Proximus PLC (PROX) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Proximus conference call on the Q3 2022 results. For your information, this conference is being recorded. At this time, I would like to turn the call over to Nancy Goossens, Director, Investor Relations. Madam, please go ahead.

Thank you, and welcome, everyone. Thank you for joining us. As usual, we will start this webcast by an introduction by the CEO, Guillaume Boutin. After that, we will be turning to your questions. And for the Q&A, we are joined by the CFO, Mark Reid; the Residential Segment Lead, Jim Casteele; the Business Segment Lead, Anne-Sophie Lotgering; Corporate Affairs Lead, Dirk Lybaert; and the CEO of BICS, Matteo Gatta. They will be taking your questions in a moment, but first, Guillaume will take us through the highlights of today. Please go ahead, Guillaume.

Thank you, Nancy, and also welcome from my side to this conference call covering the Proximus third quarter results. Similar to our previous sessions, I will take you through some of our key achievements, the progress we made with respect to Inspire 2022 strategy and, of course, a quicker view of the third quarter performance. So let me start with some of the key achievements over the past month. Overall, I'm very pleased with our trajectory, especially our group revenue, which was up by 7.8% and direct margin up by 4.9%, year-on-year growth rates we have not seen for a long time and the continued positive EBITDA trend in spite of inflationary cost pressures. These results emphasize a good performance of our Domestic activities and our unique exposure to International markets. I will get back to this later, but overall, we have kept a strong commercial performance and have, again, taken some meaningful steps in our strategy, with some of these listed on the left side. This slide sums it up for the third quarter from a financial perspective, with revenue and direct margin up for all 3 segments. Our group EBITDA was also up by 0.6%, with once more BICS closing another strong quarter. The strong results prove we have been doing the right things, and we continue to progress on our strategy. To start with, I'm really proud that we set again the pace in Belgium by introducing the 10-gigabit-per-second fiber technology across 5 cities this week and nationwide by next summer. It's a CapEx-light upgrade, and the network we built was already 10-gigabit-per-second ready. So all in all, just a smooth process on the active layer. This achievement demonstrates, without question, the technological superiority of our Proximus networks. As illustrated by the launch of our 10-gigabit-per-second offer, we continue to innovate and bring adapted customer proposals. This will, in turn, further support our NPS results, for which we have already today booked a very nice progress. Earlier this year, we launched new skinny offers, with both Proximus access and the Mobile Vikings Internet offer, clearly addressing the all-evolving customer needs in certain segments. We have seen a good uptake for both while we are retaining these customers within our Proximus family. Turning to our ongoing fiber rollout. Today, we are already rolling out fiber in 77 cities and municipalities. And we are right on target to reach our ambition of 22% coverage by the end of the year. Our fiber footprint continues to grow at a strong pace with end-September 1,124,000 homes and businesses passed with fiber, of which 93,000 were added during Q3, a significant step-up from 12 months back. In the context of our ambition to cover the country with gigabit networks, I am delighted that Proximus, Ethias and the German-speaking community have concluded the first public-private partnership in Belgium, a perfect solution to bring fiber towards more rural regions. The newly created JV, GO Fiber, will cover almost all 4,000 households of Belgium's German-speaking community region. Customer demand for fiber remains high. We added 27,000 active fiber lines over the past quarter, bringing the total fiber park to 220,000, with these customers bringing typically higher ARPC and lower churn levels. Also, the migration rate improved further, with now 68% of our copper customers having moved to fiber 1 year post the commercial launch. In the field of mobile experience, we are playing a leading part in the development of 5G in Belgium. In the business domain, we successfully tested 5G network slicing in cooperation with Ericsson. This achievement further paves the way for a dedicated handling of business-critical applications in an enterprise environment. In the sustainability domain, we are taking many measures to reduce our carbon footprint, and we want this to lead to significantly lower greenhouse gas emissions and becoming net zero across our all value chain by 2040. Therefore, we can be proud of Proximus being the first large Belgian company and the third telco worldwide to have SBTi-validated targets. Moving on now to our Q3 results and starting with the Domestic segment. Over the past quarter, our customer base continued to grow for Internet and mobile postpaid in spite of an intensified competitive environment. For TV, we noted, especially during the back-to-school season, a lower take-up rate, while our skinny offers were showing good traction. Overall, our Flex offering continued to do well, with an additional 49,000 customers that opted for one of our Flex packs in the third quarter. The traction of multi-play offers remains an important revenue driver for Residential unit, which closed a very good third quarter, with its total revenue growing by 3.0% from the year before. This was largely driven by an increase in its Customer Services revenue. For the services part of the residential unit, we have posted in total plus 2.8% growth, sequentially improving from 1.6% organic growth in the second quarter. The revenue increase is driven by a growing number of convergent customers, with a convergent revenue up by 8.1% year-on-year. Thanks to this ongoing move of customers convergent solutions, typically at higher ARPC, and thanks to the indexation of our prices, the over ARPC grew by 3.5% from the year before. For our Business unit as well, we continued to see resilience, and we closed the third quarter with a plus 3.7% revenue growth. We had a good quarter for product revenue, thanks to some catch-up in previously delayed customer installations triggered by the global supply chain issues. More importantly, our B2B unit continues to manage well the balance between growing new services and the erosion in legacy voice. Taking a closer look at the Business Services revenue. All services combined, the trend remains roughly the same, with [indiscernible] Q3, a slight overall decline of 0.6%. In the mix, we achieved good growth for Fixed Data services, mainly resulting from a higher Internet ARPU. And for Mobile Services, thanks to a growing customer base. Reflecting the ongoing transformation in B2B, we also grew high-value recurring IT services, with especially good performance in smart mobility and cloud. This was, however, offset by lower one-shot IT services revenues and the ongoing Fixed Voice erosion. And finally, our Wholesale unit, for which the revenue from fixed and mobile wholesale services was up by 17.3%. This was offset by the headwinds on Internet -- interconnect revenue with, however, no meaningful impact on margin. This brings me to the total domestic revenue, for which we achieved a 3.6% growth for the third quarter. As for the domestic operating expenses, we continue to face a significant impact from increased inflation, especially on the wages, which were now indexed 5 times since October last year. As illustrated on the chart, we have been able to offset part of the inflationary effects, thanks to cost efficiency programs. The remainder of the cost increase mainly reflects customer-related OpEx and costs related to the ongoing company transformation. Moving to the result of our International segments and starting with another strong quarter for BICS. BICS continued its double-digit EBITDA increase driven by direct margin growth in all 3 service groups. Mobility and messaging but also legacy services benefited from a strong summer travel catch-up post COVID. Growth services continued to post an excellent performance in cloud services as well. Telesign continued its strong commercial trajectory of the last quarters. Commercial indicators such as the net revenue retention rate remained at solid levels with 120% for Q3 and continue to see the momentum to be supported by strong sales bookings, up by nearly 90% from 1 year back. Overall, these results reflect the success of the strategic course the company has taken to reinforce its position in the Digital Identity and Communication markets. This brings me to the group results. With inflation being at top of everyone's mind, we have summarized the main exposures and mitigating actions on this slide, starting with our inflation-based price increase. The exposure to rising energy cost for this year was quite limited. And for 2023, we are now more than 90% hedged, with the average price level below EUR 160 per megawatt hour. The main exposure is on our wages, which we are partially offsetting through our ongoing cost program and a lower headcount base. As for the CapEx, inflation effects are being well managed in the total envelope. And for the long-term debt, we have hedged the 2024 and 2025 interest rates. As illustrated on the slide, the first 9 months delivered strong results, with all 3 segments growing revenue overall, leading to a 0.6% growth in group EBITDA. Our CapEx remains fully in line with our projections, with the year-on-year increase largely resulting from our fiber investments. This makes me to the free cash flow over the first 9 months of 2022. As shown on the graph, the 2 main drivers of the lower free cash flow year-over-year remain the higher cash out for CapEx and an unfavorable year-on-year evolution of business working capital needs. Overall, I'm very pleased with our trajectory over the first 9 months of the year, and we are confident to end the year 2022 with Domestic revenue, excluding terminals, to grow around 2%. For our group EBITDA, we expect to be at the upper range of the outlook we gave in July. Our other outlook metrics remain unchanged. As a last but one point, I'm also pleased to announce to our shareholders, the Board of Directors approved the interim dividend of the accounting year 2022 with a EUR 0.5 gross dividend per share to be paid on the 9th of December 2022. And to end this presentation, before turning to your questions, something to put in the agenda for next year. Monday, the 16th of January, we will be holding a CMD to present you our strategy over the next years, with Inspire 2022 now coming to an end. I am really looking forward to welcome all you on the 16th of Jan, either in our Brussels headquarters or virtually. With this, I have covered my introduction, so we can now turn to your questions.

[Operator Instructions] We have the first question from Ben Lyons from Credit Suisse.

The first one, I think, is just on costs. So the price of the energy hedge looks pretty reasonable for FY '23. And now given the visibility on the hedge, could you quantify what kind of step-up we should forecast for next year? And likewise, for the personnel costs, if we assume that there's another indexing at the end of the year, what should we be forecasting for a step-up in personnel costs? And the second question would be just on ARPU. I assume there's about a 1-percentage-point positive impact quarter-over-quarter on convergent and fixed-only. Are you seeing any spin down from the Mobile Vikings broadband package? Just we could see what you're seeing in the market.

Okay. Ben, thank you for the question on -- I'll address the question on cost. In terms of the overall energy position, yes, we're pleased that we've got up to kind of 90% hedge for 2023. You can effectively think of a kind of low to kind of mid-double-digit million cost increase over -- year-over-year in that range. Obviously, we've still got some exposure because of the unhedged piece, but that's the way I would think about it. In terms of the wage inflation, again, the majority of our internal wages are exposed to, at this point, 3 further indexations of 2% on each occasion, and those will take place right now in February, May and August next year. Those can't vary in terms of the timing, depending on the level of inflation and how that clicks the index in the country. But that's basically the way I would think about it. And then on ARPU, Jim, do you want to take that?

So Ben, thank you for the question. So this is Jim speaking. So on Mobile Vikings and the impact of Mobile Vikings on ARPC, the price points of Mobile Vikings are much closer to the price points of Proximus when you compare it, for instance, with Scarlet as a challenger brand. We also are already actively present with Mobile Vikings on the fiber network, which is also quite an interesting ARPC upside to the basic prices that we have on Mobile Vikings. And overall, even though, of course, as you have seen on TV, we do see a slight increase of cord cutters in the base. We continue to see a very healthy traction on triple-play and quadruple-play offers overall. So structurally, the ARPC increase that we have been seeing over the last quarters, we are convinced that you can continue to expect them going forward.

Next question from Nicolas Cote-Colisson from HSBC.

First question is your strategy regarding the balance sheet because you've decided to leverage a couple of years ago with eventually, as a consequence, dividend coverage that would wait for CapEx normalization. So my question, I think, is, what's your feeling at this stage? Obviously, it's to the Board to decide. But are you still okay with the fact that dividend coverage can wait? And I have a follow-up. I may let you answer the first one.

I think in the current environment, to have a healthy balance sheet is quite important. And I think this is something that we are looking at very carefully. So I think we don't want to overleverage the company, that's for sure, and we want to keep that healthy balance sheet going forward. And that's a discussion we'll have with the Board. But you know that we have that new 3-year strategic cycle that needs to be presented to the Board and also evaluated by the Board and then presented to you early next year, and it will be part of the discussions.

Okay. And so in the meantime, can we have an update on the network sharing with Orange Belgium? Because we see currently, you are getting more CapEx on that side of things. Any indication on how the J curve looks like against the initial plan and when savings could be seen.

Yes, Nicolas, so in terms of -- yes, you're seeing the ramp-up. So that's normal, that's the expected progression of that program, so that's in line with what we were expecting. In terms of when the savings come through, we started to do -- I think we said previously that we start to see some of those savings come through '23, '24. And that's still generally the direction we expect those savings to come in.

But when you say 2023, 2024, so it means it's not completely sure it can be 2023, right?

It will be minor in '23. They'll start to see some benefits in '23, but the main savings programs will come through '24, '25. That's probably the way I would model it.

Okay. And sorry, if I take a bit more time. On the 10 gigabyte (sic) [ 10 gigabit ] offer, can you tell us a bit more about the pricing? And how do you plan -- or in another way, I was a bit surprised that you were launching a 10 gigabyte (sic) [ 10 gigabit ] offer now and not trying to milk a bit more the possible progression in the packages in the coming years. So what's the rationale to be so fast at offering the full-fledged fiber?

Jim will come back on the way we want to monetize that speed, and you're going to see it's really well thought through, and we're going to monetize that speed advantage. But it's really to be perceived as the undisputed product leader as it comes to Internet connectivity. And we lived 15 years without a product superiority on the Internet. We had product superiority in mobile but not on the Internet. So 15 years, it's a long period of time. And now we can prove to everyone that the best Internet connectivity with the fastest connectivity is with Proximus. And I think there is no reason to wait for that, as we want. As you know, we are a challenger in the north of the country, and we want to win shares, and this is what you see in the momentum of the company. So it will be, of course, monetized, but we want, in terms of perception, in terms of branding, to be considered as the best product, especially in the north of the country, where we used to be lagging behind in terms of product quality, speeds and capacity. Now this is the opposite. We are leading. We are 10x faster than our competition. And that is here to stay for a long period of time. So I would -- I'm not on your side this time. And I think it's super important to claim that superiority and to -- of course, to monetize it. And Jim will come back to that. But I think in terms of perception, it terms of branding, this is super important to claim that type of speed.

So maybe on the monetization. So of course, this 10 gigabit offer has been announced as a preregistration offer. So we're not disclosing price points at this moment. But just to give you an idea on how we have been looking at this in the past -- and I think it will also give you one hint on how you can look at it in the future. Today on copper, our maximum speeds are 100 megabits per second. The first price points on fiber are EUR 5 more expensive than on copper. And there you get 350-megabit-per-second speed. When you want to go from 350 to 1 gigabit, which is, for the moment, the top commercial speed available, you have to add another EUR 11 on top of that. So that already gives you an idea on how we are currently monetizing the different capabilities that technology is bringing. And of course, as Guillaume says, we will continue to do this going forward. And so we will definitely also monetize the 10 gigabit offer that we're going to put on the market later.

Next question from Emmanuel Carlier from Kempen.

The first one is on pricing. Could you share your thoughts on pricing moving into 2023? The second one is on the TV losses. Is this something that you see continuing in October? And in other words, do you believe this is a structural trend? Or do you believe it is a kind of cyclical element due to the soft macro environment? And then the final question is on the fiber rollout. Could you just give an update on the number of fiber homes you expect to build in 2022 and 2023 because it looks like the speed is a bit slower than initially expected?

So on pricing, I'll start. So value management, as you can see in our numbers, is something we know how to do. I think we did 2 price increases this year, 1 in the 1st of June and 1 in the 1st of May. And at the same time, you see that our ability to continue improving NPS is still there and also to limit the churn effect on those price increases. So I think we have very good skills to pass, to land those price increases. And I think you could expect us to continue in that direction depending on the evolution of the macroeconomic environment. On TV, Jim will answer the question.

So in TV, Emmanuel, indeed, we continue to see pressure on digital TV going forward. This is, on the one hand, a combination of a changing customer behavior in a small segment of the market but also the more difficult economical context. And as you know, to capture this new demand in the market, as Guillaume already mentioned as well, we launched this year our Flex XS offer combining Internet and mobile on the Proximus brand, but also with Mobile Vikings, we are present in that market. So as a consequence, we do see some pressure on the TV volumes. But at the same time, for us, it's, of course, very important that we are also present in that part of the market so that we can capture customer demand in that segment as well. I think at the same time, let's not forget that digital TV remains a very, very relevant product for the big majority of the market, and we remain convinced that everything we do with BICS and our Android TV decoder approach, where we are combining a strong local TV offer with OTT bundling, remains the best strategy to keep customers on our local TV platform.

Next question from David Vagman from ING.

So first is on costs, so let's say, cost savings for next year. How should we be thinking about cost mitigating measure that you could take? So -- and I mean on top of what has already been announced. And could you be quantifying what is doable or new programs that you might have? And then second question is on -- also on pricing for 2023, what is, generally speaking, your philosophy, let's say, compared to inflation? So do you put yourself a bit at a discount or in line? And then on the ARPU evolution, so next to, let's say, a price increase. Could you give us, roughly speaking -- or how should we be thinking about the -- let's say, the success of your skinny bundles, Mobile Vikings, Scarlet, you said -- you mentioned cord cutting, how could this play out, so the price increase on one hand and then maybe the down spending on the other hand?

David, let me take the first question on cost. So in terms of outlook for next year, we're clearly not guiding or giving that at this point. We'll come back to that in January in the Capital Markets Day. In terms of -- I think we've talked a little around what we've got in kind of our sight already, and we -- in terms of our EUR 400 million gross cost saving program. And we continue to look at that in ways that we can expand the scope, speed, the realization of that. And the kind of areas that we're -- we continue to look at that as in the energy space. So in terms of the kind of the network usage, the office usage, the building, the phasing of the building infrastructure that we have, the building footprint. So we obviously have our headquarter's building change program beginning to start. Discretionary spend is clearly something that we would -- you would expect us to look at in terms of HR levers. We continue to be very focused on internal and external, and you've seen our kind of FTE numbers continue to progress south. So I think that's something that we're very specifically kind of managing. And then continually looking at the efficiencies and the speeding up of efficiencies in terms of the customer journey, transaction-type cost savings. And again, you'll see that in our deck. We've been very successful with that. But in both ways in terms of reducing those transactions, therefore, taking costs out but also making those transactions digital in a way that they're more valuable to the customer. And the customers are returning us very, very favorable feedback through NPS scores. So I think we've got a number of programs. Those programs will continue to look at this pace of rollout, the scope of rollout to help us mitigate the inflationary pressures that everyone is feeling.

On the price, 2023 pricing strategy for the future, of course, I won't disclose anything for 2023. But I think I tried to answer the question just before. I would try to say it again. I think we know how to do it, but we do it the right way because we value manage, but at the same time, we increase the satisfaction of our customers. And this is the way we look at it. I think if you can value manage, but at the same time increase your NPS, I think this is the right thing to do. So you can expect us to continue in that direction.