Cyfrowy Polsat SA

WSE:CPS

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to Cyfrowy Polsat's First Quarter 2019 Results Conference Call. I will now give the floor to Mr. Miroslaw Blaszczyk, CEO of Cyfrowy Polsat. Sir, you may begin.

[Miroslaw Blaszczyk, executive]

Good afternoon, and welcome to Cyfrowy Polsat Group Q1 '19 results call. First of all, let me introduce myself. My name is Miroslaw Blaszczyk. On April 1, 2019, I took the responsibility of the CEO of Cyfrowy Polsat. However, my cooperation with the growth of Polsat Group started long time ago as I worked for TV Polsat, our content production company, already in 1994. For the last 12 years, I was the CEO of TV Polsat. So I can claim I was a member of the team creating successful business projects of Cyfrowy Polsat Group since the very beginning. Presently, the supervisory board gave me a role and privilege of managing the development of the group going forward. I find this task as a very exciting and responsible one. From now, I will be also involved in our quarterly results calls. I also hope to meet you in Warsaw in future. As for today, the agenda of the call has been presented on the Slide #3.

As usually, we will summarize the quarter and discuss our operating and financial results. Moreover, Maciej Stec, the Vice President of the group responsible for our strategy and business development will present you the steps we did over the last month aimed at further strengthening of our marketplace strategy.

But first of all, let me talk briefly about our Q1 perspective. Q1 was the period of launching new important products by Polsat Group. First of all, in the beginning of the year, we started offering fiber broadbrand under Plus brand. The product is offered based on the infrastructure of Netia. So at the moment, our footprint reaches 2.5 million homes passed. However, as you remember, our strategy is based on bundling, and the Internet television provided in the IPTV model was the next natural stop. It was a very complex project. We worked on it for more than 12 months. It required renegotiating our programming deals, developing an absolutely new EVOBOX IP set-top box, working on the software, preparing the offer and a dedicated marketing campaign. Finally, we decided we were ready to launch our new product in March 2019. We believe the product is a very attractive one and give us a new potential for growth. However, I will leave the topic for Maciej who will take you through our strategic developments soon. Another project that we did in Q1 '19 stands a little bit apart from our strategy, namely, we have decided to test our capabilities of attracting Ukrainians who came to Poland with our prepaid product. You should be aware, there are as many as 1 million Ukrainians coming to work in Poland. And naturally, they want to be in touch with their families. Therefore, we decided to prepare a tailor-made prepaid offer and marketing campaign. We did engage one of Ukrainian celebrities, as the campaign was run behind our eastern border. Finally, Q1 '19 was an intensive period also for our finance division, who work on refinancing our bonds. The outcome of this project is very satisfactory as we extended a lifetime of our bonds and reduced the margin. Katarzyna will show you more detail. As the CEO, I can only comment that I'm very glad that Cyfrowy Polsat is a highly trusted brand also for the capital markets.

Now I will give the floor to Maciej who will tell you about our strategic idea for the years to come. Maciej, it's your turn.

[Maciej Stec, executive]

Thank you, Mirek. Indeed we have prepared some new products and proposal that I would like to show to you today. But before we go this material, let me stop for a while at our vision and mission.

Our business markets do evolve, however, our vision and mission remain unchanged and still valid. We are, and we want to be, the leading provider of entertainment and telecommunication in Poland. We create and deliver the most attractive content, telecommunication products and other services for home as well as for individual and business customers, using state-of-art technologies to provide top-quality multiplay services that changing needs of our customers, while maintaining the highest possible level of their satisfaction.

Our assets are summarized on the next slide. As frequently underlined, the stair was started with TV Polsat, our content production and broadcasting arm in 1992. Today, after 27 years of its existence, TV Polsat is the biggest producers of the Polish language content and perfectly understands the needs of the local audience. Satellite Pay TV business came as the next step. And under Cyfrowy Polsat brand we build the #1 player in Polish market. Based on our sizable customer base so we could collect a very broad portfolio of internally produced and externally purchased TV channels. However, as we are aware, the content consumption patterns will change in future, anyway. We have decided to expand into telecommunications. That's why Polkomtel, one of the major mobile companies, was acquired. At the moment, we have approximately 25% of the mobile market, and we have full telecommunication infrastructure under our control. Next step, Ipla is crucial platform for our online video expansion. We currently spend a lot of effort to build the library and constantly improve the customer experience of our Ipla viewers. And recently, a year ago, we took control over Netia, the second biggest Polish fixed-line telecom with over 2.5 million homes passed, our referral the door to the urban market. As you can see, we control over key telecom media assets, which give us flexibility in creating valuable multiplay telecom media services. As all of these assets have been collected under one roof, we can reformulate our strategic idea.

At the moment, we can provide Internet for everyone in Poland. Either mobile or fixed technology can be used depending on the location of our particular customer. Internet for everyone allows for distributing our content or television to everyone. Satellite technology is perfect for rural and suburban areas. However, with more and more fiber broadband connections available for the Polish consumers, we want to be there as well. Therefore, we already started providing IPTV service on closed network, and we are close to launch our OTT service available on any Internet network for everybody, everywhere. And the third pillar, telephone, our mobile service, already covers 100% of the Polish population. So we only need to constantly work on our products in order to meet the changing expectations of our customers.

Slide #10 summarizes our services. As you can see, in case of television, we have the content production under TV Polsat, we have a huge customer base using our DTH services and a constantly growing Ipla footprint. However, we want to go further with IPTV product launch few weeks ago and DVBT+OTT set-top box to be presented soon. IPTV and OTT are our key products to address the urban markets where customers frequently do not have a satellite dish on their walls. With these 2 boxes commercially available, we'll be to deliver our TV for everyone and everywhere.

In case of Internet connections, we were very successful with our LTE strategic started in 2010. And at the moment, we test LTE TDD technology in order to further improve the comfort and customer experience of our consumers. Moreover, through the acquisition of Netia, we did enter the urban B2C markets with cable and fiber services. There is still a lot of growth potential for us based on the access infrastructure of Netia. And by engaging our Plus brand to sell fiber services, we want to accelerate our expansion into urban markets. The mobile or fixed telecom services available for everybody, everywhere, is a natural third puzzle.

Moreover, we spent recent few months on developing our portfolio of value-added services. We have talked with you pretty much about our investment in Polsat becoming #1 player in the sports segment in Poland, Polsat Sport Premium and Eleven packages are highly demanded and the hype around recent very exciting semifinals of UEFA Champions League proved the product is highly attractive. Ipla and HBO GO provides very broad and attractive movie and TV service proposition for our customers. Moreover, our recent development is a new deal signed with Tidal, one of the biggest music platforms globally.

We believe an offer of the most attractive sports, movies and music gives us further potential to build the value of our customers. But a very broad portfolio of services constitutes only a part of our offer. If you switch to Slide #11, you will see how big and attractive is the portfolio of the content that we produce internally. We were present in every single group of content. We do produce 6 general interest channels. We have 10 channels with top-quality football, volleyball, Formula 1 and many other sports. We produce movie channels, music channels, news and lifestyle channels. Everything in Polish with local celebrities, local TV series, local problems, local heroes, local shows, et cetera, et cetera. Each member of the Polish family will find something interesting among our productions. Why is it important? Because we believe emotions is something which people are really ready to pay extra for.

Let's switch to the next slide. The slide summarizes smartDOM offering, which is composed of a very broad portfolio of utilities and entertainment. Our conclusion is, with cheap unlimited packages, telecom services do not differ much from other commodities. Customer do not pay much attention to the brand of the electricity provider, and they will pay less and less attention to their connectivity provider. They simply want a stable, satisfactory quality for a reasonable price that fits their monthly budget limits. They're interested in convenience, and that's all. However, what they are really ready to pay for are emotions and entertainment. Have a look, how many of your friends have commented through recent Liverpool versus Barcelona tournament. Have a look, how many of you discussed about Winterfell battle winners and losers? These 2 events took place almost in the same time, and probably many of you and your friends watch both of them through any sort of a type access. Why? Because of emotions. Real emotions. Emotions that you will never get from your electricity provider or mobile service provider. Emotions that you can get from your content producer. That's why we believe a combination of commodities of entertainment provides a winning strategy. In Poland, you need to add value for money approach in order to be really successful. And that's what smartDOM is all about: convenience, emotions and value for money. How did smartDOM strategy perform in Q1 2019? I will comment on that in the third chapter. However, first let's look at our TV production business operation as a results.

Let's switch to Slide #15. It shows you our viewership performance in Q1 2019. It was successful quarter for TV, where 23.4% viewership result, and we were in line with our strategic assumptions. Just to remind you, we intend to keep our viewership in 23%, 25% corridor, and adjust our cost to the revenue market conditions. In this respect, Q1 was a bit challenging because the advertising market was under some pressure at this time. When you see 3.1% decline, you need to remember about a high base effect. In Q1 2018, the Polish TV ad market grew by almost 10% year-on-year, and the slight reduction this year shouldn't be a surprise for you. Moreover, we do maintain our full year forecast unchanged. In our opinion, the Polish TV ad market should grow in low single-digit pace as initially expected. What's more important on the slightly weaker market, TV Polsat performed very well with 0.5% growth in our TV ad and sponsorship revenue. As a result, our market share jumped up to 28%, a result that hasn't been seen for many, many years. So another successful quarter for TV Polsat, proving our strong monetization capabilities. And now let's jump to our bigger business segment.

As usually, I will start with smartDOM performance. Our multiplay base goes up gradually with 18% year-on-year growth rate and almost 300,000 new customers. In sales Q1, 2019, we were successful in convincing almost 60,000 new customers to join our multiplay products. As a result, in March 2019, almost each third of our customers benefited from our bundling programs. These customers use 5.6 million services jointly. Last time Tobias was proud to reach a churn level as low as 7.6%. However, Q1 proves we can be even better. The churn ratio declined to 7.2% per annum, potentially one of the lowest churn ratios worldwide. Customers of Cyfrowy Polsat [ temples ] are very loyal, and we intend to make them sure that our product provides the best offer on the market.

Low churn naturally means that the growth of our business is additionally boosted. And on Slide #19, you will see, we did grow dynamically, even though Q1 is usually a low sales season in Poland. We provide over 14.3 million contracted services already. Our RGU base went up by more than 500,000 year-on-year. We continued performing very well in voice segment, which is a combination of a successful strategy, simple and attractive tariffs and a very low churn.

As a result, we do provide over 450,000 more telephony services than a year ago. Sales of our Pay TV are also healthy, with the number of services provided of 5.1 million. This growth is the result of a systematic upselling of our multiroom and video online products to our DTH and mobile customers. Finally, our contract mobile Internet is stable at 1.8 million RGU level, and we're very happy about this result.

If we switch to ARPU slide. I'm happy to report to you another quarter of a healthy growth. Our ARPU went up by PLN 1 year-on-year. This is naturally an effect of executing our multiplay strategy. As you can see, our customers use on average 2.53 services each, and with the growing portfolio of our services, we expect this ratio to grow further. In case of prepaid segment, please remember in 2018, we decided to sell our low-end brand, a2mobile, to one of our MVNOs, which explains the year-on-year RGU base decline. However, in a q-on-q perspective, you can see that our prepaid base was very stable, even though Q1 is a low sales season usually. We are seeking to make this segment more dynamic and our Ukrainian project mentioned by Mirek in the openings of the presentation is one of our recent initiatives.

Please also pay attention to our ARPU level. Even though we enjoyed a strong result of PLN 20, we are also successful in keeping it stable. Just to summarize my part, we are very happy about Q1 operational results. Polsat TV achieves very good viewership results in line with the long-term strategy and outperforms TV ad market. We have successfully executed our multiplay strategy, and we added almost 300,000 multiplay clients year-on-year and reached 1,850,000 customers. We have achieved the lowest churn ratio ever on the record level of 7.2%. We sold more than 500,000 additional services, and our ARPU grew and reached almost PLN 83. And this concludes my presentation this time.

Now I will give the floor to Kacha, who will present to you the financial results of our business initiatives.

[Katarzyna Ostap-Tomann, executive]

Good afternoon, everyone. Today, I have the pleasure of presenting you with Q1 results. Please note that as of January 1, 2019, we have adopted IFRS 16, reporting standard. Therefore, 2019 financial results are not comparable to 2018 results. For your convenience, we're presenting the results for 2019 in 2 versions, with and without IFRS 16.

So passing to the results. Excluding IFRS 16, our revenue grew by 18.6%, and this includes PLN 312 millions of Netia. Our EBITDA grew by 3.6%, which includes PLN 83 million of Netia. Please remember that Netia was not consolidated in Q1 2019. Free cash flow of PLN 1.4 billion is in line with the expectations. Leverage ratio excludes IFRS 16 and is down to 2.66x from 2.73x in the previous quarter. On both free cash flow and leverage ratio, I will elaborate on the next slide. If we did compose by segments, you can see that as far as the revenue is concerned, the growth comes not only from Netia consolidation but also from the growth of both of our segments. At the EBITDA level, we have slight growth in the broadcasting segment. As far as the free cash flow is concerned, please note that it is exactly in line with our expectations. Q1 was traditionally slower as far as cash is concerned, and additionally, we had some higher CapEx and payments for programming, which was fully expected. I uphold my previous expectations of PLN 1.3 billion to PLN 1.5 billion of free cash flow throughout the year. Now passing to the cash flow. First, please note that as of Q1 2019, we returned to the amortization of our debt, you can see it in repayment of loans and borrowings. Out of this almost PLN 600 million, PLN 255 million is amortization of debt, and the remainder is the repayment of RCF. As I expected in the previous quarter, our CapEx-to-revenue ratio increased. As the result of Netia investments and cumulation of investments in Polkomtel. For the modeling purposes, I suggest an average annual rate of 11%.

And now passing to debt, please note that our net debt dropped below PLN 10 billion. We have repaid a large chunk of RCF, and this PLN 270 million that remains is the debt of Netia, and in my opinion, we remain there for some time.

As I mentioned, we present you with data both including and excluding the impact of IFRS 16.

The leverage ratio we used for debt purposes is 2.66x and excludes IFRS 16, as this is granted to us in the financing documentation. Our weighted average interest cost remains at 3.3%. And for the debt maturing profile, let's pass to the next slide.

So as you probably know, we have recently refinanced our A-series bonds that were at 2.5 margin and due in 2021 with a B-series bonds that are at a margin of 1.75 and due in 7 years.

This is very successful refinancing and it reflects the credibility of our component. It also will save us PLN 50 million in cost over these 7 years. I would like to take this opportunity and thank all the bondholders, who have trusted us and invested in these bonds. And this would have been all as far as financial is concerned, we're right on track, both in business and finance.

And now for the summary, I'm passing to Mirek. Thank you.

[Miroslaw Blaszczyk, executive]

Thank you, Kacha. Thank you, Maciej. Just to summarize briefly. Q1 was a very dynamic quarter for us. Even though it is usually a low sales season, we were successful in building our multiplay base dynamically, reducing churn to 7.2% level, growing the RGU base by over 500,000 year-on-year and increasing our ARPU to almost PLN 83. Our solid operational performance and healthy financials seems to be highly appreciated by the capital markets, which allowed us to refinance our series A bonds very successfully. And last but not the least, we worked intensively to strengthen our marketplace strategy. We have developed new products, which allow us to enter new markets. We constantly build our content portfolio. As a result, nowadays, we can offer our TV, Internet and telephone services for everybody, everywhere. Now we're ready to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Vera Sutedja, Erste Bank

[Vera Sutedja, analyst]

I have question related to the development of technical cost and content cost. Should we actually expect, in the next quarters, that first the content cost to be as high as it was in the first quarter? So is this the current run rate going forward? And also, with technical cost, of course, with the inclusion of Netia, it is considerably higher. But generally, are these going to -- along with the synergy benefits of the 2 companies, are we going to expect any savings in the technical cost, beyond what we see -- there is -- I don't see any savings here, but do we expect that there would be any lower technical costs in the coming years?

[Katarzyna Ostap-Tomann, executive]

It's Kacha Ostap speaking. As far as the -- first I'll start with the content cost. As you probably remember, we acquired Eleven Sports in May last year, so it basically means that -- also in the second quarter you see -- you will see some increase in cost. We started Champions League as of September. So also in the third quarter, you'll see some increasing cost. Comparable cost will be in the third quarter. Basically, this sports content is the main driver behind the increase. Please just remember that tied to this cost is the revenue coming from it.

So this is as far as content is concerned. For the technical costs. Basically, if we look at the technical costs, there is nothing special there, except for some increases, which mainly come from the sources that are independent to us. For example, we have an increase in electricity cost. This is nothing special. It's all over Poland that B2B business has suffered from the year, increasing the cost of electricity and in our case, in the quarter is well over PLN 10 million. So this is the story behind the technical cost.

If you're talking about synergies with Netia, mainly the synergies here would be visible in Netia, not in you know like [ telecom service start ]. But it's -- we're building this synergy. It will be visible.

[Vera Sutedja, analyst]

Okay. And, just because when we are looking at the EBITDA developments of this company, it's excluding the contribution at Netia, it would be a decline. Of course there are some costs, especially the content one. We're just wondering whether this is actually going to be the trend going forward, which I hope not. A negative manner of EBITDA.

[Katarzyna Ostap-Tomann, executive]

Looking at the decrease in EBITDA, I wouldn't say that content is the factor that is decreasing the EBITDA because as I told you, this content has the revenue side to it. We're talking about some third-party factors that are decreasing EBITDA. First of all, it's the electricity cost, which is several million in each quarter. Then you have in the first quarter still visible cost of bad debt. It's not that we have more bad debts, it's the fact that in first quarter 2018, the bad debts were recorded at the higher value. And after the bad debts calm down, the bad debt market has decreased. And we had to revalue some of the bad debt we have on our balance sheet. This is the reason for the increased costs in the first quarter of 2019. Then you have the content, which is the third factor. But this factor, as I told you, is not tied to the revenue. And the marketing cost, obviously, as we're implementing some new products and investing in marketing.

[Operator]

[Operator Instructions] We have no further questions. Dear speaker, back to you for the conclusion.

[Miroslaw Blaszczyk, executive]

Thank you for the call, thank you all for participating, and thank you for the questions, Vera. Actually, then half year results will be published on August 29. So you're welcome to participate in the next call. Thank you.

[Katarzyna Ostap-Tomann, executive]

Thank you very much.

[Maciej Stec, executive]

Thank you. Bye.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.