Orange Polska S.A. (OPL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Orange Polska conference call. The host of today's call is Mr. Leszek Iwaszko. The floor is yours. Go ahead, sir.

Hello, and welcome, everyone, to our special call dedicated to the initial impact of the coronavirus pandemic on Orange Polska operations. Speakers for today will be Jean-François Fallacher, CEO; and Jacek Kunicki, our new CFO. There will be opportunity to ask the questions after the call. I hand the floor to Jean-François to start the speech.

Thank you very much, Leszek. Hello, everyone. Thank you for attending this call, which proposes clearly to address a lot of questions that we have received over the past few weeks. Obviously, we wanted to provide equal access to information to everyone about our first observation on how this crisis is impacting Orange Polska business as we see it today. So I would like to start by stating that any forward-looking statements have to be taken with a high degree of caution. As obviously you will understand it, the situation is very dynamic, and we are dealing with unprecedented events. So what we are going to say today is based on our best knowledge from 2 -- almost 3 weeks now of observations, which may not be representative. So let me start with brief information about key measures the Polish government introduced to handle the crisis. From March 14, all shopping centers have been closed in Poland, which means that around 45% of our shops are closed. So far, most of the shops outside shopping malls can be opened and there are strict rules on how many people can be inside a shop at a time. Movement of people in Poland has been restricted to traveling to and from work and to shopping for essential goods. Any grouping of people is now forbidden. People can move outside only in singles unless with very small children. This quarantine officially lasts until Easter, which is end of next week. However, we believe it's reasonable to expect that it will be prolonged. Just to give you a few numbers that probably you know, for those who are living in Poland, according to official statistics, there are currently more than 2,500 confirmed cases of COVID-19 in Poland and more than 40 death cases, which is relatively much less than in other European countries. Yesterday, the Special Economic Anti-Crisis Shield prepared by the government became effective and it is aimed at helping the economy during the crisis. However, it is mainly targeted to small firms, so we are not going to benefit from it, but many of our customers will. Let me now report on what Orange Polska did. Obviously, we very quickly adapted to the new situation, starting beginning of March and obviously on the 14th of March, with in mind the safety first. Our focus obviously was, first, on the safety of our employees and our customers and on ensuring continuity of our business processes. So now I have to report that more than 80% of Orange Polska employees are working remotely, including also a majority of our call center staff. We provided safety precaution measures and sanitary tools to frontline workers in customer service and network. All services for our customers are, as we speak, provided normally. And for your information, we are having, since the beginning of this crisis, daily management crisis meetings with the executive management team. Now let's discuss the impacts. I'm going to concentrate on what we see today based on the last 2, 3 weeks of observations. Firstly, I want to report that I believe that Orange Polska business is relatively immune versus other sectors. In terms of impact of this crisis on our business, fortunately, we are, I believe, and after discussion of -- with many of my fellow CEOs in the country, we are in a very favorable position versus many other industries that are likely to suffer much more than we do. Mobile and fixed broadband connectivity nowadays is more than ever critical to needs of individuals and businesses. And our business, as you know, is largely subscription-based, so we don't rely so much on sales of new services for generating our profits. Secondly, I want to remind that we have a solid and safe balance sheet, thanks to prudent financial management. In the past, we have sufficient liquidity and financing for our operations and CapEx. Our cash position is an important asset for us in this situation. I remind that our net debt stood at 2.2x our EBITDA on year-on-year with 3.1% effective interest rates. Our debt is sourced from Orange Group and is 100% in Polish zloty and in 96% hedged to fixed interest rates. So the weakening of the Polish zloty is not impacting our debt. And besides, we do not need to roll out or renew any debt facilities this year. Our average duration is above 2 years. Another topic, which is key in this crisis are obviously our networks, and our networks are our key asset. This crisis shows that telecom networks are more essential than ever. We see, obviously, an increased traffic on both our mobile and fixed networks. And they are handling this well, thanks to our past investment. Obviously, we see some local temporary congestions, but we manage the situation so that customers are assured of the best quality. In terms of data growth, it's interesting to see that there is higher growth in our fixed network than in our mobile network, which is quite logical given that people are locked down in their homes. This clearly underlines the advantage of having a fixed network versus only relying on mobile network. By the way, we see fiber as a particularly resilient product in the current environment. Allow me now to share some statistics about this network usage growth. Our mobile voice is up 20% to 30% on average during the day. But in busy hour, it is up 40% to 50%. When I'm talking about being up, I'm talking about current days versus before the crisis started. So on mobile data, the traffic is up 20% for average daily and 15% in the busy hour. On fixed data, the traffic is up 40% to 50% in average daily and 25% to 30% in busy hours. And what is interesting to see as well is that the pattern of using the network is different. It is more evenly spread during the day. Evening peaks are smaller, but in terms of data consumed, they exceed the level before the pandemic. So now let's talk about how the crisis is impacting us. I want to start with business customers. In the short term, the crisis create obviously some losses like roaming and uncertainties like potential bad debts in case of severe economic downturn that would come. But I have to say that we also see some opportunities. We see demand, especially from bigger business customers, for more data transition capacity, collaboration tools for remote work and security services. We see actually huge demand for laptops or tablets, which I have to admit is difficult to meet due to market shortages of such devices. It remains to be seen all these opportunities will balance risks of, for example, some contracts are currently being delayed or canceled. While in the long term, in our view, the crisis is bound to create a lot of opportunities in the business segments as clearly businesses realize now that having a solid, resilient and superfast network is critical to their business continuity. We believe that this crisis will most suddenly drive companies digital. And in the long term, this will create opportunities for cloud, for backup centers, virtual private networks and excess bandwidth. These are a bit difficult to precise today, but I am convinced they will appear in the longer term. Now let's look at how the crisis is impacting us on the consumer market. There is, certainly today you understood, an impact on our distribution, closing of shopping malls and containment measures means that circa 45% of our shops are closed, and there is also much less traffic in the open locations, the street locations. Please note that this shop network is responsible for around 50% of our sales. So as you can imagine, this has driven us to maximize the sales through telesales and through our digital shops. As a result of this, we expect less commercial volumes. This will be visible especially in lower sales of handsets and accessories as obviously this is not on top of people's agenda nowadays. So we observe currently a decrease in both sales but also in churn of our mainstream services. So right now, customers are sticking with the provider that they had before the start of the crisis. We see a kind of market that is becoming frozen basically. Lower sales volumes will most likely impact commercial KPIs and will slow down monetization of our value strategy, but I would like to point out to particular resilience of fiber, at least as we see today. The drop in orders of fiber is much lower in proportion to the closure of our distribution network. I would like also to give a special mention for our fully digital offer, Flex, that we launched, if you remember, almost 1 year ago. This is an offer which is purely digital, and this product is particularly suited for the time of quarantine we are living now. It can be, therefore, because it's fully digital, fully activated from home. And we made a special promotion for the time of the crisis dedicated for teachers and students. Again, the impact of the crisis on the consumer market, I want to say a few words about roaming because, obviously, we will have less roaming activities as the borders are closed and travel activity is likely to be lower. We believe it's going to be also lower after these borders will reopen. We estimate that we may lose roaming revenues in the range from PLN 30 million to PLN 50 million in the second quarter of this year. This is a loss versus our expectations from before the crisis. Revenues will lower mostly outside Europe as the Europe Roam Like at Home packages are or mostly built within the subscription, but it also means less roaming costs, especially within Europe, so the roaming impact will also be much greater on the revenue side than on our EBITDAaL. These impacts will be offset by more international calls, which are not part of the unlimited voice bundles, as people are contacting their friends and relative living abroad more frequently. A word on the ForEx. You have seen that the Polish zloty has weakened strongly, I would say, versus euro and U.S. dollar. This will impact our cost and CapEx but not by the full amount in the short term as we hedge around 75% of our foreign-denominated costs. The longer-term impact is not easy to assess today as, obviously, it will depend on the length and the severity of the crisis globally. Allow me now to sum up what it does mean for our top line and profits. So today, we see more adverse impact on the low-margin revenues, like equipment sales, rather than the core subscription services. So while our top line ambitions growth this year are now less and less likely, our profitability is likely to be much less affected. And today, we see no grounds to change the EBITDAaL guidance. Of course, this is a very early view. We are after 2 weeks and a few days of observations with no possibility to really forecast how the crisis is going to impact the economy, therefore, our bad debts and how effective will be the government economic response to this unprecedented crisis. We believe that there will be more consequences, whether they are bad or good. Obviously, a keyword for us in this crisis is to stay agile. We are addressing the situation proactively and as quickly as possible. We will take to adapt more cost-cutting measures or capitalize on commercial opportunities. So to conclude, in summary. First point, our financial structure is on a strong and safe side. Second point, this crisis shows that our services are critical to the Polish society. Third point, we are relatively more immune than other industries. Fourth point, there will be more impact on our revenue growth than on our profitability. And fifth point, we believe that crisis will create revenue opportunities in the long term. So thank you very much for your attention.

Thank you, Jean-François. Let's start now with the Q&A session. I ask the operator to moderate the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Mr. Ivan Kim from Xtellus Capital.

It's very helpful and insightful. Three quick questions from me, please. Firstly, on the roaming profitability, if you can give us any color on where it stands vis-à-vis either in absolute terms, if you can give that, or vis-a-vis your telco business -- general telco business profitability would be great. Secondly, can you tell us what B2B is as a percentage of your revenue? And thirdly, in terms of real estate sales, do you expect -- I mean it's hard to say right now, of course, but the best assessment you can give us right now on what sort of impact on real estate sales there will be for the year would be great.

Maybe on roaming, you want to say a word, Jacek?

So on the roaming -- this is Jacek Kunicki. Welcome. On the roaming activity, what is key for all of us to remember is that there is a disproportion between what is built as part of pay as you go and what is built as part of the subscription. And within that, what we can say, a big part of the roaming revenues, which are within the European Union, are right now part of our subscriptions, okay? So while decreased traffic will not cause revenue impact and, as you remember, we have had a revenue decline linked with the introduction of the Roam Like at Home packages a few years ago, but right now, while the traffic will not lead to revenue decrease, it will decrease our costs. Then there is a second portion of the roaming, which is roaming outside the European Union. And here, obviously, there will be an impact on the revenues. However, there will also be an impact on the costs. So the overall impact on the revenues will be much, much bigger than the impact that we may foresee for the EBITDA. Finally, a third portion of roaming, which is visitors' roaming, which for us is not hugely important. And obviously, this roaming, well, we will see a decrease in both revenues and profits due to the decrease of this traffic. Overall, when we've tried to see what could be the impact on the roaming revenues in Q2 in the second quarter because this is where the, well, containment measures are certainly in place, this is between PLN 30 million and PLN 50 million depending on the assumptions that you take. It will be smaller on the -- much smaller on the profit side.

Then your second question was about the ratio of global activity. Roughly 30% B2B, representing 1/3 of our activity. And your third question was about real estate. So here, honestly, the impact on real estate sales depends really -- very largely on the length and the severity of the crisis. So today is really very, very early -- too early for us to assess any impact.

[Operator Instructions] Our next question comes from Mr. Benjamin Arnould from Bank of America.

I have 2, please. The first one is do you see any impact on the usage of Netflix and these sort of video-on-demand services. And then the second one is have you had any discussions with the government. As you mentioned, the networks are very critical, and we're seeing that now. Have you had any discussions with the government or the regulator about whether they could adopt a more pro-investment stance in the future or how they're thinking about this?

Yes, on your first question, so usage of Netflix has been exploding. So we are ranked from, let's say, the start of our Netflix distribution from 2, 3 years best Netflix provider in the country, thanks to, first of all, the fact that we're having 0.5 million fiber customers but also that Netflix has special devices in the core of our network, very close to our customers to ensure optimal quality of service. So we have seen an explosion of Netflix usage more than doubling. So we have received some additional servers from those guys in the beginning of last week to cope with the growth. And we've been helped actually by the fact that they have limited the streaming of their 4K streams also in Poland. So actually, nowadays, it's not possible anymore to watch 4K stream in Poland, which has been helping as well managing this growth. But we're, at this moment, having no issue also on this type of services and specifically for Netflix, which is the most used one. So just to give you also some interesting data about usage of our network, we saw that on TV, the number of people watching actually TV news has been doubling versus before the crisis to show you the appetite and the interest of consumers on information services. Your second question was about the discussion with the government. So you have to know that since the beginning of this crisis, so middle of March, we are daily in discussions with different ministers. It can be the Minister of Digital, which is our normal, I would say, way of communication, but with Prime Minister sometime. There was, obviously, some natural worries at the start of the crisis. We have reassured everybody, and the proof is now that our networks are solid, again, thanks to the investment we have made in the past. And again, we see there are the power of the fixed network and the power of fiber for the current situation. So there are a number of discussions. So we have been request -- receiving a number of requests from the authorities and the government to help in the current situation. Just to give you some concrete examples, we were requested to ask students and professors and -- because, obviously -- and kids and pupils because, as you know, the schools are closed for more than 3 weeks now in Poland, so more and more remote studying is being observed and being proposed by universities, by schools. So we have been making this special offer on our Flex product, which is a pure digital product. So we are offering for 2 months, actually, for PLN 1 per month up to 200 gigabit data traffic using this full digital offer. This is a special offer, again, for students, professors and pupils to help the government, just to give you an idea. Proactively as well, to give you another idea of what we have been doing, we have been offering to our customer base an additional 10 gigabytes. So this is to all our postpaid and prepaid base because people are at home, so we wanted to help our customers dealing with the situation. We have been also extending the delay of payment for people being 65 years plus because, unfortunately, what we noticed in the shops that were still open in the street is that half of the people visiting our shops, they were elderly people, which is terrible, because they have payments habit. They like to pay in cash. So we're really pushing very hard to try and convince these elderly people not to come physically to pay cash in our shops. So again, we pushed the delays of payments. We have also contributed here to the Warsaw Genomics Institute to help them developing and buying some more COVID-19 tests because we believe it's a -- as a large business in Poland, it's also our duty to help the country in the difficult situation.

Our next question comes from Ms. Nora Nagy from Erste Group.

I have 2, if I may. The first one is on the tariffs. Are customers moving to lower tariffs or moved to lower-priced segment, or you rather experience an increase in convergence or higher packages? And the second is about 5G. I know it's not a priority right now, but do you have any update on the spectrum auction, if it will go according to the initial plans and will be finalized in the first half of this year?

So I can take it. So what we currently see actually happening, as I was saying, is the market is decreasing. So we have less quotas obviously because half of our retail network is closed. But we see a big, big decrease of churn and disconnections. And when we look at the volumes of MNP out, so mobile network portability out, it's is drastically decreasing. So the market is being kind of frozen. So movements between operators is frozen, which we don't see as such a problem actually. So that's to answer to your first question. Your second question...

Auction.

About the auction, yes. So the auction is supposed to start the 23rd of April. The regulator of the UKE has confirmed at this stage that they are planning this auction to take place simply because everything can be done remotely. However, we see that the French 5G auction has been postponed. Recently, the Spanish auction has been postponed. So although we are advocating for this auction to still take place because we see no reason why being capable to conduct it remotely and looking at the fact that the conditions that we see for these auctions are okay, we're advocating for it to take place, but we will see.

Our next question comes from Mr. Robert Florczykowski from PKO TFI.

Did I understand correctly that close to 75% of the foreign currency purchases on the CapEx side are hedged in short term. And what do you exactly -- if you could elaborate, what you exactly mean on what -- by short term here? And the second question what level of the equipment sales have you been seeing in those last 2 weeks since the stores are closed in Poland?

So first of all, regarding the foreign exchange, what we mean short term is few months. Obviously, we don't hedge CapEx or OpEx expenses in the longer term because this is -- it requires knowledge about how much we will buy. So we hedge them as we buy them. And by that, we mean a few months. There is in between 4 and 6 months of -- that this is the average length of the hedging activity which we do. Then of course, when you look on the large part of the expenses that are denominated in foreign currency, so customer equipment, mobile handsets, there is a natural hedge if the zloty was to remain quite weak for quite a long time. I think it would be a natural reaction for -- by all the players on the market to -- well, reflected in the prices that we give to the customers. So there is a natural hedge for the customer equipment which we buy and then sell in installments. Less for CapEx, but for the cost of goods sold, certainly, yes. And then if you could repeat your second question.

What is the equipment sales?

And the second is about the equipment sales levels in the last -- in those last 2 weeks when the network is closed, if you could maybe give us a little bit of kind of a guidance of how this number is sort of looking? And how does it correspond to the levels we saw previously before the situation occurred?

I think this one is more hard to judge. What we see is, well, half of the shops are closed. The second part of the shops have much lower traffic. So there is bound to be a big impact on the equipment sales in the short term, definitely, when we look at the period where we have the containment measures, okay? It's hard to judge how this will -- well, first of all, when the containment measures will be lifted; and second of all, how the equipment sales might rebound after they have been lifted. What I think we need to remember is that together with the decreased equipment sales, we will also observe a big drop in cost of goods sold. And the effective margin that is generated on the equipment sales is not particularly high. So this will affect revenues but much less the EBITDA. What we are really focused on is the solid structure of the -- of those revenues that constitute most of our margins, so mobile voice, fixed broadband, fiber convergence. And here, as we have been mentioning, we see a decrease of gross adds obviously with, I would say, particular resilience of fiber in trends that we have been observing, really, I would say, quite impressive resilience of fiber. And simultaneously, we observe a decrease in churn. So therefore, while, I would say, the progress in expansion of customer bases might not be as fast as we might have been hoping for it, but the, I would say, majority of the core revenues and profits seem quite solid at the moment from the trend that we're seeing over the last 2 weeks.

[Operator Instructions] We have a question from Mr. Marcin Nowak from IPOPEMA.

I just want to ask about your possible changes in CapEx pipeline for 2020 for mostly with regards to both mobile and fixed networks. And also, I know it's early to ask about your plan regarding Flex promotion for students. But are you considering potential extension of the promotion if the lockdown is extended in Poland as well? Or do you expect -- and if you expect additional integration from other operators who didn't prepare such promotion for -- in Poland?

Take the CapEx.

So regarding CapEx, today, we don't plan ourselves with the delays in CapEx. We're working to roll out fiber according to plan. To be honest, a lot will depend on how the situation evolves, if the 5G auction is on time or not, how quickly are the containment measures lifted and what is the general impact on the economy and also the duration of this lockdown. So well, today, we don't see any material changes in the way that we are able to execute investments, but that needs to be assessed quite dynamically as we go along.

As the second question on the Flex promotion, what we already decided is to renew, let's say, our B2C efforts. Might this be on the additional 10 gigabyte offer to our customers, we have decided to renew for the month of April. We have also decided to renew giving additional channels to all our TV subscribers until mid of April. And this Flex promotion will be renewed for the month of April. This is basically what we have decided to do. Would the containment -- the confinement measures be prolonged, then we would need to see if we or not prolong these special offers. At this stage, no decision has been made. Obviously, to your question about do we expect to take customers from competition, hopefully, with this very attractive Flex fully digital offer and such an attractive promotion for teachers, kids and students, we expect to take customers from competition, but that was not to the reason why we did that. Again, the reason why we did that was to answer a call of Minister Gowin, which is a Minister of the Higher Education and Science, which asked and called on operators to help in the current situation.

Our next question comes from Ms. Dilya Ibragimova from Citi.

I had a couple of questions. It seems like you did mention the B2B exposure, but it does appear that for now, that sector has not had any impact on your revenue projection for the year. If the lockdown was to be extended, do you see any risk to revenues from B2B and maybe SME sector? And also, are you seeing any working capital, maybe even temporary pressure on delay in payments not only from elder people but maybe again from B2B sector? And my second question is on FiberCo. You mentioned in the Q4 results call that you'd be looking to create the FiberCo and then start looking for financial investor sometime in the second quarter. Do this -- does this current situation with the lockdown and pandemic, does that change your outlook, maybe delay timing when you start talking to financial investors? Or is it -- do you feel like it's -- at the current stage, it's not quite -- it hasn't -- it's been separate from the whole situation?

Yes, I will take the 2 questions. So on your first questions concerning the impact on the situation on our B2B business, as we said, yes, we believe there will be an impact. We see actually the first early signs of some difficulties, especially for small companies of payments. Would this lockdown be extended? Yes, there is such a risk, obviously. It's very difficult for us at this stage to, how to say, give a size or give any idea of how large this could be. It's very reasonable today if -- but we see the first signs. So we believe this is clearly a risk. Well, obviously, this is about working capital. And because this is the ability of these customers to potentially pay us, so definitely, to your first question, there's such a risk there. And it will obviously depend on the duration and the impact of the crisis, so the earlier the lockdown would be removed, the better obviously from this perspective. To your second question, so there's no change of mindset in terms of what we want to do around the FiberCo topic, the wish to extend our fiber footprint through help of external investors. However, it is very true that for the last 3 weeks, as you can imagine, the management of the company has been extremely busy to reconfigure our way to do business and to tackle with this crisis. So this project has been, for now, put on hold, as you can imagine. So I guess, we can expect a delay of a quarter versus the initial plans I was sharing with you during the previous call. But the will is still there. And our aim is still the same. So we are going to pursue this process.

And our last question comes from Mr. [ Lukasz Kimikas ] from BNP Paribas. Okay. Maybe we'll go for a follow-up question from Robert Florczykowski from PKO TFI.

One more from my side. So the big picture one, so if you could maybe talk a little bit about the migration or to remote work within Orange and whether you see any kind of operational obstacles or difficulties coming from that. And maybe one more big picture as well, whether -- it looks like Orange Polska is quite a resilient business to the current situation, but is there anything that maybe we haven't asked or we are missing that you could consider a threat or problematic for your current situation apart from the B2B customer having problems?

So Robert, I will answer your first question. The reputation of Polish people is to be very adaptative to be very quick in finding solutions in complicated crisis situation. And once again, I could witness myself, as the CEO of Orange Polska, how this reputation is not fake and how this company has been really amazingly reacting. We have now, as I was saying, more than 85% of our people working from home, actually, which is massive. And I see the company working actually very well. From what I can experience myself, all the meetings we used to hold before are still holding. Of course, we're with the Executive Committee in crisis mode with daily management team meetings to deal with the crisis, but we're serving our customers. The shops that are still open are functioning. We're delivering. We have people on the ground. We're installing. We're repairing. So I am tremendously proud of the way the company has been reacting to this, again, unprecedented situation. So this is for your first question. On the second question, through this call and the few words I gave you on the beginning of the call, we tried to be as exhaustive as possible on what we see today, again. So obviously, as this situation is quite unique, and as I was saying, we have to be very cautious and take with a high degree of caution, everything we are seeing as forward-looking statements, but there's nothing to your question that we haven't disclosed to you during this call that we know about today.

We have no further questions on the line. I'll pass the call back to Leszek to conclude the call.

I would like to thank everyone for their participation and the questions. And usually, we are at our disposal should you have any queries. Thank you, and stay healthy and safe. Thank you. Bye-bye.

Thank you. Bye-bye.

Bye-bye.