Lesaka Technologies, Inc.

Hello everyone and welcome to the Lasaka Technologies FISPA 4th Quarter 2023 webcast and conference call. As a reminder, the webcast is being recorded and the presentation can be accessed through the webcast link as well as by dialing into the Zoom conference call and dial-in numbers provided. Management welcomes any questions you have during a Q&A session after the prepared remarks. For those joining us via the webcast live, you can ask your questions by raising your hand in Zoom. For those joining via the Zoom teleconference line, you cannot ask your questions live. The webcast link, Zoom conference call dial numbers, as well as our press release and supplementary investor presentation are available on our investor relations website at ir.lasakatech.com. Additionally, Lasaka filed its Form 10-K after the U.S. market closed yesterday, September 12, 2023, which is also available on our investor relations website. As a reminder during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our Form 10-K regarding the risks and uncertainties associated with forward-looking statements. Also, as a domestic filer in the United States, we report results in U.S. dollars under U.S. GAAP. However, it's important to note that our operational currency is the South African Rand. And as such, we analyze our performance in South African Rand. In this presentation, we will discuss our results in South African Rand, which is non-GAAP. This assists investors' understanding of the underlying trends of our business. As you know, the company's results can be significantly affected by the currency fluctuations between the U.S. dollar and the South African Rand. In the presentation that accompanies this call, we will provide all financial metrics as reported in US dollars in the appendix. Now, taking a quick look at today's agenda. Chris Meyer, Group CEO of LASAKA, will start with performance highlights for the fourth quarter of fiscal 2023 in a review of LASAKA's progress against its key strategic objectives. Steve Heilbron, CEO Connect and head of Merchant Division, will provide an update on the Merchant Division, which has produced an excellent set of results. Lincoln Molly, CEO of Lasaka Southern Africa, will provide an update on the Consumer Division, which has delivered a third consecutive quarter of EBITDA profitability. And then Naeem Kola, Group CFO will present an overview of our financial performance for the three months ended June 30th, 2023. Chris will then conclude the results presentation with a discussion of the outlook for Osaka before the team opens up for Q&A where we welcome any questions you may have. I now like to turn the call over to Chris.

Good morning and good afternoon and welcome to our fourth quarter 2023 earnings webcast and conference call. The fourth quarter was a strong ending to a transformative year for Lusaka. Excellent growth in the merchant division was driven by the Kinect and Kazang businesses, and we delivered the third consecutive quarter of profitability in the consumer division, where we have executed on our turnaround strategy and are moving strongly onto the front foot. It has undoubtedly been a year of significant positive change at Lusaka, so I would like to contextualize these results. Only 16 months ago, we announced the finalization of the Connect Group acquisition and our rebranding as Lasaka, positioning us to build the leading Southern African fintech platform focused on delivering financial inclusion to underserved merchants and consumers. And today, I'm delighted to report this robust set of results for the 12 months to 30 June 2023, especially in light of the increasingly challenging operating environment. These results demonstrate not only the resilience of our business, but also the resilience of our customers, and more importantly, the value they place on our services. The tireless dedication of our employees, from whom we have asked a great deal over this period, further underpins our success. So whether providing microloans to grant beneficiaries to help them in their daily lives or giving merchants quick access to working capital and solutions that help them de-risk their businesses and enhance operational efficiencies, our financial products and services are positively impacting previously underserved communities. We are delivering tangible evidence that our holistic financial service offerings are improving the lives of consumers and merchants across Southern Africa. And much has happened during this short period. Now, consumer and merchant customers have felt the negative effects of high inflation, high interest rates, and the escalating impact of power failures or load shedding, as it is called in South Africa. Inflation has been debilitating for all South Africans who are not seeing corresponding increases in their monthly incomes. The South African Reserve Bank increased interest rates on six consecutive occasions during the past year, adding a further 3.5% to interest rates since the start of FY2023. Power cuts have risen rapidly over the last six months, particularly in the fourth quarter, with 10-hour-per-day blackouts regularly experienced. We must recognize the cumulative negative effect of these challenges on our merchant and consumer customers. FY 2023 has also been a year of many milestones. We first issued revenue and group-adjusted EBITDA guidance for LASAKA as a group a year ago. And we have delivered on this guidance despite the tougher-than-expected trading environment, with revenue exceeding our guidance and group-adjusted EBITDA falling in line with our guidance. And as I've said before, the acquisition of the Connect Group was genuinely transformational for Lusaka. But integrations don't just happen in the ordinary course of business. The work put in by our teams to bring the businesses together while continuing to deliver the growth and performance they have achieved has been nothing short of remarkable. As we previously reported, the Connect Group implied enterprise value to EBITDA multiple was approximately 12.8 times at the time of the acquisition. That's using Connect's February FY2022 projected EBITDA. Notably, the Connect Group has surpassed the acquisition investment case and this effective multiple, enterprise value to FY2023 merchant segment adjusted EBITDA, has become approximately 8 times, with Connect contributing approximately 99% of the merchant segment adjusted EBITDA in FY2023. So our vision to build the leading fintech providing cash and digital solutions to small merchants and consumers in Southern Africa remains. On the M&A front, we continue to evaluate opportunities in South Africa that will enhance our market positioning. and this includes Bolton acquisitions that will provide scale to our existing offering or broaden our product offering in serving existing clients. Our M&A focus is primarily in our merchant business. We have successfully turned around the consumer division from a performance perspective, achieving three consecutive quarters of profitability. We have also fundamentally transformed the division into a customer-oriented, sales-focused business, And we still have work to do, but we are firmly on the right trajectory. From a balance sheet perspective, we have made significant progress with our lenders this year through restructuring our debt facilities, providing greater flexibility in managing our cash balances, as well as increasing our capacity for growth. Reducing our debt position is a key focus for Lysaka, with numerous levers at play to achieve this. Our operating cash flows continue to improve, with $9.7 million, which is R183 million, in net cash provided by operating activities in Q4, compared to $6.7 million, reported as R104 million of net cash used by operating activities in Q4 2022. We have made some progress in the realization of our non-core assets with the signing of a share repurchase agreement in regard to our interest in Finbond for a cash consideration of approximately 64 million Rand, which we intend to utilize to partially settle debt. The share buyback is subject to certain conditions precedent, including Finbond shareholder approval and is expected to close in December, 2023. We continue to focus on our other non-core asset disposals, which should further improve our balance sheet strength and debt ratios when completed. From an operational perspective, we broke some new barriers this year. We processed over R26 billion of VAS products, including supplier payments, on behalf of our merchants. Within that number, the use of our supplier payments platform increased more than 300% year-on-year to almost R4 billion in FY2023. Our merchants deposited over R110 billion in cash into our vaults in FY 2023, evidencing the value they derive from our ability to digitalise this cash and immediately provide access to working capital. Supporting this, we lent over R1 billion in growth capital to these merchants over this period. We continue to innovate and integrate market-leading solutions, often successfully tweaking formal market solutions for the informal market. Kazang Pay Advance and Kazang Vaults are great examples of how we rolled out formal market solutions to the informal market that are being well received. EasyPay Money Market was introduced in the formal market this year, demonstrating how our teams have been able to collaborate during the integration process. Our new ATM recycler is generating significant interest and this business has been transferred to our merchant division where it has been fully integrated into our Cash Connect proposition as an alternative to vaults for our merchant customers. In the consumer division, we extended over 850,000 microloans, or 1.3 billion rand, to our account holders and wrote just short of 125,000 new micro-insurance policies in FY2023. These figures demonstrate real financial inclusion and Osaka's tangible impact on previously underserved community members. We not only continue to deepen our understanding of the needs of South Africa's grant beneficiaries and the dynamics of this market, We have invested in data capabilities that allow us to better understand the impact that our enhanced products, distribution and service offerings are having across our customer base. As a result, we are on a completely different trajectory from where we were 12 months ago. To reiterate, our vision at Lusaka is to enable small merchants to compete and grow and to improve the lives of South Africa's grant beneficiaries. We are seeing daily evidence across our business of the significant impact that we are having on the lives of our merchant and consumer customers. Lusaka is a leading player in the sectors in which we choose to participate, and we are on the brink of launching an exciting project utilizing our unique datasets and insights into the informal and township markets in South Africa. There is very little empirical data available at this end of the market, and what is readily available is often contradictory. We are hard at work with other thought leaders in this space and aim to bring consistency to definitions and market size in order to drive better understanding and servicing of this market segment. With our extensive footprint in this market, we are targeting to release quarterly statistics combined with relevant thought leadership at our Q124 results. Lusaka has undergone a remarkable transformation since 2021. Our discussions at the board and operation level and with our investors and other stakeholders are vastly different now, with a clear focus on growth and opportunity rather than turnaround and integration. Lusaka has delivered on the strategy as communicated to investors and achieved several significant milestones. as a group, the Lusaka of today is ready for the exciting growth stage of our journey. The results for FI 2023 have been excellent. We've exceeded our revenue guidance for the year, primarily due to the stronger-than-expected growth in our Kazang VAS and card business. In our consumer division, whilst account growth was slower than forecast, revenue increased 12% year on year, which was very encouraging, especially considering the restructuring process was in full swing for the majority of the 12-month period. At an EBITDA level, our results were near the midpoint of our guidance, despite the challenging operating environment. The year-on-year growth rates are skewed by the inclusion of the Connect Group for a full year, but I am hugely encouraged by the continued improvement in our quarterly performance, with each quarter this year reflecting an increase in revenue and EBITDA. We are especially proud of the turnaround in operating income, which has improved from a loss of R611 million in FY2022 to a loss of R275 million for FY2023. Adjusting for the amortization of acquired intangibles and for the impairment of our new-its business, which in aggregate account for an approximately 400 million Rand charge to the income statement, we have delivered in excess of a 670 million Rand improvement to operating income over the year. And Naeem will address the Q4 results in detail later in the presentation. With that, I would like to hand over to Steve to take you through the excellent performance of our merchant division.

We've just completed our first full year as the Lasaka Group, and it's been both challenging and rewarding successfully integrating the Kazang and the Connect businesses into the wider organization. Seldom do all aspects of an acquisition work out as planned. but the way in which the teams have worked together and adapted to the changes has been remarkable. At the time of the acquisition, we said there was a close alignment of culture and values between the leadership teams, which has underpinned the transition and has seen us through a difficult trading environment in South Africa. The performance of Kazang and Connect have continually surpassed base case assumptions and the Lusaka shareholders have received value for their investment, particularly given the increasingly challenging operating environment that Chris spoke about earlier. The Kazang and Connect operations have brought diversity to Lusaka with exposure to different market sectors and revenues. Before getting into the numbers, I'd like to briefly recap what we see as the opportunity in the Merchant Divisions. With our comprehensive product portfolio covering both cash and digital and formal and informal markets, Lasaka's unique position allows us to benefit from both the significant reliance on cash in the South African economy and the rapid shift to digital that is currently taking place. This shift opens up opportunities for us to pioneer informal markets and disrupt the incumbents and traditional ways of transacting in the formal markets. We rely on being innovative and responsive to the needs of our merchants, quick development turnaround times, and getting product onto the street. We take calculated risks, learn quickly, and are adaptable. We are instilling this culture across the group as we fight for success in these competitive markets. As Chris mentioned earlier, we are a formidable competitor in the fintech space across any considered key metric. Critical to our strategy is the holistic offering we have for our merchants. We have numerous competitors on an individual product basis, but our holistic solution is a significant and durable differentiator. We have always said the SME sector is critical to the South African economic growth, and we need to assist these merchants to compete and grow, which we achieve through providing solutions that resolve their critical business issues and pain points. As a fintech company, this holistic approach is unique and disruptive. From cash vaults and immediate digitization, quick access to capital for growth and opportunities, a comprehensive VAS product suite to attract customers to merchant stores, to supplier payment systems and industry-leading payment technologies, we offer solutions that make a meaningful difference to our merchants' daily trading, risk management and business administration. We will entrench and extend our position in the informal and formal MSME markets by continuing to embed ourselves as a partner to our merchants and by offering real value. We now offer four primary solutions to both formal and informal merchants. Our portfolio of products results in increased customer adoption driving higher volumes of sales for merchants. We utilize our proprietary infrastructure to offer merchants and their customers what they need. We provide merchants with a POS device linked to a digital wallet from which they can pay suppliers, sell many VAZ products, make bill payments, take customer payments via card swipes or tap and pay, whilst providing instant settlement. Merchants are also able to access funding and a smart vault via the device. For us, as Lasaka, partnership with a merchant usually starts with a VAS device. This drives growth in all products. More merchants, more devices, more wallets, more product flow. By way of example, more than 60% of Kazang merchants that have our VAS device in store convert to also utilizing our Kazang Pay offering, which can then be followed by Kazang Pay Advance. This deeper relationship with merchants increases our value and stickiness to them and is key to our strategy. Our VAS throughput in Q4 has seen growth of 23% compared to Q4 2022 and a 30% increase year-on-year for the 12 months despite the increase in load shedding that we witnessed during 2023 and particularly in Q4. Our product development team continues to innovate and provide merchants with a comprehensive product set to attract customers into their stores. From a device perspective, we have increased our estate by 47% in the past 12 months and 4% in Q4 compared to FY2023 Q3 to approximately 75,000 devices. On a quarterly comparative basis, in Q4 we saw a significant change in product mix for VAERS sales with low margin money transfers reducing significantly. While we saw a retraction of 7% in throughput primarily due to this, the impact on the bottom line was negligible with our gross profit earned on VAERS increasing during the quarter. Adjusting for money transfers, we saw an increase in throughput of 3%. It's hugely pleasing to show growth despite our merchants' substantial loss in trading hours in Q4. During Q1 to Q3, we installed a significant number of devices at informal merchants in order to support supplier payments to two major beverage companies in South Africa. During Q4 and into Q1-24, we focused on making sure that these devices are processing appropriate volumes and removing the sub-economical devices. This pattern of onboarding and cleaning up is an expected occurrence in the Kazang business when major partnerships are initiated. In our card acquiring business, we continued the excellent growth in our estate and throughput. Our installed POS devices increased to 44,900, representing a 98% year-on-year growth, and a 7% quarter-on-quarter growth compared to Q3-23. This robust growth in devices demonstrates the frictionless process of converting VAS devices to POS devices, and we are confident we will continue expanding our market share in the informal market. From a throughput perspective, Q4-23 versus Q4-22 was up 83%, with FY23 versus FY22 up 97%. In Q4, we saw a 5% increase in throughput compared to Q3 23, which was impacted by the challenging conditions and reduced trading hours and disruption due to load shedding through the quarter. We saw a slight pullback in credit extension in our merchant credit business in Q4 as we tightened our credit criteria in response to the higher interest rate and inflationary pressures in the economy. This resulted in 262 million credit disbursements in Q4 compared to 280 million in Q3, with our loan book reducing to 333 million at year end, marginally down from 343 million at 31 March 2023. Continued innovation and market penetration during FY2023 have seen a year-on-year growth in our book of 38% and 62% in credit disbursements. In FY2023, we extended over $1 billion in credit to our merchant customers, delivering the funds within 24 hours, demonstrating the utility and value our cash vault and our KazangPay customers receive from our offering. By many accounts, we are at or near the top of the interest rate cycle and recent inflation data shows an encouraging downward trend. As such, we anticipate a more favourable operating and trading environment for our merchants and thus a resumption of growth in our credit business. Our cash vaults or cash digitisation business put in a pleasing performance despite being primarily exposed to the formal SME market, which load shedding, interest rates and consumer pressures have impacted more severely. We saw an 8% year-on-year increase in throughput on our vaults and the number of cash vaults increased similarly by 8% year-on-year. Over 300 million in cash is deposited into our vaults on a busy trading day and is immediately available to our merchants in the form of working capital. We effectively put the bank in our merchant's store and significantly enhance their risk profile and operating efficiencies. As we extend the solution, into the informal market, we anticipate making a real difference in our merchants' lives, entrenching our ability to enable them to compete and grow. Our easy-pay enterprise market solution, which offers VAERS, switching and bill payments in the formal market through retail partners, has been under pressure this year. Whilst this solution is relatively small in terms of profit in the overall merchant business, It is strategically important and a growth opportunity. We are investing in its development in order to unlock what we believe is an exciting future. Overall, it has been a challenging environment with significant headwinds, but we are encouraged that the underlying growth and profitability trends remain intact. We currently have some exciting innovations in our development cycle. In this fintech-enabled environment, innovation and agility are critical to long-term success. We are in the fortunate position to have the financial strength, skill, and a large installed client base across which we can continue to drive innovation and enhance our market positioning. Considering the challenging economic environment and the impact of increased load shedding on our merchants and their customers, the Merchant Division delivered a good fourth quarter result and excellent year-on-year revenue growth. As both Chris and I have mentioned, the Connect and Kazang businesses continue to outperform their acquisition base case, although they are growing at different rates. I am encouraged by the result for the fourth quarter. Despite facing numerous challenges, we still managed to grow. Notwithstanding the tightening credit cycle, VAS product mix changes, significantly increased load shedding disrupting our sales efforts, and continued pressure on our merchants' customers, the Merchant Division still reported 2% growth in revenue compared to Q3. On an annual basis, growth was 17%, but within that, the Connect Group revenues grew by more than 25% for the year. From an EBITDA perspective, Q4 grew 4% on Q3 2023 to $154 million, negatively impacted by our pre-existing Merchant Division. In conclusion, it has been an excellent year for the Merchant Division. We have successfully integrated the Kazang and the Connect operations into LASAKA and continued on our strong growth trajectory with our value proposition to informal and formal merchants resulting in deeper, stickier relationships that will continue to underpin the overall growth rate of the business going forward. We are excited about the overall growth opportunity that lies before us as we continue to focus on our merchants' ability to compete and grow. I'd like to hand over to Lincoln to take you through the consumer division results and strategy.