Earnings Call Transcript - GP Q4 2022

Naureen Quayum, Head of Investor Relations

Good morning, everyone. Welcome to Grameenphone's earnings disclosure for the fourth quarter of 2022. My name is Naureen, I'm the Head of Investor Relations. And with me today are our CEO, Mr. Yasir Azman; and our CFO, Mr. Jens Becker. Please note that the presentation we are sharing today, financial statements, along with additional documents are available on our Investor Relations website. You can start posting your questions. We will address them at the end of our presentation. In case you're unable to post your questions due to any technical reasons, please send me an e-mail or text. I will now welcome our CEO, Mr. Yasir Azman, to start our presentation.

Yasir Azman, CEO

Thank you, Naureen, and good morning, everyone. My name is Yasir Azman, and I am the CEO of Grameenphone. Thank you for joining us for our fourth quarter results announcement for the passing year 2022. I would like to begin with some of the industry facts. As reported by our regulator, until November, the telecommunication industry reported 180.87 million subscribers, which is a decline of 0.6 million subscribers from August 2022. During the same period, the mobile data users have decreased by 1.3 million, reaching 113.4 million in November. Some highlights of the quarter and the year 2022 include a milestone year for Grameenphone as we reached our 25th year of service to customers and empowering societies in Bangladesh. This year, we also participated in the country's largest spectrum auction in March, where Grameenphone secured the maximum allowable 60 megahertz of 2.3 gigahertz spectrum. However, 2022 brought its fair share of challenges, which we'll discuss shortly. Grameenphone continued to deliver top-line growth supported by investment in our network, strengthened market execution, and benefits from the organizational modernization journey we have embarked on for the past few years. As a result, with the dedication of the entire team, we showed resilience in overcoming the various external hurdles we faced during the year while remaining committed to our priority of improving experience for our customers and creating value for our shareholders. With advanced digital capabilities, we drove innovation in our business and customer engagement. We improved customer experience through partnerships and collaboration with Google, Facebook, a2i, and bKash, which is the largest mobile financial services provider in Bangladesh. In 2022, we faced several challenges. During the first half, we dealt with some of the worst floods and rainfalls recorded in our country's history, with Northern Bangladesh being hit particularly hard. In an already struggling post-pandemic era, the natural calamities slowed down economic recovery in Bangladesh. Additionally, the war between Russia and Ukraine has impacted the global energy crisis and subsequent cost increases, which affected Bangladesh as well. Overall, inflation levels in Bangladesh have increased, directly impacting the spending capabilities of our customers and causing them to optimize their wallets. Along with macroeconomic factors, Grameenphone faced challenges from the regulatory ban on SIM sales, which was imposed on June 29, 2022, due to not meeting the required quality of service, a ban that was ultimately lifted on January 2 this year. Throughout the year, we made significant enhancements to our network quality with high investment and innovative solutions. On January 10 this year, the FX code of the country passed a verbal ruling on a legacy litigation case related to battery weight on 2G license renewal fees, which disallows Grameenphone's appeal. We will wait until we obtain the written verdict on this matter before providing any further updates. Moving on to market execution, which has led to sustaining growth momentum, we started to deploy the 2.6 megahertz spectrum to our sites this year, leading to significant improvements and experience enhancement. With continued site rollouts, reaching 1900 in 2022, Grameenphone achieved another milestone of over 20,000 sites on our network. In addition to improving our core, we continue to work on customer journey improvements, simplifying and enhancing engagement with our customers in a very personalized and segmented manner. We continued to revamp our product portfolio, leading to ARPU improvements despite a lower subscriber base. As mentioned earlier, we partnered with tech giant Google to provide a seamless telco journey for Android users and collaborated with Facebook to deploy dynamic partial loans for subscribers to purchase the packs they need while using Facebook. Additionally, we launched auto-recharge in partnership with bKash and one-tap payment solutions for increased customer convenience. We are working with our government partner a2i to offer convenient and scalable solutions to our customers as they pay for various government services. Building partnerships is key to bringing innovation and growth into the digital lifestyle. As a result of our constant drive for digitalization and customer engagement, digital adoption improved significantly this year, leading to a 29% reload volume, a 14.3% year-on-year growth. We also recorded significant ARPU uplift from the users of MyGP. Due to the embargo on SIM sales, we registered a 5% lower subscriber base by the end of the year. We also focused on our social impact projects and empowering societies. Grameenphone's operations always emphasize sustainable and fair business practices. We concentrate on various aspects of encompassing environment, social, and governance in our operations and daily interactions with our stakeholders. As part of our digital inclusion and enablement, as of December 31, 2022, Grameenphone connects a subscriber base of 79.1 million customers, of whom 43.6 million access the Internet and 34.2 million are empowered with 4G high-speed internet connectivity. As an equal opportunity employer, diversity and inclusion are imperative in how we conduct business. Our diversity agenda broadly encompasses gender, skills, and competence. By the fourth quarter of 2022, 30% of our new hires were women while the percentage of women in our total workforce reached 18.8%, and we continue working in this area. As part of our social impact, the Digital Bangladesh award-winning initiative, Grameenphone is excited to enter its seventh cohort with six graduating start-ups boasting 10x growth. One of the leading food start-ups in Bangladesh and a graduate from the GPX later program has launched their official app at the Digital Bangladesh Mela. This year, they also secured investment from a Silicon Valley-based venture capital fund. Ipage is another start-up awarded by the United Nations Food Systems Summit in 2021 and the BASIS National ICT Award in 2022, which has also secreted multiple investments from national and global venture capital companies. CMED Health, an alumni and leading healthcare start-up, was awarded the Digital Bangladesh Award 2022 for its efforts to ensure quality healthcare for everyone, aiming to provide affordable and quality healthcare to 100 million Bangladeshis by the year 2030. We are very proud of these initiatives and our accelerator program that supports the growth of our ecosystem of start-ups, along with new initiatives entering the market. More details on Grameenphone's ESG initiatives and performance KPIs are available on our relations and social impact website. I will now welcome our CFO, Jens Becker, to take you through our financial performance for the quarter and come back at the end to summarize. Thank you.

Jens Becker, CFO

Thank you, Azman, and good morning to everyone. Let me start with a brief overview of the key KPIs. Grameenphone continued to deliver solid financial performance in Q4 with seven consecutive quarters of growth in top line and EBITDA amidst the SIM sales ban and the challenging macroeconomic and business environment during the second half of the year. Our top-line and EBITDA growth momentum was supported by the acquisition deployment of the new spectrum, as Azman mentioned, our sites rollout, price optimization, and customer-centric activities, along with improved operational cost efficiency. We registered a year-on-year growth of 4.1% in subscription and traffic revenue against a 3.6% growth in last year's Q4, while year-on-year EBITDA growth was 8.2% against a 2.6% growth in last year's Q4. In Q4 '22, EBITDA growth was positively impacted by a one-off gain resulting in an EBITDA margin of 65.2%, with a 2.9 percentage points margin improvement from last year. During the quarter, Grameenphone increased its investment momentum to deploy the mentioned 60 megahertz additional spectrum acquired in Q1 of 2022 in the 2,600 megahertz band, along with our continued network expansion and modernization initiatives aimed at improving customer experience. With our continuous investment effort, by the end of Q4, Grameenphone's CapEx to sales ratio for the quarter stood at 11.5% based on the four-quarter moving average while, on a standalone basis for the quarter, the CapEx to sales ratio stood at 13.3%. However, despite solid growth in top line and EBITDA, we registered a year-on-year decline in EPS. The decline in EPS, earnings per share, mainly resulted from the provision for regulatory disputes following relevant International Financial Reporting Standards based on the available information of the verbal judgment in court proceedings. Upon receiving the written judgment, Grameenphone will take the necessary steps subject to further assessment, and I will address this later. On a reported basis, EPS for the quarter stood at BDT 2.75, reflecting a decrease of 54.5% from last year, while for the full year, EPS declined by 11.8%. Now let me start with the details, focusing on the subscriber base. Grameenphone's subscriber growth has been impacted throughout the quarter due to reinforced SIM sales restrictions on recycled numbers. However, GP was actively engaged with the regulators and met the expected parameters for quality of service specified by the regulators. As a consequence of all our efforts, the regulator lifted the SIM sales restriction on January 3, 2023. However, at the end of Q4 '22, Grameenphone's subscriber base decreased by 5% from last year to 79.1 million, while the number of data users decreased by 2.2% year-on-year to 43.6 million. Despite the decline in our subscriber base, Grameenphone's 4G data users continued to grow and reached 34.2 million, registering a 23.6% growth from last year. This growth was possible due to our continued effort to enhance the 4G network experience. Grameenphone's subscription market share was also impacted as subscriber acquisition was restricted until December '22. So according to BTRC published information as of November 2022, GP's subscription market share stood at 44.4%, reflecting a 0.8% decrease compared to the last quarter. Grameenphone registered seven consecutive quarters of growth in total revenue and daily subscription and traffic revenues. Total revenue grew by 3.5% in Q4 after a 6.7% growth in the last quarter. The growth in total revenue slowed down in Q4 as subscription and traffic revenue growth momentum was affected by the accumulated impact of no gross additions for six months and the tense macroeconomic environment. The total revenue growth was driven mainly by the 4.1% growth of subscription and traffic revenue due to the increase in bundled and data offerings. Turning to the revenue details, as customer experience is always prioritized, Grameenphone invested in spectrum acquisition over the last two years to meet growing customer demands and improve network performance. Additionally, Grameenphone continued to provide exclusive data-only products, customer-focused package deals, and improved digital experiences. Consequently, compared to last year, data revenue and bundled revenue increased by 11.9% and 2.6% respectively, contributing to the 4.1% growth in subscription and traffic revenue. As mentioned before, Grameenphone reinforced its value proposition with competitive market offers underpinned by ongoing spectrum rollout and 4G network development to ensure a better customer experience. As a result, GP's average megabyte per user grew by 38.8% from last year. However, quarter-on-quarter data usage growth remained stable due to lower data subscriptions resulting from SIM sales restrictions. Meanwhile, service ARPU increased by 7.9% in Q4 after a 5.9% growth in the last quarter. The increase in service ARPU was primarily driven by higher contributions from data bundles and the voice segment. Now, turning our attention to the bottom line results, Grameenphone managed to deliver seven consecutive quarters of EBITDA growth despite a challenging business environment and tense macroeconomic conditions during the second half of the year. On a reported basis, Grameenphone's EBITDA increased by 8.2% in Q4 with a margin of 65.2%. Year-on-year growth in EBITDA was predominantly driven by top line growth and a positive one-off negotiation outcome with a related party supplier, as well as efficient cost management. Excluding the significant one-off effects in Q4 '22, EBITDA would have increased by 1.5% year-on-year. Operating expenses for the quarter stood at EUR 11 billion, reflecting a year-on-year 0.9% decline on a reported basis, impacted by the mentioned positive one-off negotiation outcome. Grameenphone invested BDT 5 billion in CapEx, excluding license leases during the quarter, primarily focused on our 4G network coverage expansion and spectrum deployment. We rolled out over 2,300 new 4G sites and 1,700 new coverage sites in the last 12 months. Additionally, as of Q4 '22, GP deployed 10.4 megahertz spectrum in more than 18,000 sites, along with the deployment of the 60 megahertz spectrum acquired in 2022. By the end of the quarter, the number of 4G sites reached 19,601, and 4G population coverage reached 97.9%, reflecting a 1.1 percentage points increase from last year, up from 96.8% 4G population coverage in Q4 '21. Turning to net profit, the quarterly net profit stood at BDT 3.7 billion with a 9.9% margin. On a reported basis, the year-on-year 54.5% decrease in net profit was largely a result of higher finance costs due to provisions for regulatory disputes following relevant IFRS standards, based on the available information of the verbal judgment in court proceedings, along with currency devaluation and higher depreciation. On an underlying basis, NPAT declined by 6.5% year-on-year, primarily driven by higher foreign exchange losses due to currency devaluation and increased depreciation and interest on leasing liabilities due to an expanded total network site and spectrum position. Net debt stood at BDT 1.8 billion as of Q4 '22, consisting of BDT 5 billion in short-term bank loans and a BDT 3.2 billion cash balance, excluding restricted cash. Compared to the previous quarter, the net debt position improved significantly by BDT 7.1 billion, mainly due to an BDT 8.7 billion reduction in short-term loans. Operating cash flow for the quarter stood at BDT 19.5 billion, reflecting a year-on-year increase of BDT 3.4 billion, driven by BDT 1.9 billion higher EBITDA and BDT 1.5 billion lower CapEx. Regarding contributions to the national exchequer, until Q4 '22, Grameenphone paid BDT 10.3 billion, amounting to 69.3% of its total revenue to the national exchequer in the form of taxes, VAT, duties, license fees, and spectrum assignment fees. Since its inception, Grameenphone contributed BDT 1,061,106,076 to the national exchequer. Now, regarding the dividend proposal, the Board of Directors of Grameenphone has recommended a final dividend of BDT 9.5 per share for 2022 at the Board meeting held on January 30, 2023. With this, the total cash dividend amounts to 220% of paid-up capital, including 125% for the interim cash dividend, representing 98.72% of profit after tax for the year 2022. Shareholders as of the record date of February 26, 2023, will be entitled to the final dividend, which is subject to shareholders' approval at the 26th Annual General Meeting, to be held on May 2, 2023. I will now hand back to Azman to summarize and wrap up. Thank you.

Yasir Azman, CEO

Thank you, Jens. The first nine months of 2022 registered momentum, as you highlighted, driven by higher usage and revenue and a strong market execution and strategic focus on network investment to improve our customer experience. We have faced external challenges from the macroeconomic climate and regulatory environment, which have dampened our top line performance. However, with strong teamwork, Grameenphone remains committed to delivering value for our customers and shareholders. We will continue our investment to develop a stronger network, innovation, and modernization initiatives that will help us cater to the constantly evolving connectivity needs of our customers, both in consumer and business segments. I will stop here and hand back to Naureen for a Q&A session. Thank you.

Naureen Quayum, Head of Investor Relations

We will wait a few minutes for questions to start coming in. Jens, I have a question for you. This is from IDLC. Why did your earnings crash in the last quarter?

Jens Becker, CFO

Okay. Let me take that. Despite, as you have seen, we have solid growth in top line and EBITDA, we registered a year-on-year decline in EPS. The decline in EPS is mainly due to the event on January 10, 2023, as Azman has mentioned. The Honorable Appellate Division, the AD Court, has verbally pronounced the judgment of the 2G license renewal dispute, allowing the appeal of Grameenphone and allowing the appeals of the National Board of Revenue, which means that value-added tax will be applicable for payments to the Bangladesh Telecommunication Regulatory Commission. In addition to the principal, Grameenphone will not receive a rebate for the set input VAT. Based on the verbal judgment, the necessary provisions have been made following relevant International Financial Reporting Standards. Upon receiving the written judgment, Grameenphone will take the necessary steps subject to further assessment, including regarding the relevant parts of the BTRC audit demand, which consists of this issue, and details are disclosed in Note 45C of our financial statements. Additionally, the NPAT growth was further impacted by currency devaluation and higher depreciation.

Naureen Quayum, Head of Investor Relations

I have a follow-up question to this. Will there be more provisions related to this topic?

Jens Becker, CFO

Yes. This increase primarily relates to provisions for regulatory disputes. We must assess how the written judgment addresses this; it’s too early to determine right now. For these topics on the provisions, we have more details in our financial statements in Note 21.

Naureen Quayum, Head of Investor Relations

Thank you, Jens. We will wait a few more minutes for any further questions to come in. I understand everybody is asking us the same question, so we should have answered everyone in one go. I have a follow-up question regarding the provisions. Can we share the exact amount?

Jens Becker, CFO

As mentioned before, we have more details in Notes 45C and 21.

Naureen Quayum, Head of Investor Relations

We have another question. Is there any impact of inflation on telecom usage?

Jens Becker, CFO

Yes, obviously. As we mentioned earlier, in the context of the tense macroeconomic situation, inflation certainly plays a role. Spending by consumers is impacted. However, we are experiencing continuing growth in usage patterns. Yes, there is an impact on telecom usage due to inflation, but as you can see, we have overall growth and we are able to monetize on the ARPU.

Naureen Quayum, Head of Investor Relations

Jens, we have a final question. Why is the FX loss substantially higher in Q4, even though depreciation mostly happened in Q2 and Q3? What is the major source?

Jens Becker, CFO

Let me answer. I'm not sure if I fully understand the question, but regarding the FX loss, this is a year-on-year comparison, not a quarter-on-quarter perspective. Any significant depreciation you noted comes from the acquired spectrum and capitalization. Hence, this higher depreciation and the BDT devaluation year-on-year are the main contributors to the increased FX loss.

Naureen Quayum, Head of Investor Relations

Thank you, everyone. I do not see any further questions. However, if we have missed your question today, please feel free to get in touch with me. Thank you Azman bhai and Jens, have a good day.