Joint chief executive officers' report

Mark and Brett Levy, joint CEOs

When we started this business 10 years ago, based on scratch cards for airtime top-up, we upheld the vision that the world was in need of more prepaid and virtual offerings of products and services.

This could only be achieved by building and rolling out a vast network of various types of points of presence, which would be hardware and product agnostic. Our offering to market provides first-world products to third-world consumers, and allows them to transact in the time and manner that suits them best. This past year, our neutral purse became a reality, offering financial inclusion to the country’s millions of unbanked and underbanked consumers. The practical implementation of our ‘virtual vision’ is now part of everyday life.

Group performance

The growing diversity of the group’s products and services in the South African distribution segment, combined with consolidating and increasing the rollout of the International distribution segment footprint in India and Mexico, remain key to growth. This year, revenue increased by 13% to reach R18 billion.

This was achieved through a strong revenue increase of 15% in the South African distribution segment, which included growth in electricity commissions received of 79%.

Core net profit for the group increased by 15% to R456 million, equating to core earnings per share of 60.34 cents. Although gross profit margins in the South Africa distribution segment declined from 5.58% to 5.19% on an annual comparative basis, the current melded margins have been consistent for the past 18 months.

It is pleasing to note that efficiencies and cost containment programmes, mostly in the restructured South African segment, reduced overhead costs year on year by 2%. The positive impact of these achievements is expected to be carried into the next financial year.

Aligned with the consolidation in the International distribution segment, redeployment of resources continues into our faster growing regions where value can be derived more rapidly. This is already evident in Mexico, where the recently announced issue of shares in Blue Label Mexico to Grupo Bimbo combined with a distribution agreement, should result in an acceleration of footprint in that region.

In South Africa, the Regulation of Interception of Communications and Provision of Communication- Related Information Act (RICA) required the registration of all new mobile phone starter pack activations and all existing active users, which would ultimately result in a decline in churn by subscribers. The implementation of RICA initially inhibited volume growth, but as a result of commissioning practical registration capabilities, activations of starter packs have returned to levels achieved prior to the implementation of RICA.

Positive cash flow generation from trading activities and the accumulation of cash resources to over R2.2 billion, positions the group well to continue capitalising on early settlement discount opportunities as well as pursuing possible acquisitions.

New product development

Investment in research and development continues to be an essential tool for delivering the strategy of growing our suite of products and services through the group’s established footprint. It is fundamental for perpetual innovation to be exploited.

A notable development this year was the introduction of mobile banking in South Africa, notwithstanding the highly regulated banking environment. Blue Label’s strategy is to be the neutral aggregator or back office switch to any organisation, not only banks, requiring such a service offering. To this end, agreements were concluded, in support of which we established our in-house infrastructure with dedicated sales and operations teams. Mobile banking has a strong track record in emerging and frontier markets and is particularly efficient, and therefore popular, among migrant and contract workers for remitting money to their traditional homes.

Integrated and sustainability reporting

We run our business mindful of its impact on economic, social and environmental factors. We remain committed to open and transparent dialogue with stakeholders, as reported in the engagement matrix on page 66 of this report.

In our transition to integrated reporting we have commissioned PricewaterhouseCoopers Inc to provide assurance over certain aspects of our 2011 sustainability report. The assurance report, including the scope of assurance, and the Global Reporting Initiative assessment, to an application level of C+, is included on page 80 of this report.

One of the areas in our sector that is not well understood is the relationship and the revenue structures with the major networks. Aside from the contractual rights we have secured, we continue to believe networks would rather link into Blue Label’s ever-expanding points of presence, which now exceed 140 000 across South Africa, some 80% of which are outside the traditional or formal retail channel. It is beneficial for the networks to utilise the Blue Label distribution channel, than to establish their own independent channel, so as to avoid costs such as capital expenditure, R&D, call centre infrastructure, field support, stock provisioning to customers, new product and services development and the like – and that would only be for airtime. Even though each of the main networks increased prices to us recently, and a further increase is expected later this calendar year, the price changes have, and will continue to be, passed down the distribution channel. In return, our customers are entitled to expect more ‘bang for buck’, which we provide with alternative payment options for cash, more value in our product and services offerings, call centre support,and the facilitation of loyalty, coupons and rewards programmes. These are all underpinned by our robust technology and user-friendly reporting platforms.

On the retail side, we have embedded our AEON distribution platform with the major outlets which serve some 20% of our market, by integrating with all network operators and several utility providers. As neutral aggregator, Blue Label, is thus well positioned as distributor of choice between the networks and the major retailers. By providing a single integration for multiple products and services, a retailer receives only one device from Blue Label, which offers all of the above mentioned services.

One of the challenges facing the ICT sector is a shortage of talent and skills. Blue Label is no exception. It is our imperative to identify, retain and attract those who have entrepreneurial and innovative flair, as well as impressive IT skills and experience. For these reasons, talent management and succession planning are taking on new and critical meanings at Blue Label.

We received the Shell Distributor of the Year award in the Value Added Services category, as well as three awards from MTN – for the best Informal Channel, Top Achiever, Airtime, and Distributor of the Year.

Prospects

It is generally believed that the next 18-24 months will be challenging for the Telco industry in South Africa as it grapples with cost containment. This squeeze is ultimately good for the market as it pressurises under-performing and inefficient participants in the Telco chain. We expect to grow our market share and improve margins in the year ahead.

The South African distribution segment is likely to see airtime sales continue to exceed industry growth norms. The non-telephony contribution continues to grow at a fast rate as prepaid electricity meters are rolled out by major municipalities and as contracts are signed with additional electricity providers.

The International distribution segment suffered a serious setback with the disposal of the majority of the assets and liabilities in Nigeria. The refocused segment, principally comprising our equity-accounted interests in India and Mexico, remains core to the delivery of our International strategy to replicate our South African business model in other emerging markets. Blue Label Mexico, recently recapitalised with the entrance of a local strategic shareholder, Grupo Bimbo, is ramping-up its rollout rate of POS devices. Oxigen Services India, with our effective shareholding now increased to over 50% post year end, continues to benefit from its banking relationships, in particular with the State Bank of India, enabling us to accelerate kiosk or no-frills banking, money transfers and money remittances.

We remain well-positioned to consider value accretive strategic acquisitions and organic expansion opportunities aimed at extending our footprint and range of products and services.

Appreciation

Our thanks are due to all employees for their effort this year and to the executive team for their dedication, often beyond the call of duty. We are fortunate to have members of the board whose commitment, guidance and leadership have been invaluable to the executive team over the past year. Finally, we would have no business if it was not for our suppliers and customers, whom we once again thank for their loyalty and support.