Ooredoo Q.P.S.C. (ORDS) Earnings Call Transcript & Summary

[Foreign Language]. Hello, and welcome to Ooredoo's Q3 results call. It's good to be here again. And at this time, although we are not in the same room, at least we are all in the same building from the Ooredoo headquarters in Doha. Let me start by introducing my colleagues. You are familiar with Aziz, our Managing Director; we also have Sheikh Mohammed, CEO of Ooredoo Qatar; Abdulla Al-Zaman is traveling at the moment, but our Treasurer, George Challenor, is covering for him. And we're also joined by Rene Werner, Head of our Strategy; and from the Investor Relations team, we got Sara Al Sayed on the call. You've got all the information in the deck. The buyers of the speakers are there. Aziz will start with the presentation, the consolidated results, and he will also give you a summary of the recently announced proposed merger in Indonesia. Then we're going to go into the OpCo results. Sheikh Mohammed will cover the first half and then George is going to cover the second half of the OpCos, and we will allow ample time for your questions. The presentation is available on our website. And this session is actually being recorded. And the transcription also has started. And by attending this meeting, you consent to be included here. Please do note the usual disclaimer on Slide #2. And to begin, I now hand over to Aziz. Aziz, you're on mute.

Good morning, everyone. Happy to have you, and I'm especially happy to announce that we're continuing the trend of the year with very solid performance even though we had challenging conditions. Our revenues ended up at QAR 22 billion. This is up 3% compared to the same period last year. Our group EBITDA grew by -- sorry, our group EBITDA grew to QAR 10 billion, which is a margin of 45%. This is a growth rate of 7%. If you look at our revenue and you remove FX impacts, actually, our revenue grew by 6%. And in the same way, our EBITDA grew by 10%. On the net profit, we were impacted by mainly FX losses on one side and a one-off impairment of our operation in Myanmar. This was partially offset by the sale and leaseback transaction we've done in earlier this year in Indonesia of our towers, and that was roughly proceeds of QAR 1 billion. Excluding all these one-offs, our net profit actually increased by 41%. Our customers -- consolidated customer carried on increasing. We're now exceeding 120 million subscribers. That's an increase of 2%. And of course, we'll touch on the end, we've announced a transformative transaction, which is the merger between Ooredoo Group, Indosat operation and CK Hutchison, Indonesia's operation. Can we move to the next slide, please? As I previously said, our revenue grew by 3% for the first 9 months, and it's a 4% just for quarter 3 of this year, jumping from close to QAR 7.300 billion to QAR 7.600 billion for Q3. EBITDA has grown by 7% for the first 9 months, jumping from QAR 9.248 billion to QAR 9.900 billion, and it's a 6% jump on just for the third quarter alone. This growth in revenue was mainly driven by the strong performance in Qatar, Indonesia and Tunisia and the EBITDA is driven by most of the operations but also strong performance in Indonesia, Kuwait and Algeria. Next slide, please. The net profit of the group, as we said, we are -- for the first time, we're actually reporting for first 9 months a loss of QAR 760 million, and this is due to the impairment of Myanmar and FX losses. The negative impact was partially offset by the profit of the sale and leaseback of Indosat reduced our assets of QAR 1 billion and reversal of COVID FX provision. If we exclude this one-off, What you can see is that for the first 9 months, our normalized profit has actually jumped by 41%, and our Q3 profits alone have jumped by 28%. Next slide, please. CapEx in line -- CapEx is in line with our guidance, and we're slightly below last year. Our CapEx dropped by 12% compared for the first 9 months of last year, and by 20% for Q3. If you combine that with also the very strong top line growth and EBITDA growth, what you're seeing is very strong free cash flow growth. Our free cash flow for the first 9 months grew by 18% and Q3 alone grew by 24%. Just 1 comment here. We simplified the definition of free cash flows to align it with the rest of the industry. It's a very simple definition. It's EBITDA minus tangible CapEx. As I mentioned, total customer growth has grown by 2%. We're, for the first time, exceeding 120 million subscribers. The growth mainly came from Indonesia, Oman, Algeria and Iraq. In line with the guidance of our Board. We're continuing to reduce our net debt profile. Our net debt is actually at the bottom of the range of our Board guidance, which was between 2.5x and 1.5x, and currently stands at 1.5x net debt to EBITDA and well below the bank covenant of 4x. As you can see, our 9 months revenue and EBITDA are both exceeding our guidance. We maintained the full year guidance as it is, which is revenue growing between minus 3% to plus 1%, EBITDA minus 3% to plus 1%, and CapEx from QAR 5 billion to QAR 6 billion. This is a conservative approach, taking into account that we still are aware of threats of COVID-19 for the last quarter. Now this is a transaction that we announced a month ago, and it's a transformative transaction. It's the merger of Indosat Ooredoo with CK Hutchison. This will create a pre-synergy enterprise value of $6 billion. The total customer base if you look at the combined customer base of both entities would take -- would jump from close to 60 million, all the way to close to 80 million subscribers for the combined group. This merger will be beneficial for all stakeholders, from our customers to our shareholders and then our shareholder in Indonesia, shareholders at the group, but it's also will be beneficial for the Indonesian market as it is. As you know, the Indonesian market is highly fragmented. Today, there are 5 operators operating in Indonesia. The incumbent having 43% market share. The remaining players were #2 with 17%. And then combined entity will rationalize the market, that should put us at RMS of close to 25%. Next slide, please. The combination will create a lot of value for our shareholders. We're looking at run rate synergies of close to $300 million to $400 million. A bulk of the synergies are coming from the network rationalization. We currently estimate close to 25% to 30% of the combined footprint of the network to be decommissioned because of the duplication. Also, there will be strong synergies from more efficient use of our combined spectrum. Optimization also in duplicated infrastructure transmission as well as IT stack. We also see a lot of synergies not from the nonnetwork side. Both have very strong complementary brands that address different segments. We'll leverage the best practice of both entities, and increase the scale of the footprint of both entities will give us a lot of depth in the market. And of course, the normal SG&A optimization. The surviving entity will be called Indosat Ooredoo Hutchison. As you know, in this transaction, we are going through a joint control model. This is a merger where we will be renouncing consolidation. We will both be controlling the entity. The government will still retain 9.6% shareholding. And other public shareholders will hold approximately 14%. New shareholders will ensure both the strong backing of CK Hutchison and Ooredoo with this will ensure that the combined entity has a very strong backing from 2 very big telco operators around the world. This will give long-term strength to the entity. We estimate that this will create very strong positive cash flows for the Indosat going forward. As you know, we're the dominant shareholder, to achieve joint control CK Hutchison will acquire 17% of our share for an equalization payment of $387 million. We're currently going through the regulatory approval. All existing shareholders of Indostat, as of today, will receive dividends of the tower sale achieved in May. That's a total consideration of $750 million. As OG shareholder, the group will still retain 65% of this dividend. As you know, through Indosat law -- through Indonesian law, dissenting shareholder will have the -- will be bought out by [indiscernible]. The set price of the buyout is IDR 5,200. Just to put this in perspective, as of today, the share price of Indostat is trading above IDR 7,000. With this, next slide, I hand over to Sheikh Mohammed.

Thank you, Aziz, We are going to start with Qatar. So following whatever [indiscernible] saying and for the growth of group -- Qatar as a home market -- the group one of the major contributors to the top line, Still a leading operator in terms of #1 for the [indiscernible] mobile market. That [indiscernible] if you look at the market of Qatar, the market has grown by 4% YTD year-on-year. And we have seen that the growth [indiscernible] by 3%, which is contributing also to a very healthy margin -- EBITDA margin of 54%. And the other part of our digital strategy that [indiscernible] with group strategy. We have partnered recently with Quest, and we have our own eSports gaming called, Ooredoo Nation. Also very proud of announcing the Qatar's sponsor for the F1, first time ever happened in Qatar. Ooredoo Qatar also was recognized as Microsoft's Partner of the Year and also with Moneygram as a Partner of the decade. Moving to Indonesia. Indonesia is still continuing with the momentum delivering a strong growth of 14% increase in the revenue. EBITDA by -- increase by 23% amounting of QAR 2.9 billion. Healthy customer base growing by 3%. 5G commercially launched in Surabaya, Solo and Jakarta. Proposed, as mentioned by our R&D, the merger between Indosat Ooredoo and Hutchison, it's creating more synergy and having a #2 player in the market and rationalizing the market as well. Potential dividend payment on proceeds as our Indonesian consideration of proceeds is tower sale of USD 750 million. Moving to Oman. Oman market is still suffering from the COVID-19 restrictions. We have seen also a macroeconomic affecting the operator there, and we have seen the revenue declined 8% year-on-year. Also that's attributed to consumer mobile prepaid offset partially by postpaid revenue growth, which is our strategy there and Ooredoo Oman is migration of pre to post. EBITDA decreased by 12%, but still Oman perceived as healthier or a healthy [indiscernible] we have within the group. Customer base increased to 2.8 million, up by 6%. Unfortunately, in October, the whole country hit by Tropical Cyclone Shaheen, which impacted our network and hopefully, our teamwork day and night to recover, and it was within a record time to recover all these outages and also impact consults that we had in that Tropical Cyclone Shaheen. Moving to Kuwait. Kuwait is picking, and we have seen the macroeconomy softening as well as there is a little relaxation in the COVID-19 restrictions in the country. There is a slight increase in revenue by 1%. EBITDA margin has been improving significantly with -- being thankful to Kuwait management for their [indiscernible] cost optimization. Still, the investment going there for latest services that we are providing with our customer with 5G. It has been a continued commitment also from Ooredoo Kuwait providing the business class technology and also providing a sophisticated digital [indiscernible] called [indiscernible], which we are very proud to announce and also partnering with big entities like NBK and also other entities that we are proud to be partnering and having our digital sales business combined with that. Also very proud to launch a successful event of iPhone being sold [indiscernible] with Apple, and it has been a good achievement of -- from sales and also bundling our commitment and packeges that we're providing to our customers. Having said that, I will hand it over to my colleague, George. George, over for you.

Thank you, Sheikh Mohammed, and a warm hello to all our listeners on the call today. Turning to Iraq, we have a strong recovery performance in Iraq operations in the third quarter. The Iraq economy has been impacted by the twin effects of a 20% devaluation in the Iraqi dinar, and the effect of the COVID-19 pandemic. Although flat in local -- in Qatar riyal terms, in local currency terms, there is a much stronger performance. Revenue is up 12%, EBITDA improved by 16%, and EBITDA margin grew 1 percentage point to 46%. With extending 4G coverage and switching 4G customers, the customer base grew 7% to 15.2 million subscribers. I will also note that the last quarter rebound of 24% in revenue and 27% in EBITDA growth. Turning to the next slide, Algeria. Our Algeria operations are also showing signs of recovery with the local economy despite a 7% depreciation in the Algerian dinar. While flat in Qatar riyal terms at QAR 1.7 billion, revenues are up 8% in local currency terms. EBITDA increased by 8 -- by 6% in Qatar riyal terms, with efficiency improvements yielding 2 percentage points of EBITDA margin growth to 36%. The customer base also grew by 3%. And Algeria launched a Yooz App, a new optimized version in Q2 this year. The Yooz is a prepaid offering digital app, targeting the youth of Algeria and helps them personalize their data plans and access to digital content. Ooredoo's another noteworthy point is that Ooredoo Algeria's network remained very robust despite some forest fires. And the company offered initiatives to support local associations in areas impacted by the forest fires. Next slide. Ooredoo Tunisia is another operation showing good recovery. Delivered robust results despite an increase in the number of COVID-19 cases with revenue of QAR 1.2 billion, for the 9 months ended September, an increase of 8% compared to the same period last year. EBITDA was QAR 511 million, up 3% compared to the same period last year, and streamlining its operations through digitisation, the EBITDA picked up 1 percentage point to 43% margin in Q3. Now each quarter is up sequentially in 2021. Ooredoo Tunisia also changed the reporting of their customer base to a 90-day network activity definition. But it is worth noting that on a like-for-like comparison, the customer numbers have increased by 12% year-on-year. Next slide, please. In Myanmar. Operations in Myanmar have been challenging. The authorities have proclaimed a 1-year state of emergency in February of this year, which significantly impacted the company's revenues. Revenues reported an 8% decline to QAR 799 million, and impacted by a strong currency depreciation. There was a slight easing of the data restrictions and the reinstatement of a pricing floor by the regulator, which helped improve business in Q3. A 24% increase in EBITDA to QAR 244 million, was partly assisted by lower cost of sales. And the customer base increased by 2% to QAR 13.3 million year-on-year. The company launched a new game, Oomanji, on the My Ooredoo App, which has been played over 25 million times since its launch, and this has contributed to My Ooredoo App revenue. I will close by saying that in local currency terms, whilst there has been a strong Q3 recovery in margins, conditions remain difficult to manage in Myanmar. That concludes the slides on operations, and I hand back to Andreas.

Thank you very much, George. And before we move to the Q&A part, I would like to take the opportunity to thank all the investors and analysts who voted for Ooredoo at the recent Middle East on Investor Relations conference, and we were the double winners of the Qatari IR awards, and on behalf of Sara and myself, we appreciate the vote and the support there. We always welcome your feedback, and we take it very seriously. For example, our dividend policy was also strongly encouraged by the feedback that we got from our shareholders. So please keep on sharing your feedback, positive and negative. We are always open for your suggestion. [Operator Instructions] And then I hand over to Sara now who can start reading out the first question.

Thank you, Andreas. So first question, could you please provide some color about the competitive landscape in Qatar?

Sure. The market in Qatar has been quite [indiscernible] can you hear me?

Yes, we can hear you.

So I look at that way, the market in Qatar has been quite healthy compared to 2020. And if you see the YTD market growth is around 4%. And we have seen also both operators are rationalizing and gaining value from -- thanks to their rebound summer projects. And we have seen also talking about Ooredoo as a lead operator, we have seen a major contribution from a B2B segment Ooredoo tv. And also thanks to our strategy of pre to post-migration, where we have seen a significant or feasible growth in our postpaid customers. So in a nutshell, we have seen a healthy market growth, and we have seen both operators are growing and taking a fair share into that growth.

Thank you, Sheikh Mohammed. Another question is about Iraq. What is the reason for the revenue increase of 20% in Iraq, Q3 versus Q2?

Do you want me to take it? So in Iraq, thanks to our also 4G launch, and we successfully launched our 4G [indiscernible] -- So thanks to also our migration from 3G to 4G and to our team who worked hard on revamping our products and monetizing the 4G investment. And we had seen -- from beginning of the launch, we had seen a lot of successful and smart movement to our team also migration of pre to post. And also having a impairment of products for the last 3 months in summer for a high-value segment. And that's the reason we have seen a good pickup on the data of 4G traffic as well as represented or translated into value by smart revamp products that have been launched in the last 4 months.

Thank you, Sheikh. Okay. So again, a significant impact from Myanmar on the work side. What is the current dollar outstanding from Myanmar? And is the entity in a position to clear the shareholder loan? And was any part of this loan impaired recently?

I'll take a high-level start and then I'll let George carry on. In Myanmar, the situation is quite difficult to operate on the ground, plus there are foreign currency effects and the depth of the market in Myanmar is quite shallow in terms of U.S. dollars. We are working extremely hard with all our [indiscernible] and providers to convert all our contracts back to local currency. As in local currency, we're performing relatively okay. In terms of the impairment, we fully impaired the operation, as you know, that was a total impairment of north of $750 million last quarter. George, if you want to add any further color?

Well, I think large part of the exposure in Myanmar is to do with leases and to fund the payables. And obviously those remain in place and are part of the efforts we are making to try and reduce the costs to look to see if we can make the business more sustainable.

Thank you, Aziz, and George. Again, a question from [ Nishat ]. What is affecting operations in Maldives in 2022 versus 2020? Is it a competitive pressure? Not sure whether that seems to be doing fine in 2021. So question regarding Maldives [indiscernible].

Ooredoo Madlives is also affected by tourism, and I would say that remember that [indiscernible] has a lot of government-related business, which gives them greater stability for their operations through this time, whereas Ooredoo Maldives is somewhat dependent on the recovery, which we're seeing in the tourism and dropping revenue starting to come back. Does that answer the question?

Another question from [ Nishat ]. More color on this continuous drag from impairments or financial assets regarding Maldives? So he wants more color on this continuous drag from impairment of financial assets.

I'm not actually aware of the impairment that you're referring to. I'll have to come back to you afterwards on that.

Actually, if I can add on the impairments. This actually represents the normal provision for receivables and other balances. There was a small increase during the quarter. However, year-to-year, actually, the numbers for '21 are lower than '20.

Thank you, Andreas. Also [ Nishat ], joint control of Indonesian operations. How will this work in terms of 2 different cultural management styles?

I'll take this one. So we've worked for -- we've worked, as you know, initially, when we signed the MOU with CK Hutchinson, we're targeting a close sometimes in June. It actually -- it took 3 months more. And a big part of that extension was to actually fine-tune the governance part of our merger. We actually was -- we actually found the model where we believe that a joint control is the best way to align most major shareholder into delivering the synergies as a lot of the synergies come from both operation. We've retained and appointed key managements together, each time selecting the best candidates out of both entities. We actually don't believe that the culture and the management style is that different. There are some differences. But at the same time, we have very similar objective for Indonesia. And we believe that by bringing the expertise of both operation to Indosat, it will actually benefit them by operations.

Thank you, Aziz. [ Afis ] is asking, any efforts or risk mitigation that has been taken in countries like Myanmar?

It's very difficult to mitigate risks in a country and situation like Myanmar. But obviously, careful cost control slowing down outlays as much as possible only to bare essentials is about the limit of what you can do in that situation.

Again, for Myanmar. EBITDA margins improvement in Myanmar to 41% in Q3 '21, what drove it, and is it sustainable?

George, you're taking it or I'm taking it.

Sure, I can take it, Aziz. The key element of that was lifting restrictions on the data network to allow customers to continue to use the network, obviously, growth of customers on our network. And yes. I think that's lifting those restrictions and obviously, the price flow being reestablished. So that there's a limit to the competitive damage to the pricing in the market was a substantial factor.

Thank you, George. A question regarding FIFA games. What impact does management expect from FIFA Games in 2022? Is there an overall group guidance for 2022? And can you also kindly provide some comments on expected dividend for '21?

We are very excited about having [indiscernible]. We as Ooredoo very proud being announced for [indiscernible] partner and having -- providing the full infrastructure for [indiscernible] that's hosting the event. We are quite also optimistic and looking into this event because that would impact an increase also on traffic and for the roaming, and that's something we're very excited to see and flex people and fans coming over, which will have a boost into our economy as a country and then will affect also the industry as well. From a perspective of the dividends, we always aim to keep with the policy that we are having from 40% to 60% of the normalized earnings.

Thank you, Sheikh Mohammed. How much gain will be recognized on Ooredoo group P&L due to the Indosat deal?

Ooredoo's P&L and then with Indosat deal is affected by quite a few things. One is, first, the proceeds from the sale and leaseback of the towers. That's one where only existing shareholders of Indosat, as of today, will get the proceeds of that transaction. The second is Ooredoo Group shareholder will get the benefit from $387 million equalization payment for the sale of 17% in the [ holdco ]. Last, over time, Ooredoo Group's P&L, actually, as you know, Indosat will no more be consolidated, it will be recognized as a joint venture. So there won't be anymore impact at the top line. It won't be recognized in the top line. It won't be recognized at [indiscernible] though, but it will be recognized in the net profit as a contribution to net profit. And as I mentioned earlier, we expect to drive close to $300 million to $400 million run rate annual synergies through this transaction. So we do expect quite a significant uplift in the next 2 to 3 years out of this deal to reduce P&L.

A question from [ Amar ]. Could you please shed some of the strength in Tunisia? It has been a difficult market, but lately the recovery is being steady? Do you expect this to continue?

In Tunis, we've seen good relaxation in the COVID-19 restrictions, and that's affected also positively the performance of the company. Also, we had seen some turbulence from a political side, but also that drove some traffic among the customers. And that's we had seen evident for the last couple of months. So these 2 factors, I would attribute to some recovery that seems to be seen within Tunisia market.

Thank you, Sheikh. A question from [ Faisal Zabi ]. How are the proceeds from the tower sale and merger is going to be used?

We currently haven't identified full use of proceeds, and as you know, the use of proceeds will also be subject to the Board approval. Big part of the proceeds -- some part of the proceeds, of course, is to be reinvested in the core of our operations can continue growth. Other is to continue on our strategy in slightly ancillary business like mobile money and other operations. But the reuse of proceeds will have to be proved by the Board.

Thank you, Aziz. A question for Iraq. Could you please be more specific on the quarterly revenue increase in Iraq? Was the entire 24% revenue increase versus Q2 driven by 4G data revenues? Or were there any one-offs onetime effect?

So in Iraq, as mentioned, for the last 3, 4 months, that's where we have seen an impact of a very smart move from our team there for the impairment of products for the high-value segment. And that's driven by a 4G traffic. Also, I would attribute other factors as we -- going forward, the relaxation of the COVID-19 has been there, and that's also bringing a positive move through driving the value for the company. On top of that, if you see also, there is some [indiscernible] within Q2 as [indiscernible] and that's also helping you see that growth of Q3 over Q2.

Thank you, Sheikh. [ Ziad ] is asking, did you give the regulatory approval for Indosat merger? What are the remaining steps requirements? When do you expect closure of this transaction?

So we're currently going through the different -- sorry, we're currently going through the different regulatory approval. Actually, it's going -- we're very confident because the process is going quite well. The major step is all regulatory approval. We also require a new GM approval. So approval from current existing shareholders and minorities in Indostat. We have announced that we're targeting to close before the end of the year. At the same time, we have in the agreement with [indiscernible] built room all the way to Q1 next year.

A question on Iraq also. What was the impact of setting dispute of financial specialty revenues this quarter?

We are still in that case in Iraq, and we will provide the needed information into your cost channel.

[ Ziad ] asking about Damage in Oman. What was the extent of damage in Oman in U.S. dollar terms for -- from Cyclone Shaheen? Can we expect Q4 impairments one-off losses?

In Oman, it's really that country hit badly by the Tropical Cyclone. We are still -- we have recovered heavily on the outages and also the cut in power on sites. But also in terms of the Q4 impairment that's something we are still investigating and looking into any financial impact that something will be provided in the Q4 results and [indiscernible]

Also from [ Ziad ], what is the next top 3 markets where you are working on passive infrastructure after Indonesia?

So as you know, monetizing our [indiscernible] assets is a key priority. We're actually not focusing on 3 countries. We're focusing actually on 7 countries simultaneously. So the 3G CC operation plus Iraq, Tunisia and Algeria. This is the bulk of our tower assets. We have close to 22,000 towers remaining in that portfolio. We're currently actively reviewing our portfolio to see the best monetization options.

Again from [ Ziad ], what is the size of the payables on Myanmar balance sheet?

Payables. The vendor payables are around $80 million.

Thank you, George. No further questions.

Do we have anybody raising the hand? I can't see that on my screen at the moment, [ Jessica ]?

Nothing.

Then yes, I would like to thank you all for your participation in the call. For any follow-up questions, feel free to reach out to the Investor Relations any time. And we will see you again at our full year results call, probably sometime around the middle of February. This concludes our call. Thank you.