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

Hi, good afternoon. Welcome to our first quarter 2022 conference call. With us today, we have the full executive committee. Jose Pedro Faria da Costa, CFO, will give you a brief outline of the main highlights of the results, and then we're available to take your questions. Jose Pedro, over to you.

Okay. Thank you, Maria, and good morning, everyone. We, as usual, with the highlight slide for this quarter. We continue to deliver very strong operational performance. We have posted around 90,000 RGU net adds, up from negative 17,000 in the first quarter last year. The main driver of growth, again, being mobile taking advantage of the 5G momentum. Again, this quarter, we continued to show recovery in the Cinema unit, with cinema tenants reaching almost 1 million, benefiting from the easing of restrictions during the quarter, and also a strong blockbuster movie slate towards the end of the quarter. The strong operational performance in Telco and the recovery in the Cinema unit led to strong financial results, with consolidated revenue growth of 10.6%, with the Telco unit growing an impressive 9%. This growth momentum has allowed a 4.8% growth in EBITDA at the group level. Telco unit posting 4.3% growth, well above the Telco EBITDA growth in previous quarters. Total CapEx reached around EUR 130 million in the quarter, higher level than what we expect in the remaining of 2022 on a quarterly basis due to some front-loading of 5G-related CapEx as planned. And finally, we continued to post a solid capital structure of 1.96x net financial debt to EBITDA supported by recurrent free cash flow generation, now reinforced with the recent announced sale of a second portfolio of towers for around EUR 1,050 million, allowing foreign attractive and sustainable EUR 0.278 dividend per share to be paid next week, representing around 7% dividend yield. Now moving to Slide 4, and going through the operational review. We managed to post around 90,000 RGU net adds, growing well across all services, again, mobile being the strongest growth driver. Again, we continue to show very positive trends on mobile. We have posted a very robust 74,000 mobile net adds number with 56,000 postpaid, mostly driven by continued uptake of convergent services. We also had a positive contribution from prepaid of 17,000 net adds. On the fixed area, we have posted solid fixed broadband net adds of 7,000 and positive fixed Pay TV net adds of 9,000 in line with previous quarters on the back of increased penetration in new greenfield FttH areas. Moving to convergents. Our continued very strong mobile growth continues to be driven mainly by convergents. We have ended this quarter with 1,056,000 convergent and integrated subscribers representing now 65% of the fixed place having added around 15,000 subs in the quarter, same level of last 2 quarters. This represents 5.3 million total convergent RGU with net adds in the quarter of 88,000. Moving to the Cinema units. This last quarter, we continue to have a very strong recovery in this unit with an improving easing of restrictions, as we said in the release of popular movies more towards the end of the quarter. These trends have translated in increasing levels of attendance over the quarter. In January, we started with down 63% below January 2019. Still with some serious restrictions like mandatory COVID tests in February, 43% below February 2019. This month with very few restrictions in place, but with very few movies as well. And in March, we were down only 34% versus March 2019, again, close to 0 restrictions and also benefiting from the launch of some popular blockbusters. Now moving on to Slide 9 on the B2C segment. We continued focusing on offering our customers the best services in TV content and while also moving to some adjacent new offers. This quarter, we have launched a new functionality whereby our customers can subscribe to premium channels in the NOS TV app. We continued to launch new premium content. This quarter, we highlight the Sport TV Motores pack and also a German channel pack. And also on the Earth Day, we launched a campaign where during 5 days for every sale transaction, we committed to plant one tree. Therefore, as a result of these initiatives, NOS is going to plant over 10,700 trees, compensating Scope 3 emissions. And finally, and most importantly, in terms of potential, we have launched a new home smart security alarm service for residential and SME customers. This is a NOS service powered by securities with Alarm.com equipment. Prices starting at EUR 34.99 per month with no upfront installation cost for customers. On Slide 10, and regarding 5G, we continue to aim to be the clear leader, and with that objective, we continue launching a number of initiatives to sustain this claim. We now have the most extensive 5G roaming coverage in 45 countries available to our customers. We have also launched a number of 5G experiences, providing access to -- for cloud gaming, augmented reality and virtual reality applications. Also around augmented and virtual reality, we have launched our first 5G store in partnership with [ VP ], allowing customers to try out items in a virtual way. And also our digital storefront for NOS stores, allowing customers to visualize 3D models of NOS products. Finally, we have signed a protocol in Madeira to accelerate digital transformation through 5G in the region and also launched Fast 5G, a program aimed at accelerating 5G adoption in the industrial sector. On the B2B front, we continue to position NOS as a key partner for digital transformation, our business customers. This quarter, we would like to highlight the launch of the cities and territories of the future pricing partnership with the APDC, the Building the Future initiative for start-up companies with technologically innovative products. The launch of NOS Trust Center, a complete portfolio of security solutions for our business customers. And finally, in terms of recognitions, we are proud to announce that in the last Product of the Year 2022 edition, we have got 5 awards as a recognition of the innovative features of NOS products and services and the trust of final consumers on NOS. In particular, our mobile network was recognized as the most advanced, also awards for the WOO app, the NOS TV app, our newly launched Android TV Box and Power Wi-Fi solutions. On the network front, on Slide 14, our FttH rollout continues, reaching a total 2.8 million homes passed. That is around 54% of total coverage, around close to 200,000 FttH homes passed during this quarter. On the ESG front, we continue to make good progress on several areas. This year, we have published our first Integrated Annual Report 2021. Also, we have completed EUR 300 million sustainability-linked financing lines, raising our lines with an ESG component to 42% of total contracted lines. On the climate-related areas, we have signed the commitment to the Oporto Climate Pact, and we launched the initiative already mentioned of one sale of NOS service for one tree. On the gender diversity area, we have reaffirmed publicly our objective of having 40% women in management positions. Also, we launched our women mentoring program as we have joined the Professional Women's Network Lisbon partnership. Finally, also worth mentioning, the several actions taken in order to support Ukrainian people and, in particular, the Ukrainian refugees now living in Portugal. Moving on to the financial review on Page 18. We have posted again an aggressive group revenue growth of 10.6%, benefiting from very strong 9% growth in the Telco unit on the back of strong operational activity and also from the strong recovery in Cinema and Audiovisuals. Roaming revenues had a good recovery in the quarter, but still some room to fully go back to pre-pandemic levels. We were down 30% versus the level of Roaming revenues in first quarter 2019, still considerably better than the last few quarters. Adjusting for the growth in Roaming, Telco revenues would have still grown 8.4% instead of the 9% we posted. All the segments contributed very positively for Telco growth. Consumer growing 2%, slightly higher year-on-year growth versus the 1.8% of last quarter, and B2B growing 32%. This B2B segment benefiting, again, like last quarter from software and equipment resale contracts. Still, if we were to isolate this growth, the adjusted B2B revenue growth will still be a mid- to single high-digit number, meaning B2B core revenue growth has been quite positive. Adjusting for resale, total Telco revenues would have grown around 4%. Again, showing the strong performance in our Telco consumer and B2B revenues. Consolidated EBITDA in the quarter grew by 4.8%, benefiting from strong EBITDA recovery of the SIM and audio business, but mainly from strong Telco EBITDA growth of 4.3% and that is slightly above the core Telco revenue growth, adjusted for what we mentioned of around 4%. Benefiting therefore, from operating leverage and also helped by some efficiency improvements, namely in the customer service level which compensated for instance, the increase in energy costs despite the energy saving measures that were put in place. A quick note on energy costs. As we said in the last call, we had in this quarter around 30% of total consumption on the spot market. Same situation to be repeated in the second quarter. Starting in the third quarter, we will have around 60% of total consumption. On the spot market, the remaining 40% is contracted under long-term PPA with fixed prices until 2033. The impact of current spot prices on 30% of consumption represented in the quarter, around 1.1% of Telco EBITDA, which should have grown 5.4% instead of the actual 4.3%, if it weren't the current high energy prices. Net income in the quarter was EUR 41 million, driven by the strong performance at the EBITDA level and also benefiting from a positive impact from our share in JV results due to the appreciation of the [ annual ] currency and also to a non-recurrent, non-cash gain booked in other expenses due to a favorable court ruling. Total group CapEx in the quarter, ex-leasings reached a very high number, EUR 131 million in the quarter, a year-on-year increase of around EUR 35 million versus last year and around EUR 19 million quarter-on-quarter. This was expected due to a strong rise in Technical Telco CapEx of EUR 19 million in the quarter following the FttH rollout and the particularly very high 5G deployment CapEx. Customer-related CapEx decreased, reaching EUR 36 million below last year's number, driven by low levels of churn and also lower level of customer equipment installed due to equipment refurbishment and also some lower usage of equipment in changes of services. In terms of free cash flow, EBITDA minus CapEx reached EUR 28 million, with the increase in EBITDA being mitigated by the significant increase in CapEx. Free cash flow after interest and taxes generated in the quarter reached EUR 4 million, again impacted by the high levels of CapEx. Overall free cash flow outlook for 2022, for sure benefit from the cash in of EUR 155 million resulting from the announced sale of a second portfolio of 350 towers to Cellnex. And finally, on the capital structure. Net financial debt in the quarter decreased slightly to EUR 1,030 million. This net financial debt number representing slightly below 2x the EBITDA level adjusted for these payments, which is well within our target. In this quarter, we have completed, as we said, EUR 300 million of sustainability-linked financing lines with 3 banks at very competitive levels. These loans being structured as bond issues and commercial paper programs maturing in 2027. These bank loans are supported by the recently-developed sustainability-linked financing framework and are linked to sustainability performance targets of the group's Scope 1 and 2 emissions reduction of at least 80% by 2025 compared to 2019. As a result of the refinancing, the average cost of debt was further reduced in the quarter to 1.2%. And finally, in terms of liquidity, we continue to have cash and unused credit lines around EUR 300 million at the end of the quarter. And at this point, we conclude the presentation, and we are ready to start the Q&A session.

[Operator Instructions] The first question comes from the line of Martin Hammerschmidt from Citi.

On your KPIs, I mean, they have slowed down a little bit sequentially, which coincides with the slowdown in your footprint expansion. So the question I have is, how much more footprint expansion is there for you to go? And how should we think about the net adds in the coming quarters? And then the second question is earlier, you've talked about your exposure in energy costs and how it will increase in the second half. And then we also, I think we have the salary increases coming through in the second half -- I think, and sort of consensus for 2020 to EBITDA currently that I think it's EUR 635 million. I know you don't specifically guide on EBITDA, but with the salary and energy cost effects kicking in for the rest of the year, do you think that is a realistic number to achieve? Or how should we think about the various building blocks in the second half beyond just the energy cost that you highlighted? And if I can sneak in a quick third one regarding your new entrants. They will have access to national roaming. Are you in negotiations with them? Or have they not approached you to discuss that matter?

Okay. Martin. We have a good number of questions. So I'll start with the first one. In terms of KPIs, basically, we are expecting stable performance across the year. It's true that the number of FttH households added in the quarter was slightly lower than we had in the last few quarters. The pace of FttH deployment for the rest of 2022 should accelerate, but the number of greenfield households shouldn't differ too much from what we had in this first quarter, so we basically expect a relatively stable outlook for the rest of 2022 based on these first quarter numbers. Well, in terms of energy, this is a relatively uncertain area. So we are expecting in the second quarter pretty much the same level of impact we had in the first quarter. For the second part of 2022, it's early to anticipate what type of impacts we may have. It's true that we'll have a larger share of our consumption. To go to the spot market, we said that we'd go from 30% to 60%. But also, there are a number of measures in place that could help in potentially normalizing a bit more these energy prices. And I should mention that the fact that the EC decided to allow Portugal and Spain to introduce caps on LNG prices to control the final electricity price is something that may affect energy prices going forward. Still, it's early to anticipate the type of impact we may have. Also important to note that we are putting in place a number of energy-saving measures that range in several areas from network to general and admin and also Cinemas. These efforts should also result in consumption savings, which were not initially planned. And finally, on your note around consensus. You also mentioned salaries, salaries is not a component in which we are planning to have any type of relevant inflation this year. If anything, this should be more for 2023. But relating to the consensus numbers, we are -- and even if we were -- if energy prices were to remain at current levels, that is, we would be paying the current spot prices for 60% of our consumption given the energy saving measures, plus the fact that we still have a good part of our consumption fixed in the long term. We don't think that this should impact in any meaningful way, and we are quite comfortable with the level of consensus for EBITDA [ for this year ].

On the new entrants, as you mentioned, we have an obligation to negotiate national roaming agreements with the new entrants. But we'd rather not comment at this stage on any potential negotiations going on.

[Operator Instructions] The next question comes from the line of Terence Tsui from Morgan Stanley.

I've also got 3 questions as well, please. Just following up on the question earlier around FttH and penetration. Where do you see the eventual kind of rollout and household coverage in the end game? Are you expecting to cover something like 70%, 80% or 90% of the country? And then my second question is around the article that appeared this morning in L'Expansion, quoting MasMovil's CEO and then talking about a strategic update sometime in Q2. Maybe if you can share with us any thoughts around that, and what you're planning to do to fight back against the potential risk of new entrants? And then lastly, perhaps you can just say a few words around the recent towers agreement you announced with Cellnex. In particular, I'm just interested in how many towers you've got remaining at NOS that you own outright and that not have yet been monetized through Cellnex?

Okay. Terence, again, quite a good number of questions, so I'll start with the first question. On FttH, as we have been saying, we plan to conclude the fiber sharing agreement with our partner by the end of this year, beginning of next year. And by then, we should have around 70% of total coverage with FttH, so that's the target that we have in the short term. In terms of the site -- the transaction, the recent transaction regarding towers, there's not much more we can say about what we just concluded. So it's around 350 towers, which were sold by EUR 155 million. And basically, this translates as we said in the announcement, into an impact in terms of recurrent after-tax free cash flow by 2026 of around EUR 35 million. That's transaction 1, the first portfolio of 2,000 towers and the second portfolio of 350 towers, which means for a total consideration of EUR 530 million. We'll have this sort of after-tax cash flow impact, meaning, a multiple of around 21x to 22x. Going forward, our agreement includes the sale of some additional sites to Cellnex up to 2026. The number is not completely defined, so it's dependent on a number of factors, which we cannot detail right now due to some confidentiality issues, as you can imagine. Still, the total cash in that we expect after all the transactions are concluded, we will for sure exceed the original EUR 550 million that we initially announced.

Again, on the new entrants, I think we mentioned in the last conference call that, obviously, we are taking this threat very seriously. But as you can understand, the new entrants are not keeping us posted about their plans, curiously. We've read the article, which means that we know as much as you do, so we don't have any official information. We don't have any particular insights on the new entrants plans, so we will have to wait and see.

That's excellent. If I could just squeeze in a real quick follow-up. Just looking at the CapEx in Q1, EUR 131 million, maybe a bit higher than what consensus is expecting. Should we expect like a similar amount for the remaining quarters this year? Or should we expect it to be a bit more kind of Q1 weighted, and then a bit less in the future quarters?

Yes. I think we mentioned that during the presentation that you cannot multiply this first quarter number by 4. Clearly, this is skewed up more towards the front-end CapEx relating mainly to 5G, so an area in which we aim to get a clearly competitive advantage in this area. So again, we -- in these next coming quarters, there's going to be a lower number than EUR 131 million, and we continue staying within our guidance of high EUR 400 million number for 2022. And again, also, that is now completely aligned with the consensus numbers. Consensus has been aligning to what we have been guiding. Still, consensus is higher than what we expect to have next year. So we were mentioning always that '21 and '22 would be our peak in terms of CapEx numbers, but then we should start rapidly declining. And what we see in terms of analyst estimates is that there is no rapid decline in the consensus number, so it should decline more than what is now reflected in the consensus numbers.

Dear speakers, there are no further questions.

Okay. Well, thank you for following the call. And as usual, if you have any follow-up questions, we're available and look forward to hearing from you next quarter.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.