Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Here’s the entire text of the Q&A from Orascom Telecom’s (ticker: ORSTF) Q3 2005 conference call. The prepared remarks are here.

Questions and Answers

Rhys Summerton:

I just wanted to check on two things, firstly could you explain to us your churn in Algeria, in more detail, and secondly looking at the numbers I get the impression that there is still quite a pricing pressure in Pakistan and I think in the fourth quarter you are going to see further pressure reductions on some of the on-net call pricing, can you give us your outlook on what you anticipate for next year or the year after. Do you expect prices to start stabilizing in Pakistan? I have a question for Naguib, having heard from the press about Weather and Orascom; could you give us an update on your latest thoughts on the group structure going forward?

NS:

On the last question, I explained in a press conference in Barcelona, we are not going to be merging Wind and Orascom Telecom, what I have always said we would like to get synergies between these two assets and bring them under one hat which we have done under Weather. So Weather is now the new Holding that has control over Orascom Telecom 51% and has control over Wind which will be 100% after the second closing. The vision now is to wait until we de-leverage and reach to an acceptable level which we expect will happen in 2006 and the target now is to look for a possible listing in the last quarter of 2006 of Weather, I repeat of Weather not Wind, not OT, and no merging. Listing will be most probable in Milan Stock Exchange.

AM:

Ok, for your two first questions on churn, as you know half of this churn is internal churn so there is nothing new here, I think we have taken measures to reduce this churn, so I expect next year will be a more normalized churn of around 25%, but the numbers are inflated from the internal churn we saw in the first half and also in July and middle of August. So I think first of all there is a lot of internal churn in this number, so it is a matter of cost, but in terms of market share is not as bad as it looks. And second point is that this will come back to a more normalized level around 20-25% next year.

RS:

So in the fourth quarter are you going to see a decline in the churn in Algeria?

AM:

I would target around 40% overall for the end of this year. On Pakistan as I said, the drop in ARPU is primary due to the drop in the mobile termination rate, yes there has been some reduction in prices and I suppose that we can assume that there are going to be further price cuts this quarter. But that does not necessarily impact the ARPU because of the elasticity. So what is driving APRU is the penetration of lower income segments, mobile termination rates are now in the level of 1.6 rupee in Pakistan, so I do not expect much more drop in the near future.

RS:

Should we expect that ARPU to stabilize in the beginning of next year in Pakistan?

AM:

ARPU is going to continue to fall just because the growth is phenomenal, so you are going to see 20% ARPU year-over-year drop simply due to the growth.

Operator:

Your next question comes from Sergei Arsenyev from Goldman Sachs, please ask your question.

Sergei Arsenyev:

Good afternoon, I have a question on Algeria please, if you look at your numbers, you report 64% market share in the third quarter, if you look at the regulators’ website they report 56% market share for Orascom. Can you explain the difference?

NS:

We are right and he is wrong.

SA:

The regulator is wrong?

NS:

Yes.

AM:

Let me tell you exactly how is this calculated; I would like you to call Wataniya and ask them their rule for disclosing their customer base, they will tell you the following: a customer is someone who bought a line, so there is no termination. I challenge you to go to Algerie Telecom and I think it is going to be difficult, they have no rule, we have a very strict rule.

NS:

Algerie Telecom’s rule is also whoever bought a line.

AM:

Yes, exactly the same rule as Wataniya. We have a strict rule, which is basically if a customer has not made any call for three months he is not a subscriber and what we do is that we have a software on our switch which basically monitors all the calls in and out and calculates the market share, because obviously as we have the biggest market share; we are able to know on which other network our customers are having their calls. That is our estimation. This is a rough estimation yet we think it is a very good one because we have the bulk of market share, now what the regulator does is he takes whatever Algerie Telecom or Wataniya tells him, which are the reported subscribers, which is possibly right according to their rules, but if you take the normal rules which is a prudent rule, then as Naguib says we are right.

NS:

Now I also want to add something else. We have no interest to propagate our accurate market share that we have on our financials. On our financials we have to be accurate, but when it comes to local press and the regulator we are really happy to be under estimated more than over estimated.

SA:

Can I ask you on Iraq and this fantastic 77% EBITDA margin in the quarter, what is the outlook, where do you see this staying?

NS:

I think it is going to stay, because the thing is in Iraq we have a lot of problems to roll-out as fast as we would like to. The speed of the rollout in Iraq is quite slow, I would say inhibited by the security situation. Which means out network utilization is always at 100%, with the ARPUs stabilizing now and the number of subscribers growing, we expect the margins to remain as is if not improve.

Operator:

Your next question comes from Alex Wright from UBS; please go ahead with your question.

Alex Wright:

If I could just expand on the margins trends in some of the main markets, with Algeria first of all; there has been improvement in the margins in the last quarter, yet you have not yet resolved the dispute with the incumbent operator regarding the leased lines costs and site rentals, so I just wanted you to highlight the reasons for the margins improvement are there and if the margins could go higher once this issue has been resolved?

AM:

It is a very complex matter, some of the dispute has been resolved some of them remain unresolved. So, you have the impact of half of which is evident in the third quarter and the rest will be in the fourth quarter.

AW:

So what has actually been resolved up until now?

AM:

What has been resolved is the call location and site rental price. What has not yet been resolved is the termination rate and the leased lines.

AW:

Ok, and do you expect that to be resolved sometime in the fourth quarter?

AM:

Yes.

AW:

So basically the margins can go higher than the current level of 54% once the issue is resolved?

NS:

Well it depends on how they will be resolved, they might be resolved positively and then you see the margin improvement or they will not be resolved as positively as we want and you would see the margin improvement similar to this quarter.

AW:

You mentioned termination rates which I have not realized were part of the ongoing discussion with the regulator and the incumbent is there a possibility that the fixed mobile termination rate will be reduced?

AM:

Yes. It is a very complex matter, but we are assuming a certain rate because there is no written agreement and so depending on what the final agreement shall be, we are assuming now the rate will be well below what was in the original agreement. Whether we get to this rate or higher it depends obviously on the negotiations.

AW:

Ok thank you, with regards to Pakistan you have seen some margin improvement there which is again highlighted as the result of the activation tax subsidy being removed, if I remember correctly at the time you said margins were going to improve towards the mid 40s in the second half, you still think that is going to be achieved sometime in the fourth quarter?

AM:

Yes. I think it could improve a couple of percentages 1% or 2% for the fourth quarter.

AW:

And what would that be on the back of that increase of the economies of scale?

AM:

The first one is that there is the leased line and this is a long term effect because we are basically fine as we speak, that could impact the margin and through the economies of scale.

AW:

Ok fine, and finally just on Iraq just a follow up on the previous question could you just explain what caused the rapid improvement in margins?

AM:

There is a bit of inter-company revenue which was booked in the second quarter so that it had some impact not on the margin but on the revenue, obviously the reason why the margin looks better but if you look at the revenue it is down actually quarter on quarter.

AW:

Right but I am sorry I did not quite understand the last point; you are saying that the inter-company revenue did impact on the revenue in the third quarter?

AM:

What we did is that there was some revenue in the second quarter which was intercompany revenue which was qualified as revenue and we basically took them down in the third quarter; which means that the revenues are lower but the margins are intact.

AW:

So in an underline basis as you mentioned before you think that some of the high 70s could well be sustainable for the time being?

AM: Yes. I think in this number you have as you see the revenue number impacted, so you should see this margin going down a little bit, because of this effect, but the EBITDA should increase; the margin will be reduced, because obviously the charge of revenue we took in the third quarter.

AW:

Right, but let us say 12-18 months further down the line when the other operators have had longer to actually expand their networks in your own area of the central region. Are you still making the assumption that kind of level of profitability can be achieved?

AM:

Look, yes if the market was completely opened and you had three operators in Baghdad operating freely without the risk of being shot at, then you are right, but the issue is it is also very difficult for them to rollout the network.

NS:

I can give you an example, we have approximately 500 base stations and they have about 50 and the 500 were built over two years and were built in times when actually the security situation was far better than now, so you estimate the impact and even if you cover with 50, the capacity that you can obtain on 50 base stations is not equivalent to what we can provide.

Operator:

Your next question comes from Walah Hasim, please ask your question.

Walah Hasim:

Hello, I would like to ask two questions please, the first one is about the CAPEX of US$ 1.4 billion. From what we understood the probable synergies gained from the acquisition of Wind is that there is going to be a cost of savings for both OT and Wind. So I would like to ask if US$ 1.4 billion in CAPEX is after the closing of the Weather and Wind deal? This was the first question; the second question is about if you have any comments about Turkey and Nigeria and when the decision going to be taken and if there are any other markets that the company is eyeing at this point of time? Thank you very much.

NS:

On the first question the synergies that has been obtained only I would say in last quarter or maybe even in the third quarter is only around US$ 20 million of savings, because the synergies for Orascom Telecom will start impacting next year’s CAPEX. As far as Wind we have announced already that we have saved €100 million on the course and it was very apparent that Orascom Telecom was obtaining far better prices on its equipment than Wind. On your second question, we have only two targets between now and year end, which is the Telsim tender which is supposed to take place on December 13 th, 2005.

And Nigeria, which is suppose take place also in December, however, we and other companies are requesting an extension due to the very limited information provided by the Nigerian authorities on the debt level of Nitel. So we are hopeful that it will be extended, these are the only two targets we are looking at currently.

Operator:

Next question comes from Benita Mikolajewicz from ING, please ask your question.

Benita Mikolajewicz:

Good afternoon, I have an impression looking at the market share development; loses in market share a little bit bigger this quarter than before and if I could look at your share of net additions it dropped below 50% on the main markets, so my question is whether you are going to become more aggressive going forward in terms of protecting your market share?

NS:

But I think this quarter is not, if you look at our first two quarters and if you see in our fourth quarter, this quarter is a little confusing because of the different churn that we have experienced. If you understand, the number also of subscribers in this quarter are in my personal opinion are lower than the first two and will be lower than the last quarter, which means that the absolute term it is not a very significant quarter. Having said so, as I said the numbers that we are getting that are percentages of gross adds are far higher, so there might be some confusion on the way of booking these numbers by our competitors.

BM:

Ok thank you, I have two more questions if I may, first one on Iraqi license do you know anything more about extending this license? And maybe about the new tender process for further licenses?

NS:

No, the only thing which is certain now that there is an extension of six months, beyond that the authorities have announced that they intend to have the tender in six months from now for the new licenses. Our take on that, as I mentioned on our road shows is that we really indifferent, we either win, or if we do not win we still own the subscribers and the network which we estimate the value of this over the billion dollars figure, so we are quite comfortable to wait and bid for the license or having it extended as it being extended right now.

BM:

One more thing on your Ring subsidiary, I remember that you were quite optimistic about growth going forward having such revenues drop quarter on quarter, so maybe you can tell us a bit more on what to expect going forward?

AM:

That is the same issue as in Iraqna, so the inter-company revenue was revenue from Ring and Iraqna, so this is the reason why the revenue dropped a little bit from quarter to quarter.

Operator:

The next question comes from Sundeep Bihani of Lehman Brothers, please ask your question.

Sundeep Bihani:

Congratulations gentlemen on the good quarter, just a follow up question; one is on the ARPU are you happy with the kind of decline you are seeing in your markets especially in Algeria where you saw a 12% quarter over quarter decline last quarter 7% this quarter. Again in Iraq it is 12% down in Tunisia it is 7% down, are you happy with this sharp ARPU decline. My second question is on your revenue growth do you have any internal targets for the full company given that you have delivered a revenue with a 4% quarter on quarter compared to most of the emerging markets here are delivering 8%-10%. My third question is on the denomination rate on cards which as you mentioned in Pakistan now in 2006 we are seeing another 20% rate card so does this in any way impede your competition on on-net tariffs? Thank you

NS:

Aldo you want to take this, just on the first question on the decline of the ARPU, we are happy as long as this decline, annualized, is in the ranges of 25-30%. Because this is the cost saving we can achieve on our CAPEX side as per sub CAPEX and our acquisition costs. So as long as the decline of ARPUs does not exceed 30% on an annual basis, we are happy. Once it exceeds that, then that will impact our margin going forward. Aldo you want to do the rest?

AM:

The revenue as I explained the revenue for this quarter is a little bit abnormal because of the effect I told you about. So I think you have to look once again, I think in a growth company like ours it is a little unfair to look at quarter per quarter revenue growth but I think you have to look at more year-over-year. We are not concerned by this quarterly revenue growth, which is lower than the first two quarters due to the particular effect. As far as Pakistan is concerned, I am not sure I understand your question. We have talked about the mobile termination rate.

NS:

I understand the question. You were worried about the termination. The termination really is a functional of the fixed line and the fixed line right now in Pakistan is not really growing at all in any kind of comparison to the mobile. So when they reduce the termination it is mainly targeted towards the fixed line. As far as operator to operator, we have now in this quarter introduced the lowest on-net tariff in Pakistan and we will celebrate in the coming weeks the 10 million subscribers in Mobilink, we will be of course, dominant on our own on-net subscriber base, which means you will see more of the traffic on-net and not off-net.

SD:

Just to follow up, my question to Aldo, in a year’s time in August 2006 will mobile termination rate be cut by another 22% in Pakistan. So that will take it from 1.6 rupees to 1.2 rupees. What kind of impact do you anticipate there?

AM:

Look, in August 2006 we will probably have 13-14 million customers so 80% of the traffic will be on-net. So as we go, the mobile termination rate takes a lower and lower effect as we go forward.

Operator:

Next question comes from Yasmine Ibrahim of EFG Hermes. Please ask your question.

Yasmine Ibrahim:

Hi, sorry I did not get the information that you said on the Iraqi EBITDA margin. I believe you said there was a revenue in the previous quarter that you brought this quarter on negative. Is that right?

AM:

In the second quarter there was inter-company revenue between Ring and OTI, which inflated the revenue in OTI and RING. So we took the charge in the third quarter that is why the revenue is lower but the EBITDA is growing and the margin is obviously higher.

YI:

So what would be the EBITDA margin the normal EBITDA margin that quarter?

AM:

lower than 77%.

YI:

So what would be the normal? 70 is normal earnings going forward?

AM:

Look at the first nine months that was a good indication. We are at 66% because this will cancel the affects.

YI:

Ok. Regarding the EBITDA margin also in Pakistan and Djezzy what would be the normalized EBITDA margin?

AM:

In Algeria, we are targeting the low to mid 50s. We are higher than that right now. We are more in the mid 50s. And in Pakistan we are in the low to mid 40s. That is the target.

YI:

Ok. One more question regarding the minority interest this quarter. Is there anything unusual?

NS:

What do you mean anything unusual?

YI:

The minority interest is higher this quarter the percentage of net income before minority.

AM:

Hold on, you are looking in the net income you are looking in the P&L? Can you just point out exactly where?

YI:

The 149 minority interest.

AM:

Yes, probably because of the mix. The minority share now comes mostly from Mobinil and a little bit from Algeria and Pakistan. So it is a change of mix obviously if the profitability in Mobinil is higher that will increase the minority share.

Operator:

Your next question comes from Shirley Zhang. Please ask your question.

Shirley Zhang:

Good afternoon and I was wondering if you could update us on the joint venture you have with Telecom Egypt and the Algerian fixed line business? And when the joint venture has started to rollout the network and the provide service and also is there any synergy you can generate form this fixed line business?

NS:

The operation is delayed, the launch have been delayed because of obstacles coming from lets say an uncooperative Algeria Telecom. We expect to launch in the first quarter next year, you will not see any impact in the fourth quarter. You are right at the synergies, there are synergies on the user backbone, specifically the cable, the cable coming from France will be a big addition to the fixed line and of course we are going to see some synergies in the distribution and other areas. But frankly, before the next quarter we will not see any impact.

Operator:

Your next question comes from Karim Kamal. Please ask your question.

Karim Kamal:

Hi good afternoon. I would like to ask about the news about delisting Mobinil in Egypt which was quoted on Reuters? NS: I was asked a hypothetical question whether I would prefer to be alone in Egypt without a partner and the answer was yes. Of course every operator likes to dominate his operation alone and he said in that case would you not have a listing in Egypt, I said also yes we have because Orascom Telecom is listed so there will not be any need. But this is a hypothetical question, because right now both partners are having a very good relation and operating Mobinil happily and it is controlled by the Mobinil vehicle and therefore there is no need to de-list nor to look into that.

KK

And second question related to Pakistan. Now I understand that with ARPUs going down you could protect your margins but how far would you let your margins drop if it is needed?

NS:

We are lowering our per subscriber CAPEX now. We have achieved a record per subscriber CAPEX in Pakistan right now, which is lower than last year of around, I would say 30%-40%. So if the ARPU decline as I mentioned before is in that range, we are fine because it means we are keeping our margins even though the ARPUs are declining.

Operator

Your next question comes from Eric Lee. Please ask your question.

Eric Lee

Thank you. I just had a couple of quick questions on Italy. You had mentioned that you are looking to list Weather when Wind gets leveraged out to an acceptable level I guess I was wondering what is an acceptable level for leverage on Wind?

NS:

Four point something.

EL:

Four point something and then Mr. Sawiris you had also been quoted recently in terms of other acquisitions in Italy. Is the thought process Weather it would be the acquisition vehicle, Orascom or Wind?

NS:

Weather

EL:

Weather would be the acquisition vehicle?

NS:

Yes.

Operator:

Your next question comes from Stephen Pettifer of Merrill Lynch. Please ask your question.

Stephen Pettifer

Yes hi good afternoon. I have a quick question on Bangladesh please? Your principle competitor seems to be reporting a massive growth acceleration after the end of the third quarter I wonder if you could comment on that?

NS:

Well they had three million Subscribers before we started. We launched only in February this year and we are comfortable that we will achieve our target of one million by year end. I would say for a period of 10 months it is quite a record if we can achieve one million you know so. I repeat, when we launched in Bangladesh they had three million already. Operator: Your next question comes from Sundeep Bihani of Lehman Brothers. Please ask your question.

SB:

Gentlemen just a follow up question. In terms of the incremental market share for the third quarter it looks like Algeria began the quarter at 69% market share but only got 48% in third quarter. Pakistan began at 61% but only ended at 48%. So it looks like in the third quarter you have sort of compromised on your market share and through that, held up the better margins. Can I see this as a change of strategy from your earlier comments?

NS:

You can only see the impact of new entrants coming in at the same time and that quarter you are referring in Pakistan the two entrants were Warid and Telenor launched and got maximum their first launch effect. You will see this quarter that there is a big re-bounce in the market share to our favor and we also see that in the past quarter there is a lot churn rates. For example, we expect churn rates with our competitors will specifically turn out to be very high, because when they launched they were paying more commission to the distributors than the value of the lines themselves. So in effect the users used to go and operate the line, cash the commission and then throw them away. So by the time they realized that they are cannibalizing their own fate then they diverted from that practice and of course we lose market share when someone does that.

Closing Comments

Conference Spokesperson

There are no further questions at this time. Please continue.

Paul Sydney

If there are no further questions I would just like to say on behalf of everyone on the call, thank you very much for your time gentlemen, to Mr. Sawiris, Mr. Mareuse and Mr. El Gammal and I am sure we are all looking forward to seeing the full year results in a few months. Thank you.

Related:

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

Source: Full Transcript of Orascom Telecom’s 3Q05 Conference Call - Q&A (ORSTF)
This Transcript
All Transcripts