Tele Columbus AG (TC1) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. It's my pleasure to welcome you in the name of Tele Columbus management team to our late conference call following the release of our third quarter results for fiscal year 2020, which ended on 30th of September. This call is limited to 60 minutes. In case of any follow-up questions, Manuel and myself are available and happy to discuss. I'm here today with Daniel Ritz, our Chief Executive Officer; and Eike Walters, our Chief Financial Officer. I would like to remind you that if any lenders or rating agencies on the call that this is a public conference call only in which only publicly available information will be discussed. I would therefore ask you to refrain from questions containing information not belonging to the public domain. This conference call is intended for capital market participants only and not for press representatives. If any journalists are on the line right now, we would highly appreciate if you were leaving the conference call now. Press representatives are welcome to call my colleague, Sebastian Artymiak to discuss any outstanding questions. As an additional reminder, please be aware that there might be a delay between the slides and the webcast and the voice transmission. Moreover, due to the current situation, we're partially in different locations and therefore, need to coordinate ourselves in a different manner when it comes to Q&A later on than would be the case usually. Having said that, it's now my pleasure to hand over to you, Daniel. The floor is yours.

Thank you, Leo. Good morning, ladies and gentlemen. A very warm welcome also from my side to Q3 2020 conference call. On Slide 3, the usual agenda. I'll kick it off with key messages, followed by operational update and KPIs also covered by myself. I will then hand over to Eike Walters, our Chief Financial Officer, to talk about financial performance, and I'll come back briefly at the end with guidance and outlook. Moving on to Page 4, key messages for this quarter. I guess the headline is we had another solid quarter in Q3 2020, operationally, financially and also talk about some strategic matters. Operationally, we continue to remain, thankfully, largely unaffected by the pandemic so far, and this is really good news. We have seen, and that's a very positive development, and like I said [indiscernible] 7,000 net adds on IP and 4,000 on telephony. Our NPS continues to improve across the board. And overall, NPS is now also in positive territory, which is very positive. And we also received the -- continue to receive positive feedback externally with several awards on customer service that we have been able to bag in the last couple of weeks and months. We're also happy to report another quarter of strong growth in B2B in Q3. We're up 25%. However, this is driven partly by project-related, lower-margin hardware sales, which also have weighed on the gross margin of B2B in Q3. Financially, we are confirming our full year 2020 guidance pro forma the strategic review one-off costs. And we're also happy to report both Q3 core revenues, excluding construction work and EBITDA adjusted for strategic-related one-off, up 1% year-over-year each. We have been cautious on CapEx spend in the pandemic in Q3. CapEx for Q3 is down 19% year-over-year in this quarter. We have 2 very important proof points for our Fiber Champion strategy that we have communicated during Q2. On the one hand, we have, among others, several prolongations, a very important prolongation of 20,000 homes connected in Schwerin, the Northern German City of Schwerin, where we also were to be doing FTTP upgrade and selective also FTTH. We have also put in operation, our second retail fiber backbone rings, which reinforces our Fiber Champion strategy. Lastly, we reconfirmed our prior commitment to provide a funding update during the calendar Q4. However, today is not the day for this, and we will, therefore, not be in a position to answer any questions in this regard on this call. I know this is not what you were hoping for, but I thank you for your understanding. Moving now to operational update and KPIs. As you can see on Page 6, we have seen a very positive development in this quarter on IP net adds, which are up significantly from Q2. Now, at 7,000 positive net adds. I think this is also a good achievement when I compare it to what competitors of ours have delivered in Q3, those that have already reported, especially adjusted for the size of our footprint. We're also happy to report that the promise we have made at the beginning of the year that this year we would do, cumulative over the course of 4 quarters, more net adds than might be done in 2019. We're well on track to achieve that with 13,000 net adds year-to-date Q3 compared to 10,000 overall for 4 quarters last year. Then on telephony, we have also seen a good quarter with 4,000 net adds, which represents both a sequential and year-over-year improvement. We also see this as an increase fixed-line usage in the pandemic, and this is something that is positive for us. On Page 10, we show you the usual split of bandwidth for the various tiers in our gross add base. In the quarter, you've seen Q3 2020, very positive development in the sense that the green part of the stack gets bigger every quarter, and that's good because these are high bandwidth, 200 megabits and up. And this is an ongoing trend that we see persisting now for several quarters. And we're also happy to report that over 80% of our new customers opt for 24-month tariffs, which is also, again, good news for us. Moving then on to Page 8, where we show you trends on TV, both CATV and premium TV, I would say, a mixed picture here. CATV, we've lost another 15,000 CATV RGUs. This is slightly better than Q2 and definitely better than Q3 last year. However, as we have said before, the market remains challenging for CATV, and therefore, we have lost, as I said, around 15,000. The split between bulk and individual CATV contracts, the result here is about 50-50. However, we have seen a positive development in Q3 2020 as far as premium TV RGUs are concerned. We're up 2,000, which is the first time in quite some time that we've seen positive net adds in the quarter for premium TV. However, we're cautious and we don't read a trend into this yet because of the issues that we have previously flagged on our premium TV service and platform remain to be fixed, and we presume that this has to do, on the one hand, with different viewing habits in the pandemic, more people stay at home. Cinemas are closed. And secondly, also, we see a positive opposite correlation with bundling with our IPTV -- sorry, with our IP net adds that were up in the quarter. Moving on to ARPU on Page 9, you can see that the trend of last quarters continues. We have pretty much stable ARPU both on Internet and telephony as well as on TV. I would say on TV, that's actually good news. While we continue to have an issue on RGUs, at least on the ARPU, we remain stable. So we don't have too much pricing pressure there, which is a positive. Moving then on to Page 10, where we show you the further development as far as Net Promoter Score is concerned. As I mentioned in the beginning, in my key messages, overall NPS is positive now. Actually, now you can actually see the green bar above the 0 line. For the first time, really, you can see it. That's good, but there's still more to be done. Of course, this is a long journey, and we're well on our way, but we're not there yet. As far as NPS customer service is concerned, also for the first time, you can see a little green thing there sticking up above the 0 line and NPS for direct sales is significantly up. This is one of the more recent measures that we have introduced. And we see very positive development there. So this is a strong encouragement for us to continue the journey that we're on to put the customer at the center of our attention and to do better going forward. Moving on to Page 11, where we show you B2B. As I've mentioned in my key messages, a very strong quarter in terms of growth year-over-year, up 25%. As you can see, the contribution margin also went up but not with the same percentage. So therefore, certain pressure on contribution margin in Q3 2020, as I mentioned, driven partly by project-related lower margin hardware sales. Just to be clear, we're not selling hardware, just for the sake of pushing up revenues. This is related to projects. And therefore, good news that we didn't get significantly large projects from our clients also in the pandemic. And some of them include, as I said, hardware. However, we expect that profitability measured as contribution margin for B2B is -- will return to previous levels during the fourth quarter of 2020. This concludes the part on operational update and KPIs, and I'll now hand you over to my colleague, Eike Walters, for financial performance.

Thank you, Daniel, and hello and good morning also from my side. On Page 13, you have the overview of the revenue development and the underlying trends per category. So the key message is that the recent trend continues, the B2B business drive growth and the TV business remains challenging. The light blue bars describe the reported numbers and the dark blue bar describes the development of our core revenues. On the reported numbers, the revenue decrease, which is largely explained with the ramp down of construction work. This is in line with our expectations and previous communications since the infrastructure project in Plon will be finalized this year. Our focus is clearly on the core revenues, so the dark blue bars, where we have achieved a small increase of 1% from EUR 116 million to EUR 117.2 million. As said, the TV business remains structurally challenging. By end of Q3 2020, we had roughly 80,000 less cable TV RGUs compared to Q3 2019. And this has, of course, a negative impact on our revenues. And here, you'll see the red bar resulting in EUR 2.4 million less than last year. But there's also a good side. On the other hand, we experienced positive momentum in IP and phone. The EUR 200,000 revenue growth doesn't reflect the underlying KPI performance in an appropriate manner. Q3 2019, and this will -- you see in further comparisons as well, have benefited from extraordinary one-offs, which makes a comparison rather difficult. So the underlying trend of our business is robust, and we had, by end of Q3 2020, 18,000 more broadband customers than in Q3 2019, which is very encouraging and clearly a highlight of this quarter. As usual, another strong quarter of our B2B team with an increase of 25% points versus Q3 2019. This increase is even higher than what we are used to. But as you have seen in Daniel's presentation, B2B customers ordered more hardware, which comes in as an inferior margin to our recurring business and, hence, explains the contribution margin development in Q3 2020. On the next page, Page 14. You see the EBITDA comparison with a colorful mix of bars, what means mix trends as well. The reported EBITDA decreased by approximately 3% or EUR 2 million from EUR 57.1 million to EUR 55.1 million. But I'd like to point your attention to the dark blue bars because our EBITDA in Q3 is impacted by one-off related to the strategic review. And without the EUR 2.5 million, the EBITDA would have been EUR 57.6 million and result in a growth of 1%. So this is a light blue bar on the right-hand side. As said, we experienced headwinds in revenues, minus EUR 4.7 million, higher direct and personnel costs and higher marketing expenses, and this all led to pressure on the EBITDA. And these were partly compensated by again lower signal fees and reduced cost for construction work, which are, of course, also related to the infrastructure project and plan. The increase in personnel expenses is driven by 2 facts actually. First one is really a result of our in-sourcing strategy where we made us less dependent from external partners and [indiscernible], and we hired employees to reduce the cashout and the non-recurrings. And of course, that strengthened the internal capabilities. The result is that we have by end of September, roughly 40 people more on board than last year. The rest of the increase is again, explained by the lower cost base in Q3 2019. So you had higher revenues in Q3 2019 as well as higher cost because of one-off effects with here, in case of the personnel expenses, has the nature of release provisions. And this cost was so much reduced and was at below the actual amount from Q3 2019. We experienced again higher own work capitalized and we described this last quarter as well. We put more insulation construction work internally to our subsidiary, ALC, and reduced external orders. And lastly, we took a conservative approach on the value adjustments and with the pandemic, which led to an increase of the other expenses. But all in all, all in, this quarter is in line with our expectations to reach the full year guidance 2020. On the Page 15, you see the financial results, which is still negative and reported profit decreased in this quarter slightly compared to Q3 2019, but improved more than EUR 2 million sequentially. Here again, have in mind that Q3 2019 benefited from cost-reducing one-offs. So the higher normalized EBITDA, and it's difficult to compare. The lower EBITDA and higher depreciation and amortization put pressure on the profit, while several noncash effects compensate themselves. The decrease in other financial results is mainly due to a value adjustment on embedded derivatives. And unfortunately, we had to pay a minimum amount of tax as well. With that, I'd like to turn to the CapEx. What you can see on Page 16 is a rather sharp decrease in CapEx of 20% down compared to Q3 2019. Again, relatively high expenditures in Q3 2019 on the CapEx side. And maybe you remind or be reminded that in 2018, we started the transformation program where we invested heavily in the capacity CapEx, in the network CapEx and in the IT infrastructure as well to drive the transformation. And now, we are, since the beginning of this year, back in normal territory. And -- but I have also to admit that in this quarter, our approach hasn't changed. We were again very conscious with our CapEx spending due to COVID-19, and against the backdrop of this uncertainty of the pandemic, we postponed some investments further into the future. The majority of investments are, again, in customer projects, so that hasn't changed and the network infrastructure, and these are almost 40% of our investments, we put into the network. So on our capitalized, as I said, was higher because as I already mentioned, it's from external to internal installation partners. With that, let's move to the slide, which is the leverage and liquidity table on Page 17. And the table shows you the debt structure by end of Q3 in the comparison to Q2 because there has still one change has been -- we have done one change compared to Q2. We announced the replacement of the former RCF of EUR 50 million on the 7th of August, and we have agreed upon an additional term loan of EUR 40 million as well as the RCF of EUR 10 million. So the new debt structure is effective since beginning of September and the first time that we have presented to you. By end of September, we had a cash position of EUR 66 million, EUR 56 million cash on hand and further EUR 10 million from the RCF. And this is, again, a slight increase since the beginning of 2020. And maybe one further number by the end of October, we had EUR 80 million of cash and by beginning of November, it's even more than EUR 80 million. So this is now the area where we feel comfortable, besides, of course, the huge debt we have. With this, I'd like to hand over Daniel.

Thank you, Eike. So concluding on Page 19 with our guidance page where we are reconfirming our full year 2020 guidance performance pro forma strategic review one-off costs, revenues to come in between EUR 465 million and EUR 475 million. Reported EBITDA, as I said, pro forma strategic review one-off costs, EUR 225 million to EUR 230 million and CapEx, EUR 140 million to EUR 150 million, noting that most likely, this will be at the lower end of the guidance for 2020 on CapEx. So this concludes our presentation for Q3 2020 and I'll hand you back to the operator for Q&A.

[Operator Instructions] The first question comes from Yemi Falana from Goldman Sachs.

Firstly, on the Fiber Champion strategy, could you perhaps elaborate on any conversations you've had with potential partners to wholesale on the network over and above Telefonica Deutschland? And secondly, on the TV business, could you provide some color on the rationale behind your recent 6-month free promotions? Is this product accretive to ARPU? Or is the a more focused on improving RGU trends?

So look, on wholesale partners, we are in conversation with other potential partners. So these conversations are private and confidential. Therefore, we're not in a position to give you more color on it, but I can assure you that we are in various conversations with additional potential wholesale partners. And we will report on this when we're ready to say something. On TV business, on the recent promotion, the HD TV campaign. So we give first 6 months free for HD TV, if you take 24 months. And we also throw in 10 pay-TV channels in collaboration with M7, our partner. Obviously, this is to promote RGU, and the monthly charge will, after the 6 months, be EUR 9.75. And it will be [ 4.87 ] if you take it together with the Internet. But the intention, of course, is, first and foremost, to push RGUs on this product.

The next question is coming from Christian Fangmann from HSBC.

I have 2. First one is on the Internet net adds. It looks like your momentum is slightly improving. The main question here, is that related to seeing stronger demand in terms of growth adds? Or is it because we were facing a low churn environment, you're also benefiting like other players in the market from lower churn levels. So that is one. So is it a structural higher demand? Or is it more short term, lower churn that is helping these numbers? Any color would be helpful. Second question is on your TV subscriber base, which is largely holding up, being relatively stable. But it looks like whenever you prolong a housing association contract for multiple years, you need to spend CapEx to upgrade the in-home wiring to fiber to the building or fiber to the home. And it's pretty CapEx intense. Is that a sustainable strategy when you look at free cash flow? Obviously, if you need to spend so much CapEx to keep your contracts in place. So I would be interested in your view on that.

Sure. Look, so I mean, the net-net adds. When I compare to Q2, the prior quarter on gross adds were roughly the same, right? So therefore, the improvement quarter-over-quarter is coming mainly from churn. We see a lower churn environment. I guess, the general trend is that in the pandemic, you really rely on Internet connection to work. So therefore, the propensity to turn and switch operator is probably less. We're trying to stimulate that with the recent promotion also on Internet, but the improvement is coming mainly from lower churn quarter-over-quarter. Now, on your second question about the upgrade to fiber and the sustainability of that business model. Look, so the reason why we do, as I mentioned, one of the examples we have is the Schwerin prolongation with 30,000 homes connected, where we will, over the course of the contract, upgrade to fiber-to-the-building and selectively to the home. We're not doing this for the sake of the TV business, right, because, quite frankly, coax is good enough for cable TV. The main driver for this is Internet, of course, is IP penetration, which we want to perm -- stimulate through improved retail as evidenced in Q3 and open access strategy; i.e., wholesale. And the drivers really are the housing associations because when they give us a concession agreement or they renew it, this is a 10-year contract. And well, maybe today, not everybody among the tenant says, I really want fiber, the likelihood that somebody wants fiber over the course of the next 10 years is quite high. So therefore, the driver for this is really the housing association. And the ability to monetize this is to, on the one hand, try to limit the erosion of TV, 1. And 2, more importantly, to drive up IP penetration through a blend of retail and open access wholesale. And that's how we will monetize these investments. And yes, we are confident that this will work. We have lots of these business cases coming our way. And of course, we look very carefully at profitability, and we only do the ones that we believe will generate a positive return.

Okay. That's helpful. And are you seeing increased competition when it comes to prolongations with the housing associations? Is anything changing, be it from Deutsche Telekom or from others?

No, not really. I mean, this is a fairly competitive environment. It always has been, right? So I mean, you mentioned one of the competitors, Vodafone is another one. There are some regional city carriers. But I think the good thing is here that this -- while for others, this is one of many business lines. For us, this is the business, right? And that's in our DNA. And I think housing associations recognize that we realize that and appreciate that. But yes, of course, it is a competitive environment, but it has not become more competitive, I would say.

The next question is coming from Simon Bentlage from Hauck & Aufhauser.

The first one would be on your CapEx spend. Maybe you can share a bit more color on Q4. You already said that you're looking rather at the lower end of the guidance. But I think even the lower end, the guidance would imply a quite significant increase in CapEx quarter-over-quarter. And then on top of this, maybe you can share what you see as a sustainable level also for the years to come. And then the second question would be a follow-up on the Internet question that we had earlier. So you said that this is related to the low churn environment, the strong Q4 customer growth. So would you expect this to come back down or let's say, at the beginning of next year, assuming that the low churn environment changes more towards normal levels.

Eike, do you want to comment on CapEx trends for Q4, and I'll take the other 2 questions.

Yes, of course. So as you know, Q4 typically sees the largest CapEx amount being spent, that is the recurring seasonality of our business, right? But what we have done this year is really against the backdrop of the overall uncertain economic environment that we opted for a cautious approach to invest over the past couple of months. But clearly, I think we are not so far away from the lower end of the guidance. We had now a bit more than EUR 30 million every quarter. What we are mapping now is the EUR 40 million in Q4. And this is nothing that is really unusual if you compare the recent quarters in the recent years.

Okay. So on your question regarding sustainable level for the years to come. Look, it really depends on which -- how we move forward. When wanting to implement our Fiber Champion strategy, which we have outlined during Q2, where we say that over the course of 10 years, we aim to fiber up the better part of our 2.4 million homes connected with fiber. We've given you the unitary cost to connect for FTTB, which is around EUR 450, and somewhat higher for FTTH. And the additional CapEx for L2 [ head ends ] and backbone upgrades plus revamp of service platform. So all of that, right, over the course of 10 years, will mean a higher percentage of revenue in terms of CapEx than currently. However, that would also come with higher revenue growth and higher EBITDA growth. If we continue to do what we currently do, then I think this is probably a more or less sustainable level, but then there will obviously be also less revenue growth and less EBITDA growth. So it really depends on which way we move, right? And then on your question on Internet, look, so the -- if and when the pandemic lift, and we will hope for that, of course, for various reasons, not just Internet-related reasons, then I think you will see probably more propensity to churn as rotational churn because people will then be more willing to take the risk of being without Internet maybe for a day or 2. And therefore, I think the market will start moving again, but that will also help on gross add because the churn of someone else is a possible gross add for us. And that's also why we are trying to simulate the market with promotions here and there. But to answer your question, yes, if and when the pandemic lifts, I think the churn propensity will start to increase again for everyone in the market.

The next question is coming from Jean-Marc Mueller with JMS Invest.

Yes, just a few questions on those one-off costs, EUR 2.5 million. I mean, how can one spend EUR 2.5 million in a quarter on a strategic review? I mean, if I assume that a quarter is 60 business days, you're spending EUR 40,000 a day for a strategic review. And worse, you don't even have solutions yet that you can communicate. What further costs do we have to assume on that topic to arise now in the fourth quarter? If you could answer those questions, please.

Eike, do you want to start on the EUR 2.5 million?

Yes, of course. So again, this is not the cashout. What you have to show in one quarter is also the things you need to balance and to accrue for some things. But I will not comment on the content of EUR 2.4 million, but I think it's fairly low values compared to what we have experienced in the last years. But in a strategic review, of course, you have strategic advisers. You have maybe somebody who's working on the finance team, legal experts, and so on. And in this environment, EUR 2.4 million is really not a huge number.

Yes. Look, when I came in as a CEO, I really put the breaks on consulting spend, right? So -- and we're very careful. But when needed, we do spend, And Eike has given you some color. And look, so there's nothing to show for. We just told you that we cannot answer any questions today. That's all.

How many more costs do we have to expect now in Q4?

We're not guiding on that. Look, so we tell you when we're done, and then we also have something to show for.