Cyfrowy Polsat SA

WSE:CPS

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to Polsat's Q3 2020 Results Conference Call. I will now give the floor to Mr. Miroslaw Blaszczyk, CEO of Polsat. Sir, you may begin.

[Miroslaw Blaszczyk, executive]

Good afternoon, everyone, and welcome to Polsat Group's Third Quarter 2020 Results Call. The usual agenda of our presentation is well-known to you. First, I will point out the most important events of the past quarter. Then Staszek and Maciej will discuss the operating results of both our business segments, and Kacha will present our financial results. After I show to sum up the presentation, we'll be available to answer all your questions.

Key events of third quarter 2020. As you may remember from our last presentation, I told you we had many projects ahead of us and here they are. First of all, we finalized the acquisition of Interia Group in July and have been consistently integrating it with Polsat Group structure smoothly and successfully.

We have also completed a smaller acquisition project. We took control of the 2 channels that we previously co-owned, Fokus TV and Nowa TV. This will give us greater flexibility in terms of management and facilities development of this channel. I'm proud to underline the TV Polsat family is currently composed of as many as 36 internally produced TV channels.

Moving on to a very hot topic both on the Polish and European markets recently, infrastructure sales. As you know, from our former communication, we have initiated the process of review of strategic options regarding the potential sale of our mobile telecommunication infrastructure. Anticipating your questions, I will say that the process is ongoing and it is still too early to say anything more on this subject. I want to assure you we will provide you with additional information on the topic as soon as we have anything to communicate.

And the last key event concerns our decision to intensify the pace of rollout of our Plus 5G network, by the way the only mobile network to offer transmission speed of as much as 600 megabits per second, a big step forward into the future. Summing up, another dynamic quarter focused on new strategic initiatives.

I will now let my team tell you about the details of Polsat Group's operating and financial performance. Staszek, please go ahead.

[Stanislaw Janowski, executive]

Thank you, Mirek. First of all, please note the change in the name of the segment. Following the acquisition of Interia, we decided to rename this segment and clearly include this new and important leg of our business. So from now on, I will present the results in the media segment, TV and online.

So let's start off with this new online business of ours. On Slide #8, I would like to give you a quick overview of our current position. Thanks to the acquisition of Interia, we now hold a leading position in the Internet media market, as you can see on the top chart in the joint Polsat-Interia Group jumped into the third place in terms of the average number of real users per month. In Q3, we had 18.5 million real users, almost twice as many as a year ago. We also observed a surge in the average monthly number of page views, which increased tenfold to 1.5 billion per month. Let me underline that we have significantly strengthened our position on the online market. This will, of course, support us in delivering the synergies that we announced when acquiring Interia Group earlier this year.

Returning to the more traditional part of the business. As soon as it was possible after the lockdown was lifted, we resumed internal production to prepare for the autumn programming schedule. As a result, in Q3, we achieved very satisfactory viewership figures in the top range of our target audience shares. Polsat Group channels gained a total of 24.6% of audience share in the commercial group, where our main channel profit came in top with 9.4% of audience shares and our thematic channels retained very strong position with over 15% audience share. Our news channels are still doing very well and maintain high viewership results.

The third quarter on the advertising market saw positive sentiment and the return of ad budget, as I guided for a quarter ago. We used this time to bridge the gap that was caused by the breakdown observed on the ad market in Q2, and I think we did it very successfully. Our revenue from advertising and sponsorship grew by almost 1% on a slightly decreasing market. Naturally, as a result, our TV market share increased to 29% in Q3.

Given this year is characterized by dynamic ups and downs, let's look at the 9-month perspective. In the 3 quarters of 2020, we maintained overall viewership figures within our target corridor of 23% to 25%. Our flagship channel, Polsat, captured 9.5% of audience shares, while our thematic channels had a little over 14%. This gave Polsat Group a total share of 23.6% in the commercial group of viewers in 3 quarters of 2020.

In the 9-month perspective, we can see that the same breakdown on ad markets caused by the economic lockdown was largely mitigated. The broad market declined by 15.5%. Our ad revenue dynamics was in line with the market declining by 13% year-on-year. We continue to record a high market share of 28.2%.

At this point, I would like to add underline that even though the epidemic situation in Poland has been developing dynamically over the last weeks, the second [ controlling ] lockdown will not resemble the one in spring in the context of the ad market. I can say that the beginning of Q4 supports my guidance from August of flat ad revenues in the second half of this year, which means that we are aiming for a 10%, 12% decrease in the full year.

So much for the media segment. Maciej will now present the results of our bigger business segment.

[Maciej Stec, executive]

Thanks, Staszek. Great job both with integrating Interia as well as with trading on the ad market. Switching to my part of the presentation, we have the opportunity [ and work ] for a simpler, more user-friendly name, I believe B2C and B2B services segment. New name but the strategy remains absolutely the same.

If you look at Slide 14, you will notice that our flagship multiplay program, smartDOM, continued growth at a stable pace of 5%, remaining pretty much resistant to the negative effects of the epidemic. Over the past year, we gained 100,000 customers of our multiplay offer, which brings the saturation of our customer base with valued services up to 37%. Overall, our multiplay customers used a total of 6.3 million RGUs. We continue to reduce churn ratio, which fell to 6.1% in Q3 from 6.8% a year ago, yet another historical record. This has proved that our multiplay strategy is well-designed and successful as it ensures our customer satisfaction and loyalty.

Let's now look at the number of contracted services presented on Slide 15. Newly contracted RGUs grew at a solid pace of 4% year-on-year, adding over 580,000 to our base in Q3. In effect, we closed the third quarter with 15.2 million of provided contract RGU. The key driver behind this growth remains unchanged compared to previous quarter. We continue to record dynamically increasing sales of mobile telephony RGUs up by 8% year-on-year. And I must underline once again that this is the result of our attractive offer that's well-tailored to the needs of our customers and our multiplay program. Our pay TV and Internet bases remain stable.

The next slide shows that we continue to successfully build customer value on the back of our multiplay strategy. In Q3, ARPU per contracted customer grew by 2.5% year-on-year to the level of PLN 86.9 Two main drivers influenced the level of ARPU this quarter: One, higher interconnect continues to be a factor to contribute positively here, but like I said a quarter ago, this impact will shrink gradually, and two, our multiplay strategy clearly targeted at building customer value. And the second factor is definitively the most relevant driver behind the ARPU dynamics has presented, 2.5% up year-on-year. This organic growth is derived, among others, from the consistently growing level of RGU saturation per customer. In Q3, a customer had, on average, 2.72 RGUs, which means that our upselling strategy is working as expected.

To finish off, let's take a look at the prepaid segment. After a temporary decline caused by the lockdown in Q2, our prepaid RGU base stabilized year-on-year, reaching 2.67 million services in Q3. This result was supported, on the one hand, by solid sales of mobile services after the lockdown was lifted and, on the other, by increasing interest in our online video services provided under IPLA brand. In Q3, prepaid ARPU recorded a high growth rate of 3.4% and reached a level of PLN 21.5 per prepaid RGU. Please be aware that this is -- high dynamics is still under the positive impact from higher interconnect revenues driven by increased voice traffic.

And that concludes my part of the presentation. In a nutshell, we did very well in terms of operating results. We delivered stable organic growth on all our business lines. I believe that our resilient business model and the lessons learned since March this year ensure that we are well prepared for any future disturbances that may occur in relation to second wave of the COVID pandemic.

Kacha, over to you. At the end of the day, strong operation should be reflected in strong financials. The floor is yours.

[Katarzyna Ostap-Tomann, executive]

Thank you and well done to both of you. The very good operating results that Staszek and Maciej have just described to you are indeed fully reflected in strong financials in Q3.

As you can see on the top of the graph, on Slide 19, both top line and bottom line recorded mid-single-digit growth dynamic. Revenue increased by almost 4% to break the level of PLN 3 billion, whereas EBITDA grew by 6% to almost PLN 1.1 billion. Here, I would like to remind you that in the previous quarter, we decided to adjust EBITDA by costs incurred and the donations related to battling the COVID epidemic. In Q3, we incurred minor expenses of about PLN 3 million that fall into this category. So in Q3, there is basically no impact from one-off COVID costs. In the 9 months of 2020, this impact was equal to almost PLN 45 million. As shown on the bottom graph, our LTM free cash flow remains consistently above the level of PLN 1.3 billion, and our leverage ratio was down to 2.85x even though the Interia acquisition was fully paid in cash.

Looking a little deeper into our results. Please note that we recorded positive dynamics of top and bottom line in both of our business segments. Revenue increased by PLN 122 million (sic) [ PLN 112 million ] year-on-year in Q3 of 2020. PLN 75 million of these results came from the B2C and B2B segments and PLN 41 million from the media segment. In the B2B and B2C services segment, the main growth drivers were wholesale revenue supported by still quite high levels of interconnect settlement and solid equipment sale. I would like to underline that we saw revenue growth in this segment despite continued negative pressure on retail roaming revenue as international travel has not picked up since the lockdown in spring. Also, the media segment contributed strongly to revenue growth this quarter, record revenue growth dynamics of 9% year-on-year. Please remember that this is the first quarter that we consolidate the results of Interia Group, which we acquired in July this year. Moreover, we saw higher revenue from the sale of our channels to other CabSat operators.

The combination of a strong top line and a prudent approach to cost control in uncertain times, particularly in the media segment, resulted in a very high EBITDA result this quarter. In Q3, we posted a little under PLN 1.1 billion of adjusted EBITDA, up by PLN 62 million year-on-year.

Turning to the analysis of our cash flow on Slide 21. I'm very happy with our consistently stable high free cash flow in both the third quarter and 9 months of 2020. In Q3, we generated almost PLN 300 million in free cash flow and almost PLN 840 million in 9 months. A higher EBITDA certainly contributed positively to the high quarterly free cash flow. Additionally, solid sales of equipment during the third quarter led to the decrease of our handset inventory, releasing some working capital, which also supported free cash flow. On the opposite side, as always, in the third quarter, we paid approximately PLN 120 million from the UMTS license.

Looking at our cash position, we ended the third quarter of 2020 with a sizable amount of cash in our account, well over PLN 1.1 billion. This amount gives us a high level of comfort with respect to the payout of dividend for 2019 of PLN 640 million in total. We have already paid out the first tranche of about PLN 220 million in October, and the remaining amount is scheduled to be paid in January 2021. We have carved out acquisitions on the graph to paint a clearer picture. Actually, the Interia Group transaction is responsible for a majority of this outflow. The CapEx-to-revenue ratio amounted to 9%. Please don't take this to mean that we are reducing CapEx. Let me remind you that Mirek said in the introduction that we're planning to intensify 5G rollout and some payments will take place in the quarter to come. Hence, please expect that CapEx-to-revenue ratio we'll head towards the initially guided 11% in the full year perspective.

And my last slide, debt. To be honest, there's nothing new to say here. The slight drop in leverage to 2.85 EBITDA was reached despite paying for Interia fully in cash. Please be aware that under our credit facility agreement, we apply adjusted EBITDA to calculate leverage. Also, just to remind you, we will resume that payment in Q2 2021 in quarterly installments of PLN 200 million.

One thing that I would like to turn your attention to is the average weighted cost of debt, which was equal to 1.8% at the end of Q3, following sharp interest rate cuts since the beginning of the year. This factor is already contributing to a significant reduction in our debt service cost, and I expect it will continue to support both bottom line and free cash flow in coming quarters.

So ladies and gentlemen, this was a very strong positive quarter both from the operating and financial perspective. The new restrictions and combating COVID that are being systematically introduce in Poland since the beginning of October create many question marks, however, and I believe that our business model is highly resilient and will manage well as we did so far.

Mirek, back to you for the summary of this quarter.

[Miroslaw Blaszczyk, executive]

Thank you, Kacha, Maciej and Staszek. Indeed, it was a very strong quarter. On the operating side, we reported solid, stable growth resulting from the successful implementation of our multiplay strategy. So let me repeat, over 2 million multiplay customers, over 580,000 new services, ARPU of PLN 86.9 and growing, and finally, historically low churn of 6.1%.

Excellent operating results translate into strong financial results. We have generated over PLN 3 billion of revenue and recorded an impressive 6% year-on-year increase of EBITDA while maintaining a low stable leverage of 2.85x EBITDA. So great job, everyone, and keep up the good work.

In October, we have begun paying out dividends for 2019, an issue of high interest to all investors, I believe. This payout of PLN 640 million is the highest level of dividends that we have paid to our shareholders so far, and our balance sheet is well prepared for this operation.

And to end on positive note for the future, we will continue to invest dynamically in the development of our Plus 5G network based on our 2.6 gigahertz TDD spectrum, as I have already said at the beginning of this presentation. We plan to cover over 11 million Poles living in 150 towns and cities with our top-quality 5G network footprint already in 2021.

Ladies and gentlemen, thank you for your attention. This brings us to the end of the presentation, and we are now ready for your questions. Operator?

[Operator]

[Operator Instructions] The first question received is from [ Nadia Zoda ] of Erste Group.

[Unknown Analyst]

I would have 2, if I may. And the first is on Interia. How much did Interia contribute to the revenue growth in Q3? And also to the EBITDA line, if you can share that information with us.

And the second is on the photovoltaic offer. How was it perceived by the market? And how high margins are you able to generate in that segment?

[Katarzyna Ostap-Tomann, executive]

Thank you for this question. Interia has contributed PLN 26 million to the top line and PLN 8 million to EBITDA in Q3 2020.

As far as photovoltaic, I think Maciej would like to answer.

[Maciej Stec, executive]

Yes. I can answer. So the offer has been received very well. We have significant number of fleets. But of course, pandemic times don't help us because this is high-quality product and this is a very important, like, decision for people. So the cost of simple installation is EUR 4,000 or EUR 5,000. So it's just important. And this, in my opinion, just requires seller assistance or our assistance and client attention, which is difficult at this time. But the margin is visibly lower than in our telco, media. But still, we can generate healthy double-digit margin. And what is important for us with our strategy, help people to live cheaper and eco-friendly. So -- and I believe this is like some kind of line extension of our multiplay strategy. Particularly, we have more or less 2 million houses in our database. So it's a very nice product for us.

[Operator]

[Operator Instructions] Actually, we received no further questions. So I hand back to the speakers.

[Miroslaw Blaszczyk, executive]

Hello again. Thank you for participating in today's presentation. I wish you and your families and friends good health. Thank you again, and see you at the next presentation. Thank you.

[Operator]

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