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

Hi, good morning. Welcome to our third quarter '21 conference call. We have the full executive committee in the room. José Pedro Pereira da Costa our CFO, will go through a presentation of the results, which is available on our website, and then we're available for your questions. Over to you, José Pedro.

Okay. Thank you, Maria, and good morning, everyone. We'd like to start directly with Slide 3 of the presentation and to go through the highlights of the quarter. This quarter, we have seen very strong acceleration in telco operational growth with close 150,000 RGU net adds, the highest quarterly growth in the last 5 years, with mobile being the stronger growth area. Also, this quarter was marked by a very strong recovery in the Cinema unit with cinema attendance growth 162% year-on-year due to relief of restrictions and the return of major blockbusters to the big screen. This strong operational growth led to strong revenue growth of 5.6% at the group level with the telco unit growing 4.4% and also to 6.6% growth in EBITDA at the group level, the telco unit posting a 2.4% EBITDA growth. We continue our strong investment in next-generation networks namely FttH deployment and mobile upgrade to 5G ahead of 5G launch. And finally, we have a very positive outcome last week with the end of -- finally, of the 5G auction, winning the most spectrum of all participants and fulfilling our ambition to lead in 5G. Now moving to the operational section on Slide 5. We managed to have, as we said, our best quarter in the last 5 years with around 150,000 net adds this quarter. The quarter-on-quarter recovery showing well that we are back to normal levels of sales activity. We managed to grow up to 10.150 million RGUs, having grown across all services. On the next slide, we continue to grow consistently on the mobile area. We have posted a very robust 125,000 mobile net add number, with 78,000 postpaid as a result of very positive contribution from conversions. On the prepaid front, we also had a very positive 47,000 net adds number with strong numbers in the youth segment. On the fixed front, we have posted solid fixed broadband net adds of 12,000 and positive fixed Pay TV net adds also of 12,000 in the quarter on the back of the FttH network expansion. Our very strong mobile growth continues to be supported by the growth of convergence. We have overcome this quarter, the 1 million milestone of convergent and integrated subscribers, which have grown up to 106,000 subscribers representing now almost 64% of the fixed base, having added around 12,000 subs in the quarter. We have reached 5.1 million total convergent RGUs with net adds in the quarter of 86,000 of this slightly over 50,000 are mobile cards sold under convergent offers. This quarter has marked also the strong recovery in our cinema units with relief in restrictions and the strong lineup of blockbuster movies, encouraging cinema customers to return to the big screen. Today, we are operating with close to 0 restrictions as determined by a much more contained pandemic situation in Portugal. And the studios are releasing major titles in good numbers, Black Widow and Shang-Chi are good examples and also importantly, allowing an exclusive launch to the theatrical window. These trends have resulted in increasing levels of attendance to our cinemas month after month. In July, we were 66% below July 2019. In August, 55% below August 2019. In September, we are -- we were down only 33% versus September 2019. And this trend has continued throughout October, where with the launch of the Bond movie, we were down only 25% versus October 2019. So clearly, a much more positive situation in our Cinema and Audio units, still some way to go to fully recover to the pre-pandemic levels. Now moving to the innovation front and starting with the B2C segment. We continue focused on providing our customers with the best offers while being more environmentally conscious. This quarter, we have launched a good number of new applications on our UMA top end set-top box, the most popular being Netflix, of course, but also FTP Play (sic) [ RTP Play ] and BigBrother apps are good examples. And I think the TV experience and aggregating all relevant owned and third-party content. Also, we have been releasing more environmental responsible processes like the launch of a handset buyback program. New SIM cards made out of 100% recycled plastic and the new UMA TV box and remote control also made out of 100% recycled plastic. On the B2B front, we continue to position ourselves as the ideal partner for digital transformation for companies and public entities. This quarter, we would like to highlight the Cisco Gold Partner certification to sell, install and provide support to Cisco Solutions in Portugal, providing a lot of benefits to our B2B customers, the inauguration of a new data center in Madeira to support our B2B customers in this region, the first investment made by the NOS 5G Fund we created last year. And finally, we were considered the global leader in Portugal in terms of national innovation investment. And finally, we have continued to position NOS with a clear ambition to lead in 5G in Portugal. So after having pioneered the launch of the first 5G stadium and the first 5G hospital in Portugal, this quarter, we launched the first 5G beach providing innovative solutions of artificial intelligence and video analytics to guarantee a safer beach for everyone, the first 5G school to allow students to learn through virtual reality. And finally, the first 5G sea port with the use of 5G drones to monitor in real time the movement within the port, creating a safer and more efficient environment. Again, we got the Ookla award for Best Mobile network coverage, recognizing the continued investments in our mobile network upgrade to deliver a best-in-class performance. And all these initiatives have been supported by a large 5G advertising campaign aimed at positioning NOS as a top of mind in association with 5G. Now moving to the technological front and our strategic technological projects and starting with the FttH rollout. This continues at a strong pace, reaching a total of 2.5 million homes passed that is around 50% of total coverage, around 200,000 FttH homes passed added in the quarter. As mentioned before, we will continue with the current pace of FttH rollout until the end of 2022 to reach around 70% FttH coverage by the end of next year. This FttH rollout allowed us to increase coverage to close to 5.1 million households having added around 100,000 new greenfield homes passed this quarter. Also a very relevant development with the aim of achieving our strategic ambition to lead in 5G. We have concluded our participation in the auction with a very positive outcome. NOS won the most spectrum in the auction achieving maximum possible frequencies to exploit the 5G opportunity, while also reinforcing our 4G network nationwide. We have managed to lead in 5G spectrum frequencies, having acquired 20 megahertz in the 700 megahertz band and 100 megahertz in the 3.6 gigahertz band versus our 2 main competitors. We have also secured 4 megahertz in the 900 megahertz band and 10 megahertz in the 2,100 megahertz band. This represents a total investment by NOS of around EUR 165 million, which we expect to reduce to around EUR 151 million by paying upfront and taking advantage of the financial discount according to the terms of the auction. During this last quarter, we continued to make good progress executing our ambitious ESG strategy, having planned and implemented a few initiatives. First, we have committed to use 100% renewable energy by 2022, benefiting from our first long-term PPA, which will guarantee 40% of total energy consumption through renewable energy but also committing to use 100% certified electricity from renewable sources. And finally, with the already announced reforestation program to allow -- to voluntarily compensate the unavoidable emissions of our own fleet. Also, we have recently submitted our gender equality plan, framing NOS commitment to equal opportunities for all and eliminating all types of gender-driven discrimination. And finally, we have implemented some internal initiatives to raise awareness to the importance of sustainability for our operations. Now moving to the financial review. We were able to post a consolidated revenue growth of 5.6%, benefiting from the strong recovery in Cinema and Audiovisuals but also from a robust 4.1% growth in the telco unit, taking advantage of strong operational activity. Roaming revenues continue to be under pressure and contributed only marginally to this 4.1% telco growth. We were still around 50% of the level of roaming revenues versus 2019. If we were to isolate the roaming impact, telco revenues would have still grown 3.7%. So there is still some future tailwinds from roaming recovery, not reflected in this quarter revenue numbers. All the segments contributed positively for telco growth, consumer growing 1.8%, B2B growing almost 13%, B2B segment benefiting from a number of nonrecurrent lower-margin large contracts. Still, if we were to isolate these deals, the adjusted B2B revenue growth will be slightly above the consumer segment growth. Consolidated EBITDA in the quarter grew by 6.6% benefiting from operational leverage in the Telco unit and the strong EBITDA recovery in the Cinema and Audio business, posting a level of EBITDA that is well above last year's very depressed levels. Telco EBITDA posted a 2.4% increase, that is slightly above the consumer revenue growth and the recurrent B2B growth. Nondirect costs being almost flat, showing the strong level of cost control and discipline also helped by a good number of efficiency improvements. Net income in the quarter was a solid EUR 46 million, driven by the strong contribution at the EBITDA level compensating a few negative items below this line namely an increase in D&A and net financial expenses as a result of the tower sale. On the CapEx front, total group CapEx in the quarter ex leasing, reached EUR 110 million, an increase of around EUR 12 million versus last year. This increase coming from technical Telco CapEx of around EUR 70 million in the quarter, following the strong pace of FttH deployment and already very relevant 5G CapEx. We had a decrease in customer CapEx, reaching EUR 36 million, but below last quarter's numbers on the back of lower levels of churn and also as a result of some shortage of customer equipment due to supply chain challenges. On free cash flow, EBITDA minus CapEx reached a robust EUR 60 million, the increase in EBITDA fully compensating the increase in CapEx. Operational free cash flow after lease payments and working capital variation was EUR 26 million. And finally, free cash flow after interest and taxes generated in the quarter reaching EUR 9 million, impacted by a high level of cash taxes paid, which will be reverted in this fourth quarter. And finally, on the capital structure. Net financial debt in the quarter reached around EUR 890 million. This net financial debt number representing 1.7x the EBITDA level. Adjusted for lease payments, which is still well below our target of close to 2x. This low leverage will allow us to pay upfront for the nonrecurrent 5G licenses and still end the year slightly below the 2x level, which we are committed to maintain. Average cost of debt decreased in the quarter to 1.3% following the normalization of the excess cash situation and lower cost of the sustainability-linked loans contracted at the end of the last quarter. Cash and unused credit lines reached around EUR 356 million at the end of the quarter. And with this, we conclude the presentation, and we are ready to start the Q&A session.

[Operator Instructions] And your first question comes from the line of Roshan Ranjit from Deutsche Bank.

Got 2, please. On the consumer trends, as you guys mentioned, we saw some very strong KPIs across the board. When I look at the revenue growth, we saw a slight slowdown on the Q3 trend versus Q2. Is there -- was there something going on in pricing? Or was that a bit more seasonality. Again, I appreciate the kind of conversion discounts applied when people move up the tiers, but it was a bit of a more pronounced slowdown than what we've maybe seen before. And then secondly, similarly on the EBITDA trend, the mix within business, you flagged quite a few projects, low-margin projects, yet there's a strong acceleration of the EBITDA growth. So you previously mentioned the ongoing efficiencies of programs, CRM systems. Are we now really starting to see the benefits kick in from these? And I guess, going into fiscal year '22, we should see a sustained EBITDA growth trend.

Okay. Thank you, Roshan, for your questions. First one is easy to explain. If you recall, Q2 we had this one-off effect of the premium sports. So the Q2 acceleration in the Telco unit was -- a good part of it was driven by this one-off event. As you can recall, in the second quarter of 2020, we had almost 0 revenues in premium sports. So this was clearly a strong factor to explain this acceleration. We flagged in the last quarter that if we were to isolate this effect, the more recurrent level of revenue growth would be around the 2%, which is more or less what we are seeing today. So as we flagged out consumer growth is 1.8%, B2B growth even if we strip out these nonrecurring revenues is slightly above 2%. So I think we are, again, more or less in line with what we had in the last quarter. And the same goes at the EBITDA front. So again, if you take out this one-off in this case negative impact of premium sports in the second quarter, we are seeing more or less the same type of trend. So we are, at this stage, seeing growth of 2% at top line level, more or less a bit over 2% at the EBITDA level, which is the current level. For next year, is now early to anticipate trends. So we would like to give you a lot more color at this stage.

Okay. That's very helpful. And then just on the -- I guess, without pushing too much on FY'22, would you say this kind of 2% is a sustainable level? And again, I guess, depending upon how the efficiency is going to maybe upside to that, but I guess is that sustainable, I guess?

It's sustainable for the short term.

We will now take our next question, and that comes from the line of Martin Hammerschmidt from Citi.

I also have 2, please. And the first one is, so within your consumer division after 1.8% growth, could you give us a sense of how much of that is due to service revenues and how much is driven by handset sales? And my second question is, and I appreciate it's still very early post the auction, but could you give us a sense of where you see Telco CapEx over the next 3 years? I think consensus at the moment is around EUR 430 million for next year and EUR 410 million for year after. So any color would be great.

Well, on the consumer revenue trends, most of growth comes from service revenues. So the handset sales in terms of year-on-year growth doesn't represent any meaningful number. And within this service revenues, we are seeing basically the result of the operational trends. So conversions clearly plays an important role given that we continue to upsell services on top of fixed customers, and this is basically, at this stage, the main driver of this consumer growth. In terms of CapEx, as you mentioned, it's a bit early also to give out very precise numbers. 5G auction just ended a few days ago. So at this stage, we are still evaluating the final outcome of the auction, our total spectrum allocation and reflecting that in our own 5G network planning. Having said that, we know that our strategy is to lead in 5G, that is very clear. And as we have stated several times, we plan to achieve nationwide deployment very soon. So that will imply a more intense level of technical CapEx for 2022. At the same time, we have also been mentioning that the pace of FttH deployment will continue throughout the year -- next year, so until the end of 2022 until we end the FttH deployment within the framework of the FttH sharing agreement, we should maintain the level of FTTH-related CapEx we are seeing today. So that without giving very precise number that clearly drives us to an increase for total CapEx for 2022, which we believe is transitory to the current situation. And that should also normalize back to more normal levels in the following year, 2023.

And if I can just have one follow-up. Obviously, this will be a question that is on everyone's mind. And again, it's still early, but could you just maybe share with us your early thoughts on the outcome of the auction and in particular, on the 2 new entrants?

Well, I would separate that question into two questions, starting with the outcome of the auction. We are very happy with it. We acquired all the spectrum, we believed, was critical to acquire to fulfill our ambitions. We came out of the auction as the operator with the highest amount of 5G spectrum and actually highest amount of spectrum, which is not sufficient to lead, but it helps a lot. Obviously, we have to align other variables. But as a starting point, it's a very positive starting point and that's such a very positive outcome from the auction. In what concerns the new entrants, that is something that we've known for a year now, the number of new entrants and who they are. So it's nothing -- it became public now, but we are aware of it, as I mentioned, for a year now. We don't take that threat lightly. We take it very seriously, and we have been preparing for this new competitive environment. Even though, as we've mentioned in the past, in order to extrapolate the potential impact of these new entrants, one has to look at the special or the specific characteristics of our market and our company. It's -- people tend to compare with other markets, namely, markets close to us in terms -- in geographic terms, but the Portuguese market is quite different. Within the Portuguese market NOS has also a unique position and one has to take those aspects into consideration when assessing the potential impact of these new entrants in our company. But again, going back to what I said, we obviously are taking this threat very seriously.

[Operator Instructions] And your next question comes from the line of Luigi Minerva from HSBC.

The first is on 5G, and I wanted to check with you if you think that the market can support a sustainable pricing premium for 5G services when they will be launched. And also from a network point of view, what sort of network densifications you need for your business plan. So how many more sites will you need for the 5G coverage? And the second question is on -- is more competitive dynamics. I appreciate -- it's too early for the new entrants, but I think we also have [ DG ] now more active in the Portuguese market. And I just wanted to get your views on how you see the market evolving in the next few quarters from a competitive point of view.

Well, again, starting with the last question. I think at least we are familiar with this new entrant and the typical strategy they follow. As I mentioned, we have been preparing for it. It will take still a few months for them to enter the market. But obviously, we expect that the low end of the mobile market could be impacted. And I would highlight that we have a very significant weight within our customer base of convergent customers, for which we offer well more than mobile and one should take that into consideration. In terms of the 5G network, we have assumed recently, in terms of network, we made the sharing agreement with one of our competitors that you are familiar with. Within that sharing agreement, there will be a densification of our network as a result of that agreement. And that's -- so basically, what we are planning is rolling out the agreement, which we will be rolling out for the next couple of years. And once we reach the final stage of the agreement, we don't believe we need any additional sites in order to deploy 5G. We will be in a position where we have the largest network in the country, very significant growth compared with what we have today, but that is not necessarily 5G driven. So the plan is to use that network to deploy 5G. In terms of the premium we might be -- are not able to charge customers for 5G. I think our view is that 5G is more about new services and new opportunities that will arise from B2B to B2C, probably starting more on the B2B side, but also the future in B2C. It will be more about monetizing those new opportunities than it will be in charging some kind of premium to offer customers 5G for the services they use today. So we believe it would be interesting to charge the premium. It's something that makes sense, but we are not counting that much on that premium. We are, on the other hand, counting -- expecting new opportunities, new business models, new services to peer and those are the ones we plan to monetize additional to what we have today.

And your next question comes from the line of Fernando Cordero from Banco Santander.

The first 2 are quite detailed, and I just would like to understand which -- in terms of market dynamics, sorry, which is the current levels of churn. Also regarding roaming contribution to earnings and to results [indiscernible] my question is, which is the current level of roaming that has been already recovered versus the pre-pandemic levels? And the last point or the last question is a follow-up on previous ones, taking into consideration that you have made a relevant effort in acquiring new spectrum through the 5G auction and leveling your respective holdings versus the largest peers in the Portuguese market. And even considering your current level of market share, is suggesting that you are going to be quite, let's say, aggressive on 5G deployment and also on 5G and, let's say, market share. And you have already said that you are going to push initially more on B2B. In that sense, when do you believe that this story of 5G more focused on services could be starting to be reflected into your market share?

Okay. Thank you, Fernando, for your questions. I take the first couple of questions. So in terms of market dynamics, as you know, we don't give out precise churn numbers. What we can say is that we have seen some deceleration of churn in this third quarter versus the first couple of quarters. But still, if you've been tracking our historical numbers, we are more or less at this stage, I'd say, relatively close to the minimum levels we have in this trend. Regarding roaming contribution, we are still very far from reaching 2019 level. So we've mentioned in the earnings announcement that roaming revenues grew by 25%, but that, in fact, is a bit misleading because this absolute level of revenues is almost irrelevant. So as I mentioned in the presentation, if you take out this growth in revenues, Telco growth would have been 3.7% instead of 4.1%. So actually, it's relatively immaterial. Just to give out a couple of data points, roaming represented around 2.4% of total Telco revenues back in 2019. Last year, we were down 50% to around 1.2% of total Telco revenues. This year -- the year-to-date number for this year is the same 1.2%. So the accumulated 9 months number is similar to what we had last year. And actually, this third quarter, we were up to 1.7%. But again, this is a seasonal quarter. So we have to compare, for instance, versus last year, we had 1.5% for total roaming revenues out of total Telco revenues. So there is some recovery, but still relatively modest. So I would say that, clearly, to go back to the pre-pandemic levels, this still represents for Telco revenues growing around 1%, 1.2% from the current status.

Well, as I think we all are aware, 5G, we -- it's a long run. It's not something -- if we go back to the moment 4G spectrum was allocated and by then, we try to imagine what the world would be 10 years after, I don't think anyone would have guessed where we are today in terms of usage, in terms of number of services that have appeared since that time. Those services that have developed thanks to 4G and the level of mobility we have today in society. And I don't think anyone can foresee what will happen with 5G. Of course, we need the services. We need customers to have 5G-ready equipment. And all this takes time, but we are in this for the long run, not short term. And when we state the 5G leadership, the way to get there is to make sure that we have the best value proposition to our customers and the best services and the spectrum gives you a hint of what we are trying to do. It's not about pricing. It's not about being commercially aggressive. We believe that by offering the best value proposition to both families and individual users, but also B2B customers, we will get to the position where we want to be, which is the market leadership in terms of 5G.

[Foreign Language].

Are you ready for your next question, sir?

Yes, please.

And your next question comes from the line of Mathieu Robilliard from Barclays.

I had three questions, please. The first one is around the new entrants. I may have missed it, but in my mind, there's still no regulatory framework to determine what the wholesale roaming prices could be for the new entrant. If that's correct, can you let us know how you expect the situation to evolve because I guess, until that is [indiscernible] it's pretty hard for them to determine entrant in the market. So that's the first question. The second question kind of linked to new entrants was you alluded to the fact that the Portuguese market is very different in your view from, say, the Spanish market. Maybe you can remind us what the key differences that may enable you to better resist to new entrants? And then lastly, you made some comments about CapEx, I understand it is early days. But you did mention that by 2023 you would expect CapEx to go back to something more normalized. And I just wanted to understand if that would be the result of a decline of 5G CapEx compared to 2022 or both 5G and FttH?

Well, thank you. I'll start with the differences, namely with the Spanish market. I don't want to -- I would rather not go into a lot of detail, but I'll give you some data points. If you go back to the time where these players enter the Spanish market compared to the time they are entering the Portuguese market, Pay TV penetration in this market is above 85%. When in Spain, it was, I don't know, maybe something around 30%, something -- so first big difference. Second big difference, we have been doing the convergent approach for a number of years now. In our customer base, more than 50% of our customers subscribe both to fixed and mobile services within the same bill, which is another significant difference. And the third one that I would mention is the fact that the mobile stand-alone market in Portugal is mainly more than 95% or something around that prepaid compared to a Spanish market where postpaid was quite significant. And these prepays are very low-value customers. And that's the third difference I would highlight. In terms of conditions -- national roaming conditions and other conditions, again, I don't want to go into too much detail, but this is probably the main reason and the main factors behind the claims we have presented in National courts and European courts. We think there's still a lot of discussion needed in order to stabilize some kind of rules. So it's still early to elaborate too much on how that would play in the competitive dynamics.

Regarding your CapEx question as a follow-up of what we've already mentioned. Main reason for the decline as we can foresee it right now between 2022 and 2023 will be basically 5G-related CapEx. So our plan is to frontload quite a bit in terms of 5G CapEx for next year. [indiscernible] we should go to more normalized levels on the following year. Also, on the FttH front, we should expect [indiscernible] in terms of FttH CapEx. So even if we have still the ambition to go beyond the 70% FttH coverage of our total footprint, we won't be adding the same type of FttH homes passed as we are adding today. So I'd say on both areas, we should see some relief. But clearly, the more pronounced one will be 5G related.

That's very helpful. If I can just come back on the roaming. Did I understand correctly that there are some conditions that have been set, but they could evolve?

There are some conditions that are not sufficiently clear I would say. It's not clear there's -- it's namely -- it's not clear the fundamental part of the offer, which is the pricing associated with that. We are not -- as far as we understand, there is no economic study around it, which is obviously a precondition. And as such, there's still a lot of uncertainty around this, as I mentioned, mainly because we have these judicial claims, both in the national courts and the European courts.

There are no further phone questions, sir.

Okay. Well, thank you very much for your time today and your interest. As always, we're available to take further questions. And if we don't speak before I look forward to hearing from you in the next results presentation.

Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.