NOS, S.G.P.S., S.A. (NOS) Earnings Call Transcript & Summary

Hi, good morning. Welcome to our full year '19 results presentation for our conference call. I hand over to José Pedro Pereira da Costa, the CFO, who will run down a brief presentation on the highlights of the results, and then the full management team are available for Q&A.

Okay. Good morning, everyone. As usual, we'll be following the slides of the results presentation. And starting with Slide 2. This quarter, we would like to highlight the positive RGU growth with 70,000 net adds in the quarter, with particularly strong performance in mobile and Pay TV. Also, solid consolidated revenue growth performance of 1.3% year-on-year, driven by a stable Telco revenue growth of 1.1%. And again, a positive quarter for the Cinema and audio units. This revenue growth allowed for EBITDA growth of 2.4% at the group level and 2.8% at the Telco level, well above revenue growth, continuing to drive margin expansion as it has been [ here ]. Our technological investments are on track with the expansion of the FttH network and completion of mobile network upgrade. On Slide 4, now turning to the operating review. We have, again, a very positive quarter, reflecting historical low levels of churn. Overall, we were able to post total RGU net adds of 70,000 in the quarter. We have increased subscribers across all services. We've posted positive Pay TV net adds number of 7,000, taking advantage of the fixed network expansion, low churn and better trends in the DTH business. We also have fixed broadband and fixed voice net adds of 12,000 and 6,000, respectively, very much in line with last quarter, still supported by network expansion. On the mobile front, we've posted 42,000 positive net adds, benefiting from the very strong contribution from postpaid and the seasonally negative prepaid, but much better than on the [ first quarter ] of 2018. On Slide 5, we have continued to expand steadily our greenfield FttH footprint, with close to 40,000 new homes passed in the quarter, reaching an accumulated full year 2019 number of 220,000 new homes passed, slightly above what we were expecting for the full year, that was around 200,000. This expansion has been key to continue supporting growth in our fixed Pay TV base. This quarter, we had net adds of 9,000, reflecting good penetration in new areas in the range of high single-digit numbers, after the first few quarters of commercial efforts. Also, churn levels in this quarter came down to the lowest historical levels in the last 5 years, supporting well our positive fixed Pay TV net adds trajectory and benefiting from the overall disciplined market environment. On Slide 6, the new commercial approach with pick-and-mix, allowing for more flexible, made-to-measure offers, has proved to be quite effective. If we have integrated and convergent subscribers, we have reached 930,000 subscribers, representing almost 60% of the fixed price, having added 16,000 subs in the quarter, each one having, on average, 2.1 mobile cards. The focus has been less on convergence and more on integrated offers, allowing customers to have, in a more flexible way, mobile cards on top of fixed services. In most cases, these cards are used as segment cards. The upsell of integrated mobile is providing some ARPU uplift on fixed customers, therefore, allowing us to offset the continued pressure from premium sports channel subscription and international call cap. On Slide 7, these integrated offers are now the basis of our mobile growth, with NOS adding 42,000 mobile net adds number, a very strong contribution from postpaid [indiscernible] that offset as well the typically negative seasonality of prepaid in the fourth quarter to the less negative performance of prepaid in the quarter. We have the very positive contribution from the youth segment, which continues to grow consistently quarter after quarter. On Slide 8, in terms of innovative commercial launches. This quarter, we got 4 product of the year awards, the highest number within the Telco category for the best new 5G-ready network, The UMA TV boxes, and our recently launched customer apps, both of which launched in the last quarter. The NOS app or customer service app aim to enable customers to manage tariff plans, check bills and execute payments. And the NOS Cinema app, a new app for our cinema customers that also allows customers to access the movies on show and buy easily cinema tickets and [ bar ] products using the NOS card. Also, we were the first player to have a first 5G city with Matosinhos, where our 5G network pilot is fully operational, positioning NOS as a leader in the rollout of this technology. And finally, in the Cinema unit and in the context of reopening the NorteShopping Cinema complex, we launched a new screen format, ScreenX, which provides 270-degree screen, completely innovative and immersive experience for cinema fans, once more, pioneering new formats. On Slide 9, on the B2B front, we continue to post growth in data and IT service revenues, offsetting the revenue drag from more traditional Telco services. We were presented with the HPE service provider of the year award, recognizing our positioning and strategy in delivering private cloud services to corporate customers. We continue to post healthy continued growth in B2B RGUs, namely in the SME segment. And on larger corporate segment, we continue growing in recurrent customer revenues, leveraging IT, cloud and managed services, IT representing already 20% of revenues in this segment. On Slide 10, on our technological investment projects. Our FttH rollout continues to develop at a good pace and according to plan, with total close to 4.7 million households coverage by the end of this quarter. FttH representing already 1.5 million homes passed, that is around 32% of total coverage. In this 1.5 million FttH number, we are including around [ 250,000 ] contributed by our partner, which overlap HFC areas. The sharing agreement is being executed with around 900,000 households being exchanged since the start of the project. On the mobile front, we have completed the modernization project to an upgraded single Radio Access Network, 4.5G network, 5G-ready. And finally, about 2 weeks ago, we announced the signature of a letter of intent to Vodafone, setting the negotiation principles for a mobile sharing agreement, still each party retaining strategic control of the [indiscernible]. The purpose of the agreement is to improve investment efficiency, drive product and transformation-wide coverage and reinforce services, providing more benefits to our customers. On the next slide, on the Cinema units. We had a positive quarter with revenue increase of 2.9%. The 5% decrease in attendance being compensated by the increase in average ticket revenue, namely through higher rates of new formats yielding higher prices through promotions and also, through higher card sales. The decrease in attendance was fully in line with the overall market. Therefore, we kept a robust and leading market share of around 60%. On the audio front. We had also a very positive quarter, having distributed 7 out of the top 10 movies, including Joker, which exceeded the best expectations, in terms of gross box office revenues, becoming the second highest grossing movie of the year in Portugal. Now moving to the financials on Slide 13. As we said, we had a 1.3% revenue growth at the group level or 1.4% adjusted for regulatory impacts, as a result of the solid contribution of the Telco unit, with a 1.1% year-on-year growth or 1.3% adjusted for the international call cap, being also supported by the cinema and audio units, which have posted a combined increase of 1.8% in the quarter. Cinema revenues increased around 2.9%. Audiovisuals posted around 2.6% revenue growth, well supported by Cinema distribution. On the next slide, Telco revenue has achieved 1.1% year-on-year growth. Adjusting for the cap on prices of international calls on SMS to EU, this growth would have been a solid 1.3%. The consumer segment posted 2.1% year-on-year revenue growth, adjusted for the cap, driven by the residential fixed and personal mobile segments with growth of around 2% and 11%, respectively, and despite the pressure felt in the residential DTH segment. In this quarter, the personal mobile performance was positively impacted by strong equipment sales due to increased focus on sales of mobile handsets. And finally, it is worth mentioning that sports premium channel revenues had a slight year-on-year increase for the first time in a long series of quarters. The business and wholesale segment grew 1.3%, adjusted for the cap, with growth of 2% in business customer revenues, driven by large corporates and SMEs, and 3% growth in wholesale revenues, offsetting some decrease in equipment sales in the segment. On Slide 15, EBITDA in the quarter grew 2.4% at the group level, again, growing EBITDA above revenue growth, driven by the strong performance of the Telco unit. At the group level, margins improved versus last year, 40 basis points. Telco EBITDA also grew 2.8%, improving margins by 50 basis points versus last year. The Cinema and audio EBITDA had a slight decrease in the quarter, due to the audio business EBITDA decline, where the growth in the low-margin Cinema distribution business did not compensate a decrease in the margin of the rights business of the [indiscernible] in particular. In Slide 16, total OpEx grew 0.7%, below growth in consolidated revenues, showing well cost control and discipline we've been implementing. In nondirect costs, we had a strong decrease of 4.1% year-on-year, positively impacted by efficiencies in more structural cost items, such as maintenance and repairs, and SG&A, resulting from ongoing transformational initiatives and by a lower level of operating provision. Transformational cost efficiency programs are helping to compensate for the structural inflation in items such as minimum wages, increased energy and debt costs, driven by an extended network. Regarding direct costs, we had in this quarter an increase of 4.7% year-on-year, impacted by higher wholesale traffic costs by increased corporate IT, project costs and finally, an increase in cost of goods sold associated with equipment sales. On Slide 17, net income in the quarter decreased year-on-year to EUR 5 million, despite the increase in EBITDA of around EUR 3 million in the quarter. Depreciation and amortization increased significantly to EUR 123 million, following some increase in current amortization, due to the increase in depreciation rates of network equipment, and also due to impairment charges in the quarter that reached around EUR 24 million related to terminal equipment and legacy mobile network equipment. We also had a higher negative contribution from the share of JV results, consolidated through the equity method, again mostly due to ZAP's more negative contribution due to a strong devaluation of the local currency, as mentioned in the last call. Still, it was well below what we were expecting, given the more favorable currency evaluation towards the end of the quarter. On the positive side, P&L income taxes decreased EUR 10 million due to a decrease in earnings before tax and also to the increase in the tax rate applied to the deferred tax assets recorded, which led to a positive impact in the quarter of EUR 5.8 million. Also, financial costs continued to decrease to around EUR 5.6 million, driven by lower average cost of debt versus last year. On Capex, on Slide 18. Total group CapEx in the quarter, excluding the impacts of leasing contracts reached around EUR 100 million, an increase of around EUR 5 million versus last year, reflecting an increase in Cinema CapEx, due to the conclusion of the refurbishment of a large cinema complex, NorteShopping, and also reflecting an increase in technical Telco CapEx reaching EUR 53 million in the quarter, that is 13.4% of Telco revenues, due to the phasing of technical projects, FttH expansion, namely. As expected in full year 2019, we finished the year slightly above 13% of technical CapEx to sales, that is with 13.3%, due to the FttH rollout and also to the completion of the mobile single RAN upgrade. We also had some decrease in terms of customer-related CapEx to around EUR 37 million, due to the lower levels of churn and also to higher efficiencies in equipment recovery in the context of the transformation program. In terms of free cash flow on Slide 19. We have a slightly positive free cash flow, as it is usual in the last quarter of the year. EBITDA minus CapEx reached EUR 36 million, decreasing around EUR 2 million versus last year. Operational free cash flow after lease payments and working capital variation reached around EUR 20 million, which then converted into a net free cash flow, after interest and taxes of around EUR 2 million in the quarter, reflecting a peak in terms of cash taxes paid in the quarter, as it is usual. Still, cash taxes for full year 2019 were EUR 19 million, well below P&L taxes of EUR 33 million and representing slightly over 10% of earnings before tax. On the balance sheet on Slide 20. Net financial debt was virtually flat in the quarter, with around EUR 1.1 million. This net financial debt number, representing 1.9x the EBITDA level adjusted for lease payment, same level of end of 2018, and in line with our stated target of close to 2x that we are committed to maintain. Average cost of debt decreased again in the quarter to 1.3%, benefiting from the maturity, this last November, of EUR 100 million bond issue priced at around 3%, which was refinanced at a substantially lower cost. And finally, regarding shareholder remuneration. Considering the strong financial structure, with net financial debt-to-EBITDA of 1.9x, the high level of free cash flow generated in 2019 of EUR 147 million, our Board has approved yesterday the proposal of a EUR 0.278 ordinary dividend per share, representing around 100% payout of earnings and free cash flow, and subject to final approval at the next AGM to be held in April. The Board has taken seriously market expectations into the final EPS proposal, recognizing dividends are a key component of our equity story. However, and there's a current circumstances with a challenging regulatory agenda and then upcoming 5G spectrum auction, with a still very much undefined outcome. At this stage, the Board consider this proposal to be the best compromise between providing a short-term attractive shareholder remuneration, while retaining enough headroom to finance company's medium- and long-term investment projects, driving future value creation. And this concludes our presentation for today, and we are now ready to start the Q&A session.

[Operator Instructions] We will now take our first question from Roshan Ranjit from Deutsche Bank.

Great. Two for me, please. Just on the first topic of shareholder remuneration. You talk about a conservative approach reflecting, you said, the uncertainties in the market. Now on the flip side, you talk about accelerating the transformational program through 2020 as well. Can I just get a sense of your thinking around that transformational program? Is that still going as planned? Have there been any hurdles? Or is that going better than you anticipated? Just to get a sense how that should progress through the year. And secondly, on the roll out -- FttH rollout. Now you're coming to the end of the greenfield rollout, so it's reflected in the slowdown this quarter on your subs. Is it possible to get a sense of the development in the brownfield site? So customers moving from your legacy network onto the new fiber network, which you are currently rolling out there?

Well, on shareholder remuneration. There's not much more to comment, just a general comment. The decision was based, assuming the current context in which we have several number of material uncertainties regarding the regulatory process that is going on, that drove some, we can label conservatism, in terms of the dividend proposed. Still, we believe that in the short term, this remains an attractive dividend, providing also a good level of return for shareholders. On the transformational program. No news on that front. So no news, in this case, is good news. So we are progressing according to plan. So we are already having some positive impacts of some of the initiatives, some of them we mentioned during the presentation. So on -- for instance, equipment recovery program is helping us to drive customer-related CapEx down. Also on the non-direct costs, you've seen the performance so far in which we've been able to decrease overall nondirect costs. And some of this is also a function of some of the initiatives, and we will progress with this, which also, we mentioned the launch of the customer apps that were recently launched. So no concrete and material impact so far, but we expect, once we start having more traction on the adoption of these apps, to translate also this more digital way of interaction into savings, in terms of other cost items. In terms of the FttH...

If I can complement this comment on the dividends and the transformation process. Yes, it's -- we have presented our transformation process. It's something we believe is key to create a leading company for the future. And this transformation process is going according to plan, which is obviously positive. We want to create a company that is ready to be at the forefront of the new technology paradigm, which we believe is key to be competitive in a digital world. 2020 will bring significant developments in this transformation process. And we want to be -- we want the company to be uniquely positioned to become a market leader in the long run. We believe this is the way to create value for all our stakeholders, namely our shareholders. And that's the background to both the transformation process and the dividend proposal that the Board approved yesterday.

In terms of the FttH rollout. We'll continue according to plan. So overall project entails the exchange of 2.6 million households in total. We have around 900,000 so far. So we will have around 1.5 million in the next -- basically, in the next 3 years. So roughly 500,000 exchange per year. In terms of the nature of the FttH rollout, we will have access to, we'll start having more overlap over HFC than greenfield, than what we have in the first couple of years. That's something which is a fact. Still, we believe that with the greenfield that we will have, although with a lower percentage, we can still have some margin for growth in terms of our fixed business.

And your next question comes from Michael Bishop from Goldman Sachs.

Just a couple of questions from myself. And I appreciate the first one is probably quite a complex question, but it would be great to get your early thoughts on the spectrum rules because at least, from my understanding, it feels like they're quite favorable towards a new entrant, in the sense that there'll be fairly limited capital commitments related to rollouts, paying for the spectrum. And also, your understanding of any clauses around existing operators having to give roaming agreements would be interesting. And then secondly, coming back to your explanation on the dividend decision. Away from the obvious uncertainty around the spectrum and the fourth entrant, is there anything you're saying here today on future CapEx? Because, again, if you look at the spectrum rules, it's fairly decent coverage obligations. So I was just wondering how that fits in with your long-term network CapEx to sales that you've been guiding on?

Thank you. Concerning the 5G auction process. The draft regulation was published last week and is open for a public consultation for the next 30 days. There's a number of key issues that need clarification in order for us to have a consolidated opinion. So we would rather not come forward with any comments or any additional comments at this stage. What we believe is clear for everyone, is that Portugal has the most advanced services, the better quality delivered to its customers when compared to any European country. Additionally, we have the lowest prices in the EU. If you look at these 2 metrics, they prove, without margin for doubt, that this is a very competitive market. And that is the background for the incoming auction.

In terms of CapEx projects. Again, there's some -- there's a -- today, still a relatively high level of uncertainty. It's true that the coverage obligations are quite demanding. But as Miguel has mentioned, this is still draft regulation. So we'll have to wait for the final regulation to be published. What we are also doing as we've been recently announcing is trying to be able to fulfill these coverage obligations in the most efficient way. So that's one of the basis of the recent letter of intent that we signed with Vodafone. So we are quite keen in making this investment effort as efficient as possible, and by splitting the efforts with other operators in this case. But it's soon to give you any more clear guidance on how much this will represent in the future. So there's still a lot of moving parts, which need to settle down. And before this upcoming 5G auction, we don't have the needed feasibility for that.

And your next question comes from Nayab Amjad from Citibank.

I have a couple of questions. So now that the Altice Portugal SGPS deal have been finalized, can you give us your views on the implication in the market as a result of this? Do you see any pricing implication on the fixed side and the possibility of supporting a new entrant? And then secondly, Cellnex is entering the Portuguese market with the acquisition of OMTEL. Do you think this is likely to support the entry of a new entrant into the market as well?

Well, I'll start with the first couple of questions, and unfortunately, I cannot give a lot of clarity on both question. On Altice FttH sale, there is no commercial offer still. So we know that there is a new owner of the infrastructure, but they haven't made public what are the terms to access these new networks. So we cannot also comment too much on whether the terms will be sufficiently attractive for a potential new entrant. So it's still, still early days.

In what concerns Cellnex entry into the market, I should remind you that what Cellnex did was acquiring a company, a tower company that already existed. So we don't see that move changing any of the conditions that were already in place.

And your next question comes from Ivón Leal from BBVA.

The first one for me is, do you think you have room to reduce the subscriber acquisition cost per customer? And maybe the second one. I think you've said in the past you were not open to negotiations for granting access to your network for that potential fourth operator. Is that still the case?

Okay. Thank you, Ivón. On the first question on subscriber acquisition costs. Well, yes, as you know, the transformation program is addressing a number of cost items, which are included in subscriber acquisition costs. I would say that most relevant of which would be the sales commission. So we have an objective to increase the percentage of online sales in terms of our sales channel mix. So that would help us reducing basically this component of subscriber acquisition costs. Also on the installation cost front, we've been doing also some progress in terms of helping customers to self-install some of the equipment, which will also help in containing installation costs. So yes, overall, we are -- we have a number of initiatives, which are addressed at reducing the unit costs that we have for -- to acquire subscribers.

Just -- I don't know if you could share a bit with us, even if it's not the guidance, maybe in terms of CapEx over revenues on the commercial side. Where is your internal ambitions? I mean that can go down to 8% or 8.5% or...

Well, depends basically on, I'd say, basically a number of trends. So first test, of course, this unit cost per subscriber acquired on which we are working and we plan to be able to decrease over time. It depends on -- also on the level of churn, because the more churn we have, the more we'll have to replace customers in order to maintain certain level of net debt. And today, we are experiencing historical low levels of churn, so that depends a lot on the market environment. And I would say that -- and also depends on the efforts we'll be doing in terms of potentially upgrading customers with the newer types of equipment, which we have been doing progressively over time. So I'd say that current levels of subscriber acquisition of customer-related CapEx are relatively well-balanced levels. It's true that on one side, we may have some potential to decrease the overall level. It's true that on the other side, given that we are with historical low levels of churn, that there might be some elements in which this CapEx could go up. So not giving you any guidance on this, but I'd say that current levels are -- we are comfortable with them. And the trend won't differ too much, we believe, from where we are at this stage.

On the second issue of giving access to new entrants in our networks. I will have to disagree with you. I don't think we have ever stated that. And certainly, that's what -- that's not what we've done in the past, both on the fixed and mobile. In the fixed, we give access to our network, namely under the agreement with Vodafone. And on mobile, we have reached MVNO agreements in the past. And certainly, that will continue to be our position in the future. We are open to grant access to new entrants, both on our fixed network and mobile network. That is a very clear position from our side.

Your next question comes from Pedro Oliveira from Caixa Bank.

Just a couple of questions from my side. The first question is, given that you're having heavy 5G requirements from the regulator, would you consider adding Altice to the partnership to share mobile infrastructure or at least to share in the low-density areas? And my second question is, your level of dividend that you set up now is derived from your future cash flow expectation and EBITDA growth, considering that you stated that you maintain the commitment to maintain the 12x net debt financial debt, or you are being prudent and ensuring some cushion, and therefore, even under a harsh scenario, we should expect leverage ratios to come down going forward?