Bouygues SA (EN) Earnings Call Transcript & Summary

Welcome to the Bouygues conference call. [Operator Instructions] I would like to introduce Mrs. Karine Adam-Gruson, Director, Investor Relations of Bouygues.

Thank you. Good afternoon, ladies and gentlemen. Thank you for connecting to this teaching on Saint Malo aimed to give you a detailed overview of our project and answer your questions. We will also take advantage of this call to give you some more information on Project Asterix. I would like to remind everyone that you can find on the company website at www.bouygues.com the presentation we will be commenting on during this conference call. Statements made on this call are forward-looking statements. Such statements reflect objectives that are based on management's current expectations or estimates and are subject to a number of factors and uncertainties that could cause actual figures to differ materially from those described in the forward-looking statements. I will now turn over the call to Christian Lecoq, CFO of Bouygues Telecom.

Thank you, Karine. Following my comments, we will be answering your questions. To begin on Slide 3, Project Saint Malo aims to roll out a nationwide optical fiber infrastructure in FTTA and FTTO to satisfy the growth in data usage on networks. It consists in connecting fiber Bouygues Telecom's network equipment, both mobile antennas and central offices to propose a high-speed fixed broadband offers for businesses and the wholesale market. Bouygues Telecom and Cellnex have signed a partnership to roll out our market infrastructures and manage operations through a JV, of which Bouygues Telecom will be a minority shareholder with a 49% stake. The project represents around EUR 1 billion over 7 years. Bouygues Telecom will build the infrastructures for the JV, and we have long-term master service agreement with the JV toward these infrastructures. As shown on Slide 4, Saint Malo is posting 2 goals. First, respond to growing demand from businesses for very high-speed secure fiber network; and second, satisfy the growth in data usage in a growing mobile market. Indeed, our mobile postpaid customer base has risen for -- by 35% over the last 6 years. And the data traffic per customer has increased 25-fold during the same period of time to 10.7 gigabytes per customer per month in 2019. According to Ericsson, traffic per customer should continue to increase massively towards 65 gigabytes per customer per month in 2025. Turning to Slide 5. In order to address this huge increase in data usage, Bouygues Telecom needs to expand its network capacity through 3 different ways. First, by adding more sites to densify our network. We should have 28,000 sites in 2023 compared to 21,000 in 2019. Second, by reinforcing our portfolio of frequencies. Thus, we'll participate in the 3.5 gigahertz auction process in the -- this year. And third, we need to increase the capacity of our backbone and backhaul network. We already did it on our own in the very dense area. Let us now focus on Saint Malo infrastructures on Slide 6 and 7. Thanks to Saint Malo infrastructure, our backhauling capacity will be multiplied between tenfold inside cities to 100-fold on intercity lines. We will also be able to expand FTTO offers for businesses and to develop wholesale. We have shown in blue on the infographic below the 3 different areas where fiber will be rolled out to connect our equipment to the backhaul and backbone network. First, our mobile sites; second, BtoB business; and third, central offices. Moving to Slide 7. Project Saint Malo includes 3 structural elements. First, around 90 metropolitan offices which will host core network equipment of Bouygues Telecom for 5G; second, optical fiber networks inside cities; and third, high-capacity intercity lines. In order to do this, we have 2 options, as shown on Slide 8. Notably, as mentioned in Option A, we could have built our own metropolitan offices and inside cities backhaul network. This solution would have caused some CapEx estimated between 25% to 30% of the total CapEx needed for Saint Malo. In such a scheme, we would have also rented intercity lines, leading to high OpEx in the long term due to a surge in the need for capacity. In addition, we will not have been able to boost our FTTO footprint and to market wholesale offers. We decided to find another option. Some technical and financial analysis demonstrated 2 things: first, the possibility to share the infrastructures; and second, a strong appetite from infrastructure funds for this kind of project. So we decided to take this opportunity to launch Project Saint Malo. Indeed, the Saint Malo solution allows us to have access to a complete and shared infrastructures with no short-term impact on our free cash flow and spending lower OpEx in the long-term compared to Option A. Please note that this positive impact will be very gradual. We benefit also from the collection to recover control after 20 years. And finally, Saint Malo allows us to address a larger FTTO market. Turning to Slide 9, building these infrastructures will cost us around EUR 1 billion -- will cost, sorry, Saint Malo around EUR 1 billion, of which 70% due to the cost of intercity lines. Project Saint Malo will be mainly financed through bank debt as well as a shareholder loan from Cellnex. Bouygues Telecom will have a 49% stake in Saint Malo for limited capital injection of EUR 30 million. A master service agreement over 30 years will give Bouygues Telecom a reserved access to 70% of Saint Malo's capacity in exchange for an annual fixed cost. Saint Malo JV will be also able to market the remaining 30% of capacity to other operators. To sum up, in Slide 10, Saint Malo is a high-capacity nationwide optical fiber infrastructures that Bouygues Telecom will use for backhauling mobile and fixed broadband sites and developing FTTO. The financial structure gives Bouygues Telecom access to the infrastructures at a lower cost with no short-term impact on the free cash flow. Furthermore, Bouygues Telecom will have a call option to get control of the company after 20 years. Finally, Project Saint Malo is a real opportunity to strengthen our competitiveness to accelerate in fixed BtoB and to develop the wholesale business. Let's now talk about Project Asterix, which is related to the financing of FTTH access in Orange Medium Area. Before starting the presentation on Project Asterix, let me remind you that Bouygues Telecom has access to FTTH in all areas in France, as explained in Slide 11. Indeed, our first goal has been to secure the access to FTTH. It's a very dense area. We have accessed 100% of the horizontal infrastructures, thanks to agreements with Orange and SFR, and more recently with CityFast. The CityFast agreement aims at building 3.4 million premises by end 2021, representing 50% of the area. Bouygues Telecom will have access to all of the premises in exchange for annual fixed OpEx. We can have access to the vertical infrastructure via a joint investment or via rental. In the Medium Dense Area, the sole operator with horizontal or vertical infrastructures. The maintenance cost concerns the vertical infrastructure. As of today, Bouygues Telecom has signed rollout agreements with both Orange and SFR, investing by tranches of 5% and increasingly renting premises, thanks to the success of our FTTH offers in this area. Concerning public initiative networks, we also get access here on that. Then our objective has been to optimize the financial conditions through related to FTTC access in these different areas. We already did it in the very dense area, so the agreements we signed with SFR and CityFast. We now want to address the Orange Medium Dense Area. This is the aim of Project Asterix as described in Slide 12. As of today, in the Medium Dense Area, Bouygues Telecom accesses Orange FTTH vertical network via joint investments by 5% tranches of completed lines in 1 area or through rental. The call for tenders has been launched in order to choose a partner to create a JV to co-finance the rollout of FTTH in the Medium Dense Area to market infrastructure and to manage operations. Bouygues Telecom will be a minority shareholder. The JV will buy from Orange the FTTH connections in tranches of 5% of completed lines in 1 area, in keeping with growth in the number of customers. Bouygues Telecom will have access to these infrastructures through a long-term service agreement with the JV. Bouygues Telecom will also transfer existing co-investment contracts on 5% tranches to the JV, settled by the FTTH connections currently leased by Bouygues Telecom from Orange. Slide 13 highlights how Bouygues Telecom will optimize its FTTH costs in the Medium Dense Area. The FTTH access financing project involves only the Orange Medium Dense Area for 11 million premises. Today, this can be rented for EUR 13.2 per month per customer or be bought at a cost of EUR 513 or more via joint investments. In case of purchase, additional maintenance costs must be added for around EUR 5 per month and per customers. Bouygues Telecom made a good -- made already a co-investment with Orange. Owing to the success of our FTTH offers, our needs have increased and we are now mainly leasing the premises. This situation is likely to last in the future. Thus, the purpose of this financing project is to lower the rental cost per premises. It also offers the opportunity to buy at a cheaper price of premises after 10 years as you can see on the graph. As you can read on Slide 14, our goal is to choose a partner who will be the majority shareholders of JV. Like Saint Malo, Bouygues Telecom will have a 49% stake for a small injection of capital. The JV will buy back existing 5% tranches already bought by Bouygues Telecom. Bouygues Telecom shall receive around EUR 200 million in proceeds from this disposal. Also, the JV will buy from Orange the tranches of 5% in relation to premises currently rented by Bouygues Telecom. Finally, the JV will buy additional tranches in line with growth in the number of customers. To sum up, on Slide 15, Project Asterix will rollout Bouygues Telecom. First, to speed up the rollout of its FTTH network in the Medium Dense Area. Second, to optimize the rental cost of the premises. Keep in mind that the positive impact of this optimization won't occur before 3 years. This is because during the first 3 years, savings on unit rental costs will be offset by the rental costs on the existing premises sold by Bouygues Telecom to Asterix JV. Third, to have the opportunity through a call option to take control of the JV after 20 years. And finally, this project reflects our smart CapEx and OpEx management whilst keeping differentiation. In Slide 16, we have updated our flexible FTTH access strategy, including Asterix project. This concludes my presentation. Operator, please open the floor for questions.

[Operator Instructions] We do have a question from Nicolas Cote-Colisson from HSBC.

Yes, my question is about your total CapEx budget for the group, taking into account all these infrastructure deals. So if we can have a kind of a guidance on how much do you think you can spend in the coming years?

Nicolas, your question is for Bouygues Telecom or for Bouygues Group?

Yes, for Bouygues Telecom.

Sorry. So as I explained, this project would choose our CapEx guidelines because, for example, for our case, we will have a lease to Orange. So it will be -- we have stake now. And for Saint Malo, without Saint Malo, we won't have spent EUR 1 billion CapEx. We would have only spent CapEx for the line inside the city and also for the metropolitan offices. So the gain in terms of CapEx is very, very small during the next coming year, and we don't change our guidance of CapEx. To revenues, our guidance for CapEx for 2020 is between EUR 1.1 billion and EUR 1.2 billion in terms of growth CapEx and the same for 2021.

Okay. And if I may, just a follow-up one. You will receive EUR 200 million in cash for selling your existing contracts, yes?

Yes, it will be a disposal. Exactly.

Okay. So it will be a disposal. So it will not be deducted from the growth CapEx. It would be...

It will be deducted from the growth CapEx. So the net CapEx will be between EUR 0.9 billion and EUR 1 billion.

[Operator Instructions] Our next question comes from Andrew Lee from Goldman Sachs.

It's Nicola speaking from Goldman Sachs. I just was wondering if you could explain the financing structure a little bit more of Saint Malo. I understand you're putting in EUR 30 million equity contribution, then will the shareholder loan be taken out by Cellnex? Can you just explain that a little bit for us?

We will put -- yes, we said 1 week ago that we will put less than EUR 50 million. So the exact figure is EUR 30 million that Bouygues Telecom will put in Saint Malo. It's the same for Cellnex because we will have 49% and Cellnex 51%. Then the rest of the financing of this project will be made by a bank loan mainly, and also shareholder loan with the Cellnex. If you have a question about the conditions of the shareholder loan, you should ask that to Cellnex.

Our next question comes from the line of Mathieu Robilliard from Barclays.

A few questions on my side. First, in terms of the construction. In the case of Saint Malo, you mentioned in the slides that the construction revenues linked to the project will be booked by Bouygues Telecom. I just wanted to make sure that for that you will have EUR 1 billion spread over 7 years, that will be incremental to Bouygues Telecom. But also what kind of margins will you be making on that, if any? And with regards to Asterix, will you be also building part of the infrastructure there? Or is it that there's absolutely no build? It's just taking infrastructure from Orange, therefore there's no construction revenues and margin associated? And secondly, with the Project Asterix, you mentioned in the slide that this will be deployed in the areas where Orange is actually rolling out fiber, but apparently not in the areas where SFR is doing the same. Can you explain exactly why and how it's going to work with SFR?

Okay. So first about -- your first question is about the construction revenue. So it will be EUR 1 billion during 7 years, as you said. We will recognize that in the other revenues. So it won't be in the telecommunication or service revenues. I remind you that we disclose 2 kind of revenues. The service revenue, which is purely telecom revenues and there's the total revenue also. The margin on this project are very, very low. I can't disclose any figures, but it's very, very low. Your second question was about Asterix. There is no construction in Asterix project. It's only buy -- Asterix, we don't need to buy FTTH assets or FTTH tranches from Orange, and we will access through these FTTH premises. But no construction revenue for Asterix. And your last question was about SFR. While we decided to launch Asterix project, I think it was 1 -- or 18 months ago. At this time, we decided that it would be -- we will begin with Orange that what we did and what we are doing. So we will see after Orange if we want to grow with others or not. The point is that many of our customers in the Medium Dense Area are in Orange area, in fact. We have -- our number of customers in SFR area is very low, very small. And so today, it is not relevant to already do that with SFR.

Okay. I mean I guess, one of the reasons why I was wondering why you didn't do with SFR is that it seems the wholesale costs are actually significantly more expensive than in the case of Orange. So that could have created a further incentive to do it. But then, I guess, you will continue that.

This is better to do that with SFR just because of what you said. So the cost -- for SFR, the rental cost is very high. But we -- today, it -- we decided to begin with Orange because it is where our customers are now. To find -- in fact, to find some banks and some investors ready to finance such a scheme, you need to already ask customers to fill the infrastructure because they will really spend some money to buy infrastructure. And they need from the beginning to have some customers on the infrastructure.

Our next question comes from the line of Thomas Coudry from Bryan Garnier.

Actually, on Saint Malo, I wanted to know if we could have a little bit more insight on the OpEx consequence of the deal. So you're talking about a fixed OpEx that Bouygues Telecom will pay to Saint Malo. I guess that fixed amount is evolving in time, actually, with the rollout of the network. And I'd like to know if we can have more view and how it will impact EBITDA in 2020 and in the coming years.

So in term of OpEx, just -- we'll speak about 2 things. First, what we will pay -- what Bouygues Telecom will pay to Saint Malo. So Cellnex has provided information about Saint Malo's EBITDA. As I said that it will be at the end of the 7 years, the construction period. It will be around EUR 80 million per year. You have in mind that we will have 70% of the capacity. So it's very simple to calculate. We will pay, of course, a bit more than the 70%. It's very easy to calculate the Bouygues Telecom part on EBITDA. That's the first point. The second point is that Saint Malo, of course, will cost us -- we'll have to pay something to Saint Malo. But without Saint Malo in, I would say, 7, 8, 9, 10 years, we will have to pay more to Orange SFR motorways companies to rent these infrastructures. So Saint Malo is not more OpEx in the future. It is less OpEx in the future compared to a situation without Saint Malo.

If I can have just a quick follow-up then. How would have your OpEx base increased than without Saint Malo? Because, I guess -- yes.

Today, this is very small because the traffic on our backhaul and backbone networks are quite small. And for example, we are using some microwave link, so without any cost in term of EBITDA, OpEx and impact on the EBITDA. And for example, in the backbone, we are wanting today 2 optical fiber for our traffic. And we know that we will need probably 100 optical fiber in 10 years. So the cost will be multiplied by 50. So today, of course, it's very small, a few million euros. In 10 years, it will be huge, and it will be higher than that we will pay to Saint Malo.

Our next question comes from the line of Nawar Cristini from Morgan Stanley.

I have 2 questions, please. Firstly, on CapEx. In -- if we compare the CapEx in 2019 versus 2020 in the guidance, the CapEx has increased quite significantly despite the fact that with CityFast, Saint Malo, the towers with Cellnex and also Asterix coming up. So could you walk us through the different moving parts explaining this increase? And importantly, going forward, how should we think about CapEx beyond 2020? Will the EUR 1.1 billion to EUR 1.2 billion envelope enough to cover the investment need? And lastly, thinking of the next steps, you have been quite pragmatic in the management of your infrastructure. Do you see more opportunities beyond Saint Malo and Asterix to optimize the CapEx on telecom?

So first, just to remind you, Saint Malo and Asterix projects are not here to optimize CapEx. These 2 projects are to optimize OpEx. So there is no impact, no impact for -- about on our CapEx lines except for the 25% of Saint Malo costs related to the inside city fiber and metropolitan offices. So we are speaking about EUR 300 million or between EUR 200 million and EUR 300 million split over 7 years. So it meant to be between EUR 30 million to EUR 40 million per year. So the impact of Saint Malo on the CapEx is very, very small. The main impact of Saint Malo is our level of OpEx in 10 years. And why are we doing Saint Malo now and not in 10 years? It is because the financing conditions that we can have in the market now because of the low interest rates, because the appetite of the infrastructure funds are very -- they are very pushing to find this kind of infrastructures. And so we are able to find good financing conditions. That's why we are doing that now. Your question -- so -- about -- yes, about the level of CapEx for Bouygues Telecom in 2019 and 2020. I remind you that in -- between 2016 and '18, we have been rolled out Curzon project for the mobile network shared with SFR in the medium area. And at this time, we had around EUR 200 million per year of CapEx due to that. This project ended at the beginning of last year, of 2019. And that's why we saw a decrease in term of level of CapEx last year. For 2020, what we saw now -- what we are seeing now is that our -- we are facing a huge need in term of capacity. We have to cope with the demand of our clients to use more and more their phone and to spend more and more data traffic. So we need to invest a lot in 4G for capacity. And at the same time, we'll also need to roll out 5G -- to begin the rollout of our 5G network. That's why our CapEx will be higher this year and also next year. And about more opportunities, well, we will see. We are now -- Saint Malo -- we signed Saint Malo 1 or 2 weeks ago. We are now working a lot on Asterix project. Well, after that, we will take some holidays, I think.

Our next question comes from the line of Jerry Dellis from Jefferies.

I got 2 questions, please. On Project Asterix, is the joint venture going to be buying access from Orange more cheaply than Bouygues would be buying that access today? And if so, why is it possible for the joint venture to achieve better terms than Bouygues would be capable of on its own? And second question is related to Saint Malo. It seems to me that Bouygues Group is not particularly heavily geared and has pretty good access to capital. So why is it not possible for Bouygues of its own volition to get funding for these infrastructure projects? Why is it necessary to pay a share of the upside away to Cellnex?

So your first question is about Asterix JV. No. Of course, the Asterix will buy the tranches of 5% at the same price as Bouygues Telecom would have been able to do. This is regulatory -- regulated prices. So there is no change in term of conditions for Asterix compared to the conditions that Orange has today with all the French operators. So no impact. The reason why we are able to rent -- why Bouygues Telecom is able to rent at a lower price to take then -- the access we could have with Orange is simply because the average cost of capital of Orange is very, very, very high. If you take the EUR 13.2 million per sub, per customer, so you have around EUR 5.2 related to the maintenance cost. And so you have EUR 8 per month per sub for the infrastructures. EUR 8 multiply by 12 months per year lead to EUR 96 per year per customer to have access to Cellnex infrastructures except the maintenance costs. EUR 96 divided by the investment of EUR 513 leads that the work of Orange is 19% per year, 19%. I'm sure that we can find quite easily some infrastructure fund at lower need of return at 19% per year. So that's why we decided to put in place Asterix. And I think we are not alone to do that in France.

And the question related to Saint Malo?

Yes, sorry. Why is that to be -- yes, Saint Malo. The advantage of Saint Malo, the main advantage of Saint Malo is the fact that the infrastructures will be shared with other operators, so that's why the cost will be lower from Cellnex.

So it's Cellnex's marketing expertise to sell the additional 30% capacity that warrants this.

Cellnex already had around, I think, 5,000 mobile sites in France. With Saint Malo, they will be able to market complete infrastructures with these 5,000 sites linked together. So I think that this is very important for them, and it's very valuable for them because of that. This is not only 5,000 sites alone in France, but 5,000 altogether connected, thanks to Saint Malo. So for Cellnex, I think it is very, very, very valuable.

We do have one further question from the line of Stephane Beyazian from MainFirst.

Sorry, if I missed that and you said that at the beginning. But how is Saint Malo articulated with the Curzon project basically Altice, because I'm not seeing Altice there, but perhaps Altice may join at a later stage? And I was wondering whether you could make a comment or not on whether you think other operators have already an infrastructure that is comparable to what you'll be doing, let's say, differently. If they're all doing the right thing or you think some will be struggling as they are not realizing how much traffic will be coming over the next decade.

So about your last question, Orange, of course, already has this kind of infrastructures. I think that SFR also due to what I will call [Foreign Language] in French. Thanks to Numericable, they now, I think, have this kind of infrastructures. I don't know about Iliad, but I think that they have some things. Because all these 3 operators, in fact, were in the past fixed operators. And as fixed operators, they rolled out equipment all around the territory to link their fixed network. That was not the case with Bouygues Telecom. We are coming from the mobile world and so that's why we decided at the beginning to use microwave link, for example. And that's why now we need this kind of infrastructures. Because as we said, we need that for the fixed in the BtoB and in the wholesale market and also to cope with the huge data increase that we have today. But this is for the big operators. You also have some little operators, BtoB -- many BtoB operators that, of course, doesn't have -- don't have this kind of infrastructure today. And these operators will be client -- could be client of Saint Malo infrastructures. I don't remember the beginning of your question.

How Saint Malo...

Yes, about Curzon. Sorry, Curzon, Curzon. Sorry. So Saint Malo infrastructures, in fact, as I said, you will have some network inside the city. So it would be mainly inside the city where Bouygues Telecom is leader in Curzon project. And you will also have inter-city link. So the Saint Malo project will be more dense in Curzon areas where Bouygues Telecom is leader than areas where SFR is leader.

We do have one further question from the line of Alexandre Roncier from Exane.

I just had one. I think on your full year slides, you mentioned that you were selling 50% of ownership of those assets. But I think from some of it, if I'm not mistaken, you also had and were retaining only 0% of the economic rights? So Chris, the first one, do you have, at least, built on the structure an option to buy back a couple of percent to reconsolidate those assets in the near future? And secondly, how those -- or how are those 0% economic ownership affecting potential minority dividends if any should be paid in the near future?

So your question is about the dividends for Saint Malo?

Yes, exactly, because I think -- I mean, if I'm not mistaken on your full year slide, you said you were having, well, 50% ownership but 0% economic interest. So yes.

Exactly. Okay. Okay. So in fact, we'll have 49% ownership of Saint Malo JV. To be clear on this subject, in fact, the project, we decided with Cellnex that there will be no dividends between the -- for the first 20 years. In fact, we won't have dividends, and Cellnex won't have -- should not have also dividend during this first period of 20 years. At the end of this period, we could buy 100% of the company, first option; or second option, remain at 49%. And in this case and only in this case, all the dividends between year 20 to year 35 will go to Cellnex. So nothing for us during this 15 years period. But -- so we will not receive any dividend during the first 20 years because nobody will have -- won't -- will have any -- won't have any -- nobody will have any dividends. And after that, if we decide to not exercise the call option, we won't have dividend during 15 years.

So that's 15 years after the 20 years?

Yes, if we do not exercise the call option. And about -- and we have not any option to reconsolidate Saint Malo in the near future.

Nor Asterix, I guess?

We will have -- good question. We will have a call option to go from 49% to 51% in Asterix project quite quickly. So I don't know exactly because we are negotiating, but probably in 4 or 5 years. For our stakes, we will have -- we will be at 49% at the beginning, 49%. Then 51% 4 or 5 years later, and then 100% at the end of the 20-year period.

I would now like to hand back to our host, Mrs. Karine Adam-Gruson, for further remarks. Thank you.

Thank you for joining us today. We will be announcing our first quarter 2020 sales and earnings on 14 May 2020. And this concludes our Bouygues conference call teaching on Saint Malo and Asterix projects. Once again, thank you.

Thank you very much for joining this Bouygues conference call. You may now disconnect your lines.