Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Executives

Dimitris Tzelepis – Head, IR

Michael Tsamaz – Chairman and CEO

Babis Mazarakis – CFO

Analysts

Stam Draziotis – Eurobank

Luis Prota – Morgan Stanley

Hellenic Telecommunications Organization S.A. ADR (OTCPK:HLTOY) Q2 2014 Earnings Conference Call August 7, 2014 10:00 AM ET

Operator

Thank you for standing by, ladies and gentlemen, and welcome to the OTE Conference Call on the Second Quarter 2014 Financial Results under IFRS.

We have with us Mr. Michael Tsamaz, Chairman and CEO; Mr. Zacharias Piperidis, OTE Group’s Chief Operating Officer; Mr. Babis Mazarakis, OTE Group Chief Financial Officer; and Mr. Dimitris Tzelepis, Head of Investor Relations.

At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference call is being recorded today on Thursday, August 7, 2014.

We now pass the floor to Mr. Dimitris Tzelepis. Please go ahead, sir.

Dimitris Tzelepis

Thank you. Hello everybody. I would like to welcome you to OTE’s second quarter 2014 results conference call. During the conference, we will review the quarterly performance and we’ll also leave enough time to discuss any issues you may wish to cover.

I remind you that any forward-looking statements we might make during this presentation or our answers to your questions are subject to the usual risks and uncertainties inherent in such situations.

At this time, rather than my usual boilerplate comment, I have to say that after more than 11 years and 45 quarterly results conference call, it’s time for me to move on. So today is my last day in OTE. The OTE years have been a good period of my life, which I spent in excitement. In OTE, I had a chance to come and contact with very interesting people to create relationships and become friends with many of you that are now on the call. I want to sincerely thank you all for the great time we had together.

Now let me hand over the call to our CEO, Mr. Michael Tsamaz.

Michael Tsamaz

Good morning, and good afternoon to all of you. Thank you, Dimitris, and thank you all for joining this call, where we will review our performance in the second quarter of 2014 and share with you our views of this year. As usual, Babis will guide you through the highlights of our business numbers in the quarter. Well, I’d like to say a few words on where we stand before I hand him the phone.

Our performance in the quarter and in the first half revenue was robust. In particular, we have seen solid growth profitability in the quarter with an EBITDA margin, up 130 basis points to 36.4% of revenues. The increase in net income earnings per share of more than 20% compared to the second quarter of last year.

We were able to improve our stability this quarter despite the growth in top line, where it was more pronounced than in the prior quarters, due to termination rate cuts in Romania and an intense competition in Greek Mobile.

Adversely, we posted our very good top line performance in Greek fixed-line, thanks to the smallest number of line losses in the quarter, a significant market sale of broadband additions and further growth in TV subscriptions.

RomTelecom also posted slightly higher earnings. The subdued EBITDA margins in Greek and Romania fixed operations more than offset the growth in margin in mobile telephony, due to factors I mentioned earlier.

The benefits from lowering operating costs over the past years are clearly speaking. Notably, the impact of headcount reductions and they are enabling us to more than offset the effect of lower mobile revenues and profitability.

Our resilient revenue performance is partly due to the, slow but steady, improvement of the economic environment in Greece. While unemployment remains in stubbornly high level, we are seeing some encouraging signs in terms of consumer spending. For the most part however, I would say that our top line performance is the result of our own customer-centric service focused approach across all of our activities.

We’re leading the way in technology and service quality. COSMOTE, our mobile unit’s 4G offering is far ahead of the competition and it is now available in all Greek cities of more than 50,000 inhabitants. By year-end, almost 70% of the Greek population will have access to 4G coverage.

In high-speed broadband, we have rapidly built an extensive VDSL network, which is now available to addressable market of 1.2 million households. VDSL now represents a significant competitive advantage in a significant portion of our net broadband adds.

In order to maintain our technological competitive leadership, we are continuing to invest heavily in our networks’ television content available to our customers.

In the quarter in the first half, our CapEx was up by more than one-fourth due to fixed mobile investments in both Greece and Romania. The timing of our CapEx was accelerated in the first half for VDSL and 4G launch. We expect investments to continue in the second half of the year, but not at the level recorded in the first six months.

After the one-off and timing items that impacted operating cash flow in the first quarter, we were back to normal cash flow generation this quarter, and expect a strong second half to support our investment programs, as well as other uses of cash.

We continue to cut down our debt and also took further steps to reduce our cost of debt and extend our maturity profile. The success of our additional bond issue is another major road of confidence for debt and for the Greek recovery in general.

We remain confident in our performance for the balance of the year. Leaving aside factors out of our control, such as termination rate cuts, we expect the relevance stabilization of revenues that we have experienced to continue.

The investments I just mentioned and ongoing efforts to build strong customer relationships and loyalty should once again support our top line and our competitive position. We will not relax our efforts on the cost containment front. And we will take full advantage of our stronger financial structure and solid cash flow generation to continue building for the future.

Before I ask, Babis to review the quarter, I would like to say a few words of thanks to Dimitris Tzelepis, who you all know well and who has headed our Investor Relations department for more than 11 years. Dimitris has done a fantastic job being the face of OTE with our Greek and international followers for more than half of the company’s life, as a public company through some good times and in a lot of tougher periods. As he leaves to pursue other interest outside the Group, we want to express our gratitude and appreciation of his hard work, his intense knowledge of the company and industry and his sense of humor.

Evrikos Sarsentis, who was responsible for COSMOTE IR while it was listed, and now heads our Strategy and M&A efforts, will now lead the combined department. Kostas Maselis, who has been working alongside Dimitris all over the years, whom you also know well, will become your main IR contact.

Though we will all miss Dimitris, we are confident that the team he has built will carry the operating performance and upgrade the OTE’s debt instruments by the two, who will carry the functions, and the responsibilities of the IR and the responsibilities towards you with a great respect as been done by Dimitris up to now.

So thank you all and I will pass it to Babis to continue for the financials, and thereafter we’ll take your questions.

Babis Mazarakis

Thank you, Michael, and good morning or good afternoon to all you from me as well. Before we review our performance, I wish to remind you that as of this quarter, our important numbers for 2013 and 2014 are directly comparable and no longer impacted by the disposals carried out in earlier periods.

So Group revenues were down a little more than 5% in the second quarter of the year, following two quarters of stability at the top line level. This primarily reflects the impact of the termination rate cuts in Romania we had, which revenues would have been down just 3.5% as well as a slower growth at RomTelecom following two exceptional high quarters.

In the Greek fixed-line, OTE revenues were down 4.2% in the quarter, once again extending the gradual narrowing of quarterly revenue drops that we have now seen for quite a while. Revenues from retail fixed services, over which we have more control, were down just 2.4% or above EUR 5 million in this quarter. The growth in broadband, and particularly television service revenues made doubled, offset in the drop in voice.

In Pay TV, revenues nearly doubled compared to the second quarter of 2013, reflecting growth in subscriber numbers combined with higher ARPU on the back of our rich content.

In the second quarter, we lost 29,000 retail lines. We also recorded a modest drop in years, and a testimony to the success of our efforts to reduce churn, as well as stronger consumer spending in Greece.

Alternative carriers added fewer lines than we lost, resulting in net connections of the market level, lower paced than in quarter one. All signs seem to continue pointing to a stabilization of the overall market. The decline in line losses is also upper-end in our broadband numbers.

Net additions in the Greek broadband market in the quarter totaled 74,000, a healthy level such that we haven’t witnessed in the several years, and even more importantly, we nearly doubled our market share of net additions to 46% compared to the previous two quarters.

This was partly due to the sharpest growth we ever achieved in high-speed VDSL connections with about 13,000 new subscribers in the quarter. As we speed up the investment in rolling down free service, we expect growth to remain sustained.

This being said, the growth in ADSL subscriber numbers was also the strongest in a while, reflecting improved quality and reliability, as well as the increased speeds we have also offered to our traditional broadband clients.

In Pay TV, we added 17,000 new subscribers in the quarter to reach a total of 296,000 at the end of June, 2014. This slightly lower growth pace was anticipated, as we didn’t have any major content novelties to attract new subscribers in the quarter and consequently scale down promotion activities.

We expect subscribers’ growth to pick-up when consumers return home from summer break, will obviously with a higher base we will no longer see the year-over-year doubling we experienced through 2013.

Importantly, ARPUs continued to develop nicely and ahead of our plans. The drop in call center revenues was roughly in line with the improving trends over the previous quarter, while the decline in other fixed revenues improved materially.

RomTelecom’s revenues were up less than 1% in the quarter, compared to the second quarter of last year. This marks a break from high-single-digit growth late experienced in the past two quarters. As you will recall, growth has been fueled by wholesale revenues, as well as by large information technology projects, which as we told you at the time were somewhat lumpy and likely to experience some streaks [ph].

The growth in the retail revenues for its part showed a notable improvement compared to the first quarter of 2014 and to last year’s trends. A major drop in voice and decent increases in broadband and TV revenues, give another exciting retail fixed services of just over 5%.

The contribution of TV and broadband to total retail revenues continue to rise in the quarter to 48%, moving closer to the 50% mark and validating RomTelecom’s strategy of establishing itself as a complete prepaid service provider.

Other revenues grew 18% on the back of additional large IT projects for public administration and total clients. Those instruments – this increase does not match the 70% and 55% jumps recorded in the past two quarters.

Similarly, RomTelecom’s wholesale revenues rose by above 11% in the quarter, compared to growth of over 70% in the two preceding quarters

Total combined revenues from our mobile operations in Greece, Romania and Albania declined by 7.1% in the second quarter. This decline is largely due to the mandatory cut in mobile termination rates in Romania from over EUR 0.03 to less than EUR 0.01 per minute in post as of April 1 of this year.

As a result, revenues of COSMOTE Romania swung from plus 9% in the first quarter to minus 9% in the second quarter.

In Greece, COSMOTE total revenues were down 7.5%. Perhaps more importantly, COSMOTE Greece’s service revenues were down by just 6.8% plus due to the tail-end of mobile termination rate cuts and extending the gradual narrowing of service revenues drops that we have experienced on quite a few quarters now.

As Michael noted, we believe that our competitive performance is primarily due to our network quality in voice and data, and we have continued to invest in 4G towers is enhanced customer experience.

This key differentiator should become even more important, due to the announced arrival on the market of MVNO entrant as we focus on our share of value rather than volumes.

Service revenues of COSMOTE Romania were down 14.6% due to the MTR cuts I already mentioned. ARPU was down by similar ratio reversing the self-improvements we have made over the past year. Handset revenues for mobile parts for were up once again in the quarter, due to the new postpaid split contract model I mentioned to you last quarter.

In Albania, AMC put up stronger results in a tough environment, with other revenues down 2.4% and service revenues down only 1.5% in a market have experienced a double-digit fall according to our estimates.

AMC posted another good increase in data revenues, but this was not sufficient to reverse some reduction in voice ARPU.

Finally, other Group revenues were down nearly 5%. As you know, the volatility of this line is largely due to the connection traffic at OTEGlobe, with can vary widely from one quarter to the next.

In the second quarter, OTEGlobe revenues were down by nearly EUR 9 million with a marginal impact on EBITDA.

Let’s now move onto the rest of the P&L. In the second quarter, we achieved a Group pro forma EBITDA of EUR 346 million, down 1.7% compared to the second quarter of 2013. With the wider drop revenues in the quarter, this resulted in a considerable jump in EBITDA margin of 130 basis points to 36.4%. For the current year, with revenues down 2.8% and the pro forma EBITDA down just 2.3%, we had a 20 basis point margin increase to 25.5%.

Drops in mobile activities, as well as in our other operations, more than offsets higher quarterly pro forma EBITDA from fixed line operations in both, Romania and Greece. RomTelecom’s EBITDA was boosted in the quarter by disposals of real estate assets and the sale of tower as per the company’s investment in its fiber optic network. Additional tower sales are expected in the second half of the year.

Total operating expenses excluding D&A and one-offs were down more than 5% in the quarter to EUR 620.5. The bulk of this sharp drop is attributable to a EUR 30 million reduction in personnel expenses, compared to the second quarter of 2014, due in large part to the voluntarily retirement plan, which was implemented in the Greek fixed domain at the end of last year.

Stability or decrease in most other lines offset EUR 11 million increase in other expenses mainly related to new Romania infrastructure taxes and some one-off legal provisions in Greek fixed.

Pro forma EBITDA margin in Greek fixed-line operations rose by 280 basis points to 37.0%. Total operating expenses excluding depreciation and voluntarily retirement in Greek fixed-line amounted to EUR 234.6 million in the quarter and drove performance EUR 21 million or more than 8%.

This drop reflects a fall of over 28% in personnel costs and savings in most other non-variable lines, partly offset by inventories in other operating expenses.

The depreciation and amortization charge was up just over 2% in the quarter, primarily reflecting the amortization of capitalized TV content cost, which we discussed in prior calls.

Interest expense was only EUR 46 million in the second quarter, down by more than one-third, compared to the similar quarter last year. This is due to the significant decline in our total indebtedness since the middle of last year. As you’ve seen, we continue to cut our net debt during the quarter, and at June 30, it was 37% lower than what it was just a year ago, with net debt to EBITDA standing at 1.1x as of the end of this quarter.

Earlier today, Moody’s recognized our strong financial structure and operating performance and upgraded OTE’s debt instruments by two notches up to Ba3. Our interest costs further just in the future as after the end of the quarter we were able to raise EUR 700 million in medium term loans with 3.5% coupon entire significant portion of earlier issues.

Our new issue was more than three times oversubscribed. The Group’s tax expense in the second quarter was EUR 27.3 million. Once again this quarter, as of Thursday, we took advantage of EUR 45 million in tax losses carry-forward, reducing deferred tax assets by EUR 12 million.

In the quarter, we posted net income after minorities [ph] of EUR 69 million, up more than 21% compared to the second quarter of 2013, excluding discontinued operations. There were no material exceptional one-off items in either quarters, so the two amounts are fully comparable.

Three months ago, we said that we expected the generation in operating cash flow in the first quarter during that part of timing issues to really vest through the rest of the year. This has the capability in the second quarter with a return to normalized levels.

Due to self-increase in CapEx in the quarter and first half, however adjusted free cash flow is down roughly in both the years. We believe that part of this is due to timing issues, notably the acceleration of CapEx in the first half of the year, and it will be reversed in the second half of this year.

We start by our full year CapEx and free cash flow for OTE of approximately EUR 0.5 billion each.

In conclusion, this was another rather robust quarter, with encouraging underlying trends, and at some time difficult to decipher because they are blurred [ph] by external factors. The strength in our confidence in our business, improve our operating and financial performances in the second half of the year.

And now, we will be ready to answer your questions that you may have. Operator?

Question-and-Answer Session

Operator

Thank you very much sir. (Operator Instructions) And your first question today comes from the line of Stam Draziotis from Eurobank. Please go ahead.

Stam Draziotis – Eurobank

Yes, hi there. This is Stam Draziotis from Eurobank Equities. Thank you for taking my questions. Dimitris, best of luck with your future career plans. Let me start with a question on Greek fixed. You mentioned in the press release and on the conference call, moderation of the pace of decline in retail revenues in the second quarter to minus 2.4%. Could you just elaborate a bit on the extent to which this improvement overall relates to broadband and TV? I think, in TV, you mentioned nearly doubled. And also tell us how much voice was down in the second quarter? I think it was down in the mid-teens in Q1.

Unidentified Company Representative

Yes, actually there are three or four reasons for this positive development. One comes from the reduction in terms of the access line losses. The second one has to do with penetration of broadband connections, and mainly VDSL, which is also giving enough uplift. The third reason is TV, which is almost doubling year-on-year. And this is based on our effort which was consistent in the last three, four years to invest, and let’s say, differentiate in terms of customer experience in speeds. And we see that this strategy now is materializing in better numbers and improved speeds, and also customer, despite the crisis period are opting for upgrading their connection to our VDSL services.

So I would summarize that it’s the combined effect, both in the access lines and the broadband and also in TV.

Stam Draziotis – Eurobank

But would you say, for broadband for example, the last time in Q1 you have said that revenues recorded a modest drop. Is that trend similar or a bit better you would say because of the better ARPU, I guess, and the increased additions for broadband?

Unidentified Company Representative

Actually, the overall effect from the broadband revenues is relevant to the connections and also to the ARPU levels. So it’s a combined effect. Especially this Q, we had a very good record in broadband connections and also our VDSL is penetrating base. Now it’s more than 5% of our base on the broadband with the service from VDSL. And of course this gives an ARPU uplift, which overall combined with also with the penetration of broadband it gives us this combined effect.

Stam Draziotis – Eurobank

Okay. Now moving onto the cost side, I can see that the Greek fixed-line cost excluding D&A and personnel were actually up both, versus second quarter of 2013 and the first quarter of 2014. Could you – I mean, you did say that this is partly due to some legal one-off provisions and this is what you mentioned in the press release. Could you quantify this please? And how should we look at your postpaid excluding personnel costs in the future. Do you see much room for further post adds or do you feel that most of the post adds rationalization has already taken place, and again I am referring to non-staff costs?

Babis Mazarakis

Let me say that the attention of the matter in other cost lines, in the past we have marked impressive achievements on the payroll cost, but this time we are concentrated in the other lines. And as we did in this quarter, we had some external provisions to be made for very legal reasons, and this is both in the other OpEx of the P&L, but you could also observe nice reductions in other lines like commissions for example, and of course interconnection and roaming costs because of the rates.

So there is a widespread of savings what we have for line to line, because in this quarter there might be one or two small extraordinary items. We should look the evolution of the non-payroll costs over longer period of time, since that means deliver savings, basically new techniques and negotiation with vendors etcetera, etcetera, takes some time to mature. But the other direction is for the all the cost lines is to be reduced.

Stam Draziotis – Eurobank

Okay. That’s clear. Thank you. As far as about the provisions, do you want to quantify this? I think you have said that in Q1 it was EUR 7 million. Do you want to say what that number was in Q2?

Babis Mazarakis

It was about EUR 5 million to EUR 6 million.

Stam Draziotis – Eurobank

Okay. Thank you very much. And last question, actually one that relates to the Greek mobile business. Should we interpret the moderation of the decline in ARPU at around 4% as a signal that competition has finally started to become more rational, especially taking into account that one of your other competitors also reported the increase in ARPU Q-on-Q in the second quarter?

Michael Tsamaz

There are different ways to see the reality. I would say that we have a de-escalation in terms of ARPU decline in the last Q. I cannot comment on the competitive dynamics of the forthcoming Qs, but I will say that the evolution of ARPU is mainly at this point in time depending on the macro evolution for the next two Qs.

And of course it will be also affected by the competitive movements, but I wouldn’t, let’s say, classify the difference that you see on the reduction of the activity that we have. This is not the case.

Stam Draziotis – Eurobank

I see. Okay. Thank you very much.

Operator

Thank you. (Operator Instructions) And your next question comes from the line of Luis Prota from Morgan Stanley. Please go ahead.

Luis Prota – Morgan Stanley

Yes, hello. Thank you. Two questions please. First on – it’s actually the same question I made in last conference call, which is whether you can give us any update on the regulatory front in with regards, the regulator reflecting your recent cost cutting into the cost methodology for setting prices and allowing you to close the pricing gap you have with competition? And the second question is on your offer for the TV business of FORTHNET, whether you could give us an update in terms of how things are going and expected timetable there? And following the offer from Vodafone and WIND to buy the whole of the company, I would like to get your views on whether Vodafone and WIND actually want to keep the whole company, which I presume yes, does that means including the TV business as well of course? And if so, whether do you think that you would be able to get content from NOVA on a wholesale basis going forward or you would be bidding more aggressively for, say the Champions League, which is set for renewal next, fourth quarter? Thank you.

Unidentified Company Representative

From the tentative order to your second question, I will be very quick on your first question and I will pass the floor to Babis on the second one. With regard to regulator, we have seen some signs from his side recently of transparency. He has given a model based on which we can monitor, let’s say, before submitting the fair offers, whether our tariffs could be approved. So there are some signs that, that process might be far more flexible in the future. It’s still early to that, let’s say, how this will influence our flexibility. So I would say that – apart from that, I would say that, it’s business as usual.

Babis Mazarakis

Now regarding your question, I’m afraid my answer is not going to be as long as the question. But let me just say that we have nothing material development that has to reported at time point of time. Of course we cannot comment on offers made by competition. The only thing that I can add is that we have experienced a specific interest, and we expect the process to carry forward in order to go to the next phases. And of course, as and when, we have any material development, we would announce it promptly. I’m afraid this is as far as I can tell for this specific issue at this point of time.

Luis Prota – Morgan Stanley

Okay, thank you.

Operator

Thank you. (Operator Instructions) We seem to have no further questions coming through at this time, gentlemen. I’d now like to pass the floor back to you for any closing remarks. Thank you.

Michael Tsamaz

We would like to thank you for participating in the call. We would like to wish all of you a nice summer break, if you haven’t done so yet. And see you all in the next – in our next quarterly earnings release. Goodbye.

Operator

Thank you. Ladies and gentlemen that does conclude our conference for today. Thank you all for participating and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hellenic Telecommunications' (HLTOY) CEO Michael Tsamaz on Q2 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts