Cyfrowy Polsat S.A. (CPS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Polsat's Full Year 2019 Results Conference Call. I will now give the floor to Miroslaw Blaszczyk, CEO of Polsat. Sir? Sir, you may begin. [Technical Difficulty]

Hello?

Operator?

Operator?

Yes, I'm here. Just a second. Yes, ladies and gentlemen, due to technical issues, please be patient and wait for a minute.

[Audio Gap] the year 2019 and discuss our operating and financial results. The operating part will be run by Staszek and Maciej. Later on, Kacha will comment on our financial performance. But before I hand the floor to the team, let me summarize this interesting year briefly. 2019 was an exciting and eventful year. First of all, we strengthened our multi-play strategy by introducing the concept, TV/Internet/Telephone, For everyone. Everywhere. We offered our customers 2 revolutionary services: the IPTV and OTT web TV with state-of-the-art set-top boxes. Secondly, we signed a joint venture agreement with Discovery and TVN on launching a joint OTT streaming platform, a highly prospective project that will expand and ease access to the Polish content provided online. As of for now, our regulatory approvals are still pending. Hence, I will not go into details of this project today. Moreover, in 2019, we took a very important step to secure the smooth running of our IT systems and transformations and build foundation for future services and products based on edge-cutting IT solutions. Namely, we entered into a strategic alliance strengthened through capital engagement with Asseco, the largest software producer in Poland. And last, but not least, a subject that is on the lips of the whole industry today, 5G. Following successful tests conducted throughout 2019, early this year, we initiated the rollout of the first commercial 5G network in Poland using our unique 2,600 megahertz TDD frequency band. Let us move on to our very good operating results. Staszek, the floor is yours.

Good morning. Mirek focused on our pay TV and telco business. So let me give you some detail on our smaller yet very successful business segment. 2019 was a very good year for TV Polsat. Last year, we invested in a more attractive autumn scheduling, enriching it with several new highly popular TV formats, such as Love Island and Ninja Warrior. We also aired numerous sports events in 2019, which attracted a lot of viewers to our sport channels. Once again, our operating results prove that our investment decisions were right. Polsat channels maintained over 24% in viewership figures in the commercial group while the main channel gained an audience share of over 10% and ended the quarter in second position. Let me remind you that this result is exactly in the middle of our long-term strategic goal, which is 23%-25%. I guided last time for a better market momentum expected for the second part of the year, and I'm happy to say today that Q4 turned out to be strong for our group. We outperformed a flattish market. Our TV advertising and sponsorship revenue grew by 2.4%. And as a result, our market share grew to 28.6%, a result I am very satisfied with. Let's now switch to the Slide #10 that summarizes our viewership performance in the full year. In this perspective, our main channel, Polsat, remains the #1 choice, exact for with TVN of the Polish viewers with 11% audience share. If we look at our full portfolio, our 34 channels together generated over 24% of viewership, a very stable result, once again, in the upper part of our targeted corridor. And finally, let's look at our performance on the TV advertising market in the full year of 2019. As you can see on the Slide #11, the published TV advertising and sponsorship market was almost stable, also in the full year perspective. I'm very proud to say that on this challenging market, TV Polsat generated positive ad revenues dynamics in each single quarter. As a result, our TV advertising revenue grew by PLN 23 million or almost 2% year-on-year. Consequently, our market share grew yet again, reaching 28% in the full year 2019. Thank you very much for your attention. And now, I give the floor to Maciej, who will tell you more about our retail business.

Thank you, Staszek, and well done on the strong results of the TV segment. Turning to retail, as always, we'll start with the smartDom program. It's my great pleasure to tell you that in January 2020, we hit a milestone. Our multi-play customer base exceeded 2 million. In 2019, we recorded stable strong growth dynamics of 11%, which means we added almost 200,000 customers over the past 12 months. The number of services used by our multi-play customers also continues to grow at a healthy rate, exceeding 6 million. But the most important outcome of our multi-play strategy is reflected in our churn ratio. As you can see, our churn ratio remains at a very low level, below 7% per annum. 6.4% in 2019 is yet another record on this field. We are extremely proud to have such loyal customers. The math is simple, low churn, plus strong sales equals growing RGU base. We have increased our RGU base by almost 0.5 million services. The key driver of growth was a very dynamic development of our mobile segment with stable pay TV and the Internet. As a result, we provide over 14.7 million contract services at the moment, 3% more than a year ago. Another angle of our smartDOM strategy is reflected on Slide #15, where you can see our focus on customer value. The fourth quarter saw a strong increase in ARPU per contract customer, which went up by almost 2% year-on-year. It means each of our contracted customers paid on average PLN 1.6 more than a year ago. A healthy result, I believe. Additionally, each of our contract customers uses, on average, 2.61 services, and this ratio keeps going up as well. This, of course, is another very positive result of our multi-play strategy, which helps us build the value of our customer base. To wrap up my part of the presentation, let's take a look at prepaid. This time, we can present to you a very stable development. Our RGU base amounted to 2.66 million with bigger and bigger contribution from pay TV services. Just like a quarter ago, a major part of the growth comes from the sale of the online content via our IPLA platform. Also, prepaid ARPU remains very stable at the level of PLN 20.3, which meet our expectations. To briefly conclude my presentation, let me say that 2019 was a very good year for the group. I'm very happy with our strong operating results, continued growth of our multi-play base, dynamically growing ARPU and record-low churn of 6.4%. Kacha, the floor is now yours.

Good afternoon, everyone. Today, I have the pleasure of presenting you with Q4 results. Please note that as of January 1, 2019, we adopted IFRS 16 reporting standards. Therefore 2019 financial results are not comparable to 2019 results. For your convenience, we're presenting the results for 2019 in 2 versions, with and without IFRS 16. However, please bear in mind that since Q1 2020 onwards, we will return to presenting a single set of financials with IFRS 16 fully implemented both to reported period and to the base period. So passing to the results, let's look at the quarter first. In Q4 2019, our revenue grew by PLN 57 million. Please remember that the consolidation of Netia does not disrupt this picture in Q4 anymore. So you are seeing organic growth of 1.9% year-to-year. IFRS 16 does not have material impact on revenue. Our EBITDA is somewhat stable and amounts to PLN 938 million if reported under former reporting standard or PLN 1.06 billion including IFRS 16. 2019 was a year of more intense CapEx and working capital investments as well. Hence, our free cash flow go slightly down. I will elaborate on that later on. Leverage increased to 2.9 in Q4 from 2.62 in the previous quarter, which results from our investments in Asseco Poland shares as well the tranche of our dividend that was paid to our investors in October 2019. Looking at the results for the full year, we have recorded strong growth of revenue, up by almost 9% to PLN 11.6 billion. But this time, this result reflects a positive contribution from the consolidation of Netia in the first month of the year as in Q4 IFRS 16 impact is immaterial. Our full year EBITDA grew by 0.6% to PLN 3.7 billion, excluding IFRS 16. IFRS 16 boosted EBITDA to PLN 4.2 billion in 2019. Looking at the composition of growth by segment. Both our segments delivered healthy top line growth in the full year. Our retail business grew by PLN 665 million and benefited mostly from a strong demand for smartphones and Netia consolidation while our TV segment grew by over PLN 300 million, mostly thanks to content sales and healthy revenue and growth. If you look at our EBITDA development, you will notice that overall EBITDA growth was driven by our broadcasting and TV production segment. Healthy growth of financials in this branch of our business was the effect of a very good viewership figures fostered by the investments into attractive content and excellent performance on the ad business as Staszek has already told you. In our Retail segment, we continue to invest in content, predominantly football rights in order to sell it to our pay TV consumers. Therefore, EBITDA of this segment did not grow in 2019. Of course, please be aware that the strong results for 2019 that I have just presented to you have been supported by financial synergies achieved by Polsat Group together with Netia, which contributes positively to EBITDA for 2019. The initiatives that have been undertaken following the acquisition of a controlling stake in Netia are being implemented according to our plan. We can confirm that our declaration to generate PLN 800 million in synergies in the 6-year period since the acquisition is still valid. In 2020, bigger financial effects of already implemented initiatives will be visible. Moreover, we also expect to launch new projects that will yield incremental synergies. Moving on to free cash flow. Q4 as usually saw as a strong generation of cash, this time on the level of PLN 529 million, which I'm very happy with. Please bear in mind that continued strong demand for smartphones offered under installment plans required incremental investments in our working capital throughout 2019, and I expect this factor to continue impacting our free cash flow also in 2020. Looking at the full year perspective, 2019 was also overall more CapEx intensive than in the past, partly in connection with infrastructure investments conducted by Netia, together with high investments into working capital in relation with high demand for smartphones, this drove the free cash flow down to PLN 1.3 billion, which is still a very healthy result, providing fuel for our investments. I also want to flag one topic here, namely in Q1 of this year, you should expect a noticeably higher than usual level of payments related to the settlement of taxes for the preceding year. In Poland, we are allowed to choose a more favorable method of lump sum upfront tax payments, which usually results in some delayed settlements on the beginning of the following year. And this is something that will be reflected in Q1 2020, even though I'm not able to quantify it precisely as of now. Passing to the cash flow. This year, acquisitions consumed a significant amount of cash, over PLN 1.3 billion. In December, we acquired a significant stake in Asseco Poland for PLN 1.2 billion. And earlier, we settled the transaction with Eleven Sports Networks funders for almost PLN 100 million. Secondly, the CapEx revenue ratio, excluding acquisitions, amounted to 10.5 in 2019, which is in line with our guidance. As I have mentioned before, Netia is focused on modernizing its network as soon as possible, and we support their efforts. Therefore, you should expect accelerating fiber investments also in 2020. Thirdly, in 2019, we paid a total of PLN 595 million in dividends to investors. Anticipating your questions, I plan to recommend a dividend according to our dividend policy also in 2020. Let us now move to Slide #24 and discuss the debt. First of all, I want to turn your attention to the fact that in Q4, we have obtained an additional term facility under the Combined SFA in the amount of PLN 1 billion. This is tranche B. Tranche B of the term loan will be repaid in one bullet installment on March 31, 2023. As previously, on the debt slide, we present you with our leverage ratio, both including and excluding the impact of IFRS 16. The leverage ratio under our SFA definition amounts to 2.9 while the one including IFRS 16 impact amounts to 2.91. Our weighted average interest cost remained unchanged at 3.3% level. We have been quite active on the debt market recently. As you probably already know, in February, we issued the first corporate green bonds denominated in Zlotys in the amount of PLN 1 billion. The proceeds were used to refinance projects that were qualified as environmentally friendly, including the improvement of energy efficiency of the group, of the reduction of the carbon footprint associated with the production of electronic devices by Polsat Group. On Slide 25, you can see the maturity profile of our outstanding debt at the moment. This brings me to the end of my part of this presentation. I'm especially satisfied with the very dynamic top line growth in both segments and with our stable bottom line, which results from a well-diversified business model. Additionally, our cash generation allows us to invest dynamically and pay dividends according to our policy without any major impact on our leverage ratio. And now, Mirek will summarize 2019 shortly and talk about our objectives for 2020.

Thank you, Kasha. First of all, let me congratulate you all on the strong results, both operational and financial of Polsat Group. It is pleasure to say that all the objectives that we had set for 2019 have been achieved. The core of our strategy multiplay based on the concept, TV/Internet/Phone For everyone, Everywhere, continues to generate a very positive impact. We were successful in building our multiplay base and ARPU. Moreover, our churn ratio once again fell to an all-time low of 6.4%, which I find as an excellent result. Secondly, we maintained a strong position in terms of viewership on a challenging market, thanks all to successful investments into attractive content. I'm also very pleased with the way our operational cooperation with Netia is developing, and the synergies we are achieving together. We noticed the effects of these synergies in day-to-day operating activities, and as Kacha said, they will be more and more visible in our financials going forward. In terms of financials, we have recorded a strong quarter and closed the year 2019 with highly satisfactory results. High margins, stable EBITDA and solid cash generation make it possible for us to repay our debt as scheduled and share profits with our shareholders at the same time. And finally, our investment in Asseco Poland. I strongly believe that this capital engagement will bring tangible benefits for Polsat Group, not only in the scope of implementing an integrated IT system. I see this alliance as a unique chance to develop in the future state-of-the-art products of services on the basis of our experience on the media and telecommunications market and Asseco's expertise in the area of software. To finish off, I would like to give you an insight into our plans and ambitions for the year 2020. It should come as no surprise that we will continue to develop our successful smartDOM and multiplay strategy centered around the idea, For Everyone. Everywhere. Investments into attractive content proved to be a good strategy in the TV broadcasting segment, so we plan to continue along this path also in 2020. Our next goal concerns the cooperation with Netia. We want to further tighten this cooperation on a strategic and synergy-generating level for the benefit of both Polsat and Netia shareholders. As I have said a moment ago, we are also looking forward to our successful cooperation with Asseco with respect to the implementation of comprehensive and strategic IT solutions. 2020 will probably be dominated by the subject of 5G in the telco industry. In this slide, we are already in process of rolling out the first commercial 5G network in Poland, based on our own frequencies, namely the 2,600 megahertz TDD band. We expect 7 major Polish cities to be covered soon. At this stage, we plan to put on air approximately 100 BTS using our existing sites only. We are and always have been a cost-conscious company. Therefore, we'll analyze closely the needs, expectations of consumers as well as availability of end-user devices that support 5G. We will adjust timing and scope of the next steps to our actual findings. Just as in 2019, in 2020, we aim to maintain strong financial results and generate a solid stream of cash, which will enable us to pay attractive dividends to our shareholders. Ladies and gentlemen, thank you for your attention. This concludes our presentation and brings us to the Q&A session. Operator?

[Operator Instructions] We received the first question. It's from Dominik Niszcz of Raiffeisen.

This is Dominik from Raiffeisen CENTROBANK. Let me just ask about the current situation with the coronavirus because it might be also interesting for investors. So do you think that if there is some kind of increase of data consumption of your clients because a lot of them will go on remote office, would you need to do some extra investments in your network in the short term or you think you can handle higher capacity? And in general, do you expect any logistics disturbances in terms of components to your network? I mean maybe not expansion of network, but just for maintaining -- for maintenance CapEx for the networks.

Dominik, thank you for your question. Basically, as far as the data consumption is concerned, we do see an increase in data consumption as more and more employees are doing home office in Poland. Also, some of our employees are already doing the home office. But our network is absolutely capable of serving this kind of data traffic. There is absolutely no problem with the capacity. We don't see any potential, whatever, building of whatever BTSs to serve this data traffic because our network capabilities are absolutely enough to serve it at the moment. As far as the network maintenance is concerned, for the maintenance of the network, we do have a stock of spare parts that we can use for the maintenance. We have it in Poland in our own warehouses. So there is absolutely no problem if the current maintenance of any part of the network is required.

Okay. And just one more question. What is the traffic now in your point of sales? Do you think you would need to cover some fixed costs of your dealers in a negative scenario? Or how do you see this going forward?

At the moment, we are analyzing the situation because the situation in Poland is changing every day. So this will be -- on the daily basis, we'll react to that.

Okay. And just the final one. How do you see cash flow in 2020? You mentioned these tax payments in 1Q. So they will probably reduce the cash flow. On the other hand, you had some extra smartphone purchases in 4Q. So do you think you could beat this figure, 1.330 billion, delivered last year?

Well, as far as the free cash flow is concerned, I cannot promise you the increase in free cash flow because we estimate that there will be more handset sales this year on the installment basis. So I don't anticipate that the free cash flow this year will increase.

[Operator Instructions] And we received a question from Piotr Raciborski from Wood & Company.

Two or 3 questions. First one, could you please elaborate on the risk of coronavirus affecting the ad market in Poland? Because there were some reports from the Polish media houses that the purchasers are canceling or rescheduling the campaigns, considering the expected economic slowdown. Do you see such risk? So that would be my first question. The second question is what growth base of the handset sales are you expecting in 2020? Because you've mentioned that free cash flow should be flat because of the working capital outflow related to the equipment purchases, yes? So then my second -- that was my second question. Third question will be about the EBITDA growth pace. Could you please provide us with some guidance in terms of this -- of EBITDA growth for 2020? Do you expect some rebound?

I will answer the first question. So we planned this year according to small single-digit growth for the advertising market. We are currently monitoring the situation. And as for now, there is -- nothing changes. So we'll just -- having an eye on it. Thank you.

Okay. As far as the growth of handset itself is concerned, we expect a low 2-digit number in 2020. As far as EBITDA is concerned, looking at the current situation in this context because there is an uncertainty on the market, I would be really glad if you -- we could keep 2019 EBITDA in place.

[Operator Instructions] And the next question received is from Marcin Nowak from IPOPEMA Securities.

I would like to ask about recognized synergies from Netia acquisition in 2019. Could you comment more about the nominal size of the synergies both in revenues and costs?

As far as the synergies with Netia are concerned, they're higher than the last year. They're higher double digit.

Okay. Given that there were some initial costs in 2018, they should be higher year-on-year. But could you comment if they...

Well, okay. Sorry, I didn't understand. The 2019, it was PLN 30 million, and we're expecting probably more or less double in 2020.

The next question received is from Mrs. Zelazko from PKO BP Security.

Malgorzata Zelazko from PKO BP here. My question is about the Champions League because there are some speculations that Champions League this year might be suspended. So how do you expect it might influence amortization of your content rights?

We are waiting for decisions. So that's all for now. So we don't have any other news. So we are waiting for decision. But they are playing. Yesterday, they played even without full stadium of audience in Liverpool.

[Operator Instructions] And the next question received is from Pawel Szpigiel from mBanku.

Two questions from me. The first is about the cooperation with Asseco Poland. We are after -- we are 3 months after the transaction. So please give us any comment about the first steps in your cooperation? And the second question is about investments in attractive content. You mentioned in the presentation that you want to continue that in 2020. Please, give us more details on this side.

Okay. As far as cooperation with Asseco Poland is concerned, I think they're really nice guys. But honestly, we started cooperating with them on the beginning of January. We have -- we already analyzing or we more or less at the end of the analysis of the system that we, at the moment, have. So we inherited from the project we run with Huawei, and we're on track on the continuation on this project by Asseco and finalizing this project according to our needs. So basically, Asseco has reviewed whatever we had, has reviewed the completeness of that and we now on the phase when we're agreeing how we going to proceed and how we going to continue the project. [Foreign Language]

In terms of investing in content, so we will do as previously. So year-by-year, we just analyze and just adjust our budget to the income. So this is like -- that's what we would like to build, just to continue investment in the content but in organic way, I can say, so like previously.

And we received a follow-up question from Marcin Nowak.

Just one more question regarding the Asseco cooperation. I remember that back in December, you informed that you began negotiations with Asseco CEO, Mr. Adam Goral, and that these negotiations were ongoing. Could you please provide any update regarding the outcome of these negotiations or whether there are any obstacles in reaching an agreement with Mr. Goral?

Okay. Actually, as far as our comment on the possible cooperation with Mr. Goral. At the moment, there is -- we do not have anything further to say. It has not been completed yet.

As there are no further questions, I hand back to the speakers.

Ladies and gentlemen, this bring us to the end of this teleconference. Sorry with the little technical problems. Allow me to thank you for taking the time to join us today, especially in light of the increased difficult situation caused by the coronavirus. I regret very much that this quarter, we will not be able to meet with you in person as usual, given that all the investor conferences and road shows, both in Poland and abroad have been canceled. Under this circumstances, I invite you to contact our IR team to set up to teleconferences to discuss any additional queries you might have. I hope that soon the situation will return to normal, and we will be able to resume our standard means of communication with investors. Thank you again, and have a good evening.

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