VODAF - Vodacom Group Limited (VODAF) Q2 2024 Earnings Call Transcript

2023-11-13 15:56:09 ET

Vodacom Group Limited (VODAF)

Q2 2024 Earnings Conference Call

November 14, 2023 09:00 ET

Company Participants

JP Davids - Head of Investor Relations

Shameel Joosub - Chief Executive Officer

Raisibe Morathi - Chief Financial Officer

Conference Call Participants

Preshendran Odayar - Nedbank

Presentation

JP Davids

A very warm welcome to Vodacom's Interim Results Presentation. For those of you joining in person, you're getting a taste of summer from us and hopefully, you'll see more of that on the streets and beaches of South Africa. For those of you attending online, you're missing out on some soft-serve ice cream, I'm afraid and that lovely jingle that ice-cream makes as goes past your neighborhood.

We are going to kick off in a second or two with, firstly, a Flavor Of Our Summer Campaign advert, then a video from Shameela Rossabi [ph], after which time we will take Q&A. My name is JP Davids, Head of Investor Relations for Vodacom Group and a very warm welcome to you.

[Video being played]

Shameel Joosub

Welcome to our Interim Results Presentation, for the period ended September 30, 2023. The Vodacom is a purpose-led company and we connect for a better future. Our core connectivity business provides us with the foundation to deliver on our 3 purpose pillars; digital society, inclusion for all, and planet.

Over and above these 3 pillars, Vofacom steps up when there is a crisis and help is needed. This is very evident in how we responded to the COVID pandemic, the subsequent drought in Kenya and floods in Mozambique and South Africa. In the period, we donated the Health Care packages, following COVID outbreak in South Africa. In the DRC, following a devastating flood, we provided 3 connectivity and 3 invasive [ph] transfers in the region to affected customers.

To deliver lasting societal value, we have developed Tech for Good platforms. By design, these platforms are scalable and help us contribute to a digital society by developing solutions, across critical verticals, including Health Care, Education, Energy and Agriculture. In Egypt, we are leading the Universal Health Insurance and the Egyptian University Hospitals programs. By digitizing medical records in hospital and insurance information, we are supporting the seamless delivery of medical care and improved outcomes for beneficiaries.

This platform is live across 270 hospitals and serves over 6 million people. It also provides a case study for Health Care, across the continent. I'm particularly proud of our Code Like a Go program which we introduced in 2017. Code Like a Go tackles the low representation of goals in science, technology, engineering and mathematics education. It is curated to get more goals into careers that require coding skills. The program is accelerating across all of our markets with thousands of goals are retained this year.

More recently, we hosted a coding boot camp in South Africa across our schools of excellence. We recognize that climate change is a major challenge of our time. It poses significant risk to our operations and associate value chains and the countries in which we operate. While the impacts of climate change are global. Africa is one of the most vulnerable continents to climate change, with effects being more pronounced here than anywhere else.

Our first TCFD report was published in 2022 and communicated the initial steps in our climate journey. We recently published our second report in alignment with the TCFD recommendations and undertook detailed climate-related scenario analysis, of all our operating companies. While improving our understanding of our resilience to material climate-related risks and embedding climate change into our risk management framework.

In another historic first, we signed a virtual wheeling agreement with Eskom in South Africa. Under this agreement, we will sign up independent power producers and contribute this power to the grid for which Eskom will pass us a credit. This will have a positive impact on the country's power grid and serve as an important blueprint for other corporates to follow, while moving Vodacom South Africa closer to its goal of sourcing 100% of its electricity demand, from renewable energy resources.

Our group operates across 8 markets in Africa with a combined population of more than 500 million people. Based on the performance in the first 6 months, our consolidated operations are on track to deliver around ZAR150 billion of revenue this financial year. Further, our 35% stake in Safaricom, provides exposure to another major source of revenue and growth on the continent. We are the market leader across our footprint, with the exception of our start-up operation in Ethiopia. This is an important differentiator for our group and supports an attractive return on capital, while also providing us with a unique opportunity to drive digital and financial inclusion.

With smartphone penetration below 60% and our financial service customers at 74 million, we have a clear path to drive inclusion and long-term growth. Another key differentiator of our group is our asset rich portfolio. We are one of the few multi-country operators in Africa that owns the vast majority of its towers and mobile infrastructure. Among other benefits, owning our towers, helps us to localize operating costs.

When looking at our operating profit and customer mix, the inclusion of Vodafone Egypt, into the group materially changes our composition. From a customer perspective, Vodacom comprises 4 similarly sized segments with 76% of our 196 million customers from outside South Africa. We believe this portfolio mix provides us with the optimal combination of cash generative and growth assets. Vodacom is a powerful strategy that is expected to deliver superior returns for our shareholders. We call our strategy, The System of Advantage and it has 10 drivers of success.

The first 2 drivers, relate to our core connectivity offering. We have strengthened our footprint with a greenfield rollout in Ethiopia through Safaricom and the Vodafone Egypt acquisition. I'll provide an update on the investment case for these assets in my next slide.

Across all our markets, we are extending our connectivity, leadership through smartphone adoption, rural access and investment in fiber. Whether our customers want to connect via mobile, land or even space, we want to be the connectivity provider of choice. Our leadership in connectivity positions us to scale our digital ecosystem profitably. This ecosystem is powered by big data and spans across IoT, financial and digital services.

Later in the presentation, I'll provide more color on how we are using Big Data to support our world-class CVM and personalized pricing, behavioral loyalty programs and financial service products. In the enterprise space, we are partnering with business to accelerate their growth and with government to drive efficiencies. We are transforming the way of working through digital technology, in high-growth areas like cloud, hosting, managed security, managed services and IoT.

A key focus area for us in the business segment is SMEs which are prevalent across all our markets. We are tailoring connectivity, financial services, cloud hosting and security services for them. In the financial services space, we have built a formidable business across our existing markets. With products that cut across consumers and merchants. Vodacom's success in this segment is a function of our strategic focus and our clear sense of purpose to drive financial inclusion.

As we implement our System Of Advantage, we put an equal focus on considerations to improve our overall customer proposition, return on capital employed and value creation. A key part of optimizing returns and powering our growth is leveraging scale and partnerships. This is particularly relevant, as we accelerate our deep rural and 5 expirations. And we are hard at work creating scalable partnership models for both.

Of all the elements on this slide, the most important is #10. Our purpose at model shapes our outlook and our business strategy. The Vodafone Egypt acquisition was executed to advance our strategic ambitions and diversify and enhance our growth and returns profile. Since we announced the deal, the asset has delivered ahead of our business plan with its attractive ROCE and profitability, underpinned by its market leadership position and investment focus regulation.

We have also dialed up the strategic focus on financial services and this is evident in how quickly Vodafone cash is scaling. We see financial services as a long-term growth lever for this asset, given our ability to scale group products and services into Egypt to capture a massive addressable market opportunity. Despite a big move in the Egyptian pound, since we announced the transaction in 2021, `I'm pleased to report that Vodafone Egypt was earnings accretive in the first half. This positive contribution is after accounting for the funding cost of the deal, including the issuance of new shares and debt. This was a testament to the resilient margin structure of the business held by owning its towers.

Looking ahead, we expect FX to remain an important theme. However, we believe that these results showcase how the business can mitigate headwinds to deliver bottom line growth. In addition to the FX rate, cash repatriation is a near-term focus area for us. We are exploring several different options to repatriate cash, while also considering lucrative reinvestment options.

Switching to Ethiopia. We see this investment, as a long-term growth factor for Safaricom and the Vodacom Group. In this period, we have made important progress on the investment case of this greenfield rollout. We added the IFC into our consortium, a powerful partner which injected US$257 million, of equity and debt funding. Separately, we're leveraging the group's learnings from high inflation markets like Turkey, we are accelerating the localization of costs in Ethiopia.

Scaling this asset is key to us. The launch of M-Pesa will help with this scale. We are pleased to have launched this iconic service, couple of years earlier than our business plan anticipated. Our role, as a new engine in the market is a key variable to manage going forward. As we invest into the country, we are working with the regulators and the government to shape regulation that promotes a dynamic digital and financial inclusion.

Over a multiyear period, we have re-platformed Vodacom into a data-led organization, with truly impressive capabilities. Big Data is the engine of our digital ecosystem and supports our customer management, loyalty and financial services. By powering CVM with big data, we are able to tail our offers to the segment of one. This capability is critical in a customer-focused sector like ours.

In South Africa, more than 80% of our bundles already personalized. We are also leveraging Big Data into credit scorecards to support decision-making in our Telkom and Financial Service businesses. Safaricom is already benefiting from rich credit data analytics, while in Tanzania, we have a prepaid handset finance scorecard which will soon evolve into a full scorecard.

Our credit scorecards in South Africa, Lesotho and Mozambique are ready to be commercialized with the rest of our markets to follow in the near term. Big Data is supporting smart CapEx decisions and cost savings. Smart CapEx is especially important in the context of delivering a best-in-class return on capital, while ensuring we maintain network leadership across all markets.

In the last 12 months, we have driven ZAR1 billion of efficiency with our smart CapEx tool, a trend that is accelerating. Our intelligent automation takes robotics process automation, or RPA, to the next level. It is designed to deal with unstructured data and leverage AI in tools like Optical Character Recognition to translate and structure information. A very simple example is invoice processing. The outcomes are far from simple or ever, with us saving 2 million hours of time across the group. Big Data and AI is also helping us manage one of the most pervasive threats fraud.

In South Africa, we have blocked close to 1 million calls across some interactive voice response in term channels and are scaling the for tool across our markets. Behind the scenes, we are dialing up our fraud prevention and detection tools to mitigate the impact of increasingly sophisticated for syndicates. And then on to the most exciting aspect of our Big Data and AI capabilities. Our 360-degree view of the customer is where the power of data pulls together insights from Telkom, Financial Services and loyalty to drive our global recommender engine.

This recommender helps us improve customer offerings and incentivize the next best activity. This is where the power of data can translate into a distinct competitive advantage and material revenue outcomes. And there are numerous examples of how we can use this predictive AI in the real world. One of my personal favorites is as you walk into a shopping center, we know you are hungry and fancy hamburger. We then provide you with an EatNow palate offer supported by our credit scorecard. Now that's food for thought.

We are making good progress in our dual sided financial services strategy. On the merchant side, our base merchant base [ph] is close to reaching the 1 million mark at 950,000 merchants, up 41%. This growth helps expand our addressable commission pool, beyond peer-to-peer payments and withdrawals into both online and off-line commerce. In South Africa, our merchant acquiring business is also growing quickly with over 10,000 merchants. Our superapps are scaling nicely across the group with more than 4.4 million in base users adopting this channel.

Importantly, we are seeing constantly higher M-Pesa ARPU from the Superapp users. In Egypt, autocash is a go-to mobile wallet in the country with customers up an impressive 60% to 6.7 million. Our One app strategy in Egypt is attempted for the rest of the group and means there's a clear part of Vodafone Egypt to convert its 14 million monthly users on the Anna [ph] Vodafone app into Vodafone cash users.

In South Africa, our Super Voda Pay is again integral to our summer campaign in which 7.6 million downloads with over 100 mini apps launched. It's also worth mentioning the success of our insurance business in South Africa, with revenues growing at double digit in the period. As we diversify into new grow factors beyond peer-to-peer payments, our financial service product suite continues to broaden across global payments, lending, insurance and savings.

Across our international markets, 2/3 of our revenue growth was from new services in the 6-month period, an impressive stat. The close working relationship of South Africa, Egypt and our M-Pesa Africa hub, means we have a clear road map for new service growth across all markets.

Turning to the Group's results for the first half of the financial year, encouraging revenue trend that we saw in the first quarter continued into the second quarter. Higher interest rates, elevated levels of inflation and currency volatility, did however weigh on the Group's earnings. Group revenue grew 35.5% in the 6 months to ZAR72.8 billion. Excluding the contribution of Vodafone Egypt group revenue growth, was still an impressive 7.9%. Group service revenue grew 42.2% in the 6 months to ZAR59.4 billion, positively impacted by the acquisition of Vodafone Egypt. And the rand depreciation of 12% against our basket of international currencies. Excluding the contribution of Vodafone Egypt, group service revenue growth was strong at 7.9%, supported by a resilient performance in South Africa.

Our medium-term targets include Vodafone Egypt on a pro forma basis, as if it was on from the 1st of April 2022. On a target comparable basis, group service revenue growth was 9% for the interim period and the higher end of our medium-term range. Group EBITDA increased 35.1% to ZAR27.3 billion and was up 4.1%, excluding Vodafone Egypt.

On a target comparable basis, group EBITDA growth was 5.5%. We anticipate an acceleration of group EBITDA growth in the second half of the financial year, supported by cost phasing in our Fit for Growth cost program. We now serve 196 million customers across the footprint, up an impressive 11% with Egypt in the base. Our financial service customers reached 74 million, transacting $1 billion a day across our mobile wallet platforms.

Our headline earnings per share declined 4.2% to $4.38 per share. The decline was largely attributable to start-up losses in Ethiopia, higher interest rates and the prior year deferred tax asset recognized in Tanzania. Pleasingly, Vodafone Egypt contributed $0.16 per share to headline earnings per share despite having issued 242 million new group shares.

Separately, the Board declared an interim dividend per share of $0.35 per share which reflects our dividend policy of at least 75% of headline earnings. Looking at the drivers of group revenue, we delivered growth across each of our segments. I will unpack the segment results later in the presentation. But at a headline level, South Africa grew at 4%. Our international businesses reported service revenue growth of 16.6% and normalized service revenue growth of 4%.

While the Safaricom service revenue was up 9.8% in Ganion chilling. Vodafone Egypt service revenue grew at 28% in local currency and contributed ZAR14.3 billion in the period. Group operating profit increased 28.2% to ZAR17 billion on a reported basis. In South Africa, operating profit declined 3.3%, as a result of higher depreciation and the amortization of spectrum.

Operating profit in our International portfolio grew 0.2% and was impacted by start-up costs, associated with Vodacom's direct stake in Ethiopia. Across both South Africa and our International business, our recent spectrum acquisitions, resulted in higher amortization. While this is a transient P&L effect, we have secured our future.

Operating profit in Egypt grew 29.8% in local currency. On a rand reported basis, Safaricom contributed ZAR1.5 billion to group operating profit declining 1.1%. This was an encouraging outcome given that we expected Safaricom with the Ethiopia's EBITDA losses to peak in the current financial year. In fact, on a normalized basis and excluding the start-up losses, Safaricom's contribution to operating profit would have increased an impressive 15. 9% highlighting the quality of the asset.

The chart in the middle of the slide, is new disclosure. Here, we show the group service revenue across our key products. Each of these segments as structural growth drivers. In prepaid data, smartphone penetration, regulation, support of investment and expanded rural coverage stand to benefit us. Aligned with our parent Vodafone, we see Vodacom business as an important growth opportunity over the medium term and expect to see its contribution to the Group increasing from 19.3% today.

Diving into our new services, a little bit more, the slide sets out the contribution of IoT, fixed financial and digital services to each of our geographic segments. In South Africa, 16.6% of service revenue is now attributable to new services up 14.5% a year ago. Across our International portfolio, the contribution of new services is closer to 30%, while the Safaricom sets the benchmark at 46.6%. Vodafone Egypt's new service energy contribution. The service revenue is 15.1%, reflecting its early-stage growth profile in Vodafone cash.

We intend to scan each of these revenues trends into successful businesses and target that new service revenues will contribute 25% to 30% of Group service revenue over the medium term, including Vodafone Egypt. This slide sets out matrix that highlight the scale of our financial service businesses. As a group, including Safaricom, we now have 74 million financial service customers.

While this is a very impressive number on a stand-alone basis, the scope for growth remains very material with the penetration of our overall customer base, now it's just 38%. The scale of our financial service business is reflected in the volume of transactions we process. Over the last 12 months, this reached 29.3 billion transactions which is broadly double Africa's next biggest mobile money provider and was up 32.4%.

In the period, our revenue on a consolidated basis was up 40% to ZAR6. 2 billion. Egypt's inclusion contributed to this growth, while South Africa and International continued to grow in double digits. With an additional ZAR8.8 billion range generated by Safaricom, this implies a combined fintech revenue footprint of around US$1.5 billion.

In South Africa, service revenue generated from financial services grew 10.8% to ZAR1.6 billion. Revenue growth was underpinned by insurance. Our International businesses delivered M-Pesa revenue growth of ZAR3.8 billion in the period, up 27%. Our peer to peer is still growing nicely, new areas such as lending and merchant services were the key growth drivers.

Safaricom which sets the benchmark for financial services scale delivered 16.5% growth in Canyon Shillings. This is really impressive given the size of the base. Looking at the contribution of financial services to the Group, we generate just over 10% of consolidated service revenue from this product. In Safaricom, the contribution is 42%. And looking at the contribution to profit before tax which includes Safaricom, the weighting is now 20%. This bottom line weighting of financial services, means that Vodacom's investment case offers something quite different to typical emerging market Telkom.

Turning now to our 4 segments; revenue from Vodacom South Africa reached ZAR43.3 billion, up 5% and was driven by service revenue and strong equipment sales, as we grew smartphone penetration. Service revenue grew 4% to ZAR30.7 billion which is a good result given the ongoing macroeconomic challenges. Growth was supported by new services and mobile data. We added 3 million customers in the period to reach 47.3 million, up 7%. Mobile contract, customer revenue was up 4.1% and supported by good growth in our consumer segment. Prepaid service revenue increased 3.1% and accelerated to 3.5% in the second quarter as we leveraged our big data and personalized offers to mitigate the soft consumer environment. Data traffic increased 45.2% in the period, supported by smart phone and penetration and network availability. Data customers grew 8.5% to 26 million, supported by network resilience and capacity together with our continued value commitment to our customers.

New services was up a very healthy 18.1% and contributed ZAR5.1 billion of South Africa's service revenue. Within the mix of new services, fixed was particularly strong and grew 25%. Vofacom business service revenue increased marginally to ZAR8.7 billion and was impacted by pressure on wholesale. Excluding wholesale revenue, Vodacom business was up 3.8%, supported by good growth in cloud, hosting and security.

EBITDA grew by 1.6% for the period, as we reinvested cost savings into stronger network resilience and maintenance. We expect cost savings to accelerate into the second half of this year, supporting EBITDA growth. As we will discuss this in more detail in our presentation. Vodafone Egypt contributed service revenue growth of ZAR14.3 billion, up 28% on a comparable basis year-on-year, despite the challenging macroeconomic backdrop. Growth was supported by strong commercial traction in mobile and excellent growth in Vodafone Cash and fixed. Our value proposition in the market is an interesting case study for the rest of the Group. Customers grew 5.5% to 47 million, showing market share gain. Vodafone Cash and fixed line services are scaling rapidly.

In local currency, Vodafone cash revenues more than doubled in the period, with customers growing at 60% to 6.7 million. Vodafone Egypt is well on track to exceed EGP 1 trillion of transaction value in the financial year, a milestone we committed to at our March Investor Day. Data metric was strong and supported by network investment and spectrum investments.

Data traffic was up 43% in the period, supported by data customer growth of 13% to 28. 2 million. Smartphones in the network were up by 7% to 32.2 million. EBITDA grew at 20% to ZAR6.2 billion and contributed 23% of the Group's EBITDA. We expect higher EBITDA growth in the second half of the financial year, as base effects from one-offs in the prior period normalized.

Service revenue for our International business increased 16.6% to ZAR14.7 billion, supported by strong growth in data and in M-Pesa revenue and foreign exchange translation tailwinds. Data growth was strong at 35% with in M-Pesa growth at 27%. From a market perspective, we delivered strong double-digit growth in Tanzania, while the DRC was subdued by the macroeconomic environment.

Mozambique's performance was impacted by price transformation and we will start to lap this transformation in the second half of the financial year. Customers grew by 22.3% to 53.7 million, supported by strong commercial execution. Data revenue of ZAR3.8 billion contributed 26.1% of international service revenue, supported by data traffic growth of 40.4%.

Smartphone user growth was 19.6% to reach a penetration level of 33.9%. We see scope to accelerate smartphone adoption, meaningfully over the medium term with innovative handset financing options. We are piloting a new daily repayment model in Tanzania, a product we believe can be scaled to support digital inclusion. Our M-Pesa customers increased an impressive 15% to 21 million. M-Pesa revenue was up 27% to ZAR3.8 billion, contributing 25.9% of International service revenue. Don's granted [ph] across our international business more than doubled to ZAR8 billion. To grow and diversify the M-Pesa ecosystem, we have also accelerated our merchant strategy, more than doubling the number of active merchants to 292, 000. Our Pesa app is now live across all our markets with our mini app rollout continuing.

International EBITDA was ZAR5.4 billion and grew 14.1%, reflecting foreign exchange translation tailwinds. We expect a clear improvement in normalized EBITDA growth in the second half of the financial year, supported by cost efficiencies. Safaricom delivered an excellent performance in Kenya and confirmed that network rollout in Ethiopia is tracking its guidance. Service revenue increased 9.8% in local currency, a clear acceleration from the 5.2% reported in FY '23.

The acceleration was driven by an excellent performance in mobile data and in M-Pesa revenue, both of which delivered growth well into the double digits. M-Pesa growth accelerated through the period and was an excellent 21.4% in the second quarter. The growth was supported by new services, including a successful partnership with government called the Hassler Fund. Despite the massive base, the volume of M-Pesa transactions grew 44.5% to 7.2 billion in the period. Transaction values processed over the last 12 months, equated to 273.1 million highlighting the scale of the business. Kenya's data revenue grew 12.5%, accelerating from the prior year chain rate, as price transformation supported strong usage growth.

Fixed service revenue grew 9.1% to KES 7.4 billion, supported by 28.7% growth in consumer revenue. FTTH customers grew 28.8% to reach 223,000. EBITDA for the Kenyan operations was up 13% with margins improving 3.7 percentage points to 55.9%. The margin was supported by lower handset sales and cost control initiatives. Safaricom's overall EBITDA, including Ethiopia, increased 7.6%, reflecting the expected start-up losses associated with the Ethiopian rollout.

Safaricom Ethiopia reach from 4.1 million customers in less than a year since its commercial launch. In August this year, Safaricom Ethiopia launched M-Pesa, allowing customers to send and receive money, purchase airtime and pay merchants. Safaricom Ethiopia will lead the Group's mobile financial services scale and expertise to transform the lives of Ethiopians in Africa's second most populous country.

Given the excellent performance in the period, Safaricom upgraded its guidance for Kenya and the group, Safaricom now targets double-digit EBIT growth in Kenya, well ahead of inflation.

Raisibe Morathi

In this video, I will unpack our results for the 6 months period ended 30th of September 23. We have delivered excellent revenue growth in this period despite mounting macroeconomic challenges. We are also sharpening our forecast on cost but more on this in my presentation. From here -- shareholder perspective, we have a dividend of $0.35 per share, in line with our payout policy.

Moving to our financial performance. Our income statement sets out reported growth and 2 other growth metrics to help provide better insight into our underlying trends. The pro forma growth provides the growth of the business in constant currency, assuming Vodafone Egypt had been acquired on the first of April 2022. This is comparable with our medium-term targets.

Additionally, normalized growth sets out the constant currency growth of the business, excluding Vodafone Egypt. So a measure of the legacy Vodacom Group. On a forma basis, service revenue increased by an impressive 9%, supported by excellent growth in Egypt and a solid performance in South Africa. The normalized growth, excluding Vodafone Egypt was 4.1%. On a similar pro forma measure Group EBITDA grew 5.5% and the reported EBITDA reached ZAR27.3 billion, representing a margin of 37.5%. The EBITDA margin was unchanged year-on-year, supported by inclusion of Vodafone Egypt which generated a healthy 42% margin.

The net profit from associate and joint ventures of ZAR1.3 billion, declined 8% on a reported basis, as it was impacted by start-up losses from our business in Ethiopia. Excluding the impact of Ethiopia, associates increased 12.5%, reflecting an excellent performance in Safaricom Kenya.

Headline earnings per share declined 4.2% to $0.43 per share. The decline was largely attributable to Ethiopia, higher finance charges and the prior year deferred tax asset recognized in Tanzania. As set out on the previous slide, pro forma service revenue growth for the Group was 9% in this 6-month period. This was consistent across the first and the second quarter.

South Africa delivered a modest improvement from 3.9% growth in the first quarter to 4.1% in the second quarter. This was pleasing, given the macro headwinds and the energy crisis in our largest market. Service revenue for our International business increased 4% in this half, supported by strong growth in data revenue and M-Pesa. In the second quarter, normalized service revenue growth of 3.1% and was subdued by Mozambique price transformation.

We expect a better performance from International, through the course of the second half. In this slide, we provide more context around our Group EBITDA growth drivers. The chart on the left-hand side provides a year-on-year bridge for EBITDA. Group EBITDA grew 35.1% to ZAR27.3 billion, or 5.5% on a pro forma basis including Egypt.

On an absolute basis, Egypt added ZAR6.2 billion to Group EBITDA, the key driver of reported growth. EBITDA was also supported by revenue growth in South Africa and International which outpaced cost growth. On the right-hand side, we set out the progress for our Fit for Growth cost program, a key component of EBITDA delivery and our growth outlook. This program is focused on operating costs and includes a big focus on network and technology.

We deliver savings through rigorous supply chain management and as a result of efficiencies and optimization related to our digital agenda. In FY '23, an acceleration of cost savings in the second half of the prior year, supported ATA improvement in group EBIT flation in the second half, as a result of this cost savings. Year-to-date, we have already delivered over ZAR1 billion of cost savings and plan to exceed last year's outcome.

This is expected to support an improved EBITDA growth outlook into the second half. These slides provide a bridge from EBITDA growth of 35.1%, to the net profit growth of 23.5%. From EBITDA, higher depreciation and amortization, as well as the start-up costs in Ethiopia, offset the underlying growth in Safaricom, our associates. The higher depreciation and amortization in South Africa and International is, as a result of capital expenditure growth over the recent years and the translation impact of a weaker end.

Below the operating profit line, higher finance income helped to partially offset higher finance costs. The change in finance costs, were as a result of sharp increase in interest cost and higher net debt, as a result of funding Vodafone Egypt deal, as well as the Spectrum acquisitions. I will unpack the net debt movement in the upcoming slides.

Still focused on the bottom line. Our headline earnings per share declined 4.2% to $0.438 per share. HEPS was impacted by the start-up losses in Ethiopia, higher finance costs and prior year deferred tax asset recognition in Tanzania. Pleasingly, Vodafone Egypt was accretive and contributed $0.16 per share, despite higher shares in issue and associated funding costs. This means the remaining businesses did not contribute meaningfully to group HEPS, something we intend to address in the second half.

Shifting forecast to cash flow, we generated operating free cash flow of ZAR7.2 billion, up 49.1%, having invested ZAR9.5 billion into CapEx, a further ZAR3.2 billion applied to lease payments and ZAR7.1 billion absorbed into working capital. The working capital outflow is seasonal and we expect this negative growth to unwind into the second half, supporting strong free cash flow generation.

From operating free cash flow, we received some finance income but this was offset by finance costs, net dividend paid to minorities, as well as taxation. As we set out in the call-out box on the right-hand side of the slide, the net dividend paid to minorities was higher than the associated dividend from Safaricom. This was a function of timing with us having received 2 Safaricom dividends, i.e., the interim and the final in the same period last year. We receive Safaricom's interim dividend for FY '23 ahead of the 31st March, being a week earlier than payment as usual.

Our cash flow in the period was impacted by some timing anomalies. I've already mentioned the Safaricom dividend timing, having pulled forward its interim payment into the second half of last year. This amounted to ZAR1.3 billion. Additionally, our Egypt business makes its final top-up tax payment in the first half. This means that the cash tax of Egypt was ZAR700 million more than the P&L tax, however, will normalize in the second half. Whilst free cash flow was a small negative, this trend of a soft first half is very much in line with our multiyear pattern.

The chart on the right, shows that our free cash flow generation is skewed to the second half. We expect the same trend to play out this year. Following the acquisition of Vodafone Egypt, in the previous financial year, the dividend policy was set at least 75% of Vodacom's headline innings at this level of pay, Vodacom offers one of the highest dividend payouts. Aligned to this policy for this period, the Board has declared an interim dividend of $0.305 per share. Our dividend payment for this period equates to around ZAR6.3 billion in cash paid. The $0.340 interim dividend in the prior year was based on 80% payout ratio, as the Vodafone Egypt deal had not yet closed.

Our net debt-to-EBITDA ratio improved from 1.1x to 1x in this period, with the increase in net debt offset by higher group EBITDA in this period. We provide the key drivers of this change in the waterfall chart. Dividends paid in this period exceeded seasonally low free cash flow, was ZAR1.1 billion, was directed towards spectrum across our International markets.

Looking ahead to the second half, we expect significantly stronger free cash flow generation and a lower dividend payout to support our leverage outlook. Looking at the composition of our borrowings, 86% of our debt, excluding leases, is rent based limiting our exposure to foreign exchange movements. From an interest rate perspective, our debt structure is split 37% fixed and 63% floating rates. This mix provides us with an opportunity to benefit from stabilizing and even falling interest rate expectations, when the cycle turns. And now our medium-term targets. We aim to grow service revenue in mid- to high single digits and EBITDA at high single digit.

Our Group capital intensity ratio remains in a range of between 13% and 14.5% of revenue. These targets are on average, over the next 3 years, based on prevailing economic conditions and include Egypt on a pro forma basis. Our associate Safaricom also provides guidance on Kenya, Ethiopia and the Group. It was encouraging to see that Safarcom upgraded its FY '24 EBIT guidance, for Kenya and Group on the back of excellent first half results. Safaricom also reiterated its Ethiopia guidance where the trough in its losses, occurs this year. It is anticipated that the EBITDA breakeven will be reached in 4 years, implying that there are still some losses to come from Ethiopia but less so than in FY '24.

In this slide, we see -- we set out our capital allocation priorities. Our first priority is investment into organic growth which includes our core connectivity business and new growth areas. This investment is supported by our Big Data capabilities which helped us generate the best return for each rent invested. Our dividend policy means that we do not need to compromise on our organic investment with a payout of 75% of headline earnings, we are left with room to fund our CapEx intensity and also de-lever our balance sheet in due course.

In my concluding slide, I would like to reconcile our medium-term growth target with the shape of our business in years to come and in particular, our ambitions around new services. These new services encompass digital and financial services, fixed and IoT and are key to our diversifying our revenue portfolio and improving our customer proposition. On a consolidated basis, with South Africa, Egypt and International business in scope, we see our new service revenue contribution increasing from 19.8% to around 25% to 30% in the medium term.

On that exciting note, I will conclude and thank you for your attention.

Shameel Joosub

To conclude our presentation, I'd like to set out how we plan to enhance value to our shareholders. Firstly, we will continue to execute on our multiproduct approach, our system of advantage. A key part of our strategy is to invest into fiber. In this context, we were disappointed by the Competition Commission's position, to not recommend Vodacom proposed purchase of a 30% stake in massive. It's important to note that this is not the end of the process.

The next step is for the proposed transaction to be presented to the Competition Tribunal which will more than likely take place in May next year. We remain hopeful that the tribunal will recognize the pro-competitive advantages, that the proposed transaction would have on the fiber market and the country as a whole. To enhance our leadership in mobile, we are focused on accelerating the penetration across our markets, with new Spectrum unlocking fixed wireless opportunities.

We also have exciting plans around new device financing models in the pipeline. Across our digital ecosystem, we have growth opportunities ahead of us, of new products and scaling of existing platforms and our one-net strategy. I'm particularly excited about the structural growth opportunity from the recent launch of M-Pesa in Ethiopia. And we are very excited to scale our soup [ph] apps, Voda Pay and M-Pesa, considering the exceptional growth we have witnessed so far this financial year.

At the same time, our continued and renewed focus on simplifying customer journeys and enhancing customer experience in all our markets remains a key priority for us. In transforming to Telkom, we will include the optimizing of our assets through sharing. To this end, we aim to unlock benefits to partnerships in both rural coverage and fiber across our footprint. As we pull together the levers of our strategy, we are now positioned to accelerate our growth profile and this is reflective in our updated targets, mindful that this growth must be profitable, we remain focused on our return on capital employed.

Finally, we will always prioritize our contribution to societies, in which we operate and our purpose-led ambitions. We will focus on increasing our female representation at management levels, reducing our greenhouse gas emissions, across the footprint and driving financial inclusion. These targets are including management's long-term incentives. We look forward to engaging with you over the coming weeks on our investor or shares [ph].

This concludes my presentation. Thank you for your attention.

Question-and-Answer Session

A - JP Davids

Okay. Good morning, again, everyone. So we've got a few questions online but let's start in the room. Just to be clear, Raisibe and I still haven't had our ice creams yet. I won't mention the person who has but we will be completing the deal after the results. Preshendran, do you want to go first?

Preshendran Odayar

But let me hit you with 2 questions on South Africa. If I can first congrats on the results. But can you share with us what your data traffic growth was in South Africa for the second quarter? It looks like it slowed down a bit. So if you can to share some reasons why. And then coupled with that, I saw in your presentation, you mentioned the -- that 80% of your bundles in South Africa were sold through your CVN platform. Can you share what the split was between voice bundles and data bundles?

And then if I can, with that, what is the voice revenue decline for the quarter as it -- I know it was high double digits the last time -- sorry, high single digits, low double digits, the last time we chatted on the previous quarter. If you can just share what the voice revenue decline was for that quarter. And I know you don't disclose data revenue but can you just share what the data revenue growth was, just for that quarter.

JP Davids

Yes. So maybe I'll just kick off with some of those. So just firstly, on data traffic in South Africa, you are correct. It did slow a little bit, into the -- but it's still above 40% in the quarter. And I guess the important thing to convey is across all 3 segments, you're growing data traffic growth above 40%. So Egypt across our International businesses and in South Africa.

Then to your question on just voice and helping you a little bit with that part of the business. We did see it actually sequentially improve from first quarter to second quarter in terms of prepaid voice. So a little bit of an easier decline relative to the first quarter, still under pressure in fairness. And I'll let Shameel elaborate on what's driving that. So I'll just do the numbers. He can expand on what the call out is there. And then, sorry, Preshendran, I missed the one other one in terms of...

Preshendran Odayar

[Indiscernible].

JP Davids

Yes. Sure. So we're able to give you the prepaid side of things because -- so Preshendran asked him for the split between prepaid -- sorry, voice and data. We can do that for prepaid because it's easier to allocate. And that's in terms of bundles you're asking rather than revenues. Okay. Why don't you first answer on what we're doing on voice and then I'll come back to the bundle question.

Shameel Joosub

Yes. I think from a voice perspective, no secret that voice is under pressure. I think that's generally a telco trend at the moment. But what we're trying to do is to make sure that we move it to more integrated packages. So our pricing to integrated packages that include voice and data. In Egypt, we do what we call Flex which essentially gives you the ability to -- you buy units and then you can use the units for minutes or data. So we are looking at certain transformations in that respect. I think you're seeing a few things, people utilizing. So you've got a few trends that are playing out in voice. One is people using -- Whatsapp voice. Two is basically people using things like voice nodes and these types of things as well. So we will have strategies that will increase voice by allocating different types of bundles on a personalized basis to customers and making sure that we can keep the revenue with in voice.

The good news is we still capture on the data side. So we're not losing the usage completely. But of course, it does come at a different rate. So we're trying to manage the 2 across the footprint now, 21% is basically voice. The rest is data, financial services and so on and so on. So we are seeing the diversification of revenue coming through. And then, of course, of the 20%, you have got a lot of stability in there, 25% of that is Egypt. And Egypt, you don't have an issue because there's no Whatsapp voice.

JP Davids

And then just following up on the bundle split. So it's actually very even between voice and data in terms of what we're doing in South Africa. So you can consider them basically the same for the moment. Data has slightly more users adopting bundles but in terms of absolute volume of bundles, quite similar. The new and emerging growth area for bundles, though which Shameel called out as the integrated bundles, -- so those are double-digit contributors but still, I guess, at an earlier stage in terms of adoption but certainly growing the fastest out of those 3 bits.

Any other questions in the room before I move online? Okay. So moving online, a couple of questions. First, 2 from Neil Venter the analyst from ABSA. Probably the first question to you, Shameel. It's a more strategic one and then I'll follow up with a question to Raisibe. So first question is -- would Vodacom consider exiting some of the smaller markets it operates in such as the DRC or Mozambique?

Shameel Joosub

Well, I wouldn't call it small. i mean at the DRC to put in perspective the $650 million a year business now. So these are quite material. And of course, Mozambique, so quite a big business for us, good margins in both businesses. Of course, there's times when you go through some changes and so on but if you look at the overall structure of the market. So I think in the DRC, we're seeing good growth. Last year, we grew double digit. There has been some economic pressures this year but we think it recovers. In Mozambique, we have had to go through a price transformation. And I think -- but it's a strong 42%, 43% margin business, so a really good business for us. And so we do see the potential to still grow.

We will only exit markets where essentially the market structure is wrong and we're losing money. And that effectively, we don't see a part of recovery. So we don't see us being able to recover that business within a 3-year to 5-year horizon, then we certainly will not be emotional and look at it with a different lens.

JP Davids

And then on to you, Raisibe, one on the -- I guess, same theme, maybe a couple of elements to it related to the balance sheet. So Neil is commenting that while 1x EBITDA which is our leverage ratio, is not a significant concern. How does that compared to or way up against the lack of free cash flow in the period and the big absolute debt number of ZAR57 billion, are we still comfortable at these debt levels? Or is there a priority to cut debt from here, especially given higher interest rates?

Raisibe Morathi

Thanks, Neil. So the 1x is well within our band of 1.5x. And also noting that, that ceiling of 1.5x is what we said internally, our the threshold they're looking at is 2.5x. So I think we are 1 of the telcos still with a very healthy net debt to EBITDA. In terms of the debt of ZAR57 billion, of course, there's always a plan that we will reduce debt over time. So with the dividend payout that has been restructured, One of the reasons, of course, is that to delever our balance sheet and therefore, we will start paying down the debt. Free cash flow being slightly down. Our cash flow is generally skewed to the second half of the year. So we expect that to correct as we have seen in the prior period and because, obviously, our quarter three is the strongest quarter. So, additional is the fact that we pointed out that in the base, we had Safaricom dividend, that would have been paid in the second half, coming in the first half, so it was just a timing of a couple of days. And therefore, we end up with 2 Safaricom dividends in the period -- in the prior period. And in addition to that, we had a provisional tax for Egypt that we had to pay.

So I wouldn't worry too much about the slight negative number on the free cash flow. Because it is some factors that are more one-off. But seasonally, we will see some cash flow coming through in the second half of the year. So overall, I think in terms of looking at that net debt to EBITDA perspective, we're quite comfortable that at 1x is actually quite healthy and it's an improvement, as you would have noticed from 1.1x. So we expect it to continue to be in that kind of region. And of course, we have to make sure that our balance sheet is also well optimized. And I think that the levels that you're talking about, it is optimized.

JP Davids

Peter from Merger Markets. I'm not going to ask you a question because it's effectively the same but just asking around plans to reduce debt from here. So thanks for covering that. We've got a few from Maddy at HSBC. I'm going to kick off with these first two, then I'll come to the third. The first one, can you give us some more details around some of the cost pressures in the first half which impacted the headline earnings per share trend?

Maddy is asking to go a step further and asking whether that is skewed to 1Q or 2Q. And then the second question, a great performance on revenue but did competition impact margins at all, during the first half or the second quarter period? So maybe said another way, did we have to give up some margin for competitive pressures, that we're seeing. And it's not clear which market that is but maybe we just touch on very briefly across the portfolio, whether that's a general trend, we're seeing.

So Raisibe, maybe you can kick off with the some of the cost pressures that we're seeing across the group and then Shameel, you can take the -- whether we're needing to sacrifice any margin.

Raisibe Morathi

Yes. So in terms of the costs, we know that in the emerging markets currencies have been a bit weak. So -- and naturally, then the costs which are dollar-denominated would be impacted by that. but we have been negotiating with the various suppliers. So there's a number of instances where we have converted the dollar-based cost into local currency costs which is obviously taking I guess we are taking advantage of the size. But from a negotiating perspective, we can be able to negotiate some of those is -- the good thing is that with some of the suppliers who negotiate once, covering all the different markets. So that part is continuing. We are also looking at more opportunities for sharing. We already had a number of cost efficiency programs and the shared services companies from within the group, the broader Vodafone and also from within the Vodacom markets. And we continue to focus on that.

So we do anticipate that there will be further cost savings in our second half. In terms of the skew of the cost between first quarter and second quarter, I think it is pretty much even, the costs would include some of the fewer costs that we have seen increasing in different markets. with the economies being difficult. We have seen some of the countries that had like fuel subsidies, et cetera, beginning to win off but it is really nothing of major significance between first quarter and second quarter. So we're looking into the second quarter with still the fit-for-growth program that we've identified upfront beginning of the year. But between all our markets, there's at least about ZAR3.4 billion of cost savings. And of which roughly about 40% has already come through. And we anticipate that the second half will just get on and then be able to recognize all of that.

JP Davids

So Shameel, just coming back to that competition point.

Shameel Joosub

Yes. So I think the only market where it is really due to competition, I would say, has been Mozambique, where effectively, we are going to apply transformation to remain competitive. So I think that's the one market that has been impacted. For the rest, you'll see actually very strong growth. Specifically, I think if you look at customers, customer growth across all the markets have been very strong. So that does mean that you would have allocated a few more resources to ensure that you've got that success. So your strong customer growth would have been, created through retail activity, focus, the right offers and so on and so on. But it's not due to competitive pressures. So I think that leaves us in a very good -- I think what's encouraging if I look at the numbers, I think strong growth in customers in the first half which would bode well for the performance through the year.

JP Davids

Then on to Maddy's third question. It's around the dividend policy. -- which is correct in saying it's a minimum payout of 75%. Is there a -- is there a point at which we would consider paying above that 75% mark? Or are we going to be stuck at the 75% forever?

Raisibe Morathi

Maybe I can get 25%. We remain one of the highest dividend payers on the JSE. So yes, I'm sure there's always a possibility. But at this stage, we believe that 75% is the right level, given we still do our capital allocation abroad various categories. We need to fund our ongoing organic growth. We need to pay off debt and we also need to make sure that we still pay you the dividend. So altogether, I think the 75% for now, it is kind of the right number. Of course, if we do change, we'll let you know.

JP Davids

And then just to circle back, I guess, on a question I received from a number of people this morning which is just the phasing between the first half and the second half around EBITDA growth. Perhaps a question for you, to Raisibe. We're talking about EBITDA growth improving into the second half of the year. You talked a little bit about cost programs but I guess how confident are we that there's going to be this recovery into the second half of the year, particularly around EBITDA growth for the portfolio.

Raisibe Morathi

Yes. So again, just the seasonality, our business is quite skewed in the higher revenue growth in the second half because of the third quarter. That includes the seasonal summer campaign and so on. In most of our markets, of course, Egypt is different is in the Northern Hemisphere. But we also have the base effect, where in DRC, we had some of the one-off costs coming through in the first -- in the second half last year. So we expect IB in particular to come through. And of course, we had the adverse weather conditions, both in DRC and Mozambique last year. So some floods and all the other things. So those are also a softer base for the second half in IB, so that is also expected to improve.

From an SA perspective, we're likely to do with the summer campaign, as well as the cost program. So the momentum that we saw in Egypt, we also expect that to continue. So hence, supporting the view about the second half. In terms of how it would affect margin, I think our margin that 87.5% is pretty much kind of the right level and with obviously the makeup different from different markets. Roughly about that number in SA, 42% in Egypt and around 38% or so in the IB market. So that is the kind of guidance from an EBITDA perspective or EBITDA margin perspective.

JP Davids

Okay. Then coming into the final couple of questions. We have A question around cash repatriation from Egypt which you referenced in your slide pack there. So in our video presentation, have we actually taken any money out of Egypt to date? And if we could just discuss the liquidity in the market at this point in time, what the ForEx liquidity in Egypt is at this point in time?

Raisibe Morathi

Yes. So it was getting better. And of course, the Middle East war is something that is still to be understood in terms of the impact and so on. But what we have done is that we are investing money in interest-yielding instruments whilst we are looking for opportunities for repatriation, we are discussing with the government to see what opportunities can be made available. but we are also fortunate in that we have operations which are based in Egypt. So some of our costs which are in Egypt, we just use the cash that is available already in Egypt to pay for that. You would have seen in Same slide that we also referenced looking at other investment opportunities that can be taken advantage of using the money that is already in Egypt. So we'll continue to look into that.

But overall, we do see this as a cyclical issue rather than a long-term issue. And whilst the dividend that is in Egypt remains unpaid into South Africa, it does not affect our capacity to fund the rest of the business in SA. So we're able to pay the dividend. We're able to do all the other things, including servicing the debt, that we have taken. So of course, we'll continue to work on all those different options that I have identified. And given that, this is a cyclical thing, I'm sure it will correct at some stage.

JP Davids

Perfect. So last question. Shameel, you can take this one and then perhaps you can just conclude after that. So it's just a question from Sean Jacobs of Daily Investor, wondering if we can give any financial performance indicators for Voda Pay. And I suppose if we don't have any of those, town, just any sort of update on Voda Pay and then perhaps we can conclude.

Shameel Joosub

Yes. I think what we've seen is our financial and digital services business in South Africa growing strongly. So that was kind of mid-teens growth, so that was really good. And our specifically financial service business growing double digit, buoyed by a very strong performance in the insurance and also acquiring merchant acquiring businesses. I think, what we saw in Voda Pay, it's still early days. What we're doing at the moment is really driving the uptake of the service. It's a platform. So what platforms you're going to get -- you've got to keep focusing on downloads, growing your active user base. So we're sitting at 4.3 million active users, 7.6 million downloads. What we have done and what we're busy with is what we call the One app strategy which effectively is to put all the -- so that we essentially sunset Vodacom normal app. And that will increase the amount of traffic in the app.

We're doing that in Egypt to great success. And we, of course, want to do the same in South Africa. We've already built all the features of the Vodacom map into Voda Pay, so that's ready. And now over time will sunset basically after summer -- will sunset the current Vodacom app. And that will increase the spin. As you come for airtime, we'll sell you a holiday or some chicken or some nice burgers or groceries. And if you come for something else, we'll sell you airtime. So I think it's really -- it's a good place to be but it's still early days. I think the -- so just to conclude, thank you for joining us. I think what you will see from a results perspective, I think we're very happy and confident with the results. The turnover has been good. EBITDA has been a little strained during the first half but we see a strong recovery in the second half. Part of that was deliberate in terms of phasing some of the costs and stuff into the first half that's come towards strong customer growth and we should see the benefits of that into the second half, both on EBITDA and in cash. Thank you.

JP Davids

Yes. Thank you for joining us.

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Vodacom Group Limited (VODAF) Q2 2024 Earnings Call Transcript