Vodacom Group Ltd. (VODAF) CEO Shameel Joosub on Annual Results - Earnings Call Transcript

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About: Vodacom Group Limited (VODAF)
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Earning Call Audio

Vodacom Group Ltd. (OTCPK:VODAF) Annual Results Conference Call May 13, 2019 10:00 AM ET

Company Participants

Shameel Joosub - CEO & Executive Director

Till Streichert - CFO & Executive Director

Conference Call Participants

Shameel Joosub

Good morning, everybody. Welcome to our Annual Results Presentation taking place for the first time in our new Vodacom World Venue. The Experience Center gives you a bit of a glimpse of the vision that we have for the company in connecting people and things and enabling a digital future. A special welcome to our Members of the Board and my executive management team.

I would like to start somewhat differently and share our purpose with you as we continue to play a meaningful role in social economic transformation. Vodacom is transforming to be a purpose-led company with objective of connecting for a better future. We are optimistic about how technology and connectivity can change the future in a positive way. As a responsible corporate, we aim to make a difference. In education, we are taking great strides in enabling both, educators and learners alike through various partnerships building and supporting ICT centers and giving access to free learning portals on our network. We also unlock 7.5 billion learning value for every year to shelters and have concluded the largest ever broad-based PE transaction in the South African ICT sector.

Some of our other initiatives include cyclone entire relief efforts where we free-rated calling for 10-day period and donated a $1 million for the restoration of roofs at schools to ensure that the kids could return to school. For the [indiscernible] and Eastern Cape Floods, Vodacom donated 3 million through our Disaster Relief Fund.

Looking at some of the key highlights for the group; the financial impacts of delivering on our promise of further reducing the cost to communicate in South Africa combined with costs associated with computing our new ZAR16.4 billion BEE deal masks an otherwise solid operational performance for the group where revenue grew by 4.3%. This was led by strong performance in our international portfolio offset by a slowdown in South Africa due to our deliberate data pricing transformation efforts. Excluding the impact of the BEE deal, you will note that operating profit grew 7.4% benefiting from the inclusion of Safaricom in our numbers.

Data revenue grew a healthy 6% to ZAR27.3 billion despite the impact from changes in regulation in South Africa. We added 6 million customers during the year to reach a base of 110 million customers including Safaricom, a growth rate of 5.8%. At the same time, Vodacom invested close to ZAR13 billion in networks and IT infrastructure to ensure a superior customer and network experience across our footprint. ZAR9.6 billion of CapEx was spend in South Africa. And our earnings per share reduced 6.6% to $0.867 per share, excluding one-of BEE cost and Safaricom acquisition ever grew by 2.6%. The board resolved to declare final dividend of $0.400 per share they can this year's total dividend to $0.795.

As I mentioned before, the acquisition of Safaricom has given us the opportunity to further diversify the group's portfolio. The information presented on the slide shows the context of our three segments with Safaricom on a proportionate basis representing 34.94%; it also shows benefit of 8 months in the prior year versus the 12 months in the current year off of Safaricom. The graph shows how the contribution to the group has changed in the last year; 36 % of our service revenue and 30% of our EBITDA comes from our international OPPCO's and Safaricom; compared to 30% and 22% respectively last year. What is again encouraging to see is that both international opco's and Safaricom have achieved double-digit growth. We added an impressive ZAR8.6 billion line in revenue to the group in the past year and ZAR3.4 billion in EBITDA.

51% of the Group's customers outside South Africa I will now discuss these three segments in a bit more detail. Despite lower GDP growth in consumers being under pressure, we deliver top line growth ahead of economic route. This was achieved in the backdrop of a deliberate pricing transformation. Our proactive pricing transformation program continued this year with a number of changes to drive affordability through lower pricing. Together with the impact of the implementation of the ICASA regulations]; service revenue in South Africa grew by 2.1%. Growth in the second half of the year was negatively impacted by the transition between national roaming partners and the change in core terminations rights.

Our financial services business continues to accelerate contributing ZAR1.6 billion line of revenue, growing at 67.1%, and a profit before tax of ZAR1 billion. EBITDA declined 1.3% to ZAR27.7, partially as a result of the roaming agreement with her name [ph]. The Syphax margins by 0.7 percentage age points as we continue to scale up on the roaming agreement and move costs of capacity from depreciation to direct expenses. We are excited about some of the partnerships - we have established, and I will give you more detail about these in the slides that follow.

It was a stellar year for our international portfolio where make economic and political environments have improved, although remaining challenging in various aspects. Driving on strategy of financial services inclusion and connecting customers that supported a return to double-digit service revenue grew out of 15.6% together with expanding margins. We continue to see good customer adding 2.2 million customers in the year, up 6.8% to 34.6 million customers. Growth was supported by strong data revenue growth of 25.8% as underlying demand remains strong. M-Pesa revenue growth was spectacular at 32.2%. M-Pesa continues to deliver on it's promise for financial inclusion, empowering customers to transact; more about this a bit later. EBITDA grew 26.8% while margins expanded by 3.1 percentage points. This was supported by strong revenue growth and continued focus on our cost containment through our fit-for-growth program.

Of significance in our international operations was the awarding of our 4G license in the DIC [ph] and in Mozambique who unified in new licenses for 20 years. We are also acquired 2x 210 megahertz of 800 spectrum in Mozambique. In Tanzania, we acquired additional 2x 10 megahertz of 700 megahertz 4G spectrum which enabled us to progress further in delivering on our strategic data ambitions. The total cost of all the spectrum acquisitions was $65 million across our operations. We invested $3.4 billion in rolling out 4G services, improving capacity and widening our network reach and quality.

Safaricom continues to report solid growth in margin expansion with service revenue increasing 7% and EBIT increasing 13.1%. Underpinning the results was a strong recovery in the growth of Safaricom's customer base with total customers growing 7.7% for the year to 31.9 million customers. Strong growth in M-Pesa revenue continues as 30-day active M-Pesa customers increased 10.2% to 22.6 million. M-Pesa revenue grew 19.2% and now it contributes 31.2% to service revenue. Data revenue grew at 6.4%, a slight easing of growth during the second half of the year due to deliberately positioning of consumer offerings to provide more value and increasingly competitive environment.

The opportunity exists for future growth by increasing both, penetration and mobile data usage. Investment in capital expenditure of the 37.3 billion Kenyan shillings in the period resulted into 3G sites increasing 17%. 4G sites increasing 69%, and the number of homes passed through fiber more than doubled to 300,000. Safaricom also recently announced that they will be proposing a special dividend in addition to the normal dividend for approval at the AGM in August of this year. The special dividend would increase Safaricom's dividend growth to 11.3%. This will be passed on by us to our shareholders.

Our Vision 2020 purposes stagey as well remain largely the same. Having separated the financial services strategy for increased focus and acceleration. I'll take some of these strategies during the next couple of slides.

Underpinning these strategies is a move away from being a traditional telco. We are branching out into new verticals, both through partnerships, acquisitions or building our own capabilities. To accelerate the IoT opportunity, we are in the process of acquiring IoT.nxt, an innovative systems and edge computing integrator. We've expanded our number of platforms and we will add more to increase our content offerings and the reasons for customers to consume data. In the enterprise segment, we are strategically partnering with experts to deliver integrated solutions to our customers.

Finally, we are well advanced in the process with Vodafone to acquire all the M-Pesa brand and platform assets for Africa. This will be jointly hurt by Vodacom and it will be used to help us accelerate the M-Pesa opportunity faster. We are also partnering with some OTT players in reducing network deployment cost and connecting more people. One of these initiatives is working together with a number of suppliers to reduce the cost of a base station in a global initiative called Open Rain [ph], this could dramatically reduce side cost. We will launch trials of the technology this year in the DRC and Mozambique. We will also be working with another company which will enable us to do a lot of rural coverage in Mozambique. We are super excited about these trials and look forward to scaling it in all our operations.

We have signs that strategic collaboration agreement between ourselves and Amazon Web Services which will make AWS our primary cloud provider. We will also be a strategic partner, integrator and reseller for AWS Services across Africa. We are bold in AWS Center of Excellence which will ultimately help us to sell cloud-based technology and moving from product led services to solution-based services. We will become a certified AWS direct connect partner while we will train a number of staff and aim to be AWS premier consulting partner by 2020. We are excited to work with AWS in this project and see this partnership as a game changer. We will be releasing further information soon.

Vodacom's IT strategy continues to evolve from market leading machine to machine connectivity solutions, as well as bespoke industry-based connectivity solutions like connected pharma and connected clinics. The solutions to have customer offerings across a number of industry verticals; the opportunity within the IoT space will be significant as Vodacom moves up the IoT value chain. Uptake of IoT solutions is often ended in areas where legacy technology is prevalent or where legacy technology has not been designed to integrate across multiple systems. Our acquisitions of IoT.nxt with a unique edge technology and agnostic platform plays a significant role in solving these challenges and well positioned Vodacom extremely well in the IoT space. We currently have 4.5 million IoT connections in South Africa growing at 24.4%.

Adding IoT.nxt capabilities will help in accelerating this opportunity further, not just within the group but also globally. I will now provide some color on each of the growth drivers than I previously touched on.

Looking at data, our key growth engine. Data revenue for the year grew 3.9% to ZAR24.3 billion and now contributes 43.5% to service revenue in South Africa. The growth was impacted by deliberate pricing transformation efforts to give you an update on where we are on this journey. On the postpaid side we have migrated 75% of our customers to smart integrated plans offering more than double the value, mostly in data. On the mobile broadband offerings, we have reduced tariffs on the Big Data offerings by 40% to compete effectively in the market. We're encouraged by the 40% elasticity on these tariffs which impacted the revenue growth rates for data but the price decline was offset by the requisite increase in usage.

On the prepaid side and adhoc bundles, we discounted our daily and weekly offering substantially resulting in around 80% of our bundle sales being on the shorter time based bundles. Customers are enjoying the shorter term bundles allowing them to use data when they need it most but more importantly, making it affordable for everyone to be able to connect. We implemented ICASA [ph] regulations and went a step further with 50% cut in auto bundle rates. Our effective data rates have reduced by 37.3%, overall data usage drive has remained encouraging with data traffic up 35.6%. Active smart devices in the network were up 7.6% to 19.9 million of which 10 million are 4G devices. Average usage on the smart devices have improved 23.2% to 966 megs. Data bundle sales have increased by 13% to an impressive 866 million bundles, a 100 million more than the prior year.

Our platform strategy which is designed to stimulate reasons to consume data is gaining momentum. Our video play service has seen great take up with an encouraging 869,000 active users on the platform in a very short time. The service office closed to 7,000 different video titles, customers are able to stream videos by purchasing movie by movie or daily, weekly or monthly video bundles which is a clear differentiator for us. We recently launched our music MyMuse [ph], which is a web and mobile-based digital music service that gives customer's access to millions of songs, albums, playlists, welcome tones, music videos and news. Customers are even able to upload their own music onto the platform. We are encouraged by the initial take-up of the service.

Our V-Life platform which offers ringtones, welcome tones, music, news and other content services now has 6.1 million users. Our advertising business is growing with around 2 billion impressions and our gaming platform Play Inc. is launching soon.

Data revenue growth in our international operations remain strong at 25.8% to ZAR3.1 billion and now contributes 15.7% to service revenue. Our ZAR3.4 billion CapEx investment in our international operating companies has expanded our data coverage, increasing our sites to 7,222 allowing us to cater for the 39% increase in data traffic. Our data uses have increased 6.6% to 17.7 million with active smartphone users growing at 20.5% to 9.8 million. We see the same opportunities for data and smartphone adoption in our operating companies and we continue to monetize the demand for data in the international opp-cos [ph] through our segmented marketing approach and targeted data bundle offers using our Big Data enabled to just-for-you propositions. We continue to prioritize the monetization of data in all our operations.

Authentic businesses include both, financial services in South Africa and M-Pesa. We're looking at these two businesses combined with close to 46 million customers across our footprint who are engaged in one or more financial services. In South Africa our financial services business is now a ZAR1 billion profit before tax business with growth of over 102%. Our 3 tiers of business namely insurance, lending and payments, are all excelling and we are introducing new services. We have 1.3 million insurance policyholders with insurance margins expanding by 2.3 percentage points. Our insurance offerings include both short-term, long-term in products. This year alone we advanced ZAR8.1 billion through our Air Time advanced service more than doubling last year's figure. We now have just under 10 million active customers engaged in the service. We also recently launched our payment gateway and we are in the process of commercializing this platform.

M-Pesa continues to deliver on it's promise for financial inclusion. M-Pesa is both an international operating companies and Safaricom continues to shine with double-digit growth in service revenue. In the international opp-cos, M-Pesa grew 32.2% to ZAR3.1 billion and contributes 15.8% to international service revenue. We continue to expand the ecosystem in each country to more services; some of these are person to person transfers, bill payments, electricity purchases, air time sales, and business to consumer transactions to name a few. In Kenya, M-Pesa service revenue grew 19.2% to around ZAR10.2 million, contributing 31.2% to Safaricom's service revenue. A new mobile money overdraft facility known and as Fusilli [ph] has been launched with 8.8 million customers opting into this -- into the loan facility at ZAR4.2 billion of computer transactions having taken place in just under three months; we will be expanding this to the other countries as well.

More recently, Safaricom and N-Financial Services, the world's largest front-deck service provider ended into a partnership deal that will allow Kenyan shopping on Early Express to pay for their products using M-Pesa. We now process ZAR149 billion or ZAR2 trillion across our M-Pesa platform this past year.

Looking at technology, we have now reached 90.4% 4G coverage in South Africa, made up of 98% urban coverage and 80% in the rural areas adding more than 200 rural villages this year. We launched 4G in Mozambique and the DRC during the year and we now have 4G in all operating companies and as I mentioned before, 5G in the suit too. Our strategy to transform into a digital company has required us to really look at our CapEx envelope in terms of the mix of spend. This year alone we'll spend $2 billion in IT in South Africa alone, which is close to 21% of our total CapEx spend. This is important as we accelerate technologies such as artificial intelligence, machine learning, RPA and big data. Our implementation of robotic process automation has resulted in automation of 86 processes across the organization.

We've also focused on building 60 APIs to allow various partners in applications to communicate with and integrate into our systems. All fiber business in South Africa is going nicely with over 81,200 households per as now and growing each day in this fiercely contested environment. Our enterprise segment remain strong despite the pricing transformation activities. We've experienced a 14% growth in customers in the segment boosted by our deal with the department of Education where we connected 80,000 teachers with laptops in data contracts. Again, ICASA regulations also had an impact on mobile and service revenue in the enterprise segment. Services revenue grew at 4.8% to $14.7 billion lane contributing 26.4% just on Africa's service revenue. Fixed line and BMS and avenue is a very positive story with a grounded 17.2% to R3.1 billion lane, boosted by new revenue streams from getting services and IP VPN services.

On the regulatory front, we have seen progress in all our markets. In South Africa, as I've said many times, our efforts to reduce the cost of data is highly dependent on us reducing the cost of a meg of data and to achieve this we need access to the right spectrum. We're encouraged by the withdrawal of the ECE, the electric communications amendment board, which in essence means that the licensing of high-demand spectrum can be managed under the existing legislation. We are disappointed by the further delay in the issue of the policy directions to ICASA and hope this will be resolved as soon as possible following the elections last week. We are cooperating with both ICASA and the competition's commission in terms of the priority markets that if you and the data service market and quietly respectively.

In terms of the competitions commission's the recent publishing of the provisional report, we will be making further submissions and comments on both the recommendations and the findings. We will also use the salon of consultations to provide accurate data which has not seemed to have been built into the provisional report. For example, the research used by the commission shows data prices in 2016 and 2017 when every state of prices was up 57% in the past three years. The information used is outdated and doesn't take into account hourly, daily, weekly, and fortnightly bundles, which is 80% of our volume cells in our pre-paid offerings. In addition, the commission's provisional report does not take into account the candidate using these comparisons if already licensed the 4G spectrum. This is the effect of driving down the cost of producing a gigabyte of data.

We remain committed to our pricing transformation program to reduce the cost to communicate and we will continue to engage with all the relevant stakeholders to find suitable outcomes.

I will now hand over to Till to take us through the financials.

Till Streichert

Thanks, Shameel. This year's numbers include some out of the ordinary items which should be taken into consideration when reviewing our results.

So, the first one is SEBI [ph] deal, it's the largest in the ICT sector. We issued 114.5 million new shares at group level for the deal and are carrying the idea for us to charge and transaction costs of the deal in these results. As part of the deal, there are some recurring costs which I will highlight to you. It is also important to note that's a BE structure is consolidated into our financial results including additional third-party debt and of course, the cost of the employee share scheme. The shares are treated as treasury shares and excluded from hips calculation. With regard to our investment in Safaricom the prior year results included eight months of Safaricom results while these results now carry a full year of contribution. And finally we have some accounting changes in the form of the adoption of IS15 revenue from contracts with customers, which will now be the basis of our primary reporting going forward.

Looking at the results with growth based on IS18, revenue increased by 4.3% or 3.2% on a normalized basis and service revenue was up 5%, normalized 3.8%. This is solid growth at a group level which was supported by good commercial momentum in the international markets while in South Africa the weaker macro environment continue to weigh on consumer spending together with the implementation of the end user and Subscriber Service Charter Regulation during the last quarter impacted grows in South Africa. Our international operations achieved double digit service revenue growth and strong margin expansion supported by macro-economic stability in all operations and good strategy execution.

EBITDA grew 2.4% or 2.3% normalized with strong contribution from the international. Net finance charges decreased by 17% benefiting from actions taken during the past two years to decrease the volatility exposure on re-measurement effects. The techs charge was slightly higher compared to the prior year in line with the increase in taxable income. The higher effective tax rate shown during the first half, recovered as expected, driven by as a non-deductible BEE charge now applied over a 12-month profit before tax number. Hedland [ph] earnings per share declined by 6.6% to $0.862 per share excluding the BEE IFRS 2 charge of R1.4 billion and R295 million transaction and finance costs, Hedland [ph] earnings per share increased 4.2%. If we further adjust for the inclusion of Safaricom for eight months last year and 12 months this year, the underlying business delivered 2.6% Hedland [ph] earnings per share growth. The total dividend increased by 4% for the year, which is quite pleasing. However, on a per share basis, dividends contracted by 2.5% mainly due to the dilution from the shares issued for the BEE deal.

Moving on to top-line and the main components of service revenue, data revenue as a key area of growth increased by 5.5% in South Africa, growth slowed, effected by our deliberate pricing transformation. And the implementation of the ICASA data regulation; the main impact was on out of bundle revenue. The good part is that out of bundle data revenue has come down to about 3.5% of service revenue; this is due to a number of proactive measures taken lowering the out of bundle data rate first in October from ZAR0.15 to ZAR0.89 and ZAR0.99 and further more in March down to ZAR0.49. As part of our pricing transformation, we consistently offered customers bigger and right-sized bundles for the user to profile and lastly, of course the one month's effect from implementing the ICASA regulation from March 1.

Looking forward, I expect the impact in the first quarter of our financial year to be roughly three times as much as it is for three months instead of for one month in the fourth quarter. However, the underlying drivers of data grows in South Africa are healthy and we'll support elastic city. Users grow at 35%. A lot of customers are yet to be converted from being voice-only customers to data customers with less than 50% of customers using data. Hence forth, the first two quarters of this year, for the first two quarters of this year, I expect flattish service revenue grows in South Africa before the positive effects of electricity start to offset the effects of the end user and Subscriber Service Charter Regulations and South Africa returns back to improve service revenue growth. This recovery is further supported by the transitioning of the roaming deals when Telkom's roaming traffic is moved to Vodacom's network from 1st of July.

Normalized data revenue growth in the international operations was strong at 19.6% and supported by the increased take up of smart devices, expansion of 3G and 4G coverage and fast growing data usage. The corner stone of our financial services strategy is the growth of mobile money. Normalized M-Pesa revenue growth was strong at 26.5% and now contributes 15.8% of our international service revenue. Customer base grew by 14.8% to R13.5 million and now 39% of our customer base in the international markets is using M-Pesa.

We also extend partnerships to widen and enhance the M-Pesa ecosystem and we'll continue to focus on this. For instance, in Mozambique we expanded interoperability to Millennium BIM, Mozambique's biggest retail bank. M-Pesa revenue continues to grow strong in all our markets, in Tanzania it already contributes 32.7% of service or revenue while our fastest growing market is Mozambique with 83.1% growth in M-Pesa now also contributing to the double-digit growth. The growth and fixed line revenue was a result of strong growth and wholesale trends at revenue the lower margin business level as well as good growth in cloud and hosting IPVPN and connectivity revenue.

Now, looking at the segment trends over the last three years in South Africa, service revenue grew at 2.1% though lessened a years before. In absolute terms, this still represents a R1.1 billion rand growth. The international operations perform very well and growing at Mateen's. This was achieved through good customer base growth adding 2.2 million customers up 6.8% in the prior year -- on the prior year and the accelerating data revenue growth on the back of growing smartphone penetration and as explained, the acceleration of M-Pesa.

Moving on to expenses, total expenses increased 5.2% for the group, excluding the effect of the costs associated with the rain agreement and to BEE deal expenses grew only 3% as a result of well-managed costs. In South Africa, excluding the rain costs, total expenses increased 1.9%. Group staff expenditure grew by 8.7% and in South Africa we contained staff expenditure growth at 2.7%. Publicity expenditure growth across the group was managed flat and other operating expenditure, which includes our network cost grew by 7.2% across the group. In South Africa, these costs grew by 8.1% as a result of higher number of sites added to our network above inflation energy costs increases inside rental costs inflation. As expected, our international operations continued with the adoption of our Fit for Growth program and delivered significant savings in areas like M-Pesa commissions and site sharing. Total cost in the international markets grew 7.3% which was well below total revenue growth of 14.4% resulting into great margin expansion.

Our digital savings opportunity is the next evolution of our Fit for Growth program. Across the group, we are embracing digital ways of working, utilizing big data, artificial intelligence and robotic process automation to make us more efficient. Over the past couple of years we've delivered significant savings for our Fit for Growth program. This has enabled us to continue to manage our costs growth despite rising pressure from inflation, site expansion and new businesses. In terms of our digital ambitions, which you can see on the right-hand side here, the main areas are moving to digital sales, transforming to digital services using various platforms and making efficient investment decisions using our smart CapEx tools and ensuring smart operations through process automation.

We have already started implementing big data initiatives across the business to increase revenue. We are moving beyond, just for you, personalized pricing propositions. We are using Zs these in churn prediction models and analyzing prepaid in activity to improve usage. Our cost saving initiatives are used to prevent fraud and to assist in call deflection while using smart CapEx for improved investment decisions, optimizing our returns. And we have already used RPA technologies in over 80 processes. We have 42 unattended bots by now and we will be scaling these in the year ahead. All of these initiatives are enabling us to deliver scale in the business was out incremental costs.

Looking at EBIT, group EBIT grew by 1.2%, South Africa EBIT declined by 4.2% due to depreciation and amortization growing by 5.7% as a result of R9.6 billion CapEx investment in South Africa. You can see is a strong contribution from our international operations where EBIT grew by R1.3 billion up 63.6% or 56.1% on a normalized basis. A great result. The numbers also reflect and income from an insurance claim in the DRC of about $21 million. The chart on the right shows the EBIT margin per international OPCO. This shows a significant improvement made over the last year. Mozambique has performed exceptionally well in the past two years while Tanzania and DRC continue to improve and Lesotho on a high level remains largely flat.

Let's look at the net finance charges. These were down 17% compared to the prior year, which supports the bottom-line result. There are two areas to highlight. The first is net finance costs which are up by R270 million or 12.8%. As mentioned earlier, we do consolidate the BEE structure of year-by-year to in our financial results, we therefore consolidate as well the third-party debt or ZAR4.6 billion and so related ZAR171 millions of finance charges for seven months in this fiscal year. The cost of debt has remained stable at 8.2% compared to 8.3% in the prior year and that is a great outcome in terms of managing our borings. We also made an early repayment of a ZAR2.6 billion loan further reducing our interest costs by about ZAR70 million during a year. 92% of our debt is Rand nominated. This as a safe guard against currency fluctuations.

The second item to highlight is a re-measurement, often disposal or financial instruments. So, this number has been volatile in the past reporting periods and we've taken a number of steps to stabilize this exposure, including reducing foreign denominated debt and changing our hedging strategy. The net loss on re-measurement and disposal of financial instruments declined from ZAR785 million to ZAR23 million and mainly consists of gains on the re-evaluation of foreign denominated cash balances in the group offset by the re-measurement of a derivative relating to the agreement to acquire shares in Tanzania in our Tanzanian subsidiary and a decrease in a net loss from re-measurement of foreign exchange contracts in South Africa. Included in borrowings on this slide you will note the ZAR4.6 billion preference shares issue to third-party funders as part of the BEE deal. This was partly offset by the already mentioned early repayment of a ZAR2.6 billion loan and this resulted in net debt to EBITDA slightly increasing to just 0.7 times and excluding BEE deal financing, our net debt to EBITDA would have been at 0.6 times flat year-over-year.

The effective tax rate here shown under IS18 increased by 0.6 percentage points to 30.2% with a tax charge of ZAR6.7 billion. In the chart on the right-hand side you can see the tax effects of the two transactions I've been highlighting, the Safaricom inclusion which reduces the effective tax rate and to BEE charges which increases the rate. The inclusion of Safaricom post-tax profits in profit before tax was out to commensurate inclusion of corporate tax charge has a positive effect of 3.6 percentage points on the effective tax rate. There's a dividend was holding tax payable included in irrecoverable foreign taxes on this which increases the effective tax rate by 1.4 percentage points. Thus the effective tax rate impact of Safaricom is 2.2 percentage points. The costs relating to the BEED deal adds to the effective tax rate. The day one non-recurring non-cash charge of ZAR1.4 billion, the ZAR124 million transaction costs and recurring finance cost of hundred and R71 million are all non-tax deductible, thereby increasing the effective rate by 2.2 percentage points in aggregate. Except for the finance costs, the other BEE costs are once of in nature. The effect going forward of the nondeductible finance costs will be about 0.4 percentage points annually.

So, our effective tax rate, excluding the non-recurring BEE costs is just 28.8%. And going forward, for the fiscal year, we've just started, I expect an effective tax rate of about 29%. Operating free cash flow was up 2.5% supported by effective working capital management, capital expenditure of ZAR13 billion equates to 14.4% of group revenue. This was slightly outside of our target of 12% to 14% and the main reason for this was the incremental spend to ready our network for Telkom where we signed the passive sharing agreement in November and these costs are however recovered throughout the period of the contract and we also edit additional backup power capacity to some of our sites to counter for the effects of extended low trading in the last quarter. As a reminder, the Capitol creditor is accounted for in our working capital movements.

Included in the disposal of property plant and equipment is the proceeds from an insurance claim received in the DRC of about ZAR305 million. This was for insurance claim paid out for network equipment that was damaged in the fire in the prior year. Cash tax was ZAR6.5 billion, 5.55 hire than a year ago due to growth of a taxable income albeit with slight differences related to the timing and estimates used for provisional tax payments. Free cash flow increased 4.7% mainly due to higher dividends received from Safaricom and lower net finance costs paid in the current year as a result of the repayment of the already mentioned loan. Hedland [ph] earnings has been impacted by as the new BEE deal and the inclusion of the 12 months of profits on Safaricom versus the eight months in the prior year. The BEE deal had an adverse effect due to the inclusion of the already mentioned costs. Excluding these costs, HEPPS [ph] increased 4.2%. If we further normalize for the Safaricom transaction HEPPS [ph] for the underlying business increased 2.6% that's just normalizing for the timing difference.

With this final dividend declared, the total dividend return to shareholders this year was R14.6 billion. This is a 4% growth per share. This is ZAR0.795 slightly down year-over-year by 2.5% as we issued 114.5 million shares as part of the BEE deal. This is in line with our policy of 90% of Hedland [ph] earnings excluding Safaricom. And before applying the 90% policy, the Board had approved to adjust the earnings value was a noncash BEE IFRS 2 charge of ZAR1.4 billion, which is an add back to earnings. The total dividends for the year includes the Safaricom dividend net of withholding tax of about ZAR2 billion rand and Safaricom has also announced that they will propose on top of the ordinary dividend of ZAR450.8 billion, a specially dividend of ZAR24.8 4 billion for approval at their AGM in August. In rand, at the a current exchange rate, the Vodacom share equates to ZAR2.3 billion and for the special dividend ZAR1.1 billion net of withholding tax. The Board intends to distribute the special dividend received from Safaricom to at the interim dividend declaration later in the year, we expect this to substantially boost our next interim dividends.

There has been some accounting changes this year and in the year ahead that will affect our numbers. It is firstly adoption of IFRS 15 in the last financial year and now the adoption of IFRS 16 in the financial year that has just commenced. Let's now start with IFRS 15 very briefly recapping. We adopted IFRS 15 applying the cumulative retrospective adoption. The group's results for the year are presented on an IFRS 15 basis, whereas the results for the previous year are presented on an IS18 basis. I will not go through all the details on IFRS 15 again, suffice to say is it's a biggest impact has been on revenue and on service revenue. For the current year, balls were about ZAR3.5 billion lower than under IS18 as a result of certain commission expenses recognized in service revenue and not expensed anymore. Further detailed reconciliations are available in our financial statements.

IFRS 16 which deals with lease accounting has been adopted as a 1st of April, 2019 and the key change introduced by IFRS 16 is that all leases are required to be reported on the balance sheet. The right of use asset and corresponding lease liability is being recognized for all leases. This accounting will enhance transparency on the company's financial position and enhance comparability between companies that lease assets and companies that buy assets. As the adoption of IFRS 16 is yet to be concluded, we are providing a range in our financial statements. We estimate that we will recognize right of use assets of between R8.8 a and R9.3 billion while a lease liability of R9 billion to R9.6 billion will be recognized with minimal impact on retained earnings.

Operating leases will therefore no longer be included in the EBITDA but would rather be recognized in depreciation over the period of the lease. The recognition of the lease liability will increase net debt while EBITDA will be higher due to the exclusion of the operating leases. The overall impact on net debt to EBITDA effect is expected to be by 0.2x to 0.3x higher. Cash flow is unaffected and the reporting of the lease payment will now on the financing activities outside of free cash flow and operating free cash flow as well.

Over to our medium-term targets. Our targets have been updated to include our Safaricom interest and the new accounting standards. Looking ahead, we continue to make good progress on our key strategic pillars and with this in mind, we've updated our medium-term targets to reflect the progress made and the benefits of our Safaricom acquisition and now expect a mid to high single-digit growth rate and operating profit on average over the next three years as this target is based on operating profit instead of EBIT. We also capture our share of the growing associated profits generated by Safaricom. We maintain group service revenue growth at mid-single digits. We increase our group capital intensity slightly to the range of 13% to 14.5% of group revenue and this 0.5 percentage point increase is entirely due to the lower revenue balance recorded under IFRS 15 so a function of about R3.5 billion less revenue which is purely mathematical.

That concludes my part and I'd like to hand back to Shameel.

Shameel Joosub

Thanks, Till. To conclude our presentation today, I would like to highlight I was six key immediate priorities. In South Africa access to spectrum at a leasable market related prices remain crucial in making communication services more affordable. Our digital Vodacom projects remain on check and we are accelerating our agile methodology approach to the ways in which we work. Our industry leading applications of big data and machine learning continue to differentiate us from our competitors. The growth of data in all our markets remains the key priority.

We remain on focused on data pricing, especially in South Africa, we will continue to manage the process of pricing transformation. The opportunity for growth in financial services in South Africa and M-Pesa is significant and remains a key priority for us. Transforming our revenue into new verticals such as digital services and IoT will also continue to be a focus area. These new verticals together with the platforms may require a complimentary to our traditional revenue streams, but also can be further leveraged from our strong brand reach and reputation in the countries where we operate.

And finally, we are very excited about our new partnerships and the value that will be unlocked in these new areas of our business. We look forward to much success with IoT.nxt, AWS and our OTT partnerships. This concludes our presentation for this morning. Thank you for attending. Till and I will now be taking questions.

Question-and-Answer Session

Q - Unidentified Analyst

Good morning. It's JP Davids from JPMorgan. Two questions on pricing, please. Firstly, just in terms of the discussion you had around the transformation of pricing, interested in how you land now from a competitive perspective; so particularly, with reference to MTN on the post-paid side and Telkom and so on the Free-Me [ph] side. And then switching gear back to the competition commission, your message there loud and clear around using some older price points; maybe you can specifically touch on their concern around the use of effective pricing or bundles rather than headline price points in terms of determining rates in the country? Thank you.

Till Streichert

Perfect. So firstly, from a price transformation perspective, a huge focus for us this past year was really around the hourly, daily and weekly price points; and that was also to give customers more flexibility was resulted 80% of what resulted in the prepaid segment is now our at least daily, weekly and fortnightly bundles. And the prices are very different, so a gig of data, for example, for the week is ZAR79. You can get a gig for ZAR29 for the day, to have it for the hour type of thing. So there is various different price points and a gig of data on whatsapp is ZAR35 for the month. Now what that does a URL-specific pricing; all of these have the effect of reducing your effective rates. Now the hourly, daily and weekly stuff is super competitive when you look at comparisons to the likes of Telkom and MTN. In the Big Data bundle space, we previously -- I think we were letting Telkom run away a little bit with that market, we dropped the prices by about 40% in February last year; what was encouraging was that we saw an almost one-to-one elasticity where traffic going up more than 40%. So that was good. It did have the impact however of -- because there were 1.1 million customers in that segment, it had the effect of flattening the growth of data because it was quite a big portion.

Some transformation still to go isn't some of the monthly prices where I think we still got some work to be done and that will be the key focus area for this year. In terms of comparisons to both, Telkom and MTN, I think we compare very favorably. We have reduced the price premium to Telkom, we still believe that we can command a small price premium but it's not a significant price premium, there were instances where the price premium was becoming too big, and essentially what we did is took steps to reduce that proactively.

So in the context segment, it needs no borne out by the fact of contract renewals, new sales, share of new ads and so on; very strong performance in that respect. So I think on the context side fine, in the prepaid side; as I said 80% of what we sell is hourly, daily and weekly. So that -- I think we've used this year to do a big price transformation giving back more than ZAR2 billion of value to customers in the last year. Next year we'll also be impacted by some of the outer bundle issues.

What was the second question? Their line versus effective [ph]. So, I think it's -- you got to be careful when you talk about headline pricing, which headline pricing are we talking about? Are we talking about hourly, daily, weekly because that's 80% of what we sell or are you taking the one gig price, monthly bundle which anyway includes a second gig at night but are you taking that and using one price point which is the incorrect price point because that's not where the volumes are sitting or are you looking at the effective rates on where the volumes are actually being sold. So the effective rate is probably the best measure to use because it reflects what's underpinning the real numbers that's in your financials questions.

Questions?

Unidentified Analyst

Switching gear to Tanzania; very small infraction there in terms of monetary value around some issues there but I see you have appointed external counsel to have a look at what's going on in the market. Maybe if you can just touch on what the issue is? And is it definitely contained or what the scope is here?

Shameel Joosub

Look, that's true. I mean, we have in essence communicated it, both from a Tanzanian side, we had an incident there where a number of our senior people were basically charged with -- at magistrate court in Dares Salaam. We have subsequently to that appointed as you can imagine, an internal investigation but we thought it is good to augment this and enhance it with U.S. law [indiscernible], they are going to help us looking at all of the elements and looking in essence, it's a facts what has happened, they are underneath. At the moment our view is that there had been a little bit of a gray zone of interpreting certain provisions of the Electronic Post-Land Communications Act in Tanzania potentially some operational gaps as well. So as you say, it's the monetary value of that fine had been so obviously, painful to experience that had been relatively small, and I expected over the next couple of weeks we will be having our investigation finalized. And that doesn't [ph] conclude that matter as well.

Unidentified Analyst

It's Mike Christie [ph] from Anchor Capital; just two from my side. One for you Till; so you've obviously changed your guidance methodology a bit. Now, if you assume that Safaricom is a double-digit growth business; it would imply that your guidance for the rest of the business is softened a little bit. So I just wanted to get your perspective on whether that's the case and perhaps a little bit why? And then Shameel, just on Spectrum; I mean, you know, obviously the conflicting views as to what's going on in timelines and certainly as I understand that some of your competitors are saying we're not going to see any progress on this for a long time to come. What's your take? Do you think the elections were a big distraction but it's obviously becoming quite a frustration.

Till Streichert

Let me deal with the first question Michael, on the guidance. In actual fact, the motive to do that was really to reflect the Safaricom share in our guidance because remember, so far we were guiding on EBIT which would exclude -- which did exclude the Safaricom tria [ph]; and now since we've had a full year of Safaricom numbers in our results, we've got a proper baseline to actually do so and compare. So what I think -- and remember, the second point I want to make is, it's mid-to-high single-digit which basically starts at 4 and goes to the upper-end of the mid-single digit. There is a certain range in it, and Safaricom share is all growing double-digit is basically 35%, respectively 40% in the numbers. So you must also let the mathematics work within that framework, and the guidance for the rest of the business is pretty much unchanged over the three years versus the guidance that we had issued before, call it EBIT at that stage.

Shameel Joosub

The second question was on the Spectrum part; on Spectrum, my view is that it will happen. The policy directors were supposed to be issued by the end of April, it was disappointing that it got delayed. Not completely unexpected to be fair because I think when you're having a change of -- when you're having elections, you normally find that government doesn't issue new big policy moves within the few weeks running upto elections; so no big surprise in that respect. But the timeline wasn't created, it was their own timeline that they kind of missed. I think what will happen is, after the elections, I think the President has been very clear in his speech that it will happen. And I think it's really an empowering factor for the Fourth Industrial Revolution; so one of the key priorities that government has to prioritize is the allocation of 4G. and 5G Spectrum. If we can have any hope it being at the forefront of [indiscernible]. So my expectation is it will happen later this year, this calendar year.

Unidentified Analyst

Just a quick question, you say data customers; I see that it's gone slightly backwards by about 1.9%, is that a cleanup of the price or redefinition or perhaps just an explanation?

Shameel Joosub

You know, there has been some -- there is -- what we do with these things is there is constant clean-ups that we do. So yes, it's just effect of more clean-up. Any more questions? No. Thank you for joining us.

Till Streichert

Thank you.