focus on that value-led strategy and outstanding customers. And whether that could be something, which led to a bit more price rationality from your competitors.

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Meinrad Spenger, MásMóvil Ibercom, S.A. - CEO & Executive Director [10]

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Thank you, Joshua. We have to -- on a high level, we have around 15 million broadband clients into the Spanish market. And depending how you count, but you have, for sure, about 25 million homes in the Spanish market. That means that broadband penetration is still on a European level, quite low. Now we have (inaudible), I believe it would about 90% on the broadband penetration. So -- however, we think -- see that there's a clear full potential in the market. However, also, we have prudent [plans] in our business case in our guidance that we announced. We imply a lower growth of the market, but especially a lower, let's say, share of MASMOVIL in the growth. So message, MASMOVIL doesn't need to grow the market the same way to fulfill its guidance. However, we don't see at the moment, at least, a reduction in growth of the market.

In terms of client strategy, basically, in the Spanish market, MASMOVIL is the first one to have a market brand strategy, which could be successful, and the rest followed us. What we can -- we don't think that it makes a lot of sense to push heavily ultra-low-cost brands with a lot of commercial and marketing push. We will not do that.

And in terms of concentration, we will see. And we have no immediate brands regarding that. We have 2 brands in the ethnic segment, Lebara and Llamaya. There might be an opportunity to consolidate our work in the midterm, but not necessarily over the next 12 months.

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Operator [11]

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Next question from Luigi Minerva from HSBC.

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Luigi Minerva, HSBC, Research Division - Senior Analyst [12]

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On the subscriber and the mix of infrastructure. So could you give us an update on what's the proportion of subscribers that you serve on your own infrastructure? And then what is your ambition? I think a couple of quarters ago, it was mentioned, 50-50, but maybe you are now a bit more ambitious on that.

And the second question is on 5G. Now clearly, the agreement with Orange is very positive. But still, would you be interested in purchasing 5G spectrum if the conditions are right?

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Meinrad Spenger, MásMóvil Ibercom, S.A. - CEO & Executive Director [13]

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Yes. Well, it depends on the account -- how you count. By the end of the year, we will add 5.2 million homes, optimize cost structure. And so it's not a full IRU, but it's a hybrid solution (inaudible). And we have about 90%, let's say, in cost-optimized network by the end of the year. If we not count the 5.2 million, we still like around 50% under our network. But basically, the good news is that from January onwards, basically, all our clients -- best part of the one that we have with Telefónica, is that -- the cost-optimized structure or a good and a cost-efficient network (inaudible).

In terms of 5G spectrum, well, we have 80 megahertz of the 3.5 gigahertz spectrum. And it's -- basically, we are the operator with most capacity per client. We have more or less this number of capacity per client than any other operator in the Spanish market. So for that -- and we have prepared also for 5G. In terms of the 700 megahertz auction process that we expect for Q2 2020, well, for us, we are in a comfortable situation. For us, it's so nice to have.

We are interested in the spectrum because it could allow us to improve our NRA costs and in 700 megahertz. Meaning, in low-cost -- a low-frequency band would increase our coverage indoor. And therefore, we can capture more traffic in our network. However, it passes the economic calculation. If it makes sense that we can save NRA costs, and the price of the 700 megahertz is the right one, well, we go ahead. If not, we will not go for it. So it depends on the conditions of the options, to simplify it. But for us, it's still nice to have, not a must.

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Operator [14]

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(Operator Instructions) We don't have any more questions. Back to you for the conclusion.

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Meinrad Spenger, MásMóvil Ibercom, S.A. - CEO & Executive Director [15]

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Yes. Thank you, everybody. Great quarter again, and we can -- we are optimistic for the year-end. We also think since the television evolution is that positive, we will have around 100,000 lines or 500,000 lines by year-end with the service. We have added -- we have ended Q3 with close to 50,000 lines with television service.

Also, banking another type business as we started, we are happy. We have already reached around 60,000 clients and financing processes. With the fiber business, it's not core right now and it's not contributing significantly to our results, but it's a pace on which we can grow and so -- we can diversify our business. And that makes our goals very stable. Thank you very much.

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Javier Marín, MásMóvil Ibercom, S.A. - Chief IR & Corporate Finance [16]

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Thank you, everybody. We'll see next quarter.

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Operator [17]

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