Cyfrowy Polsat S.A. Ord

Good afternoon, ladies and gentlemen. Welcome to Polsat Plus Group's results call for the first quarter of 2023. Today's speakers are, as always, Mr. Miroslav Błaszczyk, CEO, Mr. Maciej Stec, Vice President, Responsible for Strategy, Ms. Katarzyna Ostaptoman, CFO, and Mr. Stanisław Janowski, President of TV Polsat. After the presentation, we will hold a Q&A session. As always, please post your questions in advance in the chat section. Mr. Błaszczuk, the floor is yours.

Hello, everyone, and welcome. I will start the presentation by discussing the key events of the first quarter of 2023. Staszek and Maciek will follow with the presentation of the operating results in our business segment. And after that, Kasia will discuss our financial performance. After a short summary at the end of the presentation, we will be happy to answer your questions. So let me start with the key highlights in the first quarter. Even though we spoke only a few weeks ago, a few significant events have taken place since our last meeting. First of all, in the first quarter of 2023, we successfully refinanced our existing debt. In the end of April, we signed a senior facilities agreement with a consortium of Polish and foreign financial institutions for term loans of 7.3 billion zlotys and 500 million euro, additionally a revolving facility loan of up to 1 billion zlotys. This new financing will be used, among other things, to fully repay our existing bank debt, which, by the way, took place today. Also in January we issued sustainability link bonds worth 2.67 billion zlotys. This was the largest bond issuance in the history of the Polish capital market. The new financing will support our efforts as we continue to dynamically implement our strategy 2023 plus in the area of green energy. Maciek will no doubt remind you of our ambitious pipeline of renewable energy projects So let me just say that to my great satisfaction, we are very close to completing our first wind farms. Currently, we are running final tests for the launch of electricity production in our very first wind farms in Miłosław and Kazimierz Biskupi. There were also some new developments in the area of connectivity. In the first quarter of 2023, we expanded the coverage of our Plus 5G network. Today, over 20 million people have access to the fastest 5G network in Poland, which is based on 3.5 thousand base stations. Additionally, in March, we modified our telecommunication services tariffs in order to continue building the value of our customer base. Let us now move on to the operation results of our business segment. Staszek, Maciek, Please go ahead.

Thanks Mirek. I will present the results of the media segment TV and online. Starting with the online segment, we continue to build effectively our position in the market of internet portals. As you can see on the graphs, our horizontal portal Interia and its numerous portals are doing very well. Just like in the past quarters, Polsat Interia Group is a strong number 3 player with 21.2 million real users and almost 2 billion page views every month. Like I said, our goal in online media is to strengthen and build our position through Interia PL. We support Interia's performance in day-to-day operations. We cooperate closely in the area of content distribution and editorials. Our ad brokerage house Polsat Media and Interia also work together, and thanks to this cooperation, we see highly satisfactory results in terms of online advertising. Next slide, please. Turning to our TV business, in the first quarter of 2023 we recorded good viewership results of our TV channels. Our main channel was second with an 8% audience share, while our thematic channels gained almost 14% of audience shares. This brings the total viewership of TV Polsat Group channels to 21.9%. Let me remind you that we are still observing the negative impact of the refarming to the new terrestrial television standard, which is preferential towards the public broadcasters. Next slide, please. On this slide, we have our performance on the advertising market in Q1. As you can see, the broad market increased by 4% and our revenue from TV advertising and sponsorship increased in line with this trend. In Q1, we recorded ad revenue of $284 million, which gave us 28.2% market share in the TV advertising and sponsorship market. Overall, I am pleased with the results of the media segment this quarter, especially in terms of the advertising. As you will see in the financial part of this presentation, these operating results were very supportive for the financial performance of the media segment. Now I will give the floor to Maciek for the presentation of the B2C and B2B segment and the clean energy segment. Thank you. Thank you, Staszek.

Let us first look at the operating performance in the B2C and B2B segment. We maintain a high and stable base of customers who use our Multiplay offer. In Q1 2023, 2.5 million customers were Multiplay customers. That is 42% of all our customers, so it is fair to say that the saturation of our customer base with the Multiplay product is already pretty high. These customers use 7.4 million services from our portfolio. But what is more important, in my opinion, is that despite difficult market conditions, despite persisting high inflation we consistently maintain a low level of churn only 7.2 percent per annum this is of course the effect of our multiplayer strategy and also reflects the high loyalty and satisfaction of our customers with our products and services next slide please At the end of the first quarter of this year, we provided almost 13.2 million services to our contract B2C customers. This is 2% less than a year ago. If you look at the decomposition of our RGU base, you will see that we maintain a high and stable number of mobile services, 6.2 million, and a stable base of internet services amounting to 2 million. The pressure on the total RGU base comes from pay TV. This is something that I have been flagging consistently over the past quarters. We decided to change the pricing model and sales strategy of our online video services from a low-end product that generated very low RPU to a full-value standalone TV product. On the next slide, we have ARPU evolution. ARPU per B2C contract customer increased by 2.3% in the first quarter of 2023 and reached the level of 71.4 zlotys. The main drivers of ARPU growth include the consistent implementation of our Multiplay strategy and also the popularization of our 5G tariffs. Let me repeat what Mirek said in his introduction. In the connectivity segment we focus on building value and to this end we implemented modifications in our mobile tariffs in line with the more and more approach. This move should support RPO growth in the coming quarters. Additionally, today all our tariffs include 5G and we continuously work on improving our 5G. We are expanding 5G coverage. In the first quarter, we increased the number of base stations to 3.5 thousand, and as a result, already 20 million people are within our 5G footprint. We also work on a solution that can increase the parameters of our network. Only yesterday, we successfully conducted tests that allowed us to reach transfer speeds up to 1 gigabit per second on our 5G network, mobile network. Next slide, please. In the prepaid segment, we posted solid, stable operating result. At the end of the first quarter, we provided almost 2.7 million prepaid services. This level is stable quarter on quarter and obviously is lower compared to the first quarter of last year. This is because we provided support to Ukrainian refugees in the first months of war by distributing free prepaid starters pack. According to our prepaid RGU definition, we do not report RGU's that are inactive for longer than 90 days. So basically, all the cards that are not being used have been excluded from the base and you can assume that we have returned to pre-war levels in terms of the level of provided prepaid services. RPU in the prepaid segment remained at a stable level year on year and amounted to 17.1 zlotys. On the next slide, we presented the results of the B2B segment. Our performance in this segment is stable over time. We have a high stable base of 69,300 customers who generate on average 1,430 slots per month, up by 3% year-on-year. This is a very good result given that the B2B market is very challenging and highly competitive. To quickly sum up the telco part of my presentation, I'm very happy we have achieved solid operating results in the B2C and B2B segment in the first quarter of 2023. I think it's important to remember that the economic conditions and the general situation on the market are very difficult today. With this in mind, I'm especially happy that we posted very low churn and growing RPO per B2C and per B2B contract customers. And now a few words on clean energy. I talked about the new business pillar of our Strategy 2023 Plus quite extensively a few weeks ago and the spectacular progress in this area is not made from day to day, so I will only remind you briefly on what's going on in this segment. So, we have two main goals in the segment of clean green energy. Number one, We want to become a leading producer of clean green energy. To achieve this goal, we are investing in renewable energy sources, which include mainly biomass, solar power plant, and onshore wind. Our second goal is to become a leading producer of green hydrogen and create a complete value chain of an economy based on green hydrogen. Next slide, please. Our pipeline of renewable energy projects hasn't changed since our last meeting. We have 100 MW installed in biomass turbines. In the area of solar energy, our solar power plant Cambria is expected to be completed in time. That is in the third quarter of this year. We are focusing on the development of onshore wind farms because this source of renewable energy is the most effective and the cheapest at the moment. Our first two wind farms located in Miłosław and Kazimierz Biskupi are already completed. At the moment we are running tests and we should start producing energy commercially at the third quarter of this year. I think this is a huge success because we started building these farms only a year and a half ago. Once we complete all the investments shown on this slide, we will have about 330 MW installed capacity in 2024 and this number will double in 2025. On the next step, we present the progress that we are making in the area of green hydrogen and building a full value chain based on green hydrogen. Like I said, not much has changed over the past three weeks. I'm really looking forward to the moment when we initiate our own production of green hydrogen, work on the installation of the first electrolyzers and on our prototype of an alkaline electrolyzer is still in progress. But hopefully, when we meet next time, I will be able to share details on hydrogen production with you. As you have probably seen in the pictures, the hydrogen refueling station in Warsaw is already finished. We are only waiting for an official green light from the authorities to launch the station commercially. The construction of the station in Rybnik is also going according to the plan and we will soon start work on the remaining stations for which we have received a subsidy. As for our Nesobus, I'm very proud of Nesobus. Already 10 buses are almost assembled and are being prepared for delivery to our customers. As you remember, we have won a Rebnik standard for the delivery of 20 hydrogen-powered buses by the end of this year. To sum up, we are dynamically implementing our strategy 2023 plus initiatives in the area of green energy and green hydrogen. We strongly believe that this will bring long-term benefits for the environment, for society, and also for our group financials and its growth prospects. Now I will give the floor over to Kasia, who will discuss the financial performance of Polsat Plus Group. Kasia, the floor is yours.

Thank you Maciek. Before I tell you about the financial results in the first quarter and the refinancing, I would like to remind you that we are preparing to take over control of the green energy segment that Maciek was just talking about in Q3. At the moment we have a 40% stake in this segment. When we start consolidating this segment, our results will change a little bit in terms of income statement and the balance sheet. A lot of intra-group transactions will be eliminated, but then we will also have lower energy costs at the consolidated level. Can I have the next slide, please? On this slide, you can see the key financial metrics of the first quarter of 2023. The operating results discussed by Staszek and Maciek translated into a solid growth of revenues. In Q1, our revenue increased by 7.1% to almost 3.2 billion zlotys. Additional factors that drove revenue growth were the very high equipment sales, up by 44% year on year. Adjusted EBITDA was down almost by 5%, mostly on the back of significantly higher energy prices and inflationary pressure on our operating costs. Reported EBITDA was stable year-on-year. Free cash flow in the last 12 months declined by almost 50%. This reduction is not unexpected. The main drivers behind the decrease are the same as in previous quarters. Very high handset sales trigger an increase in installment receivables and high interest rates keep interest costs at elevated levels. I will discuss the details on one of the next slides. Net debt to EBITDA was 3.26 in Q1. This increase reflects mainly our extensive investments in the green energy segment. In the transition period, when these investments are at their highest, we will experience increased net leverage, but I expect this ratio to start decreasing consistently once the majority of the projects are finished and start contributing to our results with a stable and predictable stream of EBITDA. Let's take a look at the decomposition of revenue and EBITDA on the next slide. All our business segments contributed positively to revenue growth. As you can see, a big part of the revenue growth came from the B2C and B2B services segment this quarter. As I already mentioned, handset sales continue to be an important driver of this growth. Very good performance on the advertising market that Staszek talked about translated into the contribution of the TV and online media segment. And of course, the real estate segment, it contributed 45 million to revenue in the first quarter. On the right, we have the change drivers for EBITDA. As a reminder, in the first quarter of 2022, we supported Ukraine through various actions and initiatives which consumed about 34 million zlotys. At the adjusted EBITDA level, the B2C and B2B segment was still under pressure from higher energy costs and inflationary pressure on OPEX. We stabilized the results in the media segment and real estate contributed positively to EBITDA. As I mentioned earlier, free cash flow is under pressure, which is what we expected. Above all, this is the result of high interest costs, a factor that is beyond our control and is driven by high interest rates. Additional pressure on free cash flow comes from higher working capital employed. On the one hand, very strong sales of handsets translate into increasing installment receivables because we sell basically all of our handsets in the installment plan model. Also, we see higher inventory, which is mostly associated with the systematically increasing share of more expensive handsets into our sales mix. We also continue to observe inflationary pressure on OPEX and high energy costs, which lead to falling EBITDA despite a strong rate of growth in our revenues. Cash flow decomposition is pretty simple this quarter. The ratio of capex to revenue in Q1 was 9.2%. This ratio is the blended capex for the TMT group and the real estate segment. Here you can already see the first part of our refinancing. In the beginning of the year we issued the Series D bonds and partially refinanced the Series B and C bonds. The net effect was 1.142 million zlotys and this is the main driver behind the high level of cash posted at the end of the quarter. I will talk more about the refinancing later on. In Q1 we also drew the revolving credit facility to settle the payment for the renewal of the 1.8 MHz frequency. Let me remind you that although this payment was supposed to be made in Q4, it was delayed until early January because of the timing of the administrative decision. Let's move to the next slide, please. This is the structure of our debt in the end of March. So here you can already see the effect of the bond issue, but not the refinancing of the bank debt. I have prepared a more up-to-date structure for you on the next slides, so I will not go into details here. Let me just point out the weighted average interest cost at 9%, which is the reason behind our weakening free cash flow. I wanted to talk a little more about the details of our refinancing. As you know, we were able to successfully refinance our debt, despite the challenging conditions on the debt market. First, we issued the Series D bonds in January. About two weeks ago, we signed a new senior facilities agreement with the consortium of Polish and foreign financial institutions, securing 7.3 billion zlotys and half a billion euro in term loans and also a revolving facility up to 1 billion zlotys. The repayment of our debt was Our new debt is sustainability linked. This means that the margin on both bonds and the loans are linked to the fulfillment of targets that we have set in our sustainability linked financing framework. We chose two ESG KPIs, energy production from renewable sources and share of zero emission energy in our energy mix. The bank debt is linked to both KPIs while the bonds only to the second one. Next slide, please. On this slide, we have the key parameters of our new indebtedness. We have a new PLN term loan of 7.26 billion zlotys, a Euro term loan of 506 million euro and additionally a revolving facility up to 1 billion zlotys. The maturity of the loans is 5 years and the tranche denominated in Polish zloty is going to be amortized while the Eurotranche is going to be repaid in a bullet at maturity. The loan is secured but we have the option of removing collateral if leverage defined in the SFA falls below 3.3. As you can see, financial covenants are a bit complicated under the new SFA. Total leverage and secure leverage are not fixed over time. In order to accommodate our investments under the strategy 2023+, these covenants change they are going to be the highest in the peak of our investment cycle that is in 2024. And then we decline gradually starting from 2025 after the heaviest investments are already made. Lastly, the covenant level for dividend payout remains unchanged and 3.5 net debt to EBITDA. Next slide, please. On this slide, I wanted to show you how the refinancing will change the debt structure of our group. Starting from the top, the share of bonds increases to 25% of total debt. The structure by currency also changes. 18% of our debt is denominated in Euro. On the bottom chart, we have the planned maturity profile. As you can see, we pushed the maturity wall from 2024 to 2028. As already mentioned, the Eurotranche will be repaid in a bullet in 2028. Additionally, please notice that there are no capital repayments of the PLN tranche until the third quarter of next year. I'm very happy that we successfully refinanced practically all our debt. This was a long and difficult process because, as you know, the conditions on the debt market are challenging. The new debt structure ensures the flexibility that we need to continue financing our investments in the construction of green renewable energy sources. Today, we are in a transition period and we are likely to see weaker debt metrics temporarily But this is a necessary phase and once we complete our investments, they will contribute strongly to our EBITDA and cash flows and will accelerate the leveraging. Thank you very much. Maciek, I pass on to you.

The refinancing of our debt is very important. It will enable us to go ahead with our Strategy 2023 Plus and our projects, which are the foundation of the future of our group. The common element that links all our strategic business pillars are practical innovations. By that I mean innovations that actually have an impact and bring positive change to our business. In the area of connectivity, we invest in state-of-the-art 5G technology. Actually, this month is the third anniversary of the commercial launch of our 5G network, which we have developed based on dedicated 2.6 GHz TDD frequency band. Today, three years later, our 5G network is still the only true 5G network in Poland. In the area of content, we invest in infrastructure and production facilities to be able to execute better cost control in content production. We also invest in the best and most attractive content. We offer world-class content from Disney Plus in all our services packages, and we have a broad portfolio of sports rights, volleyball being only one of them, but the key one. That sets our offer apart from the numerous other offers available to our customers. And finally, clean energy. I cannot stress enough how important this segment is for us. It will support our efforts in decarbonizing our business and at the same time will have a positive input in the transformation of the Polish energy segment. It will bring tangible social benefits in the form of better air quality and finally it will be the driver of our future growth of our group. Thank you and over to Mirek for the summary.

Thank you, Kasia, Maciek and Staszek. Just a few words of summary before we move on to the Q&A session. We have successfully refinanced the group's debt on a difficult debt market. As Maciek and Kasia have already said, this is a very important milestone for us. Thanks to this refinancing, we have acquired funding for the execution of renewable energy products, under our strategy 2023+. In the TMT space, we consistently pursue our Multiplay strategy, which is reflected in growing RRPU and consistently low churn. RRPU increased by 2.3% and churn was 7.2%. I think that these are solid results given the difficult macroeconomic conditions on the today market. In the clear energy segment, we are building wind and solar farms with almost 600 megawatts of installed capacity that will generate stable high cash flows and EBITDA in the long term, which will support building the value of our group in the future. We are developing a complete green hydrogen value chain from production through logistics and distribution, ending the use of the green hydrogen in everyday life. Our hydrogen-powered bus, the Neso bus, is an excellent example. All the activities and initiatives that we undertake are aimed at consistently and dynamically implementing our Strategy 2023 Plus in all our strategic pillars. Connectivity, content and clean energy, and when doing so, we invest in the future of Polsat Plus Group. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, please post your question in the chat section or raise your hand. We have a question from Nora Nagy. Nora is asking, could you please elaborate more on retail revenues? Why we've seen lowering dynamics in Q123 and what's the outlook in this segment?

Hello, here is Maciej Stec. So just to answer the question, lower dynamics in retail segment are the effect of the macroeconomic situation and of course, decreasing households purchasing power. So that's why we have changed our offer since March. New offers are in the line with More for more approach. We really believe it will positively influence our ARPU and retail revenue when we roll over our customer base just to new tariffs. So now we are in the process. More information we can share with you probably in August.

As I don't see any further questions or any questions being asked by the audience, I give the floor to Mr. Błaszczyk for the end.

Thank you. Thank you for your participation in today's presentation of our group's results in first quarter 2023. I hope we answered all the questions and we will hear in August when we present the results for the second quarter of 2023. Thank you very much and have a nice day.

Thank you, goodbye.

Thank you, goodbye.