Conference Call Transcript

17 May 2021

VODACOM TANZANIA PRELIMINARY RESULTS

Operator Good day ladies and gentlemen and welcome to the Vodacom Tanzania preliminary results conference call for the 12 months ended 31st March 2021. Managing Director, Hisham Hendi, will host the conference call. I will read the following forward-looking disclaimer before handing over to Mr Hendi.

This announcement, which sets out the consolidated preliminary results for the 12 months ended the 31st March 2021 of Vodacom Tanzania Public Limited Company and its subsidiaries, hereinafter referred to as ‘the Group’, contains forward-looking statements which have not been reviewed or reported on by the group’s auditors. These statements are in respect to the group’s financial condition, results of its operations and businesses, and certain information relating to the group’s plans and objectives.

In particular such forward-looking statements relate to the group’s future performance, capital expenditure, acquisitions, divestitures, expenses, revenue, financial condition, dividend policy, future prospects, strategies relating to the expansion and growth of the group, impacts from regulation on the group’s businesses, expectations from the launch and rollout dates of products, services or technologies, expectations regarding the operating environment and market conditions, growth in customers and usage and the rate of dividend growth.

During this call, unless otherwise specified, all growth rates stated will be year on year and all amounts stated will be in Tanzanian Shillings. If you do not have a copy of the results announcement, it is available on the investor relations section of our website. I would now like to hand the call over to the Managing Director, Mr Hisham Hendi. Please go ahead, sir.

Hisham Hendi Thank you Claudia. Good afternoon everyone and thank you for taking the time to join us. I am here joined by Jacques Marais, our Finance Director. Vodacom Tanzania Plc is a purpose-led organisation, which means that we strive to balance economic growth with social inclusion, environmental protection and our vision for connecting for a better future. The harsh consequences of the COVID-19 pandemic reinforced the importance of our purpose-led approach as we quickly stepped up to the plate in support of society through a range of initiatives including prioritising the resilience of our network, accelerating support to government and facilitating cashless payments. Given the significant changes to the customer demands and behaviour patterns due to COVID-19 measures we responded rapidly to keep families connected and ensure customers could work, be educated and stay entertained through significant investment in our network.

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From a financial perspective revenue and profitability were adversely impacted by the barring of services to 2.9 million SIM cards in the previous year and an associated step up in competitive intensity in addition to subdued economic activity due to the health crisis. While these factors contributed to a 5.7% decline in service revenue, there was a noticeable improvement in service revenue growth in the second half of the financial year largely supported by growth in data and M- PESA revenue. Importantly, we maintained our leadership position in customer market share at 30.5% and solidified our headline net promoter score lead with a 17-point gap to the next best competitor despite efforts of certain operators to drive unsustainable short-term customer growth.

M-PESA remains a key revenue driver. M-PESA revenue increased 11.3% in the last quarter and accelerated further in April 2021. M-PESA customers grew 10.6% to 7.4 million representing 49.8% of our customer base. We continue to lead the industry with customer market share of 40.7%, up 1.4%. M-PESA continues to be a key enabler of financial inclusion while empowering customers to transact easily and effect cashless, contactless payments. In particular, our lending product, Songesha, continued to perform well with healthy growth recorded in the year. Our international money transfer also continues to play an important role in supporting financial inclusion with growth in receipts more than doubling to over TSh 500 billion and remittances exceeding TSh 70 billion, an increase of 35%.

Our partnership with more than 900 companies continued to facilitate fast, convenient and secure payment through an expanded M-PESA ecosystem. With over 4 trillion transactions processed between businesses and their customers, this has contributed significantly to the growth of M- PESA. One important thing to note, effective from 1st April 2020 our mobile money business operated as a separate legal entity named M-PESA Limited, wholly owned by Vodacom Tanzania Plc. This separation is in compliance with the National Payment System Act. While M-PESA Limited as a standalone business is profitable, the GSM business made a loss for the year. This impacted the business on which taxation was calculated in the current year resulting in materially higher tax charge compared with the prior year.

We invested TSh 122.5 billion in capital expenditure which enabled us to expand our 4G network, enhance our IT infrastructure and maintain data availability at a time when customer demand patterns shifted significantly. Our sustained investment programme continued to deliver a better data experience for customers, evidenced by 47% increase in data usage per customer, reaching 1.4 GB per month. We were pleased to be able to reward our shareholders with special dividends of TSh 178.57 per share, a total of TSh 400 billion that was paid during the year.

Looking ahead we are encouraged by early signs of industry reform that could bring back growth to the industry and accelerate investment. As we navigate through this period of reform we remain focussed on delivering great value and an exceptional experience to our customers. Our sustainable cost management programme and proactive measures to drive digital and financial growth are expected to improve profitability in the new financial year. While we continue to make good progress on SIM card registration, we remain cautious around the impact of COVID-19 and uncertainty about the pace of economic recovery that may weigh on disposable income as a result of reduced economic activities.

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Now let’s look at the numbers. We reported a 5.7% decline in service revenue as mentioned earlier. The barring of service to 2.9 million SIM cards in the last quarter of the previous financial year and the step up in competitive intensity highly contributed to the decline. While the full year result was below our growth ambition, the trends improved through the course of the year and we posted positive growth of 6.3% in Q4.

Looking at the key revenue drivers in more detail, absolute voice revenue was up TSh 311.6 billion and declined 16.5%. Despite the 6.3% increase in outgoing minutes of use, average price per minute declined by 21% accelerated by the decline in mobile termination rate as per the glide path as well as intense competition. Our focus on segmented offers using our CVM platform moderated the voice revenue decline in the fourth quarter to 8.3%. Voice revenue contribution to service revenue reached 32.3%, a decline of 4%. We believe this trend will continue as the mobile termination rate continues to decline, albeit at a slower rate.

M-PESA revenue was at TSh 356.8 billion, which represents 36.9% of service revenue. It declined slightly by 4.4% during the year. Normalised for the suspension of maintenance fees charged on dormant accounts in line with financial consumer protection regulation, M-PESA grew 1.3%. The growth was impacted by the service barring to 800,000 SIM cards in the last quarter of the previous financial year as well as COVID-19 pandemic impact. However, more positively, M-PESA revenue increased 11.3% in the fourth quarter supported by service adoption and platform growth. Demand for our mobile financial services through the M-PESA platform remained strong.

The M-PESA ecosystem processed more than TSh 69 trillion transaction values, up 20%. This growth rate accelerated in the fourth quarter to 29%. We added 710,000 customers to reach 7.4 million, representing 49.8% of our customer base. These customers are serviced by more than 120,000 active agents across the country, an increase of more than 35%. Our continued efforts in driving digital financial services proved to be a success. We grew our Lipa Kwa Simu, our merchant base, by more than 60% to above 15,000 active merchants across the country. These merchants processed more than TSh 3.9 trillion transaction value in the year, and increase of above 65%. This set up exciting medium term growth prospects for M-PESA.

Mobile data revenue grew 3.3% to TSh 186.9 billion. Despite service barring to 600,000 customers in the last quarter of the previous financial year, data services remained a key lever of growth and essential to our commitment of connecting to a better future. The underlying data metrics were strong with data traffic increase of 47% in the year despite a 30% decline in average price per MB from intense competition pricing pressure. Our smartphone users increased 7% to [break in audio] million, representing 24.7% of our customer base, an increase of 2.6%. Data usage per customer reached 1.6 GB per month in the fourth quarter, an increase of 50%. I’m really encouraged by this behaviour as it means that customers are truly growing into higher data usage. The adoption of data services is an important medium-term growth driver from a Vodacom Tanzania perspective.

From a profitability perspective EBITDA declined by 13.3% to TSh 316.1 billion. The EBITDA performance reflects the service revenue decline which was partially mitigated by cost containment initiatives. Let me unpack further the cost pressures during the year. Firstly, the market competitive pressure intensified in the last quarter of the previous financial year, accelerated by the 50% drop in

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MTR. In an attempt to gain the customer market share of the barred customers, the competition went aggressive on commissions as well as added more value into their bundles. This led to an increase in commissions as well as interconnect costs.

Secondly, there was more than 130% increase in municipal rate on external signage in line with the Local Government Finances Act. This led to 17% increase in the publicity expenses in the year. Thirdly, our payroll cost includes TSh 2.6 billion once-off restructuring cost. And finally, the higher number of network elements and inflationary adjustments applied on the service contracts as well as IFRS led to the increase in network cost. It is also worth highlighting that around 50% of our operating expenses related to locked and fixed long-term contracts, predominantly site leases, active maintenance and long-distance fibre transmission infrastructure. These costs pressure was offset by savings realised in our fit for growth programme, particularly on contract renegotiations, volume and site sharing discounts as well as digital transformation initiatives.

Operating profit declined by 48.2% to TSh 49.5 billion as a result of the decline in EBITDA and once-off restructuring cost. These pressures were partially offset by a decrease in the depreciation charge from the review of the useful lives of assets. More positively, operating profit improved in the second half of the year, recording more than 60% growth compared with prior year. Lastly, we reported operating free cash flow of TSh 79.4 billion, a decline of 26% primarily driven by the decline in EBITDA partially offset by the improvement in working capital as well as lower capital expenditure.

On the regulatory front we made good progress on SIM card registration with a significant number of customers already registered biometrically. Currently we have less than 1 million SIM cards yet to be registered. On data price reform it was pleasing to see the directives from the regulator that introduced a retail data price floor and ceiling in early March. The directives required implementation from 2nd April 2021. The data price was set at a minimum of TSh 2.03 per MB and a maximum of TSh 9.35 per MB, tax inclusive.

Together with the data price the regulator also required mobile network operators to implement a maximum of 50 local bundles. Subsequent to the implementation the regulator directed mobile network operators to revert back to the previous bundle tariffs. We continue to engage with the regulator and Minister of Communication and Technology and other relevant government institutions on the importance of industry reform. We believe that industry reform will foster capital investment in the country that will accelerate digital and financial inclusion.

Finally, on our medium-term outlook, the COVID-19 pandemic has highlighted the importance of telecommunication and financial services with our customers having accelerated the adoption of digital services. Our commitment to connect for a better future twinned with our investment into people, networks and platforms should facilitate this shift towards digital enablement. Nevertheless, industry reform remains an important aspect that will support future investments in the country. Demand for data and M-PESA services remains very strong, underpinning our strategy for financial and digital inclusion.

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As the effects of the COVID-19 pandemic continue to unfold the economic outlook remains uncertain. We do however expect the outlook to improve in the year 2022. This view is informed by global research providers and financial institutions such as the World Bank. This assumption of economic improvement together with demand resilience for our services provides the basis for our medium-term targets as follows: medium to high single digit service revenue growth and 13% to 14.5% capital expenditure as a percentage of revenue. These medium-term targets assume a stable currency, regulatory and macroeconomic environment. These targets are on average over the next three years excluding spectrum purchases, exceptional items and any mergers and acquisition activity. That concludes my comments and I would like to take any questions which you may have. Thank you.

Operator Thank you very much sir. If you would like to ask a question, please press * then 1 on your touchtone phone or on the keypad on your screen. If you decide to withdraw your question, please press * then 2 to remove yourself from the list. Again, ladies and gentlemen, if you would like to ask a question please press * then 1. We will pause to see if there are any questions. Ladies and gentlemen, just another reminder, if you would like to ask a question, please press * then 1. If you would like to ask a question, please press * then 1. We will pause to see if there are any questions. The first question comes from Darren Smith from 337 Frontier Capital. Please go ahead, Darren.

Darren Smith Good morning. Good afternoon. Can you hear me all right?

Operator Yes, we can hear you.

Hisham Hendi Yes, we can hear you.

Darren Smith Great. Just a couple questions on the mobile money business. Do you guys have an estimate of what kind of market share you have in that space? And can you give me any colour on what competitive behaviour is like right now in terms of pricing, promotions? I’m trying to get a better sense of where you guys sit in the landscape. And then still on mobile money, how much further do you think you can go to increase that subscriber penetration? You’re around 50%. Do you see that continuing to increase, and is there a natural cap on that?

Hisham Hendi Apologies, Darren. Can you repeat the second question? Sorry about that.

Darren Smith If I look at your number of M-PESA subscribers versus your total system subscribers I think you’re around 50%. I’m just wondering how much more growth you have in subscribers ahead of you. Is there a natural cap where that limits, or can you get to 80% or 90% of your subs? Any colour or thinking on that would be helpful.

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Hisham Hendi Thanks Darren. Let me unpack the first question. So the mobile money market share for Vodacom Tanzania is 40.7%. And M-PESA revenue increased as well 11.3% in the last quarter. And that gives you a bit of perspective as well on the tariffing side and the competitive environment when it comes to pricing. I would say it’s pretty stable. However, having said that there are a lot of promotional activities that take place on specific services like peer to peer in certain regions.

Sometimes a competitor goes to increase their market share in certain areas and they offer that for free. On the other hand, we continue delivering differentiated services across our M-PESA platform to ensure our continuous increase in market share. An example of that, we continue delivering differentiation on lending services, saving services, and recently we’ve also launched our insurance service. So we continue to have diversification on our M-PESA platform to keep our customers enjoying digitised financial services. That’s number one.

In terms of the second question, yes, we are at the 50% penetration at the moment. To your question, I believe there is still huge growth and there is a huge opportunity to increase that 50% market share into 70% or 80% in the coming years. And the reason why we believe this is going in the right trajectory is given the continuous engagement with our partners, government entities and so on. So far today we are connecting over 200 government entities around the country, which entices consumers to use all the payments and utilities through our platform. We are also connecting over 60,000 merchants across Tanzania to again enable more customers to use M- PESA.

So I believe there is definitely more opportunity to grow. The 50% is not capped. I think if we hadn’t had the barring in the last quarter of last financial year, we would be slightly better off than where we are today. As I mentioned, we had to bar around 2.9 million customers in the previous financial year. Out of those there was around 800,000 M-PESA customers that we had to disconnect and now we’re getting them back, so hopefully there is going to be more growth in the coming period. I hope I answered your question.

Darren Smith If I could follow up with a few, the barring of SIM cards, did that impact competitors as well? It wasn’t just you guys, was it?

Hisham Hendi Yes, it did impact the entire industry, all of us.

Darren Smith Got it. What is the rough breakdown of advanced services revenue in M-PESA versus traditional P2P or cash withdrawal on a revenue basis?

Hisham Hendi What do you mean by advanced services? You’re talking about lending services basically.

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Darren Smith Yeah. I’m just trying to get a sense of the traditional revenue from this ecosystem would be P2P transfers and cash withdrawal. What percentage of your revenue is from those two lines versus insurance, lending and other services?

Hisham Hendi Currently I would say, the lending – specifically let me talk about Songesha – is our key differentiator as far as mobile money business is concerned. And we continue to see an increasing uptake in terms of customers as well as value, which basically translates into revenue. We saw the contribution of the lending services, which is Songesha revenue, to total M-PESA revenue increasing throughout the year. Currently I would say it is on average between 5% and 7%. And close to 2 million customers are utilising the service. So I would say still peer to peer represents a significant percentage of the M-PESA revenue from where we are today.

Darren Smith Okay. It’s well above the 50% I would guess.

Hisham Hendi Correct, it is around that. Over 50%.

Darren Smith Could you also comment on the elevated tax rate for the year and what the implications are looking forward?

Hisham Hendi Sorry, Darren, can you repeat that again?

Darren Smith Could you comment on the elevated tax rate for the year? And what assumptions should we use going forward for tax rates?

Hisham Hendi I’ll ask Jacques, our Finance Director, to answer that.

Jacques Marais Hi Darren. Yes, so I’ll just take a minute and just give you some background on it. Hisham said earlier that from 1st April 2020 by virtue of the National Payment Systems Act we had to separate the mobile money business out of the Vodacom Tanzania. So basically it’s currently in a new entity called M-PESA Limited which is wholly owned by Vodacom Tanzania. So during the year M-PESA was quite significantly profitable. Of course it’s much lighter on opex and also the depreciation capex is also way lighter than what a telco is normally. So on the other hand the GSM business basically made a loss, contributed by the items that Hisham mentioned on revenue, the barring of customers, the COVID impact and of course the reduction of tariffs coming from the very competitive environment.

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So whereas in past the two would have netted off on a consolidated basis. Now it is two separate entities, so each one of them pays tax in its own right. So of course then 30% of taxable profit is what the M-PESA business has to pay. From the GSM perspective there was a loss. So you would expect zero tax then. But also from a deferred tax perspective, which you normally can recognise on your taxable losses, based on the current view where we are with very low tariffs, COVID uncertainty, still the dragging impact of some of the events we mentioned, we took a prudent view and did not recognise deferred tax asset for the GSM business.

There is over TSh 25 billion which we have not counted for based on the current view. Of course if the outlook improves, the tariffs can hopefully increase again and there is also talk of reform. I think you probably saw in our document we are talking of the new bundle rules which may or may not become effective. But of course any upside in the outlook at a later stage will result or may result in us recognising the deferred tax asset. Unfortunately, the basis of the tax calculation year on year did change, but the impact will be significantly less if the GSM business becomes profitable again or at the point where we can recognise the deferred tax asset.

Darren Smith I understand. Thank you. [Overtalking].

Hisham Hendi A clarification point on your question on P2P. The P2P including cash out is definitely over 50%. If you remove the cash out revenue, then it becomes around 10% or so.

Darren Smith Got it. Thank you for that clarification. Just one last question from me. Can you just comment on the environment generally in Tanzania? There is a lot happening with the new president in place. Maybe just a brief update on COVID on the ground. What does it look like day to day in Tanzania? As somebody sitting in New York and hasn’t been able to travel much, I feel very disconnected to what’s happening there. Any colour there would be helpful.

Hisham Hendi Sure. Now there has been a committee that has been assigned by the President, Her Excellency Samia Suluhu, where basically she has asked the committee to analyse the current situation of COVID-19 in Tanzania. We are waiting for the report. However, the country is not under lockdown. Several measures have been taken by the different institutions, wearing masks and so on. So that has been an overall COVID situation. From a telecommunication sector we’ve been having several conversations around the vision and the ambition for the country here where they would like to reach 80% of broadband connectivity in the next five years.

So we’ve been working very closely with the government to ensure we can reach that growth together as an industry. But the sentiment around enhancing digital and digitising different entities around Tanzania has been significantly high and a lot of conversation around digital economy and how important the telecommunications sector is in playing a big role in that. So I would say positive sentiments from an ICT sector. We’ve also seen there is an ICT Minister that has been appointed as

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well, compared to previously we had the Minister of Communication, Transport and Roads in one sector. Now we have an ICT Minister that is fully dedicated for the sector.

Darren Smith How is the economy doing right now? Do you think it is at 90% normal levels or much lower? What is also the prevalence of COVID right now? Do you get a sense of hospitals freeing up? Are cases going up or coming down or stable?

Hisham Hendi Obviously I cannot comment on the cases because we don’t have official reports yet. But what I can comment on is that by nature we are definitely impacted from a tourism perspective due to the travel restrictions that are coming from Europe, US and rest of the world. As you probably know, Tanzania is a strong tourist destination, whether it’s Zanzibar or the northern part of the country, Kilimanjaro, Serengeti. All of these areas have been significantly impacted by the travel restrictions, and hence consumer spend has declined in these areas. And we see it in several payments, whether M-PESA or GSM, which we have also mentioned earlier in my report that we’ve seen COVID impacting these specific areas in the region. So this is what we’ve been witnessing in the past period.

Darren Smith Great. Thank you very much and good luck.

Hisham Hendi Thank you.

Operator Thank you. The next question comes from Bernard Griesel from Steyn Capital Management. Please go ahead, Bernard.

Bernard Griesel Thank you. Similar questions were asked, but what I wanted to know is your GSM business is obviously loss-making as you’ve said. But you are the market leader with a far superior network and I believe operate at better cost versus competitors. Does that mean the whole GSM sector is currently loss-making with the current prices?

Jacques Marais Hi Bernard. Jacques here. Yes, I think if one takes a step back and you just look at the scale of the GSM networks in the country it is actually quite huge. If I take Vodacom we have already 3,500 towers. We look at how it is set up really. We are working on a lease model. In other words, we lease towers, tied into long-term contracts. There is a price in that long-term contract. This price escalates every year on predefined formulas. If you take that and if you then look at what the tariffs did, you will remember that Hisham said a 21% drop in average voice tariff during the year. And if you look at the average price for data that dropped 30% year on year from already low levels.

So of course it increased cost from a data capacity perspective. We had to take out more backhaul and more internet capacity to carry the traffic, albeit at a lower rate. Us and Tigo are set up exactly

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the same. Airtel still own their own towers, but they are also in a process of trying to sell them. So you have almost a semi-fixed cost and if you get a tariff drop – like in data we got a 47% upside on a 30% drop in average price, but we haven’t seen the same upside on voice.

Remember then you also have the depreciation charge, but not only that, also the IFRS 16 element of it. So you have quite a hefty additional chunk of depreciation and then interest if you talk of bottom line. In our case it is more than TSh30 billion on IFRS 16 impact for the year. Then a drop in revenue can hurt you quite significantly on the bottom line. And that’s not only us. That will apply definitely to Tigo as well, and if I have to guess, also to Airtel. Maybe slightly to a lower extent because they still own their towers and they can get some short-term maintenance relief from that. But generally we all have the same tariffs and GSM is struggling right now across the industry.

Bernard Griesel Thanks Jacques. As a follow-up, you talk about reforms and there was talk about the data price reforms. That sounds quite positive but it seems to have been implemented but then rolled back. Can you maybe just give us some sense of what happened there? Why was that rolled back? Is there a chance of this being implemented again? Where are you in that reform?

Hisham Hendi Yes, Bernard. I think as you rightly said, it’s a very positive indication. We have been having these series of conversations with the regulator, the ministry and the tax authority around the industry performance in general. And that reform was as a result of these conversations that we’ve been having with the different government authorities. Having said that, when this was implemented this came at a time where basically it was not correct from a timing perspective. Hence we had to roll it back and delay it a little bit. Having said that, it’s still definitely something that will be implemented, not necessarily with the same magnitude.

But we are currently talking to the regulator. The regulator and the Ministry are really adamant to bring the industry back to growth, and they are in support of these reforms because for them to be able to get to the target of 80% broadband they need to support accelerated investment from the industry on 3G and 4G coverage. But with the current situation, as Jacques rightly mentioned, it is not necessarily a plausible status where we are today. So hence this has been taken very seriously. And it will happen perhaps at a certain time this year, and we will definitely keep you as investors posted on the progress on that. But definitely there are positive signs as to how we get that to reform the industry.

Bernard Griesel Thank you, Hisham. That’s all from me.

Hisham Hendi Thank you.

Operator Thank you. Mr Hendi, we have no further questions. Can I hand back to you for closing comments, sir?

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Hisham Hendi Thank you, Claudia, very much. I would like to thank everyone who joined the call, and have a good day. Thank you very much.

Operator Thank you very much, sir. Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.

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