United Group 28 May 2020
United Group
Q1 2020 HIGH YIELD BONDHOLDER REPORT
28 May 2020
Q1 2020 HIGH YIELD REPORT
CONTENTS Page
Q1 2020 Summary ...... 3 Key Operating Measures ...... 6 Results of Operations ...... 10 Liquidity and Capital Resources ...... 16 Subsequent (Material Recent) Events ...... 20 Mergers & Acquisitions ...... 22 Group Background ...... 23 Appendices ...... 27 Appendix 1 - Financial statements ...... 27 Appendix 2 - Key Factors Affecting Our Business and Results of Operations ...... 30 Appendix 3 - Definitions of Key Operating Measures ...... 39 Appendix 4 - Description of Key Line Items ...... 41 Appendix 5 - Quantitative and Qualitative Disclosures about Market Risk ...... 43 Appendix 6 - Critical Accounting Policies ...... 44
Q1 2020 HIGH YIELD REPORT
Disclaimer
THIS REPORT (THIS “REPORT”) IS NOT AN OFFER OR SOLICITATION OF AN OFFER TO BUY OR SELL SECURITIES. IT IS SOLELY FOR INFORMATION PURPOSES. BY READING THIS REPORT, ATTENDING A PRESENTATION OF THIS REPORT (THE “PRESENTATION”) AND/OR READING THE SLIDES USED FOR THE PRESENTATION (THE “PRESENTATION SLIDES”) YOU AGREE TO BE BOUND AS FOLLOWS:
This Report, the Presentation and/or the Presentation slides contains forward-looking statements, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or including the words “targets”, “believes”, “expects”, “aims”, “intends”, “may”, “anticipates”, “estimates”, “would”, “will”, “could”, “should” or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond our control that could cause our actual performance or achievements to be materially different from future performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding our present and future strategies and the environment in which we will operate in the future. These forward-looking statements speak only as at the date of this Report. We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any of such statements are based.
This Report contains summary unaudited condensed financial information for Adria Midco B.V. and its subsidiaries for the three months ended March 31, 2020, unless another source, such as management accounts, is specifically mentioned. The statement of financial position for Adria Midco B.V. and its subsidiaries as at 31 March 2020 and as at 31 March 2019, as well as the condensed consolidated interim statements of profit or loss and cash flows for Adria Midco B.V. and its subsidiaries for the three month periods then ended have been prepared in accordance with IFRS, but have not been reviewed by our independent auditors. As a consequence, the summary condensed financial information presented is subject to potential change. If in connection with any review there is any material change to such summary condensed financial information, we intend to present a supplemental report detailing such change.
Certain financial measures and ratios related thereto in this Report including EBITDA, Adjusted EBITDA, Adjusted EBITDA minus capital expenditure, RGUs and ARPU (collectively, the ‘‘Non-IFRS Measures’’) are not specifically defined under IFRS or any other generally accepted accounting principles. These measures are presented here because we believe that they and similar measures are widely used in our industry as a means of evaluating a company’s operating performance and financing structure. Our management believes this information, along with comparable IFRS measures, is useful to investors because it provides a basis for measuring the operating performance in the periods presented. These measures are used in the internal management of our business, along with the most directly comparable IFRS financial measures, in evaluating the operating performance. These measures may not be comparable to other similarly titled measures of other companies and are not measurements under IFRS or other generally accepted accounting principles, and you should not consider such items as alternatives to net income (loss), operating income or any other performance measures derived in accordance with IFRS, and they may be different from similarly titled measures used by other companies.
Adria Midco B.V. is providing this information voluntarily, and the material contained in this announcement is presented solely for information purposes and is not to be construed as providing investment advice. As such, it has no regard to the specific investment objectives, financial situation or particular needs of any recipient. No representation or warranty, either express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness, correctness or reliability of the information contained herein. It should not be regarded by recipients as a substitute for the exercise of their own judgment. None of Adria Midco B.V., or any of its directors, officers, employees, affiliates, direct or indirect shareholders, advisors or agents, accepts any liability for any direct, indirect, consequential or other loss or damage suffered by any person as a result of relying on all or any part of this information, and any liability is expressly disclaimed.
2 Q1 2020 HIGH YIELD REPORT
Q1 2020 Summary
28 May 2020 – United Group, the leading cable and media player in South Eastern Europe, today reports its financial results for Q1 2020.
Operational Highlights Homes passed grew by 3% to 1,866 thousand compared to Q1 2019, primarily as a result of organic growth Number of unique cable subscribers increased to 1,172 thousand (Q1 2019: 1,167 thousand), primarily as a result of organic growth Revenue Generating Units (“RGUs”) up by 28% year-on-year to 4,902 thousand, driven by Tele2 acquisition (936 thousand mobile RGUs) and organic growth Blended Cable Average Revenue Per User (“ARPU”) for Q1 2020 up by 4% year-on- year to €23.5 (Q1 2019: €22.5), driven by migration from lower-priced to higher-priced service packages, subscriber growth for the Group’s multi-play offering, and price increases
Financial Highlights Consolidated Group revenue for Q1 2020 up 8% year-on-year to €194.0 million (Q1 2019: €179.4 million) Consolidated Group adjusted EBITDA up 7% in Q1 2020 to €78.3 million (Q1 2019: €73.0 million) Net cash inflow of €867.2 million versus an inflow of €39.1 million in Q1 2019 As at March 31, 2020, net leverage for United Group including Vivacom (ratio of Group Net Debt to Annualized Last Two Quarters Adjusted Pro Forma EBITDA1) increased to 5.06x (December 31, 2019: 4.71x)
1 Annualized Adjusted Pro Forma EBITDA is calculated as two times Q1 2020 + Q4 2019 Adjusted EBITDA plus €6.9 million of United Media expected synergies plus €35.8m of Tele2 Standalone L2QA Adj. EBITDA Contribution (Oct19-Feb20) plus Vivacom annualized Q1 2020 + Q4 2019 Adjusted EBITDA (€199.6 million).
3 Q1 2020 HIGH YIELD REPORT
The following summary describes the operations in each of the Group’s reportable segments or subgroups: SBB Serbia includes the results of cable services in Serbia and direct-to-home (“DTH” or Satellite) operations in Serbia and North Macedonia. Absolut Solutions results are also included in the SBB Serbia segment however, their results are not reflected in the statutory consolidated results of the SBB Serbia Group. Telemach Slovenia includes the results of the Group’s cable, mobile and DTH services in Slovenia. Telemach BH includes the results of the Group’s cable and DTH services in Bosnia and Herzegovina. Telemach Montenegro includes the results of the Group’s cable and DTH services in Montenegro. Tele2 includes the results of the Group’s mobile services in Croatia. United Media Group includes the results of the Group’s media and content business in the former Yugoslav region including the results of N1, Sport Klub, Grand Production, Orlando Kids, IDJ and entities acquired during 2018 (Nova TV and Direct Media Group). Other Businesses includes the results of the Group’s other operating businesses (such as NetTV) and its Holding companies.
United Group generated consolidated revenues of €194.0 million during Q1 2020. The 8% increase in revenue is attributable to the Tele2 acquisition, organic growth of the subscriber base, migration of subscribers to multi-play packages and the impact of other acquisitions in 2019 and 2020. Adjusted EBITDA in Q1 2020 was up 7% to €78.3 million.
Summary financials table in € m Q1 2019 Q1 2020 Change
Revenue 179.4 194.0 8% Adjusted EBITDA 73.0 78.3 7% Result from operating activities 9.4 21.4 129% Profit/(loss) before tax (7.2) (11.9) (65%)
In Q1 2020: SBB Serbia generated 29% of consolidated revenues and 39% of consolidated Adjusted EBITDA Telemach Slovenia generated 30% of consolidated revenues and 25% of consolidated Adjusted EBITDA Telemach BiH generated 10% of consolidated revenues and 8% of consolidated Adjusted EBITDA Telemach MNE generated 2% of consolidated revenues and 1% of consolidated Adjusted EBITDA
4 Q1 2020 HIGH YIELD REPORT
United Media generated 19% of consolidated revenue and 22% of consolidated Adjusted EBITDA Tele2 generated 8% of consolidated revenues and 6% of consolidated Adjusted EBITDA Other Businesses generated 2% of consolidated revenue and (1%) of consolidated Adjusted EBITDA
Adj. Q1 2020 in € m Revenue, net % of total % of total EBITDA
SBB Serbia 56.7 29% 30.3 39% Telemach Slo 57.9 30% 19.8 25% Telemach BH 18.8 10% 6.2 8% Telemach MNE 3.4 2% 0.7 1% United Media 37.2 19% 17.6 22% Tele2 15.5 8% 4.6 6% Other Businesses 4.6 2% (0.9) (1%) Total 194.0 100% 78.3 100%
As at March 31, 2020, United Group had 4.9 million RGUs, up 28% year-on-year (Q1 2019: 3.82 million) and an increase of 25% quarter-on-quarter (Q4 2019: 3.92 million). This positive trend was driven by the Tele2 acquisition (936 thousand mobile RGUs), organic growth of cable pay-TV, telephony, mobile, internet and other services, as well as a growing proportion of multi-play subscribers. Blended cable average revenue per user (“ARPU”) for the period was €23.45, compared to €22.53 for Q1 2019, with the 4% year-on-year increase primarily driven by the migration of existing subscribers from lower-priced to higher-priced service packages, growth in subscribers for the multi-play offering, and price increases. Subscriber migration to multi- play packages is expected to continue as the cable market develops further. Capital expenditure (including capitalized inventory) amounted to €56.4 million in Q1 2020, compared to €44.5 million in Q1 2019. The majority of investments during Q1 2020 related to network expansion, customer premise equipment, the purchase of new programming rights and investment in mobile infrastructure.
United Group’s three-month financial statements have been prepared in accordance with International Financial Reporting Standard (“IFRS”) accounting policies.
5 Q1 2020 HIGH YIELD REPORT
Key Operating Measures
United Group uses several key operating measures, including homes passed, unique cable subscribers, RGUs and ARPU, to track the performance of the business. None of these terms are measures of financial performance under IFRS, nor have these measures been reviewed by an outside auditor, consultant or expert. These measures are derived from management information systems. As these terms are defined by management, they may not be comparable to similar terms used by other companies. Please refer to Appendix 3 for definitions of the Group’s key operating measures. Unique Cable Subscribers, RGUs and ARPU
The following table sets forth key operating measures for United Group as of, and for the three months ended, March 31, 2020 and March 31, 2019. in 000 Q1 2019 Q1 2020 Delta % Delta Key Operating Measures
Homes passed 1,819 1,866 3% 48 Unique cable subscribers 1,167 1,172 0% 5 RGUs 3,821 4,902 28% 1,081 Cable pay-TV 1,167 1,172 0% 5 Broadband internet 830 871 5% 41 Fixed-line telephony 659 704 7% 46 Mobile services 521 1,495 187% 975 DTH pay-TV 455 449 -1% (6) OTT 122 128 5% 6 Other services 68 82 20% 14 Penetration Cable pay-TV 64.2% 62.8% -2% -1% Broadband internet 45.6% 46.7% 2% 1% Fixed-line telephony 36.2% 37.7% 4% 2% Blended Cable ARPU (in €) 22.5 23.5 4% 0.9
Homes passed increased by 48 thousand, or 3%, from 1,819 thousand on March 31, 2019 to 1,866 thousand as at March 31, 2020, primarily due to organic network expansion.
As at March 31, 2020, the Group had 1,172 thousand cable pay-TV RGUs, an increase of 5 thousand compared to 1,167 thousand at March 31, 2019, resulting from organic growth.
The total number of DTH pay-TV RGUs amounted to 449 thousand as at March 31, 2020, a 1% decrease year-on-year.
As at March 31, 2020, the Group had 871 thousand broadband internet RGUs, representing an increase of 5%, compared to 830 thousand at March 31, 2019. This is
6 Q1 2020 HIGH YIELD REPORT
primarily attributable to an increase in multi-play subscriptions over this period and organic subscriber growth.
The total number of fixed telephony RGUs rose to 704 thousand as at March 31, 2020, an increase of 7% compared to 659 thousand at March 31, 2019. The positive trend is primarily due to an increase in multi-play subscriptions over this period and organic subscriber growth.
OTT RGUs grew by 5% to 128 thousand, compared to 122 thousand at March 31, 2019.
Mobile service RGUs increased from 521 thousand at March 31, 2019 to 1,495 thousand as at March 31, 2020. This is an increase of 975 thousand, or 187%, driven by the acquisition of Tele2 (936 thousand mobile RGUs) and organic growth in Slovenia.
Total RGUs increased by 28%, from 3,821 thousand at March 31, 2019 to 4,902 thousand as at March 31, 2020. RGUs added over this period were mainly a result of the acquisition of Tele2 (936 thousand mobile RGUs), as well as organic growth of cable pay-TV and mobile service and growing proportion of multi-play subscribers.
The following table provides a breakdown of the Group’s key operating measures for SBB Serbia, Telemach Slovenia, Telemach BH, Telemach MNE and Tele2.2 in 000 SBB Serbia Telemach SLO Telemach BH Telemach MNE Tele22 Footprint Q1 19 Q1 20 YoY Q1 19 Q1 20 YoY Q1 19 Q1 20 YoY Q1 19 Q1 20 YoY Q1 19 Q1 20 YoY
Homes passed 1,069 1,097 3% 333 340 2% 334 338 1% 82 91 11% - - Unique cable subscribers 725 737 2% 197 197 0% 215 208 -3% 30 30 2% - - Cable pay-TV penetration 68% 67% 59% 58% 64% 61% 36% 33% - - RGUs Cable pay-TV 725 737 2% 197 197 0% 215 208 -3% 30 30 2% - - Broadband internet 493 522 6% 160 166 4% 157 162 3% 20 21 6% - - Telephony 372 412 11% 170 172 2% 103 105 2% 13 16 15% - - Mobile services - - 521 559 7% - - - - 894 936 5% DTH pay-TV 226 225 0% 43 42 -3% 132 135 2% 54 47 -13% - - OTT 11 16 49% 0 0 -3% - - - - 0 - - - Other services 30 34 10% 36 48 31% 1 1 -40% - - - - Total RGUs 1,857 1,945 5% 1,127 1,184 5% 609 611 0% 117 115 -2% 894 936 5%
2 Prior year figures included for presentation purposes only. Tele2 Croatia acquired in March 2020. Q1 2020 ARPU is for the period after the closing.
7 Q1 2020 HIGH YIELD REPORT
The following table sets forth the blended cable ARPU for SBB Serbia, Telemach Slovenia, Telemach BH, Telemach MNE and Tele2 generated by the products and services the Group offers.
Telemach Telemach SBB Serbia Telemach BH Tele23 SLO MNE in € Q1 19 Q1 20 Q1 19 Q1 20 Q1 19 Q1 20 Q1 19 Q1 20 Q1 19 Q1 20 ARPU
Cable pay-TV 10.5 10.5 19.0 18.6 10.0 11.0 11.1 11.7 Broadband internet 10.6 11.2 18.2 18.3 9.8 10.4 8.3 8.3 Telephony 3.7 3.7 3.4 3.1 6.9 6.8 2.9 2.7 Mobile services 10.7 10.9 12.6 12.9 Blended Cable ARPU 19.5 20.4 36.5 36.5 20.4 22.4 18.0 19.0
DTH pay-TV4 10.8 10.3 18.2 18.3 9.5 10.1 12.0 11.3
ARPU from broadband internet includes value-added services such as online backup, internet security and anti-virus solutions. One unique cable subscriber can be an RGU for cable pay-TV, fixed-line telephony, broadband internet or other services. DTH subscribers are DTH RGUs. SBB Serbia: Blended cable ARPU for SBB Serbia in Q1 2020 amounted to €20.4. The 4.6% year-on-year increase was primarily a result of the continued positive impact of subscribers upgrading to multi-play packages and a positive accounting impact due to IFRS 15. DTH ARPU for SBB Serbia decreased to €10.3 in Q1 2020, from €10.8 in Q1 2019, mainly as a result of negative IFRS 15 effect in Q1 2020. Telemach Slovenia: Blended cable ARPU for Telemach Slovenia in Q1 2020 amounted to €36.5. Growth in the number of multi-play subscribers and price increases implemented in February 2019 and March 2020 were impacted by sales/retention promotions, resulting in stable blended cable ARPU on year-on-year basis. The segment’s mobile ARPU increased to €10.9 in Q1 2020, from €10.7 in Q1 2019. The 2.2% year-on-year increase was mainly a result of price increases in March 2020. DTH ARPU for Telemach Slovenia increased to €18.3 in Q1 2020, from €18.2 in Q1 2019, as a result of price increases in February 2019 (full effect in Q1 2020). Telemach BH: Blended cable ARPU for Telemach BH in Q1 2020 increased by 9.8% year-on-year to €22.4, as a result of growth in the number of subscribers for the multi play offering and the effect of a price increases implemented in April 2019.
3 Prior year figures included for presentation purposes only. Tele2 Croatia acquired in March 2020. Q1 2020 ARPU is for the period after the closing.
4 Q1 2019 ARPUs are restated due to allocation of IFRS 15 effects across lines of service.
8 Q1 2020 HIGH YIELD REPORT
DTH ARPU for Telemach Bosnia increased to €10.1 in Q1 2020, from €9.5 in Q1 2019, as a result of price increases in March 2020 and a positive IFRS 15 effect in Q1 2020. Telemach MNE: Blended cable ARPU for Telemach MNE in Q1 2020 increased by 5.7% year-on-year to €19.0, mainly as a result of growth in the number of subscribers for the multi-play offering. DTH ARPU for Telemach MNE decreased to €11.3 in Q1 2020, from €12.0 in Q1 2019, mainly due to a negative IFRS 15 effect stemming from more subscribers having expired discounts in the contract period. Tele2 5: Mobile ARPU for Q1 2020 amounted to €12.9, representing the 2.1% year- on-year growth.
5 Prior year figures included for presentation purposes only. Tele2 Croatia acquired in March 2020. Q1 2020 ARPU is for the period after the closing.
9 Q1 2020 HIGH YIELD REPORT
Results of Operations
In this report, the Group presents financial data for United Group for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Please refer to Appendix 2 for the key factors affecting the Group’s business and results of operations. For a description of the key line items, please refer to Appendix 4. in €000 Q1 2019 Q1 2020
Revenue 179,363 193,974 Other income 1,515 1,723 Content cost (31,403) (28,551) Link and interconnection cost (9,865) (11,434) Cost of end-user equipment and other material cost (10,917) (16,964) Staff costs (31,255) (21,537) Media buying (8,058) (7,944) Other operating expenses (29,851) (30,630) Impairment loss on trade and other receivables, including (84) (2,279) contract assets Impairment loss on other financial assets (42) -
IFRS EBITDA 59,403 76,358
Depreciation (26,144) (27,126) Depreciation (right-of-use assets) (4,478) (5,550) Amortization of intangible assets (19,431) (22,254) Operating profit 9,350 21,428
Finance income 1,692 1,342 Finance costs (18,260) (34,715) Net finance costs (16,568) (33,373)
Profit/(loss) before tax (7,218) (11,945)
Income tax (expenses)/benefit (1,274) (1,433) Profit/(loss) for the period (8,492) (13,378)
Revenue
Revenue increased by €14.6 million, or 8.1%, year-on-year to €194.0 million for Q1 2020. This increase was primarily due to the acquisition of Tele2, continued successful cross- selling and price increases.
10 Q1 2020 HIGH YIELD REPORT
Revenue figures for the business segments below exclude inter-company transactions, which have been eliminated. in €000 Q1 2019 Q1 2020 Change
SBB Serbia 54,447 56,741 4% Telemach Slovenia 56,004 57,870 3% Telemach BiH 17,756 18,788 6% Telemach MNE 3,603 3,365 (7%) United Media 43,297 37,169 (14%) Tele2 - 15,462 n/a Other 4,256 4,579 8% Total 179,363 193,974 8.1%
SBB Serbia: Revenue for SBB Serbia increased by 4% year-on-year to €56,741 thousand in Q1 2020, primarily due to growth in the number of subscribers and RGUs (particularly through successful cross-selling).
Telemach Slovenia: Revenue for Telemach Slovenia increased by 3% year-on-year to €57,870 thousand in Q1 2020, primarily due to an increased number of subscribers in mobile telephony, higher mobile handsets sales and price increases in February 2019 and March 2020.
Telemach BH: Revenue for Telemach BH increased by 6% to €18,788 thousand in Q1 2020, primarily due to organic growth and price increase in April 2019 and March 2020.
Telemach MNE: Revenue for Telemach MNE decreased by 7% year-on-year to €3,365 thousand in Q1 2020, from €3,603 thousand in Q1 2019, mainly due to lower number of DTH subscribers in Q1 2020 (a declining trend).
United Media Group: External revenue at United Media Group decreased by 14% year- on-year to €37,169 thousand in Q1 2020, mainly as a result of the COVID-19 epidemic. Total revenues of the Media Segment (including intercompany revenues) shrank by 6.5% year-on- year to €62,050 thousand in Q1 2020.
Other Businesses: Revenue for the Other Businesses segment increased marginally year-on-year, by €323 thousand or 8%, to €4,579 thousand in Q1 2020.
Tele2: Revenue for Tele2 amounted to €15,462 thousand.
Other income
Other income increased 14% year-on-year from €1,515 thousand in Q1 2019 to €1,723 thousand in Q1 2020.
11 Q1 2020 HIGH YIELD REPORT
Content cost
Content costs decreased by 9% year-on-year to €28,551 thousand in Q1 2020. The Group managed to retain top ratings at lower cost levels.
Link and interconnection cost
Link and interconnection costs increased by 16% year-on-year to €11,434 thousand in Q1 2020, primarily due to higher mobile link and interconnection costs.
Cost of end-user equipment and other material costs
Cost of end-user equipment and other material costs increased by 55% year-on-year to €16,964 thousand in Q1 2020. This increase was primarily due to the higher cost of sales for mobile handsets (mainly due to the acquisition of Tele2) and higher energy and fuel costs.
Staff costs
Staff costs decreased by 31% year-on-year to €21,537 thousand in Q1 2020, mainly due to the non-cash impact of the application of IFRS 2 in relation to a Long-Term Incentive Scheme (the “LTIS”), which amounted €12,915 thousand in Q1 2019.
Media buying
Media buying decreased 1% year-on-year to €7,944 thousand in Q1 2020 (Q1 2019: €8,058). This decrease is in line with lower media buying revenues as a result of lower advertising expenditure in economy due to the COVID-19 epidemic.
Depreciation
Depreciation increased by 4% year-on-year to €27,126 thousand in Q1 2020, largely due to the attainment of new assets during the acquisition of Tele2.
Depreciation (right-of-use assets)
Depreciation increased to €5,550 thousand in Q1 2020, from €4,478 in Q1 2019.
Amortization of intangible assets
Amortization of intangible assets increased by 15% year-on-year to €22,254 in Q1 2020, mainly due to higher investments in programming rights and software licenses, as well as the addition of intangible assets of Tele2 acquisition.
12 Q1 2020 HIGH YIELD REPORT
Other operating expenses
Other operating expenses increased by 3% year-on-year to €30,630 thousand in Q1 2020, primarily due to higher license fee costs and donations related to the COVID-19 epidemic.
Net finance costs
Net finance costs increased by 101% year-on-year to €33,373 thousand in Q1 2020, mainly attributable to higher interest expenses from bond issuance and higher net foreign exchange losses.
Profit/(loss) before tax
Loss before tax increased to €11,945 thousand in Q1 2020, from a loss of €7,218 thousand in Q1 2019, primarily due to increased net finance costs, as operating profit increased by €12,078 thousand.
13 Q1 2020 HIGH YIELD REPORT
EBITDA reconciliation
EBITDA is a supplemental measure of financial performance that is not required by, or presented in accordance with, IFRS. United Group defines “EBITDA” as profit/(loss) for the period plus income tax (benefit)/expense, depreciation, amortization of intangible assets and net finance costs. EBITDA is not a measurement of performance or liquidity under IFRS and you should not consider EBITDA as alternatives to (a) net income as determined in accordance with IFRS as a measure of the Group’s operating performance, (b) cash flow for the period as a measure of the Group’s ability to meet its cash needs, or (c) any other measure of performance or liquidity under IFRS. United Group presents EBITDA and the ratios derived therefrom, because it believes that they are measures commonly used by investors and they are measures that are used in managing the business. EBITDA, as presented in this report, however, may not be comparable to similarly titled measures reported by other companies due to differences in the way these measures are calculated. The following table provides a reconciliation of profit/(loss) for the period to EBITDA.
in €000 Q1 2019 Q1 2020 Change
Profit/(Loss) for the period (8,492) (13,378) 58% Income tax (benefit)/expense 1,274 1,433 12% Depreciation 26,144 27,126 4% Depreciation (right-of-use assets) 4,478 5,550 24% Amortization of intangible assets 19,431 22,254 15% Net finance costs 16,568 33,373 101% EBITDA 59,403 76,358 29% Non-operating expenses 13,574 1,917 (86%) Adjusted EBITDA 72,977 78,275 7%
The following table provides a build-up of Annualized Last Two Quarters Adjusted Pro Forma EBITDA including Vivacom. in €000 L2QA
Annualized L2Q Adjusted EBITDA 304,858
Tele2 Standalone L2QA Adj. EBITDA Contribution (Oct19-Feb20) 35,778 Vivacom L2QA Adj. EBITDA as of Mar 2020 (as per Vivacom man. accounts) 199,584 United Media estimated additional carriage fees 6,930 Annualized Last Two Quarters Adjusted Pro Forma EBITDA 547,151
14 Q1 2020 HIGH YIELD REPORT
Gross Leverage and Net Leverage Ratio including Vivacom As at March 31, 2020 United Group’s gross leverage ratio (i.e. ratio of Group gross debt to Annualized Last Two Quarters Pro Forma EBITDA) increased to 5.20x, compared to 4.84x as at December 31, 2019. As at March 31, 2020, United Group’s net leverage ratio (i.e. ratio of Group net debt to Annualized Last Two Quarters Pro Forma EBITDA) increased to 5.06x, compared to 4.71x as at December 31, 2019.
In €000 Q1 2020 a) Annualized Last Two Quarters Pro Forma EBITDA 547,151 b) Cash and cash equivalents6 79,713 c) Lease liabilities 261,625 d) SSRCF 86,000 e) Senior Secured Notes7 2,750,000 f) Other financial liabilities 8,732 g) IFRS 16 lease liabilities adjustment (259,120) h) As adjusted Group Gross debt (c+d+e+f+g) 2,847,237 i) As adjusted Group Net debt (h-b) 2,767,524
j) Gross leverage (h/a) 5.20x k) Net leverage (i/a) 5.06x
6 Cash and cash equivalents figure includes cash and cash equivalents of United Group and Vivacom and excludes the amount of unpaid transaction costs on Tele2 acquisition.
7 Senior Secured Notes figure represents face value, hence excludes capitalized transaction costs as shown in the Statement of Financial Position as for IFRS.
15 Q1 2020 HIGH YIELD REPORT
Liquidity and Capital Resources
The Group’s primary sources of liquidity and funds for capital expenditure, acquisitions and other investments are expected to be operating cash flow, the existing revolving credit facility (“RCF”), potential additional issuances of debt securities, ancillary and bilateral lending facilities and finance leases. United Group’s ability to generate cash from its operations will depend on future operating performance, which is in turn dependent, to some extent, on general economic, financial, competitive, market, regulatory and other factors, many of which are beyond the Group’s control. United Group maintains cash and cash equivalents to fund the day-to-day requirements of the business. The Group holds cash primarily in euros, but also in Serbian dinar, Bosnian mark and other currencies.
Historically, the Group has relied primarily on its Senior Secured Revolving Credit Facility and bilateral bank facilities, other debt facilities and cash flow from operations to provide funds required for investments in capital expenditure and operations.
As at March 31, 2020, the Group had €67.2 million in cash and cash equivalents. In addition, as at March 31, 2020, United Group had €2,750.0 million in fixed and floating rate Senior Secured Notes8, along with a partially drawn Senior Secured Revolving Credit Facility of €56.0 million, a €30.0 million unsecured bilateral RCF in Serbia, lease liabilities in the amount of €148.1 million and other financial liabilities of €8.7 million. Cash Flow The table below summarises the Group’s consolidated cash flow for the three months ended March 31, 2020, compared to the three months ended March 31, 2019.
In €000 Q1 2019 Q1 2020 Change Operating net cash flow 42,242 49,947 7,705 Investing net cash flow (12,491) (181,495) (169,004) Financing net cash flow 9,341 998,704 989,363 Net cash flow 39,092 867,156 828,064
Net cash from / (used in) operating activities
Net cash flows from operating activities increased by €7,705 thousand, from a net cash inflow of €42,242 thousand in Q1 2019 to a net cash inflow of €49,947 thousand in Q1 2020. This is primarily due to increased cash generated from operations, which was partly offset by increased interest payments.
8 Senior Secured Notes figure represents face value, hence excludes capitalized transaction costs as shown in the Statement of Financial Position as for IFRS.
16 Q1 2020 HIGH YIELD REPORT
Net cash from / (used in) investing activities
Net cash outflows used in investing activities increased by €169,004 thousand, from a net cash outflow of €12,491 thousand in Q1 2019 to a net cash outflow of €181,495 thousand in Q1 2020. This increase is primarily due to the settlement of the consideration relating to the acquisition of Tele2 and increased CAPEX payments.
Net cash from / (used in) financing activities
Net cash flows from financing activities increased by €989,363 thousand, from a net cash inflow of €9,341 thousand in Q1 2019 to a net cash inflow of €998,704 thousand in Q1 2020, primarily due to the issuance of bonds.
17 Q1 2020 HIGH YIELD REPORT
Capital Expenditure
United Group’s capital expenditure relates primarily to the purchase of property and equipment, including expansion of the Group’s network in terms of capacity and new homes connected, purchase of modems and set-top boxes to be installed in customer premises, growth in RGUs and maintenance of the Group’s cable and mobile networks and infrastructure, purchase of intangible assets such as content, software, investments in core infrastructure and systems to facilitate the addition of new services and acquisitions. Therefore, capital expenditure is primarily driven by extending, upgrading and maintaining cable and mobile networks, the installation and in-home wiring for new subscribers, the cost of cable modems, including high-speed modems for subscribers to the Group’s high-speed broadband internet, as well as the acquisition and production of content. The Group’s capital expenditure has also historically included certain investments of a non-recurring nature, as well as costs to integrate acquired businesses.
Capital expenditure also includes increases in intangible assets (except the Group’s customer list and brand names) and does not include financial assets. As part of the Group’s strategy to focus on capital expenditure improving returns, it has implemented measures to ensure a more efficient usage of capital investment. United Group intends to manage capital expenditure to maintain its well-invested asset base. The members of the Group’s board review all material capital expenditure programmes.
Over the next several years, United Group expects that its capital expenditure will be largely success- and capacity-based. Success and capacity-based capital expenditure includes capital expenditure related to the expansion of the Group’s network footprint to additional homes and existing subscribers, the replacement of set-top boxes, expanding network capacity, new product and service development and expenditure incurred when connecting business subscribers to the Group’s network. Success-based capital expenditure does not include capital expenditure for maintenance, upgrade and replacement of systems and infrastructure.
CAPEX by Segment in €000 Q1 2019 Q1 2020 Change
SBB Serbia 15,204 15,588 3% Telemach Slovenia 14,748 16,352 11% Telemach BH 3,259 5,129 57% Telemach MNE 830 1,269 53% United Media 10,088 15,588 55% Tele2 - 2,280 n/a Other 324 176 (46%) Total 44,453 56,382 27%
18 Q1 2020 HIGH YIELD REPORT
SBB Serbia: Capital expenditure for SBB Serbia increased by 2.5% year-on-year to €15,588 thousand in Q1 2020, mostly due to higher network investments and more capitalized inventories compared to Q1 2019. Telemach Slovenia: Capital expenditure for Telemach Slovenia increased by 10.9% year-on-year to €16,352 thousand in Q1 2020, mainly due to higher network investments (cable and mobile) and investments in IP equipment. Telemach BH: Capital expenditure at Telemach BH in Q1 2020 increased by 57.4% year-on-year to €5,129 thousand, mostly due to higher investments in CPE and IP equipment and higher network investments compared to Q1 2019. Telemach MNE: Capital expenditure for the Montenegro segment increased by 52.9% to €1,269 thousand in Q1 2020 primarily due to more capitalized inventories compared to Q1 2019. Tele2: Capex for Tele2 amounted to €2,280 thousand in Q1 2020.
United Media: Capital expenditure for United Media increased by €5,500 thousand to €15,588 thousand in Q1 2020, due to investments into the production of new exclusive content for certain channels, the increased cost of sports rights and higher R&D investments (United Cloud). Please refer to Appendix 5 for specific quantitative and qualitative disclosures about market risk and Appendix 6 for the Group’s critical accounting policies.
Adjusted EBITDA-CAPEX decreased from €28,524 thousand in Q1 2019 to €21,893 thousand in Q1 2020 due to timing of CAPEX investments compared to growth of Adj. EBITDA. in €000 Q1 2019 Q1 2020 Change Adjusted EBITDA 72,977 78,275 7% CAPEX 44,453 56,382 27% Adjusted EBITDA – CAPEX 28,524 21,893 (23%)
19 Q1 2020 HIGH YIELD REPORT
Subsequent (Material Recent) Events
Acquisition of Vivacom and bond issue On 7 November 2019, the Group concluded an agreement to acquire the entire stake in Vivacom Bulgaria for a preliminary contribution of EUR 943 million subject to certain adjustments at closing date. The transaction is subject to customary regulatory approvals by the local competition authorities and is expected to be completed in mid-year 2020. In any event of non-satisfaction of the Closing Condition and certain other conditions a break fee of up to EUR 20 million shall be applicable (Seller shall be entitled to payment from the Purchaser - for loss of opportunity for the Seller). The Group issued bonds for the purpose of the acquisition (see Note 32 to the Adria MidCo B.V. Group Consolidated Financial Statements as of and for the period ended March 31, 2020). COVID-19 The existence of novel coronavirus (COVID-19) was confirmed in early 2020 and has spread rapidly across the globe, causing disruptions to businesses and economic activity. Many governments across the world have imposed travel restrictions, lock downs and social distancing with a view to reducing the spread of the virus and hopefully minimizing the number of fatalities. The Group considers this outbreak to be a non-adjusting post balance sheet event. The main priority has been the health and safety of employees and continuous provision of service. The Group has adhered to instructions issued by the relevant state authorities, including travel restrictions and enforced working from home. Management believes that the impact on business is currently limited with no immediate material adverse operational impact. Management intends to continue following the various national and/or state authorities’ policies and, in parallel, intend to do the utmost to continue operations as the situation evolves. COVID-19 impact on Revenues and Adjusted EBITDA Based on the analysis performed for the remainder of the year 2020, fairly minimal impact to organic consolidated revenues is estimated (2-3% comparing to previous year). Revenue streams most likely affected are advertising, media selling, mobile handsets sales and mobile international roaming revenues. The management expects to be able to mitigate revenues shortfall by cost optimisation to still record a slight organic EBITDA growth for the year 2020 comparing to previous year. In addition to cost optimisation, the Group has amended its plans for Capex spend during 2020, where possible, without hindering the Group’s ability for future growth and quality of services provided. The Group’s telco segments have continued to meet customers’ expectations on service level and its network operating centre has maintained normal service levels. Based on this, no significant change in the customer base is expected. As customers are unlikely or unable to easily migrate during the crisis, somewhat lower gross adds and churn rates are expected for the year. Organic Revenues and Adjusted EBITDA of telco segment are expected to remain stable compared to last year.
20 Q1 2020 HIGH YIELD REPORT
In its Media segment, the management expects a decline in revenue by approximately 4-5% comparing to previous year. Postponing of certain sports events effected by reduction of revenue and relevant costs. Decline in media selling revenue will be offset by decline in relevant costs. All this combined by overall cost optimization efforts should result in relatively stable Adjusted EBITDA in Media segment compared to previous year. Acquisitions of Tele2 (completed in March 2020) and Vivacom (expected to complete mid-year 2020) will represent inorganic growth of the reported operational and financial performance of the Group in 2020. Impact of COVID-19 on the acquired companies is currently estimated to be similar to that of the Group’s existing telco operations. The expected PF contribution of the acquired companies has not materially changed given the crisis. As the COVID-19 pandemic in the countries of the Group’s operations was generally announced in mid-march 2020, the impact of the crisis onto the Group’s performance in Q1 2020 was fairly minimal, with no material impact to the Group's revenues, profitability and cash flow. The Group’s management confirms that they are not aware of any other significant post balance sheet events that could affect the consolidated financial statements for 31 March 2020 or require separate disclosure.
21 Q1 2020 HIGH YIELD REPORT
Mergers & Acquisitions
On January 9, 2020, the Group acquired a 53% stake in I.R.V. Investicije, Razvoj in Vodenje d.o.o.
On February 13, 2020 the Group agreed to acquire KRS Štepanjsko naselje.
On February 25, 2020 the Group agreed to acquire Elcatel d.o.o.
On March 3, 2020, the Group acquired a 100% stake in Tele2 d.o.o.
On April 3, 2020, the Group agreed to acquire Ansat d.o.o.
On May 4, 2020, the Group acquired a 100% stake in PANEL CATV d.o.o.
On May 6, 2020, the Group acquired a 100% stake in Tako Lako Shop d.o.o.
On May 6, 2020, the Group acquired a 90% stake in EVJ Elektroprom trgovina, proizvodnja, instalacije d.o.o.
United Group continually monitors M&A opportunities and is currently in the early stages of evaluating multiple potential opportunities. In line with its stated strategy, the Group is looking for acquisitions that are value accretive and offer substantial synergies with the Group’s existing operations.
22 Q1 2020 HIGH YIELD REPORT
Group Background
United Group is the leading distributor of cable and satellite pay-TV in Slovenia, Serbia, Bosnia and Herzegovina and Montenegro, where it also provides broadband internet and fixed- line telephony services. Additionally, the Group offers mobile telephony services in Slovenia and Croatia (after Tele2 acquisition) and distribute satellite pay-TV across the six countries of former Yugoslavia, Slovenia, Serbia, Bosnia and Herzegovina, North Macedonia and Montenegro.
United Group is the only pan regional distribution platform in a region of approximately 20 million people and is the leading multi-play provider in its primary markets, where the Group combines its services into packages, or bundles, which offer subscribers the convenience of being able to purchase television, broadband internet and telephony services from a single provider. This model provides significant opportunities to cross-sell the Group’s products.
United Group believes that it has been able to establish its business as one of the leading distribution platforms in its region due to the Group’s attractive content portfolio. This has been established through United Group’s ownership of specific key pay-TV channels, long term contracts with third parties, its well invested network that provides, among other things, one of the highest internet download speeds in the Group’s markets, and its high quality customer service which has led to low churn rates that the Group believes evidences a satisfied customer base.
Management Team
Many of the Group’s key management members have been with the business since its inception, including the Executive Chairman and Founder, Dragan Šolak, the Chief Executive Officer of the Group and Group Vice President – Marketing and Media, Victoriya Boklag and the Group Vice President - Operations, Violeta Vasilijević. The Group’s senior management team has substantial experience in the telecommunications, media and technology industries, as well as in banking, private equity and corporate finance. Many members of the senior management team have held a number of different positions within the business and have shaped the direction of its development and its organic growth within the region. Dragan Šolak—Founder and Executive Chairman of the Group. Mr. Šolak founded SBB in 2000 and has been a member of management since the Group’s inception. In 2009, Mr. Šolak assumed the role of Group Executive Chairman. In his current role, he continues to be involved in all aspects of the business and is responsible for the overall strategic leadership of the Group. Victoriya Boklag—Chief Executive Officer of the Group and Group Vice President— Marketing and Media. Ms. Boklag has been with the management team since the Group’s inception in 2000. Before taking over the role of United Group’s chief executive officer and vice president of marketing and media, Ms. Boklag held several positions in finance and
23 Q1 2020 HIGH YIELD REPORT
commercial operations and acted as the chief executive officer of SBB. Ms. Boklag is also a member of the Board of SBB Foundation. She holds a BA degree from the ICU Kiev. Violeta Vasilijević—Group Vice President—Operations. Ms. Vasiljević has been with the management team since the Group’s inception in 2000. She is currently responsible for the technical and operating support for all of the Group’s administrative functions and products. Ms. Vasiljević holds a degree in Mechanical Engineering from the University of Kragujevac. Janez Živko—Vice President Finance. Mr. Živko joined the management team of United Group in March 2015. Prior to joining, Mr. Živko served as the CFO of the Petrol Group, one of the largest companies in Slovenia. He has also served in numerous roles at Gorenje Group over a period of seven years, including Director of Finance and Deputy CFO. Mr. Živko began his career in 1998 as a financial analyst and subsequently became financial controller for European operations at ACT Teleconferencing in Denver, Colorado. He holds an MBA (in Finance) from the University of Denver in Colorado, USA. Željko Batistić—Group Vice President—Technology. Mr. Batistić first joined the management team in May 2012. Prior to joining, Mr. Batistić was an experienced CATV manager and served at a Croatian cable operator at B.net Croatia from 2007 to 2012. Mr. Batistić holds a Master’s degree in Electrical Engineering from the Faculty of Electrical Engineering and Computing, University of Zagreb and an Executive MBA degree from Cotrugli Business School, Zagreb. Vladislav Ratajac—Group Vice President—Corporate Development. Mr. Ratajac joined the management team in 2011. Mr. Ratajac held positions at Mid Europa Partners from 2008 to 2011 and Deutsche Bank before joining the Group. Mr. Ratajac holds a degree in Economics from Rutgers University in New Jersey, USA. Dragica Pilipović Chaffey—Group Vice President—Corporate Affairs. Ms. Pilipović Chaffey joined the management team in 2009. Prior to her current role, Ms. Pilipović Chaffey held a number of senior posts within the European Bank for Reconstruction and Development (EBRD) from 2007 to 2009, and the IMF in Washington, D.C. Ms. Pilipović Chaffey holds an MBA from George Washington University, Washington, D.C., and a BA in Economics from the University of Belgrade. Steve Leroy—Group General Counsel. Mr. Leroy joined the management team in September 2018 as Group General Counsel. Before joining the Group, Mr. Leroy held a number of leadership roles at Discovery, Anheuser-Busch InBev, and The Coca-Cola Company. Mr. Leroy was also a lawyer in Brussels and chief of staff to the governor Antwerp in Belgium. Mr. Leroy holds a Master’s degree in Law from Katholieke Universiteit Leuven, Belgium; a Master’s degree in Commercial & Consular Sciences from Hautes Etudes Commerciales St. Louis (Groupe ICHEC), in Brussels, Belgium; a Master of Business Administration (MBA) from INSEAD, in Fontainebleau, France; and the specialized Master’s degree in EU Competition Law & Economics from the Brussels School of Competition, Belgium.
24 Q1 2020 HIGH YIELD REPORT
Aleksandra Subotić—Chief Executive Officer—United Media. Ms. Subotić joined the management team in 2014. Previously, Ms. Subotić was a General Manager at Net TV Plus. Prior to joining us, Ms. Subotić worked as General Manager at Daniel SatTV, a satellite and cable network development company in Serbia, and at Total TV Info, a distribution company in Austria. She holds an MBA degree in Economics from Educons University. Adrian Ježina—Chief Executive Officer—Telemach Slovenia. Mr. Ježina joined the management team in 2017. Prior to joining, Mr. Ježina was the CEO of Siemens Convergence Creators Adria Region. He graduated in 2009 at the Faculty of Electrical Engineering, Mechanical Engineering and Naval Architecture in Split. He also holds an Executive MBA degree from the Cotrugli Business School. Admir Drinić—Chief Executive Officer—Telemach BH. Mr. Drinić serves as Chief Executive Officer of Telemach Bosnia and Herzegovina, having joined the Company in 2013 as Chief Operating Officer. His previous positions include member of the Securitas BiH Board of Directors, Chief Executive Officer of the B.I.G.A. Sarajevo security agency, and Chief Technology Officer of Gama Sigurnost Sarajevo. He holds a bachelor’s degree in economics from the University for Business Studies, Faculty of Economics, in Banja Luka, in 2009. Milija Zeković—Chief Executive Officer—SBB Serbia and Telemach Montenegro. Mr. Zeković joined the management team in October of 2018. Previously, he was Chief Executive Officer of Crnogorski Telekom from 2016 to 2017. He was also a member of the Executive Management Board of Crnogorski Telekom from 2008 to 2016. He holds a degree in Economics from the University of Montenegro. Nikola Francetić—Chief Executive Officer—Net TV Plus. Mr. Francetić joined the management team in October of 2018. Previously, he was head of content, broadcasting and media for A1 Telekom Austria Group from 2014 to 2018 and an executive director for content at T-HT Croatian Telekom from 2011 to 2014. He holds an MBA from the Bled School of Business in Slovenia and a degree in Experimental Physics from the University of Zagreb.
Viktor Pavlinić—Chief Executive Officer—Tele2. Mr. Pavlinić joined the management team in March of 2020. He has more than 20 years of experience in the telecommunications industry, in a range of positions in finance, sales and logistics. Mr. Pavlinić joined Tele2 in 2008 as Head of Controlling and was appointed CFO and Member of the Management Board in 2011. He has been CEO of Tele2 Croatia since 2016. He holds a degree in economics from the University of Zagreb.
25 Q1 2020 HIGH YIELD REPORT
Shareholder Structure
Following the EBRD’s purchase of a minority stake in the Group in July 2019, BC Partners now owns approximately 52.3% of the Group’s shares, senior management approximately 38.5%, KKR approximately 6.8% and EBRD approximately 2.4%. BC Partners is a leading global investment firm. Founded in 1986 as one of the first pan-European buy-out investors, BC Partners has grown and evolved into a leading alternative investment firm, investing principally in larger businesses in Europe and North America. Since inception, BC Partners has completed 113 acquisitions with a total enterprise value of over €145 billion and is currently advising funds totaling over €20 billion.
26 Q1 2020 HIGH YIELD REPORT
Appendices
Appendix 1 - Financial statements Income Statement in €000 Q1 2019 Q1 2020
Revenue 179,363 193,974 Other income 1,515 1,723 Content costs (31,403) (28,551) Link and interconnection costs (9,865) (11,434) Cost of end-user equipment and other material cost (10,917) (16,964) Staff costs (31,255) (21,537) Media buying (8,058) (7,944) Impairment loss on trade and other receivables, inc. contract assets (84) (2,279) Impairment loss on other financial assets (42) - Other operating expenses (29,851) (30,630) IFRS EBITDA 59,403 76,358
Depreciation (26,144) (27,126) Depreciation (right-of-use assets) (4,478) (5,550) Amortization of intangible assets (19,431) (22,254) Operating profit 9,350 21,428
Finance income 1,692 1,342 Finance costs (18,260) (34,715) Net finance costs (16,568) (33,373)
Profit/(loss) before tax (7,218) (11,945)
Income tax (expenses)/benefit (1,274) (1,433) Profit/(loss) for the period (8,492) (13,378)
Other comprehensive income/(loss) Items that are or may be reclassified subsequently to profit and loss Currency translation differences 1,881 (2,832) Other comprehensive income/(loss) for the period 1,881 (2,832)
Total comprehensive income/(loss) for the period (6,611) (16,210)
Profit/(loss) attributable to: Owners of the Company (9,437) (14,192) Non-controlling interests 945 814 Profit/(loss) for the period (8,492) (13,378)
Total comprehensive income/(loss) attributable to: Owners of the Company (7,556) (17,024) Non-controlling interests 945 814 Total comprehensive income/(loss) for the period (6,611) (16,210)
27 Q1 2020 HIGH YIELD REPORT
Statement of Financial Position in €000 Q1 2019 Q1 2020 Assets Property, plant and equipment 406,072 504,700 Goodwill 761,905 823,955 Intangible assets 298,313 299,689 Investment property 323 292 Right-of-use assets 114,910 149,149 Loans to related parties - 6,856 Other financial assets 7,798 11,736 Non-current prepayments 161 447 Contract assets 4,151 6,122 Deferred costs 5,254 241 Deferred tax assets 3,808 9,240 Non-current assets 1,602,695 1,812,427
Inventories 23,522 31,499 Trade and other receivables 151,578 192,173 Short-term loans receivables and deposits 5,994 8,891 Prepayments 36,149 45,862 Contract assets 20,583 37,753 Income tax receivable 8,872 10,674 Restricted cash for acquisition purposes - 1,050,000 Cash and cash equivalents 82,525 67,213 Current assets 329,223 1,444,065 Total assets 1,931,918 3,256,492
Equity Issued and fully paid share capital 125 125 Share premium 352,557 352,557 Capital reserves 45,724 54,468 Translation reserves (13,161) (15,307) Accumulated losses (356,336) (424,729) Equity attributable to owners of the Company 28,909 (32,886) Non-controlling interests 10,514 10,838 Total equity 39,423 (22,048)
Liabilities Loans and borrowings 121,167 57,010 Other financial liabilities-bonds 1,334,557 2,719,878 Long-term liabilities 3,539 5,827 Long-term provisions 23,664 40,684 Deferred operating lease income 3,799 5,334 Contract liabilities 1,998 1,747 Lease liabilities 96,720 117,092 Deferred tax liabilities 29,048 26,583 Employee benefits 627 784 Non-current liabilities 1,615,119 2,974,939
Trade and other payables 222,658 197,522 Current tax liabilities 12,891 16,404 Loans and borrowings 2,582 36,384 Deferred operating lease income 6,253 5,668 Contract liabilities 13,581 16,614 Lease liabilities 19,411 31,009 Current liabilities 277,376 303,601 Total liabilities 1,892,495 3,278,540 Total equity and liabilities 1,931,918 3,256,492
28 Q1 2020 HIGH YIELD REPORT
Statement of Cash Flows in €000 Q1 2019 Q1 2020 Cash flows from operating activities (Loss)/profit for the period (8,492) (13,378) Adjustments for: Depreciation 30,622 32,676 Amortization 19,431 22,254 Impairment of trade and other receivables (90) 2,132 Impairment of contract assets 174 147 Impairment of other financial assets 42 - Impairment loss of goodwill - 354 Impairment of inventories - 176 Income tax expense/(benefit) 1,274 1,433 Long-term provisions (92) (372) Share based payment 12,915 - Net finance cost 16,568 33,373 Operating cash flows before WC changes 72,352 78,795
Changes in: Trade and other receivables 11,489 8,057 Deferred revenue (1,090) 215 Deferred cost (869) (60) Contract assets (7,834) (5,545) Contract liabilities 6,072 6,666 Employee benefits (4) (10) Inventories (1,350) (4,016) Prepayments (540) 435 Trade and other payables (7,862) 3,026 Cash generated from operations 70,364 87,563
Interest paid (26,164) (35,747) Income tax paid (1,958) (1,869) Net cash from operating activities 42,242 49,947
Cash flows from investing activities Acquisition of property, plant and equipment (29,196) (37,626) Acquisition of intangible assets (13,291) (18,186) Acquisition of subsidiaries, net of cash acquired - (123,622) Short-term loans receivable and deposit inflow 278 - Short-term loans receivable and deposit outflow - (881) Cash inflow other non-current financial assets 30,000 608 Cash outflow other non-current financial assets - (1,038) Other (outflows)/inflows (282) (750) Net cash (used in)/provided by investing activities (12,491) (181,495)
Cash flows from financing activities Proceeds from share premium 15,000 - Proceeds from bond issue - 1,675,000 Repayment of bond - (587,578) Proceeds from borrowings 118,671 44,000 Repayment of borrowings (67,955) (113,928) Transaction costs related to loans and borrowings - (12,257) Acqusition of non controlling interest (1,027) (7) Repayment from lease liabilities (5,348) (6,448) Dividends paid (50,000) (78) Net cash (used in)/provided by financing activities 9,341 998,704
Net (decrease)/increase in cash and cash equivalents 39,092 867,156 Cash and cash equivalents at 1 January 43,430 250,058 Effects of movements in exchange rates on cash in hands 3 (1) Cash and cash equivalents at 31 March 82,525 1,117,213
29 Q1 2020 HIGH YIELD REPORT
Appendix 2 - Key Factors Affecting Our Business and Results of Operations The performance of the Group’s businesses, its results of operations and the key operating measures discussed below have been, and will continue to be, affected by a variety of factors. Certain of these factors are discussed below.
Products, Services and Content
United Group’s results are impacted by the product mix as well as the Group’s ability to introduce new products and upgrades and successfully sell those products and upgrades to increase RGUs and ARPUs. United Group continually evaluates the suite of products and services provided to subscribers to ensure that it remains competitive with other providers in its markets and has an opportunity to increase the Group’s subscriber base and the number of products sold to subscribers. United Group accomplishes this through product innovation, investments in technology and acquisitions of complementary businesses. For example, the Group has expanded its product offering by introducing fixed-line services to offer multi play packages in Slovenia, Serbia, Bosnia and Herzegovina and Montenegro, including pay television, broadband internet access, fixed-line telephony, as well as mobile telephony services in Slovenia and Croatia.
United Group believes that media and communications services customers will increasingly choose bundled products because of the convenience and enhanced value resulting from obtaining TV, broadband internet and telephony services from a single provider for one price. As at March 31, 2020, 82% of the Group’s customer base9 in Slovenia, 78% of its customer base9 in Serbia and 85% of its customer base9 in Bosnia and Herzegovina subscribed for one of the Group’s multi-play packages.
United Group seeks to be the leader in its markets in pay television content and have entered into long term strategic partnerships with key international and regional content owners. The Group has also acquired leading regional content owners in key television sub segments (sports, lifestyle, children and films), such as providers of the Sport Klub family of channels (which includes Sport Klub, Golf Klub and fishing and hunting channels) and Cinemania. United Group’s ability to maintain the quality of its content impacts the Group’s ability to sell pay television offerings, as well as bundled packages.
The Group’s product mix can also impact margins. For example, the mobile telephony business and the content business generally have lower margins compared to the cable-based business. The Group’s success in growing these businesses may impact the product mix and therefore may affect UG Adjusted EBITDA margins.
9 Under new methodology: unique cable subscribers by bundle.
30 Q1 2020 HIGH YIELD REPORT
Pricing of our Products and Services
Increasing demand for attractive content and higher broadband speeds allows the Group to increase the prices at which services are provided while maintaining relatively low churn rates. United Group regularly reviews the prices of its products and services, however, and in the past has adjusted subscription fees as necessary in line with inflation, changes in foreign exchange rates or in response to market conditions and content costs. Changes in the pricing of the Group’s products and services will impact the revenues and margins that are generated from these products and services and impact its ability to attract new customers. For example, the Group’s multi play bundles offer subscribers higher value in terms of channels, speeds functionality and add on features. The pricing of all services, including multi play bundles, is dependent on market conditions, pricing by competitors with similar offerings and the perceived quality of the Group’s products versus other products. In relation to the Basic TV package, the Group was also subject to price regulation in Serbia until January 2017. From January 2017, the price of the Basic TV package in Serbia is no longer subject to price regulation. However, such price regulation might be reinstated in the future.
Subscriber Churn
The television, broadband internet and telephony industries exhibit churn as a result of high levels of competition. In addition to competitive alternatives, churn levels may be affected by changes in prices or competitors’ prices, the Group’s level of subscriber satisfaction, subscriber mortality and the relocation of subscribers, as well as from the termination of agreements. An increase in churn may lead to increased costs and reduced revenues when subscribers cancel services as the Group incurs additional marketing and advertising costs to find new subscribers.
Increasing demand for attractive content and higher broadband speeds allows the Group to increase the prices at which it provides these services while maintaining relatively low churn rates. United Group believes its relatively low churn rates provides recurring cash flows and visibility with respect to future revenues. The Group has historically experienced low churn rates in its television, broadband internet and fixed-line telephony businesses, and the churn experienced in these businesses has primarily been driven by customers moving outside of the Group’s current geographic area of services as well as termination of services due to their inability to pay, with only a limited amount of churn driven by competition. United Group believes that launching telephony in its markets, further driving digitization, providing subscribers with multi play packages (including quad play in Slovenia, as described in more detail below), expanding the Group’s cable footprint to broaden geographic reach and benefiting from increasing disposable incomes in the region (reducing the likelihood of customers’ bad debt), will enable the Group to maintain low churn rates for cable pay-TV.
The churn rates for mobile post paid subscribers are higher than the churn rates for fixed-line telephony services, as it is easier for mobile subscribers to switch to competitors as there are no infrastructure limitations.
31 Q1 2020 HIGH YIELD REPORT
United Group believes that the control of a mobile network in Slovenia, following its acquisition of Tušmobil, has allowed it to develop an attractive suite of fixed mobile convergence services in Slovenia which, among other things, has had the effect of reducing the churn of mobile postpaid subscribers in Slovenia. Since the acquisition of Tušmobil, the number of quad play subscribers in Slovenia has increased to 34% of subscribers in Slovenia, from 1% of subscribers prior to the acquisition. In addition, the Group has successfully reduced the blended annual churn rate of mobile postpaid subscribers to 9% at March 31, 2020 from 18% at January 31, 2016. This is primarily due to the Group’s attractive products and services and an increase in the number of new mobile postpaid subscribers (each with new contractual obligations). The Group defines blended annual churn as net lost subscribers (the number of customers that either on a voluntary or involuntary basis no longer subscribe for a certain service) divided by the number of all unique cable subscribers at the beginning of period, which result is then annualized. The churn rate of mobile prepaid subscribers is relatively higher due to the non-contractual nature of the relationship with such subscribers.
Cost of Services Provided
United Group’s most significant costs include:
(i) carriage fees paid to international and regional broadcasters such as Fox, Discovery and Pink, in order to carry their programs on the Group’s distribution network,
(ii) licensing fees payable to sports rights owners such as UEFA, the English Premier League, Spanish Primera League, ATP and Formula 1, in order to develop content for the Group’s own channels
(iii) satellite capacity costs,
(iv) payroll costs,
(v) internet and interconnection fees,
(vi) costs of materials used to connect subscribers to our network and
(vii) costs for marketing and sales.
Most of the Group’s costs, such as a portion of the network operations, customer care, billing and administration costs, are relatively fixed, while a portion of the Group’s marketing and customer services cost is variable. The Group’s content acquisition costs are mostly fixed, and a decreasing portion of these costs are subscriber based. Where possible, the Group aims to negotiate fixed rate content costs. This approach allows input prices of its content to be anticipated and products priced accordingly. The costs associated with the growth of the business, such as RGU acquisition costs, which are primarily comprised of campaign costs and sales costs for attracting new subscribers, are variable costs.
A large portion of the Group’s costs is content costs, accounting for 24% of operating expenses (excluding depreciation and amortization of intangible assets) in Q1 2020. While
32 Q1 2020 HIGH YIELD REPORT
United Group owns a portion of its content, the Group is dependent on broadcasters and other content owners for most of its programming. The Group pays license fees to several regional and international broadcasters in order to broadcast their programs. For on demand content purchased by subscribers, the Group generally pays a revenue share of the retail price, subject, for certain on demand content, to fixed minimum guarantees. For packaged on demand content (subscription video on demand), the Group pays on a per subscriber basis, sometimes with minimum guarantees. United Group generally expects that its content costs (above the minimum amounts) will increase in line with increased revenues from digital pay- TV and on demand content. In the past, the Group has successfully obtained rebates and discounts for its content, but these may not continue in the future.
United Group pays fees to satellite operators to uplink and transmit its content to DTH subscribers, and also uses other network operators to connect telephone calls of customers to customers of their respective networks (interconnection). Generally, the amount paid in interconnection fees in any period will depend on the level of usage of the Group’s services.
Staff costs are impacted by the number of personnel employed, the experience levels at which such persons are employed and increases in salaries and bonuses due to performance factors. Labor costs of technicians, spent on the construction and upgrade of the network and acquisition of subscribers, are capitalized as tangible and intangible assets.
RGU acquisition costs include campaign costs and sales costs. The Group aims to recover RGU acquisition costs over the duration of the service contract. Factors that contribute to the successful recovery of RGU acquisition costs include operational efficiency, the density of the subscriber base and direct relationships with subscribers, which enables the Group’s not to rely on intermediaries to interact with its customers.
Network and Technological Advances
The Group’s ability to provide new high definition and on demand digital TV services, broadband internet access at higher speeds and telephony services to subscribers depends, in part, on the ability to upgrade and maintain the Group’s network. The Group incurs capital expenditure charges in periods over which these upgrades are made, with the aim of recouping these investments through increased revenues and profitability.
The Group’s ability to compete effectively and maintain or increase the customer base depends on its ability to anticipate and react quickly to technological developments and evolving industry standards and develop successful new and enhanced products and services to adapt to changes in the market. United Group invests in new or enhanced technologies, products or services in periods over which industry standards change, or to upgrade technologies. Additionally, capital expenditure costs are incurred relating to the replacement of existing equipment.
33 Q1 2020 HIGH YIELD REPORT
Foreign Currency Exchange Rates
United Group operates across the Balkan region generating revenues in many local currencies, which fluctuate from time to time in relation to the euro. Revenues in Slovenia and Montenegro are generated in euro. SBB Serbia, Telemach BH, Nova TV and Tele2 record their financial results in their respective functional currencies (the Serbian dinar, the Bosnian and Herzegovinian mark and Croatian kuna, respectively), which are then translated into euros in preparing the consolidated financial statements. In Q1 2020, 52% of revenue was generated in euros or currencies pegged to euro, with 35% of revenue generated in the Serbian dinar and 13% of revenue generated in Croatian kuna. While the Bosnian and Herzegovinian mark is pegged against the euro at a fixed exchange rate of BAM 1.9558 per €1.00, the Serbian dinar and Croatian kuna fluctuate freely against the euro. In Q1 2020, the value of the Serbian dinar increased approximately 0.4% relative to the Euro compared to Q1 2019. However, due to the historic indexation of the Serbian dinar against the German mark, which was replaced by the euro in 2002, the Group believes the Serbian consumer price index closely tracks the depreciation of the Serbian dinar against the euro which has historically allowed the Group to “pass through” a portion of the impact of the depreciation of the dinar to customers. The Group believes that its pricing strategy reflects this “pass through” principle. In Q1 2020, the value of the Croatian kuna decreased approximately 2.5% relative to the Euro compared to Q1 2019. The Croatian National Bank’s chose the stability of the exchange rate of the Croatian kuna against the euro as the nominal anchor of the monetary policy and occasionally participates in the foreign exchange market, mostly when it considers the exchange rate fluctuation to be or may become excessive.
United Group presents its consolidated financial statements in euros. As a result, the Group must translate the assets, liabilities, revenue and expenses of all operations with a functional currency other than the euro into euro at then-applicable exchange rates. Consequently, increases or decreases in the value of these currencies against the euro may affect the value of assets, liabilities, revenue and expenses with respect to the Group’s non-Euro businesses in the consolidated financial statements, even if their value has not changed in their original currency. These translations could significantly affect the comparability of results between financial periods and result in significant changes to the carrying value of assets, liabilities and stockholders’ equity.
Additionally, certain expenses, primarily content and satellite costs, are in euro and U.S. dollar. Where the Group is unable to match sales received in foreign currencies with costs paid in the same currency, the results of operations are impacted by currency exchange rate fluctuations. A substantial portion of indebtedness is denominated in euro. In March 2015, the Group entered into a EUR/USD currency hedge agreement, pursuant to which it hedges a part of its exposure to the U.S. dollar. The Group entered into an additional EUR/USD currency hedge agreement in May 2016 pursuant to which it hedged the remaining portion of its exposure to the U.S. dollar for the year 2016. An additional EUR/USD hedge was implemented in February 2017, which hedged most of its 2017 USD exposure. As there has been no material
34 Q1 2020 HIGH YIELD REPORT
change in exposure to the U.S. dollar in Q1 2020, the Group did not enter into any additional currency hedge agreements during the period ended March 31, 2020.
Growth in our Markets
Three of the Group’s key markets, Serbia, Bosnia and Herzegovina and Montenegro, are generally characterized by lower internet broadband household penetration rates compared to elsewhere in Western Europe and the CEE region and both Serbia and Bosnia and Herzegovina have lower pay television household penetration rates compared to elsewhere in Western Europe and the CEE region. As a result, growth in the Group’s markets have been higher than in certain CEE region and Western Europe jurisdictions. The Group believes this is primarily due to the increasing importance of high-quality broadband internet and an increasing convergence of the Group’s regions with the EU. Slovenia is a more mature market, with subscriber rates similar to the CEE region, and as a result, growth in that market will depend more on the Group’s ability to effectively compete with other market participants and to continue to offer high quality customer propositions. In each of the aforementioned markets, a number of factors will impact the rate of growth of pay television, broadband internet and telephony industries, including economic conditions, political stability, increases in infrastructure and an increased distribution of wealth. Furthermore, these industries may not grow at the same rate as they have in the past.
Regulation
The Group’s operations are subject to various regulations in Europe and in its regional markets. The Group is generally free from price regulation other than, prior to January 2017, with respect to the Basic TV package in Serbia, due to SBB Serbia’s prior SMP in the Serbian pay-TV market. Since the beginning of 2017, the Group is no longer considered a significant market participant in the pay-TV market in Serbia, thus the Basic TV package is no longer subject to price regulation, though this may change in the future. SBB Serbia is, however, currently deemed to have SMP on the wholesale market for call termination in public telephone networks and the wholesale market of central access at a fixed location for mass market products, which imposes certain regulatory obligations. Prior to the change to the Group’s status in the pay-TV market in Serbia, in January 2017, the pricing of the Basic TV package in Serbia, which accounted for 12% of revenue for the year ended December 31, 2017, and which is used as a platform to up- and cross-sell products, was regulated and the Group was not permitted to increase the price for such packages without regulatory approval. In 2015, the Group’s first application for a price increase for this package was not accepted by the Serbian regulator; however, the second application, in November 2015, was accepted by the Serbian regulator, and the Group implemented price increases for its Basic TV package in Serbia on January 1, 2016. The Group also implemented price increases in January 2018, which the Serbian Commission for Protection of Competition investigated, but ultimately accepted. In addition, the Group may be subject to conditions imposed in connection with competition authority clearances as it continues to expand its business through bolt on, value accretive acquisitions and may be subject to market power analysis from the relevant
35 Q1 2020 HIGH YIELD REPORT
regulators, which could force the Group to adjust its prices or sell various parts of the businesses.
Tax Treatment in Local Jurisdictions
The results of the Group’s operations depend on tax treatment under the tax laws and regulations of local jurisdictions. For instance, in Serbia, taxable income can be reduced in the same proportion as capital expenditure for the year in Serbia divided by the carrying amount of assets in Serbia. Due to significant capital expenditure in Serbia in 2016, the Group believes it has satisfied the requirements to be granted a ten-year tax beneficial status, expiring in 2025, and recorded beneficial tax treatment for the SBB Serbia segment in Q1 2020. Additionally, under thin capitalization rules in Serbia, interest and related costs under intercompany loans are recognized as deductible expenses to the extent the intercompany loans do not exceed four times the borrower’s equity. In 2016, SBB Serbia capitalized €82.7 million of intercompany loans, so the Group received a tax allowance of four times the interest expense relating to such capitalized intercompany loans. In 2017, 2018 and 2019 SBB Serbia did not capitalize any intercompany loans. In March 2019, the Serbian Tax Authority notified the Group that it had recharacterized interest payments made by SBB Serbia under an intragroup loan agreement (and certain other transactions) as dividends, which would have been subject to a 5% withholding tax, and found a total liability of €21 million, including late interest. The Group has appealed the decision and received a deferral of its obligation to pay any amounts until resolution of the appeal. United Group also initiated international arbitrage on the basis of the bilateral investment treaty between The Netherlands (location of United Group’s headquarters) and Serbia. The Dutch Ministry of Finance confirmed that it is preparing a case on the grounds of the double taxation agreement between the two countries.
Furthermore, in Slovenia, Telemach Slovenia may use a tax allowance for investment in equipment and intangible assets (available for investments made after January 1, 2008), whereby the tax allowance is limited to 40% of the value of the assets, up to the amount of the tax base. In 2016, 2017, 2018 and 2019 Telemach Slovenia used the tax allowance for investments in the amount of €1.5 million, €7.8 million, €15.8 million and €12.1 million, respectively.
In Bosnia and Herzegovina, a taxpayer who invests more than BAM 20.0 million (€10.2 million) in production assets (property, plant and equipment) within the territory of Bosnia and Herzegovina for five consecutive years is relieved from 50% of taxation on such investments for a period of five years, starting from the first year in which it has invested at least BAM 4 million (€2.0 million). Telemach BH received relief of BAM 6.3 million (€3.2 million) in 2016 pursuant to this provision. In 2017, 2018 and 2019, Telemach BH received a tax allowance for investments in the amount of BAM 4.5 million (€2.3 million), BAM 6.1 million (€3.1 million) and BAM 3.5 million (€1.8 million), respectively. In Bosnia and Herzegovina, a taxpayer receives a tax allowance when it employs certain types of employees, and in 2017, 2018 and 2019, Telemach BH received a tax allowance for certain new employees in the
36 Q1 2020 HIGH YIELD REPORT
amount of BAM 790 thousand (€0.4 million), BAM 1.3 million (€0.7 million) and BAM 1.0 million (€0.5 million), respectively.
Implementation of New Accounting Policies
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items available on the voluntary basis. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases.
Definition of lease Previously, the Group determined at contract inception whether an arrangement was or contained a lease under the IFRIC 4 and IAS 17. The Group now assesses whether the contract is or contains lease based on the new definition of lease. Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange of consideration.
The Group applies the practical expedient to grandfather the definition of a lease on transition. This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.
As a lessee The Group leases many assets including properties, satellite capacity, facilities and infrastructure which were previously recognized under operating lease.
Previously, the Group recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised.
Under IFRS 16, the Group recognises new assets and liabilities for its operating leases of satellite, office facilities, part of infrastructure, as well base stations and the right of use of a water and land surface. The nature of expenses related to those leases has been changed because the Group will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities.
37 Q1 2020 HIGH YIELD REPORT
The carrying amount of right-of-use assets and lease liabilities, excluding previously recognized finance leases, are presented below:
In €000 31-Mar-20 31-Dec-19 Land and properties 7,013 7,314 Machinery and equipment 63,949 30,359 Office premises 28,288 23,542 Optic fibers 22,904 20,016 Motor vehicles 576 451 Other 26,419 27,792 Total right-of-use assets 149,149 109,474
In €000 31-Mar-30 31-Dec-19 Current lease liabilities 31,009 19,808 Non-current lease liabilities 117,092 87,260 Total lease liabilities 148,101 107,068
As a lessor
Where the Group is a lessor in a lease which transfers substantially all the risks and rewards incidental to ownership to the lessee, the assets leased out does not present identifiable assets, though it is used by the Group as well, e.g. cable network.
38 Q1 2020 HIGH YIELD REPORT
Appendix 3 - Definitions of Key Operating Measures Homes passed: represents all homes connected to the United Group’s network directly and through third party networks. The Group provides services to subscribers directly over its network and over certain cable networks owned by third parties with whom the Group has entered into exclusive or non-exclusive agreements to provide its services over their networks.
Unique cable subscribers represent the number of individual end-users who have subscribed to one or more of our cable-based services. In all of the United Group’ cable markets, cable pay-TV is the basic service that a cable unique subscriber is typically required to subscribe to in order to receive the Group’s other services such as broadband internet access and telephony. A unique cable subscriber may subscribe to several different services, thereby accounting for only one unique cable subscriber, but several RGUs. Cable pay-TV RGUs includes the sum of the Group’s analog and digital cable pay-TV RGUs in Slovenia and its total analog cable pay-TV RGUs (without separately counting analog cable RGUs that have purchased digital top ups) in Serbia, Bosnia and Herzegovina and Montenegro provided within our network footprint.
OTT RGUs consists of the Group’s NetTV Plus and out of footprint Eon subscribers. Broadband internet RGUs represents residential broadband internet provided within our network footprint. Fixed-line telephony RGUs represents residential fixed-line telephony provided within our network footprint. Mobile RGUs represents mobile telephony services provided to customers in Slovenia where the Group has operated as an MNO since its acquisition of Tušmobil in April 2015. Prior to April 2015, the Group provided mobile services to its customers as an MVNO. After Tele2 acquisition in March 2020 the Group provides mobile telephony services as well in Croatia. Other services includes multichannel multipoint distribution service-based services, ADSL internet services and cable services provided outside of the Group’s network footprint. Penetration represents the number of RGUs at the end of the relevant period as a percentage of the number of homes passed by the Group’s network. Blended cable ARPU is calculated by adding together, for each month in a given period, the total cable pay-TV, broadband internet and fixed-line telephony revenues (including fixed-line telephony usage revenues and excluding minor installation fees) for that particular month divided by the average number of cable pay-TV RGUs for that month and then dividing that sum by the total number of months in the period. Blended cable ARPU does not include mobile ARPU. We calculate mobile ARPU by adding together, for each month in a given period, the total mobile telephony revenues (excluding revenues generated by customers of other networks roaming on the Group’s network and excluding wholesale revenues) for that particular month divided by the average number of mobile RGUs for that month and then dividing that sum by the total number of months in the period.
39 Q1 2020 HIGH YIELD REPORT
DTH subscribers represent the number of individuals across the six South Eastern European markets (Slovenia, Serbia, Bosnia and Herzegovina, Croatia, Montenegro and North Macedonia) who have subscribed to the Group’s DTH pay-TV services. The Group believes that most of these subscribers are outside of its cable footprint. Typically, DTH subscribers are only able to subscribe to DTH based pay-TV services and represent a single RGU. However, the Group is re selling ADSL services purchased from its competitors in the respective markets to DTH subscribers.
Average monthly revenue per user, (“ARPU”) is a measure used to evaluate how effectively the Group is realizing potential revenues from subscribers. ARPU is calculated by adding together, for each month in a given period, the total subscription-related revenues for that particular month divided by the average number of subscribers for that month and then dividing that sum by the total number of months in the period.
40 Q1 2020 HIGH YIELD REPORT
Appendix 4 - Description of Key Line Items
Revenue: Generated from the following services: cable television, broadband internet, DTH-TV, value-added services (such as OTT), telephony subscriptions and telephony usage, content and other sources (primarily related to the sale of end-user equipment). Revenues generated from the Group’s bundle subscriptions are allocated to the individual products of standard cable, broadband internet and telephony subscriptions based on the individual product prices for each product as a percentage of the sum of the individual product prices. Revenue for these services is charged and recognised in the period in which these services are provided. The Group recognises revenues for connection fees upon delivery of installation and defers and amortizes connection fees over the average remaining useful life of the customer relationship. Other income: Arises mainly from the sale of programming rights, advertising and lease of cable network. Content cost: Include author rights and royalties paid to procure the Group’s content, and include fees paid to channel providers, primarily related to foreign television channels. The Group content fees are predominantly determined on a flat monthly amount and to a lesser extent on a per-subscriber basis. Satellite capacity cost: Relate to the lease of satellite capacity from third-party providers, which currently is EUTELSAT. These costs are impacted by the type and value of commercial discounts obtained from satellite providers. Link and interconnection cost: These costs relate to fees payable in order to transfer data over third-party networks. Internet connection links are leased from various parties. Cost of end-user equipment and other material cost: Include costs to procure set-top boxes, other products, such as telephones and routers, and materials used to connect subscribers to our network. Staff costs: Include wages and salaries, social security costs, pension costs and other post-employment benefits and the cost of temporary and external personnel, adjusted for own work capitalized based on direct labour hours spent on projects which are capitalized. Depreciation cost: Depreciation cost relates to the depreciation and impairment of our property, plant and equipment over their useful lives. Amortization of intangible assets: Relates to the amortization and impairment of the Group’s intangible assets over their useful lives. The Group’s intangible assets include its customer base and direct subscriber acquisition costs, which, for its cable and DTH customers, are capitalized and amortized over the estimated useful life of the customer relationship. For the Group’s mobile customers, subscriber acquisition costs are capitalized and amortized over a period of twenty-four months (the estimated life of the post-paid customer contract), while its mobile customer base is capitalized and amortized over its estimated useful life. Intangible assets also include goodwill, computer software, licenses and content such as sport rights.
41 Q1 2020 HIGH YIELD REPORT
Other operating expenses: Includes rent of premises, poles and ducts, marketing and promotion expenses, legal and administrative fees and maintenance costs. Finance income: Includes interest income on funds invested (including short-term bank deposits) and foreign currency gains. Finance costs: Include interest expense on borrowings and foreign currency losses. Income tax (expense)/benefit: Comprises current and deferred income tax and is recognized in the Group’s statement of comprehensive income, except to the extent that such expense or benefit relates to an item that is recognized as equity in its balance sheet, or in its statement of other comprehensive income. Operating income: Represents the amount of profit generated from business operations, and includes total revenues less total operating expenses (including cost of goods sold, personnel expenses, contracted work, materials and logistics, marketing and sales, office expenses, other operating expenses, amortization, depreciation and impairments).
42 Q1 2020 HIGH YIELD REPORT
Appendix 5 - Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk
The Group’s income and cash flow from operations are affected by changes in market interest rates. Some items on the Group’s balance sheet, such as cash and bank balances, interest bearing investments and borrowings, are exposed to interest rate risk.
Borrowings under the Existing Revolving Credit Facility and the Existing Floating Rate Notes bear, and the Notes will bear, interest at varying rates, and as a result we will have interest risk with respect to this debt. Interest rate hedging arrangements are not in place as of the Issue Date with respect to the debt under our Existing Revolving Credit Facility, the Existing Floating Rate Notes and the Notes. For fixed rate debt, interest rate changes affect the fair market value of such debt, but do not impact earnings or cash flow.
Currency Risk
Currency risk arises when future commercial transactions or recognized assets or liabilities are denominated in a currency that is not the functional currency of the Group entity holding the asset or obligation. As a result of the Group’s operations in various countries, the Group generate a significant portion of its sales and incur a significant portion of its expenses in currencies other than the euro. The Group’s primary exposure is to the Serbian dinar. In Q1 2020, 35% of the Group’s revenue was denominated in Serbian dinar and 65% was denominated in euros or other currency. The Bosnia and Herzegovinian mark is pegged to the euro, while Croatian kuna and North Macedonian dinar are relatively stable. In March 2015, the Group entered into a EUR/USD currency hedge agreement, pursuant to which the Group hedge its exposure to the U.S. dollar. The Group entered into an additional EUR/USD currency hedge agreement in May 2016 pursuant to which the Group hedged the remaining portion of its exposure to the U.S. dollar for the year 2016, and in February 2017, the Group entered into an additional EUR/USD currency hedge to cover most of its 2017 U.S. dollar exposure. As there has been no material change in exposure to the U.S. dollar in 2020, the Group did not enter into any additional currency hedge agreements during the period ended March 31, 2020.
Translation Risk
Translation risk is the risk that the value in euro of the consolidated profit and loss statement and balance sheet will fluctuate due to changes in foreign exchange rates connected with the translation of our subsidiaries that do not have the euro as their functional currency. Since January 1, 2016, almost all our indebtedness has been denominated in euro.
Transaction Risk
Transaction risk is the risk of exchange losses incurred by the Group through purchases and sales in currencies other than the local currency of the subsidiaries concerned.
43 Q1 2020 HIGH YIELD REPORT
Appendix 6 - Critical Accounting Policies
For a description of the Group’s critical accounting estimates and judgments, see Note 6 to the Adria MidCo B.V. Group Consolidated Financial Statements as of and for the year ended December 31, 2019. The Group’s significant accounting policies and changes of accounting policies, including IFRS 16 (Leases), are described in Notes 3 and 4 to the Audited Financial Statements.
44