SES: Half Year 2020 Results

7 August 2020

SES S.A. announced financial results for the six months ended 30 June 2020.

Steve Collar, CEO of SES, commented: “The business has performed well in the first half of the year, delivering solid revenue in challenging trading conditions, while the benefits of the proactive cost-saving measures that we took early in the development of COVID-19 are also seen in our H1 results. We were particularly pleased to sign a broad distribution agreement with BBC Studios during the quarter, underlining our ability to support premium customers across a range of satellite and terrestrial distribution methods as well as significant extensions with ProSieben in Germany and Austria. On the Networks side, we are seeing a pickup in our Government business after a slower first half, with a new and innovative use of the O3b constellation for the U.S. Government among a number of important deals won and signed in the second quarter.

1 Excluding periodic and other revenue (disclosed separately) that are not directly related to or otherwise distort the underlying business trends

2 At constant FX which refers to comparative figures restated at the current period FX to neutralise currency variations

3 Excluding restructuring charge and operating expenses recognised in relation to U.S. C-Band repurposing

4 Financial outlook assumes a EUR/USD exchange rate of EUR 1 = USD 1.15, nominal satellite health and launch schedule

5 Total incremental investment of EUR 480 million of which EUR 250 million over the period of 2020-2024 with the remaining balance thereafter

6 Treats the hybrid bonds as 50% debt and 50% equity, per the rating agency methodology

Notwithstanding the resilience that our business has shown in the first half of the year, we are not immune to the impact that global lockdowns are having on a number of the markets that we serve. We anticipate a slowdown in the pace of new business in the second half of the year and have updated our financial outlook for the full year in view of the challenges faced by a number of our customers, particularly in Mobility and Sports & Events. We were quick and early to initiate exceptional one-off cost reduction measures of EUR 40 - 60 million for 2020 to mitigate the impact of COVID-19 on our bottom line and are tracking well against this target.

Looking beyond COVID-19, 2020 has seen us make great strides in our more than two-year effort to repurpose spectrum in the U.S. for 5G while protecting the broadcast communities that we serve. Following the FCC Report and Order in February and the subsequent decision by all operators to adopt accelerated clearing in May, we are executing strongly on all elements of our clearing and transition plan. We incorporate the financial impact of the C-Band project in our financials for the first time, including clear line of sight to almost USD 4 billion in accelerated relocation payments.

We are also almost a year away from the launches of both SES-17 and O3b mPOWER, two programmes that underpin our multi-orbit, scalable, cloud-enabled network architecture that will drive significant future growth in our Networks business, a business that has already delivered 25% growth over the last three years. We have added four more satellites to the planned O3b mPOWER constellation, adding resilience, an improved launch cadence and a 90% increase in constellation throughput while maintaining our overall capex envelope broadly flat. Significantly, SES and Boeing have agreed to collaborate in the development of commercially based service offerings for Government users, including the development and demonstration of multi-orbit interoperability.

Our global transformation programme, Simplify & Amplify, is on track to deliver annualised cost reductions of EUR 40 - 50 million from 2021 onwards through a combination of sharpened focus, reductions in footprint and wide-reaching efficiency improvements. We have further strengthened our financing position with a 6% year-on-year reported net debt reduction and a new EUR 400 million Euro Bond reducing the cost of debt and enhancing debt maturity profile, with no significant senior debt maturities to refinance before 2023. Overall, we are satisfied with the progress that we are making as a business in what is a challenging, pandemic-dominated year.

Finally, on behalf of everyone at SES, both now and over the last 25 years, I want to pay tribute to Romain Bausch, who has decided to step down from the SES Board of Directors after a quarter of a century of service, dedication and success, firstly as CEO and latterly as Chairman. As we build the future vision for SES, we stand on the shoulders of giants and we could not be more appreciative and grateful for the legacy that Romain has created.”

Key business and financial highlights

SES regularly uses Alternative Performance Measures (APM) to present the performance of the Group and believes that these APMs are relevant to enhance understanding of the financial performance and financial position.

• H1 2020 group revenue of EUR 947.5 million (-2.6% at constant FX compared with the prior period) included EUR 8.8 million of periodic and other revenue (H1 2019: EUR 10.8 million). Underlying revenue (excluding periodic and other) declined by 2.4% (year-on-year at constant FX) to EUR 938.7 million.

• Video underlying revenue of EUR 559.3 million (-8.0% at constant FX) reflected the combination of lower Distribution revenue (-7.4%), from ‘right-sizing’ of capacity by customers in mature markets, and the decision to reduce exposure to low margin video services activities contributing to lower Services revenue (-9.6%).

• Networks underlying revenue grew, for the third consecutive year, by 7.1% at constant FX to EUR 379.4 million with double-digit growth in Mobility (+22.6%) and a return to growth in Fixed Data (+4.6%), while Government (-1.0%) is expected to benefit from new business wins that will contribute to revenue from the second half of 2020.

• Adjusted EBITDA of EUR 582.0 million represented an Adjusted EBITDA margin of 61.4% (H1 2019: 62.0%). Adjusted EBITDA excludes a restructuring charge of EUR 21.7 million in relation to the Simplify & Amplify transformation programme (H1 2019: EUR 11.4 million) and the recognition of EUR 13.6 million (H1 2019: nil) of operating expenses associated with the accelerated repurposing of U.S. CBand spectrum.

• H1 2020 operating expenses (excluding restructuring and C-Band) in line with H1 2019 at EUR 365.5 million. This included a one-off charge of EUR 8.1 million related to the recognition of Luxembourg net wealth tax in H1 2020 which offset the positive contribution to group EBITDA from a 2.2% (year-on-year) reduction in recurring operating expenses.

• The reduction in net profit to EUR 86.4 million in H1 2020 mainly reflected the combination of the lower reported EBITDA (including the restructuring and C-Band expenses noted above) and net foreign exchange losses compared to H1 2019, which also included an income tax benefit of EUR 22.4 million. These items offset the positive contribution from lower depreciation, amortisation and net interest expenses.

• Net cash generated by operating activities of EUR 411.9 million (H1 2019: EUR 553.5 million) represented 75.3% of EBITDA (H1 2019: 94.7%). The year-on-year comparison was predominantly impacted by the changes in working capital.

• Reported net debt of EUR 3,398 million at 30 June 2020 was 6% lower than 30 June 2019 while the weighted average debt maturity improved to 7.7 years (H1 2019: 7.3 years) and weighted average interest cost reduced to 3.3% (H1 2019: 3.6%). The Adjusted net debt to Adjusted EBITDA ratio of 3.3 times (including 50% of the hybrid bonds as debt, per the rating agency methodology) was lower (H1 2019: 3.5 times).

• Fully protected contract backlog at 30 June 2020 was EUR 5.9 billion (gross backlog of EUR 6.4 billion when including backlog subject to contractual break clauses).

• In June 2020, SES announced Ferdinand Kayser’s decision to retire at the end of 2020 with CEO Steve Collar assuming direct responsibility for the Video business from 1 July 2020. Thai Rubin was appointed Chief Legal Officer to succeed John Purvis, who will remain an important member of the legal team on a part-time basis. In addition, Romain Bausch stepped down from the SES Board of Directors in July 2020 having dedicated more than 25 years of service to the company.

Update on Response to COVID-19 Global Pandemic and Financial Outlook SES has continued to execute a series of measures to ensure employee safety and continuity of business operations including a worldwide ‘work from home policy’ implemented in March 2020 before any government regulation, and well established and tested contingency plans across all technical facilities around the globe. All operations centres across the SES network remain 100% in service and operational.

As at 30 June 2020, the group’s financial position includes EUR 366.8 million of cash & cash equivalents, a EUR 1.2 billion Revolving Credit Facility which remains undrawn, and no meaningful senior debt maturities required to be refinanced before 2023 following the successful completion of a new EUR 400 million Euro bond maturing in 2028 with an annual coupon of 2.0%.

The fixed, long-term nature of SES’ commercial contracts provides strong cash flow visibility and security as reflected in the fully protected contract backlog of EUR 5.9 billion at 30 June 2020. While the H1 2020 financial results were largely unaffected by COVID-19, it is expected that headwinds from the global pandemic will impact SES’ performance over H2 2020 and, accordingly, the financial outlook (assuming a EUR/USD exchange rate of EUR 1 = USD 1.15, nominal satellite health and launch schedule) for full year 2020 is updated as follows:

• Group revenue: EUR 1,860 - 1,900 million (from 1,920 - 2,000 million), including Video revenue of EUR 1,090 - 1,110 million and Networks revenue of EUR 770 - 790 million (from EUR 1,110 - 1,150 million and EUR 800 - 840 million respectively). At 30 June 2020, nearly 95% of the updated FY 2020 group revenue outlook is already contractually committed.

• Adjusted EBITDA: EUR 1,120 - 1,160 million (from EUR 1,150 - 1,210 million) including EUR 40 - 60 million of COVID-19 specific cost mitigation actions that were implemented during H1 2020 and which are not currently expected to recur after 2020. The Adjusted EBITDA outlook excludes a restructuring charge of EUR 40 million and non-reimbursable C-Band operating expenses of EUR 25 million.

Update on SES Value Drivers

Delivering substantial shareholder value through the repurposing of U.S. C-Band spectrum On 26 May 2020, SES elected to clear a portion of the C-Band spectrum in the U.S. in accordance with the accelerated timetable detailed in the U.S. Federal Communications Commission (FCC) final Report and Order. To execute the clearing will require an investment of approximately USD 1.6 billion, of which about USD 1.5 billion is expected to be reimbursed through the Clearinghouse envisaged in the FCC final Report and Order. The remaining USD 80 million of total non-reimbursable costs are expected to impact reported EBITDA by about EUR 30 million in 2020 and then slightly decreasing over the period 2021-2023.

The vast majority of this investment will be placed with U.S. suppliers including the selection of Northrup Grumman and the Boeing Company to deliver four new satellites to be launched by SpaceX and United Launch Alliance, while Thales Alenia Space has been contracted for the provision of two contingency satellites to ensure that SES can meet the strict deadlines laid down by the FCC. In line with SES’ firm commitment to maintaining investment grade status, the company has secured deferred payment terms with the vendors taking part in the satellite programmes associated with the accelerated clearing, ahead of reimbursement by the Clearinghouse.

SES intends to meet the deadlines envisaged in the FCC Order, which entitles the company to receive up to USD 3.97 billion in accelerated relocation payments. The first payment of USD 0.98 billion, to be earned in Q4 2021 and expected to be paid in Q1 2022, will be fully utilised to strengthen the balance sheet, while the payment of USD 2.99 billion, to be earned in Q4 2023 and expected in Q1 2024, will be used for a mix between return to shareholders, strong balance sheet and any disciplined value-accretive investment.

Investing in profitable future growth

Today, SES announced an investment in four additional O3b mPOWER satellites, expanding the constellation to 11 satellites. The total cost of the additional investment is EUR 480 million including EUR 250 million over the period 2020-2024 and the remaining expenditure thereafter. The investment further de-risks the overall project and will enhance the constellation efficiency, increase total throughput by 90% and expand geographic coverage. As SES expands the O3b mPOWER constellation, Boeing and SES have agreed to collaborate to develop commercially-based service offerings for the US Government that leverage the companies’ combined multi-orbit, multi-frequency, high-throughput capabilities including the demonstration of interoperability between systems and the use of O3b mPOWER’s flexible and open architecture to support waveforms and capabilities of interest to Government users.”

Including the above investment, capital expenditure (representing net cash absorbed by investing activities excluding acquisitions and financial investments) is now expected to be EUR 310 million in 2020, EUR 850 million in 2021, EUR 970 million in 2022, EUR 550 million in 2023 and EUR 250 million in 2024. Compared with the forecast provided with the Full Year 2019 results, EUR 550 million is deferred from 2020 and 2021 to the following years, while the total capital expenditure is in line and represents an overall investment of EUR 2.9 billion over the period 2020-2024 of which 60% relates to growth investments and 40% for replacement of existing assets. No further growth investments are currently foreseen.