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

Good morning. Thank you for standing by. Let me welcome you to Orange Polska conference call in which we will summarize our results in the second quarter and the first half of 2026. My name is Leszek Iwaszko, and I'm in-charge of Investor Relations. The format of the call will be a presentation made by management team followed by a Q&A session. Speakers for today will be CEO of Orange Polska, Liudmila Climoc; and Jacek Kunicki, CFO. Let me now pass the floor to Liudmila to begin the presentation.

Thank you, Leszek. Good morning, and welcome to our conference summarizing second quarter of 2026, and let's start on Slide 4. I'm very pleased to share with you on our progress for the first 6 months of the year. Within this time, we were focused on our priorities set in Lead the Future strategy, pursuing brave commercial agenda, investing in our network and implementing transformation initiatives for our operations. And it all starts with profitable growth, which was excellent across all our business lines. Firstly, in core telecom services, we successfully combined healthy pace of growth of customer bases and improving ARPO dynamics. And I'm very happy that Orange Polska was the leader in mobile number portability for the second consecutive quarter with net gain for Q2 of 20,000 customers. Secondly, it was a particularly good quarter for B2B. Revenues in IT&IS increased by as much as 50% in second quarter, thanks to an accumulation of contracts won. In addition, we signed the first major contract for the defense area, which we see as a significant milestone for future development. And finally, wholesale sustained very strong momentum, growing revenues by double digit despite lack of national roaming contract, which expired last year. These strong commercial achievements were combined with progress in our transformation program as we strive towards high efficiency, and it is visible through indirect costs, which were flat if we compare year-over-year. And all that is translated into strong financial results. In H1, revenue growth exceeded 7% and EBITDA (sic) [ EBITDAaL ] growth exceeded 6%. And as a consequence of a strong first half of the year, we are confident in right execution of our strategy, and we are more optimistic regarding our future prospects. Let's review these achievements in more details, and I will start with commercial activity on next slide. So our commercial performance in Q2 was successful both in volume and value. These trends are key to today's value creation, but also give us confidence for quarters to come. And starting with mobile, where results were particularly excellent. Net customer additions exceeded 80,000. And as I have mentioned already, we were again the winner of number portability with a big advantage. This demonstrates that the strength of our multi-brand strategy and also confirms that customers continue to value the quality and our always-on connectivity. For the mobile ARPO, growth improved, exceeding 2% as we monetize our value strategy. It was driven by acceleration in the main brand on consumer market and an improvement in B2B. And as a result, we have reached a well-balanced volume-value growth in mobile, which was not that evident in the previous quarters. Moving on to fiber. Customer base increased 10% year-on-year. Net customer additions were similar to a year ago, and we see it as a very strong achievement despite fierce competition, which we see in this area. In second quarter, we increased our footprint for high-speed broadband by 900,000 households in Hybrid Fiber Coax, HFC technology of getting access to one of the wholesalers network. Over the time, this footprint will be further increasing and will be gradually upgraded to FTTH standard. And this new infrastructure creates a new fishing pool for us for growth in our very high broadband services. Strong mobile and fiber were accompanied by further growth in convergence with the pace of growth in line with Lead the Future strategy. Convergence remains key to value creation on consumer market. It already penetrates our customer base in a very high proportion. And that's why we are focusing on reaching new households not yet using our services with fiber or mobile services. And we are quite successful with that in the first half of 2026, the number of households where Orange is present with our services was growing, offering promising prospects for the future. And strong results of core telecom services were accompanied by a strong performance in B2B and wholesale. And I would like to zoom in on it on next slide, Slide 6. So common feature of these 2 business lines is that their revenues include both recurrent streams and boosts from particular big deals. And if we want to achieve strong growth, we need both of these streams. And we see it well reflected in the results of the second quarter. Starting with business market, if you remember our priorities for 2026 that we were presenting in February, one of them was to achieve profitable growth in B2B. And I am pleased to confirm that this is clearly happening. It is driven by constantly improving trend in telco services and the accumulation of contracts won in IT&IS. And additionally, we have signed a first major contract in the defense sector. And I hope that this will open new market opportunities for value creation. And switching to wholesale. It sustained great momentum in H1 with a particularly high 17% growth -- revenue growth in Q2. And this is despite the absence of revenue from national roaming contract. It was driven by a consistent growth in wholesale fiber access and big deals in infrastructure rental. This should remind us that wholesale is our strategic line of business, complementing our retail operations and balancing our risk profile. And now we have discussed all 3 business lines, which build growth of our revenues and margin. And the missing element for EBITDA is cost transformation. And I invite you to look on next slide, Slide -- on Slide 7. Under the Lead the Future, we have launched a new wave of transformation focused on improving efficiency, expanding margins and strengthening our cash generation. It covers all areas of our business, and you can see the pie chart on the slide illustrating it. Its key levers are automation, processes reengineering and opportunities from integrating AI in our operations. And the key measure of its overall progress is the evolution of indirect cost. Indirect, so it is not directly linked to revenues. And our aim to keep these costs flat despite growing business and despite growing investments in our networks. This enables high operating leverage and as a result, allows us to floor our revenues in EBITDA and consequently into the cash. And we are very pleased that this transformation is progressing well and that underlying indirect costs were flat year-over-year if we look on first 6 months of this year. Now you have seen that strong H1 results were a combination of strong commercial execution and also a solid progress in our cost transformation. It allows us to be more optimistic regarding the future. And just to illustrate it on the next slide. As a consequence, we are raising our full year guidance in most areas, so for revenues, for EBITDAaL and for organic cash flow. Following the exceptional revenue growth to date, we now expect full year revenues to grow by low to mid-single digit in percentage. This will translate into EBITDAaL that we expect to grow at above 6%. So an important improvement versus our initial estimate. We have decided to guide above 6% as perfect execution in second part of the year could see us landing above this level. And finally, we are raising operating OCF cash guidance to at least PLN 1.2 billion. This means that we plan it to grow by more than 20% in 2026. This guidance is underlining our determination to grow our financial output and to create values for our shareholders. This is all for me as for now, and I hand over the floor to Jacek to walk you through the details of our financial results.

Thank you, Liudmila. Good morning, everyone. Let's start the financial review on Slide 10 with the highlights of our performance this quarter. I am very pleased with our financial results in Q2. We have increased our revenues, profits and cash generation. Revenues were up by 12% year-on-year, a solid, consistent development of core telecom services was coupled with exceptional growth of revenues from IT&IS. High top line was coupled with cost savings. And in turn, this drove the 3% EBITDA growth in the second quarter. This is a strong achievement, especially as we note that the second quarter of 2025 included a PLN 75 million positive one-off from the rollout agreement, so the comparable base was very high. Solid revenue and EBITDA in Q2 enabled us to achieve excellent results for the first semester with 7.5% (sic) [ 7.6% ] revenue uplift and a 6% (sic) [ 6.2% ] growth of the EBITDA. High operating results were coupled with CapEx discipline. And as a result, we have significantly increased our net income by 24% year-on-year and our organic cash flow by 43% year-over-year, both viewed for the first semester. These are very strong results based on solid underlying trends. They give us an increased level of confidence for the future as evidenced by the guidance uplift described by Liudmila. Let's now look into the sources of these achievements, starting with top line on the next slide. Q2 revenues grew by 12% year-on-year, an exceptionally steep dynamic. This combined a solid, consistent performance of core telecom services and a very strong growth of the less recurrent areas such as IT&IS and wholesale. Revenues from core telecom services increased by 5% year-on-year. Similarly to the first quarter, this reflected a strong above 6% growth of all postpaid service revenues and a natural slowdown in prepaid following its steep growth in 2025. Consistent development of core telecom service revenues is fueled by the rock-solid growth of the customer bases on ARPUs. Good growth of core telecom revenues was coupled with an exceptional 50% increase of revenues from IT&IS. This quarter, we benefited from a big accumulation of contracts for digital transformation and IT infrastructure upgrades. This demonstrates that market conditions are improving and that we are able to grab those opportunities due to our large portfolio of competencies and relevant experience. We continue to observe a solid pipeline of projects for H2. However, we note that the Q2 dynamic was exceptional, and we expect less spectacular growth in the second semester from IT&IS revenues. Top line also benefited from a very solid growth of wholesale, which was fueled by infrastructure contracts and IoT equipment sales in the B2B. To sum up, Q2 revenue dynamics was exceptionally high as consistent solid performance of core telecom service revenues was coupled with extra growth from big contracts. Revenue achievements in H1 lead us to increase the full year guidance even if we expect a slightly slower but single-digit growth in the second semester. Let's now look at how we turned these higher revenues into profitability on Slide 12. Our Q2 EBITDA has increased by 3% year-on-year. We're very pleased with this result, especially as last year's EBITDA included the large one-off from the fiber rollout agreement for our fiber that I already mentioned. This shows that the underlying growth of Q2 was indeed very strong, which was driven both by an accelerated growth of the direct margin fueled by revenues and by solid benefits of our cost transformation. The direct margin increased by more than 6%, an outstanding dynamic that followed strong revenue growth across all business lines. It mainly reflected the growth of the high-margin areas such as core telecom services and wholesale, but it also benefited from the exceptionally high IT&IS sales. This last item carries much lower margins versus core telco, but still delivers a direct margin rate in the area of close to 20% and an EBITDA contribution close to the 10%, 12% mark. Our indirect costs were flat year-on-year, apart from the impact of the already mentioned fiber rollout one-off last year. We benefited from the cost transformation program and made efficiency gains in network operations, employment and property maintenance costs. As a result, we preserved a high operating leverage, and we are able to convert revenues -- revenue growth into higher EBITDA. This result enabled us to reach over 6% EBITDA growth for the first semester. And as you have seen, we expect this dynamic to hold or even accelerate in H2. With this, Orange Polska will reach its highest EBITDA growth rate in many years. Now let's look at net income on the next page. Our net result amounted to PLN 580 million (sic) [ PLN 576 million ] in H1, growing by 24% year-over-year. There were 2 drivers of this increase. Firstly, the strong EBITDA growth discussed a moment ago. Secondly, high gain on asset disposals as we executed large real estate transactions, selling properties that we no longer need as we transform our operations. These were partly offset by higher depreciation linked to the 5G license that we've acquired last year and a change in CapEx structure, evolving into assets with shorter useful lifetimes such as IT software. H1 results puts us on a solid path for a significant growth of net income for the full year. And now let's switch to CapEx on Page 14, Slide 14. Our economic CapEx amounted to PLN 725 million in H1, so 9% down year-over-year. The difference resulted entirely from the PLN 100 million higher proceeds from real estate disposal due to the very good results achieved this year. CapEx spending was on a comparable level to last year. In line with our strategic priorities, we allocated almost 40% of capital expenses to access networks. In fixed, this is mainly fiber rollout in white zones, a project that will be completed before year-end. In mobile, we are deploying the 5G network, now reaching almost 90% of population and finalizing the renewal of our radio access network. Another 30% of CapEx is dedicated to core and fixed network as we are expanding the capacity of our networks to deal with the growing traffic. Finally, we've spent just over 30% on IT with focus on projects to support process efficiency through digitalization, both on the front desk and in the technical and support areas. Finally, a quick look at the cash flow on Page 15. We generated close to PLN 0.5 billion of organic cash flows in H1. This was PLN 150 million or 43% more than in H1 of last year. It was driven predominantly by the strong growth of the EBITDA, coupled with higher cash from real estate disposal. We also benefited from less cash CapEx with lower payment for prior year's investments than in H1 of 2025. However, this was offset by a higher need for working capital as a result of the great revenue growth in IT&IS, equipment, but also in the core telecom services areas in H1 of this year. As a takeaway, we're happy with cash generation in H1. We also expect a solid H2, and we are eyeing the above PLN 1.2 billion of organic cash flow for the full year. This is all from me for now, and I hand the floor back to Liudmila. Thank you.

Thank you, Jacek. So summarizing, just illustrating the bullet points, which you see on Slide 17. Our commercial and financial results in second quarter and first part of the year were strong. They not only give us confidence to upgrade full year guidance, but also constitute a great platform for growth in the future. And in the same time, demonstrate that disciplined execution of Lead the Future strategy is bringing desired results. This gives us even stronger determination to execute on commercial actions in the upcoming peak season and to focus on new transformation initiatives, but also to take more midterm perspective and to launch new actions that will fuel our growth in the years to come. This is all for us. And now we are ready to take your questions.

Thank you. Switching now to Q&A session. Let me read the instructions first. [Operator Instructions] We are as usually prioritizing questions from voice questions. The first question is coming from the line of Dominik Niszcz from Trigon.

Dominik from Trigon. I would like to ask 2 questions. So first is on wholesale revenues. In the second quarter, it's up by PLN 34 million. So I was wondering, should we view this temporary? Or do you expect this infrastructure projects to be more like a recurring contributor or it's just a fluctuation from quarter-to-quarter, so this was exceptional quarter? And what was the scale maybe if this was kind of not recurring?

Thank you for your question, Dominik. So when you take a look at wholesale, obviously, it is driven both by the recurrent streams of revenues such as rentals of our infrastructure on a subscription basis or sale of BSA accesses for the wholesale customers. And this is very often then fluctuating as we have additional impact of the -- of large projects. So wholesale is, I would say, it has a base that is recurrent, but then it's fueled by nonrecurrent projects. So yes, we did see Q2 impacted by over PLN 20 million of nonrecurrent projects. But what I would really emphasize is that we, first of all, have grown year-over-year despite losing the revenues from national roaming. So that is about -- that was about an PLN 11 million negative impact, and is PLN 11 million in Q1 and PLN 11 million in Q2. We've had to offset this. And then what I would mention is we are already heavily working on additional projects to come in the second semester that if we are able to execute them properly, will also give us quite nice upside and enable us to continue to grow revenues in H2. So it's not that we've run out of one-off projects. It's that wholesale is a lot about nonrecurrent projects, and we are working and developing those projects, and we're quite confident that wholesale will continue to deliver quite nice revenue growth.

Okay. That's clear and optimistic. And one more question on data centers. So with this AI and data center investments like accelerating globally, but also across Europe, does Orange Polska see opportunities through partnerships or some connectivity-related services to gain higher scale in this area? We've heard about the cooperation with Morrison in France by your parent company just yesterday. So is this the path you are looking for as well?

Another relevant question. What I would say is that today, we have a meaningful data center business already as we are providing colocation for our business customers. And then obviously, on top of that, a number of services, starting with connectivity, security, remote maintenance, energy guarantee and so on, the usual package for data centers. These are not AI-driven data centers. So they are with a low energy intensity. And usually, they are located next to the data centers that we have for the purposes of Orange Polska, so for our internal needs. And this represents on an incremental level, an attractive business model because we are using the space that has already been developed for Orange Polska purposes. We do not envisage today huge projects such of the scale, as you have mentioned, and targeting the AI boom, but would rather be continuing to look for ways to serve our business customers with this low-intensity data center services. And here, obviously, we are not close to needing to own data centers. We can just as well rely on trusted partners, reliable partners, such as we do with fiber, where not only do we have [ Swiatlowod Inwestycje ], which is co-owned and not entirely owned. But also please note that a significant part of our coverage relies on wholebuy tactics. So for pure data center connectivity, I would say we are open for all forms of gaining access to infrastructure to serve our customers, while obviously, our unique advantage is to be able to provide the value-added services on top of the basic colocation services that are usually offered by the pure data centers.

Next voice question will be coming from the line of Ali Naqvi from HSBC.

Can I just get your view on capital allocation for any non-telco M&A such as real estate if there was a chance deals that would be available in the end? And then, is...

I'm sorry, Ali. Could you repeat your question slowly? We have quite a poor line from you. So we have a hard time to get your question.

Great. First one is your policy on non-telco M&A, for example, in real estate, if you have anything to say on that? And then in terms of your uplift in guidance for 2026, are there any scenarios? Or is there any update to give a view on your medium-term guidance, whether you could raise that as well?

Thank you very much for your question. So I will start with the M&A. Here, we're very consistent. We would not be open to venture far out away from the telco side. The 2 areas of M&As that we are open to, and historically have been open to is on the one side, the potential increase of our competencies in the ICT area, where we've done a number of M&As historically, and where, obviously, we need to be relatively selective as to which exactly competencies would be potentially wish to acquire. And on the other hand, the infrastructure -- fiber infrastructure where we are an active participant on those infrastructure projects, the last one being the ongoing process of acquiring Nexera together with APG. And those would be pretty much the only areas that we will be looking at right now. We're not really eyeing any M&As that would be outside the core business. Now I think regarding the EBITDA, what I would say is, first of all, we need to understand where this guidance revision, upward guidance revision stems from. So we're happy with the growth that we've seen so far for 2026, and we're happy with the sources of growth. And the way that I would put it, it's in 3 steps. This guidance revision and growth stems from, one, strong sustainable growth across the recurrent business. So core telecom services, we've seen great trends in H1. We think they will be continued in H2. Plus, we see support from big deals. We've seen very nice revenue growth and converting into also EBITDA support in B2B with continued and will continue good growth from wholesale. And number three is another plus. So a great contribution of our cost transformation, and this has visibly accelerated this year. So that gets us to guiding above 6%. As -- and as Liudmila mentioned, perfect execution could take us even 1% to 2% higher. Now as far as H2 expectations, obviously, we expect slower -- relatively slower revenue growth versus the one that we observed in Q2 as IT&IS was truly exceptional. But at the same time, we expect rock-solid revenue and margin from core telecom services. So that is, in fact, translating into EBITDA growth that would even be higher -- could even be higher in H2 than the one that we've seen in H1. Now what is great about this dynamic is that both core telecom services and cost optimization provide a recurring effect. So we should be able to enjoy their benefits in the future. Now repeating this year's forecast would obviously also require for sizable additional big deals. And it's a bit early to be eyeing this right now. We are in midyear. But our 2026 performance is definitely creating a good platform for further growth in the future. And our midterm EBITDA guidance is a low to mid-single-digit percentage CAGR. So today, we stick to this. But clearly, our ambitions are at the high end of this guidance. We will be doing our annual business planning in H2 of this year. And we will definitely address, well, next year's guidance, but also give you a better outlook for 2028 together with the full year results, so in February of 2027.