Orange Polska Sa

Ladies and gentlemen, thank you for standing by. And I would like to welcome you to Orange Polska conference call summarizing quarter two and H1 of 2023. My name is Leszek Iwaszko and I'm in charge of investor relations. At this time, all participant lines are in a listen-only mode. The format of the call will be a presentation by the management team followed by the Q&A sessions. Speakers for today will be Julien Ducaro, the CEO of Orange Polska and CFO Jacek Kunicki. So now I will pass the line to Julien to begin the presentation.

Good morning, ladies and gentlemen. Welcome everyone on our conference summarizing second quarter and the first half of 2023. Let me start with the key messages on page five. I'm pleased to say that our performance in Q2 maintained its good momentum. Our commercial performance was solid given market conditions and our focus on value. I'm especially pleased that ARPO Dynamics has improved in Q2 in all key services. This is our special focus. We have further intensified our value strategy in the recent weeks. Our financial results in Q2 were very good across the board. Once again, thanks to excellent performance of our core business, we managed to mitigate inflation impact on our operating costs. Let me highlight particularly strong ICT revenues this quarter, which were boosted by a few projects in the public sector for digitalization of health institutions. This is a good demonstration of our wide portfolio, our competencies, and diversification of our revenue. Our green agenda moves forward as planned, as we now secure the source majority of our energy needs from our wind. Our CO2 emission reduction has accelerated. As you know, in June, Telecom Regulator finally announced long awaited 5G auction in C-band spectrum. Obtaining the license will be a milestone for our business and will unlock new growth potential that we will benefit from in many years to come. Let's look at the next slide. Our performance in the first half of the year has demonstrated that we continue to successfully execute our dot growth strategy. our financial results were excellent. Revenue increased more than 6%. Apart from consistent, around 5% growth of revenue from core telecom services, it is worth to mention impressive more than 20% growth in ICT and equipment. Equipment reflects shift in the customer demand to more expensive model and our attractive financing offer. In ICT, we were pleased to finally see some rebound in the demand from public sector. I already mentioned EL's project supporting us in Q2. More than 4% EBITDA growth is a remarkable achievement. It is, despite the environment, is challenging due to high inflation. Importantly, growth was generated by direct margin. This is healthy structure of growth confirming our strong fundamentals. I'm pleased to say that on the back of this strong H1 result, we have upgraded our full year guidance for revenue and EBITDA. H1 e-CAPEX were in line with our plans. It reflects higher year-on-year level of investment, and very high proceeds from disposal of assets which were also very good in Q2. So, I'm confident that 2023 will be the third consecutive year of growth into our strategic plan. Let's look at our commercial activity on page 7. Our commercial performance in Q2 reflected continuous solid customer demand our focus on value and intensive market competition. Growth of convergent customer maintained its solid steady level from previous few quarters. It confirmed that customer appreciate the quality of our multi-service offer. In fiber, we continue to generate healthy growth of customer, reflecting that the landscape on the broadband market has changed over the past year. Larger number of players is a natural consequence of market development largely in the open model. But we are also benefiting from that through our stake in Fiberco. In mobile, Q2 Net Addition were better than in Q1 on the back of our recent commercial action. On the slide, you see comparison with Q2 of the previous year, where growth of mobile customer was exceptionally high due to the demand from Ukrainian. And I am especially pleased that growth dynamic at ARPO improved this quarter in all key services. It's now growing faster in conversions, fixed broadband, and mobile. In conversion, growth is now more than 4%. It is a consequence of past price increase, not only in conversion, but also in mobile. Please note that our average convergent customer is close to two SIM cards, so hikes of mobile-only tariff also impact this incremental mobile services and contribute to convergent ARPO growth. We have as well a higher share of fiber in our base and an increased popularity for higher speed, which drive up the ARPO. we have seen a 4% point increase of the higher speed tariff plan. So our various value initiatives are increasingly rolling into our customer base. On top of that, we launched new initiatives recently. Let's look in greater detail on the next slide. Value strategy is a key factor to grow ARPO and protect our profitability in time of high-cost inflation. We have several levels to implement it. Let's review the key one. We have actively pushed the more-for-more strategy in Poland since 2018. On the slide, you see two examples of the increase of price point since we launched DOTGRO strategic plan in mid-2021. They are always accompanied with additional benefits for the customer, more data, more content, and new services like cyber protection. Recently, we have completed, complemented our value strategy with two additional elements. Firstly, if the customer does not want to renew loyalty contracts, the price automatically goes up by 10 slots a month. We introduced it to a newly signed contract in September of last year, so it will give us increasing benefit in the future. Secondly, in June this year, we have implemented CPI clauses. We decided to apply it to customers who have the CPI clauses and are out of a loyalty contract. It affected a very limited number of customers in 23, but the number will grow in time. This specific mechanism is a kind of insurance policy for us in case of inflation was to stay at a high level for a longer period. Let's zoom now on the green topics on the next slide. When presenting our full year result, we told you that in 2023, we will strongly reduce our CO2 emission in scope one and two due to high level of contracted wind energy. After H1, this is happening. With almost 75% share of renewable energy, this emission dropped by 65% versus H1 last year. We are on track to reach our strategic goal in 2025. It is important to note that we not only cut it because we have more wind in the mix, but we also continue to optimize our consumption. it dropped another 3% year on year in H1. It all greatly contributes to much lower growth of energy costs this year and make our business cleaner and more friendly to the environment. As one of our PPA is a short term, we are now actively looking for new opportunities to contract more renewable energy for the future. We are also increasing our focus on Scope 3's CO2 emissions. As these emissions are largely not in our hands, this is a more difficult task. Key two areas of priorities are for the Scope 3. The first, energy used by customers to power home and mobile devices. Given the country energy mix based strongly on fossil fuels, we are working to support our customers in their energy saving efforts. For example, we have introduced more energy efficient mode to home devices. Secondly, energy in production process for the devices we sell. Here, our main actions are related to increasing circularity in our business model, starting from set-top boxes and modems where we recycle already 90% of them. We are also looking into increasing buyback of handsets that we sell. That's all for me for now, and I hand the floor to Yacine. Thank you, Julien.

Good morning, everyone. Let's start the financial review on slide 11 with highlights of our performance. Our financial results in Q2 were strong across the board with good growth of revenues, profitability, and cash generation. The top line expanded by 5.5% year-on-year, with growth coming from all key business areas, including core telecom services, ICT and equipment. This drove our EBITDA to plus 3% year-on-year. Good profitability of revenues had more than offset the impact of inflation on indirect costs. Our net income in H1 improved by close to 40% year-on-year thanks to solid EBITDA, proceeds from sale of real estate, and lower financial expenses. CAPEX is on the low side this year, reflecting high proceeds from asset disposal and more evenly spread investments throughout the year. And finally, Cash flow generation strongly improved in Q2, thanks to working capital reduction. And this is at a very solid level after H1. As Julien mentioned on the back of these results, we are now more positive on the full year goals for revenues and EBITDA. Let's review our performance in more detail, starting with the top line. We're very satisfied with the revenue performance in Q2. Key drivers of the 5.5% year-on-year dynamics are largely consistent with previous quarters. Firstly, core telecom services continued their solid pace of growth, benefiting from simultaneous expansion of their customer bases and outputs. This is the main driver of our profitability. Secondly, IT and IS area had a particularly strong quarter, benefiting from a rebound in the demand from the public sector. Wholesale revenues have increased by 14% year-over-year as we continue to capitalize on the demand for our infrastructure. And finally, equipment revenues rose by another 15%, reflecting the shift of customer demand for higher-value handsets and also our value strategy, a trend that was already clearly visible in the first quarter of the year. The expansion of our core business was the key driver for operating profitability. Let's look at this on slide 13. Our EBITDA in Q2 increased by a solid 3.1% year on year. This growth has solid foundations. As it results, from excellent performance of our core business. The direct margin expanded by more than 6% or 100 million year-on-year in the second quarter, translating the good revenue growth into profits. This is critical for us in the time of high inflation. The key element here is profitability of the core telecom services, which is increasingly benefiting from ARPU growth as a result of our value approach. Other important contributors are also wholesale services and equipment, with the latter delivering a particularly high margin in both quarters of this year. Indirect costs have increased 9% year-on-year, and there are two main elements of this. First, close to half of this increase in Q2 was due to certain non-recurring developments that decreased the comparable cost base in the second quarter of last year, of 2022. Secondly, as expected, our costs were affected by inflation, mainly coming from indexation of rental contracts and rise of prices of various external services. After the first half of the year, the EBITDA is higher by more than 4% year-over-year. We're now confident that it will grow for the full year, marking the third consecutive year of growth of EBITDA throughout the strategic plan of Orange.gov. Now over to net income on slide 14. The net income for the first semester exceeded half a billion zlotys. and increased almost 40% year-over-year. There were three key drivers of this performance. First, the solid growth of EBITDA, which we have already discussed. Secondly, more than 60% higher gain on sale of assets, as we are optimizing our real estate portfolio. Not only does this bring cash in and net profit, but it also frees up capital for capital expenditures and reduces our recurring operating costs of running those properties going forward. Finally, 30% less net finance costs. The other key contributor were foreign exchange gains on the Euro-denominated long-term leasing contracts, and this resulted from the strengthening of the Polish Zloty. Our interest payments were flat year over year, a slightly higher cost was compensated by the lower amount of debt. I'm very pleased that 2023 is another consecutive year in which growing operating profitability is translating into a solid bottom line improvement. We made major progress here in the past few years and we intend to continue this. switching over to capex on slide 15. Our economic capex in H1 was slightly lower year-on-year and was in line with our full-year plans. Higher level of investment spending was more than offset by strong proceeds from sale of our properties that we no longer use. Higher capex spend largely reflects more evenly phased spending versus the one that we've observed last year. So in 2023, we do not expect such an accumulation of capex in Q4 as it happened in 2022. In the structure of capex, not surprisingly, mobile is gaining its share. We announced refocus of capex from fiber to mobile in the dot grow plan. We have been actively preparing the network for the 5G technology already ahead of the auction. Together with the RAN renewal project that we do alongside the 5G rollout, we have already spent more than 500 million on this. Much more will obviously be spent in the next few years after we receive the license, but this demonstrates that we are already quite advanced in this CAPEX cycle and we are well prepared to launch the 5G technology services. over to cash flow on page 16. We're satisfied with our cash flow generation in H1, which was around 420 million zloty. This was slightly less than last year, practically for one reason, and this being more than 300 million higher payments for capex from 2022, which was more back-end loaded than usual and which we do not intend to repeat this year. The cash generation very much improved in the second quarter due to a reduction of working capital requirements. A quarter ago, I mentioned that we plan to extend the securitization of receivables related to sale of handsets in installments. We did the first step in this direction in Q2 and we plan more by the year end. Our balance sheet remains very sound with financial leverage at 1.1 times at the end of June, so it does not yet include the dividend that we paid last week. This is our assets in current turbulent times and before the start of the 5G auction. Our effective cost of the existing financing stays at just over 3%. because around 90% is hedged against interest rate movement at today's cost of debt that we see in the balance sheet. Important part of this hedge is due in H1 of next year, but more than 50% is hedged all the way until 2026. You can see this structure on the bottom right hand side of the slide. Of course, and the new financing we may be drawing will reflect current interest rates, market interest rate environment. This is all from me. Thank you for your attention, and I hand this all back to Julien for the conclusions.