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

Good afternoon, and welcome to the earnings call of Polsat Plus Group for the second quarter of 2024. Can I have the next slide, please? Today's presentation will be delivered to you by Mr. Miroslaw Blaszczyk, CEO of Cyfrowy Polsat; Mr. Maciej Stec, Vice President responsible for Strategy; Ms. Katarzyna Ostap-Tomann, CFO and Management Board member responsible for ESG; and Mr. Piotr Zak, President of the Management Board at Telewizja Polsat. [Operator Instructions] Thank you. Mr. Blaszczyk, the floor is yours.

Good afternoon, ladies and gentlemen. Welcome to our results conference call for the second quarter of 2024. Today's presentation is divided into 4 sections: I will present the key highlights of the past quarter; after, Maciej will show you the operating results in our business segments, and Kacha will discuss our financial results. I will end the presentation with a quick summary, and we will move on to the Q&A section. Next slide, please. Let's start with the key events of 2024 second quarter. Next slide, please. The past quarter was a very good quarter for Polsat Plus Group in all our operating segments. In the B2C and B2B Service segment, we consistently and effectively build value across all customer groups. In second quarter, ARPU per contract B2C customer maintained a high pace of growth at 4.7%, ARPU per B2B customer increased by 1.5%, while ARPU in the Prepaid segment grew by 1.1%. As a result, we recorded 2.9% growth in our retail revenue. We also increased the coverage of our Fixed Broadband Internet Access services by almost 50%, thanks to the new wholesale access agreement with Vectra and Polski Swiatlowod Otwarty. Today, we can provide services to over 10 million households. This was also a busy quarter in the Media segment. We are investing in attractive content and sports rights for our viewers. We acquired exclusive broadcasting rights to UEFA Europa League and UEFA Conference League for the next 3 seasons. We also bought broadcasting rights to the first and second divisions of Bundesliga. We have also prepared a new programming schedule for the fall with many new formats, some old favorites and a new breakfast program. Moving to the Green Energy segment. We started technical commissioning ahead of schedule, and the Przyrow wind farm with 50.4 megawatts capacity. This brings our generation capacity in wind upto 150 megawatts. We opened our third publicly accessible hydrogen refueling station under the NESO brand in Gdansk. Three more stations in Gdynia, Wroclaw and Lublin are almost completed and will be put into operation with the next weeks. We have received funding in the amount of almost EUR 15 million from European Climate Infrastructure and Environment Executive Agency for the construction of 5 more stations. And finally, we are shareholder alongside ZE PAK in the largest and very promising wind project located in Opole with about 500 megawatts of capacity. This farm is going to be based on state-of-the-art, more efficient wind turbines with greater capacity. Next slide, please. These were the main events of the last quarter. Now let's look at our operating results in detail. Please go ahead.

Thank you very much, Mirek. Can I have the next slide, please? Ladies and gentlemen, it will be my pleasure to present to you the results of the second quarter and the first half of 2024 for the Media and Online segment. Let's move on to the next slide. The second quarter was a very good quarter for the Media segment, both in terms of viewership and advertising market position. During this period, Telewizja Polsat Group channels achieved a 22% audience share in the commercial group, with the main channel having 7.1% and our thematic channels 15%. Year-over-year, we maintained stable viewership results, which, in my opinion, is a very big achievement. Especially since at the turn of June and July, the public television broadcast the European football championships, which obviously affected all other channels and Polish people love football, so it was a really big effect as well. In the TV advertising market on the right hand of the slide, we maintain a very good and stable position. In the second quarter, the market grew by 5.7%, while our advertising revenues during that same time increased by 4.8% to over PLN 360 million. This gives us a total market share of over 28% in the advertising and sponsorship markets. Let's move on to the next slide, please. When talking about the first 6 months of 2024 in terms of viewership and our position on the advertising market, we're still very good, still very stable. Our channel share in viewership during the first half of the current year is 21.8%, which is a stable level year-to-year. The main channel's contribution to this result is 7.1% and our thematic channels are 14.7%. These results translated into an increase in our advertising revenue by 6.2% year-over-year to nearly PLN 670 million. Our share in the TV advertising and sponsorships market remains high, above 28% on a growing market. Can I have the next slide, please? Moving on to the Online segment. As you can see, we are effectively building our position in the online market. We are a leading player in this market as confirmed by the operational results that you see on the slide. In the second quarter of 2024, the average number of monthly users was 20.4 million and the number of page views exceeded 1.8 billion. Moreover, in the first half of the year, the Polsat-Interia Group was continuously the leader in the Mobile category, which from our perspective is the most prospective category in the future, and we also achieved the highest reach in the market among internet websites, 3 times during that time period. Next slide, please. Over the past months, we've been working very hard and very intensively on the new autumn schedule, which we presented about 2 weeks ago during our conference. Alongside well-known proven formats that we've done before, such as Girlfriends, Dancing with the Stars, Your Face Sounds Familiar, there will also be a lot of new and exciting additions. The autumn schedule includes 2 new premier reality shows: Special Forces Poland; and My Mom, Your Dad. 2 new TV series: Neighbor Sins and the second season of In-Laws. As well, we're returning with standup, with comedy shows with the Detective Malinowski series and the very old school game show Brawl Over Cash, which our viewers should remember from over a decade ago. Additionally, we have introduced a new breakfast slot called Halo Tu Polsat. It will be broadcast every Friday to Sunday from 08:00 a.m. All in all, I believe this is a very strong schedule. It will support our viewership results and our financial results in the second half of this year. Summarizing the second quarter and the first half of this year in the Media segment, I'm very pleased with the results we have achieved. Our viewership remains stable despite the European Championship Series. We have a high and stable share of over 28% in the growing advertising market. We prepared rich and interesting autumn schedule, which will support us in the future. And in the meantime, our online segment and Interia is absolutely cementing their position at the very top of the Online Polish Media segment. That's all from my side. Thank you very much for your attention, and I hand over the presentation to Maciej, who will tell you more about our operational results in the B2C and B2B Services segment. Thank you.

Thanks, Piotr. Let's look at the operating results of the B2C and B2B Services segment first. Can I have the next slide, please? In this segment, we focus on the consistent and efficient implementation of our multiplay strategy because it translates into higher customer value and higher customer loyalty. Thanks to our efforts in this area, already 2.5 million customers or 43% of our total base use our multiplay offer. What is important, this base is stable over time, providing high predictable revenues going forward. The number of services contracted by this group of customers is steadily growing. At the end of the second quarter, multiplay customers had over 7.5 million services, up by 129,000 compared to last year. As I said, the successful implementation of our multiplay strategy also results in high customer loyalty. This is reflected in a consistently low level of churn. At the end of the second quarter, churn amounted to only 7.5% per annum. Can I have the next slide, please? We provide over 13 million contract RGUs to our customers. Our RGU base is composed of 6.3 million voice services, 4.8 million Pay TV services and 2 million Internet access services. We are happy to see that Mobile Voice and Internet access RGUs are improving. Mobile Voice increased by almost 100,000 compared to the second quarter of last year, while Internet Access Services grew by 50,000. Also pressure on our Pay TV RGUs is visibly lower. This is because the majority of low-end E-Plus services has already faded out, and we focus on bridging the gap with high-quality Pay TV services provided in IPTV and OTT. As Mirek said in the introduction, we are expanding the reach of our Fixed Broadband Internet through wholesale access agreements. This model of cooperation has become very popular over the past years. And I think today, it's a market standard. At present, we can offer our Fixed Broadband Internet to over 10 million households, and this creates a very good business opportunity to cross-sell and up-sell other products from our portfolio to these customers. Next slide, please. As you remember, in our multiplay strategy, we focus on value-creating and value-building of our customer base. And in this quarter, average revenue per contract B2C customer grew at a very good pace of 4.7% year-over-year. At the end of the second quarter, it reached the level of PLN 75.2, and in my opinion, this is an excellent result. We were able to grow the value of our existing customer base over the past year despite macroeconomic headwinds, mainly thanks to cross-selling and up-selling our products in line with our multiplay strategy, but also thanks to higher demand for data following the popularization of 5G. The RGU per customer ratio is steadily increasing and reached the level of 2.27 services per customer at the end of the second quarter. Moving on to the next slide, please. The performance in the Prepaid segment was also good in the second quarter, considering the significant pressure coming from a highly competitive environment in this segment. We maintain a high and stable base of 2.6 million provided prepaid services. These services generated an average revenue of PLN 18 in Q2, up by 1.1% year-over-year. Let me just remind you that the numbers that you see on this slide exclude the low-margin Pay TV offer, Polsat Box Go Start. Next slide, please. In the B2B segment, we maintained a high and relatively stable customer base of 68,500. Also in this segment, we focused on building customer value, even though this is a very competitive and difficult market segment. We had just expand our offer addressed to B2B customers to meet their expectations. As a result, ARPU per B2B customer reached the level of PLN 1,490 in the second quarter, recording an increase by 1.5% year-over-year. Before I move to the Green Energy segment, let me briefly sum up our results in the B2C and B2B Services segment. The multiplay strategy remains the core of our business activities in this area. It allows us to consistently build customer value, which is very important. We build it in all customer segments and maintain a low level of churn, which I'm proud of. Next slide, please. We are making excellent progress on the development of our Green Energy segment. Contribution from this business is already significant today but will increase with time. So let's take a look at the operating performance in this business segment in Q2. Next slide, please. On this slide, we have a short overview of our renewable energy and green hydrogen projects. We generate clean energy from biomass, solar power and wind power. I'm very satisfied with the progress in the development of our wind farms. At the end of June, we started technical commissioning on the Przyrow wind farm with 50.4 megawatts. This means that we have generation capacity of already 150 megawatts. Currently, we are developing 2 more wind projects with total capacity of 146 megawatts. In terms of the green hydrogen value chain, we have started test production of green hydrogen in our 0.5 megawatt alkaline electrolyzer. And this is going very well, I'm really proud of. We have also started designing the prototype of 2.5 megawatts electrolyzers in PEM technology. In the beginning of August, we opened our third publicly accessible hydrogen refueling station in Gdansk. The construction of 3 more stations in Gdynia, Lublin and Wroclaw is almost complete. And else more, we have received funding from the European Climate Infrastructure and Environmental Executive Agency in the amount of almost EUR 15 million for the construction of 5 more hydrogen refueling stations in Poland. As for our hydrogen-powered bus, the NesoBus, we have already produced 30 units, 20 are in Rybnik, 10 are in Gdansk, now delivered, and we are currently working on the production of 26 units for Chelm. Can I have the next slide, please? As you can see, the volumes of green energy that we produce are growing dynamically on the back of new generation capacity. In the second quarter of 2024, we generated 222 gigawatt hours of green energy, up by 53%. And in the first half of the year, we generate 421 gigawatt hours, up by 43%. In both periods, almost 1/3 of total energy production was generated by our wind farms, which we are putting into operation ahead of schedules. The results of the second quarter were driven mainly by the production of the Czluchow wind farm with 72.6 megawatts. We started technical commissioning in February this year. The level of production in the next quarters will be further supported by the Przyrow wind farm of 50.4 megawatts. We started technical commissioning in late June, so its output is not really visible in these results yet. Next slide, please. I'm extremely happy with the financial results of the Green Energy segment, the average price at which we sold our energy was PLN 564 per megawatt hour in the second quarter and PLN 605 per megawatt hour in the first half. As a result, the segment generated very strong financial results. EBITDA of the segment in the second quarter was PLN 71 million. In the first half of 2024, EBITDA of the segment amounted to PLN 121 million. I'm very proud of the segment that we translate our investments to real money to real EBITDA and what is important, it is very long term. Can I have that next slide, please? So to sum up our performance in the Green Energy segment, we are dynamically executing our Strategy 2023+ by launching our renewable energy projects ahead of schedule. We have already achieved our goal for 2024. We have 150 megawatts operational in wind power, and our key focus now is on Przyrow wind farm plant for the second half of next year, which will double our generation capacity in the wind power. So I'm very satisfied. I can sustain our guidance that in 2026, the Green Energy segment will generate incremental EBITDA at the level of PLN 500 million, PLN 600 million, what we announced when we presented the strategy 2023+ in December 2021. Thank you very much and over to Kacha for the financial performance of the group.

Thank you, Maciej. This was a very good quarter in terms of financial as well. Can we move to the next slide, please? We saw a solid increase in revenue this quarter, up by 5%. The main driver was the consolidation of energy revenue but also a noticeable increase in retail revenue by PLN 50 million. EBITDA adjusted for asset disposal grew by 5.7% to PLN 844 million, including the sale of the second tranche of IP4 IPv4 addresses in Q2 for PLN 21.1 million, EBITDA increased by 8.3% year-over-year, up to PLN 865 million. Net profit amounted to PLN 176 million in the second quarter. This was due to a low base effect last year when we recognized the share in the loss of PAK-PCE, which was not consolidated at the time. Free cash flow for the last 12 months settled at PLN 436 million, up by 30% compared to the end of 2023. I will discuss the key elements of our free cash flow later in the presentation. Lastly, net debt-to-EBITDA ratio, excluding project financing was 3.3x at the end of the second quarter. This is a temporary decrease resulting from lower spending on renewable energy projects in the first half of 2024. In line with my earlier declarations, I expect net leverage to increase until the end of the year. In the second half of the year, we have higher CapEx scheduled in the Green Energy segment and the renewal of the reservation in the 2.6 gigahertz band. Can I have the next slide, please? In this slide, we proceed to a breakdown of revenue and EBITDA growing drivers by segment. In terms of revenue, that key driver was, of course, the Green Energy segment, which was not present in the comparative period. The segment generated a total of PLN 324 million in which PLN 125 million came from the sale of our own energy and PLN 169 million was generated from energy resale. In the B2C and B2B Services segment, revenue was under pressure from the last round of MTR cuts, which are EBITDA neutral, and lower equipment sales. Despite lower volumes, we maintain high margins from the sales of equipment. As I already mentioned, these declines were partly offset by an increase in retail revenue, thanks to the solid growth in ARPU, which Maciej discussed in detail. Revenue in the Media segment was supported by our very good performance on the ad market. Moving to the EBITDA, the composition, again, the key driver is the Green Energy segment, which generated PLN 71.4 million of EBITDA in Q2 2024. This result was supported by launching the 2 wind farm projects ahead of schedule and the lack of negative regulatory impact this year. I'm very happy that the negative trends on EBITDA, and the B2C and B2B Services segments are visibly slowing down. Excluding asset disposal, EBITDA in this segment recorded a decrease by about PLN 10 million year-over-year. Lower EBITDA in the Media segment was mainly the result of higher content costs in particular, higher internal production costs. We also saw an increase in marketing and salaries cost, which put additional pressure on the segment's EBITDA. Next slide, please. On this slide, we have the decomposition of free cash flow for the last 12 months, which amounted to PLN 436 million after adjustments for nonrecurring events and CapEx in the Green Energy segment. Factors that were supportive to free cash flow include higher EBITDA, CapEx in TMT under control and lower pressure from working capital engaged, among others, in connection with lower equipment sales. However, as you can see, interest payments remain high and continue to put pressure on free cash flow generation. New adjustments to free cash flow that took place in the second quarter include the payment of the second tranche of PLN 100 million per shares in Pantanomo, a company in our Real Estate segment, and PLN 21 million from the sale of the second tranche of IP addresses. We also adjust free cash flow for CapEx spend in the Green Energy segment to show you what our free cash flow would be if we didn't invest in our new business. Please remember that this represents front-loaded CapEx necessary for the development of renewable energy sources. Once we finalize our investments under the Strategy 2023+ in green energy projects, I expect CapEx in the Energy segment to drop significantly as solar and wind farms have very low recurring maintenance CapEx. Next slide, please. Our TMT business is CapEx-light. In this area, we have CapEx under control and the CapEx to revenue ratio remains low at about 6% in the second quarter and 7% in the first half of 2024. CapEx in the Green Energy segment in Q2 amounted to PLN 168 million. The current level of capital expenditures on our renewable energy project, it's mainly connected with phasing of the development of our largest wind farm, Drzezewo . I expect CapEx in the Energy segment to accelerate in the coming quarters. Next slide, please. On my last slide, as always, I would like to summarize the group debt. Our key ratio net debt-to-EBITDA, excluding project financing was 3.3x, including project financing, it is 3.6x. As I already mentioned, the decrease in net leverage this quarter is temporary, and I expect it will increase in the second half of the year, in line with accelerated CapEx spending on the Drzezewo wind farm. Our prospective weighted average interest cost amounted to 8.3%. The maturity profile and structure of our debt, which you see on the right hand of this slide remains unchanged, and this is the final structure for the nearest future. Let me just remind you that in Q3, we will start repaying the capital under the senior facilities agreement. That's all for me. Before I pass the floor over to Mirek, let me just say that I'm pleased to see a consecutive quarter of growth and the continuation of the positive trends we have seen in the first quarter, and I expect increasing contribution from the Energy segment in the following quarters. Thank you for your attention. Next slide, please, and over to you, Mirek, for the summary.

Thank you very much. Let's go to the next slide for a short summary. In the B2C and B2B Service segment, we constantly focus on our multiplay strategy. Thanks to the successful implementation of this strategy, average revenue across all customer segments is growing and churn remains at a low level of only 7.5%, demonstrating the loyalty of our customer base. Looking to increase the accessibility of our services, we have expanded the coverage of our Fixed Broadband Internet services by 50% upto 10 million households. In the Media segment, we maintained high and stable viewership results as well as a high and stable share in the TV advertising market of about 28%. Our advertising revenue increased by 6.2% in the first half of 2024 on a strongly growing market despite the European Champions League held by our competition. As for Green Energy, we have launched the Przyrow wind farm with capacity of 50.4 megawatts. This means that today, we already have a total of 150 megawatts of generating capacity in wind farms. And by the end of next year, we will double this capacity. The Green Energy segment is already generating solid financial results and contributing to the group's results at a consolidated level. Ladies and gentlemen, we have reached the end of today's presentation. Thank you for your attention. And now we are ready to answer your questions.

We have one question in the chat section coming from Nora from Erste. One question from my side, please. What is the outlook for expenses in the second half of 2024, in which areas can we expect inflationary pressure?

Thanks. I will answer those questions. As you know, first of all, we're very cautious about -- always about the cost, and we're trying to keep the costs under control. That said, some of our cost items are under the inflationary pressure, mostly that would be technical cost, content production cost and wages. Just please remember that the regulatory minimum wage also puts pressure on our costs. Other costs are not related directly to wages like, I don't know, security cost or cleaning costs, where the companies are employing people with a minimum wage, and increasing the cost ones, there is a pressure on wages as well.

I don't have any more questions in the chat section. As there aren't any more questions, I will pass the floor over to Mr. Blaszczyk. Oh, hold on. What is the strategy for hedging electricity generation? The question is coming from Peter from Avaron.

Peter, could you clarify your question because, unfortunately, I don't understand it.

Yes. I just wanted to understand whether you do any form of hedging for your electricity generation, especially in the renewable energy side, kind of, let's say, maybe you [ forward ] 50%, 60% of your generation or anything like that? Or you sell everything on spot, and plan to do that also in the future. Just to understand what is your strategy in this regard?

Okay. Okay. That's it, Maciej, you want to answer this? Yes.

Yes, we just sell the energy basing on PPAs, or long-term contracts like we did, for example, with Przyrow wind farm, so we sold the whole energy to Google Cloud for 10 years contract. So we just made the contracts -- long-term contracts, sometimes on spot. So we do not hedge energy. We try to sell it on different business models.

So this is about the sales I understand. Did it answer your question?

In general, yes, but kind of do you have the, like fixed price and whatever is coming from the wind farms, for example, is going fully to Google or you guarantee a certain level of energy at every minute. And the wind is not blowing, then you need to buy the missing part from the market? Or how does it work?

That's why our energy strategy is like we've presented. So we have like stable sources of energy like biomass and this green source of energy, and we have like unstable sources like wind farms and solar panels. So then we can sell in every model because all the time, we can secure the energy so we can deliver the energy -- the same amount of energy every hour. So we can say the long-term contracts. But for example, like with Google, we can just settle the price with some regulations or like PPAs. So then price is pre-indicated in the contract. And then there are different models. So in fact, we have like very compact energy companies. So that's why we have invested in biomass because this is stabilizing the system. And then we can sell, for example, yearly contracts on the energy like, for example, to Cellnex just to get the same amount of energy in every hour, 24 hours. So that's how it works. Then we can generate higher price of the energy when we sell the profile to the customers. So we can balance the energy system in terms of renewables like solar panels and wind farms with the biomass, so then we can sell every model on the market and, of course, long-term contracts, for example, yearly contract, B2B contracts are more effective one because then the price is higher.

Yes. This is perfect that you have this stable source of generation, which can balance the kind of inefficiencies of the unstable ones. But it also means that you are not selling or you are not 100% hedged going forward because at some point, you have -- or you are scaling down the biomass generation in the hours when wind is very strong and photovoltaics are generating a lot. So typically, it implies that you have like, I don't know, 60%, 70% hedging level or something like that because otherwise, you cannot provide electricity at kind of guaranteed level at every moment.

We can. That's what we do. So we are doing a balancing of the energy on our own, and this is our work that's why we can generate higher prices. That's the strategy. So it depends on the market. And of course, it depends on the spot. So we are more flexible because finally, this is like, it influences return on investments. So we know the biomass prices. We know the solar panel prices. We know the wind farms, and that's what we try to predict, and deliver this energy. So just to take money for balancing. So that's why we have a company inside just to trade the energy, and this is PAK-VOLT. So that's how we do it. Then we can earn just more money and to make return on investment more attractive.

If there aren't any more questions, I will pass the floor over to Mr. Blaszczyk.

Thank you. Thank you for participating in today's Polsat Group results conference for the second quarter of 2024. I hope that we have answered all your questions. I wish you a good day, and I hope to hear from you at the next conference for the third quarter of 2024. Thank you, and goodbye.