Safaricom : H1 FY2021/2022 Investor Briefing Call

Conference Call transcript

10 November 2021

H1 FY2021/2022 INVESTOR BRIEFING CALL

Philip Muchaba

Good morning, good afternoon and good evening to everyone depending on where you are joining us from. We are glad to have you for our half year FY22 earnings release investor briefing call. My name is Philip Muchaba. I'm the Acting Head of Investor Relations and Financial Planning at Safaricom and I'll be moderating today's call. In today's call we'll have a short update from our CEO, Peter Ndegwa, who will also introduce the leadership team accompanying him on the call. Thereafter we will be giving you a chance to field your questions which Peter will answer with support from the rest of our leadership team.

Before we kick off the session I would like to speak through a few housekeeping rules. Throughout this session any questions you have for our leadership team should be shared via the Q&A tab. Please type in your questions and we will read them out and provide answers. At the end of your question remember to include your organisation name. Please ensure you have joined the session with your full names for ease of identification when you post your questions. If you haven't, you can rename yourself now by hovering the cursor over your name and clicking 'rename' on Zoom. In staying committed to our promise on diversity and inclusion, a live transcript has been made available for the comfort of anyone with hearing difficulties during the call. You can access this by clicking the 'view transcript' tab at the bottom of your Zoom application under 'more options'. This will allow you to keep up with the conversation in a more comfortable manner. I now welcome our CEO, Peter Ndegwa, to kick off the session. Thank you.

Peter Ndegwa

Thank you, Philip, and good afternoon, good morning, good evening everyone, our investor community and anyone else who is joining us this afternoon. I'll make a few comments and then I'll invite Dilip to summarise our financial results that we announced this morning, then we'll go into Q&A. This morning we announced our H1 results for Safaricom Plc and we are delighted to be engaging investors and analysts this afternoon. I am joined today by our CFO, Dilip Pal, who will join me in answering the questions, Sitoyo Lopokoiyit, MD M-PESA Africa and Steve Chege, who is our Chief Corporate Affairs Officer. Between the four of us we should be able to pick up all the questions that you will ask this afternoon. If we are not able to answer all of them, I'm sure the Investor Relations team from Safaricom will reach out to you directly and give you whatever answers that we might not be able to confirm. Without further ado, Dilip, if you can spend about

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five minutes just summarising the key results that we announced this morning for anyone who may not have watched the video or seen the results, and then we'll go into Q&A directly. Thank you.

Dilip Pal

Thank you, Peter. Hello everyone. Good morning, good afternoon and good evening. I hope you can hear me well. As Peter mentioned, this morning we have released our H1 results, a strong set of numbers I would say. As you have seen, we grew our service revenue by 16.9% on the back of economic recovery, strong execution that we have done in the half year, and also a lot of innovation around our M-PESA products that we have delivered. I'll just give you some perspectives on some of the areas, like for example starting with the customer numbers. We have seen growth in customer numbers across all segments. Our customer base has now crossed over 40 million. We have seen one month active days going up, whether it is voice, mobile data or M-PESA.

From a revenue perspective voice revenue we have seen some good progress in the second half of last year and we have seen that continuing in the first half of this year as well. Voice revenue grew 3.2% and we also managed to maintain our voice traffic share at around 68%, a strong rebound on M-PESA with 45.8% growth. And of course this is also on the back of the charging that started from January 2021. But more than that I think you may have seen from our financial results that financial services on some of the fintech areas have done extremely well beyond just traditional transfers and withdrawals. Both volume and values have recorded significant growth. Our volumes grew 42%. Values grew 52%. And more importantly, the velocity, which is the number of transactions per customer per month, almost doubled if you compare the same period last year. We launched our super app as you may have seen from our public announcement. And in a very short period of time we see a significant customer engagement with 4 million downloads and 2 million active customers engaged in this platform. We are super excited about this. You may have seen our progress also on the business side as well.

Mobile data revenue grew 6.3%. While we were expecting it to be better than 6.3%, I think what you need to keep in mind is we have seen a bit of price rationalisation during this period. And also the excise tax which came in from August, the industry decided to absorb the tax and that also weighed down overall revenue growth. But on customer KPIs and the fundamental KPIs on mobile data we are actually tracking quite well with usage growth from 1.3 GB last year to 2 GB. The 4G customers using more than 1 GB are all progressing quite well. We managed to onboard close to half a million Lipa Mdogo Mdogo customers, which as all of you remember was a key initiative in FY21. So that is gaining scale now. So overall I would say mobile data is gaining traction, but we do see that there are opportunities to grow beyond what we have done.

Fixed continues to be a strong growth driver. We have grown over 20% driven by growth in both the home as well as on the business segment driven by acquisition of new customers. On the cost side overall I think our cost leadership pillar is strong. We have done KSh 2.3 billion opex cost saving this year. That actually could manage to neutralise some of the cost increase that you have seen.

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But of course on a year over year basis the cost has gone up. It's also a fact of last year's similar level of decline that you saw in H1 of last year. EBIT grew 28.8% year on year with an EBIT margin expansion of 3.3%. We sustained a high capex, investing in customer experience and also expanding our footprint. Our capex includes spent for Ethiopia.

On the balance sheet side very quickly, you would have seen borrowing levels going up. We did borrow locally in Kenya to fund our license bid, as you recall the $850 million which was the fee that we paid for the license. So for our share, we did take a bridge loan locally and then we are now in the process of syndicating that loan into a long-term loan. So we did the funding for Ethiopia license, about $850 million as the consortium, which is what I was mentioning through the local debt that we have taken for our share.

You may have also seen the revised guidance. Just to remind all of you, when we put our guidance in May this year excluded Ethiopia. As we are now consolidating our financials it is important that we include Ethiopia as part of the full year guidance. As you may have seen, underlying our overall EBIT guidance actually improved both on the lower end as well as on the higher end based on the improved performance that we have seen in H1. Capex guidance for Kenya Safaricom operations remains the same, but we have added now Ethiopia as part of the full year guidance at the consolidated level. So that's a quick update on the financials that we have released this morning. Now back to you, Philip, to moderate Q&A. Thank you.

Philip Muchaba

Thank you Peter. Thank you Dilip. We have two questions from Kungela Mzuku from UBS. They are congratulating us for a good set of numbers and the first question is; Please clarify Safaricom's share of cost and capex over the next three years. This is relating to Ethiopia. I have KSh 30 billion in capex and a total cost of $600 million in year one. Please also clarify that $1.5 billion to $2 billion in five year plan are specific to Safaricom's share of costs for the consortium in its entirety. Their second question is on the funding. To talk about the current funding plan for Ethiopia and how much of the capex and opex is to be funded by debt, and to also call out what kind of interest rates, term of loans we have and whether this debt has recourse to Safaricom.

Peter Ndegwa

Thank you Philip. I would like Dilip to answer both questions. Dilip, please.

Dilip Pal

Thank you Peter. Okay, let me confirm that you can hear me well. Okay. Let me clarify on those numbers. Thanks for your question. $600 million is Safaricom's share of funding. So just to confirm that's the year one funding for Safaricom. Largely this is the spectrum payment and then the other funding requirement that we have for year one. To your other questions to clarify whether $1.5 billion to $2 billion capex is Safaricom's share or for the business, I can confirm that $1.5 billion to $2 billion is for the entity as a whole and not Safaricom's share. That's the five year capex outlook

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that we have provided. Your question on the funding plan, so what you are looking at is an optimal capital structure which will have a combination of equity and debt, both local debt as well as foreign currency debt. And we have also looked at vendor financing to augment the funding requirement.

So the funding which has gone into Ethiopia is largely through equity. For Safaricom's part of equity, as I mentioned, we took a bridge loan of $400 million and we are currently in the process of syndication and that we will be converting to a long term loan. Beyond that the entity is currently funded well, but then we are also looking at local debt options because we do have a lot of payments that we need to make in local currency. Because of the currency situation, as you are aware of, we want to make sure that to the extent possible the local payments are made through local borrowing, and that is also work in progress.

The bigger piece is on the debt side on the foreign currency part. Our engagements have been with multiple DFIs including what you would have seen in the public domain, our discussion with DFC, IFC and the like. At this point in time what I can confirm is that the discussions in some of those DFIs are progressing quite well. And we believe that by the time we need our funding we'll have enough funding to take care of the business to make sure that the business is fully funded. And in terms of interest rates and other related information, we will share that information in due course when we have more visibility around confirmation of those debts that we are currently looking at. Thank you.

Philip Muchaba

Thank you, Dilip. Just to remind you, at the end of your question please post the name of your organisation. The next question is about Ethiopia from Madhvendra Singh. What are your medium- term targets in Ethiopia? How does your plan get affected from recent political developments in the country?

Dilip Pal

Peter, do you want to take this?

Peter Ndegwa

I will comment on the impact that we see given the issues that Ethiopia is facing at this stage. So as you know, as we assessed the risks of going to Ethiopia the political elements were always part of that risk because the potential conflict was always there. Clearly that has crystallised given the state of emergency that has been declared. And at the moment as we said during our announcement we are assessing the situation as it evolves. We had a small team there in Ethiopia and we have prioritised their safety and security both for anyone who was seconded from outside of Safaricom or Vodacom into Ethiopia but also for our local employees which we had already started to recruit.

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And this is primarily to make sure that in the next couple of weeks as we assess the situation we take care of the employee safety and security. And it's precautionary. We are seeking advice from various sources and we hope for a speedy resolution of the current issue and peaceful resolution of the current issue. And over the next couple of weeks or few weeks we will be able to assess the situation and understand if it impacts our ability to launch. In the meantime, we are preparing as we were doing before to prepare for launch, which is supposed to be mid 2022 based on our license obligation where we expect to have approximately 1,000 sites to give us the scale that we need to be able to deliver on commercial launch.

If the current issue of course has carried further we'll be able to assess that and discuss with authorities as to how that affects our ability to launch on time. At the moment, we are working on the basis that we can continue to build the infrastructure because quite a lot of it will be exported from outside of Ethiopia. And should the situation change whichever way and we think that there is need to update investors, we will do that at an appropriate time. As you know, the investment in Ethiopia is a long-term play. Our hope is that this matter would be resolved in a speedy and peaceful way. In terms of the long term KPIs from an investment perspective I'll ask Dilip. I think we did cover some of that in the presentation. So, Dilip, if you can talk through that.

Dilip Pal

Thank you Peter. You may have seen from our slide deck we have provided some information around the capex, which is $1.5 billion to $2 billion for a five year capex outlook. We expect EBITDA breakeven in year four. As Peter mentioned, we expect to launch with approximately 1,000 sites and site count could go up to 10,000 in Y10. We will use our own build as well as sharing as part of our site build. I think from a medium to long term perspective that's our outlook, based on the business case that we have evaluated, and on which we went for the license bid. Thank you.

Philip Muchaba

Thank you Peter. Thank you Dilip. The next question is on M-PESA from Madhvendra Singh. Can you please discuss the growth acceleration within M-PESA? What is the penetration now of Lipa na M- PESA versus overall M-PESA business?

Peter Ndegwa

Go ahead, Dilip.

Dilip Pal

I mean within M-PESA in the slides if you have seen we have grown 45.8% year over year, but it's not only the traditional business that has grown. Within 45.8% we have seen the fintech solution growing actually 43.7% year over year. 50% of those fintech solutions are driven by payments, which is quite encouraging. And then we have seen IMT, international money transfers, growing 22.6% and lending and savings always growing 17.2%. So if you look at the overall M-PESA I think it's not necessarily only the withdrawals and transfers, which has of course grown significantly, but

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