Conference Call Transcript

Conference call transcript

23 October 2020

H1 2021 RESULTS

Operator Ladies and gentlemen, welcome to the H1 2021 results conference call of Airtel Africa. Today’s speakers are Raghunath Mandava, Chief Executive Officer, and Jaideep Paul, Chief Financial Officer. All lines are now closed except from the speaker line. If you would like to ask a question to the speakers please press * then 1 on your keypad to connect with the operator or ask a question via webcast using the textbox on the screen. Please do note that first we will take questions asked via the phone and later on via webcast. Before we continue I will present an important disclaimer.

This presentation has been prepared by Airtel Africa Plc and is for information purposes only. This presentation contains forward looking statements which by their very nature involve inherent risks and uncertainties. Risk exists that such forward looking statements will not be achieved. You are strongly advised to review the disclaimer page of the investor presentation available at airtel.africa/investors. This conference call will be recorded, and the transcript will be posted on the website. The first speaker will be Mr Raghunath Mandava. Please go-ahead sir.

Raghunath Mandava Good morning everyone and thank you for joining the call. Today we have announced our H1 results. I will take you through the business areas and Jaideep will cover the numbers in more detail. H1 2021 results are a clear evidence of our strategy delivering profitable growth. Our revenue grew by 16.4% in constant currency with EBITDA growing even faster. Thereby we delivered a margin expansion of 110 basis points in constant currency terms. We delivered 13% revenue growth in Q1 which expanded to 19.6% growth in Q2 in constant currency. Revenue growth was broad based across all services, voice, data and mobile money. Our EPS pre-exceptional items amounted to 3 cents. Finally, we continue to improve our cash position with FCF at the level of $319 million, up 52%, largely driven by the growth in EBITDA.

We keep our aspirations announced at IPO and we continued to make good progress this year. In the first half of this year we grew mobile revenue by 15.3% and mobile money revenue by 30.4%, and increased the underlying EBITDA by 110 basis points to 44.7%. Moreover, we kept our capex broadly stable in H1 2021 at $216 million and we decreased our leverage to 2.2x. Capex in the first half was slightly below that of last year due to the lockdown effects, but the full year outlook remains the same at $650 million to $700 million. The board has declared an interim dividend of 1.5 cents in line with our new progressive dividend policy. Jaideep will talk about it a little later.

This slide sets the stage as to how our strategy delivers. As mentioned before, unlike anywhere else in the world we in Africa have an opportunity to deliver growth across voice, data and mobile money. Unique 1

customer penetration at about 46% means there is an ample scope for customer growth, and we have been growing customers in double digits. The customer growth for this half year was 12%. Voice ARPU dropped slightly due to interconnect rate reduction in some countries, but overall voice revenue grew 7%. Data growth of 33.4% is coming from a 24% growth in customers and a 10% growth in ARPU. Current smartphone penetration is 33.2% and 4G penetration among the smartphones is at about 30%. This is an important parameter for continuous growth of data.

Airtel Money grew by 30.4% as we expanded our service portfolio to more customers, resulting in the customer base growing by about 30%. The ARPU growth has only been 2.4% due to a lot of free giveaways that we gave during the pandemic period. Data and mobile money, the growth engines, now account for 30% and 10% of our revenues. That means 40% of our revenues are actually growing at about 30% plus and driving growth, along with voice which is also in good mid-single digits. This is a clear demonstration that in the countries we operate there is growth in voice, data and mobile money resulting in both customer and ARPU growth.

Let us now move to the regions. Nigeria, our largest market, continues to deliver very strong growth thanks to the continued growth of network distribution and infrastructure. East Africa was the fastest growing region in this period. Five out of six countries are growing more than 20%. Our revenue increased 21.9% and EBITDA growth of 35.1% year on year. Francophone Africa has turned around. The performance continues to improve largely driven by growth in data and mobile money, while it has been partially offset by voice. Jaideep will take you in detail through the segment performance.

COVID-19. These results that you’re seeing for the first half clearly show the resilience of our business and the effectiveness of our strategy as well as recognising most importantly the fact that the services we provide are essential to customers and economies. In these unprecedented times the telecoms industry has emerged as a key and essential service in these countries. Allowing customers to work remotely, reduce their travel, keep them connected and allow access to affordable entertainment, mobile has become an affordable alternative for travel and communication during this difficult time of pandemic. In the first half we delivered a strong set of results, and as lockdown restrictions eased during Q2 our performance continued to improve with constant currency growth of 19.6%, up from a 13% growth that we presented to you for Q1.

We remain alert to the potential for further disruptions from a second wave of COVID-19 across Africa and the associated actions by governments to minimise this contagion. Nevertheless, we are in a strong financial position to capture the growth opportunities presented by promising underlying macroeconomic and demographic trends in a fast growing region that is vastly under-penetrated in terms of mobile and banking services. Moreover, we recognise the progression of Q2 versus Q1. We remain confident of delivering long-term sustained growth for our shareholders. Let me now move on to the strategic part of what we’ve been doing.

You would have seen these six pillars of strategy. Just to remind you, it’s about winning with the network, winning with customers, winning with data, winning with mobile money, and then win with cost and win with people. There are further areas of upside and our philosophy that we are providing essential services

and hence partnering a nation helped create a good platform for our business growth. Our strategy is to continue to grow our network while becoming a leading 4G player. 87% of our sites are now on single RAN technology, which means that you can upgrade from 2G to 3G to 4G with a software switch. This, along with our fibre investments that we have put in enables us to generate huge incremental capacities at very low marginal cost. We added more than 2,300 sites and now 70% of our sites are on 4G, with three countries almost at 100% 4G level.

Our total fibre is 44,000 kilometres across our footprint with connectivity between the east and the west coast of Africa. This has resulted in us having a network that we can allocate a greater number of carriers on spectrum to data and specifically to 4G through software upgrades, resulting in creating further headroom for accelerated growth, thereby be the preferred smartphone network in Africa. Not only do we have enough headroom in our current capacity but also the flexibility through software upgrade to add more carriers and more capacity in our network.

In H1 2021 we continued the accelerated customer acquisition through our exclusive and dedicated distribution channels. Our customer base has reached 116 million, which is a 12% growth year on year. We also continued expanding our distribution network with a strong focus on both recharge and SIM card availability especially in the rural areas. This has benefitted us a lot during the pandemic when lockdowns and mobility got restricted. This along with the simple offerings helps us to increase usage per customer.

You will notice from the above table that data customers are growing at about 24% with an ARPU growth of about 10%. This has helped us grow the revenue at 33%. You will notice that the 4G contribution has grown to 30%, helping our average data ARPU from $2.30 per customer to $2.50 per customer. This growth of ARPU has come from a 57% increase in data usage per customer. A 10% ARPU growth at a 57% usage in customers, this is why I was explaining to you about the huge incremental capacities that we are capable of building and adding more. Our data consumption has grown to 90% fuelled by usage of higher value bundles and home broadband. As you would be aware, we have spoken about how we have launched in a big way wireless home broadband, and this is adding big high-value customers and high-value consumption. 4G customers have contributed to only 10% of the overall base but over 50% of the overall data consumed.

Mobile money is a strong growth opportunity we have in Sub-Saharan Africa. We continue to make good progress on this. If we exclude Nigeria where we do not have a payment license yet, our customer penetration is close to 28%, up from 24% last year. This growth has been driven through availability of assured float, distribution expansion, increase in new use cases, and through adding new partnerships and expanding the merchant ecosystem. Most recently we have added new alliances with partners like Standard Chartered, MoneyGram, WorldRemit and Mukuru. These are in addition to those signed earlier with MasterCard, Western Union, Eco Bank and others. At the end of Q2 we had over 20 million Airtel Money customers, representing 30% increase versus last year. The average annualised transaction value now stands at $47 billion.

What’s in this consistent and simple strategy for growth? Before I close and give the floor to Jaideep, let me make a short summary. With this simple strategy with strong on-ground execution and a huge data

network we intend to grow mobile revenue ahead of the industry and in line with our vision of bridging the digital divide in Africa. Our vision is to make Airtel Money the currency of choice and drive financial inclusion in the countries we operate. We continue to work on our asset monetisation which will provide us additional cash inflows. Additionally, there is a potential upside from our fixed wireless home broadband business which has started kicking in, and the enterprise business. Our operating model helps us to continue benefitting from the operating leverage and the effect of scale supported by the network we are building. Thank you. I now hand over to Jaideep.

Jaideep Paul Thank you Raghu and good morning everyone. I will take you through our financial performance for the year ended 30th September 2020. As you have seen in Raghu’s presentation we have delivered another very encouraging set of results. Our constant currency revenue grew 16.4% in H1 2021. However, Q2 2021 growth accelerated to 19.6%. These results are stronger even in the context of the first wave of COVID-19 impact in Q1 where we have seen a drop in the growth rate due to severe lockdown in the initial period. Absolute underlying EBITDA for H1 2021 amounting to $812 million is an increase of over 19% and underlying EBITDA margin stands at 44.7%, margin expansion of 110 basis points.

Leverage during this period was down to 2.2x compared to September last year and broadly stable compared with March 2020. Free cash flow continued to be strong at $319 million, up by about 52%. EPS before exceptional items was 3 cents, down by 20%, mainly due to recognition of derivative gain of $46 million in H1 2020. Excluding one-time derivative gains, restated EPS actually grew by 19%. As mentioned by Raghu, the board has declared an interim dividend of 1.5 cents in line with our new progressive dividend policy. Our reported revenue was up by 10.7% while constant currency growth was 16.4% due to unfavourable foreign exchange movement in certain countries. Growth was recorded across all three key services. Voice revenue grew by over 7%, data revenue by 33%, and Airtel revenue grew by over 30%.

Coming to our three regional performances, first Nigeria. The customer base grew by over 11%; revenue grew 20% on a year on year basis in constant currency. Revenue growth was driven by double digit growth in both voice and data. Our continuous investment in our network, especially the densification of the 4G network, resulted in data usage increase and data revenue growth. EBITDA at $386 million with a margin of almost 54% in reported currency; margin has been expanded by 60 basis points. Operating free cash flow remains healthy at $289 million, up by about 42.6%.

Coming to East Africa, East Africa was our fastest growing region in the first half of this year with revenue growth of almost 22% on a year on year basis in constant currency and customer growth of 14%. Growth was consistent across all services, and five out of six markets have grown at 20% plus. Mobile money continues to be a key driver of growth in most of the East African markets, growing by over 40%. Data revenue and mobile money both together now contribute 46% of East Africa total revenue. EBITDA was at $292 million with a margin of 44.3% in reported currency. Margin has been expanded by 431 basis points in constant currency. Operating free cash flow at $211 million is up by 35%.

Coming to Francophone Africa, our performance in Francophone Africa continued to improve. The customer base grew by almost 9% and revenue grew by 4.4% in constant currency for the first half and 6.4% in Q2 2021. Revenue growth of data and mobile money was partially offset by a decline in voice revenue. Data revenue grew by almost 30% and mobile money grew by 12.5%. EBITDA at $146 million with a margin of almost 33% in reported currency. However, there was a $6 million one-time indirect tax settlement impact which impacted the Francophone underlying EBITDA. Our operating free cash flow at $110 million is up by 54%.

Mobile money continued to deliver a very strong growth as you can see. Our mobile money business now serves over 20 million mobile money customers, representing over 17% of our total customer base and almost 28% if we exclude Nigeria. The customer base grew by almost 30% and was largely driven by further strengthening of our exclusive distribution network. Revenue grew by 30% in constant currency driven by customer growth and growth in transaction value. Underlying EBITDA increased by 31% amounting to $88 million, driven by revenue growth. Underlying EBITDA margin at 48.6% is an improvement of 21 basis points in constant currency.

Moving to EBITDA, H1 2021 EBITDA amounting to $812 million is up by 12.8% in reported currency and 19.3% in constant currency. The EBITDA growth was driven by revenue growth of 16.4% and efficiency in operating expenses. Reported EBITDA margin was 44.7%, an improvement of 85 basis points, and 110 basis points in constant currency. Adverse forex impact of $39 million has contributed mainly in Nigeria and Zambia to offsetting some of the increase in the underlying EBITDA.

In H1 2021 we kept deleveraging, achieving a net debt to EBITDA ratio of 2.2x. Our priority remains to invest in growth and at the same time continue to bring down the leverage ratio. Capex for the first half of the year was $216 million, slightly below last year, largely due to logistics issues as a result of lockdown restrictions in the first half of the year in certain countries. However, our full year guidance for capex remains unchanged between $650 million and $700 million with the focus to expand and strengthen our network.

Over the last few years, we have consistently deleveraged from nearly 9x in FY17 to 2.2x now. The management and board are committed to continue to deleverage our balance sheet, and we have now a target debt to EBITDA ratio below 2x in the medium term. As you have heard from Raghu, the board has approved a new progressive dividend policy. The new policy will allow the business to further focus on our growth opportunities while at the same time deleveraging faster. It will also provide more sustainable and predictable dividends to our shareholders. With this revised policy our aim is to pay a full year base dividend of 4 cents per year with a mid to single high digit progressive increase every year. The board will reassess the dividend policy once our leverage profile will be below 2x. For H1 the board declared an interim dividend of 1.5 cents per share and following the UK’s generally accepted practice of having a higher final dividend.

Free cash flow was $319 million, up by 52%, largely due to the higher underlying EBITDA, about $5 million of reduced interest payment as a result of lower debt, $31 million of lower tangible capex, $30 million benefit in the working capital largely due to higher payment to the creditors in the previous year,

partially offset by an increase of $49 million in cash tax as a result of higher operating profit. Coming to the leverage, over the last few years we have consistently deleveraged and closed the first half of the year with a net debt to EBITDA ratio of 2.2x, broadly in line with our recent trends. Our foreign currency debt has slightly decreased and in the medium term we aim at reducing it further by pushing more debt down to the OpCos and use of proceeds from the possible asset monetisation to repay the market debt.

Earnings per share before exceptional items. Last year EPS of 3.7 cents had a one-time benefit from recognition of a derivative gain of $46 million. Excluding the one-time gain our restated EPS grew by 19% from 2.5 cents to 3 cents. Higher operating profit was partially offset by a higher tax charge on account of higher operating profit and dividend distribution tax. However, the effective tax rate was 47%, broadly in line with our previous period.

So just to summarise H1, despite COVID-19 impact in Q1 2021 we delivered an encouraging set of results with a good performance against all metrics. We continue to deliver double digit revenue growth with all services, voice, data and mobile money, contributing to the growth. EBITDA grew even faster. We expanded our EBITDA margin by 110 basis points in constant currency during H1 2021. There was strong cash generation during the period. We continued to deleverage and reached a leverage ratio of 2.2x. Our outlook in the medium term remains unchanged as we continue the growth momentum.

As you are aware, Africa lagged the spread of COVID-19 during the first wave. Based on our experience during the first wave of the pandemic relevant risk mitigation plans are already in place to take care of any possible second wave. Thank you. Now I will hand over to the moderator for questions and answers.

Operator Ladies and gentlemen, I would just like to give another reminder. If anyone would like to ask a question on the conference, you’re welcome to press * and then 1 on your touchtone phone. For the webcast please use the textbox at the bottom to submit your questions. Our first question is from Filippo Cerasi, Goldman Sachs.

Filippo Cerasi Hi. This is Filippo Cerasi from Goldman Sachs. Congratulations on the strong set of results this morning and thank you for the opportunity to ask questions. Three questions on my side if you don’t mind. Firstly, if you can provide us with an update on cash repatriation across the footprint, particularly in Nigeria, or the thought process around dividend distribution at the group level and refinancing. And the second question is: are any of the regulators urging you to list any of the underlying subsidiaries? And my third would be on the tower sales programme. I’d appreciate an update on where we are, and if you could provide some colour there that would be quite helpful. Thank you.

Jaideep Paul Okay. So, on cash repatriation until about March we didn’t have any issue in upstreaming cash from Nigeria. Since March of course the liquidity has tightened as a result of the impact of low oil prices in Nigeria and obviously the impact on the availabilities because of the foreign currency reserve. It’s too early to say how long this liquidity tightening will last. Our experience says that in the past this was

temporary for a few quarters. However, with the crude price stabilising at around $40 and stable forex reserves we expect the foreign currency availability stabilising probably in the coming quarters. It’s difficult to say when, but we expect it will start moving up as we progress during the year. In some of the countries we have a little slowdown. In Malawi that is another country. The dollars are available, but it is available in shorter value. But the rest of the other places there is absolutely no issue.

Coming to the second one, listing of a subsidiary, currently there is no regulatory requirement of listing anywhere. If we come to know about any other requirement which is coming up in future, we will let you know. On the tower sales, we have actively pursued a tower sale possibility in five countries, but currently there is nothing to be disclosed because it’s at the initial stage of discussion. So, when something gets materialised we will definitely let you know in appropriate time.

Filippo Cerasi All right. Thank you.

Operator Our next question is from Dilya Ibragimova, Citi.

Dilya Ibragimova Hi. Thank you very much for the opportunity to ask questions and congratulations on the strong results. I have a few questions if I may. The first is maybe just following up on the repatriation question. How many OpCos do you expect to pay dividends maybe based on the dividend that has been announced or based on the decisions that have been made by the operating company to pay a dividend? Not how many have paid already but how many you expect to pay. That would be great. The second is on Tanzania, if you could give some colour on the SIM registration. I think there is a double regulation.

What’s the impact you have seen so far, whether you have gained share on the back of this, whether you have been able maybe to keep customers using your SIM on the back of the pricing that you offer? [Inaudible] Tanzania has not been affected by SIM registration at all, so just some colour there would be really appreciated. And my last question is again on Tanzania. Maybe if you could explain a bit on the impact the resolution with the government would have on a potential tower sale. Is the tower fully owned by the entity where you share ownership with the government or are there any share payables that are there that may affect your proceeds, if and when the tower sales materialise? Thanks.

Jaideep Paul To answer the first question, how many countries pay a dividend, obviously we don’t give country-wise detail but roughly slightly above half of our operating units are dividend paying companies, slightly above half. So we have 14 units, so roughly about seven or eight units are dividend paying units. I’m going to talk about the SIM registration, but before that on Tanzania I can tell you as per the settlement agreement the government has passed legislation for removing the requirement of a tower company listing. And after that we have progressed quite well with a couple of tower companies to see if we can sell the towers. Currently the towers are owned by Airtel Tanzania. So, all the towers, about 1,500 are owned by Airtel Tanzania. Of course, we have taken towers of some of the tower companies. That’s different. So, these

1,500 towers we are looking at selling off to a tower company. As I said in the beginning, we will let you know when it materialises and what the extent of money will be repatriated to the majority shareholder or what the distribution will be. Those will be communicated as the tower sale gets materialised. I request Raghu to address the second question please.

Raghunath Mandava This is on SIM registration and the increased revising norms of the Tanzanian government. They have a national ID card and we have been correcting our customer base. So, we are in the last couple of million customers only which need to be corrected. So, I think we are quite compliant to the whole thing. And as I would have explained before, please appreciate that most of these markets are a dual SIM nature. Even if 4% or 5% do not get finally registered they will be on one provider or the other. Overall revenues of the industry do not get impacted much. We have seen that in Malawi where we had to drop off 25% of the customers. The revenue dropped only by about 4% which came back in less than two months. So, I think we’re on course on the SIM registration. Over 14 countries these improved KYC norms have been coming country after country, and by now we are a reasonably well-oiled machine which knows how to manage this thing. The teams are able to handle them quite well. Thank you.

Dilya Ibragimova Thank you.

Operator Our next question is from John Kim of UBS. John, your line is live. It seems we have no response from that line. Our next question is from Sunil Rajgopal of HSBC.

Sunil Rajgopal Good morning everyone. Thank you for asking questions. I have two questions. Firstly, on the dividends, what has been the change in management thinking with regarding to the revised dividends? What has led to the change from keeping the FCF as the base for dividends versus the base of 4 cents? And secondly, what are you seeing in terms of trends in Kenya and what are the options there? And if I can just add one more question to the line, what is the progress that you have seen in terms of PBS licenses in Nigeria and what should we be expecting of any changes that might be happening there? Thank you.

Jaideep Paul Raghu, would you like to take the question, or I will deal with it?

Raghunath Mandava Go ahead.

Jaideep Paul So, I will address the first question, then I will hand over to Raghu. On the dividend side, as we have seen from today’s results the business continues to execute well, delivering strong growth across its markets. We continue to see significant value creation and investment opportunities within the group. We have consistently deleveraged over the last few years and ended the half with a leverage ratio of 2.2x.

Our aim is now to deleverage faster to get it down below 2x. Given the significant opportunities to invest in future growth and the aim to continue to reduce leverage the board has taken a decision to rebase the dividend at 4 cents for 2021 and adopt a progressive dividend policy which aims at growing the dividend mid to high single digit every year from the rebased level, which is 4 cents.

This new policy will not only allow for a faster deleverage but also provide shareholders with a certainty over a certain level of dividend. Having said so, once we go down below 2x in terms of the leverage ratio the board can always reassess the dividend policy and decide accordingly. But fundamentally the objective is to continue to deleverage and bring it down below 2x, at the same time invest in the business, and also the third, the point is that there is a certainty of dividend return to the shareholders. Raghu, two and three you can take.

Raghunath Mandava I was not very clear on the Kenya part. First let me answer the Nigeria part. Nigeria we are due for a license renewal next year and we think it’s a procedural issue with the payments that are already fixed for all the licenses. So that should not be an issue. The second issue on the payment bank license, as we told before the government has asked mobile operators to apply late 2018. Four of them have applied. Both of the leading players have not got our license and we’re still waiting. The positive thing is that we have not been rejected. So we are waiting for the governor to be positive and declare it at the earliest. However, I have no indication on time. On Kenya we have called off the merger with Telkom Kenya because of undue delays and it was hurting our investments. So we have gone alone now and we are starting investments in a big way and expanding our network so as to continue to gain in Kenya. We have been performing quite well in Kenya, and I think with these new network additions we will be able to take the next leap. I hope that answers.

Sunil Rajgopal Yeah, thank you very much. So, if I can just follow up with maybe just one more question. Should the investors be thinking about the indications of the dividend if that is any indication of the capex that is likely to go into the business next year? Because we’ve seen some of the operators pulling back the capex this year and potentially moving some of it to next year. Is there an indication on what the investment levels will be for next year? That would be it.

Raghunath Mandava If you really look at the way we have been doing, we’ve been modernising our network and 80% of our network is single RAN. So now our next level of focus has been to continue to expand our network coverage and also to get better transmission capabilities and fibre capacities on data. As we told you before, the first half was marginally below that of last year. We continue to hold our estimates at $650 million to $700 million on capex for this year. I am sure we will spend the same next year. Africa has been relatively less impacted, and as you see the business results are also in line with our expectations of growth. Telecom is a lot more essential now than ever before. And I think it is very important that we continue to invest so as to serve the needs of our growing customer base. Sunil Rajgopal Thank you very much.

Operator Our next question is from Evgeny Annenkov of BofA.

Evgeny Annenkov Hi. It’s Evgeny Annenkov of Bank of America. I have two questions please. Thank you for the presentation. The first one is on your East Africa margins. Could you please give more colour on improvement, which cost cuts you’ve done the last quarter and could this be sustainable in the next quarters, this margin progression? Secondly, could you please update us on your effective tax rate guidance? Thank you.

Raghunath Mandava Jaideep, I’ll take the first and hand over the second to you. Let me be very clear. We’ve always said that the way our operating model is a large fixed cost model, as long as we are able to generate revenues with 50% plus EBITDA margins you will continue to see EBITDA growth happening as long as revenue growth happens handsomely. East Africa has grown well above the 20% mark, and with this sort of revenue growth and with costs not changing, with 50% plus fall through of the EBITDA margin flow through on incremental revenues you are able to see this growth. If we can sustain this growth we will be able to grow our EBITDA.

The second thing that we will have to note about East Africa being at about 45% EBITDA now is that East Africa has some of our weaker market share countries like Tanzania, Kenya and Rwanda, while we have strong market share countries like Uganda, Zambia and Malawi. So our EBITDA mixture is more the mixture of these higher EBITDA countries and the slightly lower EBITDA margin countries. This also means that when the lower EBITDA margins start picking up revenues the flow through is much better and we are able to see that flow through coming into East Africa.

Jaideep Paul On effective tax rate, as you have seen from the results H1 2021 effective ETR was 47% which is slightly lower than the last year FY20 effective tax rate of 48%. The decrease is due to the profit mix change as well as amongst the operating entities the mix of profit got changed. We expect to maintain a very similar level of effective tax rate throughout this financial year. 47% by and large will remain at the same level for the full year.

Evgeny Annenkov Thank you so much.

Operator Our next question is from Alistair Jones from Newstreet Research.

Alistair Jones Hi. I’ve got three questions if you don’t mind. Firstly I’d be interested to hear the outlook for mobile money. It’s more interesting to hear how customer behaviour is changing post COVID. If I look at your transaction

value it is growing about 25% year on year for the last few quarters and then it has grown 56% in this quarter, so clearly that’s positive and there is momentum there. It would be interesting to see what you’re seeing in terms of the customer usage of the mobile money and how that’s changing in the current environment.

The second one is just following up on the Nigerian license question from earlier. You mentioned that it would be a fixed fee for all the licenses. Is that how it works? Is it the same price as it was for the last time? I know there is access to the spectrum, but then there is also the license to use the spectrum. I think they are two different things. I’m just trying to understand how we should think about the risk around that. And then finally, you mentioned interestingly that you’d put various plans in plans to try and mitigate against the risk of a second wave and to try and minimise the impact that it would have on your business. I’d be interested to understand an example of how you’ve changed the business to try and minimise the risk if there is a second wave that develops in these countries. Thank you.

Raghunath Mandava First let me answer the mobile money question. I will request Jaideep to help on the Nigeria licenses. He is a lot more experienced on Nigeria on the amount. And I will answer the first question about mobile money and the second wave of the pandemic part of it. Firstly on mobile money usage, the biggest reason why people use mobile money is because the banking penetration is not very high in Africa. And more than bank penetration the availability of banking infrastructure is much lower. That means people will have to travel longer distances to reach a bank. What we have done through mobile money is a series of agents’ kiosks and our own branches, mobile money branches. We’ve been able to establish a wide- reaching network.

Because of this and because of the mobility restrictions during the pandemic people have been able to use a lot more of mobile money. As you rightly said, a 56% jump in transaction values has gone very well. The revenue did not flow through to that extent because we did do some free giveaways, free P2P and other measures during the pandemic in order to help our customers. So mobile money will continue to grow. The current pandemic has actually given a big boost or an impetus, accelerated the whole push into mobile money.

So what do people use for mobile money? When you do not have a banking system the basic services of banking is withdrawing money and spending somewhere or depositing money for safety purposes. So when people travel from one place to the other they would rather put money in Airtel Money, travel to the next place and then withdraw it. Or a migrant working in a big city like Kampala or Lusaka sends money to his family in a village and they use mobile money. So a large amount of our transactions are cash in/cash out followed by P2P transfer.

The next [unclear] in mobile money is the big one about payment of services. It is so integrated that even people like me use mobile money to pay city bills and everything else because you don’t have to travel there. Mobile money comes in benefit wherever the distances between the customer and where your spend is remote spending. The last one comes into the merchant ecosystem. How are we growing it? As spoke to you, there is a lot of money flowing in international money transfers. People in deep rural areas

will also be able to get it directly on mobile money. So a series of measures are being taken to further accelerate mobile money growth, and surely the pandemic is giving an impetus because people are more scared of handling cash, more worried about travelling. And hence the remote movement of mobile funds is happening a lot more.

The third one, the question was on the second wave of the pandemic. In a telecoms business like ours what are we trying to do? When people cannot travel, they cannot move, they need to communicate over a tele distance. That means keeping up our networks has to be the most important priority for us. In spite of our lockdowns the amount of preparedness before the lockdowns that our teams took has been remarkable. We stocked up on greater fuel at each site. Spare parts are available. We worked very hard in order to keep our network up. Actually our network uptimes have been the highest ever in our record during this pandemic period at well above 99.6%, and in some countries even higher.

The second thing that we’ve done is let me just visualise a customer who is living in a small village or a remote place. If they need to do a recharge buying in the morning – and most of them do daily recharges – they need to go to the nearest shop. The minute Airtel Money penetration happens they can recharge themselves. Or they need to have a recharge availability very close to their houses. The spread of recharge availability and the growth of recharge availability especially in rural areas is through a very different distribution mechanism that we started building. We started building it about a year ago and it has really helped during the pandemic in accelerating our growth through our Airtel Money branches and also our rural distribution enhancement. So between distribution this has happened. This is how we think. Keeping our network up as a service to the people is our primary role, and I think that is the way we are going to keep our networks. I think that’s fine. I will hand it over to Jaideep.

Jaideep Paul Okay. So on the Nigeria license, the Nigeria license is falling due sometime late next year I think around November/December. The discussion has not yet started in terms of what the fees will be etc. But I can give you the historical. Historically it was roughly $285 million to $300 million for a 15 year license. That was the historical data point. That comes with a certain quantity of 900 MHz, 1800 and 2100. And we have also taken additional spectrum, but that is over and above this. That is falling due very recently we have taken 2600 MHz for ten years. That comes separately. That will fall due in ten years. We have taken only last year. But the basic license renewal, in the past it was renewed at about $285 million roughly. That’s falling due sometime late next year.

Alistair Jones That’s very helpful. Thank you.

Operator We have a follow up question from Dilya Ibragimova of Citi.

Dilya Ibragimova Hi. Thanks very much for the opportunity for questions. I just had a couple. You mentioned in the release that in Nigeria there has been a benefit of some bad debt reversal. If you could quantify that, that would

be very helpful. The second question is also on mobile money in East Africa. If you could give us some more colour how the transaction changes and maybe what share of transactions are related to airtime top-ups or airtime top-ups done electronically via mobile money? That would be very helpful. Thank you.

Jaideep Paul Okay. Nigeria bad debt is very insignificant. It’s not a very significant amount. It’s roughly $2 million. So during the pandemic some of the payments got delayed so we had to take the provision, and that has got reversed. So that’s not a very significant amount.

Raghunath Mandava Mobile money, as I explained before the mobile money use cases have always been on cash and also for recharging. To have mobile money penetration growing in East Africa we are also seeing a positive impact on our mobile revenues because a customer is able to recharge early morning instead of going to a shop whenever he or she can go. So, now in the key countries that we are able to see almost 30% to 40% of our recharges have started to move through the mobile money route. This not only gives us an advantage on our costs but also on increased consumption by our customers. There has also been an increased usage because of the free P2P that we have run, a very big jump in our P2P consumption which is continuing to grow. And the overall transaction values are up. Thank you. I hope that answers.

Dilya Ibragimova Yes. Thank you very much.

Operator We have a follow-up question from John Kim of UBS. John, please note that we cannot hear you. Please make sure that your phone is unmuted.

John Kim Hi. Can you hear me now?

Raghunath Mandava Yes. We lost you earlier. Yes, John, we can hear you.

John Kim Great. I’ll make it quick. On the OpCo leverage what is your ability to lever at the OpCo level? Or put slightly differently, if the FX restrictions exist for a period of time, call it six to 12 months, what are your options to try and mitigate your exposure to that OpCo from a corporate cash flow perspective? A second question on mobile money, given the strength of the growth is it mostly driven by growth in the distribution? Is it increased customer usage? What sort of concessions are you having to give away on the transactions? Are you having to give away similar concessions as M-PESA in Kenya, and how prevalent is that in the footprint? The last question is on Francophone margins. Where do you look for those to stabilise, and how soon? Thanks so much.

Raghunath Mandava

Jaideep, if you can answer the first one then I’ll handle the others.

Jaideep Paul Specific to Nigeria, if I understand the question you are asking what is Nigeria leverage, right? What is the question? Sorry.

John Kim Sure. My understanding is you are having cash flow issues out of Nigeria similar to other corporates. The broad based question is what your ability to mitigate that is. So if oil is weak and you’re not able to get Dollar liquidity for the next 12 months are there certain measures or hedges that you can put into place? When we look at other operators like MTN they did lever at the OpCo, taking Naira debt to try and minimise the mismatch between Dollar and local currency cash flows. I’m wondering how you’re thinking about the same set of problems. Thanks.

Jaideep Paul Yes. Okay. So, to answer your question, first of all Nigeria before this quarter didn’t have any debt other than financing obligation. And financing obligation of Nigeria is also payable in local currency but it is marked to a fixed spot rate kind of a thing. So it is payable in Naira. It is not payable in Dollars. So even though we say that financing obligation is in Dollar this is payable in local currency converted into a spot rate or a fixed rate depending on the contract. To answer your second question, Nigeria didn’t have any debt before this. We have taken a small debt there to pay off our Dollar denominated vendors, especially the capex vendors.

We are now actively considering and discussing with some of the vendors for extended credit so that we can get a 12 to 18 months credit to get over this situation. And of course we have local Naira currency kept in various banks as a fixed deposit because currently the availability of Dollars is a question mark. These are a few steps which we have taken. And we are also trying to see some other opportunities on discussion with the bankers to see if some other opportunities exist to do some kind of an upstreaming possibility in the coming months.

Raghunath Mandava Okay. Let me address the two parts. The first is on mobile money. What are we seeing? Actually most of the free giveaways like some of the countries did, were largely during the early part of the year, that is during the first quarter of March/April versus June. Slowly we have started charging the P2P because of other issues. So it is coming back. But nevertheless, if you really look at it our customer growth is 30%. Our transaction growth is about 57%. That means there is a broadly 27% growth in transaction per customer. This is happening because most of them are staying at home and are preferring to transact. And there are some incremental transactions we are getting from international money transfer and some merchant payments and service payments.

The second thing that we are talking about is distribution is a very critical part to making sure that mobile money is at arm’s length so as we get more and more customers being able to access mobile money.

So you’d see a part of our revenues, a 33% growth is coming from roughly a 30% customer growth. The ARPU growth has not been more than 2% or 3% because of the free giveaways, but our transaction growth has been per customer at about 24% or 25%. So this is how it is going.

Now let me come to the second question of Francophone margins. In telecoms the margins for Africa are at 45%. However, our operating profit is at about 28% because of the high fixed assets that we need to put on in an industry like ours. So you will need to run a business at 45% to 50% margin to even get a 25% or 30% operating profit. If you are today at 45% you will see that Nigeria is at 50%. You see the East Africa margins at 45%. There are a few countries above 50%. In my belief we should start moving correcting one country after the other. That’s been our journey in the last four years. Country after country we started improving and correcting and started moving them towards the 45% to 50% EBITDA margin mark.

We have done that to quite a few countries. And at some point of time even in Francophone Africa we have a couple of countries there, but we have some countries which are low. Like in East Africa there is a mix of weaker and stronger countries. You have the same in Francophone. The second part is as the revenues start growing and the incremental EBITDA margins are around 50% you should start seeing an EBITDA growth jump, initially bigger and then slower. I think this is what my expectation is. I think in Africa because the high fixed assets that we are investing in, we should start aspiring to a 45% to 50% EBITDA margin. How we get there is a challenge for us.

John Kim Great. Thanks so much.

Operator We will now take questions from the webcast.

Webcast Raghu, we’ve got some questions from the webcast. Most of them have already been answered. I think there are a couple that warrant attention. One is across Nigeria and more significant countries elsewhere do you see you are gaining market share from smaller players or from your direct bigger competitors?

Raghunath Mandava Good question, but I don’t really worry about it. The big key thing in a telecom industry is that we’re an essential service with 45% unique customer penetration. Of this 45%, 50% have a smartphone and hence data usage. Mobile money penetration excluding Nigeria is about 30%. This is a huge market for us to grow. Obviously we’ve been growing and exploiting this opportunity by serving these customers who have been unserved until now. As you see these numbers – and some of you will have access to the numbers of the industry as much as I do – you will see that we are perhaps growing faster in quite a few countries ahead of the industry. So in some places we are growing ahead of the smaller players and also some of the direct competition.

Webcast

Thank you Raghu. From Salome at UBS a question on Francophone Africa. So, the Francophone region used to be lagging the group performance. Can you please give us an idea of which countries in the region are performing well? And what is your strategy in the region? Is there any potential to exit some non-performing markets?

Raghunath Mandava We don’t get into country-wise details at this stage. But nevertheless, if you see Francophone Africa about four quarters back we were at -2% revenue growth and I was explaining that we have delayed our 4G investments, and as 4G investments come in we will start seeing the growth. Today you are able to see 4% and in Q2 almost a 6% revenue growth. Mind you, the advantage of Francophone Africa while it contributes 24% of our revenues is also that this is largely hard currency. The West African Franc and the Dollar of DRC are very hard currencies. So you have an advantage there in terms of the currencies that we are holding. To some extent I would also expect a slightly lower growth in constant currency terms here.

However, we have started seeing this growth rate happen and some of the countries have started hitting double digit growth. Some of our Francophone countries have struggled a bit, and we are trying to fix this issue. Some of them are deeply landlocked and huge countries. Chad, Niger, Gabon, they are huge land geographies and hence the ability of fibre and transmission penetration from the coast is a difficult task. So you will see the kicking of data growth will come in a little later than what we have seen in the East Africa and Nigerian markets. So I think it’s more of a timing issue and really not of concern. I’m sure our teams are focussing on executing our strategy in order to ensure that growth. Thank you.

Webcast Thank you Raghu. The last one is if Jaideep could give an overview of the effective interest rate on the debt as well as what is the reason for the slight increase of net debt.

Jaideep Paul Sure. Just give me a second. So an overview of the interest cost, if I have to give you details on interest cost, the weighted average interest rate remains at 4.8% and that’s flat on the debt part of it. Of course there is a devaluation impact which has hit us in H1. That’s actually under the finance cost. And if you see the swing between last year and this year the swing is about $44 million. Last year there was a gain. This year there is a forex loss of $35 million. Last year there was a gain of roughly $9 million. So that’s a $44 million swing which is sitting in the finance cost. So largely this is the second item. And the third thing is obviously you are aware that we had cash coming in the pre-IPO and IPO stage. So in Q2 our cash into the fixed deposit was roughly slightly higher than $1 billion. And that was generating about 2.5% of fixed deposit rate interest. Obviously over a period of time this interest rate has gone down. That has an impact of roughly $10 million of lower finance income. Overall, our fundamental cost of debt remains flat at 4.8%.

Webcast Thank you. And the reason for the slight increase in net debt?

Jaideep Paul The slight increase in debt. Just a second. So one, of course we have paid dividend of $113 million. So that’s a reduction of cash. The debt increase is because we have taken some additional loan in Nigeria, additional debt in Nigeria. That’s temporary in nature to pay off some of the capex vendors. So these are the two major reasons where the debt has marginally gone up. And the lease obligation increase we have seen is because of our additional sites which we have put up over the last one year. That has an impact of roughly about $42 million increase in the lease obligation.

Webcast Thank you Jaideep. Irene, I think if there are no more questions, I think we can end the call.

Operator Thank you. We have no further questions. That does conclude this conference and webcast. You may now disconnect.