Blu Label Unlimited Group Limited (BLU) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Blue Label Telecoms presentation of its unaudited results for the 6 months ended 30th of November 2021. During this half, we have achieved some significant milestones as we proved to be resilient during an economically difficult period, while at the same time, we already faced the ongoing challenges posed by COVID-19. Despite this, the group continued to generate cash, and back to basics, as announced last year, remain our strategic focus as we simplify our portfolio and revert to our core business. We continue to make significant investments in product development, IT infrastructure and digitization, and these results show that this investment has paid off. Our revenue, including the gross amount generated on PINless top-ups, electricity, ticketing and gaming grew by 12% to just over ZAR 36 billion, equating to an increase of $223 million, 20% on gross profit. Gross profit margins increased from 11.87% to 14.93%. When referring to our financial highlights, you will note that our revenue generated by the continued operations reflected a marginal decline from ZAR 9.6 billion last year to ZAR 9.1 billion. As I've just mentioned above, such decline was attributable to the accounting treatment of commissions earned on PINless top-ups as opposed to the gross revenue thereon. This decline was congruent with the continued shift in market buying patterns to PINless top-ups in which only the commission earnings accounted for and not the gross revenue generated thereon. Net cash generated from trading activities amounted to ZAR 862 million, whilst interest-bearing borrowings declined from ZAR 2.32 billion to just under ZAR 2 billion, ZAR 1.97 billion. Headline earnings increased to just under $0.61 per share and core headline earnings to $0.6269. The group continues to increase market share in both this product and service mix to defend and grow its positions in the market with a 3% increase in gross airtime and data revenue to ZAR 17.9 billion and a 12% increase in gross electricity revenue to ZAR 15.9 billion is proof of this. Our interest-bearing debt has increased slightly as the group continues to generate satisfactory levels of cash. When looking at our product performance, we are happy with the growth that we achieved during this half period despite margin squeeze across high-performing products, and we're also impressed by the performance of our Ringas voucher and our Blu voucher, launched last year in response to consumer buying behavior, moving away from traditional PIN offline channels to PINless online channels. The retail channel experienced some major setbacks across the segment due to the political unrest and looting in July of last year, and the year-on-year decline of 0.8% for face values attributable to site closures as a result of the unrest. Further expansion into retail and other retail independent segments is compounding as we develop and launch new products. This has resulted in growth in our financial service offerings in conjunction with our new relationships with financial service institutions. Since establishing this organization 20 years ago, we had to relook our different strategies, approaches and offerings and COVID-19 challenges in consumer behavior, different social demands and increased competition has helped us to diversify our services and products to ensure that we remain ahead of the game. We introduced new revenue streams in transportation, gaming and money transfers. And we have launched various offerings across the broader financial services category, more specifically within payments, credit and insurance. The July unrest and looting saw more than 340 people dead, ZAR 50 billion [ loss ] of our economy affecting more than 40,000 businesses also impacted on our operations. More than 500 of our customer sites were affected in many spaza shops had to close out of fear. But our company has been resilient given the essential nature of our products and our business model is robust. We can, however, not rest on our laurels, but we are constantly searching for products and opportunities to make life easier and our products more accessible to all of our customers. Financial inclusion remains Blue Label's driving philosophy and is for this reason that we would continue to invest in the informal market, so they can always be top of mind in all that we do. We develop products that are relevant, accessible, safe, affordable and convenient as we seek to expand our footprint, offering the best value to both our informal base of traders and the many consumers who rely on us to keep their lights on, keep them in touch with loved ones and get them to work, school and church. That is why we are happy with stabilizing our trading base. It shows good transaction, good traction and has grown 12% since the start of the financial year. But more exciting is the fact that our average monthly trade value per trader has increased by 67% from June last year to December. Analyzing buying patterns, we noted that those patterns seen in main markets are starting to reflect in the informal segment too, and a clear reduction in pending airtime in data is now also evident here. We are also encouraged by the significant month-to-month growth for Ringas and entertainment, not only when compared to the previous financial year but also month-to-month during it. Now let's look at some of the performances of some of our subsidiaries. CEC continues to make significant progress in stabilizing many operational areas of Project Boston with customer services and credit rating having delivered some impressive results over the first half. They have refined the strategic priorities, which aside from the postpaid business, include Nano-Advances, new credit products and Striide, the gym equipment offering. They have also recently concluded the African Bank financing agreement of ZAR 1.9 billion, and this funding allows it additional flexibility to support entrepreneurial initiatives and the freedom to pursue other opportunities. But most impressive is the fact that CEC increased its gross profit from ZAR 177 million last year to almost ZAR 370 million for the 6 months ended 30th of November 2021. Project Boston is now fully operational, and their priorities include the profitable growth of the Cell C postpaid business, a reduction of churn on the base and to regain our consumer champion title. Our gym equipment rental offering, namely Striide, was launched in September last year, in line with CEC strategy to offer new credit and product offerings, and the intention is to offer network customers innovative and attractive products and bundles and differentiate ourselves in the market while at the same time testing models for expansion into other products. We are currently in the process of augmenting our Nano-Advances and buy now, pay later services to include all Blue Label products. This service offers emergency electricity top-ups to prepaid clients. Turning our attention to Cell C. I can assure you that the steady progress has been made in the execution of the strategy. The implementation of Cell C's new operating model and network strategy on track and this would be completed within the next 24 months. Cell C has also had a stable subscriber base and the company is attracting new prepaid customers through innovative new products and services, while they improve their competitiveness in the market. More importantly, though, is that costs are managed tightly and the company remains steadfast in transforming the business into a tech company. More information would be provided by Cell C when they announce their results during the course of April. Cell C continues to reduce operating costs with its EBIT being in line with the strategy, a 4% increase in prepaid subscribers boosted by exponential growth in prepaid broadband subscribers caused a slight decrease in the overall prepaid ARPU. We are aware that the recapitalization of Cell C will address the balance sheet and provide momentum to effectively manage the transition. This along with the focus on profitable revenue growth and the overall simplification of the cost base place the mobile operator on a path to long-term sustainability. Most of the signatories to the umbrella term sheet have already signed and we hope that we'll have them all signed shortly. This is part of the overall process and restructuring of the transaction to ensure the sustainable debt profile, which is on track. We acknowledge the public interest in this process but undertake to update the market in due course. I now hand over to my brother and Blue Label's joint CEO, Mark, who will take us through Cigicell Blue Label Data Solutions and BluNova and technology. Thank you.

Thanks, Brett. Good afternoon, everyone. It gives me great please to share some of highlights and achievements by some of our subsidiaries and our various projects to change the way we work and operate to the use of data, innovation, digitalization and technology. On Cigicell, Cigicell over the year has been evolving its business model by embedding itself as a strategic business partner with municipalities in order to provide critical solutions that assist its partner base with large power user audits, rectification of inaccuracies, data verification, credit control and electricity meter installations and audits. We are focused and determined to help municipalities we partner with to be able to collect what is duly owed to them both past and present. With gross revenues for the period June to November 2021 growing by 21% when comparing it to the same period last year, it is clear that the business has the capability and capacity to sustain its performance and growth due to the innovation around revenue enhancements and revenue protection, which is gaining traction within the municipalities. ReWare, our smart metering solutions service provider continues to gain traction and its performance is expected to improve from the previous year, a there has been an increase in revenue, boost about prepaid and commercial meters within municipalities. There are several other growth opportunities in the pipeline, which we look forward to talking about in the future. VRM, a business unit within Cigicell, oversees the strategic planning, implementation and evaluation of municipal services, including data integrity and verifications, credit control and stock collections and indigent registrations to ultimately integrate and optimize revenue management within the Cigicell Group. Contracts which were delayed due to the pandemic and will form part of the innovation of the revenue enhancement protection are gradually taking off. Our bulk payments brand, UniPay, continues to grow through our online and traditional retail channels. When looking at Blue Label Data Solutions, we note that COVID-19 headwinds still exist and the fourth wave, which commenced in November, had a significant impact on call center operations throughout South Africa. We, however, continue to grow our opt-in database, which is up from ZAR 29.3 million in May 2021 to ZAR 31.3 million. We are also using cellular, credit and loan campaigns to aggressively expand our opt-in database along with third-party initiatives. In order to replace volumes lost due to POPIA constraints, we've been focusing on growing our call center lead generation, which ultimately improves our ability to upsell and cross-sell. Capabilities added now also include hot key transfers, automated voice messaging and reverse billed data. I'm also happy to announce that POPIA is now fully implemented and effective, and our strong level of compliance has allowed us to grow and take market share. Lastly on this, we have also noticed an upswing in the credit-related market as the financing sector appears to be opening up lending, and because of our high levels of compliance, this has allowed us to offer the best possible service to our potential clients. Moving on to BluNova. BluNova develops insights, feature variable, skills and competencies that can be used and reused across the group. One key example of this is the development of our Nano-Advances where BluNova developed an alternate scorecard for assessing creditworthiness. This was achieved through the provision of intelligent data analytics and consumer profiling that will then provide intelligent leads. BluNova works primarily with internal companies, namely CEC, Cell C, BLD, TPC and Glocell, and they're on track to achieve both their financial and strategic goals. Data and analytics have become key drivers for the group going forward as it assists various businesses within the group by digitizing and building automated transactional businesses. This does not come without its own challenges, as the mining of group data continues to be extremely complex, move slowly, the results in projects being delayed due to dependencies in client environments. Our ability to recruit and retrain data analysts, data engineers and data scientists have become quite challenging in the market. We are, however, excited with the endless possibilities that are and will be created through our data analytics capabilities. Some of our recent achievements have been a reduction in IT costs through the optimization of our architecture and governance, BluNova having developed the NanoScore card to support our Nano-Advances and buy now, pay later products as well as restructuring itself to be more focused on strategic goals and client projects. Moving on to technology. As explained and illustrated, we are fully committed to moving our business from digitally availability to fully digital-driven business models. So when looking at digital business advancements and core platform transformation, we have completed the rollout of remote work tools, advance our enterprise architecture. We have selected and implemented robotic process automation platform. We have also initiated the rolling out of more than 80 identified automation opportunities into core subsidiaries. We have also concluded the build-out of our API gateway capabilities and simplified integrations to enable marketplace business models. And when it comes to decisioning, we have made significant advances in the implementation of data-driven decisioning, supported by an aggressive build-out of the BluNova product set scoring and decisioning environment. On our infrastructure and fixed cost transformation, we have been embracing the hybrid cloud rails both during 2020 and 2021 for our software release processes by building a cloud-native and hybrid environment and containerizing all cloud services. This will allow software release pipelines as the central orchestration layer between build and release. On programs, we have concluded our always-on Active-Active disaster recovery and business continuity implementation. These are all being deployed. And when we are talking about costs, we have reduced running cost to reduce our transactional fixed costs by reducing infrastructure procurement expenditure and redirecting funds to a cloud-based as a service agreement and staffing. When we look at our ongoing operational stability and cybersecurity, our aim is to maintain high stability, resilience and redundancy by design to ensure continued reliability on our service offerings. On uptime, we have combined uptime of 99.9% across all transactional platforms. We have completed compliance initiatives with updates to POPIA and achieve readiness for cybersecurity at compliance. We also maintain ongoing cybersecurity vigilance with a zero tolerance factor. And on controls, we have ongoing security and fraud controls implemented within the transactional business systems, which strengthened fraud detection mechanisms in the core systems. I'll now hand you over to Dean who will take you through the Blue Label financials. Thank you.

Thanks, Mark. Good afternoon, ladies and gentlemen. The financial highlights for the period ended 30th of November 2021 were as follows: revenue of ZAR 9.1 billion, on inclusion of the gross amount generated on PINless top-ups, prepaid electricity, ticketing and gaming, the effective increase equated to 12% from ZAR 32.4 billion to ZAR 36.2 billion. Gross profit increased by 20% from ZAR 1.14 billion to ZAR 1.36 billion. Increase in gross profit margins from 11.87% to 14.93%. EBITDA of ZAR 902 million. Cash generated from operating activities of ZAR 862 million. Interest-bearing borrowings reduced to ZAR 1.97 billion from ZAR 2.3 billion in the prior period. Core headline earnings per share increased by 22% from $0.3735 per share to $0.4568 per share on exclusion of nonrecurring income of ZAR 148 million in the current period and ZAR 22 million in the prior period. Core headline earnings for the period ended 30 November 2021 amounted to ZAR 549 million, of which ZAR 548 million related to continuing operations and $1 million to discontinued operations. Core headline earnings amounted to ZAR 0.6269 per share. In the comparative period, core headline earnings amounted to ZAR 376 million, of which ZAR 351 million related to continuing operations and ZAR 25 million to discontinued operations. Core headline earnings amounted to ZAR 0.427 per share. On exclusion of the nonrecurring income of ZAR 148 million in the current period and ZAR 22 million in the prior period, core headline earnings from continuing operations increased by ZAR 71 million from ZAR 329 million to ZAR 400 million, and core headline earnings per share from continuing operations increased by 22% from $0.3735 per share in the prior period to ZAR 0.4568 per share. This growth was indicative of a robust trading performance by the group during the period under review. The nonrecurring income emanated from a fraudulent scheme operating since 2015 which was perpetrated by 2 former senior executives of the subsidiary company of the group. These fraudulent transactions were performed primarily outside of the course and scope of the subsidiary's immediate fields of commercial dealings, whereby the perpetrators interposed themselves between the intermediatory companies and the subsidiary for their own benefit. In addition, certain transactions were identified, evidencing theft of funds from the subsidiary and the fraudulent concealment thereof. Once-off recoupment income comprising the aggregate value of assets either realized by or signed over to the group as a result of the fraudulent scheme amounted to ZAR 315 million. This income was partially offset by professional fees incurred, taxation and the noncontrolling interest thereon totaling ZAR 167 million, resulting in a net recoupment of ZAR 148 million. On exclusion of the nonrecurring income in both the current and prior period, earnings per share and headline earnings per share from continuing operations increased by 24% to $0.4369 per share and 23% to $0.4385 per share, respectively. The financial results of WiConnect in the current and prior periods of ZAR 1 million and ZAR 25 million, respectively, are disclosed in core headline earnings from discontinued operations and are not included in the continuing operations, revenue, gross profit, EBITDA and net profit after taxation. Revenue generated by the continuing operations within the group declined by 5% to ZAR 9.1 billion as only the gross profit earned on PINless top-ups, prepaid electricity, ticketing and gaming are recognized as revenue. On imputing the gross revenue generated thereon, the effect of growth in revenue equated to 12% from ZAR 32.4 billion to ZAR 36.2 billion. Gross revenue generated on PINless top-ups increased by ZAR 1.2 billion, 14%, from ZAR 9 billion to ZAR 10.3 billion, and gross gaming revenue increased by ZAR 296 million, 45%, from ZAR 660 million to ZAR 956 million. The group's ticketing revenue increased by ZAR 44 million from the prior period. Net commissions earned on the distribution of prepaid electricity amounted to ZAR 177 million. Revenue generated on behalf of the utilities increased by 21% from ZAR 13.2 billion to ZAR 15.9 billion. Gross profit increased by ZAR 223 million, 20%, to ZAR 1.36 billion congruent with an increase in margins from 11.87% to 14.93%. On exclusion of the ZAR 278 million relating to the nonrecurring recoupment income, net of professional fees incurred in the current period and ZAR 102 million in the prior period, EBITDA increased by ZAR 23 million from ZAR 601 million to ZAR 624 million. As anticipated, the increase in overhead included costs of ZAR 25 million attributable to new learnership initiatives, whereby the benefit thereof realized by way of income tax savings as a result of Section 12H allowances being claimed for such learnerships. Furthermore, additional headcount and expenditure incurred in order to enhance IT infrastructure and the group's analytic and product development capabilities primarily contributed to the limited increase in EBITDA. Moving to the balance sheet. Total assets increased by ZAR 1.2 billion to ZAR 12.6 billion, of which noncurrent assets accounted for ZAR 0.3 billion and current assets for ZAR 0.9 billion. Noncurrent assets included increases in intangible assets and goodwill of ZAR 387 million, investments in and loans to associates and joint ventures of ZAR 28 million, financial assets at fair value through profit and loss of ZAR 41 million and financial assets at fair value through other comprehensive income of ZAR 7 million. These increases were offset by decreases in advances to customers of ZAR 122 million, capital expenditure net of depreciation of ZAR 6 million, right-of-use assets of ZAR 9 million, deferred taxation of ZAR 7 million and loan receivables of ZAR 3 million. Of the net increase in intangible assets and goodwill of ZAR 387 million, additions to intangible assets amounted to ZAR 530 million, offset by amortization of ZAR 143 million. Of the total additions to intangible assets, ZAR 420 million related to costs borne by the group in terms of the subscription income sharing arrangement and ZAR 91 million to subscriber acquisition costs. The net increase of ZAR 43 million in investments and loans to associates and joint ventures comprised the group's net share of profits totaling ZAR 9.6 million, acquisitions of further shares in an associate of ZAR 17.7 million, net loan increases of ZAR 15.3 million and its share of the movement in foreign currency translation reserves amounting to ZAR 1.5 million. The material net increases in current assets included increases in trade and other receivables of ZAR 778 million, cash and cash equivalents of ZAR 525 million, noncurrent assets classified as held for sale of ZAR 34 million and inventory of ZAR 17 million, offset by decreases in advances to customers of ZAR 386 million and financial assets at fair value through profit and loss of ZAR 126 million. The stock turn from continuing operations equated to 23 days compared to 22 days for the financial year ended 31st of May 2021. The debtors collection period increased to 73 days compared to 59 days for the financial year ended 31st of May 2021. On exclusion of trade debtors relating to CEC, the debtors collection period increased to 29 days compared to 28 days for the financial year ended 31st of May 2021. Net profit attributable to equity holders amounted to ZAR 531 million, contributing to accumulated capital and reserves of ZAR 3.7 billion. Current liabilities increased by ZAR 559 million, comprising an increase in trade and other payables of ZAR 449 million, borrowings of ZAR 130 million and tax liabilities of ZAR 87 million. These increases was offset by a decrease in financial guarantee contracts of ZAR 105 million. Average credit terms from continuing operations equated to 135 days compared to 116 days for the financial year ended 31st of May 2021. The decrease in financial guarantee contracts of ZAR 105 million was due to a settlement of an amount owing by Glocell Proprietary Limited to Investec Bank Limited that was guaranteed by Glocell Distribution Proprietary Limited, congruent with the buyout of the latter's noncontrolling interest in the current period. Moving to the cash flow statement. Cash generated from trading operations totaled ZAR 954 million, working capital movement comprised an increase in trade payables of ZAR 310 million, and a decrease in advances to customers of ZAR 508 million, offset by an increase in trade receivables and inventory of ZAR 729 million and $16 million, respectively. After incurring net finance cost and taxation, net cash generated from operating activities amounted to ZAR 862 million. Net cash flow utilized in investing activities amounted to ZAR 454 million, primarily attributable to the cost of intangible assets of ZAR 405 million, capital expenditure of ZAR 32 million, the acquisition of associate shares of ZAR 5 million and net loans granted of ZAR 15 million. Of the ZAR 405 million invested in intangible assets, ZAR 385 million related to costs borne by the group in terms of the subscription income sharing agreement. Cash flow generated from financing activities amounted to ZAR 117 million, of which ZAR 157 million related to net increases in borrowings, offset by ZAR 19 million to lease payments and ZAR 21 million to dividend payments to noncontrolling interest. Cash and cash equivalents accumulated to ZAR 2.9 billion at the 30th of November 2021. We are thankful to the Board of Directors for their continued support and commitment to the group. Thank you. The floor is now open to questions.

Good afternoon, everybody, and welcome to Blue Label's interim report for November 2021. And I'll start with anyone on the call -- anyone have a question?

Sir, at this stage, we don't have any questions on the lines.

Okay. We'll move across to any questions that have come through. The first question is from Philip Short. How is it, Phil? CEC is now 1/3 of the group's profits with the division growing profits by 40% year-on-year. If possible, can you give some guidance on CEC's run rate for the next 6 to 12 months? So just to be a little bit more specific, CEC contributes around 30% to our bottom line at the moment. Obviously, it has shown tremendous growth, is going to show we believe even more growth going forward. So the run rate that we believe for the next 6 or 12 months is more of the same and better. So that's exciting. There are a few more products that are going into CEC that traditionally could have gone into other parts of the group. So to separate it any longer, I guess you got to look at it more of the same now, and that is we spoke about Striide, which is a whole gym equipment. It's a brand new product range launched in October. We think it's going to be really good on the postpaid side. And very excited for the launch of what we consider of Nano-Advances, which will cover both airtime and electricity and advances and a product to look out for in the future. So -- as I think we've mentioned in the past that CEC is becoming a very significant part of our business and one to look out for, is definitely proving to come together. The next question is from Ben Pooler. I have 3 questions related to the acquisition of a ZAR 385 million intangible asset with shares in subscription income. One, can you walk me through a typical transaction which generates a subscription income? Two, who are you sharing the income worth? And three, what return will the investment generate? How long will it take Blue to get back at the money. I'll hand it over to Dean.

Thanks. So if you recall that intangible assets comes from CEC. How it comes about, is CEC has acquired the right to sharing the portion of the subscription income -- subscription revenue for all Cell C postpaid subscribers that upgrade or enter into new contracts. If we look at the roaming fees, the roaming fees and the service fees that are incurred by CEC on the existing postpaid base. So that's the base that was initially with Cell C. In substance, those payments are for the acquisition of future revenue streams. So what we do in an accounting perspective is we capitalize it as an intangible asset. So with regards to the old base that Cell C has, we look at the amount of those roaming and subscription fees and we capitalize those. With regards to the roaming and subscription fees that relate to the new contracts or the upgrade contracts, those would be expensed when they are incurred. So that ZAR 385 million would relate to the intangible assets. That is actually net of payments that have been made. So that would be the answer with regards to that.

Okay. That is all the questions that we have on a side. If there are no more questions, then I will close it out. So I just like to thank everybody, thank our Board for their continued support and wish everyone well through, obviously, what's been a tricky last year or 2, and wish you and your families only health and see you all shortly. Thank you.