Telekom Austria AG (TA1.F) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining our Q4 and full year results 2023 call. I am here with our management, our CEO, Alejandro Plater; our Execute COO, Thomas Arnoldner; and our Group CFO, Sonja Wallner. As usual, they will lead you for the presentation now, and we're happy to take your questions afterwards. Thank you.

Thank you. Good morning to everyone, and thank you very much for joining us today. I hope you can hear us well. It's flus and colds all over Austria, so sorry for the quality of our voice. I hope we will get [indiscernible]. Summary, if we move to slide -- first slide, please. As a summary of the quarter, you see that our revenues went up 2.3%, 5% if you adjust by currency effects. Especially Belarus, we saw in Q4, basically the same trends as during the full year, with a good service revenue development in mobile, very good traction in ICT or B2B solutions. EBITDA went up before restructuring one-offs and FX effect, 7.3%, what we reported was 11.4%. We had some special effects. Sonja will talk about it a little bit later in detail. We bought spectrum in Bulgaria. We hope a renewal of the 700 and 800 spectrum for a 15-year period for EUR 22 million. Finally, in December, we got upgraded as well by Moody's from Baa1 to A3. Now all rating -- major rating agencies are rating A1, in the A category that we are very proud of. We are also very proud of having reached the sixth best-performing telco worldwide in the CDP list, which has been a focus area in the last couple of years. And as you well know, we have managed to [spin-off] of our tower company, EuroTeleSites. Basically with some impacts in [indiscernible] revenues, almost no impact, minus EUR 0.1 million, but we managed to spin-off EUR 1 billion of financial debt. And of course, there is an impact on free cash flow due to higher leases moving forward. For 2024, we expect revenues to grow between 3% to 4%, CapEx around EUR 800 million. So we are back loading CapEx, basically based on what we presented at the last Capital Market Day. We are putting some projects under review in 24, especially the special projects that we have all the time that we don't know exactly how much value they are bringing to the company. So we are having an [extra look] in that. And the Management Board is recommending the board and the AGM afterwards a dividend increase to EUR 0.36 per share. Having said that, I will move to Sonja who will drive us into the details of the financials in the quarter and the full year.

On next page. In the mobile business, our subscriber base increased by 5.6% in the year-on-year year comparison. This was driven by the growth of M2M majorly, excluding M2M subscriber, the customer base remains stable. We saw growth in postpaid subscribers, especially in Croatia and Belarus in netcubes especially in Bulgaria. We booked a profit in prepaid subscribers in Belarus. The increase [indiscernible] was above all driven by growth in Belarus and Bulgaria. Good demand for TV and broadband in the international market offset the negative [FX] losses in Austria. Reported our figures in Q4 increased in all markets except Belarus, also [indiscernible] figures excluding M2M business subscribers and negative [indiscernible] increased by 1% in the quarter -- in the fourth quarter. In full year, it's exhibited growth of 4.9 percentage points of [indiscernible]. Operating ARPU is constant currency increased by 21% in Q4 2023 and slightly above full year increase of ARPU of [indiscernible] Moving to the next page, please. Sales revenues were the main driver for the revenue increase, both in Q4 and in the full year of 2023. And looking at the chart at the bottom left, we posted growth in all areas except for fixed voice and the regulation-driven declining interconnection. The main growth drivers were retail mobile core and cube. We also saw an encouraging [indiscernible] in the Solutions business on the retail fixed line side, broadband and TV, especially in CEE supported the growth. As mentioned before, sales revenues also profited from a large -- to a large extent from indexation measures, the strong mobile core business, successful offsetting to higher speeds and the cross-selling measures at the latter, especially in the CEE countries. Equipment revenues declined slightly to the Austria and Serbia. Overall, we were able to overcompensate EUR 77 million negative foreign exchange effect resulting from only Belarus. The currency depreciated by 15% on a period average in the full year 2023 and by 26% in Q4. So the last quarter was especially heavily hit by the currency with a negative impact of EUR 33 million in total revenues. Excluding foreign exchange effects, all markets posted revenue and service revenue growth, 80% of the group revenue growth were stemming from international markets, there was more than 50% from Bulgarian operations. Next page. In Austria, most of the previous trends remained unchanged amidst the other router [indiscernible] on the mobile market, while the fixed line market stays very competitive. Service revenues were the growth driver on the top line and benefited from the [protection] measures that we implemented already in May 2023. A strong mobile core business in coal protection and solutions business that overcompensated the loss of interconnection as well as the regular fixed voice revenue decline as we also showed in the previous year. Mobile service revenues increased by [2.3%] in Q4 2023 with growth both in mobile and core in the equipment business. Retail fixed line service revenues increased slightly on the factor of indexation measures. At the same time, on the subscriber side, we saw the general trend of losing voice and basic broadband [indiscernible] while advanced broadband numbers increased and mitigated some of the [indiscernible]. Equipment revenues were lower after large ICT customer projects in the previous. Also, we are seeing a general calmer hardware tariff market and certain shift to SIM-only offerings. In this context, we also keep our subsidies low because, as mentioned in the previous calls, we see subsidies as traction of the tactical methods and clearly decreased them wherever possible. Looking at the OpEx side, we want to flag several nonoperational effects in Q4 of 2023. In total, OpEx included positive one-offs in the amount of EUR 41 million. [indiscernible] EUR 35.5 million were related to the activation of the [indiscernible], which was booked in the OpEx in Q3 2023. So a positive effect in Q3 -- Q4, sorry, while it has no effect on full year results. The remainder was related to EUR 10 million related to a release of provision in workforce costs and EUR 55 million related to a provision in other OpEx related to [indiscernible]. Excluding these effects, core OpEx was mainly due to higher electricity and workforce costs. Operationally, workforce rose related to increased inflation, while the number of FTEs decreased. Overall, this result is a stable performance of the underlying EBITDA, excluding restructuring one-offs. Please move to the next page. The international markets exhibited another strong fourth quarter, with 4% sales revenue growth and double-digit EBITDA growth in all market except Belarus. For constant currency basis, sales revenues, EBITDA grew by 10% and 16%, respectively. The clear growth drivers for Croatia and Bulgaria, the 2 markets besides Austria, where we implemented indexation measures in June, July and March, respectively. In Bulgaria, they all continue to perform very convincingly in all business areas besides the very strong retail mobile performance on the back of upsetting indexation results. The result profited from the strong demand for security services and IT solutions in Q4, particularly from 2 big ICT projects. Besides this, growth was fueled by strong demand for high-speed services and TV products also lifting use up by 5.2%. Croatia exhibited an extraordinarily high growth of 44% in EBITDA, also supported by some small nonrecurring effects. Operationally, the result was already strong in the back of 11% service revenue increase. OpEx was lower despite driving workforce and electricity costs. Despite market regulatory headwinds, Belarus delivered a solid operational performance in Q4 on the back of successful upsetting in terms regression. Besides that, [indiscernible] subscriber base benefited of service revenue growth. Thomas will present more details on Belarus afterwards in the focus points. Also the smaller markets exhibited strong results. Let's move on to the next page on P&L. To sum it up at the end. In the full year, we delivered a 5% revenue increase, thereby, exactly meeting our guidance, 75% of the growth was driven by sales revenues. We managed to offset the OpEx increase mainly stemming from high electricity, workforce and product-related costs and translated 5% revenue growth into 5% EBITDA. Operationally, EBITDA also increased by 5% as positive one-off effects, negative foreign exchange effects offset each of the full year 2023. The margin remains stable. The operational improvement also led to the increase of EBIT of 4.5% despite the higher depreciation and amortization. The latter increased now into Q4 related to the rights of use assets after the spin-off of the tower business in Q3 2023. The financial result of negative EUR 90 million versus EUR 55 million last year was mainly due to higher interest expenses in leases and financial debt. The increase in interest expense on lease liabilities is mainly due to interest rate levels as well as the spin-off of EuroTeleSites. The increase related to the financial liabilities and increased income on the financial assets related to the -- a, to the issued bond and long debt bank -- long-term debt bank as well as the invest of these funds in the previous subsidiary, [indiscernible] and was generated in the period between the issuance, respective of the investment in July until the spin-off of EuroTeleSites at the end of September 2023. Altogether, with the sale income tax, we resulted in a slightly increase of net results to EUR 646 million. Then moving to the next page to the free cash flow. And in the full year of 2023, we delivered a free cash flow of EUR 355 million compared to EUR 603 million last year. Despite the solid operational performance and the EBITDA increase of EUR 86 million, the difference to large amount of EUR 250 million. The biggest part of the difference, EUR 120 million was attributed to the spectrum payments of EUR 103 million in 2023. These payments also were also higher by EUR 74 million, mainly as a result of the of the spin -- of the tower spin-off last year. Income taxes increased by EUR 3 million due to a better operational results. And the vendors can be explained by the streaming change of working capital for a positive EUR 90 million to last year to a negative EUR 40 million this year. We saw positive timing effects in accounts receivables and we saw positive timing effects in accounts receivables and received some cuts, roughly EUR 40 million of the subsidy related to the broadband subsidy program in Austria as prepayment. They only partly compensated the lower increase of accounts payable and increase in installment fees. The lower increase in accounts payable was mainly reflected in the timing effect, especially on the CapEx side, but the negative effect from installment actually was reflected almost to Belarus. In 2022, it finally reduced the period of the installment to Belarus to 6 months, positively affecting the free cash flow in 2022. After we increased the contract period again in the second half of 2022, we have a more normal development now again in the year 2023. Now handing over to Thomas with the [indiscernible] presentation.

Thank you, Sonja. As always, we will give some more details on numbers of focus. First of all, basic reminder because we cannot talk about the year 2023 without talking about the span of our tower business, a reminder on this transaction for your convenience. As you know, end of September, we spun-off our tower businesses, [indiscernible] EuroTeleSites listed on the Vienna Stock Exchange on a pro-rata basis and with an unchanged shareholder structure at the time of the spin-off the rational for us was very clear, allowing us to focus more on our core telecom business, more efficient budget allocation. We could substantially reduce our financial debt by around EUR 1 billion. And of course, we could unlock value for our shareholders through the higher trading multiple of those tower assets. Sonja already briefly mentioned some of the financial impacts of the transaction on our P&L. I'm not going to go through all the details here as you see on the slide. On the P&L, the main impact is visible in the EBIT due to a higher depreciation G&A into leases. The net income is additionally impacted by higher interest rates related to the right of use assets where their interest on financing is obviously lower. CapEx is lower by EUR 40 million to EUR 50 million. At the same time, our free cash flow is expected to be lower by EUR 60 million per year on average, driven by this transaction. And as Alejandro pointed out already at the very beginning, no change on dividend policy. We again increased -- plan to increase our dividend at least proposed to increase the dividend on an undoubtedly very sustainable level. On the next page, as always in February, we want to provide you with a little bit of update on our fiber expansion and investments in Austria, fiber, including also 5G. As you might remember, we increased our speed of the fiber rollout in 2022 already where we basically doubled the CapEx dedicated to the fiber deployment on a new level, which is now pretty similar every year. So also similarly in '23. We currently have 73,000 kilometers of fiber network covering all of Austria. We were quite successful in the broadband subsidy program called [indiscernible], aiming at the fiber rollout in the more rural areas of Austria where we received EUR 234 million in subsidies last year, and as a result in '24 fiber orders will, of course, focus a little bit more on those rural areas. Following the full deregulation, which we achieved in 2022, we have established now a significant number of partnerships with alternative operators, roughly partnerships, which we currently have, focusing on the new fiber network expansions, which we do, allowing us to fill the network better, and enhance the capabilities and also to reach -- to increase the utilization of the fiber network. Also on 5G, we keep investing. We have currently achieved around 85% of pop coverage in Austria. And looking ahead, as I just indicated, we remain steadfast on our commitment to the fiber investment, even though, as Alejandro pointed out, we have some different phasing in the CapEx in 2024. The fiber rollout here will not be impacted. Next slide, Belarus. Here again, we want to give you a little bit of deep dive and kind of the current challenges, which we have. On the GDP side, we see an improved development in '23 versus '22. In '22, we had a contraction of 3.7%. In GDP, we had growth in 23% of 1.6% again, and expectation is the current workers is 1.3% GDP growth for this year. Inflation was close to 6% at the end of December '23, which is slightly higher than in previous years, but still very much controlled by the government. We are also impacted because as contact inflation, but general [indiscernible] price increases is taking place in the country. Also looking ahead concerning inflation, at the National Bank of Belarus projects a CPI increase in 2024 that does not exceed 6% year-over-year. As it was mentioned previously, we have also seen a substantial depreciation of the Belarusian ruble by 15% in '23 with the biggest hit in the last quarter with 26% decrease on period average. As a result total revenues and EBITDA in euro terms were affected by negative EUR 37 million and EUR 50 million, respectively. Where the business managed to grow revenues and EBITDA in local currency terms, it was noticeable that the absence of price indexation, basically from the beginning of last year caused this growth rate to soften in the last year. Supply chain challenges remain have been interrupted with some of the key vendors, but I think it will do a great job in mitigating this in line, of course, with the sanction framework, but also with the telco exception rule. In this concept -- context we, of course, continue to follow a diligent approach regarding investments. And last focus area, as it has been, let's say, getting lots of attention over the place, especially in the past year, we wanted to talk a little bit of what we do with respect to artificial intelligence in A1 Group. We have been using AI or related technologies for quite some while. In the company already, we started using machine learning around about 15 years ago in the areas such as [indiscernible], customer segmentation, shopping basket and additives et cetera. But around 5 years ago, we started a transformational projects where we moved the way we deal with data to a new level, by doing data lake to our conventional data warehouse, allowing us to work with much larger data volumes, increased time data in order to actually professionalization in this area. We are giving on the left-hand side, you see some of the areas where we use it, for example, in marketing, sales, customer experience management, financial forecasting, planning of fiber requirements, et cetera. We've also started using chatGPT with an internal instance in the companies, so the employees can use it in the daily work. We have experiments going on using Generative AI, for example, software development, in document intelligence, in customer interaction, and again, of course, in the customer feedback and marketing. We are in a learning channel here. We are very excited about it. But of course, much of that is in state at the moment. Along with that, we have also introduced a robust framework of guidelines, processes and tools to ensure a responsible treatment of AI in the company. And of course, ensure data privacy, we have a fair AI policy in place. And we also introduced methods to test our AI models against biases. With that, I'm handing over again to Alejandro for their outlook and for Q&A.

Thank you very much, Thomas, for the focus points. And we would like to close the presentation. With the guidance 2024, as you can see in the slide, we expect total revenues to grow between 3% to 4%, CapEx around EUR 800 million. As was mentioned before, we are reviewing certain projects to see if strategically fit for our purpose or not. That's why it's a little bit lower than expected CapEx for 2024. The fiber CapEx in Austria is unchanged. Actually, we will accelerate a little bit investments in the fiber rollout in 2024. And Thomas and me as management board, we will propose to the Supervisory Board a dividend of EUR 0.36 for the full year 2023, previously was EUR 0.32. And with that, I hand over to Susanne, thank you for listening to our presentation.