Airtel Africa Plc (Nigeria) – H1 2024 Results Conference Call Transcript

By Published On: November 8th, 2023Categories: Earnings, Transcripts

Conference call transcript
30 October 2023


Good day, ladies and gentlemen, and welcome to the Airtel Africa half year results. All participants will be in listen only mode. There will be an opportunity to ask questions later during the conference. If you should need assistance during the call, please signal an operator by pressing * and then 0. Please note that this call is being recorded. I would now like to turn the conference over to Segun Ogunsanya. Please go ahead.

Segun Ogunsanya
Thank you. Hello, everyone, and thank you all for joining us today. With me, I have Jaideep, our CFO, and Pier, Head of Investor Relations. Let me give you some highlights about the last six months and provide a brief update of the strategy before handing over to Jaideep, to run through the financial results in detail.

Over the last year, the macroeconomic and operating environment has been very challenging in many of our markets. However, we have been much stronger, and have seen considerable progress on our priorities, which has contributed to a successful operating performance across each of our three regions. Very strong constant currency revenue growth performance has helped offset the inflationary pressure on our cost base, resulting in an improving EBITDA margin, enabling us to further improve our capital structure.

Our purpose is to transform lives across Africa. The strength of the business supports employment, as well as increased contribution to the economy and community, also allowing us to support increasing cross-border requirements of the many countries where we operate. We continue to bring communities closer and give them the opportunity to access affordable financial services, sometimes for the very first time. Value creation for stakeholders has been evident by these strategic successes.

We have navigated the challenging operating environment to report a strong operational performance with sustained customer growth across all our segments, voice, data, and mobile money. This has been further supported by increased usage across our network, which has driven ARPU’s higher by almost 10% in constant currency. This sustained demand for services has resulted in an almost 20% increase in constant currency revenues in first half of this financial year. Despite the inflationary environment, the strong earnings performance has contributed to an increase in EBITDA margin of 63 basis points.

De-risking the capital structure has been a key priority and we are all now well on track to fully repay the HoldCo debt, which is due in May of 2024, and the board has declared an interim dividend of 2.38 cents per share. This is up 9%, reflecting our confidence in the long-term sustainability of our business model. To sustain this performance, we have maintained network investment momentum to provide the platform to future proof our growth ambitions. Our momentum on a socially structured view remains unchecked and continues to be embedded in everything we do.

The next slide is about putting our performance in the context of the environment we operate in. And I would like to highlight a few of the key issues and how we are working to mitigate against those challenges. One, the consumer remains impacted by high inflation. However, with affordable and transparent offerings, we continue to provide value for our customers. Secondly, inflationary pressures remain a challenge for the business. But we had a strong constant currency growth, operational leverage, which combined with cost optimisation enabled an increase in EBITDA margins for us.

And thirdly, currency volatility across the region is not a new challenge for us, but with the focus on reducing Dollar exposure across our cost base, we’ve been able to report the margin improvement over the period. Finally, despite the adverse liquidity challenges across some of our markets, we remain successful in upstreaming cash from our OpCos, putting us in a position whereby we are on track to fully repay the HoldCo debt when due in May of 2024.

Let me now give you an update on our strategic priorities and our achievements that highlight how this strategy is working for us. The next slide captures the key drivers of our future growth potential. The demographics of our market combined with the low level of SIM penetration will continue to support the growth in our customer base, which combined with increased usage, will drive very strong revenue trends. And very important, the mobile money journey remains at a very early stage across all of our markets. And this will further underpin the growth momentum.

As a group, we are very clear on how we’re going to capture this growth. Our win-win strategy has delivered and we don’t anticipate this changing in any way. Additionally, we have executed very successfully and the last 23 consecutive quarters of double digit revenue and EBITDA growth are shown how we as an organisation have the right framework and mindset to continue delivering. You can see the growth algorithm on this chart. It shows how our operational success has been achieved and also expresses how we intend to sustain strong revenue momentum going forward.

The growth in the customer base across all segments combined with increased ARPU as increased usage is monetised, translates into very strong revenue growth. Operational leverage and cross-organisation drive increased resources by investment to reinforce future growth, therefore enabling continued customer-based growth. This cycle will continue to sustain our strong operating momentum in the future.

Slide 9 shows our strategy, which remains unchanged. The six pillars, which are designed to capture the great opportunity as a way to transform lives across Africa. Our strategy is clearly working. We will continue to seek ways to enhance our service offerings to enable sustained growth and create value for all stakeholders.

This slide shows the impact of devaluation and the fact that it doesn’t affect long term value creation trends. You can see in the period our reported currency results have been significantly impacted by the changes to the FX market in Nigeria. In second quarter, we’ve been fully impacted by June devaluation and our reported currency group revenue declined by 4.7%, with EBITDA down 3.3% as shown in the charts on the left side of the slide.

While the scale of devaluation is very exceptional, facing FX revenues across the market is not new. Our strategy focuses on the ability to drive success and strong constant currency revenue growth to limit the impact that FX valuation has on our business. The success of this strategy is reflected in the performance of the company over the last five years. By growing constant currency revenues on average by 17% each year, we’ve been able to report a 10% US Dollar growth over the same period, which has in part enabled a 13% growth in reported currency EBITDA. As a result, we continue to focus on long-term strategy of ensuring strong and sustained constant currency revenue growth, which I will explain in the next few slides.

You can see the demand for telecom services is a key driver of sustained growth. We are exposed to markets with some of the strongest population growth rates in the world, as well as some of the most youthful populations.

When you combine this with very low levels of SIM penetration across our markets, it provides significant scope for sustainable growth.

One of our key priorities is to win with data, and the opportunity for increased data adoption across our markets remains very, very significant. Currently, only 21% of customers use 4G service, and only 40% of our customers are actually using data services. Through continued network investment, our target remains to enable increased 4G adoption across our footprint.

While we continue to see the opportunity for continued customer base growth, we also see significant scope for higher usage growth across both voice and data. Over the last number of years, we are seeing this strong growth in both voice and data usage per customer. This has been driven by three factors. One, our increased investment to increase capacity and coverage across our markets.

Two, customised and affordable offerings to drive increased user adoption. Number three, our continuing investment in our distribution infrastructure to increase customer touch points. And finally, the very low average usage of data and voice services compared to global peers. All of these factors remain very relevant and we continue to support higher consumption across our network.

Now the mobile money opportunity. In addition to the telecoms growth opportunity, we are in a very unique position to layer on additional growth in the form of mobile money to further enhance shareholder value. Mobile money services is solely about driving increased financial inclusion across 14 markets. Low levels of financial inclusion has been one key reason for the 23% average annual growth in the customer base over the last five years. It’s also been reinforced by the trust that has been built through the provision of easy-to-use services with a very strong focus on float availability so that customers can access their cash with ease as and when they need it.

The chart on this slide shows how mobile money is solving the problem of low financial inclusion across our many markets. We believe there are four depending factors enabling increased customer adoption of mobile money services. The first one is branding, the second is distribution, and the third is our expertise on KYC activities, which in a telecom business ensures we can simplify the onboarding process for new customers. And finally, targeting micro-transactions in an affordable manner to further support increased transaction value. These factors have underpinned our strong performance and will continue to enable a sustained level of growth going forward.

The next slide summarises the outcome of the success of the previous two slides on mobile money that I have shared with you. At 23% growth in the customer base in the last year, combined with 45% growth in the transaction value, reflects the success of the offering, translating to 31% revenue growth. With this level of growth, at a very high margin, the opportunity to add additional value over and above what other telecom players in the industry can deliver remains very significant. With this, let me hand over to Jaideep to discuss the financial resource in more detail. Jaideep, please.

Jaideep Paul
Thank you, Segun, and good morning and good afternoon to all of you. Let me start with the key financial highlights. Our underlying results continue to be good despite macroeconomic headwinds and exchange rate volatility. We expanded our customer base by 9.7% year on year to reach 148 million customers. This helped us to sustain our revenue and EBITDA growth momentum.

Revenue growth for half year was 19.7% in constant currency with double digit growth in all three key service segments, namely voice, data and mobile money. EBITDA grew by 21.2% in constant currency, faster than revenue growth, to reach $1.3 billion in reported currency absolute EBITDA. EBITDA margin at 49.6% expanded 70 basis points despite high inflation and adverse macroeconomic conditions.

Operating free cash flow at $1 billion was up 5% on reported currency. Capex for the half year at $312 million which was almost similar to the prior period. Leverage at 1.3x was stable. The board has declared an interim dividend of 2.38 cents per share, up 9% as compared to last year, in line with our current dividend policy.

Slide 18. The overall revenue growth was 19.7% in constant currency, while in reported currency growth was 2.3%. While the impact of Nigerian Naira devaluation is not fully embedded in half year revenue, since the devaluation occurred in mid-June 2023, Q2 fully incorporates the devaluation impact. Therefore, if we apply September 2023 closing rate for Naira throughout the first half of the financial year 2024, the revenue would have declined by 5.1%.

For the period ended 30th September 2023, the negative impact on revenue for three and half months has been $283 million since the Naira devaluation took place in mid-June 2023. The annualised impact of Naira devaluation on revenue at the current exchange rate is approximately $900 million to $950 million. In constant currency, all key service segments grew double digit with voice revenue up by 12%, data revenue up 28% and mobile money revenue up 31%.

Next slide, we show the group EBITDA growing by 3.7% in reported currency to $1.3 billion. EBITDA has been adversely impacted by $165 million as a result of currency devaluation primarily in Nigeria. For the period ended 30th September 2023, the negative impact on EBITDA for three and a half months has been $153 million since the Naira devaluation took place in mid-June 2023.

The annualised impact of Naira devaluation on EBITDA at the current exchange rate is approximately $450 million to $500 million. Opex increase of $192 million is primarily contributed by the volume-driven increase of $120 million related to additional sites and other revenue linked expenses and balance $70 million on account of the rate increase, especially in the diesel price in Nigeria. Despite the above headwinds, EBITDA margin of H1 was 49.6%, an improvement of 70 basis points.

Moving on to segment performance in Nigeria, revenue grew 22% in constant currency, supported by both customer base growth of 5% and ARPU growth of 15.4%. Voice revenue grew by over 16%, primarily driven by voice ARPU growth of 10%. Data revenue grew by over 29%, contributed by 17% customer-based growth and 12% growth in data ARPU. Data ARPU growth was supported by 4G customer base growth of 33% and 4G usage per customer per month grew by 43%. EBITDA margin at 53.5% increased 275 basis points, benefiting from continued operational efficiencies and partially by lower diesel price during Q2. More recently, diesel prices have started to increase again and if this continues, we can expect some headwinds in Q3.

In East Africa, revenue in constant currency grew by 23.6% driven by double digit growth in all three services, voice, data and mobile money. The revenue growth was supported by customer based growth of 11%, ARPU growth of 11.7% to reach $2.7. Voice revenue grew by 14.6% driven by customers as well as ARPU growth. Data revenue grew 31% driven by 28% growth in customers and over 3.4% growth in data ARPU. We further expanded the 4G network across the region. Over 50% of total data customers are 4G, up from 43% of last year. Mobile money revenue grew by almost 35% driven by over 16% growth in customer base and 14% in ARPU growth.

EBITDA margin was almost 54%, expanded 114 basis point in constant currency as a result of revenue growth, cost efficiencies and marginally benefiting from the interconnect cost reduction in Kenya and Rwanda.

Coming to Francophone Africa, revenue grew by 11.5% in constant currency, while reported currency revenue growth was 14%, higher on account of almost 5% appreciation in Central African Franc. Customer base of around 31 million, up 15% year on year, while ARPU was flat in constant currency at $3.7. Voice revenue growth was 3.3% driven by customer base growth, partially offset by drop in voice ARPU, which was impacted by inflationary pressure and political development in a few markets.

Data revenue grew by almost 23%, largely driven by 26% growth in customer base and around 5% growth in data ARPU. Mobile money revenue grew around 19%, driven by 22% growth in customer base. EBITDA margin at 47.2% declined 131 basis points. Adjusting $19 million one-time opex benefit that we had in prior period and reported in last year, normalised half-year EBITDA margin improved by 185 basis points in constant currency.

Next slide, it shows the key components that led to increase in finance cost. As you can see the finance cost excluding exceptional items was higher by $44 million largely as a result of increased local currency debt in operating entity in line with our push down debt strategy as well as increase in baseline interest rate in some of the markets. Exceptional item loss of $471 million was related to the devaluation in Nigerian Naira in June 2023 reflecting the impact of revaluation of USD liabilities and derivatives in Nigeria operation.

Coming to EPS, despite our good underlying performance with double digit growth in revenue and operating profit, EPS has been negatively impacted due to exceptional points and derivative loss in Nigeria. EPS before exceptional item at 7 cents was up by 3.2% over the prior period.

Next slide, our capital allocation policy remains the same. Our key priority remains to continuously invest in the business along with further strengthening of the balance sheet. Our capex guidance remains the same, which is between $800 million to $825 million for the full year. Returning cash to shareholders through our progressive dividend policy remains one of our three key priorities. The board has declared an interim dividend of 2.38 cents per share, reflecting a growth of 9%.

Next slide, we continue to invest in future growth. We have invested $312 million in tangible capex during the first half of the year. 89% of our capex investment is geared towards growth initiatives, mainly to increase data capacity, coverage expansion and strengthening the IT infrastructure. We have also rolled out around 5,000 kilometres of fibre network in last one year, resulting in almost 74,000 kilometres of total fibre in our network.

Next slide, normalised free cash flow, cash from operation post interest and tax payment was higher by $16 million due to lower cash tax. Additionally, cash capex spend was in line with the prior period while these liability payments were higher by $23 million. Hence, our normalised free cash flow before spectru