Eutelsat's (EUTLF) CEO Rodolphe Belmer on Q4 2016 Results - Earnings Call Transcript

Eutelsat Communications SA (OTCPK:EUTLF) Q4 2016 Earnings Conference Call July 29, 2016 3:30 AM ET


Rodolphe Belmer - CEO

Michel Azibert - Deputy CEO

Antoine Castarede - CFO


Andrew De Gasperi - Macquarie

Paul Sidney - Credit Suisse

Laurie Davison - Deutsche Bank

Eric Beaudet - Natixis

Robert Berg - Berenberg

Ben Heelan - Bank of America

Laurie Davison - Deutsche Bank


Good day and welcome to the Eutelsat Communications Full Year 2015 to 2016 presentation conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Rodolphe Belmer, CEO of Eutelsat Communications. Please go ahead sir.

Rodolphe Belmer

Good morning and welcome everyone. Thank you for joining us today for out full year results presentation. I am Rodolphe Belmer, I am the CEO of the Company and I'm joined today for this call by Michel Azibert, who is the Deputy CEO of our Group and Antoine Castarede, the CFO of Eutelsat.

Let's start on the key data for this fiscal year. Total revenues stood at €1.53 billion, up by 3.6% versus a year ago and by 0.2% at constant currency. EBITDA came out at €1.16 billion and implies a margin of 76.2%. Both these indicators are in line with the revised objectives published on May 12. Group share of net income stood at €348 million, giving a net margin of 23%.

During the year Eutelsat generated a discretionary free cash flow of €247 million. Discretionary free cash flow is defined as cash flow from operating activities, less cash CapEx, less net interest paid. This is a new element of objectives that we are following. The net debt to EBITDA ratio stood at 3.4 times and Antoine Castarede will come back to this later on.

Finally, a dividend of €1.10 will be recommended for approval at the AGM, compared to 1.09 last year. Moreover, and very importantly, it's new, we will recommend that this dividend is paid entirely in cash.

Let's now take a look at the operating highlights of the past year. First, the successful launch of five satellites, Eutelsat 8 West B, boosting coverage of the Middle East and North Africa region. Eutelsat 36C, strengthening resources for video in Sub Saharan Africa and Russia and for broadband in Russia also. Eutelsat 9B, mainly a replacement satellite for video in Europe. And Eutelsat 65 West A, operating a new orbital position in Latin America. Finally, in June of this year Eutelsat 117 West B, bringing incremental capacity to the Americas.

We made further advances in our core video activity, with the number of channels exceeding the 6000 milestone during this year, with a 26% rise in HD channels, giving a penetration of 13.6% and the launch of the first commercial UHD channels on our fleet.

Elsewhere, we implemented two initiatives to address the African broadband market. First, the leasing partnership with Facebook of the Ka band payload on the AMOS-6 satellite due for launch this quarter and second, the procurement of a follow-on standalone high throughout satellite with the launch expected in 2019.

On the financial front, we took measures to optimize our financial situation with the successful issuance in June 2016 of a €500 million five year bond. And, as commented in June, we made progress on the rationalization of our portfolio of assets with the initiation of the process to divest our 33.69% stake in Hispasat and with the sale of a small asset called Alterna'TV.

Now, I'm going to hand you over to Michel Azibert for a look at the operational performance.

Michel Azibert

Thank you Rodolphe. So to recap total revenues stood at €1.529 billion, up 0.2% at constant currency and perimeter and excluding non-recurring revenues. On a reported basis, revenues were up 3.6%, including the impact of changes in perimeter, notably the disposal of Alterna'TV.

Revenues for the fourth quarter, which you can find in the appendix of the press release, stood at €371.6 million, with a like-for-like change of minus 2.3% year-on-year and of minus 1.5% quarter-on-quarter.

I will focus my comments on the like-for-like change. For the full year, video revenues amounted to €944 million, up 2.3% and represented 64% of the total. Data services were down 6% to €230 million, and represented 16% of revenues. Value-added services saw revenues rise by 4.8% to amount to €108 million and represented 7% of the Group total. Finally, government services generated revenues of €200 million, down 7.5% and representing 13% of the Group total.

Video applications revenues of €944 million reflected the sustained growth in MENA and Sub-Saharan Africa with the entry into service of new capacity on Eutelsat 8 West B in early October 2015 and Eutelsat 36C in mid-February 2016. As well as growth at 16 degrees East in Sub-Saharan Africa and Central Europe and seven degrees east in the Middle East and East Africa. Fransat in France also recorded higher revenues on the back of the transition to high definition.

These positive elements more than offset lower revenues at the Hot Bird position following the non-renewal in recent months of some contracts with service providers, a decline in revenues from professional video and lower revenues in Russia following the renegotiation of certain contracts last year.

Like-for-like fourth quarter revenues were broadly stable quarter-on-quarter, reflecting lower revenues at Fransat following the completion of the HD transition mentioned above, offset by the full quarter impact of Eutelsat 36C. At the end of June 2016, the total number of channels stood at 6342, an increase of 549 channels year-on-year. HDTV penetration continued to increase, representing 13.6% of channels compared to 11.9% a year earlier.

Revenues from data services were down 6% like for like. Excluding the impact of reclassifications to government services and the early termination of the contract for the Ka band capacity on Eutelsat 3B, revenues of data services were broadly stable. Higher volumes, mainly in the Americas on Eutelsat 65 West A and Eutelsat 115 West B, offset the effect of the highly competitive environment for this application in all geographies. Fourth quarter revenues were up by 8.1% quarter on quarter, reflecting the entry into service in May of the fully sold Ka band payload on Eutelsat 65 West A.

Value added services revenue grew 4.8% on a like for like basis to €107.8 million. On KA SAT 181,000 terminals were activated at the end of June 2016, compared with 185,000 at the end of March 2016 and at the end of June 2015. This continued to reflect the high loading of certain beams in markets like France and the UK as well as the rationalization of their customer base by some distributors. ARPU trends remained well oriented, notably thanks to proactive yield management underpinning revenues and a solid performance in B2B. Quarter on quarter, revenues rose by 8.3% like for like, reflecting the positive seasonal effect of the maritime activity.

Revenues from government services were down 7.5% like for like to €200 million. Excluding the reclassifications from data services mentioned previously, the decline would have been 12%. It reflected the early termination of a contract with a distributor in the first quarter of fiscal year 2016, as well as the impact of lower renewals with the U.S. Department of Defense in the last 12 months, which were not fully offset by new business. Fourth quarter revenues stood at €44 million, down by 9.5% quarter on quarter.

At the end of June 2016, the backlog stood at €5.6 billion, down 9.5% year on year and by 4.6% on March 31, 2016. Contracts signed during the year included the renewal of capacity with Russian customers at 36 degrees East, the renewal and expansion of capacity with the European Broadcasting Union, the EBU, at several orbital positions and several new contracts, notably at 7 to 8 degrees West and at Eutelsat Americas.

This positive impact was offset by backlog consumption as well as the early termination of the contract for the Ka band capacity on Eutelsat 3B in December and of a contract in government services in the first quarter. The backlog was equivalent to 3.7 times 2015, 2016 revenues with 85% represented by video confirming it as our core business. The number of operational transponders stood at 1328 at the end of June 2016, up 43 quarter on quarter, mainly reflecting the entry into service of Eutelsat 65 West A in May 2016. Year on year the increase in transponders by 160 units also reflected the start of operations for Eutelsat 8 West B, 115 West B, 36C and 9B.

The fill rate stood at 70.9% compared to 72.3% at the end of March and 78.7% a year earlier, mostly reflecting the entry into service of this new capacity. The increase in the number of leased transponders in the fourth quarter reflected several contracts, notably the renewal expansion of capacity contracted by the EBU for professional video as well as continued ramp up of Eutelsat 8 West B and of Eutelsat Americas fleet. Both the backlog and the fill rate already reflect the full effect of the rationalization undertaken at the Hot Bird position. Rodolphe will come back to this later.

Now, over to Antoine for the financial performance.

Antoine Castarede

Thank you Michel. Starting with a look at the profitability, Group EBITDA amounted to €1165 million, up 2.9%. The EBITDA margin stood at 76.2% compared to 76.7% last year. This mainly reflected a higher level of bad debt related notably to the contract on the Ka-band payload of Eutelsat 3B terminated in December 2015.

Group share of net income stood at €348 million, down 1.9%. The net margin stood at 22.8%. This reflected mainly the rise in EBITDA, an increase in the depreciation charge of €34 million due principally to the impact of the new capacity, the financial results of minus €123 million versus minus €116 million in fiscal year 2015. This reflected on the one hand the positive impact of the refinancing of the term loan in April 2015 plus €23 million and on the other hand the variation in foreign exchange gain and loss minus €31 million. The effective tax rate stood at 37.1% compared to 35.6% in fiscal year 2015, reflecting lower level of tax loss carry forwards activated in Latin America.

Net cash flow from operating activity stood at €896 million, resulting from an EBITDA of €1165 million, tax paid of €192 million, a negative variation in working capital for €77 million. Cash CapEx amounted to €514 million due to the phasing of the various satellite programs. It included the value of the payment done in fiscal year 2016 to RSCC in respect of lease of Eutelsat 36C amounting to €95 million, which remains blocked due to the ongoing Yukos legal proceeding. Net interest paid stood at €134 million. As a result, discretionary free cash flow stood at €247 million.

At June 30, 2016, net debt stood at €4007 million versus €3841 million at June 30, 2015. Discretionary free cash flow more than covered the dividend payment of €110 million. However, financial leases increased by €294 million, reflecting mainly the entry into service of Eutelsat 36C in February 2016.

Eutelsat continued to optimize its sources of funding through the issuance of a €500 million five year bond in June 2016 bearing a 1.125% coupon. Together with the other sources of cash on the balance sheet, this will enable Eutelsat to redeem the €850 million outstanding bonds bearing a 4.125% coupon in March 2017. Elsewhere, a swap lock has been negotiated in anticipation of the January 2019 €800 million bond maturity. The net debt to EBITDA ratio stood at 3.4 times, stable on June 30, 2015. The average cost of debt was 3.5% after hedging, down from 3.8% in fiscal year 2015. The weighted average maturity of the Group debt stood at 3.4 years, down from 4.1 years at June 30, 2015. Liquidity remains strong with undrawn credit lines of €650 million on cash of €304 million on the top of the €850 million, which will be used for the redemption at the maturity of the March 2017 bond.

Now I will hand you back to Rodolphe for a word on the outlook.

Rodolphe Belmer

First, a quick reminder of the dynamics in our three core applications that we presented to you at the strategic update on June 27. Video, we have sustained growth in emerging markets, broad stability in Europe and overall, low single digit growth in the future years. Data services, we see a global demand growing in volume, but large HTS systems bring in overcapacity and there is an ongoing pricing pressure, negative pricing pressure, and we estimate that price in this vertical will continue to decline over the next five years. But we have capacity to sell a lot of it and this will enable us to mitigate the negative effects of downward price. And overall, we estimate that we will have a low single digit decline in this vertical.

Government services, we see a stabilizing demand from the U.S. DoD, albeit at lower prices, but we believe that the worst is behind us in this vertical. We see a slower migration to HTS than in the data services applications and we also believe there are new opportunities coming in Europe, Asia and the Middle East and also in the non military applications in this segment. And overall, we believe that this vertical will show a broad stability, maybe a bit better. Taken together, it implies stable to slightly growing demand in our core business in the next few years.

At the same time, we reminded you that our business is not devoid of growth opportunities. In the medium term we believe that there is growth opportunities in video. Video, as is our core business, it represents almost two thirds of our revenues. We believe that two technologies will terminate the distribution of video in the world in the next few years and that will be satellite, together with IPTV. These two technologies are growing in parallel.

We also see a very significant opportunity, if we are able to enhance the satellite value proposition by offering IP-like viewer experience. And lastly, we see a trend of outsourcing of services by broadcasters, the outsourcing of technological operations by broadcasters, which will create additional sources of demand.

Next, we believe that all these underlying elements will enable us to extract more value from our capacity. Longer term, we see a massive growth opportunity in connectivity, growth both in Aero mobility and in land connectivity. But technology developments are still necessary before the fixed satellite industry can address those needs on a mass-market basis.

Based on these two scenarios, on these two horizons, we have adapted our strategy and we are adopting measures along two main strategic steps. Step 1, we take firm measures to optimize our existing assets, in order to maximize the free cash flow generation and the shareholder value of our business, when the revenue prospects are stable. Step 2, we are preparing for a return to growth medium term, as I told, by building on the core video business and longer term, which is in four to five years, we prepare for the potentially very significant potential in connectivity.

I mention step 2 just to give you a view of our long-term roadmap for the business, but clearly in the immediate term and for the next two to three years, our key priority, our key focus, will be very much on generating strong and significantly growing cash flow during a period of low growth for France division. To this end, we are taking financial and operational measures, as well as actions, to optimize revenues in our core verticals.

First, a view on the financial and operational measures, I will not repeat the detail, but in total we will generate CapEx savings of above €80 million per annum, as of fiscal year 2017, which has started a few days ago. We will also have savings in financial cost of around €30 million from March 2017, rising to €50 million from January 2019.

And also a new point, and I draw your attention to this third-column, which shows the fact that we have started the optimization of our asset portfolio, where since June 27 we have announced an additional development with the exercise of the put option initiating the sales process for our 34% stake in Hispasat.

We are also taking measures to maximize our top line and we believe that we have strong operational leverages to stimulate our top line that I am describing on this slide. First, our core and historical verticals, video, we will announce the value of our hotspot by leveraging our pricing power. And we will target growth in emerging markets, where we see continuing growth in demand, in volume and in value. And we will develop, as I said previously, the value proposition of satellite versus IPTV.

Data, it's a more difficult context, since we see a mounting competitive pressure in pricing in coming years. But we have lots of free capacity in this vertical and will be able to follow the price war which was triggered in this vertical without incremental investment. And this will enable us to mitigate the negative effect of price by adding more volume without incremental CapEx investment, as I said previously.

Government services, stable demand from the U.S. DoD and we think that there is incremental opportunities in other geographies and also in the non military segment of the government services. And also we have the Eutelsat Quantum satellite coming, which we think will bring a very significant source of differentiation for Eutelsat in this vertical.

On the two new, the two adjacent verticals, which are broadband and mobility, the two verticals which are related to connectivity, we are now in the phase of ramping up our broadband projects in Africa and in Russia. We're opening up our broadband services in Russia this month and we think that there are further options to develop in Europe, and we'll come to that later on, with notably the joint venture we are negotiating with ViaSat. And our key priority is to leverage our existing assets, KA SAT, the Russian broadband and the African broadband, to prepare for scalability in the longer term, when the new generation of satellite is coming by 2020, 2021.

Mobility, today it's a niche market, we think it's potentially a very significant market in the next decade. We need to prepare for that and again, it will come with the new generation of satellite by 2020, 2021. And we are preparing by leveraging our current assets, we are preparing the commercial and the distribution models to capture this growth in the medium term. A few words on our hotspot and on Hot Bird more specifically, some highlights on the situation of that Hot Bird position. As you recall, in June we identified a number of transponder opportunities, we believe four to five transponders, which were in the hands of distributors. And those transponders were empty. We said at the time we would negotiate the take back of this capacity in order to enhance our control of our network in Europe.

And I'm pleased to report today that this measure, the so called purge of Hot Bird, has been negotiated and agreed upon by our distributors and is now fully completed as of July 1. And as Michel Azibert said earlier, the impact of this action is already fully reflected in the fill rate and the backlog as reported. It means that we can begin fiscal year '17 with a clean slate on Hot Bird, to pursue actions to enhance the value of this key hotspot, notably by stimulating HD and ultra-HD take-up, especially among FTA channels, and begin to streamline the distribution by using fewer and more specialized distributors. So what does all this mean for our outlook for the next three years? The financial outlook communicated on June 27 is fully, entirely confirmed. Revenues for fiscal year 2016, 2017 at constant currency and perimeter and excluding nonrecurring revenues, are expected in the range of minus 3% to minus 1%. This is at constant currency and perimeter.

And in fiscal year 2017, 2018, these revenues are expected to be broadly flat, with a return to modest growth in fiscal year '18, '19. For each of fiscal year '17, '18 and '19, the EBITDA margin is expected to remain above 75%. Capital expenditure will stand at an average of €420 million per annum for the period July '16 to June '19. Discretionary free cash flow, which is a new metric, a new KPI that we'll communicate, is expected to see three year CAGR in excess of 10%, with fiscal year 2016 as the base year.

The Group is committed to mentioning a sound financial structure to support its investment credit rating and aims at a net debt to EBITDA ratio below 3.3 times. We also commit to serving -- and this is new, again concerning what we said on June 27, the new policy of the Company -- we also commit to serving a stable to progressive dividend to shareholders during the three years of this guidance.

So to sum up, our priority is to deliver stabilization of revenues in fiscal year '17, '18, with return to growth in '18, '19. At the same time, we will be able to maintain the EBITDA margin above 75%. CapEx reduction, OpEx containment, balance sheet optimization, will enable a steadily growing cash flow. This will enable us to fund ongoing deleveraging in line with our commitment to investment grade rating and targeted investments in future growth. And also and very importantly, to deliver a stable to progressing dividend.

Thank you for your attention, ladies and gentlemen, and we are now ready to take your questions.

Question-and-Answer Session


[Operator Instruction] We will take our first question from Andrew De Gasperi from Macquarie. Please go ahead.

Andrew De Gasperi

Yes, good morning, thanks for taking my questions. First, I was wondering, can you give us an update on what's going on, on the joint venture up to with ViaSat and when do you think that might potentially be wrapped up? And secondly, can you tell us also timing around the Hispasat cash proceeds? Is this something that we should expect maybe in a year's time, or potentially sooner than that? And if you could also let us know, what you plan to do with that, thank you.

Rodolphe Belmer

Thank you, Andrew. On ViaSat, discussions on the joint venture are still ongoing. We aim at signing this joint venture in the next few months and that's all what I can say for the moment. It's a complex discussion which takes time, there are technological and also administrative points that need to be sorted out. It's just a matter of time, in our view. On Hispasat, we don't have a clear view on the calendar, even though it's very clear in the shareholder agreement we have with our partners in Hispasat. But for the moment, we cannot comment on specific dates when we receive the payments from Abertis. We have initiated, as to put process and together with the put process comes a process of valuation of the company, which takes some time. The duration of the process as described and signed in the shareholder agreements last around three months.

Andrew De Gasperi

Great, thank you.


Thank you. We will now take the next question from David Cerdan from Kepler. Please go ahead.

David Cerdan

Yes, good morning, gentlemen, I have some questions related to [Indiscernible] and your dividends. The first one is I'm correct, you can exercise your option from July 2017, so is it correct or not? And second question, if you do proceed, what could you do with this proceed? Third question is regarding your dividend policy. Are you committed in paying a dividend for the next year only, cash only for the next year? Is this something on which you could comment on it? And regarding your dividend policy, is it dependent on the disposal in Hispasat? And the same question for the refinancing, is it dependent from the disposal in Hispasat? Thank you.

Rodolphe Belmer

Thank you, David. On Hispasat, the situation is very clear. We have a shareholder agreement with our partner that is in Hispasat with, as you mentioned very well, a lockup period until July 2017. But we have the right to exercise the put every year as of July 2016, it's very explicit in our agreement and this is a very clearly an explicit exception to the lockup period, meaning that we are completely entitled to exercise our put as of this July, as we did and have we have communicated to you.

Concerning the disposal of Hispasat and how instrumental it is to pay dividends, to answer your question, there is absolutely no relationship between our dividend policy and our divestiture plan. Our dividends will be paid by the discretionary free cash flow generated by the Company and our discretionary free cash flow is significant enough, and will be significant enough in the coming years, to serve the level of dividends we are committing on. We will pay this dividend in cash, well next year, I know very well that you know the answer. We cannot comment on that because it's not our decision; it's the AGM decision. But as we've said, we'll be very focused and we are very determined to have a very generous dividend policy, and that's the only element I can comment on for the moment. But it shows an inclination of the management obviously.

David Cerdan

And what could you do with the proceeds of Hispasat?

Rodolphe Belmer

Well we have not communicated on that point for the moment and will communicate when we have the actual proceeds and the precise amount we will get from this divestment.

David Cerdan

Okay, thank you.


Thank you. We will now take the next question from Paul Sidney from Credit Suisse. Please go ahead.

Paul Sidney

Yes, thank you very much, just three questions please. Firstly, could you just give us a bit more detail on the first commercial UHD channels that you've launched on the fleet, which broadcasters, which geography, what type of content?

And the second question, just on data services. You've clearly indicated that you expect HTS capacity to lead to price declines for many years going forward, but what do you actually expect in terms of revenue end user ARPU effectively? Would you see volume compensating for the price per bit coming down?

Just lastly, three months ago you highlighted that the Latin American outlook was deteriorating, partly due to one of your key competitors with new capacity in that area acting irrationally. I was just wondering, is that still the case? Are you still seeing that competitor acting irrationally? Thanks.

Rodolphe Belmer

Well, I will answer, Paul, part of your question and then I will hand over to Michel Azibert for the other part. On data services, we need to be very clear so that there is no confusion. When we say data, we don't say broadband. For us data means the service to the corporate networks. It's completely different from broadband and mobility services, which are put in other verticals in our Company. And meaning that in the broadband vertical, we see an increase in ARPU and no decrease in price.

e have been able, by the more, I would say, vigorous yield management of our capacity on KA SAT, in our broadband vertical, we have been able to extract more ARPU for our subscribers. And in broadband, we don't see any downward pressure on price and we see a very strong appetite from the market and coming from the digital device. Now, when it comes to data, which means serving the needs of the big corporate networks, in this vertical there is a decline in price. We estimate, we forecast that this downward pressure will continue in the foreseeable future, and in our five year plan we have computed a steady decline in price in this vertical.

What I said as a comment is that since we have a very significant free capacity to serve this vertical, because we have had many launches over the past 12 to 18 months, we will be able to bring in more volume without incremental investment, which will able to mitigate the negative effect of this downward price pressure. And that's why for this very specific segment, which represents 16% only of our revenue now, we see low single digit growth year on year, which is lower than our anticipation in terms of price decline. We think that price decline will be on a two digit decline, but in terms of value this vertical will decline less than that.

In LatAm it's true that there is in the data segment again, serving corporate networks, there is a very severe price competition in this geography on the back of significant overcapacity. We resist quite well to this pressure. The decline in price we are experiencing is one single digit decline overall on our data business in Latin America and we have growth in Latin America. It's true that this growth is lower than what we had in the past in our business plan and is lower than was planned for the guidance of the Company. But our Latin American business is growing slightly, but it's continued to grow, even so there is a strong competition in this region. And on the UHD channel, maybe I'll turn to Michel.

Michel Azibert

Yes, thank you, Rodolphe. Currently we have in fact three ultra HD channels on our fleet fully operational, two of them on the Tricolor bouquet in Russia, one of them on Hot Bird. In fact, on Hot Bird we are planning to put together a bouquet of HD channels, so we're talking to different channels and partners to put that together. It will be a mix of channels in the field of documentary, travel, culture, extreme sports, fashion, lifestyle, most of them European but not all of them European.

Also we anticipate that at some point in time, of course, in the key geographies where we are present, with Hot Bird, for instance, in Poland, with the nc+ and Polsat, or in Italy with Sky or even with Rai, we will see the development of new ultra-HD channels and that fits within the general, as I say, momentum that we see now with the adoption of the high dynamic range and a couple of big groups, big players like the Sky group and probably CANAL+ moving into ultra-HD. So we are confident and we believe that the ramp up in terms of number of channels and number of transponders will probably be a little bit faster than what was originally anticipated.

Paul Sidney

Great, thank you very much.


Thank you. We will now take the next question from Laurie Davison from Deutsche Bank. Please go ahead.

Laurie Davison

The first question is just on leverage, 3.4 times is above your target level, I'm just wondering how comfortable you are with that and if there are any issues with the Hispasat disposal, do you need to rethink that dividend policy, because that invested.

And the second question is could you update us on where you think investment grade limit currently lies?

Third question is your price increase target for Hot Bird. You're aiming for price increases here as part of your return to growth, can you just update us on when the major contract renewals come up and so the trigger points for you to test that? Thank you.

Rodolphe Belmer

Thank you, Laurie. On our leverage, which is actually 3.4 times, it's true that our long-term target is 3.3 and we are pretty confident that we can come back to this level in the short run. And we believe that this leverage of 3.4, even though it's slightly above our long-term objective, is not of an issue, we are able to maintain our investment grade rating, even with this leverage.

In terms of dividend, again there is no correlation, there is absolutely no link between the disposal of Hispasat and our dividend policy. We will be able to deliver on our due dividend policy, which is stable to progressive dividend independently of what is happening on Hispasat. We are pretty convinced we'll be able to dispose of our stake in Hispasat. It's true that it's dependent on the reaction of Abertis and their compliance with our shareholder agreement, it's true. But even though it takes time, it will not prevent us at all from delivering on our dividend policy and I want to be very clear on that. The discretionary free cash flow of the Company will be sufficient this year and the following years to serve the dividend we are committing on.

As I said, we have set as an objective and we will report on that to grow our discretionary cash flow on average by more than 10% year on year in the next three years, which is by far enough to serve a progressive dividend. In terms of our contract renewal on Hot Bird, next year will be an average year, meaning not many transponders coming to renewal. The year after will be a more significant year in terms of renewal at Hot Bird.

Rodolphe Belmer

Have I covered all your points, sorry?

Laurie Davison

Yes, there was just one follow up, which was can you just remind us of where you think investment grade currently sits? And a quick follow up, if the ECB were to stop their bond buying program, what do you think your effective financing rate would be? Thank you.

Rodolphe Belmer

Maybe I will turn to Antoine Castarede to answer on that question.

Antoine Castarede

As, with S&P we are triple B, so one notch above the level for remaining investment grade. With Moody's we're Ba3, so at the investment grade level we have good discussion on they inform about of course our cash dividends. So we don't see any problem. Regarding the ECB, they actually bought some of the Intelsat bonds on the secondary market, but I don't see the effect of that program will have to investment grade.

Laurie Davison

All right, thank you.


Thank you, we will now take the next question from Eric Beaudet from Natixis. Please go ahead.

Eric Beaudet

Yes, hi guys, two questions on HTS actually. The first one is on the contract you lost on our satellite, which is your KA on your Eutelsat 3B satellite. I was wondering, as this is quite a recent capacity, why did you lose the contract? Is it a matter of pricing pressure, or is it a matter of geography? I had a hard time understanding how come already HTS can be declining and some orbital position. My second question regards your KA SAT, it's now been a couple of quarters that your beams are full over France and the UK and that therefore you've stopped growing because most of your free capacity is in Eastern Europe. What do you expect to do over the couple of two years to address that problem and maybe start growing again on KA SAT? Thank you.

Rodolphe Belmer

Thank you, Eric. The situation we had on E3B with the loss of this contract that we reported is purely, I would say, contractual and dependent on the economic health of our clients, which actually was unable to pay for this and that's why we had to suppress the contract we had with them. And the situation is that we cannot really announce it today, but we believe that in the very short run we will have been able to resell all of this capacity that we had lost with this situation. It's not a matter of demand for Ka band, which we see very solid and growing, it was just a very specific contractual issue with a specific client which was not able to find a profitable business model, and it was a Brazilian client, very specific.

On KA-SAT or KA-SAT satellite in Europe, it's true that it's full in the Western part of Europe and we are now developing plans to stimulate demand in the Eastern part of Europe, in which we have to develop specific products for consumers and specific commercial distribution models to the consumers. And we are just in the process of reviewing that to re-boost our distribution in Eastern Europe.

Eric Beaudet

Thank you.


Thank you. We will now take the next question from Robert Berg from Berenberg. Please go ahead.

Robert Berg

Two or three questions from me, probably all for Antoine actually. The first is on the lease payment, the 95 million to RSCC for Eutelsat 36C. You never really discussed the payment terms of this contract and maybe you still won't, but in your CapEx guidance should we assume it is 100 million per annum over the next three years, which seems quite high? Or was this a front end loaded payment? That's the first question.

The second one is in regard to the revenues that you book from SES as part of the agreement around 28 degrees. I think I remember you saying these will continue until at least the end of fiscal year '16, which we've had and I'm expecting these revenues to drop out from some point '17. Can you remind us how much of these revenues you have in your guidance for fiscal year '17 and '18 onwards?

And just sticking on other revenues, what one-off revenues, now you've finalized the negotiations for Hot Bird, should we see in relation to termination of contracts in the other revenues line? Thanks.

Antoine Castarede

Yes, Robert, on the lease, actually to be very clear, after the contract there was a payment this year and we mentioned actually €95 million that we didn't pay because of the Yukos deal, so the Yukos basically litigation, say that actually any money due to a Russian entity actually could be seized by the former Yukos shareholder. Of course, RSCC is not a Russian entity, so there is no litigation there, but we didn't take the risk of paying, doing this litigation. However, it's part of the operational, so the 36C was put in operation, so we put that 95 million in our cash CapEx, because operationally we were supposed to pay it.

Going forward, we have also some more leases to pay, because it's a long-term lease arrangement, but it will be -- we're not going to disclose specifically the numbers, but it's much lower than the 95 million. But we're not going to give the specific, but it's much lower. And of course, it will be then for the cash CapEx for the year coming. But the net debt -- the impact on the debt has been fully reflected, of course, on all the lease payments basically, decrease this lease net debt.

Rodolphe Belmer

But all of this lease is included in our guidance and you shouldn't take into consideration 95 million per year. It will be much less than that on the long run, it's around €40 million per year in the medium term.

Robert Berg

Okay, thank you.

Rodolphe Belmer

And for SES, it's true that the settlement that we found with SES on the 28 position is coming to an end by the end of this [Indiscernible] year which will be in the middle of our next fiscal year. But this was taken into consideration fully in our revenue objective, in our revenue guidance, which means you shouldn't expect any negative impact, because it's not [Indiscernible], it's totally forecast and planned. And for the other revenue, it's true that we had some termination fees that are derived from our renegotiation on what we call the purge of Hot Bird, that we will recognize this fiscal year. I'm not sure we're going to give the actual figure, but it's a relatively small figure in comparison to the magnitude of the purge.

Robert Berg

Perfect, thanks guys.


Thank you. [Operator Instructions] We will now take the next question from Ben Heelan from Bank of America. Please go ahead.

Ben Heelan

Hi, yes, thank you. I just wanted to ask a quick follow up on the comments you made on mobility around investing in satellites, for mobility around 2021. Is there a risk that you'll be late to the party at the end of the decade with the moves that Inmarsat and ViaSat and SES are all making into the mobility market? Thank you.

Rodolphe Belmer

Thank you, Ben, it's a good question. First, we already have some assets which are very good to serve the mobility needs. There is KA SAT Europe, there is 172 over the Pacific. There is East 3B that we have just mentioned previously. All of these satellites, they have a KA payload which can serve and which sometimes already serves the need for bringing connectivity in mobility situation and more specifically, for aero nautical needs. What we believe is that with the advent of the new generation of satellite, which we call VHTS, in 2020, 2021, at that moment we are able to deliver internet service which will be compatible with the usage of internet of today.

Because today, people they want Netflix, they want YouTube, they want Facebook, they want video consumption through the internet, which means that we need to bring in something like 50 kilo to one meg per user to enable this kind of usage. And this is only possible with the new generation of satellites, which can produce much more capacity. Serving the mass market from satellite means producing lots of capacity and that's when the new satellites are coming which are able to deliver this kind of capacity, that we will be able to serve the mass market with a compelling consumer benefit.

And also at a price which is consistent with the kind of price consumers will accept to pay. And that's the moment where we see that satellite will really be perceived as a solution to serve the needs of the mass market, meaning consuming video over the internet in mobility situation.

And it's true also for the [indiscernible] for the [indiscernible] usage to really bridge the digital divide with accompanying consumer solution, you need to bring in a fiber-like benefit through satellite at a fiber-like pricing to the consumer, to the subscriber.

Benjamin Heelan

Brilliant, thank you.


Thank you. We will now take a follow-up question from Laurie Davison from Deutsche Bank. Please go ahead.

Laurie Davison

All my questions have been answered, thank you.


There are no further questions in the queue.

Rodolphe Belmer

Well thank you to all of you for attending this meeting and have a good summer.


That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.

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