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

Hello, ladies and gentlemen, and welcome to the Digi Communications NB Investors 2022 Preliminary Financial Results Presentation. A copy of the corresponding report is posted in the Investor Relations section of Digi's website at www.digi-communications.ro. The conference is being recorded today, and a replay will be available shortly after. Details of the replay will also be posted on the website at Digi Communications.ro together with the presentation. [Operator Instructions] Before we can start, you are advised that certain statements in this conference call are forward-looking and therefore subject to material risks and uncertainties. Actual results could differ materially from those stated or implied by such forward-looking statements due to the risks and uncertainties associated with Digi Communications and, which include, amongst others, various risks related to our business, risks related to regulatory measures and litigation risks related to investments in emerging markets, risks related to our financial position as well as the risks related to the notes and the related guarantees. I would like to introduce the speaker for today's call, Mr. Serghei, the CEO of Digi Communications [indiscernible]. Sir, you may now begin the call.

Good afternoon, ladies and gentlemen. Thank you very much for joining our 2022 preliminary results presentation call. Without so much delay, I will start going through the slide in the presentation. And I hope or we have a chance to have a good discussion at the end. 2022 was an outstanding year. Our results, our group results reached EUR 1.5 billion. In fact, the results are in line with 2021 results when we also achieved the sales figure of EUR 1.5 billion. The difference from the changes that this time basically in 2022, we replaced fully the effect of boundary with organic growth both in Romania and Spain. So, the EUR 1.5 billion top line figure is a result of 18% growth, fully organic that's fully replaced the [ edges of foundry ] from our portfolio of operations. This was based on primarily on the gross produce in Romania and Spain. As you see, we increased our yields by 15% to 20.8 million units. EBITDA for the full year amounted to EUR 420 million. This is the first time we are reporting EBITDA. I believe we will continue doing so because we think EBITDA is more informative than in comparison with fewer EBITDA. In Romania, we surpassed 5.4 million pay TV RGUs, 4.2 million broadband RGUs and 4.9 almost 5 million, mobile RGUs at the end of last year. Spain exceeded 3.8 million mobile users and 1.1 million fixed broadband and fixed telephone users. A 36% growth, which is outstanding. Going on, as you see, we generated close to EUR 1 billion in sales in Romania. We're very proud of this achievement. We exceeded EUR 500 million in Spain, again, an outstanding result. And we thank all our Spanish colleagues but also customers and partners. And in Italy, we generated EUR 228 million in revenues. Our RGU numbers also look pretty around more than 15.5 million users in Romania and almost 5 million users in Spain. Moving on. We see the results of Q4 in a better focus in the spotlight. So, at the end of the year or in the last quarter, we generated sales of over EUR 400 million on a group level. This time EBITDA, EUR 134 million and CapEx of EUR 150 million. Total for the year, revenues and other income amounted to EUR [ 1.47, 517,000 ]. Our EBITDA, again, the larger number, EUR 506 million and total CapEx, EUR 564 million. I mean these numbers look imprecise to us to look outstanding. I hope you share our views and we certainly would like to continue on the foundation that was built both in Romania and Spain so far to provide robust results going for. Basically, revenue -- I mean, the dynamic of our business is unchanged, more or less unchanged revenues up predomination of RGUs, both in Romania and Spain, with -- I mean Spain grew 3%; Romania grew 11%. And all that is really driven by the RGU growth. I mentioned EBITDA, adjusted for IFRS 16 is a total of EUR 420 million, an increase of 6% year-on-year. Again, in this inflationary environment, with cost increasing this is good achievement. Of course, result is not as high as the gross margins or growth the top line. We still believe it's a very good outcome year-on-year. I move on to the slide with customers, and we generated 15% growth year-on-year. The #1 market in terms of absolute growth remains Romania with 10% growth and -- sorry, excuse me, Romania and Spain are pretty close in growth in absolute terms. However, Romania is still the #1 growing market. We increased from 14.1 million RGUs to 15.5 million RGUs in the year 2022. In Spain, we grew from 3.6 million to 4.9 million RGUs, so a comparable increase. Italy has increased 12% to 362,000 RGUs. Segment-wise, mobile is the largest segment in absolute terms, suppressing 9 million users in Romania and Spain, and also having a 22% growth year-on-year. Of course, somewhat bigger in Spain, on a percentage level, somewhat smaller in Romania for the moment. Fixed broadband is our second growing segment with 18% growth, again surpassing 5 million RGUs. And Pay TV is the second or the slowest growing segment with a total of 5.4 million RGUs at the year-end. Excuse me, I'd like to go back for a second. And while we don't have slides here, we do not have the presentation here, basically, 2 markets are missing from this slide, -- Excuse me, we are a bit confused between our pages. Well, and the 2 markets, of course, are Portugal and Belgium, we are busy in both markets as we were discussing in our previous calls, Portugal is more advanced. We are effectively building this moment our mobile network and our fixed networks there. In Belgium, we're still in design and interoperation phase and we expect the build-out to start in the coming [ 3 ] months. So, this is like a full overview of what we have done so far. In terms of what we want to do, I think for 2023, just to give you, let's say, a very rough, very broad outlook, we want to continue our projects. Nothing that we started is going to stop in 2023. However, the focus of our activity shifts as we were discussing earlier from Romania to markets outside of Romania, Spain, Portugal, Belgium, as build-out, as development of the fixed networks has reached a maturity point in Romania. We do not expect this activity to be so important and so large in our operations going forward. However, we will continue developing and growing our mobile networks. And certainly, we also expect continued growth in the mobile segment in Romania going forward. In terms of Spain, Portugal and Belgium, we will continue our projects as we do now. We hope to continue expanding our mobile user base across the 3 markets, of course, Portugal and Belgium have yet to start. We're also expanding into fixed services in the 3 markets. Again, percentage-wise or effort wise, we do expect that markets outside of Romania will overtake Romania in terms of CapEx, in terms of the resources used but also at some point in time, maybe 3 to 5 years from now, they should surpass Romania in terms of overall results. So, this is it. This is also the short outlook going forward. I hope it is helpful to all of you. And I will go briefly to the financing page. Now what you see here a total gross debt of EUR 1.27 billion, net debt of EUR 1 billion and a leverage of 3x on a growth basis and [ 1 2.3x ] on a net basis. In 2023, we have relatively small maturities, EUR 33 million, mostly coming in Spain. And in 2024, we have maturities of EUR 120 million. As you see a relatively conservative financial profile for the next 2 months. This is my presentation. I hope it was concise, but also helpful.

[Operator Instructions] So, we have our first question from [ Argamate ] and it's about the CapEx plan for 2023. So, this year, we our CapEx amounts -- well, excuse me, this year, meaning last year in 2022, our CapEx amounted to somewhat over EUR 550 million to EUR 154 million to be more precise. We do expect CapEx to remain more or less flat for 2023 as well. As I said, there will be structural changes within the CapEx figure. We will spend a big portion of this money outside of [ Romania ], and Romania, will use less than half of these tons. Our net leverage target in the medium term. Ideally, we don't see big debt we do not see the high leverage. So, on the other hand, you always have to balance your growth effort, your growth intentions with your resources. And all in all, we do expect leverage to remain, let's say, in the medium term in the 2x to 3x area. When I started answering the question, I think the intention was to say that we prefer 2 or less. However, probably it's more realistic to expect to expect to have it within 2x, 3x. Next question from Alexandre [ Cortana ]. In Q1 in context inflation. How do you see the price adjustment [indiscernible] also the proper margin? This is an expected question. And this is something we continue -- we discussed continuously in our previous calls at this moment, we do not have plans to change our prices. We do not have plans to increase our prices. Basically, we are managing the inflation with our efforts trying to optimize our cost structure and so on. So, [indiscernible]. If we will be further impact on the margin, possibly, I mean, some of the costs we are able to do [indiscernible] the cost we're able to absorb. But yes, ultimately, probably the effect will be some [ so much ]. For fixed products in Belgium, also the question from Russel Walter, [ Wale ] for fixed project product in Belgium, will you build or wholesale if you want to build would you consider joining one of the [indiscernible] one pf the [ GBs ]. In Belgium, we are open to all options. So, we are not closing any route for ourselves. As we have previously discussed, as we discussed in our previous conference calls, let's say, the scenario that has the highest probability of achievement is our own network, but we are not close to any of the wholesale discussions or partnership discussions in terms of either backbone networks or [ last-mile ] local boxes networks. So, we are open to all these discussions. But again, our, let's say, a scenario is building our own methods in partnership with Citi [indiscernible]. [ Joshua means ], there are press reports that you are planning to take remedies from Orange Mass Mobile in Spain. Have you confirmed this? And if so, what kind of remedies are they? Well, how much will we have to pay? And do you have financing in place for this? Yes. No, look, I'm sorry, this is -- I mean reading this I'm smiling a little bit, we also read the press and probably we're in the same press. But apart from this, the little to comment. We don't have any visibility on the Orange Mass Mobile merger or if there will be remedies or if somebody will take them for how much. So, far, these are just rumours and prestige. A question from Nora Nagy. I have 2 questions. Do you consider today's tariffs? This is the first question. And second one, on which cost lines do we experience inflationary pressure, thank you. So, I think we touched on this, but maybe we just say it again. So, no, we are following the inflation. We are following our cost structure. But at this moment, we are not considering changing the prices. We're not considering raising the prices. In terms of where we are --- what are the highest or the most are areas where the costs grow well, it is -- last year, it used to be salaries and energy and rent. And this year, it continues to be salaries for sure. On the energy market, there is an improvement in Romania this year. The government has passed a series of a number of laws at the end of last year, which somewhat entered the structure in the market and which, let's say, for now or at least for the moment or hopefully, for the full 2023, if removed the risk of very high energy tariffs. So, far, so good. Question from Mark Chapman. Could you give me some color on your thoughts on refinancing the 2025 bonds. Do you expect to address these maturities in 2023? Thank you for the question. We are thinking -- we are considering refinancing the 2025 bonds. -- somewhat, we still have a bit of time, probably not too much of this we do not consider this to be a very long period ahead of us. The [ D ] is the following. As we all know, the bond markets have come back earlier this year. The bond markets are active. So, we are closely monitoring the situation. And if we find the situation, positive and the opportunity relevant, we will consider refinancing the bond. Whether it will be in 2023 or 2024, it's very difficult for me to say. We don't have immediate plans to refinance now. That is the only thing I can say now. But again, if you find a window, if we think the market is right, we will certainly want to refinance [ Joshua Rami ]. Can you give me an update on the timing that you launch in Belgium and what your market share targets are both in fixed and mobile. It's a bit premature to us for a launch date for Belgium. As I said, we continue to be in the planning design phase. We do expect the build-out of the network to start in the coming months. In the coming few months or very few months, but it's too early to say of the launch date. Peter [ Eurik ], could you discuss in more detail your plans for infrastructure built in the [ plant ] this year [indiscernible] in Portugal, [ you were starting home-builders association for Greece ]. What is the latest there? Are you intending to build your own network in Portugal. Similarly, in Belgium, you are discussing designing the network. Is this in relation to [ fix ] as well. and no plans to lease in Belgium as well. And lastly, Spain. Can you give us targets on what you aim to get in own wireless network coverage and the same in [ Fix ]. And any more detail in this regard would be useful. I think this is a longer complex question. Starting maybe with just as the question did, with Portugal. We are indeed building our own mobile and Fix network. We are, at the moment, cooperating with [ Senex ] to put our mobile equipment on the towers. We are open to other opportunities of this kind. Our relationship is not limited to [ Senex ] from this point of view. Having an existing partner with the mobile sales, the mobile towers helps to roll out this equipment quicker. We are also in parallel building our own Fix network in Portugal. We have more or less the same intention in Belgium, but it's early to give, let's say, more details on this, as I said, because we are still in the development and in the research and development phase in terms of Belgium. So we should have more the ability within the next 3 months or so. As of Spain, think let me take this question because tasks, what are our plans in terms of mobile rollout. We don't have any work in Spain, and we certainly do not plan to do so. We are working in partnership with Telefonica and we are an MVNO Telefonica network. So, no work, no plan, no intention to do anything in relation to mobile Spain. However, in terms of fixed services, we are using both Telefonica network as a wholesale operator, and we are also building our own Fix networks in certain areas of Spain just to have a balanced mix of presence. And yes, this is happening at this moment. I'll go forward, [ Agaramenta ] will you be paying dividends with 2022 results. Okay. Well, dividends are something that we will decide around the General Meeting of Shareholders, which is expected to take place in June or around June. And this is the time that we will decide on the dividend. In any case, the intervention, the expectation is to continue our dividend [ dosy ] and to continue paying dividends in the amount, not less than what has been paid -- that was paid last year. So, that is the intention. Can you confirm your -- sorry, a question from Peter [ Euric ]. Can you confirm you're still on pause in Italy. Excuse me, I don't understand the question because Italy is a growing market for us, but the market growth -- The market is relatively small in comparison to both Romania and Spain at this moment. And that also basically hitting a small base has an okay growth rate of 10%, 12%. But again, because the base is small, the result is also small. We are EBITDA positive. We have free cash flow positive in Italy, which is an achievement. I mean, in the previous years, we are negative in the cash flow for every [ year ] we were also EBITDA negative. This is not the case anymore. So, from this point of view, Italy is, let's say, it has been sorted out. Other than that, it's not on pause. From Thomas [ Chair ]. What is the outlook for energy costs remaining in 2023 versus 2022? We do not expect energy costs to increase in Romania in 2023 versus 2022. However, 2023 will remain higher compared with 2021 just like 2022 was. So, Romania basically stabilized for now is prices. I still hope there will be no the big changes or brakes in the energy market, and we expect the market to remain more or less in the same area. Question for Alexander Patrick. How do you expect to handle the upcoming maturities in 2023 and 2024, the EUR 53 million and EUR 121 million? Well, we will handle them from our cash flow and from our cash balances. That is the simple answer to the question. How do you expect to finance your expansion in Portugal, Belgium CapEx and new debt equity injection? Well, thank you for this question because in any case, the first part of the question I did ask in a simple manner. There is also the second part. We have transfer on the balance sheet, which will be partially used for further extension. We also are open to new financings to basically -- to do new financings, to provide the resources for our growth in Spain, Portugal and Belgium. Mostly, we are thinking of debt, equity injection, I doubt. I mean, with the share price, it is certainly not useful to think into that direction. Another question from Joshua Mills. How are you prioritizing your rollout in Spain, Belgium, Italy and Portugal, which one is the focus and how much CapEx is required? Can you afford to do them all simultaneously? We hope so that -- well, sorry, that's the question to the last part, if you can afford to do that simultaneously. In any case, you can do many projects at once. It's only a question of how much you really spend on each of them. And we probably we can certainly manage, let's say, the relative or the individual efforts between these markets. But having said this, Spain is a cash flow -- Is an EBITDA positive market, which generates its own cash flow and an important part of Spanish [ royalty ] is financed directly by the Spanish operation. In Belgium and-- In Portugal and in Belgium, we intend to, at least at the beginning, to use existing funds but also to use that for the financing. In terms of how much CapEx is required for each? It's a difficult question. I mean these are sizable investments. We spent EUR 70 million -- well, we will spend in total around EUR 70 million for frequencies in Portugal. Our joint venture together with Citymesh, will spend around EUR 100 million in Belgium for Spectrum. On top of it, we will spend sizable amounts, certainly larger than this to expand the networks. I believe we will give the guidance that in 2023, the total CapEx will amount to approximately EUR 550 million, more or less on par with this year number. As we progress, I'd rather discuss this question going on, and we will discuss with you the capital allocation as it unfolds. Just some questions. So, [indiscernible], when do you expect to launch a product in Portugal and Belgium? Thank you for the question. Belgium an easy one. We're really only planning to start building the networks in the coming months. So, it's premature for us to answer this question at the moment. We will postpone it for now. In terms of Portugal, the intention is to start providing these services within the next 12 months, maybe possibly even sooner than 12 months, but that's roughly the horizon. And I hope you appreciate that there's a lot of work to do, and we do our best to have this date rather sooner than later. But this is probably the best guidance we can give at this moment. A question from [ Grant ]. Can you observe -- we can observe decreasing ARPU in all markets. This comes to continue in 2023 and beyond. Excuse me, my reading of our financials was a bit different. ARPU has increased in 2022 in comparison to 2021 on a group level. And secondly, the result of -- the result of this increase comes from a change in the mix, basically, a bigger contribution of Spain to our services portfolio. Other than that, we are not decreasing our prices in any of the markets. We are relatively consistent and stable with our pricing. But from time to time, and I give you the example of Romania, we could have let's say, a downward pressure on our ARPUs. And again, it comes mostly from the mix of the users just because we have more rural users in -- Just because we have more global users in Romania. It doesn't mean that oil prices are lower, but it means that we have new users using our rural packages, which basically have lower prices. And the overall ARPU of the company is somewhat decreasing in that area. But our prices are relatively stable. And overall, in the group level, our ARPU is increasing. A question from [ last quarter ]. Can you confirm that [ brands ] related to electricity supply in Romania, we previously put it in revenues? If so, can you disclose how much was recorded as income from these grants just in Q4 instead of EUR 24 million for the full year? Sorry, this is a very specific question. No, I don't -- I don't think subsidies of [ brands ], no matter how you call them, were included in the revenues previously. So, the revenues are on equity -- the revenues are provided on a continued basis and a consistent basis. But unfortunately, I cannot tell you how much of the EUR 24 million is just for Q4. I'm lacking this figure at the moment. One more question from Peter [ Eurik ] it appears your closest in Portugal, as you next place to actually launch your retail product. When do you expect to start offering your first product to the market? Well, again, I can't answer better than to say that within the next 12 months deal. Can you provide any revenue and EBITDA guidance for the next financial year. We don't provide guidance as such. But I try to basically outline the dynamic that we expect for our markets. And in Romania, we certainly want to continue growing, and we see mobile segment as a segment which will provide the best results in terms of the RGU growth. Not all in all, because the market is large already because the market is mature, we do expect the growth rate to be in the low percentage numbers. We do expect on the other hand, to continue growing in Spain. Again, I don't think 13%, the growth rate that was achieved in the last year is feasible for 2023, but it's double-digit growth and it's certainly a high double-digit growth that we expect for Spain for 2023. While the rest-- Italy, I mean, we do expect relatively small growth, and this is less relevant. And as we were discussing Portugal and Belgium are not meaningful in 2023 in terms of revenues. For EBITDA, it's a more competitive question. We do expect EBITDA at least at the moment to trail behind revenue growth behind RGU growth because it is more complex. I mean, experience has growth, but we also face inflationary pressures as we were saying. Severis energy rental payments. And I wish we could generate the growth in EBITDA just as we are generating in terms of revenues. But I think it will not be just as fine. I'd expect also EBITDA to continue the dynamic of 2022 versus 2021, more or less. And I hope it's helpful. A question from [Euana], what is your approach to the return on investment? When do you see the investment in Portugal and Belgium will start being profitable when making plans about new markets, how many years do you consider recovering your financial investment? What is your experience in Romania and Spain regarding this? It's a complex question. I don't think we are as is articulate or as precise as this question asks us to be, we are a long-term investor in all of our markets. Our region is probably 5 to 10 years away at least. And basically, the intention is to generate a meaningful market share. And I repeat what we were discussing in the previous calls, we believe that having at least 10% is sufficient to be breakeven. Now how soon when can we make it and achieve? It is difficult to say we cannot predict. What kind of Fix [ on past ] target do you have in Spain. I don't know how to say. We don't necessarily have a target and we would like not to discuss the number as such. We are offering services equally on our own network and on Telefonica's network and both services, both products work grade. Only in places in areas where we see in place scenarios where we see a bigger uptake for our products, we try to try to build our networks as well. So, far, it's complementary A question from Russell [ Wale ] I think you have said EUR 100 million for CapEx Belgium and Spain for each country is the trade. It seems quite low. Does that equipment and backhaul and all infrastructure is it just equip not only? Is it fixed or mobile? Thank you. I did not mention any breakdown by country. The only thing I said, I said that territories outside of Romania will surpass Romania in 2023 and will all in all, be more than half of our CapEx. So, Romania will decrease, and we will represent less than half of the total spend. But I did not go into further breakdown. And I would rather not answer this question now in full. Thank you. Share of your Fix Internet customer base in Spain is currently on smart network. Sorry, this -- on one hand, I don't have the number to say. On the other hand, we have not published these numbers and we do not expect to do so. I can't answer this question now. A question from [ Basili ] are we thinking about the mid long-term balance between fiber post-selling and building on fiber Spain. I think -- I hope it's clear from my comments, it's an open question. We will see what product works best for us, what products was best for our customers. It's also basically -- and based on this, we will decide, but there is no target. There is certainly no number behind. When is your MVNO with Telefonica is due to mature, get renewed? So, as we discuss this again in previous discussions, our contract expires in 2026 -- sorry, is up for renewal in 2026. I hope it does not expire in 2026. I hope you and you hear me. Nico Hakala, -- can you elaborate on how the cash received from the sale of [ Kangare divestment ] that have been used to this point? And how is the remaining part planned to be used? So, we used the proceeds from the sale of [ Kangare ] for CapEx. As we outlined, the CapEx was relatively high last year, EUR 554 million. And the rest of the funds will also be used for CapEx. A question from Peter [ Sols ]. Are you considering providing wholesale services to other operators on your own Fix access networks in the future, for example, in Romania or Spain. I think ultimately, this is a good question. I'm not sure it's a question for today, but it's a relevant question for the future. We don't have a strategy in this respect, in this regard at the moment. We don't have a decision when we will have, we'll probably be able to discuss it properly. A question from Alexander [ Petricic ]. Do you expect to extend your RCF maturity, correct me if I'm wrong, but I think the RCF is maturing in December 2023. Yes, the answer is yes. We will expand the RCF maturity. We most likely will also expand the RCF size. So, at this moment, we're using -- we have an RCF of EUR 50 million. The intention is to double it to increase it to 100. A question from Oliver [ Borg ]. Have you considered hosting an Investor Day in 2023 to give more detail on your plans for Belgium and Portugal to give an overview for the opportunities use in each market? Well, look, honestly, thank you for the question. After we leased it ourselves back in 2017, we had an Investor Day now, excuse me, because of Covid, I don't remember, but it was only one. I think somewhere in 2018, so a long time ago. In the meantime, we all lived through the pandemic through a totally different life. But thankfully, let's say, we are mostly back to hopefully, back to normal. And from this point of view, we -- there is no clear plan, but there is an intention, there is a desire to have such kind of a day and possibly having it, let's say, later on, maybe mid-year or early, in early autumn, could be helpful as, again, we would be just more. Today, it's maybe too early to discuss both Belgium and Portugal. But as the time goes by, it will be easier for us to share with you our progress. And the broad answer to your question is yes, we will come back with planning details on this in the coming future. A question for [ Euana ]. There's a difference the divergence between your results and the price of Digi shares. We agree, considering your generous cash balance and the fact that with just EUR 1 million, you can buy back about 150,000 shares --, sorry let me see the question in full. Do you think a buyback program cancelling the shares can close the gap between the value of the company and the price on the stock exchange. I don't have an answer to this question. If I knew the answer or if that would be the solution, we will certainly do it. But I simply do not know the answer to this question. We certainly in and we want to, let's say, not just to increase our share price, but to have our share price reflect if not fully better our value. We are just don't know what the solution is. We will discuss with our investment bankers or advisers. And if this is a solution, we certainly may do it, but no decision at this moment. What about the market maker for the Digi shares. We're open to this as well, and we will certainly consider or reconsider this decision in the coming future. Question from Chris [ Poiser ], do we have a rating commitment, for example, keeping BB? No, we don't have a rating commitment. We certainly want to just improve our rating going forward, like probably any company desires, but we don't have either an undertaking nor an obligation to do so. But again, the general intention is to have this rating just better. Well, so far, so good. I mean the questions are not coming anymore with great speed. We will certainly keep the line open. And if there are more questions, we're happy to answer. There's a question from Peter [ Euric ]. Apologies if I missed it, but did you provide an ambition or a goal for a Fix network transport Spain. No, sorry, we didn't for 2 reasons is not necessarily such a goal or ambition on one hand. And second, we're not publishing it. Once again, thank you. It was pretty intense in terms of the depth of the questions and the focus. I hope we speak again mid-May with our Q1 results. And we will wish all these updates in the meantime. Thank you very much and see you all.