Orange Polska Sa

Good morning, ladies and gentlemen, and welcome to the Orange Polska first half results call. After the initial presentation, there will be a question and answer session in which we'll have the chance to ask questions either by phone or by web. I will now hand over to the Orange Polska team. Please go ahead.

Thank you. Good morning, everyone. Welcome to our call summarizing second quarter NH1 2021 results. Our speakers for today's presentation will be Julien Ducarot, CEO of Orange Polska, and Jacek Kunicki, our CFO. Let me now hand the floor to Julien to begin the presentation.

Good morning, ladies and gentlemen. Welcome, everyone, in our conference summarizing second quarter and first half of 2021. So, as usual, I will start with the highlight of our quarter, Jacek will take over more on the financial and I will come back to summarize our second half of the year. So let me start on the slide number five. So those are the key highlights of the quarter. Obviously, one of the main items that you remember that was our announcement of our strategy.grow. at the end of June, which we have laid down our priorities for 2024. Just to remind you, so far, this is a natural evolution from the previous plan with as well some new elements, which we believe will help us to accelerate our growth and as well lay down foundation to go even further beyond 2024. Financially, we want to grow faster and in a more sustainable way, ensuring benefit of this growth with our shareholders. Financial results in Q2 and in H1 were strong, driven by robust performance of our core telecom services. Commercial results were solid, clearly in a context that was not as easy as we thought at the beginning of the year. I will mention here still the ongoing pandemic for the sales part. But as well, we have to notice that the weather was quite unexpected as well, impacting as well some of our operations, especially when we are talking about fixed. However, I believe that this is more a temporary drop and we are confident that the demand will come back after the summer break. We have as well revised our offer portfolio, and I will take some minutes to talk about it, which I believe is quite important, and it is in line with our strategy of more for more, and as you might have noticed as well, the environment is getting hot with inflation, and we believe as well for us the move of the more for more and create more value is important in this context. And as well, we have announced in July some important steps regarding the FibroCo, and we are still fully on track to be operational by the end of August, or operational from September. So going on the next slide, number six, let's start with the overview where we stand after half of the year versus our full year guidance and expectations. Revenue increased by an impressive 4.3%, driven by convergence, our ICT services, and equipment. This dynamic will slow down from Q3, when it will start to reflect regularly H1. Growing revenue fueled over 4.5% EBITDA growth. We are very pleased that this growth is derived from improving direct margin, which is the direction we want to take to have this sustainable growth for the long term. Please note as well that announcing our strategy, we increased our guidance for EBITDA growth this year. We now expect it rate will have a very low impact on the margin. CAPTEC is slightly higher, which reflects more evenly timing of spending and prolonging slowdown of the real estate market. Our full-year plans here also remain unchanged. On page 7, we start to review our commercial performance. So let me start with convergence and fibers. We present here together as fiber is a key driving force for performance in convergence, both in volume and value terms. A strong growth of convergence revenue is fueled almost equally by growth of customer base and growth of output. As I already mentioned, net addition this quarter were affected by low customer activity after lifting pandemic restriction, and as well, especially in Q2, due to weather conditions. Harpo growth, however, accelerates to 6%, mainly driven by an increasing adoption of fiber. One of the reasons why fiber generates higher harpo than copper is increasing popularity of higher speed options, which are additionally paid. Their share in the total fiber customer base is now 16% versus only 7% a year ago. So we can see that the demand of the customer for higher quality and higher speed is clearly growing, which mechanically, as I said, is growing our output. In Q2, we added 48,000 new fiber retail customers. This was more than a year ago. Fiber is now the largest technology in our total fixed broadband base with a share of 30%. This quarter, it overpassed ADSL, which symbolically marks our technological transformation. We went from technology gap to technology edge. Moving to slide number eight, mobile handset customer base is growing at a steady, healthy pace. In Q2, net additions were 83,000, which was more than last year and comparable to Q1. In pre-pay, In Q2, customer base returned to growth after a few quarters of declines. Lifting of pandemic restrictions resulted in higher mobility of people, which fueled activation of new prepay cards. You might remember I was commenting that we were not performing so well on prepay in the past due to the closing of the border or the restrictions to enter the country, which clearly we see now that it's getting better and now We are very pleased to say that in Q2, ARPO in mobile-only services was growing both in post-pay and in prepay. In post-pay handset offer, it increased by 1.8%. This turnaround has taken place both in B2C and B2B and is an outcome of our strategy focused on value. In Q2, it was also supported by partial return of roaming in this growth. In prepay, ARPO was growing for a few quarters, but in Q2, it accelerated to 6%. Also, as a result of our pricing strategy and growing share of customers with unlimited voice and text bundle. Here, we also benefit from higher ROI. With our different actions, we are able to minimize the impact of unfavorable impact of new cash back regulations. I'm going to the next page where I just wanted to take one minute to show you a bit more operation and how we came with the design of our offer. So we continue to adopt the more for more policy, which is especially important in this increasingly inflationary environment. It's done either through straightforward price increase or changes in the tariff structure in such a way that we will encourage customers to choose more valuable packages. In May, we increased our four mobile subscription plans by 530. It's on the left side of the chart. In exchange, we are offering increased data package and also subsidized OTT content. We lowered the barrier for 5G availability as we see that the penetration of the adoption of 5G smartphone is increasing in our portfolio. Change to convergence log offer were introduced a few days ago. They were not simple price hikes. Instead, we restructure our package to promote higher end option and TV content. Our value strategy is also supported in our smartphone price list as we subsidize handsets in the high-end tariff and earn a margin in the low-end option. As always, new subscription prices apply only to new signed contracts with custom. The terms of existing contracts do not change. In prepay, we have recently introduced another increase of pay-as-you-go tariff. More importantly, however, We aim to generate more value from unlimited services where a top-up allows unlimited voice and text and a defined data allowance for a given period of time. These options are growing in popularity. They are now responsible for majority of prepaid traffic and revenue with above average output. Here we have also modified our pricing in a more for more strategy. All these changes were made very recently. We expect positive impact to gradually contribute to our results and help to tackle the inflation pressure. Going on the next slide, number 10, just a brief update on the FiberCo. So we signed, I remind you that we signed the transaction in April. Now in July, we just concluded some important steps toward making FiberCo operational. So it's a good timing for an update regarding this very strategic transaction for us. First and more important, we obtained debt financing for 3.1 billion SLOTI that will finance more than 80% of FibroCo network rollout capits. Please note that obtaining this financing was equally crucial for the success of this transaction as finding right equity partners. So this is a major development to facilitate operating activities of FibroCo. Of course, this debt will not be guaranteed by Orange Polska and will not be on our balance sheet. Secondly, we carved out and transferred almost 700,000 fiber households out of our existing footprint to FiberCo. It ensures that the FiberCo will generate cash flow from the start of its operation. This means that we will now pay FiberCo monthly access fee for around 170,000 customers that have active services on this footprint. On the other end, We will render some services to FiberCorp so the net impact of this flow will be balanced. We are now only awaiting regulatory approval and we expect closing of this transaction by the end of August. So now let's go to the financial with Yacine.

Thank you Julien. Good morning everyone. Let's start the financial review on slide 12. Our financial results for Q2 were strong, confirming our growth ambitions. Revenue expansion accelerated, fueled by all key product lines. Strong growth of the core businesses is especially encouraging, as it benefits our profitability. Profitable revenue expansion allowed us to post an almost 4% EBITDA growth in Q2. The EBITDA increased in Q2 despite a high comparable base from last year when it was supported by strong positive one-off cost savings executed to mitigate the impact of the pandemic. After two quarters of the year, our EBITDA is up by 4.6% and well on track to meet our full year objectives. The economic capex was slightly above last year. This stemmed mainly from a more even timing of our investment as well as from a persistent weakness of the real estate market. Finally, cash generation is solid this year. The H1 organic cash flow was stable year over year. This is a good result as we remember that last year The anti-crisis legislation allowed us to delay over 120 million of payroll tax payments to the third quarter of 2020. Let's now review our results in more detail, starting with the top line. Our revenues expanded by a strong 4.5% in the second quarter. They were supported by positive dynamics in all major product lines. Firstly, conversions. Revenues from these services grew by almost 15%. This is a strong performance with the pace of the increase accelerating in comparison to the previous quarters. It results from a combination of a solid customer base update coupled with an accelerating ARPO growth. Secondly, mobile only. These revenues expanded by 3.5%, and this is the first increase in this category since we began to report it separately. It results from a continued increase in the number of mobile-only clients, as well as from a growing ARPO, which benefited from a partial recovery of roaming in the second quarter. Thirdly, ICT revenues. These were up 13% year-on-year. Their growth reflects the contribution of craftware, new entity, and also organic development in all of our subsidiaries. Revenues from equipment rose by 7% year-on-year versus a lockdown-stricken quarter of 2020. And finally, our energy retail business contributed to the revenue development Looking ahead, our revenue dynamics will slow down in the second half of the year due to the cuts of the mobile and fixed termination rates. However, the impact of these cuts on profits on EBDA will be immaterial, and EBDA will continue to benefit from the growing direct margin driven primarily through the core business. Let's now take a closer look at our profitability. We're pleased to report an almost 4% EPDA growth in Q2. This is a strong achievement considering the high comparable base of Q2 of last year when our profitability was boosted by large The EBITDA increase this year was achieved as we converted the growth of the core service revenues to profits, benefiting from high operating leverage. It's visible in the expansion of the direct margin. Indirect costs increased year on year in the second quarter. This unusual performance, as I mentioned, reflects a very low comparable base of last year. effort. It included a one-off release of 64 million of HR provisions back then in 2020 as we curtailed the Jubilee Awards. It also included an all-out freezing advertising as our shops were closed last year, while on the contrary this year we invested into commercial activity in order to maximize the sales, to support the sales. Obviously we're continuing to our ongoing cost savings plan. This is mainly contributing to an underlying decrease of labour costs, CRM subcontracting, as well as a decrease in general expenses. The EBITDA growth has enabled us to increase the net income. Let's now look at this on slide 15. We posted 116 million zloty of net income in Q2. growing at more than two times year-over-year. It resulted from a higher EBITDA, which we've already analyzed, as well as from lower depreciation. The depreciation was down year-on-year, mainly because we were able to use our assets more efficiently and for a longer time than originally estimated. On the other hand, we posted a higher net income tax in Q2. This is linked with more profits before tax, as well as with a write-off of certain debt-fared tax assets on losses from prior periods. As you can see, our Q2 performance was strong in all of the areas of the income statement. Now let's take a look at CAPEX on page 16. and in line with our full year plans. This year, some of our investment projects are more evenly spread through the year. On the other hand, the real estate market continues to be very challenging, and this is visible in low asset disposals. which we hope will be initiated soon. Now over to cash flow on page 17. We generated around 360 million of organic cash flows in H1. This was roughly stable euro per year. This is a strong achievement considering that last year we benefited from a delayed payment of over 120 million zloty of payroll third quarter of the year. This limited the working capital requirements last year, while in 2021 we have a larger need for working capital requirements, especially as we have rebounded the sales of handsets in installments. The underlying cash generation is positive. We are particularly pleased that the growth of the EBITDA Solid cash generation has translated into a further decrease of our leverage. It now stands at 1.8 times the EBITDA, so well within our long-term leverage corridor. This concludes the financial review. Let me hand the floor back to Julien for the conclusions.

Thank you. I would say to conclude and share with you our focus for H2. So on H1 we are very pleased with our financial results and as well our commercial and we have observed that especially in Q2 the pandemic constraint on the limited traffic in impacted a bit our sales compared to our ambition but we have noticed as well that it was reflected in other category and we do believe that there will be a rebound for the back to school period so one of the focus obviously will be on the second part of the year in term of commercial activity that we plan to be strong So we have laid down a new portfolio that I presented to you and we believe strongly that with this portfolio and promotion, we will see and catch the rebound of the demand on the market. Obviously for us, we are very close to closing the FibroCo and become operational, so this will be as well one of the priorities in H2. And so we are confident and we reconfirm today our full year financial objectives. And I think the only thing that remains to be seen is how the pandemic will develop. Regarding back to the office, so in the current, with the current environment, we believe we will go back to in September in a hybrid mode to our offices and we will focus mainly to get back together the team, rebuild team spirit physically, and still spend some time teleworking for the tasks that are more in front of the computer. So that's the summary for H1 and a bit of perspective for H2. So now we are open to your questions. Thank you.

Thank you very much. So we will now be opening the floor for questions. If you do have a question, please press star two on your telephone, or you can also type a question if you're signed in via the web. We'll just give it a moment or two. So our first question comes from Pavel Puchalski from Santander Bank Polska. Please go ahead.

Hello, Pavel Puchalski here. I've got three questions. First of all, you recently announced incentive program for key employees. Please let me know what are your incentive program goals for EBITDA and organic cash flow because the communique is not specifying it and I believe we would all like to get as much info as possible.

Thank you for this question Paweł. So I think commenting on that you will see that the incentive program is perfectly aligned with the new growth strategy. The structure of the goals reflects exactly what we wish to achieve financially through the years. I think it's size. Regarding the goals of the incentive program, well, the revenue and the organic cash flow growth, I think it's fair to say that it's aligned with our plan and it's within the upper range of That's as much specific as I can be. Then regarding the share price, obviously it reflects the hopefully appreciation of the share price that we would like to achieve through execution of the adult growth strategy.

Thank you very much. The other, well, I noticed you are suggesting in 2H, second half of this year, strong focus on commercial activity. Well, is it a suggestion that commercial cost will be higher than usual in second half? Because, well, that's the that has got key impact on potentially BTA?

So let me take this one. So first of all, when we say that we want to focus on commercial activities, from my perspective, we have seen a weaker than expected Q2. But as far as we can know and understand, this was not only an orange, I would say weaker, but more a demand on the market. And I refer here to, you know, traffic in the overall retail mall. We know as well the total equipment volume on the market that went down. So we have noticed that, and probably we will need a bit more time and external analysis to show that probably the, you know, other spending, probably holiday to prepare the summer. Therefore, we believe that they will be, this is not that they are not interested in telecom, I just think that they have been more focused on other items and we do expect them to come back to school. Commercially, financially or cost-wise, I don't think this will be material. Anyway, from an accounting perspective, the commercial costs are spread over the contractual period, so I don't expect any impact on our guidance. And as we all know as well, when you are doing a strong commercial activity, this is helping you anyway in the mid-term to confirm the ambition. So we are very confident on this strategy, and we believe as well that There has been a drop in the sectors driven by customer demand shift on other categories, which is not the case on B2B. B2B has been very good. We commented a bit, but as well the demand. I will not make the same comment for the B2B, which still remains very strong on ICT and in mobile too.

Okay. And two last questions from my side. Very similar. Well, are you planning to sign an agreement with Viaply? Because we see it is about to kick off its operations very soon. And secondly, are you planning any further Fiber costs or net costs? Because you still have a lot of assets.

I'm not going to comment on our strategy as this is an ongoing discussion. We have historically, already in terms of content, some very strong agreements in place. As always, those are moving a little bit. It's not a fundamental shift. There are some assets that have moved from one platform to another. but certainly we are looking at it carefully as well this is a quite costly activity so we looked very carefully and for the moment we have no comment to make on the commercial intention and the second point regarding more asset deal I will say you know, let us come back once the FIBOCO will be operational and, you know, we will start not focus anymore on legal financial aspect with the team but on the operation and then we will contemplate and come back to comment on what could be the next, if any, move related to infrastructure in general.

Okay. Thank you very much.

Thank you.

Thank you. So we also have a question from Dominic Nish from Trigon. Please go ahead.

Congrats on very good results, in particular your ARPU growth. So actually I had a similar question to Paweł on this commercial activity. Maybe just a second question on 5G auction. Can you share with us your understanding of the reasons behind delay of the auction? Do you see significant risk that the rules may be changed compared to the first proposal last year? How do you see this process delay?

Yeah. Thank you, Dominique, for the question. So while obviously I'm not in a position to come and to detail this because this is not happening on our yard, but this is more the government and authorities that are in discussion and they announced that they will not start sooner than after the holiday. But what we know, and it's public information, I would say that this is, as there is a sequence of getting a good understanding on the cyber security law as a prerequisite to start the auction, so my understanding is that they have not yet found, as you know, that this is a law that requires many parties within the government to agree upon that probably they have not yet found a common ground so I don't think it's fundamentally on the condition of the 5G which we don't expect them to change dramatically compared to the first version but I think it's rather the first checking box which is cyber security law that is still in discussion within the authorities

And if your capex plans in the strategy can still change depending on the cybersecurity bill or you think you are quite secure with the guidance?

Well, thank you for the question. We've commented that during the strategy day that today we don't know the cybersecurity regulations. It's very difficult to comment on that. Obviously, we are aware that there are some regulations that might be, I would say, happening, so we are taking that into account in our various decisions. We think that, well, first of all, it has taken quite a long time to develop those cyber security regulations. So even if they were to be I would say adverse, their execution would not be immediate and it would be quite likely for the That's, I would say, my comment. Obviously, the guidance itself was given, I would say, subject to any potential changes or any potential impact of the cybersecurity regulations once we would know them. But as I mentioned, what we could expect is even if they were to be addressed, they would rather not be immediately executable and they would be spread over some time.

Okay. Thank you for that. Maybe the final question on regulations. So we seem to be behind Western Europe on 700 megahertz. Recently we saw Spain. So do you think we will know something this year about the distribution of spectrum on 700 megahertz or together with cybersecurity bill or?

Yeah, I think we'll Yeah, I think we do expect to have more news on this. Now, regarding the commercialization, which is at the end probably what we are looking for more, it will require some cleaning and preparation of the spectrum. So from this perspective, anyway, it is not for the coming probably two years that we will see 700 live. After, obviously, there is a different scenario for this spectrum, but I do agree with your assessment that we might know, we should know more together with the package of the cybersecurity and the auction.

Okay, many thanks.

Thank you. So just a reminder, if you have a question, please press star 2 or type a question if you're signed in via the web. So our next question comes from Anna Kai at Pekal. Please go ahead.

Hi, everyone. Thank you for taking my question and congratulations to the team on great results. So I have a little bit similar question, but more in a sense of strategic thinking about your tower infrastructure. because very recently Orange joined the trend set up by Deutsche Telekom and Vodafone and announced the creation of European tower called Totem. And they carved out towers in France and Spain. And how are you thinking about your tower infrastructure going forward, especially taking into account the recent activity of Celmex on Polish market? And after 5G auction, you will need to roll it out. So in general, or maybe in more detail, what are your thoughts about your strategic assets?

Thank you. Thank you for the question. I think it's fair to say that, first of all, today we're we've had the signing phase, we've now concluded on the financing, on the carve-out and we expect to have the closing of the transaction and the operationalization of the cooperation soon. So this is what is really on top of our agenda and what is right now the execution. Now, going to assets and obviously this includes towers, as we mentioned, we will be looking for additional ways to create shareholder value, if we can. Obviously, that will mean that towers will jump higher up in our agenda as soon as we finalize the fiber core project. We will then analyze the options that we have at hand and see if any of those options can be beneficial to shareholders. Obviously, that would include a scenario or an option of the cooperation with the group project, with Totem. But it's a bit early today to conclude if we see additional shareholder value in this or not. So we will need to come back to you when we have a bit more and then it is done with our thoughts on that. But definitely it is an asset that we will be considering.

Thank you. Thank you. Thank you for that. So I understand that as of now you're staying open-minded and you'll have a closer look at it short-term in the future.

Yes.

Thank you.

Thank you. Just a final reminder, if you have a question, please press star 2 or type a question if you're signed in by the web. So we have a question from Rabbit Mubi at Citi. Please go ahead.

Hi. Thank you for the opportunity. Just two from my side. Firstly, on your B2C convergence net ads, if you see the convergence net ad, you know, it's been trending down. Your run rate has been particularly down when I compared to 2018 or 2019 levels. I'm not taking 2020 into account, given it's been a special year. And I know you said that the market demand has already been low. But just wanted to understand, is it also because of the increased focus on convergence by your peers? This is the kind of run rate we should assume going forward, or do you think trends will change on that side? Secondly, and sorry if I missed this earlier, and it's already been... mentioned on the call, about this proceeding by the regulator on some of your revenues, which are in charge. Will that have any impact on your revenue growth in future, these kind of revenues you won't be able to charge in future?

Okay, so I will answer the first part on the comment of the NETADS for convergence, and I will leave Jacek to comment on the proceeding with the authorities. competition so well you know on the net out of convergence so first of all convergence for us as you know it's it's coming out of our operation or fix and as well migration from legacy business as well to a mobile customer family household that we are providing a log package where everything sits under one roof. So I would say mechanically, because we have seen this lower demand on the market of telco in general, whether it is handset, whether it is mobile voice on the consumer side, being lower than we expected, we do expect that this has been across the sector at least the indirect indicator we have tend to show the same trend. So I would say from this perspective it's normal that the net ads are slowing down. Now if we look for the future, I'm fully confident that once people will come back to our shop online, we will see back the same momentum we had in the past. We are deploying heavily. We have a new, very, I would say, attractive footprint that's being put online with the POPC and the FiberCo. We start as well in low competition area from September as soon as we are ready to be operational. I see absolutely no reason not to see back the dynamic we had in the past, and I do not believe that our lower net ads than expected is a result of activities of the market, but rather of low activity or low demand. And what is as well specific to fiber, not to forget, is that The last few weeks have been quite disruptive in terms of operation due to the weather conditions. You might know that in Poland there are some record numbers of storms, and this is impacting our operation as well, both from an installation repair but as well deployment, because our team has to focus on more activities to visit the customers. then on activities to deploy new. So this is just a temporary slowdown that I expect it will come back in 2.3 and 2.4. So now, Yacek, on the proceedings.

Yes, so on the proceedings, yes, we confirm we have been informed about two proceedings on the mobile. We're analyzing those claims introduced by the Consumer Protection Office. Some of them were very recent. Together with the office, we will be working for solutions that will be satisfactory to the office. And at the same time, we'll be in line with the interest of proceeding in a dialogue with the office.

Got it. Thank you very much.

Thank you.

Thank you. There are no more questions, so I'll now hand back to Orange Polska for closing.

Thank you very much for listening to us. for being with us today. That concludes our conference. If you have any follow-up questions, you know how to reach us. Otherwise, talk to you in October. Thank you.

Thank you very much. Thank you.

Thank you, everyone.