Hello, everyone, and welcome to Lesaka’s Fiscal Second Quarter 2023 Earnings Webcast and Conference Call. My name is Rob Fink, and I'm part of the newly appointed IR team here in the U.S.
As we get started, I just wanted to remind everyone that this webcast is being recorded and the presentation can be accessed through the webcast link, as well as by dialing into the Zoom conference call dial-in numbers provided. Management will address any questions you may have at the end of the presentation.
To ask a question, you must be logged into the webcast and you can use the raise your hand button on the bottom of your screen to indicate your interest in participating in a Q&A session.
If you have joined via the Zoom teleconference line, you cannot ask a question live, but we would encourage you to reach out to the IR team if you have questions following the completion of this call.
The webcast link Zoom conference call dial-in numbers, as well as the earnings press release, and supplementary investor presentation are available on Lesaka’s Investor Relations website at ir.lesakatech.com. Additionally, Lesaka filed its Form 10-Q after the U.S.
market closed yesterday, Tuesday, February 7, 2023, which is also available on the Investor Relations website.
As a reminder, during this call, management will be making forward-looking statements, and I ask you to look at the cautionary language contained in Lesaka’s Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. Also, as a domestic filer in the United States, Lesaka reports result in U.S. dollars under U.S. GAAP.
However, it is important to note that the company's operational currency is South African Rand and as such management analyses their performance in South African Rand. In this presentation, we will discuss results in South African Rand, which is non-GAAP. Doing so assist investors understanding the underlying trends in the business.
As you know, the company's results can significantly be affected by currency fluctuations between the U.S. dollar and the South African Rand. Take a quick look at today's agenda.
Chris Meyer, Group CEO of Lesaka will begin today's call with performance highlights for the second quarter of fiscal year 2023 and review Lesaka’s progress against its key strategic objectives.
Steve Heilbron, CEO, Connect & Head of the Merchant Division will provide an update on the Merchant Division, which has produced just stellar set of results this quarter. Lincoln Mali, CEO of Lesaka, South Africa, will then provide an update on the Consumer Division, which has passed the key milestone this quarter.
And then Naeem Kola, Group CFO, will present an overview of Lesaka’s financial performance for the three months ended December 31, 2022. Chris will then conclude the results presentation with a discussion on Lesaka’s outlook before opening the call for Q&A, where we welcome any questions, you may have..
Firstly, shifting our points of presence to where our customers want to be, which is in retailers. Secondly, by improving the customer journey through digitization and streamlining our processes. And thirdly, by further enhancing our value proposition as we shift our product and pricing proposition to recognize and reward our most loyal customer base.
Lincoln will provide more detail on these focus areas later in our presentation. And, so the third area I would like to highlight is how our improved operating performance has also meant we are generating positive cash flow in the business and have been able to further optimize Lesaka’s capital structure.
Our banking partners have agreed to further extend the group's lending facilities on more favourable terms, increasing flexibility, adding further liquidity and providing greater capacity to fund growth.
For FY 2023 Q2, we saw ZAR60 million of cash generated from operations and we ended the quarter with ZAR722 million in unrestricted cash, compared to ZAR543 million a quarter ago.
We continue to focus on reducing our net debt to EBITDA ratio, in step with the growth of the business, and with our net debt to EBITDA ratio reducing to 3.3 times from 5.9 times in FY ‘23 Q1. And Naeem will address this in greater detail later in the presentation.
So given the momentum in our Merchant division and the strong foundation for growth in the Consumer division, we are reaffirming our guidance which we provided for FY ’23. We believe the growth drivers remain intact and we are confident the momentum will continue.
In September 2022, we provided further earnings guidance for the first time since the transformation and repositioning of Lesaka began. Our guidance was for group revenue to be in the range of ZAR2 billion to ZAR2.3 billion for FY ‘23 Q2. We are pleased to be able to report revenue of ZAR2.4 billion, which exceeds the upper end of our guidance.
Revenue growth was driven predominantly by the stellar performance in the Merchant division, primarily the Connect Group. We also guided for group adjusted EBITDA to be in the range of ZAR116 million to ZAR123 million for Q2 FY 2023.
And we have delivered ZAR130 million in group adjusted EBITDA for the quarter, which surpassed the upper end of the guidance provided by 6%. This represents a significant turnaround on the loss of ZAR84 million recorded in Q2 FY 2022.
Our performance specifically in the Consumer division and also across the group were supported by well controlled costs, including our group cost line. Lesaka is a full service fintech platform, serving the needs of consumers and merchants, and we are also facilitating the secular shift to digital that is currently taking place.
We are increasing our points of presence across our ecosystem in the form of branches, retailer pay points, ATMs, satellite kiosks and merchant devices, and these increased to more than 72,000 by quarter end.
Building momentum in our footprint raises our standing as a player of scale in the market and creates growth opportunities across our ecosystem. Our Q2 FY 2023 results demonstrate that we have set a solid foundation for growth in this market and we are very excited about this.
And with that, I will hand over to Steve to discuss the performance and opportunities in the Merchant division.
And as a leadership team, we are very pleased that Steve has extended his contract with Lesaka for the next three years, continuing in his current role as Head of the Merchant Division and also taking on additional responsibilities at a group level. Lesaka certainly stands to benefit from his continued involvement.
And Steve, over to you to take us to the Merchant division's performance. Thank you..
Kazang VAS throughput for the quarter of ZAR6.8 billion is up 40% year-on-year and up 17% for Q2 and Q1 for FY ’23. This is supported by solid growth in the onboarding of new merchants with circa 7,500 merchants being added in Q2, up 13% on Q1. The Kazang Merchant Estate closed Q2 at 64,500 merchants, this is up 47% year-on-year.
Our business development team continues to focus on adding to the bouquet of products, vended by our merchants from the e-wallets, as well as broadening the added value solutions targeted at solving for our merchant’s pain points.
In our card acquiring businesses, Card Connect and Kazang Pay throughput for the quarter of ZAR3.1 billion is, up 106% year-on-year and up 35% for Q2 on Q1 for FY ‘23. This performance is almost entirely attributable to the incredible growth achieved by our Kazang Pay solution.
This is evidence by the onboarding of circa 6,700 merchants in Q2, up 24% on Q1. The combined Card Connect and Kazang Pay Merchants Estate closed Q2 at 34,400 merchants versus up 129% year-on-year. The Cash Connect business throughput for the quarter of ZAR29.5 billion is up 9% year-on-year and up 7% for Q2 on Q1 for FY ‘23.
The Merchant Estate closed Q2 at circa 4,300 volts, this is up 11% year-on-year. As mentioned at our last results presentation, we have integrated the ATM business into Cash Connect. This has served to enhance our focus on the ATM business as a standalone ATM acquiring unit with a heightened focus on achieving scale and efficiencies.
We continue innovating in the cash recycling space with the imminent rollout of our new ATM recyclers. This is still in pilot phase with proof-of-concept testing in a selection of our merchant clients. Lincoln will touch on this a little more later. In our Merchant Credit businesses, Capital Connect and Kazang Pay Advance.
Credit dispersed for the quarter of ZAR262 million, is up 71% year-on-year. We have become a key provider of capital to the Vital MSME Merchant segment and have grown the receivable book from ZAR178 million to ZAR380 million, representing a 79% growth year-on-year.
We are experiencing great momentum in Kazang Pay Advance and Capital Connect evidenced by strong uptake from our merchants. We are excited about the opportunities in the Merchant division and are encouraged by our ability to scale our product sets within the respective target market.
The integration of Connect Group into Lesaka serves in broadening the Merchant divisions reach into the informal market, which thanks to benefit from enhanced inclusion from an underserved customer base. This broadens consumer access to a range of services, as well as supporting the journey to an increasingly digitized world.
As evidenced by the numbers presented, we continue to see strong demand and have achieved excellent growth in the onboarding of many new merchants, as well as increased usage of our solutions by our existing merchants for the quarter and year-to-date.
Both consumer and merchant clients benefit from a more secure, convenient and efficient ecosystem enabled by our proprietary technology. Supplier payments in our Kazang VAS business continue to grow and are becoming a larger composition of the Kazang VAS throughput.
This slide shows an example of our strategic partnership initiatives, which continue to drive growth. This proposition supports customer acquisition by providing more value for our merchants.
To illustrate the point, this image represents multiple points of value for our merchant customers and thus our business as a merchant can accept card payments from these customers at this time using Kazang Pay. The merchant can also sell a range of VAS products to their customers using the same device for cash or card tender.
And using the same platform, the merchant can settle stock purchases like VAT, Clover, Coca-Cola, SAB, and others directly from their e-wallet, reducing reliance on and the risk of holding onto cash for payments. It has scanning a unique supplier QR code when stock is delivered.
This offering is quick and efficient for merchant and allows them to pay suppliers at their own convenience, reducing the need to hold cash, lowering transport costs, as well as the time taken to execute supplier payments. Now to our EasyPay business, where as expected, we continue to see a decrease in VAS throughput for prepaid electricity.
This is due to the impact of load shedding and important to emphasize that it's not due to a loss of customers. VAS throughput for prepaid airtime grew 4% year-on-year. In our EasyPay bill payments business, we are connecting approximately 650 billers through payment infrastructure. Revenue earned is on our transaction fee basis.
Bill payment transaction volumes declined by 5%. We continue to reposition our EasyPay business by prioritizing commercial revenue streams in relation to existing and new clients. In [Indiscernible], our point-of-sale payment device business revenue generated from the sale of point-of-sale devices can be lumpy given the seasonality of bulk sales.
As disclosed in our Q1 results, we have reflected a 12-month rolling average as a more meaningful metric in tracking the performance of this business. The rolling average for Q2 FY ‘23 was 9,763 devices sold, an increase of over 100% on a year-on-year comparison. Rented devices have continued a steady growth trajectory at 9 % year-on-year.
In conclusion then, this has been a stellar period for the Merchant division. We are excited about the growth prospects and opportunities to derive more value from synergies across Lesaka, especially as we expand our footprint and deepen into the informal market.
We continue to focus on opportunities to deliver services that are of tangible value to our merchant base. We have an excellent merchant team in place with a proven track record, who continue executing against strategy and innovating in an underserved market. Lastly, but not least, thank you to all the people in the business for an incredible quarter.
I would like now to hand over to Lincoln, CEO of Southern Africa to discuss the performance of the Consumer division..
Thank you, Steven. It is so pleasing to see the growth and profitability coming out of the Merchant division and the progress we've made on the integration. Moving on to Consumer division, the last 18-months have been a very busy time for everyone. As we said, how to transform it, and return it to profitability and position for growth.
I'm extremely proud of the Lesaka team and specifically all the staff in our Consumer division in achieving our first EBITDA profitable quarter in years. It was a critical milestone in our journey as it removes the drain on financial and human resources and allows us to focus on growth.
We are pleased to report a ZAR10 million segment EBITDA profit for the Consumer division in quarter two, which was slightly under our guidance, but a vast improvement from a year ago when we reported a consumer segment EBITDA loss of ZAR67 million.
We marginally missed the guidance for Consumer segment EBITDA, due to a lower growth in our Easy Pay loan business that we had forecast. But we were encouraged by strong December growth, which has continued into January 2023. We do not need to change our guidance for the full-year and are confident we are on track to deliver.
Over the past four quarters, I've been speaking about the three levers we have used to retain the Consumer division to profitability, which are cost optimization, increasing our ARPU through cross-selling and growing active EPE account numbers. This result achieved was primarily through the first two levers.
Under Project Spring, we committed to annual cost savings of approximately ZAR350 million in the Consumer division. Through the rightsizing and rationalizing of our infrastructure and staff complementing the consumer business, we've achieved ZAR222 million already in the first half of 2023.
Our ARPU for our permanent client base has increased to ZAR74 from ZAR71 in quarter one and ZAR69 in quarter two of last year. We implemented our strategy to focus on product and efficient distribution channels, upgrading technology platforms, training staff, and we're still pulling hard on this lever.
As we enhance our cross-selling initiatives, and spend more time in front of our customers, we expect the upward ARPU trend to continue. The combined effect of the first two levers have got us to a point where we now have a strong and stable base from which we can grow our consumer division.
Lesaka is all about financial inclusion and offering affordable financial services to undersized consumers. Our products are specifically designed with permanent social grant recipients in mind, where we have an opportunity to build deeper relationships through lending and insurance. We do have products for people, who receive temporary grants.
But we don't offer the same breadth of service as permanent grant recipients. In the consumer market, approximately 19 million social grants are paid to 12 million grant recipients every month. Of which approximately 7 million grants are paid by Post Bank of South Africa.
These numbers exclude the temporary SRD grants, which were instituted during COVID, which have recently been extended to the end of 2024. Social grant form an integral part of South Africa's lives. And for many, it is the only source of income to support their families.
Approximately 90% of grant recipients in South Africa currently receive their grant and withdraw it all in one transaction and two to transact in cash. Further, only 20% of grant recipients have access to regulated insurance and lending products. Turning to the third lever, which is growing our active EPE account numbers.
We ended quarter two with 1.2 million active EPE bank account customers of which just over 1 million at our target permanent grant recipients. For the first time, we are separately reporting on our core permanent grant customer base from the more temporary SRD customer base.
As of the end of December 2022, we increased our overall customer base by 18%. Within this result, the permanent grant account base grew by 4% on a net basis, which maintained our market share.
Whilst this was slightly below what we had hoped for, it must be seen in the light of us going through a complete restructuring and cultural reset in the consumer division, particularly in the sales team and an entirely new national and provincial leadership. And a focus on cost optimization and cross-sell initiatives.
As a reminder, we continue to apply a rigorous approach in our measurement criteria for an active account. We only classify an account as active, if we have charged a monthly account fee during that specific month. We have identified actions and strategies to now leverage off our firm base and improve our EPE growth.
These include, firstly, enhanced distribution model where we're moving away from branches and now have stuffed kiosks and ATMs and retailers, where our customer base has more convenient access and longer trading hours. Secondly, marketing initiatives and incentives encouraging account openings and switching to Easy Pay.
Thirdly, easing the friction in the onboarding of new clients with technology interventions, opposed incurring travel costs and specifically having to be in a branch to open an account. I mentioned in quarter one of our 2023 financial year, that Easy Pay loans, our lending product had grown at a slower rate than expected.
I'm pleased that we have seen a recovery in this quarter with 18% growth in the number of loans originated. In terms of our book size, we have grown 13% year-on-year. We're encouraged by the positive results coming through already and continued momentum on loan growth in January 2023.
Again, it is pleasing to see our loss ratio at less than 4% per year. Our customers place a high value in these loans to get them through difficult months and having the facility available to them leads to a good repayment experience.
Our Easy Pay insurance product continued to outperform our expectations in quarter two, growing 15% to approximately 294,000 active insurance policies. It is encouraging that this new business is of good quality with a high premium collection rate of approximately 98% being maintained.
Our move to more retail focused distribution strategy is paying off. Our presence in the retail stores where our customer base shops has provided Easy Pay much more visibility and convenience for our customers with longer trading hours and easy access to our ATMs.
We've seen an 18% increase in transactions per ATM, compared to three months ago, with a strong increase in other bank customers also using our ATM network now. We are continuing to implement our retail focused distribution strategy and our initiatives we're exploring with Kazang will further accelerate and expand our retail presence.
We see great potential in the mutual benefits for retailers and our consumers in terms of convenience and buying power for our own ecosystem. We continue to develop our strong relationship with SASSA through proactive engagement at a local, provincial and national level.
We've also made good progress on building relationships with our various key stakeholders, including Grindrod Bank and representative from its new owner, African Bank, who acquired 100% of Grindrod in May 2022.
As highlighted by Chris earlier, the consumer division has been fundamentally transformed, and we've built a strong and stable base to grow our customer base and deepen our product offering.
We’re well positioned for growth and in doing so continue to focus on establishing point of presence for our customers that are convenient and cost effective to access.
We also strive to further improve the customer journey through digitization and further enhancing our value proposition, including plans that will reward and grow our loyal customer base. Thank you, Naeem will now take you through our financial performance in more detail..
namely executive sign on, Connect Group acquisition awards and long-term incentive plans. The long-term incentive of plane awards are indicative of the continued run rate cost, whereas review the sign on awards in the Connect acquisition awards as largely one-off in nature incurred at the beginning of the transformation journey.
The increase in stock-based compensation costs between fiscal 2022 and 2023 is mainly due to fiscal ‘22 only, includes part year charge whereas fiscal 2023 includes a full-year charge, as well as a ZAR23 million one-off for senior executive to secure a long-term commitment.
We estimate that in the medium term, once the effect of sign-ons and the Connect acquisition amortized that annual stock-based compensation charges should be in the range of ZAR60 million to ZAR70 million per annum.
This would imply that the stock-based compensation charge should trend towards a single-digit percent of group adjusted EBITDA as benchmark to market norms. Overall, Q2 20 23 is evident of the efforts we implemented in fiscal 2022 and we are now reaping the positive results.
Our continued focus on the strategic initiatives is progressing well and we are optimistic about delivering on positive performance for the remainder of the year. I would now like to hand over back to Chris, who will address the group's outlook..
Turning to the outlook for Lesaka. We wanted to provide you with guidance on the near-term performance of the Group. And although we report results in U.S. dollars under U.S. GAAP, our operational currency is in South African rand and we analyze our performance in South African rand. And as such, we believe that providing guidance in rand is more useful.
I'm very pleased to reaffirm our prior guidance provided for financial year 2023. Our outlook for group revenue is between ZAR8.7 billion and ZAR9.3 billion for the 12-months ending 30 June 2023. Merchant segment adjusted EBITDA between ZAR550 million and ZAR565 million. Consumer segment adjusted EBITDA between ZAR95 million and ZAR110 million.
And adjusted for group costs, which we expect to be between ZAR165 million and ZAR150 million. This implies an adjusted group EBITDA of between ZAR480 million and ZAR525 million for FY 2023. For Q3 FY ‘23, our outlook for group revenue is between ZAR2.5 billion and ZAR2.8 billion for the three months ending March 31, 2023.
And we expect Merchant segment adjusted EBITDA between ZAR140 million and ZAR145 million. Consumer segment adjusted EBITDA between ZAR40 million and ZAR45 million and group costs between ZAR45 million and ZAR40 million for Q3 FY 2023, which taken together means group adjusted EBITDA of between ZAR135 million and ZAR150 million for Q3 FY 2023.
It is important to note that the Merchant segment adjusted EBITDA of ZAR160 million for FY 2023 Q2 included ZAR22.1 million relating to point-of-sale devices in our NUETS business. And this is not forecasted to repeat in FY ‘23, Q3 or Q4 given the lumpy nature of bulk sales in this business.
And in addition, seasonal trends indicate that our Q2 is usually a slightly stronger quarter, due to higher -than-average transaction volumes in December. Looking forward, we expect the Connect Group to continue to maintain its strong growth trajectory in line with historical trends.
And so taken together, we believe that should current trends continue, there is potential upside. And we will reevaluate this position in a few months’ time when we report Lesaka’s Q3 2023 results. Before I conclude, I want to give special thanks to Alex Smith, the Group's Chief Accounting Officer.
In January 2023, we announced that Alex would be leaving Lesaka to pursue other opportunities outside the group. The past 18-months have been a time of significant transformation for Lesaka and Alex has played a key role in Lesaka’s growth journey and its transition from Net 1 to Lesaka.
Prior to my appointment, Alex was Interim Group CEO for every year and served as the Group Chief Financial Officer for more than four years. And I would like to thank Alex for his valuable contribution to the company. So in conclusion, this past quarter represents a real milestone for Lesaka.
Our results be a testament to the progress made since the transformation began. And we will continue building on the momentum created across the business to drive growth, including by realizing the benefits and synergies of our unique dual sided ecosystem.
We believe there is tremendous scope for both our merchant and consumer divisions to grow and scale in their respective target markets in their own right, supported by the self -reinforcing business model we are building as part of Lesaka’s unique value proposition. And with that, we’d like to open up the Q&A session and take your questions.
Thank you..
Thanks, Chris. The Q&A session will now begin. [Operator Instructions] We're going to take a minute to build the queue. And while we do, we're going to read two questions that were submitted by [Indiscernible] of Anchor Securities.
Chris, Spin wants to know what the impact of load shedding has been on the business and specifically in the Merchant division?.
[Technical Difficulty].
Yes, sure. Thanks, Chris. I think the reality is we delivered a very strong set of results despite the load shedding. So the question really is, how much worse could it actually get? Now, we believe as we move into Q3, we have a strong momentum and our business has been stress tested with, you know, -- from Stage 3 to Stage 6 and at times even Stage 8.
So the numbers speak for themselves..
Thanks, Steve. [Technical Difficulty].
Great. Spin’s second question is about guidance. And he wants to know given the strong performance and guidance beat in the second quarter, why your outlook is being reaffirmed and not raised.
Chris, can you unpack your thoughts on the full-year outlook and overview your expectations for growth in the second half of the fiscal year?.
Sure. So we decided to leave our guidance unchanged. As I explained, we exceeded guidance in the Merchant business last quarter. The Merchant business grew by 19%. And I think there are two things within those numbers to think about.
One is, we saw a large bulk order in our NUETS business, plus the bulk device business, which had around a ZAR22 million net impact on EBITDA. That's a lumpy business, a lumpy order cycle, when you look at it quarter-on-quarter, you need to look at it over a while longer period. So sort of taking that out of the picture firstly is important.
And secondly, December, and for us is a big math. We see increased volumes across the business seasonally as an expectation. So again, we want to effect in any type of thinking. So we believe that the -- as I've said, the growth drivers that underpin our business remain intact.
And most importantly, we believe that the growth trajectory that we've seen, particularly within the Connect Group, and we expect that to continue into the future. So if -- we'll look at it again in a few months’ time when we present Q3.
And if necessary, if the conditions and the momentum are continuing in the way they are, we might look at it at that point in terms of revising that. But for now, we wish to remain and reaffirm..
Great. Thank you. And Chris, just so you know, there may be a little issue with your mic, so I'm going to give tech a minute to address it. And while I do, we did have a question from David Garrity of GCA.
How does Lesaka recognize revenue from hardware terminal sales? Contemporaneously or over an expected period of use?.
Hope you can hear me. And hopefully my previous answer came through, if you need me to repeat it or that I'm happy to. But just picking up on the question regarding revenue recognition on that, I'll pass it to -- I’ll ask Naeem and maybe just do that. Is that's okay..
Yes. Thanks, Chris. So just to understand the question, if we are referring to the hardware terminal sales that we sell to our NUETS business, these are sales that we do to customers and ownership of these terminals are taken over by the customer.
So we recognize our revenue on the time of delivery, and the way that is treated from an accounting perspective is that on the time of sale, because the risk is transferred and we do not have any underlying ownership.
We recognize the revenue as a gross number in our income statement and the related inventory that is sold is then recognized on our cost of sales..
Thanks, Naeem..
Okay, great. Our next question is a live question from Frank Geng. Frank, your line is going to be unmuted..
Hi, guys. Thanks again and congrats on the quarter. Just a few questions from me. They're somewhat related. You know, maybe first Naeem or Lincoln to you.
Could you provide some rough commentary on how much working capital before the loan book funding, you'd expect to invest per year and how much that's to maintain the business versus growing it? Second, you know, I guess, how should we think about usage of cash going forwards? And third, you know, Naeem now that you've extended the lending facilities, are there any other levers to continue to optimize capital structure, reduce debt repayments, reduce interest expense? And I guess what's the new maturity on the debt? Thanks..
Thanks, Frank. So I'm going to put those questions to Naeem to respond to and just maybe help you that he can deal with it. I think the first question was around our working capital requirements in the business. And our requirements to invest in working for growth..
Yes. So look, I think, Frank, from a working capital perspective, it's quite important to understand that the majority of our working capital is really in our VES and the Card Acquiring business. If you look at our cash management business, as well as the business related to the consumer.
The working capital requirements are not that significant, because we receive the funds from the customer upfront. So those are held on a wallet.
If I look at the current facilities, you will see as well that as we highlighted between quarters, we can have quite a swing in terms of the working capital requirements in the Kazang business depending on when the month end or when the quarter end.
And that is managed through adequate facilities that we have in the moment in terms of cash, as well as an overdraft facility. We do also take advantage of opportunities where we can earn higher margins, specifically on our value-added services business in terms of airtime and electricity.
And in those circumstances, we would fund upfront, and that's then specifically through cash reserve. So I think we do those only in circumstances where we can earn a higher margin and it's a cost-effective way of increasing the margin in the business.
In terms of going forward, we do not envisage a significant increase in working capital requirements. We are experiencing quite a significant growth in our Card Acquiring business. But the capital requirements in terms of working capital are well managed and within our facilities that we would be able to do in our overdraft.
So I think that our longer-term view in terms of working capital is that we don't believe there is a significant increase anticipated..
Thanks, Naeem. I think the question on debt and the change to our facilities and we’ll leave this [Technical Difficulty]..
Yes, sure. Look, I think for us, firstly, we’re super excited about the fact that we've been able to renegotiate a position with our bankers. Number one, over the last six to nine months, it's very indicative of the confidence that the bank is already seeing in the performance.
And the extension of the facility to three years taking us up to 31st December 2025 gives us the ability to really focus on making the right, kind of, decisions in terms of capital management. And in addition to that the potential upsizing of that facility that will help us fund our loan book growth mainly on the consumer side of the business.
So that is quite a significant change for us. In terms of levers, as we've highlighted in a number of our presentations, the focus for us in the business is really the consumer and the merchant business in South Africa. We have the non-core investments such as MobiKwik and [Indiscernible].
And we will be looking at means and ways to exit those positions in a responsible way. And that would result in quite a significant cash inflow for us to manage. In addition to that, I think we would be also looking at the right time in the market in terms of adjusting the structure of our capital position..
Okay, thanks..
Great. The next question is coming in from Raj Sharma of B. Riley..
Yes. Hi, thank you for taking my question. I wanted to ask maybe, perhaps, directed towards Lincoln.
If you can talk a little bit about the consumer division, you know, talk about the lower transaction, the ATM transaction fees and the higher insurance fees? And also, what's happening in the ARPU? And how you are able to push it up? And what should we see that going forward in terms of the traction in the conversion of the accounts?.
First of all, thank you so much. I think firstly, I want to say how pleased we are with the turnaround of the consumer business. I think that we've spoken over the last few months about the work we've done to get our staff to understand the importance of cross-selling. And all of that work is starting to come through.
You're starting to see more of our clients taking our insurance business and our sort of insurance products and our lending products. Those two things how to drive our ARPU. As long as we've got quality clients and those clients are able to take more of our lending products, and our insurance products, we want to see that ARPU increasing.
And we think that if we maintain that, you'll start to see some upside on that ARPU even further. So we're quite confident on the trajectory of our ARPU as we improve our business, as we improve our cross-sell to our existing clients. So we've been quite pleased with how our customers have responded on the lending side and the insurance side..
And on the ATM transaction fees, was that just primarily because of reducing your infrastructure..
So just to clarify -- can you just clarify the question specifically on ATMs? Are you asking about….
Yes. You know, on the ATM transaction fees, they were lower. And was that because of the reduction in the infrastructure? I know that the ATMs have become far more efficient.
And productive?.
Yes. So what I like -- let me comment on just a macro point around it, ATMs in the business and then we can talk about some of the macro movements quarter-on-quarter as well. I think that according to your highlights is we've taken the 18 states down from around 1,500 devices, you know, just over year ago to around 880 at the moment.
And approximately 60% of those are now in retailers. Previously, all of them were in our branches. And what we are seeing is a significant increase in volumes on those ATMs what we would call, [Indiscernible] transactions, which means other banks, the clients of other banks using our ATM. So you know, with the and state that it's essentially hard.
We are seeing and we're protecting our volumes, and in fact growing [Indiscernible] and then that really is coming from a much more efficient, you know, per ATM activity than what we saw previously.
So I think very happy with the, you know, with the strategy that we -- that's playing out on the ATMs are in terms of driving productivity and super good device..
Yes. Thank you. And then just a question on Connect.
Just wanted to understand how was it better than initial expectations when Connect was acquired? Has it -- has Connect surprised you in any particular segment, and it surprised you positively?.
So, you know, I think on the whole -- the Connect Group, you know, for us has delivered, let's say exactly what was laid out in terms of the vision and the opportunity for the business. And as seamlessly integrating to Lesaka. So, you know, we believe it's, you know, a successful transaction in every way.
You know, areas where it's outperformed would be, for example, you know, in the Card Acquiring in the Card Payment space, we had forecast around volumes and growth in that business and have been exceeded. And that's positive upside. So that's been a big positive. We've seen growth in the -- in our merchant numbers ahead of our business cases.
So in terms of rollouts of VAS devices, that has been ahead of our original expectations. So it's usually positive. But I think what it's saying to us is it's just underlying -- underlining, rather, you know, the market opportunity, particularly in the informal space.
And we've spoken about the fact that 1.4 million informal merchants out there as a target addressable market, we've got something like, you know, 65,000 devices. We've spoken about the fact that 4% of their rebates of merchants in the informal space can accept card payments. You know, we've seen our volumes double.
Our current pipeline is doubled over the last six months in the informal space. So those themes are, you know, are well understood or have been identified, and I think of the secular themes that drive the Connect Group. Maybe the pace of growth has been a little bit more than we built into our original plans..
Got it. Got it. Thank you so much for taking my questions. I'll take it offline. Thanks..
Great. Our next question were submitted by Judge [Indiscernible] of Cloud Penny Partners. His first question is for Steve. Steve, you have a stellar growth rate in the Merchant division, even quarter-on-quarter.
And we expect this type of momentum on a quarterly basis going forward?.
So maybe just circle back quickly to, you know, the earlier question raised around load shedding and maybe, you know, what I want to remind everybody about is retailers in this country, particularly in the MSME sector and more broadly, if you look at the last three years, we've had COVID, we've had in the Kaizen area. We had significant flooding.
We've had riots. And of course, now we've got this perpetual load shedding. So the business -- the merchants have been stress tested. I think one of the things that we'll have to watch in -- as we go into Q3 is the perpetual nature of this has some form of exhaustive effect on the retail merchant.
So we produced a very good set of results as you can see in Q2. Our momentum going into Q3, we are through January, we have very strong momentum and that has continued. But perhaps some of that slowdown, which we may see, in some of those areas relating to load shedding are offset by some of the innovation that sits within the business.
And Chris touched on it already. So as I've mentioned before, Kazang Pay was a spin-off of Kazang. And our Kazang Pay advance is a spin-off of Kazang Pay.
And some of these ideas and businesses, which we were pregnant with, including our supplier payments businesses, and our capital connect business are starting now to see much stronger momentum than we initially anticipated. So I think whilst we -- so I think the answer is we have a well-balanced offering.
We are solving and having a lot of fun solving for the pain points of our merchants. And the business is underpinned with very good momentum. So I think Chris, we've given guidance for Q3. And I think we're relatively confident that, that is -- it's solid and if anything, probably -- potentially a little bit conservative..
Great. Another question from Judd and this is for Lincoln. Congrats returning the consumer division to profitability.
How should we look at the growth outlook of the consumer division over the medium term? Would you say that you now have fixed the cost structure in place to drive operating leverage from here? How do you think about the long-term stable margins in the consumer business?.
I think that if you look at the guidance that Chris has given, we can now see that this business is stable. That this business now is planned for growth and that all the cost initiatives that we've taken we will now reap those benefits.
And then all of the work we've done in preparing our clients for new propositions, we will now be able to kind of build on that. And I think that in terms of the guidance, you now will have a business that is growing profitably quarter-on-quarter to be in line with the guidance.
So we've done a lot on the cost in terms of the bulk of what we need to do. But obviously, there are still some tweaks that we need to do.
But on the own, I think that those phases of firefighting are gone, we now can start to think about what are the innovative things that we can do with our clients, what value propositions can offer them and what can we do to compete with other players in the market. So that's how we look at the future from the consumer division..
Well, great. Thanks.
We're running short on time, but we do have three more questions that I'd like run through before we close-up, has there been a notable increase in SASSA beneficiaries after the major glitches experienced with Post Bank since November 2022? How do you guys -- have you guys’ plan set up aggressive acquisition of customers currently served by Post Bank?.
Yes. We have great plans around that. We are actively encouraging customers to join us. We are also making sure that we have more presence in terms of marketing. Telling people what we offer and what alternative we have.
But what we're trying to think about going forward is not just the mistakes of the Post Bank or challenges that they have, but to work on our value proposition and make sure that our value proposition is quite competitive and enticing for customers to join us. And those are some of the things that we're working on.
What can we put in the table that makes customers excited to join us regardless of the challenges that SASSA and them are facing..
Great. Thank you. This next question is for Steve. Steve, there are a couple of players in the merchant credit provision space such as retail capital, habitat, who have been in the space longer.
Have large data set provided by Yoko and others or large balance sheets? How do you plan to differentiate yourselves from them?.
So let me at the outset, let me say I'm just so impressed with some of our young folk in the business who just perpetually innovate and bring good solutions to the market. So if we look at the Capital Connect business, I mean, the differentiator in that space is hassle free credit.
Between the time of applying and it's all preloaded, our customers can have credit approved and money in their account within a few minutes. So I think that in itself is a major differentiator. Remember, we are well positioned in that business. We process close to ZAR10 million a month through our vaulting infrastructure.
And we process close to -- if you look at Q2, well Q2 and in fact December, we did about ZAR1.3 -- just under ZAR1.3 billion in our card processing business. All of that data is attached to an algorithm, which allows us to -- allow our retailers to take advantage of an opportunity when it knocks.
Now, there's an old saying opportunity doesn't knock at whispers. And if you're an entrepreneur, you've got to take advantage of it immediately. So the intrinsic advantage we have is really the speed and our ability to turn that round within minutes.
So the conventional approach, which is I need management accounts, audited accounts, a credit committee and will revert within a few days is not a model that really is appropriate for the type of retailers that we're dealing with.
And then, of course, on the back of that, we continue to innovate in terms of added-value beyond simply the speed to market..
Well, great. And guys, we're at our last question. And this is another question for David Garrity, and it's for Chris.
Chris, do you have an authorization to repurchase shares in the market -- in the open market? If so, what is the size of the repurchase facility? What are your plans there to exercise the authorization if any?.
Thank you for the question. Yes, we do have a capacity or a facility rather to repurchase shares in the market. And I'll confirm the exact size for you or flatten out of the numbers with me here. But yes, the business does have that authority or ability to repurchase.
I think the broader question around share buybacks, for us, as I've said before, our focus has been around stabilizing the business. It's been about -- on the consumer side and it's been about integrating the Connect acquisition and focusing on delivering the growth journey that you've been hearing about here today.
So as our first quarter have actually generating cash in the business at an operational level, we feel we've turned a real milestone. And our focus continues to be to reduce that debt to EBITDA ratio on a net debt basis. As we said, a net debt to EBITDA, we're now at 3.3 times. We'd like to see that come down a little bit more.
So all of these things are sort of immediate focus areas around cash and our resources in the business. And we believe we are producing and delivering a business that has excellent returns to shareholders, return on your capital. And we'd hope to start to see that coming through and continue to coming through in the quarters ahead.
So yes, we'll monitor the situation. We'll continue to focus on where we are and we're very alive to this question, we get it quite a lot..
Well, Chris, everyone, thank you for your time. Thank you everybody for joining us today. We've run out of time. That concludes the call. I would encourage any investors who didn't get a chance to ask a question or have more questions to reach out to the IR team, we are here 24/7. Thank you..