Conference Call transcript

13 May 2022

FY 2022 Investor Briefing Call

Zuri

Good morning, good afternoon and good evening to all Investors and Analysts on this call. Welcome to our virtual investor briefing for our FY22 results announced earlier today. Our moderator for this session will be Caroline Wambugu, our Head of Investor Relations at Safaricom Plc.

Caroline Wambugu

Thank you, Zuri, for the warm welcome. Good afternoon, good evening to all our investors joining us from around the world. We are glad to have you for this briefing session on today's results for the year ended 31st March 2022. My name is Caroline Wambugu. I'm the Head of Investor Relations and Financial Planning at Safaricom, and as Zuri mentioned, I will be moderating today's discussion. We have our CEO, Peter Ndegwa, who will make introductory remarks. Thereafter our CFO, Dilip Pal, will give his remarks before we open the session to field your questions, which will be answered by Peter with support from the rest of our leadership team.

Before we kick off the session, I would like to speak through a few house rules. Throughout the 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 later and provide answers. At the end of your question, kindly remember to include your organisation name. please ensure you have joined the session with your full name 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 who has joined 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. Finally, in case you require any assistance from us that is not related to the discussion, you can write to us via the chat platform, and we will help you from the back end. I now welcome our CEO, Peter Ndegwa, to kick off the session. Thank you.

Peter Ndegwa

Thank you, Caroline. Just confirm that you can hear me for the benefit of everyone.

Caroline Wambugu

Yes, Peter. We can hear you. Please proceed.

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Peter Ndegwa

Okay. Thank you, Caroline and Zuri, our moderators this afternoon. And good afternoon, good evening to everyone from the investor or analyst community. This morning we released our results and also had a presentation. Some of you may have watched that presentation or some of you may have come across the results. Our intention this afternoon is that Dilip will summarise the key financial results and the drivers of that for about five to six minutes, and then we will go into Q&A. We believe that's the best way of utilising the time.

What I will say though is that we are pleased with the results that we've announced. It has been a strong year, especially in Kenya. We have seen strong financial performance and commercial momentum across the business and also are making progress on our Ethiopia operations, setting up for commercial launch sometime during this calendar year. We will go into the detail of the drivers of that. So that we don't duplicate the work, I'll ask Dilip to take us through the key highlights and then we'll go into Q&A. Dilip, over to you.

Dilip Pal

Thank you, Peter. Thank you, Caroline. Confirm that you can hear me well. Caroline, you can hear me?

Caroline Wambugu

Yes, we can hear you, Dilip.

Dilip

Thank you very much. Good morning, good afternoon and good evening, everyone. As Peter said, I'll be very brief, assuming that you have all seen our presentation or had a chance to go through our numbers. Starting with our top line growth, it's a strong set of numbers that we have reported, mainly attributed to our economic recovery and very strong commercial execution. Service revenue, as you have seen, grew 12.3% supported by an all-round growth across all revenue streams. M-PESA especially grew very strongly with 30.3% year over year growth.

On the back of our top line growth what we have also seen for Kenya standalone our EBITDA grew by 15%. EBITDA margin expanded by 0.7% to now 51.7%. And EBIT also grew by 19%. In terms of customer profile, we have seen customer growth across all segments, whether it is our 90-day customers or 30-day active customers. And we also celebrated our 15 years of M-PESA with a very important milestone of 30 million customers for M- PESA.

On the revenue side just to call out a few things, a few areas that we are very happy with. On Voice revenue we managed to still keep within a positive trajectory with a 0.8% growth, which was quite good given that there was huge price pressure mainly attributed to our CVM initiatives which resulted in usage stimulation. M-PESA, as I mentioned, was a stellar performer with 30.3% growth. This of course also on the back of or supported by the return to charging for previously zero-rated transactions, but more importantly the increase that you have seen in the volumes and values of transactions which has grown over 34% in FY2022.

As you have seen, M-PESA now is the biggest contributor. What is important here to talk about is that M-PESA's overall health of the business is very strong. We see our merchants growing by 60%, now close to 500,000. We

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have 3 million businesses who are using our services and we also launched our super app and also the business app, which we will talk about in detail through Q&A session. And you have also seen our presentation.

Mobile data, you will recall in our H1 results we were not very happy. We were not satisfied with the growth profile that we have seen, but the growth actually rebounded in the second half with double digit growth, leading to a 13.5% growth in Q4, so quite satisfactory. Usage per customer reached 2.3GB, 60.5% growth. But most importantly, our ARPU profile, which is what we always spoke about, has grown by 10.4%.

Our device story is going very well on the back of a very good growth last year. We have also seen our 4G devices growing by 29% in this financial year, passing 11 million. Fixed revenue continued to perform well on the back of subscriber additions. On the cost side I think on the group performance you may have seen an increase of 20% year over year, but that is coming on the back of our opex of KSh 5 billion that we reported for Ethiopia. If we remove that, for Kenya we have seen an increase of 8.8%.

Capex, of course the group number is quite high, which was expected. For Kenya we also have seen about 12% growth in capex, but the capex was mainly in the areas that we all planned for. And just to call out a few things, last year we got new spectrum and we upgraded almost 70-75% of our sites with the new spectrum. We added close to 500 new sites. We are also modernising our energy infrastructure through IoT to solar and hybrid power. We added about 29,000 new homes and also added close to 500 new buildings. The CVM new engine that we procured last year is something we are very proud of, and will enable us in the future to propel our CVM initiatives in even a better way than what we have done before.

In terms of the balance sheet, I spoke during our presentation about our syndication closure of $400 million bridge loan, and we are very happy with the outcome that we have seen. Our net debt to EBITDA closed at about 0.2. In terms of the Ethiopia funding, we have funded about $540 million during FY2022. You have seen our guidance. As Peter mentioned during this presentation, we have surpassed our guidance and we are very happy about what we have seen for the outcome of Kenya both on EBITDA and also on the capex side.

From an Ethiopia perspective I'm sure you will have questions that we will address, but just to say that we are making good progress in terms of the commercial launch within calendar year 2022. And the entity is well funded. From a FY23 point of view we also spoke about headwinds in terms of regulatory, especially MTR, which is in court process, and of course the macroeconomic factor influenced by the UK/Russia war which is something to watch out for.

With those things keeping in mind, you have also seen our guidance, but I just want to highlight that our guidance doesn't take into account MTR, as you know, MTR is still going through the court process. And my last comment to all of you, we are planning for an investors' day, which if you recall we spoke about last year, but finally we plan to host this within June 2022. With that, thank you very much, and I hand over back to Caroline for questions and answers.

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Caroline Wambugu

Thank you very much, Peter, Dilip. Now, investors and analysts, this is your moment to ask your questions. I'm yet to get any questions. Now they are coming through. Just a quick reminder, for those who would like to ask questions, just ensure you type in the name of the organisation you're representing so that we can identify you well.

We do have a question here from Madhvendra Singh from HSBC. And the question is, why did voice revenues decline in H2? How much of that came during Q4? The second question on Ethiopia plans. You have not shared any plans on targets within Ethiopia in terms of subscriber numbers or revenues. Any help you can provide in terms of understanding revenue trajectory in the market? Another question on Ethiopia. In terms of capex spend, at what FX rate are you able to buy the equipment at? Is it at the current FX rate, or are you buying the equipment outside and directly bringing it in? And lastly, on Ethiopia, how focused are you on maintaining EBITDA / EBIT loss levels at minimal levels in the market? Still on Ethiopia. Over to you, Peter.

Peter Ndegwa

I would suggest, Dilip, you go ahead and answer the questions.

Dilip Pal

Thank you, Peter. On your first question on voice revenue, you are right. Our H2 was negative. The primary reason for that is if you recall we were on a recovery path in FY21, so we are of course lapping a better performance than FY21. But most importantly, voice revenue has been on decline, and we managed to arrest the voice revenue growth. And the decline was coming on the back of the rate rationalisation that we are doing. The affordability was an issue, and of course we are at a premium to our competitors. And we needed to address that, and we have done that. So, I think your point is valid that our second half performance probably was not as good as what we have seen in H1. But as I mentioned, overall, we are very happy with the voice performance that we have seen in FY22 because we have seen use stimulation and our CVM initiatives really paid us well in voice revenue.

On Ethiopia numbers, in terms of our disclosures, we have provided based on your request and based on some of the conversations, more information than what we had done before. And we will continue to improve our disclosures in this area. But let's keep it in mind that Ethiopia has still not started generating revenue. It is not a steady state operation that we start giving those kinds of numbers. We still don't have the first customer or subscriber in our network. So, I'm sure as we progress, as we go along, you will see more of Ethiopia information coming in.

Now, from a capex perspective I know you have asked quite a few questions. In case I missed out something, Caroline, just remind me. So, the way we have done the major capex, the deal is those are in foreign currency. And then we have vendor financing wherein at the time of the receipt of our equipment we fix our vendor financing for the period. So, it's fixed at the time when we are doing the vendor financing after which it gives us the cost of financing which is pretty attractive. So therefore, it kind of protects us for the future volatility when we shall actually make the payment because we are fixing at the time when we are doing the vendor financing.

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But what I wanted to highlight here is what Peter also mentioned during the presentation. The forex volatility is a cause of concern and we have been watching out very closely. And what we are also trying to do is, for the payments that we have to make locally we maximise our payments through our local funding, whether it is short term or long-term debt we are working on. Short term is done, and mid to long-term funding is currently work in progress. So, I think the way we are managing is through a combination of foreign debt and the local currency will hedge that to some extent, but this is something we cannot fully rule out on currency. Caroline, let me know if I have missed out on the other questions that came in. I think there were quite a few questions that came in.

Caroline Wambugu

You have addressed them, Dilip, but there are more questions still on Ethiopia which I will read out. This one is from Maurice Patrick of Barclays. In Ethiopia can you please talk about timing of launch of services and what needs to be completed before launching? How advanced are negotiations with Ethiotel regarding wholesale? Press reports indicate talks are advanced. That is from Maurice Patrick of Barclays.

Peter Ndegwa

Okay, Caroline. I'm happy to answer that one. Yes, we are making progress in Ethiopia. I suppose the key elements to consider in terms of our ability to launch is there are two components. One, is considering the political and economic space. You know we had to withdraw our team sometime November/December. So, we knew to some extent the launch would be delayed, given that there was a period that we were not in the market, both ourselves and also our vendors. The biggest task is to build the towers that we need for full commercial launch. We expect that we will have between 800 and 1,000 towers by the time we launch. We will start with towns that are ready from a capacity perspective and then make sure that we deliver our commercial launch by the time we get to about 1,000 towers. That is underway, and we are making quite some progress.

In addition to that, we have entered into negotiations with Ethiotel. The press releases are correct. It took quite a bit of time. Both of us are learning the market. But we have been able to get into a place where we can now agree on interconnect, on transmission, leasing but also on tower sharing in future. We are just currently going into the detail of that. We believe that by the end of this month we will have the signed agreement between ourselves and Ethiotel. Some of the arrangements will not be in line with what we expected at bid stage, but they are commercially acceptable to us and will allow us to make sure that we launch on time. We've been pleased with the way the negotiations have gone in terms of being mutually beneficial for Safaricom Ethiopia but also Ethiotel across all those lines.

So, it's about building towers. It's about agreeing on the key commercial components with Ethiotel. But also, it is ensuring that the commercial side is also ready. We've recruited distributors, close to 30 dealers. We have identified the outlets, the commercial shops that we will use. And then we have a team of about 305 people with an office already set up. So, we are ramping up and we believe that we will be able to have a strong commercial launch in this calendar year. We don't want to be specific because we are waiting for some of the agreements to be completed and for us to make an assessment about our ability and how many sites, we will be able to lease, and also complete some of the build phase ourselves. So that's all I want to say. Dilip, if you want to add anything to that, please do.

Dilip Pal

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Safaricom plc published this content on 20 May 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 20 May 2022 06:04:11 UTC.