Safaricom Limited (Kenya) – July 2020 investor briefing call transcript

Cyndia Nguli: Good morning, good afternoon or good evening, depending on where you are joining us from. Welcome to the Safaricom investor briefing with Safaricom CEO, Peter Ndegwa, Outgoing CFO, Sateesh Kamath and Interim CFO and Head of Investor Relations Ilanna Darcy. I am Cyndia Nguli, Senior Manager- Investor Relations. Peter and Sateesh will give brief opening remarks and we will turn to your questions.

I would kindly request that you submit your questions on the chat, providing your full names and the organization that you represent. I would also request that you submit your details in the Investor Brief registration link that we have provided on the chat and with that, Peter, I hand over to you. Thank you.

Peter Ndegwa: Thank you, Cyndia. Good afternoon, everyone. I hope you can hear me. I meant you to Cyndia just to confirm that you can hear, you can hear me.

Cyndia Nguli: Yes, we can hear you Peter.

Peter Ndegwa: Good afternoon, everyone and it’s great to have this call. We are looking forward to answering any questions that you might have. As we’ve said in the past, when we have had conversations with investors, as Safaricom given the current situation we are faced with during the COVID era, we are not going to be giving any guidance at this stage in terms of our results.

However, we are willing and ready to share the status of the key aspects of our business as an update to you as a group and answer any questions that you have. For those of that I have not met, Peter Ndegwa is my name, CEO fourth month now, just over my hundredth days. So clearly verses when I initially spoke to you I have a clear understanding of the business and some of the opportunities and challenges that we are dealing with. I handover to Sateesh to say a few words and we shall take it from there.

Sateesh Kamath; Thank you so much Peter, good day, ladies and gentlemen. First and foremost, I just wanted to say thank you so much for all the kind messages that I’ve received since my announcement of the new role. I have really enjoyed interactions with you over the last few years, and I will continue to be available for Safaricom through the transition phase. The good news is Peter has very modestly said that he has understood a bit of this business, to be honest he taken almost like duck to water, I have not seen many people picking up so much about this company in such a short period of time. So, in whatever its worth, I just wanted to reiterate the fact that we are very fortunate to have Peter take over the reins of the company and when he speaks I am sure you will understand and feel like he has been in the business for two years or more and nothing less. Peter, just checking with you do you want me to give a general overview or you want me to give your back to you?

Peter Ndegwa: Why don’t you go ahead with a general overview.

Sateesh Kamath: Yeah, sure, sure. Happy to do that. The general overview in terms of macro-economic situation is not any dissimilar with many of the countries. COVID specifically, we have now just over 10,000 cases, reasonably low death rates compared to what some of the other countries have seen. So, at this point of time, the pandemic is an issue, but health issue-wise still reasonably contained. And I’m saying relatively reasonably contained, the larger issue is economic, and it is manifesting in many ways. To start with tourism industry is impacted, a lot of SMEs are impacted along with the tourism industry. None of which should be a surprise for you, but I just thought I should call it out anyway. In terms of the currency and Forex, reasonably range bound, we’ve seen like a 5% volatility in currency over the last three months. Sometimes going up to 108 shillings to a dollar and then stabilizing to 104, and then moving in that range bound territory. So, no significant depreciations in the currency. I’ll speak a little bit more in detail about the line wise for what we’re seeing. So, I pack the impact for what does it mean for Safaricom till I finish one or two more overall updates. In terms of competitive space, the merger between Airtel and Telkom has been delayed and we’ve got understanding that it will be delayed a little bit more. As we always said, we are not against the merger. We are happy to have stronger competition if some of those clauses that we want are satisfied for. But we do understand that the merger is not delayed because of questions that we have raised. It is delayed because of shareholder reasons between the two companies, which they’re trying to sort out.

Moving on to another important topic. Ethiotel, sorry I meant Ethiopia, I am so sorry, don’t pick any meaning from what I said, I meant Ethiopia. So, Ethiopia process is underway. We have participated in the expression of interest stage. The current understanding of the timing is that it is more likely to get concluded towards end of the year and if there’s a bit of delay possibly towards early part of next year. In terms of expression of interests, it was interesting to see the people who have come up with the expression of interest. If you have questions there, we can speak a little later in the call.

One aligned comment there, the current version of what the government hasissued is without mobile money, however, as you know, our interests would be significantly enhanced if there’s mobile money and what we would be willing to put in down as license fee would certainly be different if there’s mobile money and lesser, if there is no mobile money.

So, we would continue to lobby in that direction. At this stage. I don’t think we will be able to give more details because it will impact our competitive bids in the days ahead.

In terms of coming back to Safaricom if I can call out the bad news first and then get into the better news. On voice, we are seeing pressure, a good amount of pressure. We’re seeing that consumer wallets are constraint and so they are really into a deal seeking mode at this point. So, we’re seeing good number of customers using, but they’re using lesser from their wallet on voice. That’s the phenomena that we’re seeing and it’s consistent between the three months that we’ve seen in the year between April, May and June. As a result, do expect voice to decline in this current year compared to the previous year. The other bad news that I want to speak about and the most significant bad news is the free P2P. The initial request from the government and the alignment with the Central Bank was for 90 days, which ended end of June. The Central Bank has asked us to extend up to December. We obviously are not happy with that recommendation and decision. We are continuing to have conversations with the Central Bank. In fact, Peter spoke to the Central Bank as late as this morning and while we are not able to tell exacts of how it will pan out what I would like to assure investors is that we are working closely with the government. So while we do appreciate that, we need to be supporting the country in some form or other over the next few days. The next six months we find is on the higher side, possibly in a safer environment, I would call it excesses. So, we’re working on it at this stage, given the negotiations and conversations are happening, I would pause there and say, we would give you a more accurate update when we have one. At this point of time, we are working with the government on that, Peter would you like to add anything there before I go ahead?

Peter Ndegwa: Just to re-echo what Sateesh has said, at this stage, I would say, we are working closely with the central bank and we are not able to say anything until those discussions concluded. I wouldn’t look at the issue either way but just to say that currently we are working with the central bank to see the best position that we can end up with.

Sateesh Kamath: Moving on to other streams, sorry, let me complete, M-PESA excluding the free P2P, we are seeing some interesting trends in M-PESA in the last call, which was mid may, I did call out the fact that we are seeing customers enhancing their confidence in M-PESA and instead of keeping money for rainy days in the more traditional way, more and more they’re choosing M-PESA as the way of doing business. We saw a 20% increase in M-PESA balances pre and post COVID and by this time we are seeing closer to 30% increase in customer balances pre and post COVID. Now quick reminder, when people keep money in M-PESA, till they transact, we don’t make money. So, what this indicates is that customers have confidence in us and are more and more getting used to M-PESA as a way of life, even more than what it was and when life starts becoming normal in the new normal, we expect these to translate into stronger loyalty, stronger revenues for M-PESA. So underlying M-PESA performance excluding the free P2P is strong and encouraging. Within this we had a tougher April, we have seen a lot of activity returning in June. So June compared to April is better. Just to give you a feel of the direction of travel, not necessarily giving you numbers at this stage, because numbers are volatile.

Moving on to mobile data, we’re seeing mobile data continuing to be strong. Mobile data is growing volume-wise high, like 30 to 40%, which is a plan that we’ve seen. We have got into device financing, which I’m sure Peter will explain a little bit more in a few minutes time that we think will fuel the next level of consumption in mobile data. We are excited about device financing because it’s a unique partnership and something which combines the capability of our company as a telco, as well as M-PESA together and the uniqueness of it is something that is not easy to replicate. So, we are optimistic about device financing as a key differentiator in taking mobile data consumption and what my marketing colleagues call truly democratizing mobile data.

Moving on to fiber on fiber, on FTTB or the businesses, we initially saw a decline when businesses started closing and starting either not operating or operating from home. Over time from April to June, what we are seeing is most of the small businesses, which had negative impact because of COVID are switching on the alternate modes of using, and a lot of them have moved into fixed LTE using 4g into temporary spaces where they are currently operating for. Overall over time, while we saw a decline in April, we’re seeing that fiber to the business is kind of now with the flattish space. Fiber to the home on the other hand has accelerated pace we’re seeing significantly better space in this year compared to the previous year and no brainer It is with more and more people operating from home and using Safaricom as their service provider of choice.

Peter already mentioned about the fact that guidance is something that we would stay away from now, given the volatility and at this point of time, along with half year results, we think we’ll be in a better position to guide for the rest of the year. With that, I just want to hand over back to Peter to see if he wants to add anything. And then we can go to questions and answers. Thank you.

Peter Ndegwa: Thank you Sateesh. Just one additional point with respect to mobile data. I think Sateesh did reference that we have seen a robust growth in terms of volume and in terms of usage, that does not necessarily translate into a direct into revenue because of the mix of customers or offers that allow customers to access better value at a lower price. The second aspect that I wanted to mention, and I think we, we messaged it in the previous call is that as the economy got challenged, we saw a significant negative impact on SMEs as smaller medium sized enterprises. As you know, we have a significant number of them using our Lipa na M-PESA and therefore we could see those sectors that have been impacted by the economy being affected more, however, we’ve seen some level of recovery, but the SME sector is still the one that is most hit.

We do see an opportunity for us, both in terms of supporting, the country as the COVID crisis evolves, to support the SME sector, whether that is on providing better connectivity, providing solutions, but also working with others to see how they could restart their business. So those are the two points I wanted to add but I will hand over back to you, is it Ilanna who is facilitating or Cyndia?

Ilanna Darcy: It was supposed to be Cyndia, but I think she’s having some IT connectivity issues, so I can do it in her place. Thank you, Peter. Thank you Sateesh for the update.

And we’ve got one question so far on the chat, so it’s from, there’s another one. Sorry, let me scroll up from Karanja from Faida Investment Bank. According to the Central Bank of Kenya data there was a decline in the value of mobile money transactions in the second quarter of the year because of COVID-19 containment measures. Can you confirm this from your data, the magnitude of the decline, if any, in the last three months, compared to similar period last year, which M-PESA segments, P2P Lipa, have been most affected, do you notice changes improvements when containment measures are eased?

I can take that one myself, if you want. So, the information that the CBK is quoting, we do submit a lot of information to the Central Bank of Kenya. Understanding when we’re trying to seek guidance from them in terms of what they’re reporting is the Agent related transaction values. So that’s withdrawals and deposits and yes, we me concur that we have seen a significant decline in withdrawal especially in April, as, people were encouraged to stay away from Cash and deposits because of restrictions in movements. So, we can validate that. We have seen that run rate improve through may and into June as the economic activity has picked up, but withdrawals are under pressure as people are restricted in movement and staying away from cash. I hope that answers that question. The next one is from Christine.

Sateesh Kamath: I would just add one point to it. You’re right in calling out that what the central bank reports is the agent related one. When we look at it, we look at transactions happening through agents, as well as transactions happening through banks and the overall, which is a combination of transactions from agent plus banks Is better at this point of time when compared to same time last year.

Ilanna Darcy: Yes. Thank you. Thanks for Sateesh. Um, the next question is Anh Hoang from Wasatch. Many countries are talking about open loop and interoperability in any payment network. M-PESA has been a great closed loop network, what is the possibility that Kenyan regulators will move toward an open loop model? What are the risks to M-PESA If that happens.

Peter Ndegwa: Sateesh I’m happy for you to answer that one.

Sateesh Kamath: Sure Peter. Great question. Um, so if we step back and look at what M-PESA already had pre-COVID, it was a great open loop model. M-PESA is interlinked with pretty much all the banks in Kenya, I think more than 40 banks or so, so people can easily move money from banks to M-PESA and M-PESA to banks as well. As far as our competitors are concerned, like Airtel and Telkom, we are interlinked with their money wallets as well. So, you can send money from M-PESA to Airtel and vice versa as well. At this point of time, we don’t need to make any urgent changes to the way we operate because of COVID and thanks to the fact that this interoperability was established systematically over time, what we’re seeing is in the space of COVID, customers have got maximum convenience of what they can or what they need to.

Cyndia Nguli: Okay. Our next question is from Jaynesh Bhana from Mazi Asset Management and it’s to you Sateesh. When does the Sateesh officially and effectively leave Safaricom and to Sateesh when did you officially start your new role at Vodafone?

Sateesh Kamath: Jaynesh thank you so much. I was not expecting you to be in a hurry for me to leave. So, I will hang around for some time. That was on a light note I know you mean it in a very good sense. Ilana started acting in the role from 1st of July and I started taking responsibility for my new role from 1st of July. However, I will continue to double hat and provide support where necessary. So, a lot of, time-consuming operational elements have been thankfully taken over by Ilanna but for places which are strategic in nature, Peter, Ilanna and I are from the constant conversation with each other. So, we’ll continue to provide support. I would provide the support as long as I can. It’s an informal arrangement to given I start 1 July but given the fact that I’m going within the group and not into an external company, there’s a lot of flexibility of how we can operate with each other. I can see Peter smiling. So, I would like to think he wants to add something.

Peter Ndegwa: I was smiling Sateesh by saying that I am holding your passport. So, you are not going anywhere. Yeah. But I agree with the summary and as soon as we are able to get a substantive CFO in the future, we will announce it at an appropriate time.

Cyndia Nguli: Okay. The next question is from Robert Silgardo of Westwood International. Can you provide us with some color on a M-PESA commissions and how you see that evolving over the next few years? With respect to your margins is there risk to the government providing support to M-PESA agents somehow?

Sateesh Kamath: Robert, good question. Just to build on what we have disclosed in the past. This M-PESA agents’ ecosystem is something that we have built carefully, nurtured carefully and during this time, and for the days ahead, this is going to be an important partnership as far as Safaricom is concerned. We have continued to pay our agents the level of commissions that we will always had. However, because we add more and more products, which require lesser human intervention, M-PESA commission as a percentage of M-PESA revenue has come down over time. So, it is more of the new product lines, which are digitally more efficient, resulting in margin accretion, while balancing the need for having a strong channel and making sure that they’re healthy and make money.

This is a careful balance that we will constantly evaluate. At this point of time, we do not see a necessity for the government to interfere, but if the government wants to interfere and subsidize some of those agents, we will never say no, though I would say that’s more of a wish than a possibility.

……CONTINUED

Download Full Transcript

Safaricom July 2020 Investor Briefing Call Transcript

• Safaricom Limited (SCOM.ke) on Africanfinancials