Safaricom PLC (SCOM) Earnings Call Transcript & Summary

[Presentation] Good morning. Good morning, everyone. It's a good afternoon and a good evening from wherever you are joining us from, and welcome to the Safaricom PLC update call on Ethiopia's currency devaluation. We are glad to help you all here for this session. My name is Caroline Wambugu. I serve as the Head of Financial Planning and Analysis and Investor Relations here at Safaricom PLC and I'll be moderating today's discussion. Let me also take this opportunity on behalf of everyone here at Safaricom PLC to extend our heartfelt wishes to our Ethiopian brothers and sisters as they celebrate their new year today according to the Gregorian calendar. And on that note, on today's call, we will have an overview on the subject matter shared by our CEO, Peter Ndegwa, followed by additional remarks on the valuation impact from our CFO, Dilip Pal, and then we shall thereafter open it up for an opportunity for you to fill your questions, which they will both address. Before we kick off our session, I would like to speak through a few housekeeping rules. Please ensure that you have joined your session with your full names for ease of identification when you post your questions. And if you haven't, you can kindly take a moment right now to rename yourself by hovering over your name and clicking the rename tab. Throughout this session, any questions that you have for our leadership team should be kindly shared via the Q&A tab. We will read them out later during the Q&A section. And at the end of your question, kindly remember to include your organization's name. And in staying committed to our promise on diversity and inclusion, a live transcript has been made available for the comfort of anyone with hearing difficulties, who has joined the call. You can access this by clicking the view transcript tab at the bottom of your Zoom application under the More options tab. This will allow you to keep up with the conversations in a more comfortable manner. Finally, and in case you require any assistance from us that is not related to the discussion on hand, you can write to us via the chat platform and the Investor Relations team who support you from the back end. I would now like to welcome our CEO, Peter Ndegwa, to kick off the session. So over to you, Peter, and thank you. Peter, confirm that you are able to hear us?

Caroline, can you prompt Peter again? Peter, can you hear us?

I can hear.

Okay. You may proceed, Peter when you are ready.

So thank you, Caroline, and apologies for that delay. Good morning, good afternoon, good evening, everyone, depending on where you are. And we are happy to be speaking to all of you this afternoon. As Caroline has said, I'm joined by Dilip, who is CFO, and of course, Investor Relations team. I'm also joined by Wim Vanhelleputte, who is our Safaricom Ethiopia CEO. Can I confirm that Wim is on. So that looks like Wim is on, but we are joined by Stanley Njoroge, who is the CFO for Ethiopia. As you know, we promised to update you a really significant change that happens in Ethiopia. As you know, a market that we still consider a very significant business for Safaricom PLC into the future. Given the recent devaluation, we wanted to update you on what has occurred in the past couple of weeks. And as you know, during the time when we updated you on the full year results in May and June, across various road shows in various countries. There was significant interest on devaluation. And seeing that this devaluation was anticipated, the only question was when the devaluation was going to occur? As you know, in Africa, we have had a number of instances for devaluation in the past few weeks -- or past few months and here also Nigeria, in Ghana and also in Egypt. So there is some precedent that we can use to focus on to learn on how to manage the devaluation in Ethiopia. Just giving some background, Ethiopia has had a managed exchange regime, which has resulted in severe currency shortage -- foreign currency shortage due to macroeconomic imbalances, lessened by structural import dependencies and significant debt repayments leading to high inflation. The foreign exchange shortages and a tightly controlled exchange rate led to a significant gap between the official rate and the parallel rate. The parallel rate being almost double what the official rate was, which allowed a black market to flourish and which the bill traded for most of the past year. Ethiopia as you know, has been discussing with IMF and World Bank for continued support. The IMF have agreed to issue a credit facility to the government of Ethiopia to boost the country's foreign exchange results, but stipulated certain preconditions for these financial assistance to be given including assurances and support from the Ethiopia financiers and partners. Additionally, the government to narrow the gap between the official and the informal currency exchange rate by devaluation of the Ethiopian bill. It was expected at the time that if Ethiopia bill was overvalued by almost 70% between 50% and 70% according to the IMF. As a consequence, the National Bank of Ethiopia on the 29th of July 2024 announced a reform of the foreign exchange regime with immediate effect through a comprehensive press release. The reform introduced a competitive market-based determination of the exchange rate to address the long-standing disruption between -- within the Ethiopian economy. The directive also involved significant policy changes encompassing 13 broad elements, which I'm sure you are aware of, and they are detailed in the press release. On the same day, the 29th of July, the IMF issued a press release supporting the move by the Ethiopian government and also confirming that the IMF Board had approved a 4-year financing package of about [ $3.4 billion ] extended credit facility ACF arrangement for Ethiopia. This decision enabled an immediate disbursement equivalent to about USD 1 billion to help Ethiopia its balance of payments, needs and provide support to their budget. The extended credit facility, which the ACF arrangement is expected to catalyze additional external financing from development partners and creditors. What is important to note is that Ethiopia has been on a journey of reforms, which they refer to as the home grown economic reform plan, HGER, who's first phase of [indiscernible] 1.0 was introduced in 2019 fiscal year and run for 5 years to 2023. Over this period, Ethiopia registered an average of GDP of 7.1%. This foreign currency correction reform agenda which is part of the recently approved second phase of the homegrown economic reform 2.0 has 3 key objectives: the fastest to restore macroeconomic stability. The second is to boost private sector activity and the third is to ensure sustainable, broad-based and impressive growth. As a business that is as Safaricom PLC, but also Safaricom Telecommunication, Ethiopia Telecommunication PLC, we see these changes as very positive in the long run for Ethiopia. And many of you have asked us what our view is about future currency regime. Of course, in the short term, and I'm sure Dilip will speak about this, we must absorb the financial impact which the CFO will explain. Let me now invite Dilip to take you through the specifics of the level of devaluation that has been registered so far. What that means for our business and what we expect as we journey along in today. Dilip, over to you.

Thank you, Peter. Thank you very much. Caroline, confirm me, you can hear me?

Yes, we can hear you well, Dilip. You may proceed.

Thank you. So greetings to all of you, and thank you for joining the call. And also thank you very much for sharing some of the expectations of this update and also some questions were in advance. And we'll try to see do justice to all those questions and expectations that you have set through the question and answer sessions that we have. That's what the main purpose of this update today. As Peter mentioned, this was anticipated question was time. And looking back, if you have -- if you have listened to us and all the engagements that we had with you, the currency risk was one of the risks that was always highlighted. And the free float as the devaluation also called today is the free float wherein the currency was allowed to depreciate based on the market economics was something we always anticipated. And in fact, we discussed about it in the last update. If it happens earlier, even if it is better because that's an overhang that we felt that it should be out of our way, because most of our discussions revolved around the currency situation and currency regime in Ethiopia. And you have been keeping track of what's happening in Ethiopia. So I'd be very specific, what does it mean for the business of Ethiopia for us. Now before I get into the details of this, as you know, the broadly, the free float of the devaluation and the extent Peter mentioned about the gray market and the managed market has short term and the more long-term effects. In short-term effects, there are 3 things. First is inflation on the negative side. Inflation is expected to go up. Although the jury is still out, there are conversations around to what extent the actual import was happening to the gray market route and what was happening through official route. You have seen that if inflation was a declining trend, but it is expected that it will go up, but we just don't know to what extent. Normally, devaluation leads to an increase in inflation. The second part is foreign exchange access. It's a benefit because importers will now benefit from easy access to foreign currency, which has always been a challenge. And more importantly, on the long term, there are 2 clear positive with -- first is the export competitiveness. Ethiopia has massive dependence on the export earnings, that will boost the export market, which is positive. And last but not the least, in the long term, it's also helps improving the investor confidence. The shift to a market-based exchange is actually likely to increase the investor confidence. And this is something which is visible and this is something which is being spoken about a lot. Now what happened? So post the market-based exchange regime, which was adopted on 29 July, the USD/ETB rate rose from [ $57.335 to $277.39 ], which was roughly about 35% devaluation. And due to these devaluations, I just want to tell you the impact that comes in income statement first. So the first, that 35% movement happened and will lead to what you call that income statement, the day 1 impact and day 1 impact, basically revaluation of the foreign denominated items in the balance sheet. So post July, the currency further devalued closed August at about [ 111.02, ] which means that there is further 43% devaluation, this is what we are calling this so far in the first 2 months. Actually, in the first full 1 month after the day 1 impact, full devaluation of about 94%. Now this additional 43% along with the day impact, that's what its impact is going to impact the P&L. If you assume, we assume that the rates are not going to change from the levels that we have. And then we still keep booking operational activities, the P&L impact on the operational activities in future months based on how the rate changes. Now in September, the rates are more or less steady, moving between [ 112 to 114 ], and parallel market rates is also anything between [ 115 to 125 ], actually parallel market states have not necessarily moved a lot. It remained more or less steady. Now this -- so I spoke about income statement impact and then let me talk about cash flow. So this is eventually impact cash flow because the restatement of liabilities, when those liabilities are paid off, and then there are no further action or mitigation taken will lead to a cash flow impact. Now what will happen, it will be -- the impact of that will be delayed, and that will be the timing difference between the P&L impact, income statement impact and the cash flow impact. And some of the things that we've spoken about in our last update call, what you are trying to do? We have been anticipating this. So we have always been on the lookout for making sure that some of the mitigations are in place. I'll talk about that. Now what are those balance sheet items in foreign currency in our balance sheet, which typically we have the lease liability for the or the sites that we have taken from them. The trade receivables, CapEx creditors and IFC debt. This is also offset partially by the cash balances in dollar-denominated terms that we had. Now you probably are aware, because we've spoken about it. About 85% of our currency is CapEx is in hard currency denominated and about 50% of OpEx is in foreign currency denominated. So of course, that's where the implication comes in. I spoke about inflation. Inflation has been actually on a decline from over 30% to July, actually close to 18.6%. So it was on a declining mode. Now August, we don't have the data, but it is likely, as I mentioned, it's likely that inflation is going to inch up. Now in terms of mitigation, I think it's important that you take note of the mitigations that we are taking, and we are also likely to take in future. Some of the mitigation measures include renegotiation of the foreign currency denominated contracts, which also include the leases, onboarding local suppliers as much as possible for products. For example, we already have sites that we are now building based on the local supplies. One of the major costs in our income statement is the expatriates cost, and that is also likely to come down as we are reducing dependency on the expatriates. The other important part, very important and maybe the timing and there are dependencies in the pricing. Most of the markets when you have devaluation that typically the market price goes up. And of course, this has a dependency on the appropriate approvals that we need to see from the regulator. Now you have asked questions pertaining to our medium-term impact on our breakeven time lengths and the impact on dividend. Now we are currently reviewing the forecasted business plan in view of these changes to determine the same, including any funding impact to the business. But it is more than likely that the breakeven for EBITDA will move forward. In the immediate, the underlying business performance I can confirm you that we are on course, and we are on course to meet the market guidance without the impact of devaluation. I think the other important factor is the dividend. I'm sure all of us have -- everybody has an interest on this. I just want to explain to you a bit technical. So the devaluation impact will be included. Let's first confirm that as we calculate net income. As it relates to the transactions and balances in the balance sheet, but as you know, the impact of IAS 29, we normalize, we don't keep impact of IAS 29 in calculation of dividend or the retained earnings eligible for dividend, but I'm confirming that the devaluation impact will be included in the calculation of net income. But as far as payout ratio, payout policy, that remained unchanged at 80%. What is worth noting here is Ethiopia is under loss-making position. That will account for a lower translated losses in the consolidated financials of Safaricom Group due to the conversion rate benefit from the devalued currency. So Ethiopia has devaluated, whereas Kenyan shilling has appreciated or more or less to remain steady compared to last year, it has appreciated. So there will be a currency benefit. And it is likely that the impact on this dividend -- impact on the devaluation after translation of the losses and the currency gain that we get from the Kenyan shilling gain may not have an impact. And this probably will benefit to the group consolidated numbers and should substantially push on the devaluation impact to yield a decent dividend. That's what is our expectation. And of course, we are in the period that we are not discussing a lot about numbers, and we will provide a more detailed update during our half year '25 results release in November of actual devaluation impact and what is likely to be the full year impact based on the ForEx trend that we see going forward. Now let me pause and hand back to Caroline now to coordinate the question answers. Back to you, Caroline. Thank you.

Thank you. Thank you very much, Peter and Dilip for that brief overview. So now we would like to field your questions. I'm looking at the Q&A tab. I just see one question so far. So I want to invite as many as possible, so please make use of the remaining 32 or so minutes to be able to engage with us through Q&A. So I do have one question, which I'll start with. And this question is from Rishqa Marsh. Marsh is with Franklin Templeton, and the question is and this one, I'll direct it to you, Dilip. I think you also mentioned it in your update, but happy for you maybe to just reiterate again. But any changes to Ethiopia breakeven and other operational guidance apart from CapEx guidance? Dilip.

Yes. So first of all, let me start with the underlying commercial performance because that's what is important, and that's what we have been talking about it, and we have given you a broad -- and we have given you an underlying KPI, so the drivers that will drive the performance in Ethiopia. So first, as I said, I'm confirming that we are on track. And we are -- we believe we are executing on our commercial momentum that we have planned for. So that's the reconfirmation of the operating performance. And of course, I'm not providing you more numbers, you'll have it pretty soon. Now from a -- what I mentioned about based on what we see. You have seen a 94% devaluation of the currency. And we do have foreign currency denominated liabilities, in forms of IFC loan and also the other lease liability. And our initial assessment, which we're still doing, as I mentioned, it is more than likely that EBITDA breakeven will move forward. Now how much? I think broadly, I mean, we -- as I said, we're still work in progress, broadly, it could be 1 year, yes. So that's what we are seeing. As I said, I will not be able to necessarily confirm you in full detail because we're still working. But it is more than likely that because of devaluation, the EBITDA breakeven will move forward. But again, reconfirming that the operating momentum continues, and we are on track as far as the guidance that we have provided to you.

Thank you for that, Dilip. I'll take the next question from Melissa and I'll request Peter to address this one. So Melissa is with African Sunrise Partners. And the question is, please update us on the security situation in Ethiopia and how this affects your tower rollout? Peter.

Yes. So thank you. Melissa's question, is that correct?

Yes. That's Melissa .

Yes. So thank you, Melissa, for the question. And I will ask Wim shortly to answer. But in a nutshell, as you know, at a broad level, the Tigray situation has actually stabilized, and we have been able to open operations there. And Wim, I'm sure, will talk through that. The Amhara situation is still under certain restrictions, although we have -- I mean they are -- it's improved since the last time we spoke. But certainly, I would prefer that Wim gives a bit more detail about the operational implications for various parts of the country based on where the security situation is.

Okay. Thanks, Peter. I'll take over from here. So as you have said, rightfully said, the situation in Tigray is now resolved, which means that we have now launched our commercial operations with more than 100 sites, and we have another additional 150 or so that are being rolled out. So in Tigray, the situation is very much normalized. The situation remains a bit more challenging in the Amhara region, although since half July, around 15th of July, the authorities have lifted the service restriction order, which was issued in August last year to restrict data services in the region. They have partially restricted -- lifted that restriction, which means now that about 1/3 of the existing footprint, we are allowed to offer mobile data services, while the remaining 2/3 of the Amhara region, where we have network is still under that restriction. And for the moment, we are not rolling out any additional sites in the Amhara region. We already have 600 sites. So for the time being, that is the main reason where the rollout is paused because of security. The rest of the country, the Oromia region, Somali, the southern part, there is no challenge in terms of security when it comes to rolling out a network or operating the network. So it's mainly restricted to the Amhara region for the time being.

Okay. Thank you for that, Wim and Peter. I'll take the next question from Alvaro, so Alvaro is with the HMG Finance, and Alvaro's question I'll request Dilip, if you could please address this one. So it's more a reiteration of what you said towards the beginning. So the question is, I don't know if anyone else had a luck to but could you repeat what is the cushion for the devaluation impact that you talked about at the end, please? So the devaluation impact mitigation, Dilip?

Yes. So thank you for your question. I think I referred to the cushion in the context of dividend. So the cushion actually -- more than cushion, there are 2 things I said for the operations, of course, because of the currency rate devaluation, the operating performance there are implications. So there are mitigations that not necessarily a cushion that I had spoken about. The team has already started doing much before the devaluation happened and also are in the process of currently executing. Now the cushion word that I used to us more in the context of dividend, what I mentioned is Ethiopia as a loss situation and FY '25, Ethiopia will also be in a loss situation. And when you translate that losses to Kenya shilling, I remember, we pay dividend based on the consolidated net income after adjusting the minute interest, right? So there, when you convert the ETB, the currency to Kenya shilling, we get a gain. So to some extent, the devaluation loss that we are incurring for the ETB devaluation gets cushioned because of the currency gain that we are getting at a group consolidated statement, because ETB depreciated, whereas Kenya shilling has appreciated compared to last year. And that's what I was saying. It is more than likely that the impact may not be a material from a dividend perspective and we still hope to see a decent dividend for FY '25. That's what I mentioned by cushioning.

I think Dilip, Dilip probably it might also be useful for you to indicate how the devaluation effects both half one and full year because there is a difference.

Yes. So -- thank you, Peter. What will show in the half year is, remember, the bulk of the half year devaluation -- or the bulk of the devaluation is the day 1 impact, as we call it. And that has already happened on the day, which is 29th of July. And you will see a bigger impact of devaluation in the net income in half one. And H2 is more like a regular -- beyond the rate that we spoke about the August, for example, we have closed about 111. So beyond that rate, whatever comes in this comes in the second half of the year. So the extent of impact of devaluation, it will be much higher in the H1 and it will be much lower in H2. So that's what you can expect. When you see H1 numbers, you'll probably see a higher devaluation impact and a much lower impact in the H2. And it is -- of course, we have -- we'll definitely unpack in more details in terms of the numbers when we release our half yearly results to tell you where is this impact coming from and what's the difference between H1 and H2. But directionally, as Peter mentioned, I think it's important for you to note that half year will show a higher number because of the day 1 impact of devaluation that we've already impacted.

Thank you for that Dilip and Peter. So Peter, I will request that you respond to this question from Rohit. Rohit is with Citi. And the question is, will there be any change in the investment strategy if regulatory approval for price up is not received. Peter?

I'm assuming this is on Ethiopia?

Yes, yes. It's on Ethiopia.

Because there could be other questions related to that. So remember that pricing decisions are not necessarily made by the regulator. So the regulator intervenes with respect to pricing only through -- for voice through the MTR composition. So when MTRs are set, that's what determines our inferences the price that market plays price at, and that is for voice. And therefore, unless they choose to intervene, the price generally after devaluation happens because players decide to price up because of the impact of devaluation on their cost, but also because the whole market tends to price up as a result of that adjustment. And that's what you've seen in almost all the other countries. How fast that will happen, Wim please express your view, but how fast that will happen will depend on the local market conditions and potentially interventions from the government on subsidizing some of the more critical elements like fuel and so on. But Wim, please feel free to add to that.

Thanks, Peter. I think you've mentioned the most important critical element is that the pricing is not regulated, strictly regulated. So the players in the market are free to increase their prices. Of course, we have a small market share, so being a small player in the market, you might not be in a good competitive position to be the first one to drastically increase your price. So we will need to see how the market dynamics are going to play out in the next few weeks and months. But it is fair to expect that sooner or later, there will be maybe not a massive, but at least a staggered in time -- over time, staggered kind of price repair, let's call it, the price repair. So I think it's fair to assume that, that will happen over a period of time. How big and how soon we will need to see how the market dynamics are going to play out in the future.

Thank you very much for that, Peter and Wim. So I believe that addresses the questions I see here from Marie and Francis that were also touching on pricing. So I believe that has been answered. But should you have a follow-up question, feel free to just type it out and kick it up. So I want to take a question here on funding. Actually, I'll combine 2 questions, and this one's I'll request that, Dilip, if you could please address them. So related but about funding. So the second part of Rohit's question was, could you please confirm if you're still looking to fund future CapEx through debt? Or will there be more equity infusion into the business? And I want to combine that with Roman's question, so Roman is with Helios. Will the funding plan for the Ethiopia business change as a result of the devaluation and will Safaricom need to contribute additional capital to ST over and above what was previously expected? Dilip, if you could address that.

Thank you. So on funding, let me reiterate what we have said before. I think in our previous conversation, Rohit, Roman, I think this has always come up. And we have always confirmed that we -- our income is in ETB and there's a lot of expenditure that we incurred. ETB currency, as I mentioned, 50% of our OpEx actually is in local currency. So the matching actual payer payments with the source of funding actually helps us. So this was absolutely deliberate to maximize local funding. And that is what we have been doing. And we have done quite a lot. I think by the financial year-end, last financial year, we are in excess of about $130 million of local currency debt equivalent that we have unlocked. And we have been also in discussion and currently in the process of unlocking further amounts. To what extent it will be possible to the extent is possible and the readiness. We also have been talking about participating in the local market, capital markets in the form of bonds or papers as and when it comes in, early stage. So it is subject to the readiness of the market, but I think we have expressed our interest in that space for the funding. I think that the fallback option is always equity. So I think you try and see maximize based on an optimal capital structure to maximize debt. But we are also very conscious about not putting in a lot of foreign currency debt knowing very well in the beginning that it's going to devalue and devalue substantially knowing what the gray market rate and official market rate was. So maybe I can say that because of the devaluation, we now know what it means. So which means that a dollar requirement, dollar -- although we're avoiding dollar conversion or a currency conversion avoiding as much as possible, but that conversion was giving half of what we could actually get now. So it's also comes in our favor. But the objective is always trying to see match the actual payouts. You don't convert hard currency in ETB to pay for foreign payments requirements. So you try and do that as much as possible through the foreign currency debt or foreign currency equity conversion and try and maximize the local currency as much as possible, top it up with market -- capital market readiness as and when they already. So I hope that satisfies your questions.

Thank you, Dilip. I believe it does. I think there's a point here, Dilip, that you did mention in your update, but probably maybe the team was not on the core because I see quite a number of questions asking for a clarification on the EBITDA breakeven. So Farooq is asking is the EBITDA breakeven moving forward, meaning coming earlier or later and I'll combine that with 2 others. So one is also from [Shadrach Singh] asking rather that we will still retain our breakeven production as at March 2026 and Alexandra also following with a question around the same, whether it's moving 1 year forward, meaning FY 2025 or 2026? And lastly, also from James Banan on, is it moving forward, meaning it will happen either earlier. So I guess just the question here to clarify what we -- what the update that you gave on EBITDA breakeven from a time line perspective following the devaluation that has just come, Dilip.

So Caroline, I must say my English was not good, because moving forward, could also be actually [indiscernible] the EBITDA breakeven is happening earlier than anticipated. I wish that was the case. Unfortunately, that's not what has happened. What I meant to us it's going to be later yes, it's going to be later than -- and I'm again saying this with a bit of caution. As I said, we are in the process of assessing the impact, but it is more likely -- it is more likely that it will be 1 year further, which means if you talk about -- I think we gave you FY '26 as the year 4 and it could be in FY '27, which is year 5. So I hope by the year that confirms, but I'm again saying please take it with a bit of -- I mean, with a bit of a disclaimer or a rider as we will actually give you the full update during the half year results, yes, but this is an indication that it will be later.

Thank you, Dilip. I trust that clarifies that for us. Yes. So moving on to a question from Linet. Linet is with Absa Securities, and this I'll request Dilip to respond to. Please take us through hyperinflationary gains. Now that inflationary pressure is set to rise. The question is how will that impact or affect the income statement? And Dilip as you take us through that, I think I'll combine it with a question related from Davis. And the question is by way of confirmation, can you confirm that you expect the hyperinflationary monetary gain at the group level that it will net of the devaluation impact on the P&L? Dilip.

Thank you. Yes, I think it's dealing hyperinflation with the devaluation. Devaluation has a specific set of numbers, which gets impacted based on which you take our day 1 impact and then you keep taking operational impact based on how the rates further move up or down, right? So that's devaluation I think I explained. Hyperinflation, we are in this stage, this will be the third year that we would be in hyperinflationary environment. We have always been very clear about explaining where does the gain or loss of hyperinflation come from. And that's purely coming from the monetary assets and monetary liabilities, the extent of that and the level of inflation. So I mean at this stage, let me not give you any numbers, but we have always been letting you know that it is better that you look at the performance underline because there are gains we have had, and there could be losses at certain point in time. So it is better that you take out -- keep this IAS 29 impact separately. We have had gains -- and it is possible that we will have losses coming up based on the actual balance sheet movement of the monetary assets and monetary liabilities. And therefore, the link of IAS 29 and devaluation, I think -- and we'll make sure that you have good visibility, understanding of half year numbers when you give you -- actually release our results. And these are not linked, but it does have impact because as we said, devaluation could lead to a inflation, higher inflation, question is inflation was at 30% before now it's about 19%. Will it go beyond 30% or will it be below 30%? And second part is, I mean there are also theories going on, as I was mentioning in my opening remarks that majority of the imports are happening at a market -- at a rate which was higher than the official rate. So effectively it means that the cost of import may not have gone up as much as what was anticipated because the import was happening at a higher rate. So my suggestion would be delinked this to look at numbers without hyperinflation. As we always normalize it, hyperinflation impact, we don't consider portion, but devaluation is real and devaluation impact you need to assess separately, and I mentioned about that already.

The one additional point, Dilip, is just to mention to everyone on the call is that the difference between impact of devaluation, which Dilip mentioned would impact dividends or at least the base earnings for dividends. Hyperinflation impact does not -- IAS 29 impact does not impact dividends.

That's correct, Peter. So we -- we don't make impact of IAS 29 hyperinflation in calculation of eligible profit for distribution before dividend, whereas devaluation impact you will have.

So the next question from Tracy of SBG and I'll request, Dilip, you respond to this one as well. is what do you think would be a sustainable FX exposure for OpEx and CapEx in Ethiopia?

So I wish I could give a number and Wim is here, and we actually could also speak through that in terms of the efforts being made almost like on a -- absolutely on a priority basis to see that -- to the extent possible, we localize -- to the extent possible to actually push ourselves to localize. I mean, to give you an example, what we managed to do a couple of months back on localizing the tower infrastructure as part of local sourcing. We still -- I mean, in Kenya, we still import tower. So I think there are positive trend I would see. OpEx, I think, is still manageable. I would see probably that will also on an decline based on the expatriates cost, which is also a large cost of -- I think after our network cost, the major cost is expatriate cost, payroll cost, and that will be mostly localized. I think the bigger one is on the CapEx side and CapEx equipment, we cannot do anything when we have to import. And rest, I think you can just mention about some of the things that you have done recently to reduce the dependency on the foreign currency.

Yes. So thanks, Dilip. I think you've mentioned the essentials. In terms of the CapEx, there are certain elements that cost cannot be localized, your whole telecom equipment. So what percentage of that of the CapEx would it be -- what we try to localize as much as we can, of course, is the everything else and including towers, of course, civil works. But there will be always an important component of your CapEx that will be dollar-denominated. That is inevitable by the nature of the industry that we're in. On the other hand, on the OpEx, you are very right. We are localizing a lot of the costs also through in-sourcing, but even there, there are certain must-do contracts, certain vendor-related Level 3 as they call it at the engineering, certain very specific SLA contracts that are required to be kept at the vendor level, at the international vendor level, which are inevitably -- will inevitably remain in dollars or in ForEx. But on the OpEx part, I think you can really be very would I say, ambitious in localizing as much as you can, and we've already done a lot. There are still a few other outstanding items that we're working on. But on the CapEx part, we are restricted by the nature of the industry and the importations of the telecom equipment, which are inevitable in ForEx.

Thank you very much for that Wim and Dilip. So Tracy, the second question on tariff increases and the regulatory approval, I think that has been addressed. And I also want to acknowledge our related question from Omar. So unless you do have a follow-up question, happy to address that. So I'll take the next set of questions from Mahdi with HSBC. I now request once again, Dilip, if you could respond to this one. So the first question is, will you need to take a write-down on Ethiopia's investment? And would that come through to income statement or directly into the balance sheet? And would you consider revaluing assets further given FX deval? Maybe I'll start with that and then we'll come to the second. Dilip?

So a very good question, Mahdi. So impairment assessment is not new. So we do that as part of our 2 cycle of results and also half year rated accounts and also the full year account or digital accounts. So we'll do the same thing as we are currently working on. So -- now it's -- I would wait for that process to get concluded because this also gets audited and then finally get concluded. So this will be part of my half yearly results release conversation, Mahdi. And it's not just -- so we do have our long-range plans, and this is a plan that we -- every year we evaluate and on March '24, when we release our results. We have gone through that and impairment -- there is no impairment requirement. But because of the devaluation, it's important that we look at this with a fresh pair of eyes. As I mentioned, that it's -- as you know, this is based -- mostly based on the cash flow. So income statement impact and the cash flow impact are different and different because of the timing, just to give you an example, say, IFC loan while you take a write-down or a devaluation impact now, but actual cash flow will not come until the time you start repaying, which is still a couple of years away. So I think you -- I would suggest that you wait for us to conclude the process and then we discuss this as part of our half-yearly results release. So I think the devaluation of assets and liabilities is in the context of impairment assessments, and this will all be concluded together as part of half year results release.

Yes. And the second question still from Mahdi one. So when you said that group earnings likely to benefit from lower translated losses, did you include any and all potential charges coming from balance sheet liabilities being revalued as well as any likely impairments? And if not, are you able to give any guidance on one time of the same? Dilip.

Yes. So Mahdi, when I say that, that's, of course, including everything. But as I'm saying directionally because the process and the review is still on. And that's what I'm saying, it is likely we'll be getting benefit out of that losses just for the translation gain from ETB to Kenyan shilling. So yes, it does include all the balance sheet-related items as well.

The next question, I'll request Peter to respond to this one from Ahmad. And the question is, how will the devaluation likely impact the competitive dynamics? And especially, he points out as it concerns future CapEx spending. Peter.

So I'll be off video, because I'm in a car. But I think we did explain that our thinking about devaluation and local impact. So we have already set out with our with analysts and investors about the -- focusing on a lower cost model given where we are in Ethiopia. The biggest area of focus for us is at what point does the market price up? Of course, we mentioned that we are a smaller player in the market. So we'd have to wait for the lead player to price up. We wouldn't preemptively price significantly up versus competition. But that is for us to wait to see. It is likely, as Wim said, it will be more gradual. But from a competitive dynamics, it doesn't change massively because we will all be impacted. So we need to import CapEx in foreign currency. We will have similar profiles of cash flows in terms of spend. So it also depends on the level of loans that if you tell us. So at the moment, the biggest unlock in the market is pricing and that would have just to wait and see at what point the prices -- the marketed prices.

Thank you for that, Peter. I see our time is gone. So we've got about 5 or so minutes to end the call. So before I bring back Peter for his closing remarks, I want to take one last final question here from Peter. Peter Tan is with Africa Lions Fund and I'll be requesting Dilip to respond to this question. Most of the other questions are related to what we've already addressed. So I trust you received some good color around it, but feel free to reach out to us separately to be able to address that. But the question from Peter to you, Dilip, Ethiopia has taken the hard decisions in floating the beer to a market rate. So what are you seeing on the Ethiopian macro front that would see the bill appreciate from the current FX rate? Some economics there, Dilip, if you have a view on that.

Yes. Maybe I'll dial a friend, which is Wim, but let me just first start by -- I mean he probably sees it more than me. Let -- okay, let's just accept it that it's a very bold move. Even when you were doing our scenarios, remember and you are doing our quarterly update in September, yes, I think it was in July, sorry, when we were doing the quarterly update in July, we are talking, we are doing scenarios. I think this was the worst scenario that we said it would be a free float. We felt at that time, probably it will be a staggered devaluation rather than a onetime devaluation. So which to my mind is a very bold decision, right? So I mentioned about the short-term benefit and the long-term benefit and also some short-term pain and the long-term pain of the process. And we have quite a few examples of what you have seen, Egypt, Nigeria, or Ghana. I think no one market is unique. And no one market is -- all markets are unique and no one market you can just draw. There are elements of Nigeria, there are elements of Egypt and there are elements of Ghana in the way Ethiopia would shape up. And Ethiopia will have its unique way of dealing with this. The -- I think the -- some of the initial and what we are hearing from speaking -- because we are also relying -- we are not economists, we are also relying on speaking to many economists there are many bankers who are speaking to us giving us presentation. Overall, I mean, we could confirm you that the presentation they have made to us there is a positivity around that saying, this is a bold move. And if Ethiopian government is continuing to reform, as Peter mentioned about the reform program and the follow-up of the things that they have committed, it is more likely that it will be in a positive direction, but it is too early. We're just in the second full month of devaluation. As I said, I think the first month itself, 100% depreciation or the devaluation happened, taking it very close to the gray market rate. I think the difference between gray and official market is as low as 4%, 5%. And gray market has not gone further. So -- but these are very early days, so it's difficult to say. But I think what we are hearing overall from the market and speaking to the other specialist analysts, especially in the economic front, are saying bold move if the government regulator follows up with what they have committed, I think it will be in a positive direction. And more importantly, for our business, it's a big overhand and all of you will appreciate that investor confidence is important. The currency is a big part of that factor. So it's also overall from the business -- yes, it's a onetime hit or onetime pain that you have to go through, hopefully, more sustainable, I would say, commercial and operating momentum going forward, that's what we'll discuss and not necessarily more about devaluation. Wim, I don't know whether you want to add any color to what you see or hear from the market.

Dilip, I think you were calling the wrong friends. You know that I'm an engineer, not a macroeconomist. But yes, I think that the point is that everybody in the community internally and externally seems to be convinced that this is the right thing to do, taking the short pain and at least now we are living in the real world. I think when you go prior to the devaluation, we were almost living in a virtual world where we're having an official rate, which is half of the informal rate. And then the real economy as the economists were always saying, 80% or 90% of any importation was already done at the informal rate anyway. So it is like we're coming back into a real world, and we will need to see now how that evolves over the next few months. But I think in terms of investor confidence, I think it should actually be -- we should actually be in a better space now than we were 6 months ago, because this was always inevitable to happen. Having such a spread, I think, was impossible to sustain in the long term. So I think we're now in reality, and we'll need to see how that evolves over time.

Yes. Thank you for that, Dilip and Wim, very enlightening, I must say. So now I think we feel that the questions that we are able to within the time given, but should you feel you would want to make a follow-up question with us, feel free to reach out to us through our normal channels or anything that you feel has not been clarified to the extent that you've gained some good understanding. Also, feel free to reach out to us on that particular piece. And before we exit, I want to request Peter to give his closing remarks and do not be in a hurry to exit. I do have an important update to share with you post Peter's closing remarks. So Peter, over to you.

Yes. So thank you, Caroline, and thank you, everyone, for attending today. I think this is a very important one for us. We promised that we'd update you if there are significant move by the government on devaluation, which we are having. I have to say we are also trying to understand how this evolves over time. And whether Wim is an engineer or an economist or Dilip, I think it is quite clear all of us are now starting to become economist with respect to this issue. But one thing that we have picked up is analysts believe that we need a stabilization process probably a period of about a year will be needed, where you see liquidity coming into the market, depending on the backlog that there is. But certainly, I want to reinforce what Dilip said, we believe that this is a very, very positive thing for the long term. All of you have always been asking us how will we ever take dividends out of that market? And this will open up the market in many ways, including diaspora flows of currency into that market, which previously came through informal channels. So whilst you will take the short-term pain from a reporting perspective, we believe that commercially, this is the right thing that the government is doing to take the pain this early and it is better probably when our business is smaller than when is much bigger. So I hope that you got a benefit from this call. Commercially, we are on track, but we need to navigate through this issue over the next couple of months. So thank you, Caroline, and thank you to everyone.

Thank you. Thank you very much, Peter, Dilip and Wim for that particular engaging session. Thank you to all of you for making time to join the call. I just wanted to make a brief announcement now that I know the next time we'll be engaging will be post our half year results announcement in November going into December. So we have opened up registrations for our upcoming Investor Forum on the 13th and the 14th of February 2025. So kindly do sign up and reserve those dates so that you can join us here in Kenya, in the coastal region of Kenya that is Mombasa. So we are looking forward to ensuring that we have a good time of engagement. So we are just calling up on you to please reserve those dates for that particular engagement, 2 days in the Costa region of Kenya. Thank you very much for making time to join this particular session, and that is it from us. So good day and god bless you.