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

Ladies and gentlemen, thank you for standing by, and welcome to Zain Group's 2Q '23 Results Conference Call. [Operator Instructions] I would now like to hand the conference over Nishit Lakhotia. Please go ahead, sir.

Greetings, ladies and gentlemen. This is Nishit Lakhotia from SICO. And I would like to welcome you all to Zain Group's Second Quarter 2023 Results Conference Call. It is my pleasure to host Zain Group's senior management today on the call. By now, you should have received the company's presentation and earnings release along with detailed financials for the second quarter, which has also been uploaded on the group's website. Now without further delay, I will hand over the call to Aram Dehyan, Zain Group's Director. Thank you.

Thank you, Nishit, and welcome, everyone, to Zain's Q2 earnings conference call. I'm joined today with Mr. Mohammed Shereef, our Group Head of Finance; and Mr. [indiscernible], our Group Finance Senior Manager. In a moment, we will take you through the IR presentation, which was posted earlier today on our website. And after that, we're happy to answer any questions you may have. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Please refer to our detailed cautionary statement found in Slide #2. With that, I will now turn the call over to Mohammed Shereef.

Thank you, Aram. Ladies and gentlemen, a warm welcome to all of you joining us today. As we celebrate our 40th anniversary this year, I'm delighted to announce that we have witnessed a continued success in Q2 2023. Our group consolidated revenue, EBITDA and net income witnessed double-digit growth which demonstrates our operational excellence and market resilience despite the competitive and socioeconomic challenges we face in some of our regions. It is also important to note that despite the ongoing conflict in Sudan since April 2023 that resulted in displacement of over 2.1 million people and closure of air space, our colleagues in Sudan operation have displayed great resilience and dedication by ensuring that [ avoidal ] communication services continue to be in reach of for the Sudan community, especially in the conflict zones. We are continually exploring ways to utilize our resources and capabilities to contribute to relief efforts and provide assistance to those in need. We are proud to say that Zain Sudan remains the only operational network in the conflict areas. As a result, despite the ongoing conflict, I'm pleased to report that Sudan operation has surpassed our expectations with the resilient H1 performance. We will elaborate more on these numbers a bit later. Moving forward, we will continue to closely monitor the situation in Sudan and amend our plans accordingly. Before we dive in into the financials, it is worth mentioning that several accomplishments and transactions that have occurred recently. On Page 4 of the presentation, introducing Zain Omantel, ZOI. We are very excited by this groundbreaking joint venture between Zain and Omantel that will transform the telecommunications wholesale landscape. ZOI aims to be the leading wholesale provider in the Middle East, catering to regional operators, international carriers and global hyperscalers. ZOI will unlock immense growth and innovation opportunities for their customers. Delivering top-notch Internet connectivity, voice services, roaming and messaging. ZOI will handle all international wholesale needs for Zain and Omantel across 8 countries benefiting over 55 million customers and boosting financial, commercial and operational aspects for both companies. On power sales strategy, as highlighted in our previous call, our pioneering and value-accretive tower sale and leaseback strategy is making substantial progress on multiple fronts. In KSA, we sold 8,069 towers to PIF for $807 million. The transfer of 3,600 towers was completed during Q1, resulting in a notable gain of [ $102 million ]. The second batch of towers is scheduled to be transferred in Q3, and the gain will be booked during the quarter. Note that the whole transaction will result in a total gain of up to SAR 1.1 billion, which is USD 293 million. In Iraq, we finalized the sale and leaseback along with the management rights of 4,968 towers to TASC Towers Iraq, a subsidiary of Zain Group. This transaction was valued at $180 million and Zain Iraq recognized a gain of $32 million, which was eliminated at group level. We are currently in the process of concluding the second phase of this tower deal, to sell these assets to TASC Towers Holding, which is anticipated to be completed during Q3 2023. We are currently reviewing similar TowerCo models in Sudan, Bahrain and South Sudan, and will make announcement as we progress. Additionally, as recently announced, Ooredoo, Zain and TASC Towers Holding enter into exclusive negotiations to combine their respective power assets portfolios in Kuwait, Iraq, Jordan, Qatar, Algeria and Tunisia, into a jointly owned company to create an independent tower company compressing up to 30,000 towers. This new partnership will form the largest tower company in the MENA region. The enlarged tower company will continue to operate as an independent and stand-alone entity, providing passive infrastructure as a service throughout the region with focus on operational efficiencies, synergies and reduction of carbon footprint. We will update you in the next call on this matter, hoping to have more good news in Q3 2023. I would like to highlight that TASC Towers Holding is a totally independent company run by its own management team, and this will remain so should we close the deal with Ooredoo. FinTech. Our FinTech arm, Tamam and Zain Cash grew experientially surpassing expectations. For the first 6 months, total revenue sold threefold to reach USD 60 million, achieving 121% of the full year 2022 KPIs, while customer base grew more than 73% to reach 1.3 million customers. The market update. We look forward to receiving digital bank license in Kuwait soon, and we are actively preparing the go-to-market road map launch FinTech services in Bahrain expected Q3 2023. In Sudan, the launch is pending due to the ongoing crisis in the country. Digital services and B2B. Digital services, including the Dizlee API platforms experienced a notable growth with a 15% increase year-over-year. Additionally, ZainTech and local B2B teams are working closely together to secure lucrative deals across 3 markets consistently raising the bar, achieving 27% year-over-year growth in enterprise revenue. Regarding the Kuwait Number Range Litigation. In May 2023, Zain won the case on the number range fees amounting to KWD 24.68 million, which is USD 80 million. The claim has been recorded in the books during Q2 2023. Cash proceeds are expected to be received soon. Removal of KSA or it's qualification. Zain KSA auditors had qualified the audit and review report for the year ended 31st December 2022 and for the 3 months ended 31st March 2023, respectively, in relation to the carrying values of ROU asset and lease liability and all associated accounts. The same qualification was carried forward in the respective audit and review reports of the group. We are pleased to inform you that the management was able to resolve this matter with the auditors and the related qualification has now been removed from Zain KSA as well as Group. No adjustments were made to the 30 June 2023 financial results of the group. Corporate governance recognition. We received 2 prestigious awards for our exceptional corporate governance practices in Kuwait. The World Finance, a publishing house recognized us as the Best Corporate Governance for 3 consecutive years. Additionally, we have been honored with the esteemed Best Corporate Governance as a listed company award by Arab Federation of Capital Markets, further highlighting our commitment to ethical standards, transparency and professionalism as well as validating our dedication to meet [ own ] governance framework. These 2 milestones justly rewards our Investor Relations, Corporate governance and sustainability teams and reinforces our commitment to delivering sustainable value and setting new standards in corporate governance. Moving to the financial highlights of Q2 2023. On a positive note, just today, the Board announced the declaration of third consecutive interim dividend of 10 fils per share for the first 6 months of 2023, that will be distributed on September 14. We ended the period surveying more than 52.7 million customers, an increase of 2%, reflecting an additional 1 million customers compared to June of last year. In the second quarter of 2023, Zain Group generated a consolidated revenue of KWD 461 million, USD 1.5 billion, up 10% year-over-year. EBITDA for the quarter reached KWD 182 million, USD 594 million, up 10% year-over-year, reflecting an EBITDA margin of 40%. Net income for the quarter amounted to KWD 57 million, USD 187 million, up 14% year-over-year, reflecting earnings per share of 13 fils which is USD 0.04. In the first 6 months, which is Page 11, revenue reached KWD 950 million, USD 3 billion, an increase of 12% year-over-year. EBITDA for the period reached KWD 348 million, USD 1.1 billion, up 9% year-over-year, reflecting an EBITDA margin of 37% Net income for the period reached KWD 112 million, USD 364 million, up 14% year-over-year, reflecting an earnings per share of 26 fils, USD 0.08. Our data revenue witnessed a healthy growth of 9% for H1 2023 to reach USD 1.2 billion, representing a 39% of consolidated revenue. Zain Group digital revenue grew 15% year-over-year. Over the last 6 months, Zain Group invested USD 178 million in CapEx, tangible and intangible. The reason for the relatively low CapEx spend is primarily due to heavy 5G and 4G expansion investments we did over recent years that has allowed us to take a breather. Nevertheless, going forward, we expect CapEx spend to be higher with the Jordan gradually expanding its 5G network, Sudan requiring more CapEx as soon as the conflicts subsidize while Iraq and KSA will acquire continuous network expansion and updates. ZainTech is progressing on a multiple levels, implementing improved revenue and working capital management and successfully rolled out a cybersecurity business. In May 2023, ZainTech acquired 65% of the stake in Adfolks, a cloud service provider, expanding its digital transformation services. Furthermore, a partnership with the MasterCard in June 2023 has opened opportunities in the payment solution industry. ZainTech has also finalized the partnership with Du paving the way for enterprise and strategic accounts penetration in the UAE. We expect big business opportunities to come out of this agreement. Debt profile on the next page, 14. The group continues to maintain healthy cash flows with the total due to banks USD 4.4 billion, in line with prior year, and net debt-to-EBITDA currently standing at around 1.9x. Finance costs increased compared to the prior year on account of significant increase in debt rate, which is [indiscernible], LIBOR and SAIBOR. Moving to OpCos. Let's go to Slide 19, Zain Kuwait. Maintaining market leadership, the operator's customer base increased by 2% to serve 2.6 million. Revenue for 6 months stood at KWD 173 million, USD 563 million. EBITDA grew by 39% to KWD 90 million, USD 295 million, representing an EBITDA margin of 52%, while net income reached KWD 63 million, USD 206 million. It should be noted that the EBITDA and net income includes claim related to winning the number range fees of KWD 24.68 million, which is USD 80 million. Data revenue represents a 39% of the revenue. Despite the intense competition, the operator continues to grow its market-leading 5G network, maintaining the largest share of 5G customers and revenue in the country. It achieves this by attracting key corporate and government clients through its exceptional B2B offerings. The operator also introduces appealing digital services like Zain Max, which provides innovative Internet and entertainment plans for postpaid customers. These efforts remain a top priority for the operator. Zain KSA, which is on Slide 20. On a very positive note, Zain Group received first-ever cash dividend of USD 42 million from Zain KSA. This great milestone reflects the successful transformational turnaround of Zain KSA in recent years. This achievement is highlighted by its record-breaking revenues and profits in 2022. We remain highly optimistic on the growth potential of Zain KSA in creating value for shareholders and on its pivotal role in the realization of Saudi Vision 2030. For H1 '23, the operation reported 10% growth in revenue year-over-year. EBITDA grew by 1% compared to last year, reflecting an EBITDA margin of 31%. Net income for the period increased to twofolds, reaching USD 183 million, driven by gain from sale and leaseback of towers during Q1 '23. The operator data revenue represented 41% of total revenue and active customer base stands at 8.7 million. The OpCo witnessed continued growth in 5G, B2B, Yaqoot and Tamam revenues. Yaqoot, Zain KSA's digital arm witnessed 204% increase in revenue compared to H1 2022. In Tamam, the consumer micro finance arm witnessed an increase of threefolds in revenue year-over-year, all of which contributed towards increasing top line. Moving to Slide 21, which is Zain Iraq. Zain Iraq customer base reached to 17.7 million customers. For the first 6 months period, revenue grew 17% year-over-year due to better operational performance and significant improvement in macroeconomic environment in the country, such as appreciation of IQD, U.S. dollar, official Central Bank rate from IQD 1470 to IQD 1320, and removal of 20% sales tax on telecom services. While EBITDA decreased by 1% on account of higher OpEx due to tower deal and a reversal of our accruals in H1 2022 to reach USD 166 million with an EBITDA margin of 37%. Net income for the period sold by 766% to reach $43 million, mainly from tower transaction gain. Zain Jordan on Slide 22. The operation had mixed results for H1 '23. Customer base increased 5% year-over-year to serve 3.8 million customers. Revenue increased 4% while EBITDA and net income decreased by 4% and 7%, respectively, compared to last year. This is mainly due to the reversal of excess accruals during H1 '22 coupled with the increase in finance costs on account of increase in interest rates. The operation maintained a healthy EBITDA margin of 41%. Data revenue grew 2%, representing 49% of the total revenue. It should be noted that Zain Jordan soft launched 5G commercial services during Ramadan 2023 in parts of Amman, Jordan. Zain Sudan, which is on Slide 23. As mentioned earlier, Zain Sudan delivered a resilient H1 2023 performance in an extremely challenging environment. For the first 6 months, the operation reported 46% growth in both revenue and EBITDA reaching USD 303 million and USD 154 million, respectively, reflecting an EBITDA margin of 51%. Net income for the period reached USD 136 million, up 23%. This was driven by continuous price events during 2022 and Q1 2023. Customer base also increased to 3% to reach 16.9 million, maintaining its market leadership. Data revenue grew by 67%, representing 35% of total revenue. Finally, Zain Bahrain, which is on Page 24. Zain Bahrain generated revenue of $98 million for the first 6 months, an increase of 11%. Data revenue grew 7% to represent 45% of total revenue. EBITDA was stable at USD 29 million, reflecting an EBITDA margin of 30%. Net income reached $7.3 million. With that, I will hand over to Aram for Q&A.

Thank you, Mohammed. [Operator Instructions] Nishit, could you please repeat the instructions? Operator, do you hear us?

Yes, sorry. Can we limit to one question? And can we take the questions from the audio first operator before we move to the chat.

And the first question from Madhvendra Singh from HSBC.

First question is on the number fees award which you booked in the quarter. So if you could talk about what was the impact on the group financials from this and whether the reported net income includes this win award as well. So if you could just give a clean net income number, if possible? And whether this number is also included in the group EBITDA. So if you could clarify that. And then the second question is on Sudan, where if you could talk about how did you manage to pull off such a strong performance, revenues actually have grown year-on-year, even quarter-on-quarter. So if you could talk about that. But there is some impact on margins it seems. So if you could talk about the performance in Sudan in that context, that will be helpful.

The first one is regarding the number range. As I mentioned in my script, the amount related to the number ranges KWD 24.68 million, which is recorded in the P&L. As I told you, the cash proceeds will be expecting -- will be expected to receive soon. What was the next question in Kuwait, I...

So if you could talk about just the -- how do we adjust for that in the net income. So should we just remove KWD 24 million from the net income for the group?

Plus the 4.5% total tax. When I booked KWD 24.68 million profit, there will be a total 4.5% tax will be there. Not that you should remove. And you can see, there is -- this is off the record I'm saying, there will be an accrual and the provision reversal is there. And we kept the provision as an accrual, we put capital provisions.

So what is the clean net income for the quarter? If you could -- I mean, the recurring net income level, is it possible to share that?

This is -- I'm saying. The provisions for accrual, what we took is around about $50 million. This is what we took the situation since Sudan. It seems okay now, as you are saying that the growth is coming. This all growth coming because we had this continuous price revamps over throughout the year 2022 as well as up to Q1 2023. Afterwards, there is no pricing. So all this increase and this thing is coming because of the price increase. Going forward, we don't know now, this one how long it will take and these things. And definitely, there are some damages and stuff, which we cannot assess at this time. So this is all. That's why we took this provision is what I'm talking about.

Also you -- okay, I had misunderstood that. So you have taken some provisions during the quarter as well?

Yes. Yes.

Okay. So $50 million of provisions and then you have some gains or...

You can do your mathematics to get the number.

Okay. Okay. Okay. And if you could talk about the Sudan performance, how did you manage to have such a strong performance there?

Again, it's the same thing. The price, remember which I mentioned already. Every -- the thing is when the devaluation of the currencies happening, and there was something correlated with the -- yes, the inflation increases. There's a link to the license. I don't need to get an approval or anything. It's by default in the license is there. So that's why whenever there is an inflation happening, we used to increase the prices. And we are the #1, still we are the #1, and that's what helped us so far. That's the reason you don't see the impact now. We don't know how long it will continue. These things now, the situation in Sudan. We hope it will resolve soon.

Yes, I will ask some questions until you get more questions on the queue. The first one is given the conflict in Sudan, is the group planning to revise their FY guidance? Or we are looking at the similar guidance as what was shared earlier?

You are talking about the guidance for the full year. This one, what I will say is an understanding of the future expectation, taking into consideration of the Sudan, are you -- I mean all what I can say is it's, Sudan is very important and a major contributor to the group. Despite the current issues, as I mentioned here, it is performed better than what we thought about in the Q2 as reported. Right now, we won't change our guidance. Instead we will keep a close eye on things and check again in Q3.

Okay. The next question...

And what you want the guidance, it will be the same thing, yes.

As we've been previously disclosed, Nishit, just to follow what Mohammed Shereef said. So previously, in our previous call, we reported revenue guidance of around 10% increase. I believe, as he mentioned, we will be keeping a close eye on the situation of what is happening is Sudan because it is a major contributor to the group. And since in Q2, actually, what happened, we were expecting worse than what we have actually reported. If the situation remains, we're expecting the situation remains the same for Sudan going forward into Q3 and Q4. If that has happened, we will -- our guidance as we provided in Q1, will be unchanged.

Okay. Understood. And given that you are expecting a sizable cash from the number case, is there any upside on the dividends for this year?

Related to the dividend, it all depends on the shareholders and the execution of our strategy. Taking into consideration the plan to create the largest tower company with Ooredoo in the region, Zain will be investing its towers as well as the funds for equal ownership with Ooredoo. This will maximize the shareholders' value and the plan is to expand to other markets and consider the other tower companies in the region. So logically, we will not be advising to pay more dividends other than the 35 fils. If there were delays in the execution and we were able to collect the number range, then the Board might suggest an upside.

Okay. so the next question is on the tower deal with Ooredoo. How do you see this as a net impact on the Zain Group, whether it will be cash positive or neutral or negative? And the other part of this same relating to the deal is on the amount that needs to be paid for the compensation for Ooredoo's or the cash paid out to Ooredoo, how will that be funded? Has Ooredoo will get some cash or this deal as the stake is similar, 50-50 in the new JV?

Regarding this Ooredoo Tower deal, it's -- we cannot disclose complete information because very confidential these things, but still I'm saying that as a part of our foresight strategy, digital infrastructure is one of our four course that were identified as a venue of the growth, TowerCo in partnership with the TASC Towers and Zain and Ooredoo, Zain and TASC partnership would allow us to create the latest independent TowerCo in MENA region, tenth largest globally, while we cannot disclose the numbers at this point. Zain would be investing significant funding in this deal with strong expected returns on the shareholders.

Okay. And one more question on the Zain Saudi -- Zain KSA operations. How is the prepaid mobile segment in Saudi? And how is the competition with the MVNOs currently in this quarter?

Yes. As far as Zain KSA is concerned, we have 2 MVNOs operating under our network, that are Red Bull and I think the other one is Salam. Yes, we're going to -- going after the prepaid base that Zain is not capturing today. So it's -- while Zain is concentrating on the postpaid and these 2 operate -- these 2 MVNOs are concentrated on the prepaid base. So it's pure incremental value. Yet, overall, when it comes to the MVNO, it continues to be very aggressive, especially when it comes to the international segment.

Okay. And on the Zain Kuwait operations, the revenues were down 3% year-on-year. But when we look at your -- another competitor who showed their performance for the quarter, the revenues were up 6% to 7%. So are you losing market share by any chance in Kuwait, given two different performances in your home market?

Nishit. Nishit, could you please repeat your question because as we're checking the numbers, we don't -- there is no decline year-on-year, which operation and which period you're talking about?

I was talking about the Zain Kuwait second quarter revenues. We showed 3% decline year-on-year. This was versus Ooredoo's numbers, which we saw last week when they showed a strong performance in Kuwait. So just wanted to get a sense on the competitive dynamics in Kuwait.

Yes. But the revenue, what I can see it's the same KWD 172 million last year, KWD 172 million this year. No change.

Okay. I was looking at the presentation on that. $278 million for 2Q on Slide 19.

Yes, that's the dollar figure, Nishit. Okay. When we post our supplementary data on the website, you will be seeing both local currency and USD figures. So the numbers that we have in front of us are in local and in KD figures were kind of flat. But if you translate into U.S. dollar, that's the FX impact that we're getting, you will be having a minus growth when it comes to the dollar. But as of KD figures, we're kind of on the revenue side in Kuwait were flat.

But any comment on the competitive environment in Kuwait?

We are the market leader in terms of customer base as well as in terms of revenue share. Our aim is in order to sustain the revenue as it's not going down. So that's what we are maintaining. And it's a mature market, it is a mature market. And our base is the postpaid, not the prepaid, postpaid is the customer, majority customers is postpaid. So what we are doing is...

Okay. Understood...

And we are focusing on the profitable growth. Yes, this is what we are looking.

Perfect. Operator, can you check if there's any questions on the audio?

[Operator Instructions] And the question from [indiscernible] from NBK Wealth Management.

My question regarding the cash flow impact for the Tower deal Saudi Arabia. So let me put it this way. What used to happen is that you are banked to the leaser directly. Now there is a middleman who shall take the money from you and pay it to the leaser. What I want to understand is what is in it for them. Will you be subsidizing their margin? And will we witness a negative impact on the cash flow or what?

Sorry, excuse me sir, could you please repeat your question again? It was not clear.

Okay. So my question is regarding the cash flow impact for the Tower deal in Saudi Arabia. Let me put it this way. What used to happen is that you are banked to the leaser directly. Now there is a middleman, who shall take the money from your side and pay it to the leaser. What I want to understand is what's in it for them? For the middleman? Will you be subsidizing their margins? Or -- and will we witness a negative cash flow impact or what? I want to understand the cash flow impact in this deal.

The towers is sold to GLI. It's not our towers, now we sold already, so the rent and everything we are paying to these guys for the usage fee.

So will you pay a lease or not?

No, it's a usage fee.

Okay. So -- okay. Can you compare the usage fee and the lease that you used to pay?

Leaseage fees and use -- definitely, they will have a margin, yes. Definitely. Definitely, they will have a margin. Yes. Otherwise, why they will pay us KWD 1.1 billion or USD 650 million, why they will pay?

Yes. But I want to understand with the usage fee will be higher than the lease amount that you used to pay. And if you can quantify this by percentage or whatever, I will be grateful.

If you're not sure -- it is internal, right?

Sorry, what I couldn't hear you?

It is internally. It's neutral.

There are no further questions at the moment from the phone.

Operator, could you check if we have questions in the chat as well?

There are no questions on the webcast.

All right. If there are no further questions, I may wrap the call. Thank you, everyone, for joining us today. Thank you, Nishit and the operator for hosting the call. Please refer to our Investor Relations website for additional updates, and feel free to contact the IR team for further information at ir.zain.com. We look forward to your future participation in our Q3 update. Thank you for joining, and have a great day.

That conclude the conference for today. Thank you for participating. You may all disconnect.