Tele Columbus AG (TC1) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Tele Columbus AG. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Leonhard Bayer, who will lead you through this conference. Please go ahead.

Thank you, Judith. Good morning, ladies and gentlemen. It is my pleasure to welcome you in the name of Tele Columbus management team to our today's conference call following the release of our second quarter results for fiscal year 2021, which ended on 30th of June. This call is limited to 60 minutes. In case of any follow-up questions, Manuel and myself are available to discuss. I'm here today with Daniel Ritz, Chief Executive Officer; and Eike Walters, Chief Financial Officer. Now I would like to remind you that if any lenders or rating agencies on the call right now that this is a public conference call 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 to leave the conference call now. Press representatives are welcome to call my colleague, Sebastian Artymiak, to discuss any outstanding questions. Please be aware that there might be a delay between the slides and the webcast and the voice transmission. 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. Warm welcome also from my side to our Q2 conference call. As usual, I will kick it off with key messages, followed by operational update and KPIs. Eike will then talk about financial performance. I'll be back for outlook and guidance and then we are ready for your questions. So the headline for this quarter is mixed operational results and important transaction milestones achieved. More specifically, what do we mean by that? In terms of operations, the positives are we had another good quarter, continued momentum in Internet and telephony net adds with 6,000 and 4,000 net adds, respectively. However, another soft quarter on TV, where CATV was down 22,000 in terms of customer base. However, 7,000 of that are noncash relevant adjustments to the database, which should have been done in Q1. So actually, the operational performance in Q2 was minus 15,000, which is in line with other second quarters. Premium TV net adds were broadly stable. The NPS scores remain firmly in positive territory. However, we now see and you will see it when we talk about the specific slide, but they're now starting to plateau in Q2 after a rally over many, many quarters, though that means we need to add some fuel to that fire here to continue growing our NPS scores even further, which we are firmly committed to do. We achieved a good rating in the recent broadband connect test. We're proud that was significantly higher in terms of points. We scored 26 points more than in the prior year where we also had a good rating already. On the less positive side, B2B revenues are down 2.7% year-over-year, in absolute money minus EUR 400,000, as the -- Q1 already anticipated slowdown now materializes, so that's happening in B2B. Now how does that translate into financials? For Q2 core revenues, excluding construction networks -- sorry, excluding construction work, we are down 0.6%. So almost stable had we had the usual boost from B2B. Like in previous quarters, we would have been able to grow Q2 core revenues year-over-year. Reported EBITDA level were down 6% year-over-year. That's driven by lower reported revenue, which includes not just core, but also construction revenues, which are down materially year-over-year, but that's actually not a bad thing, but a good thing. And OpEx increased, which Eike will elaborate on further. We spent 11% more CapEx in the second quarter of this year as we have invested in network quality initiatives, as you have seen in the broadband connect test. Those are paying off. And we have also invested further into our fiber backbone rings. In terms of strategics happenings, you're all well aware of them, which is recapped for your convenience. We have successfully concluded our equity rights issue, and we have deleveraged by EUR 360 million. So for the first time in a long time, Tele Columbus now has net debt of less than EUR 1 billion, and the leverage factor is about 4x net debt over EBITDA that as Eike will elaborate on. We also have a new Supervisory Board since the AGM in May, with whom we're working very intensively and very constructively. And as you're well aware, the delisting offer is out and that runs until the 1st of September at an offer price of EUR 3.25 per share. And lastly, as we published a talk last night, and I'll elaborate on that further on, we have updated our guidance for the full year 2021 to reflect what's now happening in terms of accelerating our investments into executing our Fiber Champion strategy. And of course, one of the transaction costs also had a bearing on that. Yes. So now on operational KPIs. As already mentioned here, you see the net adds development quarter-by-quarter for -- at the top for Internet, where we had another good quarter of 6,000. So that's already 14,000 for the first half, and we're well on track to deliver the best full year in terms of Internet net adds in quite some time. On the back of that, we also had better net add performance -- continued good net add performance as far as telephony goes. However, that's very much linked to IP performance as we only charge for outbound usage. In terms of -- the trend towards higher bandwidth continues, as you can see here, on the stacked bars. The green is the better. It's the easy way to summarize it. We now have in excess of 75% of our gross adds in the second quarter joining us with speeds of 120 megabits or higher. And more importantly, the light green part of the stacked bar is also growing. Now we're in excess of 11% now that these are customers that are joining us with speeds of 250 megabits and higher. And I can also share with you that on the back of our current summer promotion in Berlin, where we are promoting specifically the 1 gig -- the gross add share of 1 gig is developing very nicely. So the market is moving towards higher speeds, which is a good thing also for us, of course. Here is the less positive development in terms of TV, another soft quarter. As I mentioned, we report minus 22,000 net adds, however, the operational performance is minus 15,000. And so you should basically take the 7,000 and add it to the first quarter rather than to the second quarter to have the full operational picture. And that explains -- that is easily explained because the first quarter typically is the one which is the weakest as we are getting also here usually at the beginning of the year, the cancellations from the housing associations, and that's the 7,000 that was missing in the first quarter. As far as premium TV goes, with the expiry of the campaign that we have out there, the marketing campaign, premium TV net adds were 0 in the second quarter. So that again emphasizes the need to revamp our Premium TV solution, which we're in the process of doing. Nothing new to report as far as ARPU goes, flat. On the top, you see Internet and telephony where basically the positive trend in Internet and the less positive trend in telephony, net each other out. We reported consolidated, so EUR 24.1 in the second quarter. That's basically -- that's for the base, of course, not for the gross adds. As far as TV goes, also here, at least stable ARPU. We are losing RGUs, but CATV ARPU remains stable at EUR 8.7 in the second quarter. Here's what I already mentioned as far as NPS goes. So first, let's look at the rallies since the fourth quarter of '17. You see very significant development, plus 80 or 70 points in some areas, which is a really, really nice rally that we have. We're firmly in positive territory, but now you see it's getting harder to notch up these green bars even more. That's what I was mentioning. We're committed to doing so because NPS has a strong correlation, of course, also to churn, and we have some initiatives coming especially now that we have more fuel in the tank, and I'll elaborate on that when we talk about guidance. And here, you see B2B. So on the right-hand side of the chart, you see the 2 bars. This is for the first half, where we still show a material growth year-over-year. However, on the left-hand side of the chart, we see the year-over-year development for the second quarter, which is what I mentioned, 2.7% or EUR 400,000 down as the anticipated slowdown materializes in the second quarter. And on the back of that, we also have a EUR 2 million lower contribution margin from B2B which, of course, also has a bearing on our consolidated EBITDA within Tele Columbus. So B2B, we have some challenging quarters ahead of us, but they have delivered significant growth in the past and we'll work hard to get back on track there. With this, I hand you over to Eike.

Thank you, Daniel, and good morning also from my side. On the next page, it's Page #13, we have the overview of the revenue development and the underlying trends per category. The light blue bars describe the reported numbers and the dark blue bars describe the development of our core revenues, which are the revenues excluding the construction businesses similar to the recent reportings we gave to you. So the decline in reported revenues from EUR 119.9 million to EUR 115.7 million are quite significant, and this is more or less driven by the noncore revenues of the construction revenue. So the construction -- the core revenues are slightly down only 0.6% or EUR 700,000. Overall, we have a mixed picture there. While in TV and broadband, broadband's recent trend continues. We saw the first time lower revenues in the B2B business [indiscernible]. The decline in TV structurally and in line with the development of the customer base, so we lost almost 70,000 cable TV RGUs compared to Q2 2020. And this result in EUR 1.7 million less revenues, roughly 80% of this revenue decline is stemming from the individual customers. We see an ongoing positive momentum in the IP revenues. The increase in customer base there is rising the revenues, but the underlying trend is mixed. While we are pushing the high-bandwidth products with high ARPUs, we are dealing with lower ARPUs in the telephony business. But Dan has said it in especially Berlin where we have a promotion for high bandwidth and it's very, very positive to us and to our bandwidth mix there. As indicated already in the Q1 communication, we experienced and see a less active project business for B2B, since some of our clients belong to the industries which were harmed by the pandemic. For example, hotel chains or others. But the team has, as said, are working very hard to come back on track there. As a result, we have now the first quarter without growth in B2B and then we also see for further quarters in this year more challenging. The decline of the other revenues was driven by less construction revenues. So these are around EUR 3 million, and these were partly compensated by other revenues like feed-in fees from broadcasters or broadcast fees. On the next page, we have the EBITDA comparison with the Q2 2020. You can see that the fewer revenues and higher OpEx weigh on the EBITDA there. The reported EBITDA shrank by 6% from 57.1% to 53.6%. The decrease is majorly driven by the aforementioned decline in revenues. Usually, the construction business is a low-margin business, and thus, the EBITDA effect out of this business is rather small. Maybe those of you who feel familiar with our business would have expected higher savings in the direct costs, which amount here to EUR 1.1 million. So there are savings out of the construction business, but we had exceptional high cost of EUR 1.6 million compared to Q2 2020 in B2B. And this weighs also on the margin of the group. So we have double negative effect in B2B, higher costs there and lower revenues in this quarter. So -- but this all sum up to the EUR 1.1 million less direct cost. The decrease of the signal delivery cost for TV due to capitalization effects with regard to feed for the use of foreign grids or network lease in the context of new leasing contracts that were capitalized according to IFRS 16, something we had also in the last quarter. Higher personnel expense due to higher number of FTE on board. We hired roughly 60 more FTEs. And the drivers for that are the technical departments. We insourced some positions in FTE, but also finance and [ field ] service and also necessary investments in the overhead areas where we hire people. And finally, some higher marketing spend and reduction in non-recs concludes this slide. On the next page, we have the overview of the net income and the financial results. So we had another quarter of negative net income. So net income in the second quarter amounted to a negative of EUR 22.8 million. So this approximately EUR 7.5 million less compared to Q2 2020. The decline there is driven by the lower EBITDA and the lower financial results where the latter is stemming from prepayments and cancellation fees in relation to the deleveraging in May where we paid back 2 term loans. On the next page, we have the CapEx and so no news of relevant changes. And the CapEx, we were very disciplined with our spending in H1. By the end of Q2, we were on track to reach our full year goals. That means that we had EUR 35.7 million in total or an 11% increase in Q2 compared to last year. This remarkable increase in network CapEx is due to network quality initiatives in order to lay the foundation for the customer satisfaction, what we already started beginning of the year. In the last weeks, the team put a lot of effort in the preparation of the planned Fiber Champion investments, and now we are ready to start the engine for the rest of the year to invest in our network and the company further. My last slide is the leverage and liquidity table. So what you can see, there is a debt structure by the end of Q2 and the comparison to Q1 2021 before the partial repayment of debt of the Q1. So after the capital increase in May, we used the proceeds to pay back the 2 small term loans, so the EUR 40 million and the EUR 75 million term loan. And we paid back part of the big term loan there. So the rest is EUR 462 million, which we have still there. And the payback of the loans, together with the cash position of EUR 144 million by end of June, reduced net debt position to below EUR 1 billion, so EUR 970 million, which is quite new to the company and very, very positive. We are very happy as a management team to be in this position, and the net debt ratio is now at 4, and this is quite significant and a good achievement, and we are very glad that we are in this position. With that, I would like to give back to Daniel.

Thank you, Eike. So now we get to guidance. Let me give you a bit of background to the revised guidance that was published ad hoc last night and which we replicate here for your convenience. So the previous guidance that you see on the far right of the chart was based on what we call the going concern budget approved by the then Supervisory Board in December of last year at the time where we did not know yet whether the transaction that we have done would materialize or not. So this was a budget which did not assume a transaction and, therefore, it was very much focused on cash preservation as in the past. Now on the account of improved capitalization, we presented -- the management presented to the Supervisory Board yesterday a revised budget that now reflects fully our Fiber Champion strategy and calls for additional spend at both OpEx and CapEx level to start implementing our strategy in an accelerated manner. And the Supervisory Board approved this revised budget 2021 at this meeting yesterday afternoon. And subsequently, we issued the revised guidance. So let me elaborate on the individual line items here. Starting maybe, we've reported EBITDA, which we have taken down materially. This is driven by 2 things. One, as I mentioned, incremental spend in areas such as personnel, IT, marketing and others, which are related to the acceleration of our Fiber Champion strategy. And in there are also additional transaction-related one-off costs. And taken together, they call for a reduction of the reported EBITDA guidance down to EUR 190 million to EUR 200 million. So typically, an EBITDA guidance reduction is a bad thing. In this case, actually is a good thing because now it says that now we're at the point where we can invest into executing our Fiber Champion strategy in a significant manner. The same applies to CapEx, where we now have taken up the guidance on CapEx by roughly EUR 40 million compared to the previous guidance. And that, again, is on the account of faster, more pronounced investments in areas such as deployment CapEx, network CapEx, IT CapEx and other areas. They all add up to roughly EUR 40 million. So again, in this case, it's a good thing because it says that now we are ready to fire from all cylinders and start investing materially into our Fiber Champion strategy on the account of improved capitalization. Now you may wonder why didn't they do anything to the revenue line as far as guidance goes? Well, that's easily explained, because, first of all, we're now in late August. So now that we're ramping up these investments, they have a lead time. And secondly, many of them go into foundational items. When you build a network, when you deploy CapEx, you're not going to get incremental revenue the next day. So we're building the foundation for a strong '22 and beyond. And that's the rationale why the revenue guidance remains at the level that it was previously. So that's the background to our revised guidance for your information. And the last slide, which takes a bit of time to appear. Yes, here it is. So just, again, nothing new here, but to remind you that the delisting offer launched by Kublai on the 4th of August is still running until the 1st of September. The offer price is EUR 3.25 per share in cash. And yes, so no closing conditions attached to this offer, just FYI. And that concludes our presentation, and we are now ready for your questions.

[Operator Instructions] And the first question is from Lars Dueser, Deutsche Bank.

Yes. I have actually 3 this morning. First of all, if we talk now about this EUR 20 million less reported EBITDA guide, how much is driven by higher transaction costs? And how much is driven really by higher OpEx related to the new strategy?

Yes. It's Daniel. Thank you, Lars. So we're not disclosing the exact split, but...

Sorry, speakers, I have to interrupt. Your line is very bad at the moment. Maybe you could redial.

It's up or actually Lars' line?

Now it's even -- it is better now, but for a moment it was very bad. So please go ahead.

Okay. Thank you. So sorry, we had some technical glitches here. Lars, thank you for your questions. Look, we're not disclosing the exact split, but we had previously indicated that the transaction cost would be in excess of EUR 10 million. So I think you can do your own math in this regard. But it's a material part, but it's not the only part. And also, please keep in mind that we're now talking about -- all the amounts I've given to you or the indications are related as far as OpEx and CapEx into the strategical or related basically to the remaining months of the year. So they're not 12 months run rate.

That's fair enough. And related to that, is it fair to assume that the portion, which really relates to the accelerated OpEx in line with the new strategy, that this is really a start-up cost to get the project up and running and to make yourself wholesale ready? Or is that something which will recur next year, given that's now the path you're bearing down to. I think that's a question more around sustainable margins now, right?

Yes. Look, so I mean, it's both, right? So there are things which are like onetime and there are others which are more recurring in nature. So hiring more people, they're not going to disappear at 1st of January 2022, so they can remain here. So these are recurring costs that we carry through. But all of this eventually will translate into incremental revenue. It's just that, as I was trying to explain, it's a bit of a time lag. You invest into deployment projects, for instance, and you bring onboard new people, additional people to drive revenue. That will have a certain lead time until that revenue growth starts to appear. So I don't know whether I answered your question.

Okay. Okay. But you wouldn't give us a number or a ballpark of how much of the EUR 20 million will be recurring really next year?

No, it looks -- then we get into levels of detail, which we don't really disclose. As I mentioned, some of that cost is one-off transaction related. Some of that is -- the rest is operational and of the operations, some are more like onetime, like kick off, and there are others that are recurring. Well, we're not going to get into the details, but I can give you the areas again. It's personnel, it's marketing, it's IT and it's a couple of other areas. But they are not 12-month run rates. They are for the remainder of this year.

Got it. Got it. Got it. And then maybe to the second question, when it comes to CapEx. So the guide there was up by EUR 40 million. Probably that is also related to the second half really. So if you analyze that, you probably get closer to EUR 100 million of incremental CapEx spend. Now of course, at the same time, we know you want to spend quite a bit, right, you want to spend EUR 2 billion over the next 10 years, which would imply EUR 200 million on a linear basis. But is it fair to assume that maybe at the beginning of the project, you spend a bit below that EUR 200 million average closer to the EUR 100 million ballpark? Just until you have more critical mass on the hold of sales [ from early. ]

Yes. Look, so your assumption is correct, right? I mean, when you scale up an engine, it takes time to scale it, especially on deployment. You cannot spend everything day 1. So first, we need to win additional housing association projects, which is the housing or the housing association guys do. And then we define the projects and then we spend the CapEx. And it takes a bit of time to scale up the engine. So your assumption is correct. This is not the run rate yet that you will see when we are in full swing. And again, remind you this is for the remainder of the year and not 12 months.

And also just to add on the last, remember that the EUR 2 billion you were referring to is in relation to network CapEx. The overall envelope is close to EUR 3 billion over 10 years.

No, no. Absolutely. Absolutely, Leo. I think that the question related to that really is, is that something you disclosed how much FTTH you have spent, let's say, in full year '20 or even better in the first half of '21?

No, unfortunately not. But look, so -- I mean this is also -- please bear with us, this is also competitively sensitive information, and we're well aware that there are some competitors out there. So we're not disclosing this level of detail. However, you can track what we're doing in terms of FTTH because when we do a material size FTTH project, several thousand homes connected, we typically do a press release. There were several of them over the course of the last few months.

And also remember what we shared initially in August 2020 when we highlighted that roundabout 15%, so 1-5, of our IP-enabled network is based on FTTH, respectively, FTTB. And then we gave you the numbers of what these build-out costs are. So all that is in the market. But again, it's 15% of our IP-enabled network. I think this number hasn't moved a lot over the past 12 months.

I think you will get a better sense of annual run rate once we guide for the full year 2022. Because here, we're in a transition year, right? We saw the first couple -- the first half plus was growing concern, and now we're starting to ramp up the Fiber Champion execution. So it's quite difficult to read something from this. I think, as I said, full year 2022 guidance will give you a much better idea of the shape of things to come.

Okay. Okay. Understood. Now I guess with the information Leo just provided, we can obviously come up with an estimate on that. The last question, any update or latest view on the regulatory change on cable TV building in Germany? And if you can remind us maybe of what's going on there, the time line and how you see this impacting Tele Columbus down the line?

Sure. Look, so as far as the law goes, nothing new. And the law has been passed and it's coming into effect 1st of December of this year. And it says that as of mid-2024, there shall be no more bulk billing for CATV. That goes away. So it will have to be individual billing. Nothing new in this regard. We are now working internally to -- in anticipation of that to strategize how we best do this. What we do know is that by mid-2024, all those concessions where we have bulk billing today will have to be switched over to individual building. So that's one activity with the housing associations because we need to change that contract because where it says today bulk billing, that needs to be changed to individual billing. And secondly, of course, we will need to approach the tenants that are today under a bulk billing contract to entice them to join us as individual customers for our TV product. So that's basically what's happening. And in terms of impact, I mean, it's -- these are counterbalancing effects, right, as we've disclosed before. On the bulk, you have basically 100% penetration unless [ partners are empty ] so let's call it maybe 90% or 95%. And on the individual contracts, by definition, you will have less. So we'll have less penetration. However, we do know from concession agreements where we today already have individual billing, we have an idea where we're going to land. In terms of penetration and as far as ARPU goes, and that's the argument that we have used towards the politicians, but they were not willing to listen, is that it actually will get more expensive for tenants. Because today, on the bulk billing contract, typically the ARPUs are lower and now they're going to go up. Having said that, we are also well aware there's a competitive market out there for TV products. And therefore, the TV ARPU will not increase materially, but it will increase. But the most important thing is that we upgrade and we're working on that, a TV proposition because, clearly, today, CATV appeals to some, but not to all. So these are some of the effects that we anticipate and things that we are working on.

The next question is from Bruno Reading (sic) [ Bruno Read-Cutting ] PGIM.

I have a couple of questions. First was just a bit of to the point, but just there was a EUR 30 million working cap outflow in the quarter, which seems quite large compared to historic trends. So I was just sort of wondering what that was related to.