Safaricom PLC (SCOM) Earnings Call Transcript

Good morning, good afternoon, and good evening from wherever you are joining us from. We are glad that you have joined us for this briefing session on Safaricom Ethiopia. My name is Caroline Wambugu. I'm the Head of Investor Relations, Financial Planning and Analysis, and I'll be moderating this discussion. We also are joined by our CFO, Dilip Pal, who will give some opening remarks before we open up the session to field your questions. And thereafter, we'll be able to pick up any Q&A that you have and supported also by the Investor Relations team. So before we kick off, allow me to make some few house rules. Please ensure that you have joined the session with your full names for ease of identification when you post your questions or comments. And if you haven't, you can do so right now by renaming yourself through hovering your cursor over your name and clicking the Rename tag on the drop-down. [Operator Instructions] In staying committed to our promise on diversity and inclusion, we have included a live transcript 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 show captions. This will allow you to keep up with the conversations in a more comfortable manner. [Operator Instructions]. Once again, welcome to this call. I now want to welcome our CFO, Dilip Pal, to kick off the session. Thank you, and over to you, Dilip.

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

Yes, we can hear you Dilip. Please proceed.

So good morning, good afternoon and also good evening in case you are joining from different time zone. So it's a pleasure to be talking to you on our Ethiopia update. As you would recall, during our roadshows, we have promised that we'll be sharing a quarterly update on the Ethiopia's progress. And a note has actually been shared on last Friday, which I'm sure you had an opportunity to go through and therefore, you will have questions around that, which you are very happy to answer today. Just to start with very few key updates, starting with the one, which is the governance matter, which is changing the CEO. You may have seen the announcement that our CEO, Anwar Soussa, who has been part of the team from day 1. He'll be leaving the business effective 31st of July once his secondment comes to an end. And as you know, he has been instrumental in bringing the business to its current shape and that has been well understood and well appreciated by the team and also by the shareholders. Now we -- it's very difficult to pronounce the second name. I'll just leave it as Wim. Wim has been appointed as the CEO, and he will start from 1st of September, and he has also rich experience working in Africa and managing many businesses across different companies. I'm sure you know Wim based on your telecommunication understanding of the people that has been managing business, and we are very excited to have Wim as our CEO for Ethiopia, as we are beginning to start a new journey in the transformation of lives for Ethiopians. Now on the commercial side, we are making progress, good progress in 9 months. Now we have launched and we have covered 22 cities and 49 large and medium towns. We finished -- we completed our coverage obligation, which, as you recall, was to do 25% by the time that we got from the communication authority, and we have complied with that. We have seen increased momentum on the customer side. We have added 4.5 million gross additions from the launch. We see usage growing for both voice and mobile data. Average data usage is actually now touched to 2 GB from the level of 1.5 GB that we have seen last year. And average minutes of usage also growing. Now to reach from a 70 minutes -- sorry, from 55 minutes to 70 minutes per customer per month in this quarter. And Combined with all of this, you may have seen an improved ARPU trajectory, which was what was expected. As you know, initially, we had quite a few promotional offers and the voice minutes as the cumulative interest grows, you will start seeing voice minutes also growing and so is data. We're very encouraged by the results that we have seen, especially in the mobile data, as you have seen from the note both on the customer side as well as from the usage. On M-PESA, commercial readiness preparation. We have incorporated the subsidiary in Ethiopia, the operations will be done through a subsidiary, which is called Safaricom and M-PESA Mobile Financial Services. We have briefed you previously that we have started configuring the systems. So we have kicked off testing of the system and all the functionalities as the team is doing all end-to-end and [indiscernible] tests and also for the customer experience. We have onboarded our agents and also pursue recruiting. So in kind of completing the recruitment process of agents in preparation for the launch in this quarter. So from a commercial side and the technical side, I think we are fairly ready. We are just finishing the last leg of testing. Now lastly, on the IFC investment into GPE and also into Ethiopia operations. You have seen the announcement on the IFC is coming in as a minority shareholder with an equity contribution of $157 million and also a debt into Ethiopia operations of $100 million. IFC will have an equity stake of 7.25%. And then we will still continue to have majority and Safaricom will have a shareholding of 51.67% once IFC puts in equity. So that's what I wanted to brief as a starting point before I hand over back to Caroline for you to moderate the questions. Thank you.

Thank you. Thank you very much, Dilip. I am checking my Q&A tab, again, requesting us to please post our questions via the Q&A tab so that we can have those addressed by Dilip. I also want to take this chance to, of course, to make a cognizance of the fact that we did receive a number of questions through the preregistration exercise for this particular meeting. And the beauty is that I see a good number of them have been answered by the brief that we've just received from Dilip and also from their update report that was shared with you on Friday, and that is also available on our website. So should you have any new questions, please kindly do a quick follow-up through the Q&A tab or should you want anything further clarified for you? Happy to take that again through the Q&A.

With that, I see questions streaming through. So thank you for your questions, and I'll get right into it. So Dilip, we have a question here from Dean and the question is, with the new CEO in place, should we expect any changes in the strategy of Ethiopia operations? And is this also a fixed or Secondment contracts? Dilip?

Thank you. So let me first start with the strategy. As far as strategy for Ethiopia is concerned, there is no change in that, and there will not be any change because we finalize our strategy and how we want to serve our customers, what's our key milestones? What's the goal that we want to achieve at a different point in time that remain unchanged. And Wim coming in will probably with his wealth of experience in working under different companies and working also in Ethiopia -- sorry working in other parts of Africa will actually supplement what the team has already been doing. Now in terms of his term, I remember the secondment comes more when you were within the group organization. So he secondment runs from the Vodacom Group as some of you know, he was the CEO of Vodacom DRC, before he took up the role of Ethiopia. So that was his secondment. And Wim comes from the outside -- within -- outside of the group. So he's joining from another organization. And so therefore, he's coming with a contract like all expatriates normally come to contract.

Thank you very much, Dilip, for that. A question here from Rohit of Citi. Please could you share when you expect cash flow breakeven in Ethiopia? Yes, I think you can take that Dilip before I take the next set of questions.

No. So Rohit, what we have not done is -- so what you have done is given you new guidance for FY '24? What if we have given you a guidance -- in the guidance. We spoke about the peak EBITDA losses that we will have, which will be the FY '24. And then we said by FY '26, we'll be EBITDA breakeven. In addition, what I -- what we have also confirmed about our peak CapEx investment period, which is the past 5 years, and we're seeing by next -- by end of this financial year, we'll have a critical scale, what you're calling in terms of the base stations, which is over 3,000 stations. You have seen that by first quarter -- end of first quarter, we have already finished 17 -- we are already 1,700 base stations, which we are progressing. Our progress is quite satisfactory, and we're very confident of doing that. Now what you're anticipating by end of what you're calling the peak investment period into getting into a more business as usual scale, as you call it, close to 6,000 base stations which will allow them to look at CapEx after that more as a business actual CapEx as a percentage to revenue rather than looking at a CapEx as an absolute amount. So I think based on that, you probably need to do a little bit of modeling to be able to see when we have not yet gone public in terms of when we do a cash flow breakeven. Obviously, this will be after the EBITDA breakeven definitely after FY '26. But we will let you know and we can't push to the date of actual cash flow breakeven. But I think based on the CapEx and based on the other information that we have provided, it is possible that you can have a look at the year of cash flow breakeven as well.

Thank you very much, Dilip. I'll take about 3 questions. Now one is from Baiju. Baiju is asking with Safaricom's hyperinflation, is Safaricom still in line to meet the 5- to 7-year breakeven point. And how does Safaricom adjust pricing such that they gain customer -- they gain consumer growth but manage costs? Then 2 sets of questions from Madhvendra, Madhvendra, HSBC. What were the other income in FY '23. It looks like a significant amount. So that is other income in FY '23 and followed up by why is equipment revenue, why it has fallen this year, Dilip?

First of all, our EBITDA breakeven that we have mentioned or giving an outlook is year 4, which is FY '26, not what I heard you mention about 5 to 7 years, so I can confirm you that even at the hyperinflation and based on the plan that we see now on the ground having [indiscernible] close to 5 million customers by now that we see the our plans still intact of breaking even by FY '26. From a pricing perspective, unfortunately, that's not the case. What you see probably that's more Asia and Africa doesn't have that pricing power. when customers face issues when the attrition rates are high. I think that's the time when they expect that something as essential as communication that their cost of communication doesn't go up. And of course, you also have to look at the competitive scenarios there. From a price level security pricing is quite low, I mean, from a -- compared to other markets in Africa. And from that level, we don't see much of pricing increase. And remember, we are in a phase where we are helping our customers, our main effort at this point in time is to make sure that we get customers we get the scale on customers, which allows us to then use customer loyalty as part of retention and also running more revenue in the future. So unfortunately, no, we don't see a lot of opportunity in pricing up in Ethiopia at this point in time. And 2 questions from Madi, I think other income for FY '23, Caroline you can take it away, you can share that separately. But equipment revenue is more about the device sales. So obviously, promotion we -- sorry, during the commercial launch and post-debt there was increased level of promotion going on, on the devices. So it is -- I mean, I think it's -- if you look at the period that you're talking about, it was last year, FY '23 was about 2 quarters here, just about 1 quarter. And remember, we are not subsidizing any device there. And also the device price corner because of the macroeconomic challenges. So we have seen similar trends also in Kenya side as well because of the pricing issues. We see a decline in devices. But for Ethiopia, it's more about 2 quarters and also initially that we are shipping a lot more devices to our distributors. I think that's what is showing numbers lower than. But device continues to be a very, very strong and important part of our strategy in drilling out in making sure that we achieve our mobile data penetration that we want for the digital experience that customers are looking for.

Okay. Thank you very much, Dilip. And maybe just to add some color on the other income for the prior year. So that was some support we had received from Meta just to be able to facilitate our visibility in the market. And of course, it becomes a mutual benefit at the end of the day. So it's not a cost that is a recurrent one in terms of how you view it. So that's really what the other income for the last prior year is about. Taking the next set of questions, I have Mishra. Mishra of HSBC, any comments on potential entry of Orange or Etisalat in Ethiopia, especially from a competitive and pricing point of view. And you can combine that with the question from Parvin on when are you reaching 6,000 stations, sites Dilip?

Yes. Unfortunately, we don't want to speculate on a call about potential entry of Etisalat or Orange. What is available in the public domain is what I can confirm you, what we are aware of at this point in time is. The government is looking at -- government is relooking refreshing their offer for privatization of Ethiotel. And we have heard about or at least we have seen in the media that there is potential interest from Etisalat and Orange, but you cannot neither can confirm nor can deny that because they're adjusting the public domain news that what you see and what you're also going to see. What you also are aware of probably you have seen that government has requested -- the government has already released the request for information for the third license, which they did not issue during the time when they should license to us. And the deadline for that, I think, is in September, by which they are expected to get request information for the third license, which is also something that we are watching very closely. Yes. So honestly, it's very difficult for us to confirm or deny any of these news because this is what the government has confirmed that they are looking for privatization and also they're looking for third license issue. Now what we are saying is pretty much the closure of year 6, pretty much, yes 6 is when we believe that you will reach the critical mass of 6,000 base stations, yes. So you're calling it anything between 5,500 to 6,000. So it could -- it would be in between year 5 and year 6. So somewhere there what you're calling this sites between 5,500 to 6,000 sites called that as really the business as usual or recall does coverage and population coverage as well as the revenue opportunity that we see that we'll be in a fairly good position by the time.

Thank you very much, Dilip. So a set of another 3 questions here from Farouk. Farouk is with all Africa partners. Please provide a commentary on Ethiopia macro, especially inflation and the interest rate environment and how this impacts the coming 12 to 24 months for Safaricom. So I knew Farouk, we did provide a bit of detail on the macro environment for Ethiopia. But I get it, you're trying to get also an outlook view. So Dilip will be able to share something on that. The second question from Farouk is based on findings to date, what are the main differences, positive or negative of Ethiopia market versus Kenya? And lastly, from Farouk, can you summarize how much USD debt the Ethiopia business has and how this will be serviced or sourced for the dollars for this -- how we will sourced for the dollars for this [indiscernible], Dilip over to you.

Yes. So starting with macro, I think as Caroline already have mentioned, there's quite a bit of information that you have provided on macro side. Inflation is out of stable. I won't say, although it's showing a little bit of decline, but I would say inflation is stable at a very high -- elevated high level. It's not going down. Interest rates, at least from our side, we haven't seen much of a change. Basically, the local funding that we have, the interest rates are quite stable. So it has not changed much. And also on the currency side, situation is similar to what we have probably spoken about during our FY '23 results release. It continues to be a challenge. And the gray market -- the gray rate and the official rates, that difference continues, although I think if you look back from last 3 to 4 years, the ETB has depreciated, but the gray market rates has also gone up. So necessarily, they have not been able to bridge the gap, and that continues to be. The 3 areas, basically these 2 areas, high inflation and the exchange rate differential and also the liquidity continues to be a big concern. Nothing has changed compared to what we have discussed in the FY '23 results release. Now going forward, the government based on our discussion, government is committed to bringing in investments for direct investments. Government is opening up as you have seen now, the announcement relating to privatization of Ethiotel or getting third license, then also in the financial sector. Of course, the mobile money has been open and so is the bank financial sector. So I think the way it is going to work out is that the government will look -- I mean what you hear is that on the ground, is the government will look for more and more for indirect investments, opening up economies, and that takes time. And obviously, between till such time that currency stabilizes and there is enough flow. We will be going through a challenging time. And for us, I think the focus is to ensure that we service our local payments as much as possible to the fullest through the ETB, the local currency borrowing and then pay the -- to our importers, major payments importers through the funding that we have received that so you have done to the equity hard currency funding and also the funding that you will get from IFC, which is expected to be concluded this quarter. So it is not necessarily a problem right now, but it is something that we need to watch out very closely as government progresses on its liberalization agenda. Now coming to on findings, positive negatives. I think from a positive -- I will start the positive. First, I think we're creating, especially on the customer acquisition side, one thing we differentiated and differentiated from day 1 is biometric registration. That actually allows a lot more flexibility in the future because now for any initiatives, even government-led initiatives, you know the customer so a disbursement can happen because just a biometric verification will take care of that. So our all agents and dealer points can actually become half of those activities, including some of the challenges that we face here when a SIM gets sorted or a SIM that's replaced, we necessarily don't have any biometric check you have to rely on the physical documents. So there is a lot more focus on the digitization and overall agenda, probably government or other institutions will be looking at us to see this as a strong -- as a strength. Now the other positive thing is on mobile data usage. We have not -- even -- we haven't completed 1 year of our operations. In less than 1 year, we see average usage per customer per month of 2GB and remind me, Caroline, I think we finished FY '23 in Kenya side just over 3GB. Yes. So I mean, I think our view is that Ethiopia will catch up and actually supersede probably Kenya pretty fast. And also the ratio of penetration of mobile data users compared to the voice users is very, very healthy. So we actually see this as something very positive. I think the areas that I would call out, which takes time. I think voice usage is still low. And obviously, we don't have a community of interest in terms of the number of customers on voice side, which takes time. So that's obviously, we are on that ramping up phase, then -- the other thing I would -- I should say in terms of the price levels, price levels are quite low, whether it is for voice. Voice, I would still say it's okay, but I think mobile data price is quite low compared to the other markets and including Kenya and Ethiopia. So that's something I would say different. And the other thing is the pace at which you can do the rollout, I think it's probably a bit slower than what we could experience here in Kenya. But I think that's kind of improving. And as we speak, I think it's improving to a point, I could say it's probably becoming competitive, yes? And then the complexity of ease of doing business in terms of the approvals, the time takes to move around files. It's improving a lot, but it's still a lot to do. There is practically very minimal digitization in the way government services work, which I think with the penetration of smartphone with our mobile data propositions and our coverage, we believe that we can also make a big difference in the Ethiopia, which is currently lacking. Now in terms of U.S. debt, I think we have, from the chart that we have provided. I think it's given you some numbers. We were in the note that we have provided. So we don't have any foreign currency debt in Ethiopia yet. The first foreign currency denominated debt will come in Ethiopia would be IFC, yes. Having said that, we do have vendor financing, which is in hard currency, which also have given numbers. So you can just have a quick look at the briefing note that we have circulated. So as on Q1 FY '24, when the financing value is KES 30.89 billion which will be maybe about $250 million, maybe about $250 million, give and take of build the financing, so the deferred financing, not necessarily there is no other loan, which is the first one we get is from IFC.

Okay. Thank you very much, Dilip. I'm going to combine a set of questions, I've received a number of them from Tracy are touching on 2 key thematic areas IFC and M-PESA. So let's start with IFC, and I'll combine with a few others on IFC so that we can address some of the queries just touching on IFC together. So Tracy of SBG is asking, when will the IFC shareholding, when is it expected to reflect? And what premiums are payable for the MIGA guarantee? And what is the cost of debt for the IFC loan versus Ethiopia, local debt? So that combining with an almost similar question coming from Linet on please share additional details on IFC's term A loan the tenure, the rate, any moratorium given and combining that also with Muammar's question on the press release on IFC and debt equity injection, including a 10-year guarantee of USD 1 billion to cover the investments. Please, can you elaborate on what this means and what it is for and what the implications are for Safaricom's shareholding over the next 10 years. So a bit of detail on IFC and back to you Dilip.

Yes. Okay. Happy to start with the whole arrangement. So I'll give a brief on that. So from the announcement and the press release that you have seen, World Bank we signed agreement with World Bank on 3 areas. One is IFC coming in and putting in equity for a 7.25% shareholding amounting to $157 million into our global partnership for Ethiopia, which is GPE where the shareholders have their shareholding for the investment in Ethiopia. So that's the first part of it. And this investment will be over a period of time based on the equity call. And at the beginning, there will be a large chunk of that money will already go part of that because the other shareholders have already contributed to their equity. So not all $157 million come at a one go, it will come over phases, but most of the money will come as the shareholders contributed to get the net par 7.25%. The second part of World's Banks agreement is, so we signed a framework agreement after a prolonged due diligence were in IFC is bringing in $100 million bid into Ethiopia books of accounts, Ethiopia balance sheet. And in terms of those fairly good. The rates it's a markup on the SOFR and based on the current rate as you [indiscernible] subject to change. We are in the ballpark in all-in cost of around 8%, around 8%. So that's the cost of the debt, and it has a 5-year moratorium and in 10-year tenure. The third part is the MIGA. So MIGA is shareholders insurance of the investment they have put in into Ethiopia, should there be a situation which there are those situations, which have been actually defined, including there are 3 things where you can -- you stock -- you are not able to continue our business. You need to make sure that money can be recuperated back. So there are quite a few areas that has been not included. So this is a yearly renewal, so it's not forever. It's a yearly discussion. So up to $1 billion investment is protected through [indiscernible] and this also allows us to assess situation on the ground and then take a call. Over a long period of time, whether should we need to continue this? Or we can discontinue based on the actual improvement situation. I remember the time that we have gone for the bid, where we won the license. There's quite a bit of crisis integrate the region. And because of that, we wanted to make sure that the investments are secured and that's why we have, so we have gone for this insurance. This is a very well known insurance, many [indiscernible] companies. They do it on their investments and they're making some of the situations that come some of the countries where there is this risk that remains if such situation arises. So this is not necessarily our going in assumption that those risks will come up. This is just to make sure there is more of a protection should those situations arise are they still protected. So that's the background of all the 3 arrangement of the agreement that we have signed with IFC. And the money disbursal expected to happen pretty much between August and September.