Vodacom Group Ltd Ord

A very warm welcome to Vodacom's interim results presentation. For those of you joining in person, you're getting a taste of summer from us, and hopefully you'll see more of that on the streets and beaches of South Africa. For those of you attending online, you're missing out on some soft serve ice cream, I'm afraid, and that lovely jingle the ice cream truck makes as it goes past your neighborhood. We are going to kick off in a second or two with, firstly, a flavor of our summer campaign, a short advert, then a video from Shmila Narasebi, after which time we will take Q&A. My name is JP Davids, head of investor relations for Vodacom Group, and a very warm welcome to you.

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Welcome to our interim results presentation for the period ended 30th of September 2023. Vodacom is a purpose-led company and we connect for a better future. Our core connectivity business provides us with the foundation to deliver on our three purpose pillars, digital society, inclusion for all, and planet. Over and above these three pillars, Vodacom steps up when there is a crisis and help is needed. This is very evident in how we responded to the COVID pandemic, the subsequent drought in Kenya, and floods in Mozambique and South Africa. In the period, we donated healthcare packages following a cholera outbreak in South Africa. In the DRC, following a devastating flood, we provided free connectivity and free and passive transfers in the region to affected customers. To deliver lasting societal value, we have developed tech for good platforms. By design, these platforms are scalable and help us contribute to a digital society by developing solutions across critical verticals, including healthcare, education, energy, and agriculture. In Egypt, we are leading the universal health insurance and the Egyptian university hospitals programs. By digitizing medical records in hospital and insurance information, we are supporting the seamless delivery of medical care and improved outcomes for beneficiaries. This platform is live across 270 hospitals and serves over 6 million people. It also provides a case study for healthcare across the continent. I'm particularly proud of our Code Like a Girl program, which we introduced in 2017. Code Like a Girl tackles the low representation of girls in science, technology, engineering, and mathematics education. It is curated to get more girls into careers that require coding skills. The program is accelerating across all of our markets with thousands of girls already trained this year. More recently, we hosted a coding bootcamp in South Africa across our schools of excellence. We recognize that climate change is a major challenge of our time. It poses significant risks to our operations and associate value chains and the countries in which we operate. While the impacts of climate change are global, Africa is one of the most vulnerable continents to climate change, with effects being more pronounced here than anywhere else. Our first TCFD report was published in 2022 and communicated the initial steps in our climate journey. We recently published our second report in alignment with the TCFD recommendations and undertook detailed climate-related scenario analysis of all our operating companies. while improving our understanding of our resilience to material climate-related risks and embedding climate change into our risk management framework. In another historic first, we signed a virtual wheeling agreement with ESCOM in South Africa. Under this agreement, we will sign up independent power producers and contribute this power to the grid for which ESCOM will pass us a credit. This will have a positive impact on the country's power grid and serve as an important blueprint for other corporates to follow while moving Vodacom South Africa closer to its goal of sourcing 100% of its electricity demand from renewable energy resources. Our group operates across eight markets in Africa with a combined population of more than 500 million people. Based on the performance in the first six months, our consolidated operations are on track to deliver around R150 billion of revenue this financial year. Further, our 35% stake in Savaricom provides exposure to another major source of revenue and growth on the continent. We are the market leader across our footprint with the exception of our startup operation in Ethiopia. This is an important differentiator for our group and supports an attractive return on capital while also providing us with a unique opportunity to drive digital and financial inclusion. With smartphone penetration below 60% and our financial service customers at 74 million, we have a clear path to drive inclusion and long-term growth. Another key differentiator for our group is our asset-rich portfolio. We are one of the few multi-country operators in Africa that owns the vast majority of its towers and mobile infrastructure. Among other benefits, owning our towers helps us to localize operating costs. When looking at our operating profit and customer mix, the inclusion of Vodafone Egypt into the group materially changes our composition. From a customer perspective, Vodacom comprises four similarly sized segments with 76% of our 196 million customers from outside South Africa. We believe this portfolio mix provides us with the optimal combination of cash generative and growth assets. Vodacom has a powerful strategy that is expected to deliver superior returns for our shareholders. We call our strategy the system of advantage and it has 10 drivers of success. The first two drivers relate to our core connectivity offering. We have strengthened our footprint with a greenfield rollout in Ethiopia through Safaricom and the Vodafone Egypt acquisition. I'll provide an update on the investment case for these assets in my next slide. Across all our markets, we are extending our connectivity leadership through smartphone adoption, rural access, and investment in fiber. Whether our customers want to connect via mobile, land, or even space, we want to be the connectivity provider of choice. Our leadership in connectivity positions us to scale our digital ecosystem profitably. This ecosystem is powered by big data and spans across IoT, financial, and digital services. Later in the presentation, I will provide more color on how we are using big data to support our world-class CVM and personalized pricing, behavioral loyalty programs, and financial service products. In the enterprise space, we are partnering with business to accelerate their growth and with government to drive efficiencies. We are transforming the way of working through digital technology in high growth areas like cloud, hosting, managed security, managed services and IoT. A key focus area for us in the business segment is SMEs, which are prevalent across all our markets. We are tailoring connectivity, financial services, cloud hosting and security services for them. In the financial services space, we have built a formidable business across our existing markets with products that cut across consumers and merchants. Vodacom's success in this segment is a function of our strategic focus and our clear sense of purpose to drive financial inclusion. As we implement our system of advantage, we put an equal focus on considerations to improve our overall customer proposition, return on capital employed, and value creation. A key part of optimizing returns and powering our growth is leveraging scale and partnerships. This is particularly relevant as we accelerate our deep rural and fiber aspirations, and we are hard at work creating scalable partnership models for both. Of all the elements on the slide, the most important is number 10. Our purpose-led model shapes our outlook and our business strategy. The Vodafone Egypt acquisition was executed to advance our strategic ambitions and diversify and enhance our growth and returns profile. Since we announced the deal, the asset has delivered ahead of our business plan, with its attractive row key and profitability underpinned by its market leadership position and investment-focused regulation. We have also dialed up the strategic focus on financial services, and this is evident in how quickly Vodafone Cash is scaling. We see financial services as a long-term growth lever for this asset, given our ability to scale group products and services into Egypt to capture a massive addressable market opportunity. Despite a big move in the Egyptian pound since we announced the transaction in 2021, I'm pleased to report that Vodafone Egypt was earnings accretive in the first half. This positive contribution is after accounting for the funding cost of the deal, including the issuance of new shares and debt. This was testament to the resilient margin structure of the business, helped by owning its towers. Looking ahead, we expect FX to remain an important theme. However, we believe that these results showcase how the business can mitigate headwinds to deliver bottom line growth. In addition to the FX rate, cash repatriation is a near-term focus area for us. we are exploring several different options to repatriate cash while also considering lucrative reinvestment options. Switching to Ethiopia, we see this investment as a long-term growth factor for Safaricom and the Vodacom Group. In this period, we have made important progress on the investment case of this greenfield rollout. We added the IFC into our consortium, a powerful partner which injected US$257 million of equity in that funding. Separately, we're leveraging the group's learnings from high inflation markets like Turkey. We are accelerating the localization of costs in Ethiopia. Scaling this asset is key to us. The launch of M-Pesa will help with this scale. We are pleased to have launched this iconic service a couple of years earlier than our business plan anticipated. Our role as a new entrant in the market is a key variable to manage going forward. As we invest into the country, we are working with the regulators and the government to shape regulation that promotes a dynamic market and digital and financial inclusion. Over a multi-year period, we have re-in-platform Vodacom into a data-led organization with truly impressive capabilities. Big data is the engine of our digital ecosystem and supports our customer value management, loyalty and financial services. By powering CVM with Big Data, we are able to tail our offers to the segment of one. This capability is critical in a customer-focused sector like ours. In South Africa, more than 80% of our bundles are already personalized. We are also leveraging Big Data into creative scorecards to support decision-making in our telco and financial services businesses. Safaricom is already benefiting from rich credit data analytics, while in Tanzania we have a prepaid handset finance scorecard which will soon evolve into a full scorecard. Our credit scorecards in South Africa, Lesotho and Mozambique are ready to be commercialized with the rest of our markets to follow in the near term. Big data is supporting smart capex decisions and cost savings. Smart CapEx is especially important in the context of delivering a best-in-class return on capital, while ensuring we maintain network leadership across our markets. In the last 12 months, we have driven 1 billion rain of efficiency with our Smart CapEx tool, a trend that is accelerating. Our intelligent automation takes robotics process automation, or RPA, to the next level. It is designed to deal with unstructured data and leverage AI and tools like optical character recognition to translate and structure information. A very simple example is invoice processing. The outcomes are far from simple, however, without saving 2 million hours of time across the group. Big data and AI is also helping us manage one of the most pervasive threats, fraud. In South Africa, we have blocked close to 1 million calls across our interactive voice response and Toby channels and are scaling the fraud tool across our markets. Behind the scenes, we are dialing up our fraud prevention and detection tools to mitigate the impact of increasingly sophisticated fraud syndicates. And then on to the most exciting aspect of our big data and AI capabilities. Our 360-degree view of the customer is where the power of data pulls together insights from telco, financial services, and loyalty to drive our global recommender engine. This recommender helps us improve customer offerings and incentivize the next best activity. This is where the power of data can translate into a distinct competitive advantage and material revenue outcomes. There are numerous examples of how we can use this predictive AI in the real world. One of my personal favorites is as you walk into a shopping center, we know you are hungry and fancy a hamburger. We then provide you with an eat now, pay later offer supported by our credit scorecard. Now that's food for thought. We are making good progress in our dual-sided financial services strategy. On the merchant side, our M-Pesa merchant base is close to reaching the 1 million mark at 950,000 merchants, up 41%. This growth helps expand our addressable commission pool beyond peer-to-peer payments and withdrawals into both online and offline commerce. In South Africa, our merchant acquiring business is also growing quickly with over 10,000 merchants. Our super apps are scaling nicely across the group with more than 4.4 million M-Pesa users adopting this channel. Importantly, we are seeing constantly higher M-Pesa ARPU from these super app users. In Egypt, Oracash is the go-to mobile wallet in the country with customers up an impressive 60% to 6.7 million. Our one app strategy in Egypt is a template for the rest of the group and means there's a clear part of Vodafone Egypt to convert its 14 million monthly users on the Enna Vodafone app into Vodafone cash users. In South Africa, our super app Vodapay is again integral to our summer campaign and reached 7.6 million downloads with over 100 mini apps launched. It's also worth mentioning the success of our insurance business in South Africa with revenues growing a double-digit in the period. As we diversify into new growth vectors beyond peer-to-peer payments, our financial service product suite continues to broaden across global payments, lending, insurance, and savings. Across our international markets, two-thirds of our revenue growth was from new services in the six-month period, an impressive stat. The close working relationship of South Africa, Egypt, and our Pace Africa hub means we have a clear roadmap for new service growth across our markets. Turning to the group's results for the first half of the financial year, the encouraging revenue trend that we saw in the first quarter continued into the second quarter. Higher interest rates, elevated levels of inflation, and currency volatility did, however, weigh on the group's earnings. Group revenue grew 35.5% in the six months to R72.8 billion. Excluding the contribution of Vodafone Egypt, group revenue growth was still an impressive 7.9%. Group service revenue grew 42.2% in the six months to R59.4 billion, positively impacted by the acquisition of Vodafone Egypt and the rain depreciation of 12% against our basket of international currencies. Excluding the contribution of Vodafone Egypt, group service revenue growth was strong at 7.9%, supported by resilient performance in South Africa. Our medium-term targets include Vodafone Egypt on a pro-forma basis as if it was owned from the 1st of April 2022. On a target-compatible basis group service revenue, growth was 9% for the interim period at the higher end of our medium-term range. Group EBITDA increased 35.1% to R27.3 billion and was up 4.1% excluding Vodafone Egypt. On a target compatible basis, Group EBITDA growth was 5.5%. We anticipate an acceleration of Group EBITDA growth in the second half of the financial year, supported by cost phasing and our Fit for Growth cost program. We now serve 196 million customers across the footprint, up an impressive 11% with Egypt in the base. our financial service customers reached 74 million, transacting $1 billion a day across our mobile wallet platforms. Headline earnings per share declined 4.2% to 438 cents per share. The decline was largely attributable to startup losses in Ethiopia, higher interest rates, and a prior year deferred tax asset recognized in Tanzania. Pleasingly, Vodafone Egypt contributed $0.16 per share to headline earnings per share, despite having issued 242 million new group shares. Separately, the board declared an interim dividend per share of $0.305 per share, which reflects our dividend policy of at least 75% of headline earnings. Looking at the drivers of group revenue, we delivered growth across each of our segments. I will unpack the segment results later in the presentation, but at the headline level, South Africa grew at 4%. Our international businesses reported service revenue growth of 16.6% and normalized service revenue growth of 4%, while Safaricom's service revenue was up 9.8% in Kenyan shillings. Vodafone Egypt's service revenue grew at 28% in local currency and contributed 14.3 billion rand in the period. Group operating profit increased 28.2% to 17 billion rand on a reported basis. In South Africa, operating profit declined 3.3% as a result of higher depreciation and the amortization of spectrum. Operating profit in our international portfolio grew 0.2% and was impacted by startup costs associated with Vodacom's direct stake in Ethiopia. Across both South Africa and our international business, our recent spectrum acquisitions resulted in higher amortization. While this is a transient P&L effect, we have secured our future. Operating profit in Egypt grew 29.8% in local currency. On a RAND-reported basis, Safaricom contributed R1.5 billion to group operating profit, declining 1.1%. This was an encouraging outcome given that we expected Safaricom Ethiopia's EBITDA losses to peak in the current financial year. In fact, on a normalized basis and excluding the startup losses, Safaricom's contribution to operating profit would have increased an impressive 15.9%, highlighting the quality. The chart in the middle of the slide is new disclosure. Here we show the group service revenue across our key products. Each of these segments has structural growth drivers. In prepaid data, smartphone penetration, regulation support of investment, and expanded rural coverage stand to benefit us. Aligned with our parent Vodafone, we see Vodacom Business as an important growth opportunity over the medium term and expect to see its contribution to the group increasing from 19.3% today. Delving into our new services a little bit more, the slide sets out the contribution of IoT fixed, financial and digital services to each of our geographic segments. In South Africa, 16.6% of service revenue is now attributable to new services, up from 14.5% a year ago. Across our international portfolio, the contribution of new services is closer to 30%, while Safaricom sets the benchmark at 46.6%. Vodafone Egypt's new service revenue contribution to service revenue is 15.1%, reflecting its early-stage growth profile in Vodafone Cash. We intend to scale each of these revenue streams into successful businesses and target that new service revenues will contribute 25 to 30% of group service revenue over the medium term, including Vodafone Egypt. This slide sets out matrix that highlight the scale of our financial service businesses. As a group, including Safaricom, we now have 74 million financial service customers. While this is a very impressive number on a standalone basis, the scope for growth remains very material, with penetration of our overall customer base now at just 38%. The scale of our financial service business is reflected in the volume of transactions we process. Over the last 12 months, this reached 29.3 billion transactions. This is broadly double Africa's next biggest mobile money provider and was up 32.4%. In the period, our revenue on a consolidated basis was up 40% to 6.2 billion rand. Egypt's inclusion contributed to this growth while South Africa and international continued to grow in double digits. With an additional 8.8 billion rand generated by Safaricom, this implies a combined fintech revenue footprint of around 1.5 billion US dollars. In South Africa, service revenue generated from financial services grew 10.8% to 1.6 billion rand. Revenue growth was underpinned by insurance. Our international businesses delivered and pasted revenue growth of 3.8 billion rand in the period, up 27%. While peer-to-peer is still growing nicely, new areas such as lending and merchant services were the key growth drivers. Safaricom, which sets the benchmark for financial services scale, delivered 16.5% growth in Kenyan shillings. This is really impressive given the size of the base. Looking at the contribution of financial services to the group, we generate just over 10% of consolidated service revenue from this product. In Safaricom, the contribution is 42%. And looking at the contribution to profit before tax, which includes Safaricom, the weighting is around 20%. This bottom line weighting of financial services means that Vodacom's investment case offers something quite different to typical emerging market outcome. Turning now to our four segments. Revenue from Vodacom South Africa reached 43.3 billion rand, up 5%, and was driven by service revenue and strong equipment sales as we grew smartphone penetration. Service revenue grew 4% to R30.7 billion, which is a good result given the ongoing macroeconomic challenges. Growth was supported by new services and mobile data. We added 3 million customers in the period to reach 47.3 million, up 7%. Mobile contract customer revenue was up 4.1%, supported by good growth in our consumer segment. Prepaid service revenue increased 3.1% and accelerated to 3.5% in the second quarter as we leveraged our big data and personalized offers to mitigate a soft consumer environment. Data traffic increased 45.2% in the period, supported by smartphone penetration and network availability. Data customers grew 8.5% to 26 million, supported by network resilience and capacity, together with our continued value commitment to our customers. New services was up a very healthy 18.1% and contributed 5.1 billion rand of South Africa's service revenue. Within the mix of new services, fixed was particularly strong and grew 25%. Vodacom Business Service revenue increased marginally to R8.7 billion and was impacted by pressure on wholesale. Excluding wholesale revenue, Vodacom Business was up 3.8% supported by good growth in cloud, hosting and security. EBITDA grew by 1.6% for the period as we reinvested cost savings into stronger network resilience and maintenance. We expect cost savings to accelerate into the second half of this year, supporting EBITDA growth. I swear we'll discuss this in more detail in our presentation. Vodafone Egypt contributed service revenue growth of R14.3 billion, up 28% on a compatible basis year-on-year, despite a challenging macroeconomic backdrop. Growth was supported by strong commercial traction in mobile and excellent growth in Vodafone Cash and Fixed. Our value proposition in the market is enhanced with embedded entertainment, an interesting case study for the rest of the group. Customers grew 5.5% to $47 million, showing market share gain. Vodafone Cash and fixed line services are scaling rapidly. In local currency, Vodafone Cash revenues more than doubled in the period, with customers growing at 60% to $6.7 million. Vodafone Egypt is well on track to exceed 1 trillion Egyptian pounds of transaction value in the financial year, a milestone we committed to at our March Invest today. Data Matrix was strong and supported by network investment and spectrum investments. Data traffic was up 43% in the period, supported by data customer growth of 13% to 28.2 million. Smartphones on the network were up by 7% to 32.2 million. EBITDA grew at 20% to R6.2 billion and contributed 23% of the group's EBITDA. We expect higher EBITDA growth in the second half of the financial year as base effects from one-offs in the prior period normalize. Service revenue for international business increased 16.6% to R14.7 billion, supported by strong growth in data and in base revenue and foreign exchange translation tailwinds. Data growth was strong at 35%, with in-person revenue growth at 27%. From a market perspective, we delivered strong double-digit growth in Tanzania, while the DRC was subdued by the macroeconomic environment. Mozambique's performance was impacted by price transformation, and we will start to lap this transformation in the second half of the financial year. Customers grew by 22.3% to 53.7 million, supported by strong commercial execution. Data revenue of R3.8 billion contributed 26.1% of international service revenue, supported by data traffic growth of 40.4%. Smartphone user growth was 19.6% to reach a penetration level of 33.9%. We see scope to accelerate smartphone adoption meaningfully over the medium term with innovative handset financing options. We are piloting a new daily repayment model in Tanzania, a product we believe can be scaled to support digital inclusion. Our M-Pesa customers increased an impressive 15% to R21 million. M-Pesa revenue was up 27% to R3.8 billion, contributing 25.9% of international service revenue. Loans granted across our international business more than doubled to R8 billion. To grow and diversify the M-Pesa ecosystem, we have also accelerated our merchant strategy, more than doubling the number of active merchants to 292,000. Our M-Pesa app is now live across all our markets with our mini-app rollout continuing. International EBITDA was R5.4 billion and grew 14.1%, reflecting foreign exchange translation tailwinds. We expect a clear improvement in normalized EBITDA growth in the second half of the financial year, supported by cost efficiencies. Safaricom delivered an excellent performance in Kenya and confirmed that network rollout in Ethiopia is tracking its guidance. Service revenue increased 9.8% in local currency, a clear acceleration from the 5.2% reported in FY23. The acceleration was driven by an excellent performance in mobile data and in pacer revenue, both of which delivered growth well into the double digits. M-Pesa growth accelerated through the period and was an excellent 21.4% in the second quarter. The growth was supported by new services, including a successful partnership with government called the Hassle Fund. Despite a massive base, the volume of M-Pesa transactions grew 44.5% to 7.2 billion in the period. Transaction values processed over the last 12 months equated to $273.1 billion, highlighting the scale of the business. Kenya's data revenue grew 12.5%, accelerating from the prior year trend rate as price transformation supported strong usage growth. Fixed service revenue grew 9.1% to 7.4 billion Kenyan shillings, supported by 28.7% growth in consumer revenue. FTTH customers grew 28.8% to reach 223,000. EBITDA for the Kenyan operations was up 13%, with margins improving 3.7 percentage points to 55.9%. The margin was supported by lower handset sales and cost control initiatives. Safaricom's overall EBITDA, including Ethiopia, increased 7.6%, reflecting the expected startup losses associated. with the Ethiopian rollout. Safaricom Ethiopia had reached 4.1 million customers in less than a year since its commercial launch. In August this year, Safaricom Ethiopia launched M-Pesa, allowing customers to send and receive money, purchase airtime, and pay merchants. Safaricom Ethiopia will leverage the group's mobile financial services scale and expertise to transform the lives of Ethiopians in Africa's second most populous country. Given the excellent performance in the period, Safaricom upgraded its guidance for Kenya and the group. Safaricom now targets double-digit EBIT growth in Kenya, well ahead of inflation.