Cyfrowy Polsat S.A. Ord

Good afternoon everyone and welcome to Polsat Group's Q1 2020 results call.

Q1 has been a busy quarter. So this time each of us will talk about the most important events in Q1. Then, traditionally, Staszek and Maciek will tell you about our operating performance, followed by the comments from Kasia on our financial performance. Let me summarize this interesting quarter briefly. The number one subject in Q1 was of course the coronavirus pandemic. To my great satisfaction, Olsas Group as a whole adapted to this difficult situation in smooth and efficient ways. I will say more on this in a short while. A few weeks ago, we have informed the markets that we have successfully finalized the complicated process of refactoring our debt. Kasia will give you an insight into this process shortly. Moreover, I am very happy to say that we have signed a preliminary agreement with Bauer Media to purchase Interia Group, owner of one of the top three Polish horizontal portals. My team will give you the details of this deal. And last but not least, just this Monday, Polsat Group has launched the first in Poland commercial 5G network. It will be my pleasure to tell you more on this topic. Let's turn to the details of the events I have just outlined. First, the impact of the coronavirus pandemic. On slide 7, you have a summary of reasons why we believe that our business is largely immune to the effects of the pandemic. Please remember that our business model is based predominantly on subscriptions and diversified portfolio of products and services, which ensures a predictable and stable stream of revenues. Connectivity today has become as essential as electricity, driving up voice and data volumes. Combined with the price increases on the mobile market of the past several quarters, this will support ARPU levels in the coming months. Among headwinds, we expect a slowdown on the advertising market, but it is still too early to talk about the ultimate impact of the pandemic on this business area, because there are still too many question marks. In terms of liquidity, we are definitely on the safe side given our high level of cash generation. All in all, I needed to underline the ultimate impact of COVID-19 on our group depends mainly on two issues. How long the pandemic will continue and how much pressure it will exert on Polish and global economies. Given we perceive our business as largely immune to COVID situation, Polsat Group has engaged actively in the fight to suppress the pandemic. Among the many initiatives that we have taken since mid-March, I would like to turn your attention to several chosen ones outlined on slide 8. With the support of Mr. Solos, our major shareholder, Polsat Group has purchased medical equipment to help test 200,000 Pols. Moreover, we donated connected tablets for children in need, offered our customers free data packs. Telebizia Polsat earned a special commercial block and donated the proceeds along with own funds to the cause as this Polsat Foundation. Our news and other TV stations have been very active in providing information and so fighting the pandemic. So far, Polsat Group has provided aid worth almost 20 million zlotys. I will now give the floor to Kasia to discuss refinancing. Kasia, please go ahead.

Thank you, Mirek, and good afternoon, everyone. In spite of the difficulties caused by the pandemic, we have finalized the complex and multi-stage process of debt restructuring that gives our group greater flexibility of operations and further development prospects. One of the changes in the financial documentation was the incorporation of the IFRS 16 standard, which is connected with shifting the main governance upwards by 0.3 times a BPA. We have also expanded the maturity profiles of our debt to adapt them to our goals related to acquisitions and dividends. We succeeded in diversifying our debt structure, shifting focus more towards bonds. Slide 11 summarizes the whole process, which was initiated over a year ago with the refinancing of the series A bonds, followed by an additional bank loan and the issue of green bonds to be completed with the renegotiated terms of the SFA. As you can see on slide 12, we now have a very comfortable situation with respect to that maturity with the first sizable bullet payment falling in 2024. As I have already said, this structure not only allows us to continue our dividend policy, but also guarantees operating flexibility and the flexibility to invest in the future development of the group. And now,

Thank you, Kasia, and my congratulations on the refinancing process. I must confirm that the successful debt restructuring was one of several key elements that made the planned acquisition of Interia possible. So, why Interia? Interia is a strategic component of our business model that was missing so far. We would like it to be our strong flag on the internet market, strengthening our online ad business and supporting the monetization of our content. A very important gateway to communicate with our customers. Once we finalize the acquisition, our group will be definitively the most equipped TNT company in the Polish market. Through TVPolsat, we produce a lot of attractive, unique local content. Through Chicago Pulsat, we have a huge content distribution platform. Through Plus, we are a very active mobile market player, technology leader with 5G available now and here. Through ePla platform, we are very active in the online video market. Through Natia, we became an important player in fiber access business. And finally, through interior acquisitions, we intend to build our position in the local internet. And now, Staszek will talk you through the current business model of Interia.

As Maciek said, this is a strategic acquisition that will strengthen our position in the Internet. We buy a company that has a 20-year history in the Polish Internet and is a well-conducted enterprise with a strong managing team. Interia will be yet another channel for distributing and monetizing our existing wide portfolio of content. Moreover, in light of the rapidly developing online advertising segment, we believe it is crucial to build a position on this market. And thirdly, we plan to concentrate the group's online marketing effort in Interia, thus improving cost efficiency in this area. Interia is a highly appealing asset, being among the top three media tech groups and one of the largest digital enterprises in the country. Interia operates one of the biggest horizontal portals accompanied by a comprehensive set of additional applications such as email, thematic portals and mobile apps. The numbers speak for themselves. Over 100 websites and mobile apps, over 16.5 million real users and 1.3 billion views every month. As for the financial details of the transactions, I will give the floor to Kasia.

Thank you, Stasek. As you already know from our current report, we have concluded a preliminary deal with power companies to acquire 100% in Interia Group for 422 million zlotys. The final price will be adjusted down slightly to reflect some settlements between Interia and their current owners. The buyer is Talavizia Polsat who will finance the transaction from own funds. Please bear in mind the finalization of the transaction is subject to the approval of the Antitrust Office. Anticipating questions you may have will delete the price paid for Interia is fair. When taking into account expected synergies, the agreed price implies a multiple of 8.7 EVDA, which is comparable to the current valuation of Interia's peers after their valuations got hit by the pandemic. Synergies are of key importance in this case, hence I give the floor to staffers who will be responsible for generating them in the future.

Indeed, we expect synergies in three areas. Firstly, Interia will be yet another channel for distributing and monetizing our existing wide portfolio of content. Secondly, by inserting our current online campaigns to Interia webpages, we will effectively reduce our OPEX. And fourthly, we believe Pulsat Media ad brokerage house will be definitely more effective in selling Interia ad space to the third party. All in all, I believe we are able to double the EBITDA result of Interia in the mid-term. Concluding, I would like to underline once again that Interia is a strategic acquisition that complements perfectly to our business model. Now, over to Mirek for some technological news.

Thank you. It is a great pleasure to tell you about the launch of the first commercial 5G network in Poland that took place earlier this week. 5G from PLOS is based on our unique 2.6 GHz CDD spectrum which allows the transferring more data at higher speed over a larger area. People using our 5G network will be able to achieve transfer speeds of up to 600 Mbps as of now and more once we aggregate our frequencies in future. We have installed the first 100 base stations operating in 5G that reach almost 900,000 people in 7 cities – Warsaw, Łódź, Gdańsk, Poznań, Szczecin, Wrocław and Katowice. In the second phase of this project, we plan to launch another 600 stations to cover the Warsaw agglomeration and reach an additional 2 million people. At the moment, we use our unique 2.6 GHz band and the network is on air. Ultimately, the 5G network from PLOS will be developed based on all available frequency bands. I'm extremely satisfied that our group leads technological race and plus became the key leader of 5G in Poland. This sums up the key events of Q1, so let's move on and discuss our operating performance. Staszek, the floor is yours.

Thank you, Mirek. In terms of viewership, TV Polsat channels have maintained a strong position with over 23% in the commercial group. Our main channel, Polsat, was the leader in the commercial group, gaining almost 10% of audience share. Please note the viewership was maintained even though we had to stop our spring scheduling this year. It comes as no surprise that TV business is and will continue to be impacted by the coronavirus pandemic. In the first quarter, the broad market declined by 3% and TV Pulsars recorded ad revenue dynamics in line with the market trend. In consequences, our market share amounted to 28.1%, a result I'm satisfied with given the unfavorable circumstances. Now, over to Maciej, who will tell you more about our retail business.

Thank you, Sasek. Starting off with our flagship program SmartDOM, as you already know, in January 2020, we hit a milestone. Our Multiplay customer base exceeded 2 million people. In Q1, we continued to record sales growth dynamics of 8%, which means we increased our Multiplay customer base by 157,000 year-on-year. The number of RGU's owned by these customers also continues to grow steadily, exceeding 6.1 million. The record low level of churn that we record quarter by quarter is proof that our multiplayer strategy is successful. In Q1, the churn ratio amounted to 6.6% only. Moving on to slide 28. Once again, our RGU base grew by almost half a million services. Just as in the previous quarter, the key driver of growth was a very dynamic development of our mobile segment with stable pay TV and internet, supported by strong sales in the B2B segment. As a result, we now provide 14.8 million contract services, 3% more than a year ago. Given we just launched 5G technology this week, I believe this positive dynamic will be continued as soon as the pandemic lockdown is finished. The core of our multiplayer strategy is to build customer value. As you can see on slide 29, we are pretty successful at this. Q1 was yet another quarter with strong growth dynamics. RPU grew by 3%, reaching the level of 85.4 zl per contract customer. As you can see on the graph, the level of RGO saturation per customer is consistently on the rise, reaching the level of 2.64 in Q1. This is another very positive result of our multiplayer strategy, which helps us build the value and loyalty of our customer base. And finally, the pre-built segment on FlyStoreT. The pre-built RGU base is stable at the level of 2.6 million, with an increasing contribution from PayTV services, the sales of e-club packages in particular. Prepaid RQ grew by 3% in Q1 on the back of increased volumes of voice calls triggered by the introduction of the state of epidemic in Poland. This, in turn, resulted in higher impersonal settlements. We believe this factor will continue to support RQ also in Q2. Just to summarize my section, Q1 operating results came in strong, which makes me very happy. These results have been affected by the coronavirus pandemic only to a small degree as the state of epidemics in Poland has been introduced mid-March. Kasia, how about our financial performance?

Thank you, Maciek. I'm very happy with Q1 financial results. Quick reminder, all the financials presented in our documents, including this presentation, are IFRS 16 based. In Q1, our total revenue continued along a growth path, increasing year-on-year by 2% to 2.85 billion zlotys. Our EBITDA was almost stable and amounted to over 1 billion zlotys, a strong increase of over 7% in LTM. Free cash flow is the effect of software equipment sales in light of the pandemic and the resulting decrease in working capital investments. Leverage decreased to 2.86% in Q1. Looking at the decomposition of growth by segments, both our segments delivered healthy top-line growth in Q1. Our retail business grew by 55 million, mainly due to stable retail revenues and increasing wholesale revenue from the interconnection. Despite some headwinds in ad sales, the TV segment grew by 6 million as a result of strong sales of channels to cable and satellite operators. Turning to EBTA development, the overall level of EBTA was mainly under slight pressure from lower EBTAs in the retail segment, which in Q1 was still associated with investment into some football content. Total EBTA was almost stable, yielding a high margin of 36%. Moving on to free cash flow on price 34, I'm very happy with the level of cash generated on this quarter, 267 million zlotys. As mentioned a moment ago, the state of epidemic introduced by the government led to the mandatory closure of part of our sales network, which resulted in a fall in equipment sales. This in turn means a lower level of investment in working capital, thus strengthening free cash flow. I would like to remind you that last time I flagged the topic related to the settlement of corporate taxes. The date for the settlement of the taxes for 2019 was postponed by the Polish government to May 31st of this year following the introduction of the state of pandemic. Please take it into consideration when forecasting the next quarter. As you can see on slide 35, we have closed the first quarter with a significant amount of cash on our account, which was supported by strong generation of cash from operating activities and the issue of series C bonds in February. Acquisitions in this quarter were limited to some local fiber companies bought by NETIA in the beginning of the year, so we will impact there. The ratio of capex to revenue remains near the upper limit of the guided level 10.8%, which is connected with NetEA's focus on modernizing its network as soon as possible. Moving on to debt, there are two things that I would like to turn your attention to here. Firstly, the structure of debt that you see here is going to stay with us for some time. I'd like to remind you that we have weak health debt repayments for four quarters starting Q2 2020, extended the maturity profile of the debt and increased the level of governance by 0.3 times a big year. Secondly, the Polish national banks have cut sharply interest rates by 100 BPS in March and April, thus driving our average cost of debt down to the level of 2.3% from 3.3% at the end of 2019. This, of course, will have a visible positive impact on our bottom line and free cash flow going forward. This is all I have for you today. I'm very pleased with the financial results of both our segments, which prove the resilience of our business model. Also, I'm confident that our strong cash generation will allow us to continue with all our plans for this year, irrespectively of the disturbances caused by the pandemic. Mirek, over to you for the summary now.

Thank you, Katia, as always. My congratulations on the strong result, both operational and final trial of Polsat-Bruk. This has been a long presentation, so let me conclude quickly and move on to the Q&A session. Thanks to our subscription-based model, we are highly immune to the negative factors that result from the state of epidemic introduced in Poland. Therefore, we recognize the need to help in this difficult situation both as an organization and as individuals. Polsat Group and its employers are actively engaged in initiatives that support the country and its inhabitants. The pandemic did not stop us from working intensively. We have concluded a preliminary deal with German company Bauer Media, which makes a strategic move for Polsat Group. Through the strategic acquisition of interior, we will strengthen and develop our business model going forward. 5G from PLOS. This is a huge technological step forward, and I'm hoping to be part of such an exciting project. And finally, The successful refinancing and restructuring of the group's debts has secured the possibility to continue investing in our development as well as sharing profits with our shareholders. Ladies and gentlemen, thank you for your attention. This concludes our presentation and brings us to the Q&A session.

Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speaker, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your questions answered before you turn to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. As a reminder, if you would like to ask a question, please press 01 on the telephone keypad now. and we will receive the first question. It's from Roman Zavaros of Prince Street Capital. It's now open, so please go ahead.

Hi, guys. Thank you very much for the presentation today. I just wanted to follow up about what's been happening for the industry as a whole in recent months, and specifically, has... Has the pandemic led to any changes in the competitive environment, both in terms of how the different companies are reacting in the competitive intensity that you've seen? And the question is primarily in that mobile, but I guess I'm also interested in the broader telecom industry as well.

Okay, so sure. To be honest, business as usual. So nothing particularly changed in our competitive landscape. So everyone is doing the same. So the intensity of the competition is not more aggressive. No one thinks about, you know, like changing strategy. So even in TV business, broadcasting business, which is, of course, affected by coronavirus the most in terms of our company, So because, as Taszek said, the advertising market is down nowadays, but nothing happened to us. In fact, it's very good for us, for the future, that no one reacted accidentally and no one reacted... nervously, so it's really okay. But to be honest, as you can see, our business model is very resilient, I can say, because we have different legs of the business, so as you can see, so we have TV production, so then we have pay TV, then we have mobile operator also, and mobile is also... Ten years ago we launched high-speed mobile internet in terms of LTE. Last Monday we launched the first and the only commercial 5G network. So we continue the business. As you can see, our OTP platform was very popular during this pandemic time, which is important, so it's IPLA. also the business in terms of fiber optics is quite good because people need internet and finally we would like to acquire you know like interior group which is very important like for us for the future just to strengthen our position in internet so nothing happened for us and it's good for us that our business model is quite safe for this time because that's what we offer especially in our smart house offering so multiplayer strategy is just needed nowadays because you need mobile, you need internet and you need to in fact TV just to have all information on daily basis so it's quite okay it's maybe not good words about that but But business is really okay.

Do you think that Q1 results financially in terms of top line and EBITDA are representative of what we should expect over the course of the year as a whole? Or do you think the rest of the year will look better or worse?

Well, actually, I cannot confirm that the Q1 results would be representative because COVID pandemic in Poland is the second half of March, actually, I mean, in terms of lockdown. There are different things that appear in our business since then, Mati has told you our business model is quite resilient. I would be happy if our EBITDA would stabilise by the end of this year at the level of the last year EBITDA, and I think that is achievable. However, you know, as far as the pandemic is concerned, I'm not the fortune teller.

Kasia, there is a lot of factors which influence this result, but nowadays we... We stay calm and we continue our business as usual. We do our best. Absolutely.

Is the advertising side of the business going to be the one that's hit the hardest by the macro disruptions, do you think?

Currently, the advertising market is around 35% down year on year, as far as April and mostly May is concerned. And honestly, we don't have good visibility for the coming quarters, but we believe there's a there is a positive attitude towards advertising. So as soon as the lockdown is a little bit lighter, then the advertising should come back.

Yeah, and the same with the pandemic-related restrictions have had a significant, I can say, impact also on the sales of our equipment. So here a decline reached about 50% in the first moment, and now the sales are growing, but are still on the level which is like lower by 30% but it's coming healthy every day so on equipment which is quite a big part of our business but it's day by day it's better and better so nowadays we opened like almost 100 points of sales in our network so we just strengthened our kind of I don't know, online channels. So we are really good prepared and that's what Mr. President, Mr. Boszczyk said, you know, like it was overnight execution of online managing the company. So we are really proud of that.

And we passed the test, we think.

What percentage of the EBITDA does advertising account for? Is it less than 10%?

advertising business on Epista is less than 10%.

Last year it was close to 600 million.

Revenue. Sorry, Epista. But it was not only based on advertising, also the paid channels, so from this 500 million, 60% was advertising.

Yeah, because we have changed over the years our also TV business, because previously, like three, four years ago, 80-90% of EBITDA came from advertising, or revenue, sorry, and now it's only 60%, 40% is subscription fee for our channel.

So, obviously, we're talking about the segment, so the impact of the part driven by advertising is less than 10%.

Yeah, understood. Okay. Okay, I'll let a lot of the people jump onto the call. Thank you.

Before we take the next question, just a reminder, if you would like to ask a question, please press 01 on the telephone keypad. And the next question is from Laura Knight of the group. The line is now open. Please go ahead.

Good afternoon. Thank you for taking my questions. I have two. The first is about prepaid art books. that we saw that you report 3% growth in the quarter, no, sorry, year-on-year, and that was mainly due to the positive factor of interconnect settlement, as you mentioned in the presentation. Do you think that this trend will continue so that we could even see more stabilization in retail segment? And the second is about the collections. What's your perception in the first quarter? How many business customers ask for postponement and this type of thing? Thank you.

Hello, Laura. Look, as far as the RPU in the prepaid segment, RPU growth, This was the first reaction when people started calling each other and some of people in private segment don't have, they have pay-as-you-go rates. So this was the first hit. It stabilizes at the moment and it will not be growing in the future. I think it might go down a little bit in the future when the pandemic situation Your second question was about debt collection. Actually, as far as B2C customers, we don't see any, absolutely any slowdown at the moment. We have a total of 60, zero customers, 60 customers out of 6 million, calling us to postpone the payments, and that was wrong. As far as B2B customers are concerned, they are also paying well. We might have some medium-sized, small and mid-sized companies that might have in the future some cash flow problems, but honestly, this is not our domain. Most of these customers are with Play and Orange, and we, I think, as far as the collection is concerned, are resilient. If you're looking at that on our balance sheet, The growth is not connected to the payments from the customers, because as I told you, everyone is paying well. I think they will pay us, you know, as good as the electricity bill, because they really need internet and a telco connection. connected to the change of our business model. You probably remember that we acquired part of the company that's collecting debt, and instead of selling debt, collecting them themselves. So in the long term, it's more profitable for us, but in the short term, you might see some increase on the balance sheet. So that's basically all.

Eti, thank you for your answer.

At the end as a reminder, if you would like to ask a question, please press 01 on the telephone keypad now. And we receive the follow-up of Roman Bosairos of Princesa. Your lines now open again. Please go ahead.

Hi guys, just two more questions from you if I may. First question is about the billing system and you canceled, I think, the contract at the end of last year, if I remember correctly, with the Chinese vendor. I just wonder if there's any update if that project is concluded or when it might be concluded with the new vendor?

Well, yes, we consult the billing system building with Huawei and our new vendor of the system and actually the company that will continue the project that was postponed in December is Asseco, the company that we hold 23% in. and at the moment ASECO has already assessed what work has been done and what needs to be done in order to continue this project and they are starting their work at the moment, so we in the process of continuing the I don't think that the project will be completed by the year end. It will probably take around two years to have the first results.

I see. Are there any operational problems that that switch has caused? No. I recall there was some talk that you weren't able to make shadow plan changes, pricing changes that you wanted to because of what was happening there. Is that not an issue anymore?

No, that's not an issue anymore because at that moment that we were talking about the tariffs, it was the time of testing of the system. There is absolutely no problem with implementing new tariffs. I think Maciej maybe would like to comment on that.

No, we have changed the tariffs like the end of December, so in terms of multi-seam offering, And that's what you can see also in our RPO results in terms of 3% growth quarter to quarter this year. So we have reached in our multiple strategy the RPO on the level 85.4 zlotys. So it's also influenced by the change of target in the end of December. And especially that it was done before prolonging the contracts which we started new service two years ago, so just before February, when the first new opening service customers came back to prolonging the contract.

I see. On the subject of tariffs, the movement that we began to see last year, in the middle of the year, when we saw price adjustments, Do you expect further movement in that direction this year? Or if we do see that, it will likely happen after this year?

No, we believe that the stats are not very good just yet. increase pricing, because we try to help people, especially that we are, you know, Polish company, we are local player, we try to help people, so that was what Mr. Basik said, we were focused just to help people to live with the pandemic here and get used to it somehow, so it was a spectacular action, spectacular but helpful, I can say. There's 200,000 tests, which we just bot to polish society just to test more and identify you know like people who are with coronavirus so this is important for us because as i mentioned we are polish company we would like to help people uh sure with on them yeah that that makes a lot of sense and and our final question um

In terms of CAPEX, how do you think CAPEX this year will compare with last year? And has the budget been changing in any way as a result of what's happened to the country over the last couple of months?

Well, actually, there is, in our opinion, no exact connection in between what's happening and our plans. We're planning the CAPEX for 2020 as 11% revenue. And we at 10.8 at the end of the first quarter and we intend to continue that. And that's it.

Was last year's number 11% as well?

Yes.

Okay. Okay. All right. Thanks.

So as far as capacity is concerned, it's business as usual.

Understood. Okay.

Ladies and gentlemen, as a final reminder, if you would like to ask a question, please press 01 on the telephone keypad now. As we receive no further questions, I hand back to the speakers for closing remarks.

Thank you for today. You know, if you don't have any questions, you know, we meet, I think, for the next three months. Thank you very much and have a nice day.

Thank you. Thank you. Stay healthy.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.