Hellenic Telecommunications Organization SA

ATHEX:HTO

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by, ladies and gentlemen, and welcome to the OTE Conference Call on the First Quarter 2019 Financial Results.

We have with us Mr. Michael Tsamaz, Chairman and CEO; Mr. Babis Mazarakis, Chief Financial Officer; Mr. Panayiotis Gabrielides, Chief Marketing Officer, Consumer Segment; and Mr. Evrikos Sarsentis, Head of IR and M&A. [Operator Instructions]

I must advise you this conference is being recorded today. We now pass the floor to Mr. Michael Tsamaz. Please go ahead.

[Michael Tsamaz, executive]

Good morning and good afternoon to all of you. Welcome to our first quarter earnings call. For the most part, 2019 is off to a satisfactory start for OTE, particularly in Greece where both fixed and mobile operations achieved top line growth across all business sectors. In Romania, things remain challenging, but we're seeing some encouraging developments.

Babis will go through the details of the quarter and our operations, but I would like to make some rapid remarks on developments throughout the group.

While our performance in the quarter was in line with the trends in the past year, it's not a time to be complacent. On the regulatory front, we will be facing tougher conditions through the current quarters coming both from the Greek regulator and from Europe-wide rules. It's likely to impact our top line as well as our profitability.

On the competitive front, we're an industry facing disruption, not only from traditional players but also from new actors like over-the-top media services. We're preemptively addressing these challengers. We have invested massively in our infrastructure. We've entered new industry segments, and we have never stopped innovating and leading our market. But as we face disruption, we have to deliver more. We must become even more agile and customer-centric than we have been and take advantage of digitalization to intensify this process. So we're accelerating the pace of our transformation.

We're working on a number of areas, looking to outsource legacy activities that are not central to our telecommunications and media services and spin off others in order to gain efficiency and flexibility. You can expect updates along these lines in the coming quarters.

We also continue to streamline our personnel, both to reduce our fixed cost base and to build workforce and start to align to today's requirements in our field. In April, we have carried out another voluntary exit scheme; approximately 320 employees, mainly people nearing retirement, participated. The cost to the company was approximately EUR 52 million, while annualized savings should amount to about 1/3 of this.

As you saw yesterday, we completed the closing of the sale of our mobile operations in Albania, which we had announced earlier this year. Net proceeds from these disposals should total approximately EUR 29 million. As we have already discussed, this amount will be used to fund an extraordinary dividend of approximately EUR 0.06 per share, which would -- we would expect to pay out by July following relevant approvals.

Apart from this extraordinary dividend, our ongoing shareholder remuneration policy is comforted by a strong cash flow we're generating, which has been developing according to plans. In the first quarter, reported cash flow was close to EUR 30 million, consistent with the EUR 350 million figure we are targeting on a full year basis. And we have restarted our share repurchase program. By end of April, we had repurchased a total of 2.1 million shares at a cost of EUR 24.4 million.

We are well positioned, so we should be able to adapt to changes in our environment all at once. We can evolve our organizations, save our customers, reward our people and remunerate our shareholders. But we're also vigilant and increasingly nimble. We are not just the incumbent.

Thank you, and now we'll turn the call to Babis, who will review the quarter.

[Charalampos Mazarakis, executive]

Thank you, Michael, and good day to all of you on the call.

A couple of accounting notes to begin with. First of all, our numbers are adjusted to exclude our Albanian business, which was stated as discontinued operations in line with IFRS 5 in the first quarter. It will have the same status in the second quarter up to the closing -- up to date of closing of the disposal, which was May 7.

And secondly, following the implementation of IFRS 16 on leases since the beginning of the year and in order to provide you with meaningful comparisons, we are discussing numbers before IFRS 16. However, in the press release, we have given you the EBITDA after the leases termed as EBITDA AL, which will form the basis for our discussions and comparisons starting in 2020. Of course, we will provide you these numbers this quarter this year so you have a proper series to work on from next year.

But let's go back to the first quarter. Group revenues totaled EUR 909 million, up EUR 2 million compared to the first quarter of last year. In line with the end of last year, we had revenues growth of nearly 2% increase, up close to EUR 12 million to EUR 697 million. Conversely, revenues in Romania were down nearly EUR 10 million or more than 4% to EUR 217 million.

Turning to adjusted EBITDA. It was down just EUR 3 million or less than 1% of group level to EUR 311 million.

In Greece, adjusted EBITDA was up EUR 4 million or nearly 2% to EUR 284 million. In Romania, it dropped by over 20% from the first quarter of 2018. However, in Romania, the numbers still largely reflect the past operating issues that resulted in tougher comparisons in this early part of the year. While the Romanian market will continue to be challenging, we believe we are on the right track to stabilize profitability, as I would show you later.

The EBITDA margins were resilient in Greece and at group level at 40.8% and 34.2% respectively, down just 10 and 40 basis points. In Romania, EBITDA margin declined by 250 basis points to 12.1%. So in Greece, our overall performance remains satisfactory.

Let's now look at our performance in each particular country. Starting with Greece, where revenues from Retail Fixed services increased 2.8% and Mobile Service revenues returned to growth with an increase of 1.2% following a drop in the previous quarter. Revenue from Retail Fixed services were particularly strong. Broadband revenues continue to make significant headway, up nearly 9% in the quarter. But voice revenues were also positive. And if we look back at the past 5 quarters, our view that they have stabilized appears to be confirmed.

As for TV, after a few relatively stable periods, the top line was growing again in the first quarter of 2019. The total Greek market added 6,000 access lines in the quarter, while we lost over 3,000 lines and we saw a little dip in our market share, reflecting a slightly negative profitability balance fueled by competitive pressure.

Broadband was once again the engine of our growth in Retail Fixed services. We added another 24,000 new connections in the first quarter. Fiber was up a record 54,000 connections, accounting this quarter for more than twice our total broadband growth. Broadband penetration of our fixed customer base has reached 73%, while 586,000 fiber customers at the quarter's end accounted for more than 50% of our total broadband base. It is also worth noting that 65% of our fiber customers get speeds of 50 Mbps or more, a number that stood at just 36% a year ago. This proportions will continue to grow as we no longer offer 30 Mbps service to new customers.

In TV, year-on-year, the total number of subscribers was up more than 2% while revenues were up more than 3%. This underscores our ability to support television ARPU through attractive programming, and we're working on new solutions to pursue and accentuate this trend.

ICT also grew nicely in the quarter. In particular, we are working on a number of smart city projects having to do with traffic, parking, lighting and all water management, areas we expect will generate significant demand in the future.

Greek Mobile Service revenues were up more than 1% in this quarter with increases across the board and KPIs all moving in the right direction. We are working on a number of value-enhancing initiatives targeting our prepaid customer base. And we are also doing all we can do to step up the pace of pre- to postpaid migration. As a result, the total number of prepaid lines were sharply reduced for the second consecutive quarter due to the multiple sim consolidation, while blended ARPU was up significantly.

Data once again was the main driver of revenue growth. Data traffic was up 52% in the quarter. The number of active data users, smartphone penetration and LTE sale of traffic are all up sharply. As a result, data revenues jumped nearly 19% in the quarter, aligned to the 2018 full year trend and showing no sign of slowdown.

We're also continuing to make progress in developing a number of ancillary services, notably e-money and e-gaming, aimed at creating new revenue streams and leveraging our market position in the future periods. This being said, as Michael pointed out, we have to be a little cautious when it comes to sustaining growth in the coming quarters as there are several regulatory measures taking effect, both in the Greek market and at the European level, that are likely to create some headwinds going forward. In particular, tariff caps on international outgoing calls coming into effect in the next week could slow down our growth.

In Greece, total operating expenses before IFRS 16 and excluding depreciation and amortization and one-offs stood at EUR 415 million in the quarter, up 2% from the first quarter of 2018.

Expenses were down in most categories with the exception of personnel costs, which was up more than 20%. However, as some of you may remember, personnel costs were exceptionally low in the first quarter of last year due to the adjustment of our staff retirement indemnity provision, which was a one-off benefit. If we discount this factor, personnel costs in this quarter would be down by about EUR 5 million, reflecting the benefits from the 2018 voluntary exit scheme, in line with our expectations.

As a result, total adjusted EBITDA in Greece before IFRS 16 exceeded EUR 284 million in the quarter, up 1.5%, and the Greek EBITDA margin was 40.8%, down just 10 basis points in the quarter. While it's probably not obvious from the first read of the headline numbers, we have made some underlying progress in Romania in the first quarter. Total revenues in the country amounted to EUR 217 million, a drop of more than 4%, in line with the decline for the whole 2018. However, net of the write-offs and provisions we took in the fourth quarter of last year, we are seeing signs of stabilization, particularly in mobile. Revenue from Retail Fixed Services stood at EUR 58 million and were down 12%, while Mobile Service revenues were down nearly 7% to EUR 76 million. Wholesale revenues, for their part, were up more than 38%.

In Retail Fixed services, the drop in voice revenues was much -- was very much in line with what we experienced throughout 2018, but the pace of decline was sharply reduced in broadband and TV.

Regarding the Mobile Service revenues, we still face tough comparisons that should ease as we move on to the second half of the year. Once again, we saw good progress in the FMC conversion services. Subscriber numbers were up by 40% and service revenues jumped nearly 21%. Bad debt provisions following this very significant increase in the fourth quarter of last year returned to more normal levels.

Total operating expenses, excluding one-offs and before IFRS 16, were down more than 2% in Romania in the quarter, reflecting our continued cost-capitalization efforts -- cost-rationalization efforts. As a result, total adjusted EBITDA in Romania was down 21% to a little over EUR 26 million and EBITDA margin at 12.1% dropped by 250 basis points. However, if we adjust for the 2018 base effect, the decline would be approximately 7%.

Now we expect EBITDA to start improving in the second half of the year where performance will no longer be weighed down by the receivables issued we tackled in the second half of last year. In addition, we are working on a number of cost-reduction initiatives which should support EBITDA. Conversely, there will be a negative impact from the 3% emergency tax on revenues, still though to be determined. All told, we are confident that we have reached the inflection point.

Let's now have a look at the rest of the financials. The consolidated group adjusted EBITDA totaled EUR 318 million in the first quarter, down less than 1%, reflecting the decline in Romania. Total group operating expenses before IFRS 16 and excluding depreciation, amortization and one-offs amounted to EUR 608 million, nearly unchanged compared to the first quarter of 2018 despite the unfavorable personnel impact I discussed before.

Adjusting for this, OpEx will be lower by nearly 4% or EUR 23 million. Total depreciation and amortization amounted to EUR 200 million in the quarter, roughly unchanged from the first quarter of last year but impacted by the implementation of IFRS 16 for approximately EUR 21 million.

Net interest expenses were up 8% as a result of an increase of about EUR 6 million, which is due to the implementation of the new accounting standard IFRS 16.

Our net debt before IFRS 16 totaled EUR 732 million at the end of March, down more than 2% from the level 1 year earlier.

Net debt-to-trailing 12-month EBITDA was 0.6x. Income taxes at EUR 46 million were stable compared to the same period in 2018. As a result, adjusted net income for the quarter stood at EUR 63 million, up 11%.

CapEx excluding Spectrum totaled EUR 176 million in the quarter, up about 7% compared to the first quarter of 2018. We are confirming our full year adjusted CapEx guidance of EUR 650 million. We generated adjusted free cash flow of nearly EUR 36 million in the quarter, a sharp increase compared to less than EUR 14 million in the first quarter of last year. Reported free cash flow, which, as you know, constitutes the basis for our dividend calculation, also increased sharply from minus EUR 3 million to positive EUR 29 million in the quarter.

So to conclude, we have a positive start to the year in Greece, where we will continue to work hard to face regulatory hurdles ahead of us and reduce our cost base. In Romania, we should see some encouraging top line signs, especially mobile, starting in the second semester, but the impacts of last year's ordinance is hard to measure.

That concludes my remarks. Michael, I -- myself and all colleagues at the table are now ready to take your questions. Operator?

[Operator]

[Operator Instructions] We will now take our first question.

[Georgios Ierodiaconou, analyst]

Georgios. My first question is around mobile and the moving parts. I think, Babis, earlier you mentioned that international calls regulation should impact the rest of the year. Do you mind just giving us an idea of the magnitude of these headwinds and whether there's any action you are taking in other parts of the tariff portfolio to offset that? And then my second question, more around the fixed-line, are you seeing any more action from the other competitors around VDSL as the situation gets more competitive? As far as I can see the second quarter, there doesn't look to be any change -- sorry, in the first quarter, there doesn't seem to be any changes. But I was wondering if there is any evidence subsequent in the year that, that becomes more active.

[Michael Tsamaz, executive]

Thank you for the question, George. First of all, the magnitude is in the area of EUR 7 million annually. That's annualized. And of course, it hinders our -- well, it hinders to extend our efforts to continue to have a sustainable growth. However, this doesn't really change the overall commercial policy which, as I said, constitutes in the monetization of data and offering more for more to our customers.

To the second question, I'm not really in a position to comment about our competitors actions, and I wouldn't like to do so. However, what we can say for our strategy, we have not changed our strategy. The strategy is always that we have invested significantly in linked fiber all over the country. And this now is the time to get it back in terms of payback for our investment. So what we see is the natural preference of the customers, who prefer to select an utility provider like us who provides not only high speeds but also much more premium service at -- and the right combination of meeting their demand for an increasing world of data consumption and connectivity. So other than that, competition -- what the competition is doing is really something that isn't part of our playbook for the day.

[Operator]

We will now take our next question.

[Stamatios Draziotis, analyst]

This is Stam Draziotis from Eurobank Equities. May I ask, I want to follow up on regulation, please. You mentioned these -- the new regulatory provisions which will create headwinds in the coming quarters. Just following up on the previous question, does the -- is the EUR 7 million annual tax impact the total impact that you expect from regulation? So that's the first question. And secondly, on Romania, in the presentation -- in your press release, sorry, you talked about stabilization of revenues in the next quarter. Just wanted to confirm basically what does this mean for profitability. Should we expect ongoing margin compression due to adverse mix, pricing and promotional activity? Or do you think that your cost-reduction initiatives will offset such pressures?

[Michael Tsamaz, executive]

Thank you for the questions. First of all, on the first front, I offered a very perfect example about how a decision taken at this instance in the European-wide level, which was the cap [indiscernible] some calls, could impact our revenues and it was for the EUR 7 million. There are also other hedges that are put in terms of the things that you can do and things you cannot do in the market. And we are saying this because as with international calls or something that popped up not suddenly but at least without being expected in the last year, we just -- our course is always to guide the market that there are things we don't control and they're coming from the regulatory front and these may place some hurdles in our revenue growth. I offered example of the EUR 7 million hit from the international caps.

But as I said, this doesn't really change our commercial strategy which continues to be focused on offering to our mobile customers the best service through our superior 4G network.

Now in Romania, you are right to say that our guidance is at -- as we go ahead in the year, things will get improved and we will see this in the top line when the whole comparison effect starts to [indiscernible]. The forecast we have for this year, I mentioned earlier on, I had -- I mentioned that we feel that we're really hitting the tipping point in -- after the challenge we had the last year. So for us, the target for this year is to see profitability that would be around the same level as last year.

Now Q1 does not fully really subscribe that one, but as I said, if we strip off the comparison level between the quarter 1 in '19, quarter 1 in '18, then the -- currently, the EBITDA drop is just [ 7% ] and it's starting to get better as we go ahead in the year, fueled not only by the rebound of the mobile services, but also from the monetization the cost-cutting activities that we are -- the last quarter of next year. And as we go through in this year, we'll see also the benefit in the bottom line from the cost savings. So bear with us for the next quarters to see how much we comes put on this target of getting the profitability stabilized.

[Stamatios Draziotis, analyst]

That was helpful. And just to follow up on it, on Romania, just wondering, are you still -- I mean, at some point in the past, you have said that you are considering more options for the particular business. So just wondering, does having reached the tipping point change this strategy? Or is it reasonable to say that the disposal of this businesses is on the table and it's something that we might expect will happen in the next, I don't know, year or 2 years, as was the case for Albania?

[Michael Tsamaz, executive]

I think I can comfortably reiterate our previous statement that while we are focusing on revising our operational performance, on the same front, we are exploring all of our options as diligently as we do with our operational excellence in order to have all options open. And at this point of time, I cannot say more things. But I can assure you we are fighting on both fronts, both operational excellence and concluding what is the best thing to do strategically with us.

[Operator]

There are no further questions.

[Michael Tsamaz, executive]

Thank you all for your attention, questions and interest in OTE. Have a nice day, nice weekend, and we'll talk to you again in August when we report our second quarter.

[Operator]

Thank you. That does conclude this conference for today. Thank you all for participating. You may all disconnect.