LEADERSHIP

Chairman's report

The Board and Senior Management team have, over the past year, focused on three key priorities: our back-to-basics operational plans, asset sales to reduce debt levels and strengthen the balance sheet and the recapitalisation of Cell C.

Larry Nestadt, Chairman


I am heartened to report significant progress on all three strategic priorities.

The success of the back-to-basics plan is evidenced in the solid core trading results reported for the year ended 31 May 2020 in very challenging COVID-19 impacted trading conditions. Revenue, including the gross amount generated on "PINless top-ups", prepaid electricity, ticketing and gaming, increased 7% from R56.0 billion to R59.9 billion, the gross profit margin continued its steady increase from 9.21% to 10.05% and net cash generated from operations amounted to R1.3 billion.
The proceeds of R1.038 billion, generated from the successful disposals of the Blue Label Mobile Group and the handset division of 3G, assisted Blue Label to reduce interest-bearing debt by R902 million to R2.3 billion. Post-year-end, the Group disposed of Blue Label Mexico for USD11.5 million. These proceeds have been used to reduce debt further to levels that, as a Board, we are comfortable with.

We must compliment management for its tireless efforts in implementing the back-to-basics plan and for the way in which it led the Group through the COVID-19 pandemic and motivated its teams to rise to the occasion. There are seldom times that a business's disaster recovery and business continuity plans are put to the test. The COVID-19 pandemic and ensuing lockdown regulations demanded that Blue Label respond immediately and with supreme flexibility, in order to continually supply our products and services, many of which are regarded as essential. Intense preparations for protecting our staff and anticipating a remote working environment began in earnest in late February/early March 2020 and by the time lockdown level 5 was implemented, our entire staff complement was working remotely.

Blue Label has continued to deliver essential services, including electricity, airtime, data and other digital services, as well as providing financial transactional services. The lockdown regulations and the downturn in economic activity have not negatively impacted airtime, data and electricity sales volumes. The Group's digital expertise has enabled uninterrupted access to these products and services through banks, formal retailers, independent retailers, petroleum forecourts and spaza shops across South Africa.

While most subsidiaries evolved quickly to meet the changing market dynamics, some were unavoidably impacted. The decline of R100 million in core headline earnings from trading operations was partly attributable to starter pack distribution, gaming vouchers and ticketing being negatively impacted during the initial lockdown period as a result of COVID-19. This also resulted in the Group incurring a general increase in allowances raised for expected credit losses. Furthermore, exposure to the Edcon Group amounting to R41 million net of taxation has been provided for in full. Of this amount, R21 million relates to the closure of the WiConnect retail stores.

As Chairman, I have, since the end of the 2019 calendar year, convened bi-weekly Board meetings to monitor not only trading performance and asset disposals, but also progress on the Cell C recapitalisation process. We restructured the Cell C board by replacing our Joint CEOs with two of our Independent Non-Executive Directors. Gary Harlow has been appointed Chairman of the Audit and Risk Committee, Jerry Vilakazi is Chairman of the Remuneration Committee and Joe Mthimunye has stepped up to Chair the Cell C board. This, we believe, has strengthened the corporate governance processes at Cell C and allowed our CEOs to focus on our core operations and normal trading arrangements between Blue Label and Cell C at arm's length.

There is no disputing that we discovered poor governance processes and questionable past management decisions at Cell C, but I must report that, under the new leadership of Douglas Craigie Stevenson as Chief Executive Officer, and Zafar Mahomed as Chief Financial Officer, significant progress has been made in returning Cell C to a profitable footing at EBITDA level and significant strides have been made in improving governance and internal control processes. A revised business model, cost-cutting, rightsizing and the new MTN roaming agreement, have all contributed to a good operational performance in a difficult trading environment.

At Cell C, we appointed PwC to advise on the restructuring of the business model and to achieve cost savings and improved procurement practices. Deloitte was appointed to advise on the recapitalisation process. An Investment Committee that meets bi-weekly, was established under the Chairmanship of Stephen Koseff, to work with Deloitte on this difficult task, as it involved negotiations with many lenders and bond holders from many different jurisdictions. I am most grateful for their efforts and am confident a settlement will be reached within the near future.

We are cognisant of our role as Directors to correct the disastrous shareholder value destruction that followed the initial Cell C investment and wish to assure shareholders that we remain committed to see plans in place to recoup these losses. We are also committed to good governance and an orderly succession plan at the Blue Label Board level, especially for longer serving Directors. As part of this process, and towards our goal of gender and racial diversity on the Board, we are pleased to put forward Ms Nomavuso Mnxasana as a new Non-Executive and Independent Director, for appointment by the shareholders at the AGM on 26 November 2020.

With a successful conclusion of the recapitalisation of Cell C, the Board will seek to assess the need for any further Board and management reset as we prioritise our business focus and growth strategies at Blue Label. As part of succession on the Board, we will actively recruit further Directors with the required skills, experience and racial and gender diversity, to ensure a smooth transition and handover from the "old guard" who have served as Non-Executive Directors for longer than 10 years. The restructuring of the Board will be smoothly managed by the Nomination Committee of the Board to ensure continuity and institutional memory while introducing new energy onto the Board. The timing will be as we see appropriate and with the attainment of our recovery of shareholder value. This is our commitment to not only our shareholders, but to all stakeholders.

I would like to extend my sincere gratitude to Mr Joe Mthimunye who has worked tirelessly as Chairman of Cell C overseeing the restructuring and recapitalisation process, my colleagues on the Board for their unwavering support, the Joint CEO's Mark and Brett Levy, their management teams and the entire staff complement of Blue Label for their perseverance, innovation and work ethic, rising to the challenge presented by the COVID-19 pandemic. We still have a way to go in navigating the consequences of this global pandemic, and the Board will be with you all the way.

Larry Nestadt

Independent Non-Executive Chairman

23 September 2020


Blue Label is a fintech specialist enabling financial inclusion through platform innovation. We have accelerated innovation, go-to-market strategies and digital enablement while investing in significant additional redundancy for improved stability and business continuity. Active-active has been deployed with transactional success rates and uptime increasing to beyond 99% and transactional volume growth sustained at over 20% per annum.

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