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

Hi. Good afternoon. Welcome to our first quarter 2021 results conference call. The full team are available. And we'll go through a brief presentation of the results the main highlights led by Jose Pedro Faria da Costa, CFO. And then we'll be available for questions after the presentation. Jose Pedro, over to you.

Okay. Thank you, Maria, and good morning, everyone. I'll start with some of the key highlights of the quarter before starting the presentation. So in this first quarter and despite the very strict lockdown during the full quarter, we have managed to continue to post growth on Telco unit and continuing to prove business resilience, strong cost discipline on various areas, in particular, in the most pandemic-affected cinema units allowed for almost flat group EBITDA evolution and to post a 1.2% EBITDA growth in the Telco unit. We continue to innovate in both the Consumer and the B2B segments. We will give a few examples of that later in this presentation. And finally, we continue to have a very strong balance sheet with net financial debt over EBITDA after leasing of 1.5. Now starting with the presentation and going directly to Slide 5. Starting the operating review we have to consider. We continue to post solid operational performance. We managed to grow overall RGU number in the last 4 quarters, that is since the start of the more severe pandemic situation, from 9.7 million RGUs to 9.9 million RGUs. That is a 2.1% year-on-year growth with growth across all services. In the next slide, this quarter, we had a strong performance in postpaid mobile and again showed resilient numbers in the Fixed area. On the Mobile front, we have posted a very positive 39,000 postpaid net adds number as a result of very positive contribution from convergent and integrated offers. On the Fixed front, we have posted solid Fixed broadband net adds of 4,000 and slightly positive Pay TV net adds of 1,000 in the quarter, continuing to benefit from the Fixed network expansion to new greenfield areas. Overall, commercial activity was affected by the strict full lockdown during the quarter, namely the closure of all retail shopping outlets, which affected more the Mobile prepaid numbers more dependent from these sales channels but also affected somewhat the Fixed numbers. The prepaid mobile numbers started to recover in the second quarter with a much more controlled pandemic situation, allowing for the reopening of retail shopping areas after mid-April. On Slide 7, convergence continues to be, for us, the major driver of Mobile growth. We continue to grow our convergent and integrated subscriber base, having reached 986,000 subscribers, representing now 63% of the Fixed base and having added around 9,000 subs in the quarter. We have exceeded 5 million RGUs sold under convergent and integrated offers with net adds in the quarter of 46,000, and we continue the Mobile densification, increasing the number of mobile cards per household. We should remind again, stand-alone mobile cards are not sold within convergent or integrated packages, represent for us less than 40% of total Mobile subscribers and well below 10% of total Telco revenues. Now moving to Slide 9. We continue launching latest generation and environmental-friendly services in the consumer market, which continues to bring differentiation to the market. This quarter, we have launched the first 5G-ready hotspot, integrating the most recent Wi-Fi 6 protocol, enabling speeds above 1 gigabit and allowing 15 devices connected simultaneously. Also in the context of the pandemic, we launched exclusive discounts in equipment like tablets and gaming consoles for our 3P and 4P customers. We were also the first operator to make available refurbished Apple smartphones with a 2-year guarantee at very competitive prices, also reinforcing the commitment towards environmentally aware solutions. And finally, our self-installation solutions were also made available for our top-end router V5, enabling a convenient speedy and safe service, particularly relevant in the current pandemic context, not to mention also the environmental advantages through the reduction of our carbon footprint. In the next slide, we show that NOS continues to upgrade our entertainment lineup, improving and complementing the TV experience. We have launched new Apple TV features for consumers that use our NOS app in this device, allowing for picture-in-picture and also for Sport TV HD Premium, which is now available. We have also launched on-demand TVCine+ service, allowing for catch up services for all TVCine customers at no additional cost. Also Amazon Prime is now available on our UMA top-end setup boxes. And finally, we launched a new e-sports channel and new gaming apps, which have been made available for our UMA customers. On the B2B area, we have implemented a number of partnerships aimed to accelerate digital transformation and leveraging 5G. We would like to highlight the partnership with Kaizen Institute to allow our B2B customers to have access to the best consultancy and digital innovation services to accelerate 5G implementation and operating model transformation. As we have been mentioning, we have now set strong partnerships for the Cloud with Microsoft, Google Cloud and Cisco. And finally, we have reached an agreement with Lleida to provide electronic registering services, improving the communication of businesses with their customers. On the next slide, we continue launching innovative initiatives and to get recognition from renowned partners. We have launched a 5G accelerator program, a collaborative innovation program for start-ups with ideas that can be potentiated by 5G, the best projects, maybe candidates for investment by the NOS 5G fund. Also, we got the 0 outage supplier certification by Deutsche Telekom, recognizing international technological partners with the best quality of service. And finally, we have been recognized by Google Cloud and Cisco as Premier Partners in Portugal. Now moving to Slide 14. On the network front. Our network investment continues to support well exponential traffic increase. Following the sharp increase in traffic during the first lockdown that took place about a year ago, traffic growth has continued throughout 2020 and early 2021 with traffic increases year-on-year of 29% in Fixed data, 25% in Mobile data, also TV streaming sessions increasing 12%. The traffic profile has also changed being more evenly distributed throughout the day with increased upload demands. Our investments in network upgrade, not only the FttH coverage increase but also the Mobile network capacity increase allowed us to cope very well with these challenges, enabling positive performance of network quality KPIs. Our FttH rollout accelerated again in this last quarter, reaching a total 2.1 million homes passed. That is around 43% of total coverage, around 200,000 FttH households added in this last quarter. This allowed us to increase coverage up to 4.9 million households, having added around 100,000 homes passed this quarter. As mentioned before, we are increasing the pace of FttH rollout until the end of 2022 to complete the 2.6 million FttH network-sharing agreement with Vodafone. Before we move on to the financials, we would like to call your attention to our ambition on the ESG front, a clear ambition to live and to be recognized as a leader on ESG in the sector and in Portugal. This ambition is materialized in the sustainability plan with 4 main pillars: the Environment pillar on behalf of the planet, taking the lead in the fight against climate change; the Digital pillar by enhancing society's digital transformation allowing access to technology and inclusion of more vulnerable targets; the People pillar by positioning NOS as the best workplace, promoting equal opportunities, diversity and inclusion; and finally, the Ethics pillar so that NOS leads in ethics, risk management and evaluation of our supply chain. To illustrate this ambition in the next slide and show our commitment on the ESG front, we would like to highlight some recent developments. NOS signed the European Green Digital Coalition, being the only Portuguese founding member and committing to the reduction of carbon emissions by 75% until 2030, reaching carbon neutrality by 2040. As a follow-up to this commitment, NOS just signed our first long-term Power Purchase Agreement, which will guarantee 40% of total energy consumption through renewable energy allowing the deployment of new renewable energy capacity and enabling to run our entire 5G network on certified renewable energy. This PPA is a major step towards reaching our 2030 target of 85% of total energy through renewables. Also, we have signed a protocol with União das Misericórdias Portuguesas for digital and social inclusion to deploy innovative technological products for the elderly and more vulnerable population. And finally, we joined the Portuguese Woman in Tech association to encourage projects promoting gender diversity in the tech sector. Now moving to the financial review on Slide 20. As we said in the introduction, we were able to continue to post revenue growth in the Telco unit with a 0.8% year-on-year revenue increase. The most relevant impact of the pandemic is still coming from Roaming. If we were to adjust for this, Telco revenues would be growing 1.6%. Group revenues were negatively impacted by the Cinema and Audio businesses, decline of 55%, still showing a slightly positive trend versus previous quarters due to the more positive performance of the Audio businesses not related to Cinema exhibition, namely the TVCine. In the next slide, the Telco unit showed resilience and again, posted growth in the quarter. Again, adjusting for Roaming, this would be a positive 1.6%. At this stage, the pandemic, which is starting to allow a gradual deconfinement and return to normal, Roaming remains the major drag. Roaming revenues decreasing in the quarter 50%, very much in line with previous quarters. Adjusting for Roaming, the Consumer segment posted year-on-year, an increase of 0.3%, impacted positively by conversions, integrated bundles and Personal Mobile. The business segment had a revenue increase of 4%, benefiting from strong contribution from large corporates, namely IT and security line of business. And finally, the Wholesale and other segment increased 11% on the back of growth in part wholesale services, compensating advertising declines. In the next slide, Telco EBITDA posted, again, growth with an increase of 1.2% versus a 0.8% revenue growth, benefiting from top line growth and strong cost management in non-direct costs, namely several general and admin costs, in particular in the Cinema unit. This strong cost management allowed for consolidated EBITDA to be almost flat in the quarter with just 0.4% decrease this last quarter. In the next slide, with group EBITDA almost flat in the quarter, net income increased EUR 40 million due basically to a significant decline in nonrecurrent costs due to COVID-related provisions and impacts booked in the first quarter of last year and also a recovery in the earnings of subsidiaries consolidated through the equity method due also to the impairments booked last year. This compensated the increase in financial costs due to the leasing financial cost of the Tower deal and then increasing taxes due to the earnings before tax increase. On the CapEx front, total group CapEx in the quarter ex leasings reached EUR 96 million, an increase of around EUR 8 million versus last year, reflecting stable technical Telco CapEx of around EUR 49 million this quarter following the strong FttH deployment. Also an increase in customer related CapEx, reaching EUR 44 million due to the impact from the upgrade to last generation CPEs on the broadband and TV areas and also a reflection of the lockdown with customers willing to upgrade CPEs to more robust and high-end equipment driving some additional ARPU uplift. On the free cash flow front, EBITDA minus CapEx reached EUR 56 million. Operational free cash flow, after lease payments and working capital variation, was EUR 32 million. And finally, free cash flow after interest and taxes generated in the quarter reached EUR 21 million. And finally, on the capital structure. Net financial debt in the quarter reached around EUR 780 million, representing around 1.5x the EBITDA level adjusted for lease payments, which is well below our target of close to 2x. Average cost of debt increased in the quarter remaining at the same level of last quarter of 1.6% due to the high level of excess cash, which is not remunerated. Around EUR 150 million of excess cash following the sale of NOS Towering. This excess cash situation has normalized already this quarter after the dividend payment last week. So average cost of debt should go back to the level seen before the Tower sale. Cash and unused credit lines reached close to EUR 500 million. And our 1.5x leverage provide us with a lot of headroom to continue financing the investments in our core infrastructure projects and to keep a robust investment-grade credit profile, which we are committed to maintain. And at this stage, we conclude the presentation, and the team is now ready to start the Q&A session.

[Operator Instructions] And your first question comes from the line of Michael Bishop from Goldman Sachs.

Just a couple of questions, please. I mean, the first one is just whether you have any updated thoughts on the spectrum auction. Clearly, from the regulator's website, it's increasing quite slowly. So just wondering whether you had any thoughts on when that might reach a conclusion? And also any thoughts on the impacts going forward and -- sort of in terms of new entrants and things like that? And then the second question was just around the customer CapEx. So obviously, it's gone up because you're, I think as you highlighted, you're selling more of the new routers or people are replacing those, but you also mentioned the fact that those are easier to self install. So could we see some benefit going forward from a higher proportion of self install, which I might actually have a positive impact on the customer CapEx?

This is Miguel Almeida. On the spectrum auction, as you can understand, there's not much we can say at this moment of time since the auction is ongoing. So there's nothing we can say on potential outcomes or whoever is bidding in the auction. The only thing I would say is that what's happening in this long, long auction confirms what we've said in the past that we have a very incompetent regulator and the rules of the auction and the whole structure of the auction is badly designed. And we are suffering and all the country suffering from that incompetence of the regulator, given that this only delays further the introduction of 5G in this country.

Well, thank you, Michael on the commercial CapEx question. As you know, this is always dependent on the overall level of commercial activity. Yes, self installation helps in containing overall costs, but at the same time, we see a very strong trend of upgrade of -- to next-generation CPEs by our -- both B2B and B2C customers. Of course, the confinement to which the country has been following, also helps because people want more robust solutions and better Wi-Fi connectivity. So that is helping to generate demands for these higher generation CPEs. So we should continue to expect some additional increase in terms of overall customer related CapEx. But I should say that it shouldn't grow much more than the levels of last year's full year numbers for the -- let's take it for the overall year. So we should continue to see a trend in terms of increase of customer related CapEx.

And your next question comes from the line of Martin Hammerschmidt from Citi.

Yes. I have 3, please, if I may. Could you provide us with a split of the equipment sales and the service revenues within the B2C segment, please? The second one is, if I think about sort of the building blocks of the revenue recovery starting from next quarter. So we have roaming potentially coming back at least a little bit this year. And then cinemas have reopened, we see incremental sports billing versus last year, but you're not repeating the price increase, I think, from last year. Is there anything else that you would flag in terms of how we should think about the recovery? And then on the cost side, so you saved around EUR 10 million in nondirect cost each of the last 3 quarters. How much of these cost savings do you actually expect to come back once things return to normal?

Well, thank you, Martin, for the questions. On the first questions, we are not giving out at this stage the split between equipment sales and service revenues. But just to give you a bit of color, equipment sales are -- have been increasing over these last few quarters. That has been also as a function of the level of commercial activity and promotions we have been having in trying to incentivize people to buy, for instance, handsets and other types of equipment in our own stores and through the online channel. So that is something which has been growing over the last few quarters. In terms of the building blocks of revenue growth, you highlighted well, we expect roaming to start to recover a bit. Although we are not, particularly in the second quarter, still seeing a lot of debt. Good sign is Portugal is now in the green list of U.K. So we expect a lot of British people visiting us in the next few weeks, but still, this is relatively early days. So at least for the second quarter, it shouldn't be too much of a benefit in terms of revenue uplift. In terms of the premium sports situation, as you can recall, this was something very specific to the second quarter. We have recovered 100% billing June last year. So in terms of year-on-year comparison, we will start comparing on a like-for-like basis again in June. So -- but it's true that in the second quarter, April and May, we will benefit from premium sports recovered billing increase. In terms of cinemas, again, also can only go positive because last year second quarter, cinemas were close. So at this stage, we are seeing cinemas reopening, although the take-up in terms of customers is relatively slow at this stage, but it should also help. And we should also flag B2B as an area that we expect to continue growing. So we have seen robust growth in the first quarter of around 4%. If we exclude Roaming, we should continue to see a bit of that in the coming quarters. In terms of your third question in nondirect costs, a lot of this decrease has to do with the very specific situation we are going through. And I give you the example of the Cinema unit. So we have basically managed costs up to 0 because cinemas were closed. So that means basically 0 electricity, close to 0 cleaning costs. Well, not 0 staff costs because we continued to pay salaries to our employees. But everything else has been kept to almost 0. So as you can imagine, part of these savings will go away once the activity restarts. And don't mention the Telco business, but on the Telco business, there are a number of areas in which we have cost coming down because of the overall confinement situation. So not having people working in our offices, for instance, basically reduction in terms of the moving expenses, this sort of stuff. So part of this will recover when we go back to a more normal situation.

Can I quickly sneak in the last one, which is very -- more clarification question. Has there been any other news on the [ de Santos ] stake? Or is basically still the same as last quarter?

No developments. I would say that the status is the same as last quarter.

And your next question comes from the line of Luigi Minerva from HSBC.

Yes. 3 questions. So the first one is on the developments on the mobile KPIs. Clearly, quite a bit of pressure on the prepaid. So you have like, first time in 4 quarters, a negative Mobile net adds. So I was just wondering how -- can you explain what has happened? And how do you see the Mobile KPIs developing in the Q2, in Q3 and the rest of the year? The second question is on the balance sheet. Clearly, a 1.5x leverage ratio is well below your 2x target. I was just wondering how you think about it? Is it just like a headroom you want to keep for the spectrum auction? Or you will be thinking about returning to shareholders as a way to leverage up to your target? And then lastly, if I may ask a question about your environmental policy. And so I noticed your ambition to get to net 0 by 2040. And I'm wondering how you think about this in terms of the cost to achieve that and the benefits. And I appreciate each company is a bit different, but if I look into the European Telco sectors, I think the idea -- the kind of best-in-class examples already aim for net 0 by 2025 or 2030. So yes, if you see some room from improvement on your side there?

I'll start with the Mobile KPIs. I wouldn't try to read too much on the prepaid evolution. As you know, there is some seasonality on prepaid. And the fact that there was almost a full lockdown for the whole of the quarter and prepaid is much more an impulse buying and it's much more dependent on retailing. So it's only natural that this happens. You didn't see it as so visible last year when we had the previous lockdown because it was split between 2 quarters. But now that the restrictions are up, we are sure -- we are confident that we will go back to the same kind of trend. And actually, in April, with lockdown over, we already see prepaid recovering. So there's not significant reading from the prepaid numbers on Mobile.

Well, on -- Luigi, on the balance sheet situation, so we clearly see the 1.5x today being well below the 2x, it's creating enough headroom to accommodate what you just mentioned. So we still have to incorporate what we will pay as a result of the current 5G auction, and that remains, at this stage, still a bit of an uncertainty. We know that we have also an ambitious investment program ahead of us, not only in 5G, but continuing to deploy FttH. We want to get to 70% of coverage by 2022. And following that, we will continue to -- with the plan to upgrade most of our coverage to FttH. So we want to retain the headroom. And also on the shareholder remuneration front, we want to continue remunerating shareholders in an attractive way. So that means that this headroom basically accommodates these priorities, and we want to keep this target of the 2x as also a signal of commitment to maintaining the investment-grade credit rating. So we think we can balance all these different priorities between debt holders, shareholders and the investment needs of the company in a quite balanced and, I'd say, attractive way. In terms of ESG, you mentioned in terms of cost to achieve this ambition. At this stage, we are not seeing any -- very relevant cuts. And an example of that is the recent PPA we just announced. So it was not the financial impact, the main purpose of this agreement. But I can tell you that the financial conditions to source 40% of total energy through renewables as -- didn't imply any type of cost increase, quite the opposite. It also -- it even implied a small saving. Although, as I mentioned, this was not the main purpose of this project. In terms of ambition, net 0 for 2040, our -- this ambition is more supported around actual reduction of carbon emissions, not so much about compensation. So that might give you a difference towards some of our peers that are communicating, as you said, 2025 or 2030 net 0 ambition.

And your next question comes from the line of Evgeny Kudinov from Crédit Suisse.

I wanted to ask you a little bit on the B2B. So what is the outlook for the B2B segment? Obviously, in Q2 -- Q4 '20, you had a very strong performance of 5.6% growth this quarter, plus 3%. But last quarter, you mentioned that B2B had elements of nonrecurring revenues, which were about 50% of the growth you delivered. So does that mean that going forward this year and the following years, you could be delivering between 2% to 3% growth in B2B? And then I wanted to ask you on the B2C side as well. You're obviously doing quite a lot of initiatives in terms of entertainment for Pay TV and converged customers. However, your consumer revenues have stayed flat for the past 3 quarters. Is there any reason apart from COVID and roaming impact that your efforts might not be fully reflecting in the consumer revenues? Is the competition too intense?

Well, thank you for the questions. I'll start with the second question, and I'll give the floor to Manuel to answer -- to give a bit more color on the B2B prospects. So on B2C, we have seen a few drags related to the COVID situation. You mentioned roaming, in particular, in the second quarter, we also had the specific situation around premium sports. We have seen also some reduction in terms of basically more in the low-end B2B of customers asking for discounts or suspension of billing due to their overall situation of their businesses being shut down. And I'd say, other than that, those were the major drags. So the fact that we didn't increase very materially prices last year didn't help in terms of increase. And in terms of overall competition outlook, it remains, I'd say, relatively stable. So we are not seeing any spike in terms of level of proportional activity. Manuel?

Regarding B2B, just 2 things. One is our expectation, as Jose Pedro mentioned a while ago, is to maintain this growth levels throughout the year. We believe that, one, there is a great demand for digital transformation services that was spurred by the pandemic context that is going to still go on. We are experiencing a strong commercial momentum, and we have a strong pipeline. So we believe that, in particular, in the upper band of the market, and we believe this is -- should be also maintained. And also to note that, of course, this year will compare better with last year, especially in Q2, because of the impact that we have last year of a lot of -- well, assistance that we had to tend to customers that were -- had their businesses closed. So our expectation is that we can maintain this level of growth throughout 2021.

Are you ready for the next question, sir?

Yes.

The next question comes from the line of Mathieu Robilliard from Barclays.

Actually, a few follow-ups on the B2B market. We don't have a lot of data provided by the regulator in terms of the size and the trend of this market at the national level. But maybe you do. And so if you could give us a sense of how the market is growing and whether you are growing because you are taking market share? Are you just growing in line with the market? It'd be great to know what kind of market share you think you have in that market? And lastly, with regards to your revenues, I imagine this traditional communication connection services, and you just mentioned strong demand for all sorts of IT services. Maybe if you could give us a little bit of color in terms of the breakdown. What is communication traditional? And what is IT services currently in your revenue line? And what are the different growth rates there?

So thank you very much. I think the current growth that we're experiencing is a combination of all 3 factors. So one, market growth in the last few years, and it was slowed down by the pandemic. The number of societies or a number of companies in Portugal was growing at a relevant pace every year. So the market was growing. Even though there is a countereffect that it's a very competitive market, especially in the low end, so probably, that growth is compensated by an increased pricing pressure. So probably the net effect is not that relevant. The second is, yes, we believe that we've, as a whole, been growing market share in the whole of the B2B segment. But my belief also is that most of all, there is a huge adjacent opportunity in the IT market, which is probably 1.5x the size of the Telco market, at least the part of it that is addressable by a Telco or by NOS. And that's probably the greatest source of growth since -- at that level, we expect levels of growth that are much higher than the Telco expectations. And of course, that even encounter some of the additional pressure that the Telco revenues are taking. I'll give just a sense of color of -- that the level of IT revenues penetration is very different to gross segments. And it's, of course, much higher in the corporate segment, mid-sized and the middle-market, that is still a lot of potential in the SMEs and the smaller companies for that -- for the sites to grow. We can probably share those numbers after the call.

Maybe if I follow-up, unless you want to catch up after the call, but since you mentioned, you said IT services is maybe 1.5x the size of the traditional market. Can you give an absolute figure for that? I mean, mostly just a sense, not an exact figure. But what kind of total addressable markets are we talking about?

I'd say that for the whole of the country, we could probably consider the whole market potential as being around EUR 1.5 billion. But that's the whole potential, not necessarily the part of it that we can capture.

There are no further questions from the phone lines, sir. I'll hand it back to you.

Okay. Well, thanks. Thanks very much for being with us today. As usual, we're available to take your follow-up questions, and we look forward to speaking to you next quarter. Bye.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.