MTN Group Limited (MTN) Earnings Call Transcript & Summary

Good day to everybody. Thank you for joining us on this call to discuss the MTN Group's Trading Update for the period ended 31 March 2024. My name is Thato Motlanthe. I look after Group Investor Relations. And on the call with me, I've got Ralph Mupita, who's our Group CEO. We've also got Tsholofelo Molefe, our Group CFO; and also joining us on the call this afternoon is Charles Molapisi, who's the CEO of MTN South Africa, as well as Dineo Molefe, who's the CFO of MTN South Africa. So our trading update was published this morning on the JSE and it's posted on our website on the Investor Relations page. I trust that you've had a chance to look at it this morning, along with the Q1 releases from our listed OpCos. And these were published over the past couple of weeks. And hopefully, you've been able to join their investor calls as well. So for today's call, we'll present a bit of a focused overview of our Q1 performance, reiterating the key highlights before we open up for Q&A. The running order is as usual, Ralph will be kicking us off with an overview of the commercial performance as well as the key issues. Tsholo will follow up with an overview of the financial highlights and then Ralph will come back to run up with key focus areas and the outlook. After that, we'll go into Q&A, and I would encourage you to enter your questions on the webcast platform, which I will read out at the end. We're scheduled for about an hour for this call after which we will wrap up. And then you can send me any additional questions, which we are not able to cover. On that note, let me hand over to Ralph for introductory comments.

Thank you, Thato, and a very good afternoon to you all, as well for myself and Tsholo. I trust everybody is keeping well. In terms of our Q1 trading update, we are encouraged to have delivered a resilient performance for the period in what continues to be a challenging macro backdrop. And before going into the trading update highlights, it's important to just touch on the environment we continue to navigate in the period. From a macroeconomic perspective, inflation and interest rates in some of our key markets remained elevated during Q1. It was encouraging to see the overall inflation trend improving. And to give you a sense, the blended rate of inflation across our footprint averaged around 13.7% in Q1 2024, which favorably compares to 18.5% in Q1 2023 and 15.4% in Q4 2023. We also saw local currencies under pressure, particularly the naira, which continued to devalue against the dollar during the period. You would have seen from MTN Nigeria's reporting the business there delivered strong underlying commercial momentum despite the financial impact of the sharp devaluation of the naira. There are a number of other factors impacting us in the period, including the ongoing civil war in Sudan, the severely affected network availability and revenue generation in that market. Most of you will also be aware of the cable cuts that caused major disruptions and outages, especially in West Africa. In terms of regulatory issues, we have reported to you in the past about the impact of SIM registration regulations in a number of our markets, notably Nigeria and Ghana. This mainly impacted our subscriber development during the period, but we do believe that we manage the impacts well, and sustaining service revenue growth. Tsholo and I will cover 3 areas in our overview commentary this afternoon to run as follows: firstly, the overall performance highlights, a summary of the financial review, which Tsholo will cover. I will then come back at the end to conclude with some priorities and outlook comments. So let me start on our performance highlights, which is topic one. We continue to invest in our networks, and we deployed ZAR 5.4 billion of CapEx ex-leases, reflecting an overall CapEx intensity of 11.8%. We delivered overall service revenue growth of 11.1% in constant currency terms, with EBITDA up 3.9%, with the underlying margin down 2.5 percentage points to 38.1%. That's all in constant currency terms. In terms of our commercial progress, our subscriber base increased by 3 million to 288 million. As I mentioned, this was impacted by subscriber registration regulations in Ghana and Nigeria, as well as a decline of subscribers in Sudan amidst the ongoing conflict. Active data subscribers were up 7.8% to 149.2 million, supporting the increase in data traffic in our networks. We are pleased with the continued strong demand for our services, which underpin our media -- which underpin our medium-term growth thesis. In this regard, data traffic was up 36.2% year-on-year, 32.2%, excluding the joint ventures. MTN South Africa, putting another resilient Q1, given the pressures in that market with service revenue up by 3% year-on-year. Within this mix, the data performance was impacted by initiatives implemented to recover legacy Xtratime data advance balances through data bundles, which slowed revenue development. We have now completed the network resilience plan and our position to manage loadshedding and maintain good network availabilities up to Stage 8. Subscribers increased by 3.3% to close of 37 million while data traffic growth was up 42%. This includes a strong growth in FWA products as the business accelerated penetration in that market. This is a particular area of focus in terms of MTN SA's pricing priorities where there are some initiatives being implemented to announce revenue yield. MTN Nigeria reported its results at the end of April. Under the circumstances, they delivered quite a solid underlying operating performance given the sharp naira devaluation impacting the financial results. Data traffic, in particular, was quite robust and grew by 41% which supported MTN Nigeria's strong underlying top line performance. Constant currency service revenue for MTN Nigeria grew by about 32% in the quarter, which was once again ahead of local inflation. Within our markets portfolio, MTN Ghana, put in another stellar performance. The reported -- again, reported at the end of April. But looking at the Q1, very strong service revenue growth of 32% in constant currency with a strong contribution from data and fintech. The results were supported by pricing initiatives implemented in the market, especially for data. For group fintech year-on-year transaction volumes and values grew by around 18% and 11% respectively, as we ramped up for a focus on monetization. You would recall our comments from full year '23 results, this is a major priority for 2024. This is really to ensure that we balance the expansion of our ecosystem with revenue and cash flow growth. The initiatives in key markets include changes to -- in B2B and C2B activities. We were pushing more transactions into merchant ecosystem for higher monetization. We have intensified bill collection initiatives, optimizing our pricing in order to improve take rates. In remittances, we are enhancing our model to enhance better pricing, especially in terms of rates charge to our partners. We're also pursuing high yields and floats and improving how we manage our float monetization. Through initiatives like this, we are accelerating the growth in advanced services in line with our strategy. When you look at our performance, we grew advanced services by 63.3% year-on-year as we continue to evolve the revenue mix. The progress in Fintech was underpinned by a more active user growth of 6.2% to 65.5 million and by 8.1% to 62.2 million. If you exclude OTC customers in Nigeria, you would have seen in our tables that we provide in both metrics. And what you'll probably see going forward is a streamlined towards the ex-OTC metric in line with our focus on active wallets. We are encouraged by the growth in active merchants, up 40.1% to 2.2 million, supporting the growth in merchant payments of $4.7 billion, up 32.6% on prior year. So let me pause here and hand over to Tsholo for some color on our financial performance, and I'll come back with outlook and priorities as we conclude before we take Q&A.

Thank you very much, Ralph, and good afternoon to everyone joining us on the call this afternoon. I'd like to first talk about the financial overview for the Q1 results. And firstly, just to reiterate the resilient financial performance we have reported in light of the steep headwinds impacting our business and as outlined by Ralph, our service revenue increased by 11.1% in constant currency terms. And as highlighted, the conflict in Sudan had a significant impact on this performance. MTN Sudan revenue declined by 83% year-on-year, affected by mainly the lack of network availability. If we exclude MTN Sudan, our service revenue would have been up 13.3%. So quite a solid underlying performance. [Indiscernible] impact our EBITDA margin, this was affected by upward pressures on costs due to higher inflation and ForEx depreciation largely in Nigeria, the network resilience cost as well as electricity tariff escalations we saw in MTN South Africa and the escalation of costs arising from the conflicts in Sudan. We mitigated this effect, however, through the execution of our expense efficiency program in terms of which we realized about ZAR 430 million during this period. Overall, this enabled us to report group EBITDA growth of 3.9% in constant currency, with a margin of 38.1%. However, lower by 2.5 percentage points compared to the same period last year. Over the course of this year, we will accelerate the initiatives to realize further efficiencies and ensure that we meet our expense efficiency targets. You will recall that we have targeted savings of between ZAR 7 billion to ZAR 8 billion over the next 3 years. The focus on our financial resilience has been and still remains a key focus area for us. In this regard, we are very pleased to have maintained a group net debt-to-EBITDA ratio of 0.5x as at the end of March this year. This remains well within our loan covenant limit of 2.5x. Our net interest cover from a group perspective is at 5.6x and also within the covenant threshold, although under pressure -- under some pressure given the near-term headwinds, especially the FX impact. It is important to note that we've engaged with our lenders, both at group as well as Nigeria level, we have secured the necessary accommodations from our lenders in relation to some of the potential impacts on our loan agreement arising from the major currency devaluations we have reported in Nigeria. Our holding company leverage expanded slightly to 1.7x which is above our midterm guidance to the market of 1.5x, and which was anticipated, really, given the short-term pressures from FX impact as well as lower cash upstreaming from the OpCos, which is normally a softer quarter. We remain focused, however, on our streaming efforts and anticipate this to improve in the coming quarters. Overall, this will also support efforts to retain Holdco leverage back within guided range of 1.5x over the medium term. In terms of our upstreaming, you would have seen from the sense that we reported cash upstreaming of ZAR 718 million received mainly from our OpCos largely in MTN South Africa. Again, you may recall that we do have a seasonality in the profile of our cash upstreaming, as I indicated, and we expect this to increase over the remainder of the year. In light of comments, I would stress that we remain guided by our capital allocation framework that has really stood us in good stead. We believe remains relevant and even as we navigate the current volatility in our macro context and will enable us to continue to execute on our strategy. With that, I'll hand over back to Ralph.

Thanks very much, Tsholo. Just to echo the really resilient operational and financial performance we've delivered given the near-term headwinds. The strength and flexibility of our balance sheet gives us a lot of confidence about our ability to deliver on our investment case as we navigate some of these near-term challenges. Just in terms of the outlook, let me outline a few key messages. Firstly, I think the first is to recognize the prevailing geopolitical and macroeconomic conditions will continue to impact our business in the near term on our expectations. That said, the fundamentals of our businesses are quite strong, and we are confident in our ability to continue to navigate the near-term uncertainties. In South Africa, Charles and the team are doing work to accelerate growth and improve profitability underpinned by its resilience plan which is significantly improve the network availability. Several initiatives are underway and are being executed in MTN SA, including price ups in prepaid plans and other portfolios, as well as revision of data bundle portfolios. As we noted in our FY '23 results, MTN SA is making investments into the device market to support its revenue acceleration initiatives. And we have cautioned that this will put some pressure, some near-term pressure on EBITDA margin there. In the sense, you would have also seen that MTN SA has mutually agreed to unwind the PaaS agreement with IHS, and we're happy to take questions around the logic of that. But very importantly, MTN SA remains very focused on delivering on the medium-term guidance for FY 2024 for both service revenue and EBITDA margin guidance. For MTN Nigeria, the key will be to resolve the negative equity position reported there. The EGM in Q1 already highlighted the 5 key initiatives we implemented to achieve this. And without getting into details of it, they do merit some repeating. Firstly, continuing to pursue regulated tariff increases through engagement with authorities, and these are ongoing. Driving margin recovery through accelerated top line growth with a focus on executing on the expense efficiency program. The third, optimizing CapEx deployment targeting CapEx intensity in the upper single digits. Fourth, reducing U.S. dollar exposure with a focus on the MTN Nigeria's outstanding letters of credit obligations. And the fifth MTN Nigeria is considering strategic options to manage its tower lease portfolio. As we communicated with the release of MTN Nigeria's Q1 trading update, we have revised up our service revenue guidance to high 20s to low 30s. We've also communicated FY '24 EBITDA margin guidance of 33 to 35 on the assumption of FX average rates between and 1,400 and 1,700. No tariff increase and no successful outcome from TowerCo contract renegotiation. Obviously, as any of those 3 variables move, they would affect the margin guidance positively. Of course, MTN Ghana will continue to lead the focus within our markets portfolio and achieving operational excellence, which will help safeguard as margins and drive sustained bottom line growth in the medium term. In our platforms, we will leverage partnerships to accelerate ecosystem growth and wrap up commercial monetization. We also continue the work to bring in further minority investors into our platform. The commercial initiatives in Mastercard will ramp up in Q2. The sequential launches across markets through the remainder of the year. And then on CapEx, we have revised our anticipated CapEx for 2024 to ZAR 28 billion to ZAR 33 billion. This was due to the reduction in expected spend by MTN Nigeria as they announced a couple of weeks ago. I do want to however reiterate that we have a very well invested network in Nigeria, excellent spectral assets and network headroom in Nigeria to take on the data traffic growth in the year ahead. And we believe we will be able to maintain the strong network leadership position that we've had over several years. So in closing, we remain focused on our strategy execution to deliver on our medium-term guidance. This is guided by a robust capital allocation framework and [Indiscernible] on the resilience and flexibility of our balance sheet. So let me stop there and hand over to Thato for Q&A. As was mentioned earlier, we have Charles and Dineo also in the room to help us answer some of your questions. Thato?

Yes. Thanks so much, Ralph. Thanks, Tsholo. Let's just jump straight into Q&A. There are quite a few of them. This is about to the question on Nigeria. Can you please provide some color and the progress regarding the renegotiation of the Nigerian USD leases and why this is taking time to execute.

Yes, just to start with that one, and I think we messaged this quite clearly during the results roadshow. Obviously, there are a variety of variables that are very sensitive when you do this multiyear renegotiation. Firstly, is what exchange rate do you convert what is currently dollar-denominated, U.S. fees into naira. And that's one key variable that if you get it right, so if you get it wrong, I mean you're kind of stuck with it with a period of the contract. So there's a lot of work grained through that. The other is just on CPI escalations, how do we frame the CPI escalations. And then there are a few other terms that are being discussed where we've got to so far is -- and I think we've made good progress in particular, on looking towards movement from technology-based pricing towards space and power. So that side is not a big issue. So it's essentially really around the rate that is used to convert what was previously dollar-based U.S. fees or currently dollar-based U.S. fees to naira. The CPR rate, understanding also the tower portfolio is actually 3 of them. There's the so-called IHS. There's a Helios portfolio, there's an INT portfolio. And all of those have various terms that are still being discussed, including the lease tenor. So these discussions will remain ongoing.

A couple of questions on Nigeria. Following the MTN Nigeria EGM, just to clarify, is there no holdco obligation to shore up support for OpCo balance sheet in any way. While the 5-point plan may help OpCo trade out of its negative equity position, what is the fallback plan if any of the initiatives do not result in the closing of the net equity balance by '25?

Yes. I mean there's no holdco obligation to shore up the balance sheet in terms of an equity capital injection. I think that's super clear. The common rules require us to communicate the plan. And obviously, if we get the tariff increase, we were able to renegotiate an attractive new set of contracts with IHS. I mean that obviously changed the picture pretty much in an instant. So there is a scenario, which we say is the trade-out scenario, which is you continue to keep the current contracts as they are. They have different tenures, a big portfolio of towers as a tenure that goes up to 2029. That's the so-called INT portfolio. So that's still got 4.5 years to run. And so there is a scenario you just trade out and go into next year. I mean, obviously, the impact of that would be you remain in negative equity as to the sense you've got your accommodation from the fund raise, et cetera. And on all kind of reasonable scenario assumptions, you come out the back end of next year towards a profit situation given various assumptions about exchange rates and so forth. So that scenario remains one that is available for the company. But I think it's important to note that we're going to remain agile and responsive to developments, whether they are on the tariff increase side or on progress with IHS on the contract renegotiations.

And it's maybe another question on Nigeria CapEx before we move on to some SA questions. I think you did touch on it, but please talk about the change in approach in Nigeria CapEx. At FY '23 results, it seemed the approach was largely to maintain spend levels, especially considering your experience through the prior devaluation, what's the change since then? And how is this different this time? It doesn't look like your peers are pulling back on CapEx intensity in the near term.

Yes. I mean I think there's one peer who communicated less CapEx into the year with full year results. So we won't comment about them. I mean, what we assessed and I guess in these situations, you have to remain strategically agile. So what we assessed after full year was what is the headroom in the Nigeria network? And what we have seen in the Nigeria network and particularly given that we had secured 2 x 5 megahertz of 2,600, which was continuous to the balance of the 2,600 we had, when we looked at that and having done our spectrum planning, Carl and team concluded that actually, without compromising network quality and having a level of sustaining CapEx, mostly going to be going to IT. And with some radio planning, we would actually be able to maintain the data growth that we've seen certainly in Q1, so you saw 40% traffic growth supported by revenue growth that's in the 50s. So the team felt that, that's -- that could continue to absorb that and that headroom to be able to take on the data traffic. So that was being responsive to the conditions as we saw the trading through February and into early March. I understand the point that says you can cut CapEx substantially. But I think, as I said, we've invested ahead of demand in Nigeria. We've got headroom in 5G. We're trying to move a lot more traffic towards 5G and particularly in FWA and our Home Solutions, we're trying to use more of that 3500 megahertz spectrum over a 100 megahertz of that and then as I said, the 2,600 portfolio is helping us carry quite a lot of traffic. So we feel comfortable that there is no kind of competitive impairment by taking on the strategy.

Maybe some questions on SA. What is the effective price increase MTN SA is looking to price up for prepaid? When will this start? And any color on initial subscriber response we are seeing in ARPU uplift.

Charles?

The prices, maybe just to give you a blueprint, we delivered the postpaid pricing in February. The first time we do that, that was about in 8.6% target increase with a 4.3% effective rate. On prepaid, I just want to maybe explain that prepaid is done maybe on multiple layers. So we've been prepaid on CVM, have also been prepaid on open market. CVM, were done, I think mostly all our top 20 bundles. We've completed that. The intensive rate defers depending on the bundle profile. So we know it vary depending on the size of the bundle and the target the market that we're targeting. And then on open market, most of those prices have not started yet to go in the market in the month of May. There's a bit of a lag effect in terms of those pricing because there are a lot of channels, there's a bank integration. We must [Indiscernible] them out into the channel altogether. So that will come through, I think, mainly, but there's a comprehensive pricing strategy across all the segments, whether it's wholesale, enterprise, FWA and then postpaid and prepaid.

And then maybe just clearing on, postpaid ARPU decline is accelerating quarter-on-quarter. Any color on what is driving this in the outlook for FY '24.

Yes. No, our expectation is that postpaid will see some recovery. I think that [Indiscernible] is also just the profile of the customer that you are onboarding on postpaid. So that's mainly that. But I think we expect that as we go into Q2 and then Q3, then the postpaid recovery will come through. We did also mention that postpaid was affected by the cleanup that we did on the base. That cleanup was done in Q4 2023. So we can expect that the comparable will be a little bit low sighted for a while, but will come through the wash as we go into quarter 4.

A couple more. EBITDA margin in South Africa, what would the margin have been had you not front-loaded device investment. And when should we expect to see the benefit in terms of revenue acceleration initiatives from this?

Yes. I'll deal with the revenue profile and then Dineo will deal with the margin. First of all, just to explain the strategy. I mean, I just want to be clear that in terms of the envelope that we intend to spend on devices, that is pretty much under control. The front-loading was a strategic decision that we are taking to say, let's get the customers pay as opposed to actually delaying the -- getting the customers on board later in the year. Let's put them through -- and in the year, let's say, Q1 and maybe in Q2. That allows us to load the sales revenue profile. So still early, but we're seeing a nice upside coming through. But I think we'll start to see a much more clear picture as those devices get into the market. Remember, there's a bit of a lag effect once it device is bought and get into the market. So we expect to see some form of upside going forward. And obviously will assess and try to bring the whole margin under control.

So the device operation had a 0.6 percentage point impact on the reported margin. So we would have reported 35.5%.

If we move on to a question on pricing. So please can you update us on the price up initiatives across Nigeria and Ghana. And have you upstream cash from Ghana in the quarter? And then just linked to that -- or it's same person asking. Can you give us color on the detail on the products that you'll roll out in conjunction with Mastercard...

Yes. Maybe just take the pricing in Ghana, Nigeria, I mean, Ghana, I think there's been now a kind of a rhythm and a pattern that we do get price increases, particularly on data actually is a function of S&P regulatory status, where we can't price below the competitors, and that's supported top line and margin growth in Ghana's, so that is actually driven by the S&P regulations that are in place there. I mean, in Nigeria, I think what is that we think about this in 2 codes. I mean, we are talking about a data and voice tariff increase just to lift at an industry level. As many of you have read that certainly on voice, the floor price has been in place in over several years. And that's what we are engaging as an industry through [Indiscernible] with engagements with the minister. What we did do, as we spoke with full year results at the end of Q3, we did introduce new bundles that we frame it as bundle optimization that has supported the strong growth that you saw at the top line level in Nigeria without the tariff increase, we got to 32%. So data there, 40% traffic growth, almost mid-50s, data revenue growth was boosted by that optimization. So I mean, we'll continue to work on both, both the tariff increase and where optimization is possible, particularly around data. On upstreaming, quarter 1 is seasonally very low. I think last year's comp has been about 1.6, so we don't normally get a lot of upstreaming. It's mostly South Africa that comes in Q1. And we start getting management fees, some of them are paid on a quarterly basis and then the dividends that get declared, some happen at half year. So you start actually seeing seasonally that the bulk of the upstreaming is Q3 and Q4. Q4 is always generally much higher. So I mean we still feel confident that the upstream will come through, not streaming from Ghana. And as I said, the majority of the upstream would have been SA and some of the smaller markets and management fees will start seeing it come through Q2 now by the half year. And then as I said, the majority, you normally see that come through Q3 and Q4. With Mastercard, obviously, One of the key things we want to launch and get out the way is really the virtual cards. Ours is a most Mobile Money system or fintech systems in our markets, these are closed-loop systems, most of them, not all. And what this virtual card really enables us to do is take our customers out of the whole garden of the MTN MoMo business into kind of a broader ecosystem with the ability to make payments with MoMo overlaid by the virtual contact capability that we get from Mastercard. And that's what we are kicking off. So big push on issuance and acceptance. So also a big push from the merchant side, as I mentioned. And we saw very good growth from merchants, and that's obviously ultimately going to be a big part of -- the success of our strategy is just a ubiquitous merchant ecosystem to support our strategy.

And then just a question may be one on fintech. How likely are you to do a MoMo transaction this year, i.e., a further sell-down?

Our shareholders like to ask me that when I don't deliver in the period than I get feedback. I mean all I can say is we currently are working on this. We are working on the second process. So that's kind of underway. Thato as you said [Indiscernible] because they'll ask me that. But I mean the work is ongoing. We're not sitting still on this.

Maybe just a question on balance sheet. Can you discuss the plan for addressing the holdco company that previously it was communicated that the goal would be to bring FX debt to a de minimis level as soon as possible. Is this still the case? What funding options would be available to take out the debt.

Thanks. I'll take that. I mean we're still on track. We communicated to the market with the year-end results that we still have about $97 million to clear on the 2024 Eurobond, which is due in the last quarter. So plans will be underway to clear that and then we will have the 2026 bond as we indicated. So we will explore liability management, subject to market conditions when the time is right. And we -- as we indicated as well, we do have the domestic medium term note in South Africa that we utilize. We're comfortable that we have sufficient headroom to be able to tap into that. I think as we indicated before, the debt mix is well within our target of 40% USD to ZAR currently at 23%, USD to ZAR at 77%.

Some follow-up questions on SA. Why is the EBITDA margin taking longer to recover, especially since load shedding is now much better, and then how much was the contribution of price hikes in the growth of SA service revenues? Do you expect more? I think you did cover that earlier? And then your organic growth rate is now at low level -- I think it should be low single digits -- at low single digits. How quickly should we expect it to track back to your medium-term guidance?

Yes. Maybe just a quick point on pricing, just to emphasize, most of the prices will come in only in say, in May, and there were very few price that we did in April. So the current performance that you see doesn't necessarily show all the price changes that we have done. The big one that would be reflected on the performance will be the postpaid, which was -- just as well on the pricing. I guess the issue of EBITDA may [Indiscernible].

Yes. So just why is it taking longer to recover, especially given that load shedding is now much better?