Mobile Telecommunications Company K.S.C.P. (ZAIN) Earnings Call Transcript & Summary

Good day, and welcome to the Zain Group Full Year 2019 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Omar Maher. Please go ahead, sir.

Thank you. Good morning, and good afternoon, everyone. This is Omar Maher from EFG Hermes. I'd like to welcome everyone to Zain Group's 4Q 2019 Results Conference Call. As usual, the call will begin with a discussion of the key highlights of the period, and this will be followed by a brief Q&A session. The presentation is now available on those -- on the website, if you wish to see it. And I will now hand the call over to Mohammad Abdal, Group Chief Communications Officer. Thank you very much.

Thank you, Omar, and welcome, everyone, to Zain's Full Year 2019 Earnings Conference Call. With me today is Scott Gegenheimer, our group CEO of Operations; and Ossama Matta, our group CFO. In a moment, we'll take you through the IR presentation, which has been posted earlier today on our corporate website. And after that, we're happy to answer any questions you may have. During the call, we'll be making forward-looking statements, which are predictions, projections or other statements about the future events. These statements are based on the current expectations and assumptions that are subject to risks and uncertainties. Please refer to the detailed cautionary statement found in Slide #2. With that, I will now turn the call over to Scott.

Thanks, Mohammad, and good afternoon to everyone, and I would like to thank you all for joining us on today's call. 2019 was a very good year for Zain. The company's overall performance is a testament to the sustainable strategic road map set by the Board and management, which continues to gather momentum. We are pleased to report solid delivery of our strategic programs. We have an accelerated pace of digital transformation across our footprint, and this is indicative of a tremendous opportunity in front of us. Our results for the full year 2019 were impressive with growth across all key metrics. 500,000 growth in customers; 26% growth in consolidated revenues, mostly due to the half a year consolidation of Zain Saudi Arabia in 2018; a 40% growth in EBITDA, mainly attributed to Zain Saudi consolidation; and the adoption of the new accounting standards, which is IFRS 16 related to leases; and a 10% growth in net income. It's particularly pleasing to note that all the operations recorded net profit growth for the full year of 2019 in both local and USD terms. For the full year 2019, Zain Group generated consolidated revenue of KD 1.66 billion or USD 5.5 billion, while consolidated EBITDA for the period reached KD 728 million or USD 2.4 billion, reflecting a healthy EBITDA margin of 44%. Consolidated net income reached KD 217 million or USD 715 million, reflecting earnings per share of 50 fils or USD 0.17. These results were tempered by some ForEx challenges. For the full year, foreign currency translation impact, predominantly due to the 30% currency devaluation in Sudan, from an average of 31.9 to 45.8 SDG to USD. Across the group, USD 140 million in revenue, USD 61 million in EBITDA and USD 20 million in net income. For the fourth quarter of 2019, Zain Group generated consolidated revenues of KD 439 million or USD 1.4 billion. This is up 7% year-over-year. EBITDA for the quarter amounted to KD 191 million or USD 629 million, reflecting a healthy EBITDA margin of 43.5%. Net income for the period amounted to KD 64 million or USD 212 -- sorry, USD 211 million. This is up 8% year-over-year, representing earnings per share of 15 fils or USD 0.05. In Q4, there were no currency translation impacts given the stability of the official USD to U.S. -- I'm sorry, SDG to USD rate when you look at Q4 2018 to Q4 2019. Group data revenues experienced a 36% growth for the full year 2019 to reach USD 2 billion, representing 36% of the group's total revenues. This substantial growth percentage is predominantly due to the consolidation of Zain KSA with Zain Kuwait, Iraq and Jordan now recording healthy data revenue growth for the year. Regarding CapEx. The group's tangible CapEx reached USD 806 million, which is 14.7% of our revenue, predominantly for the network expansion across our markets, mainly for 4G as well as the 5G rollouts in Kuwait and Saudi Arabia. The major relevant highlights for the full year were as follows. Operationally, all of our operations are performing well, especially Saudi Arabia, which reported its highest ever financial results for the year with double-digit growth in revenue, EBITDA and net income. Also in Iraq and Sudan, reported double-digit growth in net profit for the 12-month period. Notably, for the first time in recent memory, Sudan had an increase in USD profit terms that Ossama will provide some more detail on. Additionally, the Kuwait operation, despite intense competition, is performing well, substantial increases in the customer base and recorded increases, although slightly -- slight in both revenue and net profit. Our 5G rollouts in Kuwait and Saudi Arabia, combined with the many data monetization activities that we have implemented have resulted in data ARPU increases. In Saudi, the fiber-to-home rollout is also seeing good take-up by consumers. Kuwait 5G availability is nearly nationwide now, while Saudi Arabia, we cover the top 27 cities with 5G services, and this coverage area continues to expand. Furthermore, our focus on B2B is resulting in mid-double-digit growth in the B2B revenues as we continue to reposition ourselves from a mobile player to a fully ICT player. Additionally, we are exploring and setting up structures with Omantel to create new value-creating verticals in the wholesale and carrier business as well as expanding our data center presence and offerings. We will make some major announcements within the coming months on these 2 areas. We've also been very active and quite successful in the regional area in regard to spectrum acquisition and seeking support from the regulators and other government authorities. During 2019, we acquired or renewed over 600 megahertz of spectrum -- frequency spectrum across our markets and various bands, in an acquisition commitment price of nearly USD 300 million. In Kuwait and Saudi Arabia, the allocation of spectrum bands has facilitated the launch of 5G services. And in the case of Bahrain, we'll be launching 5G soon. On this point, I'd like to point out that we were the first operator in the region to offer 5G roaming between Kuwait and KSA back in November. Apart from the pure business activities mentioned already, I would like to point out that Zain takes seriously its corporate sustainability strategy as it is an intrinsic part of our DNA. We firmly believe that through digitalization across our footprint, we can unlock many of the opportunities that sustainable development goals SDGs offer, contributing to the social economic development of our operating countries, aligning to climate change targets and other environmental matters as well as helping our employees, ultimately leading to a more successful and profitable organization. Most recently, for example, Zain became a member of the Climate Disclosure Project, this is CDP, thus paving the way to structure reductions in our environmental footprint. Furthermore, regarding the company's internal initiatives, we are implementing initiatives inside the organization to foster understanding and offer greater life and work opportunities to all employees. Our diversity and inclusion program is one of the most progressive of any entity in the region with initiatives focusing on gender diversity, such as our WE Program, which is our Women Empowerment Program, where we said we will increase our women in leadership positions from -- it was 14.5% in 2017, and our target is 25% by the end of 2020. We've also launched the WE ABLE program, aiming to be a disability inclusive by 2022 and becoming a signature to the International Labor Organization, their Global Business and Disability Network Charter. We've also implemented a reverse mentoring program, and all of these have become essential to our development of our organization. Four final points I wish to close that all occurred in the last week. First, last week, we announced a new top management structure in Bahrain with our Group Chief Commercial Officer, Duncan Howard, taking over the CO role with Mohammed Zainalabedin taking on the role of Managing Director. Duncan has been a key part of the executive management team for several years, and will bringing a wealth of experience to the operation, especially in the new data monetization initiatives exploiting the eminent rollout of 5G. Last week, Zain KSA announced the capital restructuring and rights issue that will support the operational and future growth plans, improving the financial performance, profitability and leverage ratios of the company. We also completed the sale of Zain Kuwait Tower Network to IHS last week for USD 130 million, and this will result in the net accounting gain of USD 43 million when realized. Finally, the Board of Directors of Zain Group recommended a cash dividend of 33 fils per share for 2019, which represents 66% dividend payout ratio. Also, as the first company in Kuwait, we made another recommendation to implement a minimum cash dividend policy of 33 fils for the forthcoming 2 years. 2019 and an additional 2-year dividends are subject to the annual general assembly and statutory approvals. And with that, I'll hand over to Ossama to discuss the results in more detail. Thank you.

Thank you, Scott, and good afternoon, everyone. As highlighted by Scott, what a great way to end this year. Operational excellence is very much on track, and we continue to generate strong free cash flow across our business segments and key markets, enabling us to both invest in growth and improve the value to our shareholders. As advised in our previous call, the group applied the new accounting standard, IFRS 16 related to leases, from 1st January 2019. Accordingly, during 2019, the adoption of the standard led to a benefit of KD 73 million, which is approximately USD 241 million in EBITDA, and KD 7 million, approximately USD 23 million in net income. Our strong cash flow is allowing us to reduce the group's leverage, i.e., net debt-to-EBITDA, including guarantees, which currently stands at 2.2x. If we move to Slide 14, which is Zain Kuwait, we lead in 5G rollout and coverage, and we continue to innovate in the customer and enterprise segment. Operationally, Zain Kuwait remains the most profitable operation within the group and continues to maintain its market lead in both value share and customer base. It now serves 2.8 million customers, reflecting a 7% growth compared to 2018. From a local market perspective, that continues to be extremely competitive. Zain Kuwait's market leadership is reflected by the fact that its revenue represents 39% of the total market revenue and 59% of the total net income in the Kuwaiti telecom market. This is up 3% compared to last year, 3 percentage points. For the year 2019, revenue grew by 1% year-on-year to reach KD 333 million, which is equivalent to USD 1.1 billion, mainly on account of the solid growth in data revenue. Excluding the additional enterprise revenues, which is the MEW project, which we mentioned before, this happened in 2018, and bulk sales that were realized in 2019, in total amounting to KD 20 million, revenue growth would be 7% and not 1%. EBITDA jumped by 10% to reach KD 126 million, in dollars, it's USD 417 million on account of improved gross margins and benefits obtained from IFRS 16, which amounts to KD 9.8 million. Net income increased by 1% to reach KD 83 million, equivalent to USD 273 million. This includes a benefit of KD 5.9 million on the adoption of IFRS 16. Zain Kuwait invested total of USD 209 million, approximately 19% of its revenues, in CapEx during 2019, and this includes investment in 5G and growing its digital platforms. The benefit of such investment and focus are reflected in the data revenue that grew by 7% and now represents 37% of total revenue. As Scott mentioned earlier, Zain Kuwait made substantial progress in its digital transformation, launching numerous applications and operational efficiency initiatives to support the expansion of 25 smart branches and further enhancement of its interactive zBot chat digital channel on the WhatsApp platform. That reduced customer waiting times by 90%. We are extremely confident that 2020 will be a great year for Zain Kuwait in all its key financial indicators, noting that we also expect to book up to USD 43 million of gain from the sale of its towers. We move now to Slide 15, which is Saudi Arabia, a record year for Zain KSA, obtaining its highest ever financial results. Zain KSA is the group's largest revenue contributor, representing 41% of group consolidated revenues. The 5G rollout and expansion of FTTH, Fiber-to-the-Home, is attracting customers and supporting revenue growth. Revenue for the year was at an all-time high of USD 2.2 billion, an increase of 11% year-on-year, mainly due to the revamped postpaid consumer segment, B2B growth, trading revenue and other revenue streams, as I mentioned, Fiber-to-the-Home, dedicated Internet access and et cetera. EBITDA for the year jumped by 27% to reach $1 billion, reflecting a healthy EBITDA margin of 46% on account of the top line growth, coupled with the IFRS 16 benefit of $142 million. Net income for the year was the best ever since inception, reaching $130 million compared to $89 million last year, mainly attributable to the positive EBITDA performance and benefits from regulatory agreements, the CITC waiver. The benefits from IFRS 16 on net income was only $11 million despite the benefit we got of $142 million on EBITDA. Zain KSA invested $512 million in CapEx, 23% of revenues during 2019, and this is tangible CapEx and spectrum licenses and fees. One relevant and positive point I wish to highlight is that the ARPU in Zain KSA increased from $18 to $20 over the last year, 9% year-on-year growth. This is indicative of the success of our focus on postpaid and data monetization initiative. Data revenue currently represents 43% of total revenue. The company's strong performance and the solid cash flow generation led to early voluntary repayment toward the senior Murabaha financing agreement of SAR 1.4 billion, approximately -- well, this saves approximately USD 20 million in finance costs annually. Also, for the first time ever, during 2019, Zain KSA paid $200 million interest on shareholder loan to the group. Note that the Saudi team will hold their Analyst Call on Wednesday, so if you need any further information, Wednesday is your target day. Moving to Slide 16, which is Zain Iraq. Despite a competitive landscape and economic and political issues in Zain's stronghold region, Zain Iraq's top line performance was relatively stable at $1.1 billion. EBITDA increased by 10% due to the cost transformation initiatives implemented at operation as well as $34 million benefit from IFRS 16. Net income increased 28% to reach $63 million, even after a negative impact from IFRS 16 to the bottom line, which is approximately $1.6 million. Zain Iraq's focus on customer experience, services expansion across the country and cost transformation, combined with the growth of data and digital revenue were the key drivers of this exceptional performance. The operator invested $133 million, this -- approximately 12% of revenue in CapEx. To support the increase in data demand, the team in Iraq is focusing heavily on the enterprise B2B segment, as this is proving to be a very profitable growth area in both service and data revenue. Retention on customer loyalty initiatives also resulted in the company serving 15.7 million customers. We hope to acquire 4G spectrum in Iraq during 2020 that will further support the growth. Moreover, the regulator expanded 2G, 3G license for a further period of 5 years starting from August 2022, which will further benefit the operators' performance. This is for Iraq. We move to Zain Jordan, which is Slide 17. Zain Jordan continues to maintain its market leadership and now serving 3.6 million customers. Revenue for the year remained stable at $496 million despite the new regulated lower interconnection rates, which became effective from 1st January 2019, and that saw the rate change from 11.6 fils to 8.4 fils on account in the increase in data revenue. So the increase in data revenue compensated the drop in the interconnection rate. EBITDA was up 14% year-on-year to reach $221 million, reflecting an improved EBITDA margin of 45%, including, of course, IFRS 16 benefit of $14 million. Net income reached $77 million, up 5% compared to last year, with IFRS 16 have no impact or no material impact on the bottom line. Fiber rollout continued in 2019, driving an increase in FTTH revenue by 104%. CapEx spend in Jordan was $43 million, reflected by the investments in the data center, which we call The Bunker, 4G and FTTH expansion. Data revenue grew by 8% year-on-year and represented 41% of total revenue. On Slide 18, which is Sudan. Zain Sudan is performing exceptionally well in local currency terms. But a significant 30% currency devaluation in Sudan during 2019 compared to 2018 affected both the group's and the operational -- and the operation's financial results in USD terms. For the full year 2019, in local currency, SDG, the operator's revenue grew by 43% year-on-year. When we compare it in dollars, it was down by 4%. On EBITDA, it has increased by 52% in SDG, and in dollar terms, it was up by 0.6%. And the net income has increased by 87% in SDG terms, and in dollars, it was up 11%. This is the first during this devaluation of currency. Data revenue accounted for 18% of total revenue and grew 41% in SDG terms. The operation serves around 15.9 million customers, which grew by 9% year-on-year, making this the largest within the group and representing 32% of the group's total customer base. With that, I will hand over to Mohammad for Q&A.

Thank you, Ossama. With that, we'll now move to the Q&A session. [Operator Instructions] Operator, can you repeat the instruction for the Q&A?

[Operator Instructions] We will now take our first question from Nishit Lakhotia from SICO.

I just have 2 questions, actually. One on the Kuwaiti market outlook on the competitive environment. If you can be more granular as to where are you seeing the competition rationalize on the handset side? And how is the completion over the 5G-related services that you are rolling out and ramping up there? So overall, how is the competitive environment between the 3 operators? That would be helpful. And second, on the Bahrain operations. I mean it seems like the company here is debt-free and there's lot of cash, but I'm kind of surprised on the very low dividend payout given that some of your operation is difficult to upstream cash. Why isn't Zain Group more generous in kind of upstreaming cash from the subsidiaries, which are in a position to pay higher -- much higher dividends than what they are currently paying? So any color on that would be helpful.

Thanks, Nishit. Regarding the Kuwait market, we haven't seen too much pressure on the overall 5G. If you look at our rollout, we're nearly nationwide, and we've got very good coverage on it, and it's mainly fixed wireless that we're going after right now. And so we haven't really seen too much competition from them regarding the 5G yet. I think eventually, they'll start to grow, but we've got a head start. We launched before everyone, and our network is much stronger than them. So we haven't seen that. We'll see what happens when the handsets come in and maybe in September. There are handsets, obviously now, but we don't have the Apple handset yet, and that will be in September. We're also waiting for some of the small cells to come out so we can have better indoor coverage when it comes to the malls in that area. But I don't see too strong of a competition on there. On the core side, there's a lot of competition, obviously, even on handsets. Although the handset subsidies in the last year saw -- decreased dramatically in Kuwait, mainly because of the accounting standard changes, where you have to take the handset subsidy all upfront to the P&L. So that's helped quite a bit on there. Regarding your second question in Bahrain on the dividends, truthfully, that's more of a shareholder issue than it is from management's perspective. I think part of it is maybe keeping some of the cash available because of the tight market and also trying to roll out 5G there in the second half of this year. We've already seen VIVA Bahrain or -- I'm sorry, the Bahrain competitor roll out 5G already and make announcements for major 5G rollout. So I think that had to do a little bit with that. Hopefully, I answered your question.

And I would like to add, yes, as you mentioned, the expected CapEx this year will basically be covered from the cash, plus they have paid during 2019 a lot to the group because of the receivables between group and Zain Bahrain. So what is left, basically, we looked at it, and then what it fixes is good enough for the dividend.

[Operator Instructions] We'll now take our next question from Hassan Abdelgelil from CI Capital.

Congratulations on the good results. I just have a question regarding Zain Iraq. You've said that there has been an extension for the 2G and the 3G license for 5 years, starting August 2022. Can you please share for how much for all this? And how much do you think you will -- Zain would be paying for 4G license that you are open to acquire in 2020?

Thanks for the question. Regarding the extension of license on 2G and 3G, we've got the formal letter from them saying that the license will be extended for 5 years on there. But it's subject to the final negotiation of pricing on there. At this time, we haven't given any estimates for that, but we expect it to be quite reasonable compared to the previous licenses. But we don't want to say a number on air in case the Iraqis are listening or the government's listening because I don't know the exact price. So -- but we do expect it to be quite reasonable on there. Same with the 4G license, the discussions we're having with them. Originally, we thought we'd had a 4G license by the end of 2019, but with the demonstrations, everything got delayed, but the talks are still going on. We expect that to happen in probably the first half of 2019 as well. And then the prices seem to be much more reasonable than what we are paying for the 3G license. Hopefully that answers your question.

Yes, if I may, I just want to add another question regarding Zain KSA. The debt -- the advances from shareholders to Zain KSA, what's the interest rate on it?

We usually don't disclose this. Allow me not to disclose it, but it's basically in the range of the other debt that they get from the financial institutions. But take into considering that one is guaranteed. This one is us. So you need to kind of take that into consideration as well.

[Operator Instructions] Well, may I take our next question from Ziad Itani from Arqaam Capital.

Just a few questions. First, on Kuwait, what's the latest with regards to MVNOs entering the market?

Well, thanks for the question. Regarding Kuwait, they have been discussing about 2 MVNOs coming into the market. We know that Virgin is tied up with STC mainly because of the relationship in Saudi Arabia. We -- as Zain don't expect to have an MVNO here. We've got a sub-brand that is working quite well. And then we think we're in a very good position, so there's no real need. We think the market is a little overcrowded as it is with the 3 players and no one new coming in, so we don't really think there's a need for it. So we probably only expect [indiscernible] coming to this market there. Hope that answers your question.