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Edited Transcript of RTKM.MZ earnings conference call or presentation 7-Nov-19 1:00pm GMT

Q3 2019 Rostelekom PAO Earnings Call (IFRS)

Moscow Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Rostelekom PAO earnings conference call or presentation Thursday, November 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ekaterina N. Ustinova

Public Joint Stock Company Rostelecom - Head of IR

* Mikhail Eduardovich Oseevskiy

Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director

* Sergey Nikolaevich Anokhin

Public Joint Stock Company Rostelecom - CFO, Senior VP & Member of Management Board

* Vladimir Sergey Kirienko

Public Joint Stock Company Rostelecom - First VP & Member of Management Board

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Conference Call Participants

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* Alexander Vengranovich

Renaissance Capital, Research Division - Analyst

* Anna Kurbatova

Joint Stock Company Alfa-Bank, Research Division - Senior Analyst

* Igor Goncharov

Gazprombank (Joint Stock Company), Research Division - Senior Analyst

* Maria Sukhanova

BCS Financial Group, Research Division - Research Analyst

* Sergey Libin

Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. We're very happy to welcome you at this conference call to discuss financial and operational results of Rostelecom for the third quarter and 9 months of 2019. On the call today, we have the executive team with our CEO and President, Mikhail Oseevskiy. We also have with us Vladimir Kirienko, First Vice President. He will discuss operational performance; and Sergey Anokhin, Senior Vice President and CFO, who will discuss the financial results for the reporting period.

Traditionally, we would like to remind you about our cautionary statements. Some statements made during today's call may be forward-looking statements. And as such, may be subject to risk factors, which are often outside the company's control. We ask you to please not unduly rely on such statements, and we don't take any obligation to make any public revisions of those should they be different -- should the actual results be different from the projected ones. We are now ready to start. I will now hand it over to Mikhail Oseevskiy.

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Mikhail Eduardovich Oseevskiy, Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director [2]

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Hi, friends. I hope that you have already been able to review our results. They have been made public earlier this morning. Including in the newswires, in the media, et cetera. Rostelecom continues to confidently pursue its strategy. We are seeing growth of revenue from digital services. It's now 11% higher than in the same period last year. We are growing in terms of revenue, in terms of margins and profit. Revenue increased by over 4% to RUB 242 billion. Our OIBDA margin increased by almost 9 percentage points, and we were able to substantially increase our net income to over RUB 16 billion, almost 30% increase versus the same period last year. So the company confidently continues on its path to its transformation to more than a digital service operator.

My colleagues will now share more about that, Sergey, Kirienko.

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Vladimir Sergey Kirienko, Public Joint Stock Company Rostelecom - First VP & Member of Management Board [3]

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Hi, colleagues. Let's now discuss the operational results. The digital segments firmly secured its stance as the driver of our business. Revenue from content services in 3Q 2019 versus same period last year increased by 13% to RUB 49 billion. The flagship of Rostelecom's digital business growth is B2G and B2B, which grew by 14.5%.

Let us now look at the digital revenue mix. The leader here are VAS and cloud services, up by 37%. The headline projects here were on safety, cloud services, cybersecurity services, IoT and other digital services. Second, by the growth rate are VPN services, up by 16%, mostly due to higher growth from large government customers. Revenue from Pay TV increased by 6% due to higher IPTV base, driven by switching of subscribers from cable TV and the growth of fiber-optic users. I would like to note that the switching comes with increased ARPU. And revenue from broadband was also positive at up by 4.4%.

Summarizing, I would like to say that over the past few years, we were able to build the momentum that matches the objectives of Rostelecom's development strategy until 2022.

Let us look at the next slide. You can see that the digital segment contributed 59% of the top line. We are approaching another milestone here at 60%. Rostelecom's top line mix is evolving in line with our plans. The share of telephony is going down, and it now accounts for less than 20% of our total revenue. There's an unsurprising growth in our digital services that are the backbone of the new digital business of our company.

Let us now discuss the main drivers of this success. Looking at sales in B2B, our sales are driven by developing additional digital services, such as bundles and conversion products. Blended ARPU, a key metric was up by 3% in 3Q, driven by higher revenue from broadband and IPTV. The IPTV, an important segment for us, we were able to grow our customer base by 6% to 5.4 million subscribers. This was driven by switching from corporate to optic fiber that helps connect additional services, including IPTV. We are actively working with new construction projects where we offer an end-to-end product to our customers' IPTV together with the Internet. Number of subscribers on optic fiber tariff plans grew by 4%, mainly due to migration from corporate to fiber-optic as well.

On the next slide, we would like to note that B2B -- sorry, B2C has changed a lot, and customers are becoming more sophisticated. And we are now focusing not just on technology, but also an experience in lifestyle that customers cannot say in using our technology. We are proud to say that we have now fully launched our fully-fledged convergence offering, or FMC, on a national-wide scale. That is a platform that offers a seamless experience of using the Internet, TV content and gaming services, video surveillance, both at home and outside. And following the launch of FMC, our revenue there almost doubled.

And in terms of video surveillance, we were able to sell in the reporting period almost 120,000 cameras.

Let us now discuss our B2B and B2G. Revenue here grew by 14.5%, largely due to implementation of cloud services, data centers and other digital services. Revenue from broadband and VPN in the segment increased by 9% due to a higher number of customers, and the customer base increased, in fact by 24%. Revenue from data centers increased by 14%, including due to the commissioning of racks in Udomlya data center. And another driver of this growth was a staggered tariff increase by 10% to 20%.

As part of our ecosystem approach, we actively promote our digital services, including in IT security. Revenue of IT security in the reporting period grew by 2.4x. This was driven by some other areas as well. We almost doubled our revenue in video surveillance, and we launched the new features in video analytics. In virtual ATS or ATE, revenue growth was 47%. That was driven by broader geography, which now includes 400 cities and towns in Russia, focus on active subscriber base implementation of a number of projects with large customers and active sales in SME.

A few words about O2O, or operator segment. Revenue in O2O in the third quarter increased by 60%. The competence to service the telecom infrastructure helps us obtain contracts, not just for operation, but also for turnkey construction. As part of our second project, which is Clear Sky, in the 9 months of 2019, we moved 2x more lines, 2 underground cable tunnels. Operators and municipal authorities, pay a lot of interest to this project. And again, that is a core competence for us because we've got a lot of underground cable tunnels in all of the major cities and towns. Revenue from traffic transit for content provider services also grew in the 9 months of 2019 by 77%.

In conclusion, I would like to say that we see the results of the third quarter as strong. This -- they are fully in line with our plans set forth in our development strategy. And we continue to develop our own services that will equip us to meet every need of our customers in all areas of our business. That's all from my side. I will now hand over to Sergey Anokhin.

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Sergey Nikolaevich Anokhin, Public Joint Stock Company Rostelecom - CFO, Senior VP & Member of Management Board [4]

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Hi, colleagues. Thanks to strong operational results and cost control and successful sale of noncore assets, the company continues to demonstrate good EBITDA margins and also growth in absolute terms. OIBDA in the 9 months grew by almost 9%. And in terms of quarterly performance year-on-year, growth was 2%. Apparently, there's some seasonality impact as well as a number of factors, in particular, in the second and third quarters. The company obtains payments for the Bridging the Digital Divide projects related to last year. On the other hand, there are some higher personnel costs in line with the strategy to increase the number of employees with the digital competencies.

This strong OIBDA performance as well as a number of additional factors helps us to ensure solid net income growth. And the growth in the reporting quarter year-on-year was almost 12% and cumulative total. You can also see here on the slide, in terms of the factors that impacted this. That was the income from equity affiliates and, in particular, the strong performance of Tele2. For the 9 months, the company posted a strong net income.

On the other hand, we can see growth of interest expense related to the growth of Rostelecom's net debt. There was a growth of some 14% there, 1-4. And also depreciation and amortization increased by some 10%, which relates to the growth of our business. The impact of foreign exchange -- there was also a positive effect there of some RUB 700 million. CapEx is, in general, proceeding according to our plans. There is some seasonal variability, for example, looking at CapEx, net of government programs, CapEx was down by 6%, but cumulative total was some RUB 41 billion. In terms of government programs, well, that is mostly driven by the company's active involvement in the Bridging the Digital Divide and other initiatives.

In terms of CapEx to sales, there has been modest growth. In terms of free cash flow, in the third quarter this year, Rostelecom demonstrated positive performance there year-on-year, plus almost RUB 4 billion. And again, cumulative total that amounts to RUB 7.4 billion to RUB 4.1 billion from minus RUB 3.3 billion in the same period last year. And the drivers here were the improvements of the working capital due to lower receivables from major counterparties. There was an important impact, positive impact from that refund in the third quarter and also changes in our employee obligations. Another positive impact was the receipt of payments for providing connectivity to hospitals for previous periods, in this year. And also, again, the improvements of receivables from major counterparties.

The financial performance and the cash flow helps us to maintain our net debt to OIBDA at 1.9%. The cost of debt in September is at some 7.7%, which is 13 basis points lower than in early July, and we were able to refinance a part of our portfolio at better rates to make our borrowing costs lower, which will also contribute to our future performance.

And we also realized the offer on repurchase on our bond portfolio. So now we have quite a comfortable level of debt costs. As previously, 100% of our debt is ruble denominated. In terms of maturity, it is also quite comfortable for us. And given the good performance for the 9 months, we are happy to reiterate our existing guidance, which will bring us over 3% of improvement on the key financial metrics, that's -- in terms of CapEx, with some seasonality, we reiterate again the range of RUB 65 billion to RUB 70 billion, and we will discuss the actual numbers as we discuss the year. Thank you.

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Ekaterina N. Ustinova, Public Joint Stock Company Rostelecom - Head of IR [5]

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We are now ready to start the Q&A session. And the operator will give all the necessary instructions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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And we'll take our first question from Alexander Vengranovich of Renaissance Capital.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [2]

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A few questions from my side, if I may. First, about free cash flow. What would be the best view of the free cash flow performance in the fourth quarter? I understand that this year, you have a more even cash flow distribution. So should we look at the numbers of the prior quarters and assume that there will be a similar cash flow generation given your CapEx phasing as well. So we shouldn't expect substantial increase in cash flow in the fourth quarter? My second question is about your view about the net debt. Do you have an idea at the moment what maximum net debt-to-EBITDA level would be comfortable for you? And if, as a result of certain M&A transactions, it happens to be higher than 2x to that, will you continue to maintain the same dividend policy for 2019 as you have been following for prior years?

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Sergey Nikolaevich Anokhin, Public Joint Stock Company Rostelecom - CFO, Senior VP & Member of Management Board [3]

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Thank you for your questions. In terms of free cash flow performance, yes, indeed, this year, we seem to have a smoother distribution than in the past years. But again, given the CapEx cycle, overall, it still holds. So we believe that, as usual, the fourth quarter will see a lot of the CapEx on the one hand and a lot of receipts on major projects on the other hand. The first quarter would have substantial movements, if you will, on both the positive and the negative side. In terms of net debt, as a reminder, our, so to say, psychological maximum is 2.5. So now we are at almost 2. That's certainly more comfortable than 2.5, but we understand that within periods, if you will, or given M&A transactions, this is the range in which we can find ourselves. In terms of the transactions that we are working on that we demonstrate, we hope that we will be able to remain within that comfortable range, and that will not have an impact on our dividend policy.

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Operator [4]

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We can now take the next question. It comes from Sergey Libin of Raiffeisen Bank.

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Sergey Libin, Raiffeisen CENTROBANK AG, Research Division - SVP Equity Research [5]

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My question is about the outlook for 2019, and in particular, your OIBDA outlook. If we were to look at the lower level of growth at 3%, that means that there will be a significant reduction in OIBDA in the fourth quarter. So is it -- this something that you really envisaged? Or do you just affirm this conservative guidance?

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Sergey Nikolaevich Anokhin, Public Joint Stock Company Rostelecom - CFO, Senior VP & Member of Management Board [6]

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We believe that the outlook, as it is formulated at the moment, helps us to not continuously review. Well, it's less than 2 months until the year-end. So we would better discuss the actuals of them rather than making adjustments to the outlook or to the guidance. Our current model helps us substantiate 3% or 4%, et cetera, but we want to wait until the year-end.

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Mikhail Eduardovich Oseevskiy, Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director [7]

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Historically, the fourth quarter has been traditionally strong in terms of financial performance, and we still sort of expect that. But Sergey is right in saying that we are approaching the year-end, and it's not very reasonable to make any changes to the outlook now.

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Operator [8]

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And our next question comes from Maria Sukhanova of BCS.

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Maria Sukhanova, BCS Financial Group, Research Division - Research Analyst [9]

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I have 2 questions. First, coming back to the guidance for the year. At one of the previous calls, you discussed property tax. Do I understand that you don't see this risk anymore until the year-end? Or maybe it's not on the table at all? And my second question is about the Tele2 transaction. If you could comment what is the current status? And should we expect any news?

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Sergey Nikolaevich Anokhin, Public Joint Stock Company Rostelecom - CFO, Senior VP & Member of Management Board [10]

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We still see these tax risks as something that's there. We do make provisions for potential increase of payments.

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Mikhail Eduardovich Oseevskiy, Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director [11]

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On the transaction, you may be aware that there were 2 regulatory documents decreed by the President and the resolution by the government, and those directives are in high degree of readiness, and we expect that they will be signed in the next few days.

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Operator [12]

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And our next question comes again from Alexander Vengranovich of Renaissance Capital.

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Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [13]

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It's a quick one about the acquisition of Dataline. There has been discussion for a few quarters now in the media, and you sort of hinted that you were interested. When should we expect any resolution or decision on that? On term sheet, announcement of terms, if you could discuss that? And what's the logic behind that transaction overall? What synergies do you see between the existing business of Rostelecom's and Dataline's data centers?

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Mikhail Eduardovich Oseevskiy, Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director [14]

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Well, we'll probably discuss that transaction after it happens as well as our rationale behind that. But we are expecting, again, a directive to come out about that in the next few days.

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Operator [15]

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Our next question comes from Igor Goncharov of Gazprombank.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [16]

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I have few questions. First, about dividends. Given the free cash flow, 2 questions on that. First, can you please give a guidance in terms of free cash flow for the year, if at all possible, to understand the potential dividend amount because the dividend is linked to the free cash flow? Then the next question relates to the free cash flow. Will the receipts from the sale of the Central Telegraph building be included in the basis for dividend calculation of 2019? And my next question is whether we should expect an interim dividend for 2019? And when can we expect any guidance in terms of the amount of the dividend?

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Sergey Nikolaevich Anokhin, Public Joint Stock Company Rostelecom - CFO, Senior VP & Member of Management Board [17]

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In our guidance, we don't provide any outlook about the free cash flow. Just one comment from my side here. We expect generation of efficient free cash flow to meet our dividend obligations in terms of the transaction for the sale of the Central Telegraph building, you are right in assuming that the proceeds will be included in our total cash flow and as such will add to the basis for dividend calculation.

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Mikhail Eduardovich Oseevskiy, Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director [18]

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I would like to reiterate that the decision on whether to pay dividends or not, will be taken in relation to the terms and the timeline for the acquisition of the Tele2 stake at the Board of Directors. So once the decision is taken, we'll be ready to discuss the dividends.

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Igor Goncharov, Gazprombank (Joint Stock Company), Research Division - Senior Analyst [19]

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I have a follow-up, if I may, regarding the Tele2 transaction. Yes, there has been some regulation in respect of that, but it is not clear from them. Is there any idea that Rostelecom's cash will be used to pay for that transaction? Or will only shares be used?

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Mikhail Eduardovich Oseevskiy, Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director [20]

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Please be patient. You don't have to wait for long. You will soon know.

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Operator [21]

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And we have no further questions at this -- oh, my apologies. We do have one more. It comes from Anna Kurbatova of Alfa-Bank.

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Anna Kurbatova, Joint Stock Company Alfa-Bank, Research Division - Senior Analyst [22]

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Questions to follow-up on the Tele2 theme. My first question is of a general nature. Given that the transaction has been in preparation for a while, are you now undertaking any procedures that will enable you to once it's officially finalized, that would help you to reduce the period of integration regarding of its depth, so to say, of how deep it should be? Are you discussing anything at the level of your management? Are you working on any strategy on any action plan? So given that you will become a majority shareholder, are you working on anything post transaction, so to say, even now? And my other question is, again, going back to the dividends. Is our understanding correct that the Tele2 transaction may actually become the reason of not paying interim dividends, given your prior comments? You mentioned that the decision on the Board of Directors, essentially there will be a joint [anthem] on Tele2 and the dividends.

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Mikhail Eduardovich Oseevskiy, Public Joint Stock Company Rostelecom - Chairman of the Management Board, CEO, President & Director [23]

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Well, managing the group -- the joint group will require new management approaches and new strategy, and work is ongoing on both those areas. We have now set up an integration committee, which is now running, which is working on the tactical side, so to say, of things. And we have started working on a new group strategy that we plan to present at the end of the first quarter next year. I guess we will be retaining advisers that will help us look into various aspects, including the international one. In terms of dividends, there are many factors that may impact the final decision, including the Tele2 transaction.

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Unidentified Company Representative, [24]

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Okay, colleagues. We see that there are no further questions. So thank you for your attention. Thank you for your questions. And as usual, we are happy to discuss things offline. We are available, so please, please call us. Please drop by. Thank you, and goodbye.