PT Indosat Ooredoo Hutchison Tbk (ISAT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to PT Indosat Tbk Full Year 2021 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to your host today, Ibu Wina Amelya Kartika. Please go ahead.

Yes. Hi, everyone. Thank you so much for joining our full year 2021 results earnings call. Before we start, I will provide a quick safe disclaimer. Kindly note that the company PT Indosat Tbk will caution investors that certain statements contained in this call are management's intention, hope, beliefs, expectation or prediction for the future, which are forward-looking statements. We wish to caution the participants of this call that forward-looking statements are not historical facts and are only estimates or predictions. Actual results may differ materially from those projected as a result of risks and uncertainties. Furthermore, the company undertakes no obligation to update publicly any forward-looking statements, whether as a result of future investments or events, new information or otherwise. I would like to also inform that the conference call today is recorded and a replay of this call will be available soon after the call is completed. For today's earnings call, we have Mr. Vikram Sinha, our CEO; and Mr. Nicky Lee, our CFO, on the line. So, without further ado, I will hand over to our CEO, Mr. Vikram Sinha to deliver the opening remarks. Vikram, the floor is yours, sir.

[Foreign Language] Good afternoon, everyone. Welcome to the last earnings call for financial year 2021. Allow me to start this earnings call with few remarks before I hand it over to our CFO for financial presentation. With quarter 4, 2021, our 3-year successful turnaround strategy has come to a culmination. The biggest highlight for this year will remain that Indosat Ooredoo Hutchison continue to gain customer trust through focused execution on our strategy. Customer experience is what we strive for and we will continue to stay committed to provide great digital experience to our customers. Quarter 4 earnings continued to stay robust. Solid revenue growth continued. For the financial year 2021, total revenue grew at 12.4% year-on-year. Quarter 4 revenue performance also remained solid with 3.2% growth quarter-on-quarter. EBITDA is growing almost 2x versus revenue, which gives us immense confidence that our revenue growth is organic and sustainable. EBITDA margin improved 3.3 basis point, closing the year at 44.2%. We have always believed that our turnaround strategy will generate great results for the company and our customer and shareholder. We have been able to deliver IDR 828 billion normalized net profit for the year. Customer growth remained intact. We added close to 3 million net customer for the financial year 2021. This shows growing customer trust in brand IOH. This year will be remembered as a very significant year for us for the people of Indonesia. After fulfilling all required regulatory approval on 28th December, 2021, the shareholder of the company approved the merger with Hutchison 3 Indonesia. With close to 100% approval rate, the merger comes into effect by 4th January, 2022, with the born of Indosat Ooredoo Hutchison. With its biggest scale and strength, our second biggest operator in Indonesia, Indosat Ooredoo Hutchison is better positioned to drive innovation, provide world-class digital experience and services to our customers. IOH will continue to focus on driving synergies across its assets and network, creating more value for customer and shareholder, as well as accelerating Indonesia digital transformation. Finally, we thank our customer for the continued trust and also our partner and all the investors. Indosat Ooredoo Hutchison will continue to focus on its core mission to provide a world-class digital experience to connect and empower all Indonesians. With this, I will pass on to our CFO, Mr. Nicky Lee for the financial walk-through. Over to you, Nicky.

Thank you, Pak Vikram. Good afternoon, everyone. [Foreign Language] My name is Nicky Lee. It's my pleasure to join this meeting for the first time as I joined the IOH family recently as part of the merger. As explained by Pak Vikram, we delivered encouraging results for the year 2021. Revenue for full year '21 is growing at a best of the industry rate at 12.4% to reach IDR 31.4 trillion from IDR 27.9 trillion last year in 2020. The revenue improvement was per along with very good solid subscriber growth as well as good cost control. This has translated into significant step-up in EBITDA by 21.4% from IDR 11.4 trillion to IDR 13.9 trillion. The expanded scale of our business has brought along 3.3% -- 3.3 point -- percentage point increase in EBITDA margin. At the net profit level, we reported a profit of IDR 6.8 trillion for the year 2021. And I will elaborate more on this number later on. With the combined impact of much improved EBITDA and lower net debt, the ratio of net debt-to-EBITDA reduced to 0.94x from 1.25x of 2020, another encouraging trend for us. Moving to the next slide. This slide shows both the year-on-year and quarter-on-quarter comparisons. Let me focus on Q-on-Q performance as the year-on-year numbers have been discussed in previous slides. In terms of revenue, Q4 continued our strong trajectory to record a further 3.2% increase in revenue from IDR 8.1 trillion to IDR 8.3 trillion. EBITDA reduced slightly from IDR 3.6 trillion to IDR 3.5 trillion. This is mostly to do with more spending on marketing expenses and some one-off expenses in Q4. Again, we will look at more cost details later on. The higher cost booked in Q4 also led to a 2.7 percentage point fall in EBITDA margin. Net profit for Q4 jumped from IDR 202 billion to IDR 951 billion. We had a number of adjustments, one-off adjustments in Q4 as well as in the year 2021. I'm going to take you through the significant ones. And the largest one that would relate to the sale of over 4,000 towers, which was completed in Q2 and generated almost IDR 6 trillion of profit. We spent some consultant cost to do -- mostly to do with the support we need to take us through the merger discussion. There was IDR 436 million extra provision made in relation to the disputes we have with the tax office. And for the full year, the amount is IDR 697 billion for 2021. We reversed some provision for the brand license cost after receiving the confirmation that such costs are no longer required to be paid. So, such provision was reversed in Q4. Same effect in full year, as you can see in the table. The last one is in relation to IM2 deconsolidation. In Q4, IM2 was put into voluntary liquidation and as a result of this was required to be deconsolidated. The provision recorded in IM2 in previous quarters are therefore required to be deconsolidated as well and that generated a reversal of provision at the IOH level. So all in all, we recorded normalized net profit of IDR 212 billion and IDR 828 billion on a normalized basis for Indosat. Zooming in on our revenue across different business lines, we have achieved sizable growth across cellular, MIDI and also fixed telecom. Being the largest revenue contributor, cellular provided the highest revenue increment of IDR 2.3 trillion or 10% year-on-year. On a quarter-on-quarter basis, there was a 3.5% uplift from IDR 6.4 trillion in Q3 to IDR 6.6 trillion in Q4. 2021 proved to be a strong recovery year for MIDI as COVID supplied a bit and there was more projects undertaken by the group. Fixed telecom revenue was up by 2.6% for the full year as a whole and ended on a high note, with the revenue rising over around 9% from IDR [ 109 ] billion to IDR 152 billion. Our costs very much remain under control. Our total OpEx for 2021 was up by 6% from that of 2020. Cost of services was up by 12%, pretty in line with our revenue movement and our year-on-year personnel expenses returned to the normal level without booking any organization resulting as we did in 2020. So, this help dilute the total OpEx increase to just 6%. As we mentioned earlier, we booked the one-off gain in tower sale and also the IM2 provision reversal in Q4 and that provided a large one-off net other income of IDR 6.7 trillion. So, this helped to reduce our total expenses to IDR 21 trillion, reducing 18% from last year. On a quarter-on-quarter basis, there were some larger movements across different lines. Our total OpEx increased 8% from IDR 4.5 trillion to IDR 4.8 trillion. This is mostly to do with a number of factors, including some one-off expenses. And also there were some expenses incurred for facilitating the merger, administrative, marketing spending, et cetera. Moving on to the following slide. Looking at CapEx. Our CapEx spending reduced significantly from IDR 8.7 trillion last year in 2020 to IDR 6.9 trillion as we continue to follow the principles of making our investments smartly as well as trying to avoid wasting on things and spending in areas where Hutchison 3 have already covered. Overall CapEx to revenue ratio also dropped significantly from 31.1% to 22%, a drop of 9.1 percentage point. For Q4, there was a bit of a pickup in CapEx spending. As a result, you're seeing CapEx spending went up from IDR 1.7 trillion to IDR 2.1 trillion, taking the CapEx to revenue ratio to go up from 21.7% to 25.8%. As I told you in my first slide, our net debt dropped from 2020 to 2021. Here are the details and it fell from IDR 14.2 trillion to IDR 13.1 trillion, representing around 8% drop. It did go up from Q3 to Q4, though following the payment of dividend and a massive amount of new spectrum prepayment in Q4 totaling around IDR 11 trillion. This has caused our net debt-to-EBITDA ratio to rebound from 0.23x to 0.94x, but still at a very comfortable level. So, this is the highlight financial -- highlights on the financial performance for my section. I'm going to pass the time back to Vikram.

Thanks, Nicky. Ladies and gentlemen, let me run you through some of the operational indicators. If you look at Slide 20, as Nicky said, 10% cellular revenue year-on-year growth. Very clearly, Indosat is the fastest-growing operator by far in the market. And I want to highlight a key message here. Our learning has been not getting into price competition, but focus on customer experience, getting out of unlimited, focusing on delivering value for money and this is what we will build on as we go along. Look at the number on 4G data users added, close to 9.5 million. Also, data traffic growth, a very important indicator, close to 37%. All these things are resulting in one of the best ARPU growth in the industry, close to 8%, 7.7%. And we continue to invest, 4G BTS added, more than 8,000 4G BTS were added in 2021. If you look at Slide 21, that is what is giving us a lot of confidence. The growing trust on our brand, the Net Promoter Score, the Customer Satisfaction and Brand Index. All these are done by AC Nielsen, third party. And if you look at the number, it has significantly moved. That is showing that our customers are also happy with our focus on customer experience and simplicity and building trust with them. If you go to the Slide 22, again, I have already spoken about 4G data user, ARPU, very clearly, all these underlying shows that we are building on a very solid foundation. Our 5G strategy, this is a long haul and we have been investing on the fiberization and all, but happy to share with all of you that we completed 5 cities in 2021. The last one was Balikpapan and then we have been seeing some good response from the market and we will continue to build on it and then work with the partner ecosystem so that 5G can drive value for Indonesia as a country and for our shareholder also, it will be more sustainable. This is one of our focus areas. With all these background, again, on 28th December, our shareholder approved and the good thing I want to highlight, the overwhelming support and confidence by all the investors, close to 100% people, all our investors voted in favor of it. And that resulted in a very strong IOH, Indosat Ooredoo Hutchison was born on 4th January. If you look at Slide 25, it will show you -- when we say a strong #2 telco operator, it shows our bigger, when I say bigger, bolder, better. Our landing or starting point for IOH is IDR 45 trillion revenue, close to $3.2 billion, IDR 19 trillion EBITDA, again, $1.3 billion EBITDA and 96 million customers. This is where we are well placed with our scale and with our customer to deliver much more innovation, much more experience to all our customer. And I want to highlight one thing here that we will be obsessed about providing superior customer experience. This has been our single-minded focus. And we want to be a purpose-driven organization and our purpose is to connect every Indonesian and the mission of digital Indonesia. We want to be an enabler. If you go to next slide, when number speaks for itself, there are a few good awards, which we got. But I want to highlight the brand Indosat. Again, I keep talking about it. It is a very strong brand. And now it is among the top 10 brands in Indonesia across category and it is one of the fastest-growing brand. So, this was one very important highlight. With all these background, I will request Nicky to give us more insight on the guidance for 2022.

Thank you, Vikram. In terms of guidance on revenue, we're still seeing we grow in line with the market. And on EBITDA margin, similar to what we provided -- what we reported in 2021, which is in the low 40-ish level. For CapEx spend, we will need to spend a bit more money to integrate the network. So, we have raised our CapEx guidance to around IDR 10 trillion.

I just want to add one thing here. We see a much healthy industry growth in 2022 because of a lot of focus on customer experience. So, we are hoping that the overall industry growth for 2022 will be much better. We have all seen the important role, which companies like Indosat Ooredoo Hutchison is playing, especially post COVID and we expect a much healthier industry growth this year.

Okay. Thank you, Vikram and Nicky for the presentation. Operator, we are ready to move forward to Q&A session.

[Operator Instructions] First question comes from the line of Arthur Pineda from Citigroup.

Three questions, please. Firstly, just a question on the P&L side. And I'm sorry if it's a bit of a maintenance question. How do you see the D&A charges going forward? Can we assume the pro forma levels based on the benchmark that you've set last year going into this year? Or are there any cleanups that you need to do post merger? Second question I had is with regard to your liabilities. If you can provide us with some guidance on your fixed versus floating rate for your liabilities? And last question I had is with regard to restructuring costs. Any idea in terms of how much you'd have to undertake this year? When do we see the cost savings initiatives as visible in your P&L?

Perhaps I can take the first question on depreciation. We, less than 2 months old at this stage and still going through some detailed accounting processes on technical matters what we call purchase price allocation. So, it's rather difficult for us to give any guidance on depreciation moving forward. Sorry about that. And can you repeat your second question, please?

Just to clarify with regard to your liabilities, the fixed versus floating rate liabilities that you have?

So, we have not very dissimilar fixed and floating portfolio in our debt portfolio. So, you should be able to find more detail in the accounts there. So, a lot of disclosure in regards to the financial statement if you need those details.

So, the Indosat one would be very similar with the consolidated entity with Hutch, yes?

Hutch, actually not carrying any external debt.

And in terms of the last question, restructuring expenses, do we have any idea in terms of what will be undertaken this year? And when do we start to see the benefit of cost savings coming in, into P&L?

This is Vikram. So as you know, we said that because both the business is very complementary and we spoke about IDR 300 million to IDR 400 million of recurring synergy between 3 to 4 years. Now that the team is in place, we are already 52 payroll company, what I can assure you is minimum, we are confident of that. We might do more. But what we said, we are on track. And then quarter 1 onwards, you will start getting the update on that. But the key message is the number which I spoke about, IDR 300 million to IDR 400 million between 3 to 4 years, now the management team and the chief integration team are very confident that, that is the minimum we will deliver, but more detail on it. What will happen in first year, you will start getting from quarter 1 onwards.

[Operator Instructions] Next question is from the line of Choong Chen Foong of CIMB.

This is Foong from CIMB. 3 questions from me. Firstly, on the integration costs that [indiscernible] into next year, can you break that down in respective areas? [indiscernible] on the numbers. And if you can also sort of guide us as to whether this would be, a lot of it will be front-loaded in 2022 and less so in 2023? If you can get us on that, that would be much appreciated. Second question on the CapEx guidance of IDR 10 trillion, how much synergies are we factoring in here? And would that IDR 10 trillion be the run rate going forward for Indosat Ooredoo Hutch? Or is there some one-off element for our integration? And if so, what would be the longer-term run rate? And my third question in regards to the brand license reversal. Can I clarify whether this refers to the fees that are payable to Ooredoo? And just to double check that this fee no longer applies to future years, whether Indosat makes a profit or losses, is that true? Those are my 3 questions.

This is Vikram. Mr. Choong, let me start with the first question. Historically, you must have seen in all the in-country merger first 2 year, there is significant amount of integration costs. What I can tell you now with our larger scale, we have a very good bargaining power with our partner. And I also want to highlight, we are getting lot of support, especially from our key partners like Huawei, Ericsson, Nokia on a bit of a long-term outlook in Indonesia. So, I can only tell you that we are working on something, which has never been done before. And then in the first quarter onwards, you will get to hear more on it. But the key message is that we want to make sure that we move fast and first time right and we want to make sure that with our combined scale to strong shareholders, we get the best out of our partner and then they need to put the skill in the game when it comes to integration cost, modernization, doing it first time right and we are in a good place. So -- but the detailed number, you will have to wait for a little longer to get the specifics. Second question on the guideline, whether IDR 10 trillion will be the run rate going forward, I think the important point is that we are working with a growth mindset. And we don't want to compromise. You must have seen our commitment on [indiscernible], on improving indoor coverage experience. So, first year is decide what it is. And as we come closer to quarter 3 and all, we will be more clearer, the full benefit of loading all the spectrum. IOH is in a very good place with the kind of spectrum mix, which we have and for further years, you will have to wait a little longer to get more detail.

On question 3, yes, the reversal has to do with Ooredoo, just to confirm this.

And just to follow up there, Nicky, does this mean that the fee we will no longer apply for future period?

Yes, I believe so.

And going back to, Vikram, right, with regards to the network investment, given the fact that you need to return some spectrum, you're spending this amount of CapEx, where do you think the network quality will be for IOH this year and next year compared to where you were before and compared to your peers?

Yes. Let me put it this way. So today, IOH has close to 61,000 physical BTS and let me remind all of you, quarter 1 also, we will be rolling out, we already spoke about it last time, close to 1,500 to 1,700 site. So, the point which I'm trying to highlight is that we spoke about there are close to 15,000 to 18,000 duplicate site. So, before we start eliminating those duplicate site, we want to make sure we upgrade the surrounding site so that we only improve customer experience. And then we have done this testing what is called MOCN trial. We did it in 3 different cities and it is all working well. So, what it will do with you will see that all these will get into execution mode in the coming months and quarter and the number will flow. So, we are working as a team here with a growth mindset and we want to eliminate all those benefit, which is there coming out of synergy by only building on customer experience. There is no question. We have full support from shareholder to ensure that we only build on customer experience and we don't cut corner. And the number which I spoke about in the analyst call earlier, synergy benefit, and 80% of it is coming from network and eliminating the site, we are even more confident that we'll be able to deliver that on a timely manner.

Sorry, when we -- the CapEx we are spending and we are talking about growth, it's not just in growth, it's just not a growth in coverage, but also in the capacity of our network. So, that's also an important element to consider.

[Operator Instructions] We have new questions from the Hussaini Saifee from UBS.

Several questions from me. First is Pak Vikram you said that you, Indosat is looking to get out of those unlimited plans. Just want to understand, has Indosat already moved out? Or is Indosat looking to move out in the coming quarters? Then as a related question is on the industry growth rate for -- I mean, so you expect a healthier industry growth. Is it possible for you to quantify on that side? And final question is on the fiberization of the towers. Just want to understand where is Indosat on this side? And what I also understand is that a chunk of towers are coming up for renewal. So, I just want to understand that is there any update on this side? Like what were the rental rates you are getting? And how many towers which are coming up for renewal as part of the synergy benefits, how many of them you will renew? And what percentage of it will be -- will not be renewed?

Let me start with the first one on unlimited. I want to remind you and everyone on the call that end of 2019, we moved out of it and we keep building on it. So, if you look at our last 10 quarter, consistent double-digit growth, we have been growing 3x or 4x of the market growth. It is a result of our focus on not getting into live competition and focus on improving customer. So, we will build on it further. So, straight answer is we moved out in 2019, and that is how you see us and our customer also has really appreciated because doing things unlimited is impossible and people do it with certain terms and conditions and all and customer doesn't understand all those things. So, we are very clear on that and then we will build on these simple transparent pricing strategy. Coming on to industry --.

So, if I can follow-up on this side. So, it's better trying to better understand it, a few of your customers or one of your customer is trying to raise pricing. So, do you think that Indosat needs to follow that or the -- moving out of unlimited plans is, I think, is the right strategy for Indosat?

So, moving out of unlimited has been a proven good strategy for Indosat. And last 10 quarter result is a testimony of it, number one. Number 2, I think you are telling that some of our competition is trying to increase price. Is this what you are telling?

Yes, yes.

I think, look, this is what and we have demonstrated it that customers are looking for experience. They are looking for value for money. They are not looking for cheap product. And I think it is high time that the industry moved in a more healthy direction. And that is why I highlighted that I'm more bullish, much more healthier and better industry growth. Industry should always grow more than the GDP. So, I'm keeping my finger crossed and I see clear trend that this year will be a good year for the industry. And at least the top operators have seen value in it that we need to focus on giving experience, not get into price.

So, any color on the growth expectations for 2020 to the industry-level growth expectation?

I told you it should be at least more than the GDP growth. So, I think whatever number I have seen coming out from some of the government authorities that the GDP is expected to be 5%, 6%. So, I think, at least IOH is very much focused towards growing industry faster than the GDP growth. Now, your last question on tower. It's a good point, which you highlighted and this is linked to our synergy benefit also. So, at IOH level, we are in a good place. This year, there are close to 3,000 sites up for renewal on the ex Indosat side. And when you look at 3, the contracts are more short term. So, putting both these things together, we are in a very good place to get favorable terms and condition and we will do things, which is on the best interest of IOH and you must have seen in the past with our tower transactions and all, there is more competition in the market. There are players like one of them who bought our tower, they are also very hungry. There are our existing partners and we have leverage. They were close to 2,500 sites historical 2012, where we were paying quite higher than the market rate because of our U.S. dollar denomination issue. So, now time has come to fix all those things and get maximum benefit for IOH. I will not be able to give you detailed specifics how many we'll renew, how we'll not. But what I want to tell you is that we are in a very commanding position and then we'll make sure we get the best out of this opportunity. And on fiberization, we again, historically, this is a long haul. For the last 3 years, we have been focusing on fiberizing our sites. And the good thing is that when you look at IOH number and what we are getting from 3 side also, they have a distributed core. And then when we put everything together, again, we are in a very good place, getting ready for giving very good experience on 4G and also full readiness for 5G. So overall, at an IOH level, we are in a very, very good landing position on fiberization.

[Operator Instructions] We have a follow-up question from Arthur Pineda from Citigroup.

Yes, if I can get 2 follow-ups, please. Firstly, on capital. What would be the gearing targets and the dividend policy going forward with the combined entity? Second question I had is with regard to the network. What are your thoughts on network sharing? Is this something you'd be open to? Or is the priority now really more on network integration between Indosat and Hutch?

Let me start with the second question. Absolutely, our first priority is network integration and we have to do it fast and first time right. At the same time, at Indosat level and at IOH level, we are always supportive of sharing because it is value for everyone. And with Mitratel IPO and all, we believe that the industry and with Omnibus Law, it is all enabling more of sharing, which is move in the right direction and we are always supportive of that.

This is Nicky. On dividend policy, we're still a pretty young company and working on the integration and although we generate a net profit last year, but in the whole scheme of things, we have ambition to grow in a big way going forward. But at this stage, we haven't formulated a dividend policy for shareholders to consider. Where we have one, of course, we will share, share with you going forward.

[Operator Instructions] At this time, there are no further questions on the line. May I hand the call back to the management for closing.

Okay. Yes. Thank you, operator. It seems that there are no more questions on the line. Thank you, everybody for participating in today's call. Stay safe and have a good day.

That does conclude our conference for today. Thank you for your participation. You may now disconnect.