CEC | FY2015 Conference Call transcript
ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2015
Operator
Good day, ladies and gentlemen, and welcome to the Copperbelt Energy Corporation Plc earnings presentation for the year ended 31 December 2015. All participants are currently in listen-only mode and if you should need assistance during the call please signal an operator by pressing star and then zero. Please note that the call is being recorded. I now wish to draw your attention to the usual forward-looking statements on slide three. The presentation takes about 20 minutes and will be followed by a Q&A session. Our presenters today will be Owen Silavwe, the Managing Director, and Mutale Mukuka, CEC’s Chief Financial Officer. I now hand the conference over to Owen. Please go ahead, sir.
Owen Silavwe
Good afternoon ladies and gentlemen. To start our presentation I will go straight away to slide six. Looking at the graph there you see that the macroeconomic indicators are quite depressed in 2015. And we mostly expect this to continue in 2016. Despite the short-term economic challenges, our business performed well in 2015 and I will be speaking to this fact shortly. And our expectation is that this will continue. As we all know, our business revenues are Dollar based on the basis of the commercial contracts that we’ve got with our customers, which customers also earn their living in Dollars. This, to a large extent, helps the business to mitigate the forex issues.
I now move to slide seven. On slide seven, I share with you a picture of our HSE. We continue to focus on achieving HSE excellence and we are quite proud of our performance in Zambia where we have been implementing, over the years, procedures and processes that are working very well. Our intention is to duplicate this in Nigeria and we have scored some improvements in this area, though a lot more remains to be done.
I now move to slide eight where I begin to discuss some of the details in terms of our performance in the Zambian market. Generation constraints that were occasioned by the drought and compounded by falling commodity prices resulted in lower sales volumes in terms of the power that we sell to the mines as well as in terms of the wheeling volumes. However, through strong power trading, we mitigated most of these issues; and at the end, you will see that we delivered a strong performance at CEC Plc. During the same period, I am happy to report that the performance improvements that we have been making at our telecommunications businesses have essentially delivered a turnaround of CEC Liquid Telecom where we were able to deliver a profit for the first time. And we look to the future expecting that the solid performance will continue, and the restructuring that we have done in terms of CEC Liquid Telecom’s acquiring 100% of what used to be called Realtime, now renamed Hai Telecoms, we think this should facilitate stronger growth going forward.
I now move to slide nine. You will note from slide nine that ZESCO was unable to provide all our power requirements and, therefore, in Q4 we had to seek alternative sources of power. And we did this through relatively more expensive imports from the region. And you will also note that we suffered a reduction in demand as a result of some of the factors that we faced in our business environment where our customers were facing falling copper prices, as well as the shortage of power that necessitated that our customers look to improving their efficiencies in terms of how they utilise the power that we supply to them, and also we noticed that some of our customers scaled down a little bit in terms of their operations.
I will now move to the Nigerian market. We basically see in terms of the macroeconomic factors that the Nigerian market in terms of performance reflects exactly the same picture that we saw in Zambia. This economic downturn in Nigeria has added an element of uncertainty to the environment in which we operate. However, I’m happy to report that in Q4 of 2015 the regulator approved a ten-year tariff plan and the increases that we saw as part of this tariff plan certainly do reflect some of the macroeconomic factors that we are showing in this slide. We believe our business model is still solid as it is supported by the approved tariff plan and the financial support that we anticipate to come through from the central bank of Nigeria that I will be talking about in the next slide.
I now move to slide 12. You will note that AEDC as a company is still making some losses and our Chief Financial Officer will be alluding to that fact. However, we are quite confident that the tariff plan that has been approved, whereas it doesn’t enable for recovery in the first two years we think that combined with the facility that is being provided by the Central Bank of Nigeria should mitigate these losses in the short to medium term. And in the long term we think once the cost-reflective tariffs are achieved the business should be able to be sustainable.
I move to slide 13 where we share with you some of the details of the tariff methodology that the regulator is following in Nigeria. You will see that the methodology is quite robust. It covers all the efficient costs associated with the business. This comprehensive tariff methodology as outlined in this slide was also adopted and used in the ten-year tariff plan that has been approved, and we believe this provides a solid framework for us to earn an acceptable long-term return on our investment in AEDC.
Moving to slide 14, I’ll share with you what we consider to be the key operational pillars for the success of our business at AEDC znd we believe so far we are on track in terms of delivering on each of these pillars. If you look at the ATC&C losses we have achieved some milestone in this area. However, we realise a lot more work needs to be done. The same can be said about the improvements that we make in the billing and systems as well as customer connection strategies that we continue to implement. We believe more needs to be done to improve on our collections, and this is an area where we continue to put a lot more effort.
I now move to slide 15. And you will notice that this slide basically speaks to the performance that I’ve alluded to at AEDC. It clearly shows improvements in the ATC&C losses, and it also highlights the need for us to continue working on this important aspect of the business as well as the required investments that we need to make in ICT and systems to continue to sustain the improvements that we’ve already begun to see thus far. In terms of the billing, again we will see that improvements are being made in that area. And as I said, we will continue our efforts in these critical areas of the business. At this stage I would like to hand you over to Mutale, our CFO, who is going to take us through the financial performance of the CEC Group.
Mutale Mukuka
Good afternoon listeners. Thank you for joining us. I will take you through the financial results of CEC Group starting with slide 17 which provides the Group’s long-term financial snapshot. On the top left provides the revenue, which has increased at the back of efficiency gains at AEDC. On the earnings side, the earnings were negatively impacted by, number one, the impairment to the value of the property, plant and equipment which was a one-off write-off as well as the change in policy in bad debt provision, which was implemented in January 2015. The policy now provides for more prudent accounting with respect to receivables. These two aspects negatively impacted on the Group’s earnings and the resultant earnings per share. On the bottom right side it highlights the need for the Group to continue to balance shareholder returns between dividends and future returns from today’s investments.
Moving on to slide 18, the Group’s cash operating expenses remained static as shown in this slide and the Group experienced an increase in gross profit at the back of primarily AEDC performance improvements during the year. Non-cash operating expenses and one-off impairments explained in the previous slide negatively impacted on the 2015 financial results.
Moving on to slide 19, which provides the Group’s financial position, an important aspect worth mentioning here is the overall interest-bearing debt which remained static over the two years as well as a significant increase in current liabilities which I will explain in the next few slides.
Slide 20 provides the debt profile as well as the investments which the Group has made in capital expenditure and project investments. A few scores during 2015 include the fact that we’ve managed to restructure the facilities at a company called KANN Utility to try and align the cash generation to the debt repayment profile. The restructuring was concluded in December 2015 and it provided for an additional principal moratorium of 15 months on the entire facility sourced from UBA with an outstanding balance of USD127 million. This increased the weighted average life of the debt portfolio from 7.2 years to 8.4 years. The Group continues to make investments in projects and prioritised capital expenditure and driving value for the shareholders.
Moving on to slide 21. Slide 21 provides an analysis of the net current liabilities as well as the composition of the Group loss. Of importance to note on this slide is the fact that the accounting losses and the net current liability position at year end raises a going concern question which has, to a larger extent, been reported in a lot of detail in our 2015 annual report. Suffice to say that the net current liability position is purely on account of a payable for deferred power purchases at AEDC. The expectation is that this liability or this payable will be settled by way of future tariff increases as well as the drawdown from the proceeds from the CBN funding, all of which should be closed out in the short to medium term. We are currently working towards drawdown of the CBN facility. On this basis, the directors are satisfied that the Group’s business model enables it to continue to operate as a going concern entity.
Slide 22 provides the independent CEC Plc long-term financial snapshot. Clearly, as provided by these statistic, over the long term CEC Plc has delivered consistent financial results as illustrated by the core measurement metrics in this slide. These include revenue, cash generation, EPS as well as the dividends paid over the period under review.
Slide 23 provides a more detailed analysis of the CEC Plc financial results. Of importance to note is the fact that despite the revenue being comparable between 2014 and 2015 results, the EBITDA increase was over 38%. And this was on account of the power trading revenues and FX gains realised during 2015. On the debt front, the Company had a debt balance of USD115 million during 2014. This reduced further just close to USD100 million despite the fact that there was an additional drawdown of USD15 million during the year under review.
The next two slides, slides 24 to 26, provide an abridged financial summary for CEC Liquid Telecom, Hai Telecommunications, NSP as well as additional financial insights for AEDC for information.
Moving on from slide 26 to slide 28, which provide a project pipeline for the Group, it highlights that our project pipeline reflects our intention to participate more actively in the power generation sector, and this includes the renewable space. Of importance is the fact that we’ll need and we want to continue to close out on the second interconnector which is an important project for the Group as it will reinforce our power trading strategy to the region.
Moving on to slide 30, which focusses on the strategy for the Group, our Zambia strategy is focussed on ensuring that we seek alternative power generation sources to partly help diversify our revenue base but also to try and meet our customer power requirements in view of the power generation shortages, which were experienced during 2015. In Nigeria the focus will purely be on pursuing stabilisation initiatives to ensure a robust base from which to realise the long term value which we believe is inherent in the power sector in that area. Closer to our shareholders we recognise the fact that our public market’s equity value is significantly undervalued and on account of that we will be looking at ways to unlock the value to align it to the business fundamentals valuation.
We also recognise that we are looking at a number of projects and capital expenditure initiatives. And at the back of this we would definitely be looking at capital raising initiatives to allow us fund our project pipeline as well as our prioritised capital expenditure programmes. With this said, I’ll hand over back to the moderator to allow us to go through the question session.
Operator
Ladies and gentlemen, at this time if you wish to ask a question please press star and then one on your touchtone phone. If you decide to withdraw your question please press star and then two to remove yourself from the queue. While you are queuing for questions I invite Mutale and Owen to consider questions submitted in advance of the call. Over to you, gentlemen.
Owen Silavwe
Thank you very much, ladies and gentlemen. We will start by taking the questions that have been submitted online. The first question that we’ve got is from Joshua Tembo from African Alliance. Thank you very much for the question. I will read out the question and then Mutale will provide the feedback to that question. The question reads as follows: for the past few years, CEC as a Group has reported a negative bottom line. This has been attributed to a number of factors such as the acquisition of AEDC and movements in forex. According to management expectations, (i) when do you expect the Group to start breaking even? That’s the first question. The second question is, is the capital injection in AEDC in line with the company’s five-year turnaround business plan? I now invite Mutale to answer that question.
Mutale Mukuka
Thank you, Owen. The first question which alludes to our timeline for breakeven for the Group in terms of profitability, as indicated in the presentation, which has been shared with you, we anticipate that we should break even in line with our business plan, and therefore, at the back of this we foresee that we should be breaking even in the next two to three years at Group level. This is purely aligned to the tariff profile which was approved by the regulator in Nigeria as well as the expected business improvements on that asset.
The second question refers to the capital injection at AEDC, on whether the capital injection is in line with the initial business plan. It is worth noting here that the original business plan did not provide for additional equity injection into this business. And two years down the line we have not provided additional equity funding into this asset. However, it was recognised even before and is still a fact that the business requires debt funding to roll out various programmes which will allow the business to operate efficiently. Most of the funding at this asset will essentially go to fund the various capital programmes such as meter rollout, automation of the systems and we anticipate that debt financing options should be closed out in the near term. At the moment we are exploring various debt financing options at the asset level. Thank you.
Owen Silavwe
Ladies and gentlemen, that looks like the only question that we have on record in terms of those questions submitted online. At this stage, we are ready to receive questions.
Operator
Thank you very much, sir. Ladies and gentlemen, just a reminder, if you wish to ask a question please press star and then one on your touchtone phone. We will pause a moment to see if we have any questions. We have a question from Melissa Cook from African Sunrise Partners. Please go ahead.
Melissa Cook
Thank you very much, and thank you to the management team for a very comprehensive presentation. My question is around the power structure in Nigeria. There has been quite a bit of back and forth as to the commitment of NERC and other regulators to support a proper cost-reflective tariff. I just wondered about your views on how successful this new tariff plan will be if there is another big upheaval in the currency and if gas prices start to rise. Will you really be able to pass those costs through the way the original cost-reflective tariff was set up? Thank you.
Owen Silavwe
Thank you so much, Melissa, for that question. Yes, we recognise that there have been a few shifts on the part of the regulator (the NERC) in Nigeria with respect to tariffs. But I think as a business operating in that sector, what gives us the comfort that these tariffs will stand the test of time is the fact that the expected increases are not as high as they previously were anticipated. What we now have is a gradual increase over a longer period of time. Now, we believe that this sort of profile helps the consumers to absorb the tariffs over a period of time. Now, we also recognise that with this type of structure it essentially means that the first 12 to 24 months a number of distribution assets including ours…
Thank you Melissa. I think I will go back to your question. You were asking what our views are with respect to the commitment of the NERC on the tariff profile that was approved for the various distribution assets. Our view is that we think the current framework that has been approved is definitely more practical and is something that can easily be absorbed by the consumers in that it provides for staged increases over a period of time. If you compare this to the previous framework which we had, which essentially guaranteed a cost-reflective tariff on day one, I think this framework definitely is something that the consumers will support. And we have also seen the government officials starting with the Vice President who is the Chairman of the overall Council on privatisation coming out supporting the current framework which is in place. So on the basis of that we are quite confident that this is something that will stand the test of time.
Melissa Cook
Thank you. If I could ask a follow-on. On a recent trip to Abuja, speaking with the Ministry of Power, I sense a more flexible attitude around embedded power and the ability of the transmission network to shift power more towards where it could really be paid for as opposed to having it more equal across the discos. Assuming gas is available, if you were able to get more power can you get paid for it, and are you exploring additional embedded power options in Abuja? Thank you.
Mutale Mukuka
Thanks Melissa. Yes, definitely embedded generation is a way to go for these sorts of assets. However, you agree with us that at the end of the day any type of generation that you introduce, whether it’s embedded or it’s off grid, it is all underpinned by the same tariff. So a larger extent, I think the tariffs and the operational improvements will have to be achieved at more or less the same time. At the moment, our focus is on making various improvements and reducing the ATC&C losses. And we anticipate that in the medium term, we will look at a few embedded generation sources which will help us to deliver more power to our consumers.
Melissa Cook
Okay. Thank you very much.
Operator
Thank you very much. Ladies and gentlemen, a reminder if you wish to ask a question, please press star and then one. Gentlemen, we have no questions in the queue at the moment. Do you have any further questions online?
Owen Silavwe
We’ve got another question online coming from Mulambo Hambayi from Stanbic Bank Zambia. And the question reads as follows: could we have more insight on what factors contribute to the loss in Hai? What is the expected performance going forward?
Mutale Mukuka
Thank you, Owen. Hai is a retail telecoms business and most of its suppliers or consumers of its services are essentially the retail end. Now, one of the key factors which Hai is exposed to is the fact that it buys most of if not all of its bandwidth in US Dollars; and at the moment, it’s not able to pass on all of that risk to the consumers. Whereas some consumers are able to absorb FX risk on these services, the retail consumers cannot easily absorb the FX risk. Now during the year 2015 what we saw in-country in Zambia was a sharp depreciation of the local currency of, I think, at some point it was over 50% depreciation. Now, that in itself introduced a new risk to the business. It meant that for all the supplies that Hai had not paid for yet, sitting on the balance sheet, all of a sudden that amount in Kwacha terms had more than doubled.
Secondly, it also meant that for the income that it was getting especially in the last half of the year, the income was for most services, it could not pass on the FX risk. Now, this is something that the business has learnt over the period and it doesn’t have the ability at the moment to easily pass on that risk to the consumers. However, post this event, there are a number of mechanisms that have been implemented at Hai which will allow it to be more responsive and to mitigate the FX going forward. The other point to note is that if you see in the business segmentation results, Hai is a very small business relative to the Group results. Whereas the overall revenue is under USD10 million we are looking at the Group revenue of over USD600 million. And the same applies for the balance sheet.
Operator
Thank you, sir. We do have a question on the conference call from Deckart Polni from Ashmore. Please go ahead.
Deckart Polni
Sorry if you’ve answered this before but I just got knocked off the call. Just a question on your non-cash charges to earnings. Impairment loss on property, plant and equipment, is that a one-time thing done and dusted or does that happen again next year? And also the bad debt provision, is that completely related to the AED Plc or is there other stuff in there as well? And is that repeatable or are you expecting to bring that down?
Mutale Mukuka
Thank you so much for that question. I’ll start with the bad debt provision. The bad debt provision is specific to AEDC. The expectation is that this policy will remain in place and we expect that a similar level of debt will probably be provided for in this year’s financial results. What I mean by similar is that we anticipate that we will apply a consistent policy. Thank you. I will take those questions again. The first question was linked to the bad debt provision, whether this debt was only provided at AEDC or it applies to other entities in the Group. I can confirm that this level of debt provision was solely at AEDC level. And in terms of the policy itself we anticipate that a consistent policy will be applied during the year 2016. This bad debt provision policy is directly linked to the collection strategy at AEDC; and at the moment, management have come up with a number of collection strategies which hopefully will help mitigate the level or quantum of bad debt being provided.
The second question was linked to the impairment loss which is provided in the financial statement. I can confirm that this is a one-off impairment loss. Typically, applying the IFRS rules we apply the fair valuation on our assets. And every so often, three to five years, we essentially have to undertake a fair valuation to confirm that the assets have been recognised using a fair value methodology. Now when this happens the expectation is that there will be adjustments whether positive or negative, and the differential will ideally be passed through the income statement if it is a loss or the other comprehensive income if it is a gain. And we anticipate that during the year 2016 we will not see a further impairment as we will only be undertaking an impairment review in the next three to five years.
Ashmore
To follow up on that on the bad debt provision, thanks for the clarity. When I look at page 15 on your slides, it is always averaging around 50%. Is there a management target that you want to get it under?
Owen Silavwe
Would you please just repeat your question?
Ashmore
Sure. On slide 15 the ATC&C losses looks like it is averaging 50% throughout the year. Is that a management target that you would want to get that below in 2016, the losses?
Mutale Mukuka
I think the slide you are referring to aggregates a combination of technical losses, commercial losses as well as collection losses. Now, if you add all the losses, yes you are right that the aggregate loss profile is just around 50% on average. Now, there are various initiatives and strategies that are being implemented for the different components of the losses, so on the technical loss, we are looking at introducing more insulation and reducing the lines to reduce the losses there. On the commercial losses, I think most of the gains have to do with the automation of the processes themselves to ensure that we have the capacity to bill most of the energy that we actually receive. Now to a larger extent, this will have to be done over a period of time because in certain instances we actually have to make a number of investments in things such as meter rollout. At the moment we have a combination of estimated meters, we also have prepaid and post-paid meters which we are looking at. So over the period we anticipate that the aggregate technical, commercial and collection losses should reduce from these levels and align to what we would deem to be an international utility loss profile which you would see. That essentially is aligned to the five-year strategy which we presented to the federal government of Nigeria.
Deckart Polni
Thank you very much.
Operator
Thank you. Ladies and gentlemen, a final reminder, if you have a question please press star and then one on your touchtone phone now. We will pause a moment to see if we have any further questions. Gentlemen, we have no further questions on the conference call. Do you have any closing comments?
Owen Silavwe
Ladies and gentlemen, we wish to thank you most sincerely for participating in this conference call. Thank you very much for all the questions that have been asked and we look forward to your participation in the next conference call with CEC management. Thank you very much.
Operator
Thank you very much, sir. Ladies and gentlemen, on behalf of Copperbelt Energy Corporation Plc that concludes this conference. Thank you for joining us and you may now disconnect your lines.
END OF TRANSCRIPT
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