Edited Transcript of PLY.WA earnings conference call or presentation 27-Feb-20 8:00am GMT

In the meantime, we’ve seen our new mobile convergence services growing in Q4. We now have 32,000 active customers for OTT PLAY NOW TV box service that we regularly enrich with new programs. Watching time per user continues growing with the base at 120 minutes a day per viewer. Furthermore, our PLAY NOW TV box service is also available via Play Home Box TV offering. We also extend our mobile convergence more-for-more strategy to the B2B segment with our successful tariff Biznes Box Pro, a solution for SME offering richer data transmission packages, combined with optional smartphones routers and virtual SIM cards management option.

Finally, we continue being successful with our phone-related services such as PLAY 360 and PLAY 360 Max, an all-in package of smartphone repair and value-added services or with our screen protection insurance to which 1 million customers have subscribed so far.

Slide 8, we are preparing for 5G, and we are ready. All in all, the coefficient network gives us the opportunity to upgrade it to 5G Ready at a marginal cost. In 2019, we decided to accelerate this upgrade. As a result, at the end of December, we had 37% of our network sites upgraded to 5G Ready, providing half of the Polish population with Internet speed of up to 0.9 gigabit per second. In December 2019, we made Tri-City: Gdansk, Sopot, Gdynia, the first 5G cities in Poland, thanks to more than 100 5G base stations deployed on a 2.1 gigahertz band with a dynamic frequency sharing system. This 5G upgrade was made possible thanks to the real-time network synchronization of our network, a prerequisite for 5G, which has now been implemented in 100% of our network sites. Last but not least, we continued rolling out our own network at an accelerated pace, adding 865 new sites to our network since the beginning of 2019, and covering close to 99% of the population with our own LTE network.

Slide 9 provides you more detailed figures about our network rollouts and our fast 5G Ready upgrade. We had 7,868 sites operational at the end of December, out of which 2,900 upgraded to 5G Ready.

Slide 10, our progress with national roaming switch off is in line with the full switch off target at the end of 2021. As already mentioned, thanks to this fast rollout for our all-national network, we started switching off national roaming in 2019. We have partly switched off national roaming in 28 cities, representing 20% of the population. 66% of total traffic was transferred to Play and the rest were to temporarily remaining national roaming partners.

In addition, we have also switched off national roaming entirely in 4 other cities, covering 3% of the population. In these cases, it’s 100% of traffic was transferred to Play network. Consequence — consequently, thanks to partial or total switch off in close to 25% of the population, the overall national roaming traffic decreased year-on-year by 34% for data and 41% for voice, generating a significant OpEx savings for Play.

Finally, we terminated our national roaming with Polkomtel on 31st of December 2019. With a visible customer experience impact, 55% of data traffic went to Play own network.

Slide 11, we continue making further progress in digital. Our Play24 self-care app, which is ranked best telco self-care in Poland — app in Poland, is a flagship of Play digital experience and leadership. Play24 is now used by close to 5 million active users, which is 14% more than in Q3 2019. We continue upgrading permanent rich content recently by integrating natively a large range of payment solutions or implementing new loyalty features, such as the successful Shake to Play. Our digital focus allows us to accelerate the automation of our business processes and progress on all our digital KPIs. For examples, in Q4 2019, 5% of B2B — B2C retentions were digital, which is almost twice the ratio we had in Q4 2018; 80% of transaction in costs were fully digital, thanks to the introduction of e-signature; and 66% of invoices with our B2B partners were electronic.

Slide 12, the evolution of Play customer base reflects our continuous focus on contract subscribers. In 2019, Play reconfirmed its position as Poland’s leading mobile convergence operator in a very competitive and saturating mobile market. Our reported total base reached 15.3 million customers at the end of the year, out of which 129,000 only are machine-to-machine SIMs, less than 1%. Our contract base grew up by 125,000, plus 1.3% year-on-year, reaching 10 million customers, including 9.3 million active contract subscribers. The minus 1.8% year-on-year reduction of our active prepaid consumer base is partly due to migration to contracts.

Slide 13, our value strategy translates into the increase in value of our existing customer base. Thanks to our continuous focus on customer base value, we continue observing accelerated development in usage, which translated again in year-on-year ARPU growth last year. Play blended ARPU increased by plus 1.5%, up to PLN 32.8 in 2019. Contract ARPU grew up to PLN 37.7 in 2019, while contract churn slightly decreased to 0.75% in the same period. The share of bundled SIM customers slightly decreased due to a change in reporting of mobile Internet vendors.

Slide 14, Play delivered all-time best performance across all financial metrics in 2019. As already mentioned, our full year adjusted EBITDA and free cash flow to equity beat the record high levels in 2019. Full year operating revenue is up by 3% year-on-year, exceeding PLN 7 billion and driven by 5.4% increase in usage revenue. Full year adjusted EBITDA increased by 12.8% year-on-year to PLN 2.436 billion on the backdrop of reduced national and international roaming costs, lower acquisition costs, partly offset by higher network maintenance, payroll and marketing costs.

EBITDA margin reached 34.6%. Net profit is up by 16.4% year-on-year driven by higher adjusted EBITDA, and free cash flow to equity amounted PLN 929 million, up by 13.8% year-on-year, fueled by adjusted EBITDA increase despite higher cash CapEx and taxes.

Slide 15, Play Q4 2018 — 2019 results were stable compared to the full year trend. The net revenue grew year-on-year by 5.6%, offset by sales of goods and other revenues. Adjusted EBITDA increased year-on-year by 6.5%, mainly thanks to reduced national roaming costs. Net profit went down by 17.7% year-on-year due to higher income tax charge. And free cash flow to equity decreased by a little bit more than 20% year-on-year, mainly due to decrease in payables.

Slide 16, Play overachieved its guidance despite 2 consecutive upward revisions. Our 2019 performance is fully in line with our 2019-2022 strategic ambition. To compare with our initial and upgraded guidance, which was plus 2.5%, our 2019 revenue grew by 2.9% year-on-year, up to more than PLN 7 billion, with usage revenue growing by plus 5.4% year-on-year. Our adjusted EBITDA reached PLN 2.436 billion, meeting our upgraded guidance of above PLN 2.4 billion. Cash CapEx of PLN 848 million matches our upgraded guidance as we took the decision in Q3 2019 to accelerate the upgrade of our network to 5G Ready.

Our PLN 929 million free cash flow to equity meets our upgraded guidance of above PLN 900 million. And finally, consistently with our previously communicated guidelines, we are happy to confirm that the group’s intention is to distribute in 2020 between 40% and 50% of the free cash flow to equity generated in 2019, subject to the decision of the Board of Directors of Play Communications S.A. We expect the process to be similar as last year.

So now I have the pleasure to hand over to Holger Püchert, Play’s CFO, who will present to you our full year and Q4 2019 financial performance in more details.

——————————————————————————–

Holger Puchert, Play Communications S.A. – CFO & Member of Management Board [4]

——————————————————————————–

Thank you, Jean-Marc. This is Holger Püchert. Let me talk in more detail about our excellent 2019 financial figures. And let’s look to Page 18.

We increased our revenue by 2.9% year-on-year to more than PLN 7 billion, which you can see on the left-hand side of this chart. Major drivers have been our usage revenue, up by PLN 202 million and also our interconnect revenue.

Let’s look to the adjusted EBITDA on Page 19. Our adjusted EBITDA reached PLN 2.436 billion with an EBITDA margin of 34.6% for the entire year. Major driver for EBITDA growth had been service revenue impacts and secondly, lower roaming costs, here in both areas, national and international roaming costs. Our adjusted EBITDA grew by 12.8% on a year-on-year comparison.

Let’s look to the cash CapEx on Page 20. Our cash CapEx grew to PLN 848 million or 12% of our revenue. Due to the excellent strong cash flows we had in 2019, we decided deliberately to accelerate our 5G Ready investment, and this is reflected in this cash CapEx figure. We reached meanwhile a pop coverage of 98.7%. We have at the end of 2019, close to 7,900 sites. As planned, we could reduce our national roaming costs by our accelerated network [roll-ups].

As you know, we acquired in 2019 an affiliate, the 3S Group. And on Page 21, we summarize some highlights of this acquisition. So the acquisition was done in 2019, our first consolidation as of 1st of September. We acquired a company being a B2B business, optical fiber network, around 4,000 kilometers and data center clusters with 6 objects or 2,700 — around 2,700 square meters of net floor space. 3S Group is serving 2,800 business clients.

On the right side of the chart, you see the impact after first consolidation of the group on the PCSA group financial statement. So revenue contribution around PLN 30 million to adjusted EBITDA PLN 10 million. The balance sheet increases after PPA by PLN 475 million. We are — a goodwill is recognized with PLN 191 million.

On the next chart, you’ll see the summary of our financials, and Jean-Marc and myself already talked about it. So in the green boxes, again to mention, our service revenue grew by 4.2%, up to PLN 5.296 billion. Our national roaming costs decreased significantly as well as our international roaming costs reflected and other service costs, including international roaming and content. Our adjusted EBITDA grew by 12.8%, and we could reduce our financing cost.

Let me also come to a comparison Q4 2019 to Q4 2018. Here, you will see that it’s — the line G&A and other increased, and this is due to direct that we had higher spending on A&P in the — especially in the fourth quarter of 2019. If you compare fourth quarter of 2019 to third quarter of 2019, there’s also as major effect to mention for higher G&A cost, especially marketing spend, but also higher debt to expected lower revenue from sales of handsets in the future.

I would like to come now to the free cash flow to equity, which is fueled by our adjusted EBITDA, on Page 23. As our adjusted EBITDA increased by 13%, we had a significant positive effect on our free-cash-flow to equity. We talked about — already about the total cash capital expenditures, which have been higher by the deliberate decision of the company, lower cash interest, higher cash taxes. And altogether, we reached an free-cash-flow to equity of PLN 929 million, 14% up.

Jean-Marc already talked about the deleveraging of the company. Despite the fact that we paid the dividend, acquired 3S Group and had high cash CapEx on our network rollout as well on the 5G Ready initiatives, we could delever the group.

Let’s look to the total net financial debt from September to December, we could reduce by around PLN 150 million. Our total net debt is PLN 6.6 billion. And Jean-Marc already mentioned our leverage. This is 2.72x of last 12 months adjusted EBITDA.

I would like to hand over again to Jean-Marc.

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [5]

——————————————————————————–

Thank you, Holger. So Slide 24, our operating and forward-looking targets for 2020. During the first year of our 2019-2022 mobile-centric strategic plan, we have over delivered upon our promises, demonstrating that the strategy supported by our lean cost structure, efficient operating model and commercial excellence creates value for both Play shareholders and Play customers.

When we look ahead of us, we see a lot of positive trends that comforted our faith in the Play’s future. Market rationalization supports our new mobile convergent HOMEBOX packages. The evolution of the Polish society towards more and more mobility and data consumption translates into an increasing appetite for mobile Internet and TV and video streaming. Advanced mobile network already provide or will provide soon data speed that match or even outperform fixed broadband as already demonstrated by the performance of our own 5G Ready. All these evolutions represent huge opportunities for Play to develop according to its mobile strategic — mobile-centric strategic plan, continue growing our base of value mobile customers, thanks to our unique positioning and progressively expand our leadership through home and family services.

2020 will be all about 5G launch in Poland, and of course, 5G will accelerate Play’s mobile-centric development. We already made Tri-City, the first 5G cities in Poland. And we are ready to launch 5G commercially in 16 additional cities in the coming days, including Warsaw, Wroclaw and Kraków, whose network has been already upgraded. Our 5G Ready layer already covers 50% of the population, and we have started upgrading it to 5G legacy on 2.1 gigahertz frequency. We are waiting for the condition for 5G C-band spectrum auction, and we are ready to purchase 1 block of 80 megahertz in the forthcoming C-band tender, which will be key for further development of 5G coverage and data transmission speeds.

We will fully embrace the 5G opportunity for the benefit of our customers, and our technology mix will help us better serve them during the early stage of 5G in Poland. But this technology mix will also allow us to demonstrate once again that Play is a thoughtful spender of its CapEx as we will upgrade our 5G Ready footprint to 5G 2.1 and the 3.6 gigahertz at the pace of penetration of 5G-compatible handsets in Poland.

Before presenting our guidance 2020, I would like to flag 2 recent significant development of our strategy. First, we believe in the value of our network, it being the most modern and the most cost-efficient in Poland. Play has decided to proceed with the carve-out of its existing and future passive network infrastructure and to establish a dedicated subsidiary, TOWERCO, to host them. Second, in anticipation of the commercial launch of — later this year and according to our plan, I’m pleased to announce that we have already successfully connected our first customers to our fixed broadband service as part of a friendly user trial. Our agreement with Vectra, who just acquired Multimedia, will give us access to an addressable target footprint of around 3.7 million households in Poland.

Slide 25, 2020 guidance. As a reminder, our 2019-2022 strategic ambitions that we presented to investors in December 2018 include: to deliver continuous EBITDA annual growth until 2022; to keep the cash CapEx to revenue in the range of between 11% and 13% until 2020, before declining below 10% by 2022 following the network rollout; to maintain high CapEx conversion compared to European peers; to continue gradually decreasing leverage to 2.5x net debt adjusted EBITDA at year-end 2022; and to distribute to shareholders between 40% and 50% of free cash flow to equity.

Consistently with our 2019-2022 strategic ambition, here is what we expect to deliver in 2020: Between 2% and 3% year-on-year growth on — for revenue, driven by solid usage revenue growth, partly softened by lower increase in handset sales; adjusted EBITDA between PLN 2.5 billion and PLN 2.6 billion driven by growing service margin, partly offset by higher network and payroll OpEx; cash CapEx, firstly, is up between PLN 850 million and PLN 900 million at stable ratio of 12% of revenue with network CapEx rebalanced from radio to fiber backhaul 3S and core 5G, and increasing digitization CapEx; free cash flow to equity above PLN 800 million, impacted year-on-year by temporary increased cash CapEx and significantly higher cash taxes; finally, a dividend equivalent to between 40% and 50% of our free cash flow to equity.

Let me add one last word about Holger Püchert, our CFO since March 2017, who has decided to leave Play for personal reasons to the end of the year 2020. I want to thank Holger for his contributions, including significant milestones such as our IPO in 2017, our PLN 7 billion senior facility agreement in 2018 as well as, of course, Play’s best financial results ever in 2019. Play will appoint a new CFO in due course.

This concludes our presentation of Play Communications S.A. full year and Q4 2019 results. And now Holger, Tomasz and I are ready to take your questions.

——————————————————————————–

Tomasz Pozniak, Play Communications S.A. – IR Director [6]

——————————————————————————–

Thank you, Jean-Marc. Thank you, Holger. So we are now open for your questions. Go ahead.

================================================================================

Questions and Answers

——————————————————————————–

Operator [1]

——————————————————————————–

(Operator Instructions)

Our first question comes from the line of Dominic. I think he’s not yet ready for the question. Our next question comes from the line of Pawel Puchalski.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [2]

——————————————————————————–

Hello, can you hear me?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [3]

——————————————————————————–

Very well. Thank you, Pawel.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [4]

——————————————————————————–

Congratulations on 2019 results. And I’ve got some questions on 2020 and ’22. Let’s start with full year 2020 guidance at free cash flow to equity. You guide for above PLN 800 million. And then when I’m looking — well, free cash flow to equity, originated EBITDA and cash CapEx, and I see growth at EBITDA is over PLN 100 million, more or less. Growth at CapEx is much smaller. Please, could you guide me why your free cash flow to equity is actually down by over PLN 100 million?

——————————————————————————–

Holger Puchert, Play Communications S.A. – CFO & Member of Management Board [5]

——————————————————————————–

This is Holger. I am happy to answer the question. So due to the excellent performance of the company, our net profit before taxes, of course, also increasing as the tax — I have to say the tax base, and we expect a significantly higher cash taxes in 2020. And you have an indication to this. If you look to the tax section of our group financial statements as we are paying always in Q1 the remaining amount — the remaining and balancing amount for the last year, we have to consider for 2019 the further cash taxes to be paid in 2020 and then also the prepayment for 2020. As you have already seen, the free cash flow to equity table that also from the year ’18 to ’19, we had already a significant increase.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [6]

——————————————————————————–

If I may continue, yes, I’ve seen a significant increase, but the increase was in the range of PLN 70 million or PLN 80 million. So even adding another PLN 80 million, well, I’m not adding up to above PLN 800 million. So my question is, do you expect negative working capital in 2020? Because that’s the one position that could, well, make all those numbers matching.

——————————————————————————–

Holger Puchert, Play Communications S.A. – CFO & Member of Management Board [7]

——————————————————————————–

We do not guide on any of the specific line items of the free cash flow to equity. But this is the reason why we guide on the FCFE as accumulated. And I gave you the really overrunning significant reason for this.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [8]

——————————————————————————–

Okay. Let’s come back to your 2019 performance, fourth quarter specifically, because it was a very weak quarter with respect to both handset sales and handset margins. Could you — well, could you tell me what is happening with handset sales and margins in 2020? Shall we expect low margins? And does your adjusted EBITDA forecast includes low margins on handsets or average handset margins? How it was calculated?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [9]

——————————————————————————–

What is your question exactly? I’m not sure I understand.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [10]

——————————————————————————–

In fourth quarter, we had very low handset margin. Was it one-off? Or shall we expect another quarter of low handset margins?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [11]

——————————————————————————–

I believe that usually in Q4, due to the Christmas campaigns, we have a lot of attractive promotions for our customers, not only the new ones, but as well the existing ones, which explains that in Q4 we usually have a lower handset margin than during the other quarter. So no, it’s seasonal, and I would say that it’s a phenomena that happen every year. So for us, nothing special. But of course, the progressive situation of the market and the refocus of all the operators, including Play and Home customers who — to retain them and extend the contract.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [12]

——————————————————————————–

Well, yes, still, your fourth quarter 2019 margin on handsets was exceptionally low, 3% — 3 percentage points down year-on-year. But still, what kind of margins…

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [13]

——————————————————————————–

Sorry to interrupt, but it’s due as well to an evolution of the mix, of course. Because the — now we are at the end of an industrial cycle for handsets, meaning that the price of 4G smartphone, the average 4G smartphone is decreasing. As you know, Poland is still not a very big iPhone market. So that’s as well one of the trend, which is the expansion of the ratio of smartphone-equipped customers to the lower segment, which comes with lower prices and slightly lower margins as well. But it’s a pure commercial trend related to the end-of-year period, and there was, of course, nothing special. And this trend will, of course, not reproduce in all the quarters.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [14]

——————————————————————————–

Okay. So I shall expect a flat margin on handsets in 2020 versus 2019? That’s your core assumption?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [15]

——————————————————————————–

You should expect the same variation of handset margin quarter-by-quarter as we observed in years earlier — in the other years.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [16]

——————————————————————————–

I’m fully aware of deviation quarter-on-quarter. But overall, in — for the whole year, shall I expect the same margin? Or shall I expect weakening margin versus what you reported in 2019?

——————————————————————————–

Holger Puchert, Play Communications S.A. – CFO & Member of Management Board [17]

——————————————————————————–

Let — Pawel, I think Jean-Marc answered on this. And please, exactly, we do not guide on these special figures. We give a guidance what we have presented in the chart, and we explained in detail on revenue development and adjusted EBITDA, but we are not guiding on the special margin lines.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [18]

——————————————————————————–

Okay. There is one more question I would like to…

——————————————————————————–

Holger Puchert, Play Communications S.A. – CFO & Member of Management Board [19]

——————————————————————————–

We will follow, of course, the market. And you see our excellent result despite the fact that our sales of goods margin was a little bit lower in Q4. But Jean-Marc explained all this.

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [20]

——————————————————————————–

And by the way, if I may say, we should look at the market from a broader perspective. Let’s not forget that 5G device will — devices will arrive in Poland starting in Q2 this year, and this will be the beginning of the new cycle. So you have the evolution of the price during each industrial cycle for handsets. And no, we are, of course, observing a trend which is related to the penetration of the lowest segment with low-cost 4G smartphones, and we will start a new cycle with the penetration of the high-end segment with the new 5G handsets in H2 this year, and that’s it.

——————————————————————————–

Pawel Puchalski, Santander Brokerage Poland, Research Division – Head of Equity Research Team [21]

——————————————————————————–

Okay. Last question, if I might. In your 2019-’22 guidance, you are referring to cash CapEx falling to 10%, well, as of 2022. While when you were speaking on cash CapEx, you said that you expect cash CapEx-to-sales ratio declining below 10% after 2021. So which is correct? Is it down to 10% as of 2022 or falling below 10% as of 2022?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [22]

——————————————————————————–

It’s down to 10%. But I need to remind you that in November 2018, when we guided for the — when we presented this plan, we specifically mentioned that the additional 5G CapEx wouldn’t be included. So what we said in 2019 is that we would go down at — to 10% of sales after 2021, meaning starting in 2022, but without computing at this time the impact of 5G investment, which will change a little bit the picture. But once again, we will be less impacted by the 5G investment because of the preparation of the 5G layer. But anyhow, there will be an impact as well.

——————————————————————————–

Operator [23]

——————————————————————————–

(Operator Instructions) Our next question comes from the line of Anna [Kazarian].

——————————————————————————–

Anna Kazarian, – Analyst [24]

——————————————————————————–

My first question is about the surcharges for roaming. So what are your estimates of potential negative effects from cancellation of the surcharges for roaming? And do you already take it into account in your guidance for 2020? And my second question is about 5G. While you are focusing more on upgrading your network to 5G, do you expect any positive impact from these upgrades on your revenue side, maybe on EBITDA? And how soon do you expect to see this effect?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [25]

——————————————————————————–

So Holger is going to answer your first question. I will take the second one.

——————————————————————————–

Holger Puchert, Play Communications S.A. – CFO & Member of Management Board [26]

——————————————————————————–

The question was on the surcharges, the development of — or latest development of surcharges, yes, they are included in our guidance. And of course, the effect is negative, but we will not — we haven’t quantified or we would not like to quantify it here as an stand-alone figure. But we considered it when we, here, put the guidance — or put the guidance here together.

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [27]

——————————————————————————–

So it was included in the guidance. And in the meantime, we see that the elasticity is lower than what we could anticipate. So we are not too much afraid of the impact in 2020 and beyond. I would say that now that we have seen a stabilization of the international usages and despite this — the withdrawal of the protective measure held by U.K., we believe that the negative impact will be under control.

Regarding 5G, I believe that the most important point to highlight is that, thanks to our mixed technology strategy, we have the ability to adjust the investment to the penetration of the 5G devices, meaning that we have already, as I mentioned in my presentation, upgraded our network, 37% of the sites of our network to 5G Ready. And you need to understand then that to upgrade 5G Ready to 5G in the 2.1 gigahertz requires only a software upgrade. So we can do that very easily. That’s why we have already upgraded some cities in Poland. And we will switch off the sites depending on the penetration of the devices, and we will roll out the C-band 5G as well according to the penetration of the devices.

We expect the first devices to be launched by the end of the June, at least in Q2 this year, between April and June. And of course, the penetration will increase over the year. We believe that — we anticipate that for the Christmas will be the first layer of promotion of 5G devices in Poland after the opening of C-band. So in the meantime, for us, it’s very important — we mention our investment to the revenue that we can generate from 5G, and then we will modulate. So we have this lever in our hands, and that makes Play very special in regard of 5G on the Polish market because we will be in full control of our CapEx and we will proportion our CapEx to the prospective of extraordinaries.

On the long run, of course, we expect 5G to generate — to help us accelerate our revenue by enriching our plans for smartphone, but as well, and it’s an important part of our strategy, with wireless to the home. And we see that 5G will offer Internet speeds that will match and sometime beat fixed broadband Internet speeds. So we have a big ambition in leveraging 5G to accelerate our revenues.

——————————————————————————–

Operator [28]

——————————————————————————–

Next question comes from the line of Marcin Nowak.

——————————————————————————–

Marcin Nowak, IPOPEMA Securities S.A., Research Division – Analyst [29]

——————————————————————————–

I have several questions. Let me just start with, could you please more comment something more about your change in approach to potential disposal home by fiber growth? In the presentation, you noted that you’ll — to establish an SPV with HOMEBOX infrastructure. And I remember at some point in the past, you were saying that you do not see benefits from disposal of infrastructure as it is critical for Play. Do you — did you change maybe your approach in terms of infrastructure, mobile infrastructure?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [30]

——————————————————————————–

No, we just — we didn’t change our overall approach. We still believe that our network and the operating model of our network is a major asset for Play. And whatever the model, we will keep being in control of our operations, especially the integrated maintenance for active and passive equipment. But considering that, we don’t see any reason why we should keep the property of the towers that support our equipment to maintain this and protect and even improve this operating model.

And on top of that, we see an opportunity to value this asset separately, which, of course, is something that a lot of operators have been doing. So, so far, we are buying the optionality. So we have no specific plan ready for what we are going to do with this loophole, but we want to convert the passive network infrastructure of Play and put it in a separate dedicated subsidiary, and then we will analyze the opportunities that we see in the market later on. But we want to buy this opportunity — this optionality and prepare the future, which is the reason why we have decided to create this subsidiary.

——————————————————————————–

Marcin Nowak, IPOPEMA Securities S.A., Research Division – Analyst [31]

——————————————————————————–

Okay. Could you also comment in more detail about the changes in active contract customers in the fourth quarter? And what was the exact nature of those anomalies — anomaly that were described in the statement regarding the activation of the cards by inbound calls?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [32]

——————————————————————————–

Yes. Thank you for pointing this note. I cannot answer yet to your question, to be frank. But we have observed some, I would say, unusual activation rates in the market, and I can tell you that this is not special to Play. So we need to analyze further the phenomenon in order to understand the impact and, of course, the impact is not only on the active base, which is, I would say, accidental, but on the ARPU. So it could have a positive impact on the ARPU if we correct the trend, if we find a reason to correct the trend, but it’s too early to comment. The analysis is ongoing, and today I have no further information to share with you.

——————————————————————————–

Marcin Nowak, IPOPEMA Securities S.A., Research Division – Analyst [33]

——————————————————————————–

But could you comment, please, more on the CapEx guidance, cash CapEx guidance for 2020? You mentioned in the presentation that there will be some shift from mobile to backhaul and core. And could you provide more detail about this? And especially, what is your plan at — the planned size of backhaul CapEx for 2020 and the following years?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [34]

——————————————————————————–

I generally repeat what we have in the presentation. So this year, we continue with the last 2 years of the rollout of our network, so we continue in the same pace. And we still have, according to the plan, a little bit more than 1,500 sites to build by — until the end of next year, 2021, which is the deadline for us to switch off entirely the national roaming. What we have done so far gives us confidence in our ability to capture a significant part of the traffic progressively until then and 100% of the traffic on our network without a customer impact in — at the end of 2021.

In parallel, for marginal investments, we will upgrade — we will continue upgrading our network to 5G Ready and depending on the penetration of the 5G handsets to 5G 2.1 and C-Band.

Of course, this year, we will open a number of cities, and we have already made a number of investments to make the 5G available in 16 cities in Poland. Saying that, as I mentioned, we focus as well this year on transmission. We are actively and rapidly migrating some transmission lines from microwave to home fiber. You remember that our objective is to have 50% of our urban sites connected to our home fiber backbone from 3S by the end of 2024. That, of course, implies that every year, we will migrate a number of sites — a significant number of sites to 3S fiber network. In addition to that, we will invest in our core network for 5G. It will be a virtual core. It’s, of course, a prerequisite for 5G as well. So this will be an important investment this year but for the future.

——————————————————————————–

Marcin Nowak, IPOPEMA Securities S.A., Research Division – Analyst [35]

——————————————————————————–

Okay. And to clarify, in the past, after the acquisition of 3S Group, you mentioned that the planned CapEx for backhaul investments will be covered by cash flow from 3S. And do you maintain the same approach or guidance?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [36]

——————————————————————————–

Yes. Yes, the industrial model of 3S acquisition for us is to self-finance the development of our fiber network because 3S generates the cash to invest in its own network for benefit of Play. And in the meantime, they develop low revenue and their customer base in the SME segment. So for us, it’s a win-win-win solution. And I have to say that now that we have completed the integration of 3S within Play, we see even more opportunity that we were seeing before the acquisition. So I confirm that the model that was the main motivation for us to acquire 3S is still valid and confirmed by the fact.

——————————————————————————–

Marcin Nowak, IPOPEMA Securities S.A., Research Division – Analyst [37]

——————————————————————————–

Okay. And earlier on the call, you said that 5G might potentially change the picture of the guided CapEx, cash CapEx for then — this year or maybe another. Could you — should we expect material additional CapEx on top of the guidance previously? Or should we expect that current expenses on current — network roll out should be just simply exchanged for 5G CapEx?

——————————————————————————–

Holger Puchert, Play Communications S.A. – CFO & Member of Management Board [38]

——————————————————————————–

This is Holger. We had that question also — by one of the previous questions, I think it was from Pawel. We gave at the Capital Markets Day in October 2018 the Play ambition, where we said we would like to give you a guidance on the medium term. And at that time, we said, well, we have not explicitly at the time calculated in the 5G investments, as we said, well, it was at that time too early. And the other thing is that we also said we believe that the 5G will come — or the investments will come over time. And then the 5G investments will replace what we currently have underlying in the LTE network and the rollout.

And — so this is to explain here the ambition — we explicitly quoted ambition level and not a full guidance — to say this is a ballpark you should expect us to move in. And what we see from the 5G, as Jean-Marc elaborated on it, so we took already investment on the 5G Ready and for you also to understand the core network is also preparatory. It is for, of course, actual use, but also preparatory for the future. And so these investments are also paying in already into the 5G.

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [39]

——————————————————————————–

Maybe to be more explicit, considering our investment strategy and the investments already included in our current rollout to prepare for 5G, please don’t forget that first, the upgrade for 5G Ready from 5G Ready to 5G legacy in the 2.1 represents only a software upgrade, which is a marginal cost compared to the investment per site. And second, that regarding the C-band, we have, of course, to invest in a new net — in a new antenna component. But the rest of the sites are already prepared for hosting this C-band equipment, and we will make this investment proportionally to the penetration of 5G handsets. So this should answer your question.

Of course, we expect an additional — to spend an additional CapEx to roll out 5G, but it will be marginal compared to our global investment. And it’s happening in 2021 — in 2022, sorry, we will have completed our rollout. Doesn’t mean that we will not open a few additional sites every year — in the coming years. But then, of course, we will have the margin as maneuver to consider investing in 5G. So it shouldn’t change the global picture of our investment, and it shouldn’t change the ambition that we have to lower our CapEx as of 2022.

——————————————————————————–

Marcin Nowak, IPOPEMA Securities S.A., Research Division – Analyst [40]

——————————————————————————–

Okay. Understand. And last question for me, if I may. Could you comment about your internal targets for cooperation with Vectra? And how much uptick do you expect to have within year 2 or 3 on Vectra’s increased number of households?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [41]

——————————————————————————–

Let me skip your question for the time being. The next 2 steps regarding Vectra, and I would say, for fixed broadband offer supported by Vectra and Multimedia networks are after this customer-friendly trial, the commercial launch, which should happen in H1 — which will happen in H1. We’ll confirm the date in the coming few weeks. And then we will, of course, test and improve our processes. And then we will come back to the market with an ambition probably before the end of the year.

What we see today is that there is a real appetite for this product. We’ve seen a lot of requests, questions asked in our shops. It seems that the process works very well. The first installations went very smoothly. It’s due to the fact that using a cable network is much easier to connect in apartment and connected it with FTTH. So we are quite optimistic about the potential. We see as well that we target different customers than Vectra wants. But we will come back to you probably not before the end year, with a more specific target. Let us first launch the project. Let us first test the processes and test the customer appetite.

——————————————————————————–

Operator [42]

——————————————————————————–

Next question comes from the line of Pawel.

——————————————————————————–

Pawel Szpigiel, Biuro maklerskie mBanku SA, Research Division – Analyst [43]

——————————————————————————–

My first question is about the trial, broadband trial with Vectra. Could you give us the first impressions from this trial?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [44]

——————————————————————————–

Yes, give me your address, and I will come with a nice proposal for you. The first impression is that it went smoothly. The IT has been — the IT systems have been integrated. We have designed common processes. So we wanted to test the process in real life. And so we opened the — we launched the offer in a number of shops only. We didn’t market anything. But we saw that the customer were interested in considering this option, buying it and the installation was completed in, I would say, in one visit, a few hours after the signing of the contract. So yes, it went smoothly. And we are very happy to see that we have designed something that could make our customers happy and fulfill their need for an additional hotspot — Wi-Fi hotspot network.

——————————————————————————–

Pawel Szpigiel, Biuro maklerskie mBanku SA, Research Division – Analyst [45]

——————————————————————————–

Okay. I’m curious about how you will address the commercial launch of fixed broadband in the media. With no hesitation, you position yourself right now as a — mobile telco player, let’s say, a pioneer in Polish 5G. Do you want to alter this message a little bit?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [46]

——————————————————————————–

No, I believe that you heard me saying that this is an additional Wi-Fi hotspot for the home. So we see fixed broadband connection as an opportunity to expand the — your personal connection which is linked to your mobile Internet to 1 or 2 hotspots in the places that you live in. And so this will be the positioning of our fixed broadband for an extension of the mobile Internet. Regarding the marketing plan, once again, let me skip the question and come back to you in due time. We will not reveal our commercial plan before we will launch them.

——————————————————————————–

Pawel Szpigiel, Biuro maklerskie mBanku SA, Research Division – Analyst [47]

——————————————————————————–

Of course, I understand. Sorry, but I have to go back to the topic of the handset sale. Because for me, you clearly sacrificed the profitability of sale of handsets for maintenance of customer base and the growth of ARPU. Do you want to continue this strategy in the coming quarters?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [48]

——————————————————————————–

No, I believe that we need to look at the customer P&L as a whole. What we have been able to demonstrate is that a handset-equipped customer generates more service revenue, more usage revenue than a non-handset customer. So as we mentioned already, we have developed quite an in-depth intelligence of our base, and we are still investing in order to improve this business intelligence of our customers. So I dare to say that we know on which customers we can invest a little bit in terms of handsets to drive the revenue and the usage — revenue up and which customers we need to, let’s say, keep in a service plan only.

So this is — we have an overall view about the operating revenue. And we consider that handsets, of course, are not only a source of revenue and margin, but as well a driver for service revenue. Depending on the time of the year and the number of customers that we want to retain, depending on the promotion opportunities, for instance, the Christmas period, we can move the (inaudible) from one site to another one, which is the main reason why you are asking the question because, of course, we don’t have one model that stay for every quarter. We play with it in order to maximize the value of the base and increase the value per customer. During the Christmas period, of course, we have special promotions like other operators even more attractive to drive the value.

——————————————————————————–

Pawel Szpigiel, Biuro maklerskie mBanku SA, Research Division – Analyst [49]

——————————————————————————–

Okay. And my last question would be on this dedicated subsidiary that — by whom you want to operate your infrastructure, so-called TOWERCO. Can I assume that you consider the sale of part of it to obtain additional funds for further network construction?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [50]

——————————————————————————–

Today, as I was mentioning, no decision has been made about the use of this subsidiary. We are just considering. We are very fragmented, an action-oriented company. We see that there may be an opportunity. We decided that we had to seize it, and we decided to buy the optionality and that’s it. And we will decide probably during the year what we are doing with this tool that we are building, and then, of course, we will communicate about that.

——————————————————————————–

Operator [51]

——————————————————————————–

Our last question comes from the line of Nora.

——————————————————————————–

Nora Nagy, Erste Group Bank AG, Research Division – Research Analyst [52]

——————————————————————————–

I would have only one question left. Does your full year ’20 guidance include a further price increases as well?

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [53]

——————————————————————————–

As we already mentioned during our Q3 presentation, the market prepared a long-term plan. You see that there are some moves from the different players in different segments. So it doesn’t include a specific big bang price increase, but of course, it computes that we will continue in the same trend and, of course, differentiate the more-for-more approach depending on the segment. We have a more and more segmented approach, and we have more and more specific strategies for the different segments. But overall, the budget was built on the assumption which is materializing today that the market evolves for more-for-more plans and the customers’ appetite is driven by an appetite for more data and reach of that.

——————————————————————————–

Operator [54]

——————————————————————————–

There are no questions on the phone line. Please continue.

——————————————————————————–

Tomasz Pozniak, Play Communications S.A. – IR Director [55]

——————————————————————————–

Okay. So as we — since we have explored all questions, thank you very much for participating again, and we’re looking forward to the next event, the Q1 results, which will be happening in May this year. Good bye.

——————————————————————————–

Jean-Marc Harion, Play Communications S.A. – President of the Management Board & CEO [56]

——————————————————————————–

Thank you.

——————————————————————————–

Operator [57]

——————————————————————————–

This ends the conference for today. Thank you all for participating. Speakers, please stand by. Participants, you may all disconnect. Thank you for joining.