MTN : Transcript of Q3 24 trading update on the 14 November 2024

MTN Group

Q3 2024 Trading Update Call

Thursday 14 November 2024

MTN Group

Q3 2024 Trading Update

14 November 2024

Thato Motlanthe

Good day to everyone and thank you for joining us on this call to discuss the MTN Group trading update for the nine months ended September 2024. My name is Thato Motlanthe, Head of Group Investor Relations, and on the call with me is Ralph Mupita, our Group CEO, as well as Tsholo Molefe, Group CFO. Also on the call we have MTN SA CEO Charles Molapisi, as well as MTN SA CFO Dineo Molefe.

Our trading update was published this morning on the JSE and is posted on our website on the investor relations page. I trust that you have also seen the Q1 releases from our listed Opcos that published their results over the past couple of weeks; and hopefully you were also able to join their respective investor calls.

Today's call will follow the usual running order: Ralph will get us underway with an overview of the operational performance; he will be followed by Tsholo with an overview of our financial highlights. Ralph will then come back to wrap up with key focus areas and outlook comments. After that we will move into Q&A, and I would encourage you to use the webcast platform to send through your questions, which I will read out at the end.

Finally, a reminder that this call is scheduled for about an hour. On that note, let me hand over to Ralph.

Ralph Mupita

Thank you, Thato, and a very good afternoon to you all from me as well. I trust that everybody's keeping well. In terms of our Q3 trading update, we are encouraged to once again report a resilient performance for the period, in what has remained a challenging macro and operating context.

As Thato outlined, we will cover three overall areas in our commentary this afternoon:

1. I will start with an operational overview, covering our performance highlights
2. I will then ask Tsholo to cover our financial highlights
3. And then I will talk briefly at the end about our outlook and priorities

Before we delve into some of that detail, let me spend some time on six key messages we would want to leave with you in terms of how we look at our performance for the period.

The first point is that we have managed to sustain the commercial momentum in our core connectivity business. This is critical, as we navigate the near-term headwinds facing our operations, as it gives us confidence in the underlying resilience and strength of the business. The continued structural demand for our services underpins our medium-term growth outlook and capital allocation.

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In that sense, the second key message is that you also will see a strong result in our fintech business, which spearheads our platform strategy. In particular, we are driving continued strong growth in advanced services in line with our strategic priority in fintech.

Thirdly, we have made further progress in Q3 in executing on some of the strategic priorities we have articulated to the market. If I outline these briefly: in Ghana, we completed an additional 2.1% localisation in the period. This brought the local shareholding of MTN Ghana to 30% and makes it compliant with regulatory requirements. This followed the 7% sell-down of MTN Uganda in June that we reported on with H1 results - so both of these operations now align with local requirements in terms of localisation and sell-downs.

In terms of the overall portfolio optimisation priority, we exited Guinea-Bissau in August, and the work is ongoing to complete the exit from Guinea-Conakry. Of course we will update you on that progress, as and when appropriate.

We also reported on the progress in extending the 2016 broad-based black economic empowerment scheme, managed through MTN Zakhele Futhi. As a reminder, this was due to unwind at the end of this month, November 2024. With this extension, it will now run for up to a further three years to November 2027. Not only does this align with our commitment to transformation and the creation of shared value for South Africans, it is also integral to the future success of the Group.

So this extension was supported by the shareholders of both MTN Group and MTN Zakhele Futhi, in their respective extraordinary general meetings held in October. You may have also seen the announcement from two days ago that the related conditions precedent have been fulfilled, so the extension has now been finalised.

If I move on to the fourth key message, which is balance sheet resilience, supported by upstreaming and localisation proceeds. I will leave this for Tsholo to unpack, suffice to say that we are pleased with the overall shape of our balance sheet and financial flexibility. This is enabling us to deal with the macro impacts from our operating environment, as well as continue to invest in the growth of our business.

The fifth point is on the macro environment. While this has remained challenging, the direction of travel of some key variables in Q3 was encouraging. For instance, the blended inflation in our markets averaged 13.9% in Q3, compared to 17.9% in the same period last year. So coming down steadily, and of the key markets its only Nigeria where there is currently still some upward pressure.

In terms of currencies, you would have seen there is still some depreciation and volatility against the US dollar, but those movements are much less pronounced than say 6-12 months ago.

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The sixth and final message is that we have maintained our medium-term guidance - so, I will come back to this at the end - and the Board's expectation of a 330cps ordinary dividend for FY 2024.

Turning to the high-level performance highlights, we delivered overall service revenue growth of 12.9%* for the nine-month period in constant currency terms; with the underlying margin down 3.2* percentage points to 37.3%*. Of course, this includes the performance of MTN Sudan, which remains in a conflict situation. If we adjust our result for MTN Sudan, service revenue would have been up by 14.0%*, which is within our targeted growth range of mid-teens.

In terms of the key drivers of our topline growth, data revenue increased by 21.3%* and fintech by 28.9%*.

In the overall mix, the performance of MTN SA continued to be slowed by initiatives implemented to recover legacy XtraTime data advance balances, through data bundles. So this impacted especially prepaid data, which you would recall we spoke about at the half-year results. To give you a sense, the underlying performance of prepaid data was more mid-single-digits revenue growth, if we adjust for the bundle clawbacks.

Notwithstanding, the performance remained steady and resilient with total service revenue up by 3.3%.

MTN SA implemented some pricing revisions in prepaid between May and July. We communicated previously to the market that this is something you would anticipate would take a few months to settle. Because as a value-seeking segment, prepaid customers will optimise their consumption and spend, there would be a bit of a lag before the effects of the price-ups come through. As we've indicated before, we believe this is the right approach to ensure sustainability and support continued investment.

The business has also done a lot of good work to enhance customer experience and value propositions in order to support growth. We have seen a good improvement in customer satisfaction through measures like net promoter scores.

You will have seen from our release that MTN SA was awarded the "Best in Test" certificate for its network performance. This was the result of an independent peer group benchmarking and substantiates the investment we have made in South Africa's network over the past year or two. This leadership in network quality and performance underpins the commercial initiatives we are executing to accelerate the financial performance of MTN SA.

MTN Nigeria reported its results two weeks ago. In terms of the headline, they grew service revenue by 33.3%*, which was ahead of local inflation. This was achieved in a trading environment that was still quite challenging and that is now quite familiar to most of you. The drivers were broad-based, with strong growth in the data, digital services and enterprise segments.

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A key feature of Q3 for MTN Nigeria were the tower contract renegotiations. To remind you, the revised terms with IHS in Nigeria reduced the US dollar-indexed component of the leases linked to a discounted US consumer price index (CPI) and removed technology-based pricing, to ensure that payments for new upgrades will be based on tower space and power usage.

The renegotiated leases incorporate an energy cost component indexed to the cost of providing diesel power; however, the terms also include discounts and incentives over the life of the contracts. These discounts will start to kick in from 2025 onwards. So relative to where we were before, this helped to mitigate the effects on the business in Q3 of factors like foreign exchange volatility and inflation.

In our Markets portfolio, the respective regions continued to grow their service revenue above blended inflation on an overall basis. MTN Ghana continued to spearhead growth with topline growth of 31.9%*; and MTN Uganda was also a solid contributor to the Markets performance.

In terms of the commercial progress that underpinned our financial result, our subscriber base was up by 1.6% YoY to 288 million. This was impacted by subscriber registration regulations, particularly in Nigeria, as well as a decline in subscribers in Sudan amid the ongoing conflict.

Active data subscribers were up by 7.4% to 152.8 million - this was a net addition of 3.0 million data customers in the quarter. This supported the 37.0% YoY rise in data traffic on our networks, excluding JVs, which was also boosted by increased monthly usage within our customer base.

Finally - before I hand over to Tsholo - I talked a bit earlier about the strong result in our fintech business. Revenue grew by 28.9%*, which is line with our objective to grow topline in the high-20% to low-30% range. This was driven by the continued expansion of our ecosystem KPIs and strong commercial execution, with a focus on monetisation of our services.

Our MoMo monthly active users increased by 5.7% YoY to 61.5 million - you would recall that this measure excludes OTC customers in Nigeria, so it focuses on our active wallet base. For MoMo PSB in Nigeria, you will have seen the decline in the active base; as Karl and the team explained, this was due to an increased emphasis on building out the ecosystem in a more profitable way. This entailed a streamlining of incentive structures in the distribution channels; particularly, reducing acquisition costs and making sure that we grow in way that drives service penetration and commercial monetisation.

In terms of the broader Group performance, we are pleased with the 17.4% increase in fintech transaction volumes; transaction value was up 27.1%* in constant currency terms. This underpinned the strong growth in our advanced fintech revenues of 53.1%* - this aligns to our stated objective to accelerate the mix of our fintech revenues towards advanced services.

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So overall, I would say, pleasing commercial and operational performance. In a challenging macro context, we also managed to advance some of our strategic initiatives, which I believe speaks to the execution excellence across the Group.

I will pause at this point and hand over to Tsholo for our financial highlights.

Tsholofelo Molefe

Thanks so much Ralph, and very good afternoon to everybody - thank you for taking the time to join us on this call. As mentioned, it is my pleasure to walk you through the financial overview of our Q3 performance. I would echo that it was a solid outcome given the macro challenges we continue to navigate.

Turning to our overall performance, you heard earlier that Group service revenue grew by 12.9%* in constant currency for the nine-month period under review. Quite encouraging was the growth acceleration in the September quarter to 14.7%*, which highlights the positive momentum in the business. This was underpinned by an uptick in MTN Nigeria and MTN Ghana service revenues, which I will talk more about shortly.

If we exclude MTN Sudan, Group service revenue growth was 14.0%* for the nine-month period. Again, I think this highlights the underlying strength of our topline performance.

In terms of our revenue bearers, voice held steady (up 1.0%*) while data was up by 21.3%* and fintech by 28.9%*. Again, I think an important call-out here is the overall acceleration we are seeing in the underling bearers on a sequential basis. For fintech, Ralph talked about the growth in advanced service by 53.1%*, which was a key highlight. This meant that the contribution of advanced services to overall MoMo revenues was 29.9%, which supported the EBITDA margin improvement in the business.

Our constant currency EBITDA margin for the nine months trended 3.2* percentage points lower to 37.3%*, due to the upward pressure on costs from elevated inflation in our markets, local currency depreciation against the US dollar, as well as the conflict in Sudan.

As mentioned earlier by Ralph, these pressures were mitigated by the benefits from the renegotiated tower lease contracts in Nigeria. In the nine months, MTN Nigeria accrued the equivalent of R602 million in opex savings from the revised contracts, and R503 million in cashflow savings.

Given the nature of these revised agreements, you can expect that we would incur higher depreciation and finance costs in the early stages. This is due to the extension of the lease period to December 2032 for all the contracts. However, the benefits should actually be more pronounced in the later years, in light of the discounts built into the agreements that start to kick in from 2025. So really the objective was to put MTN Nigeria in a better position to manage the potential volatility in its macro environment.

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Of course, we also continued to aggressively drive expense efficiencies across the Group, with the objective of realising savings of between R7-8 billion between 2024 and 2027.

If we turn to the performance of MTN SA in the period under review, service revenue increased by 3.3%; and it was the same growth rate in Q3 specifically. There were stronger base effects in some of the business segments, however there was also a positive momentum in some underlying trends. Overall data service revenue grew by 2.1%. This continued to be affected by the ongoing initiative to recover legacy XtraTime, however the momentum of the underlying drivers remained quite robust with growth in usage and traffic.

Consumer postpaid service revenue increased by 3.5% in the period, with an acceleration in growth to 4.1% in the Q3. And this was supported by growth in the adoption of home propositions, particularly FWA packages. Consumer prepaid service revenue was up by 1.0% year-on-year - again with an uptick in growth in Q3 to 1.9%. XtraTime was key driver here, as well as increased penetration in CVM-driven bundles.

Wholesale service revenue held steady, and this was impacted by pressure on national roaming revenues from Cell C, where some of the pricing was renegotiated. Fintech revenue was up by 61.8%, driven by growth in both XtraTime and MoMo from a low base.

MTN SA's EBITDA reported margin was a touch lower at 36.3%, which included some once-off factors, impacting in H1 in particular. Excluding these, the underlying margin was 0.9 percentage points lower to 35.8%. The margin was impacted by higher Cell C roaming fees and some dilution from lower-margin ICT revenue from ICT business, within the enterprise unit. What was more encouraging, if you look at Q3 as a standalone, the EBITDA margin for MTN SA was 36.4%.

Briefly on MTN Nigeria's performance. Strong topline growth with service revenue growth of 33.3%* coming in ahead of local inflation. The underlying drivers were data, which was up 52.6% and underpinned by increases in usage and traffic. As well as digital services revenue, which more than doubled. Voice revenue was solid and was up by 13.8%*. When you look at the Q3 momentum in total service revenue, this was up by 35.4%*, year-on-year. So, again, a testament to the underlying strength of demand and the business there.

EBITDA margin in Nigeria contracted, due to higher inflation and energy costs, naira devaluation and the impact of a new VAT on leases. The margin came in at 36.2%*, however adjusting FX and VAT on leases in particular, this underlying margin would have been more like 53.8%*.

At a high level, the Markets portfolio continued to perform well overall. Both SEA and WECA grew service revenue ahead of their respective blended inflation rates, at 20.2%* and 9.2%*. Within there, for SEA - MTN Uganda delivered another strong performance, growing service revenue by 20.1%*, with a 1.2* percentage point improvement in EBITDA margin to 51.7%*. Very good momentum in that business across its key revenue bearers, supported by expense efficiencies,

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which is helping to sustain the EBITDA margin above the medium-term target threshold of "above 50%".

MTN Ghana, within the WECA region, grew topline by 31.9%* for the nine-month period, with an uptick in Q3 growth to 33.4%*. Again, a robust margin performance in constant currency terms, with a slight uplift of 0.2* percentage points to 56.2%*.

Finally, a few comments on our financial profile. Let me start with capex - you would have seen from our SENS that we deployed capex of R19.9 billion, excluding leases, with capex intensity of 14.7% hovering around the lower end of our targeted medium-term guidance range. Overall I think we are still on track to exit the current financial year within the guidance range or R28-33 billion; probably towards the upper end of that. This incorporates the increase in capex signalled by MTN Nigeria to enable them to accommodate the increase in traffic on their network.

Our balance sheet remains in good shape. Overall consolidated net-debt-to-EBITDA came in at 0.8x, which was comfortably within our covenant limits. Holdco leverage ticked up to 1.8x at the end of September. We did signal at the start of the year that it is something we expected to happen, and that the ratio would trend slightly above our medium-term target threshold of 1.5x. This was in light of the various disbursements through the course of the year, including prepayments geared towards mitigating against FX volatility.

We still anticipate for this to come back within range in the coming financial year. In terms of the 2024 expiry Eurobonds, we settled the outstanding balance of around $97 million earlier this month.

In closing off my comments, our cash upstreaming from Opcos is tracking reasonably well. In Q3, we upstreamed R2.2 billion, which brought the year-to-date total to R8.7 billion. Over and above this, we have completed R2.3 billion in gross localization proceeds year-to-date, specifically from Ghana and Uganda.

We have maintained a very healthy liquidity position, with headroom of R32.1 billion, as at the end of September. So, overall we retain a flexible financial profile, guided by a disciplined capital allocation framework. As we navigate the near-term challenges in our macro, this will enable us to continue to execute on our strategy.

Thank you very much, I will stop there and hand back to Ralph for his closing remarks.

Ralph Mupita

Thank you Tsholo - an important call out there. The strength and flexibility of our balance sheet really underpins our ability to continue to drive our medium-term growth ambitions and deliver on our investment case to shareholders and broader stakeholders.

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In terms of how we see the shape of the business going forward, I will just outline and reiterate a few key messages.

Firstly, while the near-term challenges in our operating environment are still there, the trends are a lot more encouraging. Inflation has started to abate in most key markets, and we are seeing a lot less volatility in local exchange rates against the US dollar. In other words, as we move forward, this should have less of an impact on our business, especially in terms of costs. And the underlying strong demand and topline we see in our markets should translate better into profitability, cash flow and returns.

In South Africa, the investments made in the network there are bearing fruit. We are seeing much better availability and quality, which is being borne out in independent benchmarking and network NPS. This underpins the commercial activities in MTN SA, including pricing adjustments, that are geared to returning the business to a more sustainable growth and profitability trajectory within our medium-term targets.

For MTN Nigeria, the underlying demand and operational momentum remains quite strong and the focus will be on sustaining that. We have spoken about the initiatives being implemented to recover profitability in MTN Nigeria, and particularly to turnaround the negative reserves and balance sheet position. The tariff engagements with relevant authorities in Nigeria remain an important element of these initiatives, and those discussions are ongoing. We still remain constructive on the progress there, even if timing is a bit harder to pin down.

The renegotiated tower leases in Nigeria have been an important development for us. When we look ahead at the next few years, we are positive on the benefits that will accrue over the tenure, relative to where we were. Especially as some of the discounts built into the agreements kick in over the next few years.

In our Markets portfolio, the key focus areas will be sustain the good performance of key operations such as MTN Ghana and MTN Uganda, which we have called out. Along with a couple of others in the portfolio. We have also spoken about the work that is underway to improve the performances of Opcos such as MTN Côte d'Ivoire, MTN Rwanda and MTN Zambia. This work continues, and as they recover, we should see this benefit come through in terms of supporting the growth and profitability of the business.

For our fintech business, the momentum is quite pleasing and we will sustain that topline growth in that bracket of high-20% to low-30%; supported by acceleration of advanced services. And we are satisfied that the EBITDA margin is tracking as planned. We remain fully engaged in progressing the structural separation work at the Opco level, in terms of constituting the Group Fintech structure. As you are aware, this is also key to unlock the proceeds from the minority equity investment made by Mastercard.

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I think Tsholo touched on the importance of maintaining a strong and flexible financial position and profile. This enables us to execute on our plans. As part of this, we maintain our goal to realise savings of R7-8 billion between 2024 and 2027 and bring our Holdco leverage back within our 1.5x threshold. Again, just important to maintain that balance sheet flexibility.

Finally, we maintain our medium-term guidance, which is the framework that guides our growth ambitions and investment case. In that context, our capex guidance range remains unchanged at R28-33 billion. MTN Nigeria is accelerating investment in Q4, having made very good progress in reducing US dollar LC obligations - and this is to support the stronger data traffic growth coming through there.

And in terms of our single-year dividend guidance, the Board still anticipates to pay a minimum ordinary dividend of 330cps.

As Tsholo mentioned, we've seen good upstreaming of 8.7 billion to the end of Q3, in terms of management fees and dividends. We've also had the localisation process of 2.3, and we anticipate seeing a similar level of upstreaming in Q4. That again, will support and underpin the dividend guidance that we have.

So, in closing, as a management team and organisation, we remain excited by the medium-term growth opportunities presented by our markets. We are committed to executing on our strategy to unlock value for our stakeholders. Thank you very much for listening, let me hand over to Thato for the Q&A.

Thato Motlanthe

Thanks Ralph and Tsholo for those scene-setting comments. Just a quick apology that the slides were delayed in coming up, that was part of the technical challenge we had in getting going. But thanks for your patience and understanding. We'll just jump straight into the questions.

A couple of questions on South Africa: Can you please talk about the price hike timeline, and why is it taking so long to trickle down, are you facing high elasticity, or is there some other issue preventing the price hike to cover the base?

Charles Molapisi

Thanks for the question, Thato. The pricing started in May and July. So in May we did the pricing for internal channels, and then in July we did the trade. We saw a little bit of an uplift, if you look at the internal channels, USSD, MyMTN app, so a little bit of an uplift that came through that, but the external ones have not really shown the sort of numbers that we're looking for.

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