MTN Nigeria Communications Plc 2020 Interim Results Conference Call Transcript

Operator :

Good day ladies and gentlemen and welcome to MTN Nigeria’s First half of 2020 results conference call. All participants will be in listen only mode. There will be an opportunity to ask questions when prompted. If you should need assistance during the call, please signal an operator by pressing * and then 0.Please note that this conference call is being recorded. I would now like to hand the conference over to Mr Chima Nwaokoma. Please go ahead sir.

Chima Nwaokoma :

Hello everyone, thank you for joining this call to discuss MTN Nigeria’s half year 2020 results. My name is Chima Nwaokoma. I’m responsible for investor relations in MTN Nigeria. With me on this call are Ferdi Moolman, who is our Chief Executive Officer, Mazen Mroue, Chief Operating Officer, and Modupe Kadri, Chief Financial Officer. On the MTN Group side we have Ralph Mupita, Group Chief Financial Officer, and Thato Motlanthe, Group Investor Relations Executive.

Ferdi will provide you with an overview of the business performance in H1, while Modupe will cover some Financial highlights. Thereafter, we will move on to the Q&A which will be facilitated by the conference call operator. Just to remind everyone, our results were announced last Wednesday and a version of the announcement is on our website www.mtnonline.com/investors. I will now hand over to Ferdi to give us an overview of the business. Thank you.

Ferdi Moolman

Good afternoon everybody. Welcome to the call from wherever you’re phoning in From. Just on a personal note, I hope all of you are well and safe and that you and your families are coping with the challenges we are all facing.

To start off, let me provide you a little bit of background in terms of Q2. Q2 is generally characterised as seasonally slower compared to Q1 of every year. This is mainly due to the rainy season, and this year we also had Ramadan in Q2. Then, towards the end of Q1, we had the devaluation of the CBN exchange rate. The CBN rate devalued by about 18%. This was a devaluation From around ₦306 to ₦360, and you will see how that impacted us in Q2 as we go on with the presentation.

We saw an increase in VAT rate in the middle of Q1. The rate was increased from 5% to 7.5% and the VAT base was broadened to capture certain products. It’s important for you to note that VAT in Nigeria is not the same as if is in many other countries. You are limited in terms of what input VAT you can claim back against the output VAT in Nigeria. Generally, for most of the expenses we incur VAT on, we can’t claim back against input VAT.

Then as all of you know, there was COVID which had a major impact in Q2 with the implementation of a phased lockdown in Nigeria, which ultimately impacted the entire country. So, whenever you look at the results, it’s important just to take note of these five characteristics.

Despite the challenging environment, we were able to maintain a healthy growth on the subscriber numbers. We added 6.8 million subscribers in the last six months and we ended half year at 71.1 million RGS — revenue generating subscribers. This was achieved on the back of a number of initiatives, including the extension of our sales and distribution infrastructure which is a project that we’ve been working on since Q4 of last year.

We now have 29 million active data subscribers. These are subscribers that use more than 5MB per month. In the last six months, we added 3.8 million data subscribers. The work we have done to expand the user base of our digital products and services has started to yield positive results. The number of digital subscriptions has more than doubled and we had 1.6 million digital subscriptions at the end of H1.

I’m also very excited to say that we’ve been working hard on growing our mobile money agent network and we’ve doubled that in this last quarter. We now have 220,000 mobile money agents in the market. Consequently, we’ve also seen a very good increase in our mobile money subscribers. In the last quarter, we increased the mobile money subscribers by 1.6 million bringing the total number of subscribers who have used our super-agent network to 2.2 million. The performance in the subscriber numbers provides a solid foundation to build from as we hope the lockdown restrictions will further be relaxed towards the end of the year.

How did these impact headline earnings? On the service revenue side, we were able to maintain our double digit growth which was at about 12.6%.

Over and above the general impact the lockdown has had on service revenue, there are two specific issues that l would like to highlight. The first is the free SMS we provided during the three months of lockdown in Q2 as part of our Y’ello Hope initiative. The Y’ello Hope initiative is part of our palliative response to support the vulnerable in the society during COVID. So, there was no significant SMS revenue in Q2.

The second is that we have been faced with some pressure on certain of our wholesale products, and we now account for some of these products on cash basis. If you just do a top line calculation, you will notice that if we didn’t have these two issues, the revenue growth would have exceeded 13% on a year on year basis.

As the lockdown was implemented in Q2, we saw a change in the subscriber behaviour. This was generally characterised by a drop in voice traffic and higher demand for data. Nevertheless, we still saw growth of 2.8% on the voice revenue. Data revenue increased by 57.6% and this was obviously supported by the change in behaviour that we saw and an increase in the data subscriber numbers. We saw a higher usage of data per subscriber. We saw our smartphone penetration growing and we also had an increase in our 4G population coverage.

Digital revenue continues to grow. Just be aware that if is off quite a small base, but we are continuously seeing growth. We saw a 121% growth in the digital revenue. We are still cautious in our marketing initiatives on these products since they are notorious for some challenges when you get to the subscription process. But, so far, For the last two quarters, everything has gone well.

Modupe will unpack in more detail the evolution of our expenses and margins, but l would just provide you a high level view in terms of some of the pressures we faced in the market. The devaluation of the CBN exchange rate I referred to in my opening statement had an impact on our expenses. We’ve always indicated that a 10% devaluation in currency would have a 1% impact on our margins on IFRS 16 basis. This materialised in the quarter.

The increase in the VAT also had an impact on costs and margins. In addition, the new financial regulation, which was issued in February of this year, broadened the VAT base for certain products that were previously exempted. So, there were some expenses that we picked up there as well.

We had quite a number of COVID palliatives during the quarter. Over and above the free SMS we gave away, we donated towards an initiative that is driven by private sector and spearheaded by CBN. This is called the CACOVID initiative to which most businesses contributed. The CACOVID rolled out quite a number of isolation centres and are now going to move into a phase where they will provide food for the vulnerable in society. Our contribution to this was ₦1 billion. And then of course with the pressure of COVID and the environment itself, as I said earlier, we now account for some of our wholesale revenue on cash basis. We also needed to impair some wholesale debtors during the course of the quarter as well. Due to the external pressures in Q2, we saw a softening in our margins with EBITDA levelling out at about 51.3%. We have instituted a company-wide efficiency programme, similar to what we did in 2016-2017 in order to improve our margins going forward. We believe there is still some efficiency that we can unlock going forward.

Regardless of the external pressure we faced in Q2, our overall half year results were strong and the board of directors has approved an interim dividend of 83.50 which is a 19% increase on the H1 dividend of 2019.

As you are aware, we issued an announcement in terms of the renegotiation of our IHS agreement. Just to provide a little bit of background on this, generally IHS has about 80% of our towers that we lease from them. There is an element of the pricing that is Naira based and there is an element that is priced in Dollars but converted to Naira for payment. Payment takes place quarterly in advance. Hence, the devaluation of the CBN rate that we saw after the end of Q1 had full impact in Q2.

Generally, the Dollar pricing was benchmarked against the CBN rate. As you know, the gap between the exchange rates has closed quite substantially, and this gave us the opportunity to negotiate a pricing structure change with IHS. What we unlocked in the pricing negotiation was to get a discount on future technology evolution and backhaul in the network.

So, we were able to get discounts on 4G, discounts on future 5G technology as well as discounts on fibre rollout. And for this, we agreed to move from CBN to NAFEX. This would improve the relationship between the two parties and if would be more transparent in terms of how the pricing works. Also, l think this would be fairer on all the parties. As we’ve announced on the stock exchange, if you do the calculation based on our 2020 forecast, this has about a 0.4pp impact on the margin. This 0.4pp is just the differential between CBN and the NAFEX rate, which today sits at about 6-7%. Obviously, as we start moving further with 4G population coverage, fibre rollout and into 5G in the future, we will start unlocking the value of the discounts that we negotiated.

Just to give you a bit of an overview in terms of COVID and the impact of the pandemic, the impact on our performance was quite broad based. COVID induced movement restrictions and scarcity of foreign exchange had an impact on our capex. We saw a decline in demand for voice services as our customer base, especially in the mass market segment, was impacted by the economic constraints caused by the lockdown in the country.

We saw significant growth in data revenue. However, the acceleration in data and digital revenue only partially offset the decline in voice revenue. As part of our response in the fight against COVID, we launched various initiatives under what we called our Y’ello Hope package. We also supported Government’s effort to this end. As said earlier, we gave away free SMS targeted at providing value to the vulnerable in society, of which 75% or about 53 million of our subscribers benefitted, sending over 4.3 billion free SMSs.

We also allowed free money transfers using the mobile money network agents. Although this agent infrastructure is still immature, over 100,000 customers utilised the service during that time period. Our customers accessed healthcare websites and educational platforms using more than 3,000 terabytes of free data in H1.

We delivered about ₦250 million worth of PPE — personal protective equipment to the Nigeria Centre for Disease Control through the MTN Foundation. We supported the Federal Inland Revenue Service with an early payment of our taxes ahead of the established deadline. In terms of our network, we prioritised capacity upgrades to accommodate growth in traffic while continuing to expand 4G network coverage, albeit at a slower pace.

What do we see in the outlook? As indicated in our announcement, the early trends emerging from the easing of the lockdown restrictions indicate the steady normalisation of our revenue mix. However, if remains unclear how this will continue to evolve for the remainder of the year, given the ongoing uncertainties presented by the pandemic. We will continue to invest in our network and ramp up our 4G rollout to cover more cities as well as broaden rural connectivity. This is important as traffic on our network continues to increase. We have built up a solid inventory of critical parts during the lockdown period and we are well prepared in the event of further disruptions.

In terms of top line growth, we are still targeting double digit growth. We’re also putting plans in place to ensure that we grow the top line slightly better than inflation. As l said earlier, we have put cost saving programme in place, quite a substantial programme, and we will be implementing them to unlock efficiencies and improve our margins.

Chima, that’s all from me. l will hand back to you. Okay.

Modupe Kadri

Thank you Ferdi. Modupe here. l would like to start by reminding you that we changed the accounting treatment of the non-recoverable VAT, value added fax, on our lease payments and this resulted in some impact on our costs and margins. These VAT payments were previously included in the measurement of the lease liability and the right-of-use asset and were depreciated over the lease term.

We reassessed this treatment and excluded the non-recoverable VAT from both the lease liability and the right-of-use asset, and account for if as an expense over the lease period. We applied the revised accounting policy retrospectively from the date of IFRS 16 adoption which was 1st January 2019.This resulted in a 0.2% decline in our EBITDA margin in H1.

In addition to this, the combined effect of the site rollout and foreign exchange rate adjustment, the 2.5% increase in VAT and the associated cost of COVID-19 initiatives all impacted our costs. Like Ferdi rightly mentioned, we are all aware that the Finance Act changed the VAT rate from 5% to 7.5% in February of 2020. As a result of all these, we recorded a 24.1% increase in our opex in H1, contributing to the 2.0% decline in our EBITDA margin to 51.3%.

In terms of the margin impact, site rollout and exchange rate depreciation impact on the lease rentals had a 2.1% impact on our margins. If you put if in context, you know there was an aggressive rollout of sites in 2019 and the impact hit us in full in H1 2020. So, in H1 2020, we had 41,891 sites versus 35,798 at the end of H1 2019. So that had a 2.1% impact on our margin.

The change in treatment of the non-recoverable VAT that l talked about impacted our margins by 0.17%. The unanticipated COVID-19 costs — Ferdi has alluded to some – and the cost incurred in making the business safe all impacted on our margins by 0.25%. Then like Ferdi also mentioned, the new VAT actually broadened the base of VAT, so that increased VAT on different services run by the business because we are not able to pass that over to the subscribers just as yet. That had a 1.4% impact on our margins.

We continue to implement expense efficiency initiatives, which are aimed at restoring our margins in the near term, supported by the new IHS deal that was signed recently. In terms of capex, excluding right-of-use assets, if declined by 20.9% to ₦76 billion in H1 with a capex intensity at 12%. This was mainly due to the slow pace of site rollouts occasioned by port congestion, movement restrictions and the paucity of forex. We are, however, on track to accelerate rollout in H2 as the lockdown restrictions are eased.

We had a healthy free cash flow growth of 24.7% to ₦195.6 billion due to the lower capex in H1. Our PBT, profit before tax, however declined by 2% due to an increase in finance cost resulting from higher borrowing. You will recall we did announce in H1 of last year that we signed a facility of ₦200 billion. The interest cost of that facility drove the increase in finance costs. Our efforts to reduce effective cost of borrowing continue to yield results as finance costs declined in Q2. Our intention is to continue to reduce that in the foreseeable future.

Overall our profit after fax and EPS, earnings per share, declined by 4.7% respectively, reflecting an increase in taxation mainly due to lower investment allowance and exempt income. During the period a ₦100 billion commercial paper was issued at a blended rate of 5.7% per annum. This allows us to broaden our sources of Funding and combines our established lines of credit with access to capital market funding, which will lower our cost of borrowing.

Our funding and liquidity remain well managed supported by strong cash flows and approved headroom facilities. Our headroom to leverage is comfortably within banking covenants and we are able to meet our operational, investment and financial requirements and obligations. Our Foreign exchange exposure is also within manageable limits with 95% of our total debt in local currency so that our balance sheet can withstand currency volatility. With that, l hand you back to Chima and thank you for listening.

Chima Nwaokoma

Thank you Ferdi and Modupe for the insights. We will now move on to Q&A. Back to you, Judy.

Operator

Thank you very much sir. Ladies and gentlemen, at this time if you would like to ask a question you are welcome to press * and then 1 on your touchtone phone or the keypad on your screen, aft which time you will hear a confirmation tone. Following this process will place you in the question queue. For the benefit of our participants who have joined via the HD web phone, please ensure that you have given your microphone permission to make yourself audible before accessing the question queue.

If you decide a question had been addressed and you wish to withdraw your question, you’re welcome to press * then 2 on your touchtone phone to remove yourself from the question queue. Just a reminder, if you would like to ask a question you’re welcome to press * and then 1. The first question comes from Preshendran Odayar of Nedbank CIB.

Preshendran Odayar

Hi guys. Thanks for giving us the opportunity For some questions. I’ve got three if l may please. The first one. Can you give us a little bit more colour on the significant cost increases I saw on some of the line items, particularly direct network cost, handsets and accessory cost and employee cost? Those seem to have had significant increases year on year especially in the second quarter.

My next one is around your access to hard currency. Do you foresee any issues to get cash to repatriate the dividend that you’re going to be paying out on the 24th August? And then the last one. Ferdi, I know you did mention previously as well that the second and third quarters are seasonally softer than your First and your fourth quarters. With the impact of COVID and the related economic slowdown, the free SMS and data that you guys are giving, what trends are you seeing in a lot of the operating metrics now that we’re into July and into the third quarter of the year? Thanks very much.

Ferdi Moolman

All right. I’ll take the question and then Modupe will follow if I miss something. The increase in network cost was because we had more sites that we rolled out. The devaluation of the CBN exchange rate from the ₦306 level to ₦360 also sits in network expenses.

On the handsets, in Nigeria generally we don’t do handset business as you find elsewhere in the world. But we do have MiFi and WiFi devices that we make available. During the pandemic, with the stay at home, obviously there was an increased demand for those types of services. That’s why you see those costs going up and you’ll see the benefit in data revenue.

The increase in employee cost was due to bonus accrual we needed to put through that wasn’t sufficiently done against previous year’s figures.

In terms of access to hard currency, obviously, given the scenario in the country, access to hard currency or Dollars is quite difficult. AF this point in time, the focus principally for us is on ensuring that we can obtain hard currency and ensure if doesn’t impact our network rollout. Options like cash collateralised letters of credit etc are being explored. The currency is available but in limited supply.

And in terms of externalising the dividend to our foreign shareholders, we are working with the CBN and banks on the process, but this could be difficult as I’m sure you could understand how if has been historically.

Just some comment on the seasonal offers. We stopped the free SMS aft the end of Q2. That was for three months only and if was more or less aligned with the lockdown. And the idea was to provide some form of benefit to the vulnerable in the society. Most of the vulnerable people in Nigeria, in the world in fact, don’t have access to 3G or 4G handsets and therefore don’t have access to data. So we felt that giving free SMS away would actually benefit them.

So, that’s what we did during the lockdown and if came to an end at the end of Q2. We’re now in the process of charging for the SMS service. What have we seen since the lockdown has eased? There are still some level of restriction of movement in Nigeria. So the airports aren’t fully open yet for local traffic. They’re not open for international traffic. So, we don’t have 100% movement in the country. The economy is not 100% open either. There is still an element of pressure From the economy.

But since the lockdown was lifted and people started moving around freely, we’ve seen a recovery of our network traffic profile. We’ve seen voice going up again, while demand for data slowed down a little bit but we are quite positive. We’ve seen quite a good recovery in the market itself. Obviously it’s early days. One doesn’t know what’s going to happen in the future with the lockdown, but there are positive signs that we’ve seen.

Just maybe to give you an idea on the subscriber numbers, the subscriber performance was really encouraging, especially the revenue generating subscribers (RGS). The majority of hose sub numbers came in towards the end of June when we started seeing a little bit of easing of the lockdown. So, we had an exceptionally good month in June in terms of subscriber acquisition, and that demand is largely still there. We’re very positive about the uptick, but it’s very difficult to tell you whether this will continue going forward. Modupe, l don’t know if l missed anything or there is anything you want to add, and maybe Mazen also.

Modupe Kadri

I think that’s basically the major components. When you look at H1 2020 you need to compare it to H1 2019. And the major driver of those costs is the aggressive 4G rollout in H2 of 2019. So when you are comparing half year, year on year, you’re going to see the full cost of those site rollouts coming in H1 2020. Except if Mazen has something else to add, that’s fine.

Mazen Mroue

I just want to add that while we see, as Ferdi said, voice recovery going in the right direction, we continue to see growth in data, but probably at a slower rate than what we saw during the lockdown. So data still continues to grow. Thank you.

Preshendran Odayar

Thanks very much, gentlemen. Really appreciate it.

Operator

Thank you. The next question comes from Johnathan Kennedy-Good of Standard Bank.

Jonathan Good afternoon.

Thanks for the opportunity to ask questions. I just wanted to follow up with you on the status of the PSB license and whether there has been any movement there. And if you could just clarify operationally the difference between having that PSB license and operating under the super-agent license, just in light of the increase in your number of agents on the ground. And then you mentioned that the capex rollout is a little bit slower than you probably would have liked. Are you seeing those conditions worsen? And is that really a lockdown issue or is if a currency issue?

Ferdi Moolman

Sure. Thanks Jonathan. On the PSB, the status quo is still the same as if was when we had the previous call. We’ve submitted all the documents to CBN. There is nothing outstanding. We see if in a positive light that three licenses were issued and two were issued to mobile operators. So, to us, that was a positive step and we’re working with the CBN to try and unlock the issuing of the license.

In terms of the fundamental differences between the PSB and the super agent, obviously, there are quite a number. But, principally, the major difference is that on the PSB, we don’t own the wallet, which means we need to work with a bank to get access to a wallet. There are some limitations in terms of some of the services we can provide under the super-agent license, which we would be able to provide under the PSB. So, for now, we just have to work with the bank and we work with Access Bank. However, we don’t need to work with just one bank. We can actually work with all the banks. We are at a stage where we would make our product fairly agnostic. This would open up a lot of other types of transactions like bank to bank transactions etc.

What is important though is that the PSB requires an agent network as a foundation. That is really what distinguishes us from the banks and what makes our products far more successful in reaching the under-banked, our agent infrastructure that extends to the rural areas where there is no formal bank infrastructure. I’ve always said that super-agent is the foundation for the PSB. The success of the PSB ultimately depends on the size and the efficiency

CONTINUED…..

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