MTN Group Limited (MTN) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining us on this call to discuss MTN Group's trading update for the quarter to the end of March 2023. My name is Thato Motlanthe, Head of Group Investor Relations. And on the call with me is Ralph Mupita, our Group CEO; as well as Tsholofelo Molefe, our group CFO. Also joining us on the call is Charles Molapisi, the CEO of MTN South Africa as well as Dineo Molefe, who is the CFO of MTN South Africa. Just a quick reminder that our trading update was published this morning on the JSE and it is posted on our website on the Investor Relations page. I trust that you've also had a chance to look at the Q3 releases from our listed Opcos, we reported over the past couple of weeks. For today's call, it will be my pleasure shortly to hand over to Ralph and Tsholo, who will provide an overview of the business and financial performance and then give you some outlook remarks. We can then go into the -- to open up for the Q&A, and you should have a space on the webcast page to enter your questions, which I will read out at the time. Finally, just to note that this call is scheduled to wrap up in about an hour's time, which is when we will close the call. And with that, let me just hand over to Ralph for his comments.

Thank you very much, Thato, and a very good afternoon from me as well. I trust that everybody is keeping well. I appreciate you taking the time to join us on this call. Before we get into it, let me just start by acknowledging the situation in Sudan. You may have read about the fighting that broke out in mid-April, which is affecting families and communities in the country. We extend our condolences to all those who have been impacted. And as MTN received with ensuring the safety and well-being of our employees, customers, partners and the communities we serve in Sudan. For the core, we will follow broadly our usual sequence, our first set, the scene with our operating context. Second, I'll cover operating momentum. Third, some comments on our strategic progress. Tsholo will come in with Topic number 4, which is our financial overview, and I'll come back with topic number 5, which is conclusion and some outlook comments. So if I turn to the quarter under review, we have highlighted the past few reports that we are navigating quite a challenging set of conditions across our markets. We are resilient of our business and the execution of our teams across our footprint which enables us to continue to deliver relatively solid results. We continue to see challenging macroeconomic, geopolitical and regulatory conditions in 2023. The blended inflation across our footprint remained elevated and averaged 18.5% in the first quarter compared to 11.5% in Q1 2022. Interest rates increased during the period and central banks acted to curb inflation, high inflation and interest rates weighed on consumer spending power and impacted business activity. In South Africa, the load shedding challenges persisted with approximately 90 days of load shedding in Q1 2023 compared to 14 days in Q1 2022. As we guided previously, this impacted quite acutely MTN SA's network availability and business performance in the period. In Nigeria, you have heard from Carl and Modupe speak last week about the shortage of cash in the economy due to the Lira redesign policy. Of course, this over and above the broader macro factors and it impacted the ability of our customers to transact both in the GSM and fintech business there. Coming on to operating performance. As mentioned, we were encouraged by the business ability to sustain top line growth and manage inflation pressures in Q1. This supported by ZAR 6.4 billion of CapEx investment into our network and platforms in the period. We delivered constant currency service revenue growth of 15.1% at the group level, which was in line with our medium-term guidance. MTN Nigeria, MTN Ghana, and MTN Uganda, all delivered double-digit service revenue growth. MTN SA delivered positive service revenue growth of 1.3% against the severe impacts of load shedding that I mentioned earlier. Group EBITDA growth was resilient at 11% despite the effects of much higher inflation and the EBITDA margin was 43.9%. I'll leave it to Tsholo to give some of the color around our financial performance. Our commercial performance was quite pleasing. In terms of overall connectivity business, our subscriber base grew by 5.2% to 290.6 million customers despite load shedding in South Africa and SIM registration headwinds in Ghana. Our active data subs were up 11.9% to 140.4 million, which helped us to underpin 19.3% year-on-year growth that we saw in our data traffic. On the fintech side, we are super focused on rapidly expanding our ecosystem. Active MoMo users increased by 5.2%. This was impacted by Nigeria, where the user base was impacted by the cash shortage situation in the country. The agent and merchant bases both up strongly by 27.1% and 103%, respectively. And this is really enabling the continued robust expansion in the fintech transaction volumes by nearly 40% in the quarter. So we are pleased with the continued evolution of what we refer to as a structurally higher demand for our data and fintech services that underpin our medium-term growth thesis. On our strategic progress, we continued the engagements on a bespoke basis with select potential strategic minority investors in the group fintech platform. Our focus is really to ensure the commercial agreements that ensure that any strategic minority investment also supports the acceleration of growth of our fintech business over the medium term, and we're working through that diligently. So on current progress and issues outstanding, we anticipate concluding this and have an outcome of the process within quarter 2 2023. You may have seen [indiscernible] this morning that we've made an announcement relating to our portfolio optimization focus, with an ambition 2025 and the ongoing assessment of our portfolio focused on improving returns, reducing risks and efficient capital allocation. In this regard, we are evaluating an orderly exit of 3 small operations in West Africa, namely MTN Guinea-Bissau, MTN Guinea-Conakry, MTN Liberia. We have received an offer from Acxiom for our equity interest in the operations, which we are looking at. Naturally, a process of this nature will entail extensive engagement with stakeholders, and we're still in the early stages of that process. So we will keep you -- all our stakeholders appropriately updated as we progress on this possible transaction. I'm going to pause here and hand over to Tsholo for a financial overview before I close at the end with outlook and concluding remarks. Tsholo, over to you.

Thank you very much, Ralph, and good afternoon to everyone. I'm pleased to run you through some of the key financial highlights for the first quarter. Ralph gave you some of the headline numbers, which just to emphasize, were quite pleasing given ongoing challenging trading conditions in our markets. So just to recap on the group results. As usual, the numbers are in constant currency. Service revenue, we saw an increase of 15% and EBITDA growth of 11%. The EBITDA margin was lower by 1.6 percentage points to 43.7%, really impacted by the growth in the business, but particularly the much higher inflation in our footprint. We are pleased, however, to have contained cost growth through the ongoing focus on our expense efficiency program. So a resilient outcome overall, and this was underpinned by the investments that we continue to make. We deployed CapEx of ZAR 6.4 billion in the quarter, which is really the lifeline of our network and platforms. As you know, some of our key Opcos have already reported and held their calls, but I will just provide a high-level overview of the numbers. So starting with Nigeria, we saw a solid set of results with growing -- with service revenue growing by 20.4%, and this was in line with the medium-term guidance. Good growth across the key revenue segments of voice, data as well as fintech in Nigeria. And this was achieved in an environment with much higher inflation and rising interest rates. There was also the cash strategies, as Ralph indicated, which is now behind us. On the Southeastern Africa region, we saw strong double-digit service revenue growth of 17.7% year-on-year, again sustained growth in the key segments and a good subscriber growth overall. An overall increase in EBITDA margin was slightly up by 0.1 percentage points to 46.1% in the quarter, which is pleasing given the challenging conditions. With regards to the Western Central Africa region, also managed to deliver double-digit service growth of 10.8%. with MTN Ghana, which does index quite highly in that mix, growing by 23.2%. EBITDA margin in the region declined by 1.7 percentage points to 38%, and the key -- with the main key drivers here in MTN Ghana, which has experienced a big spike in inflation, as we all know. MTN Cote d’Ivoire also impacted the overall trend and they experienced power supply disruptions impacting network availability as well as the performance of the business. If I will pack some of the details for South Africa, service revenue was up 1.3% under pressure due to load shedding impact on network availability. This is over and above the tough macroeconomic environment impacting the consumer. Voice was particularly hard hit by the disruptions and was down 16% year-on-year in the period, although data revenue growth was comparatively resilient with a growth of 9%. On the consumer side, we saw prepaid being 5% lower, while postpaid revenue grew by a solid 3.3% with data fairly resilient in both segments, as mentioned. In the enterprise business, we saw top line growth of 11.7% -- 11.4%, driven by growth in data and new wins in the ICT environment. In the wholesale business, we saw an increase of 14.9%, which was underpinned by continued progress in the national roaming strategy there. While still nascent, we are seeing an encouraging growth in the volume traffic from Telkom on our network. MTN SA's EBITDA was 6.5% lower with a 3.7% decline in EBITDA margin now at 36.2% on a reported basis. Excluding the one-off gain on disposal of SA towers in the period, this would have been 36.1%. This is really reflecting the impact of load shedding on top line as well as on our costs. The higher management fee that we have reported on previously also had a negative impact with an impact of about 0.7 percentage points on margin. In terms of our financial resilience overall, I touched on the expense efficiencies a little bit area and we are particularly pleased with the entrenched resilience of our balance sheet and liquidity position overall. Consolidated group net EBITDA and net debt to EBITDA held steady at 0.3x, comfortably within our covenant threshold. Holdco leverage ticked slightly up to 0.9% -- 0.9x compared to 0.8x at the end of the year, and this was largely due to ForEx movement. A very strong liquidity position at Holdco with headroom at ZAR 57.2 billion of which ZAR 20.5 billion was in cash and the balance in committed undrawn facilities. We upstreamed a total of ZAR 1.6 billion in cash from our Opcos in this quarter, as well as an additional ZAR 978 million from Nigeria coming from the capital proceeds from [ series 1 ] of the localization. You may have picked up that the group elected for a scrip dividend option for the financial year ended 2022 dividend at MTN Nigeria's AGM on the 18th April this year. This will include the group's effective shareholding from 75.6% to 76.2% after the finalization. As we indicated to you at the financial year-end results 2022, with view to the scrip option as providing optionality and flexibility given the greater challenges currently to secure foreign exchange to upstream, we believe this will provide a more favorable short-term store of value for our investment as we manage the nearer-term challenges in upstreaming cash from the country. On the same reasoning, therefore, we also consider a scrip dividend option from MTN Ghana, conditional upon its approval at upcoming AGM at the end of this month. So thank you very much, Ralph, and I'll hand over to you at this point.

Thanks very much, Tsholo, and just some concluding remarks and outlook from my side. First point, overall challenging environment remains with us in the near term. But the MTN Group is positioned to manage this through its resilient business model, strong balance sheet and disciplined strategy execution. The second point I'd like to make is the elevated inflation environment necessitates implementing selective price increases across our portfolio to ensure that operations generate sufficient cash flow to fund future capital expenditure and growth. We are engaging with regulatory authorities on this, and we'll continue such engagements in the next few quarters. In South Africa, the postpaid tariff increase has been implemented in April 2023 and that should underpin improved top line growth in the coming quarters. Price ups in selected prepaid plans and other portfolios as well as network resilience support recovery of the top line and improving EBITDA margins towards our medium-term guidance by H2 2023. We will continue with our network resilience program to deal with the load shedding and look to accelerate it as we've been seeing very pleasing results with our self-help plan. And as we communicated with our FY 2022 results, in H1 we'll remain a challenging period with recovery in H2 driven by improved network availability, the price increases that I mentioned and Cell C moving traffic as it shuts down its own network and more traffic roaming on our network. In Nigeria, focus will be on enhancing network capacity, accelerated broadband coverage to sustain growth in data traffic. The business has started to recover from the effects of the cash shortages that we saw in quarter 1, which are very pleasing. Tariff increases are key to help overcome effects of inflation, and we are engaging the authorities, as I mentioned in Nigeria on the tariff increases that we'd like to see on both voice and data. On MoMo PSB, we're prioritizing the development of the agents and merchant ecosystem to support accelerated growth of the wallet base. So we spoke to financial resilience, and we will continue to drive our expense efficiency program to mitigate inflationary pressures on our cost base. As communicated previously, we're also looking carefully at opportunities for liability management for non-rand debt should market conditions allow. And as previously mentioned, we are engaged with tower companies across some of our Opcos on improving MLA terms as contracts come to an end. On our strategic priorities, we'll continue to work to finalize the agreements with selective strategic partners to introduce potential minority investments in the group fintech structure. We're also in the early stages of exploring the potential orderly exit of the group from Guinea-Bissau, Guinea-Conakry and Liberia, and we will update all stakeholders as we progress on this process. We are well progressed on our exits of Afghanistan. We've seen very positive engagements with the regulatory authorities, and we're anticipating to complete this by the end of -- sorry, in early H2 2023. In terms of the CapEx outlook, we are maintaining the 2023 guidance at ZAR 37.4 billion, cognizant of a significant potential impact of volatility in local exchange rates against the dollar as well as our work to accelerate MTN SA's comprehensive network resilience plan, which is a key focus in the coming quarters to materially improve network availability in the second half of this year. And finally, as we manage the ongoing challenges in our trading environment and the near-term impacts on our top line and margin evolution, we maintain our medium-term guidance and FY 2023 dividend guidance of a minimum of ZAR 3.30 per share. Thank you very much for listening to Tsholo and I. I'll now hand over to Thato to field any Q&A. Thato, over to you.

Thanks so much, Ralph. And sort of for the introductory comments, I'll just read some of the questions that have come through on the webcast. I'll try to keep them to banks of 3. The first one is around load shedding. How much did load shedding cost you guys in Q1? The first question. The second, was there any catch-up of Cell C revenue in Q1 '23 service revenue? I think there was a ZAR 200 million unrecognized revenue at the end of FY '22. And how much revenue did you recognize and did not recognize in Q1? So let me start with those 3 questions.

Yes, let's give those to Dineo. Dineo, are you in the room?

Thank you, Ralph. So in terms of the cost of load shedding in Q1, the impact on EBITDA was a 1.6 percentage point impact and the impact on service revenue was 3.2 percentage points impact.

In terms of growth?

In terms of growth. Yes, impact on growth. And in terms of your question on Cell C, what was not for [indiscernible] You would remember that we started to accrue account Cell C revenue in quarter 3 last year. So what we left as cash accounted was the BTS revenue. In the current period, Cell C have paid some of those BTS outstanding. So what is not recognized has reduced compared to the prior period.

Thanks Dineo. Just another question kind of attached to scrip dividend. Are there any regulatory implications from you increasing your stake in MTN Nigeria from opting for the scrip dividend?

Yes, I can take that one. Yes, I can take that one, Thato. There's no regulatory implications. As investors will know that we did take a view, it wasn't a regulatory view that we would want to have more local shareholding of MTN Nigeria. So that was something that we elected to do. It wasn't a regulatory requirement. So we've taken the scrip dividend and increased our shareholding a little bit more because of the scrip dividend option we elected for, but there are no regulatory implications.

Thanks, Ralph. Just a question on electricity and load shedding. Please can you help us understand, SA networks preparation or material deterioration in the current grid power supply. We note the comment that battery life will be extended to 6 hour stretch but this appears to largely be catch up in the current environment rather than planning for a worst case scenario, do you have any color for us on this?

Charles, do you want to start?

Yes. Thanks, Ralph. I think the best way maybe to answer the question is to give, let's say, in 2 forms. The first thing is just to give the assurance that there is a proper enterprise-wide grid [ fillup ] framework. This has been done in collaboration with [ KPMG ], well endorsed and supported by management and the Board. So very, very clear in terms of the entire enterprise. If you then take and zone in into network, we have always said that the deployment of resilience on the network, the energy mix has battery. It has solar and it has gensets. So we're not necessarily deploying resilience as a battery-centric deployment alone. So how do you make choices? The first thing, of course, is to say deploying the battery and then look at the criticality of the site, look at the hub sites and then also lay out with solar. So while taking a much more broader energy mix, if you have sites that put an [indiscernible] of about 6 to 8 hours, in case of the grid failure, then we have to kick in, in terms of genset; that we are deploying. But to be clear again is that this is deployment that's going to be across the entire network in terms of scale by looking at critical hubs to make sure that sites -- that other sites depend on are hooked into [indiscernible] or gensets and then working at critical revenue generating sites as well as high-traffic volume sites, that must be on gensets. That's form part of the current resilience program. So it's not a very short-term approach to just do batteries alone. And just to top it up, I mean, this is more of an industry discussion as well. We are also within the construct of what is allowable with the [indiscernible] looking at genset sharing at the industry level, subject to, of course, a number of regulatory issues that we have to pass. But there is also what the association is dealing with as well. Thanks. Thanks, Thato.

Maybe just an add on to that question. You said you're seeing results of network self-help plans. Can you please elaborate?

Yes, very, very important. We're very clear in the beginning of the year that we need to scale up. And we said that to do that, we will do a three pronged [ bend ] approach. we indicated that as MTN we will bring [indiscernible] in 2007 website. We will let ATC and IHS do the rest. We have done quite amazing work as a team, a significant amount of sites which now are delivering north of 95% availability even under Stage 6. There is a major achievement for us. And I think there's a very clear proof points for that while seeing a good recovery in terms of minutes, in terms of traffic and availability. So those interventions are working. Now that we've proved that this model really works, we are now putting ambitions of acceleration. That could mean a number of things. It could mean onboarding additional partner to accelerate and drive this program aggressively. So on the sites that we have deployed, either whether they were done by -- MTN or deployed by ATC and as well as IHS while seeing significant improvement in terms of the availability of the site. So the program now moves into much more accelerated mode.

Thanks, Charles. Maybe just another one on South Africa, just to keep them grouped together. Would you say Q1 performance in SA is the bottom and should show sequential improvements from 2Q or quarter 2 or can it get worse?

We communicated when we did our annual results. We are very clear that H1 is going to be difficult. So as management, we come here very clear that we're not really surprised about the outcome of the results of Q1. That has always been the model that we have. And then we initiated that we expect that H2 will recover. And of course, the recovery of H2 will always be incremental. It's not going to be just a massive jump there. The incremental, of course, starts into the month of, let's say, April, May, and there are proof points if you look at our recharge profile year-on-year growth and month-on-month performance, at the recharge level, if you look at the daily recharge rate, we've seen a decent performance coming into the month of April. We expect that trajectory will continue as we go into May. But if you have to ask me what are the levers of that, why are we so confident that this is possible? We have to explain that is a mix effect. First of all, I have to appreciate the fact that we now have a solid plan on the network. We believe that will bring availability up, that should deliver traffic and recharges. We also are injecting a number of price ups which Ralph has covered on, whether it's postpaid -- across all segments. In fact, the enterprise and wholesale included. Those we expect to get an injection in elsewhere. We're also looking at, on the MVNO site, it is a number of logos that are committed to be announcing. That should give us an injection. And also at top line level, we expect, we just won a big HBN deal, the housing broadband network deal, as a decent amount of a contract. So we are quite comfortable. The trajectory of recharges is very clear. But I also remind that the fact that the base effect also will kick in because it is in the month of May last year when now the grid deteriorated much more, and then we start to see the drop in recharges. So we're fighting against the lower base effect. So it's a mix of injections, and therefore we're confident that steady as you go into H2, the run rate of H2 should be within guidance.

Yes. I mean just to add to Charles' points around the shape of the H1, as we said, with FY '22 results will be tough and Q1 is probably the toughest part of H1. As we mentioned, 90 days load shedding effectively every day against 14 days. And now we start to hurdle some of those load shedding days with a network that will be in better shape. The price increases, they start delivering to the top line as we move into Q3 and Q4. So that's both postpaid and then selective increases that we started now on prepaid and that's the thesis that we see to give us in H2 that will be stronger than the H1. But Q2 will still be relatively tough, let's be clear around that.

Thanks, Ralph. And this we just turn to Nigeria. There are a few questions here. What was the percentage of -- I'll just read a couple of them. What was the percentage by which MTN increased tariffs in Nigeria during 2022 before the Nigerian regulator order that they be reversed? It's the first question. What is the current status of price increase engagements with the Nigerian regulator? That's number two. What is the magnitude of the tariff increase now sought by MTN [indiscernible] for some answers.

Yes. Maybe I should take that one. I mean what we had sought in Q4 last year was a 10% increase, and that's both for data and for voice. The state of the engagements, these are ongoing. Carl and I have -- both of us have engaged the minister. And there are obviously ongoing engagements with the NCC around that as well. So I mean, we feel relatively confident that we will see these prices come in the second half of this year, and if not even before the end of H1, but H2 certainly. And the rationale for it -- I'm not sure who asked the question, Thato. But the rationale for it, which is the statement we make into the authorities is that if we want to have world class networks across our markets, they need to be funded by free cash flow the company generates in prior periods. So if we're not able to generate enough free cash flow, we can't invest sufficiently to give the citizens of the markets we operate in, decent network experience. So these are the conversations we're having. So I mean, you need to leave it up to us to continue having these, but we do feel confident that in Nigeria, it will come through certainly at least in the second half of 2023.

Thank you, Ralph. Maybe just a couple of questions on upstreaming. How much of the ZAR 1.6 billion in cash upstreamed during Q1 was from Nigeria? And then the usual question, at what rate we're upstreaming from Nigeria?

Yes. So if I can take that, in the -- of the ZAR 1.6 billion, nothing came from Nigeria. If you recall, we said that we received ZAR 987 million from capital proceeds for [indiscernible] So that was outside of the ZAR 1.6 billion that came from other markets. And then in terms of what we upstreamed at for the capital proceeds, it was an average of about 550 naira to the dollar.

Thank you, Tsholo. Then just a question here. The Sudan performance was very strong, can sustain in Q2 given the unrest? And can it affect your group revenue guidance? That's the first question. And then what is the time line on the West African asset disposal in the markets that you mentioned?

Yes. Let's take on Sudan first. Obviously, in recent days past, the network actually did shut down. And obviously, with the network shut down, we can't generate revenue. We've been able to get feel to critical sites, so the network is back up, but still quite a volatile situation. I mean Sudan is an important part of our overall portfolio. But it's too early to say what the impacts would be in Q2. But we still think that, as we said, we are maintaining our medium-term guidance. So we think that the group service revenue guidance of high mid-teens would be -- will still be achievable in the year. But on West Africa, I mean, it's early days. I'm not going to give a timeline to how that process will work. We have received an offer. We're engaging with the party who will engage with stakeholders, minority shareholders across the market, et cetera. This will take time. But I think if you reflect on our announcements of exiting a market like Afghanistan. It took us -- we are not talking about the closing of Afghanistan -- from announcement to closure took us all of 3 years; we're obviously going to anticipate will take this long. But we don't want to put a timeline and then come back and revise it.

Thanks, Ralph. There's a question here. Can you please discuss the delay in announcing a potential transaction in mobile money?