Telkom SA SOC Ltd (TKG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Telkom Pre-close Conference Call. There will be an opportunity to ask questions later during the conference. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Serame Taukobong. Please go ahead.

Thank you, Irene. Good morning, everyone, and welcome to our pre-close call. On the call is our group CFO, Dirk Reyneke, and the Investor Relations team. We are hosting this call to update you on trends in the second quarter and give you a high-level view on group performance for 5 months of the 2024 fiscal year ended on the August 31, 2023. This call will also give you an opportunity to engage with us as we enter our close period and to the release of our results on or about the November 21, 2023. The call will last about 10 minutes, and then we'll go into Q&A. So let me start with the operating environment. Performance continues to be impacted by economic conditions, load shedding and ongoing migration to NGN technology. The economy, as you're all aware, remains challenged, characterized on ongoing inflationary pressure, on the cost of living for consumers, a robust competitive landscape, marginal economic growth, plus ongoing rolling power cuts. Load shedding has remained a recurring feature, unfortunately, for all 5 months of this fiscal. Today, South Africa has experienced 133 days of load-shedding compared to 71 days in the prior comparable period. To our end, we are focused on what is within our control by configuring our key infrastructure sites to reduce the use of diesel by installing batteries and introducing solar energy as the primary backup form of energy, as well as upgrading backup batteries to lithium batteries in order to increase the capacity, time to recharge and longevity. This work is ongoing and will mitigate the cost of ensuring network availability during power cuts, both for our fixed and mobile networks. As expected and communicated previously, overall performance continued to be impacted by ongoing migration to NGN, next-generation technologies, as legacy and fixed line voice revenues reduce for the next 18 to 24 months. Despite this, we continue to see positive trends into Q2 F 2024 at all revenue and EBITDA level. There is a great focus on driving growth on the top line across all businesses, as well as the cost reduction initiatives to offset the inflationary cost pressures and the added cost of load shedding. Dirk will share more on group performance trend for the 5 months. In terms of continuing to realizing value for shareholders, we continue exploring the best options to unlock value for our shareholders underpinned by the belief that Telkom share price does not reflect its intrinsic value. Talks are ongoing for the Swiftnet, the Masts & Tower business. We will update the market on where we are with this process and other initiatives with the release of our interim results in November. Just to update you on the recent Board appointment of a Group Chief Financial Officer. On the past Friday, we announced the Board appointment of our incoming Group CFO, Ms. Nonkululeko Dlamini, joining Telkom as Executive Director effective December 1, 2023. The Board was determined to ensure that we are cognizant of our gender and transformation and equity requirements. Ms. Dlamini is a highly qualified CA with diverse expertise in large and complex organizations, and her recruitment came after many months of searching and examining a highly skilled pool of candidates. Her recruitment was also confirmed by a rigorous process involving Remco and Nomco, whom they finally made the recommendation to the main Board. Her skills in capital projects, capital raising, cost management and strategy alignment are a strong fit for the executive team which will lead Telkom's new strategic direction as an Infraco. Our current group CFO, Dirk Reyneke, remains available to support Ms. Dlamini in her new role and will assume the role of Chief Capital Projects Officer. His in-depth knowledge of all the Telkom business units positions him well for the strategic role as well as to share his expertise and experience with his successor. I'll now hand over to Dirk to take us through the trends we are seeing in the second quarter. Dirk, over to you.

Thank you, Serame, and good morning to everybody on the call. I've got a list of lot of everybody registered last night. I'm not sure we were on call this morning. Through this call, I will provide you with a consolidated view of the group financial performance. Individual business unit performance will only be covered in detail with the release of our '24 interim results. As we are in the close period, we'll stick to trends. I'm not going to quote numbers, percentages, et cetera. Suffice to say, we've seen continued positive momentum from the first quarter for the 5 months ended August. Group revenue is trending up similarly for quarter 2 to the end of August year-on-year within guidance provided despite the ongoing legacy revenue declines that Serame referred to. If I look at the costs, we're pleased that our cost reduction initiatives are bearing fruit, partially offsetting the impact of the inflationary cost increases and load shedding. Employee costs are trending downwards year-on-year, as anticipated. As a result, the total expense increases are well under control. We're seeing that the consumers remain under strain as high interest rates and record high fuel prices continue to eat into their disposable income. As a result of such economic pressures, our ECL provisions has increased year-on-year, but we are adequately covered. Despite these challenges, the group is making good progress and remains committed to improving operational profitability in the medium term. EBITDA margins are trending upwards from quarter 1 due to revenue growth and cost reduction initiatives. With improving profitability and excluding the restructuring cost provided for in the prior year, the ZAR 1 billion that I've referred to before. We have also seen a positive trend in free cash flow since the end of full year '23 and also since quarter 1, assisted by our focus on working capital efficiency during the period. Given the current debt levels, finance costs have trended upwards as a result of higher interest rates year-on-year. As you all know, lending rates are at a 14-year high with a [indiscernible], increased by 400 basis points since the beginning of full year '23, 200 basis points from [indiscernible] 2 in '23 and by 50 basis points from quarter 1. We continue to invest in our growth areas of our business. And for the first half, our capital expenditure as a percentage of revenue is expected to be slightly below the lower end of guidance, but we are still comfortable that we're investing adequately. That concludes the update on the group performance, and I will now hand over to the operator for any questions and answers. And thereafter, Serame will conclude. Thanks.

[Operator Instructions] The first question we have is from Preshendran Odayar of Nedbank CIB.

I just want to clarify on the free cash flow question. You're saying outside of the employee restructuring costs. So that's probably gone through in this period, this first half. It's trending upwards. Does that include or exclude the spectrum payment? And has that been done? And then coupled with that, is there any other, should I say, negative surprises that we should expect on free cash flow outside of the 2 known ones, which is spectrum payment and employee restructuring cost payments?

Now Presh, you recall that I said, guys, we're starting off ZAR 2 billion negative, ZAR 900 million spectrum and ZAR 1.1 billion restructuring. The restructuring costs, free cash flow has gone through. That process is completed. The spectrum cash flow will only be in the second half of the year. And again, that's in our plans and in our projections. But for half one, we've only had the restructuring costs flowing out. I'm not aware of any other surprises. I think in terms of free cash flow from a group perspective, from a central treasury perspective, the initiatives we set out to do, I'm referring handset sales, those sort of things, working capital value unlock. I think there, we've stick to what we said we will do and it's starting to bear fruit. So that with the increased profitability I'm seeing from an operating cash flow with respect to very positive trends.

The next question we have is from Nadim Mohamed of SBG Securities.

Just a couple from me. Just following on from Presh's question. Just wanted to ask about the account receivables and contract assets. And just if you could give us any color on the shape of that. I know you can't give us exact numbers. But any sort of guidance on how that's trending relative to the guidance and expectations earlier this year? And then just if you could give us a sense of how the mobile industry is currently trading. I mean we see, for example, Capitec announcing 1.3 million customers recently. MobileVoice is still sliding since Q1 and then just how your more nice offerings and Airtime Advance offerings are trending in market. .

Dirk, you can take the first one. I'll take the second 2. Dirk, have you vanished?

I'm here. Can you hear me?

I can hear you.

Okay. Sorry. So Nadim, yes, I think I'll take the working capital and Serame can deal with the second question. But in terms of accounts receivable, I'm not sure what guidance you're referring to. But we have put specific focus into our working capital investment releases. As I say, in the, let's call it, the wholesale market in Openserve, no surprises. I think there, our debtor days well under control, and it's low volume, high value and that's well managed. I think in the consumer space that I've referred to, as Serame has referred to the pressure that the consumers are under. But we well covered. The ECL increase probably more relating to the uptick in the revenue. I think in the corporate space, your accounts in BCX, you're all aware of. And I think I announced that in the quarter results, the post office business rescue and then the unintentional impact that had on Postbank. So there are, I want to call it, 4 or 5 large accounts that we're managing in intensive care. There's no new ones there. There's no surprises there, but there are big numbers that play there. So from a debtor's perspective, I think really, we're putting a lot of effort in unwinding that. And also with our collection agents, how do we recover some of the older book. We call it post write-off recoveries, which we've written off completely. But in terms of IFRS, again, you bring the book and the provision back on balance sheet. And we're saying what incentives are we giving our collection agents to recover more of that and not just on [indiscernible] through the bank's production systems. Forward-looking, we have increased or we've increased our scoring metrics in terms of credit scoring. So we are comfortable that given the higher credit risk, that our forward-looking business is more conservative and that we can manage that properly. Thanks. Serame?

Look, Nadim, I think on mobile, we certainly are seeing positive trends, which continue actually driven by a bigger focus on our active base management, supported by [ more nice ] and the Airtime Advance. So the team had been working quite hard in increasing the uptake of more nice and focusing on driving higher levels of retention as we also balance our completions. So mobile trends continue in a positive direction.

Excellent. And just to explain on that, are you seeing any, let's say, pressure from the likes of Capitec or some of these new plans you see from MTN? Any sort of resonance of those in the market right now?

Well, I think the new plan certainly from MTN as a response to some of -- from our plans. So it is expected. I don't think we need to do anything more drastic than that. MVNO space, I think, is an exciting space. I am seeing more dilution between the MVNOs, there is so significant impact on our side.

The next question we have is from Jono Bradley of Absa.

Just a question on asset realizations, specifically the Openserve deal or potential for an Openserve deal. Is this still on the cards given the Competition Commission recommendations on the Vodacom CIVH deal? Or does this change your plans at all?

Excellent. I'll take that one. I think obviously, the Competition Commission is a very interesting posture. I think the structure of an Openserve deal at this point in time, we've not settled on a particular partner in this regard. Secondly, I think given the recent announcement that I made to the market of our strategic shift towards an Infraco, we are in the process of reworking what that state will look like for a far more holistic Openserve. So at this point in time, we obviously, as a market, await eagerly to see what the Competition Commission landing is because it does have obviously an impact overall to the industry, but it certainly has not dampened our strategic direction. Ours is to really shape up and say how we really gear Openserve as an Infraco or an organization as an Infraco, which will include Openserve, obviously, and get that ready for market. I hope that cover it, Jono?

The next question we have is a follow-up from Preshendran Odayar of Nedbank.

It's me again. Just, Dirk, if I can ask some -- a little bit more probing questions for each of the businesses. What can we expect just some compared to quarter 1 in terms of revenue and margins for the mobile business, BCX, Openserve and the Lycamobile had quite a strong showing in the first quarter a good run rate and then some of the other businesses went a bit backward. So just some -- if you can give us some color on what to expect in the second quarter or for the first half. And then coupled with that, can you just give us what your network uptime is under Stage 6 load shedding, the mobile network, not the -- I know that Openserve is pretty robust. But just want to know on that it seems like MTN, they're throwing a lot of money to actually get that up and they've done quite a lot going from what competitors say was around 80% to now at 91% on Stage 6. So just if you can give us some color on that. That's 2 from me.

Yes. Presh, I'll take again the first one. Serame can talk to the network uptime. I think in terms of different business units, the trend that you saw in quarter 1 continued. So if I look at the fall, Openserve is an annuity business. You don't see big peaks and valleys there. Once you've got a wholesale customer, you probably retain that wholesale customer. Openserve, you've still got the biggest legacy overhang. So the legacy trends continue as the next generation growth continues. And on a net basis, as I say, we've reached that inflection point before. I think in terms of the consumer mobile business, clearly, on the mobile side, the trend of quarter 1 continues, specifically on the prepaid recharges side, service revenue, et cetera. They've still got a small legacy overhang on the fixed side, on the medium business. But the trend that we saw in quarter 1 continues. Gyro is solid and stable. The Swiftnet business, it's a small contributor, but that trend is with or without a transaction, that trend continues. I think there's no concerns there. And then BCX is the big kicker. Clearly, they were under pressure in quarter one. In terms of revenue growth, still a bit of pressure. And then for them on the cost side, the ECLs, the bad debt provisioning that play a role in this quarter. So I think the trends of quarter 1 probably continuing and on a blended basis on a very positive manner.

Yes. I think on the load shedding -- load shedding Stage 6, it's 2 different stats, of course. If we look at Stage 6 during peak hours, and we haven't had many of those, it ranges from 87 to about 90-odd. That's at peak. Off peak, we're above 90. So when Stage 6 happens at about 2:00, 4:00 in the morning. Generally, because we live in stage 2, stage 3. If I look at the later steps I've just received this morning with my -- we are sitting at an average of 95, 93.98% availability. Well, as of last night, I think we were Stage 2. Availability was 93.98%.

The next question we have is from Myuran Rajaratnam of Metal.

Two questions on the recent Board announcements. The first one is you used the word extensive search. So can you tell us how long the Board was looking for a candidate? And secondly, because the word extensive doesn't mean much. You can be more precise than that. And the second part is what should get the Board to do an extensive search?

No problem. I can take that one. Thank you, Myuran. First, I'd like to dispel the horrible rumors that this process took less than 24 hours. As you know, this is a listed entity. As you -- as we have indicated in Dirk's contract extension, part of the process was to find then a suitable candidate. This process kick started late last year, actually, about November going through the process. The candidates in question was selected and approached finally, I think, in February 2023, where she registered an interest in the role. She then went through the process amongst other processes. And finally, with the short list being interviewed by the audit committee on or about the 1st of June. And the offer was officially presented in the first week of August. So it started late last year, was obviously quite a huge panel and pool. Like I said, it involved our Nomco and Remco in particular reference to Ms. Dlamini, the first engagement with the Board in the short list was on the 1st of June. I hope that covers you.