Q: How did you manage to mitigate a headwind of more than PLN 200 million from 2022 energy costs to grow EBITDAaL by almost 4%?
In short, I would say that we have the right assets and strategy for these turbulent times. There are two key elements of this strategy that allow us to deliver in spite of headwinds. First and most importantly, the strength of our core business. Second, the ongoing transformation and adaptability of our cost base. Let’s briefly look at each one.
Our core business is strong. It consists of three commercial engines: services for consumers, businesses and wholesale activities. All these engines consistently deliver growth of revenue and margin. In all key telecom services we are growing simultaneously the number of customers and the average revenue each one generates. The latter has become an absolute priority, taking into account high inflation. Wholesale has recently emerged, next to B2C and B2B, as an important contributor to our profits. We will explore more business opportunities in this area. We have put the expansion of revenues and direct margin at the core of the .Grow strategy and current circumstances underscore that it is well suited to weather the current challenging macro-economic conditions.
For many years we have been transforming our cost base. This was the basis of the success of our turnaround. It continues at full speed even if the results are not as spectacular as they were in past years because a lot has been already done, because some costs are necessary to grow the business, and last, but not least because of inflation. Nonetheless, in 2022 we managed to adapt our costs to offset the majority of increase in energy costs. We achieved savings in property maintenance, network maintenance, procurement and optimisation of various business processes, which benefit from automation and digitisation. We have also benefitted from workforce optimisation, as we are implementing a social plan agreed with our social partners. In 2022 we took advantage of some less-recurrent developments, including increased sale of copper, sale of some obsolete technical equipment and reversal of certain provisions. As growth of indirect costs was largely contained, it preserved our high operating leverage, enabling increase of the direct margin to convert into EBITDAaL and net profit growth.
Q: Energy costs are expected to flatten out. What are the main challenges to achieve growth in 2023?
Growth of EBITDAaL is our objective for this year. However, this is going to require a lot of effort, even taking into account that we now have energy costs under control. In short, the energy challenge has been replaced by a challenge of double-digit inflation. It is affecting our cost base directly and indirectly.
The average annual inflation in Poland increased from 5% in 2021 to more than 14% in 2022. One important element of our costs is a set of rental agreements for network infrastructure, points of sale and office space. These rental costs are indexed to the previous year’s inflation, so the impact of these will be much greater in 2023 than it was in the previous year. We also experience inflation of various costs related to property maintenance, including gas, central heating, cleaning, sewage and trash collection. The impact of inflation was exacerbated by a 20% increase in the minimum wage. This has two effects: it puts pressure on our own labour costs (we have increased minimum salaries in Orange Polska by more than 20% to adjust to market conditions), and it forces some of our suppliers to increase their prices.
Another aspect to watch for this year’s growth outlook is overall uncertainty in Poland’s macroeconomic situation. GDP growth is expected to slow to below 1%. While our operations have proven resilient to short-lived recession (during the pandemic), it may have an impact on our business customers, which remains a risk area. We need to closely monitor the level of bad debt and the contracting demand.
In order to rise to these challenges we need to be persistent in execution of our commercial value strategy and continue our cost transformation. Let me be clear: we aspire to another year of growth despite the headwinds we face, while our guidance must reflect the level of uncertainty and all that is out of our control. With two years’ experience within our strategy, I am confident that we are well prepared to face the challenges and to continue to extract maximum value from our assets.
Q: Management has recommended a 40% dividend increase for 2023. What enabled this important increase and what could potentially drive further increases?
We were very happy to have been in the position to recommend a 40% increase of the dividend that will be paid in 2023 from 2022 profits. We have passed a mid-point of our strategy cycle and our results speak for themselves: we are on track to meet its goals. In addition, our financial leverage stood at 1.3x at the end of 2022, which shows a strong balance sheet, giving us the safety and flexibility that is necessary, especially considering the current turbulent environment. Let me underline that not only did we announce that a PLN 0.35 per-share dividend will be paid in 2023 but also made it a new floor level for the future. This is our commitment to our shareholders: that our dividend going forward will be at least on this level.
Regarding future dividends, our policy has not changed. We assess our dividend potential annually, taking into account prospects for growth of our business and the prospective level of financial leverage. We have set ourselves a longterm leverage corridor between 1.7 and 2.2x. Currently, we are much below its low end. A very important development for its future level will be how much we will need to spend on the 5G licence in the C-band and what will be the prospects for 700 MHz spectrum allocation in the future. Our ambition is to grow our financial outputs and create long-term value for shareholders. The results of the first two years of the strategy demonstrate that we are on a very good path to achieve this.