Proximus PLC (PROX) Earnings Call Transcript & Summary

Good day, and welcome to today's Proximus Q3 2023 Results Conference Call. This meeting is being recorded. At this time, I'd like to hand the call over to Nancy Goossens, Head of Investor Relations. Please go ahead, ma'am.

Thank you, and welcome, everyone. Thank you for joining us. We will start the webcast with an introduction by the CEO, Guillaume Boutin. We will be using the presentation that we have published this morning on the website. After this, we will turn 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; the Corporate Affairs lead, Ben Appel; and the CEO of BICS, Matteo Gatta. They will take your questions in a moment, but first, Guillaume will take us through the highlights of today. Guillaume, please go ahead.

Thank you, Nancy. Ladies and gentlemen, welcome to this webcast. And over the next 15 minutes, I will cover these topics on the usual ones. And let me start first with the highlights of this quarter. We'll get into more details. But clearly, there are a number of things that I'm very pleased to announce today. To start with, the continued and very good customer growth with, in particular, mobile, postpaid closing another excellent quarter. Secondly, resulting from the growing customer base and our pricing strategy, we achieved strong revenue growth for our domestic segment, up for the quarter by 4.3%. At the same time, our EBITDA trend starts to recover with a domestic EBITDA decline mitigated to minus 0.7% and minus 0.4% for the group EBITDA. With the results outperforming our own expectations, we have improved the outlook for the year for our domestic operations. While for international segments, we expect the direct margin growth to be somewhat more moderated than we had anticipated. And as the last point, the free cash flow for Q3 was good, showing recovery from the declines in the first half of this year. We are now 9 months in our bold2025 strategy, and I have been taking some major steps forward. For our Domestic segment, our results demonstrate our strategy is already delivering. Internationally, Telesign continues its growth trajectory and turning EBITDA positive a bit sooner than we expected. And with the announcement of the Route Mobile transaction, we'll be set to accelerate the growth for both CPaaS and digital identities. As you know, for Domestic segment, the key factor in our strategy is the rollout of Belgium gigabit network. As you can see on the quarterly update chart, we have been further expanding our fiber works, and our fiber machine is going full speed in no less than 133 Belgium cities and municipalities, bringing Belgium inhabitants the best technology available. In view of making fiber accessible to all citizens and businesses in Belgium, we also welcomed the recent announcement of the regulator. The BIPT stated being ready to evaluate any fiber agreement between operators in Belgium spanning across all possible geographical areas. By the end of September, we are nearing 1.6 million homes passed with fiber. On top of this, Fiberklaar and Unifiber have today [ installed ] fiber in the street for over 300,000 homes, meaning fiber is in the ground, but homes are basically waiting for the hubs to be activated. Our network drilling rate is also nicely progressing, reaching 26% by the end of September. In terms of active customers on fiber, we have been growing our base with 31,000 over the past 3 months. This brings the total now to 353,000, that is 60% higher than 1 year back. The success of fiber is also reflected in the strong migration rate of 70%. Turning to mobile. I'm proud, Proximus was recognized for the quality of its network, especially since we are in the midst of [ our changing ] with the redeployment of our mobile network. The RAN swap to Nokia and the mobile network consolidation is now reaching its cruise speed. Staying in mobile, we are pleased to announce the signing of a mobile wholesale agreement with a new market entrant. This will, together with the preparation works for Residential segment, ensure the best -- the position for us to compete in a changing market structure. A quick word on the partnership with Google, which we are proud, as we are becoming Google's exclusive partner amongst operators for the distribution of the Google Pixel in Belgium. This Wednesday, we announced also Clarence, the joint venture between Proximus Luxembourg and LuxConnect, the presence of Prime Minister, Xavier Bettel and the [ means of telecom, ] Petra De Sutter, which is a key player in the data center sector. This is to offer unique disconnected server and cloud solutions to governments, [ figurate ] companies, international organizations and enterprises with the sensitive data in Europe. The creation of GD Clarence is the first step towards proposing the Google distributed cloud to our customers in Belgium and Luxembourg in 2024. Next, the transaction to buy a majority stake in Route Mobile is going as planned. Preparation activities have started, and we can confirm our expectation to realize synergies of at least EUR 90 million on an annual run rate basis. In a 3-year time frame, we estimate that the combination of Telesign and Route Mobile should generate total revenue of around USD 2 billion and align the EBITDA margin to best-in-class peers, meaning 13% to 15% margin and a cash conversion in the 50% to 75% range. Subject to obtaining all regulatory clearances and MTO completion, we reasonably expect the closing of the transaction to happen by the end of the first quarter of 2024. Eventually, as part of our bold2025 strategy, we have also made good progress on the ESG front. We have recently published a dedicated webinar in ESG, which I invite you to have a look at. You will find the link on the slide showed on the screen. Having covered the strategic part, let's move to the financial and operational results of the third quarter. I trust that you have already seen the numbers, so I will go through this part relatively fast. And I'll start with our Domestic segment. So thanks to our network superiority, our multi-branding strategy and the success of our new mobile portfolio, we achieved another really good quarter in terms of customer growth, and this across all our main product groups. Especially for mobile, we have closed an outstanding quarter, adding 60,000 new mobile postpaid customers during the quarter. Zooming on our residential units, the sustained strong commercial performance, further supported by price indexations, resulted in another strong revenue quarter, with total revenue up 5.5% and services revenue progressing to a 6.2% growth. The residential customer services revenue benefited from a strong interest in ARPC, up year-on-year by 6.1%, reflecting the effect of price indexations and the ongoing move from customers to convergent offers. The combination of customer growth and pricing greatly supports our value management. The new pricing lending well and clearly supports the ARPC growth. At the same time, churn levels remain well under control. All in all, this is translating into a revenue uplift by over 6% for the residential services in general and plus 10% for the revenue from Convergent Services. Our business unit also closed a very strong quarter, with revenue up plus 4.1%. We are especially pleased with the business services revenue, which pursued its positive trend in the third quarter, reflecting the strategic progress we have made in this area. Taking a closer look at the business services revenue. You see that in particular, strong growth was realized for IT services, up by 10.2%, resulting from growing revenue in cloud, security, smart mobility and smart network services. Moreover, we continue to achieve good growth in Internet revenue, with ARPU up by 8%, while we managed to keep a stable customer base. This more than offset the erosion in legacy fixed voice. And finally, our Wholesale unit, for which the year-on-year revenue decline is mainly the result of the ongoing decrease in interconnect revenue, however, with no meaningful impact on the margins. This brings me to the total domestic revenue, for which we achieved a sustained strong growth, up by 4.3% for the third quarter. The main driver is services revenue, for which the growth further improved to a 4.6% increase. Turning now to the domestic operating expenses. In line with our expectations, we still face significant inflationary cost effects on wages, electricity and other exposed cost lines. Moreover, the strong commercial momentum also drives the customer-related OpEx higher. But thanks to our ongoing cost efficiency program, we couldn't in part offset this, overall resulting in OpEx being up by 10.3% for the third quarter. Let's take a closer look to the main moving parts, starting with the progress made on the plan to realize cost efficiencies. The execution of this is going as we expected, with also this quarter some meaningful cost savings across the 3 axes that we are targeting. This gives us great confidence in our ability to deliver the EUR 220 million of cost reduction over the 2023-2025 period. In the middle, you see that the exposure to inflation impact of both wages and electricity is starting to come down. At the same time, the commercial success is also driving higher customer-related costs. So then just a few example, think of back-office costs related to fiber activations or higher sales commissions linked to the strong growth of customers. This brings me to the total domestic EBITDA, which was down by minus 0.7%, with the increase in direct margin almost fully offsetting the OpEx increase. Turning to the International segments now. For BICS, the trend shows how they are cycling against an exceptional strong performance in 2022. This is especially the case of legacy voice. And besides a USD currency headwind, voice is impacted by the erosion of our international voice volumes and a change in destination mix, with a notable revenue decrease for 1 specific country, yet with limited impact on margin. Currency effects aside, Telesign's business performance remained strong, achieving double-digit revenue and direct margin growth. Revenue and direct margin from Communication Services was positively impacted by strong performance of Telesign's largest U.S. customers, while the growth in the Digital Identity segment was driven by the expansion of the customer base outside of the U.S. With direct margin growing and OpEx year-over-year, the EBITDA of Telesign turned positive in the third quarter of 2023, totaling EUR 2 million. This brings me to the group results. And this slide sums it up for the group with a strong performance of Domestic in the third quarter driving the group revenue and direct margin increases. Overall, the group EBITDA decrease was limited to minus 0.4%. Turning to the group CapEx. Over the first 9 months, we invested EUR 904 million, and we remain well on track for our full year projection of around EUR 1.3 billion. In line with what we announced, own fiber build is coming down from its peak in 2022, while the CapEx to connect and activate our fiber customers is going up. Moreover, the mobile network consolidation led by Mwingz is ongoing, with CapEx spending following the pace of the mobile site consolidation. Brings me to the free cash flow. The adjusted free cash flow for the third quarter was EUR 64 million positive. Bring us to a minus EUR 35 million over the first 9 months of the year. As shown on the graph, the main driver for the lower free cash flow is phasing in VAT and income tax payments, in part offset by positive business working capital. In Q3, we also had equity injections for EUR 30 million. With increased attention to financing costs, just a quick reminder that almost all existing debt is at a fixed rate, and bonds maturing in 2024 and 2025 are hedged at low rates, in line with the current average funding cost of around 2%. With its well balanced debt maturity profile, the debt is spread out over a reasonable period of time and not concentrated in a particular year or short time frame. With the good results so far, we are confident of raising our domestic and group guidance. For the full year 2023, we expect our domestic revenue to be up between 3.5% and 4%, while domestic EBITDA decline will be limited to around minus 2%. For the group EBITDA, we are also improving the 2023 outlook to a year-on-year decline of around minus 2%. Our international segments, BICS and Telesign, we are mitigating our direct margin expectations for the year 2023 to growth between 4% and 5% for the 2 companies combined, excluding the currency effects. As a final point on this slide, I'm pleased to announce that the Proximus' Board of Directors has approved the payment of the interim dividend over the result of 2023, [ an amount ] of EUR 0.50 cents per share, in line with our 3-year remuneration policy. To conclude with the topics I covered earlier and summarized on this slide, we believe we are extremely well positioned for the growth ambitions we have set in bold2025. With this, I have covered my introduction, so we can now turn to your questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from Nicolas Cote-Colisson from HSBC.

Yes. Sorry, can you hear me now?

Yes, we can.

Okay. Sorry about that. So you called for a regulatory framework on fiber co-investment. Now you've got it, or at least you have the go ahead to discuss with the competitors. But now, what is the plan? Because I can see a vested interest for one of your competitors to work with you in Wallonia, but much less so in Flanders given Flanders had its own plans. And a lot of customers, too. So I'm just wondering, where is the opportunity for Proximus with co-investment in Flanders? And more generally, what do you think are the implications from a CapEx point of view? Is it a case of lower CapEx for you or same CapEx for more deployments? Just asking what is your preference, what the priority ahead with your discussions with peers. And I may have a follow-up on Telesign.

Thank you, Nicolas, for the question. So obviously, I cannot share a lot of details as we speak because the discussion just started. I think, as I said, we are pleased that the 2 deals are closed. The first blocking point of not being able to start discussion was the closing of the tech private's move on Telenet and the closing of the discussion between Route and Orange. Those 2 events are now behind us. So we can start discussion, and indeed, BIPT say that he was not opposed, and we're welcoming those discussions as well. So now we have started. We need some time to conclude. And no, I cannot comment, but there is opportunities both in Wallonia and both in Flanders to get to a framework, which will be positive for all parties, positive for Proximus, positive for other partners, but also positive for society. I think we can also bring some societal benefit to those discussions, which is quite important, also for our regulators. So that's where we are today. I cannot comment too much on it, as you can imagine, but discussions have started. BIPT gave us 6 months to make significant progress. I hope we'll be able to indeed make significant progress, but I think we are all very motivated to get there.

And do you think it's more a matter of a lower CapEx in total or more faster build up?

You can imagine that it's a factor of a lot of different elements, but -- and we know. I will give you more clarity on that when we can present the deal.

So if I may, just a follow-up on Telesign and eventually, Route Mobile. Because -- thanks for mentioning details in the slides. So you said 11 countries. Maybe can you precise a bit more whether it's all about competition authorities' approval that you are looking for? Or is there anything else we should be aware of? And also out of the 11 countries, how many are they in Europe and Africa? Because this is where maybe the regional overlap is the greater. And then I'll stop, just a very last one, just on the price paid. I think you're well aware that the market on CPaaS and the peer performance in terms of share price since July has been quite bad. So would you have any capacity to revisit some of the terms of the trade? Or at least, could you reconsider the size of the PTO?

On the approval process, [ Junie, ] I think this is only a regulatory approval process. I think it's really going well. And most of the countries have already been secured. I think we are still waiting for 2 of them now. So I think we -- it's really going according to plan. And then, of course, there is a CFIUS approval process, which sometimes is the one that takes the longest time. But also there, we are seeing some positive signal that we can go and get cleared quite rapidly. So I think there is no really blocking point for a closing date before end of Q1 next year on the regulatory approval process on the MTO or PTO, but we call it MTO here. So the tender offer. I think the terms of the contract are for us, the right items. You reflect the value of both companies, both the value of Telesign and both the value of Route Mobile. So I don't want to change the terms of the contract. We are very happy with the terms of the contract. And as you know, all the prep works -- because, as you know, because I just said it in the presentation, the prep works are going quite well, and we are extremely confident to confirm the level of synergies that we envisage for the combined entity. So it's really going according to plan. The more we look at the 2 companies and the business opportunities, the more we are very pleased about the move we made.

We'll now take our next question from David Vagman from ING Belgium.

First, on the -- and regarding also related to the new fiber framework potentially and the BIPT being more open for cooperation between regulator. Regarding the fiber JV and in particular Fiberklaar, can you contractually stop or massively shrink the rollout at Fiberklaar. As it seems to me, it's becoming actually less relevant. So -- and okay, notwithstanding what could be the outcome of your negotiation with the other operator. And then on Digi, can you explain the strategic rationale of the MVNO deal or the pricing compares to, let's say, what Digi could have obtained from a national roaming agreement with an official price? And then maybe a few words on the sale of the towers, what kind of price level can we expect for the tower sale.

On your first question on Fiberklaar, I think I cannot comment on that. I think we -- what we know is that we are doing, we are full speed. We have continued to accelerate. And on the development, we want to continue to invest using our 3 engines, Proximus, Unifiber and Fiberklaar. And of course, we are opening discussions with our friends of Fiberklaar also involved with the other parties. But there is 2 different discussions here. There is a discussion around finding a framework that could be good for everyone. But at the same time, we are still investing and delivering the products we had foreseen with our partner, Fiberklaar, to be delivered in the months and quarters to come. Overall, if you take the products that are not yet activated, but already in the streets, we have covered more than 30% of -- 3-0 of Belgium, and that will reach close to 33%, 34% by the end of the year. So the speed of putting fiber in the streets will not decelerate, but at the same time, we will have discussions to make it a better project for everyone. But -- that's where we stand at the moment. On Digi, deal rationale is always better to have a commercial agreement compared to having an agreement that is forced by regulation. That was the idea of striking a deal with Digi during summertime. I think I was not the only one around the table, all operators were willing to get that deal, but we managed to convince Digi to sign with us because first, we have the best network. Second, we have also those assets to be -- to be offered to them. I think you referred to the pylons, which was also quite an important element in the discussion with them. In terms of pricing, that agreement is market conformed, nothing different from what does already exist on the market with other partners of Proximus. So there is no specific discount to them as it comes to the agreements we stretch for the access to our mobile network.

And on the price to be obtained from the pylons, can you say anything?

Yes, David. I mean, look, we're not going to disclose the value, but it's not meaningful at the Proximus group level in terms of free cash flow number. So I think that's probably the best way to think about it.

Okay. Okay. And a very quick follow-up on the -- sorry, on the fiber, the new agreement. Could it also encompass your copper network? Could you -- I mean, or even you moving to the HSE network of Telenet, could we see like broader deals than just fiber?

I'm really sorry, but I won't be able to comment on copper, coax, fiber, everything has been discussed. We'll see where we go and where we land. But we need some time, so I'm going to have to ask you to be a bit patient. We want to go fast, but we've seen this some time before, we can come back to some deals to be discussed.

And our next question comes from Roshan Ranjit from Deutsche Bank.

Great. I've got 3, please. Firstly, on B2B, the IT services had a material growth improvement this quarter. Anything in particular this quarter? I know you sounded out that segment around cloud. But is that something that's sustainable going forward? Are we just at the start of the ramp-up? And then you could say that would be useful, please? And secondly, thanks for the extra detail on energy. Can I check, in terms of the tailwind for '24, are we looking at a high-single-digit energy tailwind for the EBITDA contribution, based on similar volumes in '24 versus '23? If you could confirm that or give any details, that will be useful. And just following up on Digi, any discussions around fixed access? Has that started? Or are we still waiting to see that?

Hello, Anne-Sophie here. Thank you very much for the question. So on B2B, indeed, we've seen good IT services growth in Q3. And that's driven by actually all of the different customer value propositions we have within IT. So security, smart networking. But also cloud, as you highlighted. As you probably saw also recently in the press, we unveiled the launch of our JV in Luxembourg with LuxConnect and Proximus Luxembourg called Clarence, which stands for clarity and transparency, which enables our customers to benefit from the Google distributed cloud environment in a very safe and compliant manner. This offer will be available in 2024. But what we see already is revenues in cloud based on the existing offers that we already have today, which, as you know, is a hybrid cloud offering, therefore, enabling us to provide different cloud types depending on what data would be hosted where. In terms of moving forward on expectations, there's just one thing I'd like to highlight. Some of our growth, as you could see from the slide from an IT perspective is products. And there, I don't see the same type of year-over-year growth for Q4. Because as you remember, last year, we had a very high comparable base because we were seeing the beginning of the supply chain issues being resolved. So we had a very high -- it remains less relevant because, as you know, our strategy is to develop our recurrent managed services, and products is just one-shot services. So I hope that answers the question.

I think the...

I just want to follow-up on -- sorry, are you saying that the IT services 10% growth is sustainable into Q4?

I'm saying that part of that growth is product. And for the product, which is one-shot revenue, we will likely not see the same type of growth. Because of a very high comparable base, the quarter of the year previous.

On the -- I'll take the energy question, then. I think there is a lot that Digi needs to do before launching. Also, we need the mobile platform to be ready for them by the -- by mid next year. So probably the first priority of Digi. They made some announcements also that they wanted to consider also being a commercial operators -- commercial operator, and look at what could be a fiber strategy for them. I think this is what we have read. I think they also have to learn the specificities of the major market as it comes to rolling out fiber. So I think they also do -- need to do their homework. And at some point, they will probably engage into discussions with the different partners. But we are not yet at that stage. I think there is a lot to be done for Digi in Spain, Portugal, Belgian mobile, that's totally a lot to be achieved. But of course, our network is open, and we have the best network around fiber. So we see how it goes.

Ranjit, yes. And I think the last question on power. So yes, we were expecting -- as you saw from our hedge perspective, we're in pretty good shape. So I think in a middle digit, maybe just getting into the high digit would be a reasonable number to expect.