Hellenic Telecommunications Organization SA

ATHEX:HTO

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the OTE conference call and webcast to present and discuss the first quarter 2022 financial results. [Operator Instructions] And the conference is being recorded [Operator Instructions]

At this time, I would like to turn the conference over to 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.

Mr. Tsamaz, you may now proceed.

[Michael Tsamaz, executive]

Good afternoon to all of you, and welcome to the first quarter '22 earnings calls. We had an exceptionally strong first quarter. It provides a solid base to continue progressing throughout the year of 2022. Part of the top line growth reflects the rebound from last year's first quarter when some activities were still experiencing slowdowns. In addition, our profitability benefited from some one-offs. There's also plenty of hard fundamental strength in our results.

Looking ahead, we are well positioned but also cautious that is a year of many pitfalls that require particular vigilance. The health crisis is not over yet. The geopolitical situation is getting more troubling each day. The macroeconomic environment is impacting the disposable income of our customers as well as our own cost base. In our home market, the competitive landscape is undergoing many changes. So while we're glad that the year started on a strong note, we're also fully aware that we will need to work hard to continue advancing along this path.

But back to the first quarter, when we achieved a nearly 5% increase in revenue and an 8% improvement in EBITDA at the group level. In Greece, we posted significantly higher revenues in our EBITDA and margins were up nicely. At the core of our business, our retail service revenues in Greece rose nearly 4% with an even higher increase in mobile, mainly driven by postpaid.

In Greek fixed, we had an impressive digital jump in TV, reflecting the enrichment of our content and the rise in subscriber numbers over the past year, on top of a favorable comparison base. This more than offset a moderate slowdown in broadband growth, ahead of our announced doubling of speed at no extra cost. Beyond the speed upgrade, our focus is as on fiber to the home, both in terms of rollout subscriber acquisition. We passed 634,000 homes at the end of the first quarter, well on track to reach our year-end goal of 1 million homes.

We also signed up another 14,000 subscribers, so take-up is growing even as we are accelerating rollout. Romania is a fiercely competitive market where we are still seeing the impact of our transformation into mobile stand-alone operator, the effect of sharp drops in mobile termination rates in our top line. We remain confident in the strategy we implemented in Romania and in the performance, it will lead to.

We are taking a number of initiatives to maintain and reinforce our leadership in the Greek telecoms market. Our market push into fiber to the home is just one of them. On both the fixed mobile fronts, we are constantly enhancing the coordinate liability of our services to our customers.

We mentioned the speed doubling in broadband. It will enhance our positioning, market competitiveness and in the medium term should greatly strengthen our performance. We just launched our plan to offer unlimited voice on some of our postpaid mobile offers. We are very proud of the initiatives. We've taken all front to boost customer loyalty. So while we are fully aware that 2022 might not be an easy year, we feel that we are in a great shape to face these challenges.

We're continuing to invest. We're working on our OpEx base to minimize the impact on inflation and growing energy costs on our profitability, and we are constantly strengthening our positioning and brand equity to support our revenue base. This is why despite growing uncertainties around us, we are confirming our outlook for 2022. Now I will ask Babis to review our performance in the quarter. Babis?

[Charalampos Mazarakis, executive]

Thank you, Michael. Greetings to all of you from me as well. Our first quarter performance was indeed very good. And Michael is right to point out that part of this is due to factors that are not repeatable. Therefore, I hope that by end of my presentation, you will have a clearer picture of what we are carrying and what is not and what we expect for the balance of the year.

So group revenues were up 4.7% compared to the first quarter of 2021. This is a robust performance even if we consider the relative weakness of last year's period where we faced still the impact of COVID. In Greece, the revenue increase this quarter was in line with the progression of the group level and revenues were up in Romania as well.

Group adjusted EBITDA after leases rose by 8% to EUR 325 million this quarter. Part of this sharp increase reflects the low base and one-off factors in Romania. Excluding this, however, EBITDA growth would be roughly in line with the group top line increase and a powerful testimony to our ability to offset the impact on our profitability of the hike in certain major cost items.

Group adjusted EBITDA margin stood at 39.4% and was 120 basis points higher than in the first quarter of 2021, with part of that improvement due to the nonrecurring factors I just mentioned.

Now looking at Greece. The increase in total revenues was driven by both fixed and mobile, pretty much across all our activities. Revenues from Greek retail fixed services were up 2.8% in the quarter, while adjusting for the comparison effect I mentioned, would have been up 1.9%. Growth in TV revenues were striking, a part of this is due to the rebate we offered last year to shops and cafes shuttled by lockdowns, but other line growth benefited from our strong and expanding content and from our operated top offerings. The number of TV subscribers rose by 12,000 in the quarter to 637,000, a very satisfactory year-over-year increase of more than 10%.

Broadband revenue growth was such lower than last year's levels, but this would be expected following our announcement of significant speed upgrades to be carried out in the near future.

At this time, we are focusing our marketing efforts on fiber to the home and the numbers Michael mentioned, both in terms of installation and take-up are consistent with our plans. We added nearly 60,000 new fiber subscribers for a total of over 1.2 million at the end of the quarter, representing a 53% penetration of our total broadband base. Year-on-year, this is a jump of around 20%.

The number of fiber to the home subscribers, FTTH reached 75,000 or 12% of households passed. This already high penetration level is climbing fast. Speeds in excess of 100 mega bps now represent 28% of total retail subscription, up from 17% a year ago.

ICT is benefiting from our EU recovery fund and we anticipate further acceleration in coming quarters as we position ourselves as a key play in the digital transformation of our market. Wholesale revenues were up on higher international transit as well as fiber acceleration supporting domestic wholesale.

Now Greek Mobile service revenues posted a very healthy growth of 4.5% as we continue leveraging our network superiority, notably in 5G. Business roaming picked up sharply, but they never represented a significant contributor in this particular first quarter of the year. Excluding the positive impact, however, from roaming, mobile service revenues would have been up by 3.9%. If as we expect, this trend continues in the high tourism season, it will have a meaningful impact later in the year.

The increase in service revenues was mainly driven by postpaid. The introduction of unlimited voice packages should further improve the competitiveness of our postpaid offering. Prepaid revenues recorded moderate growth, benefiting from ongoing execution of our more for more strategy and to some extent from lowering of taxes or the complete elimination for [indiscernible] customers.

The increase in operating expenses, excluding depreciation and amortization and one-offs in the first quarter was aligned with the growth in revenues. Much of the increase, as you can imagine, is due to higher energy cost which was about EUR 10 million for the quarter. They should post a similar increase in the second quarter and then start to taper considering that costs have started [ climbing ] in the second half of the last year.

Bad debt provisions, which have been impacted by the pandemic last year, were down by about 1/4. Personnel expenses pursued the steady decline. There were no expenses related to early retirement in this quarter. But as you might have heard, we are implementing a new program that should mainly be expensed in Q2, expecting to result in annual savings of about EUR 40 million, which will start materializing in the second half of the year and in 2023. We do not expect any material impact from the increase in the minimum wage as most of our employees already enjoy higher remuneration levels.

First quarter adjusted EBITDA after leases in Greece was up 5.1% to nearly EUR 314 million with a margin of 41.9%, up 30 basis points from the same quarter last year. Total revenues in Romania were up 2%. The increase is partly due to other mobile revenues, which benefited from the provision of MVNO service [indiscernible] services that should be gradually discontinued in the coming quarters. For the part, service revenues were down due to some regulatory cuts by 28% in mobile termination rates, particularly impactful this quarter at the revenue level. Adjusting for the severe impact of regulatory cuts in termination rates, service revenues would have been up by 1.2%, a second consecutive quarter of underlying growth in Romania mobile service revenues.

Telekom Romania Mobile strategy of migrating subscribers from prepaid to postpaid is making continuing progress, fueling a continuing increase in the postpaid subscriber base. We expect Telekom Romania situation to improve in the second half of the year, reflecting its strategic direction as well as more favorable comparisons with 2021.

Total Telekom Romania operating expenses, excluding depreciation and amortization, were down nearly 13% this quarter driven by significant reductions in commissions, bad debt, maintenance and other items. Telekom Romania Mobile's adjusted EBITDA after leases was mainly up EUR 9 million in the quarter to about EUR 12 million, excluding the one-off impact I mentioned earlier of the MVNO and the like profitability will still have doubled compared to the first quarter of last year. We continue to expect a significant rebalancing in the second half of the year.

Now going down to the rest of the P&L. Group operating expenses, excluding depreciation and amortization and one-offs, were up slightly compared to the first quarter of 2021, while group personnel expenses were down. All of the increase in expenses is attributable to higher energy costs. A part of the 8% decrease in group adjusted EBITDA after leases was due to the favorable comparison base as well as the one-off in Romania not been supported for the balance of the year.

We estimate that the underlying EBITDA growth would have been roughly in line with the increase of the top line. Interest expenses was down by 1/3 from the 2021 level. The double-digit decrease in income taxes primarily reflects lower tax rates.

Turning now to cash flow. Adjusted CapEx was EUR 93 million, down 7% from an already low level in the first quarter of 2021. However, we expect a more normal run rate to start in the second quarter as we accelerate payments to contractors working on the fiber-to-the-home deployment. In addition, TV content payments are also skewed towards the balance of the year.

As a result, we confirm our EUR 620 million CapEx guidance for the full year. The third jump in the quarter's adjusted free cash flow after lease reflects higher profitability at the absence of voluntary retirement schemes in addition to the CapEx cadence. We maintained our stated guidance of EUR 600 million for the full year as well as our EUR 500 million shareholder remuneration guidance.

So to sum up, we had a very solid first quarter in both Greece and Romania. There are obvious factors that make this quarter exceptional, and we clearly cannot just multiply all the metrics by 4 to have an accurate vision for the year ahead. But we are positive and reiterate our guidance for the full year even if we know that it's not going to be an easy period for us and for the world.

On this note, Michael, the rest of the colleagues and myself would be around the table, we'll be ready to take your questions. Operator?

[Operator]

[Operator Instructions] The first question is from the line of Patrick Maurice with Barclays.

[Maurice Patrick, analyst]

Maurice here from Barclays. Couple for me there. The first one, you made some references in your prepared remarks about the European recovery fund. And I would love to get a greater sense in terms of when we'll start seeing a contribution from that actually coming through in terms of the release of those funds and the impact on your business?

And then second, unrelated question, just around any change in capacity behavior since the sort of wind Forthnet kind of combination would be helpful.

[Charalampos Mazarakis, executive]

Thank you very much for the questions. On the EU recovery funds, we have also commented in previous periods, the benefit for us comes through the fact that a good part of this recovery funds, namely around EUR 5 billion, are dedicated into digitalization projects in Greece. And this usually comes with through ICT programs and actions that we are very active in this area.

So I think in the speech, we mentioned that ICT is on the right track to grow. And as more and more of these projects will be materialized in terms of biddings and awards to specific vendors among which we hope to be, then this also will flow into our P&L. It's difficult to quantify because this is a part of the timing and also the process to get there. But it's important to note that we -- this is the main channel through which we see the benefit of the EU recovery fund on our numbers.

Now the competitive behavior. I think that there's nothing better or worse versus the previous quarter. The competition continues to be quite intense and quite intensive and it's a battle day-to-day on all fronts, both in mobile, fixed and TV. And this is why -- and I think it was very evident in our presentation that will continuously come up with consumer offerings that makes sense in order to be able to stay high at the consumers' preferences.

The doubling of the speeds on the fixed. There are limited voice programs we just announced on mobile. Our continuous reshuffling of the TV content in order to find the right mix and the appealing mix for our customers. And also, as we discussed just before, the continuous drive to win the ICT gain. So all these results come not from the fact that competition has become a little bit less intensive or more intensive, it's the same intensive, highly intensive as it used to be.

[Operator]

The next question is from the line of Ierodiaconou George with Citigroup.

[Georgios Ierodiaconou, analyst]

A couple of questions from my side as well, please. The first one is around the benefit from the lower special taxes. Obviously, it already benefited a bit mobile service revenue in Q1. I was wondering if the benefit in the coming quarters could be more meaningful or whether we've already seen the impact. Just wondering how this is, in a way, pass through the renewal process of the contract.

I also wanted to ask a question around the speed increases on broadband that you mentioned earlier. I'm a bit confused because I think this well announced at the end of last year, but then there were some complaints from one of your competitors that meant you could have implemented. I just wanted to make sure is now being implemented as of April, May, is that correct? And if you don't mind, just giving us any indications of how you expect this to benefit maybe your churn and other metrics?

And then a final question around Romania. There were some reports in the press that you are looking at strategic options. I know you can't comment extensively this, but I was curious if you could perhaps outline some of your thoughts, whether you believe in market consolidation is possible in Romania or whether that's not an option and you are looking at, players that are not involved in the market right now.

[Charalampos Mazarakis, executive]

Okay. Thank you, George, for the questions. Starting from the lower tax on the consumer tariffs, I think this has been around now for a couple of quarters. It's returning into the, let's say, in the demand -- but I think the main driver of what we see in the mobile service revenues and the fixed service revenues is the offering that we are making to the market. And it is true that the more-for-more that we implement on the mobile or the pre-to-post migration, certainly, is enhanced or facilitated from the lower tax regime. And this carryover, we expect to see going on.

On the doubling of the speeds, we are actually implementing it as we speak. We are upgrading the customers wherever technically feasible and according to the capacity of the systems and it's an ongoing exercise. So far, we have upgraded almost 1/3, a little bit 30%, more than [indiscernible] that I would say of those who are eligible technically to be upgraded. So it's going on. It's continuing.

And on the Romanian case, I think you gave the answer to your question to yourself. I mean it's a little bit of discussion that confirms our interest to explore all of our strategic options. There's nothing concrete that we could announce. So at this point of time, the main focus is to stabilize and start taking the growth rate on the operational level. And I think it was evident that at least at the mobile service revenues, we are now in the positive territory for the second consecutive quarter, which, among other things, it will also facilitate the possible strategic discussion, but there's nothing that is certain, so we can announce it.

[Operator]

The next question is from the line of Grigoriou George with Pantelakis Securities.

[George Grigoriou, analyst]

A couple of them actually already been answered. Just a follow-up, if you like. If you can please repeat what you just mentioned before in your presentation in your opening remarks, regarding a new voluntary exit scheme for employees. How many are you targeting and the annual savings you mentioned before.

And the second one is, again, on rumors. In Romania, there's also been rumors in the market that you are about to sign a 3-year TV deal with [indiscernible]

[Charalampos Mazarakis, executive]

Okay. Thank you for the questions. The first one around the voluntary exit scheme, we are launching a new program. The annualized savings is around EUR 14 million, and the expected investment to get there, the payments will be around close to EUR 55 million. Of course, this depends on the participation. And on the ability to execute promptly as planned.

[Michael Tsamaz, executive]

Okay. Regarding [indiscernible] in the audience, you have some great journalists. If I invite you on what will happen on [indiscernible] cost instead of reading about the good results that we had this quarter, we'll be reading about the football.

So let's leave it for next time.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

[Michael Tsamaz, executive]

Okay. Thank you very much for being with us today results call for the first quarter of the year. We're looking forward to talk to you and communicate with you in the next announcement of the 6 months of 2022. In the meantime, I can say that we're pleased with the results, and we will keep up our efforts to maintain the good momentum that we have despite the difficult circumstances. So take care, every one of you.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.