Operational review

The financial year ended 31 May 2019 was focused on integrating the acquisitions made in the preceding two years, and refining operating structures and processes to improve our ability to service customers and maximise benefits for existing and new operations while adapting to changing market conditions. Improving the agility and security of our IT systems, which is the bedrock of our business, has been a major focus this financial year.

Blue Label's primary trading market in the South African cellular industry has been significantly impacted by competitive MNO pricing pressure coming to the fore in June/July 2018. The depressed South African economy has also contributed to the tough trading environment. Blue Label is proud of its resilience, its stated strategy of expanding both its reach and product portfolio to produce additional revenue streams which enhance Blue Label's financial performance.

Core headline earning for the Group equated to a negative 304.77 cents per share, down from a positive 135.62 cents per share recorded in the 2018 financial year. The loss was largely attributable to Cell C's trading losses, impairments of its property, plant and equipment, derecognition of its deferred tax asset, fair value downward adjustments of the exposure relating to SPV 1 and SPV 2 and the consequent requirement to write down the investment in Cell C to zero. These losses were further exacerbated due to the impairments of Blue Label's total investment in Oxigen India Group, as well as providing for loan impairments, guarantees payable therein, as well as impairments of goodwill and investments in a joint venture. On exclusion of the negative impacts as detailed below*, the Blue Label business did, however, grow strongly, recording a 26% increase in its core headline earnings.

The review that follows provides more detail on the operating performance of primary businesses in the Group. Financial performance within these businesses and divisions can be referred in the Financial Director's report.

* 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.

AFRICA DISTRIBUTION

THE PREPAID COMPANY (TPC)

The Prepaid Company is the leading distributor of prepaid airtime and data for all the South African mobile network operators. It facilitates, manages and maintains the distribution of all airtime, data and starter packs. Relationships with each of the network operators are crucial to the success of the business.

The Prepaid Company is responsible for supplier agreements and procurement on behalf of the Group, including wholesale and community sales, starter packs, handsets, tablets and fulfilment of bulk airtime printing capabilities to its merchants.

The wholesale market is declining in excess of 5% per annum as customers are changing their buying habits, in addition to margins being squeezed. From an internal perspective, much of TPC's traditional formal retail customer base is now being managed by Blue Label Distribution (BLD), as the Group concentrates on customer centricity.

TPC's fresh approach has been to focus on efficiencies, gross profit margin accretion and to assist BLD in the growth of the informal market channel by specifically concentrating on community channels, churches and the spokes in BLD's hub and spoke strategy, for increased starter pack sales.

Limited cash resources have inhibited TPC's ability to take advantage of bulk buying and early settlement discounts, due to the investments and financial commitments of the broader group.

BLUE LABEL DISTRIBUTION (BLD)

BLD provides electronic products and services throughout South Africa through its extensive distribution channels. These encompass, but are not limited to, banks, retailers, spaza shops, informal traders and petroleum forecourts. We aim to stimulate and contribute to financial inclusion in South Africa, providing convenient digital transacting solutions to all.

Our technology provides traders an efficient and user-friendly interface to sell products and services through the integration of various hardware solutions. These devices and integrations allow for the continued growth of an ever expanding base of products, as well as functionality which is constantly refined to empower traders into the future.

Penetration into the informal market continues to be a driver of growth. Aligned to our aspirations of financial inclusion, we are intent on continuing this penetration in a smart and controlled fashion. BLD registered 17 000 new outlets in the year ended 31 May 2019.

A further key driver of sustainability in business, BLD is firmly committed to upskilling and competence development of its trading base. With each device placement, traders and staff are trained and allocated fit-for-purpose marketing material aligned to their chosen product set. The resultant quality in execution has seen traders' revenue grow to an average that exceeds key competitors within the market.

Our commitment to customer service is paying dividends. We have full line of sight of the challenges that our customers face and we continue to address these challenges on an ongoing basis through our insourced Customer Interaction Centre.

BLD will maintain this focus on delivery in 2020. The business unit has and will continue to strengthen its core platform to enable scale. This scale allows for delivery across multiple channels, while expanding our base of customers. It also enables us to continue to offer more products and services more rapidly. BLD continues to drive a growth mind-set while remaining true to our customer-centric approach.

TICKETPRO

TicketPro is a vital element in securing exclusive distribution contracts. The ability to offer our customers access to transport services, sporting events and entertainment is exceptionally attractive to them in terms of being a 'magnet for foot traffic' to their customers.

Traditional ticketing is an extremely thin margin model as a result of intense competition in the market. TicketPro is therefore focusing on building its online and white label ticketing platforms and is investigating how to take advantage of NFC technology while remaining open-looped.

Transport is the most lucrative of TicketPro's business segments and it continues to work with information technology to onboard further transport capabilities. This process has taken longer than expected.

Cigicell

Cigicell provides municipalities in South Africa with revenue collection and revenue assurance solutions.

Revenue collection

Cigicell is the leading distributor of prepaid electricity and water tokens in South Africa. The size of the current market exceeds R2.5 billion per month. Cigicell also offers municipal customers the ability to pay their rates and taxes or traffic fine accounts via convenient retail and banking channels.

Revenue assurance

Cigicell offers financially distressed municipalities across South Africa a revenue assurance ecosystem, which encompasses a variety of solutions including debt funding and funding of metering infrastructure requirements. Cigicell prides itself on an efficient treasury function to support its projects around South Africa.

As we sign on more municipalities around the country, we need to reinforce our service levels by hiring highly skilled metering specialists and relationship managers who ensure that we maximise the potential of our solutions for all our customers. Municipalities are confident that they are receiving the best advice available and trust us to collect, protect and enhance their revenue. Cigicell employs local semi-skilled and skilled people in the targeted municipality, thereby positively impacting the local economy. Cigicell is continuously advancing its business processes, software and hardware to complement its processes, focusing on efficiency, sustainability and scalability.

3G Mobile

The South African retail market has declined by between 5% and 15%. 3G, however, delivered another strong performance. The business has invested in the right people and processes and is able to offer pricing that is competitive across the market.

3G has forged partnerships with the networks and OEMs offering them an ideal alternative to the current traditional status quo. The company currently operates in South Africa, Botswana, Namibia, Mauritius, Eswatini, Lesotho, Zimbabwe, Zambia, and Mozambique and intends to further extend its presence in Africa with four new territories in the next financial year.

Post-year-end, the Board of Blue Label has decided to dispose of the handset division of 3G. The proceeds of R544 million will be used to reduce interest-bearing debt.

Blue Label is retaining the Comm Equipment Company division of 3G that provides finance for handsets and other products such as DStv decoder acquisitions. Its finance book amounted to R3.1 billion at 31 May 2019.

Cell C

The financial performance for the 12 months to 31 May 2019 was below expectation and several key performance indicators were not met. The 2019 financial year has been characterised by slow growth, a volatile rand against major currencies, service issues with Eskom and a continuing slowdown in the economy, which resulted in a decline in the GDP by 3.2% in the first quarter of 2019. Consumer purchasing power has weakened; contributing to the lower than expected financial performance of the Company.

Furthermore, new regulatory and legislative frameworks pertaining to data expiry and out of bundle usage had been implemented with effect from 1 March 2019. The new legislation requires telecommunication operators to:

• roll over unused data;
• provide an option to offer unused data to other users on the same network; and
• ensure that out-of-bundle data was explicitly opt-in only.

Please click here to access Cell's C presentation for the 12 months ended 31 May 2019.

WiConnect

WiConnect is a speciality retail store where customers have access to a variety of products, which include various ranges of handsets, tablets, prepaid, hybrid top up and postpaid deals. There are 73 outlets which have been designed to provide customers the full Blu Approved product offering including ticketing as well as accessories and WiFi routers.

The business has been stabilised following the termination of the relationship with Edcon. Key issues regarding stock management, staffing, point-of-sale and in-store communication have now been resolved.

Glocell

Glocell was acquired to complement our distribution strategy. The Company has fitted well into the Blue Label stable and has reduced its operating expenses by 65%.

The Company will focus on the distribution of starter packs and its wholesale business.

Technology

We maintain our strategic drive towards improving customer centricity within our operating model, underpinned by partnership, collaboration, prioritisation and alignment according to the Group's RITE (Reach, Innovation, Trust and Efficiency) strategy.

Platform renewal, improvement, innovation and transformation remain key to our central mandate to deliver world-class, customer-centric business solutions with the primary goal being to enable the delivery of continuous growth.

Our objective for agile transformation further ensures sustainable delivery methodologies within our strategically-aligned technology functions across the Group. This 'fail-fast-deliver-fast' approach accelerates our go to market strategies for new products and enables the Group to launch new revenue streams on enhanced technology platforms. Our technology function maintains an active, forward-planning approach to embracing change. Providing a future-fit delivery capability is a business imperative.

Blue Label Connect

Blue Label Connect distributes tailor-made hybrid top-up airtime and data contracts on behalf of all major South African cellular network operators. These can be purchased as a SIM-only package or alternatively bundled with mobile phones, tablets and accessories.

Blue Label Connect, through its over-the-air mobile platform, enables its partners to extend their customers' offerings into the digital space to maximise customer convenience. Its cost-effective mobile platforms enables customers to purchase tailor-made products and services utilising their mobile phones.

The primary operational highlight has been the development of a revamped and optimised credit/debit screening process. Prepaid cash transactional data has been added to the traditional screening process.

Blue Label Connect is now able to finance a handset over the length of the contract.

A newly established commercial arrangement with a call centre is one of the primary drivers of growth for this business unit.

Airvantage SA

Airvantage supplies advanced airtime to traditional prepaid customers. The company has extensive experience and insight into consumer behaviour and nano scorecard analysis. This allows them to guarantee the highest possible service revenue and low levels of bad debt. The service continues to grow organically and we constantly launch new product innovations, which lead to more loans being granted and higher penetration into the prepaid base. Airvantage operates their model and systems in South Africa, Brazil, the rest of Africa and the Caribbean.

The service continues to grow organically and we constantly launch new product innovations which lead to more loans being granted and higher penetration into the prepaid base.

Post year-end, the Board decided to dispose of the mobile division, Airvantage and its divisions.

INTERNATIONAL

Blue Label Mexico

The company remains consistent in pursuing its original strategy of network growth by growing the number of transacting terminals; customer penetration through incremental products and services provided on our terminals; and constant improvement of our processes to deliver more efficient services at lower cost.

Our focus for FY19 has been the implementation of a turnaround programme based on people, processes and technology. The programme comprises the following actions:

• A rationalisation programme of both pricing and expenses;
• Implementation and expansion of a new customer acquisition model based on hubs and spokes to change customer acquisition into a variable cost component;
• Rightsizing the organisation and placing the right people in the right positions;
• Redesigning the IT architecture, enabling faster time to market and a significant reduction in operational and transactional costs; and
• Development of a new customer servicing model.

Blue Label Mexico has implemented these changes to reduce losses and turn to profitability and allow expansion of our business off a lower cost base. Blue Label and Grupo Bimbo look forward to reporting our progress in FY20.

Oxigen Services India

The Indian operation has been written down in full. Please refer to note 2.1 of the Group annual financial statements for a full report on the financial implications.

Local management remains committed to identifying potential investors into this business and we will report further on any successes in this regard.

Airvantage Brazil

The Brazilian operation has negotiated a renewed contract with TIM in Brazil following the conclusion of the pilot phase of this project. Full operations commenced on 1 August 2019. The macro-economic environment is picking up and TIM is the largest prepaid carrier in Brazil. We have also established an office in Brazil to cater for growth across LATAM.

Airvantage Mauritius

The operations continue to grow organically due to implementation of new product innovations across the airtime, data and value-added service advance space. We are continually looking to expand into other emerging markets in Africa, the Caribbean, the Middle East and Asia.

SOLUTIONS

Blue Label Data Solutions (BLDS)

Blue Label Data Solutions (BLDS) is one of South Africa's market leaders in consumer data, big data, validation, verification, cleansing of data and lead generation. BLDS is accredited by the Direct Marketing Association of South Africa, of which it is a founding member. The focus this year has been on accumulating "big data" in-house, recognising that there are benefits to be reaped in co-ordinating and channelling the data. A sophisticated "big database" is currently being developed in order to aggregate, process, analyse and prioritise vast sets of customer and transactional data, from across all the subsidiaries in the Group and their partners.

BLDS has had a very strong financial year through a hybrid of organic and acquisitive growth. The division acquired 50% of United Call Centre Solutions (UCCS) during the 2018 financial year. The call centre operation leverages data provided by BLDS to generate sales. Blue Label's 81% share of BLDS saw core net profit increasing from R29.8 million to R43.6 million in the 2019 financial year.

BLDS will extend its product offerings to include banking and insurance products and is expanding into new markets.

MOBILE

Blue Label Mobile Group (BLM GROUP)

Blue Label Mobile's strategy is to partner with Mobile Network Operators (MNOS) with carrier grade platforms to provide various products and services to their consumers. Over the past two years, BLM has been transitioning its focus from a B2C focused business into at B2B2C service provider. It has repositioned itself to operate in three vertical – integrated communication, infotainment & VAS and mobile financial services.

The new regulations surrounding requirements for double opt-in have decimated the traditional B2C business. The MNOs have reacted by changing billing rules which makes business far more cumbersome. This has resulted in churn rates escalating significantly.

The Board has taken a decision to dispose of The Blue Label Mobile Group as referred to director's report in the Annual Financial Statements.