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

Good afternoon, and welcome to Ooredoo's Financial Results Call. My name is Andreas Goldau, and I'm in charge of Investor Relations. Today, I'm joined by Aziz Ahmad M. Fakhroo, CEO and Managing Director of the Ooredoo Group, who is going to start the presentation with an overview of the consolidated results and the strategy, followed by a presentation by Abdulla Al Zaman, our Group CFO, who is going to talk us through the operations. As always, we keep the presentation's part brief to allow ample time for your questions. Please do type your questions into the Q&A section of this Zoom seminar at any time. The presentation is available on the Ooredoo website at ooredoo.com as well as on this webcast. The recording and transcription of the session has started now. So by attending the session, your consent to being included. Please do note the usual disclaimer on Slide #2. And on that, I will hand over to Aziz.

Good afternoon, everyone. Welcome to our investors call. Last week, we announced a groundbreaking transaction that will lead to the largest tower co in the MENA region. I'm obviously very pleased with this announcement. I must reiterate that we are still in exclusive negotiation with our future partners of Zain Group and TASC Towers Holding. As you may appreciate, this is a complex transaction, and it represents an important milestone for all parties. We're aiming for definitive agreements to be completed during the third quarter of this year. In terms of transaction structure, a new JV will be created. It will operate as an independent tower company with its own dedicated management team, focusing on increasing the value of its assets. Ooredoo will contribute its towers assets in Qatar, Kuwait, Algeria, Tunisia and Iraq. The transaction concerns only the passive infrastructure. Each of the operators will retain its active equipment on each site. To give you some context, when the transaction completes, TASC Towers Holding will have 30,000 sites across 6 countries: Qatar, Kuwait, Algeria, Tunisia, Iraq as well as Jordan contributed by TASC. Oman is running a separate process, as you know, due to regulatory reasons. This will create the single largest tower co in the MENA region. This transaction will allow us to achieve 3 things. Firstly, it will unlock value for our shareholders. The transaction has a cash consideration as well as an ownership stake to participate in the future upside. Secondly, we will be able to optimize our capital and cost structure. And let's not forget the synergies that we will generate by combining our tower portfolio of Asiacell and Zain in Iraq. This will drive an environmental impact, which -- with a reduced carbon footprint. Here are the key highlights for the first half of 2023. As you can see, we continue on our good performance for the first half, which has delivered an increase in revenue with a solid EBITDA margin, free cash flow and net profit growth. We'll take you into more details later, but the key highlights are: increase of 3% of the top line to QAR 11.4 billion. Reported EBITDA remained flat at QAR 4.8 billion. Reported EBITDA margin at 42% and free cash flow is up by 2% to QAR 3.9 billion in the first half. Reported net profit is up by 20% to QAR 1.8 billion. Normalized net profit are up also by 20% at QAR 1.6 billion. Other significant updates include the tower transaction, which has already touched on, and the appointment of our new Palestine CEO, Samer Fares, on May 15. He was previously the Chief Legal and Regulatory Officer of Ooredoo Algeria. As mentioned before, for the first half of the year, our revenue is up 3% to QAR 11.4 billion. Here are the highlights in more detail. I would just like to draw your attention on the fact that our EBITDA at QAR 4.8 billion is flat as reported numbers, but up by 4% on a normalized basis. Our EBITDA margin is also up by 0.4 percentage points on a normalized basis. Another key highlight is our customer base, which encompassing of IOH now is at 156.2 million subscribers or a 3% growth. This is the same -- this is a similar breakdown for Q2. Again, our revenue is up by 4% to QAR 5.8 billion. Our EBITDA on a normalized basis is up by 7% at QAR 2.4 billion. Our EBITDA margin is up by 1 full percentage points on a normalized basis. Our free cash flows are up by 17% at QAR 1.9 billion on normalized basis, and our net profit is up by 26%, roughly at QAR 0.8 billion on a normalized basis. As mentioned previously, for the first half of the year, our revenue is up by 3%. On a quarter-by-quarter basis, it's up by 4%, mainly driven by Iraq that grew by 26%, Algeria that grew by 11%, Kuwait that grew by 6% and Maldives that grew by 9%. In the quarter, Qatar's revenue was negatively impacted by a highly competitive environment in the consumer space, discontinuation of the transit business and the reporting of fintech separately into a new entity partially offset by higher handset sales. Myanmar and Palestine's revenue increased in local currency, but was negatively impacted by FX depreciation of 34% and 9%, respectively. In general, revenue increased across all segments. "Others" consist mainly of fintech revenue from Qatar. Ooredoo Money, effective January 2023, reported separately from Ooredoo Qatar. Group delivered reported EBITDA of QAR 4.8 billion with a healthy EBITDA margin of 42% for the first half. Group EBITDA down by 3% in Q2 year-on-year, up by 7% on a normalized basis, mainly from good top line growth. Included in "others", is a negative contribution from IOH of QAR 194 million, due to the one-off gain on the sale of data centers recognized in 2022, normalizing for this, there was a positive IOH contribution of QAR 52 million in this quarter. Oman's EBITDA was impacted by lower gross margin and higher OpEx. There is an ongoing evaluation of the cost structure to improve efficiency in the operation. Reduced EBITDA margin in Qatar for Q2 due to bad debt and competitive pressures. As previously mentioned, net profit for the first half of the year, both on a reported and normalized basis, are up 20% to QAR 1.795 billion on a reported basis and QAR 1.625 billion on a normalized basis. Here, you will see, I think, a self-explanatory waterfall of the adjustments done in the first half of 2022 and the first half of 2023 as normalization exercises. The major items include the NMTC legal case gains of QAR 446 million, end of Q1 of this year. Similarly, net profit for Q2 is up by 1% on a reported basis, but up by 26% on a normalized basis. The major 2023 normalization items include an impairment on the MMH investment and QAR 75 million of FX impact. Our CapEx for the first half of this year is 10% below the first half of last year. As you know, the significant seasonality and a lot of the CapEx happens between Q3 and Q4. Other major items include Maldives, an increase of 52% in CapEx, mainly driven by a subsea cable and the completion of our main headquarter. In Iraq, this is network rollout. Palestine, Oman and Tunisia also includes some rollout effect. What you will see in Kuwait, Algeria, Qatar, is a decrease in CapEx as most of the network upgrades and the 5G upgrades were done in the previous year. Qatar also included last year some one-offs for the World Cup. Myanmar, as you know, we're managing this operation on the bare minimum CapEx. Free cash flow is up by 2% for the first half. Main drivers for the free cash flow performance is mainly top line growth and lower CapEx. As previously mentioned, our consolidated customer base has grown by 3% from 54.8 million subscribers to 56.2 million subscribers. Every single market has known an inspection in the customer base. Please note that the decline in Qatar is due to a change in the definition of the prepaid base to include 90 days active base instead of 365 days as previously reported. On a like-for-like basis, our customer in Qatar were up by 1%. As previously mentioned, IOH consumers stood at 100 million subscribers. IOH numbers are not consolidated anymore. We're currently on track to meet our guidance. Our revenue is slightly ahead by 3%. Our EBITDA margin is flat and our CapEx is down by 10%, but we're still aiming to hit the QAR 3 billion mark by end of the year. Our debt profile has not changed since the previous quarter. We still are at 1.1x net debt-to-EBITDA ratio. 95% of our debt is a fixed rate, as you already know. We had 2 RCF facilities expiring in 2023 and 2024. We have had the maturities extended to 2027 and 2028 proactively. Our credit rating remains A stable and Moody's A2 stable. As you know, in Q1, S&P had upgraded us. And now I hand over to Abdulla for the operational review.

Good afternoon. As always, I start the operational review with our home market in Qatar. Reported revenue hasn't changed much year-on-year due to 2 factors. Number one, we voluntarily reduced transit revenue, because it is high volume, low margin business. Our revenue -- or a second point, our revenue base was impacted by the Fintech carve-out. So on like-for-like basis, revenue increased 4% in the first half of the year. EBITDA is at 6% year-on-year in a high competitive market and impacted by bad debt provision. In normalized basis, EBITDA was flat. On ESG, we started a recycling program or the used handset. Moving to Kuwait, solid commercial performance in quarter 2 from Kuwait. The customer base increased year-on-year by 7% as a result of the first half of the year. Local currency revenue grew by 5% and EBITDA also grew by 8% year-on-year. Next is Oman. In Oman, we are seeing increased competition after the entry of the new mobile operator, but this did not stop us from growing our customer base, which increased by 6%. Revenue remained stable, thanks for higher postpaid and handset sales. EBITDA was lower because of the lower gross margin and higher OpEx due to the reversal on bad debt provision. Moving to Iraq. (13:50) [ SSL ] was our portfolio top performer. Our customer base grew 5% year-on-year. This is another quarter of net adds. The Iraqi customer appreciate that we have the best data service in the country. We have provided outstanding customer experience. Revenue grew 10%, thanks to higher data usage, that are no longer applicable in data. EBITDA improved due to higher revenue, our continued efficiency efforts were reflected on the EBITDA margin. Turn to Algeria. Algeria gave a solid performance, up 3% in local currency. Local currency revenue growth was driven by data bundle. The Algerian dinar appreciation contributed to 8% increase in reported revenue. EBITDA improved due to higher data revenue and lower OpEx. Just a few days ago, we announced a new appointment of CEO, Roni Tohme, congratulations, and he was the former CFO of the company. Next is Tunisia. Ooredoo Tunisia remain the leader in the mobile market. Strong fixed revenue was offset by softer mobile business, where we saw discount on data bundle. Local currency revenue was down by 1%. We faced a challenge of currency depreciation. EBITDA was down due to bad debt provision in the quarter 1, excluding this first half EBITDA margin is 40%. Myanmar, and in spite of good financial results and local currency, currency devaluation had an impact on the reported number. Despite challenges like FX and cyclones, the EBITDA margin remains strong. No new development with regard to the sales process, is still ongoing, and we are still waiting for regulatory approval. Next, Maldives. In the Maldives, we continue our network investment that help us gain market share, growing revenue and increase profit. Next, Palestine. In Palestine, revenue was up in local currency terms. Again, FX depreciation impact there reported results. Our improved offering and amazing customer experience led to a 5th consecutive quarter of customer net adds. EBITDA and margin improved due to the strict cost control. We appointed Samer Fares as Ooredoo Palestine, the new CEO. He joined from Ooredoo Algeria and also has experience working on the headquarter in Doha. Next, IOH. Our Indonesian asset performed strongly. I'm very pleased with the solid growth rates across the board. IOH has updated the guidance for EBITDA margin to mid to high 40s. EBITDA margin in H1 stood at 46%. This concludes my operational review. Back to IR team. Thank you.

Thank you very much, Abdulla. Before we go to the Q&A part, I would like to highlight some conferences that are coming up in the second half of the year. We're probably going to attend the Bank of America MENA Conference in Riyadh and in Dubai, early November. And we're also planning on attending the Qatar Exchange event in New York on the 20th and 21st of November. We're going to host the Capital Markets Day. The details will be announced in due course. And now we come to the Q&A part. [Operator Instructions].

So welcome again to the Q&A part, and I'm delighted to have the whole team here with me. So we are joined by Aziz, our CEO; and we also have the Deputy CEO, Sheikh Mohammed with us; our Group CFO, Abdulla; Deputy Group CFO, Eyas; and our Group Chief Strategy, René Werner. So we're going to open up the panel for your questions. [Operator Instructions] I'm going to start with the first question from [ Rachel. ] He's going to ask about the prepaid revenue, the change in customer base definition from 365 days to 90 days out of the total drop in prepaid customers of 420,000. What's the impact due to the change of the base definition? Abdulla, do you want to consult on?

Yes. Most of it is coming from the definition. Most of that, that word is only due to the definition. If we actually use the old definition, our customer base is up 1%.

That covers the first question. And you have another question, what is the impact of the discontinuation of transit on overall revenues in Qatar?

This is approximately QAR 82 million. As you know, transit business is close to 0 margin. Yes, this is right. Maybe we can define it as a high-risk slow margin.

Then moving on, what drove the drop in postpaid customers in ARPU, Qatar?

Just to squeeze that, the market-driven, highly competitive market as addressed by R&D. There has been some changes also in our plans, which has been introduced in late March. And that's -- we see that impact going forward now.

Excellent. Then we got some questions from HSBC from Madhvendra Singh. He continues on the topic of Qatar. Why did revenue decline and margins are lower? We saw post World Cup margins should improve. Is competition getting tougher?

Competition is getting in general tougher in general market. Our Qatar margins are also slightly dropping, because we're growing on B2B, which is recurring revenue, but it's a lower margin.

Even if we have normalized the revenue to exclude the transit revenue and mobile money services actually the revenues are flat, the revenue numbers.

Thank you very much, Eyas and Aziz. Any updates on the Myanmar exit?

We're still pushing and coordinating as much as we can with the local regulator to finalize the approvals. Unfortunately, it's a slow and tedious process.

And to Myanmar, of course, the government extended the state of emergency and has concentrated on elections, but we are waiting for some news there. Then there's an accounting question. Which are the other associates, excluding Indosat, their contribution seems to have improved?

It is Starlink, I can say it. And the other one was -- it's a mobile one is it?

No. I think, as I shared, it's IntilaQ, mainly. IntilaQ has contributed around QAR 11 million in the EBITDA numbers.

Just as background information, IntilaQ is a joint venture that we have with Aspire in the area of sports and event management, and they've been very active during the World Cup and still ongoing, solidly. Next question is on the dividend outlook from Medi, especially getting the strong growth in normalized net income. What is the policy? Is it based on reported or normalized net profits? Can you confirm the payout ratio for 2022? I can do that straightaway. That is 60%. And what's the outlook on 2023, maybe a question for Aziz.

We have this question every time. It's normalized pay off up to 60%. As you've seen below, but it was within the maximum of the payout ratios for the last 2 years. Further than this, we can't comment, as you know, the dividend policy is a prerogative of the Board. Management recommends it as a bit too soon to be discussing dividends.

Great. Then we move on to the tower business and the recent announcement there. Can you remind us what is the rationale behind the tower transaction given that you are contributing towers into a JV and have more towers relatively to your partners. Do you plan to keep the majority stake in the joint venture and thus keep the towers on the balance sheet? That's the question for (23:18) [indiscernible].

So I would like to expand. We can't say much more than what we've currently disclosed. We're in exclusive discussions with Zain and TASC. We will end up with equal stake with Zain. It will therefore become a joint venture, so it will be off balance sheet. As you have rightfully noted, we're basically contributing roughly 20,000 towers and they're basically contributing 10,000 towers. So at the end of the day, it will be a cash and share transaction where we received shares in that resulting vehicle plus an equalization payments. More than this, unfortunately, right now, I can't comment, I'd love to, but I can't.

Yes, I can only repeat it the type question. He's asking what's the impact on EBITDA and net income if you deconsolidated and the Bloomberg range citing in the past between QAR 3 billion and QAR 5 billion. He is asking if that's a valid valuation range.

More than what is disclosed currently in our statement, we can't disclose whether in terms of valuation range and even a pro forma impact to the accounts to the assets are not closed, we can't disclose those.

Fair enough. I believe with Zain towers, is also happening next Monday, but in the same situation there. Then we have a question with regards to the Iraqi business and Algeria. Despite the improvement in EBITDA, the net profit is not showing the corresponding increase. Can you help us explain the reason?

Algeria, we don't disclose the net profits. So I don't know, if somewhere with the [indiscernible]

And to narrow, it's really a very good growth in topline and it's been really run down the EBIT bottom line. So we see a very good progress in that around more than [indiscernible] topline.

Okay. Then we have a very forward-looking question from Ziad Itani. And I'm frightened that, we have no comment answer again, but I ask it anyway. What are the plans for the potential proceeds of the tower deal would be consider one-off dividends?

Again, similar answer. We do not comment on dividends. This goes to the prerogative of the Board. In general, as a statement, as the management, as you know, sales of towers are -- it comes in long-term leases. So use of the proceeds, we have referenced to reinvest these proceeds and higher rates of returns investments than the underlying lease we're sustaining. And that's to avoid destructing value over the long term.

Your voice is sounding like a broken record. We're going to skip the next tower deal question, but there's another question here. Are you considering any other M&A expansion outside of your current markets?

Again, this is a question we get every time. We're very value-conscious for our shareholders. We've been looking at a lot of opportunities. I think the opportunities in the past 2 years. Till date, no opportunities has ticked the box in terms of being value accretive to our shareholders and to Ooredoo Group in general, but we keep our eyes open, and then we'll be opportunistic if needed.

I thought of data. We'd like to know if there's an update on data centers and their performance and development.

So you want to take it or?

Yes. With the process basically of carving out the operations, there is a process, as we have commented earlier that is ongoing, and we're running. So we'll come back with probably news where it's the right time in that process to comment on this. As you can see in the region, data centers get increasing focus. So we think we have an attractive asset there. And we have also demand for the external market, growing that asset even organically further in the region. So we're quite optimistic about the development of our data center operations.

Thank you very much, Rene. Then there's a question again with regards to the reclassification of the revenue definition, customer definition in Qatar. Is there any onetime revenue ARPU benefit of the change?

Yes, it's clearly a positive upside in the ARPU and that's clear, because of the outcome or result to that formula, when you have the discussions.

You can also, yes I see, Maddy has raised his hand there. So I'm going to open up his microphone.

I'm going to keep tendering on that dividend point because I'm still not clear. So 2022, the normalized net income was QAR 2,821? Am I correct on that?

Of memory, probably, yes.

Yes. So if I calculate the payout ratio on that, that payout ratio comes to 49%, not 60%.

No. So if I remember correctly, our normalized last year's payout ratio, and it was just to have a round number on the dividend, we're actually at 58% or 59% or close to 60%.

That is on reported net income. Because your EPS -- clean EPS, normalized EPS is QAR 0.88 and the dividend was QAR 0.43. So I mean, either I'm missing something or there is some.

We are more than -- we will be more than happy to furnish you with the information needed. I have no problem with that.

So let's -- yes, so please, if you could clarify that, that will be great. And then second question is on the tower transaction. So without sounding repetitive there. Just the way the transaction is fluctuating, are you trying to keep it earnings neutral? Or is there a risk of like fusion, accretive? How do you think this transaction will be overall?

We believe that the transaction will actually generate substantial value on both sides. On the OpCo side because once we carve out the assets, there will be mutualization of assets between the different operators. I give you very simply, in most of our geography a tower is not just a steel structure, it's a diesel generator, it's logistics to fuel that generator. It's 24-hour security, that cost is then divided by the number of tenants. So there will be enhancement on the OpEx side to run the number of sites. Also on the tower side, and that's why we also elected to keep a significant state. There's a lot of synergies as you mutualize sites. What happened is, we use the number of ground leases you're paying and you're increasing the yield per tower at a much higher multiple than a telecom is currently paying. So we actually believe that this is going to be a very accretive transaction both for the ongoing telco operation, but also for our remaining stake within the telco.

So just to clarify there, that obviously sounds like a great plan. But doing all of that would probably take some time. In the first instance, let's say the first quarter post transaction, do you expect that to be accretive right from there? Or you want the -- you expect the synergies to build over a period and then maybe in year 1 or year 2, end of that, that's where you get to benefits?

Just to clarify, in Q4, right now, we saw an exclusivity. What we're looking to do is to sign final documentation. We don't expect to close any market before next year, because we need the regulatory approvals. Once the market is closed, the actual operational benefits and consolidations can start quite quickly. But overall, the materialization of synergies should appear over probably a 2-years period.

We're going to have another audio question from Behrain, Nishit from SICO.

A couple of questions. First, again, on the Qatar market, can you give more clarity on what the bad debts were, because it seems to be sizable in 2Q? And so if you can just quantify what was it regarding where is it coming from? And what's the strategy on perhaps dealing with the competition given that it's become pretty intense. So any strategy that management want to share for your home market? That's the first question on Qatar. Second, given that there was recent in Iraq sanctioning of some 14 banks, is there any issues with upstreaming of dividends that you see in Iraq? And also regarding increasing in prices, are you now able to increase prices without any restriction by the regulator on your packages? That's the second question. And third, again, on the tower home, regarding the JV, once is formed, will it be open to acquiring more towers? Or this is the tower base that the JV will have? And will you be open to selling your stake in the JV to another operator as well and diluting. So how will that strategy be with this JV that is getting formed for further acquisition or divestiture?

Let's take a break and then start with the question. The first one was on Qatar, net debt impact and the competitive environment in the Qatari market.

When it comes to the bad debts, it's cleaning our books, and it's been pretty normal may be debts and this is sort of the debts we have taken also segments. When it comes to the market, post World Cup, we had seen a dip in the market. We have seen also a decreased number of population, a very competitive market, as explained also by the speakers here. However, we are really looking for our strategy, which we initiated in postpaid, looking for the more value money that's still overcast We're looking very healthy also to our own channels of sales. And that's versus you are avoiding enough [indiscernible] until the end of 2023. Tower also, we have the planning exists, so the 4G workshop that we are having next month. And looking into this 3 years target planning and estimated taken our consideration -- taken into account more than 3-year business plan.

Now then there was a question, do you experience any impact from sanctions in Iraq. I just got a message from our treasury team the upstreaming is progressing as planned in [indiscernible].

No issue in Iraq. In terms of upstream, and there's also a question, I think, on our price uplift in Iraq. Across all our [indiscernible] reached fully and we maximized data across all our portfolio constantly. But then we have to do it in the [indiscernible] manner and not to also deteriorate our competitiveness and our market positioning. So it's something which is a constant delicate exercise of 5 markets. I think the numbers in Iraq show that we're doing a very good job there.

I think your third question is also regarding tower project.

Look, limited, first of all, into what I can say. We just signed exclusivity this past [indiscernible] to create from what is going to be [indiscernible] This will have an independent management, will be considered a joint venture and as a subsidiary. Apart from that, looking forward, I do appreciate your enthusiasm, looking down the line we will be acquiring new territories, et cetera. I think it's extremely premature to have this discussion as the transaction, we haven't even finalized -- final documentation.

Okay. But can I just follow up on this tower thing. I mean, given the earlier strategy of possibly becoming asset-light and monetizing on the passive infrastructure, these kind of JV structures would just mean moving from your main -- from one company to another, but still holding the asset. I think there's a bit of a different strategy now instead of -- because you are just partially possibly monetizing, but we are keeping a decent chunk still through the JV on your books.

There's a couple of points here. One is a deliberate choice not to monetize 100% today as explained to previous -- our colleague, there's a lot of value to be unlocked across portfolio consolidation in the tower co itself. And we don't see the purpose, especially we're not doing sales of towers to deleverage our balance sheet. We're currently running at 1.1x bad debt. So monetizing 100% today is not the most efficient, especially would be leaving quite a lot of synergistic value on the table in the next few years. That's number one. Two, it is an asset light as these assets will not be controlled by us and will not sit on our balance sheet at the end. So these will not be impacting our balance sheet whether in terms of leverage or in terms of depreciation going forward.

Question regarding the dividend, we have the answer.

I want to highlight. I think we highlighted before the parts in the normalized profit for dividend, we always exclude that and add to the ForEx. So if you go to last year, plus 2.8 and it has ForEx impact QAR 512 million. If you normalize it come 2.3, and you found that it was 59 point-something of that QAR 2.3 million. I hope it is clear.

[Operator Instructions]. I don't see any further questions. Then I would like to thank you for your participation. Our next call is probably happening at the end of October, tentatively scheduled for the 31st of October. If you have any further comments, feedback questions, feel free to reach out to the Investor Relations team at any time. Thank you very much.