Cyfrowy Polsat S.A. Ord

Ladies and gentlemen, welcome to Polsat's H1 2020 results conference call. I will now give the floor to Mr Miroslav Plaszczyk, CEO of Polsat. Sir, you may begin.

Good afternoon, everyone, and welcome to Polsat Group's Q2 2020 results call. Today, I will take you through the key events that took place in the second quarter. Sasek and Matik will tell you about the operating results of both our business segments, followed by Kasia with our final performance. As always, we will end the presentation with a short summary and Q&A session. Ladies and gentlemen, I would like to ask you to look at the results of this quarter from a different perspective. Today, the coronavirus situation seems relatively stable, Life has almost returned to normal and investors tend to quickly forget the past. So I would like to remind you all of the reality we faced in Poland in March and April when schools, shopping malls, most public facilities were shut down. When we were only required to stay at home and work remotely. When the level of uncertainty was at its highest point. That was the reality of the second quarter that we report today. During this most difficult time, we were focused on maintaining continuity of operation and ensuring at the same time the safety of our employees. We are focused on supporting those points of faith that had to be locked down. We are focused on delivering the highest quality of services to our customers especially as telecommunication and how entertainment services have become absolutely crucial for so many people during this time. Please remember all this when listening to today's presentation. Like I said, the adjustment of our business operation to the new, difficult reality of the state of pandemic was one of our priorities this quarter, and I think we did this very efficiently. We are also very active in supporting the Polish society and healthcare services in the fight against the coronavirus epidemic in Poland, in particular with donations of about 30 million zlotys. But the coronavirus did not stop us from developing our business according to plan. We strengthened the position of Polsat Group in the Internet through the fast finalization of the acquisition of interior.pl in the beginning of July. We have also launched a completely new product. We have started operation on the photovoltaics market in Poland, introducing our new brand ESOL. I believe it is a very promising business in steel coal-dominated Polish energy production. Last but not least, we have decided to share profits with our shareholders and pay a record high dividend of 640 million zloty or one zloty per share. This proposal has been fully accepted also by you on the company's general shareholders meeting. Summing up, a challenging and a very dynamic quarter when our focus was on business continuity but also numerous new strategic initiatives. I believe we did very well in this context, even though the situation was very complex. Staszek, please tell us how our media business was conducted during this turbulent time.

Thank you, Mirek. I have to admit that this was a challenging quarter for our television business. The coronavirus epidemic and the imposed lockdown had a profound impact on the advertising market, a major source of our revenue. Still, I believe we did a pretty good job of mitigating the negative impact of the breakdown on the ad market. Let's begin with our viewership figures. The lockdown and coronavirus threat forced us to review our internal production basically from day to day. As a result, we had to withhold the spring programming schedule. Also, the numerous sport events to which we hold broadcasting rights, football in particular, were suspended. I am very pleased to say that the majority of these events have already been relaunched. We all had the pleasure of watching the finals of the Champions League last Sunday. All in all, despite these challenges, our viewership figures in Q2 remain within our target audience shares, that is, at 23% in the commercial group. Our main channel podcast gained 9.2% of audience shares, and our thematic channels retained their strong position, gaining almost 14% of audience shares. I have to underline our news channels did a great job doubling or even tripling their viewership results. Let's look at revenues perspective. The TV market took a really hard hit this quarter, declining by 35.4% year-on-year. We did a little better than the broad market and recorded a decrease in ad revenues by 34.5%. This result gave us 27.4% share in the market. So, a turbulent time for all media businesses. where fast decision-making was crucial in order to protect value for shareholders. The next slide describes our response to these challenges. Looking at the overall financial results of the TV segment, in Q2, our total revenue fell by 21%, entirely due to the breakdown on the ad market. We have not seen any major problems with our sound sales of channels to our cable and satellite providers which helps us in minimizing stop-line pressure. On the other hand, our strong side is that we are very flexible in respect to cost. If the need arises, we can quickly adjust the cost side to match it with the condition of the advertising market and consequently reduce pressure on EBITDA. This is what happened in this quarter. We cut costs by 18% and as a result we posted EBITDA at the level of $122 million, down by $39 million. I believe TV Poltar did a lot in order to mitigate top-line pressure. Looking at the results in the longer, happier perspective, you can see that our viewership figures remain in the line with our strategy. Our main channel, Polsat, had 9.5%, and our thematic channel had 13.6%, which gives the total share of Polsat Group at the level of 23.1% in the commercial group of viewers in the first half of 2020. On the next slide, we can see how these audience shares translated into ad market shares. In the first half of 2020, our ad revenues fell by 20%, which is in line with broad market trend to 475 million. We maintained the high market share of 27.7%. As media business changes dynamically this year, in order to conclude, let's look at the six-month financial performance of TVPulsar. The financial results are presented on site 13. we posted revenue of $873 million down by 10%. Naturally, the decline comes from the breakdown of the ad market in the second quarter. As I have already told you, we have adjusted operating costs, which fell by 9% to $604 million in the half-year perspective. Accounting for the financial aid and other COVID-related costs, The adjusted EBITDA of the TV segment for six months amounted to $269 million, recording a drop by $38 million. That was H1, while right now we are already at the end of August. As mentioned, the situation changes very dynamically this year, so let me now give you some insight into the second part of the year. I would like to tell you that the figures for July and preliminary readings for August look very promising. It seems that the TV ad market is following a V-shaped recovery path and has the potential to be flat in the second half of the year. Assuming that the epidemic situation does not get worse than expected in autumn, I believe the value loss of the Polish TV advertising market could be limited to around 10% in a full year perspective. Now over to Maciej who will tell you more about our retail business.

Thank you, Sasek. I must admit it was a very turbulent time for media businesses. Nevertheless, TV Polsat proved its flexibility and ability to react fast. In this context, great job and congratulations for the whole TV Polsat team. During the lockdown, our bigger segment faced other challenges, mostly related to maintaining uninterrupted customer service in our sales and customer care channels. And I believe our Q2 operating results show clearly that our efforts were highly effective. Traditionally, I would like to open the discussion of the operating results of our retail segment with Smartdom. This is our flagship multiplayer program. Despite the difficult conditions that we had to operate under COVID restrictions, closed stores, social distancing, requirements to stay at home and so on, SmartDOM generated very satisfactory results, growing steadily at 7% year-on-year. We increased our base of Multiplay customers by 130,000, who owned 6.2 million RGU's in total. This quarter saw yet another record slow level of churn of 6.4%. This very low number shows our customer satisfaction with our services and their high quality and prove the success of our Multiplay strategy. Moving on to the next slide, please take note of the high rate of growth of new contract RGU. 4% year-on-year, more than half a million. In effect, at the end of Q2, we provided almost 15 million contract RGU. I would like to underline once again that a significant part of this growth, almost 200,000 new RGU's took place during Q2 when COVID restrictions were at their highest. As in the previous quarter, the key driver of growth was a very dynamic development of our mobile segment. Mobile RGU's grew by 8% year on year, mainly thanks to our attractive offer and the positive influence of our Multiplay program. supported by strong sales of M2M in the B2B segment. In Q2, our pay TV and internet bases were stable. Our strategic aim is to build customer value through the successful execution of our Multiplay strategy. In Q2, we recorded very strong ARPU growth by Dynamics of 3.7% year-on-year, which led to ARPU at the level of 86.5 losses per contract customer. Part of this growth was organic and part was fueled by higher interconnect revenues related to a surge in voice traffic during the coronavirus epidemic. We believe this factor might be temporary and will become less important once voice traffic returns to usual, pre-epidemic levels. Nevertheless, contract RP growth remains our strategic goal for the future. The number of RGU-owned companies on average by each customer, or RGO saturation per customer, continues to grow systematically, reaching the level of 2.68 in Q2. This means that our existing customers continue to add new services to their basket. This is an important factor that supports increasing the value and loyalty of our customer base. Moving on that prepaid segment. The lockdown of the economy put this part of our business under some pressure. As you can see on the graph, the prepaid RGU base shrunk slightly to 2.53 million. Lower phase of prepaid RGU was influenced mainly by two factors. One was that part of sales networks and shopping malls were closed for a few weeks during the lockdown period, and these are important channels of distribution of our prepaid services. The other factor was closed borders and lower number of incoming foreigners, in particular Ukrainian citizens, who usually constitute a noticeable part of prepaid users in Poland. In Q2, prepaid ARPU grew by 2.9% on the back of increased voice traffic during the epidemic in Poland, which resulted in higher interconnect revenue. As I already mentioned, this is a temporary factor and ARPU growth is likely to slow down as traffic volumes return to normal. Okay, a quick summary. As Mirek said, when opening today's presentation, Q2 was a very challenging period and we had to face unprecedented difficulties and operate under unprecedented conditions. In spite of all that, we posted strong results with organic growth. This proves that our business is resilient and that as an organization we are capable of rapidly adjusting to dynamically changing conditions. I'm very impressed and proud of this success. Now I will give the floor to Kasia to discuss how this very strong operating result translated into our financial performance. Thank you.

Thanks, Maciek. Our financial results also show a high level of resilience in the face of the turbulences caused by the COVID-19 pandemic. As you can see on the slide, our revenues and IPTA were under some pressure. However, I think that under the circumstances, these are good results. Just to remind you, all the financial data that we published is based on IFRS 16. As the access already told you, we were strongly engaged in supporting the society in fighting the COVID pandemic in Poland. We made significant contributions, both in the form of donations and aid in kind, and incurred additional costs necessary to ensure the continuity of operations of our group, totaling 41.5 million zlotys. We decided on a one-off basis to adjust EBITDA by this amount to enable you to compare apples to apples. So, passing on to the numbers, in Q2 we posted revenue of 2.86 billion zlotys, that is 2% lower than a year ago. EBITDA adjusted for the one-off COVID-related costs. that I've just told you about amounted to a little over 1 billion zlotys, down 7% year-on-year. Reported EBITDA was 960 million zlotys. I will elaborate in a moment on key drivers behind this decline. LTM free cash flow remained stable at about 1.3 billion zlotys and our leverage ratio was down to 2.86%. Passing to the next slide, looking at the decomposition by segment, you can see that the top line in our broadcasting and TV production segment was under strong external pressure and recorded a drop of over 100 million zloty. This should not come as any surprise after the crash on the Polish ad market, as Spaszek described. However, at the EBITDA level, this decline was set off to a significant extent. Adjusted EBITDA in this segment fell by 39 million only. This was possible thanks to our flexibility and ability to quickly adjust the cost side to match the condition of the advertising market. In our retail segment, we posted 50 million lotis more revenue year-on-year. This quarter saw strong equipment sales despite the fact that the third of our sales network was closed during the lockdown period. Sales were especially strong in May and June, and we were able to compensate for lower volumes sold in the beginning of the quarter. Also, voice traffic at the resulting interconnect settlements remained on a high level supporting revenue growth. These two factors, however, are reflected to a similar degree on the cost side. We also saw pressure on retail roaming revenue because of limited willingness to travel and incurred additional costs related with our decision to buy broadcasting rights for the channels involving PKOBP extra-classa football matches. All these factors were drivers behind the 4% decline in the retail segment. Overall, the adjusted EBITDA results that you can see on the graph amounted to a little over 1 billion zlotys down several percent year on year. If we include the one of COVID-related costs of 42 million zlotys, reported EBITDA was 960 million zlotys. Passing to the next slide. On the next slide you can see that cash flow generation both in Q2 and the first half of 2020 was at the stable high level. $271 million in Q2 and $539 million in the half year are very satisfactory results in my opinion. In Q2, dividends from ASECO contributed positively. Also, we settled the corporate income tax that I told you about in Q1. Please also note that in the spring, we have decided to increase our handset inventory, anticipating COVID-related problems in our supply chain. Thanks to that, we could immediately recover our handset sales after our points of sales were reopened. As you can see on the cash flow side, we were accumulating cash in Q2 in preparation for the acquisition of Interia Group. At the end of Q2, we had over 1.3 billion zlotys in our account. CapEx is going according to plan. CapEx revenue reached the level of 9.4 at the end of Q2, mainly fueled by Metia Network modernization. As for debt, not much has changed on this slide since you saw it in May. This is because of the refinancing that we executed earlier this year. A quick reminder, we have withheld debt repayments for four quarters until Q2 2021. We have extended the maturity profile of our debt and we have increased the level of covenants by 0.3 times EBITDA to account for the impact of IFRS 16. Another important issue was that the Polish National Bank cut PLN rates for the third time in Q2. Overall, in 2002, interest rates fell by 140 points, and this factor is already contributing to a significant reduction in our debt service costs. At the end of Q2, average weighted cost of debt was 1.9% compared to 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. That was my last slide. I would like to say that the financial results I have just presented to you are, in my opinion, good results considering the the obstacles that we had to face in Q2, and they prove that our business model is indeed very highly resilient. Thank you very much for your attention, and Mirek, back to you. Thank you, Kasia.

I would like to end this presentation with a short summary and an outlook for the second half of this year. Firstly, I would like to congratulate my whole team on the very good operational and financial results that we have achieved despite the pandemic and the ensuing restrictions. Well done! Once again, please remember that for part of this quarter we operated in conditions of high uncertainty and complete lockdown. Looking into the near future, First of all, we have embarked on a new project that built a strong position of our new brand Isoleo on the market of photovoltaic installation, which we believe has a lot of potential. Secondly, we are focused on developing and integrating interior DOSPL in Polsat group structures. This process is going smoothly and according to plan. And finally, we are working continuously on the roll-out of our cutting-edge 5G network constructed based on the unique 26 GHz TDD spectrum that we have. So, many tasks and projects are already scheduled for the months to come. Ladies and gentlemen, thank you for your attention. This concludes our presentation and brings us to the Q&A session.

So now we will begin our question and answer session. If you have a question for our speakers, please dial 0 and 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find the question is answered before it is your turn to speak, you can dial 0 and 2 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 0 and 1. The first question is from Nora Knight of S Group. Your line is now open.

Hi, good afternoon. Thanks for the presentation. Could you please share with us your expectations for 5G frequency allocations in Poland with this year?

Thank you. regulator still plans to launch the auction this year. This is the official communication from the regulatory regulator. However, actually it might be challenging because actually we are heading towards September and right now we have still no initialization of the process. So we are waiting patiently, but we believe that the process is moving more and more towards 2021. I see.

Thank you. And regarding our pool of help, both post and prepaid, as far as I understood, the main driver behind the growth was mainly the traffic increase. So for the upcoming quarters, you could say that we should expect some stabilization and getting back to normal levels.

Yeah, our RP growth is driven by our multi-play offers, so that's what we observe every quarter in fact, quarter by quarter, and that's what we focus on, that just building the value of our customer base. When we take a look at our presentation, it's like nowadays we have like 2,028,000 multi-play offer customers, And what we believe is important, and that's what is also giving us opportunity to drive ARPU, that we have recorded low churn level 6.4%. So our customers are very satisfied from our services, and in fact we can sell them more services and build ARPU and build the customer value.

Thank you. Thanks for the answer.

If there are no further questions, I hand back to the speakers for the conclusion.

Thank you. Thank you also. Thank you, ladies and gentlemen. Thank you for meeting for today. We hope you are in good condition and we meet in the next, you know, three months together. One more thing. Thank you very much.

Thank you very much.

Thank you.

Thank you very much.

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