Cyfrowy Polsat SA

WSE:CPS

Earnings Call Transcript 2020-Q1

[Operator]

Dear ladies and gentlemen, welcome to Cyfrowy Polsat Q1 2020 Results Conference Call.

I will now give the floor back to Miroslaw Blaszczyk, CEO of Polsat. Sir, you may begin.

[Miroslaw Blaszczyk, executive]

Good afternoon, everyone. And welcome to Polsat Group's Q1 2020 Results Call. Q1 has been a busy quarter. So this time, each of us will talk about the most important events in Q1. Then traditionally, Staszek and Maciej will tell you about our operating performance followed by the comments from Kacha on our financial performance, but let me summarize this interesting quarter briefly.

The #1 subject in Q1 was, of course, the coronavirus pandemic. To my great satisfaction, Polsat Group, as a whole, adapted to this difficult situation in smooth and efficient way. I will say more on this in a shorter while.

A few weeks ago, we have informed the market that we have successfully finalized the complicated process of restructuring our debt. Kacha will give you an insight into this process shortly. Moreover, I'm very happy to say that we have signed a preliminary agreement with Bauer Media to purchase Interia Group, owner of 1 of top 3 Polish horizontal portals. My team will give you the details of this deal. And last but not least, just this Monday, Polsat Group has launched the first in Poland Commercial 5G network. It will be my pleasure to tell you more on this topic.

Let's turn to the details of the events I have just outlined. First, the impact of the coronavirus pandemic. On Slide 7, you have summary of reasons why we believe that our business is largely immune to the effect of the pandemic. Please remember that our business model is based predominantly on subscriptions and diversified portfolio of products and services, which ensures a predictable and stable stream of revenues. Connectivity today has become as essential as electricity, driving up voice and data volumes. Combined with the price increases on the mobile market over the past several quarters, this will support ARPU levels in the coming months. Amongst headwinds, we expect a slowdown on the advertising market, but it is still too early to talk about the ultimate impact of the pandemic on this business area, because there are still too many question marks.

In terms of liquidity, we are definitely on the safe side, given our high level of cash generation. All in all, I needed to underline the ultimate impact of COVID-19 on our group depends mainly on 2 issues: How long the pandemic will continue? And how much pressure it will exist on Polish and global economies? Given we perceive our business as largely immune to COVID situation, Polsat Group has engaged actively in the fight to suppress the pandemic.

Among the many initiatives that we have taken since mid-March, I would like to turn your attention to several chosen ones outlined on Slide 8. With the support of Mr. Solorz, our major shareholder, Polsat Group has purchased medical equipment to help test 200,000 Poles. Moreover, we donated connected tablets for children in need, offered our customers free data packs. Telewizja Polsat aired a special commercial block and donated the proceeds along with own funds to the cause as did Polsat Foundation. Our news and other TV stations have been very active in providing information and so fighting the pandemic. So far, Polsat Group has provided aid worth almost PLN 20 million.

I will now give the floor to Kacha to discuss refinancing. Kacha, please go ahead.

[Katarzyna Ostap-Tomann, executive]

Thank you, Mirek, and good afternoon, everyone. In spite of the difficulties caused by the pandemic, we have finalized the complex and multi-stage process of debt restructuring that gives our group greater flexibility of operations and further development prospects.

One of the changes in the financial documentation of the incorporation of the IFRS 16 standard, which is connected with shifting the main covenant upwards by 0.3x EBITDA. We have also extended the maturity profiles of our debt to adapt them to our goals related to acquisitions and dividends. We succeeded in diversifying our debt structure, shifting focus more towards bonds.

Slide 11 summarizes the whole process which was initiated over a year ago with the refinancing of the Series A bond followed by an additional bank loan and the issue of green bonds to be completed with the renegotiated terms of the SFI.

As you can see on Slide 12, we now have a very comfortable situation with respect to debt maturity with the first sizable bullet payment falling in 2024. As I have already said, this structure not only allows us to continue our dividend policy, but also guarantees operating flexibility and the flexibility to invest in the future development of the group.

And now for Interia.

[Maciej Stec, executive]

Thank you, Kacha, and my congratulations on the financing process. I must confirm that the successful debt restructuring was 1 of several key elements that made the planned acquisition of Interia possible.

So why Interia? Interia is a strategic component of our business model that was missing so far. We would like it to be our strong plaque on the internet market, strengthening our online ad business and supporting the monetization of our content, a very important gateway to communicate with our customers. Once we finalize the acquisition, our group will be definitively the most equipped TNT company in the Polish market.

Through TV Polsat, we produce a lot of attractive unique local content. Through Cyfrowy Polsat, we have a huge content distribution platform. Through Plus, we are a very active mobile market player, technology leader with 5G available now and here. Through IPLA platform, we are very active in the online video market. Through Netia, we became an important player in fiber access business. And finally, through Interia acquisition, we intend to build our position in the local Internet.

And now Staszek will talk you through the current business model of Interia.

[Stanislaw Janowski, executive]

As Maciej said, this is a strategic acquisition that will strengthen our position in the Internet. We buy a company that has a 20-year history in the Polish Internet and is a well conducted enterprise with strong managing team. Interia will be yet another channel for distributing and monetizing our existing wide portfolio of content. Moreover, in light of rapidly developing online advertising segment, we believe it is crucial to build a position on this market. And thirdly, we plan to concentrate the group's online marketing efforts in Interia, fast improving cost efficiency in this area.

Interia is a highly appealing asset being among the top 3 media tech groups and 1 of the largest digital enterprises in the country. Interia operates 1 of the biggest horizontal portals, accompanied by a comprehensive set of additional applications such as email, thematic vortals and mobile apps. The numbers speak for themselves. Over 100 websites and mobile apps, over 16.5 million real users and 1.3 billion views every month.

As for the financial details of the transaction, I will give the floor to Kacha.

[Katarzyna Ostap-Tomann, executive]

Thank you, Staszek. As you already know from our current report, we have concluded a preliminary deal with Bauer companies to acquire 100% in Interia Group for PLN 422 million. The final price will be adjusted down slightly to reflect some settlements between Interia and their current owners. The buyer is Telewizja Polsat, who will finance the transaction from own funds. Please bear in mind the finalization of the transaction is subject to the approval of the antitrust office.

Anticipating questions you might have, we believe the price paid for Interia is par. When taking into account expected synergies, the agreed price implies a multiple of 8.7x EBITDA, which is comparable to the current valuation of Interia's peers after the valuations got hit by the pandemic. Synergies are of key importance in this case. Hence, I give the floor to Staszek, who will be responsible for generating them in the future.

[Stanislaw Janowski, executive]

Indeed, we expect synergies in 3 areas: Firstly, Interia will be yet another channel for distributing and monetizing our existing wide portfolio of content; secondly, by in-sourcing our current online campaigns to Interia web pages, we will effectively reduce our OpEx; and thirdly, we believe Polsat Media ad brokerage house will be definitely more effective in selling Interia ad space to referred parties.

All in all, I believe we are able to double the EBITDA result of Interia in the midterm. Concluding, I would like to underline once again that Interia is a strategic acquisition that complements perfectly to our business model.

Now over to Mirek for some technological news.

[Miroslaw Blaszczyk, executive]

Thank you. It is a great pleasure to tell you about the launch of the first commercial 5G network in Poland that took place earlier this week. 5G from Plus is based on our unique 2.6 gigahertz TDD spectrum, which allows transferring more data at higher speeds over a larger area. People using our 5G network will be able to achieve transfer speed of up to 600 megabits per second as of now, and more, once we aggregate our frequencies in future. We have installed the first 100 base station operating in 5G that reach almost 900,000 people in 7 cities, Warsaw, Lodz, Gdansk, Poznan, Szczecin, Wroclaw and Katowice.

In the second phase of this project, we plan to launch another 600 stations to cover the Warsaw agglomeration and reach an additional 2 million people. At the moment, we use our unique 2.6 gigahertz band, and the network is on air. Ultimately, the 5G network from Plus will be developed based on all available frequency bands.

I'm extremely satisfied that our group leads technological race, and Plus became the key leader of 5G in Poland. This sums up the key events of Q1. So let's move on and discuss our operating performance.

Staszek, the floor is yours.

[Stanislaw Janowski, executive]

Thank you, Mirek. In terms of viewership, TV Polsat channels have maintained a strong position with over 23% in the commercial group. Our main channel Polsat was the leader in the commercial group, gaining almost 10% of audience share. Please note, this viewership was maintained even though we had to stop our spring scheduling this year.

It comes as no surprise that TV business is and will continue to be impacted by the coronavirus pandemic. In the first quarter, the broad market declined by 3% and TV Polsat recorded ad revenue dynamics in line with the market trend. In consequences, our market share amounted to 28.1%, a result I'm satisfied with given the unfavorable circumstances.

Now over to Maciej, who will tell you more about our retail business.

[Maciej Stec, executive]

Thank you, Staszek. Starting off with our flagship program smartDOM. As you already know, in January 2020, we hit a milestone. Our multiplay customer base exceeded 2 million people. In Q1, we continued to record solid growth dynamics of 8%, which means we increased our multiplay customer base by 157,000 year-on-year.

The number of RGUs owned by these customers also continues to grow steadily, exceeding 6.1 million. The record low level of churn that we record quarter-by-quarter is proof that our multiplay strategy is successful. In Q1, the churn ratio amounted to 6.6% only.

Moving on to Slide 28. Once again, our RGU base grew by almost 0.5 million services. Just as in the previous quarter, the key driver of growth was a very dynamic development of our mobile segment with stable Pay TV and Internet, supported by strong sales in the B2B segment. As a result, we now provide 14.8 million contract services, 3% more than a year ago. Given we just launched 5G technology this week, I believe this positive dynamic will be continued as soon as the pandemic lockdown is finished.

The core of our multiplay strategy is to build customer value. As you can see on Slide 29, we are pretty successful at this. Q1 was yet another quarter with strong growth dynamics. ARPU grew by 3%, reaching the level of PLN 85.4 per contract consumer. As you can see on the graph, the level of RGU saturation per customer is consistently on the rise, reaching the level of 2.64% in Q1. This is another very positive result of our multiplay strategy, which helps us build the value and loyalty of our customer base.

And finally, the prepaid segment on Slide 30. The prepared RGU base is stable at the level of 2.6 million, with an increasing contribution from Pay TV services, the sales of IPLA packages in particular. Prepaid ARPU grew by 3% in Q1 on the back of increased volumes of voice calls triggered by the introduction of the state of epidemic in Poland. This, in turn, resulted in higher interconnect settlements. We believe this factor will continue to support ARPU also in Q2.

Just to summarize my section, Q1 operating results came in strong, which makes me very happy. These results have been affected by the coronavirus pandemic only to a small degree as the state of epidemic in Poland has been introduced mid-March.

Kacha, how about our financial performance?

[Katarzyna Ostap-Tomann, executive]

Thank you, Maciej. I'm very happy with Q1 financial results. Quick reminder, all the financials presented in our documents, including this presentation, are IFRS 16 based.

In Q1, our total revenue continued along the growth path, increasing year-on-year by 2% to PLN 2.85 billion. Our EBITDA was almost stable and amounted to over PLN 1 billion. A strong increase of over 7% in LTM free cash flow is the effect of software equipment sales in light of the pandemic and the resulting decrease in working capital investments. Leverage decreased to PLN 2.86 in Q1.

Looking at the composition of growth by segment, both our segments delivered healthy top line growth in Q1. Our retail business grew by PLN 55 million, mainly due to stable retail revenues and increasing wholesale revenue from the interconnection. Despite some headwinds in our sales, the TV segment grew by PLN 6 million as a result of strong sales of channels to cable and satellite operators.

Turning to EBITDA development. The overall level of EBITDA was mainly under slight pressure from lower EBITDA in the retail segment, which in Q1, was still associated with investment into some football content. Total EBITDA was almost stable, yielding a high-margin of 36%.

Moving on to free cash flow on Slide 34. I'm very happy with the level of cash generated on this quarter, PLN 267 million. As mentioned a moment ago, the state of epidemic introduced by the government led to the mandatory closure of part of our sales network, which resulted in a fall in equipment sales. This, in turn, means a lower level of investments in working capital, thus strengthening free cash flow.

I would like to remind you that last time, I flagged the topic related to the settlement of corporate taxes. The date for the settlement of the taxes for 2019 was postponed by the Polish government to May 31 of this year, following the introduction of the state of pandemic. Please take it into consideration when forecasting the next quarter.

As you can see on Slide 35, we have closed the first quarter with a significant amount of cash on our accounts, which was supported by strong generation of cash from operating activities and the issue of Series C bonds in February. Acquisitions in this quarter were limited to some local fiber companies bought by Netia in the beginning of the year, so little impact there.

The ratio of CapEx to revenue remains near the upper limit of the guided level, 10.8%, which is connected with Netia's focus on modernizing its network as soon as possible.

Moving on to debt. There are 2 things that I would like to turn your attention to here: Firstly, the structure of debt that you see here is going to stay with us for some time. I'd like to remind you that we have withheld debt repayment for 4 quarters starting Q2 2020, extended the maturity profile of the debt and increased the level of covenants by 0.3x EBITDA; secondly, the Polish National Bank has cut sharply interest rates by 100 bps in March and April, thus driving our average cost of debt down to the level of 2.3% from 3.3% at the end of 2019. This, of course, will have a visible positive impact on our bottom line and free cash flow going forward.

This is all I have for you today. I'm very pleased with the financial results of both our segments, which prove the resilience of our business model. Also I'm confident that our strong cash generation will allow us to continue with all our plans for this year, irrespectively of the disturbances caused by the pandemic.

Mirek, over to you for the summary now.

[Miroslaw Blaszczyk, executive]

Thank you, Kacha. As always, my congratulations on the strong results, both operational and financial of Polsat Group. This has been a long presentation. So let me conclude quickly and move on to the Q&A session.

Thanks to our subscription-based model, we are highly immune to the negative factors that results from the state of epidemic introduced in Poland. Therefore, we recognize the need to help in this difficult situation, both as an organization and as individuals.

Polsat Group and its employees are actively engaged in initiatives that support the country and its inhabitants. The pandemic did not stop us from working intensively. We have concluded a preliminary deal with German company, Bauer Media, which makes a strategic move for Polsat Group. Through the strategic acquisition of Interia, we will strengthen and develop our business model going forward. 5G from Plus, this is a huge technological step forward, and I'm happy to be part of such an exciting project.

And finally, the successful refinancing and restructuring of the group's debt has secured the possibility to continue investing in our development as well as sharing profits with our shareholders.

Ladies and gentlemen, thank you for your attention. This concludes our presentation and brings us to the Q&A session. Operator?

[Operator]

[Operator Instructions] And we receive the first question from [indiscernible].

[Unknown Analyst]

I just wanted to follow-up about what's been happening for the industry as a whole in recent months. And specifically, has the pandemic led to any changes in the competitive environment, both in terms of how the different companies are reacting and the competitive intensity that you've seen? And the question is primarily aimed at mobile, but I guess, I'm also interested in the broader telecom industry as well.

[Maciej Stec, executive]

Maciej Stec here. So to be honest, business as usual. So nothing particularly changing our competitive landscape. So everyone is doing the same. So the intensity of the competition is not more aggressive. And no one thinks about like changing strategy. So even in TV business, broadcasting business, which is, of course, affected by coronavirus the most in terms of our company, so because as Staszek said, the advertising market is down nowadays but nothing happened too much. So there is -- in fact, it's very good for us for the future that no one reacted like accidentally, and no one reacted nervously. So it's really okay.

But to be honest, as you can see, our business model is very resilient, I can say, because we have different legs of the business. So as you can see, so we have TV productions, so then we have Pay TV, then we have mobile operator also and mobiles also. So 10 years ago, we've launched high-speed mobile Internet in terms of OTT. Last Monday, we launched like the first and the only commercial 5G network. So we continue the business.

So as you can see, our OTT platform was very popular during this pandemic time, which is important. So it's IPLA. So also, the business in terms of fiber optics is quite good because people needs Internet. And finally, we would like to acquire like Interia Group, which is a very important leg for us for the future as a -- just to strengthen our position in Internet.

So nothing happened for us, and it's good for us that our business model is quite safe for this time because that's what we offer, especially in our smartDOM is offering a multiplay strategy is just needed nowadays because you need mobile, you need Internet and you need, in fact, TV just to have all informations on daily basis. So it's quite okay. It's maybe not good words about that, but business is really okay.

[Unknown Analyst]

Do you think the Q1 results financially in terms of top line and EBITDA are representative of what we should expect over the course of the year as a whole? Or do you think the rest of the year will look better or maybe worse?

[Katarzyna Ostap-Tomann, executive]

Well, actually, I cannot confirm that the Q1 results would be representative because COVID pandemia in Poland is the second half of March, actually, I mean, in terms of lockdown. There are different things that appear in our businesses then, but as Maciej has told you, our business model is quite resilient. I would be happy if our EBITDA would stabilize by the end of this year at the level of the last year EBITDA. And I think that is achievable. However, as far as the pandemic is concerned, I'm not the fortune teller.

[Maciej Stec, executive]

Kacha, there is a lot of factors which influence these results.

[Katarzyna Ostap-Tomann, executive]

Absolutely.

[Maciej Stec, executive]

But nowadays, we stay calm and we continue our business as usual.

[Katarzyna Ostap-Tomann, executive]

We do our best.

[Maciej Stec, executive]

So we are optimistic than pessimistic.

[Katarzyna Ostap-Tomann, executive]

Absolutely.

[Unknown Analyst]

Is the advertising side of the business going to be the ones that's hit the hardest by the macro disruptions, do you think?

[Stanislaw Janowski, executive]

Currently, the advertising market is around 35% down year-on-year as far as April and mostly May is concerned. And honestly, we don't have like good visibility for the coming quarters, but we believe there is a positive attitude towards advertising. So as soon as the lockdown is a little bit lighter, then the advertising should come back.

[Maciej Stec, executive]

Yes. And the same was that pandemic-related restrictions have had a significant, like, I can say, impact also on the sales of our equipment. So here, decline reached about 50% in the first moment. And now the sales are growing, but are still on the level, which is like lower by 30%, but it's coming healthy every day. So on equipment, which is quite a big part of our business, but it's day-by-day is better and better. So nowadays, we opened like almost 100 point of sales in our network, so we just strengthened our kind of the online channels. So we are really good prepared, and that's what Mr. President, Mr. Blaszczyk said like it was overnight execution of online managing the company. So we are really proud of that.

[Katarzyna Ostap-Tomann, executive]

And we passed the test, we think.

[Unknown Analyst]

What percentage of the EBITDA does advertising account for? Is it less than 10%?

[Katarzyna Ostap-Tomann, executive]

Advertising business on EBITDA is less than 10%.

[Maciej Stec, executive]

Last year, it was close to PLN 600 million.

[Katarzyna Ostap-Tomann, executive]

Revenue. Sorry, EBITDA.

[Maciej Stec, executive]

EBITDA.

[Katarzyna Ostap-Tomann, executive]

But it was not only based on advertising also the price channel. So from this PLN 500 million, 60% was advertising.

[Maciej Stec, executive]

Yes, because we have changed over the years, our also TV business because previously, like 3, 4 years ago, 80%, 90% of EBITDA came from advertising revenue, sorry, revenues. And now it's only 60%. 40% is subscription fees for our channels. 2020 trends.

[Katarzyna Ostap-Tomann, executive]

So obviously, we're talking about the segment, so the impact on -- of that part driven by advertising is less than 10%.

[Operator]

[Operator Instructions] And the next question is from [indiscernible].

[Unknown Analyst]

I have 2. The first is about the prepaid ARPU growth that we saw that you reported 3% growth in the quarter -- no, sorry, year-on-year. And that was mainly due to the positive factor of interconnect settlement, as you mentioned in the presentation. Do you think that this trend will continue so that we could even see more stabilization in retail segment? And the second is about collections. What's your perception in the first quarter? How many business customers ask for postponement and this type of thing?

[Katarzyna Ostap-Tomann, executive]

Hello, Laura. Look, as far as the ARPU in the prepaid segment, ARPU growth, this was the first traction when people started calling each other and some of people in prepaid segment don't have -- they have Pay As You Go rate. So this was the first hit. It stabilized at the moment, and it will not be growing in the future. I think it might go down a little bit in the future when the pandemic situation is over.

Your second question was about debt collection. Actually, as far as B2C customers, we don't see any -- absolutely any slowdown at the moment. We had the total of 60, 6-0, customers, 60 customers out of 6 million, calling us to postpone the payments and that was all. As far as B2B customers are concerned, they're also paying well. We might have some medium-sized -- small and mid-sized companies that might have in the future some cash flow problems. But honestly, this is not our domain. Most of these customers would play an Orange and we, I think as far as debt collection is concerned, are resilient.

If you're looking at that bad debt on our balance sheet, the growth is not connected to the payments from the customers because, as I told you, everyone is paying well, I think they will pay us as good as the electricity bill because they really need Internet and telco connection.

The growth is connected to the change of our business model. You probably remember that we acquired part of the company that's collecting debt and instead of selling debt, collecting them themselves. So in the long-term, it's more profitable for us. But in the short term, it might -- you might see some increase on the balance sheet. So that's basically all.

[Operator]

[Operator Instructions] And we received a follow-up of [indiscernible].

[Unknown Analyst]

Just 2 more questions for me, if I may. First question is about the billing system. And you canceled, I think, the contract at the end of last year, if I remember correctly, with the Chinese vendor. Just wonder if there's any update if that project is concluded or when it might be concluded with the new vendor?

[Katarzyna Ostap-Tomann, executive]

Well yes, we canceled the billing system building with Huawei, and we -- our new vendor of the system. And actually, the company that will continue the project that was postponed in December is Asseco, the company that we hold 23% in. And at the moment, Asseco has already assessed what work has been done and what needs to be done in order to continue this project. And they're starting their work at the moment. So we in the process of continuing the project. I don't think that the project will be completed by the year-end. It will probably take around 2 years to have the first results.

[Unknown Analyst]

I see. Are there any operational problems that, that switch has caused?

[Katarzyna Ostap-Tomann, executive]

No.

[Unknown Analyst]

I recall there was some talk that you weren't able to make tariff plan changes and pricing changes that you wanted to because of what was happening there. Is that -- that's not an issue anymore?

[Katarzyna Ostap-Tomann, executive]

No, that's not an issue anymore because at that moment that we were talking about the tariffs, it was the time of testing of the system. There is absolutely no problem with implementing new tariffs. So I think Maciej might be -- would like to comment on that.

[Maciej Stec, executive]

No, we have changed the tariffs like the end of December. So in terms of multi SIM offering and that's what you can see also in our ARPU results in terms of 3% growth quarter-to-quarter this year. So we have reached in our multiplay strategy the ARPU on the level PLN 85.4. So it's also influenced by the change of tariffs in the end of December. And especially that it was done before prolonging the contracts, which we've started new tariffs 2 years ago, so just before February when the first new opening tariffs customers came back to -- came back to prolonging the contract.

[Unknown Analyst]

I see. On the subject of tariffs, the movement that we began to see last year in the middle of the year, where we saw price adjustments, do you expect further movement in that direction this year? Or if we do see that, it will likely happen after this year?

[Maciej Stec, executive]

No. We believe that these times are not very good just to increase pricing because we try to help people, especially that we are Polish company, we are a local player, we try to help people. So that's what Mr. Blaszczyk said, we were focused just to help people to live with pandemia here and get used to it somehow. So the spectacular -- action was spectacular, but helpful, I can say, this 200,000 tests, which we just bought to Polish society, just to test more and identify like people who are with coronavirus. So this is important for us because, as I mentioned, we are a Polish company, we would like to help people cure with pandemia.

[Unknown Analyst]

That makes a lot of sense. And a final question. In terms of CapEx. How do you think CapEx this year will compare with last year? And has the budget been changed in any way as a result of what's happened to the country over the last couple of months?

[Katarzyna Ostap-Tomann, executive]

Well, actually, there is, in our opinion, no exact connection in between what's happening and our plans. The CapEx -- we're planning the CapEx for 2020 as 11% to revenue. And we at 10.8% at the end of the first quarter, and we intend to continue that. And that's it.

[Unknown Analyst]

Was last year's number 11% as well?

[Katarzyna Ostap-Tomann, executive]

Yes. So as far as CapEx is concerned, it's business as usual.

[Operator]

[Operator Instructions] As we receive no further questions, I hand back to the speakers for closing remarks.

[Miroslaw Blaszczyk, executive]

Thank you for today. If you don't have any questions, we meet I think for the next few months. Thank you very much, and have a nice day.

[Katarzyna Ostap-Tomann, executive]

Thank you.

[Maciej Stec, executive]

Thank you. Stay healthy.

[Operator]

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