Lesaka Technologies Inc Q1 FY2023 Earnings Call

Hello everyone, and welcome to the Lesaka Fiscal First quarter 2023 Webcast and Conference Call. As a reminder to everyone that the webcast is being recorded and the presentation can be accessed through the webcast link as well as dialing into the Zoom conference call dial-in numbers provided. Management will address the questions you may have at the end of the presentation. For those joining us via webcast, you can ask your questions live by raising your hand in Zoom. For those joining via the Zoom teleconference line, you cannot ask your questions live. The webcast link Zoom conference call dial-in numbers as well as our press release and supplementary investor presentation are available on our Investor Relations website at ir.lesakatech.com. Additionally, the company filed its Form 10-Q after the US market closed on Tuesday, November 8, 2022, which is also available on our Investor Relations website. As a reminder, during the call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. Also, we will be discussing our results in South African Rand, which is non-GAAP. We analyze our results of operations and our press release in Rand to assist investors understanding of the underlying trends in our business. As you know, the company's results can be significantly affected by the currency fluctuations between the US dollar and the South African Rand. I would now like to turn it over to Chris Meyer, Group CEO.

Good morning, and welcome to our first quarter 2023 earnings webcast and conference call. Taking a quick look at today's agenda, I will start with performance highlights for the first quarter of 2023 and then provide a brief business overview. Steve will provide an update on our merchant business. Lincoln will provide an update on the Consumer business, and Naeem will present details of our financial performance for the three months ended September 30, 2022. I will then conclude the results presentation with our outlook for Lesaka, before we open up the Q&A, we will welcome any questions you may have. First, let me say that Q1 FY 2023 marks the start of our first full quarter as Lesaka incorporating the Connect Group. And I'm pleased to report that execution on our strategic imperatives has translated into solid financial performance, including strong revenue growth and improved profitability. We are delivering on our objectives, and we are well positioned to continue doing so. We have significantly expanded our merchant offering through the transformative acquisition of the Connect Group, which brings together two businesses with complementary product and customer sets. This is a growth story. Connect fills the gaps in our MSME offering and completes the end-to-end financial ecosystem that underpins Lesaka’s mission. On a standalone basis, Connect continues to perform ahead of expectations, and the strong underlying fundamentals that underpin the business remain intact. Integrating our pre-existing merchant businesses and Connect has been very encouraging, and the synergistic benefits have exceeded our initial expectations. The organic turnaround of the consumer business continues to deliver improved performance and remains on track to reach a monthly breakeven adjusted EBITDA during the second quarter of fiscal 2023. As such, our merchant and consumer businesses are both very well positioned to scale and grow in their respective target markets, while at the same time, benefit from the synergies and opportunities created by a dual-sided ecosystem. Turning to our funding and capital structure. We have previously highlighted that as part of the Connect acquisition, we took on a bridge of ZAR 1.1 billion, maturing in April 2024. And I'm pleased to update the market that we are in the final stages of agreeing to convert this facility into a three-year term loan that will bring greater flexibility, increase liquidity, and sufficient capacity for us to deliver on our guidance and growth plans over the medium term. Once in place, this facility provides real evidence of the progress made in the turnaround of our consumer business and the strong ongoing performance of the Connect Group. So as you know, in early September, we provided forward earnings guidance for the first time since the transformation and repositioning of Lesaka. This was a bit of a milestone for us, as it further illustrates the progress we've made and the clarity we are building in our business. Our guidance was for revenue to be in the range of ZAR 2.015 billion to ZAR 2.062 billion for FY '23 Q1. And we are pleased to be able to report revenue of ZAR 2.1 billion, which exceeds the upper end of our guidance. We also guided for group segment adjusted EBITDA to be in the range of ZAR 106 million to ZAR 112 million for Q1 FY 2023, and we have delivered ZAR 111 million in group segment adjusted EBITDA for the quarter, which is at the upper end of the guidance provided and is a significant improvement on the loss of ZAR 106 million in Q1 2022. Revenue growth was driven predominantly by the inclusion of the Connect Group for the full quarter, with the momentum in the Connect business continuing. And as I said, the drivers underpinning the growth remain intact. The consumer business continued to deliver improved performance, evidencing the positive turnaround, and it remains on track to reach breakeven during the second quarter of fiscal 2023. Along with the primary focus on rightsizing the business, the net active account base grew by 3% in the quarter, with transaction volumes and revenue remaining in line. This is testament to the consumer team's ability to grow and serve our client base, while at the same time, managing a fundamental transformation of our consumer distribution model. The Consumer business reported revenue for the quarter of ZAR 257 million. Segment adjusted consumer EBITDA improved to a reduced loss of ZAR 24 million for the quarter, compared to a loss of ZAR 137 million in Q1 2022. This improved profitability was driven by a combination of realized cost savings as a result of Project Spring, together with a marginal improvement in revenues. We have previously provided a detailed strategic overview of Lesaka in each of the last three result presentations. And therefore, I intend to only touch on this briefly today. As Lesaka, we strive to improve people's lives by bringing financial inclusion to South Africa's underserved consumers and by helping small businesses access the financial services they need to prosper. We are constantly innovating to help merchants grow, manage, and digitize their business, while enabling our large consumer customer base to easily access their money and the financial services they need in their daily lives. And as we previously pointed out, there are real challenges to delivering financial inclusion and digitization in the South African market. The challenges stem from a deep distress and a lack of understanding of cash alternatives, which is driven by low levels of financial literacy in our country. Additionally, relatively high connectivity costs in South Africa, airtime and data are expensive and prized commodities. Smartphone penetration remains relatively low, with many South Africans still using older style feature phones. Taken together, this all means that although over 80% of South Africans may have a bank account, many treat them as post boxes with the intention of growing their money in one transaction. Solving these issues for our customers is our mission, and we have shown that Lesaka is very well-placed to meet those challenges and deliver for our customers. Lesaka's addressable market is large and it offers multiple levers for expansion. Our platform serves micro and small merchants together with the consumers who would typically shop in their stores. We estimate there to be approximately 1.4 million informal merchants and approximately 700,000 formal merchants in our target markets, along with the approximately 26 million consumers in LSMs 1-26 who form our target addressable markets in the Consumer division. Our strategy is to build our ecosystem where our consumers are. This often means in the townships and the rural areas of South Africa, creating points of presence that are convenient and accessible for our customers. As such, we have over 68,000 points of presence in the form of branches, retailer paid points, ATMs, satellite kiosks, and merchant devices. This compares to approximately 58,000 disclosed previously. The Lesaka platform offers growth and broader reach in an underpenetrated market. We believe there is tremendous scope for both our merchant and consumer businesses to grow and scale in their respective target markets in their own right, while at the same time, also benefiting from the synergies and opportunities created by the dual-sided ecosystem and self-reinforcing business model we are building as part of Lesaka's value proposition. As post-COVID travel has started to open up again, we have been fortunate in recent times to host a number of investor visits showcasing the Lesaka platform and allowing our investors to gain first-hand experience of our merchant and consumer offering. One thing that has become evident through these visits is that our offering and growth potential in the formal sector seems to be well understood. However, it is often seeing the size and scale of the informal sector together with our leading offering therein that is invaluable to our investor base and allows them to conceptualize the growth opportunity and the need for financial inclusion in our country. And as such, I thought it would be useful to spend a little more time looking at the informal sector as part of today's presentation. South Africa's informal economy is highly cash-driven, and while information is imperfect, estimates are that the GDP of the informal sector is well above ZAR300 billion and it continues to grow. We estimate that 60% of total transactions in South Africa are cash-based. We also estimate that approximately 90% of transactions in South Africa's informal economy are cash based. Anecdotal evidence indicates that over 70% of fresh fruit and vegetables in South Africa are sold in the informal economy. It is highly evident that the size and nature of South Africa's cash-driven informal economy necessitates financial inclusion and digitization in the informal market. Through our ability to efficiently digitize the last mile of financial inclusion, providing a full-service fintech platform across cash and digital to serve the needs of both, while also facilitating the secular shift to digital that is currently taking place, positions us so well to deliver on our mission. I would like to turn it over to Steve to provide an update on the merchant business as well as the progress made on the integration of the Connect Group.

Thank you, Chris. At the outset, let me reiterate that the Connect acquisition was an essential building block in expanding and transforming Lesaka's merchant offering to what it is today. It has served the purpose of introducing new products, services, and customers while establishing Lesaka as a leading player in South Africa's merchant sector. Getting straight into the financial performance of the Merchant division. For Q1 2023, the merchant business reported total revenue of ZAR 1.9 billion driven by the inclusion of Connect Group for the full quarter from July 01 to September 30, 2022. This compares to ZAR 1.6 billion in the prior quarter Q4 2022, a quarter in which Connect was included for most of the quarter. Similarly, segment adjusted EBITDA for the merchant business increased to ZAR 134.5 million compared to ZAR 124.4 million in Q4 2022. In Connect, throughput is one of the fundamental measures of how the business is performing and it supports ongoing growth. Compared to Q1 2022, Kazang's cumulative transactional throughput grew 29% to ZAR 5.8 billion. This continued momentum demonstrates the value that we bring to our informal merchants through this offering. I will go into more detail on this when I discuss operational metrics. We saw robust growth in our Cash Connect business, with cash settlements up 19% to ZAR 27.5 billion despite the challenging environment for retailers over this period. In Connect's card acquiring business, cumulative transactional throughput continued its exceptional growth of 115% to ZAR 2.3 billion due to further traction in penetrating the informal market through Kazang Pay. As indicated previously, we believe there should be a strong growth potential in this product. Finally, we saw great traction in Capital Connect, which focuses on providing merchants quick access to working capital, dispersing approximately ZAR 190 million in Q1 2023, up 77% compared to Q1 2022. We previously mentioned that we anticipate strong growth in this arena, which certainly has been the case with two record lending months in the first quarter of 2023. We're also seeing good momentum in Kazang Pay Advance, which was launched a year ago off the back of Kazang Pay in the informal market. Now in our EasyPay business as expected, we saw a decrease in VAS value processed for prepaid electricity as a result of load shedding. It's important to clarify that this decrease is not due to a loss of customers. VAS value processed for prepaid airtime increased by 8%, and our bill payment volumes declined by 2%. We remain focused on the repositioning of our EasyPay business and on prioritizing commercial revenue streams in relation to existing and new clients. In the US, our point-of-sale terminal business, revenue generated from the sale of point-of-sale devices can be lumpy, given the seasonality of bulk sales. We have, therefore, reflected a 12-month rolling average and will do so going forward. For Q1 2023, the 12-month rolling average was 7,761 terminals sold compared to 3,365 terminals in the first quarter of 2022. We are excited about many of the opportunities in our merchant business. Today, we have a comprehensive offering to SME merchants in Southern Africa, and now we have a distinct dual-sided ecosystem driving financial inclusion and serving both merchants and consumers. As Chris mentioned, the integration work between the pre-existing merchant business and Connect has been extremely encouraging, and synergies to-date have exceeded expectations. Our bulk business effectively puts the bank in approximately 4,200 merchant stores. Historically, we've been placing our bulk into formal SME merchant stores, but are now also penetrating the informal sector under the Kazang Connect Vault brand. This has provided significant operational and risk benefits for our Kazang informal merchant base. We are also pleased with the progress made in integrating Lesaka's ATM business into Cash Connect and beginning the rollout of our new ATMs and recyclers as part of a holistic cash management solution. This project is in the pilot phase. What we envision here is an ATM product that is a cash vault with cash dispensing capability. This integration will also increase traffic across Lesaka's ATM infrastructure. In our card acquiring business, we saw excellent growth during the quarter, with more than 5,000 new merchants being added. We expanded our offering into the informal space last year under Kazang Pay, and the pace of growth continues to exceed expectations. This is a profitable revenue stream as we leverage our existing infrastructure to grow this offering, presenting a clear competitive advantage in this sector. Growth was supported by broadening our product set for merchants, enhancing functionality, and forming corporate partnerships. Card-enabled point-of-sale devices are up more than 100% from a year ago, with approximately 27,700 card devices deployed at the end of Q1 2023. The card acquiring opportunity in the informal market is nascent, and a large portion of this market remains to be captured. In our VAS and bill payments business, we added approximately 6,300 merchants in the quarter, ending Q1 2023 with approximately 57,000 devices in the field. This was driven by organic customer acquisition and was also supported by corporate partnerships and initiatives. The EasyPay money market pilot is proceeding according to plan, and we are pleased with the swift pace at which this initiative has been implemented. All basic vending functionality, including ticketing, has been completed and has been installed at numerous pilot sites. The ARPU in these pilot sites is materially larger than in the informal sector. Rolling out more EasyPay money market offers a significant growth opportunity and is a significant synergy of the Connect acquisition. This slide is an example of the partnership initiatives that continue to support growth by positively impacting customer acquisition, operational efficiencies, and improving value for our merchants. This image highlights that a merchant can take card payments from Easy customers at this tavern via Kazang Pay, and the merchant can also sell a bouquet of Banner products to consumers of the same device for cash or card tender. Off the same platform, the merchant is able to settle with South African Breweries directly for stock purchases. In conclusion, we are incredibly pleased with what has been delivered in the Merchant Business. The Connect business has continued to grow in line with expectations and in sync with historical achievements. The team has executed on new growth initiatives in a short time frame. This is certainly the early stage of what has the potential to be a large growth opportunity. I would now like to hand over to Lincoln, CEO of Southern Africa, to discuss the Consumer business.

Thank you, Steve. Good day everyone. Moving on to our Consumer segment, in the first quarter of 2023, we continue to make great progress on rightsizing the business and toward implementing our revised consumer strategy, focused on product and efficient distribution channels. First, let me remind everyone that on the consumer side, we currently provide transactional banking, short-term loans, a digital wallet, as well as insurance and various value-adding services to underserved consumers in South Africa. This aligns with our purpose of improving people's lives and increasing financial inclusion. At the end of September 30th, 2022, we grew our customer base by 16% to 1.17 million active EPE contact accounts. Traction in our EPE banking offering is evident with the number of issue transactions being any transaction resulting in revenue earned is up 75% to 2.3 million transactions in this quarter. We ended the quarter with 257,000 active policyholders, up 10% compared to a year ago in our EasyPay insurance product offering, which we previously called Smart Life. Our insurance business has a very high cash collection rate of 98%, and this has remained consistent over many years. Our loan book size in our EasyPay loans, previously branded money line, was ZAR351 million at the end of September 30th, 2022. This portfolio comprises approximately 190,000 loans and has a loan ratio of less than 4% per year. Our low loss rate and high cash collection rate in insurance emphasizes our compelling value proposition in offering fit-for-purpose solutions to millions of consumers desperately needing financial services. We also see continued improvements in the ATM business, with over three million transactions through our ATMs in the first quarter of 2023. The productivity per ATM has increased significantly after implementing our ATM optimization actions. The number of ATMs in the field has decreased by 40% compared to a year ago, and the average number of transactions per ATM has increased by 60%. I will discuss ATM optimization in more detail when I get to my next slide. While we have achieved a great deal in our 2022 financial year from refining our value proposition, repositioning our offering to be more customer-centric, to building a sales culture, I want to remind everyone that we're still early in our transformation journey, and there's still a lot of work to be done. We have taken more stringent measures to grow our active EPE consumers. Now with the right team in place, the right products, and having rightsized the business, we will focus our efforts on reaching breakeven in the consumer business by the second quarter of fiscal 2023. Practically, we have focused our efforts on understanding what our customers are looking for, the best channel to engage them with, what our competitors are offering, and where we can disrupt the space by designing the right innovative products that truly meet our customers' needs. This slide shows how we have reinvented our distribution model. Following the execution of a full performance review across our brand’s network, we have closed over 100 branches and commenced the shift into the retailer partnership strategy. Our mindset is to shift from traditional bricks-and-mortar towards in-store kiosks wherever possible. We continue to build in-store partnerships with merchants who are both national and independent players. This brings our consumer proposition to where our customers want to be and drives footfall into the merchant stores. This includes identifying the right retailers to partner with, those retailers that service our grant recipient market. We have streamlined our onboarding processes, including tech-enabled mobile sign-ups. These efforts are beginning to yield expected results. We have made great progress towards implementing our revised consumer strategy, focused on product and efficient distribution channels. Our ATM optimization program is also benefiting from the retailer partnership strategy as we've shifted more ATMs out of branches into retailers. We've also deployed almost 40 through-the-wall ATMs. These ATMs are available for more hours, given optimal positioning within the stores or malls, attracting more customer footfall. This means increased volumes, especially for the number of on-us transactions. Steve and Chris have already touched on the encouraging results from the launch of our EasyPay money market offering. The image on the bottom left brings to life the EasyPay money market concept, which has been launched in merchant stores. This is a great example of how in practice we've executed on an opportunity to develop the self-reinforcing ecosystem, which creates synergy and opportunity for growth and expands their overall start-up value proposition. In quarter one, 2023, we achieved approximately 78,000 EPE account activations, and our churn rate averaged well below 5%, evidencing traction in our focused consumer strategy. As a reminder, churn for us predominantly relates to the impact of reactivations and deactivations in the SRD grant space. I think it's important to highlight that we apply a very rigorous approach in our measurement criteria for what we regarded as active accounts. We only classify an account as being active if there was activity on that account during that specific month. Our profitability improved in quarter one, 2023, as we reported a reduced segment adjusted EBITDA loss of ZAR 24 million compared to ZAR 137 million in the first quarter of 2022. The Consumer segment adjusted EBITDA loss narrowed further, and we're very close to breakeven levels. As part of our renewed consumer strategy, we will continue to focus our efforts on attracting permanent grant recipients, growing active accounts, and increasing penetration across our loan book and insurance products. We've seen mixed results with these two product offerings. Insurance sales continued to strongly outperform while growing the loan book has been slower than expected, and we are very focused on actions to drive awareness of this product. Despite the challenges in growing the loan book, we remain on track to achieve breakeven by December 31, 2022. As you can see on this slide, the merger run rate of the Consumer business segment adjusted EBITDA loss continues to move in the right direction as we progress on our turnaround strategy for the consumer business. I will now hand over to Naeem, our Group CFO, to discuss our financial performance.

Thank you, Lincoln. The first quarter of fiscal 2023 continued to build on the strong momentum from Q4 2022 for both the merchant and the consumer business. We continue to be very pleased with the performance growth of the merchant business, successfully integrating the Connect Group into the merchant business, and the continued turnaround and improved consumer performance. Good performance in revenue, cost reductions, and improved EBITDA being reported. We achieved consolidated group revenue of ZAR 125 million for the quarter compared to ZAR 35 million in Q1 2022, mainly related to the revenue for the Connect Group consolidated for the full quarter. Positive turnaround of normalized EBITDA to a profit of ZAR 2.8 million for the quarter. It is essential to note that Q1 2023 includes pre-existing Lesaka and Connect Group for the full quarter compared to Q1 2022, which only includes the pre-existing Lesaka business. Q1 2023 delivered a positive performance across all the financial performance categories. We are very enthusiastic about the transformation of the business delivering growth and strong performance results. The merchant business, including Connect Group, continues a solid strong performance trajectory. While the consumer business turnaround continues in the right direction, growing account and transaction numbers while rightsizing the consumer cost base. Total combined revenue for the quarter was ZAR 2.1 billion, a 13% growth compared to Q4, coming from including Connect Group for three months versus 2.5 months in Q4 2022, as well as the continued underlying growth in the revenue drivers. Revenue delivered in the quarter exceeded the upper limit of the guidance in rand. We achieved a segment adjusted EBITDA profit of ZAR 111 million, as compared to an EBITDA loss of ZAR 106 million in Q1 2022. A normalized EBITDA profit of ZAR 58 million, as compared to an EBITDA loss of ZAR 143 million in Q1 2022. This performance is evidence of the significant performance turnaround the group has achieved through the acquisition of the Connect Group and the cost rightsizing in the consumer business. The segment adjusted EBITDA profit of ZAR 111 million for the quarter came in close to the upper end of the guidance for the quarter in rand. The merchant business achieved revenue of ZAR 1.9 billion and segment adjusted EBITDA profit of ZAR 134 million, a solid performance with continued strong growth across the Connect Group business. The consumer business delivered segment adjusted EBITDA loss of ZAR 24 million, as compared to an EBITDA loss of ZAR 137 million in Q1 2021, a ZAR 113 million turnaround driven mainly by cost savings. I will now take you through the performance on a US dollar converted basis for the quarter, noting that we use an average rate of ZAR 17.13 to the dollar for the quarter, compared to ZAR 15.56 used in Q4 2022. This is a 10% devaluation in the rand. The total combined revenue for the quarter was ZAR 125 million. The segment adjusted EBITDA profit was ZAR 6.5 million, and a normalized EBITDA profit of ZAR 3.4 million. I will now focus on the components underlying revenue. Revenue increased from ZAR 34.5 million to ZAR 124.8 million when compared to Q1 2022. Merchant revenue was ZAR 109.4 million, contributing 88% of the group's revenue. Revenue increased primarily due to combining Connect Group revenue under the merchant business segment. Telecom products and services include all the VAS and bill payment collection we do across the group. This has increased to ZAR 76 million, mainly from the contribution from Kazang. Processing fees increased to ZAR 27 million, mainly from the inclusion of processing fees through the Cash Connect business. Interest from customers represents the revenue earned from merchant advances. Turning to the Consumer business segment. At the revenue line, we achieved ZAR 15 million of revenue compared to ZAR 17 million of revenue in Q1 2022. This was mainly due to the depreciation in the rand to the dollar. On a rand basis, revenue grew by 2%. We continue to achieve consistent growth of account fee revenue, ATM revenue, while insurance commission revenue delivered strong growth in this quarter. At an EBITDA level, the impact of the turnaround continues to be evident with a consistent improvement in EBITDA since the first quarter of fiscal 2021. We achieved ZAR 58 million of normalized EBITDA for the quarter, an increase of 43% as compared to the fourth quarter of 2022. The improvement in the EBITDA is attributable to both the merchant and consumer business segments. In US dollar terms, this equates to a normalized EBITDA profit of ZAR 3.4 million this quarter, an improvement of ZAR 800,000 compared to Q4 2022. Earnings per share, both basic and fundamental, showed a similar trend of positive turnaround since last year and the prior quarter. This is indicative of the positive EBITDA contribution from the inclusion of Connect Group, which has exceeded the increased interest costs and amortization of intangibles as a result of the acquisition. Our operational cash flow utilization has decreased from ZAR 10 million in Q1 2022 to ZAR 0.5 million for Q1 2023. From a cash flow perspective, we continue to make improvements with a reduced reliance on cash reserves to fund operations. This has been achieved through cost reductions and improved revenue, as well as positive cash flow contribution from the Connect Group. Capital expenditure for the quarter was ZAR 4.5 million compared to ZAR 2.8 million in Q4 2022. The increased CapEx predominantly relates to growth CapEx spent on cash recyclers for our ATMs and the point-of-sale devices to support the growth in the Kazang Pay business. We have a net debt position at the end of the quarter of ZAR 104 million. This includes unrestricted cash of ZAR 93 million and total debt of ZAR 197 million. We continue to focus on creating a stable and long-term capital structure. We have worked closely with our bankers and agreed on a restructure of the ZAR 1.1 billion bridge facility that is subject to final approval by our bankers. The renegotiated position will introduce greater flexibility and further increase liquidity as we invest for growth. As in the last quarter, we continue to hold our MobiKwik investment at ZAR 76 million in line with the large capital raise. Our Cell C investment we continue to hold at zero, and Finbond investment at ZAR 5 million. These investments remain non-core. Overall, the first quarter of fiscal 2023 is evident of the efforts we have implemented in fiscal 2022 and is now delivering positive results. Our continued focus on the strategic initiative is progressing well, and we are optimistic about delivering positive performance. I would now like to hand back to Chris, who will address the group's outlook.

In closing, we wanted to provide you with guidance on the near-term performance of the group. Although we report results in US dollars under US GAAP, our operational currency is in South African rand. We analyzed our performance in South African rand, and we believe it makes sense to provide our guidance in rand. For Q2 2023, Lesaka expects group revenue between ZAR 2 billion and ZAR 2.3 billion for the three months ended December 31, 2022. Total segment adjusted EBITDA is expected between ZAR 157 million and ZAR 164 million, comprising merchant segment adjusted EBITDA between ZAR 145 million and ZAR 150 million. The consumer segment is expected to range between ZAR 12 million and ZAR 14 million. We expect group costs of approximately ZAR 41 million for Q2 FY 2023, which means that this results in an adjusted group EBITDA of between ZAR 116 million and ZAR 123 million for Q2 FY 2023. For the full financial year FY 2023, we are reaffirming the total group guidance provided on September 19, 2022, on a rand basis. Our outlook for group revenue is between ZAR 8.7 billion and ZAR 9.3 billion for the 12 months ended June 30, 2023. Total segment adjusted EBITDA is expected between ZAR 645 million and ZAR 675 million, comprising merchant segment adjusted EBITDA between ZAR 550 million and ZAR 565 million, and Consumer segment adjusted EBITDA between ZAR 95 million and ZAR 110 million. Adjusting for group costs, which we expect to be between ZAR 155 million to ZAR 165 million on a normalized basis for FY 2023 implies an adjusted group EBITDA of between ZAR 480 million and ZAR 525 million for the financial year 2023. With that, we would like to turn to the Q&A session to answer your questions. Thank you.

We will now start our Q&A session. We'll take our first question from Raj Sharma from B. Riley.

Hi. I wanted to understand the consumer Q2 guidance in the fiscal 2023 guidance, there's a step change in performance. Can you talk about what's driving this growth? I'm sorry, can you hear me okay?

We can hear you. Can you hear me? It's Chris speaking.

Yes. Yes.

Hi, Raj. Thank you for joining the call. Welcome. We heard your question. I want to ensure I understood it correctly. You mentioned a significant change in the second half regarding the consumer business turnaround. I will ask Naeem to address that for you.

Hi, Raj. How are you doing? Hope all is well. So Raj, if you look at the Q1 results and what I've highlighted in my presentation, in September, we closed the consumer business with just under ZAR 2 million loss. A large part of that turnaround has come through from cost savings as well as increased revenue. If you look at the Q2 forecast that we provided of ZAR 14 million, around 60% of that turnaround will come through some of the cost savings that we've already executed on, and it's merely a timing of those cost savings coming through. About 40% of that will come through from our revenue uplift. As noted, as we deploy our ATMs, we expect higher revenues coming through from our ATMs, as well as our loan businesses. We anticipate a strong month in December, where we will have higher performance on the loan book. These two are the critical areas that will drive the Q2 turnaround for us. On a full-year basis, around 56% of the uplift will come from cost savings and around 44%-45% from additional revenue driven by the ATM rollouts in the retail segment and from the growth in the loan book.

Yes. Thank you. Can we talk about the consumer business a little? Your EPE account activations have gone up on a monthly basis. It seems like there's a 78,000 run rate. Do you anticipate this rate to sort of continue over the next year? Is it too early to talk about some long-term trends here? And are you still targeting the 45%, 50% sort of monthly activation rates? Could you comment on that, please?

Okay. Thanks Raj. I think the momentum we're seeing, the growth rates we're seeing on a net basis in terms of active accounts, so net of churn, when we look forward, we essentially assume that sort of momentum and growth rate will continue. That's how we plan and forecast within the business, looking at the current quarter and using that as the basis. That said, we've said this before, it still is early days for us. We still have a number of initiatives out there within our team to improve many of the tools of trade for our sales staff. Lincoln spoke about the rollout of the digital iPad onboarding device that makes life easier. A lot of time and effort is spent on training our staff, shifting our branches into the retailer. All these things are additive in terms of helping us grow the account base and should see benefits in the future. But ultimately, the way we've planned and forecast is based on what we're seeing at the moment.

If I could just add one more thing, Raj, we've also focused our staff much more on permanent grant recipients, because the other grants can be quite volatile. People can get a grant today and then they don't qualify the next month. The permanent grants provide more certainty, and we focus more on activating those accounts, which gives us a better runway and allows us to cross-sell other products as well.

One more question before we move on. The consumer revenue benefited from higher insurance. Is this, and you mentioned that growing the loan book has been challenging. Can you explain what is driving this and what is contributing to the increase in insurance?

Yes. If you go back to our earlier conversations, you would remember that we indicated that many of our staff could only sell one product and there was not enough product knowledge of all our products. Now getting all of our staff trained and accredited to sell all of our products has definitely helped growth in the insurance space. Getting our staff trained and ensuring they have the right products, coupled with increased visits from clients as we place our ATMs in the right locations, all contribute to the growth you are starting to see.

Thank you. We will now move to the next question from Chad, who may ask his question. Chad, you may need to unmute your line.

Hi, sorry about that. Can you hear me?

Yes, Judd. Thank you.

Sorry about that. Thank you for taking my call. Do you have an active stock buyback program in place? And if so, how large is that? How much has been used?

Judd, hi. It's Chris speaking. If you can hear me. So, we do have some capacity to buy back. I don't have the numbers to hand, but there is some capacity for buyback. I think your question is what is our view on buyback. At the moment, our focus has been on investing our funds into the business, reducing cash burn and losses, and getting this business to a cash-positive position. So, we're always looking at the market. We believe that buyback is a positive sign. However, given where we are at the moment, we are somewhat constrained on our cash resources and focused on investing in the business. That is not to say that we’re not watching it, and under the right circumstances we would consider it.

Okay, great. Thank you. Another quick question. A few months ago, you filed a shelf with the SEC. Are you insinuating you are contemplating equity financing? Any update on that? Do you foresee that being required?

The filing of that shelf was a routine renewal of an existing shelf. So, we have a shelf that facilitates equity issuance. Every three years, we are required to renew it, and it happened in early September. Just to be clear, at that time and right now, we did not have any plans or do not have any plans to raise equity to fund the business or the activities within our business as it currently stands. Naeem made some important points earlier around the restructuring of our existing debt facilities, which we’re pleased about. We have agreed on a term sheet; final approvals are pending. This will give us a lot of flexibility, runway, and sufficient means to deliver on the guidance and growth plans.

Okay, great. Thanks. One last quick question. How should we think about capital expenditures on an ongoing basis? What do you think a good run rate should be for modeling?

Sure. For Q1 2023, we spent approximately ZAR 4.5 million. Looking ahead, our capital expenditures will be focused solely on growth. This quarter's spending has predominantly focused on two items, cash recyclers for our ATMs and point-of-sale devices to support the growth in Kazang Pay business. I would predict a CapEx run rate of about ZAR 3 million to ZAR 3.5 million per quarter going forward. Any increase would be justified through the higher revenue growth we see in the merchant business.

Let me underline that for you, Judd. Our CapEx investment is growth driven. We invest in new devices and equipment to grow our customer base. As Naeem mentioned, we've given you a decent run rate that could be indicative of expected growth. If we see growth in excess of that, we would look to justify additional CapEx for new assets or equipment.

Thank you. I will now read a Q&A from the panel. First from Jarred Houston. Please provide more detail on the working capital absorption in the quarter.

In our working capital for the quarter, we've seen significant growth in our finance and merchant finance loans. These loans typically range between three to six months and are reported under the working capital line. This accounted for at least 70% of the increase in our working capital. Just to clarify this is funded through a financing facility specifically for growth, rather than from operating cash flows. Additionally, we’ve seen an uplift in our Kazang merchant business due to merchants funding their wallets for the weekend. There was a slight spike of about 20% in funding on the merchant's wallet that contributes to our working capital. The remainder is mainly driven by financing our loan book, which is revenue-driven and is a separate bucket of funding.

Thank you, Naeem. Next, we have a follow-up from Frank Geng.

Hi there. Thanks for taking my question. I just wanted to ask about the full year guidance. I noticed that relative to the September statement, the Consumer segment contribution has decreased a bit, whereas the merchant contribution has increased, while you reaffirmed the overall guidance. Can you walk us through the rationale for that shift?

Thank you, Frank. I'm going to ask Naeem again to pick up on that.

In September, we provided guidance based on our budget. After Q1, we've reassessed, and our merchant business has performed stronger than expected. We've identified challenges on the consumer side, notably certain delayed cost initiatives. Much of this has been bedded down and is merely a timing issue. We've been specifically focused on growing the loan book, which has taken longer than anticipated. As such, about 80% of our prior EBITDA guidance was from the merchant side, now adjusted to approximately 85%. The consumer side is slightly down to about 15% due to the forecast on loan book growth.

To frame it further, over 55% of the consumer business EBITDA guidance relates to the cost initiatives we've executed upon, and those actions are in play. The remaining 45% reflects our revenue growth, influenced by the loan book and other transactional activities.

Go ahead.

That's super helpful. Maybe just very quickly back on the working capital. Is there a way to think about a good normalized run rate level of working capital investment?

Excluding the finance merchant loan book growth, I would estimate our working capital investment could swing between ZAR 3 million on the negative side to about ZAR 5 million on the positive side. It really depends on the month-end timing, particularly considering weekend funding for your merchant side. From a disclosure perspective, we track the financing of the loan book separately as it contributes to revenue growth but does not come from our operating cash flow.

Got it. Very helpful. Thank you.

Great. Thank you. We will pause here to see if there are any additional questions. We have a follow-up from Raj.

Hi. If I could ask a broader question. Some people are struggling to understand why your business model isn't going to be taken over by a bank or a larger entity. Why would customers choose to use your card instead of just opting for a bank card?

We do get that question, and there are a few things to consider. First and foremost, our focus is very much on the lower LSMs income groups in South Africa and the merchants who serve those consumers. A large proportion of those people and the merchants in the informal sector are largely un-penetrated. Although 80% of people might have bank cards, they often treat them as post boxes, withdrawing their money in one go and operating in cash. We want to build offerings around our card technology, creating a presence with our consumers where they shop, partnering with retailers and building points of access convenient for our customer base. Our focus remains on the informal market and grant recipients. We believe we're providing simple, transparent products and building an ecosystem that encourages consumers to operate within our merchant's offerings. We've demonstrated this through the growth in transactions, which continues to verify our business model.

Does this not mean the bank is going to focus on this space, as they run out of growth? Do banks then start to target your market? I get that you've disrupted the market, but how much of a lead or a first-mover advantage do you have in the economy?

Thanks, Raj. I'll invite Steve to answer the question since he's been sitting quietly.

For starters, we have about 1.1 million accounts in the consumer space, whereas the total grant customer universe is around 12 million. A significant portion of those customers is served by the Post Office or the Post Bank. While there's an opportunity for the big four banks to enter this space, our presence is relatively small currently, and we have considerable room to grow. We are not dominant yet, and we have a compelling product offering with significant opportunities for increasing market share. From a merchant perspective, there's opportunity as well. We're making inroads in fintech and acquiring cash transactions, which are all growth areas for us.

Our strong distribution base and momentum give us a competitive advantage as we build out our market share. We've already initiated partnerships across the informal segment, with 60,000 devices penetrated. The potential for growth is significant as we add more customers and merchants.

Yeah. We are good on that. Thank you. I’ll take my question offline.

Thank you, Raj. That is all the time we have for questions. You are welcome to reach out to management if any questions remain unanswered. I would now like to turn the call over to Chris for any closing remarks.

Thank you, everyone for joining the call. Thank you for listening to our presentation today. A big thank you for the questions, which indicate the interest in our business. Our focus is on delivery. We are excited about where our business is at, and you've seen the guidance for the next quarter. It's all about delivering on that. We look forward to speaking to you all again in three months' time. On behalf of the team, thank you very much and goodbye.

Thank you.