SES S.A. (SESGL) Earnings Call Transcript & Summary

Hello, and welcome to the SES 2021 Half Year Results Conference Call for investors and analysts. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, Richard Whiteing to begin today's call. Thank you.

Good morning, everyone, and thanks for joining our investor and analyst results call for the half year ended 30 June 2021. This morning's presentation was uploaded along with the press release to the Investors section at ses.com, if you don't already have it. As always, please note the disclaimer at the back of the presentation. In a moment, Steve Collar, CEO, will present the main business highlights, followed by Sandeep Jalan, CFO, to cover the financials in more detail. After some closing remarks from Steve, we'll be happy to take your questions, where we're also joined from the U.S. by JP Hemingway, CEO of SES Networks. So with that, let me hand over to Steve.

Very good. Thanks, Richard, and good morning, everyone, and thanks for joining us. So I'm going to be starting with Page 3, and our good start to 2021 has continued into the second quarter. We've delivered a solid first half in video on the back of important long-term renewals across our core neighborhoods, expanding our market leadership in high definition and good progress in consumer, all of which has contributed to an improved top line trajectory. In Networks, we've maintained revenue year-on-year in the face of the extended COVID environment. We do see good signals that the market is picking up and government has been particularly strong through this period, growing double digit. We continue to execute strongly in the business with a 5% year-on-year reduction in recurring operating expenses, a significant reduction in interest costs and a reduction in net debt by almost EUR 400 million. And our progress through the first half means that we're on track to deliver our 2021 revenue. We've got more than 90% of our revenue outlook already signed, while laser focus on reducing costs means that we're raising the low end of our adjusted EBITDA outlook. So then with respect to C-band, we remain fully on track to achieve the Phase 1 clearing deadline at the end of this year and triggering the first $1 billion in accelerated relocation payments. The recent issuing of C-band licenses and the support of the major licensees to the efficient reimbursement process means that we expect to start receiving cost reimbursement in the coming months. And then last but not least, we've returned EUR 275 million of cash to shareholders this year through a combination of dividend and share buyback, and this underscores our commitment to delivering sustained shareholder returns. So turning to the key financial highlights on Page 4. Revenue of EUR 875 million and adjusted EBITDA of EUR 544 million were solidly in line with our expectations. EUR 526 million in video revenue delivered reflects the improved trajectory, down 3.9% year-on-year through the first half versus 8% previously and consistent with our conviction of flattening the curve over the medium term. EUR 349 million year-to-date in Networks is flat year-on-year, which we are pleased with given the ongoing COVID headwinds. Cruise lines are returning to business. Aviation is picking up driven by the U.S. And we've seen increased deal flow in the last few weeks across the board. Pleasingly, the strong focus on execution and the measures implemented during our transformational Simplify and Amplify program have driven recurring OpEx down 5% year-on-year with a corresponding increase in EBITDA margin to 62%. Given our solid adjusted EBITDA through the first half, we're increasing the low end of our 2021 EBITDA outlook by EUR 20 million, with the range now at EUR 1.08 billion to EUR 1.1 billion. So then turning to Page 5. And on the video side, we've concluded over EUR 250 million of renewals and new business in the first half of 2021, building on the EUR 650 million of backlog signed during 2020. In Europe, we saw Sky in a number of major public broadcasters extend their business with us, particularly at 19.2 and 28.2 East, the jewels in our network and among the most valuable video neighborhoods globally. Pricing trends are flat to increasing, reflecting the value that we deliver to our customers' businesses. Importantly, we also extended our relationship with Comcast to serve millions of cable homes in the U.S. while also facilitating the accelerated clearing of spectrum to support the SEC process through the implementation of more efficient transmission. We talked previously about our leadership in both the total number of channels carried across the SES neighborhoods and the number of HD channels carried. And pleasingly, this leadership widened through the addition of 225 channels in high definition, up 8% year-on-year to more than 3,100 in total. Satellite remains the most efficient, reliable and cost-effective platform for broadcasters to distribute their most valuable content to consumers around the world. Good momentum and a positive trend in HD+ in Germany, but I'll skip over that for a second, to the recent launch of HD+ in Ghana and an exciting world first, as SES and HD+ Ghana was the first business to transmit ultra-high definition in Africa, transmitting both semifinals and the finals of the European championships for HD+ subscribers in collaboration with Samsung. Exciting developments regardless of whether you are on the right or the wrong side of the result. And sticking with the theme of sports, our Sports & Events business is back to pre-COVID run rates and picking up nicely. So then turning to Page 6 and HD+ provides us with direct access to consumers in Germany and is an increasingly important contributor to our most valuable neighborhood. The business is growing again, with important growth in the number of registered subscribers, while a price increase implemented earlier this year is contributing to higher year-on-year revenue. As trailed last time we spoke, we'll be expanding our HD+ portfolio over the next few months, starting with the launch of HD+ to go. For just an additional EUR 5 per month, HD+ subscribers will be able to take their HD+ subscription mobile with access to over 100 channels on their mobile devices using the HD+ to go app. The app will launch in Q4. I've already got the prelaunch version on my phone. It's pretty cool. And for those interested and want to improve your German, we've included the link to the commercial in the deck. And this will be followed early next year with an IP version of HD+, and that will be accessible to the 19 million non-satellite households in Germany, substantially increasing our addressable B2C market. So, so much for video and now shifting to Networks on Page 7, and it's worth noting that we've been in a COVID environment now for almost 18 months, a period that had a profound impact on cruise and aviation, and these segments for the 3 years prior to COVID were our fastest growing. In that context, we're pleased with the year-on-year revenue holding firm. And the standout performers, definitely the strong growth in our government business, up 13% -- sorry, up 11% year-on-year on the back of strong demand from the U.S. and other governments for the multi-orbit solutions that we offer, anchored particularly with our unique O3b infrastructure. I would note that I'm really excited by the engagement that we're seeing from governments around the world in MEO and in advance of the launch of O3b mPOWER later this year. On the fixed data side, we saw a modest contraction in the first 6 months, driven by expected lower volumes in the Pacific following the deployment of a number of cable systems, but we continue to see growth from rural inclusion projects and continued success of broadening our relationships with Tier 1 operators, and we see that evidenced here with our relationship with Orange and the Maritime Service Partners that we announced yesterday. We're also excited to add AWS to our one hop to the cloud connectivity services, delivering a multi-cloud environment for our customers. Notwithstanding COVID headwinds, our mobility sector is picking up, with a return to sailing for the cruise sector. We deliver the best solutions for cruise in the industry. And with O3b mPOWER still a year away from commercial launch, we've already secured over 300 million in backlog from cruise alone. We're making good progress in replicating the success in cruise across into the government sector with Navy and have a number of demonstration services ongoing across multiple naval fleets that we expect to transition on to O3b mPOWER. And that's a nice segue to Page 8 and our view of how we see the market in networks dividing and where we believe we have a sustaining right to win with our unique multi-orbit cloud-enabled architecture. So this graph shows on the X-axis increasing throughput per site, and on the y-axis, increasing flexibility, whether the demand is essentially fixed geographically or varies over time or location. And so if we sort of start bottom left, services such as consumer broadband and traditional VSAT need relatively small amounts of bandwidth into relatively fixed sites. This is a large market. It's actually the largest on this graph, and that's where you'll find consumer broadband and providers such as Viasat and HNS, but also where we see the LEOs focus such as Starlink as their architectures lend themselves towards low throughput and low mobility. We focus our assets around high throughput and high flexibility. This is where you'll find segments such as cruise, but also important government requirements such as ISR and Navy. And we're particularly strong here. We're close enough to the year to solve the latency, but far enough away to allow us to deploy power and bandwidth flexibly to address the changing nature of demand in cruise, aviation and government as well as the higher throughputs for cell backhaul, trunking and fiber restoration. We overlay this with a coherent geo fleet and create seamless interoperability between them. And this is -- will be made super powerful with the addition of O3b mPOWER, 5,000 beams per satellite and terabit per second throughput. With O3B mPOWER launching our second-generation network before others have deployed their first and our network is designed to address the more profitable network segments with a sustaining value proposition. And to underpin this, we've signed 210 million in backlog for SES-17 and O3b mPOWER since the start of the year and total backlog now stands at $770 million for the combination, approximately a year ahead of commercial service. And finally, for me, on C-band, and the summary is that we're fully on track. Everything remains green with respect to Phase 1 clearing. We've completed the satellite transitions. And we're substantially through the filter installations. Phase 2 also remains fully on track, with satellites well under construction. And with the issuing of C-band licenses, we expect the reimbursement expenses to start flowing in the coming months. So we continue to make progress with the project that will obviously deliver substantial value for SES shareholders. And with that, I'll hand over to Sandeep.

Thanks, Steve. Good morning, everybody. We are very pleased with the solid start to 2021, as shown by our first half financial results. Our revenue is fully in line with our expectations, and we are improving our adjusted EBITDA outlook for 2021, at the low end by EUR 20 million on the back of both revenue performance as well as cost reductions. Net profit is up 35% year-on-year. Net debt reduced by almost EUR 400 million. And we have also continued to bring down our financing costs significantly by about EUR 45 million per year. We have also distributed EUR 275 million of cash to our shareholders during first half of this year, which includes EUR 94 million of share buyback, which was completed recently. And a total of 12 million A shares and FDRs and 6 million B shares were bought back at average price of EUR 6.56 and EUR 2.62, respectively. Turning to the results in more detail and starting with adjusted EBITDA on Page 11. Adjusted EBITDA for the first 6 months of 2021 stood at EUR 544 million and represented an improved margin of 62.2% compared to 61.4% a year ago. This reflects the combination of solid revenue performance and a 5% year-on-year reduction in OpEx with the benefit of last year's Simplify and Amplify program. At the revenue level, video continued to deliver an improved performance, where the reduction of 3.9% year-on-year compared with minus 8% that we had recorded during the first half of last year. This is thanks to our pricing power and our unique video neighborhoods as well as our growing B2C business, GDP+ in Germany, where we also implemented recently 7% price increase. In Networks, our flat performance versus first half of last year is evidence that even in the challenging COVID environment, our unique infrastructure continues to deliver customer value and especially in government segment, where we achieved growth of 11.3% year-on-year. This has mitigated the impact of COVID on mobility, which not surprisingly declined by about 10% year-on-year with a lag effect after a double-digit percentage growth during last year as well as lower fixed data revenue in this period. The long-term prospects in Networks continue to remain strong, and we are very well placed to grow thanks to our unique assets and capabilities in Network, which is well set to capture the massive growth in connectivity demand and is also said to benefit as the recovery from COVID start to set in motion. I will now move to Page 12, which explains the net profit bridge. Adjusted net profit for the first half of the year stood at EUR 152 million, which is an increase of 35% compared with the first half of last year, where the lower adjusted EBITDA of EUR 38 million, which includes EUR 24 million from ForEx effects, as explained on the previous slide, and this was more than offset by 3 main positives. First, depreciation & amortization was lower by about EUR 32 million or 9% year-on-year. Second, I'm very pleased with the progress we are making to reduce our cash cost of financing. The refinancing actions contributed to an interest expense reduction of EUR 15 million in first half P&L and our about EUR 30 million annualized, which is about 20% reduction compared to first half of last year. And by the way, this represents only the savings in the cost of our senior debt. On top, there are also tangible cash cost savings of about EUR 15 million per year from the recent tender of our 2022 hybrid bonds with a combination of new hybrid EUR 625 million and a top of Eurobonds 2026 for EUR 150 million, which was done at our historically lowest ever cost of 0.21%. And this savings, EUR 30 million plus EUR 15 million, respectively, they really expand our free cash flow generation potential of the company significantly for the benefit of our shareholders. And the third main positive comes from the ForEx gain of EUR 20 million compared with a loss of EUR 12 million in the prior period. And this ForEx gain is mainly linked to certain intercompany non-euro-denominated flows. Reported net income of EUR 137 million for first half of this year compared to EUR 86 million in the first half of last year and includes a few exceptional items. These comprise restructuring charge of EUR 6 million and net C-band charges of EUR 12 million and related tax benefits on these exceptional charges. And this is fully in line with our guidance. Our reported earnings per share was also higher than prior period at EUR 0.25. Turning now to the balance sheet on Page 13. Our continued strong focus on free cash flow generation led to the adjusted net debt being reduced by about EUR 400 million or about minus 10% compared to 30th June 2020. At the same time, and as I mentioned earlier, we have also reduced our average cost of financing from 3.5% to 2.8%, which is about 20% reduction, with the benefit in cash annual cost of about EUR 45 million, as I explained earlier, and this expands the free cash flow generation potential. As shown by the chart on the right, our weighted average debt maturity profile is very healthy at an average of 7.6 years. And you can note that there is no significant bond maturities coming due over the next 2 years. Moving to the CapEx forecast on Page 14. This is totally unchanged. Our robust cash flow will be able to support the growth investment of 2021 and 2022 with no major financing needs. After the growth CapEx peak of this year and next, for SES-17 and O3b mPOWER, our cash flows will not only benefit from the growing revenues and EBITDA generated by these highly differentiated assets, but also from the significantly lower level of CapEx needs beyond 2022, which is at around EUR 375 million per year during the period from 2023 to 2025. More importantly, after this investment peak cycle of EUR 2.67 billion, we would have completed both our -- most of our growth investments and major satellite replacements meaning that we will then enter a sustained period of limited CapEx and higher free cash flow generation. Turning now to the financial outlook on Page 15. We are on track and continue to expect 2021 group revenue to be between EUR 1.76 billion to EUR 1.82 billion, of which more than 90% has now already been contracted. Our focus is to continue to execute across the business and deliver the growth in group revenues between first half of the year and second half. That is implied in our outlook, where we expect some reduction in video during quarter 3 and quarter 4 to be offset by new wins in Network. So with revenue on track and our solid performance and reducing year-on-year OpEx, we are also raising the low end of our adjusted EBITDA outlook by about EUR 20 million. So our 2021 revised outlook EBITDA now stands at EUR 1.08 billion up to EUR 1.1 billion. Positive developments continue also on C-band front. The reimbursement process is now set in motion with the issuance of licenses by FCC as well as clearing house being in place with a defined reimbursement process. Billing statements have been submitted to clearinghouse for reimbursement which we'll expect to start and receive the monies within this year. We are well set to the first clearing milestone letter this year, which will allow us to receive the first proceeds of $1 billion, which will be fully utilized to strengthen the balance sheet. With this, I now hand back to Steve to conclude.

Very good. Thanks, Sandeep, and I will end on Page 17. And this is a slide that we showed last quarter and it provides a picture of how we expect our business to develop in the coming years. As we continue to flatten the curve in video and launch SES-17 and O3b mPOWER to support Networks' growth, we'll see top line and EBITDA growth coming through from 2023, while beyond our investment fee next year, we'll be in a sustaining low CapEx environment, and this will allow the business to drive strong cash flows on a sustaining basis, augmented by $3 billion in accelerated clearing proceeds in late 2023, all of which focused on driving substantial value for SES shareholders. And so with that, Richard, I think we're ready for questions.

Great. Thanks, Steve. I think -- yes, go ahead, operator.

[Operator Instructions] And the first question comes from the line of Sami Kassab from Exane.

A few questions please to start. What is driving the growth in international video markets? Can you elaborate on that, please? Is it pricing? Is it volume going up? And do you think video revenue growth in these emerging markets is sustainable over the next 2 to 3 years? Or is it more due to specific contract renewals that you're seeing growth in '21? Secondly, what's the outlook for fixed data? When do you expect it to return to growth, please? And lastly, can you provide an update on the revenue impact you expect from the QuetzSat satellite renewal?

Great. Thanks, Sami. So yes, I mean, growth in international markets in video, I would say we're doing well in Africa. So we're making good progress in Africa. We have built a neighborhood in Ethiopia at 57 East, and so that's kind of an important neighborhood for the future. I would say Asia continues to be a good market for us, supported by what you probably saw a couple of days ago, a strong renewal in India to support the significant business that we have there. And I would say Asia continues to be, again, a good market where we've seen some good renewals and also a little bit of new business coming from the Asia market. So I would say we're relatively modest in our expectations for growth in the emerging markets. We do have some promising developments also in Latin America, where we see a little bit of progress. But I would say our expectations are still relatively modest. But yes, what is there, we definitely expect to be sustaining. I'll hand to JP in a second on fixed data, just to cover the QuetzSat question. So yes, we have a renewal coming up on QuetzSat towards the end of this year. Won't say too, too much about it, but I think we -- as we have discussed before with Ciel and QuetzSat and the relationship with EchoStar, I think we see that declining over time. But nevertheless, we have some very nice business on QuetzSat in Mexico which we expect to extend for the long term. JP, on fixed data.

Yes, Steve. Sami, so on fixed data, obviously, looking back to 2020, we actually had a really solid performance, actually exceeded our expectations. And in 2021, so far, we've been seeing really sort of mixed trend among the regions. Some really, really solid performance in the Americas and Asia. And some softness that we knew would be in place in the Pacific region, as Steve mentioned, around where some of the submarine cables have come into some of the island territories that we've had for many years. We expect that sort of mixed performance across the regions to continue through the remainder of this year. Some overperformance in those strong regions and managing the softness in the other regions. So we would expect the real performance to pick up in fixed data as we get fantastic new assets that we have coming to market in 2022 and beyond, where we really get to leverage the SES-17 and O3b mPOWER, which provide fantastic capabilities for the fixed data market.

The next question comes from the line of Aleksander Peterc from CCT General.

I have 3. One is on your guidance upgrade. If you could clarify what is driving your EBITDA outlook upgrade precisely? Is it more cost cutting, for better savings? Or is there better mix, with video tracking slightly stronger, Networks a bit weaker so far this year than you were modeling originally? And then the 2 questions on the divisions. So just in video, if you could remind us what is the proportion of HD+ new video revenue base? And on Networks, I'd just like to understand if the midpoint of your guidance range is still realistic. If I calculate it right, do you get in the second half 12% growth like-for-like? So after a flat underlying in H1, what will drive this acceleration? Or should you rather model the lower end of this range?

So Sandy, why don't you kick off with the guidance?

Yes. So thanks very much for your question. So on the guidance upgrade, as our guidance implies, for the full year, we will continue to expect our revenues to grow in the second half of this year, of course, with a mix, as you can see, when you take a look at video and network separately. In video, we would expect some declines in second half of the year compared to first half of this year, as Steve talked about, but on the other hand in network, we continue to expect revenues to grow as JP was just talking about. So this makes overall we expect our revenues to continue to grow that's first plus for second half of the year. Second, we are continuing to perform well on the cost reduction front. We are putting a laser focus across our businesses in terms of cost attention also making sure that this ramp-up of Simplify & Amplify program gains are continuing to ramp up. And we see pretty decent progress, as you can see in our results for first half of this year, this program was launched just 1 year back and we can already see a good, decent ramp-up in these gains. Of course, the COVID-related saving that we had last year, they will continue to go down. But clearly, the mix is that cost savings continue on track, revenue will continue to grow. And with this, we feel pretty confident to upgrade the guidance for the full year. First half of the year EBITDA was EUR 545 million. And you can see that from the full year guidance, the second half, despite the revenue growth, we are implying an EBITDA at the midpoint range of very similar magnitude.