Edited Transcript of BLU.J earnings conference call or presentation 28-Feb-20 12:00pm GMT

From our Blue Label Connect point of view, which is our hybrid offering, which is in between a postpaid and a prepaid contract, we now have developed an in-house scorecard. We continue to improve the credit. We continue to improve the scorecard and our hybrid product is definitely growing.

Moving on to the informal market specifically. This is, of course, the vision and strategy that we have stated over many years, and that is to take products and services to all South Africans. There is no reason, no matter where you live in this country, no matter what kind of connectivity you have and no matter where you are that we can’t reach you and offer you exactly the same product and service that we would have in the urban areas. Our total sign ups grew 59% to just over 27,000 new, and we are targeting 100,000 over the medium term, as we have spoken to you in the past about.

Our product offering, as I mentioned before, is growing significantly. In the past, it was what products can we do? Now it’s really about choosing specific products. They are a lot on offer, a lot that we can do, focusing on our strategy, focusing on the products that add stickiness into what we’re trying to achieve as a whole. And every year, our stated policy is to try and introduce 2 or 3 brand-new products into the market.

We are specializing now on bringing transport ticketing to all communities, making it easier to get. Right now, transport ticketing is limited to only a few outlets, along with all our other strategy of making it wider and better to complete products across the board, ticketing is up there with one of the most important of what we’re going for. Our ongoing focus remains merchants, getting our merchants to do top-up points, cash in, cash out within the formal communities, and expanded product offering and optimization of the merchants using interfaces that are unique to them, are new to them and giving them technology firepower that, in the past, a merchant wouldn’t have.

We’re obviously building on our Blu Approved brand, which we have over many years. And of course, in the informal market, is a well-known brand. The communities know it, they trust it. And of course, trusting it in the communities, in the markets that we’re working on are absolute — absolutely important to what we’re doing. We are proactive in our customer support, proactive in knowing what our customer wants and giving them their needs and fulfilling their needs for the different areas at they are. We are identifying, at the same time, opportunities through the analytics that we do through our data side, and Mark will touch on it more when he goes, but data is a huge part of Blue Label’s future, touches every point of what we do, touches all the subsidiaries of what we do and is key to the future of what we do. Just as a statement goes, cash, today, powers nearly 50% of transactions in South Africa, and its share represents 58.2% of the country’s GDP. That is the informal market that we are concentrating on.

Moving on to CEC, or the Comm Equipment Company. As you are aware, we had a company called 3G. 3G was split into 2 parts. 3G itself was the hardware division that we announced, the sale of it. Obviously, we announced to you recently the sale was complete. The ZAR 544 million was paid over as well as an additional ZAR 60 million, which was the NAV at the time. So ZAR 604 million is received. And we wish 3G, of course, the best of luck in its new home and success in its path. What we are left with the CEC. I mentioned this to you in the past, this is a very, very exciting business for Blue Label.

When we acquired it, we acquired it for a particular skill set. It is a very well-run business. It has a clear strategy of how it wants to deal in credit in South Africa. It has a very clear strategy of how to deal with credit within our group. We are innovative in what we are doing. And in most cases, market leaders in what we are doing in the space. From a treasury position, we have 2 treasuries in the group. We have the main Blue Label treasury and then we have CEC’s treasury. They act absolutely independent of each other. So the Blue Label treasury will cover all the subsidiaries of Blue Label, except for CEC.

CEC is of that size that it has to have its entire own treasury and will concentrate on growing its own treasury and its needs outside of the Blue Label treasury. We obviously, currently, have the postpaid book, as you know it. We do a lot of decoders, as you know it, we do a little bit into the actual electricity side. We continue to expand the reach of what this company can do, and expand what we can do in the postpaid world, the decoder side and the electricity world.

We have reduced our exposure to Cell C. Our book decreased from ZAR 2.9 billion in May of 2019 to ZAR 2.5 billion at the end of November. But to end off with them, I think, this is a point that we really want to stress. Post the sale of the 3G handset division, which the money transferred in February, we were sitting at ZAR 1.67 billion owing in May of 2019 on the treasury.

As of November, we were owing the banks ZAR 1.5 billion, or just under ZAR 1.5 billion. As of the end of February, our total outstanding is ZAR 765 million. So bringing that down by over ZAR 1 billion in the last year. So tremendous focus on CEC, tremendous focus on credit in a very specialized way within the group, of course, and what we can do outside the group.

And of course, as I’ve said in the past, it’s a division of Blue Label to watch very carefully. There’s a lot of concentration on it. And the scope for it, not only within the group, but where we’re going in South Africa, we believe that this division specifically has tremendous potential.

I thank you all, and I’ll now hand you over to Mark.

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Mark Steven Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [2]

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Thank you, Brett. Moving on to Cigicell. Just to remind everyone, Cigicell is the wholesaler of our prepaid electricity tokens. They’ve been one of the star performers of our group, again, growing their electricity revenue by billions of rands again for the 6 months.

Electricity is a far more complicated product as compared to airtime as it’s treated as a financial token. What I mean by a financial token is every token of electricity that’s sold is dedicated to a specific municipality and to a specific meter. The reason for this relevance is that Blue Label has developed significant competence in the recon end settlement of these transactions, which makes it very difficult for anyone else to do these things to spar with lack of investment in technology.

The contracts in the munics are renewable every 3 years. And because they’re renewable, we’re finding a lot of margin compression as and when these contracts come up for renewal.

Our ability to attract new municipalities through our ecosystem offering, which I’ll elaborate more in the presentation, has allowed us to attract new municipalities as well as derive other revenues from other additional verticals in those municipalities.

As you can see from the graph, this division has not been immune to load shedding. And load shedding has been a national crisis and a problem and has affected the consumers’ usage of it, and therefore, their topping-up of the products. We hope that this doesn’t last forever. And by signing up new municipalities has allowed us to maintain quite a high-growth rate, even though there has been load shedding.

If you look on the right of these graphs, we talk about revenue collection and revenue protection. What do we mean by this is, as a company that’s proudly South African, we have a civil duty to help stem the flow of revenue, or stem the flow of non-revenue in this country.

What we mean by that? We are deploying systems and processes to help the municipalities we are in, find lost, stolen and incorrectly build tokens. By doing that, we are obviously increasing the revenue collections of these municipalities and also directly increasing the vatable portion on them for the receiver of revenue to add to his pile of cash.

The biggest part and problems within this revenue leakage is that the whole ecosystem needs to be relooked at, not just a single item in the process, not just the smart meter at the end, not just the billing process. So we’ve developed a lot of systems, processes to help the municipalities deal with this.

We’re also creating a lot of employment in the municipalities we are busy with, by training people in the ability to go in and look at meters, ensure that they are correctly tariffed and then look at the flow-through that those tariffings are correctly allocated at the municipality level to ensure that they are being built correctly every single month. We are also helping the municipalities to credit control services and audits in order to find where these meters aren’t collecting in the proper manner.

Once we found the incorrect meters, we will then replace these faulty meters where necessary and not just go out and replace meters where they are working correctly. Part of our offering to the municipalities in order to ensure that there’s correct collection processes in place as we are geocoding and spatial coding these meters and documenting them for the municipalities to show where they are, where there’s coverage and where there’s insignificant coverage to help them then deploy new meters in the coming period.

One of the other programs we’re on is helping the municipalities deal with indigent registrations. And that’s important to ensure that they maintain that base. And on an annualized base, keep updating that process so they can monitor where they are providing free electricity and those people who deserve it are getting what they deserve. So from a revenue protection point of view, it’s really evolving this business from being just a traditional token vendor to helping the municipalities really drive through collection processes through the whole ecosystem.

Moving on to Data Solutions. Blue Label Data Solutions is a market leader in big data, consumer data, validation, verification, cleansings of data and lead generation. What we are able to do is help our many customers help promote sales through sophistication, through AR in generating leads for them to customers that are specific to their needs. We have a lot of focus around our compliance, whereby we have strict adherence to the POPIAT, which is the Protection of Personal Information, and the Consumer Protection Act and any other relevant regulations. Data is a very weak part of Blue Label’s future strategy, and it’s something that we’re concentrating hard on and building the sophistication around managing these billions of transactions that we are doing on a monthly basis.

We have also concluded and had a JV with a company called United Call Centre Solutions, which actually provides us with the call center capabilities in which to up-sell and cross-sell products of Blue Label and any of our clients, which they require. Blu Nova, which is fast becoming the leading practitioner of data and data science in South Africa is using our very rich data that we generate along with very sophisticated skill sets that we are building to deliver speed to market on products and services to this country.

We have partnered with [FICO] to roll out a decision engine, which allows us to ingest a lot of data and ultimately, help the mobile operators reduce mobile churn and helps them on customer acquisition. This decision engine is going to be a large part of Blue Label in terms of the ability to interrogate and analyze the data that’s coming in and provide a decent throughput into our call centers and to our clients in the future.

Moving on to our technology side. Whilst we call Blue Label, Blue Label Telecoms, we are actually a very sophisticated technology company. We have spent a lot of time, money and effort ensuring that we have optimal scalability in our technology platforms. One of the core strengths of Blue Label is being channel agnostic, hardware agnostic and product agnostic.

What I mean by that is we have built solutions from an integrated mainframe solution right through to a man who sits at the corner of the vending product. And that differentiates Blue Label to anyone else, or any other competitor in the market, is our ability to penetrate any channel that there is.

But by doing this, one would have to build and ensure that they have a scalable and robust platform, which our technology teams has spent a lot of time and effort ensuring. We have invested a lot of money in ensuring stability and our future capability of our technology division to ensure that we are able to manage the demands and this high availability of all our customers.

We have also developed simple integration mechanisms to allow restful APIs to allow people to integrate into Blue Label a lot more. Our intention is, and we seem to be managing uptime in excess of 99%, looking at deploying active, active environments, whereby we’ll have an eyes-on-it environment and ensuring that our disaster recovery protocols and our disaster recovery is state of the art.

Our transactional volumes, month-on-month, are growing with the number of customers that we are signing on. And we’re ensuring that we have future capacity to onboard as many new customers as necessary. Once again, the governance and the framework, we ensure that we are vigilant in our security. We are POPI compliant, we adhere to the GDPR, all the ECT Acts and any other legislation that exists. What we also do is do constant vulnerability checks to ensure that our environment is as safe from external hacking as possible.

There’s a large focus constantly on security to ensure that our data, our customers’ data and any of the PINs that sit in our environment are safe and secure. Blue Label is proud of itself on ensuring that we foster entrepreneurs quicker than any of our competitors. And we continuously aim at achieving this agile process within Blue Label and encouraging this entrepreneurial spirit that exist within Blue Label.

Moving on to Cell C. The following slides have been prepared by Cell C and provide a brief operational update on the business as well as some key financial indicators. Cell C will be issuing their full year financial results ending December 2019 on the 23rd of March.

This slide is a recap of the turnaround strategy and the progress made by the Cell C leadership team to focus on sustainable growth. Good headway has been made against 3 of the 4 pillars of the company’s turnaround strategy, which includes improving overall liquidity, implementing a vast network strategy and a focus on operational efficiencies. The final pillar relates to recapitalization, and while complicated, progress has been made in this regard.

Liquidity platform has been put in place to take the business through to the recapitalization. With regards to the Cell C network strategy, an extended roaming agreement with MTN was concluded in November 2019 and enables network innovation, promotes efficient network infrastructure utilization and sustainable investment in network infrastructure.

The third pillar is the operational rationalization. Cell C has an extensive cost-cutting program, and has taken active steps to reduce its focus on pure revenue, subscriber growth to focus on profitable long-term growth. The positive impact of these initiatives will be backed up with the release of the company’s financial results in the coming weeks.

Finally, the recapitalization. It is complicated and delicate restructure with multiple stakeholders involved. What we say at this stage is that the structures are being discussed and all parties remain vested in the process to finalize the transaction.

This slide gives an operational overview for the 6 months to November. Service revenue and EBITDA are marginally up, and the financial performance is encouraging given the tough economic environment, increased market competition, and the continued cash flow constraints experienced by the company.

Key performance indicators for the period include: year-on-year, half year service revenue, otherwise known as customer spend, from June to November 2018 versus June to November 2019 grew by 1%. Year-on-year half EBITDA was 2% higher.

This slide shows the customer base evolution in pursuit of profitability. Cell C is focused on profitable and long-term growth and has made strides in this regard. There is a focus beyond pure revenue and subscriber growth. Following the review of its nonprofitable product portfolio, certain services, such as black and Wholesale Fixed LTE were discontinued.

While there has been a decrease in the customer base, service revenue remains comparable year-on-year. The impact of all the strategic actions by the leadership team to turn around the business will be covered in more detail when Cell C releases its full year financial results on the 23rd of March.

The way forward, just to summarize what Brett and myself has spoken about. It’s really focusing on back to basics for Blue Label, really focusing on how to improve our balance sheet through a debt reduction and improving on our cash flow generation.

We will ensure that our airtime and data still remains our cash cows, while still focusing on how to grow our electricity side and also ensuring that other multiple revenue streams within that vertical are achieved. We will utilize CEC financial skills to innovate the financial offering to the rest of our group, whether it be through bulk buying or utilizing the funds we have through interest income.

We’ll also continue to aim at improving our product and service offerings to our various clients in a manner that they are accustomed to. We will grow our transport revenue through our Ticketpro ticketing business and also enable additional technologies like Near Field Communication to enable smarter tickets in the future. From a technology point of view, we will ensure that our technology platform enables easier and more convenient integrations, whilst also ensuring agility, scalability, robustness and uptime while maintaining the highest level of security.

As I mentioned, data is a large portion of Blue Label’s future, and we’ll utilize our rich data lakes, our decision engine, to ensuring we’re able to extrapolate data to up-sell and cross-sell products to our wide client base. Thank you very much.

I’ll now hand you over to Dean Suntup to take you through the financials.

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [3]

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Good afternoon, ladies and gentlemen. The Blue Label group generated growth in revenue, gross profit and core headline earnings per share for the half year ended November 30, 2019. This was a resilient performance in an adverse economic environment. Agreement for the disposal of Blue Label’s interest in Blue Label Mobile and the handset division of 3G Mobile were entered into on the 25th of September 2019.

Their financial results totaling ZAR 67 million are disclosed in core headline earnings from discontinued operations and are not included in revenue, gross profit, EBITDA and net profit and loss after taxation. The financial highlights for the 6 months ended 30th of November 2019, were as follows: revenue increased by 2% to ZAR 11.5 billion, an inclusion of the gross amount generated on PINless top-ups, prepaid electricity, ticketing and gaming, the effective increase equated to 12% from ZAR 27.1 billion to ZAR 30.3 billion. Gross profit increased by 10% to ZAR 1.21 billion, gross profit margins increased from 9.75% to 10.52%; EBITDA of ZAR 723 million net of extraneous expenditure and core headline earnings per share of ZAR 0.4318.

Core headline earnings for the half year ended 30th of November 2019 amounted to ZAR 390 million compared to a loss of ZAR 129 million in the comparative period. The comparative period reflected fair value losses of ZAR 493 million attributable to the exposure to SPV1 and SPV2 relating to Cell C as well as the recognition of the group’s share of equity accounted losses in Cell C of ZAR 123 million after accounting for the amortization of intangible assets.

On exclusion of these negative contributions, core headline earnings amounted to ZAR 487 million in that period. No further fair value losses relating to the SPVs were recognized in the current reporting period as the exposure there to was fully accounted for as of the 30th of May 2019.

As the carrying value of Blue Label’s investment in Cell C was fully impaired for the year ended 31st of May 2019, the financial results of Cell C during the current period did not have any impact on Blue Label’s earning for this reporting period.

Core headline earnings for the current period amounted to ZAR 390 million, inclusive of nonrecurring one-off costs of ZAR 61 million, of which ZAR 50 million pertain to extraneous expenditure within the retail division and ZAR 11 million to fair value loss as a consequence of providing for an increase in the put option liability for the acquisition of the remaining 40% minority share of Airvantage and AV Technology, which will be settled during the current calendar year.

The comparative period, reflecting ZAR 487 million included income of ZAR 48 million, of which foreign exchange gains accounted for ZAR 25 million and finance income for ZAR 13 million. These movements related to loans provided to Oxigen Services India and 2DFine Holdings Mauritius. No further income in this regard was accounted for in the current reporting period as the loans were fully impaired as of the 31st of May 2019.

The balance of ZAR 10 million related to fair value gain as a result of providing for a decline in a put option liability. An exclusion of the extraneous cost of ZAR 61 million in the current period and the nonrecurring income of ZAR 48 million in the comparative period, core headline earnings generated from trading operations increased from ZAR 439 million to ZAR 452 million.

Group revenue generated by continuing operations within the group increased by 2% to ZAR 11.5 billion. As only the gross profit earned on PINless top-ups, prepaid electricity, ticketing and gaming are accounted for. On imputing the gross revenue generated thereon, the effect of growth in revenue equated to 12% from ZAR 27.1 billion to ZAR 30.3 billion.

Of the group’s gross revenue, telcos accounted for 58% and nontelco products and services for 42%. Gross profit increased by 10% from ZAR 1.1 billion to ZAR 1.2 billion, underpinned by an increase in margins from 9.75% to 10.52%. EBITDA in the comparative period amounted to ZAR 239 million after accounting for the fair value losses of ZAR 493 million relating to the exposures to SPV1 and SPV2. On exclusion of this negative contribution, EBITDA amounted to ZAR 732 million, inclusive of nonrecurring income of ZAR 42 million. EBITDA in the current period of ZAR 723 million included nonrecurring ones-off cost of ZAR 41 million.

An exclusion of the extraneous costs in the current period and the nonrecurring income in the comparative period, EBITDA generated from trading operations increased by 11% from ZAR 690 million to ZAR 764 million.

Turning to profit and losses from associates and joint ventures. The comparative period included the group’s share of losses in Cell C, amounting to ZAR 133 million. The financial results of Cell C during the current period did not have any impact on Blue Label’s earnings for this reporting period in light of the carrying value of the investment therein having been fully impaired. And the exclusion of the group’s share of losses in Cell C in the comparative period, contributions from associates and joint ventures increased by ZAR 28 million.

Blue Label Mexico generated profits of ZAR 0.6 million compared to a loss of ZAR 25 million in the comparative period, of which the group share accounted for a positive turnaround of ZAR 12 million.

Moving to the balance sheet. Total assets increased by ZAR 0.7 billion to ZAR 12.8 billion, of which noncurrent assets accounted for a decrease of ZAR 725 million and current assets a decrease of ZAR 299 million. These declines were offset by an increase in assets classified as held for sale of ZAR 1.77 billion relating to the reclassification of the assets of Blue Label Mobile and the handset division of 3G Mobile, in line with the contemplated disposals thereof.

The net decrease of ZAR 22 million in investments in and loans to associates and joint ventures comprised the group’s net share of profits totaling ZAR 12 million, offset by loan repaid by associates of ZAR 9.3 million, reclassification to assets held for sales amounting to ZAR 18 million, dividends received of ZAR 4.6 million and other movements amounting to ZAR 2.1 million. Of the net decrease in intangible assets and goodwill of ZAR 793 million, ZAR 53 million related to the fair value adjustment for the disposal of the 3G handset division and Blue Label Mobile group as well as ZAR 638 million reclassified to assets held for sale.

Amortization of intangible assets amounted to ZAR 102 million and disposals to ZAR 21 million. These decreases were offset by additional intangible assets of ZAR 22 million. The material net decline in current assets included decreases in inventory of ZAR 474 million and trade and other payables of ZAR 266 million, offset by increases in cash and cash equivalents of ZAR 255 million and advances to customers of ZAR 210 million. The stock turn equated to 20 days compared to 24 days for the financial period ended 31st of May 2019. The data’s collection period increased to 78 days compared to 68 days for the financial year ended 31st of May 2019.

Net profit attributable to equity holders amounted to ZAR 315 million, contributing to accumulated capital and reserves of ZAR 2.84 billion. Net borrowings increased by ZAR 409 million, in which the prepaid company utilized an additional ZAR 634 million of its banking facilities, offset by a reduction in Comm Equipment Company’s interest-bearing debt by ZAR 199 million. Liabilities classified as held for sales amounted to ZAR 676 million relating to the reclassification of the liabilities of the disposals. Trade and other payables decreased by ZAR 692 million, with average creditors’ terms equating to 78 days compared to 83 days for the financial year ended 31st of May 2019.

Moving on to the cash flow. Cash generated from trading operations totaled ZAR 390 million. Working capital movements comprised an increase in trade receivables of ZAR 711 million and a decrease in trade payables of ZAR 61 million, offset by a decrease in inventory of ZAR 304 million. After incurring net finance cost and taxation, net cash generated amounted to ZAR 110 million.

Although inventory holdings declined, as we’ve mentioned in the past, the remaining balance of ZAR 1 billion is a highly liquid asset capable of significantly reduction in a short period of time. The net cash flows utilized in investing activities amounted to ZAR 49 million, mainly attributable to the purchase of intangible assets of ZAR 17 million and ZAR 72 million on capital expenditure. These were offset by loans repaid of ZAR 31 million.

Cash flows from financing activities amounted to ZAR 376 million, of which ZAR 422 million related to additional borrowings, ZAR 34 million from the dilution of shares in a subsidiary, offset by dividend payment of ZAR 58 million to noncontrolling interest and lease payments of ZAR 23 million. Cash on hand accumulated to ZAR 1.8 billion.

Thank you to the Chairman and the Board of Blue Label Telecoms for their continued support. The floor is now open for questions.

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Questions and Answers

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [1]

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Good afternoon, everybody. Welcome to Blue Label’s interim results. I think we’ll open first to callers and then we’ll deal with web afterwards. So let’s open up to any questions on the call.

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Operator [2]

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Sir, at this stage there are no questions on the line, sir.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [3]

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No questions. Okay. Sorry. So let’s go straight to the web. The first question is from Philip Short. His question is, your — post disposals, Blue’s debt stands at ZAR 2 billion come May 2020. Investec facilities required to wind down to ZAR 1 billion by May of 2021. How is Blue going to achieve that? Over to you, Dean.

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [4]

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Thanks, Philip. As you would see, as of November ’19, our interest-bearing borrowings sitting at ZAR 3.6 billion. After you take into account the disposals of just over ZAR 1 billion, which is made up of the disposal of 3G, which is ZAR 604 million, we’ll get from Blue Label Mobile, ZAR 350 million initially and from Hyve, ZAR 83 million. So that equates to just over ZAR 1 billion as well as paying down certain other facilities of just over ZAR 560 million at May 2020, we would arrive at our interest-bearing debt being approximately ZAR 2.05 billion.

As you mentioned, at the end of May 2021, you mentioned that the debt needs to be ZAR 1 billion. But if we can break down the ZAR 2 billion, as at the 31st of May 2020, that comprises approximately ZAR 450 million debt from CEC. And our main Investec facility would be sitting on just over ZAR 1.6 billion.

With regards to reducing the ZAR 1.6 billion to the ZAR 1 billion, that you mentioned, that would be able to be paid through cash generated from operations during the year, May 2020 for the 12 months ended, which would then reduce that facility to ZAR 1 billion as well as approximately ZAR 450 million to ZAR 500 million on CEC’s side, which would result in total interest-bearing debt of approximately ZAR 1.5 billion.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [5]

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Thank you, Dean. The second question is from Bianca Boorer of Reorg. Your presentation said the roaming agreement with MTN has concluded. I heard the contract was meant to start in January, but it was postponed to April.

And this may be extended again. I understand Cell C owes ZAR 887 million to MTN in out-of-bundle charges from the end of last year. I understand MTN is hesitant to continue the current contract because of this. Can you comment on this? Also, I understand the Competition Commission is investigating a deal. I understand this is because there’s a question of our share in Cell C spectrum. Can you comment on this?

So let’s start with that in piecemeal. The answer to the first question is that it has been extended to April. We are not aware of any other further extension that has been granted or has been asked for.

The second question of Cell C owing ZAR 887 million to MTN is absolutely incorrect. They definitely do not owe them ZAR 887 million. I understand MTN is hesitant to continue, that is news to us. For us, it’s all on schedule with MTN. So if there’s anything else, we are totally unaware of that. And as far as the competition commission goes, we cannot comment on that because we have no understanding what is at the Competition Commission or anything that is being dealt with there.

The next question is again from Bianca Boorer. Can you comment on the sale of Cell C’s postpaid book to Vodacom? I understand CEC’s owed ZAR 1.6 billion from Cell C enhanced financing. Will this debt be settled using the proceeds of the sale?

We want to make it very clear that Cell C’s book has definitely not been sold. So that answers part 1 and part 3 of the question. The amount owed by Cell C to CEC is just over ZAR 1.1 billion, and that obviously gets collected in the normal course of collecting the book.

The next question is from Bianca Boorer again. Can we get an updated debt structure for Cell C? The answer is yes. In Cell C’s presentation, which I’ll be giving a full presentation to the market next week.

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [6]

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On the 23rd.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [7]

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On the 23rd. Sorry, on the 23rd of March, that will, obviously, include the full updated day-to-day structure of Cell C.

Next question is from Bianca Boorer again. Is Blue Label or a new investor looking to invest more money into Cell C to keep it running?

As you’re aware, the recap is underway. That would, obviously, include new investors, that would include participating with the current shareholders and the current investors. From a Blue Label perspective, we cannot comment at the moment. We will see where it all falls. And we will comment at that stage, whether, we will be investing more money, or we won’t be investing money at all.

The next question is from Patrick from Perpetua Investments. How much profit does CEC make? What is the exposure to Cell C of the ZAR 2.6 billion book? Noted that you realized ZAR 604 million from 3G’s disposal. How much is CEC worth based on current profit levels? What is the cash conversion rate?

Okay. So I’ll answer part one of the question, how much does CEC make? ZAR 114 million after-tax for the 60 — for the 6 months to the end of November. The exposure to Cell C, as I mentioned before, is just over ZAR 1.1 billion, and that gets collected in the normal course of collections. We realized a ZAR 604 million, so how much is CEC worth? Well, if you take a simple calculation, as of end of March, you will have a book of approximately ZAR 2.6 billion.

You will have a debt to the banks of approximately ZAR 550 million. So ZAR 2.1 billion in the book itself, besides, obviously, the valuation of whatever people value companies at today on the market.

What is the cash conversion rate? That’s obviously in the profile of the book. So it’s not a simple answer. Happy to take that off-line with you, Patrick.

The next question is from Ed Pienaar. A few more from me, please. Of telco gross margin, what percentage is from Cell C? Another prominent player in the industry is saying that you’re cross subsidizing their airtime by using the higher margins available from Cell C. Is this true and sustainable? What caused the uptick in debtors? Who are the counterparties? Why are you allowing such a large uptick in debtors? Can you please give us a sense of what caused the retail ones-off expense? More to come.

Okay. Let’s break this up. Telecom gross margin, what percentage is from Cell C? What — we’ll answer it differently. We’ll answer it from a total profit point of view, which we have indicated to you in the past. From a total profit point of view, between 25% and 30% of our profits come from Cell C. So that hasn’t changed. Another prominent player, we’re not ever going to answer that question. I don’t think it’s worth answering what other players are saying how we trade. We would have a lot to say about other people. But at the — the moral the story is, we do what we do, one has nothing to do with the other. What caused the uptick in debtors?

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [8]

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So Ed, you would see, as you mentioned, if you include both the discontinued and continuing operations, the debtors would have increased by ZAR 700 million, approximately. This doesn’t just relate to trade debtors, trade receivables would have only increased by approximately ZAR 210 million. But included in that increase is also prepayments, which was amount of approximately ZAR 300 million.

These prepayments relate to prepayments, either for Atom stock or as well as electricity because the half year fell on a Friday, being a Saturday, we preplanned the weekend before. So ZAR 300 million of that relates to the increase as well as, if we look at the Hyve consideration from sundry debtors, is approximately ZAR 100 million, of which ZAR 65 million comes from the Hyve purchase consideration.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [9]

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Thank you, Dean. That answers the counterparties, why are you allowing such a large uptick in debtors? I think that’s answered. Can you give us a sense of the once-off retail expense?

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [10]

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So as you saw in the trading update and our results, we mentioned the once-off nonrecurring cost of approximately ZAR 50 million relating to retail. This was broken down into 3 parts: ZAR 11 million was a stock obsolescence, ZAR 19 million was an IFRS 19 adjustment that we made with regard to recoverability of the debtors. And ZAR 20 million related to the reversal of the deferred tax asset within the retail division that added up to the ZAR 50 million.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [11]

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Thank you, Dean. Next question is from Anonymous. At the last result, you mentioned the CEC unwind is expected to bring in a few billion rand. Given the current net debt of ZAR 2 billion and the expected ZAR 1.1 billion in asset sales, this would leave Blue in a net cash position, not even considering any cash generated from operation. What is the likelihood of a significant buyback in the next few months?

As we always comment on buybacks or dividends, this is taken in high consideration by the Board of Blue Label. And obviously, will be considered again. The dividend side of it is always considered, obviously, after year-end. The buybacks are considered all the time. And will — can always be debated at the Blue Label board. So we cannot comment more than that for now.

The next question is from Anonymous again. Was there any significant impact on working capital, given the period ended on a weekend? I.e., inventory purchases from munics with payment only expected the following Monday?

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [12]

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As mentioned, with Ed’s question, there was an impact, and that was ZAR 300 million, was the movement between May and November, the increase in the prepayments.

So with regards to that, the inventory reduction was in the normal course of business, reducing our inventory from ZAR 1.5 billion to just over ZAR 1 billion. And the creditors movement was really small from that basis.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [13]

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Thank you, Dean. There are a lot of questions coming through on Cell C. And I think what we’re really trying to avoid is mixing up the Blue Label roadshow with Cell C. The Cell C will be having their own presentation, a full presentation on the 23rd where all questions can be asked and will be answered. So we would like to not go into anything more in Cell C and leave it for when the full presentation is done. And more importantly, not do it in piecemeal rather than as a whole.

The next question is from Nick from Signal Asset Management. Do you think you can recover any value in Cell C? Can you comment on any conflict from Blue relating to the discussions between Cell C and the Buffet Group? What are your thoughts with regard to time line of Cell C’s structure? It has taken a very long time.

Nick, yes, it definitely has taken a long time and it has taken longer than we thought. The value that Blue will recover from Cell C is what is being determined in the recap as we go through it now.

But as we said in the past, as the recap goes, and we can comment on and we will. Conflict between Blue Label and the Buffet Group, there’s no such thing that exist of that nature at all. So I’m not sure where that comes from.

Next question is from Ed Pienaar. Sorry, guys, to be clear, CEC is separate from Blue facility but Investec is banker for both.

When looking at Blue book, CEC’s consolidated in, so the disclosure now reads that all debt from Investec must be below ZAR 1 billion. If this is the case, please reiterate.

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [14]

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Just with regards to that disclosure, we specifically mentioned that the prepaid company’s debt needs to be at the ZAR 1 billion mark. That is specific to the prepaid company. The CEC debt is separate with Investec. And as we mentioned, that would be on approximately ZAR 450 million. That as at the 31st of May 2021, the prepaid company’s portion must be sitting at the ZAR 1 billion mark.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [15]

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Next question is from Philip Short again. At what point will the board or yourselves feel comfortable to reinstate the dividend? Is it a certain gearing level?

I think our gearing is underestimated at the moment of how comfortable we are with it. Just to put that into perspective, we are approximately 1.4x EBITDA to debt ratio, which I’m sure you all agree is not a very hard gearing at all. So it’s got nothing to do with the gearing. It’s more about where we are, where we have been over the last year. As you know, it has been a very tough year for Blue Label with, obviously, the results what Cell C has caused. And as we try and separate ourselves and get back to basics of showing the market, I guess, how well the core of Blue Label is doing. These things get debated all the time, and I have no doubt that the dividend will be debated heavily at the right appropriate time, which, as I said, is after year-end, which is around, obviously, August of this year.

The next one is from Brad Virbitsky from Equinox. What’s a rough run rate post-tax, post-minority earnings level for core Blue Label post the asset sales? The rundown of CEC and other businesses you expect to discontinue in near future? And how much of this translates to FCF?

Let’s break this down. What is a rough run rate post-tax, post-minority earnings level for the Blue Label core?

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [16]

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Thanks, Brad. As you would recall, from a core headline earnings, we made ZAR 390 million, of which ZAR 323 million was from continuing operations.

We’ve mentioned the once-off non-reoccurring expenses of approximately ZAR 61 million, which would potentially add back to that amount as well as with regards to the disposals that we made of over ZAR 1 billion, that naturally would earn interest income throughout the year. So if you include those on, that’s kind of the run rate that we’re looking at going forward.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [17]

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Thank you, Dean. The next part of the question is the rundown of the CEC book and other the businesses you expect to discontinue.

There are absolutely no other businesses we expect to discontinue in the future. We are very comfortable with all our businesses in the core. And as we have presented to you, each one in its own right is holding its own and doing nicely. The rundown of CEC, in time, we will show you how we run down the old book and build the new book, but we mentioned it in our presentation that CEC is a main focus of our group. It is very exciting, it has great management, it has great systems. And is a very, very big part of Blue Label’s future and one to watch out for.

How much currently is — translate into free cash flow? Well, we’re generating around ZAR 60 million to ZAR 80 million of cash, obviously, before taxes and everything else that happens. The free cash that actually gets generated after everything is probably around ZAR 30 million to ZAR 40 million. And as of now, it’s continued in the same format. So we don’t see any change to that.

The next question is Cell C again. We are going to put a hold on that. The next question is Cell C again.

That is all the questions that we have on the web. Are there any questions on the line?

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Operator [18]

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No, sir, there are no further questions on the line.

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Brett Marlon Levy, Blue Label Telecoms Limited – Co-Founder, Joint CEO & Executive Director [19]

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So we’d just like to thank everybody. I guess, you all understand that, it hasn’t been a very easy 6 months in South Africa. The economy itself and the country itself has had a pretty tough time. And I’m sure the next 6 or 12 months in South Africa will show pretty much the same. So from a Blue Label management point of view, I think the results to the end of November are satisfactory.

I think the core business continues to be resilient and continues to show its vision and strategy coming through. So we look forward to the next 6 months and reporting to you after May, and hopefully, continuing with the same trajectory as we did in the first 6 months. Thank you.

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Dean Alan Suntup, Blue Label Telecoms Limited – Financial Director & Executive Director [20]

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Thanks.