Proximus PLC (PROX) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the Proximus Conference Call on the Q2 2022 Results. For your information, this conference is being recorded. At this time, I would like to turn the call over to Nancy Goossens, Director, Investor Relations. Please go ahead.

Thank you. Welcome, everyone, to this results presentation. Let me just quickly introduce you the participants on our side. So we start with the CEO, Guillaume Boutin. He will open the session with an introduction. After that, we turn to your questions. So for the Q&A, we are also joined by the CFO, Mark Reid; Jim Casteele, the Residential segment lead; Anne-Sophie Lotgering, the Business segment lead; the CTO, Geert Standaert; our Corporate Affairs lead, Dirk Lybaert; and Matteo Gatta, the CEO of BICS. So they will be taking your questions in a moment, but first, Guillaume, will take us through the highlights of today. Guillaume, please go ahead.

Thank you, Nancy, and also welcome from my side to this conference call covering the Proximus second quarter results. Next slide. In the next 10 to 15 minutes, I will take you through some of our key achievements, the progress made with respect to our #inspire2022 strategy, and of course, a quick overview of the second quarter performance. So starting with some of the key achievements over the past month. Overall, to say I'm proud of our trajectory so far with first, and again, some meaningful steps taken in our strategy, and we work through some of them on them later. But 2 key steps for sure, having the strong position we have obtained in the spectrum auction and also our announced ambition to further broaden our fiber rollout. Secondly, even though the quarter was commercially less active, we continued to see a strong commercial momentum for Proximus. And the last point, we achieved over the past quarter a strong set of financial results, with group revenue up by 4.9% and direct margin up by 4.7%. The annual growth levels we have not seen for a long, long time. And as we are closing a strong first half of the year, we feel comfortable in raising revenue and EBITDA metrics on our guidance. This slide sums up it from a financial perspective, with the revenue growth translate into higher direct margin for both our Domestic segment as well as for BICS and Telesign. The group EBITDA was up by 0.9% with especially BICS causing a strong second quarter. As already mentioned, we have made significant progress in our strategy, and this has also supported Proximus in becoming much more resilient in a changing market. And I think we are very well positioned to continue winning the Domestic market. We'll further strengthen our mobile network, which is already today recognized as the first in terms of quality. We are turning a fixed copper network into a fiber network, known to be the best technology available. And we'll have undisputed product superiority on fixed mobile and conversions for our customers. And you all know how important it is to have product superiority in that industry. We have a residential customer base that is highly convergent and is addressing customer needs through different brands. This includes fully fledged premium offers, but also low-cost offers for price seekers. And last, our business segment is supported by a very strong telco customer base with strong upsell potential to IT services. Our NPS results progressed further in the second quarter, leading to first half NPS level shown on the graph at the bottom left, with a nice improvement across our 3 brands. The increased level of customer satisfaction order supported the price changes we have put through the year. Overall, this has landed well, with no material increase in churn levels. Turning moment now to the outcome of the spectrum auction. Overall, we are very pleased with the amount of spectrum obtained. Out of the spectrum in which we could make a difference in the auction, we obtained half of what was available. With this, we have secured over the next 20 years a crucial asset to make a considerable difference in network quality, and hence, offering the best mobile experience to our customers. Another big step in our gigabit network strategy was taken with the announcement of our ambition to broaden our fiber coverage. We agreed an MoU with a consumption of Belgian financial partners to bring high-speed connectivity to the country's low-populated areas. The ambitions of balance sheet structure has an ambition to reach 95% of the population with fiber, this by 2032. It will reinforce our position as leading fiber operator in Belgium, and it will generate financial benefit from a broader fiber scale, including also cost benefits from copper decommissioning. We aim to reach a final agreement by the end of the year. Today, we are already rolling out fiber in 62 cities and municipalities, and we are well on track to reach our target of 22% coverage by the end of the year. In June, we crossed the 1 million mark of homes and businesses passed with fiber, highlighting the fast expansion of our fiber network. Customer demand for fiber is increasingly higher, with also the fiber price increase having landed very well. Think we all agree digital technology has become essential, and this is certainly also true for B2B customers, for which we continue to develop innovative offers. This, through the new partnerships or through the co-creation of new solutions on 5G, we -- with, on the right of the slide, some recent examples. In the context where cybersecurity becomes increasingly relevant, we are proud to announce our partnership with Microsoft for the development of a sovereign cloud solution. For smaller businesses, customers, we announced our partnership with Odoo, providing our customers access to Odoo's full suite of business applications. Now turning to our international business, and let me start with Telesign. Clearly, we regret that the broader economic context and impact on financial markets hampered the envisioned public listing. Telesign is, however, continuing its strong commercial performance, and we remain fully supportive of its growth trajectory. We are considering our options, and we'll get back to you on this once this crystallizes. For BICS, there was good news on the closing of a multiyear commercial agreement signed with the international communications company, Ooredoo Group, for which BICS is now becoming the trusted partner for communication services, a great proof of the quality provided by BICS and by its team. As the last point of the tragic part, a few realizations in the ESG domain. What I would like to highlight here is our announced ambition to provide at least 15,000 charging points for electrical vehicles by 2028, which we see as a very nice and relevant side opportunity of our fiber rollout plan. Turning to our second quarter's results now, and starting with the Domestic segment. Overall, the past quarter was not the most intense from a commercial perspective, as I said, but did not have the big promotion as we had last year in view of the European football Championship. So in this context, we are able to take a big portion of the market growth, which again confirms we have been doing the right things. One of these things is a focus on convergent offers, with Flex continuing to do a great job in attracting multi-mobile customers. An additional 84,000 customers opted for one of our Flex offers in the second quarter, and as such, we have now crossed the 1 million mark. The traction of multi-play offers remains an important revenue driver for residential unit, which closed a very good second quarter, with total revenue growing by 4.3% from the year before. This was supported by the inflation-driven price indexations, the remaining 2 months of inorganic contribution of Mobile Vikings and higher revenue from mobile handsets. Moving on the Services part of the residential units, we have posted in total a 3.3% growth, sequentially improving from prior quarters, driven by better ARPC trends. As shown on the slide, if we put aside the impact of Mobile Vikings, the ARPC was up by 3.7% on an organic basis. Turning to our Business unit, which closed the second quarter with a 0.6% revenue growth, mainly resulting from a firm revenue increase from Internet services and also higher IT hardware revenue. Partially a one-off, but we also see some of the previously delayed product contracts catching up. Taking a closer look at the Business services revenue. All services combined, we posted a slight decline of 0.4%, so roughly the same as from the previous quarter. Revenues from fixed data, mobile and IT services were up year-on-year. Though was offset by the fixed voice revenue erosion, which is losing the support of the temporary vaccination center-related traffic linked to COVID-19 -- COVID crisis. And finally, our Wholesale unit, for which the revenue from Fixed and Mobile Wholesale services was up by 20.1%. This was offset by headwinds on the interconnect revenue which, however, with -- however no meaningful margin impact, as you know. This brings me to the total domestic revenue for which we achieved a 1.9% growth for the second quarter. As for the domestic operating expenses, which faced a significant impact from increased inflation, especially on the wages, which have now increased 4x since October last year. As illustrated on the chart, we have been able to offset most of the inflationary effects by our cost efficiency program. The remainder of the cost increase mainly reflects customer related OpEx and costs related to the ongoing company transformation. Moving to the results of our Industrial segments and starting with the strong achievements of BICS. BICS closed the second quarter with its EBITDA up from last year by 25.5%, driven by strong margin growth in its core services, more precisely, Messaging and Mobility services and another excellent performance in Cloud Communication services. Our second industrial business, Telesign, continued its strong measure trajectory of the last quarters, resulting in strong revenue and direct margin growth for the second quarter. Commercial indicators such that the net revenue retention rate remained solid at 125%, and the momentum was also supported by further geographical expansion as well as a launch of new services within the Digital Identity suite. Overall, these results reflect the success of the strategic approach the company has taken to reinforce its position in the Digital Identity and Communication markets. This brings me to the group view. As illustrated on the slide, we are closing a good first half of the year, with all 3 segments growing revenue, overall, leading to a 0.7% growth in group EBITDA. Our CapEx remains fully in line with our projections, with increase on last year largely resulting from the accelerated fiber investments. This brings me to the free cash flow for the first half of 2022. As shown on the graph, the 2 main drivers of the low free cash flow so far are, one, the higher cash out for CapEx; and two, an unfavorable year-on-year evolution of business working capital needs. Our financial position remains very sound, and we remain on track to maintain our full year net debt level around 1.6x. Also longer term, we have secured our debt, and we have hedged our exposure to rising interest rates through 2025. In conclusion, I'm overall very pleased with our achievements over the first half of the year. Our Domestic business is delivering better-than-expected ARPC and churn, which is very supportive for the offsetting of inflationary effects we are facing. And in addition, also our international businesses are performing better than anticipated. So hence, we're in a good position to raise our outlook for the year. We now expect to close the year 2022 with a growth of 1% to 2% for Domestic revenue, excluding terminals. For the Domestic EBITDA, we expect to land at the upper range of the guidance. And for the group EBITDA, is expected to grow up to 1% compared to the year before. Our full year outlook for CapEx and for the net debt ratio remain unchanged. And with this, I have covered my introduction, so we can now turn to your questions.

[Operator Instructions] So we have our first question from David Vagman from ING.

So I've got 2. One on fiber and one on BICS. So first, on the fiber networks, what is your reaction to the recently announced communication from Telenet. By Telenet introduced on the [ network ] plans, and especially on the economy. It seems on paper at least that the [ net cost ] is more favorable rollout cost compared to Fiberklaar or Proximus, so making this potentially think more attractive commercially to access seekers. So is it a view that you would share, or rather, why not? And how would you work to make a difference? So what at access seekers to Proximus stand-alone network to Fiberklaar? That's on fiber. And second on BICS. So could resume indeed on BICS and strong performance to better understand the sales and margin dynamic at play in this Q2, but also going forward in coming quarters in the years ahead? I'm thinking about the different trajectory of legacy core and growth sales. So what is structural, what is not, et cetera?

I'll start with the first one. So it was expected that Telenet Fluvius would come to an agreement. I would obviously not comment on the agreement of Telenet Fluvius on their economics. But what I know is that there is no magic in rolling out fiber, you need to trench. You need to go faster. You need to deliver the network to the end customers, and that is costly. And I don't see why they will not bear the same kind of cost that we are bearing for rolling out the network. And we have good experience now because we started 5 years ago, and now we know what it costs to rollout the network in Belgium, and there is no space in this context -- it's a new context we have since a few quarters. There's going to be no magic, no surprise, and they're going to have the same kind of cost that we do have to hold the network. I have to say that for the moment, we are really delivering the acceleration plan of fiber according to our plan. We are making a lot of rapid progress. Now, we have a run rate of 10% of additional new Belgium homes per year because we are starting the summer with that kind of run rate, and that is going to be like that for the next 8 years. So I think that's always the same strategy that we want to deliver. We'll be the first to plant a fiber flag in every cities and municipalities of Belgium with a view to cover 100% of the country. That the plan we have, and then we're going to benefit from a copper-free company because we want to get rid of copper by 2025. And that will create a lot of opportunity for us to further reduce the cost to operate and to bring, more importantly, better services to our customers, being B2B customers or B2C customers. So we are delivering on our own strategy. I think we are -- we have the time advantage. Still a lot of paperwork to be done for Telenet Fluvius to come to live state, regulatory approval, talks with our commune. So it will take some time. And during that time, we are accelerating and delivering more and more plugs to Belgium homes. And that's for me a key advantage that we have. Just one last comment on this. As I always say it, we will also be pragmatic and rational in the approach, and I think this is also the message that they convey. So we're going to be also a pragmatic -- we're going to have a pragmatic approach in that initiative. But with the view at the end of the day, to own a network, to deliver a fiber solution to 100% of the Belgium citizen.

Maybe a very quick follow-up on this one, on the -- let's say, being pragmatic. Do you view any regulatory headwinds? Or have you been discussing with the regulator on the developments that they have to see what is possible in terms of cooperation with other players?

I think for the moment, this is really a statement that we all make, that we have to have a rational approach in less than 3 years, because there is not a lot of sense or economical sense to roll out to networks. At the same time, there is no regulatory framework to organize this kind of discussion. So we want to, of course, to be pragmatic, but we have also to comply to the competition framework of the country and also the regulatory framework. So that pragmatism is going to be executed in that context, and that's the only thing I can say.

So you are negotiating or discussing with the regulators? I mean, to get such a framework, the new framework, maybe?

I think we will come back to you when we can share more on this one.

I'll take the next question. I'll start the next question. David, thanks for this question. I think it's great to recognize BICS. I think we've come off of 5 straight quarters of growth on top line and EBITDA, and Q2 was the strongest EBITDA quarter of those 5. So as you can tell, we're so pleased with the performance. In terms of the kind of constituent parts, the core part of the business, the mobility services, signaling, messaging enjoyed continued growth, sequential growth. So there's a part of that supported by the return to travel that we're seeing pretty strongly over Q2, and that's certainly progressing into Q3 as we go into the main holiday period. In terms of the cloud communications, the growth part of the business, again, we've seen double-digit growth in that business with particularly strong demand for cloud comps from our enterprise customers, and you can see that in the earnings presentation. In terms of our exposure to enterprise customers versus telcos is significantly ramping. And then legacy, a business that has been declining. We had growth in the quarter. Again, destination mix of where the legacy voice is being delivered and the return to travel is helping there. So -- and I'm sure we're going to get guidance questions on that. But I think the business is performing really well. And -- but -- as you know, there is some volatility in some of that traffic mix. And so we're cautiously optimistic for the rest of the year, but that was one of the parts of where we got to in terms of upgrading the group guidance. Matteo, I don't know if there's anything else you'd add to that.

Not really much to add. Just to say that if we compare to prior to the COVID, basically BICS performance has reached the same level as '19. But the mix is very positive because it's more structure, more recurring business compared to the past. So growth has replaced basically part of the legacy voice. So that is the underlying message.

And on the margin mix, could you make just a comment on the difference between growth, legacy and core?

David, we haven't gone to that level of disclosure, so we won't. But it's positive in terms of, as you said, the overall business is outperforming our expectations. And as Matteo says, the recurring nature of that business, specifically on the growth side, we're particularly pleased with, so.

So we have another question from Nicolas Cote-Colisson from HSBC.

My question is on the Telesign. Obviously, the IPO didn't happen, and the funds were to support the expansion. So should we assume lower growth and maybe less ambitious gross margin, or EBITDA margin forecast now that the process is aborted? I also wondered, if you were to face any legal fees, legal cost, I mean, of fees, after the cancellation of the IPO? I've got another question, but I may let you answer this one first.

Okay. Yes. Thank you, Nicolas. So yes, clear. I think, as you saw in Q2, Telesign continued to perform right in line with what we told the investment market back in November where we're going through the preparation for the IPO. So we've seen -- again, internationally, we're super pleased with the way the businesses are progressing. Telesign has really matured from a management perspective, from a strategic and execution perspective, and you can see that coming through the numbers, the company was ready for IPO. The market just wasn't there, and that's clear. So in terms of do we see any slowdown in that, the business is executing exactly as we expected to. In terms of -- you'll see some of the EBITDA, primarily a better in the first half, primarily because the ramp-up OpEx is more phased to the second half of the year. But again, we don't see any material issue in terms of the performance or execution of the growth plan with -- without the public listing at this point. In terms of fees, there's nothing material. So everything was success-based. And yes, there's no material element of kind of post the closure of the process with NAC.

Okay. If I remember on the slides, the IPO slides, the 2026 revenue of EUR 1.1 billion so this was quite aggressive. So obviously, it's a long time from now. But -- so should we keep in mind the same kind of growth profile, not just for H2 or 2023, but beyond?

I think the objective to get to EUR 1 billion company stays, and that's really the commitment of the management team and that also our views. We want to get there and to grow that business towards that EUR 1 billion threshold by 2026. So that commitment is still valid.

Okay. That's very clear. So maybe just a quick follow-up on the market. Obviously, it's been a supportive market in Q2, but still I noticed a spike in churn in your 4-play stats. I was just wondering if it was just a one-off, or if it was saying something about affordability and people trying to cut the cord a bit amongst their products?

So Nicolas, on the 4-play, 3-play and the related churns, this is the continued pressure that we see on fixed voice, which quarter-over-quarter continues to impact the movements from 4-play to 3-play. And we indeed see structurally a better market traction on our Flex triple play offer rather than the Flex 4-play offer. So that part is going to continue to go into the numbers going forward.

So we have another question from Ulrich Rathe from Jefferies.

Maybe one follow-up on the fiber question. Is this from -- in the big picture, is this now essentially a rat race where you rollout and -- service rollout and then sort of see what happens? Because it's bit difficult from the outside to see how 2 networks can be rolled out to at least 80% or so Flanders and both of them making proper returns. So I suppose the question in simple terms, is it -- can you envisage a situation where there would be 2 networks covering 80% both making returns? Or is it more a question of who wins in the way to get there now? The second question is you are talking much about the staff cost in the context of inflation, much more than in energy costs. On Slide 39, it's sort of showing that the energy cost inflation is very minor. Could you talk a little bit about the outlook into 2023 for that? And if I may squeeze in a third one, when you mitigate the wage cost, I suppose the one lever is to get the headcount down. Are you increasing earlier retirement offers at the moment? Is the cost of those offers going up? Or are these things essentially in place and you're counting on the sort of gradual take up as it has happened in the past?

So on the fiber, the fact that Telenet and Fluvius did announce a partnership last week was not a news or a surprise to us and in our ambition to deliver 95% of cover of the country. We, of course, took into account the probability that to see some of the build coming from other players. Does that mean that you're going to see overbuilt in all parts of the country? Probably not, because this is not something that is rational. And I don't think that our bit is going to be fully there, especially on the less dense areas. That's why I think the speed to rollout in those -- also in those geographies is important. Are you going to see some overbuild in the more dense areas? Probably yes, because this is something that is happening in every market. But again, we are at full speed. We are only at 550,000 plugs this year. It's going to be even more next year. So we are delivering 10% of better homes every year with good partners, with a fully funded plan. And with at site, the ability for us to become a copper-free company and which is super important for us in order to also transform the operating cost of the group. So with those kind of ambition, we are super enthusiastic about the prospect of putting the ground the fiber network as a key element for future growth for the group.

Let me take your energy costs. So in terms of -- as you know, 2022, we're in fully -- pretty much fully hedged, so we have no material impact there. In terms of '23, I think last time we spoke, we were around 50% hedged. We're now up 75% hedged for 2023. And we're monitoring it every day in terms of kind of opportunities to buy. In terms of the overall exposure, it's probably a kind of low double-digit impact for 2023. But as I said before, we continue to kind of look at in various ways from our efficiency program to mitigate those things. In terms of the overall workforce, you're right, we continue to be very focused on the overall number of internal workforce, in terms of we still consider customer supporting and directly billable FTE very carefully, but the overall number is going down. In terms of any program, we don't have any program to accelerate pensions, or any additional costs associated with that in the plan. So that's where we are. Right now clearly, we also have a significant external workforce, which we're also very carefully managing to mitigate overall costs.

So we have another question from Roshan Ranjit from Deutsche Bank.

Great. Got 3 please, hopefully very quick. You've seen the pricing support come through, which is driving your top line guidance increase. That's clearly indexation led. But is there a consideration to maybe put the underlying price of the fiber product up, given that you've seen a good take-up in the areas, and as you're working out, you are seeing a higher kind of penetration in certain areas? So is there a case of, I guess, increase in that fiber premium? Second question on the enterprise or the business unit side is we've seen a number of peers this week, sites and weakness in enterprise. That's clearly different from what you guys are seeing. Is that a case of maybe the corporates in Belgium or your end kind of customer? Or are you guys further through the mix of that legacy versus new products? Because I think a couple of years ago, you were embarking on that big shift within the Enterprise segment. And thirdly, just touch on some of the previous questions. On fiber, you announced these 2 further JVs, and that extends the fiber coverage. Was there a consideration to maybe accelerate the coverage? So you still got the 70% target by 2028. Was there a consideration to say, I don't know, it's 70% by 2026? Did that ever come up in discussions or not?

We will let Jim answer the last part of the first question. But the good top line on consumer is, of course, a result of the price indexation, but it's way more than that. It's just like -- it's not like you decide to do price increase and everything is suddenly happening as a miracle and lending in the revenue of the Residential segment. This is way more difficult than that. I have to remember that there is no contract in Belgium, so there is no commitment. So you can now leave Proximus tomorrow, if you want to. So it's way more than just that. It's the product superiority on which we are putting a lot of effort in investments on fiber and mobile. This is the improvement of the NPS. You see the trends on the NPS that are favorable and that are continuing to bring better customer satisfying despite the fact that you -- that we value managed during the quarter. And of course, we have some -- also some good volumes in a market that was quite -- not that active in Q2. But if you look at the performance of Proximus, we are clearly winning the vast majority of the customers on mobile and half of those in Internet. So just to put a little bit of context, it's way more than just deciding to increase prices. This is way more than that, that is driving the good performance of the Residential segment. And last, and then I will really let Jim answer that question. Also, the strength of our brands. If you look at the Proximus brand over the last 3 years, we improved a lot of perception of the brand. And this that will continue to pay off in the coming quarters, that's for sure.

So Roshan, maybe adding on that, on the fiber part. So fiber in detail is bringing a better experience, of course, to customers than on corporate technologies. And that's already reflected in, I would say, the base pricing of our Fiber Flex versus the Flex that we are delivering on copper technology. Next to that also, thanks to fiber, we can introduce a new kind of tiering that we didn't have on our copper technologies, which is a tiering based on upstream and downstream speeds. So we already have today, next to our standard offer, a 1-gigabit solution in the market, which is steered at a higher price. It's EUR 12 more than on copper. And then next to that, as you know, by the end of the year, we're also going to launch the 10-gigabit solution on fiber, which is again going to be a way to increase the value that we're getting out of fiber customers. So we're really also there already today, indeed leveraging the quality of fiber to get as much value as possible for our customers, and this is reflected in the pricing, of course, as well.