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Edited Transcript of TELEC.PR earnings conference call or presentation 1-Nov-19 10:00am GMT

Nine Months 2019 O2 Czech Republic as Earnings Call

Prague 4 Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of O2 Czech Republic as earnings conference call or presentation Friday, November 1, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jakub Hampl

O2 Czech Republic a.s. - Head of IR

* Jindrich Fremuth

O2 Czech Republic a.s. - Chairman of the Board of Directors & CEO

* Tomáš Kouril

O2 Czech Republic a.s. - Vice-Chairman of the Board of Directors, CFO & Director of Finance Division

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Conference Call Participants

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* Martin Cakl

Patria Finance a.s., Research Division - Analyst

* Miroslav Frayer

Komercni Banka AS, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to the O2 Czech Republic's Financial Results for the First 9 Months 2019. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Jakub, who will lead you through this conference. Please go ahead.

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Jakub Hampl, O2 Czech Republic a.s. - Head of IR [2]

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Thank you, operator. Good morning, ladies and gentlemen. This is Jakub Hampl. On behalf of O2 Czech Republic, I would like to kindly welcome you to our today's conference call, where we are going to present and discuss our financial results for the first 9 months of 2019, which we have released earlier today in the morning. As in the past, the presentation is already available for download at our IR web pages.

And I would like to introduce the speakers. So first of all, Jindrich Fremuth, the CEO and Chairman of the Board; and also Tomáš Kouril, the CFO and Vice Chairman of the Board.

And now it's my pleasure to hand over to Jindrich to start with the presentation.

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Jindrich Fremuth, O2 Czech Republic a.s. - Chairman of the Board of Directors & CEO [3]

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So good morning, everyone. Thank you for joining us. As always, I will take you through some business highlights, and then Tomáš will follow up with financials.

So if you follow what is happening on the Czech telco markets which I'm sure you do, you know that the last quarter was very dynamic and full of changes. We introduced completely new mobile tariffs and bundles portfolio in September. And just today, coincidentally, we are launching the new O2 TV and home broadband propositions. So we can say that in our consumer business, all the key propositions have changed. And even though we slightly adjusted the timing, most of those changes have been planned and sought through for quite some time.

Obviously, it's too early to judge as we have only a few week experience with our mobile propositions and literally none with the fixed one. But based on the first numbers and customer reaction, we feel quite confident that the steps we (inaudible) are continuing value creation story.

So please go to the Slide 5 of the presentation we provided, in case you have them. Well, I will begin by a short summary of the very first and early results of our mobile and bundle businesses, which we launched mid-September. As you may know, we've significantly improved our mobile data packages by boosting the data volumes while making slight pricing adjustments. And we launched completely new range of unlimited mobile voice and data tariffs.

Introducing unlimited mobile data element is generally rather tricky mainly for 2 reasons: one, it raises a question of how data monetization will be done in future; and second, what will be the impact on the overall network quality in the long term, and network quality, which is in the Czech Rep, one of the best in the world. And we, of course, want to maintain this.

So we have considered both of these topics as well as the overall value generation potential we have in our mobile base, where many of the customers still do not use mobile data or do so in a very basic way. So the potential to grow average revenue per user is still very significant.

At the end, we took, we believe, a rather innovative approach to differentiate the unlimited tariffs by speed. There are not many markets where this approach has been successfully applied. But we have done very extensive market research and customer testing to make sure that all the options will not have any negative impact on customer experience regardless of the given customer segment. In other words, the speeds are absolutely sufficient for the customer needs. It protects the network quality in the future, and it helps us monetize better in different market segments going forward.

As I said in the beginning, it is rather early to evaluate, but we see a very healthy and strong demand from our customer base as every third new tariff activated has an unlimited data component in it. And as bundles are our priority, the whole new mobile portfolio can be combined in O2 Store bundles, which we make even more attractive not only because of the price advantages it offers as opposed to individual single product, but now every O2 Store bundle includes also exclusive O2 TV Sport and 3 HBO channels depending on the type of bundle.

Speaking of our fixed mobile bundle portfolio, you can follow me on the Slide #6 in the presentation. Along with the new tariffs, we also introduced new product bundles, offering many combinations not only for smaller and larger families and groups but also individuals as we have a proposition for single-member household customers as well.

It is possible to combine not only individual product and their quantity but also choose by their parameters, be it speed, be it volume of mobile data, speed of home broadband or, of course, channel selection in the O2 TV packages.

All this, of course, should be reflected in our commercial performance. So going to the Slide 7, I will now mention a few highlights regarding our trading performance. In the enclosed material, you will see that our mobile base keeps continuously growing, and this applies also to Q3. But let me briefly comment also on home broadband and TV business performance.

During the last quarterly call, we already indicated that we believe we managed to turn around to the fixed broadband trend. And looking at the last quarter, I'm happy to say that this trend continues with a 2% year-on-year growth in revenues, which is a significant change compared to the last year, where we were declining 6% in the same quarter.

And last but not least, our favorite O2 TV product also retains its strong trajectory, adding 23,000 new customers to our base in the last quarter and close to 100,000 over the last year. That means 32% year-on-year growth. This actually resulted in quite an exciting news which we have not yet published. And that is that the number of average unique monthly devices accessing our O2 TV platform now broke the milestone of 1.2 million. This represents a 36% year-on-year growth.

This is a result of many years of hard work done by people in our company. You know that it was O2 who introduced IPTV under the Czech market. And we have been committed to explaining customers all the benefits of nonlinear TV and video on-demand services. Now I'd have to say we are harvesting the fruits of this hard work. But the story is far from being over, and we will continue our focus here.

Before I hand over to Tomáš for the financials, let me cover a couple of good details about our Slovak operations on the Slide 8. We maintained the growth in all major customer as well as financial parameters. Our total customer base in Slovakia grew by 6%. Proportion of the contract base improved by 3 percentage points to almost 2/3. And as a result, total blended ARPU went up by 3.4% in the first 9 months.

Later on, Tomáš will provide more details on the financial performance, but I would like to highlight our focus on monetization and increasing data demand. Last year, we boosted data packages in our top-end tariffs. And this year, we enabled a 5-gigabyte try-and-buy promo for all customers via their self-care application. And we also refreshed data proposition for prepaid customers. In addition, in Slovakia, we continue with our 4G LTE network rollout. And of course, we keep focusing on LTE hardware sales.

All these activities helped us to improve revenue from domestic data by 20% in the first 3 quarters and were the key growth engine for a 2% total revenue increase year-on-year. Total EBITDA in Slovakia grew by 16% in Euros. This was helped by additional national roaming cost savings and also application of the new IFRS 16 standard. So on the like-for-like basis, if we disregard IFRS 16 effect, EBITDA in Slovakia would grow by a solid 8%.

Now let me hand over to Tomáš Kouril for the key financial indicators.

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Tomáš Kouril, O2 Czech Republic a.s. - Vice-Chairman of the Board of Directors, CFO & Director of Finance Division [4]

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Thank you, Jindrich. Good morning, ladies and gentlemen. Now let me comment on our financial results starting with main messages on financial performance on Page 10.

Total group operating revenue reached CZK 28.6 billion, which is up by 1.4% year-on-year. Later on, I will comment in detail on the Czech Republic and Slovakia and our performance there. Our group EBITDA reached CZK 9.3 billion, representing nearly a 12% year-on-year growth. So we have achieved roughly 33% EBITDA margin. On underlying basis, so excluding application of IFRS 16, EBITDA would grow 5% year-on-year.

Net profit reached CZK 4 billion, down by nearly 5% year-on-year. I would like to remind you that in -- back in 2018, we invested heavily into the exclusive sport rights, IT transformation and also in further improvement of our network in Slovakia. And as a result, our recurring depreciation charge increased by close to 20% year-on-year. However, year-on-year net income decline -- deaccelerated to only 1.5% in the third quarter stand-alone. This is evidence that our strategy to invest into growth areas that is -- that this strategy works.

Next comment is on free cash flow. In the first 9 months, we generated CZK 4.7 billion of free cash flow by over 30% more compared to last year.

Last comment is on CapEx. As you can see, overall, CapEx decreased by half, and this is driven mainly by CapEx decrease in the Czech Republic. And again, I will provide you more details later on.

Now Page 11 shows the year-on-year development of our mobile operating revenue. Here, I would like to highlight that in Slovakia, we reported 1.7% revenue growth year-to-date on a year-on-year basis. This growth has been driven by investment into 4G network with a positive impact on data revenue.

Now important comments. In the third quarter stand-alone, we reported year-on-year decline of revenue by 1.4% in Slovakia. This decline is mainly in hardware revenue category, with year-on-year drop of 13%, while margin or EBITDA effect is rather marginal.

The other area with a negative revenue effect in Slovakia was due to mobile termination rates reduction in August. This was quite relevant reduction by 1/3. However, same comment is for hardware revenue. EBITDA impact was overall limited. If you exclude the regulatory effect, mobile service revenue grew over 3% year-on-year in Q3 stand-alone. So to conclude on Slovakia, even if reported revenue shows negative trend, underlying service revenue still grew by 3% and there was limited impact on our profitability in Slovakia.

In the Czech Republic, mobile revenue grew by 1.2% year-on-year, close to 13% growth of data revenue and by 14% higher revenue from financial services where key growth drivers, which more than compensated 5% voice and 12% messaging revenue decline.

Now moving to Page 12. You can see that in fixed revenue, we reported 1.2% growth year-on-year in the first 3 quarters. This part of our business shows improving trend compared to the previous years, and broadband and O2 TV are the key growth drivers. On the other hand, we see continuous fixed-to-mobile voice substitution, actually in both segments, B2C and B2B, with a negative impact on voice revenue. Broadband and pay TV revenue grew close to 6% year-on-year, helped by strong performance of pay TV revenue and overall slightly growing broadband revenue year-on-year. And in line with our broadband and pay TV service revenue, there is also revenue growth of 35% in fixed hardware revenue category.

Moving to Page 13. On Page 13, I will comment on the development of group total operating expenses. As you can see, we are reporting 3% overall decline, including IFRS 16 positive impact. In the Czech Republic, total costs declined by 2.2% year-on-year. There are savings across all major categories except for personnel costs. While in supportive functions, personnel cost declined, the overall growth is driven mainly by increased capacity in customer-facing area. And there is a clear payback for this. Therefore, this is a healthy trend.

In Slovakia, total OpEx was lower by 5% year-on-year, helped mainly by lower cost of sales. In previous calls, I already commented on the positive impact of CapEx we spent on network coverage expansion, which led to another savings in national roaming costs.

On the following page, Page #14, let me briefly comment on our CapEx in the first 9 months of 2019. As I commented in the previous calls, there has been a difference in CapEx intensity between the Czech Republic and Slovakia. In the Czech Republic, CapEx declined from close to CZK 2.7 billion to less than CZK 1 billion. It was directed mainly into the upgrade and development of our IT systems, core network. And in third quarter, we booked also the acquisition cost of Premier League content. Overall, CapEx in the Czech Republic represented only 4% of revenue in the first 3 quarters.

Our CapEx in Slovakia. We continued with our investment mainly into further extension of our 2G network with the aim to further reduce national roaming costs. The other major areas in Slovakia are improvement of transmission and backbone networks and also fixed wireless network rollout. As a result, in the first 9 months of the year, Slovak CapEx increased by 3 percentage points and CapEx to revenue ratio was at a 13% level. However, in third quarter stand-alone, CapEx in Slovakia was by 9% lower year-on-year. Total consolidated CapEx reached CZK 1.7 billion, roughly at half level of the same period in 2018. And group CapEx to revenue ratio was as low as 6 percentage points.

Before we open the Q&A session, let me briefly comment also on major changes in our balance sheet on Page 15. As a result of IFRS 16 standard adoption, total assets and liabilities were increased by about CZK 4.2 billion. We recognize receipts as noncurrent assets and corresponding noncurrent and as well current liabilities.

Just to remind you, in April, we have successfully raised a new loan in the amount of EUR 160 million, which led to an increase of our gross debt by CZK 4.1 billion to current CZK 14.6 billion. This means that based on our net financial debt as of end of September and EBITDA for last 12 months, our net debt-to-EBITDA reached 0.9x multiple as of the end of reported period.

Other relevant changes in our balance sheet between December '18 and June '19 relate to the approval of distribution of 2018 shareholder remuneration. In total, at the beginning of July, we distributed over CZK 6 billion to our shareholders. As you can see, our equity has decreased by CZK 2.3 billion in December, and this is a combination of the paid shareholder remuneration for 2018 and first 9 months of 2019 net profit.

And that's it for me. And I hand over back to Jakub to open the Q&A session.

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Jakub Hampl, O2 Czech Republic a.s. - Head of IR [5]

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Thank you, Tomáš, and thank you both for your presentation. And now ladies and gentlemen, we are ready to open the Q&A session. Aurelia, we are ready to take the first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Miroslav Frayer.

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Miroslav Frayer, Komercni Banka AS, Research Division - Equity Analyst [2]

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I would have 2 questions. The first is about the cost of sales because it was maybe the biggest surprise for me. If you give us more details about savings?

And the second question is related to the recently announced transaction between PPF and CME. If you can share with us any idea about the potential cooperation in the future between you and CME?

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Tomáš Kouril, O2 Czech Republic a.s. - Vice-Chairman of the Board of Directors, CFO & Director of Finance Division [3]

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Okay. Thank you for the question. I will start with the second one regarding the CME or PPF topics. So unsurprisingly, I cannot and will not much comment on the PPF acquisition themselves. I think the question should be directed towards them. However, what I will say is that -- and we communicated in the same sense in the last quarterly calls is that we as O2 are mainly seeing ourselves and our opportunity, as a TV and video content aggregator and distributor. So we do not have an intention to become a content creator or provider. And rather, we want to leverage our channels and significant customer base to distribute the content via very innovative mainly IPTV and video platforms, of which we have quite a few.

Now that, of course, creates some opportunities also for the content providers. But at this point, we are looking at CME or TV Nova rather as one of many content providers that we are using in our platform, yes? And we collaborate and we have been collaborating with them as well as with other national and international content providers. And of course, we want to maintain this collaboration and make it more successful.

Now having said that, even though some synergies are possible, we do not see TV Nova as some sort of a preferred type of content provider because we cannot depend on them only. So we have a very large and wide content proposition. We need many different content providers. And of course, we will and we need to treat them in a fair and competitive way, yes?

So this will continue being the case. However, what we believe -- and this is a proposition not only to CME but to Prima and other content providers. We give to these content providers much wider opportunities to present their content in terms of both quality and quantity than they are presented on the current linear or traditional TV platforms. And this represents a big opportunity for them not only in terms of reaching new customers and new customer segments but also significantly increasing the footprint and reach, which can also lead to a potential new advertising revenue streams for them. So we believe we are very kind of a potent partner for other content providers, CME being one of them, no more, no less.

Last point I will say to this. At this moment, we have not started any specific negotiation with TV Nova connected to the acquisition whatsoever. So we have been treating them as one of our business partners the same way as we have been treating others.

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Jindrich Fremuth, O2 Czech Republic a.s. - Chairman of the Board of Directors & CEO [4]

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Okay, Mirek, I will cover your second question on cost of sales. So first of all, there will be the -- actually, there are 3 answers. So first is cost of sales is one of the cost category we keep under control. So this is our overall focus, which is behind profitability. And then there are 2 more specific areas which I would highlight, both are related to Slovakia.

First of all, for a couple of quarters you have heard from us that we are investing through CapEx into the network to reduce national roaming costs. So basically, we are switching CapEx for current OpEx cost. It is profitable, so this is a good investment.

And second area is specific for this quarter, and you have heard from us for the first time that. And this is related to 2 revenue categories: hardware revenue and interconnect or mobile termination rate-related category. As I said, decline in Slovakia was mainly in terms of revenue in hardware category with year-on-year drop of 13%. I said that the effect on EBITDA is rather marginal. So as I -- what you can basically read from that is that there was drop in revenue but also in cost of sales category for hardware revenue in Slovakia.

And same comment is basically valid also for this interconnect revenue and related costs. I said that the reduction in Slovakia or MTR cut was quite relevant. There was 1/3 cut in August. So if you are going to update your malls, you can contact Jakub, who will provide you basically more inputs for you to be able to do so. So basically, it happened in August.

And same comment is for hardware revenue with a very limited impact on profitability. Therefore, it was not only revenue but also cost of sales impact. So overall focus, national roaming and for this quarter specific, hardware revenue and MTR cut, it limited impact on profitability.

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Miroslav Frayer, Komercni Banka AS, Research Division - Equity Analyst [5]

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If I can follow up one question. The decline in hardware sales, is it only a one-off effect? Or can we expect it also in the future quarters?

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Jindrich Fremuth, O2 Czech Republic a.s. - Chairman of the Board of Directors & CEO [6]

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Yes. Basically, I will provide you the context of what's happening in Slovakia. We have commented in the past that we decided in Slovakia that we will launch internal installment activities. So basically, we fund the installments in Slovakia, and this is our internal product.

So the de-acceleration is driven by 2 factors. First of all, the penetrated customer base. So there was like increasing period where we were penetrating the base, and it goes for more than 2 years. We are running that project. So it typically takes 2 years before the customer change their hardware.

And the second effect, as we can see it from management in Slovakia, is there is overall market de-acceleration in terms of buying new hardware. So I would rather see that as a trend rather than one-off.

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Operator [7]

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The next question is from Martin Cakl of [Adriana] Finance (sic) [Patria Finance].

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Martin Cakl, Patria Finance a.s., Research Division - Analyst [8]

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I have one question regarding the Vodafone complaint to European Commission, if you actually see it as a material risk? Because it seems like it might have been one of the reasons why the 5G auctions got delayed. But then again, Vodafone is complaining for a while and nothing really happened so far.

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Jindrich Fremuth, O2 Czech Republic a.s. - Chairman of the Board of Directors & CEO [9]

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Okay. I will take this one. So just a quick reminder also for the others. We have been one of the first telco operators in Europe, actually in the world, to execute the network sharing agreement as such. And as you probably know, many other operators later on followed in many different markets, including many European markets. So a, we are confident we were completely compliant with other legal and regulatory rules, and we are absolutely prepared to disperse any concerns of the European Commission. And b, we consider network sharing in general as a very sort of positive phenomenon which will be quite crucial going forward for, as you by the way mentioned, 5G network rollout. By the way, if you go into the details of this whole document, which is very dense, the merit of the issue is not whether the network is shared between 2 or 3 operators but it's a little bit different. So I think the Vodafone angle is there, but it's not necessarily the major angle.

Now so just to update you on the current process. In these days, we are preparing our response team to give preliminary conclusion. And we are required to provide this by mid-December, which will surely happen.

Regarding what kind of effect this has on the 5G auction in the Czech Rep, if you ask me, I do not think those 2 things are directly related because the timing of the 5G auction or 700 megahertz auction which is being prepared is driven by the many different other factors. And I don't see this EU comment to be one of them, frankly speaking.

So what we know about the timing right now is that the announcement of the tender or publication of the official document should be sometime in January 2020. So the regulator already announced that there will be a delay. And there should be next steps following submission of the application by mid-February and potential bidding maybe April or on.

Now having not received the final exact conditions, we have not yet decided whether and how we will participate. So it's very preliminary or premature to comment to this. But getting back to your question, I don't see really a direct link between these 2 events.

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Martin Cakl, Patria Finance a.s., Research Division - Analyst [10]

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Right. So the overall impact you think -- other risks coming from this potential risk is rather low. Do you feel confident this shouldn't be an issue?

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Jindrich Fremuth, O2 Czech Republic a.s. - Chairman of the Board of Directors & CEO [11]

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Well, I don't feel confident commenting what is a potential outcome from the EU Commission complaints or the findings. The future will show, but -- so I'm not commenting on this.

I'm not, however, connecting this thing to the 5G auction. And by the way, it is the EU Commission themselves who mentioned that network sharing is absolutely not in contradiction with the 5G rollout and 5G auctions. The opposite is to -- it's actually encouraged.

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Operator [12]

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(Operator Instructions) We haven't received any further question. So I hand it back to Jakub.

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Jakub Hampl, O2 Czech Republic a.s. - Head of IR [13]

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Thank you. So ladies and gentlemen, if any follow-up questions will arise later after this call, please feel free to contact me as usually. In this case, I would like to thank you for attending today's call. And on behalf of the company, I would like to conclude it. Thank you, and goodbye.

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Operator [14]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.