Orange Polska Sa

Ladies and gentlemen, thank you for standing by and let me welcome you to Orange Polska Q3 2023 results conference call. 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 made by the management team followed by the Q&A session. Speakers for today will be Lyudmila Klimok, the CEO of Orange Polska and Jacek Kunicki, CFO. So without further ado, I would like to pass the line to Lyudmila to begin the presentation.

Thank you, Leszek. Good morning. Welcome to our conference summarizing our performance in the third quarter and nine months of this year. It's my pleasure to welcome you for the first time in my role. Dialogue with shareholders will be an important topic for me, so I hope to be meeting you in person in the future. The format of presentation is unchanged, and I will start with business highlights, and Jacek will follow with financial review. And then I will come back at the end with a conclusion. And at the end, of course, we are available to answer your questions. So let's start slide five with key messages for the quarter. So first of all, to say that the results we achieved in the third quarter were good and in line with our full year objectives. On commercial part, our performance is very satisfactory and is reflecting a good balance between volume and value growth. Net customer additions have remained solid and our POG maintained a very healthy pace of 3-4% growth. On a financial part, our results in Q3 were sound. With growing EBITDA, strong improvement in net profit and in cash generation. And we have once again demonstrated our resilience to a challenging external environment. And as you are aware, 5G auction now is over. And we are very happy that we will finally be able to use C-band spectrum for the benefit of our customers. Obtaining the license was an important milestone for our business, but also for overall Polish economy. It is well known that digitalization is an important contributor to the evolution of country GDP. Let's proceed to the next slide. We present here our performance and the key financial metrics after nine months versus our full year guidance. As you remember, presenting on Q2 results in July, we have upgraded our guidance for interest and for EBITDA. Our results after nine months confirm that we are fully on track to reach our objectives. Looking on revenues, we increased it more than 4% and the key drivers are based on three components. So one is quarterly comm services with growth of 5% year-over-year. Equipment with dynamic which was exceeding 20% as the customer demand shifted to higher value brands and ICT this very healthy double digit growth. On EBITDA part the growth was generated by direct margin while indirect costs were affected by double digit inflation and this is actually demonstrating the healthy structure of growth and confirming our strong fundamentals. e-CAPEX after nine months is broadly flat versus last year, and we are very comfortable with the full year guidance. The results confirm our growth ambition and our ability to adapt to a rapidly changing environment, and I propose to look now at our commercial activity on page seven. Our commercial focus in Q3 benefited and actually our results were coming from a continued solid customer demand and our focus on value. And they were achieved despite market competition, especially in broadband. Growth of number of convergent customers maintained is dynamic from previous few quarters, and it confirms that customers appreciate the quality of our multi-service offer. In fiber, we continue to generate healthy growth of customer base. We benefit from strong demand for fiber and network rollout done by various fiber costs. At the same time, we compete with a growing number of retail fiber providers in those areas, and this is a natural consequence of more and more infrastructure available by fiber costs that are open for retail competition. And please note that our fiber customer base after the third quarter has reached 1.3 million customers and accounts now for close to half of our total broadband customer base. In mobile, our third quarter net additions were better than in the past, if we refer to the past few quarters, reflecting solid performance both in consumer and in business segments. And all these consistent volume growth is combined with healthy growth of ARPO. In all key services, it improved by 3-4% year-over-year as a result of price increases and growing share of fiber in our broadband base. So our value initiatives are gradually rolling into our customer base and value strategy is and will continue to be an important for us going forward. Over to the next slide. Let me reiterate that we are very happy that we have secured license for C-band spectrum. It's a big step forward for our business. If we talk about benefits that it does give to us, first of all, it is a capacity spectrum. It gives us much more resources to carry over growing data traffic and securing top service quality. Secondly, it opens the whole range of new services that we will be able to offer mainly for our business customers. If you remember our dotGrowth strategy presentation two years ago, we were showing various opportunities related mainly to mobile private network, IoT ecosystems, different use cases for 5G. So now we will be fully on our journey to implement them. In terms of CAPEX for the rollout, we didn't wait for auction to happen. As we had commented in July, we are already well advanced in this CAPEX cycle. for both 5G rollout and renewal of our radio access. By the end of this year, of 2023, we have invested close to 40% of the total envisaged plan, and the remaining will be invested mainly in the next two years. So this is fully in line with assumptions that we have presented for dot-grow strategy. So, thank you for now, and here I will hand over to Jacek.

Thank you, Lumiwa. Good morning, everyone. Let's start the financial review on slide 10 with highlights of our performance. Our financial results in Q3 were solid, with good growth of EBITDA, net profits and cash generation. The top line evolution was broadly flat, as strong performance of core telecom services and equipment was offset by a drop in ICT and energy research. Good performance of our core business drove more than a 2% EBITDA increase. The profitability of revenues has more than offset the impact of inflation on our indirect costs. Our net income in Q3 improved by an impressive 23% year-over-year thanks to higher EBITDA and lower depreciation. We are very pleased that we are able to convert the growth of the EBITDA to higher net income. After nine months, it is already higher than it was for the entire year 2022. CAPEX reflects more evenly spread investments throughout the year. Our analysis suggests that for the full year, we're likely to lend closer to the lower end of our guidance, which, as a reminder, was set at 1.5 to 1.7 billion zlotys. This is an evidence that we are very disciplined with our investments and we search for the optimal rate of return. Finally, cash flow generation was very strong in Q3, thanks to robust operating activity and lower cash capex. Let's now review our performance in more detail, starting with the top line. The revenues in Q3 were broadly flat year over year. This is a change versus the previous quarters when they were growing by a mid single digit. There are few drivers of this dynamic. First and foremost, the core telecom services, which are key for value creation, maintained their strong growth dynamics close to 5% year over year. They are benefiting from the simultaneous expansion of their respective customer bases and ARPOS. Second, revenues from the resale of equipment continue to grow at double-digit rates. This reflects a solid customer demand for high-end handsets and also our value strategy. Third, revenues from IT and IS dropped by 3% year-over-year in the third quarter. This followed a very strong 20% growth achieved in H1. Our Q3 dynamic reflected a slowdown in market demand, resulting from a tougher macro environment. Finally, our energy resale activity, which we report as other in the category that you see. Its revenues fell by around 30%. The average output price of energy reflected a very high comparable base of last year when market prices were at their absolute peak. In addition, we have decreased the level of trading volume in 2023 as we have reduced the risk profile of this business activity and we have focused on maximizing its profitability. To sum up, we are satisfied that we continue to deliver the expected and necessary growth of the core telecom services. They are the key driver for our operating profitability. And now let's look at this on the next slide. Our EBITDA in Q3 increased by a solid 2.3% year-over-year. It was a good quality growth, resulting from a positive performance of our core business. This is evidenced by a 3% expansion of the direct margin. Key factor here is the profitability delivered by our core telecom services, which benefits as I mentioned, from a simultaneous growth of their customer bases and ARPOS. Other important contributors include higher margins generated from the sale of equipment and also from the energy trading activity. The latter has increased its profits thanks to attractive input prices sourced by Orange Polska from renewable energy providers. The indirect costs have increased by 3% year over year. And here, let me mention two effects. First, as in the previous quarters of this year, our costs were affected by inflation, mainly linked with indexation of rental contracts and the rise of prices of various external services. Secondly, our labor costs this quarter increased by 7%. This unusually high dynamics reflected a 5% salary increase implemented in Q3. It reflected a difference to last year's timing of the recognition of a holiday pay provision, different between the particular quarters of the year, and it reflected a higher variable part of remuneration linked to a better and improved full-year outlook and to an increase of the company's share price. Now over to cash flow and balance sheet on slide 13. We are very satisfied with our cash generation over the last nine months, which amounted to 850 million zloty. It is already higher than the cash generation for the entire year 2022. The trends that we observe today also suggest a solid cash generation for the last quarter of this year. The achievement in the third quarter strongly contributed to the accumulated organic cash flow that you see for the nine months of the year. And looking at the quarter, first, the cash flow from operating activity was driven up by higher EBITDA and also by lower spectrum fees. Here it's worth to note that since 2023, we no longer pay the annual installments for the UMTS license. Secondly, cash capex in Q3 was almost 90 million below that of last year. Our balance sheet remains very sound with financial leverage at 1.2 times at the end of September. If we include the upcoming expected payment for the 5G spectrum, this would increase it to 1.3 times, so at par with the level at the end of last year. This is a strong balance sheet, and it is our asset, giving us the necessary flexibility much needed in the current macroeconomic context. Our effective cost of the existing financing stays at just over 3%. It is because around 90% of our debt is on fixed interest rate. Around 30% of this debt is due in Q2 of next year, but more than 50% is hedged until 2026. You can see this structure on the bottom right hand of the slide. Of course, any new financing that we may draw will reflect the current interest rate environment upon its renewal or join. That is all from me. Thank you very much for your attention and I hand the floor back to Lyudmila.