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

Hi. Good afternoon. Welcome to our First Quarter '23 Results Conference Call. We have the executive team all together. Jose Pedro Faria da Costa, CFO, will give a brief summary of the results and the presentation that's available on our website. And then we're all available for your questions.

Okay. So good morning, everyone. As usual, we'll start with the highlights of the quarter. I'm starting with the operational highlights. We would like to stress that we started 2023 in a very good shape with solid commercial activity. Very much in line with the first quarter of last year with around 90,000 RGU net adds. Like in previous quarters, main area of growth has been mobile with close to 80,000 net adds; postpaid mobile, representing almost 90% of these net adds. Convergent continues to lead consumer preferences. We have added this quarter 15,000 convergent net adds. And this very positive mobile performance has been benefiting from what we consider best-in-class customer experience, in particular in 5G, with the accelerated rollout of our network, which is now reaching 88% of the Portuguese population. Also, we continue our recovery in terms of cinemas activity. Again, we have our best quarter so far still benefiting from the strong lineup of blockbusters released at the end of last year, attendance and revenues growing very strongly year-on-year. In terms of financial highlights, this very positive operational performance, in particular, in the Telco unit, but also in Cinema and Audiovisuals, has allowed consolidated revenue growth of 6.6%, if adjusted for the low-margin resale revenues booked first quarter '22. The Telco units growing in this quarter at 5.4%, again adjusting for resale revenues. And this has translated into very nice EBITDA trends. Consolidated EBITDA grew 8.8% year-on-year in the quarter, and consolidated EBITDA after leases also grew 6.2%. Total CapEx in the quarter came down very significantly, as expected, to EUR 97 million following the deceleration in deployment of 5G and fiber. And finally, also as expected, significant free cash flow generation in the quarter of EUR 28 million or EUR 39 million, if adjusted for the nonrecurring VAT payments related with our sales. Now giving a bit more color in terms of operational trends. Again, as we said, we started this year in very good shape, 90,000 RGU net adds this quarter. Year-on-year growth in terms of total RGUs was 4.6%, translating very nice operational trends. As we said, mobile was the driver of this growth, very positive mobile numbers, 78,000 mobile net adds. Again, 67,000 postpaid net adds, 11,000 net adds in prepaid. First quarter, usually a seasonal weaker quarter. Still, these numbers being above the net adds of first quarter last year. Also on the fixed area, we have posted also nice numbers. Solid fixed broadband net adds of 6,000 and also positive fixed pay TV net adds of 7,000, benefiting from selling in new greenfield fiber areas. In terms of convergence, we have added this quarter 15,000 convergent customers, in line with last few quarters, ending the quarter with above 1,100,000 convergent and integrated customers, now representing around 68% of the fixed voice. In terms of our cinema operations, as we said, we have our best quarter post-pandemic so far in relative terms versus 2019 in attendance and revenues. Versus 2019 attendance, only down by 19% and revenues only down by 7%, with Avatar impacting very positively December and January numbers. Both months, we have higher revenues than in the same months of 2019. Avatar becoming the highest gross box office revenue movie ever in Portugal, showing that provided there are strong titles, customers go back to the cinemas. February and March were not so positive, minus 17% and minus 19%, in terms of revenues versus same month 2019 given the lack of blockbuster movies. As we have seen before the pandemic, this business is somewhat volatile depending on the movie lineup. Still, we have very promising titles ahead of us for the rest of the year. Now moving to a quick update in terms of the more strategic projects we have been developing in terms of deployment of the mobile network. We continue with the 5G rollout, and this is providing us with a good number of awards. Following our accelerated 5G rollout, we continue to be recognized as the best network in Portugal with the highest coverage in terms of 5G, 88% of the Portuguese population. And this quarter, we highlight the Ookla Speed Test Award for the fastest 5G mobile network. In terms of deployment of the fiber network, we continue our FTTH rollout at a strong pace, reaching a total of 3.6 million homes passed. That is around 67% of total coverage, over 200,000 FTTH homes passed added in the quarter. Of which, around 50,000 were greenfield homes passed. In terms of ESG progress, again, we continue to execute our strategy. We would like to highlight a number of the more relevant developments. First and following the successful refinancing EUR 350 million refinancing banking lines concluded this last quarter, we now have 70% of our debt indexed to ESG objectives. Also, we are launching Eco Rating labels in our stores to help customers choose the more climate-friendly types of equipment. We have developed a partnership with ICF Nova to recruit employees with disabilities. And finally, we continue to transition to a fully electric fleet. Now moving to the financial review. We have, again, strong revenue growth, as we said, 2.2% at the consolidated level, 0.9% in the Telco unit. But again, adjusting for low-margin resale revenues, we had a very tough comp in the first quarter of '22. Consolidated revenue growth would have been 6.6% and Telco revenue 5.4%, benefiting from strong operational activity and also the price adjustments that were implemented. The Consumer segment posted a very impressive 7% year-on-year growth on the back of RGU and the ARPU growth, accelerating versus last quarter and showing a very positive trend. The B2B segment declined by 18% in the quarter. This was clearly impacted, as we said, by the tough comp of the resale revenues in the first quarter last year. Adjusting for that, we have -- we should have had a slight decline of around 2.7%. Again, the performance in large corporates being impacted by a one-off large project. If we adjust for this, recurrent B2B revenue would have been close to 4% with the performance of SMEs being very positive and very much in line with the Consumer segment. The tougher comps in terms of resale in B2B were mostly the last quarter of '21 and the first quarter of '22. So for the rest of the year, we should have a much more normalized progression of revenues in the B2B segment. And finally, the Wholesale segment posted a 17% year-on-year growth, continuing to benefit from roaming and recovery and also increase in low-margin mass calling services. In terms of EBITDA performance in the quarter, we grew this quarter an impressive 8.8%, driven by strong Telco EBITDA growth of 9.4% above last couple of quarters growth, benefiting from operating leverage, also helped by cost contention efforts and efficiency gains achieved despite the overall inflationary pressures that we continue to see and feel in some areas. More relevant being indirect and direct salaries and customer equipment costs. Cinema and Audiovisuals EBITDA increased by 0.7%. Adjusting for the rent discounts, EBITDA would have grown close to 17%. Just a quick note, we have been giving out some detail regarding the impact of energy costs in terms of EBITDA during last year. Full year '22 energy costs represented a drag to EBITDA of around 1.5%. As we said before, our energy provisioning strategy with 35% of total consumption in a long-term PPA, which was contracted well before the energy crisis, leave us well positioned for this year. We were able, during the quarter, to transfer the remaining 65% of energy to the spot market, and we are now benefiting from the considerably lower energy prices in the market. So this last quarter, energy costs actually represented a tailwind in terms of EBITDA evolution of a little bit over 1%, helping us to mitigate the inflationary impacts that we see in other items as we referred. Also this quarter, we start giving out more focus on EBITDA after leases, equivalent to pre-IFRS 16 EBITDA. We believe it provides a better reading in terms of operational profitability. Consolidated EBITDA after leases in the quarter grew a solid 6.2% on the back of strong Telco EBITDA after leases growth of 6.3%, despite the increase in leasing costs as a result of the additional tower sales executed in 2022 and to the inflationary environment in the case of tower leasing costs. Inflation adjustments are kept at 2%. Cinema and Audiovisuals EBITDA after leases increased by 5.8%. In this case, using this metric, we don't need to adjust for these rent discounts. In terms of net income, we have reached this last quarter a net income level of EUR 35 million, despite the strong performance at the EBITDA level. Net income decreased as a result of a number of negative impacts below the EBITDA line, the most relevant being depreciation. Of course, as a result of the strong levels of CapEx in the last 2 years. Also, on the negative side, as expected, we have financial expenses increase given the interest rate environment and also other expenses items, which have decreased since last year, we booked recurrent gain relating to a judicial process we won. In terms of CapEx, as expected, total group CapEx in the quarter came down quite substantially to EUR 97 million. The strong decrease in CapEx reflects mainly a strong decrease in terms of technical Telco CapEx to around EUR 53 million in the quarter, reflecting particularly the deceleration in 5G deployment and also considering that we are considerably ahead our direct competitors in terms of 5G effort, where we continue to lead versus peers. And also relevant to technical CapEx, the fiber rollout, we expect to get by the end of the current quarter the full execution of the fiber partnership agreement, where we expect to reach close to 70% FTTH coverage over our total footprint. Also, customer-related CapEx reached around EUR 39 million in the quarter. Same level of last couple of quarters, reflecting already some inflation in terms of customer equipment unit costs and also indirect salaries related to sales and installation service providers, despite the continuing low levels of churn and despite -- and this also despite the efficiency gains achieved. In terms of cash flow, following the strong EBITDA increase and also the strong CapEx reduction, EBITDA minus CapEx reached EUR 77 million. Operational cash flow after leases reached a solid EUR 44 million. And finally, free cash flow after interest and taxes generated in the quarter reached EUR 28 million. Again, adjusting for the VAT related to the tower deal, free cash flow in the quarter would have been EUR 39 million. This free cash flow evolution allowed us to decrease net financial debt to around EUR 970 million, representing 1.74x EBITDA after leases, well below our stated target of 2x. Average cost of debt increased as expected to 2.3%, following the current interest rate context. And finally, our liquidity remains at very healthy levels, around EUR 400 million, at the end of the quarter. And with this slide, we finish the presentation, and we are now ready to take questions you may have.

[Operator Instructions] The first question comes from the line of Clara Ng from JPMorgan.

Can you hear me well?

Yes, yes.

Okay, great. Just 2 questions. The first one on CapEx. So with the 5G rollout mostly done, are there any areas that you intend to spend more CapEx on? And then the second question is, is there any kind of like one-off personnel costs that you will be spending on in a particular quarter this year? I mean, some companies kind of do a bonus. So yes, just a question on phasing, I guess, of these kind of costs.

Thank you, Clara, for the questions. In terms of CapEx, basically, we -- the trends we highlighted this quarter, so the deceleration in terms of 5G and also fiber rollout, will remain for the rest of the year. And for kind of -- also, say for the coming years, there's no other new area where we expect to spend more than we are spending right now. Also, in terms of personnel costs, we have highlighted in the last call that we have increased, on average, salaries by 6%, so there is no one-off payments. So personnel costs this quarter already reflect the level of personnel costs we expect for the remaining quarters of the year.

We are now going to proceed with our next question, and the questions come from the line of Martin Hammerschmidt from Citi.

The first one is on the energy cost, please. I mean you mentioned energy cost in the first quarter provided a bit of a tailwind to EBITDA of roughly 1%. Given the comps should get easier from the second quarter, how much should we sort of think that from the second quarter onwards, energy tailwinds are going to sort of materialize given where current spot markets are? I mean you mentioned the 1.5% drag in 2022. So that 1% tailwind in the first quarter become sort of more than 1.5% or sit a little somewhere between those 1% and the 1.5%? And the second question is on B2B. Excluding resale, you -- I think in the report, it stated it was a decline of 2.6%, 2.7%. Given where we are in the macroeconomic environment and possible recessionary scenarios, how should we think about that B2B line going forward over the next, let's call it, like 12 months?

Okay. Thank you, Martin, for the questions. In terms of energy, as we said, we are now with 65% of the energy, which is not in the PPA. We are currently on the spot market. So clearly, the level of tailwind for the rest of the year will depend on how energy prices will progress. But I'd say that given the comps we have from last year, I'd say that assuming the 1% type of EBITDA impact that we had this first quarter seems a reasonable assumption for the rest of the year. In terms of B2B segment, as you know, we have booked these very large resale contracts in a number of quarters, which made the evolution of B2B revenues a little bit lumpy. But if we adjust for that, the recurrent revenues continue to grow at relatively healthy levels, so as we said, close to 4% in aggregate terms. With SMEs, I didn't give out the numbers. But basically, we're growing more or less in line with consumer revenue, so very high single-digit numbers. So that is on the basis of current operational trends, RGU growth, of course, price adjustments, which we expect to flow for the rest of the year. So I'd say that in terms of revenues, if we are to adjust for these lumpy resale contracts, the type of performance that we had in this first quarter, the 5.4% in the Telco unit, we don't see any reason why it shouldn't be repeated in the next coming quarters. And also to that point, I'd say that in terms of EBITDA progression, we are not seeing any reason why we shouldn't repeat the type of performance that we had in this first quarter. So we had around 8% EBITDA increase in the first quarter, given what we are seeing in terms of impact of inflation, the energy tailwinds, the growth of revenues. We believe that it's doable to do the same type of performance, the same 8% on a consolidated basis for the rest of the year, which is clearly above the consensus numbers.

That's very clear. And if I can just maybe dive deeper into the B2B specifically. I mean, you mentioned that sort of you're growing on SMEs. I think you mentioned you're growing on -- was it you're growing on the large accounts as well? I'm just a bit -- maybe I hadn't understand, in the press release, you said that B2B resale revenue -- B2B revenues, excluding the resale component, decreased by 2.7%. So I'm just trying to understand what component was -- it was decreasing this quarter within adjusted B2B.

Yes. We had -- in the large corporate segment, we have a large project, which we have also booked some revenues last year. Basically, first half of last year, which did not translate with the same level of revenues this year. So it was a one-off project. So we expect for the second part of this year, clearly, to have a more normalized progression in terms of revenue. So apart from resale, we had this one-off large project, which mostly affected first quarter but also a little bit the second quarter of last year but not, in any sense, the second half of last year. So again, we expect a more normalized progression for the second half of this year.

We are now going to proceed with our next question, and the questions come from the line of António Seladas from A|S Independent Research.

Just one question related to prices. Prices already improved in the first quarter. Taking consideration that you just increased your prices to customers by -- I think at the beginning of February, this improvement over the first quarter, it should be even higher in the coming quarters, I guess, just to confirm it.

Yes. At least, I'd say the current quarter, second quarter, third quarter, it should be a little bit higher. But as we said, we are looking at adjusted level of growth of revenues of the first quarter as a good basis to project the rest of the year. But you're right in the sense that probably in the second quarter, it will be a little bit better than this.

We are now going to proceed with our next question, and the questions come from the line of Fernando Cordero Barreira from Grupo Santander.

The first one is a follow-up on the B2B segment, just to look at it, understand a bit better if I may have missed there. Can you give us the weight of SMEs and large corporates within the total segment? And the second question is regarding leases. We have seen the impact of the change of perimeter of the large contracts with your tower provider in this quarter. But I would like just to understand what has been the underlying trend in your operating leases cost in the quarter. Or if you prefer, what could be the best guess for the total figure of operating leases at the end of this year? And then a final point also, regarding price increases impacting total taxation into the [ Apple ]. I just would like to understand that considering that volumes have not materially suffered from the price increases, just to understand with this spend if you have seen any kind of down-trading effect also from them.

Okay. So in terms of weight of SMEs in terms of B2B, we're talking about more or less 1/3, 35% more or less of total B2B segment, which is growing pretty much similar to consumer. The rest of the segment, as I said, is -- could potentially have some more one-off nonrecurring items that adjust a little bit the progression of this segment. But overall, if we adjust for these projects, we continue to see healthy growth in terms of total B2B segment. In terms of leasings, I've seen your notes this morning. So your ballpark numbers, you're more or less in the right number for this year. The way to measure these leasing costs, I assume that typically, we should have around 1% to 2% inflation increase. The tower leasing, as we said, there is inflation adjustment but kept at 2%. And then you have to adopt the impact of the tower sales of last year. So we have highlighted that the multiple we have is a little bit over 20. So if you do the cash out of last year and divide it by 20, more or less, you get the type of impact in terms of leasing costs, additional leasing costs that we should have for the fact that we have sold a portfolio of towers last year. In terms of operational trends, we are not seeing any type of downplay in terms of the packages that we sell, so we continue to see relatively low levels of churn. And we continue to see more or less the customers with the type of packages they have and no significant downplay for the moment.

[Operator Instructions] We are now going to proceed with our next question, and the questions come from the line of an Roshan Ranjit from Deutsche Bank.

I've got 2, please. Just going back to the question on price. I think in your press release last night, you talked about a better customer value mix. So I guess the question is price increase aside, are you seeing customers actually take bigger packages, faster download speeds, more data within the convergent plan, please? And secondly, on CapEx, as you highlighted, we saw a strong decrease this quarter, 26% down. Now based on your previous comments around the full year expectation, I think you said EUR 375 million to EUR 390 million, surrounding that 20% down or so. So is there any phase-in in the CapEx decrease through the year and in particular in this quarter? Or is -- should we be expecting to be at the lower end of that range?

Okay. Thank you, Roshan. In terms of when we sell -- when we say basically that we see improving customer value mix, of course, that we consider the RGU growth, in particular, the mobile component within the convergent bundles, that we continue to see very strong take-up. So we continue adding new services on top of the services that we now have. And that is also providing -- apart from price adjustment, it's also providing some tailwind in terms of revenue uplift, and that's the type of trend that we continue to see. In terms of CapEx, also the number in absolute terms that we had this last quarter, we think it provides a good base to project the full year number for this year. Probably, we'll have a bit more in terms of phasing in the second quarter. But for -- in average, I would assume the EUR 97 million that we have released for this quarter is a good base to project for the average CapEx per quarter for the rest of the year. But as I said, probably with a bit more in the second quarter coming with the end of the fiber partnership agreement, but then trending out and averaging down to the more or less to the same -- to these values, the EUR 97 million for the rest of the -- for the remaining 3 quarters.

We have no further questions at this time. I will now hand back to you for closing remarks. Thank you.

Okay. Well, thank you, everybody, for being on the call today. As usual, you can always reach out to us if you have any further questions, and the team is doing their best to meet, if required. So look forward to hearing you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.