Lesaka Technologies, Inc.

hello everyone and welcome to lasaka technologies 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 dialing in to the zoom conference call dial-in numbers provided management will address any questions you may have at the end of the presentation for those joining us via webcast you can ask your questions by using the raise your hand button in zoom and for those joining via the zoom Conference line, you cannot ask your questions live today. The webcast link, Zoom conference call dial-in numbers, as well as our press release and supplementary investor presentation are available on the Investor Relations website at ir.lasakatech.com. Additionally, Lasaka filed its Form 10-Q after the U.S. market closed yesterday, which is also available on the 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-Q 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 is important to note that our operational currency is 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 in our business. As you know, the company's results can be significantly affected by currency fluctuations between the U.S. dollar and the South African Rand. Taking a quick look at today's agenda, Chris Meyer, Group CEO of Lasaka, will start with an overview of performance 2024 in a review of Lasaka's progress against its key strategic objectives. Steve Helbron, CEO Connect and head of Merchant Division, will provide an update on the Merchant Division, followed by Lincoln Mollie, CEO of Lasaka Southern Africa, who will take us through the Consumer Division's performance this quarter. Naeem Kola, Group CFO, will present a detailed overview of our financial performance for the three-months-end your guidance and open the floor for any questions you may have. I'd like to now turn the call over to Chris.

Good morning and good afternoon, and welcome to our first quarter 2024 earnings webcast and conference call. Today, I'm pleased to present the continuation of the growth in our merchant division and another quarter of continued improvement in the consumer division, as both our turnaround efforts and growth initiatives bear fruit. Lusaka is a leading FinTech in Southern Africa with over 1.3 million grant beneficiaries using our Easy Pay Everywhere financial services platform and over 84,000 MSME merchants using our FinTech solutions to grow their businesses. Our dual-sided consumer and merchant ecosystem penetrates deep into South Africa's informal markets, providing us with an opportunity to meaningfully drive financial inclusion across previously underserved communities. South Africa's economic environment remains difficult, which has made executing on our strategy more challenging. Despite seeing a reduction in load shedding this quarter, the effect of high interest rates, inflation and unemployment continue to negatively impact the wider South African economy. And with this in mind, these results demonstrate not only the resilience of our business model, but also the resilience of our customers and the value they place on our services. We achieved an important milestone this quarter. I am very pleased to report that at an operating income level, we delivered a profit for the first time in five years. And while it's just over 4 million this quarter, it is evidence that the strategy set by our board to develop this financial technology platform, servicing the digital and cash needs of South Africa's consumers and merchants can generate significant shareholder value and is starting to pay off. It is also the first quarter that is directly comparable to the prior year with the Connect Group included for the full period in both quarters. The improvement from an operating loss of 80 million rand to an operating profits of 4.2 million rand is testament to the commitment and efforts of our employees in turning around the consumer division and growing the merchant division. We are proud of these achievements. So turning to our revenue and group adjusted EBITDA for the quarter. We grew revenue at 19% year on year from 2.1 billion Rand to 2.54 billion Rand, which is at the upper end of our guidance range. And this was achieved through a 20% increase in merchant revenue and a 13% increase in consumer revenue. Lincoln highlighted some of our new consumer growth initiatives during our annual results presentation in September. And it is pleasing to see that they are already starting to have a positive impact on the consumer business. Group adjusted EBITDA came in at the midpoint of our guidance. And it is important to note that we incurred 6.1 million Rand of restructuring costs, primarily in the merchant ATM business, without which we would have exceeded our adjusted EBITDA guidance for the quarter. and Naeem will unpack the financials in more detail later. But overall, I'm very encouraged by the performance our businesses are delivering. Our vision to build the leading fintech providing cash and digital solutions to small merchants and consumers in Southern Africa is firmly in our sights. M&A will play a role in achieving this vision, and we continue to evaluate opportunities that will enhance our market positioning. And this includes bolt-on acquisitions that will provide scale to our existing offering, as well as those that will help us broaden our product offering to our clients. Our M&A focus is primarily on our merchant business. We have successfully turned the consumer division around and have recorded four consecutive quarters of adjusted EBITDA profitability. And we have also fundamentally transformed this business into one which is customer oriented and sales focused. We are seeing early traction in improved customer acquisition and account activations, which is very encouraging and is evidence of the significant efforts made by our consumer team over the past few quarters. From a balance sheet perspective, our positive cashflow from operating activities generated 63 million Rand this quarter compared to an outflow of 131 million Rand in Q1 last year, demonstrating just how far we have come in one year. Our net debt to EBITDA ratio reduced to 3.1 times at quarter end, with our near-term target being below 2.75 times, and we expect to achieve this in fiscal 2024. We continue to focus on our non-core asset disposals, which will further improve our balance sheet strength and debt ratios when complete. As mentioned in our Q4 results, we have signed a share repurchase agreement in respect of our interest in Finbond for a cash consideration of approximately 64 million rand, which we will utilize to partially settle debt. In November 2023, Finbond released a firm intention announcement regarding the repurchase transaction, and we expect a meeting of Finbond shareholders to be held in December 2023 to approve the transaction. This means the transaction is expected to close in December 2023. Lysaka is a leading player in the sectors in which we choose to participate. We will be launching our quarterly Lysaka Informal Economy Index tomorrow, 9 November, utilising our unique data sets and insights into the informal and township markets in South Africa, combined with relevant thought leadership. There is very little empirical data available in this important sector of our economy and that which is readily available is often contradictory. We hope to bring more consistency to defining the informal market and the understanding thereof through our work in this space. We are entering an exciting period at Lusaka with the turnaround of the consumer division and an integrated connect group Lusaka is poised to capitalize on its leading position in South Africa's informal markets and scale the depth and breadth of its fintech platform in the next phase of its development. And with that, I would like to hand over to Steve to take you through the performance of our merchant division. Thank you, Chris.

Before I run through our Q1 performance, I will briefly outline our merchant strategy. We have a comprehensive product portfolio covering both cash and digital and formal and informal markets. Our 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. As I referenced at our recent annual results, This shift opens up opportunities for us to pioneer informal markets and disrupt the incumbents and the traditional ways of transacting in the formal markets. We rely on being innovative and responsive to the needs of our merchants with quick development turnaround times and the ability to get products onto the street without delay. We take calculated risks, we learn quickly, and we are adaptable. We are instilling this culture across the group as we fight for success in these competitive markets. 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 proving to be both a durable and an effective differentiator. As a FinTech company, our approach is unique and disruptive. From cash vaults and immediate digitization, quick access to capital for growth opportunities, a comprehensive VAERS product suite to attract consumers to merchant stores, to a supplier payment platform 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 critical partner to our merchants by offering real value. We offer four primary solutions to our merchants. Our portfolio of products results in increased consumer adoption, driving higher volumes of sales for our merchants. We provide merchants with a device linked to a digital wallet from which they can pay suppliers, sell many VAERS products, make bill payments for customers, take payments via card swipes or tap and pay, whilst providing instant settlement. A partnership with an informal merchant usually starts with a VAERS device. This drives growth across all products. By way of example, more than 60% of Kazang merchants that have our VAZ device have converted to also utilizing our Kazang Pay card offering. Many of them are utilizing our supplier payment platform to improve efficiencies and reduce cash risk. These deeper relationships with our merchants increase our value and our stickiness to them and underpin our strategy. From a VAAS device perspective, we have increased our estate by 34% year-on-year and by 3% quarter-on-quarter to over 77,000 devices. Focusing on device growth, core to our device placement strategy is the decision to focus on quality business, which is reflected in a healthy throughput and margin per device. This drives profitability, which I will talk to shortly. In line with the strategy, we uplift unprofitable devices which can arise from a number of factors. Two contributing factors are increased competition, which results in a drop-off in usage, or the optimization of our fleet following on from a specific campaign. I mentioned at our last results that during Q1 to Q3 of the 2023 financial year, we installed a large number of devices at informal merchants in order to support supplier payments to a few major FMCG companies that we partnered with. This has resulted in a more than double year-on-year increase in our supplier payments throughput. The supplier payments platform is an important value-add service to our merchants as it significantly de-risks their operations from a cash perspective and reduces admin time. We have a number of large FMCG partners on board, which is driving increased adoption and usage and is resulting in growth. We continue to bring new suppliers onto our platform. During the last two quarters, we have focused on optimizing this new fleet by removing devices from the low profitability sites, which has impacted quarterly device growth on a net basis. This pattern of onboarding and then cleaning up is an expected occurrence in the Kazan business when any major partnerships are initiated or cashless delivery routes on existing partnerships are expanded. Turning to VAS throughput, we saw a 20% year-on-year increase, with the quarter being flat compared to Q4 if you include international money transfers. There has been a significant change in product mix relating to international money transfers, which impacted our quarter-on-quarter growth. International money transfers have reduced 80% year-on-year and 71% quarter-on-quarter due to a change in the regulatory environment in South Africa, which has impacted the industry as a whole. Fortunately, this is a lower margin product for us and we have not seen a material impact on overall gross profit. Excluding IMT, our core VAERS throughput increased by 58% year-on-year and showed quarter-on-quarter growth of 12% or 48% on an annualized basis. The gross profit of our VAS business in Q1 2024 increased 8% compared to Q4 2023, representing a healthy quarter-on-quarter growth. In our card acquiring business, our installed card-enabled devices increased to 46,600 units, representing a 68% year-on-year growth and a 4% quarter-on-quarter growth of a much higher base. This device growth demonstrates continued adoption of card payments in the informal economy and the frictionless process of converting VAS devices to POS devices. From a throughput perspective, we saw a 56% increase year on year. On a quarterly basis, throughput grew 6% or 24% annualized. These are very good numbers considering the pressure our merchants' customers are under at this present time. Our VAS and card throughput and margin growth shows good momentum that supports the growth rates we communicate to the market in our guidance. Our cash vaults or cash digitization is primarily exposed to the formal SME market, which has been more severely impacted by load shedding, interest rates and consumer pressures than the informal market. Year on year, we saw a 1% increase in throughput on our vaults, with the number of cash vaults increasing by 5%. On a quarterly basis, we have seen good momentum in Q1, with throughput up 3% over Q4, or approximately 12% annualized. We are effectively putting a bank in our merchants' stores and positively enhance their risk profiles whilst also driving operating efficiencies. As we extend the solution across the informal market, we anticipate making a real difference in our merchants' lives by enabling them to dynamically compete and grow. High inflation coupled with high interest rates is impacting our formal and informal credit businesses. As I mentioned earlier, we innovate and execute quickly, but if we don't achieve the desired result, we don't hesitate to change course. Our informal sector credit offering, Kazang Pay Advance, is not proving effective in its current form and as such, we have withdrawn the product and gone back to the drawing board. The reductions in origination of new loans, loan book and disbursements are primarily a result of this decision. By many accounts, we are at or near the top of the interest rate cycle, and with recent inflation data showing an encouraging downward trend, we anticipate a more favourable operating and trading environment for our merchants, which may allow for a resumption in credit growth later in the year. Our EasyPay enterprise market solution, which offers VAERS, switching and bulk payments in the formal market through our retail partners, experienced pressure during the 2022 and 2023 financial years. Despite this, we deem this platform to be strategically important and we have invested in the technology and changed our management structures. With over 600 billers on the platform, which are embedded into all major retail systems, it has an extensive footprint that would be very difficult to replicate. Whilst this business is not a material profit contributor at this stage, we are encouraged by its recent performance with throughput increasing by 8% quarter on quarter and we believe it can make a meaningful contribution in the medium term. The economic environment remains challenging and I am pleased with the yearly and quarterly throughput and device growth that has been achieved under the circumstances. We have a few 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 innovate, experiment and drive growth. The merchant division delivered a 20% revenue increase year on year and 5% quarter on quarter. Considering the headwinds our merchants faced over this period, we are very pleased with this result. From a segment-adjusted EBITDA perspective, we reported an 11% increase year-on-year with a 3% decrease quarter-on-quarter. Our first quarter profits were impacted by a few items which pulled us back. Firstly, as a result of the suspension of our KazangPay advanced credit offering to informal merchants, we provided for expected credit losses on the remaining outstanding exposures at the end of the quarter. Whilst we made a small profit overall on Kazang Pay Advance, providing for the outstanding loans in this quarter was necessary and conservative. The impact of withdrawing Kazang Pay Advance on our quarter-on-quarter segment adjusted EBITDA was approximately $3 million. Secondly, we restructured our ATM business when it was integrated with the Cash Connect business. This resulted in a one-off restructuring charge of R4.6 million this quarter. Our innovative ATM recycler is generating significant interest as an alternative to vaults for our merchants. Adjusting for the effect of these two factors results in a quarter-on-quarter segment-adjusted EBITDA growth of 3% in Q1. As mentioned in previous presentations, we do take advantage of bulk deals in our VAERS offering from time to time, which improves our profitability. These deals can be material and Naeem separately discloses these in his slides each quarter, given the impact on group cash flow. Our Q4 results included a benefit from such deals, but we had no repeat of this in Q1, which also contributed to a lower growth in segment-adjusted EBITDA than we had hoped for. Whilst individually not material, the combined effect of the above had a negative impact on the quarter-on-quarter profitability comparison. However, the underlying profitability of our business remains strong. In conclusion, we are very pleased with the top-line growth and profitability achieved in Q1, considering the challenging environment. I'd like to hand over to Lincoln to take you through the Consumer Division results and strategy.