Orange Polska Sa

to our conference summarizing first quarter of 2021 results. Speakers for today's conference will be Julien Ducaron, CEO of Orange Polska and Jacek Kunicki, our CFO. Let me hand the floor to Julien to begin the presentation.

Good morning everyone. Welcome to our Q1 results. Today I will highlight what we did in Q1. Jacek will follow with our financial and I will summarize our main action for the rest of the year. And then we will gladly take your question. So moving on the next slide, highlighting the main event of Q1. So obviously Fiberco has been a big achievement. Also, technically it was not in Q1, but we believe that this is very important and structural even for Orange Polska. I remind you that it will enable us to expand the footprint while allocating our capex to other projects. And as well, as you have seen, it allows us to take advantage of a high valuation of an asset. Regarding commercial, I would say that we had solid results when we compared to last year Q1, but I have as well to share that those results are a bit below our expectations. And when I refer to expectation, I will say our plan and we will see in more detail after. But the main reason is because a lockdown and the demand on the market that we have seen across all the product line has been a bit lower than we expected. On the financial side, I think we are posting some strong results. And it's an illustration that our value strategy is the right one. And as well, we will see that this growth pattern is a sustainable one so it's a it's an important one and the last point i will cover which is a very important for me and we have seen as well inside the company a great mobilization and engagement is that yesterday we published our commitment regarding our green target and our climate policy, and I will come back a bit more detail on this. So let's start the discussion around the financial result. As I said, strong result and here you see the different lines. So on the revenue, we posted a 4% growth year on year. And when we look at the component of it, they are strong one because they are driven by convergence and ICT and as well equipment. We had a good quarter following as well as strong Q4 and the Q1 continue on this area. When we look at EBITDA, the EBITDA grew even faster by 5% compared to last Q1 quarter and this is coming both from our direct margin which is very important because this is what we are looking at and as well our continuous effort on cost saving. On the commercial side, we see as well that thanks to last year's strong performance, you remember we commented 2020, especially H2, and the combination with ARPO growth is delivering this nice growth. We can say that we are now confident on a full year trajectory. Obviously, it will depend as well as we see in Q1 about the macroeconomic situation and as well on I will say the pandemic, but I'm getting more positive on this side. The last comment on the financial, on the CAPEX, you see that we are above and this is due to the fact that we had to reverse a real estate transaction in Q1, but it's a matter of phasing as well and we don't see any issue on our ambition for e-CAPEX. So going to the first Zoom, which is back to the FIBERCO, and I do know that you had already a quite extensive discussion with Jacek, so I will not go back to the detail, but just to remind everyone on the reason we are doing, we did this move and why we believe this is the right move. So obviously fiber, we are at more than 5 million connectable household in Poland. This is By far not the entire Poland. As you know, there is 15 million. And so our journey in the fiber must continue. And we are strongly convinced. And when we see the result, we see that this is the right thing. So fiber must go on for us. And we know as well that there is still plenty of potential to be covered. So first point, fiber must continue. And we came with this model of Fiber Core, obviously for the reason that we need as well CapEx to fuel other part of the business, upcoming business, one of it being 5G, but not the only one. And clearly the market condition, as you have seen on the valuation that we got out of this exercise, which is 1.4 billion Slotty. for the 50% sales of this FiberCo is obviously a very good moment to have done it and we are very pleased with the result. I want as well to remind you that this is the first step we need now to work toward the closing and as well to operationalize it as you know that we will be the engine behind to deploy this 1.7 million households over the next five years. So going now on more commercial result and starting with a fiber. So in Q1, we added 54,000 new fiber customer. This is lower than the Q4 but this is a bit of a seasonality and as I commented as well the overall market situation related to pandemic and closing of malls and this is clearly a bit pushing down our result but we are confident that the dynamic is there and as soon as the shop will open or the economy will more widely open, we will benefit and continue a strong growth. But as you see, 54 is a very strong result. I think what is important and we wanted as well to show you that it's not only because we are deploying but it's as well because we are becoming months after months more, I will say, agile and precise in exploiting the previous deployment because you see that our penetration and what we called utilization is increasing quarter after quarter We can share that even if on average it's getting close to 16%, we have cities where it's higher than 20%. And even on the top 10 cities, we have more than 30%. utilization of our infrastructure. So a very healthy one that is driven by new deployment, but as well on the existing footprint that we continue to better and better utilizing. When we look at the value, you can see on the bottom left chart that fiber customers on ARPO level are generating 20% higher ARPO than the fixed broadband. So as well, when we are growing fiber, we are growing the value. And when we look and analyze where this value is coming from, We have a strong driver that we have seen especially since last year is the adoption of higher speed. As you know, we have a tired strategy pricing for fiber, 300, 600 and 1 gigabyte. And we see that quarter after quarter, and you see that on the bottom right chart, the adoption of the high speed is increasing, which mechanically increases the output. And here this is as well not only sustained by the demand of the customer for a better speed, but as well a great innovation that we launched in Q1, which is our Funbox 6, which is leveraging new Wi-Fi technology, which allows the customer to have a much faster Wi-Fi. And so this is a good combination of delivering fiber high speed, but as well providing it in Wi-Fi at a high speed. Because most of the time, if you don't have this technology of the Funbox 6, even if you have a very good fiber to your home, If you are using Wi-Fi, you might not get all the speed that we are providing, because the Wi-Fi is limited. And that was a great innovation we had in Q1. Moving to the next one around Obviously, our main axis of the commercial, which is convergence. So convergence as well growing versus Q1 last year. Again, I am same comment as before. We are a bit below our ambition due to the demand, but nevertheless, you see the growth is there and it's encouraging. And as well, we can see that when we compare convergence and fixed broadband, both are growing in terms of ARPO. So we are growing volume and we are growing value. So I think those are very good signal of healthy growth of our business. I can tell you as well that if I look at the convergence segment as a revenue line, we are growing by 14% in Q1. So going to now on the mobile side, so as well very strong Q1 in terms of net ads with 88,000 net ads. As well you probably follow the portability and market and we are very happy to report that we were positive. One of the highest volume over the last period which is as well showing us that When I'm commenting that we have a bit of a slowdown versus our ambition, we cannot say this is due to the competition, at least not through the portability, but we strongly believe that by the decrease of traffic that has been in March almost 40% in our retail, that once the economy will be open again on a more on a wider basis, we will see back a strong momentum like we have seen last year. This time I wanted as well to share with you some insight on the prepay that we don't usually comment. You probably know as an industry prepay has been very much affected across all Europe. This is a segment that is very volatile by nature, but as well it's a segment that most of the dynamic is driven by seasonal whether it is visitor roaming whether it is a worker coming from abroad and in the case of Poland obviously we have there is a lot of people coming from abroad on a seasonal basis which are usually the the prepay part of the prepayer base and as you understand that those mobility has been very much constrained over the last 12 months and this is reflected in our prepay but nevertheless you see here that we are showing you the ARPO and for those customers that are here because our base is decreasing, they have a better output. So this is encouraging for us that the day when, again, the economy and especially the workers from abroad will come back, we are well positioned. I remind you as well that we had noticed that as a headwind for this year that the new regulation has been implemented regarding prepay. has been implementing in February and will impact our revenue as it relates to the recognition of the top-up fund. Going to the next one about our green ambition. So we published yesterday and I'm very happy that today on the special day of Earth Day, Worldwide Health Day, we can talk about this topic. It's a very important topic for me and for Orange. So just to give you a bit of our story and our ambition on this topic. First of all, Orange Group, on which Orange Polska is fully subscribed to, we had a bold ambition to be net carbon neutral by 2040 on all the scope, so internal and external, and as well all our suppliers. So this is scope one, two and three. So this is the clear ambition we have. But obviously, 2040 is a bit far away and the climate situation, we cannot afford to wait and just project in such a long perspective. So we publish a strong commitment toward 2025. And those commitment is that we will reduce by 65% our carbon emission compared to 2015, which I believe it's a very strong commitment. The way we will do it, and this is for Scope 1 and 2, Scope 3, we will start to address it, but the main, I will say, effect and result will take more time to be visible, so we focus for 20 and 25 to commit on a reduction of 65% of the carbon emission. When we are looking at our business, obviously the main impact is coming from energy. Therefore, we want by 2025 to have 60% of our energy coming from renewable sources. And this is all our strategy that we will, and we started already last year by getting almost 10% of our energy coming from renewable sources through PPA. that we will implement before summer. So this is where we want to go. And obviously we believe as well as a telecom and technology company is not only about what we do inside the company, which clearly we have taken, as I just said, strong commitment, but we have a great role to play in the economy to help with our technology other players, other business partners to engage into their green transformation. I can mention a few like smart cities, but as well 5G and fiber are great, I will say, transformation of our green. If I look at fiber compared to copper, you have to know that the fiber is consuming 80% less energy than copper. So as we are engaged in this transformation from copper to fiber, we will mechanically as well contribute to our main objective of reduction. I do believe as well that we have a great role to play with our customer when it comes to devices and equipment material that we need to enable more circular energy. circular economy, sorry, that you will see more and more that we will come back on this topic. So I'm very pleased today to share that with you, that we have committed and we are going along all our report to be transparent with you and show where we are and the progress we are making in this very important topic. So now let me hand over to Jacek.

Thank you, Julien. Good morning, everyone. Let's start the financial review on slide 13, where we present the highlights of the quarter. As you can see, the financial results of Q1 were strong and in line with our expectations. Revenue growth was fueled by expanding revenues of conversions and ICT, as well as by a rebound in equipment sales and in our energy business. The revenue increase was a key driver of the 5% EBDA growth. This was possible as direct margin from core telecom services is now offsetting the structural decline of legacy. This is a key change in our EBDA dynamics and it makes this growth much more sustainable. The year-on-year increase of economic capex results mainly from phasing. Please note that last year, in the light of the outbreak of the pandemic, we were slowing down capex projects as part of the mitigating measures. In addition, proceeds from real estate sales are much lower in 2021. This reflects a tough business environment and also a change in accounting estimates relating to a consideration from previous periods. Finally, cash generation was much higher than in Q1 of last year, driven by EBITDA growth and by timing of working capital requirements. Let's review this in more detail, starting with revenues on the next slide. So as we've mentioned, the revenues expanded by 4.1% in Q1. There were four main reasons to this very satisfactory performance. Firstly, convergence. Revenues from the e-services grew by 14%. This is a strong performance, with the pace of the increase even accelerating in comparison to previous quarters. It results from a solid customer-based growth coupled with an expanding ARPO. Secondly, ICT revenues were 7% up year-on-year. The key driver of this growth was the contribution of craftware. which we acquired in December last year. It generated over 20 million revenues in the first quarter of the year, posting a satisfactory growth year-on-year. Excluding craftware, ICT revenues matched their level in the Q1 of last year, when we realized a large contract to enable the digitalization of the Polish post. Thirdly, revenues from equipment were 12% up year-on-year. We have been able to adapt to the new environment and this year's lockdown did not affect equipment sales as severely as the one in the first quarter of last year. Finally, our energy resale business is regaining momentum after a difficult 2019 and 2020. It should continue to support our top-line development in the next quarters. The resulting revenue growth is a solid start to the year. Let's now see how this translated into EBITDA on slide 15. We are happy to report a 5% EBDA growth in Q1. This is a strong achievement. I am also pleased with the structure of this growth. It is almost equally driven by the expansion of the direct margin and by cost optimization. This means that our growth is becoming much more sustainable. Growing direct margin demonstrates that our future-proof revenues generate higher value for us, and we are able to offset the burden of legacy decline. At the same time, we continue to pursue further cost optimization. In Q1, we report another sequential 2% reduction of indirect costs. This came mostly from workforce costs, as well as from property and general expenses, as we have continued to save due to remote work. The Q1 EBITDA performance was in line with our expectations. We are confident to deliver on our full-year objective to grow the EBITDA in 2021. Obviously, as the pandemic is not over, we will continue to monitor the pace of the economic recovery and its impact, particularly on the credit situation of our B2B customers. Also, looking forward to Q2, please remember that we posted a very high EBITDA last year when it was boosted by the curtailment of Jubilee Awards and non-recurring development. Let's now look at the next page to see on the net income. We posted a 39 million net income in Q1, a marked improvement versus the net loss that we have generated a year ago. The main drivers of this improvement were growing EBITDA, lower depreciation and less finance costs. Well, we already discussed the EBITDA development. Depreciation costs decreased year over year as we've extended the economic useful life of certain assets. We mentioned this already in our financial statements for the full year of 2020. It impacted Q1 by about 33 million zloty and we expect a similar year-on-year impact for the next quarters. Finally, finance costs were 66 million below last year when they were heavily impacted by significant weakening of the Polish zloty. Finally, over to cash generation on page 17. We generated almost 200 million of organic cash flows in Q1, a significantly higher result than in the Q1 of last year. We're pleased that the expansion of EBITDA has translated into growth of operating cash flow before working capital. As for working capital itself, its evolution was influenced by three elements. Firstly, by different timing of payments between quarter four and quarter one in both years. Secondly, by good receivables collection. And thirdly, by a more favorable change in inventory balance resulting from better handset sales this quarter. Working capital evolution is by nature tends to be volatile from period to period and an extrapolation of this result and trend should be made with quite caution. Let me also remind you that in the quarter two of last year, working capital was exceptionally positive as we shifted over 100 million of social security payments from Q2 to Q3 as this was allowed by the anti-COVID legislation. I think this concludes the financial review. You can see that we've had quite solid satisfactory financial results.

Thank you very much and let me hand the floor back to Julien. Thank you Jacek. Let me just summarize what we just presented and give you a bit of our perspective for the remaining of the year. So obviously you have seen that we had a good start of the year which is the result of Very good H2 commercially last year and all the effort of the team in terms of transformation and cost optimization that now are visible on our Q1 result. obviously we are i'm looking as well to to have a bit more dynamic in our commercial performance and i do expect and we will get ready we are preparing for this moment so we have seen last year that as soon as there was a bit more opening The commercial dynamics went back very quickly and we must be ready for this moment. As well, we are preparing our new operating model, which will be important for the future, which is related mainly to how are we going to work and it will have an impact on our offices because we plan to optimize offices under the assumption that we will go back on a hybrid model between working home and working in the office. as we commented fiber core now we need to be going full speed we aim to go to the closing in in q3 and we need we have to do that because our deployment will depend now on Fibreco. So we need to be ready in Q3. Regarding 5G auction, we are still on a waiting position. You probably know that the cybersecurity law is still in discussion and that will be the trigger for the license process. But I hope it will start soon so it will give us more visibility on some of the topics that we have been as well discussing in the past. So globally, I'm optimistic. I'm looking forward with confidence together with the team about our full year target. As long as we see in the short term, I would say a better evolution of the pandemic situation and as well that we will see a macroeconomic environment favorable for us. To conclude, I will invite you toward the end of June to present our new strategy. And as I was telling you, we are moving. We finished dot one and we will start a new cycle. And I'm very excited and looking forward to meet you at this occasion. Thank you very much. And we will take the question.

Thank you very much for the presentation. I would like to now turn to the Q&A session. If you have any questions, please press star two on your telephone pad and wait for your name to be called. If you are dialed in via the web, you may also ask a voice or text questions. We will now give a minute or two for the questions to come in. Thank you. Our first question comes from Mr. Peter Khan from Barclays. Please go ahead. Your line is open.

Good morning, everyone, and thanks for taking my question. Just two from my side. The first one on your inorganic growth. So with 21 million, craft has been growing quite nicely over the quarter. And could you please elaborate on how much the EBITDA after this contribution was? And similarly, could you please quantify the revenue impact from energy's resale over the quarter? Is this also likely to continue over the next couple of quarters? And the second question is more strategic. So a number of your peers in Poland have already decided to sell their mobile infrastructure. Does this have any impact on your strategy regarding tower ownership? And also, how do you expect to work together with the TowerCo that has now entered the market? Will this impact your investment needs? And to what extent could this be actually beneficial for you?

Okay, thank you very much. So, thank you for your question, taking the first two ones. Well, I will start with the energy business. The growth of revenues was about 26 million year-over-year for energy. I would expect that we should have at least this kind of benefits for the year-on-year evolution for the next quarters. If we can do better, we will try to do better, but I would say at least this level of contribution for the year-on-year growth. Regarding the inorganic growth, so the EBDA of craft, the revenues of craft were about 20 million zloty. As you can imagine, the EBDA is much, much smaller. So I would say single millions. We don't guide per subsidiary, but you can imagine that this is not a significant impact when you analyze the overall performance of Orange Polska, which was much more driven by the good growth of convergent revenues as the percentage margin coming from convergent is much, much higher than from ICT.

um that's that's for the first two questions can you repeat the second one um around the the move on the tower core uh i will say sector in in in poland so um for us obviously we are uh We are about to close, not yet close, FibroCo and as we indicated in the past and you know that our group is active now in Spain and France via Totem Company. that we said we will, after the team will start to get less busy with Fibreco, we will progressively look at the different options. And obviously one of it will be to look together with our group on what can we do. I remind you as well that we have networks together with T-Mobile. So I will say... Our situation is a bit different than for the one who have already did a move on the market. And we need to look carefully on the option. But obviously, I can say that all scenarios are on the table and we are going to look what makes more sense for Orange Polska and the stakeholder. But at the moment, we have no... I would say decision or any indication in which direction it will go. So I will come back on this point probably in Q3.

I think that's very helpful. And does it impact something kind of from an operational standpoint in terms of you having a new tower coast you can negotiate with about additional sites potentially?

Yeah, it will, but obviously we are mainly active already with our networks that we had already by getting together with T-Mobile done already a lot of optimization and I will say cross-utilization. you know, remain to be seen. It's not yet operational and we will see. But I would say we have already done a lot on our side and on our parameters together with network. So we are not dependent, highly dependent on this new identity.

Great. That's very, very helpful. Thank you.

Thank you very much. We will just have a reminder once again. Please press star 2 for any additional questions. Star 2 will give a minute or so for any additional questions to come in.

While waiting for more voice questions, let me go through some questions that we have received online from Santa there. First question. Could you add more color on volumes below your expectations? What line represents key negative surprise to you in the first quarter?

Yeah, so I would say, as you have seen, we are higher than last quarter in Q1. So I could have commented that we are happy with our performance because it's growing. But I wanted as well to be transparent. And you probably know that, obviously, in Poland, we started January was quite good, probably prolongation of... of Christmas offer and dynamism on the market. And then it went slowly down in traffic. You probably know that if you go shopping, the traffic is extremely low. For us, it was in the range of 40% less traffic. And if you would ask me on how much I consider versus our ambition, we are probably in the range of 10 to 15% below our ambition. But once again, when I look at portability, I clearly see that this is not an issue of competition, but this is an issue of demand. And I have good hope that the moment the opening will happen, we will see, like last year, a very strong dynamics. That's why one of the focus I have in the short term is to make sure that we have the right offer once the market will reopen.

And I think it's clear, it's fair to say that while obviously mobile is slightly below expectations and through lower mobile volumes also convergence, fiber on the other hand is where we wanted it to be. So that just shows how remarkably resilient fiber is to any crisis. And in fact, I think it's fair to say that increase of home office and remote schooling has fueled the demand for fiber and we're benefiting from that.

The next question from Santander is about real estate. Do you expect real estate disposals to accelerate in coming quarters? What may be the total positive impact of real estate in 2021?

Thanks for your question, Paweł. Well, I definitely expect us to accelerate in real estate sales starting from Q2. I think Q1 was not particularly a favorable period for this. One, because generally the environment was tough. Secondly, as we commented, we had to reverse the transaction. So definitely expect to accelerate. I will not comment on the overall amount that we would wish to sell this year as we integrate real estate proceeds and capex spending into e-capex. Well, everyone is aware of the range that we are targeting for this year, and we are quite determined to keep eCAPEX to this amount. We will keep you posted when we have more progress. Thank you.

And the third question from Santander, it's about capex. You mentioned some extra capex for other businesses going forward. This would be on top of your 5G deployment outlays? What scale of extra capex do you expect? Any early view on your 2022 e-capex?

I will let Yacek comment on the numbers, but to give you a bit of where I foresee the need of how to allocate CapEx, because we are not talking about on top of, but in terms of allocation of CapEx, for sure. 5G will be in the center stage in terms of spending, but we need as well in the area of digitalization, transformation, automatization, which are in our plan to deliver optimization in in the long run but at the beginning you need to invest it's unrealistic to believe we can continue to transform the business without investment so those are there is no major other i would say surprise or ideas of spending but mainly to continue to invest in order to have in in two three years time a real impact on our operating model

Yes, I will not comment extensively on the financial figures because we will deal with this when we will communicate to you our three-year strategy. From the main directions, I think it's clear we will spend less capex on fiber. And we commented before that thanks to Fiberco we could expect, well, 250 up to even 300 million benefit of lower capex than if we were to invest by ourselves. But on the other hand, clearly there will be capex linked with 5G spectrum. Clearly there will be capex linked with 5G rollout. And we will need to initiate and network renewal for our mobile radio access network. So definitely there will be a pivot towards mobile and towards 5G. I think that's all we can say right now for the main directions. Thank you.

And then another question that came online is, will the company pay dividends for 2020?

Well, this is a question that is coming up frequently. We've commented that the last time we commented was in February. I believe that we then mentioned that there were, on one hand, we really would like to come back to paying a dividend. However, there are three items that we need to, I would say, clear and we need to be more certain about. One was the sustainable growth of our results and our EBITDA. I think Q1 shows that we are well progressing on this path. We have mentioned Fiberco as one of the unknowns, and now we see that we've been able to sign the transaction, not yet conclude, but we've been able to sign the transaction with a good inflow for our balance sheet. I think the two elements that we are still missing today is, first of all, more clarity on the 5G auction. because this is quite a considerable spending that is coming up, and we don't know neither the timing nor the conditions today. And we are observing still quite, I would say, rigorously the pace of the economic recovery. because we are under lockdown as we speak right now. And we are observing how well the economy and especially our business clients, how will they, in what condition will they come out from this crisis? So obviously we will address this soon. We will address the dividend policy together with a strategy. We will address the 2020 dividend decision before the AGM, but you need to appreciate we need a bit more time to try and get more clarity on those. Thank you.

As it appears, we have more questions. Sorry, just came. But I think this is a question of the dividend that has just been addressed, so no need to repeat. Operator, can you please confirm we have no other questions in the queue?

Confirmed. Leszek, we have no further voice questions. I'll pass the line back to you. Okay.

So thank you very much for your attention, and you will hear from us soon, hopefully. Thank you. Bye-bye.

Thank you. Thank you very much.