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

Hi, good afternoon. Welcome again to our conference call to go through the second quarter results. We have the full executive committee together physically and virtually. And after a brief presentation by Jose Pedro to cover the highlights, we'll be available for your questions. Over to you, [indiscernible].

Okay. Thank you, Maria, and good morning, everyone. We use, as usual, the presentation that is available in our website. And I would start directly with the operational review at Chapter 1, Page 5. And starting with the operating review after a first quarter of a very strict full lockdown, the reopening of the economy in the second quarter allowed for a very strong quarter in terms of operational activity. We managed to grow over the 10 million RGU milestone, having grown across all services in the last four quarters, most notably in Mobile and Fixed Broadband. In the next slide, this quarter, we have, again, a very strong performance in mobile. We have posted a very positive 93,000 mobile net adds number with 72,000 postpaid as a result of very positive contribution from convergent and integrated offers. Also, on the prepaid front, we have a positive 21,000 benefiting from the reopening of major retail shopping outlets from mid-April. On the fixed front, we have posted solid fixed Broadband net adds of 5,000 and also positive fixed Pay TV net adds of 7,000 in the quarter on the back of the FttH network expansion to new areas, also with some migration from DTH to FttH taking place. On Slide 7, our mobile growth continues to be done mostly through convergent and integrated offers. And our convergent and integrated subscriber base has grown upto 994,000 subscribers, representing now 63% of the fixed base, having added around 8,000 subs in the quarter. We have reached 5.1 million RGUs sold under convergent and integrated offers, with net adds in the quarter of 59,000, of this a bit over 40,000 were mobile cards sold under convergent and integrated offers. Consumer stand-alone mobile cards not sold within these bundles, represent increasingly less of total mobile subscribers and revenues. On the next slide, a note on our Cinema units. Our Cinemas, as you know, reopened on April 19, with encouraging attendance numbers, although far from pre-pandemic levels. Main difference versus the reopening of Cinemas of the second half of last year has been the much stronger movie lineup. With the reopening of cinemas in the U.S. and major European markets, the studios are releasing blockbuster titles like Fast and Black Widow and this is attracting back some of the usual cinema goers. So even with 50% capacity restriction, average levels of attendants have been increasing. In April, we just have half of the month open. So we had relatively residual attendance. In May, we had around 33% of May 2019. And in June, we had already 45% of June 2019. Therefore, showing that the measures that we have implemented both in terms of cleaning and security in our cinemas have been quite effective in attracting the confidence of our customers, provided we continue having a normal and regular flow of movie releases. Now moving to the second chapter, we will highlight a few of the innovative products and services launched within the consumer and B2B markets. And starting with Slide 10 on the consumer front, we continue launching services in this segment focused mainly in connectivity and customer proximity. This quarter, we have launched the Giga Router Wi-Fi 6, allowing for 1.5x more speed and 400 connected equipment with 7x less energy consumption and 100% recycled plastic. We were the first telco in Portugal to launch this technology. So we are quite confident it will gain traction in the market. Also, with the aim of improving Wi-Fi connectivity. We launched the new Plume Super Extenders with speeds up to 500 megas and 2x more coverage with the app enabling self-installation and Wi-Fi customization. Again, this is a distinctive equipment, also getting very good customer feedback. We also launched an innovative commercial partnership with EDP, the leading energy company, allowing for advantages for customers of both companies with a common purpose of protecting our planet. Main focus is in retention and customer acquisition. NOS customers having additional discounts in the energy bill and 100% green energy, the promotion only available through 100% digital channel. In the next slide, we highlight that our WOO service, the first only 100% digital service has won the Product of the Year award by consumers, very high scores in terms of customer satisfaction. We have also launched Netflix on our UMA top end set-top box and apps, enhancing the TV experience aggregating all relevant owned and third-party content linear or OTT. On the B2B front, we continue to accelerate digital transformation of companies and public entities. We would like to highlight the 5G Accelerator mentioned in the last call with more than 50 applications, 13 start-ups reaching the final stage with the start-up working on AR and AI for industrial processes being the winner. Also, we launched the Albufeira Smart City and online tool for incident reporting and large has completed, the Cisco certification for convergent, infrastructure and hybrid multi-cloud computing. On the next slide, we continue launching innovative IT data and cloud solutions, continuing to drive growth in this segment. We have launched a Pro TPA payment terminal, introducing a number of innovative features for B2B customers. And also, we started marketing a multi-cloud storage solution allowing B2B customers to have data storage simultaneously in AWS, Google Cloud and Azure with different storage options. Finally, we launched Analytics PRO and Innovative spacial analytics solution working around mobility dynamics. Now moving to the third chapter and highlighting some of the developments in the technological front. On Slide 15, our FttH rollout continues at a strong pace, reaching a total of 2.3 million Homes Passed, that is around 48% of total coverage, around 200,000 FttH households added in the quarter. As mentioned before, we will continue with the current phase of FttH rollout until the end of 2022 to complete the 2.6 million FttH network sharing agreement with Vodafone. This FttH rollout allowed us to increase coverage up to close to 5 million households, having added around 100,000 new greenfield homes past this quarter. On the mobile front, on Slide 16, we continue to prepare the 5G launch, having pioneered the launch of the first 5G hospital in Portugal with Hospital da Luz. This is a very important first step towards the hospital of the future. This pioneering partnership will boost technological advancements in health care and medical research with virtual and augmented reality, censoring, monitoring and robotics being some of 5G's applications in the health care industry. Also, we got the Ookla Award for Best Mobile Network Coverage being the first telco operator to receive the awards as a result of the continued investment in our mobile network to deliver a best-in-class performance. These awards recognize this mobile user experience during the second half of last year and first half of this year, with results ranging from 99.9% availability to 93.1% in terms of 4G availability. Now moving to the sustainability chapter. During the last quarter, we continued to deliver on our sustainability strategy, having planned and implemented a good number of initiatives. First, we approved the road map for our Own Fleet Electrification until 2030. Also, we became a founding member of digital with purpose and international movement, integrating more than 40 leading technology companies worldwide. Also, at the end of the quarter, we announced the issuance of EUR 150 million of sustainability linked loan lines, therefore, strengthening the link between our ESG performance and cost of funding and reflecting the importance we place on delivering on our sustainability strategy. Of the 3 facilities issued, one is linked to the evolution of our CDP rating, currently A-; the other 2 lines being KPI linked to the 50% reduction of our own operation carbon footprint, Scope 1 and Scope 2 emissions by 2025 in comparison to 2015 and to achieving 65% consumption of renewable energy by 2025. And finally, we have installed solar PV panels in one of our car data centers, representing an additional contribution to our self-production climate [ pools ]. Now moving to the last chapter in terms of financial review. We were able to post group revenue growth of 6.2%, benefiting from the recovery in Cinema and Audiovisuals versus a quarter of 0 revenues last year and also a 5.3% growth in the Telco unit, given the strong positive impact of the back to normal premium sports revenues again versus 0 revenues in April and May last year due to the interruption of the major sports competitions. Roaming revenues continue to be under pressure, but now they compare much better to last year's numbers. If we were to isolate the premium sports and roaming impact, Telco revenues would have grown a robust 2%, slightly above last quarter of 1.6%, also adjusted for roaming. This quarter, all the segments contributed positively for Telco growth, consumer growing 4.5% and business growing 8.9%. Both segments being impacted positively by the premium sports recovery. The B2B segment also impacted positively by the pandemic-related contract renegotiations and suspensions with B2B customers we had to face in the second quarter of last year. On the next slide, group EBITDA was down in the quarter by 2.2%, benefiting this quarter from the strong EBITDA recovery of the Cinema and Audiovisual business posting a level of EBITDA that is well below pre-pandemic levels, but is now comparing much more positively to last year's numbers. Telco EBITDA posted a 5% decline, but this is a completely nonrecurring trend given that in the second quarter last year, we have booked close to 0 costs on premium sports. Again, adjusting for the impact of sports and roaming, Telco EBITDA would have grown a positive 2.2% above last quarter trends and benefiting from customer revenue growth and strong cost management in nondirect costs. The trends around sports will normalize again in the next quarter since in the second half of last year, sports competitions were back to normal. So this type of extraordinary impact should not be expected. On the next slide, on the net income in the quarter, we had a robust EUR 44 million, driven mainly by a strong contribution from the taxes line with the booking of a number of fiscal incentives taking place this quarter and compensating some increase in depreciation and amortization and financial costs due to the booking of leasing costs of the tower sale. On Slide 23, total group CapEx in the quarter, ex Leasings reached EUR 104 million, an increase of around EUR 20 million versus last year. Most of this increase came from Technical Telco CapEx of around EUR 65 million in the quarter, following the strong FttH deployment and already some relevant 5G CapEx. Also some increase in customer CapEx reaching EUR 36 million, but below last few quarters' numbers due to some decrease of commercial activity, driven by lower churn and also due to the higher usage of refurbished equipment. On the free cash flow front, EBITDA minus CapEx reached EUR 50 million this quarter. Operational free cash flow after lease payments and working capital was EUR 35 million. And finally, free cash flow after interest and taxes generated in the quarter reached EUR 30 million, benefiting from low level of cash taxes paid this year. And finally, on the capital structure. Net financial debt in the quarter reached close to EUR 900 million after the EUR 142 million dividend payment in May. This net financial debt number represents 1.8x the EBITDA level adjusted for lease payments, which is still well below our target of close to 2x. Average cost of debt decreased in the quarter to 1.4% following the normalization of the excess cash situation driven by the tower sale. Average cost of debt should go down additionally in the next coming quarters. Cash and the used credit lines reached around EUR 300 million. And as referred before, we have refinanced 100% of the 2021 maturity lines with EUR 150 million of sustainability linked loan, so in what refinancing is concerned. And also given the strong liquidity position, we are pretty much done for the rest of the year. And with this slide, we'll conclude the presentation and start the Q&A session.

[Operator Instructions] Your first question today comes from the line of Luigi Minerva from HSBC.

Yes. It's about the outlook in the second half of the year. It's obviously a difficult year to predict with the developments on the COVID side, the lockdown side. So I mean, after what is, I think, a very positive Q2, maybe can you share a bit of color on your expectation on the commercial momentum for the second half of the year for B2C, B2B and wholesale?

Well, thank you for your question. Yes, you're right, it's not easy these days to predict the future on the near-term future. But given the trends of this quarter, our expectation is that these trends are continued to be the reality in the next few months. So our expectation is that the next couple of quarters would be pretty much in line with the second quarter.

Is that for all segments? Or can you give us a bit more color there for B2C, B2B and wholesale?

Yes. All segments. We cannot see any event changing the trends -- positive trends of this quarter. So yes, clearly, for all segments, including the Cinema business, which should have the second half of the year really better than the first half. Of course, it will depend on how the pandemic evolves and all the constraints associated with the fight with the pandemic. But both -- in all segments of the Telco business, but also on the Cinema business, we expect the positive trends of this quarter to continue to be the reality of the second half of the year.

Your next question comes from the line of Fernando Cordero, Banco Santander.

The first one is related on the impact from the premiums per content, in that sense. And looking on the impact, as I said, on your earnings and thanks for the visibility that you intently provided. And I would like to know if there is any kind of -- or what could be the -- let's say, the tools that you have in order to improve the profitability of that -- of the business, namely should we only rely on revenue recovery in terms of number of subscriptions in terms of the pricing for the premiums subscription -- for the premium subscriptions? Or should we expect also some lever to work in terms of costs? And secondly, I would like also to understand how is the commercial activity, particularly in the greenfield fiber areas? And in that sense, you can give us some kind of color on what kind of penetration are already -- are you already sorry, obtaining those areas? And finally, if you can give us also a little bit of color on how churn is evolving?

Okay. Thank you, Fernando, for your question. So well, let's start on the premium sports. As I think you know, premium sports is a service with considerable less margin than the core Telco service. So it is no doubt, very margin dilutive. This was the main reason for the bump we had in Telco EBITDA year-on-year evolution, as we said in the presentation. As we said also, the trends around this premium sports will normalize in next quarter since we started having back the sports competitions starting in June last year. So we are not expecting any type of bump again. So this extraordinary the impact is confined to the second quarter. So we are expecting a more normalized situation. Given the more -- your more -- your question around the structural issue of premium sports, I think that -- and in terms of recovery, I think we have to work on both sides on both revenues and costs. And going forward, although we have to acknowledge that in terms of costs, we have the most relevant contracts run up to 2026 and 2028, so there's not much we can do. But of course, that we can still work on a few contracts that will mature before that time period. But I think to improve the current situation we -- again, we have to improve both revenues and also work a bit on the cost side. In terms of commercial traction in the new greenfield areas, this is more or less following what we have been seeing in the last few years with penetration going up to high single-digit numbers over -- after a few quarters, in some cases, getting over 10%. So it's the usual numbers we have seen in the last few years and the take-up has also been good. In some cases, as we referred in the presentation, we are migrating DTH customers to FttH, which also improves the level of penetration around fiber. In terms of churn, I would say that there hasn't been any major evolution since the beginning of this year, and we are seeing more or less same level of churn as in previous quarters. So no major news on that front.

[Operator Instructions] Your next question comes from the line of Martin Hammerschmidt from Citi.

Yes. A couple from me, if I may. The first one is on the spectrum option. Has there been any update on procedural rule changes? Because I think right now, we are at what around 900 or so. And any update on that front? And then maybe to come back on the question on the 2021 outlook in the second half. If I think about the Telco EBITDA drivers in the second half, I mean we have less Roaming probably compared to 2019 levels that we have more cost savings. So if I compare it to a non-COVID year, is it possible give us some color and to what extent the 2019 second half performance on how EBITDA could be reached? Or why it shouldn't be reached? That would be my two questions.

Thank you very much. Well, the update on the spectrum auction is that there is no update. What I -- what we said in last quarter's conference call, still applies in the sense that we had no -- we have no visibility when the auction will end. You're right, we are slightly above around 900, which compares to the 12 rounds in Spain yesterday. But it still don't have any visibility. In terms of rules, there was a change in the rules with an increase in the number of rounds per day. So currently, we started with 6 rounds per day, and we are currently 12 rounds per day that is being implemented, I believe, around one month ago. So we have more rounds but still no visibility when this could end.

Okay. On your second question, Martin, I think we will be, for sure, below 2019 numbers on the second half. in the Telco unit, we continue to have the drag of Roaming. So what we've seen in the second quarter is more or less similar level of revenues we had in 2020. So we are considerably below still 2019, and this will continue for the remainder of the year, and this represents close to 2% of revenues and more or less, given the margin we have on Roaming, this represents still a major drag in terms of EBITDA. And also, let's not forget that in terms of group numbers, we still have the Cinema business, which has been strongly affected by this pandemic situation. Again, encouraging results we are seeing in June and already some in July. But as we referenced, we are operating at 45%, close to 50% of 2019 numbers. A lot of restrictions still, so 50% maximum capacity restrictions. No popcorn and soda sold during weekends. A number of sessions after 8 p.m. not being able to be released, which means that basically, this impact still considerably the level of activity. So clearly, on the Cinema front, still well below 2019. Let's see how the year progresses until year-end and still -- and also on the Telco unit, again, the roaming drag, we believe will continue for the rest of the year, and this will impact our ability to achieve close to 2019 numbers.

If I may ask a third one, a really quick one. On the fixed Pay TV net add. Obviously, in the second quarter with a plus 70,000, that's been quite a strong performance. How much of that is catch-up from the first quarter? And how much is basically, would you say, is the normal run rate and that we should think about going forward?

Well, I'm not sure if I understood 100% your question, but there's some catch-up on mobile, but there is not catch up in terms of fixed. So in prepaid, namely, we have seen the retail shopping outlets closed effective considerably the level of commercial activity around prepaid, which -- so there's been some catch-up in the second quarter on fixed. There hasn't been any material catch-up. So the level of net adds and gross adds we had in the first quarter didn't impact in any material way the second quarter numbers.

And your final question comes from the line of Roshan Ranjit from Deutsche Bank.

Two for me, please. When looking at the residential ARPU, you see a nice quarter-on-quarter increase. Is it possible to try and understand how that splits between the price increases which you put through on selected products and maybe then underlying migration to some of the bigger packages from your customers? And just tied to that, I'm assuming most of the customers are still kind of taking the 100 to 200 meg product. Is it possible to get split on that, just, I don't know, 80% on the 100, 20% or 200. Any details there will be good? And secondly, just going back to one of the previous questions around fiber, but maybe focusing more on the brownfield areas. You're not proactively migrating customers to fiber at the moment, I think. So you're still running with the legacy DOCSIS network. But are you seeing customers move to the Vodafone fiber, so your JV partners fiber network proactively, i.e., is there a case that we could see a faster switch off of your DOCSIS network given the need or demand from your customers?

Thank you. In what concerns residential ARPU, there are two main drivers: one is the increment in terms of convergent customers in the customer base, which drives ARPU up; and the second is that we are adding more fixed customers compared with satellite customers, which have a higher ARPU and those are the two drivers. We didn't do any price increases.

Well, on your question on the dynamics around FttH in brownfield areas, true that we are not migrating active customers from HFC to FttH. The reason being that -- I mean, we have satisfied customers today with HFC. And basically, at this stage, we are not seeing any need at least in terms of the mass market segment to do any type of more proactive migration. And to your question, we haven't seen any particular churn also to our partners' FttH network. So basically, what we're seeing in these areas is similar levels of churn that we see in areas where we are not implementing this overlap of FttH over HFC.

Okay. That's clear. And just going back to my first question. So I'm saying you're adding more, I guess, higher-end customers maybe supporting the ARPU. But in terms of the split of the products between the 100 meg and 200 meg product, I assume it's very limited on the 1 gig. So it's possible to get some detail on that split?

Well, what we can say about that is that the weight of our customers subscribing to the 200 megabit and 500 megabit offers is increasing significantly at the expense of the 100 megabit offer. And of course, that also helps driving ARPU up. So we have seen recently the take-up of these higher-end offers increasing.

We have no further questions, sir.

Thank you. Thanks for being on the call today for your interest. As usual, all the [ stuff ] from the IR team, and hope you have a great holiday. Bye.

Thank you. That does conclude your call for today. Thank you all for participating, and you may now disconnect.