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

Hi, good afternoon. Welcome to our Full Year 2021 Results Conference Call. José Pedro Pereira da Costa, our CFO, will give you a brief overview of the highlights of the results. And then the full executive committee are in the room today to take your questions.

Okay. Hello, everyone. And starting with the highlights of the quarter. And this quarter, we have continued to deliver a very robust operational performance in Telco driven by our strong value proposition and customer experience. We have posted around 160,000 RGU net adds, exceeding the numbers of the last quarter. Again, this was the highest quarterly growth in the last 5 years. After having won the 5G spectrum auction, we were the first operator to launch 5G services in Portugal in November 26 ahead of our competitors. Again, this quarter, we continue to have very positive trends in the Cinema unit with Cinema attendance growing almost 5x year-on-year due to the easing of restrictions and the strong blockbuster movie slate. The strong operational growth in Telco and the recovery in Cinema activity led to strong financial results in the quarter with group revenue growing 8.8% year-on-year with the Telco unit growing 6.3% and also leading to 6.3% growth in EBITDA at the group level, the Telco unit posting a 2.5% growth. After having paid upfront, the full amount for the spectrum frequencies, we still continue to post a solid capital structure of slightly less than 2x net financial debt to EBITDA after leasing, supported by recurrent free cash flow generation, allowing for an attractive shareholder remuneration of EUR 0.278 dividend per share, representing around 8.1% dividend yield. Now starting with the operational review. We managed to exceed last quarter's operational numbers and achieved again the best quarter in the last 5 years with around 160,000 RGU net adds, growing well across all services and notably in mobile. In Slide 5, again, we continue to post very positive numbers on mobile. We have posted a very robust 140,000 mobile net adds number with 86,000 postpaid as a result of very positive contribution from conversions. On the prepaid front, we also had a very positive 54,000 net adds number. On the fixed front, we have posted solid fixed broadband net adds of 8,000 in the quarter and positive fixed Pay TV of 11,000 on the back of continued increase of penetration in new fiber-to-the-home areas. Our very positive mobile growth continues to be supported by the group of conversions. We finished this quarter with a bit over 1 million convergent and integrated subscribers, which have grown up to 121,000 subscribers, representing now 64.4% of the fixed base, having added around 15,000 subs in the quarter. This represents 5.2 million total conversion RGUs with net adds in the quarter of 85,000. Now moving to the Cinema unit. This last quarter, we continue to have a very strong recovery in our Cinema business with a much more contained pandemic situation and the release of strong blockbuster movies attracting Cinema customers. Still, this last quarter, we have seen the right levels of restrictions. We started the quarter with very few restrictions. But at the end of November, we had to ask customers for COVID test results, which, as you can imagine, has refrained a bit the full recovery. This situation was still in place in the beginning of January. Today, we are operating with close to 0 restrictions. On the movie slate front, this last quarter has seen the launch of major blockbuster titles, 007 and Spiderman are good examples. These trends have resulted in increasing levels of the tenants to our cinemas month after month despite the higher level of restrictions towards the second half of the quarter. In October, we were only 25% down versus October 2019. In November, 40% below. In December, we were down only 33% versus December 2019. So clearly on track to continue the recovery until the pre-pandemic levels. In January and February, some slowdown in this recovery due to a traditionally weaker movie slate, but much promises to be already a good month with the launch of strong blockbuster titles. Now moving on to Slide 9 on the B2C front. We continued focusing on providing our customers with the best TV and content offer. This quarter, we have launched the best Android TV set-top box in the market faster and more intelligent. Also, we have made our NOS TV app available in any box for customers we then drive our Apple TV. And finally, we have been reinforcing our video group selection with the best blockbusters being available only 1 month after the Cinema released. Regarding 5G, as mentioned before, NOS was the winner in the 5G auction, having won the most spectrum in the auction achieving massive -- maximum possible frequencies to exploit 5G while also reinforcing our 4G network nationwide. Building upon this positive outcome in the auction went with the aim of achieving our strategic ambition to lead in 5G, we were the first operator to launch a 5G commercial offer on November 26. In the beginning, making 5G available for all customers on a trial base in order to have a full experience of this new technology. After this promotional period, customers with mobile data packages over 10 gigabit per month. We'll have 5G for free. Customers below this data plan will pay EUR 5 per month. Finally, we have launched a number of 5G convergent bundles. Also, we have been promoting the migration of our customers to 5G smartphones under special conditions. On the B2B front, we continue to drive the digital transformation in our business customers. This quarter, we would like to highlight the first 5G factory in Portugal in partnership with Sumol+Compal, the digital volunteers mentors program, another investment made by the NOS 5G fund. Also, our participation in the Smart City Summit, where we were the exclusive Telco partner. And finally, in association with Benfica, we launched the 5G Seat to recreate through visitor reality and immersive stadium experience. On Slide 13, and on the technological front, our FttH rollout continues, reaching a total of 2.7 million homes passed. That is around 53% of total coverage, around 200,000 FttH homes passed in the quarter. The FttH rollout was mainly in what we call brownfield areas, that is areas where we have HFC coverage. Our mobile network quality has a very positive recognition. This last quarter, having received the fastest mobile network Ookla Award relating to the second half of 2021. Over 186,000 tests were conducted on the Speedtest platform by users from all 3 operators with NOS achieving a score of 80 compared with 57 and 54 by the other operators, having won across all categories, highest downloads and upload speeds and lower latency. On Slide 16, on the ESG front, we have a very significant milestone with our greenhouse gas emission reduction targets validated by the science-based target initiative. We have set ambitious targets of at least 90% reduction in own operations, Scope 1 and 2 emissions and also 30% reduction in Scope 3 emissions until 2030 from 2019 levels, aiming net 0 carbon emissions and external operations until 2040. Also, we continued to make good progress in the several ESG ratings. We have maintained our A- score with CDP, which was quite positive since we have seen a good number of downgrades this year. We have improved to 63 advanced with Moody's ESG, the sixth best outcome in the European Telco industry. Also improving to 53 with S&P all above the Telco average. We also got our first score of 65 and were included for the first time in the Bloomberg Gender Equality Index. Also, we have signed a declaration of commitment for diversity and inclusion, guiding the behavior of our governing bodies and employees and also joined the women's empowerment principles. Now moving on to the financial review. We have posted a strong set of results with strong group revenue growth of 8.8%, benefiting from the strong recovery in Cinema and Audiovisuals, but also from a very strong 6.3% growth in the Telco unit, taking advantage of strong operational activity. Roaming revenues continue to recover, but relatively slowly and contributed only marginally to the 6.3% Telco growth. All the segments contributed positively for Telco growth, consumer growing 1.8% same year-on-year growth of last quarter and B2B growing 14%. The B2B segment benefiting again like last quarter from a few software resale contracts yielding low margins. Still, if we were to isolate this growth, the adjusted B2B revenue growth would be in line with the consumer segment growth. Consolidated EBITDA in the quarter grew by 6.3%, benefiting mainly strong EBITDA recovery of the Cinema and Audiovisual business, posting a level of EBITDA that was significantly above last year levels. Telco EBITDA posted a 2.5% increase that is above the consumer revenue growth and the recurrent B2B growth, benefiting from operating leverage and also showing strong cost discipline, helped by a good number of efficiency improvements, namely in the customer service area. Net income in the quarter was a solid EUR 24 million, driven by the strong performance of the EBITDA level and also benefiting from a positive tax impact driven by the recognition of tax incentives in the quarter. Total group CapEx in the quarter, ex-leasing reached EUR 112 million, a decrease of around EUR 3 million versus last year, with an increase in technical Telco CapEx to around EUR 71 million in the quarter following strong CapEx in FttH and 5G deployment. This higher level of technical CapEx, being compensated by a decrease in customer CapEx, reaching EUR 35 million below last year's numbers, driven by lower levels of churn and also lower level of customer equipment installed due to equipment refurbishment and supply chain constraints. EBITDA minus CapEx reached EUR 28 million with the increase in EBITDA and the decrease in CapEx allowing for year-on-year growth of around EUR 11 million. Operating free cash flow after lease payments and working capital valuation also grew versus last year. And finally, free cash flow after interest and taxes reached EUR 11 million, benefiting from cash taxes received in the quarter reverting the payment mentioned in the third quarter. On the capital structure, net financial debt in the quarter grew to EUR 1,032 million, driven by the EUR 151 million full payment related to the spectrum acquired in the 5G auction. This net financial debt number represents 2x the EBITDA level adjusted for lease payments, which is still within our target. Average cost of debt was kept in the quarter at 1.3%. And finally, regarding shareholder remuneration, the Board of Directors approved the proposal to take to the next April AGM of a dividend payment of EUR 0.278 per share, in line with the last 2 years, representing a dividend yield of approximately 8.1% versus yesterday's closing price. The Board of Directors recognizes that our solid capital structure of 2x net financial debt to EBITDA after leasings and the strong level of free cash flow generation, we will have once we normalize our CapEx levels in 2023 will allow for a sustainable and attractive shareholder remuneration. And with this slide, we conclude the presentation, and we are now ready to start the Q&A session.

[Operator Instructions] We have questions coming from the line of Terence Tsui from Morgan Stanley.

I had a couple around CapEx, please. So firstly, please, can you just remind us around the 5G rollout requirements in terms of the key milestones you've got to hit in terms of coverage? And then related to that, perhaps you can just give us an indication of how you see the trajectory of future CapEx, please? I think you mentioned that the normalization in 2023, but how should we see the buildup of CapEx in the next couple of years, please? And then finally, just on the dividend. Again, just a comment that you made right at the end of the presentation. Should we expect the dividend to be covered by free cash flow post 2023?

Well, thank you, Terence, for your questions. Regarding CapEx, well, as we have been telling you recently, 2021 and 2022 will be our peak years in terms of CapEx. 2021 is now over. Total CapEx reached EUR 420 million. If we have the nonrecurrent CapEx to -- related to 5G spectrum license, it reached last year EUR 570 million. This year, in 2022, we'll have the final year of our FttH sharing agreement. We continue to deploy FttH under this agreement with aiming to reach close to 70% FttH penetration over total footprint by the end of this year. This means that we should more or less maintain the level of FttH deployment around 200,000 homes past per quarter. That is more or less the same level we had last year. So this means more or less same level of CapEx, FttH-related CapEx versus last year. At the same time, and as we have been saying numerous times, we maintain our strategy to lead in 5G, and that means to -- that we have a plan to achieve nationwide coverage very fast ahead of the requirements of the 5G regulation. And this implies, of course, a substantial level of mobile CapEx for 2022. So this means overall that CapEx, if we are to exclude the 5G license, will increase, for sure, in 2022. And then we expect to rapidly decline to normalized levels by 2023. If we compare our own numbers with the consensus numbers, they are -- they do not differ too much versus what has been recently published post third quarter results announcement. If anything, we can say that this year, probably a bit more than what is reflected in consensus for 2022. But also in 2023, we should see CapEx coming down quicker than what is reflected today in the consensus number. So the -- and going to what we call normalized levels 2023. And when we mean normalized levels, basically, we refer to the CapEx we used to have before this peak level. So if you look at the series between 2016 and 2020, so that is a 5-year period before -- again, before the CapEx peak of last year and this year. We have seen CapEx between EUR 375 million, EUR 390 million. So that's to be more concrete to what we consider as normalized levels, and that's where we expect to land in 2023, and that is below what is reflected today in the consensus numbers. Well, regarding dividends, basically, we expect, again, that this normalized level of CapEx will put us back in a normalized level of recurrent free cash flow that will basically be able to cover dividends at that time. So that's our expectation.

We have the next questions coming from Martin Hammerschmidt from Citigroup.

I have one question on the leverage target. You said in the press release that the target is 2x. So just to clarify, does it mean you'd like to remain sort of below 2x? Or is it anywhere between 1.6 and 2.4x given that I think right now you are at 1.99x? And then if I can come back on the dividend coverage. I mean you talked about that by 2023, you expect dividend to be covered, can you maybe walk us through the building blocks? I mean you just talked about CapEx going down and EBITDA going up. But at the same time, I think lease costs are supposed to go up as well. And I think on a structural basis, so excluding the tower proceeds, consensus has not dividend coverage, I think, until 2025, 2026. So if you could maybe walk us through what we are missing here?

Well, in terms of dividend coverage, basically, the -- what we expect is that with CapEx coming down. And again, we mentioned the normalized levels and looking at the 2016 to 2020 period. And let me recall that during this period, we also had a good number of relatively relevant infrastructure projects. We did the upgrade to single run. We are already doing a lot of FttH during that period. So we may normalize these levels, but this doesn't mean that we'll spend these levels of CapEx forever. So we should expect basically the CapEx decrease to allow that recurrent free cash flow by that time, we will cover dividends. And...

Sorry, could you repeat the second question?

The first question.

First question.

Sure. That was on leverage if you would like to remain at 2x?

The leverage is -- yes, it is around 2x. So we went down to 1.6 on the back of the tower sale. So that was clearly a nonrecurrent event. Also, we have a nonrecurrent event that put us back in the 2x, which was the payment of the 5G spectrum license, and we would like to be around 2x. So that's what we always said. So not between 1.6 and 2.4 to be around 2x, so to be more precise.

Great. And if I can sneak in another one is on the new entrant. Are you in discussion with them on the possible mobile roaming deal? And in terms of time line, when should we expect sort to see them launching?

Well, we don't have any additional information regarding new entrants. We read in the news that one of the new entrants stated that they will be prepared to enter the market in the second half of this year. But still, since the last conference call, we don't have any additional information. These new entrants remain rather secret and not very public. So what we knew back then is what basically we know now. You know the results of the auction. You know that these -- at least 2 new players are spectrum. But since then, we had no developments. So in our plans, what we expect is that they will start operations closer to the end of the year. Clearly, in the second half of this year and build up from there. And we don't have any additional information.

We have the next question coming from António Seladas from AS Independent Research.

My question is related with the current inflation environment in Portugal and worldwide. So your average revenue per user is already increasing about between 3% and 4%. However, your consumer revenues are increasing about 2%, 1.5% and 2%. So my question is, should we expect your consumer revenues to start to increase at some pace that the average revenue per user is increasing? There is some lag effect here or not? So in terms of price environment, what should we expect or what do we expect for the coming future?

Well, thank you, António, for the question. Consumer revenues have been growing around between 1.5% and 2%. On the ARPU numbers, it's right. You mentioned ARPU grew this last quarter between 3% and 4%. Part of this growth is still -- we have to say part of this growth is growth of base ARPU and within base ARPU, we mean basically upselling 3P to 4P, cross-selling other products within our basic services, namely upselling broadband packages, upselling our equipment in terms of improving the Wi-Fi experience, which also makes it life easier for our customers. So that's the more recurrent growth, and that is more or less in line with the 1.5% to 2%. Then we also had some ARPU effect that we can say that is a little bit of post-pandemic recovery. We had some increase in terms of data traffic revenues because it decreased in 2020. So it went back to normal levels. We also had some increase in terms of premium sports, so it went down a bit in 2020 and recovered in 2021. All this to say that we should look more at the -- more recurrent level of growth, which is more around 1.5%, 2% than the 3% to 4% that shows up in the ARPU number.

[Operator Instructions] We have next question coming from Luigi Minerva from HSBC.

It's about the 5G CapEx acceleration. And I was wondering if you can share your view about the returns on this CapEx? What we are seeing in other markets is that other operators are adopting a gradual approach to 5G deployment exactly because it's difficult to identify 5G bringing additional returns or justifying returns on those CapEx. And perhaps related to this, I'm wondering whether this further acceleration in CapEx is rather to be seen as a defensive move following the new entrants rather than actually driven by the potential returns?

So if I had to classify it, I wouldn't classify it as defensive as an attacking need in the sense that we see 5G as an opportunity. We see 5G as an opportunity, a disruption in the market regardless of how much additional revenues it will bring, which obviously, we believe it will bring additional revenues. But beyond that, we see as -- see it as a moment of disruption in the market and an opportunity in that sense to differentiate ourselves and to really target for the leadership in this new wave of the telecom market. So we have -- we are betting and upfronting investment in 5G as an attacking move. Nevertheless, as you know, we have coverage obligations. So either way, we would have to deploy that CapEx over the next few years. But we see it as an opportunity. A disruption, again, I insist a disruption in the market, a potential disruption. So an opportunity to attack to differentiate from our competitors and creating an advantage in what we see as the next wave of this industry.

We have the next question coming from Roshan Ranjit from Deutsche Bank.

Three from me, please. Just going back to the previous question -- sorry, a question earlier around inflation. And you gave a breakdown of the ARPU impact, and you gave the kind of 1.5%, 2% given the upselling and cross-selling. You previously mentioned putting in a EUR 5 premium for 5G services. Can I just ask about underlying price increases on your 4G plans or some of your convergent plans? We've seen a number of operators across Europe put through higher than inflationary price increases. I just want to see what the opportunity is in Portugal? Clearly, hope that there are 2 entrants -- 2 new entrants, which are launched in the second half of the year. Second question is on business. The business segment, and you've delivered another strong revenue performance here. You have mentioned now for the last couple of quarters some kind of revenues being brought upfront as a function of some of the software licenses and projects. I guess what impact would that have through, if any, through 2022? And how long can this momentum on these projects and IT sales continue? And third question, just very quickly. When you sold your towers to Cellnex, if I remember a couple of years ago now, was there anything in the MSA about those towers hosting third parties? Or is there no calls like that in there? Anything you can say around those MSAs will be good.

Well, thank you for your questions. And what concerns the inflation? We have been operating over the last few years in almost no inflation whatsoever. So the growth in revenues that we have been posting is by increasing the number of services our customers subscribe. But if we were to project the context where inflation would be material. Just a quick note to say that in our current contracts, we foresee that's possibility. And if there is inflation, we will apply that inflation across all products and services and across the customer base as a whole. So when we are discussing, as Pedro mentioned, 1.5%, 2% customer revenues increase is without inflation. But if we get inflation, hopefully, not that much. But if we are to leave in the context of inflation, then our contractual relationship with our customers allows us and foresee that, that's, okay. And of course, even 4G and other services, we'll see prices being increased according to the inflation level and that we will see.

So regarding B2B, 3 notes. One is that we see this upfront revenue, which is mainly derived from our strategic bets and mainly from our key partnerships with the main providers of equipment and of cloud and software. We see this as a driving force for engaging in very fruitful customer relationships that will derive necessarily and have been driving into additional services and additional share of wallet. Underlying -- so we believe that this trend and the opportunity is still not fully taken by us. So we believe that this is an opportunity that we will continue to see happening for the future, certainly for 2022. And the last note is that regardless of this opportunity that we're seizing that the underlying revenue trends in all segments -- in all subsegments of B2B are pretty healthy. So we believe that this is -- has a positive global impact on our ability to serve our customers.

Okay. Roshan, regarding your third question regarding the tower deal with Cellnex was concluded at the end of 2020. And yes, the service agreement that we have signed with Cellnex allows Cellnex to host third parties in these towers.

We have a follow-up question from Terence Tsui from Morgan Stanley.

So a follow-up question. I'll just kick to one. Just picking up on the topic of inflation, perhaps you can just say something around the cost base, and particularly your exposure perhaps quantify how much the energy costs are as a percentage of your cost base and various -- whether you have hedging agreements in place to mitigate the changes going on in the spot market? And related to that, perhaps you can just also say a few words around wage inflation, whether we should be factoring in some wage inflation into our models going forward?

Okay. Thank you, Terence. Regarding the energy costs, it represents, in total, not a very meaningful number. So it's around 2% of the total OpEx base. In terms of hedging, as we have announced, we have contracted a long-term power purchase agreement where the prices will be fixed for the maturity of this contract. So it's a long-term contract that represents more or less 40% of the consumption, which is hedged, and it was fortunately hedged at a very attractive price. . The rest of the energy, I'd say, more or less 50% to -- 50% of the rent. So around 30% in total is under market prices right now. The remaining 30% is hedged until the end of this second half. So we typically do 2-year hedging contracts in terms of energy costs. So we have the last one renewing in 1st of July this year. So overall, I'd say, long-term hedging 40% and the rest 30% market today and 30% going into market prices, second half of this year.

In terms of salaries, we expect salaries to follow inflation or inflation to follow salaries. So it is linked with the previous answer. We -- if there is inflation, it will translate into both revenues and some of the costs. Because as mentioned -- José Pedro just mentioned that not all costs will be impacted directly or fully by inflation. But in terms of salaries, we expect salaries to follow inflation.

There are no further questions at this time. I hand back the conference to you for any closing remarks.

Okay. Well, thanks very much for being with us today. As usual, we're available to take your follow-up calls -- follow-up questions if you have any. And look forward to seeing you next quarter.

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