Hellenic Telecommunications Organization SA

ATHEX:HTO

Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm [indiscernible] your Chorus Call operator. Welcome, and thank you for joining the OTE conference call and live webcast to present and discuss the third quarter and 9 months 2022 financial results. [Operator Instructions]

At this time, I would like to turn the conference over to 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. Mazarakis, you may now proceed.

[Charalampos Mazarakis, executive]

Good morning, good afternoon to all of you. I am very happy to welcome you all to OTE's Third Quarter of 2022 earnings call. Michael is not able to join us today on the call due to other obligations, but we have plenty around the table to take you through the discussion and answer your questions. Michael, of course, will be with us in our next call. So our performance in the third quarter in a volatile environment clearly demonstrates our strength and the validity of our strategy. facing inflation, rising interest rates, other consequences of hardening global conditions and intensifying competition in our home market, et cetera, some organizations might have decided to return, but it's not what we are doing. We are continuing to push forward and build the conditions for continued overperformance way into the future.

We are leveraging our state-of-the-art infrastructure in fixed and mobile and our whole ecosystem to make further progress. We are mindful of the increasing pressure on the wallets of all of our customers and world communications to be the one thing they don't worry about. This is why we raised our speed of our broadband offerings without changing our prices. The impact on customer satisfaction is appreciable. This accomplishment did come at the detriment of some of our top line growth and fixed date. However, we are confident that they will put us in a very strong shape to face the existing and future competition in the next quarters. In the meantime, growth in the Greek Mobile remains buoyant, above the level in the first half of the year. We had good performances from all segments of the market.

Greece had a stellar tourist season. As a result, in the first 9 months of the year, OTE's digital roaming revenues already exceeded the record figure we achieved back in 2019. Revenue growth in Greece also benefited from strong wholesale and particularly ICT system solutions, where our expertise landed as many important public and private assignments. The newest addition to the Cosmote offering is the Payzy payment application for everyday transactions that we launched at the beginning of October, bringing flexibility and simplicity to our world of payment systems. It is still early days to report the numbers, but we base our ambitious goals on the fact that so far, mobile payment solutions in Greece accounted for 83% of the total, giving us thus a huge upside. In Romania, year-on-year revenue comparisons continue to be impacted by stringent cuts in mobile termination rates, which are scheduled to continue over the next couple of years.

But our mobile operator is successfully adopting to the new top line environment. It is making further progress implementing its mobile-only strategy. We are maintaining our disciplined approach to investments in our future successes. We are targeting EUR 640 million in CapEx for this year. This is roughly around EUR 20 million higher than our earlier expectations due to the timing shift of fiber-to-the-home CapEx against future years. Our cash flow generation, however, remains on track, and we are once again performing our 2022 outlook. Let me now deep dive a bit deeper on the results of the third quarter. So total revenues were up 5.9% year-on-year and reached EUR 905 million, maintaining a strong trend.

The increase is entirely due to our operations in Greece. As we started signing earlier in the year, the change in retail fixed revenues reflecting a combination of post-COVID line disconnections, the accelerated suites by certain customers from voice data lines, the impact of the speed upgrades and the commercial activity to boost loyalty and service to our customers. This picture is expected to be there in the coming couple of quarters before stabilizing thereafter. In Romania, revenues show the impact of mobile termination rate cuts along with the base effect due to some ICT revenues booked last year. As a result, group adjusted EBITDA after leases was up 1.6% to EUR 358 million in the quarter. The increase in total operating expenses largely reflects costs directly tied to higher revenues, notably device costs, marketing and third-party fees as well as the impact of higher one-off accounting provisions in personnel.

The group's EBITDA margin was down in the quarter, reflecting all the above. We should see our margin rebound as we maintain our efforts to improve costs in the coming quarters. Turning to Greece. Retail revenues were up, thanks to another outstanding quarter in mobile. This more than made up for the drop in fixed retail of nearly 5%. With wholesale up 4%, the other revenues were up nearly 29% while an exceptional level of ICT and System Solutions revenues, total revenues increase were up more in total than 6%. Growth in broadband revenue slowed down, as we had expected, following our competitive strategy and efforts to enhance loyalty. We are maintaining our market share as we accounted for a significant portion of all market net additions since the beginning of the year. Our fiber-to-the-home rollout is proceeding apace. This quarter, we added 18,000 new fiber-to-the-home subscribers to reach a total of 110,000.

Despite the absence of any state subsidy for a period of time, we have very ambitious new fiber to the home subscriber targets going forward. With 733,000 homes passed as of the end of September, we will reach our target of a little bit below 1 million homes passed for the end of the year. Our utilization rate had gained 2 percentage points in the quarter alone to above 16%, a very satisfactory ratio given the very rapid growth of the number of houses passed. We anticipate demand will accelerate in the next quarters as consumers appreciate more and more the full fiber experience. We hope to see another government-sponsored subsidy put in place within 2023, targeting the higher speed range. In the interim, we are leveraging our market-leading position and the breadth of our network to continue attracting new clients. In TV, growth revenues grew by more than 4%. We ended the quarter of 644,000 subscribers, up more than 7% compared to September 2021.

Our content remains as rich as ever, but macro factors affecting consumer confidence as lowing subscribers grow also impacted by taxes on TV subscription, which were restated in July 2022. We had an extremely good quarter in terms of ICT revenues, which were up 43% year-on-year. We expect ICT and system solutions to remain important drivers of growth for us, though, obviously, not at the exceptional pace as the need for digitalization of public and private entities only grow more pressing and European programs provide [indiscernible] incentive. Growth in Brick mobile service revenues further accelerated in the quarter, exceeding 5%. Cosmote customers are evidently perceiving the differentiation of our superior infrastructure -- our superior infrastructure provides.

Mobile service revenue growth was well balanced between prepaid and post-paid, both the revenue numbers of its segment and the respective customer bases were up in the quarter. As in prior years, our summer data packages proved extremely useful and successful. Average mobile data consumption per user exceeded 11 gigabytes for the first time this quarter. The recovery in inbound tourists has begun last year, but it really took off in the past 2 quarters. As a result, our revenues from business roaming jumped 33% compared to the third quarter of 2021. In Greece, total operating expenses, excluding depreciation and amortization in [indiscernible] were up more than 10% in the third quarter. Nearly half of the increase is due to higher device costs. Personnel costs were about 3% due to the anticipated one-off payments and provisions. This rise in energy cost was contained due to the preventive actions we have taken in the previous quarters.

Greek adjusted EBITDA after leases stood at EUR 346 million and was 1% up in the quarter. In Romania, total revenues were down 5%, largely reflecting in one-off ICT projects recorded in the same quarter of last year. Service revenues were down nearly 9%, primarily due to the continuing impact of sharp mobile termination rate cuts. Excluding the MTR cuts, mobile service revenues would be down approximately 4%. The shop growth in total number of telecom Romania mobile subscribers continued in the quarter. Importantly, postpaid subscribers were up more than 6%. Total operating expenses, excluding depreciation and amortization in Romania were down 9%, mainly reflecting the adjustments in several key OpEx lines. Telekom Romania mobile adjusted EBITDA asset leases amounted to nearly EUR 13 million, up 20% year-on-year. Approximately $4 million of this number is related to a reversal of sales provisions and, therefore, not recurring.

For the 9 months of the year, adjusted EBITDA amounted to EUR 38 million, close to our full year target of approximately EUR 40 million. Now looking at the rest of our P&L. Interest expense was down 26% from the prior year, partly reflecting our ability to lower the cost of our debt despite the interest rate climate. We repaid the remaining EUR 375 million bond issued in July and refinanced this with EUR 150 million loan for our fiber investments subsidized by the NRF and with a short-term EUR 150 million bond, which will be repaid next year from existing resources. Therefore, we do not anticipate any refinancing needs until maturity of our EUR 500 million bond in 2026. Income taxes were down 36%, reflecting lower earnings before taxes due to the last year's benefit of the one-off reversal of provisions related to OTE's voluntary leave schemes from earlier years.

Turning to cash flow. Adjusted CapEx was EUR 178 million, up more than 10% from the third quarter last year, largely of hybrid home investments and TV content acquisition. The full year increase in expected adjusted CapEx to EUR 640 million primarily reflects a slightly different building mix for the fiber to the home rollout from what we had originally been planning. Higher CapEx as anticipated led to a 2% reduction in our adjusted free cash flow after lease. Reported free cash flow was down 26% in the quarter, reflecting a different schedule of payments for voluntary excess schemes. In the 9 months though, however, the reported free cash flow is up more than 20% to EUR 459.

Overall, we don't expect the slight higher than planned full year CapEx to affect our free cash flow target. We will give more detail for 2023 CapEx guidance next quarter, where we will report the full year. But I want to emphasize right now that the 2022 excess does not imply any upward adjustment for the following years, each at the [indiscernible]. Taking that into account, we reiterate our stated guidance of EUR 600 million in reported free cash flow for the year. To conclude, third year has been solid, both in terms of delivering further growth and in putting aside some of the fruits of our growth to strengthen our future potential. With increasing the certainties ahead, we have improved our readiness to meet our competition and weather a tougher economic climate. Now at this point, without our [indiscernible] on the table, we are ready to take your questions. Operator?

[Operator]

[Operator Instructions] The first question is from the line of Draziotis Stamatios with Eurobank Equities.

[Charalampos Mazarakis, executive]

Mr Draziotis, I apologize to interrupt, but Your line is very, very bad. Could you please hang up and try to call back?

[Stamatios Draziotis, analyst]

Okay.

[Operator]

The next question is from the line of Ng Clara with JPMorgan.

[Chai Lin Ng, analyst]

Hi, can you hear me well?

[Charalampos Mazarakis, executive]

Yes. We hear you. Please go ahead.

[Chai Lin Ng, analyst]

I have 2 questions, please. So in the fixed service revenue decline, I guess a part of that is due to the customer that switched from traditional fixed voice to data communications. So what are you seeing on that migration for other customers? Do you think this is a trend that could continue that more customers would switch? And then second question would be, I think in the report, you guided towards low to mid EBITDA growth, but that also implies that Q4 EBITDA growth would be kind of flat to like low single digit. So is there any factors that would lead to higher cost in the last quarter, please?

[Charalampos Mazarakis, executive]

Thank you for the questions. On the first question about fixed, I think we -- as we described it, this is a trend that is caused by, let's say, controlled items. It's, of course, the migration of customers from the traditional voice to the data comps, and this is also captured in the other line, the other revenues, but also the continuous commercial activity to ring fence the -- our investments in the broadband and continue to grow our broadband base. So I think the most important KPI that we should flag out in this quarter is the continued growth of the broadband customers in an environment, which is other, the market has declined.

So we are capturing the biggest part of these additions -- and this one is a result of our commercial activities, which not only ensure that we defend the current base, but also we build the basics in order to be able to capitalize on this investment in the future. So in this trend, as we described also in the presentation, the next couple of quarters might be looking along the same investment targets in terms of nurturing our customer base before [indiscernible] thereafter. So it's not worrying us. It's actually deliberate actions we are taking, taking the advantage of the very good performance in other areas of our business to reinvest in the ring-fence the critical part of our investments, which is on the fixed part. On the second question, and if I understood you correctly, is whether this trend in Romania will persist in Q4. But before that, let me say that...

[Chai Lin Ng, analyst]

Yes. Sorry to interrupt. No, my question was just on the guidance for this year for EBITDA growth, that would be low to mid-single digit and what it implies for Q4, and that a 9-month EBITDA growth is around 5% already.

[Charalampos Mazarakis, executive]

Okay. Well, when discussing Q3, we had the effect increase and that's why the EBITDA growth was 1%. However, as we go forward, -- and also in Q4, we expect to rebound some of our dynamics that we have in the EBITDA, of course, we cannot disclose the exact numbers, because again, I may repeat myself, but it's very important, the investments we are doing in our base in this quarter are intentional. I repeat it is they are intentional in order to secure the base for the next quarters. So to the extent that dynamics of this go to the right direction, we should expect to see in Q4 a rebound of the EBITDA growth. Despite the fact that we continue also this strategy on the fixed [indiscernible], it will also be present in Q4. But obviously, our growth is also fed by the other lines and the underlying savings that we have on the cost side. It's not remind you that [indiscernible], it's Greece and the -- for Q3. As I said, this one is going to be reaching much better in the coming quarters.

[Operator]

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

[Georgios Ierodiaconou, analyst]

My first question is around the line just on fixed KPIs, firstly, around the line losses, which accelerated for the whole market. I was wondering if there is any trend that could be long-lasting? Or is it a one-off effect of certain contracts you migrated? Just curious to see if there is anything structural shifting in the market? And the second question I got on the fixed KPIs on the broadband side, you clearly have done very well on the retail side, but the market is slowing down. Is it just macro factors that are driving this? Or is there anything more structural maybe customers moving to mobile in areas where fixed infrastructure hasn't been upgraded. Just trying to understand if it's something that maybe temporary or again a bit more long-lasting.

And then my third question is around the OpEx phasing. Not only [indiscernible] that you expect EBITDA to improve a bit in the coming quarters. Is it something that you will implement for cost control? Is there any one of course, but will not recur. Is there any cost savings that you're implementing, -- just trying to understand whether it's more revenue or OpEx [indiscernible].

[Charalampos Mazarakis, executive]

Thank you for the questions. On the first one, the line also that the market imported is on the main on the access part. So it's also some voice-only customer lines that are disconnected. We discussed that this one of the action lines. There's also some substitution because some customers, B2B customers are moving from traditional fixed buys to data comps. And this revenue service captured in another line. So -- but in terms of number of access lines, that's one reason for reduction. Another reason for reduction is the continuous but trading out post-Covid effect that we have in the country after the surging of the lines during Covid. And to a lesser extent, some of the macro things that in seasonal, let's say, B2B business, which take out the businesses in the upper the touristic season.

That's what the action side is. on the broadband side, the total -- at least our customer base continues to grow, albeit at lower numbers. This is also explained by the fact that Q3 usually is the lowest production of -- in terms of -- because of the summer break, but also is because there is some temporary slowdown because of the macro because that also plays some role. And that is why also coming back to the previous point of the fixed activity. This is why we have intensified our commercial approach to even in this declining environment to continue to grow our broadband base, especially the broadband -- the percentage of our broadband that is migrated into the high speeds, what we call fiber determent which is [indiscernible] and higher.

And we believe that we have to be -- at this point of time, we have to be close to our customers to help them weather this crisis in this environment in order to reap off of their loyalty or to gain their loyalty for the future quarters. Regarding the -- going forward in the Q4, we expect Q4 to be a combination, the improvement that we expect in the EBITDA is going to be a combination of both top line because the mobile parts continue to perform as we have demonstrated quite satisfactorily, thanks to the appreciation of our network superiority by our customers.

OpEx savings, I think we reported that this quarter, there were some account seasonal bookings of business for annual bonuses, et cetera, for the personnel, which is not, of course, gaining the next quarter. So the continuous -- the organic reduction in the OpEx that we have traditionally doing through our activities will be more evident in Q4. So the combination of the 2 is expecting to help us improve our EBITDA rate in Q4. Although, as I said, the investment that we are doing on the fixed line will continue to persist for the next couple of quarters, certainly for quarter 4.

[Operator]

[Operator Instructions]

[Charalampos Mazarakis, executive]

Okay. I think we have some questions from the from e-mails and from the text. So allow me to take them through, so we can answer them to the whole [indiscernible]. So the first question is that we have seen some EU operators echoing a cautious message about cost inflation, particularly with respect to staff and energy. So I would appreciate some clarity as to the extent of pressure you expect to face on these 2 items in 23, especially with respect to energy, given the changes that we put in place over the course of the year.

Thank you. I think here, the answer the question also provides some of the answer. I mean for energy costs for next year, we continue to have our agreements, which are helping us to look at it a little bit stable for 75% of our consumption. The remaining part is due to floating -- and we are monitoring the current progress in the current price of electricity in order to be able to compare how it will evolve. As it looks today, the provision between '23 and '22, looks like this float in part will be moving around the levels of this year in terms of the averages. So we don't expect dramatically particular pressure on that side.

On the other inflationary pressures, the value chains are, of course, absorbing gradually the inflationary pressures I think the October number for inflation is lower than what it has been in the past 4 months. That's an indication that at least 1 month is not [indiscernible] of stabilizing in terms of the inflationary pressures. And we come with our agreements in place and our management of the value chains, we will be able to absorb most of this inflationary pressure without a significant hit in our costs. But again, that's all subject to the evolution of the over environment the next year, and we will -- certainly, we will not be able to defend it 100%. So some of this inflationary pressure will hit our P&L. But this doesn't change the upward direction of our growth.

Second question is there is -- I'm putting the question. There is a reduction in the retail fixed revenues in Q3 of 4.6%. Do you expect a rebound in the next quarters? Have there been any special events during the third quarter that led to this reduction?

I think we responded extensively in this call. Just I don't know if Mr. Dermizakez, who asked the question was here from the beginning of the call. So I will repeat very broadly and very in brief the answer. This one is a result of mainly our commercial activities that are aiming to strengthen the broadband base and increase the loyalty in our customers in a difficult period. that we expect this will secure the loyalty and the stickiness of these customers and will help us to monetize our fiber-to-the-home strategy in the coming months. We said that we expect to continue this study this tactic on the fixed -- also in Q4, at least and perhaps in the quarter after. But overall, naturally, we expect to rebound thereafter.

The next question I see on the screen is from Mr. Bode, and it is as follows. I'm [indiscernible] from Barclays, and thank you for taking my questionn -- so a couple of them from my side. What is the energy cost as a percent of OpEx? And could you provide some color here this Secondly, any updated thoughts on mobile and disposal in Romania.

Regarding the energy cost, again, we have discussed approximately -- this is roughly about 5% of our overall OpEx in terms of size overall OpEx. And we have agreements in place that cover with certain prices for almost 70% -- 75% of consumption. On the Romania part, I think we described the operational part quite well in our speech. Discussing the [indiscernible] disposal or strategies about the asset, there's nothing new to report on this call. Obviously, whenever we have more, we will revert to the to the audience for news. But so far, we don't have to report anything new -- to the operator, I think I read all the questions on the screen. I don't know if there's another question waiting in the room. Otherwise, you can take you to the closing.

[Operator]

There are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

[Charalampos Mazarakis, executive]

We thank you all for the attention and questions and your intent. For those of you who we'll not meet until February, when we report our 2022 results, we wish you a peaceful and healthy year-end. Good evening and until next time. Bye-bye.

[Operator]

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