Orange Polska Sa

Ladies and gentlemen, thank you for standing by. I would like to welcome you to the Orange Polska FreeQ 2022 results conference call. My name is Leszek Iwaszko, and I'm in charge of investor relations. At this time, all participant lines are in listen-only mode. The format of the call will be a presentation by the management team, followed by a question-and-answer session. Speakers for today will be Julien Ducarot, the CEO of Orange Polska, and CFO Jacek Kunicki. So without further ado, I would like to pass the line to Julien to begin the presentation.

Good morning, ladies and gentlemen. Welcome everyone on our conference summarizing third quarter and nine months of 2022. I will go through the main business update and then Jacek will tell us about the financial and we will resume on the conclusion and take your questions. question at the end. So going on slide five, I'm happy to tell you that our business performance in Q3 was strong and consistent with previous periods, despite difficult macro environment resulting from rising inflation and high energy prices. Customer base expansion in our key subscription services was solid and steady. ARPO continued to grow. Handset sales were particularly strong as our commercial action were well received by our customers. ICT had another strong quarter of revenue growth as we benefit from our diversified portfolio of competency and demand for digitalization. Wall sales also nicely contributed to our result. As you know, as part of DotGrowth Strategy, we developed this area of business, so I'm happy that we have a new customer, Play, that will use our fiber network in regulated zone and build within POPC project. Similar agreement was signed with them by Fibercore. This will improve monetization of our infrastructure. Financial results were strong with marketable growth in revenue and EBITDA despite continued burden from energy prices. We are aware that inflation continues to accelerate and this is forcing us to act both on the top line and cost saving at least to partially mitigate its impact. On the front of energy, we have intensified measures to reduce our CO2 emissions by securing more energy from renewable sources and reducing energy consumption. We are also supporting our customer in more energy efficient usage of our services and equipment. Moving on to the next slide. We present here performance of our main financial metrics after nine months. This is full year guidance. I'm pleased to say that we are well on track to reach our objective. Our revenues were up 4% over nine months. Its year-on-year dynamics significantly accelerate in Q3 because of our strong performance, but also because it was no longer affected by negative regulatory impact. EBITDA is growing close to 4%. Obviously, we continue to be confident that we are able to deliver growth for the full year. eCAPEX this year is particularly back-end loaded because of phasing in mobile network investment and timing of our asset disposal. For the full year, we expect to lend close to last year level. This result proved that our business is resilient and once again, we adapt well to a turbulent environment. Going now on the next slide about commercial activity. Our commercial results in Q3 were solid. Net customer addition in convergence and fiber were slightly better than last year, despite intensifying competition. Fiber customer base is 27% higher than a year ago. We now have more fiber than copper broadband customers, which symbolically mark our technological transformation started around seven years ago. Our fiber reach approached 6.8 million households, almost 50% of all households in Poland. Apart from the POPC network, we grow it almost entirely through wholesale partnerships, mainly Fiberco. This leads to more operating expenses, but allows us to save capex and have a lighter balance sheet. In mobile handset net customer addition, we are a bit lower. This is due to elevated churn of Ukrainian customers from our flex offer that we acquired over H1. Customer base expansion in our main brand both in B2C and B2B were in line with previous quarters. ARPO in convergence, broadband, and mobile continue to grow in the range of 2% to 4%. ARPO growth is essential for us to at least partly mitigate the impact of inflation. And we need new action to sustain and regenerate this space. Going on to the next slide, which we want to explain a bit where we stand in this difficult environment. So you know that macro environment is deteriorating. CPI inflation in Poland exceeded 17% and keeps on increasing. This is exacerbated by 20% growth of minimal wage in Poland starting in 2023. We must prepare for its elevated level in the quarters to come. It is affecting us mainly in the four following areas. Energy, rental contract for offices, technical infrastructure space and point of sales, labor costs, and finally, as well, labor-intensive services like cleaning or maintenance that we contract from third parties. We are launching action to mitigate at least part of its impact. We need to act both improving our top-line growth and finding new cost savings. Regarding top line action, we continue with our more for more policy, which we initiated already a few years ago. In Q3, we increased price of the main convergence package in return for more data and content. This was followed by increase of the pay-as-you-go tariff in prepay in the beginning of October. Yesterday, you might have noticed that we reshuffled mobile tariff in B2C cancelling entirely the low-end tariff plan and increasing remaining tariffs by 5.30. In return, we offer more data and a new feature, cyber protection, which is a unique solution on the market, increasing security of our customers against cyber attacks. In parallel to top-line action, we continue to transform our costs. We fully edge energy costs for the next year via green DPA with rates favorable versus the market. So hopefully energy costs will not grow in 2023. I'm saying hopefully because one of these agreements has a condition precedent that needs to be met. We also look at other cost areas to take more radical stance in some of them, for example, our properties. Just one example, we are going to sublease part of our headquarters as we need less office space. Environment is very volatile, and we need to be very agile and prepare ourselves for different scenarios. This is all from me for now. I hand the floor to Jacek.

Thank you, Julien. Good morning, everyone. Let's start the financial review on slide 10 with highlights of our performance. Our financial results in Q3 were very good with strong growth of revenues and profitability. It's another quarter when solid underlying performance has mitigated the headwinds from a challenging environment. Our top-line growth accelerated to more than 8%. This was due to solid growth in all core areas and also due to comparable base for the wholesale termination rate. EBITDA rose by almost 4% year-on-year. We benefited from high operating leverage and ongoing cost savings. They have mitigated the impact of surging energy prices. Looking at net income, please note that last year we benefited from a substantial gain in Q3 on sale of shares of our fiber core. Excluding this one-off impact, The net income was plus 8% in Q3 year-over-year. It was driven by higher EBITDA and less depreciation. Q3 capex was up since last year. The year-on-year growth reflects more investments in mobile and less fiber asset sales through the fiber code. Finally, the year-on-year evolution of cash flow reflected an exceptional decrease of working capital last year in Q3, while the year-to-date cash generation has stayed plus 12% year-on-year. Let's now review our performance in more detail, starting with the top line. So as I mentioned, the revenue performance was strong this quarter. It expanded by 8.2% year-over-year. When comparing the dynamics with the previous quarters, please note that it was no longer affected by negative rec letter impacts. Mobile and fixed termination rates had been cut in July 2021, so starting with Q3. The year-on-year comparison is no longer impacted by the different rates of the MTRs and the FTRs. Our underlying performance was consistent with the prior quarters and based on sustainable demand for our services. Firstly, core telecom services continued to benefit from a simultaneous expansion of their customer bases and their ARPUs. These are key to our results as they generate a high variable margin, their pace of growth has decelerated slightly compared to the dynamics of the previous quarters. It's due to rising compromise of the ARPU and in particular its roaming part, which has regained momentum from H2 of last year onwards. Secondly, IT and IS had another strong quarter with more than 20% revenue expansion. We have once again demonstrated our ability to make the best of market opportunities and adapt to a rapidly changing environment. Finally, equipment revenues were up by 17% as our commercial actions attracted customer demand, and other revenues category was boosted by higher output prices in energy research. Now let's switch to operating profitability on slide 12. Our EBITDA increased by 3.9% year-on-year in the third quarter. The strong performance was achieved due to very good growth of the direct margin and limited growth of indirect costs. The sustainable expansion of the direct margin is absolutely key to the EBDA growth due to the high operating leverage. This is how we are converting the strong core revenues into profits. Small growth of indirect costs was an outcome of surging energy costs and continued cost savings to mitigate them. Q3 energy costs grew by over 60 million zloty year-over-year due to a steep price inflation this year, which results from the market crisis. We had been able to mitigate roughly two-thirds of this impact with savings in indirect costs generated mostly through headcount and process optimization, as well as less advertising, promotional, and G&A expenditures. Looking forward, please note that elevated energy prices will continue to weigh in on our profitability in Q4. However, as mentioned by Julien, we are adequately hedged for 2023 via purchases of energy from wind farms at attractive rates when you compare them to the forward prices which are currently available on the market for 2023. Over to cash generation on slide 13. We generated around 830 million zloty of organic cash flow in the nine months of this year. This was 90 million or 12% more than last year. If we look on the year-on-year evolution, there are three key elements to this good result. higher BDA translated into 113 million more cash from operating activities before working capital. Secondly, around 200 million Zloty lower net cash capex, including the sale of assets to our Fibreco JV. The capex profile in 2022 is significantly back-end loaded due to the timing of mobile access network renewal and this is visibly impacting this year's cash generation. Thirdly, working capital requirement was higher due to different timing of some payments, and also it reflected the growth of receivables relating to much higher equipment sales this year. Good cash generation further strengthened our balance sheet, which continues to be very solid. The financial leverage stood at 1.2 times EBDA at the end of September. Obviously, this does not include the 350 million cash outlay for renewal of the existing 2.1 GHz spectrum, which was made in October, or the highly anticipated 5G spectrum purchase. Nonetheless, our balance sheet is very solid, giving us the flexibility needed for the turbulent times ahead. That's all from me, and I hand the floor back to Julien. Thank you very much.