Digi Communications N.V. (DIGI) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for joining our call. We are pleased to present our first quarter 2022 results. Without too much other well, information or delay, I will just move to share with you our presentation. So to start with the last element on the page and maybe just giving us a bit of guidance to our call, as most of you, all of you are very well aware, we've sold our Hungarian operations. And the transaction was closed in early January 2022. It was both a successful closing and a good transaction for us, whereby we reached total sales proceeds of EUR 625 million. Because this has, this was a hugely transformational event for our group, we have changed slightly the basis of presentation for the numbers in this call. And most of the numbers that we are discussing are both for the current period, but also for the historical for the past periods exclude the results of Hungary, so that we can speak on a comparable basis. So starting and going on. We generated revenues of EUR 361 million on a group level, a 21% increase year-on-year. Our customers grew 15% in the same period, reaching 18.7 million RGUs. And our EBITDA reached EUR 106 million, excluding IFRS 16 results, which also represents a 6% year-on-year increase. The main driver -- and I'll be coming to this throughout the presentation, the main driver for our growth is -- has been the increase in the number of RGUs, the increase in the customer relationships that we serve across all our countries, Romania, Spain and Italy. In particular, Romania has grown 10%, and Spain has generated an outstanding 41% growth helped both by growth in mobile, almost 30% growth year-on-year but also more than doubling of the customer base in the fixed services, broadband Internet and fixed telephony services. Moving on. We -- you can see that Romania generated revenues of EUR 244 million in the quarter, Spain, EUR 111 million, while Italy generated slightly less than EUR 7 million. Total EBITDA, as I said, EUR 106 million, split in 2: EUR 90 million, Romania; EUR 16 million, Spain. And in Italy, we are positive. However, in the third column of this presentation, we combined both Italy and our group headquarters operations. And for this reason, the result is neutral. And as you see, RGUs reached a total of 18.7 million units. And once again, I repeat, this excludes Hungary. So going into the mechanics of our performance. As you see and as we mentioned, we've seen good growth in the number of users. We've seen stable growth in profitability. We have also executed more or less a steady CapEx plan with Q1 capital expenditure amounting to EUR 117 million. Just -- well, somewhat higher, maybe 10% higher, 15% higher in comparison to the first 3 quarters of last year. It certainly is not comparable to the fourth quarter of 2021 when we recorded total CapEx of EUR 200 million. However, if you recall, in -- we paid about over, slightly over EUR 100 million of that number is represented by frequency payments that we made both in Portugal and in Romania. So compared -- for comparative reasons, our Q4 CapEx was -- from operations amounted to just a bit over EUR 100 million as well. EBITDA has grown. And I just want to add here. Most likely, we will discuss this during the question session. Despite the inflationary pressure that exists across all the markets where we operate, and -- which, of course, comes from the energy segment, which comes from employee segment. But other -- well, other segments as well. So indeed, there is an inflationary pressure. However, we are able to absorb part of it also through continuous growth that we have. So I did mention reaching 18.7 million RGUs. And as you see, we continue growing in mobile, in broadband on a group level. Of course, Spain grows at a much faster pace in comparison to Romania. But all in all, both mobile and broadband segments generate 20% growth which is an outstanding achievement. And we generate, we generated year-on-year 6% growth in the Cable segment in Romania. Also, our fixed telephony segment grew by 5%, helped primarily by the Spanish operations. The dynamic is opposite here. We are losing customers in Romania, and we are adding customers in Spain. All in all, being a positive number. Yes, country-wise, you see the same dynamic. So Romania grew by almost 10%; Spain, 41%; and in Italy, also an impressive 27% growth. Yes, apologies, the slides got shuffled just a little. Maybe very few words on Spain. So we reached a total of 575,000 broadband customers in the first quarter of 2022. And as you see, the dynamic is quite positive. We are very happy that Spanish customers choose our services in a market which is competitive and which is reaching offers -- and which is reaching very good offers. We also continued growth in the mobile segment, reaching 3.2 million RGUs by the end of Q1. And again, a growth of more than 230,000, 240,000 RGUs just quarter-on-quarter. And yes, an impressive result for our colleagues in Spain. And maybe just last remark. As you see, we have -- we continue to be the #1 portability destination for Spanish mobile users, with Q1 2022 being the top quarter in terms of net gains. We achieved 116,000 users that came with the from other networks. And this is -- as you see it on this graph, this is the seventh consecutive quarter of being the #1 portability destination in the Spanish market. So all in all, we are, again, grateful both to our customers but also to our colleagues for executing this strategy so well and achieving these results in the Spanish market. Yes. Well, coming back to the financial profile, we see on this slide, the effect of the sale of Hungary. So as you see, the total gross debt as of Q1 is EUR 1.150 billion. Because we -- since we had almost EUR 320 million cash on the balance sheet, the net debt is EUR 333 million. And the metrics are seen on the graph. So gross leverage 2.9x. The net leverage is 2.1x. And you also see in the top right corner, the repayment profile for the next years. So as you see, we are more than comfortable this year, having no due financial repayments. And we are pretty comfortable in the next years, 2023 and 2024, when EUR 35 million and almost EUR 100 million of debt come to maturity. So having gone through the slides, this is the presentation which summarizes our achievements and results for the first quarter. And we do invite you to ask questions in the -- through the chat box which we'll address just in a minute time. We will go through the questions.

Christian Popesco, from Swiss Capital. Regarding total profit for Q1 2022, why attributable to noncontrolling interest profit is rising to EUR 388 million? Well, thank you very much for the question. I think yes, I have to apologize. The report was rushed a bit, and the reason for that is that on a -- from a financial point of view, we are still dealing with the effects of divesting Hungary, and we are also busy with year-end closing accounts. So that is a mistake, and EUR 388 million are not attributable to noncontrolling interest, but they're attributable to all -- to the group and the controlling shareholders. So absolutely, no issues there. It's just a mistake, and thank you very much for raising it. We -- I -- we will correct the financials on the website in the coming 1 or 2 days, so that it reflects properly, the information, and there is less confusion going on. Thank you very much once again. Question from Vlad Podea. Could you confirm that you will begin construction of the mobile network in June? How much CapEx will this entail in 2022 and 2023? I assume that Vlad is asking us about Portugal because he did not mention the territory. And the answer is, yes, we are closer now to start building, developing and building the network. We -- it's -- and certainly, the construction activities will initiate in the second part of the year. I mean we have people on the ground even today. But the volume of activity is less relevant because, as I mentioned earlier, these are mostly planning activities. They do not consume a lot of money, and -- but they are very important for our future operations. But it is clear that we will build networks in the second part of the year. However, in terms of budget, it's too early for us to say how much we'll spend in 2022 and 2023. Question from Laura. And she's asking if we can comment on the use of the remaining proceeds from the Hungarian sale. Yes, thank you as well. And look, I think we touched upon this in our previous calls as well. This is an important question given that we also have to respect the rules of the bond documentation. And while analyzing and going through all the provisions and the options available to us, the decision was to use the funds available for CapEx. So this, and we do intend to use these funds by the end of the year. A question from Thomas Chair. How do you think about pricing in this inflationary environment? Well, it's, it's a repetitive question, and I'm not criticizing anyone at all, Thomas included. And the repetitive answer is we have no intention to change our pricing in this environment. We are certainly evaluating our options but so far, so good, and we believe we can still absorb these costs. And again, it's important for us to be able to grow. And we believe that we have a good way and yes, a good strategy to execute that. The question from [indiscernible]. Please elaborate on the ARPU developments of all 3 markets. We see -- Yes. So I think it's a good question, which is well connected with the previous one. And we see a bit of -- let's put it differently, contrary to the inflationary expectation or the expectation of companies to raise the pricing, we see a bit of the price erosion just because the current offering works in this way. And to give you a couple of examples, our developments in the last quarters, but also a few years in Romania, are predominantly in the rural areas, where our prices are slightly differentiated and where our prices are slightly more affordable in comparison to urban areas. The services also differ a little. So this price differentiation is justified. However, the important element is that having more rural customers, there is a bit of pressure on the total ARPU, which, yes -- which is -- which can be seen. There are other elements there as well. For example, the decrease of termination rates or the decline of the roaming rates, which are discussed with the regulator. So that puts additional pressure on the margin. However, all in all, we do not see this as an issue. We do not see this as -- yes, as an important element because we believe that growth at this moment is levering off the price erosion and is able still to support the inflationary pressure. But again, if you cannot read me in a very absolute station, it's not a perfect now that we will not reconsider raising the prices. It's just that it's not now. Just mentioning the same on Spain and Italy, we have a small price erosion there as well. And again, it's mostly related to the addition of new -- especially in the mobile segment. It's mostly related to the -- our activities related to the addition of new customers. And Laura is coming back. And what is our target leverage going forward? So I think we -- well, our net leverage, as we said, is a very good 2.1x with gross leverage being closer to 3. I'd expect that in the coming periods, we would target the midpoint of these 2 numbers, and we would like to place ourselves -- we would like to place ourselves in the 2.5x area. And the question is why did -- another question from Laura. Why didn't you participate in the sale of the Romanian mobile assets from on Romtelecom? Well, I can't comment on this, meaning this question -- I think this question should be addressed to the sellers not to the buyers. And yes, other than that, I cannot comment. Francois Boudet. Could you give us the amount of the RCF, the maturity and the amount drawn at the end of March 2022? So at the end of March, we had RCF -- our RCF was totally undrawn, and it amounts to EUR 50 million. In addition to this, we have uncommitted overdraft of another or extra, approximately EUR 50 million, most of which were undrawn as of Q1 2022. The maturity of RCF, I believe, it's either -- yes, it's between 12 and 18 months from today. I don't remember this by heart. In any case, we do intend to refinance and prolong it. So I don't see any issues there. Should we understand that the 5 points impact on your margin in Romania is due to higher electricity and utility costs? Well, not only. There's a mixture of factors. And in Romania, I would put at least 3 factors that contribute to lower margin. It's indeed higher energy costs, including electricity and fuel for our car fleet. I would put there as well the salary increases. And I would put also costs associated with mobile communications like decrease of interconnection costs -- intercession fees. How should we look at it for the rest of 2022? Well, from a certain point of view, I believe the energy market has taken it. I'm not sure if this is the end of the story for us or for the rest of the Romanian economy or for the rest of the EU economy. It may possibly go worse. However, we don't have further visibility on that. We would hope that we remain here at this level. Of course, we will see. I mean, certainly, we don't have perfect visibility. Are you experiencing more pressure in the second quarter so far? Yes, just maybe marginally because fuel prices started to increase in the second part of February. So the first quarter has not experienced the full effects of the geopolitics with us and with other companies. Can we talk a bit about the competitive environment in Romania? Well, yes, for sure, I believe it's more or less unchanged. Well, with one important change that occurred at the end of last year. So Orange has acquired the fixed operations of Telekom Romania. And in this way, it consolidated its #1 position on the Romanian communication market, having revenues in excess of EUR 1.5 billion, having both mobile users and having fixed users. Other than that, we believe the market is somehow in a continuous mode because well, the Orange Telecom transaction closed at the end of last year. From what we see in the press, from what we see from the declaration of our colleagues from Orange, they are busy integrating the operations. And from this point of view, we do expect, but we have not seen yet any significant changes in the market. Certainly, they will come in the coming quarters. And we do expect competition to entice to be much stronger and much better, which I believe is a very good thing for the Romanian customers. They will have the ability to choose the best services from -- yes, well, the strongest and the best companies in Europe. Have you worked on your business plan in Portugal? Yes, we are working. But as I mentioned earlier, I think it's too early for us to share this information. And we will come back to market when we are -- when we have decided to allocate proper funds and proper budget for this market. So thank you. It was a long discussion with Francois, a monologue from us. I hope we did answer your questions. A question from Gabriel. How much of your cost base is energy and employee costs? And how will you mitigate the increase in cost? Do we have a CPI index contract? And if not, are you planning to increase pricing to new customers? Yes. I'm not perfectly ready to answer this question in a detailed manner. Salary cost is one of the largest one cost factors that we have in our cost structure. Energy cost is a smaller cost. Also due to the fact that we run a very good fiberoptic massive networks which require less energy in comparison to older copper or cable -- classical copper or cable networks, but we'll -- let us kindly come back to you on this question later on separately. What is -- sorry, so next question is from Thomas again. What is the plan with the high cash on the balance sheet? So as I mentioned earlier, the main use or the use for the proceeds of the Hungarian sale will be CapEx. Could you please comment on how will you use -- the same question from Gabriel. Could you please comment on how will you use the cash on balance sheet? Will it be used for the Portugal CapEx or M&A or debt? Well, look, it's the same question, but there is a small clarification here. We have to use the proceeds from the sale within this year. I don't think Portugal simply is able to consume these level of funds in the short period and at the beginning. So certainly, our investments in Portugal will start to be meaningful during the next year but not this year. In terms of M&A or debt. So these are both open questions and valid options, but there is no decision. For M&A, we have to have targets for that. We will consider this question before -- well, continuously during the rest of the year. There's a question from Mikhail. Given the low debt obligation for the year 2022 and high inflation rate, how do you plan to use the huge calculation balance? So apology, I'm reading this question live, and I will skip this one. Okay. Next question is from Mario. Can I ask, please, which part of your debt will be redeemed using the Hungarian sales proceeds? Well, yes, so maybe I'll just repeat. We do not intend to use the Hungarian proceeds for repayment of debt. We do intend to use them for CapEx. And so this is our plan at this moment. A question from Alex. Can you comment on recent competitive dynamics in fixed business line in Romania? Can you give some indication on churn development for this segment? Well, once again, I think if you look at this -- there's less information from our competitors. There's a bit more information from us in this respect. And if you look at our numbers, they are pretty robust and they show, let's say, a relatively constant growth and development effort in the last quarters. Now I think this has not been asked, but I have to warn the listeners that we do not expect this growth rate to last just because, I don't know, important phases of our network rollout and development has been either completed or are close to the end. And most of the growth that came in the last quarters came exactly from these new territories that we have explored and developed and grown. And on top of that, as I said, we do expect much more competition both from Orange and Vodafone in the coming quarters. So we do expect this market to be maybe in a different state of competition 1 year from today or 2 years from today. I don't know. I mean, it's more for the market and for the competitors to decide. However, this is the general dynamic that we see. And yes, and we are ready to share it with you. So we hope you understand the way we see the market. One second. Yes, yes, yes. Just to find a proper question. A question from Alexi, do you have any near-term M&A ambitions? And how will you use the existing cash? Could you please remind your dividend policy? Well, we don't have any M&A ambitions. If we have suitable targets and we are open to opportunities, we will look and we will consider. So there is no rule here, and we are not M&A driven on the other hand. So having access to funds at this moment or having access to credit in general doesn't mean that we will certainly want to buy other companies. So it's not our first priority. How will you use the existing cash? I think I mentioned this CapEx. And could you please remind your dividend policy? Well, just -- so the foundation or the basis of our dividend policy is that we allocate our funds in a priority fashion to servicing our debt, to meeting our CapEx intentions, which are related to growth. And available funds, we are ready to share -- the remaining available funds, we are ready to share with the investors. So on top of it, just to say, we have paid constant dividends since we listed ourselves back in 2017. And the expectation is to continue these payments this year and in the coming years as well. So a question from Vlad Podea, do you believe you will be able to start offering services in Portugal as early as next year? It's too early to say, probably on a large scale, not yet. Do you also plan to launch fixed services in Portugal alongside mobile? Well, yes, thank you for the question. The simple answer is yes. Question from Gabriel, where do you stand versus your competitors in terms of ARPU, lower, higher, in line with competitors in Romania? I think there a few -- well, there is one distinction. I don't think we are significantly different in terms of ARPUs in the fixed services. I believe the offering of all competitors is more or less comparable. On the other hand, we see -- we -- on the other hand, the ARPUs -- our mobile ARPUs are may be slightly lower than the ARPUs of our competitors. However, this difference was considerably bigger a few years ago. This difference is -- are much closer now. We are not so far from Vodafone and Telekom in terms of ARPUs. I think Orange is slightly farther having somewhat higher ARPUs here. But yes, it's just -- it's just statistics in a way. The leverage target of 2.5x is gross or net? It's a good question. I think long term, we think about it net because -- yes, long term, we think about it net. Is there an EBITDA margin level where you would start increasing prices in order to neutralize inflationary effects? So is there any margin flow? Our thinking is more complex. Certainly, you can have such rules. Our thinking is more related to the purchasing power of the population. However, we cannot ignore inflation whatsoever because if money was considerably less and not in only 1 or 2 segments, be it energy, or be it, I don't know, fuel construction prices, then we'll certainly have to act. But we don't have triggers set to share. We will decide at a later stage, if any. The next question is with the exception of -- a question from Mikhail. With the exception of Q4 2021, the history showed us that the CapEx is entirely financed by the EBITDA. So why do we need to use the proceeds from the sale of Digi Hu? Yes. I mean these are correct observations. And so -- however, we believe that the best way for us to use the proceeds of the Hungarian sale is CapEx. So I don't know, I mean, I'm not sure, I'm not sure if this is helpful or if this fully answers the question, but this is our decision. Question from Thomas. Please elaborate on the drivers of Romanian mobile customer growth. Well, Thomas, if you remember, before IPO and at around the time of the IPO, we enjoyed higher growth, and then there was a certain stall for about 2, 2.5 years going into the pandemic. And this growth has come back. So if you are referring to this dynamic, the simple answer to that is the following. We enjoyed the high growth during 2015, 2017. However, we also had to adjust the network quality and to basically make sure that the number of existing users, but also the number of the new users that we have or that we can possibly have on the network will have the same very good robust experience on the network with good coverage, outdoor, indoor, on the highways with very good 4G signal and so on and so forth. And that was the reason of our effort during all this period, starting with approximately 2014 and up until today, and this effort will continue. And this is the reason for the growth that came back. I mean, to me, it's simply much better quality of the service, much better availability of the service. It's very simple. And yes, it's nothing else. A question from Nora Nagy. So what is the outlook for electricity costs for the rest of the year? Well, speaking of Romania, our main market, the electricity costs so far are kept by the government. So what we enjoy as the level of the -- let's say, of February, March, this is the expected level throughout the whole year, at least that is the political declaration that was made by the government for the benefit of all consumers, residential and business. So that is the policy that Romania has adopted. And in a way, it's helpful to see and to foresee the cost until the end of the year. Separately, can you please update us on the remaining spectrum allocations this year? Yes. So indeed, Romania intends to have its 5G auction. There is a possibility for it to happen this year. It can also happen later. As we understand from the declarations of the officials at the telecom regulator. The country is expecting to adopt, to finally, adopt the EU telecommunications directive. And once this is finished, the auction will take place within 6 months. As such -- I mean it's a legislative process. It can possibly be completed within a few weeks, possibly within a few months. So again, the algorithm everybody was given is that we should count 6 months after that date. A question from Mikhail, do you have in plan to use some part of the cash balance to implement the buyback program in order to reduce the outstanding Class B shares? Thank you for the question. We do not have such plan at this moment. So, so far, I have reached -- I reached the end of the list. We will wait on the line a few more minutes, and if there will be more questions, yes, we'll answer happily. So we have a few more questions from [indiscernible]. Of the EUR 117 million CapEx spent in Q1, how much of that was spent in Spain? Apologies, I don't have detailed breakdown at this moment. So maybe we can take this question off-line. And the next question is really is pretty detailed. It's about if we can say how much salary increases have we had this year. If you could discuss this online -- off-line, it's easier for us. And the last question is when will you publish the expected figures for the year 2022? So I'm not sure I understand. We do intend to report on Q2 numbers in mid-August as usual. Well, thank you very much. It was a very intense discussion. Well, we hope to see you all mid-August when we discuss the Q2 results. Once again, thank you much for your interest, but also for your questions. Thank you. Bye.