Joint CEOs' report

We both recognise that Blue Label's share price has been under enormous pressure as a result of the market's concern regarding Cell C's ability to restructure its balance sheet and secure access to sufficient, reasonably priced funding to propel earnings growth into the future. Blue Label writing its investment in Cell C down to zero has compounded these fears.

We are confident that the conclusion of the extended national roaming agreement and recapitalisation transactions in progress will place Cell C on a path to sustainable growth into the future.

The mobile industry in South Africa is under pressure as a result of high subscriber penetration and intense price competition. However, mobile technology is clearly a fundamental requirement of human life in the 21st century and is becoming the tool through which multitudes of products and services ranging from communications, entertainment, financial and administrative services to education and healthcare services will be delivered. Cell C is driving to be in a position where it provides these services rather than focusing on network rollout and management thereof.

The 2019 financial year ending 31 May 2019 was focused on refining operating structures and processes to improve our ability to service customers and maximise benefits for existing and new operations, taking into account changing market conditions. Improving the agility and security of our IT system, which are the bedrock of our business, has been a key priority this financial year.

Blue Label has again demonstrated its resilience and continuing ability to innovate during tough economic trading conditions, evidenced by the increase in core headline earnings by 26% to R904 million on exclusion of the negative impacts as detailed below*. Our underlying ethos of driving financial inclusion for the mass market is delivering the social and financial benefits we strive for. As South Africans, this is our responsibility. Blue Label's further growth into the formal retail, banking and informal markets has been achieved by delivering technology and payment agnostic products and services that South Africans need and want. Our products and services make life more convenient, reduce the cost of transport in particular for the man on the street and grow the businesses that we distribute to. We are proud of what we do.

Going for growth and efficiency

Our focus during the 2019 financial year, apart from progressing the Cell C transactions, has been on deep diving into Blue Label's technology stacks and operations. We have spent many years growing both organically and acquisitively. Consolidating and rationalising what we have to greatly improve our service to customers and create agile technology platforms and people processes to rapidly deliver new and existing products and services to market has been our focus.

We have reviewed every aspect of our business and created a new operating structure which maximises and leverages our current skills base for the benefit of a broader number of our subsidiaries. We are also investing in new skills that will assist us to develop and rapidly deploy the new products in our pipeline. Key to all of these undertakings is customer service and efficient and effective scalability.

We reported last year on the creation of our new Customer Interaction Centre (CIC) to specifically support customer service and lower the cost of servicing our extended reach in the informal markets. The CIC allows us to automatically monitor every device we have in market to assess and measure data, such as volume and time of use and stock levels. We can therefore proactively service our customers and ensure that the spokes servicing our hubs are resourced correctly. These types of initiatives allow Blue Label to significantly improve customer centricity and profitably, reconcile billions of nano transactions, deliver margin expansion, and provide for further volume growth.

We have also spent time and effort on further training and upskilling our own staff with regard to capability management and customer service. It is imperative that this training improves our ability to service our customers and provides our staff with the skills needed to further their own careers. We aim to be an employer of choice. In addition, unlike some of our competitors that employ 'stop and drop' strategies, we spend meaningful time with our merchants to train them on our devices and the myriad of products and services available for their own revenue growth. We also provide them with ongoing marketing support. Our business grows as our customers' businesses grow.

Further information on the performance of our core Group companies can be found in the operational review.

* On exclusion of the negative impact attributable to:

• Cell C's trading losses, impairment of certain of its property, plant and equipment, the impact of the derecognition of its deferred tax asset and the impairment of Blue Label's total investment in Cell C;
• Fair value downward adjustments of the exposure relating to SPV1 and SPV2 pertaining to the initial recapitalisation of Cell C and the Glocell loan;
• An impairment of Blue Label's total investment in the Oxigen India group, including 2Dfine Holdings Mauritius, as well as providing for loan impairments and guarantees payable therein; and
• Partial impairments of goodwill and an investment in a joint venture.

Asset disposals

The Board took a decision to dispose of the Blue Label mobile business and the handset division of the 3G Group. Although these businesses are sound entities, the need to reduce debt and provide the Group with cash resources through the unwinding of the CEC book will further strengthen our trading ability. Blue Label is focusing on going back to basics, resuming our impressive positive cash flow generation and to rebuild trust with all our stakeholders. The proceeds from the disposal of these entities of R994 million will be used to reduce interest-bearing debt and further strengthen our balance sheet.

These disposals do not affect the core trading and distribution operations in any way. We thank all these employees for their valuable contribution to the Blue Label Group and wish them well in the future.

The finance book relating to the Comm Equipment Company (CEC) division within the 3G Group will remain in the Blue Label stable. This book is valued at R3.1 billion and we will look to wind down a major portion of this book, further increasing our cash resources.

Technology

Technology has always been at the heart of Blue Label's business. Technology innovation is how we started this business and how we will continue to take it into the future. The 2019 financial year has seen us renew investments into our technology platforms to sustain the increased volume requirements generated through the growth of our business. Critical objectives for the modernisation and digital transformation roadmap were set and achieved in line with this priority, catering for the necessary required scalability and rapid delivery.

Essentially, agile platforms accelerate the delivery through our RITE (Reach, Innovation, Trust, Efficiency) strategy of new products and services and enable the Group to launch new revenue streams on our enhanced technology platforms.

Financial performance

Impairments, fair value downward adjustments and the Group's share of losses in Cell C negatively impacted our earnings by R7.5 billion. We accept responsibility for this poor performance and are determined to regain trust with our respective stakeholders. Our focus on the operating efficiency, speed to market and customer service within the core Blue Label business has resulted in a good performance relative to the South African economy. We intend to continue to build on this strength in coming years.

Please refer to our detailed commentary in the financial director's report and to our financial results presentation which details our strong product and channel performance, growth in the informal market, further gains in prepaid electricity and data business.

Cell C transactions

On 7 August 2019, Blue Label notified shareholders that Cell C and MTN South Africa had concluded a detailed term sheet regarding an extended national roaming agreement. This transaction will result in substantial cost savings for Cell C by reducing network and capex spend.

This agreement is mutually beneficial to both parties as MTN will significantly increase its wholesale revenue.

The conclusion of this agreement, as well as the recapitalisation, allows Cell C to finalise its long-term business plans.

Prospects

It has been a challenging two years and we are proud of how our Blue Label team has remained focused and optimistic. The Board and Executive Management have decided to focus on doing what we do best. Blue Label's DNA is trading and distribution.

Our strategy remains to efficiently grow our reach through innovation and exceptional customer service. We will also continue to grow our revenue assurance business in the municipal market and continue to develop innovative products in our data solutions and distribution businesses.

We look forward to updating shareholders on the progress of the Cell C transactions and thank all our staff, customers and shareholders for their continued support.

29 October 2019