Safaricom PLC (SCOM) Earnings Call Transcript

Good morning, good afternoon, good evening to you all from wherever you're joining us from, and welcome to our Safaricom Ethiopia quarterly update call where we'll be briefing you on the business performance of our operations in Ethiopia. My name is Caroline Wambugu. I head the Finance Planning and Analysis team, including Investor Relations, and I'll be moderating the discussion. We have our CEO, Peter Ndegwa, who will make introductory remarks; and our CFO, Dilip Pal, who will share a brief performance overview before we open the session to field your questions. Before we kick off the session, allow me to speak to 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. If you haven't, you can rename yourself now by hovering the casa over your name and clicking rename on the drop-down. Throughout this session, any questions you have for the leadership team should be shared via the Q&A tab. And at the end of your question, kindly remember to include your organization's name. And 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, then click Show Captions. This will allow you to keep up with the conversation in a more comfortable manner. Finally, and in case you require any assistance from us that is not related directly to the discussion, you can write to us via the chat platform, and the Investor Relations team will be on hand to assist you from the back end. I now welcome our CEO, Peter Ndegwa, to officially start us off with his opening remarks. Thank you, and over to you, Peter.

Yes. So thank you, Caroline. And just confirm that you can hear me?

We can hear you well, Peter. Please proceed.

Yes. So good afternoon and good evening, everyone, who have joined us today. I can see we have just about 100 attendees joining us this afternoon or this evening. And we are very happy to be able to engage with you as we have promised on a quarterly basis on our Ethiopia business. So I'll go through just a bit of a summary and then I'll ask Dilip, as Caroline has said, to go into a CFO summary. So it's been 22 months since we launched commercial operations in Ethiopia. We've done a number of things at a high level. We've sharpened our strategic approach. We've started to redefine and evolve our business model, recognizing that this is going to be a low ARPU market in order for us to meet customer needs, but also our business model needs; and also have launched, as we announced previously, an enhanced distribution model to build accountability on the ground, to build visibility of our brand and propositions, but also to build transparency with customers and also trust. In terms of our purpose. In Ethiopia, our purpose remains to transform lives for a digital future. And our vision is to establish an innovative brand that is loved by our customers. And our intention is to build a world-class network that allows us to add customer loyalty and ensure that we are learning from the lessons since we started our operations. But the most important is to create a digital future for customers that is guided by internal values such as customer obsession, trust, respect, innovation, compliance and integrity. From a brand perspective, we want to establish a data network. We want to be seen as a -- primarily, our going-in position is to offer superior data experience. And we already see that our customers appreciate the superior customer experience we are offering and in terms of reliable connectivity and speeds. We're also positioning ourselves as an international brand for the youth, so much younger brand and have a new -- that should have shown a real affinity for data and also are most suited and actually aspire to associate with new international and more aspirational brands. As I've said, we have established ONE distribution network, both for combining our GSM, but also mobile money business. We decided not to separate distribution of both -- of the 2 propositions in order for us to have a One Customer approach, and one service approach; and a streamlined way of driving trade execution in order for us to have One Trade, so one visit that allows us to see customers once and not to differentiate between GSM and also M-PESA dealers, agents and merchants. From a network perspective, our strategy is focused on enhancing population coverage, which is important, and we have clear regulatory obligations to meet in this instance. We also want to ensure that we have critical mass in order for us to offer a seamless experience for our customers, but also deliver a network rollout that allows us to deliver at low cost in terms of cost efficiencies given the low ARPU market position -- I mean, lower ARPU market environment that we face. Sites distribution is guided, as I've said, by license obligation and geo-marketing to identify continuous socioeconomic clusters, but also population areas that we prioritize and sequence our rollout so that we start with more dense and then keep moving outwards. As you know, we've been doing both self-build, but also infrastructure sharing with Ethiotel, and we continue to do that. And our intention is instead -- I mean, in maturity, we should have around 10 to -- an 8,000 to 10,000 sites by year 10 of operations. So far, we've rolled out about 2,900 sites, and we are on track to meet our guidance for full year of approximately 3,500 sites. From a regulatory perspective, just starting with some of the areas that we've had security challenges, Amhara and Tigray. The state of emergency in Amhara region is now ended, ended sometime in mid-June. But however, we are still seeing issues on the ground with curfew and restrictions still ongoing. On a positive note, we now have resumed Internet data access or services for about 1/3 of our sites in that region. As you know, most of them are restricted for data. This, of course, has started to prove very useful in terms of revenue momentum and customer momentum. And we hope that more areas within Amhara now will be opened up. In Tigray, we have resumed network rollout and also -- and we have about 102 sites, and we launched commercial operations sometime in June. And we have been very encouraged by what we have seen since the launch. From National Bank of Ethiopia, they have launched what they call a new monetary policy framework for Ethiopia, which is geared to modernize the monetary policy framework and align it to global best practice. So the National Bank of Ethiopia launched this on the 9th of July and aims to make sure that they have low and stable and predictable inflationary environment. This includes adopting modern central bank practices and enhancing technical capacity of the NBE. In particular, they will use what they are calling a National Bank Rate, NBR, as the primary tool for signaling policy stance and influencing monetary conditions. The initial policy interest rate is now set at 15%, 1-5. The NBE is also conducting bi-weekly auctions to manage liquidity in the banking system, ensuring that the interbank market rate aligns with the NBR. And the bank has also made additional measures, including introduction of overnight lending and deposit facilities and an electronic platform for interbank money market operations. As you know, liquidity had been quite constrained. So it's good to see the NBE putting a lot more structure in the way they manage this -- in the way they use these instruments. Although this has not impacted the setting of -- the NBR has not influenced the cost of borrowing immediately, we believe and many economists believe that the cost of borrowing will gradually move to the NBR plus a margin as banks embrace the new guidance from the Central Bank. And clearly, this is important for us as we have some -- quite some borrowing so far, and we intend to continue to ensure we have local currency borrowing in the future. So this will be an area of interest for us and we'll continue watching. So I want to end there, Caroline, and hand over back to you or to Dilip.

Thank you. Thank you very much, Peter, for that overview. Let me now welcome our CFO, Dilip Pal, to give us an overview on performance. Dilip, over to you.

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

Yes, we can hear you. Please proceed.

Okay. So good morning, good afternoon and good evening from wherever you have joined. It's good to be talking to you again. Feels like yesterday when we have released our full year results and then the road shows that just finished, and then we are again talking about our quarter 1 performance update of Ethiopia. To start with, I'll give a little bit of update on the macros, which are in big part of our watch list. As you have seen, it's a bit of a mixed bag. We have inflation easing out, which is now one of the lowest level that we have seen, less than 20%, which is good. And at the highest level, we were 30% plus. So it's on a decline. The projection or prediction that we are hearing is that it's still going to be double digit, but it's going to go down. And I think another encouraging factor is on GDP growth. As you have seen, the GDP growth is accelerating. I think it's one of the best performing country in terms of the projection, it's expected to be anything between 7.5% to 8% GDP growth. The concerns, of course, remains on the currency side, it's continued. I mean, although it's a controlled currency, the -- it's depreciating, but there is also a big discussion around a potential negotiation and conclusion with IMF leading to a devaluation of currency, time line and the extent of which is still not clear. As Peter mentioned, when we were releasing our full year results, and if you have seen, we were -- on customer side, due to Amhara closure, so we got impacted by that, and we haven't seen much of growth in customers. For example, Q3 to Q4, 90-day active customers pretty much remains same or flat. But with the distribution model, which just Peter spoke about, which he mentioned to you that we are in the process of transforming our distribution model, which is now stable, and with more so the launch of Tigray in June is helping us to now see a positive traction in the customer additions. As you have seen in this quarter, we have moved from a 4.4 million -- 4.35 million to 4.57 million 90-day active customer base, which is good. And we see that the traction continues. And if you recall, one of our enabling factor for our guidance for full year for Ethiopia was based on a customer base of 7 million to 10 million. We are confident that we will reach there. And so the other area that I wanted to highlight, not so much, although we are registering a lot of customers, I think activity level for M-PESA customer is still low. And that's something -- although we're making some progress on partnerships, which are good, but the one -- this is one area where you have to do much better than what we have done. We are registering customers, but activity levels are still low. Peter mentioned about sites. I think we're also comfortable in reaching our guidance of 3,500 sites. Presently, we are about 44% of population coverage, which, as you know, with 120 million to 125 million population, is a large number of population that we have already covered. And this was clearly our strategy to make sure that we cover the population and now leverage, this is really the year of leveraging the populations that we have covered. From a revenue side, it's tracking well, mostly driven by mobile data. As you have seen, user usage is really driving the growth. Almost 80% of revenue is now coming from mobile data. And we see that it's positively reflecting on the ARPU, quarter-on-quarter ARPU as well. So CapEx, we are in line. And I think the other part is the Amhara, that 40% opening up of Amhara region on the mobile data is also going to help us in this quarter, quarter 2, in terms of accelerating mobile data even further. I think the watchout areas for us are still on macros. We are still in a hyperinflationary environment. So it will be IAS 29 will still most likely to apply in this year as well, in FY '25 as well. So we'll still be under IAS 29. And as I mentioned, the other area, which is very closely monitoring, is the devaluation. And we are developing all scenarios and also mitigations plan based on those scenarios to make sure that the impact of devaluation is minimum on the overall group performance. So Caroline, that's all I wanted to cover, and then I hand it over to you for the Q&A session now.

Thank you. Thank you very much, Dilip, for that great overview. So again, I encourage us to post our questions on the Q&A tab. Thank you to those that have already started sharing with us their questions. And immediately, we shall get into it right now.

I'll take questions from Tracy, Tracy Kivunyu of SBG. Tracy, thank you for your 7 questions, well received. And so, Dilip, this one is direct to you. A number of them, maybe I will give you the details off-line. But let's talk about the sites rollout. So Tracy is concerned as to why the site rollout has slowed down in the first quarter of this financial year. And as you take us through that, the second question is, has there been an increase in voice traffic post implementation of lower MTRs in the country? And the last question to you, Dilip, from Tracy is how -- has there been an update on M-PESA access to full -- to fuel payments? Actually, let me give that to you, Peter, on the fuel payment, which I'll combine with a question coming from Wesley related to the SIM. If you could please comment on the status on mobile money agency rollout, pricing model and competitive landscape. And on the latter, what would agency interoperability mean for the business if it comes to play? That is from Wesley Manambo on mobile money. Wesley is with the Standard Investment Bank. So I'll give that to you, Peter, to combine it with the fuel payment piece for M-PESA. And then Dilip, you can take the first 2. Over to you. Let's start with you, Peter -- oh, sorry, Dilip.

Yes, I can start, and then I'll hand over to Peter for the rest. So Tracy, on site rollout, as I mentioned to you, so we finished, I think our closing number is about 2,800 sites. And we said during this financial year, we intend to close by 3,500 sites, which will take care of our coverage obligation as well. There is no slowdown in site rollout. I think one of the areas that we highlighted when we released our full year results that you get into a scale, so you're beginning to get into that scale, and then you want to make sure that you are commercializing your site rollout in a better way. So the transformation, the distribution and the entire product and marketing propositions are towards that. So there is no -- I mean, there is no plan for scaling back of what we already mentioned about. It's just the speed in which we originally plan, and that's what we are delivering now. As you know, we have done quite a bit of number of sites in the last financial year. So we have to make sure that those are put into commercial use alongside it's just not about the rolling out number of sites, but we also make sure that we commercialize. But we are on plan to reach to the 3,500 sites that we spoke about. I think on voice, I mentioned about mobile data, I think we are also beginning to see some positive traction on voice as well. Just to give you a number, I think our quarter 4 30-day active voice user was around 2.28 million, which was -- which has now moved to 2.7 million. So we see voice users growth faster than what we have seen in the past, which is good. And then we also see the minutes of usage per customer has also moved up from 84 minutes to now 91 minutes or 92 minutes. So we are adding more customers on the voice side, active users, and also we are seeing more usage. So just to confirm, yes, we are seeing some positive traction in voice as well. So over to you, Peter.

Yes. Okay. So thank you, Tracy, and thank you for some of the questions. Yes, I think the thing is on fuel payments, still not fully on stream. We do have electricity coming through. That has now been enabled, still at a low scale, but fuel payments are still not through. The Ministry of Transport is starting to -- I mean, is developing infrastructure that will allow all partners, including M-PESA, to be able to enable all payments providers to be able to enable the fuel payments. So once that is done, we expect that both ourselves and anyone else in the industry will be able to connect and be able to get to the same level that telebirr lays in terms of enabling fuel payments. In terms of agents, yes, we continue to accelerate our rollout or recruitment of agents. Agency interoperability is not necessarily a big concern for us. I think the most important for us at this stage is making sure that we have propositions that customers or use cases that customers can go after. And that's why some of the public sector payments use cases are very, very important because once customers start to use M-PESA on a regular basis, then they will be able to carry out all the other services. Of course, the agency interoperability like we have seen in other countries coming in at some point will help, but that's not the constraint at the moment. The most important enabler of progress is to ensure that we have use cases on the payment side that customers can use on a regular basis. That's why fuel is so important.

Thank you. Thank you very much, Peter. Thank you very much, Dilip. There's a follow-up question here from Wesley. And I know, Dilip, you sort of alluded to the IAS 29 impact coming through even this year, but maybe just a little bit more color based on Wesley Manambo's question, which reads, on IAS 29, inflation trends signal that this might be the last financial year with hyperinflationary adjustments. Does this change your projection on the breakeven, at least from an accounting vantage point? Dilip?

No. So as I mentioned, the timing of when we will be out of hyperinflation or IAS 29 environment is still uncertain. And there are factors which will lead to this. So I think we'll have to just watch out. So I cannot -- this year, definitely, we are in, in FY '24, definitely IAS 29. As I mentioned to you, there are inflation scenarios which could change it. But at least from our point of view, we don't see a certainty about that we are going -- we'll be out of IAS 29 after this year. But this year, for sure, based on our assessment of what the inflation is likely to be, we'll be in a IAS 29 environment for FY'25 at least.

Thank you. Thank you for that, Dilip. I do have a question here from Rohit. Rohit is with the Citi. And the question is, and this is to you, Dilip, please, could you share if you plan to infuse more equity funding in Ethiopia in the near term? And any update approval for the $350 million loan from IFC?

Yes. So Rohit, what we -- I'll start with IFC. I mean that's one of the approval that IFC has gone through their internal process, but we haven't concluded internal process from our side. So there are several considerations that we are also taking into account in terms of balancing the foreign debt versus local debt. Our focus is a lot on trying to maximize local debt based on the payment profile that we have. Having said that, that's something is always there for us to evaluate and then take an appropriate call in future. So yes, we haven't concluded either way, but IFC has done from their side, but we -- our process is still ongoing. Along with that, I think I also want to highlight to you, if you have seen the contribution from all the shareholders that has now -- in this quarter, there has been additional infusion of equity by about $164 million. So we closed FY '24 with $1.626 billion, and that has now gone up by about $164 million, which is entirely equity. So I think we have the flexibility to be able to finance through equity as well as through the debt. But as you know, we have to ensure that we are not getting into a big -- in a dollar-denominated or hard currency-denominated debt. And therefore, we are trying to make sure that we maximize as much as local debt as possible, and that's what we are doing currently.

Thank you. Thank you very much, Dilip. And Peter, this is a question I'll direct to you. This is from Maximilian Sporer. Maximilian is with Mobius Capital. And the question is, are you expecting to remain the only foreign telco in Ethiopia? And why do you think the others are not pushing into that market? Peter?

Yes. I think it's a great question. I think in the long term, we believe that there will be 3 players because it's a large market, 120 million people. So you'd expect in the fullness of time, there will be 3 players. However, we've always been signaling in the recent past that because the government has tried a couple of times and not been successful in attracting credible third player to bid for the market -- for the third license, we do not believe that it will come through in the next -- in the foreseeable future, first, because the funding environment have been constrained globally from a financial market perspective, and we didn't expect that there's anyone who would come in at this time. Having said that, we also believe that should we be very successful, then that will also be an attractive -- an attraction criteria for a third player. And the proxies will be how is the regulatory environment going, what are the ARPUs in the market, how is the government dealing with the FX issue, whether it's a devaluation or not, and also how is the security situation. Security, to a large extent, has always been known, but the other 2 factors, I think, will be a consideration. And so at the moment, we don't see the likelihood that it will come, but at some point in the future, certainly, we believe it will. I think the third component is that the government needs also to make a decision as to the future of investment into Ethiotel because they have already signaled a strategic investor coming in there. To some extent, that also will be a signal to how the telecommunication industry is developing, and that also will influence how a third player comes and the timing of it.

Thank you. Thank you very much, Peter, for that. I see your question, Alessandra David, asking for a breakdown of the M-PESA services by segment. So that one, I'll take it off-line. We'll be able to share that with you. We'll share with you that breakdown for M-PESA by segment. So Dilip, I'll direct these questions to you from Danesh, Danesh of Franklin Templeton. What is the current black market rate on the birr? And the second question is, what percentage of population is represented by the Amhara and Tigray region? And would these regions be or have lower ARPU than current average? And the last question from Danesh is, in your scenario planning, what changes the breakeven year? Dilip?

Okay. So I will start with the first one, which is the unofficial market rate. It is anything between what we hear is 110 -- around 110 compared to, say, the official rate of about 56, 57. So it's pretty much double that of what the official rate is. So the unofficial market had not moved much. But as you know, even the official market, the control depreciation is happening, but it's happening at a much slower pace, 3%, 4%. I think 5%, 6% year-over-year is very, very small. On population, I think Amhara -- so I don't have the exact number, but from our perspective, our network footprint is close to 20%, 25% of our network footprint is in Amhara, so -- which is what was, as I mentioned to you in the beginning, that was causing -- because we are not -- our main proposition is mobile data. And when Internet is off, so basically, we are not only losing our existing customers, but also new customers don't have necessarily a proposition, much proposition. So that's with the 1/3 of the sites being enabled now with mobile data, that is likely to have a positive impact. From an ARPU perspective, the -- yes, I think Tigray ARPU, what we are observing is slightly lower than, of course, what we have seen in the other markets. It's mainly driven by -- we see a lot of traction on the voice, and it's also a function of the devices. So the device ecosystem, the penetration of the smartphone is lower than what we see in other markets. So in one way, it is accelerating voice, but also, I think, one thing to acknowledge that the ARPUs are slightly lower. I think from a breakeven perspective, let's wait and see what happens because devaluation has many scenarios, yes? So of course, I think a moderate devaluation may not change materially, but then -- I mean I'm saying moderate day 1 impact -- or day 1 devaluation may not change materially. But then if it is stiffer and then how that plays out, I think we need to come back to you and show you based on that. But it could change the breakeven beyond what we said, which is also FY '26, if the devaluation is stiff. Back to you, Caroline.

Thank you. Thank you very much, Dilip, for that. So I'll take a question here from Kishan. Kishan is with MIT, and this is again to you, Dilip. And he says, just to piggyback on the guidance, is there any changes to EBITDA breakeven forecast for FY '26 and the 15 million to 20 million customers that we guided in May? Dilip.