Grameenphone Ltd. (GP) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Grameenphone's Earning Disclosure for the Fourth Quarter of 2019. My name is Michael Foley, and I'm the CEO of Grameenphone. Before we begin, I want to inform you that this presentation, along with additional information has been uploaded to our Investor Relations website. Our financial statements for 2019 will be uploaded later today. The Q&A link is live. You can start asking your questions. We'll address them at the end of our presentation. In case we missed answering your questions today, or if something else comes up, please reach out to Naureen with your questions over e-mail. Grameenphone will soon be celebrating 23 years of operations in Bangladesh. This will be on the 26th of March 2020. In these 23 years, we are proud to have been able to empower Bangladesh by bringing connectivity to 76.5 million people, out of which 40.6 million are enjoying connectivity to the world through our superior internet services. We've also made our great contribution to the Government of Bangladesh by contributing -- to uphold our responsibilities as a largest taxpayer in the country. In 2019 alone, we have paid more than BDT 8,500 crore in taxes, VAT, duties, license and spectrum fees and revenue shares to the National Exchequer. In other words, that's another $1 billion. With over 16,000 towers across the country, we already cover 99.6% of the population and 96% of the geography. What we are particularly proud of, as well, is our ability this year to enable deep-sea coverage that we've been able to provide and that's especially beneficial to our fisherman who work out at sea every day. Over the last 2 years, we have been able to meet and cover 900,000 children in 580 schools with our Be-Smart, Use Heart campaign that teaches the practices of online safety to children, parents and teachers. Our GP Accelerator Program is an innovation platform where Bangladeshi young entrepreneurs and innovators are supported to take their ideas to market and find mentors and find investments to scale their businesses. So far, we've run 5 batches of GP Accelerator and supported 26 startups. We've revamped this program in 2019, extending our reach, finding people from all over the nation to come to the program. Now Grameenphone reported a solid financial performance in the fourth quarter of 2019. As an industry, we gained 2.9 million new subscribers in the quarter, ending with 165.6 million subscribers as reported by the BTRC, our regulator. During the same period, mobile data users grew by 1 million to 99.4 million at the end of 2019. During the fourth quarter, we reported revenues of BDT 36.2 billion, registering 4.2% growth over the same period last year, and with an EBITDA margin of 61.2%. We were also able to achieve our ambition of rolling out more than 10,000 4G sites in the country, and this despite the regulatory restrictions placed upon us by the BTRC. We ended the year at a 46.2% SIM market share, and we also registered a growth of data of 17% in data revenue year-over-year. Jens is going to take you through our performance numbers later on in the presentation. In Q4, we were able to expand our 4G network by adding 715 4G LTE sites. We ended this year with 11.9 million 4G customers. This is attributed in no small measure to the focus on the 4G SIM conversion in the market that we are focused on as well as a 4G only data pack portfolio that we launched. Not only are we able to sustain our investment in the network, but we ensured we are building a more sustainable network itself, a more resilient network. We enhanced coverage capacity, I should say, on 3,000 3G sites as well as we improved LTE 4G into our coverage. Aggressive competition continues on data. We ran nationwide trade campaigns with incentives and commissions along with revamping our portfolios and made price revisions in our Flexi Plan program. In the fourth quarter, we faced adverse effects from the weather as winter came early, a month early, affecting us in November. As a result, we saw some drop in voice usage. And of course, unsurprisingly, there were developments on the regulatory side during this quarter. The Appellate Division ruled on our injunction against the BTRC, providing us with an order for a conditional payment and extending the injunction by 3 months. However, despite the injunctions, the BTRC continues to be uncooperative with us in providing NOCs and restricting our ability to import equipment. I will speak about these topics in more detail now. So let me speak about the regulatory landscape. Let me start with S&P. In February and May 2019, the BTRC imposed restrictions on Grameenphone as a significant market power. This was done, although there were no allegations of abuse of dominance by the operator. Both times, the Honorable High Court Division issued show cause and injunction on the directives. On the 15th of December 2019, the High Court Division passed its verbal judgment, declaring that the directives of May 30, 2019, cannot be sustained in law as the BTRC did not consider GP's reply dated of 27th of May 2019, prior to the issuance of the same. The BTRC -- the court also ordered the recalling of these directives and ordered the BTRC to take steps with respect to the directives within 4 weeks of the receipt of the certified copy of the judgment, and they were to consider the relevant provisions of the S&P regulations and GP's reply. To date, the written judgment has yet to have been published. And as of now, there are no S&P restrictions on GP. Let me move to the tower companies. On the September 8, 2019, in order to expedite the existing writ that we had filed earlier, an application was filed seeking direction on the BTRC to allow us to build 279 critical sites. On the 26th of November 2019, the BTRC finalized a full-fledged agreement template in the name of a common SLA. But still, this includes, not just service level agreement, but commercial terms, but no pricing tables and sent a copy of this document to all mobile network operators and Tower Cos for necessary action. GP responded to the BTRC on the 4th of December 2019, reiterating its previous position that the BTRC should not interfere in the bilateral agreements and negotiation between mobile network operators and Tower Cos. We were, in fact, following to the letter, the directives of the BTRC. In that letter, GP also asked the BTRC to withdraw the imposed common SLA and vet the bilateral SLA agreed between GP and edotco in conformity with the original directives on the Tower Co from the BTRC. GP sent another letter on the 30th of December 2019, to MoPT, describing the facts and requesting them to intervene to remedy the situation. The GP team also met with MoPT concerns and officials in this regard on the first week of January 2020. On January 22 this year, a letter from [ M Top ], our industry association, was sent to the Ministry of Transport, MoPT, sharing all our concerns as commercial operations of the Tower Cos had yet to begin despite all the initiatives from the mobile operator side [ M Top ] sought the BTRC's intervention to allow the negotiation between mobile network operators and Tower Cos, maintaining the principles and the guidelines in the Tower Co. regulation for delivering faster, cost-effective and better service to customers. Let me go on now to the BTRC audit. GP has held a position, and has always sought, to find a transparent solution and process to addressing this incorrect and disputed BTRC audit claim. Regrettably, our engagement initiatives have not materialized to tangible results yet. Rather, we have had to defend the company vigorously through legal means. At first in July 2019, we filed and moved an arbitration application for the appointment of the BTRC's arbitrator and sought an injunction on the restrictions imposed by the BTRC before the High Court Division. On October 21, 2019, these applications were rejected since GP had filed a suit to -- civil suit to challenge the audit. We have decided not to file any appeal against the rejection orders related to arbitration. Now if we talk about the court cases, on August 2019, GP filed a title suit against the audit demand and moved an application for an injunction in district court. At that time, it was clear to us that we would probably not get positive views on arbitration. So we moved to the civil suit. In this title suit or civil suit, GP also asked for interim injunctions in order to prevent any realization measures of the demand from the BTRC and on our BTRC letter dated 22 July, 2019, imposing certain operational restrictions on GP, mainly, in this case, the non-approval of NOCs. However, the district court did not approve this injunction. Faced with this rejection at the district court, GP filed an -- a civil appeal before the High Court Division and on October 17, 2019, the High Court Division passed an interim order of injunction, restraining the BTRC for a period of 2 months for realization or enforcement of audit demands. The High Court Division also stayed for a period of time the letter sent to the BTRC dated 22 July indicating that they would no longer approve NOCs for us. It is important to note that since that date, no -- even with these injunctions in place, no NOCs have been approved by the BTRC. After that, the BTRC filed an appeal before the Appellate Division against the interim order of injunction, and the stay passed by the High Court Division, to which, on the 24th of November, as many of you know, the Appellate Division ruled that the interim order of stay in injunction passed by the HCD, or the High Court Division, would be maintained subject to the condition that Grameenphone would pay BDT 20 billion to the BTRC within 3 months of the order. Failing to do so, at that point, the injunction would stand vacated, but would be in force for that period of time. On the 18th of December 2019, the High Court Division extended the interim order an injunction for 1 month in the absence of the certified copy of the order passed by the Appellate Division. The original title suit is pending at the district court, and the next hearing is fixed for the 3rd of March 2020 for written reply by the BTRC and the auditor. I think it's important to note, again, with all these injunctions against the impositions of the BTRC, the BTRC has yet to issue 1 NOC to us. On Sunday, this last week on the 26th, Grameenphone filed a review petition with the Honorable Appellate Division of the Supreme Court of Bangladesh, requesting that the order that was passed on November 24, 2019, may kindly be reviewed. We are seeking consideration of the Honorable Court to allow Grameenphone to deposit approximately BDT 5.75 billion that represents 25% of the BTRC's related portion of the amount demanded in the audit through 12 equal monthly installments. So that concludes my comments for this point, and I'd like to introduce Jens to come and speak a little bit about our results.

Thank you, Michael, and hello, everybody. Continuing the topic of the audit demand, I will take you now through the accounting treatment related to this demand. As part of the audit process, the BTRC appointed auditor, shared a summary of the draft audit observations for Grameenphone's feedback on December 11, 2017. Grameenphone provided feedback clarifying its position against the observations on 18th January 2018, and on 26th August 2018, BTRC shared the full audit report for Grameenphone's feedback to which Grameenphone responded in September 2018. Despite numerous interactions with BTRC and full cooperation to the BTRC appointed auditors, Grameenphone's concerns regarding the audit findings were not addressed by BTRC. On 2nd April 2019, GP received an audit demand of BDT 125.8 billion, which includes BDT 84.9 billion claimed by BTRC and BDT 40.8 billion claimed by BTRC on behalf of NBR. Out of the BDT 84.9 billion BDT claimed by BTRC, BDT 61.9 billion is interest. Grameenphone phone has disputed the whole audit demand based on errors in substance, methodology and procedure. We continued engagement with the authorities, including the regulator, and the Ministry of Post and Telecom, requesting to solve the matters through amicable discussion and thereafter through arbitration process. And as mentioned by Michael before, our applications for arbitration were eventually denied by the honorable high court. The title suite that we fight at the learned District Court continues, however. Overall, the BTRC audit demand is comprised of claims against 26 line items, of which 22 line items are related to BTRC payments, the principal among being BDT 22.9 billion, including some sub-judice items and are fully unjustified from Grameenphone's position. The other 4 line items was a total amount of BDT 40.8 billion, unauthorized and erroneously claimed by BTRC and are related to already resolved matter or matters pending in ongoing formal resolution processes with the NBR. To reiterate, the errors in the audit findings, the unprecedented long period of over 20 years covered by the audit, the inclusion of already settled resolved items, the erroneous claim on behalf of third parties, in this case, NBR, the inclusion of sub-judice items in conjunction with the absence of merit-based determination through any solution process create a significant uncertainty about the validity of the demand and outcome of the dispute. Therefore, as of now, no reliable estimate of liability can be derived. So turning to the financial overview. GP came with a strong financial performance in the full year 2019 in terms of solid top line growth along with profitability despite significant regulatory challenges with substantial business impacts like the increased supplementary duty from 5% to 10%, the SIM tax increase from BDT 100 to BDT 200 and the restrictions on the NOC. Also in Q4, GP saw the continued growth in top line along with profitability. So the subs and traffic revenue grew year-on-year in Q4 by roughly 4.8% despite the continuous restrictions on issuing NOCs on importing telecom equipment, software and tariff approval. Our EBITDA margin came out with 61.2%, which post a growth year-on-year by 3.1% in Q4 -- against Q4 2018, as per IAS 17 restated. On the earnings per share, on a reported basis, the EPS for the quarter stood at BDT 6.81 with 7% growth from Q4 2018. The full year 2019 EPS stood at BDT 25.56, with 3.5% growth from last year. On the subscriber base, we stood, by the end of the year, at 76.5 million, which means that 0.7 million net add during the last quarter of Q4. The subscriber acquisition was adversely impacted by increased SIM tax, as I mentioned before from BDT 100 to BDT 200, resulting into 0.6 million decrease in net add compared to the last year Q4 2018 where we had net adds of 1.3 million. The 4G population coverage reached to 74.5%, which implies a 5.5 percentage increase from last quarter, where we started with 69% 4G population coverage last quarter. In subscription market share, we had a marginal decrease of 0.1 percentage point against last quarter, so 46.2% versus 46.3% in a quarter-on-quarter comparison. Turning to the revenue in more details. We see a 4.2% year-on-year total revenue growth in Q4 2019, which is mainly driven by a 4.8 growth -- 4.8% growth in subscription and traffic revenue, partly offset by lower other revenue, mainly device revenue. The respective BDT 1.6 billion growth in the subscription and traffic revenue is mainly driven by the growth in data, which also is clear from the data revenue that contributed 63.5% of the incremental revenue as a result of the continued drive on 4G conversion and expansion of the 4G network. We also had a strong full year growth 9.6% year-on-year of subs and traffic revenue, mainly driven by 17% growth in data revenue and 8.5% growth in voice revenue. The growth in voice revenue was positively impacted by the unified floor tariff introduced in Q3 2018. On the data side, with a 14.2% growth in data revenue, mainly driven by a 9.5% increase in data users with 3.5 million net adds in data users from Q4 2018, the number of data users end of the period Q4 2019 stood at 40.6 million, including 11.9 million 4G data users. With our continued focus on 4G conversion drive, data user penetration improved by 2.1 percentage points from last year. So 53.1% versus 51%. Year-on-year data ARPU increased by 3.3% in combination of a 54.9% increase in average megabyte per user, so we are having there 1.21 gigabyte now, and a 33.3% decrease in average price per megabyte. On the service ARPU, we had a marginal dilution, minus 0.8%, which was mainly driven by lower contribution from voice and interconnect, partly offset by higher contribution from data. The 3.7% lower voice ARPU, mainly driven by 1.6% fall in outgoing average minutes per user and a 2.2% fall in average price per minute. On a full year basis, the service ARPU remains stable at BDT 157. Excluding contribution from interconnect, full year subscription at traffic ARPU grew by 1.3%, reflecting BDT 150 versus BDT 148 . In terms of OpEx, the OpEx for the quarter stood at BDT 11.9 billion, with a 6.3% growth from last year. The growth in OpEx is mainly driven by higher revenue sharing in Q4 2019 and a one-off reversal in the last year. The higher revenue sharing expense is driven by the revenue growth, along with the 4G revenue share after first year's exemption. Excluding last year's positive impact from one-off reversals, the year-on-year OpEx increase stood by 3.1%. With our continued focus on OpEx efficiency, the full year OpEx to sales improved by 1.5 percentage points from 33% versus 34.5%, mainly driven by efficient market spend, along with lower acquisition cost. On a full year basis, EBITDA grew by 10% with a 1.1 percentage point margin improvement, 61.1% versus 60%. Turning to the investment side. We had a BDT 2.9 billion lower CapEx in 2019 due to continuation of BTRC's restrictions on issuing NOC on importing telecom equipment, initiating new LCs and release of already imported equipment from the port. BDT 3.8 billion CapEx in Q4 2019 was mostly managed through local procurement. GP continues its focus on 4G rollout and strengthening its existing network for data capacity enhancement and expansion of coverage. We rolled out over 715 GP -- 4G sites and 128 3G sites in Q4 2019. The number of 4G sites crossed 10,000 at the end of 2019. On the earnings, we had a 7% increase in net profit after taxes and EPS on a reported basis, in combination with a 3.1% growth in EBITDA, higher FX losses and 8.6% lower tax expenses in a quarter-on-quarter comparison -- year-on-year comparison for the quarter. On a full year basis, 3.5% increase in NPAT and EPS was mainly driven by 16.5% growth in profit before tax, partly offset by 36.8% higher tax expenses. The underlying basis -- on an underlying basis, 19.4% growth in the full year EPS. So on the operating cash flow, BDT 0.7 billion higher operating cash flow in Q4 2019 versus last year. The OCF growth was mainly contributed by the EBITDA growth of the same value of BDT 0.7 billion. Our net debt stood at minus BDT 3.9 billion, where the decrease in net debt from last quarter mainly came from lower SDL, partly offset by BDT 2.5 billion lower cash balance, excluding the restricted cash. With having said this, I would like to ask Michael, again, to come to stage.

Thank you. Thank you, Jens. I want to talk a little bit about of our contribution to the Bangladesh economy. And while our contribution is much more than what we pay in taxes, I think it's important to know that in 2019 we paid BDT 85 billion to the exchequer of Bangladesh. This amount is equal to 59.2% of our total revenues. And since its inception, Grameenphone has contributed BDT 554.5 billion to the exchequer of Bangladesh. On the dividend side, the Board of Directors has recommended a 50% dividend for the full year 2019. That means our dividend per share will stand at BDT 13 for the full year. This decision was made in line with our current dividend policy of a 50% payout and based on the current uncertainties that we face and keeping our business flexibility to meet our obligations. So as a recap, and going forward. In 2019 -- while in -- 2019 was, in fact, one of the most challenging years for Grameenphone despite which we've delivered a really solid business performance, our 2020 ambitions remain the same. We will focus on sales and traffic revenue growth, leading with voice and 4G experience through structural changes and initiatives, modernization and in distribution, in particular, we hope to improve our EBITDA. And we will continue to focus on reputation management efforts to better manage our business priorities while building a future-ready organization. This remains our priority. As you may know, at this point, this will be my last earnings call with you, and I will be stepping down at the end of this month. And I would like to introduce the new CEO, Yasir Azman. Azman, please come and join us.

Thank you, Michael.

Yasir has been with the company for 15 years. He has worked in Bangladesh, India and in Norway. He's probably our most accomplished commercial expert in the group, and we are really delighted to have you on board. And with that, I would ask maybe Jens to join us as well so that we can go into the Q&A.

And I'll direct the Q&A to different people, but let me just start with the first one. 2019 has been the most challenging year for Grameenphone in many ways. Despite that, you seem to have delivered very strong results. How have you managed to do that? And what do you see the growth prospect you see for the future? Well, I think this one, we should give you.

Oh, thank you, Michael. I think it's a fact that we had -- latter part of the year, we had challenges in terms of restrictions on our network equipment rollout and product and services. However, we should not forget that last 23 years, we have built a network which is all over the country and the best data network at this point of time, more than 10,000 4G sites. And the whole Bangladesh is covered by high-speed data network, 3G is everywhere. We have also enhanced the 3G capacity over the last 1 year in more than 3,000 sites. We should not forget the brand we have is very strong, and we have been basically very granular managing our performance. Those resulted in a substantially good result in 2019. And I would say that our focus remains in growth with efficiency and simplification drive and a responsible business environment management, as you mentioned, in your latter part of the presentation, Michael.

Thank you, Azman. The second question is, given the hurdles constantly created by the regulator, what will be the strategy that GP would adopt to break the shackles of mid- to-low single growth? First of all, I would say that our ambitions for rapid growth and continued growth in Bangladesh remain unchanged. And it's true that the regulatory environment has been difficult, but we are positive people, and we believe that those things will eventually be resolved. The potential exists in the market for significant growth, and we're not allowed to give forward-looking statements in Bangladesh, but I think there's still a real opportunity for continued growth. And I believe that over time, we will get over these issues with the regulator as well. The next question is about, I think there's a misunderstanding here. There's a question that said, our CapEx in 2019 was BDT 13.9 and BDT 34 in the previous year, that's not quite correct, right?

No. It's BDT 34 billion has been last year, including the license acquisition, which had a value of BDT 17 billion out of the BDT 34 billion. In a like-for-like comparison, we are also lower, but not that significantly. So BDT 17 billion out of the BDT 34 million has been for license acquisition last year.

Okay. Citi Brokerage asks a question. Due to the regulatory entanglements, what kind of business disruptions have you seen? Because of not having NOCs, what strategy do you take to maintain the best telco network at the time? First of all, let me thank Citi Brokerage for recognizing us as the best telco network. But having said that, it has been difficult. We have significant resilience in our networks and our ability to meet needs. We've been very effective at reprioritizing what is important for customers first when we were missing things. I must admit that it's difficult, and that we haven't had major impacts on the network because of the NOCs at this point, but it is something that we need to get over very soon. And again, I want to mention that the High Court -- the Appellate Division of the High Court have issued injunctions against these restrictions, but nevertheless, we've had to live with those restrictions through that period anyways. Azman, 1 for you. What would lead to faster conversion of data subscribers to 4G for excited adoption? Will pricing be the key? Or there are other drivers that you could use?

No. I think, Michael, there are 4 elements into it. The coverage of the 4G network in Bangladesh and then the 4G SIM conversion, the smartphone, the 4G smartphone availability, and of course, the services what we can offer to the customers as a reason for use. I think in Bangladesh, we have already -- as in the presentation, more than 74% of our population covered in 4G. We have a very good run in there. We have a good adoption of 4G SIM. What we see that one of the main major criteria would be that how fast we can basically see the uptake of 4G smartphone in our network, and we have seen an encouraging trend in last year.

I believe everybody sees the question that's on the card right now about the 2018 audited provisions, would you answer that question for us, Jens?

Yes. GPS discovered some erroneous omissions around marketing, sales and commission payments in Q2 and has this corrected and restated and to know there's nothing related to BTRC or NBR claim in this restated amount. And I think we have spoken about this quite extensively in Q2 and Q3.

Okay, good. Azman, data users have stagnated over the last couple of quarters, would you comment on the same?

Usually, Michael, what we see that in Q4, that there is an always a slower trend. It's a history. But, however, in the last budget, we had like an increase in import duty in 4G, especially in smartphone. At the same time, we had a SIM tax increase. Those resulted in a little slowdown of subscriber addition overall into the industry and hampered into the 4G subscriber or data subscriber growth. But we have seen that latter part, at the end of the year, we are coming back to the trend.

The next question is despite year-over-year growth in EBITDA, Q4 profit remains as almost similar to the level of Q4 2018. Is there any explanation for that? Can we go back? Do we know that?

Yes. No it's -- actually, we had a growth of 7% year-on-year.

Okay. So that may not be correct then. Okay?

Yes.

And on last question, if the company pays the amount directed by the Supreme Court, what will be the accounting treatment? We're not going to deal with questions about what the Supreme Court is going to do. At this point, we're going to wait and respect the order of the court when we see it. And the last question, I love this question because you've asked this so many times in so many ways. According to you, what would be the audit claim or BTRC claim -- BDT -- what could be the most -- what possible solution for you? We will continue to work towards an amicable solution with the regulator. We're not going to discuss it and negotiate it in earnings calls. We'll take a couple minutes to see if there's any more questions coming on that. Are there going to be any more questions? Okay. Okay. So first of all, let me thank all of you for being on the call and being so helpful in discussions over the last 1.5 years -- 2.5 years, I should say, and we'll talk again soon. Thank you so very much. This ends the call for today.