Hellenic Telecommunications Organization S.A. (HTO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the OTE conference call and live webcast to present and discuss the first quarter 2023 financial results. [Operator Instructions] The conference is being recorded [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Michael Tsamaz, Chairman and CEO; Mr. Babis Mazarakis, Chief Financial Officer; Mr. Panayiotis Gabrielides, Chief Marketing Officer, Consumer Segment; and Mr. Evrikos Sarsentis, Head of IR and M&A. Mr. Tsamaz, you may proceed.

Thank you. Good morning and good afternoon to all of you. The first quarter we reported earlier today reinforced our confidence that we are implementing the right strategy in the phase of development. As you know, all have weighted our bank proposition or the quality of networks we build and the services we offer rather than competing on price alone. Even if vigilance will certainly be acquired more than ever, in 2023, the group's performance this quarter shows that we are on the right track and our execution is paying off. At group level, the slight drop in revenues we experienced this quarter was mainly due to the low margin international wholesale traffic as well as the comparable base in Romania and I will get back to what we are doing to address that in a minute. In Greece, on the other hand, international wholesale was the main headwind. But excluding what is largely a lower-margin business, revenues were up and we delivered solid performances for mobile and ICT. In retail fixed services successfully defended our market share and captured the bulk of broadband additions during the quarter. Our focus is squarely on upgrading our subscriber base to higher speed solutions and this translated in further growth of fiber subscriber numbers in the quarter. On the cost side, we maintained and intensified our discipline across the world, benefiting from last year's voluntary retirement schemes as well as arrangements sheltering us from the most extreme variations in energy costs. As a result, EBITDA in our home market was up nearly 2% and very satisfying performance. The EBITDA margin reached 43.3%, ahead of the levels recorded in the previous 5 quarters. Now let us look ahead to the rest of the year and how we can leverage our first quarter as we go forward. In Greece, we will continue to focus on our top line strategy on fiber mobile, coupled by with most vigilance across the board. Together with the expansion of our fiber footprint, we will pursue intensive marketing efforts to continue raising our fiber-to-the-home utilization rate, which has been growing steadily and reached 18% at of the end of March, up 12% a year earlier. In mobile, we are leveraging our 5G infrastructure and continuing to push convert users from pre to postpaid services. Our focus is to retain our market share, focusing especially on the more value generated segments in the market. In addition, Cosmote's new businesses will continue to reinforce the influence of the brand, like the box delivery service and the payzy payment system, which has now reached over 100,000 users in a few months since it was launched. We will also carry on pushing ICT projects, which are valuable by themselves, but also contribute to utilization of our economy and create better conditions for growth. We have a strong pipeline of projects of valuable assignments, which should support this line of business going forward. The world of Romania, where our mobile subsidiary was impacted following the discontinuation of the MVNO service provided after separation from its fixed [ arm ]. As you have seen, we announced last Tuesday that following the resignation of the previous CEO, Babis, in addition to his responsibilities of group CEO, will take all duties of the CEO of Telekom Romania. Babis will intensify the focus to stabilize and improve the performance as well as to explore any strategic options. So in a year that we don't expect to be particularly easy, we are reassured by this solid first quarter results and are committed to great customer service, continuing to build top class infrastructure, controlling our costs. That is why we are confirming our outlook for the year. Our CapEx, which was down in the first quarter for seasonal reasons should be stable in the full year as we accelerate fiber-to-the-home deployment. We also confirmed our shareholder remuneration. On this note, I will now ask Babis to review our performance in the quarter.

Thank you very much, Michael, and greetings to all of you from me as well. I am proud that decided to take over the added duty of the CEO in Romania and I look forward to getting this operation faster on stabilization path. Let us now jump into our first quarter performance. This year, first quarter group revenues were down 2% from the first quarter of 2022. In Greece, revenue was down less than 1%, primarily from international wholesale and to a lesser extent, retail fixed services. In Romania, the 2% drop reflects the MVNO discontinuation following the sale of our fixed business the year before, and as well as lower mobile termination rates. Group adjusted EBITDA asset leases were just down 1%. The drop was entirely due to Romania, which had benefited from a sizable one-off positive factors in the first quarter last year and experienced certain headwinds this year. In Greece, we achieved a strong operating profitability with EBITDA margin at the high end of our historical record. This is due to our ability to control our cost base. All told, the group EBITDA margin was 40.1%, up 40 basis points from the same quarter in 2022 despite the Romania shortfall. Now turning to Greece, the resiliency in revenues reflects the strong performance of mobile and ICT while wholesale and [ Swift ] weighed on the total. Revenues from Greek retail fixed services were down 3.5% in the quarter, including data services, which makes absolute sense to incorporate. Most of the decrease comes from voice and TV, while broadband was roughly unchanged. Overall, this reflects certain pricing adjustments as well as lower demand for some legacy services. In TV, the growth in subscriber numbers continues. Now we are approaching 650,000 customers. It is mainly driven by our over-the-top service, which commands a lower ARPU. With excellent content, we are successfully preserving our share of the market as well as our penetration of total households. As mentioned before, the broadband revenues were stable, which represents an achievement if you consider that we are comparing to the last quarter before we started implementing around significant speed upgrades at no additional cost for the customer. This has frozen revenues that would normally have benefited from customers upgrading voluntarily, but most importantly, it also has a desired effect that of stabilizing our base. We added 15,000 customers in the quarter, pursuing the increase in penetration on total base, which now exceeds 86%, 2 points higher than a year ago. As you are aware of, we are totally focused on moving our customers to fiber and the quarter marked another series of successful moves in this direction. Compared to the past 2 quarters, we more than doubled the number of fiber additions during the first 3 months of this year to 41,000. More than 2/3 of these additions or 29,000 came from [ MTTH ], bringing the total FTTH base to 166,000, way more, but twice the number a year ago. Similarly, despite ongoing expansion of our fiber-to-the-home footprint and despite the current lack of any government subsidy encouraging take-up, fiber-to-the-home penetration reached 18% of homes passed, up from 12% a year ago. With fiber playing an even larger role in our offers, speeds in excess of 100 mega bps representing now 45% of total retail subscriptions at the end of the first quarter of this year, up from 28% a year earlier. As you see, we are holding our ground in a changing competitive landscape by leveraging our advanced infrastructure and top customer service offer. ICT had another strong quarter, boosted by system solutions for private and public entities, including EU-sponsored projects. As a result, other fixed revenues were up more than 12%. For the most part, the decline in wholesale revenues comes from international transit, but there is also some slight drop related to lower tariffs in domestic wholesale. Moving to mobile service revenues in Greece. This achieved another quarter of a very healthy growth, up nearly 3% this quarter, driven by increases in both postpaid and prepaid. In prepaid, we had a very solid quarter, validating our more-for-more strategy, notably higher top-up value bundles. Postpaid continued to benefit from the expansion of the base and very encouraging data monetization. Data KPIs are all pointing in the right direction, notably monthly data usage per subscriber up 67% year-on-year. We are actively pursuing the expansion of our 5G network reach, which should stretch to 90% of the population by the end of this year and is already above that level in most of the country's major cities. Now let's turn to the other side of this quarter story in Greece, with good cost control. Total operating expenses, including depreciation and amortization and one-offs, were down nearly 4% in the first quarter, a sharp reversal from the trend last year when our cost control initiatives ended up being neutralized by inflation and higher energy costs. This quarter, energy cost came down significantly, about EUR 5 million, thanks to hedging and long-term supply contracts. Energy, of course, remains a volatile element in our P&L and our efforts are focusing now on stabilizing price for the future years even if this implies somewhat higher prices going forward. Bad debt provisions were also down as the higher rates of the pandemic periods are proven overly conservative. Personnel expenses declined more than 3% in the quarter, reflecting the benefits of last year's early retirement plans as we had anticipated. A new voluntary exit scheme is underway, which should improve further our cost structure in 2023 and onwards. We have also finalized a new labor agreement with the union, which provides visibility to our cost while eliminating a number of legacy bureaucratic salary structures. Important to say employees at the lower salary echelons will benefit the most from the new agreement. All told, first quarter adjusted EBITDA after lease increase was up 1.6% to nearly EUR 319 million, resulting in a margin of 43.3%, which is up 110 basis points from the same quarter last year. Total revenues were down 12% in Romania, which is a very challenging market, of course, where we are facing competitors who are offering unlimited services for a couple of euros a month. In last year's first quarter, the Telekom Romania was still providing MVNO services to [indiscernible] following its acquisition of the fixed business. This service has been gradually discontinued. As a result, revenues were down sharply. Revenues were also affected by the mobile termination rate cuts imposed by the regulator. Now starting this quarter, that is Q2 of 2023, the comparison should become more favorable as the MVNO agreement subsides and there is only EUR 2 million in Q2 last year and very little after that. Total operating expenses, excluding depreciation and amortization, were down nearly 2% in the quarter, primarily due to lowered connection cost, while device costs were up as Telekom Romania was forced to align the strategy with those of its competitors. Energy costs were also higher as the government terminated a subsidized app benefiting larger enterprises, leading to significantly higher tariffs throughout 2023. The impact in this first quarter alone is in the area of EUR 2 million from this energy costs. As a result, Telekom Romania Mobile's adjusted EBITDA after leases was nearly EUR 4 million in the quarter compared to nearly EUR 12 million in the same quarter last year. Important to note is that if we exclude the MVNO impact we discussed before, EBITDA would be down less than EUR 3 million from last year's level, reflecting just the aforementioned higher energy costs. There is not much to point out in the rest of the P&L since the interest expense and income taxes were down by 4% and net income was up nearly 5%. Turning to cash flow. Adjusted CapEx was down 14% to EUR 80 million versus last year, but as you know very well, the first quarter CapEx is often not represented of the full year outlays because of the seasonality. As we step up the pace of fiber-to-the-home deployment, there are rates who normalize starting this quarter, in line with the EUR 640 million full year CapEx guidance, which we are fully confirming. Free cash flow after lease was up 2% to EUR 226 million. We maintain our guidance of approximately EUR 500 million for the full year. Finally, our shareholder remuneration guidance of EUR 425 million is unchanged with EUR 250 million in dividend payable in early July and EUR 175 million in share buyback, which is currently under execution. So to recap, we are pleased with our healthy first quarter in Greece, underscoring the competitiveness that comes from offering great service on a state-of-the-art infrastructure. While we expect to face new challenges, we remain optimistic for the coming quarters. In Romania, the situation is definitely tougher and we are weighting all of our options there. On this note, Michael, Panayiotis and myself and our colleagues are on the table, are ready to take your questions. So operator?

[Operator Instructions] The first question is from the line of Draziotis Stamatios with Eurobank Equities.

Just a couple if I may, please. Firstly, on Romania, with the performance there, as you said, going south, again, I expect the business will be cash flow negative again in 2023. Could you tell us what you think in terms of your strategic options and how these thoughts relate to Babis taking over as CEO of Telekom Romania Mobile? And secondly, I guess the pressure in Greek [indiscernible] was well telegraphed in previous quarters. It is clear you intend to protect your subscriber base. Just wondering what you've been seeing from a competitive dynamic perspective, has your main competitor leading price initiatives been able to gain subscribers? And when do you think the top line dynamic in fixed will improve, please?

Thank you for the questions. First of all, Romania, the appointment of Babis doesn't really change much. I mean, the direction is there. The first one is to continue and intensify the efforts of stabilization. Yes, EBITDA-wise, we are in the first phase down versus a year ago, but I think we explained that the comparison doesn't help. So this drop versus the previous year will get normalized as we move on to quarter where last year we didn't have the MVNO and this will be more evident in Q2. So the effort now is to intensify the stabilization, meaning the challenging environment to continue driving the customer base as we saw also in the results, continues to grow and take advantage of any type of synergies and efficiencies we can do in order to improve the customer experience and the profitability. So consistent with what we have discussed in previous calls, this hasn't changed. It's intensified, of course, because we need to make sure that the pace that we are running towards the stabilization will not be impacted. Regarding strategic options, this is something that, as we said in previous calls, we continue to explore and assess. Inevitably, we don't have anything concrete now to discuss because these strategic options will be materialized whenever there is a real case. And rest assured when we have something, we will inform the market. But the message here is that while we are stabilizing the business, we are also exploring any strategic option which makes sense. On the fixed side, I think alluding to what we have discussed in the previous calls in the past 2 quarters. So the picture here is on the fixed side is consistent with what we have discussed, meaning that we see a top-line decline, also compared with last year that before we upgraded our customer base to the next speed at no cost. Just to say that the feeling that if we haven't done that one, then your question would have reverted mostly why do we lose customers. So now we have achieved the first part, which is to maintain our customer base, thanks to this move that we did last year and also thanks to the continuous drive of the fiber-to-the-home superior service we have in the market. And as we move on in the next quarter where we will be comparing with quarters where we had these 2 effects evident, the expectation is that this top-line negative point will start getting a little bit towards stabilization. We cannot put an exact quarter when it will happen because we are not alone in the market and we have to continuously get our customer offers updated, but the competition remains intense and we think that our strategy so far works and it's consistent with what we have discussed in previous quarters.

The next question comes from the line of Patrick Maurice with Barclays.

This is Maurice here from Barclays. Just a couple of questions for me, please. First one is you showed the chart of fiber penetration, which shows, if I understand correctly, now sitting at 18% of your homes connected to the fiber network with 940,000 houses passed. That's pretty impressive increase and the utilization rate was 12% a year ago, now 18%. How high [indiscernible] average? I'm just curious as to how high the penetration is on some of the more mature cohorts. Like are we sitting at sort of 30% or some cohorts now? Or what is it like in terms of the cohort penetration? And then the second question, if I may. You saw United Group sell a bunch of towers or announced towers to sales at 20x EBITDA. I'm just curious, given those elevated multiples, if you're tempted at all or you're still taking the view of wanting to owning and control your towers.

Let me take the second one on the towers. On the tower sale, yes, that was an announced market by United. So we cannot comment any more on that one. This doesn't change our strategy, which has been that this is an asset that, for the time being, we have elected to keep. If anything else, assessing strategic choices, there is also different drivers between a decision to go that path from component-to-component depending on the structure. On the penetration part, if I understood the question correct, and please follow up if this is something that we [indiscernible], is that this 18% is currently what we have at the end of Q1. Now the way this will grow is a little bit depending or it's mostly dependent on how fast we roll out also the base, the whole part because currently, we are in the peak, I would say, of our activity there and this will be this year and next year. So inevitably, we'll roll out a big proportion of the total project in the coming, I would say, 18 months or so till the end of 2024. So the penetration will continue to grow, but we have to wait the first maturity level, which is around in the area of close to 2 million homes before we see the utilization getting to what might have been your thoughts when we answered the question, in the levels of above 25% or above 30%, once the base has been stabilized. So if I got the question, please follow up if this is not what you were looking for.

Yes, sorry, maybe if I ask it in a different way. So 18%, I guess, is the average penetration on your entire base. And of course, the ones you rolled out in very recent quarters probably are less than 18%. So probably you have some more mature cohorts that are currently more than 18%. I was just wondering what penetration are you getting on some of the more mature cohorts.

Okay. I may add to this. If we go to the base that we have rolled out and is now mature and let's say it was 2 or 3 years ago, I would take your 3 years ago rollout penetration of fiber on our own base of fiber-to-the-home is 1 out of 2 customers, meaning 1 out of 2 of our customers, our broadband base in the areas that we have rolled out 3 years ago. On that wave of rollout is 1 out of 2 customers have already moved to fiber. And if we go even back to 4 or 5 years, it's more than 65% of our own base that have migrated to fiber. I don't know if that was the question. I hope I have helped on that.

That is exactly the question. Very impressive by the way.

The next question is from the line of Ng Clara with JPMorgan.

I have one clarification question just on the MVNO revenues in Romania. Could you just share how much the MVNO revenues were in the last like comparable quarter last year, so in Q1, just so we can kind of compare what it would be in -- compared to Q1 and Q2. And then just the second question is on energy costs. So just following up on what you said about trying to stabilize the cost going forward. Is this kind of through a PPA? And would this mean maybe 2024 and going forward, the prices may increase versus now? Or would this be like versus 2021 prices?

Thank you for the questions. So on the numbers of MVNO, we had about EUR 6 million in Q1 of 2022. And the Q2 of 2022, we have EUR 2 million. So that is a total of EUR 8 million. And then in the Q3, Q4 of 2022, it was nearly 0. So on the energy cost, [indiscernible]. If you hear me, so on the energy cost, we have the following. In 2023, the cost of energy for a big part of our consumption was lower than the market because we had this long-term agreement we had signed a couple of years ago. So this is what gives us this nice savings that we are discussing. In 2024, of course, if we look just the forward rates or if we look the best guess in the market, we expect that there might be an increased reversal because the good rate we had in 2023, as we said, they were locked in the previous year and they were lower. So in 2024, they will be higher. However, we are doing various exercises with, for example, to sign PPA agreements and things like that in order to contain those costs. So if you want to put a number in 2024 versus 2023, I think this is a little bit early. We need to see how we were progressing in the next couple of quarters of this year to look this type of deals, the PPA deals that will change again the picture in 2024. But definitely, we are expecting an increase in some of our consumption, which will not be a part of the PPA, the magnitude which we do not expect to be huge. It may be in the low double digit or something like that. But putting a number there, we'll have to be -- wait a little bit in order to give you a more credible answer in the coming quarters.

The next question is from the line of Grigoriou George with Pantelakis Securities.

Two if I may. The first one is up until the fourth quarter of 2022, would you kindly just give us some data on how the market and your competitors are doing in broadband and fixed access lines. I was hoping you could give us some numbers as well for the first quarter. And my second one is related to what the previous questions were about the energy costs. If you could tell us about your thoughts about how you plan to attack your cost base even further in this year?