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

Good afternoon, ladies and gentlemen. Welcome to our second quarter results call. I will guide you through the slides and the information and we'll have a discussion afterwards. So we had a great quarter with our sales growing 13% year-on-year, RGUs increasing 16% and EBITDA growth was 24% during this year. So as you see, across all indicators we have had just an outstanding performance. The biggest growth certainly comes from Spain. In both in absolute terms but also in relative terms, Spain grew by 34% during the period, primarily caused by growth in our mobile customers, but also by expansion in our broadband and fixed telephony users. We move to the next slide. And basically, this is just a broad outline of our focus for this year. We continue to grow RGUs in Romania and Spain to maintain the market share expansion that we enjoyed in the past period. As I already mentioned, we have a very strong commercial momentum in Spain but also in Romania, especially in the mobile segment. So both mobile sectors of Romania and Spain have grown by 19% and 25% during this period. In terms of investments -- in terms of long-term development, we continue focusing on our network expansion. In Romania, it's mostly mobile that we focused on, because as we were discussing in the previous discussions -- in the previous calls, our fixed network is meaningfully completed. The expansion that is happening there is limited at the moment, but we still have projects to complete on the mobile side to one, it's related to the further smaller increase in footprint, but also enabling the frequencies that we acquired recently at the end of 2022, but also 2021 to extend the [indiscernible] portfolio that we haven't operated at the moment. In Spain, we continue developing the fixed infrastructure. And in Portugal, we are quite busy in setting up both our mobile and our fixed networks with the aim, as we were discussing earlier to launch services in early 2024. We rely on our cooperation with Cellnex to happen -- for this to happen rather sooner than later. And we're also busy, as I said, I repeat myself in building out the fiber optic networks. So back to the numbers. Sales of EUR 414 million just in the quarter. With Romania at over EUR 250 million, Spain EUR 156 million and Italy EUR 7 million. EBITDA in Romania amounted to EUR 101 million, basically a 40% EBITDA margin. And this is just to remind EBITDA, excluding IFRS 16 numbers. Spain amounted close to EUR 25 million in EBITDA in the quarter, a 60% margin. And our overall result was EUR 125 million for the entire group. RGUs reached 22.4 million units helped by growth in Spain and in Romania during the period. Diving more into the numbers, basically, you see a 13% growth in terms of revenues, you see 21% growth for adjusted EBITDA, including IFRS 16 numbers and 24% growth for EBITDA, excluding IFRS 16, as we mentioned a bit early. CapEx for the period amounted to EUR 256 million, which is significantly higher than what we had the year before, EUR 140 million and in the quarter before, which was close to EUR 160 million. Now this almost EUR 100 million difference comes from the ECA financing that we arranged in the second quarter, whereby we use the export credit agencies of Finland and Sweden to finance the acquisition and rollout of Ericsson and Nokia equipment, in this case, both in Romania and Portugal. I explained this number in a bit more detail, just to give you a context and reference of this higher CapEx number because without -- I mean, there's a particularity about the CapEx in this case because we used the ECA financing, the number was abnormally higher but for a short period of time without recurrence. So we expect the third quarter CapEx to come back to, let's say, more normal levels of around EUR 150 million or less and same for the fourth quarter numbers. So once again, if I were to call this normalized CapEx or CapEx result ECA financing, we would expect it to be around EUR 600 million for the rest of the year. While together with the ECA financing, it will be probably in the EUR 720 million, EUR 730 million range. So apart from this focusing and trying to explain the CapEx number, I think we had an outstanding growth quarter, again, with growth across all benchmarks. And secondly, we were helped by the Spanish growth, we were helped by the continuous Romanian growth despite both the fact that the market is established and mature but also we are pretty happy with the EBITDA evolution despite the inflationary pressure, which basically affects all of us, all operators in our market, but also most other companies in other sectors of the economy. Moving on. You see the -- our customer numbers. So as I mentioned, we've surpassed 22.4 million RGUs in our markets, a 16% growth. Again, mobile is the highest segment, both in terms of the absolute number of users, but also in terms of the growth speed having increased by 21% and again being helped primarily by our Spanish operations. Although Romania is not very far -- not very decent for state. I mean, from this almost 2 million users added in the last 1 year, we are pretty close to each other, Spain and Romania. And looking overall at the profile of the customers, so Romania is still far ahead with 16.3 million RGUs. And Spain has an impressive almost 5.8 million RGUs at the end of second quarter. So all in all, we're extremely happy with the performance and with the achievements both in Spanish and in the Romanian market. Just to prove the numbers we were discussing earlier. We are the leading operator, both in Romania and Spain, in terms of number portability. So Romania mobile number portability amount is to 464,000 RGUs in the first half of 2023. In Spain, this number was almost 600,000 -- sorry, this includes both, mobile and fixed number. If we were to compare apples to apples, the number for Romania will be around 480,000. So a big cluster of Spanish colleagues who have performed very well, both in their market, but also did better than we here in Romania. Again, these numbers are very meaningful to us. They reflect the confidence of our users in our services. And also, they show the health of our growth because number portability is a very good -- I mean, the quality of the customers that you get through portability is very, very high. I will move on to the financing -- to the financial profile. And you see that we ended the quarter at EUR 1.45 billion in gross debt, EUR 200 million in cash and EUR 1.25 billion in net debt with a leverage ratio of 2.7x -- net leverage ratio. And you see on the right-hand side in the top corner that our repayments for this year are minimal at around EUR 17 million, this is almost at EUR 193 million in next year. And of course, we have the bond tranche coming due in February 2025 at EUR 450 million. I think we are almost done with the fixed part of the -- formal part of the presentation and just the last announcement. So on Friday, later this week, we will hold the Annual General Meeting of Shareholders approving 2022 report and results. And I think probably an important element of the discussion would be the approval of dividend at -- on Romanian later share. Of the approval, basically, the ex-dividend date will be August 30, the record date will be August 31, and the payment date will be September 14 for our shareholders. And I think this concludes the presentation. Thank you very much for your attention. And probably even so we should start discussing the questions. As usual, we will read the questions from what you posted in the chat boxes, and we'll take it from here.

Alexandre Turo. Congratulations on the reported period. I have a question regarding Digi's ARPU in the future. Although we are currently in a highly inflationary period, we saw a decline in the output. I understand this is in line with the strategy to grow the market share as much as possible. But considering that you offer the lowest prices in the market, can expect in the future to see an increase in ARPU, which can boost the profits for the company? To be a bit ironical, I think we are profitable -- so it's not necessarily an issue in itself. But it's just a joke, just to make sure, it's just a joke. I think we touched this question before, and I hope some of the listeners who participated in the previous discussions will find this answer similar to the one that we had before. So we are basically not in the business of decreasing prices. However, what you see is also correct. There is a small or slight erosion in the ARPU in our numbers. And this erosion is just very marginal. I mean it's -- yes, it's -- I don't have a different [indiscernible] it's just marginal. And to explain this is just -- it is for Romania, our biggest market, the erosion comes from either factors outside of our control, for example, a decline in the interconnection fees, which are mandated by the European Commission for a year or 1.5 years already. And they will continue to decline, and they will continue to be basically mandatory -- applicable in a mandatory fashion, but also from factors like expanding into -- further into rural areas, where our customers benefit from different smaller pricing packages in comparison to urban customers. So urban market is more established one with less mobility, while rural market still provides bigger growth opportunities, again, at least in Romania. In other markets in Spain and in Italy, the ARPU erosion may come -- again, from slightly different reasons, but mostly linked to the fact that people -- sorry, customers choose just more attractive options, more attractive packages on a day-by-day basis. And the question about the price increases. Well, we do not plan a price increase in the coming future but never say never. So as I mentioned earlier, we are prone to the same inputs like any other company in Europe. We are subject to inflation. We are subject to costs and possibly at some point in time, we'll have to adjust our prices as well. It's just not happening today. Is not -- it is -- we do not expect it also to happen this year. A question from Oliver Berg. Can you confirm how much of the EUR 100 million RCF was undrawn at the end of the period? And can you disclose how much of the SFA facilities remain available to be drawn? So at the end of June -- thank you, I think it's a good question. So basically, in addition to the EUR 200 million in cash that is available as of the end of quarter. The entire RCF is undrawn EUR 100 million. The entire SFA that was originated in Romania by RCS and RBS of EUR 150 million is undrawn and most of the Spanish facility of EUR 100 million remains undrawn. So I think the total committed available and undrawn amount exceeds EUR 325 million as of the end of June. And again, it's on top of the EUR 200 million that we had available in cash. Can you please -- sorry, Maurice Patrick. Can you please update us on the launch time table and plans for Belgium? Yes. Well, so there is a little to mention at this moment for Belgium. We are still, let's say, in the R&D and preparation mode. And it's difficult for me to provide any timetable as of now. I'm sorry, it's not a helpful answer or it's not an informative answer, but this is how much we have at the moment. Can you please update us on how many sites do you have built already in Portugal? How many you expect to have by December and how many you need for launch? Well, this is a very precise question. I'd rather not answer it as such, well, with precise numbers. I think the broad idea is that we are working and we have all the means to be there close to launch somewhere at the end of this year, beginning of next year. So I'd rather not say precisely, excuse me, but our plan is unchanged. Oliver Greg. Given you have front-end loaded Nokia Ericsson equipment purchases in the second quarter of 2023. Does it mean CapEx savings in the future years? Well, yes, because it's a zero-sum game, what we paid earlier this year will show as a smaller CapEx in the future. Yes. question from Maurice Patrick. Can you please update us on your plan strategy for possible price increases in Romania and Spain? Well, I think I did mention it a bit earlier. We don't have plans to increase prices neither in Romania, nor in Spain. Question from Nora Nagy. I have 2 questions, please. Can you provide a breakdown of CapEx per geography in the second quarter 2023? Electricity expenses -- can you tell us please, was the driver behind? No, please do excuse me, I don't think I have the CapEx number split by geography. However, in the segment information part of our financial report, you have the additions to our fixed assets, which are split by geography. They are relatively good -- they're not perfect replacement for the cash CapEx. However, they are relatively good proxy for the intensity of the investment activity and if you somehow follow these numbers, let's say, historically, you'll get a very precise and accurate feeling of what is happening in any of the markets. So you have this information in our report. In relation to the electricity expenses, it's true. The reality is that there has been changes in the legal environment in Romania. The electricity supply market is heavily regulated at this moment, with benefit for the users, both residential and corporate with electricity prices being kept at around, yes -- what is it, EUR 200 per megawatt hour. So we got rid of volatility. We got a cap for ourselves and the price is, let's say, very predictable and smaller than what it used to be last year. This is all positive news for corporate users. So I go to the next question, Aisha Mansour. I have 4 of them. One, what is the interest in taking remedies in Spain? I think broadly, yes. I mean, this is an important transformative moment for the Spanish market, with the market going from -- with the market possibly going from 4 large players to 3 large players. And if there is an opportunity, there is ability for us to play a part in this process, we will certainly be interested to take part. Now how will it turn out finally, we don't know, we can't comment, we don't know. Guidance of how much -- so second question, how much you pay Telefonica and wholesale piece today? And what would the savings be? I think this is a very precise question, and we would rather not answer it in this forum. And I'm not sure that we are looking for -- I mean, when we say remedies, we speak of remedies that can help us and help the market just to, let's say, assure or to get continuously competitive environment. It's very -- I think it's impossible for anyone to think of the long-term strategy, but also in a combined manner with the immediate savings. So it's a question that is not possible to answer. Comments on the Spanish competition. Well, Spain is vibrant and dynamic market. We sincerely hope it remains so in the future as well. And plans and timing of the Belgium launch. I think I mentioned a little bit earlier, at this moment, we are not commenting on this point. A question from Martin [indiscernible]. So 2 questions. Priorities on capital allocation, that's the first question. Romania and Spain are clearly the priority, as there might be remedies in Spain and your leverage approaches 3x, how do you think the ability and time frame of your Belgium operations in case you acquire remedies in Spain. Well, yes, I think there's an element of -- I don't know how to take these questions, because you ask something in the future with the precision of the past knowing how much we need to spend both in Spain and in Belgium, and knowing how much we need to spend on the remedies, although there are no remedies as we speak now. So I think this is all highly speculative. And we'd rather take it 1 by 1 at every step whenever any of this happen and take place. So once again, I know I am not helpful. And I think the real answer to your question is, whatever happens remedies, Belgium, Portugal -- I don't know, Romania, Spain or any other market, we will aim not to grow our leverage beyond 3x, apart from maybe short periods with a clear visibility that we come down below 3x. So I think this is the important element of our strategy. And the rest is really an event that will have to be taken individually on a case-by-case basis. And the second question is on Spain. Could you update on how many homes have you passed with your FTTH network and all the penetration rates when your own FTTH network is? So yes, it's a good question. We did announce earlier in April that we operate 6.5 million home spots in Spain that are on our network. We did not make any other announcements seen. And at the moment, so more or less before the end of the year, we will probably not disclose the number. However, the number -- so I think the April reference is a good one in terms of the order of where we are. In terms of penetration, again, our network is relatively new. It was built in the last few years. And again, most of it was built probably in the last 2 years. And the penetration is still relatively small to what it could be. We are using -- as you know, we're using both Telefonica network, the wholesale Telefonica network. We're using our own network. And basically, I'd say that at the moment, the penetration rate on our network is rather irrelevant. We still need time to increase it. So I move on to the next question, Jose Rodriguez. Could you give us more details about the development of your fixed infrastructure in Spain? How many households are you connected? So I sincerely, we hope that the previous comments are addressing this point, I do hope so. So Laura Holmes. Would you be interested in any potential remedies for MasMovil or in Spain JV in terms of potential spectrum purchases? No. Look, I think it's very detailed, we cannot comment. The question from Joe. Regarding Portugal, is Digi going to have access to national roaming with any of the main operators? For the moment, so as of today, we have not been able to receive offers or to agree offers that would allow us to use national roaming, hopefully or maybe in the future. Evan Romanenko. How much more CapEx do you need to invest in Portugal to start your operations next year? How much more CapEx do you need to invest to achieve an EBITDA close to 0 or breakeven? When do you expect to be profitable in Portugal? So I think, well, it's a bit early on. Portugal is a smaller market for us in comparison to both Romania and Spain, which are considerably bigger markets. We do expect CapEx to be somehow contained, not limited, but let's say, smaller than the CapEx that we spent both in Romania and Spain. And the intention is to start offering our services early next year. However, in the meantime, it's kind of difficult to comment on your questions. We do hope that within 2 or 3 years, we are able to achieve a market share or a number of users that would allow us to break even. But what these numbers would be -- what the number of users is or what is the CapEx that we need to break before then, it's difficult for us to provide at the moment. I'm sorry I am not very helpful, but that is the broad pass that we are taking. Also next question comes from Maurice again. In Romania and Spain, what proportion of your broadband base is converged, fixed and mobile? Maurice, thank you. It's a good question. I'd say that rather than saying wrong numbers, I'd rather not answer. But we could come up with these numbers somehow maybe on our next communication, because this is a good question, absolutely no problem to respond. But still, we see a lot of opportunity to upsell to our existing broadband users that do not have mobile yet from us, both in Romania and Spain. We also see a lot of opportunity to simply address our nonmobile users irrespective of whether they are users at all in both markets. So I think because our market share -- I mean in Spain is very small. And in Romania is relatively smaller in comparison with the 2 largest operators. We have still a lot of potential for growth in this area. Again, in Romania and also in Spain. Questions from Alex Lawrence. What is -- what are your plans to address the 2025 bond maturity? I did answer in an extensive manner a bit earlier, both about the available cash, but also available facilities that we have at this moment. And basically, we rely on our own capital, but also committed capital from the banks in excess of EUR 500 million at this moment. And this is the primary source for our 2025 repayments. In addition to this, we rely on our future EBITDA, primarily 2024 EBITDA given our ability to scale down CapEx if necessary. And also we possibly rely on extra financing facilities, if needed, because at this moment, the exposure -- our exposure to our banks is relatively limited, and we know there is interest from the [indiscernible]. So next question is from Joel. In Portugal, do you expect ARPU to be closer to the Spanish one, around EUR 9.4 per month. Look, I will not answer in numbers. We have not done our final home work. It's a bit early on as we speak today. What I can promise is that it will be an attractive price, a price that would address, let's say, the needs of the public and the price that should be sustainable for a long period ahead. I mean this is how we usually judge our market opportunities, but we will disclose this at around the launch. The question from Mahmood Rasheed. Can you tell us a bit more about the conditions of the EUR 350 million credit facilities that you have. If you draw them, would they be cheaper than the current interest on the bonds? Well, I wish they were, unfortunately not. The bonds were raised in pre-COVID era, and it was a totally different market. And today, we're speaking about drawable of floating rates on top of [indiscernible]. So certainly, it's a higher cost than what the bonds are. We are short of questions for now. We did answer them all. I didn't answer them all. So we will stand the line for a few more minutes. And if you have more questions, please be welcome. So it looks like the line is free. Thank you very much. Thank you very much for your interest. Thank you very much for attending. I hope it was helpful. Once again, we are very pleased and very happy with the results. And we look forward to hear you all next time when we speak in November.