Good day, ladies and gentlemen, and welcome to the Net 1 Second Quarter 2019 Earnings Conference. [Operator Instructions]. Please note that this call is being recorded. I would now like to turn the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Chris. Welcome to our Second Quarter 2019 Earnings Call. With me on the call today is our CEO, Herman Kotzé; and our CFO, Alex Smith. Our press release and a supplementary financial presentation are available on our Investor Relations website, ir.net1.com. As a reminder, during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our press release regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures, and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African Rand, which is a non-GAAP measure. We analyze our results of operations in our press release in Rand to assist investors in understanding the underlying trends of our business. As you know, the company's results can be significantly affected by currency fluctuations between the U.S. dollar and the South African Rand. We will have a question-and-answer session following our prepared remarks. So with that, let me turn the call over to Herman. Herman Kotzé: Thank you, Dhruv, and good day to everybody else. As you are all aware, this was a very difficult quarter for our company, and the transition out of our SASSA contract has been more challenging than anticipated, given the auto migration of our EPE account holders. Alex will go over our financial results in more detail shortly, but our operating loss for the quarter was predominantly attributable to our rural South African businesses. Our remaining transaction-related businesses continue to operate in line with our expectations and provide a substantial source of EBITDA to the group. The annualized EBITDA contribution of these businesses based on Q2 2019 results was approximately…

Thank you, Herman, and good day to everybody. I will discuss the key results and trends within our operating segments for the second quarter of 2019 compared to a year ago. Turning to our results. For Q2 of 2019, our average Rand dollar exchange rate was ZAR 14.32 compared to ZAR 13.67 a year ago, which adversely impacted our U.S. dollar-based results by approximately 5%. The Rand has strengthened slightly since quarter-end and is currently trading around ZAR 13.60 to the dollar. Revenue of $97 million in Q2 2019 was down 35% year-over-year in dollars and down 31% in constant currency. Our fundamental earnings per share declined to a loss of $0.88 impacted predominantly by the losses incurred by our South African financial inclusion business as a result of the forced migration of SASSA grant recipients from EPE cards to SASSA cards. Fundamental EPS includes $0.74 per share of noncash adjustments, including a $0.41 allowance for doubtful loans receivable, a $0.28 Cell C fair value loss adjustment and a $0.05 Cedar Cellular note impairment loss. By segment, South African transaction processing reported revenue of $22 million in Q2 2019, down 66% compared with Q2 2018 on a constant-currency basis. The decrease was primarily due to the termination of the SASSA contract and to a lesser extent to the migration from EPE as mentioned above. Our revenue and operating income was also adversely impacted by the significant reduction in the number of SASSA grant recipients with SASSA branded Grindrod cards linked to Grindrod bank accounts as the contract ended in the end of Q1 2019 as well as the lower EPE numbers. These decreases in revenue and operating income were partially offset by higher transaction revenue as a result of increased usage of our ATMs as well as higher volumes in…

[Operator Instructions]. Our first question is from Allen Klee from Maxim Group.

So my first question is, if you could help us simplify the analysis of what your earnings or losses would have been if you excluded the challenged South African businesses? And how much of the losses from the, say, financial inclusion business kind of and you think about, what the -- you mentioned that you could have a positive operating margin in that business, maybe starting next year, but what type of margin are we talking about?

Allen, I think, in terms of the impact of the South African rural and financial inclusion businesses on the results are roundabout $37 million of operating loss came out of that segment or out of those business units in the quarter. So you can see a very substantial portion of the loss is really coming from those businesses. And that's really the -- our Moneyline business, our Smart Life business and the mobile ATM infrastructure and the various cost bases related to it. We think that for the third quarter, our overall sort of group EBITDA number should be in the region of a loss of about $5 million based on a normal -- on the current run rate and the current account -- customer base, particularly in the EPE space. And that would, obviously, exclude any once-off items, which will occur in the third quarter as we go through the various cost-cutting exercises.

Okay. And then another kind of bigger picture question. You have a significant value in your investments and KSNET in my view. But the market's not giving you credit for them, and it seems that management will need to take actions to unlock this value in order to likely get credit. So my question is, how does the management think about this? Herman Kotzé: Allen, there are obviously various assets within the portfolio and they -- of different sizes and in different geographies. The way we look at them is individually. We understand that some of these individual portfolio assets have a longer path to liquidity potentially than others, and so we evaluate and look at each of these on an ongoing basis. And so I think it's important to stress that clearly, the KSNET is by far the largest contributor to the group earnings, not necessarily part of the investment portfolio, but I think, a lot of our shareholders look at KSNET as a bit of an outsider in terms of the overall group structure, and as I've said, it fits very nicely into our transaction processing portfolio, but we are busy with an ongoing exercise and where appropriate, we do bring in expertise and help from the relevant management advisers and/or banks to help us understand what the potential opportunities are out there for the businesses. So it's an ongoing process. It's something that we are very aware of, and obviously, we will keep our shareholders updated as to any developments as and when they happen.

The next question is from Scott Buck from B. Riley FBR.

I'm curious, are you continuing to issue new loans within the microlending book? Herman Kotzé: Scott, yes, we are. So there is a different methodology that we actually adopted in as far ago as February last year. So on a very selected basis, we provide loans to people that have obviously got EPE accounts. Those accounts need to be active for at least a minimum period of three months, and we, obviously, do have comprehensive affordability assessment on them. The extent of -- just to give you an idea of the application versus actual disbursement ratio is that we reject more than 60% of all the applications that we receive. And I think, the indication of the quality of the book that remains is such that the first strike collection rate on the booking in -- for the month of February was in excess of 98%. So short answer, yes.

Okay. That's helpful. And then I know you had some trouble growing EPE accounts organically this quarter. What's the thought process going forward on what the marketing efforts are going to be to try to continue to grow some of those account numbers organically? Herman Kotzé: Yes. So the account numbers have been fairly static over the last three months, and we have registered some nominal growth in the uptake rate. The big plan for the next 3 to 6 months is to focus on the distribution channel that we have now unlocked through our relationship with Finbond. So over the last quarter, we have also been able to obtain the required certifications for Finbond to become an issuer of our UEPS/EMV cards. And so with that behind us, we now have access to Finbond's 450-odd branches in addition to our own 250-odd branches, we have of approximately sort of 670, 680-odd locations across South Africa to really market the EPE offering. We hope to add additional products to this offering specifically in the field of low-cost telephony and data access, which we believe, is still an important consideration for our customer base. But there will be a lot of focus and effort, not only, obviously, from ourselves, but also in collaboration with Finbond to grow this customer base going forward.

The next question is from Joshua Raisen from Edell Street Asset Management [ph].

Given the changes to bring the EPE base back to breakeven, do you have a clear idea how many current EPE customers fall outside of what will be the new geographical operating area? Herman Kotzé: None. So we will still able to service all of the current EPE customer base. The rightsizing that we are doing is of such a nature that we are not at all closing down specific geographies. It is a factor of rightsizing the individual teams within each of those areas, but making sure that we retain a core team that is capable of servicing those EPE cardholders. Our fixed ATM base obviously remains in place, so there is over 1,100 of those. We hope to grow that quite significantly over the next 12 months by another 500 or so. It is really only on the mobile ATM base, which is by far the most expensive of all of our distribution channels that we are scaling back. But again, where the volume warrants the actual deployment of those ATMs, we will continue to service the cardholders in that area.

[Operator Instructions]. The next question is a follow-up from Allen.

The financial inclusion segment looks like, if you excluded the doubtful finance account loan allowances, you'd have around 12.5% operating margin. The segment had been running at around 20%, 25-ish percent or so. Is this 12.5% kind of the right number to think about going forward?

I think the 12.5% is certainly at the bottom end of where we would expect to be, Allen. The financial inclusion segment is highly sensitive to the addition of other goods and services and products into the customer base. And so given the amount of containment exercises that's been going on over the last three months or so, we haven't really focused on expanding the product base. But as that gathers momentum, we would expect the margin in the financial inclusion business to start recovering back towards the sort of 20% region.

Okay. And then a follow-up. Explain a little more KSNET's revenue declined and that you've been running around an $8 million quarterly EBITDA for KSNET. So what -- I'd like to understand, what makes you confident that next fiscal year you can get to that $10 million run rate to get you to a $40 million annualized EBITDA. What -- I know you have a third party you're working, but what's going to -- what do you think is the actions that's going to increase that? Herman Kotzé: There are a few of them. In no order of importance, the work that we're doing at the moment, really focuses across all the key product areas of the business. So if we look at the first one, which is the card VAN or the proper sort of card processing business, and that by far is obviously the biggest contributor to KSNET's financial results. The key focus for us in that specific segment is twofold. First, we are specifically focusing on diversifying our merchant portfolio to not be completely focused on the SME market in South Korea, but to include some of the more sort of medium and larger size merchants within that specific portfolio. Those merchants, although the sales cycle is slightly longer, have a slightly more profitable contribution to the overall EBITDA result. The second element that we are focusing on really involves around the difference between the agent-based distribution model that we follow quite extensively in South Korea and a direct sales-based model. And so obviously, with the use of agents, there is the introduction of an intermediary party, that introduces all sorts of different cost and complications. And so we are in the process of carefully analyzing all of those individual relationships to make sure that we focus…

Next question is from Thomas Zeifang of Lucrum.

Could you help me understand what the recurring revenue and recurring operating profits are by business unit using Q2 '19 as your base? Herman Kotzé: Business unit.

Yes. The recurring revenues in terms of the individual segments that we report...

Yes. So if you back out the main levy that you guys had in the second quarter knowing that that's going to go away. Can you give me those what you're -- recurring what you consider recurring revenues and EBITDA, so we can get a sense of what the current businesses worth? And also, if you could do that on a -- from the investment portfolio, what that generates relative to your share of those percentages?

I can cover it by segments as opposed the business units. Our total sort of revenue run rate of the recurring businesses, and really here we're talking about sort of five business units. So we've sort of identified DNI, the KSNET and some of the South African sort of processing businesses, excluding the troubled businesses. Then there is about $56 million of recurring EBITDA sitting within that space and the annual revenue of about $300 million. Does that make sense?

That's recurring? Herman Kotzé: Yes.

Yes. We obviously have to rightsize and fix the troubled areas in order for that to be evident in the results. Herman Kotzé: Yes.

And is -- of the $56 million annualized, KSNET is part of that, correct?

Yes, a very substantial portion of that, yes.

So it's $32 million of the $56 million?

Yes, approximately.

And so when you make these adjustments going forward, what do you think the exit rate for June will be?

For June, difficult to say given we are -- the cost-cutting exercise is obviously a big one, and we expect to be breakeven on a monthly basis by the end of Q4, but there will obviously be recurring -- there'll be -- there will have been losses during that fourth quarter, and there's like to be a lot of once-off costs in both Q3 and Q4 associated with the cost-reduction process.

How much we're losing on a monthly basis right there? Herman Kotzé: On those South African businesses. I mentioned earlier that...

Correct. Herman Kotzé: For the quarter... Herman Kotzé: Q3.

For Q2, we saw about $37 million losses in those South African businesses. That obviously includes some of the -- obviously includes the $23.4 million of write-offs. But really, Q3, on the basis of what we see now and assuming there's no further significant events, from a group perspective, we'd expect to see EBITDA losses of about $5 million for third quarter.

For the quarter, but not for each month?

No. For the quarter. That's on a group-wide basis.

We have a follow-up question from Allen.

For the South African transaction business, how do you visualize going into next fiscal year, if you do rightsize it, is this a business that you think you can get a margin on it? And if so, what type of margin would that be? Herman Kotzé: Yes. I think, definitely, this is -- remember, the South African transaction processing businesses include some of the other perennially good performance, including the EasyPay, bulk payment and transaction processing switch. The biggest sector when we look at the margins and what this business will contribute going forward, Allen, is that the CPA, let's call it, the traditional, rural South African mobile banking base will be gone going into fiscal 2020. It obviously has been depressing our margins for quite some time as the volumes -- the payment volumes in those specific -- for those specific channels came down. By the end of this year, we would have eliminated all of the high cost associated with the running that part of the business, so that would include staff, security and cash handling costs. And so entering the new year, I think, the business will be profitable as it has been, if you stripped out those specific cost over the last year or so. And again, we would like to see the overall margin of that business recover over the course of next year to the sort of levels that we had in 2017 and 2016.

Ladies and gentlemen, this does conclude the conference call. And you may now disconnect your lines.