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Dialog Axiata Audio Interview Transcript with Hans Wijayasuriya, CEO

Published: 19:32 09 Jun 2011 BST

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Harry Norman: Hello, this is Harry Norman for Proactive Investors and welcome to another Proactive audio interview.  Today is the 26th of May 2011 and I’m talking with Hans Wijayasuriya, Group Chief Executive and Executive Director of Dialog Axiata.  Listed on the Colombo Stock Exchange Sri Lanka telecoms sector.  Stock ticker DIAL, share price 10 Sri Lankan Rupees, market cap 81.4 billion Sri Lankan Rupees, web address dialog.lk.  

Hans, thank you very much for joining us for this interview.

 

Hans Wijayasuriya: My pleasure.  Thank you.

 

Please give the investment community a brief introduction to Dialog Axiata and the company’s business strategy.

 

Dialog Axiata is sited in Sri Lanka. It is the country’s market leading mobile operator.  And in addition to mobile services the company has branched out into a quadruple play formulation to provide fixed voice, broadband as well as digital television services.  

In the mobile space the company commandeers a 55% revenue market share and supports 3.5G infrastructure, providing mobile voice as well as – high speed mobile broadband services.

 

So the benefits of Dialog’s Rebound turnaround programme showed in the company’s financial results for the year ending 31st December 2010 with a net profit of five billion Sri Lankan Rupees compared with a loss of twelve billion Sri Lankan Rupees for the previous year.  What can you tell us about this programme and about what was achieved, Hans?

 

In brief, I think the Dialog Rebound programme was about a sharp turnaround of the company’s financial fortunes. The company made ten years of profits on the trot, from 1998 up to the end of 2007.  In 2007 the Sri Lankan economy went through a very rough patch, with inflation hitting the upper 20s and interest rates in the mid-20s.  A price war in the market brought down revenues for most teleco operators in parallel with input inflation in terms of costs.  

On the back drop of this environment the company, being a market leader and one of the largest market capitalised companies in Sri Lanka, had to take a very aggressive as well as progressive approach, I would say, to achieving turnaround in profitability. The Dialog Rebound programme was all about rebounding from the position of strength the company had in the market place to repair its financials within a very short space of time.  

The Dialog Rebound programme focused on cost rescaling on one hand which led us to analysing on an activity base methodology each and every cost line that the company had and rescaling the costs in a manner which elevated the company’s EBITDA margin from the low 20s all the way to the high 30s within a space of 18 months.

The large loss recorded in 2009 - of 12.21 billion Rupees was largely due to the write down of our TDM legacy core network.  We decided to take the plunge and upgrade the core network to a full IP based formulation.  Why IP?  Because through using IP and next generation technologies our operating costs could be rescaled very significantly. So taking this bold move at a time when the company was targeting a completely rejuvenated cost structure, paid off  and come 2010 we were able to achieve a far superior operating cost structure and record a profit of five billion Rupees. 

We’ve also been very aggressive in the marketplace throughout this period during the rebound, not taking a defensive approach to the market, but attacking in the market space while restructuring our cost base and back office.

We maintained our market share, in fact grew it slightly during this period in terms of revenue share.  We also expanded and made profitable at EBITDA level at both our subsidiary businesses in digital television of DTH as well as in fixed broadband and fixed voice services.

 

Dialog recently released its results for the first quarter of this year and posted a net profit of 1.16 billion Sri Lankan Rupees compared with 700 million Sri Lankan Rupees for the first quarter of last year.  What are your thoughts on these results and the trends they show?

 

Seasonality a side I’m confident that the positive trends in the core business of mobile as well as in the subsidiary businesses of television and fixed broadband and voice, are all very much on track.  The company had followed a positive EBITDA growth trend through five quarters in a row. In the first quarter of 2011 we experienced a step change in the cost structure due to a change in the tax regime in the country.  But apart from this all fundamental trend lines are on track in line with the performance improvements that were worked upon in 2010.

 

Given that Dialog made a net profit of five billion Sri Lankan Rupees for the year ending 31st December 2010 and has posted positive cash flows for five consecutive quarters, what is the company’s financial situation going forward, Hans?

 

We are very much focused on growing cash flows, free cash in particular.  Given that we have established a very focused and controlled process with respect to Capital expenditure and a very pointed and rationed approach to investment, I believe that given our market leading position and our revenue market share, which is moving forward in a very healthy manner, that we would be able to deliver free cash flow levels very similar to 2010 where we ended the year on a steady state of 40 to 50 million Dollars of free cash flow.  

We were also in a position to declare and pay a dividend for 2010 and this is a trend which we intend to take forward as well.

In terms of company fundamentals the cost structure that we worked upon during the Dialog Rebound programme is delivering results and we continue to see costs de-escalating as we move down the road, especially with respect to revenue linked costs where the efficiencies we have established in infrastructure as well as in operating costs would deliver higher margins as we move forward.

 

About a year ago, following the end to three decades of civil war, you described Sri Lanka as entering an era of peace and limitless opportunity and, indeed, the Sri Lankan economy grew by 8% in 2010.  What are your thoughts now on the Sri Lankan economy and its prospects?

 

Yes, certainly I would say that the economy and the country as a whole is also going through very aggressive rebound.  We see the key sectors of tourism and infrastructure growing very rapidly.  We see the tourist arrival figures ticking by the month.  And these augur well for very bullish projections on economic growth going forward.  What excites us about this environment is that economic growth filters down very quickly to consumption of ICT services. And I believe as Sri Lanka’s economy moves forward, consumer wallet share for ICT services will also increase.  So, given our market leading position in the mobile space and our strong position in fixed and broadband arena, as well as our market leading position in pay TV, the future holds well for Dialog to reap multiple benefits and dividends from economic growth going forward.

 

What can the investment community expect from Dialog Axiata over the next 12 to 18 months, Hans?

 

Our focus on free cash would continue.  We would make strategic investments in line with the country rebound, which I just described, where it would be necessary to invest in order to capture the new demand created through economic growth.  Having said that, we would continue to apply a very high-level of scrutiny and a very rational approach to investment vis-a-vis, the potential of those investments to generate cash in the medium term.  This way I think the investment community could see at the minimum a steady state performance from Dialog relative to 2010 featuring a moderate growth both at EBITDA as well as free cash level.  With the country upside moving on track - as we see from the country’s performance - with fundamentals such as inflation, interest rates and exchange rates being under control and on a very stable footing, I believe the investment community could see very positive returns from the company.

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