Cyfrowy Polsat SA

WSE:CPS

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to Cyfrowy Polsat Second Quarter and First Half 2018 Results Conference Call.

I will now hand over to your host, Mr. Tobias Solorz. Sir, please go ahead.

[Tobias Solorz, executive]

Good afternoon, and welcome to the Cyfrowy Polsat Group Half Year Results Conference Call. As usually, let's start with the key events.

First of all, in May, we have successfully finalized Netia acquisition, probably immediately started working with Netia team on the operational level. I will comment more on that on the next slide.

Another project that we realized in May was related to sport content. Eleven Sports Network is the young, but a very dynamic company. It operates on a number of markets worldwide, including Poland. The owners of Eleven Sports found long-term cooperation with Polsat's Group attracted. Therefore, we planned to work together in order to develop the Polish brand of Eleven Sports. It will decently strength our content arm.

And finally, 2 days ago, we started broadcasting Polsat's Sport Premium channels, the new dedicated channels focused around Champions League and European League, top-quality full returns to TV Polsat, and we're excited to work on this project, but that's a story for our next call in November.

At the moment, let's return to Netia for a moment. After taking control of Netia, we were finally able to have a look into details of operation business. One of the conclusion that we found is that the overlap between our customer base is limited to less than 20%. As a result, our combined customer base goes up to 6.4 million individuals. The penetration of multiple products amounting to approximately 32%, is still relatively low. I could summarize is that the acquisition of Netia will have a good impact for our multiplay strategy.

As we have commented before, Netia business is very much about B2B. As a result, ARPU of our combined customer base would go up, reflecting a growing share of business and our customer mix. It does not change our view that we still have a potential to continue building value of our customers. It remains among our top priorities.

What has been done so far? Let's look on Slide #7. First of all, the fixed-line broadband provided by Netia has become most immediately added to our smartDOM program. Naturally, Polsat customers were offered fiber broadband from Netia with smartDOM discounts. Secondly, content of Netia has been largely improved. The IPTV of Netia become more attractive, including TV Polsat channels.

Moreover, Netia is among very few operators who were able to offer Champion Leagues content to its customers over next 3 years. We believe this highly attractive offer will be fuel for Netia growth into midterm horizon.

This topic is communication. We work together with Netia team to modify the position of the brand. We believe Netia needs to shape its brand as a provider of an entertainment, which more focus onto emotion rather than technology.

And finally, sales metrics. One of the weakness of Netia in the past was its very limited B2C sales network. That is why opening our sales network for Netia was among our priorities. At the moment, almost 200 shops offer Netia products.

As a summary, a lot of come projects in the pipeline. This key area's already addressed.

Right now, let's go to our operational results, as usually, to be commented by Maciej Stec and myself. Maciej, the floor is yours.

[Maciej Stec, executive]

Thank you, Tobias. The TV broadcasting segment is to be commented, we need to start with mentioning that the quarter was largely impacted by Football World Cup that took place in June and July 2018. The event was broadcasted on the open channels of the public broadcaster TVP and naturally, attracted both viewers as well as advertisers, which can be clearly seen on the bottom chart.

Nevertheless, despite this short-term drag, our viewership strengthened by a recent acquisition amounted to 24.2% and was stable in Q2 2018, just in line with our long-term strategic assumptions.

If TV advertising market is concerned, the second quarter was, again, very healthy for the market as a whole. Almost 8% growth is a very strong result and allows us to confirm the full year guidance of mid-single-digit growth of the market as initially expected.

Naturally, the growth ratio was partly driven by the advertisers' interested in the campaigns around Football World Cup. Nonetheless, TV Polsat also successfully grew its TV advertising and sponsorship revenues by 4.5% in Q2 2018, which I find as a sound achievement in this particular situation. As a result, our market share reached 26.7%. But as I keep underlining, the performance of TV broadcasting business needs to be monitored in a long-term perspective in order to get a correct view. Therefore, I encourage you to have a look at our half-year results.

If we turn to Slide #12, you will see our 6-month viewership is very resilient to a short-term challenges. Despite continued fragmentation of the market TV Polsat channel continues to be among the most popular TV station in Poland, while our growing number of channels allows us to keep the viewership of the Polsat Group's station at the very solid 24% level, which is just in line with our long-term strategy.

And as I always say, good viewership results are nice to have, but the most important issue is how they translate into sales of our advertising airtime. On a very solid TV advertising and sponsoring market, Polsat Group grew its half-year revenue by over 9% year-on-year. It's very strong result, supported by our investments in the new thematic channels and the past generated synergies. As a result, our ad market share amounted to almost 27%, which supported the financial performance of the entire group.

And just to conclude, I'm happy to remind you that TV Polsat has just started monetizing a new midterm project related to UEFA Champions League. A strong bolster for TV Polsat's revenue in the quarters to come that I hope to discuss with you together with our Q3 results.

Thank you for your time, and let me return the presentation to Tobias, who will comment on a strong operational performance of our bigger business segment. Tobias, please.

[Tobias Solorz, executive]

Thank you, Maciej. Indeed, we are also very happy with the operating performance in our bigger business segment. Just a small opening remark. The KPIs that I will comment on in this section exclude Netia consolidation at this moment, so you can compare numbers to our previous presentations. Our base of multiple grows very fast, and the pace of growth does not slow down.

Our smartDOM base grows to the level of 1.65 million in June. The penetration of multiple packages among our contract customers has reached 29%, which means over 70% of the customers are still single play. This is the reason why we continue focusing on our multiplay strategy going forward.

[indiscernible] is just one part of the story. The other is satisfaction of the customers. As you can see bottom chart, our churn declined to 8.3% only. This is the lowest ratio ever. The fact that our customers are so highly satisfied makes me really proud.

As you can see on Slide #16, our base of contract services also continues to grow, driven by the good performance of our multiplay strategy. We are very close to breaking the level of 40 million services provided.

If you look into details, strongest growth is currently generated in the mobile telephony category. Last time, we commented that our new simply postpaid tariffs provide very good sales results. And this fact will still contribute positively to our contract RGU development, which is -- seems also in good mobile numbers portability trends.

Moreover, our B2B team has successfully developed dedicated machine-to-machine platform that has accelerated sales to our business customers. As a result, we saw a very strong net additions in mobile telephony category, almost 300,000 more year-on-year and 100,000 in quarter 2 only.

Sales of our pay TV services, they're also very good, as the number of provided services exceeded 5 million. This growth is the result of systematic up-selling of our multiroom and video online products to our DTH and mobile customers. Finally, our contract mobile, Internet reached 1.8 million RGUs provided.

If you switch to ARPU slide, I need to remind you that our contract ARPU is still under the pressure resulting from the roaming regulation. This factor should disappear in the next quarter. However, if we put in place currently valid accounting standard, our ARPU was 2.1% up year-on-year, also RGU situation keeps growing. 2.4 services per customer is a proof that we are effectively executing our multiplay strategy.

Moving on to the prepaid segment. Our prepaid RGU base remains stable at the level of about 2.8 million services and generates a solid ARPU of about PLN 20.

Now Kacha will refer to the financial performance of our group.

[Katarzyna Ostap-Tomann, executive]

Good afternoon, everyone. Today, I have the pleasure of presenting you with Q2 2018 results. Please note that as of 2018, we reporting according to IFRS 15. So in the financial statements, 2017 is reported still in line with IAS 18. For your convenience, the presentation, therefore, includes both. Slides that show IFRS 15 in both years are in the main body of the presentation and slides that show IAS 18 version in both years are in the appendix.

So passing to the results. In Q2 2018, our revenues grew by 7.5% and EBITDA by 3.5%. Please note that EBITDA results includes the positive contribution of Netia of PLN 44 million. We consolidating Netia as of May 22 and the negative influence of Roam Like At Home regulation of PLN 22 million year-over-year.

Free cash flow of PLN 1.4 billion is in line with our expectations. And the leverage ratio of 2.91 is basically stable quarter-on-quarter, despite the fact that we paid for Netia and Eleven in Q2 2018.

Passing to Slide #21, you can see the breakdown of our revenue and EBITDA increase. In revenue, our service to customers segment grew by PLN 155 million, out of which Netia was PLN 145 million net of consolidation. Our Broadcasting segment grew in revenue by PLN 24 million, despite World Cup impact in Polish National TV.

You can also see the breakdown of EBITDA impact of Netia and Roam Like at Home I already described on the previous slide, and TV and Broadcasting segment is flat.

Now let's pass to the cash flow for the first 6 months of 2018. As you can see, our Q2 investments, Netia and Eleven being the largest ones, are reflected in the cash flow in aggregate amount of almost PLN 300 million.

Our CapEx to revenue ratio is on more or less stable level of 7.1%. However, our investment in reforming and rollout of 900 LTE is going according to schedule. Apart of that, we have payment of interest and repayment of revolving facility.

Passing to free cash flow. As I mentioned previously, annual free cash flow of PLN 1.4 billion is in line with our expectations and to what I mentioned to you last quarter. This has been a quarter with healthy almost PLN 400 million free cash flow generation. Out of this PLN 400 million, we made investment in Netia and Eleven. So the leverage ratio is almost at the same level as last quarter what you will see on the next slide.

And now to last, but very important, our net debt, including Netia is only PLN 10,369,000,000, while it was PLN 10.2 billion at the end of last quarter when it did not include Netia's debt.

Please note that Netia's debt was fully repaid in July and transformed into our revolving facility. Our leverage ratio increased only by 0.04 from the last quarter, which I consider a very good result given that we made acquisition and absorbed Netia's debt in Q2. Weighted average interest cost remains unchanged at 3.3%.

So in summary, this was quite a good quarter first time, including Netia's results, both in profit and debt.

And now I pass to Tobias for the concluding remarks.

[Tobias Solorz, executive]

Thank you, Kacha. To conclude our presentation, I'm happy to say that we have a solid operational and financial performance. Our focus at the moment is mainly to improve operation performance and implementing to synergies. Many in this list have been started. We also seek for opportunities to use the newly acquired sport content to improve the sales in Netia.

Eleven Sport Networks acquisition is also a very important investment for our group. It is not only about the current business of Eleven, but also about future access to the most important and attractive sports. I believe our partnership with the owners of Eleven will be very value for both parts in the future. Especially, the premium content is expected to contribute to our future sales results. We believe in the current positive macro situation in Poland, and it's a good time to extend our premium

offers. That's why we went into the European Champions League project. The first sales effects of our Polsat's Sport Premium packages are encouraging. We look forward to discuss it with you during our next result call. Thank you very much for your attention.

We will move now to the Q&A session. Operator?

[Operator]

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

[Vera Sutedja, analyst]

I have several questions first, please. The first one is related to the EBITDA guidance, which was announced in the morning conference. It was mentioned that Cyfrowy Polsat would not manage EBITDA growth, excluding Netia. So is this -- are you expecting actually a flat one or a declining EBITDA, excluding Netia? And what would be actually the drivers for this, because if I can recall the second half, we will not have so much damaging effect from the Roaming Like at Home anymore. So if you could remind us what are the cost items in the second half that should be aware of? And the other question is, do you expect any one-off restructuring cost in the second half? That's the first set of the question. The second one was related to Roaming Like at Home. Do you expect any positive effect from the sustainability clause on ARPU? So when should we see the effect of this higher roaming prices or the ability to charge roaming cost to the customers on the ARPU? Is it already from the second half of this year or is it from next year onwards? And did you renegotiate your roaming wholesale rate with the operators, for example, in Germany? That will be the first set of questions, please.

[Katarzyna Ostap-Tomann, executive]

Okay, good afternoon. First of all talking about EBITDA, we actually on the morning conference, we said that we're not moving our [indiscernible] because, obviously, we are not publishing on a prognosis. We just say what are our more or less expectations that we're not increasing our expectations from the last quarter. So basically, we said we will come back to talks about EBITDA in the third quarter. We have to wait a little bit to see how the third quarter is going. Second, that's for EBITDA. As -- we don't expect on the restructuring cost in the second half of the year. We concentrated on developing our corporation with Netia. So we're not really concentrating on the restructuring. As far as Roam Like at Home is concerned, in the third and fourth quarter, I would say, we would expect no more effect of the Roam Like at Home because maybe, if you remember, the Roam Like at Home started in the third quarter of 2017. So in the third quarter of 2018, there should be basically no standing effect or no negative effect of this regulation. And as far as the negotiation with the operators in you are concerned, we constantly renegotiating with the operators, but we -- usually, we're not talking country by country, we rather renegotiate with the operators who are in a set of countries. So yes, we renegotiated with some of the operators who operate in Germany, but we constantly in the process.

[Vera Sutedja, analyst]

And I have some follow-up question, please. Regarding the Polsat Sport Premium offers, do you expect the strong revenue uplift in the second half of this year, especially in the retail revenues?

[Unknown Executive]

Hi, hello, Maciej, it's [indiscernible]. So, of course, yes, so Polsat Sport Premium is like extra paid product. So, of course, we believe in incremental revenues in second half of the year. But release -- the project -- and the project started 2 days ago, and it was fourth round of qualification to the main tournament, so that's the group stage. So we believe that the real value of the project will see like in September when it's -- on 18th of September, the group phase of Champions League will start and group phase of Europe League will start. So -- but that's what I can say now that we are very satisfied nowadays that quite a lot of subscription for the product we sold in Cyfrowy Polsat. But also just to let you know that the product will be quite widely distributed in other operators. So finally, we've decided just to sell the products to NC Plus, our direct competitor in DTH and the cable operators. The product will have an attractive offer also in our acquired company, Netia. So product will be available quite widely. But of course, in our packages, we believe that it will give our -- it will give us -- especially we can observe it -- in the fourth quarter, we can observe probably some incremental revenue and ARPU increase.

[Vera Sutedja, analyst]

Okay. If I may, one last question. Regarding this time spectrum, this 800 megahertz spectrum the one that's from Sferia, am I correct to understand that you are not prepared to extend it for the amount of requested PLN 1.7 billion? The second question will be, can you run your operation smoothly without it?

[Katarzyna Ostap-Tomann, executive]

So for answering your first question, we -- at the moment, we're in the round of consultations with the regulator. And until the 31st of August, we're really not commenting of what we're going to do. If you're asking us whether we prepare to run our operations without the 800 spectrum, in the last years, we have rolled out the 900 spectrum and most of the devices that our customers are using, at the same time operate on 800 and 900. We're still finishing the project until the end of the year. So we don't expect really any problems running on the 900 spectrum. However, about the prolongation of the 800 spectrum, we're not commenting until we finish our dialogue with the regulator.

[Vera Sutedja, analyst]

So you actually can basically go on operation without it. Am I correct to understand that?

[Katarzyna Ostap-Tomann, executive]

Yes, you're correct to understand that.

[Operator]

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

[Tobias Solorz, executive]

Thank you very much. This was a really good quarter. And see you, again, in the next quarter. Thank you. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes our conference call. Thank you for participating. You may now disconnect.