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

Good afternoon, everyone, and welcome to Blue Label Telecoms presentation of its audited results for the year ended 31st of May 2022. I will commence my presentation with a brief outline of our operating environment, share some highlights of our financial performance, our strategic execution and operational successes and then give an overview of the performance of some of our subsidiaries. The post here was arguably what are the most difficult. The world and the environment within which we operate have been drastically altered by COVID-19, and its aftermath continues to impact on how we operate as an organization, how we ensure cheaper and easier access to our services and products, and how we utilize innovation and digitization to improve our service offering and products. But despite these challenging geographic and macroeconomic conditions, we are proud to announce that when considering our financial performance, the consistent implementation of our strategy and operational successes we have exceeded most targets resulting in strong growth and a great year. Looking at our financial highlights. Gross revenue generated on PINless top-ups, electricity, ticketing and gaming increased by 10% to just over ZAR 72 billion, equating to a growth of ZAR 548 million or 23% on gross profit, underpinned by increasing margins from 12.66% to 16.46%. Revenue generated by continued operations reflected a decline of ZAR 1 billion from ZAR 18.8 billion last year to ZAR 17.8 billion before imputing back the PINless revenue. This decline was congruent with a continuous and exponential shift in market buying patterns to PINless top-ups in which only the commission earned is accounted for and not the gross revenue generated thereon. Net cash generated from trading activities amounted to ZAR 767 million, whilst interest-bearing borrowings increased from ZAR 1.7 billion last year to ZAR 2 billion this year. Headline earnings increased to ZAR 1.1734 per share and core headline earnings increased to ZAR 1.21 per share. Our gross revenue has, for the last 2 years grew by 10%, while our gross profit when comparing it with last year's 12%, almost doubled this year. Our EBITDA increased by ZAR 548 million or 23%. On exclusion of the ZAR 326 million relating to the nonrecurring income in the current year and ZAR 132 million in the prior year, EBITDA increased by 12% to ZAR 1.3 billion. With back to basic solidified is central to our strategic approach, our core businesses have shown good results. That is why the consistent implementation of our strategy as well as the centrality of our customers and the experience building on agile, resilient and future-ready organization and preserving and creating best value for all stakeholders are the basis for our strategic successes. Operationally, we are proud of the rapid growth and performance of RINGAS that now have 32 million unique customers. The rollout of Blu Advance that is now available to nearly 7 million eligible customers. The completion of the transition of all our services related to Project Boston, our stabilized trader base that has grown across the group by nearly 25%, the growth in our confirmed opt-in database that now stands at 21.1 million and the 150% growth in Transaction Junction's revenue. Let us now take a more in-depth look at the SA distribution, the formal and informal markets covering TPC, CEC and Cell C. By generating billions of transactions a year, Blue Label distribution has established itself as South Africa's leading distributor of prepaid products and electronic distribution of virtual, merchandise and it will continue its focus on innovation and diversification to ensure continued differentiation. This, we will do through the development and introduction of new products, increasing key distribution partners and product listings and through additional market share and branded exposure in the informal market. Our channel performance reached record highs from a performance perspective for the financial year, and while we have seen a positive growth trajectory across all segments, we continue to notice that the retail segment and in particular, PIN products remain under pressure due to consumer buying behavior moving to online platforms. While turnover in face value sales continues to show positive year-on-year growth during these tough economic conditions, the need to drive and focus on our own product development and exclusive product offerings remain a key focus to the distribution business and to our success. These products include Blu Voucher that has seen monthly sales reaching in excess of ZAR 450 million for the year. And RINGAS, our proprietary airtime and data agnostic network top up voucher that showed a 40% month-on-month growth and contributed more than ZAR 200 million in face value sales per month. According to the Oxford Business Group, 23.5% of the South African population remains unbanked, and that means ZAR 12 billion in cash is being held outside the formal banking system. The bank, however, fell from 17 million people to 14 million people last year. Our purpose is to drive financial inclusion for the mass market and we remain committed to the informal market, and our aim is to continue our expansion and growth in this market segment, making access to our products and services more convenient and more affordable. Our trader base has stabilized and has shown good traction, having grown by 29% since the start of the fiscal, while trading the informal market is showing promising trends with an improvement in both our product mix as well as our average trade value per trader. Our product mix as an example, have improved substantially in favor of our own in-house products as well as core products, which is reaching margin to the business and to all of our traders. Key commercial changes were plugged the entire environment, resulted in improved profitability to the business unit as well as improved trader base growth, and we improved on our customer centricity levels through key changes in our operating model, ensuring that more traders are touched on the ground than in previous years. There is a significant increase in the sales of BLT's own products during fiscal '22, with both RINGAS and Blu Voucher showing promising growth trends. With approximately 100 million SIM cards in circulation in South Africa, there can be no doubt that the prepaid SIM landscape is virtually saturated. The prepaid company, however, is determined to turn the tide by defending and maintaining its traditional base through RINGAS and Blu Voucher, Terminal SIM bundling through a partnership with T3 and through job creation and skills development initiatives, such as UBELONG, and WOZZA AIRTIME. UBELONG, a program that was specifically designed to address youth unemployment, digital inclusion and improved efficiency, already employs 400 learners and is anticipated an additional 2,500 learners will be employed in the fiscal of 2023. WOZZA AIRTIME aims to employ approximately 1,000 learners in the next financial year to improve the lives of our delivery service riders in the unbanked population by providing the most cost-effective, full maintenance scooter rental model available in South Africa. This will supplement the income of these riders through the vending of data, airtime and electricity products. We are indeed proud of the progress made by GloCell Retail Solutions who, for the first time, generated revenue of ZAR 1 billion for the financial year. They are performing well in stabilizing their trader base and improving trade in terms of average trade per trade and from a product mix perspective. With a 50% growth in the number of merchants and a 94% merchant retention rate, they are also aligning the strategy of diversified revenue streams and are launched in various offerings across the broader financial service category, more specifically within payments, credits and insurance. With Project Boston completed, CEC has evolved from a specialized lender to a fully operational business unit with responsibilities and range across the Cell C postpaid offering. CEC has now entered the next phase in which the focus is on growing and improving performance in order to achieve it, as has been driving various initiatives and improving service delivery and customer satisfaction. CEC continues to perform several postpaid back office functions with a combination of in-house and outsourced services in return for a share of the postpaid revenue generated thereon. This refined and specialized business strategy has yielded very good returns, as you can note from the strong growth in both gross profit and net profit. CEC remains focused on expanding the base and improving performance, driving initiatives to improve service delivery and customer satisfaction. In this regard, it has launched several campaigns to drive acquisition and awareness with positive results, working in conjunction with BluNova, monitoring credit operations and risk. CEC has leveraged its direct relationship with all the major OEMs and warehousing and logistic partners to improve the management of their stock and are now also assisting with the management of outbound call center sales. As a custodian of credit products within the group, CEC has launched BluAdvance, the latest application that will provide high frequency, low value advances to approve customers. They have scored 25 million customers and over 7 million are eligible for, and this number will grow as the algorithms adapt. Access to extensive BLT market data, preexisting electricity and airtime integration and BluNova's unique scoring abilities enable CEC to launch and scale this project. Blue Label Connect offers a complete virtual mobile retail solution for retail as well as a complete end-to-end virtual mobile business to business solution. And while the strategy for 2021 was to stabilize the company, their strategic priority for this financial year is to build foundations and to grow. Its growth in revenue of almost 40% is expensed per period going forward. The B2B and B2C offerings are highly dependent on a robust ecosystem to ensure that they offer the most comprehensive services to their retail customers and in doing so, maximize convenience for the end users. Cell C. Cell C has made significant progress in the execution of its network strategy to substitute CapEx for OpEx and closing the network deficit. The telco is now access to more than 8,000 sites and has completed 57% overall migration nationally, while full migration will be concluded by the end of next year. With a deleveraged balance sheet, a CapEx-light model key assets that underpin the transformation journey, including spectrum, a viable and loyal customer base and a resilient brand, Cell C will be able to invest in high-value opportunities. The company has its go-to-market plans in place. Once the recap is completed, including the launching of key initiatives to drive sustainable growth in Advanced Cell C's ambition in line with its digital transformation intend, Cell C is in the process of evolving its core business model, while simultaneously building and scaling this new business model with a number of initiatives that play for delivery over the next few months. Thank you very much. I'll now hand you over to my brother and Blue Label's joint CEO, Mark, who will take us through performances of GloCell Retail Solutions, Cigicell, Blue Label Data Solutions, Blue Label and Technology. Thank you.

Thanks, Brett, and good afternoon to everyone. While the essential nature of our products and service was emphasized, you will note that our organization has changed in how we innovate, market our products, take our products and services to the market whilst also constantly looking for new opportunities. Allow me to share some key highlights and major achievements by the rest of our subsidiaries. With Cigicell's focus on auditing and rectification of electricity meeting accuracies, data verification, credit control and meet installations, they continue to be the leading distributor of prepaid electricity and water tokens in South Africa. With a double-digit growth of 18% increase in revenue, the rewarding of major contracts, Cigicell continues to solidify themselves as a partner of choice by bringing real value to their customers and their customers' customer. Cigicell's largest earnings still emanate from electricity sales, which continues to show consistent growth. We are constantly looking for additional value propositions to offer the meetings by implementing revenue assurance and revenue protection models, which will enable much better collections for them. All 3 companies under Cigicell continues to make significant progress, gain traction and increase their respective market share despite a very uncertain period in local government. Unipay, which is a market leader in the digital billing space, exceeded the ZAR 300 million mark in face value sales this year, and this growth is continued -- is set to continue. VRM's performance was slightly affected by the local government elections. This was as a result of the higher number of hung councils, which ultimately impacted heavily on decision-making within the respective municipalities. Reware continues to make strides in the private metering business, which can be seen by the doubling of private metering installations in the last year, and this is due to the fact that an increasing number of large power users prefer to have the meters read remotely in order to ensure that the correct billing files are being sent. Moving on to Blue Label Data Solutions, they had a great year, despite some challenges, mainly due to regulatory changes, including those to [ popi ], fiscal regulations and changes to the consumer protection app to regulate the e-commerce sector. With the 21 million strong opt-in database, strong relationships with clients both in and out of the group, the use of machine learning and artificial intelligence to improve campaign performance and constantly evolving and developing new partnership models to enhance lead and data quality. The next year is set to be even better. BluNova is on track to achieve their financial and strategic goals. As Brett explained earlier, it focused primarily at this stage on key projects for both Cell C and CEC. Some of its achievements include the scoring algorithms for CEC, the deployment of the bureau batch vetting service to prescore Cell C's postpaid base of customers. And our NanoAdvanced proof of concept that has been deployed into production with an electricity advance on USSD and a clawback mechanism in place thus far. Some of the challenges BluNova are experiencing are as a result of the challenges of recruiting and retaining data analysts, data engineers and data scientists, hence BluNova launching its own new intern program to help bridge the skill shortage and retention gap. Over the last few years, Transaction Junction has grown into a major supply of payment services in sub-Saharan Africa while continuing to expand its footprint across all retail tiers. E-commerce and new digital channels are showing impressive growth as revenue increased by over 150%, with the business now executing more than 2 billion transactions per year. Through technology via the cloud that is enabled by AWS deployments, Transaction Junction is already operating in 6 Southern African countries and will continue its African expansion within the next year with additional territories already earmarked. Looking forward, Transaction Junction will deliver on new strategic agreements, invest in technology and as already mentioned, continued to expand their footprint. Technology remains the lifeblood of our organization. And as we modernize, digitize, transform and depend on innovation, we'll continue to invest in technology. When looking at our digital business advancements and our core platform transformations, we have concluded our application program interface gateways and enable simplified integrations and improved marketplace business models. We have also embedded enterprise architecture discipline in the design process and we're making significant progress in the robotics process automization in identified automation opportunities across the businesses. The master data strategy and approach have been defined and are advancing rapidly in its implementation. Our continued drive and focus for digital transformation and implementation are ongoing. We constantly look at new ways to improve our customer experience and automation. When looking at ongoing operational stability, governance and cybersecurity, we maintain ongoing cybersecurity vigilance with zero tolerance. We have formalized the implementation of the IT governance, controls and risk management processes and are making additional progress on our internal controls within our business application. No other company within the group suffered more than Ticketpro as a result of COVID-19. This impact was evident in all of its offerings other than in transportation, were partnerships with some of the largest commuter carriers started taking shape whilst the recovery in sports and events segments were limited. Now with the economy open and sporting events at full capacity, we are certain that Ticketpro will show significant improvement in the sports and events segments as it has already landed the rights to many sporting events, shows and festivals. Our work with PUTCO has allowed us to invest energy and resources into our proprietary NFC Tap & Go solution, which will be replacing the old paper ticket. With state-of-the-art software and hardware, this platform allows us to sell tickets online and in South Africa's largest distribution network. The hardware is built locally, giving us the ability to scale while keeping the costs low. It also acts as a fleet management tool that allows carriers to monitor their buses and drivers in real time. A lot of emphasis was made to ensure that this solution is built on the highest security gateways, which will also ensure 0 revenue leaks. Part of our contribution to revolutionize public transport in South Africa is the introduction of our in-house WiFi platform that enables video on demand and WiFi for commuters, allowing them to watch content and purchase our products whilst in transit. We are also very happy with the slow but impressive growth of Ticketpro travel that was launched last year during COVID, offering travelers and tourists a fully-fledged online travel portal that includes local and international flights, accommodation and car rental, which can be bought in conjunction with their tickets. With the terminal, economic uncertainty and geopolitical instability of the last 3 years behind us, our focus in the short and medium term will remain solely on South Africa and our businesses operations locally. The impressive growth in popularity of RINGAS and Blu Vouchers are indicative of our innovative strength and our ability to optimize the use of market research and data. As a result, we will continue to make the required investment in product development and refinement as well as customer satisfaction. While we would remain invested in the telecommunications industry, you will also note from this presentation that we continuously exploit opportunities within the fintech space, and it is expected that we will grow significantly. With technology, digitization, innovation, automation, artificial intelligence and big data playing bigger roles in what we do and who we are, we will continue to expand our digital ecosystem that will improve our market share in fintech and solidify our role as a market leader there in. The group's future looks bright as we are well equipped to deal with the challenges that lie ahead and are ready and geared to exploit new opportunities by focusing on what is necessary to build on the strong set of results that we are presenting to you today. And now for a more in-depth insight of our financials, I wish to introduce you to Dean Suntup, our Financial Director.

Good afternoon, ladies and gentlemen. The financial highlights for the year ended to 31 May 2022 were as follows: Revenue of ZAR 17.8 billion, an inclusion of the gross amount generated on PINless top-ups, prepaid electricity, ticketing and gaming, the effective increase in revenue equated to 10% from ZAR 66 billion to ZAR 72.3 billion. Gross profit increased by 23% from ZAR 2.38 billion to ZAR 2.93 billion. Increase in gross profit margin from 12.66% to 16.46%. Core headline earnings per share from continuing operations increased by 18% from ZAR 0.815 per share to ZAR 0.9656 per share, an exclusion on nonrecurring income of ZAR 214 million in the current year and ZAR 47 million in the prior year. Core headline earnings for the year ended 31st of May 2020 (sic) [ 2022 ] amounted to ZAR 1.06 billion, equating to core headline earnings of ZAR 1.2101 per share. In the comparative year, core headline earnings amounted to ZAR 788 million, of which ZAR 763 million related to continuing operations and ZAR 25 million to discontinued operations. Core headline earnings amounted to ZAR 0.8965 per share. An exclusion of the nonrecurring income of ZAR 214 million in the current year and ZAR 47 million in the prior year. Core headline earnings from continuing operations increased by ZAR 131 million from ZAR 716 million to ZAR 847 million, 18%. And core headline earnings from continuing operations increased by 18% from ZAR 0.815 per share in the prior year to ZAR 0.965 per share. This growth was indicative of a robust trading performance by the group during the year. Of the nonrecurring income of ZAR 214 million, a ZAR 123 million related to a net one-off recruitment income as a result of the previously reported fraudulent scheme, ZAR 46 million pertaining to the accounting effects of the settlement of the contingent consideration relating to the disposal of the VAS operations in April 2020 and ZAR 46 million attributable to the accounting implications of the put option obligation for the acquisition of up to 40% of the shares in Air advantage. Earnings per share and headline earnings per share from continued operations increased by 20% to ZAR 0.92868 per share and by 19% to ZAR 0.9289 per share, respectively, excluding the nonrecurring income in the current and prior year. The financial results of WiConnect in the prior year of ZAR 25 million are disclosed in core headline earnings from discontinued operations and is 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 17.8 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 10% from ZAR 66 billion to ZAR 72.3 billion. Gross revenue generated on PINless top-ups increased by ZAR 1.7 billion, 9% from ZAR 19.2 billion to ZAR 21 billion and gross gaming revenue increased by ZAR 737 million, 54% from ZAR 1.4 billion to ZAR 2.1 billion. The group's ticketing revenue increased by ZAR 121 million from the prior year. Net commissions earned on the distribution of prepaid electricity increased by ZAR 18 million, 7% to ZAR 298 million. Revenue generated on behalf of the utilities increased by 18% from ZAR 26.7 billion to ZAR 31.5 billion. Gross profit increased by ZAR 548 million, 23% to ZAR 2.93 billion, congruent with an increase in margins from 12.66% to 16.46%. An exclusion of the ZAR 326 million relating to nonrecurring income in the current year and ZAR 132 million in the prior year. EBITDA increased by ZAR 144 million, 12% from ZAR 1.23 billion to ZAR 1.37 billion. The anticipated increase in overheads included costs of ZAR 65 million attributable to new learnership initiatives in the current year and ZAR 10 million in the prior year, whereby the benefit thereof is realized by way of income tax saving as a result of Section 12H allowances being claimed for such learnerships. An exclusion thereof, in both the current and prior year, EBITDA increased by ZAR 199 million, 16%. Moving to the balance sheet. Total assets increased by ZAR 1.9 billion to ZAR 13.3 billion, of which noncurrent assets accounted ZAR 4.7 billion and current assets for ZAR 1.2 billion. Noncurrent assets included increases in intangible assets and goodwill of ZAR 614 million, investments and loans to associates and joint ventures of ZAR 36 million, financial assets at fair value through profit of loss of ZAR 58 million, deferred tax assets of ZAR 8 million, loans receivable of ZAR 5 million, capital expenditure net of depreciation of ZAR 1 million and financial assets at fair value through other comprehensive income of ZAR 2 million. These increases were offset by decreases in advances to customers of ZAR 23 million and right-of-use assets of ZAR 22 million. Of the net increase in intangible assets and goodwill of ZAR 614 million, additions to intangible assets amounted to ZAR 952 million, offset by amortization of ZAR 338 million. Of the total additions to intangible assets, ZAR 693 million relates to costs borne by the group in terms of the subscription income sharing arrangement and ZAR 212 million to subscriber acquisition costs. Net increases of ZAR 46.4 million in the investment and loans to associates and joint ventures comprised the group's net share of profits totaling ZAR 8 million, acquisition of further shares in an associate of ZAR 17.7 million, net loan increases of ZAR 25.8 million and its share of movement in foreign currency translation reserves amounting to ZAR 1.3 million. These increases were offset by a dilution of its holding in a joint venture of ZAR 0.5 million and dividends received of ZAR 5.8 million. The material net increases in current assets included increases in trade and other receivables of ZAR 991 million, cash and cash equivalents of ZAR 306 million and inventory of ZAR 177 million, offset by decreases in advances to customers of ZAR 122 million and financial assets at fair value through profit and loss of ZAR 130 million. The stock turn equated to 28 days compared to 22 days for the financial year ended May 2021. The debtors collection period increased to 79 days compared to 59 days for the financial year ended May 2021. On exclusion of the trade debtors relating to CEC, the debtors collection period remained unchanged at 28 days. CEC's trade debtors predominantly related to amounts due from Cell C, which will be settled down to an amount of ZAR 1.1 billion on the recapitalization of Cell C. Net profit attributable to equity holders amounted to ZAR 1.03 billion, contributing to accumulated capital and reserves of ZAR 4.2 billion. Noncurrent liabilities increased by ZAR 546 million, comprising an increase in borrowings of ZAR 472 million, deferred taxation liabilities of ZAR 105 million, offset by a decrease in lease liabilities of ZAR 31 million. Current liabilities increased by ZAR 378 million, including increases in trade and other payables of ZAR 94 million, deferred revenue of ZAR 36 million and borrowings of ZAR 390 million. This increase was offset by a decrease in financial guaranteed contracts of ZAR 106 million and financial liabilities at fair value through profit and loss of ZAR 47 million. Average creditor terms from continuing operations equated to 124 days compared to 116 days for the financial year ended 31st of May 2021. The decrease in financial guaranteed contracts of ZAR 106 million was due to the settlement of an amount owed 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 year. Moving on to the cash flow statement. Cash generated from trading operations totaled ZAR 935 million. Working capital movement comprised an increase in trade payables of ZAR 45 million, and a decrease in advances to customers of ZAR 145 million offset by an increase in trade receivables of ZAR 847 million and an increase in inventory of ZAR 181 million. After incurring net finance cost and taxation, net cash generated from operating activities amounted to ZAR 649 million. Net cash flows utilized in investing activities amounted to ZAR 1 billion, primarily attributable to the purchase of intangible assets of ZAR 1 billion, capital expenditure of ZAR 78 million, the acquisition of further shares in an associate of ZAR 15 million and net loans granted of ZAR 38 million. These were offset by receipts of ZAR 117 million in contingent considerations relating to the disposal of the VAS operations in April 2020. Of the ZAR 1 billion invested in intangible assets, ZAR 928 million related to the costs borne by the group in terms of the subscription income sharing arrangement. Cash flows generated from financing activities amounted to ZAR 668 million, of which ZAR 756 million related to net increases in borrowings, offset by ZAR 38 million to lease payments, ZAR 30 million to dividend payments to noncontrolling interest, ZAR 11 million to the acquisition of noncontrolling interest and ZAR 9 million to the purchase of treasury shares. Cash and cash equivalents accumulated to ZAR 2.7 billion at the 31st of May 2022. We are thankful to the Board of Directors and staff members for their continued support and commitment to the group. Thank you. The floor is now open to questions.

Hello, everybody. I think let's start online. Can I ask anyone who's online? Are there any questions?

We have a question from Myuran Rajaratnam from MIBFA.

My question is very simple. This is a cash flow generative business, and you can see that -- and it's historically been that case and you sort of pay a full year dividend -- and my pension is hungry guys. When can I expect a dividend? It's an inelegant solution for me to feed shares into the market when I think it's undervalued. Rather, you give me a dividend. So when can I expect that?

So just to point out the point to everybody again. We would love to pay dividends. We would love to do share buybacks or a hybrid of both. Unfortunately, we have been restricted by the banks which we have mentioned to everyone, obviously, while we were getting through everything with Cell C to the recap. Of course, the recap is imminent as we put out a sense yesterday. And as a Board, we will obviously get together closer to the time, but hopefully, everything gets back to normal after the recap and Blue Label recommences dividends and share buybacks or, as I said, a hybrid of both. It's 100% intention. And unfortunately, we found ourselves in the last 3 years not doing it, but obviously before that paid it every year. And hopefully, very shortly, meaning next year, we will hopefully be back to doing it. Obviously, we need the permission from the banks. And hopefully, as I said after recap, we'll be back online, so we will recommence.

Great. And well done on a great set of results.