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

Good day, and thank you for standing by. Welcome to the Zain Group Second Quarter 2024 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Nishit Lakhotia. Please go ahead.

Thank you. Greetings, ladies and gentlemen. This is Nishit Lakhotia from SICO, and I would like to welcome you all to Zain Group's Second Quarter 2024 Results Conference Call. It is my pleasure to host Zain Group's senior management today on 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 Mohammad Abdal, Zain Group's Chief Communications Officer. Thank you.

Thank you, Nishit, and welcome, everyone, to Zain Group's Q2 2024 earnings conference call. I'm joined today with Mohammed Shereef, the Group Head of Finance; and Aram Dehyan, the Group IR Director and some of the key management with us. If you allow me, I will start to express our condolences for our colleague, Sultan Al-Deghaither for Zain KSA CEO in Arabic. [Foreign Language] 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 the call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on the 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, Mohammad. Ladies and gentlemen, I start this call with the heavy heart as we mourn the sad demise of our colleague and dear friend, Mr. Sultan bin Abdulaziz, the CEO of the Zain KSA. I ask all of you on this call to pray for his soul and wish his loved ones the strength to overcome this huge loss. He was an exceptional leader and mentor and an inspiration for us and we shall continue with his legacy of growth and excellence. With this very sad news, I shall kick off the Q2 earnings call, and thank you for all joining us today. As we review the second quarter, I am pleased to report that we have seen a notable improvement during Q2 '24, reflecting the company's resilient and consistent focus on strategic execution that has set the theme for a solid year. Our improved performance is the result of comprehensive approach, targeting revenue book across all operations, cost optimization and implementing various mitigating initiatives to beat with socioeconomic and currency challenges, most notably in Sudan. These efforts are not just about achieving targets. They are about preparing the company for the next phase of sustainable growth, driving shareholder value and ensuring long-term success. On a more positive note, our Board declared an interim dividend of 10 fils per share for the first 6 months of 2024. This being the fourth consecutive year of interim dividends. This dividend will be distributed on October 6, 2024, and underscores our strong balance sheet, financial solvency and confidence in the future prospects of our business. In Q2 '24, all major markets delivered solid top line growth compared to the same period last year. This growth has helped us to offset the drop in Sudan, which has been severely impacted by the ongoing conflict over the past 16 months. We would like to point out that while presenting Sudan Q2 '24 performance, we are using Q1 '24 as our comparative periods present a more relevant overview of the latest growth trends and results of our mitigation efforts given the rapidly evolving situations in Sudan. We would like to report that despite the network and distribution challenges, Sudan's Q2 '24 revenue surged by 41% in U.S. dollar terms compared to Q1 2024. This is an impressive achievement despite a significant currency devaluation. This highlights that our efforts to improve network services and coverage in Sudan are gradually paying off. Implementation of our Disaster Recovery plan, including a new data center in [indiscernible] Sudan has resulted in the gradual improvement in network now operating approximately at 40% capacity. This has brought over 5 million customers back to our network, resulting robust growth in Sudan revenue compared to Q1 '24. Network improvement in Sudan resulted in 13% increase in total group customer base when compared to Q1 '24 and now stands at 47.8 million. In Q2 '24, Zain Group generated consolidated revenue of KWD 479 million, USD 1.6 billion, up 4% when compared to Q2 '23. EBITDA for the quarter reached KWD 178 million, USD 579 million, reflecting an EBITDA margin of 37%. Normalized EBITDA for the quarter grew 11% year-over-year. In Q2 '24, Zain Group net income reached KWD 52 million, USD 170 million, reflecting an earnings per share of 12 fils, USD 0.04. On a normalized business, net income increased 55%, achieving high double-digit growth. Normalized EBITDA and net income growth is adjusted for the one-off gain from Kuwait number range claim last year, amounting to KWD 24.68 million, which is [ USD 80.03 ] million. Additionally, the currency evaluation in Sudan from SDG 596 per dollar in June 2023 to SDG 1,799 per dollar at the end of June '24, negatively impacted H1 '24 key financial KPIs. Additionally, for the second consecutive year, Zain KSA distributed cash dividends on [ SAR 0.5 ] per share, whereby Zain Group received USD 44 million. We go to debt profile. The group continues to maintain healthy cash flows. Total due to banks stands at USD 4.6 billion and net debt to EBITDA currently standing at around 2.2x. Year-over-year increase in finance cost is mainly on account of higher interest rates. On ZainTECH, ZainTECH's total revenue for H1 '24 reached USD 41 million, an impressive 52% increase over H1 '23. This substantial growth is primarily due to the consolidation of the new entity, STS effective from 1st, March '24. With multiple M&As already finalized and a large pipeline of high-value lease in progress, we expect exponential growth from this side of the business in the coming quarters and years ahead. FINTECH. The impressive profitable growth of Tamam and Zain KSA have seen revenue surging 24% for H1 '24. The total transaction value increased by 59%. Digital operators both Yaqoot in KSA and Oodi in Iraq continued to grow during Q2 '24, as Yaqoot reported 21% revenue growth and 8% customer growth with Oodi reporting 63% revenue and 35% customer growth. Corporate sustainability. We published our 13th sustainability report titled A Pathway to Value Creation. This report summarizes the progress and strategic efforts undertaken across the company's footprints in the past year as we continue to execute on our 5-year corporate sustainability strategy centered across four pillars, namely climate change, operating responsibility, inclusion and generation youth. Corporate governance recognition. We received a prestigious award for our exceptional corporate governance practices in Kuwait. The World Finance recognized us as the best corporate governance of a listed company for the fourth consecutive year. This highlights our commitment to ethical standards, transparency and professionalism as well as validating our dedication to maintain a strong governance framework. Full year guidance. We are pleased to report that we are on track to deliver what we promised in our previous full year guidance. Despite the big cost by nonrecurring items such as gain from Tower sales and number range benefits that boosted profitability last year, as well as the impact of ongoing conflict in Sudan and the currency devaluation, we are on course to achieve our targets of 80% to 85% of our full year '23 net income. Looking ahead to the second half of the year, we remain optimistic. We expect performance to improve compared to the first 6 months with Q4 being particularly active. We are investing heavily in upgrading and expanding our 4G networks in KSA, Kuwait, Jordan and Bahrain to meet the ever-growing demand for the high speed and reliable connectivity. At the same time, we are focused on monetizing these networks on both B2C and B2B customers, especially to satisfy the lucrative demand from government and corporate enterprises. These are the main drivers of our revenue growth along with the introduction of new smart phones in H2 '24, mainly new Apple, Samsung launches, et cetera, is also set to drive operational benefits and bolster our performance further. Short highlights on each [indiscernible] presentation already, I believe. In Kuwait, the strength of 5G network continues to drive revenue growth, and we expect to win some major B2B deals in H2 as well as witness the fruits of our B2C customers' attractive initiatives. This quarter marks our highest achievement in prepaid to postpaid migration with an impressive 61% increase versus Q2 '23 and a 51% increase compared to Q1 '24. For Q2 '24, revenue grew 9% to reach KWD 93 million to USD 303 million. Normalized EBITDA grew 11% to reach KWD 37 million, USD 122 million, reflecting an EBITDA margin of 40%. Normalized net income grew 17% to reach KWD 24 million, USD 78 million. Normalized EBITDA and the normalized net income growth for Q2 is arrived by adjusting the number range claim in Q2 '23, which is KWD 24.68 million. In KSA, revenue continues to grow and the recent announcement to invest SAR 1.6 billion, USD 407 million, to expand 5G network coverage from 66 cities to 122 cities. We expect this market to continue on a very strong growth path and achieve its full market potential. Revenue for the quarter grew by 7% compared to Q2 '23 to reach USD 680 million, while EBITDA reached USD 208 million, reflecting an EBITDA margin of 31%. Net income for the quarter reached USD 28 million. The operators 5G network covering over 66 cities, so data revenue represents 40% of the total revenue, and customers served stood at 9 million. We have lost an invaluable leader, Mr. Sultan bin Abdulaziz and the KSA Board will be looking into succession once the mourning period is over to ensure continuity of his legacy and his initiatives. We will advise all stakeholders of his replacement and other relevant news in due course. Zain Iraq. Iraq performing exceptionally well, and we are expanding the 4G network that has been an impressive quarter and expect this market to continue its upward trajectory and deliver exceptional financial in the second half of the year. Revenue for the quarter jumped 13% year-over-year to reach USD 263 million, EBITDA grew by 28%, reaching USD 115 million, reflecting an EBITDA margin of 44% with a net profit soaring 196% to reach USD 39 million. Customer base reached 19 million customers, maintaining its market-leading position. It is worth mentioning that excluding the one-off power gain in H1 '23, I think it is approximately [ USD 30 million ], normalized net income growth is 215%. In Jordan, we are expanding the 5G network, attracting new customers and migrating customers from 4G to 5G and this is the key driver for the revenue growth there. Q2 '24 revenue grew 4% to reach USD 137 million, EBITDA grew by 3% to reach USD 56 million, reflecting an EBITDA margin of [ 14% ], while net income for the period reached USD 17 million. Zain Jordan served 4 million customers, up 5%, maintaining its market leadership. In Sudan, the teams are focused on maintaining and revising the network to deliver much needed connectivity as well as implementing price revamp to mitigate the currency valuation. Revenue for Q2 '24 increased to 41% to reach USD 71 million when compared to Q1 '24, with strong EBITDA growth of 195% (sic) [ 163% ] when compared to Q1 '24, reaching KWD 34 million, reflecting an EBITDA margin of 49%. Net income for the quarter grew 51% when compared to Q1 '24, reaching USD 33 million. Customer base increased 92% to reach 10 million, up from 5.2 million last quarter due to the robust recovery plan and a new data center in Port Sudan. On our strategy foresight strategy. By end of the year, we expect to announce plans to accelerate our foresight strategy growth, ambitions, further boosting our confidence and ability to meet our targets, endeavor value to our shareholders in the years ahead. With that, I will now hand over to Mohammad Abdal the Q&A session. Thank you.

Thanks, Mohammed. With that, we will move now to the Q&A session. [Operator Instructions]. Nishit or the operator Malia, could you please repeat the instructions?

[Operator Instructions] And now we're go take our first question, and it comes from line of Madhvendra Singh from HSBC.

And first of all, I'm sorry for Zain Group's loss and my condolences to the family of Sultan bin Abdulaziz. I'm really sorry to hear about his demise. And moving to the question. The question I have is on the impairment you took in Sudan. So that's $20 million. I'm just wondering whether we need to adjust the EBITDA and normalized net income you reported for the quarter any further for that $20 million impairment? So I think you reported $52 million. Do we need to add back anything to that to reach the clean net income? And then on -- one question on Kuwait was it had such a strong recovery. So what is driving that? And is this run rate is what we should assume going forward?

Regarding the impairment of Sudan, remember that $48 million was the capital provision in last year. And this year, what we did is we impaired $20 million, and we -- the profit is down by $30 million this year. So if you see apple-to-apple, the $48 million was there and $250 million. So if you see normalization is there already because the $48 million provisions last year, what we booked, we are thinking that it may come. It depends upon the next quarter, whether it's in Q3 or in Q4, when we review the ongoing business plan. And this does depends upon that one, we will take appropriate actions whether it's required a gain impairment or we have to reverse something. This is -- we'll decide at that end depending upon the situations there in second half. What is the -- the second question was Kuwait?

No, sorry. The first question, what I meant was you reported KWD 52 million of normalized net income. Do we need to add back the $20 million impairment in Sudan on top of it to get to the clean net income?

No, no, no. Because why I'm saying that you don't need to add because later also, there was the impairment. So you don't need to take it again. This is what I explained to you. Q2 '23 -- in last year, it was $48 million provision book. This year, impairment is $20 million, and profit reduction is $30 million due to the situation. So apple-to-apple, it's the same. Because of the reduction in this one, it comes to the $30 million -- That's why. That's it.

Okay. And the second question was on recovery in Kuwait. What is driving that? And whether this EBITDA run rate is what we should assume going forward?

Yes. Kuwait is performing well. And normally, there will be some rebates or credit notes from supplier to help these things whether it is the handsets -- handset rebates, this is normal. So this year was a little bit higher. That's only. No need to take anything normalized. It's the normal. You can take the run rate thing.

So the run rate...

It will go...

Now we're going to take our next questions, and the next question comes from the line of Ziad Itani from Arqaam Capital.

Sincere condolences on the passing of Engineer Sultan. Just a couple of questions from our end. First, we've seen Maroc Telecom in Q2 book massive losses after losing the legal dispute they had with VEON or Inwi basically. And then group owns through the JV, 31%. So -- and basically, the net ownership is at 15.5%. But we haven't seen any one-off gains and the amount was quite substantial. We're talking about $640 million. So your share without excluding taxes, would be around KWD 30 million. What's your take on that? And the second question, if you look at your financials, you have several other income, KWD 5.2 million in other income, KWD 5.9 million and FX gains, KWD 1.4 million in net monetary gains. The total of this is close to KWD 12.5 million. Can you elaborate more on this? How should we think about these line items going forward, especially you mentioned severe devaluation in Sudan. So what's triggering the FX gains?

Regarding your first question about Inwi, we are currently in consultation with our legal counsel on this matter. We will proceed on this matter based on their feedback. We are on the Board of Inwi so we also will meet to see if we can book our share of [ KWD 300 million ] in Q3. We have not booked anything yet, and we'll provide further details in due course. And the second question, you asked about other income. The other income, there is -- it's coming from the USF from KSA. That's what the other income, that one. And the FX gain, it's from Sudan because they have a receivable -- a huge receivable they have in their books. And that's what when you have receivable revaluing in dollar, so there's a gain because the currencies changing from [ 596 ] to, I think, [1,600 -- 1,700 ], that's the reason.

Perfect. That's very clear. So now even -- I mean, the currency devalued further as we speak, so it's close to [ 2,500 ]. Would that mean you're going to book more gains on these receivables? Or did you manage to collect?

It will. It will. If the currency changes deeper, the currency gain will increase.

Okay. And how long outstanding has these receivables will be in, like what's the days of receivables in Sudan roughly?

The receivable from Sudan, it's collecting. It's collecting. Gradually, it is collecting. Because you see the situation in Sudan is very bad. I mean, honestly, they're getting the -- making the payment or getting these things is very bad. It's not like -- we are, in a way, we are managing -- we saw a dip in Q1, it went down. And then with the Port Sudan and these things, we come back. This is gradually is coming back. This is what happened.

Yes, that's clear. But I assume these are related mostly to wholesale connectivity, right? Because it's a dollar...

Yes, yes, yes. Exactly. Exactly. Yes.

So there's no issues on collections...

No, no, no. No issue. No issue with collections.

[Operator Instructions] At this moment, we do not have any questions over the audio lines. And therefore, I would like now to hand over to Nishit for any written questions.

Yes, we have one question from [ Tandos Cosana ] from UBS, that thing regarding Zain's Saudi. First of all, the condolences on untimely passing. And what is the strategy of Zain Group regarding Saudi? Will this unfortunate incident affect the strategy of the Saudi operation in anyway? And whether the company is looking to appoint -- a replacement internally or externally? If there is anything that they can share?

Yes. Regarding Saudi, the strategy, of course, will not be affected because we have a team there on the ground. The key management team is involved with Sudan from day 1, and the Board is on top of it as well. And you have to understand, at the end of the day, it's kind of too early to announce the next move immediately, but we are going to announce in the next few days, I'd say. We have an NRC committee there working on this. We have a succession planning there on Board. We have -- at the group level, we have it in all our codes. So I don't see any reason to worry about it at the moment because the strategy is on and the people -- the management team that we have is really on board and they can deal with these circumstances.

Okay. Then there's a question from Kushal. He's asking what's the CapEx guidance for 2024 in percentage of revenue?

It is approximately 12% to 15%.

Okay. And then there's one more question from [ Haram ]. We would like to know the reason for increase in EBITDA by KWD 6 million? When SR declined in second quarter compared to first quarter. Not sure what does SR mean, but that's the question.

This one, let me tell you. This is -- we have some over accruals related to compensation, indemnity or vacation. We are not doing this one every quarter or every year. Whenever it is required, we are doing that one. So that's one. And plus, there are some review of accruals and everything taken place this quarter. It's approximately, I think, KWD 4.5 million or KWD 5.5 million. This is what we did in this quarter.

Okay. And then the next question is from [ Hami ]. He's asking an update on the insurance claim in Sudan?

Yes, we are -- the team is working on it closely. We are anticipating updates on the insurance claim for the damages incurred in Sudan hopefully in the second half of this year. We have received already $2 million from the [ 40 million ] roughly as for the interaction of the loss of the revenue in the business and the other claim is on the way, hopefully. The team is working hardly with the insurance company, and is doing lot of meetings. As you know, it's hard to access the country at the moment. So that takes a little bit longer than usual. However, we expect something to happen in the next quarter or 2. So the second half, hopefully.

Okay. So we are still waiting for more questions on the webcast. So I can ask a couple of questions that I have, till then. First on, I have it on the Kuwait market. Actually, the margins looked very strong in terms of recovery. So the -- compared to even first quarter, it came above 40. So is this EBITDA margin sustainable that we've seen in second quarter? Or there were any reversals that actually bloated the margins for the Kuwait operations this quarter?

Yes. If you see the Kuwait EBITDA margin, if you see in Q1 '23, it was 36%. In Q2 '23, it's 39%. And then in Q4, it is at 33%. So it's the same trend. If you see Q1 '24, it is 33%. Q2, 38%. Approximately, it's the same. And if you see Q2 '23, that's the same. It's the same thing, almost the same range 39%. So it's the trend.

Okay. And in Iraq as well, there was a very strong performance in the second quarter. So how do you see this sustaining in the coming quarters? And you mentioned the new operator is -- I mean, the regulators are going ahead with the new operator launch. So when do you see that happening? Any feedback on that?

Iraq is performing very well, as I mentioned in my scripts. They are growing, I think, year-over-year, the 200-plus percentage if you compare to H1. Even the quarter somewhere in 190 plus. It's a great improvement, what's happening in Iraq. Plus, the market itself is improving. So we expect Iraq to continue the same thing. Maybe more.

And when do you expect the new operator to launch? Any feedback you've got from the regulator?

The same talks, nothing has been changed. We're talking about it for a while that in 2024, we expect something. We didn't see anything happening at the moment yet. So what we expect, as I think can happen to our year-end or maybe beginning of 2025. I think in Q3, we'll have -- they will update everyone on the matter.

Okay. And one final question from my end then we'll check the other questions on the chat. Regarding the cash flows, I see some kind of stress. I mean, looking at your free cash flow and the dividend commitment that you have. So if you look at the cash flow for -- operating cash flow minus your CapEx, then -- do you see any challenges there? And do you think that there will be more leverage on Zain Group's balance sheet? In addition to linked to this, would be even on the Tower traction, you -- TASC has to make some payment to Ooredoo given that they are contributing more. So how do you see this -- is there some level of difficulty? Or you're very comfortable with the cash flows?

Free cash flow of the group will not be impacted since we are not depending upon the upstream from Sudan. All other -- [indiscernible] are upstreams as planned. In addition, Zain Group have buffer, unutilized [ FFCs ] of around KWD 1.8 billion as of June, contingencies to service payment for any other acquisitions or anything in the future.

Okay. So there's a couple of more questions on the chat. The reason for drop in service revenue in second quarter in Kuwait and guidance on Kuwait EBITDA for 2024.

Nishit, could you please repeat the question again?

Yes. The question is, what is the reason for drop in service revenue in the second quarter in Kuwait operations? And following on that, what is the guidance on the Kuwait EBITDA for 2024?

Guidance will be, I think, neutral. It will be same approximately. And if you see now, flat and it's flat. And if you see in first half, it's 40. I think [ KWD 40 million -- KWD 40 million ], I think it's a flat. And then the service revenue, it depends upon the package and sometimes they will increase the trading revenue and these things and the service revenue will be -- will not be getting. It's balancing beginning in both lines. So at the end of the day, the revenue is there and the EBITDA is there.

Understood. There's no more questions right now on the webcast and even on the audio. So maybe we can just wait for a couple of minutes if anybody has any more questions.

[Operator Instructions].

Okay. We have one question on the webcast from Omar Maher. He is asking on the recovery plan in Sudan. Recovery plan in Sudan seems to be working well. And I assume now that you have good visibility on the second half of 2024. When do you expect to recover the remaining 4 million to 5 million subscribers, which are still missing from your subscriber base? And when should the revenue fully return to its normalized level.

Nishit, it was disconnected. The voice, we didn't hear the second one. Could you please repeat the question again?

Yes. So Omar is asking in terms of Sudan, when do you expect to recover the remaining 4 million to 5 million subscribers that is missing from the subscriber base? And when will the revenue also fully return to its normalized levels in Sudan?

Due to our continued efforts on restoring network services in Sudan, we expect and anticipate further improvements in the financials of Sudan as the network coverage expands and more distribution channels come online. Continuing network restorations will gradually improve the network availability and will generate more revenue. Because currently, the people are a displacement here and there, so we cannot -- I mean, nobody can -- yes. But as of now, and last moving, it's growing better, much, much better than Q1. And [Foreign Language] it will grow gradually.

Okay. So we don't have any more questions on the webcast and as well as in the audio for now?

Thank you. Dear participants, thank you very much for all your questions. I would now like to hand the conference over to the management team for any closing remarks.

Thanks, Maria. Thanks, Nishit, for raising the call. Please refer to our Investor Relations website for additional updates and feel free to contact the IR team for further information at [email protected]. We look forward to your future participation 2024 update. Thank you all for joining the call and enjoy the rest of the summer.

This concludes today's conference call. Thank you for participating. You may now all disconnect. Have a nice day.