Swisscom Analyst Presentation managing uncertainty. Zürich 4 March PDF

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Swisscom Analyst Presentation managing uncertainty Zürich 4 March 2009 Agenda 2 Introduction a) Overview - managing uncertainty: 1. macroeconomic development 2. telecoms environment 3. Swisscom cockpit

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Swisscom Analyst Presentation managing uncertainty Zürich 4 March 2009 Agenda 2 Introduction a) Overview - managing uncertainty: 1. macroeconomic development 2. telecoms environment 3. Swisscom cockpit 4. Swisscom segmental sensitivity 5. Swisscom fiber investments Page Bart Morselt, Head of IR Carsten Schloter, CEO Swisscom b) Fastweb, : 10 years of growth 30 Stefano Parisi, CEO Fastweb c) Results 2008, Swisscom Group d) Financial policy Ueli Dietiker, CFO Swisscom e) Outlook & Conclusions 67 Carsten Schloter, CEO Swisscom Q&A All a) Overview Carsten Schloter, CEO Mild, short recession 1. Macroeconomic development Sincere, longer recession 3 2. Telecoms environment 3. Swisscom strategy 4. Segments Impact & uncertainty legend: Severe 5. Fibre Results 2008 Medium Financial policy (payouts, refinancing) None/Low Outlook Base plan Managing uncertainty Fall back options a) Overview 4 1. Macroeconomic development 1. Macroeconomic development Switzerland and Italy compared with Europe GDP growth yoy [%] CH Eurozone Italy Inflation [%] Eurozone Italy CH Current expectations y KOF and SECO currently expect a mild and short recession for CH with recovery in 2010 (mainly due to exports and industrial capex) KOF Seco Current expectations 15y KOF Seco Mainly the oil price has brought inflation down in Q4/2008. For 2009 and 2010, the expected level is similar to Sources: IMF, Credit Suisse, KOF, Seco Unemployment [%] 0 15J 15y Q1 Q Q3 Q4 Q1 Q2008 Q3 Q Jan 96 Jan.97 Jan.98 Eurozone Italy Jan.99 Jan.00 CH CH PMI and Consumer Confidence [points] 1996 Consumer Confidence Purchasing Manager Index (PMI) Jan.01 Jan.02 Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Current expectations Seco KOF The unemployment rate is expected to increase in the next two years as a result of the recession The crisis led to slump of both Consumer Confidence and Purchasing Manager Index 1. Macroeconomic development Switzerland compared with other countries 6 5y credit spreads over mid swap [bps] Exchange rates Europe AA Europe A Telecom A Europe BBB Telecom BBB 0 Dez 07 Feb 08 Apr 08 Jun 08 Aug 08 Okt 08 Dez US$ current 1.48 current Credit spreads have increased substantially in autumn 2008 Increased volatility in currency rates. CHF has lost against EUR and gained against USD since autumn Long term interest rates (10yr), cost of refinancing Corporate taxes in Switzerland 34.4% % 25.5% 27.5% 28.0% 30.2% Jan 09 France Germany Italy Netherlands Switzerland UK Switzerland Netherlands Italy UK Germany France Swiss franc interest rates consistently 1.5-2% below rates, making funding significantly cheaper Swiss taxes low, allowing for higher FCF conversion of gross profits than elsewhere 1. Macro economic development Lower interest and tax rates result in comparatively higher earnings and FCF for Swiss companies, with over 20% more conversion of EBITDA into Free Cash Flow. This percentage increases with higher leverage (and decreases with lower leverage) 7 Switzerland Germany Italy France Netherlands UK EBIT Debt Interest Rate *) 3.4% 4.7% 5.0% 4.8% 4.8% 5.5% Interest EBT Tax Rate 21.2% 30.2% 27.5% 34.4% 25.5% 28.0% Tax Earnings & FCF **) 23% higher than average *) long term (10 yr) rate +50bp **) assuming depreciation = capital expenditure = % dividend yield in CHF is more than 6% in a) Overview 8 2. Telecoms environment 2. Telecoms environment Financial strength of (mother companies of) players in Swiss market rather different 9 Net interest / OpFCF proxy Debt/interest ratios as per end of 2008* Net debt and avg. cost of debt as per end of 2008* 70% 60% 50% 40% 30% 20% 10% 0% Bubble size = 2008 OpFCF proxy in bn CHF** FT/Orange 1.9x/18% x/53% 2.1x/11% Net debt / EBITDA x/45% Liberty Global*** TDC/NTCH Swisscom Group Net debt [bn CHF**] % 9.9 Swisscom Group 6.1% 57.3 Net interest/ avg. net debt 6.8% 6.6% 7.0% FT/Orange TDC/NTCH Liberty Global 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Sources: all figures based on or calculated based on publicly available data in quarterly/annual reports of FT/Orange, Liberty Global, TDC/NTCH * NTCH and FT/Orange ratios based on Q3 figures (FY figures extrapolated) ** 1 EUR = 1.5 CHF; 1 DKK = 0.2 CHF; 1 USD = 1.1 CHF *** Liberty Global assumption: Operating cash flow = EBITDA 2. Telecoms environment Financial strength of players in Swiss market rather different 10 Financial strength of CH competitors 53% * 44% Absolute EBITDA and cash flow level of main competitors in Switzerland significantly below Swisscom % in % of net revenues 31% 29% * Swisscom as incumbent and Cablecom with own broadband infrastructure have the highest margins Attackers such as Sunrise and probably also Orange have significantly lower margins % Potentially challenging investment effort over time given the absolute cash flow levels generated ? 586* 254? 319* FCF after (high) interest burden offers limited room for maneuver in Swisscom s view in MCHF** EBITDA 2008 OpFCF proxy 2008 Swisscom Schweiz Sunrise Orange Cablecom Sources: based on or calculated based on publicly available data in quarterly/annual reports of FT/Orange, Liberty Global, TDC/NTCH * Cablecom assumption: Operating cash flow = EBITDA ** 1 DKK = 0.2 CHF; 1 EUR = 1.58 CHF; 1 USD = 1.1 CHF 2. Telecoms environment Limited sensitivity to swings in macro economic environment 11 higher Sensitivity lower 356 MCHF Projects business 662 MCHF Traditional data and fixed-line equipment LAN-Services Private Networks Leased lines PBX s Customer premises equipment Total MCHF 6% 4% 10% 8% 40% 32% External revenues Swisscom Schweiz MCHF Mobile roaming 831 MCHF New services, mobile handsets & Directories MCHF Basic telco services Voice (fixed and mobile, excl. roaming) SMS Business lines Value-added services MCHF Monthly connectivity fees PSTN/ISDN connections Broadband subscriptions Mobile subscriptions Remarks: Recent survey showed that following services - among a full basket of residential services (i.e. not just telco services) are the last for people to drop in case of lower spending power: last (i.e. # 1 preferred): broadband internet # 3: mobile subscription # 4: fixed connection # 6: TV = Access and basic communication services (mainly voice/data) 2. Telecoms environment Receivables profile relatively stable, bad debt profile not worsening, yet requires monitoring Bad debt losses [MCHF/month] RES: Ageing list of receivables 31 days [MCHF] days days days 180 days May 2008 Oct Nov Dec Except for effect from large single customer bankruptcy in October, no acceleration visible SME: Ageing list of receivables 31 days [MCHF] 0 May 2008 Oct Nov Segment RES: Stable development. No significant changes CBU: Ageing list of receivables 31 days [MCHF] Dec days days days 180 days days days days 180 days May 2008 Oct Nov Dec Segment SME: Stable development. No significant changes 0 May 2008 Oct Nov Dec Segment CBU: Slightly increasing trend year end = highest value. To be monitored closely. 2. Telecoms environment Mobile customer base Swisscom growing faster than market 13 Growth in 2008 Until Until ~1.5%** ~8 670** * +8.7% 1'524 1'550 1'580 1'628 1'770 * 1'510 1'529 1'527 1'530??% 1'530?? +1.6% 5'007 5'100 5'181 5'284 5'370 CH market +5.4% Tele % Sunrise +6.8% Orange +1.3% Swisscom +5.5% CH market ~+7%** Now integrated into Sunrise Sunrise +16.1%* Orange?? Swisscom +7.2% Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 * In Q4 Sunrise completed the acquisition of Tele 2 s operations in Switzerland. Customer base of Tele2 is integrated in Sunrise figures for Q4. ** estimated 2. Telecoms environment Usual seasonality in mobile business, trends unchanged yet needs close watching 14 AMPU Mobile [Minutes monthly] ARPU Mobile [CHF/month] SME CBU SCS RES SME CBU SCS RES Jan 2007 Jan 2008 No significant slowdown beyond usual season pattern - in Q4/2008. AMPU Outbound roaming [Minutes monthly] 0 Jan 2007 Jan 2008 Year end usage lower as usual however now mostly driven by lower roaming ARPU new data [CHF/month] SCS 4 2 SCS Jan 2007 Jan 2008 Low year-end usage is normal, yet needs to be closely watched whether this recovers 0 Jan 2007 Jan 2008 ARPU new data shows steady growth. No impact. 2. Telecoms environment Broadband Swisscom growing faster than market 15 Growth in 2008 Broadband lines (000)] Until Until ??% ?? ~2.7%* 1.9% ~2 560* % CH market +6.8% Other 1) +6.1% Cablecom +4.8% Swisscom WHS +2.2% CH market ~+9.6%* Other?? Cablecom +6.8% Swisscom WHS -1.6% 1'164 1'216 1'249 1' % 1'325 Swisscom xdsl +9.4% Swisscom xdsl +13.8% Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 1) mainly other cable, Full Access * estimated 2. Telecoms environment Market shares robust 16 PSTN / ISDN lines -1.9 pp vs % Wireline traffic Mobile subscribers Broadband MEUR retail lines Bluewin TV subscribers +6.1 pp vs % +2.0 pp vs pp vs pp vs % 62% 67% Market share mobile subscribers 0% Tele2* 07: 1% 20% Sunrise* (incl. Tele2 07: 19% 18% Orange 07: 19% 62% Swisscom 07: 62% Market share net adds 08: ~64% Market share broadband 12% others 07: 11% 10% other cable 1% Full Access 1% other xdsl 69% Swisscom 07: 69% Δ07/08: +2pp retail -2pp OLO s * In Q4 Sunrise completed the acquisition of Tele 2 s operations in Switzerland. Customer base of Tele2 is integrated in Sunrise figures for Q4. 19% Cablecom 07: 20% Market shares 2008 based on estimates 2. Telecoms environment Subscriber development, churn and order intake show no signs of weakness Subscriber development [Net adds in k#] Line development [net changes in k#] Non-CPS ratio % 75% 20 77% Mobile xdsl retail TV Ongoing strong net add development Mobile churn rates [%, annualized] 10 0 (10) (20) (30) Full access lines PSTN/ISDN losses: avg. -16k per quarter Project business order intake [TCV, MCHF] 146 * CBU +35% IT Services % Trend Stable development of line losses (decreasing to Cable, increasing to Full access). Net winback of CPS customers. 4 Jan Jan No significant change in mobile churn rate * excl. Credit Suisse deal 360 MCHF Substantial increase in order intake in the project and outsourcing business at CBU and IT Services. 2. Telecoms environment Regulatory environment most imminent proceedings 18 Proceedings Access-Proceedings Interconnection (LRIC) ULL: full access, co-location and rebilling Bitstream Access ComCo-Proceeding Mobile Termination I ( ) ComCo-Proceeding Mobile Termination II (from ) ComCo-Proceeding ADSL Explanation The current regulatory proceedings regarding the interconnection and the access proceedings Co-location, Full access and rebilling are covered by provisions of CHF 296 Mio. Swisscom accepted a reduction in price concerning the interconnection, Full access and rebilling, however not the collocation prices and the third party effect clause. Swisscom is considered as market dominant (court ruling February 2009), and will make a regulated offer late 2009 Proceeding about the question of market dominance and regulated prices with imposed sanction of CHF 333 mm. Contingent liability, not provision (chance of occurrence 50%). Proceeding about the question of market dominance and regulated prices. Contingent liability, no provision (chance of occurrence 50%). Proceeding regarding the broadband market and the accuse of a price squeeze (whether or not the competitors can generate a sufficient profit margin) with a threat of a sanction of CHF 237 mm. Contingent liability, no provision (chance of occurrence 50%). a) Overview Swisscom cockpit 3. Swisscom cockpit Special crisis cockpit developed. Constant monitoring in order to be able to act early 20 Macroeconomics/ capital market External GDP development Inflation Unemployment rate Interest rates Spreads for refinancing CDS spreads of different sectors Purchasing Managers Index Consumer Confidence Index Rate of bankruptcies in Switzerland Rate of new company formations in Switzerland EUR and USD exchange rates Internal complan coverage ratio Business KPIs RFI/RFP and order entries at CBU and SCIS Readiness to change the operator Market share of gross adds # of customers reducing usage Migrators to M-Budget products # of customers rightgrading # of down-migrators among xdsl profiles Average value of reload on prepaid Development SAC/SRC KPI Changes in wireline voice discounts Success rate of direct marketing actions Request for price decreases (SME/CBU) AMPUs (Outbound mobile, roaming, wireline) ARPUs (Mobile voice, new data) Net adds (Mobile, BB, TV) Churn rates (per segment/per product) Business financials Extent of financial flexibility (MCHF of opex/capex not allocated yet) Ageing list of receivables of different segments Dunnings, collections Effective bad debt losses Qualitative elements Incidents/requests regarding customer solvency issues Business customers sentiment barometer Development/incidents of key customers and key suppliers Competition Aggressiveness of competitors (Media spendings, price decreases, etc.) 3. Measures Short-term measures Agility reserve Postpone opex and capex for internal projects Suppliers Identify top 50 suppliers by risk (impact on technology and roadmaps) and elaborate alternative sourcing plan Renegotiate contract conditions External employees and consultants Insourcing of external employees Assess necessity of new and existing contracts with consultants Headcount Define areas for FTE freezes without impact on the business Bad debt Identify top 50 customers by risk and introduce credit limits Improve and increase focus of monitoring of bad debt development and ageing list of receivables Options for medium-term Rollout capex Evaluate potential and priorities for substantial reduction of infrastructure rollout capex MarCom, Sponsoring, PR Evaluate potential and priorities for substantial reduction of expenses Working capital Evaluate measures to free cash from working capital (e.g. introduction of pre-billing flat monthly rates) Headcount reductions Divestments (of assets or subsidiaries) 21 a) Overview Segments 4. Swisscom segmental sensitivity Proportion of services sensitive to downturn likely to be lowest in Segments Residential and SME 23 higher RES SME CBU Mobile roaming New services, mobile handsets & Directories Mobile roaming Project business New services Mobile roaming Project business Customer premises equipment Business data + PBX New services Sensitivity lower External revenue ACT 2008 ~80% Basic telco services Voice (fixed and mobile, excl. roaming) SMS Business lines Value-added services Monthly connectivity fees PSTN/ISDN connections Broadband subscriptions Mobile subscriptions ~85% Basic telco services Voice (fixed and mobile, excl. roaming) SMS Value-added services Monthly connectivity fees PSTN/ISDN connections Broadband subscriptions Mobile subscriptions = Access and basic communication services (mainly voice/data) ~70% Business data, Business numbers + PBX Basic telco services Voice (fixed and mobile, excl. roaming) SMS Payphones Value-added services Monthly connectivity fees PSTN/ISDN connections Mobile subscriptions 4. Swisscom segmental sensitivity Potential changes in customer behavior in case of prolonged depression 24 RES - Increasing price sensitivity - focus on cost control and increased rightgrading as well as churn Less travel activities - lower roaming usage Resistance for subscription and usage of new gadgets/services Cancellation of non-basic services Increasing hard substitution (one access) + Increasing TV consumption Longer usage of handsets - lower SAC/SRC SME Increasing price sensitivity - focus on cost control and increased rightgrading Less business travel activities - lower voice roaming usage Resistance for subscription and usage of new gadgets/services Cost pressure - FTE reductions and closure of locations Potential for ICT solutions as means for efficiency increases CBU - Increasing price pressure - renegotiations of existing contracts Prioritisation of investments/projects Less business travel activities - lower roaming usage Resistance for subscription and usage of new gadgets/services Clearing up actions (validation of needs) Cost pressure - FTE reductions and closure of locations + Increasing demand for outsourcing projects for variabilisation of cost structure a) Overview Fiber 5. Fiber Regardless of macro economic situation, Swisscom plans to allocate significant resources to further push fiber as a means to stay ahead of cable, and invest in the future 26 Focus until 2008: offering VDSL by rolling out fiber to street cabinets Focus from 2009: selectively investing in FTTH: CHF 2 to 3 bln until 2015 5. Fiber FTTH roll out selectively and as long term investment, also in turbulent & uncertain times 27 FTTH extension * from autumn 2008 from 2009 Geneva (426 buildings) Lausanne Basel (148 buildings) Berne Fribourg Zurich (1,230 buildings) The goals: St. Gallen At the end of 2009: 100,000 households connected A the end of 2015: Over 1 million households connected (1/3 of the population) FTTH extension: cooperation as opportunity * Including connected buildings at the end of 2008 5. Fiber Investments for fiber dominated by civil works in last meters and in in-house cabling. Overall investments until 2015 likely to amount to CHF 2 to 3 bln (as part of the overall Swiss Capex envelope, which is not expected to increase from today s CHF bln annually 28 Central office (10 16 per city) Appartement equipment Basement manhole OP Inhouse cabling OP Drop cabling ~ 150m Feeder cabling ~ 1000m CO cabling 43% 42% 8% 7% CAPEX 5. Fiber In order to promote a Swiss wide model, with minimal costs for parties involved, Swisscom promotes Fibre Suisse : a multi-fibre model, with co-investments by third parties 29 High Possible forms of cooperation: Construction partnership Cost/benefits of cooperation: Single player 100% Multifibre total 110% 120% For each player 55% 60% For each player 36% 40% Willingness to invest Partners with their own ducts such as electrical utilities or cable network providers Investment partnership Partners without their own ducts Leasing of individual optical fibres For service providers with own technology but no network 100% Low Leasing of transmission services For providers without their own network Costs Single- Model Overall costs with cooperation model Scenario: partners Scenario: partners 30 b. Fastweb years of growth Stefano Parisi, CEO Fastweb FY 2008 Results at a Glance 2008 was a year of solid industrial growth on all relevant KPIs - FY targets achieved 31 Revenues EBITDA Net Result FCF Capex/Sales FY Target FY Target FY Target FY Target FY Target 1,640 Mln 530 Mln 0 0 26% FY Actual FY Actual FY Actual FY Actual FY Actual 1,708 Mln 518 Mln 6 Mln 55 Mln 26% Actual Vs Target Actual Vs Target Actual Vs Target Actual Vs Target Actual Vs Target 104% 98% In line In line In line Overall CSI increased 5% vs 2007 further reinforcing FASTWEB position as the top quality player on the Italian market 2008 Italian BB Market Evolution # of Italian BB Customers (Mln) 2008 vs 2007 Comparison of Italian BB Net Adds % -41% % -15% FY05 FY06 FY07 FY08 1Q 2Q 3Q 4Q 27% Italian BB Penetration Italian BB connections increased 12% to 11.3 Mln in 2008, posting lower growth than in previous years 34% 39% 43% FY05 FY06 FY07 FY08 # of BB net adds were lower in every quarter in 2008 vs 2007, however BB penetration at 43% of households and business sites, still significantly below 50% European average 2008 FASTWEB Customer Base Evolution 33 FY Customer Base Growth ( 000) FY 08 FWB Share of BB Net Adds 220 1,483 1,263* 17% 19% +17% YoY EoP07 Customer Base Net Adds FY08 EoP08 Customer Base FY 2007 FY 2008 * Customer base 2007 restated by -50k inactive customers due to TI agreement Customer base increased more than the Italian market (17% vs 12%) FASTWEB market share of BB net adds grew vs 2007 (19% vs 17%), despite the Company premium price positioning in the market 2008 Revenue & EBITDA Trend - Total FASTWEB Revenue Evolution ( Mln) 1,708 FY Industrial EBITDA Evolution ( Mln) +26% YoY 34 1, % YoY Mln extraordinary item FY07 * FY08 FY07 * FY08 SME 13% BUs Revenue Contribut
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