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Edited Transcript of VOD.J earnings conference call or presentation 11-May-20 9:00am GMT

Preliminary Q4 2020 Vodacom Group Ltd Earnings Presentation

Vovadavalley, Midrand Jun 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Vodacom Group Ltd earnings conference call or presentation Monday, May 11, 2020 at 9:00:00am GMT

TEXT version of Transcript


Corporate Participants


* Mohamed Shameel Aziz Joosub

Vodacom Group Limited - CEO & Executive Director

* Phil Till Streichert

Vodacom Group Limited - CFO & Executive Director

* Shaun Van Biljon

Vodacom Group Limited - Managing Executive - IR




Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [1]


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our virtual annual results presentation via webcast. Especially welcome to members of the Board and my executive management team, who are online as well today. These are unprecedented times. But through technology, we are able to stay safe while bringing these results to your home and offices. Till and I will be taking questions at the end of the presentation. Please enter your questions in the space provided on the webcast link.

Before we have a look at our financial results, I thought I would share some of our responses to the COVID-19 pandemic. As a purpose-led company and a leading African telco, we have a clear duty as part of our social contract to assist governments and our customers to cope with the impacts of the pandemic and to contain the spread. We recognize our role of ensuring vital connectivity to keep families connected to enable businesses to operate, students to learn, health care to be delivered and partnering with government to provide critical services.

Some of our responses to the pandemic are detailed in the 6 categories on the slide. I will highlight a few of these. All our operations across the continent have recently experienced heightened growth in network traffic, especially during periods of limited mobility such as lockdowns and curfews. We have undertaken various measures to ensure that our network quality across the continent will not be compromised. In South Africa, Vodacom will spend over ZAR 500 million within the space of 2 months to add network capacity. The recent assignment of temporary spectrum will assist us to provide much-needed capacity for the surge in demand on our data network. This has also enabled us to switch on Africa's first live 5G mobile network in 3 cities: Johannesburg, Victoria and Cape Town. This illustrates again just how quickly we can move forward once we are allocated the tools by government and regulators.

We are similarly prioritizing spend on capacity in our International operations to keep customers confidently connected. In order to keep our customers informed, we have zero-rated many critical services websites, including the official COVID-19 site and many other public hospitals and clinic websites and a number of education sites. We donated 20,000 smartphones loaded with data and voice minutes to be used to facilitate the immediate collection and transmission of data to the Department of Health to assist with the containment of the pandemic.

In our International operations, we have donated funds for PPE equipment, phones and data. We have zero-rated and greatly reduced fees on M-Pesa below certain thresholds for person-to-person transfers to minimize the use of cash flow payments. We are assisting government with the dissemination of public information across all our operations. Vodacom South Africa recently entered into a partnership with Discovery Health to offer 3 virtual consultations with doctors to the general public to alleviate pressure on the health system.

Vodacom has always prioritized education as part of our social contract. And with children now being unable to attend school in person, e-learning has become even more important. We have seen user registrations on the platform increase to over 1 million. Our e-school platform is available for free through ConnectU. We've expanded our zero-rated offering to all public schools, universities and TVET Colleges across the countries to ensure that students enrolled into these institutions will be able to access relevant information for free via these portals.

We are also assisting governments with big data analytics, providing aggregated data to help track the spread of the disease as well as to monitor population movements. This includes offering the use of location services, which is based on aggregated and anonymized information. These insights can assist decision-makers in understanding how people are responding to various COVID-19 interventions, such as the national state of disaster lockdown. These are just some of the numerous activities that we have implemented across our markets to assist governments in their response.

Looking ahead, we see the future in 3 distinct phases. Of course, it is very difficult to put time lines across these phases, considering the amount of uncertainty facing the world right now. We are currently in Phase 1 of the crisis, where our immediate focus is the enabling of critical functions and assisting governments in saving lives. This phase was about quick responses to save lives and supporting our staff, governments, customers and suppliers.

We see Phase 2 as the recovery phase, in which our focus will be supporting the broader societal recovery, which we are now slowly heading towards. Businesses will attempt to recover and jobs are hopefully restored. Our response in this phase will be to support our individual and business customers as well as our supply chain and distribution. We will provide targeted and personalized offers and solutions to our consumers and businesses.

Phase 3, the new normal, will see a societal focus on economic resilience, where our focus will be once again on platforms for a new growth trajectory. Our response in this phase will be to assist with more platform offerings as more and more businesses go digital. Till will share some of the elements around the resilience of the company as we forge ahead with the crisis.

I thought I would share some of the trends we are seeing across the business as a result of the pandemic. Mobile data traffic on average in South Africa is up 110% year-over-year and around 20% compared to pre-lockdown levels. In the initial stages of the lockdown, we did see spikes of 40% increases in traffic.

On the voice traffic, it has been mostly been flat overall with slight increases in the consumer segment but down in the Enterprise segment. Air time recharges has been slightly up compared to pre-lockdown despite price adjustments with the lowering of 30-day bundles by as much as 40% from the 1st of April.

As expected, roaming revenue has seen the biggest reduction. In South Africa, we have experienced around an 80% reduction. However, it is important to note that roaming revenue only makes up less than 1% of our service revenue. Gross connections are down as expected due to our stores being closed for the lockdown period but picking up now that they have reopened. Churn is also down.

In our International markets, data traffic is up in all countries by around 10% to 15%. Voice volumes are flat. But we have seen negative trends in the DRC and Lesotho. Recharges are down except for Tanzania, which are in line due to minimal restrictions. M-Pesa revenue is down mostly due to the free person-to-person transaction fees that are currently being offered.

Let's now turn to the results for the financial year and look at some of the key highlights for the group. An improved second half performance in South Africa and the sustained growth of our International businesses has contributed to the growth -- to the group achieving a 4.8% growth in revenue.

The past year has been characterized by strong customer growth. We now connect 116 million customers across the group, including Safaricom. This is an increase of 5,4% of the customer base. Our data customers have increased close to 11% to 61,5 million customers. Again, this year, we continue to invest significantly in all our markets, modernizing our networks and increasing high-capacity backhaul fiber and microwave while also enhancing our IT systems.

Our CapEx spend was ZAR 13,2 billion, of which close to ZAR 10 billion was invested in South Africa alone. This equates to capital intensity of 14.6%. EBITDA grew by 11.6% to ZAR 37,6 billion while operating profit grew 13,2% to ZAR 27,7 billion. Till will go into more detail about normalization in his section. Headline earnings per share was up 8.9%, bolstered by the once-off BEE cost of ZAR 1.5 billion included in the prior year. The Board resolved to declare a dividend of ZAR 4.05 per share, resulting in a total dividend per share of ZAR 8.45, up 6.3%.

The diversification of the portfolio with Safaricom and International acting as a rand hedge has contributed to our strong growth. The information presented on the slide shows the context of our 3 segments, with Safaricom only represented on a proportionate basis. The graph shows how the contribution to the group has changed in the last year. Close to 40% of the group's service revenue and just under 35% of the EBITDA comes from our International Opcos and Safaricom compared to 37% and 30%, respectively, last year. We have added an impressive ZAR 4,9 billion in service revenue to the group and ZAR 5 billion in EBITDA. Nearly 65% of the group customers are outside South Africa.

In South Africa, despite the weak economic environment and the proactive price cuts to our out-of-bundle rates, service revenue rose 2.3%. Data usage elasticity supported recovery to the growth in the second half. Excluding a number of once-off benefits, underlying growth for the year was 3.3%. EBITDA grew 4,9% with underlying growth of 2.2%. We announced sharp data price reductions, specifically out-of-bundle data rates, in the first quarter. This led to a steady increase in data traffic and elasticity with improved service revenue performance through the year.

We added 1,9 million more data customers, a 9,7% increase to 21,9 million. The number of 4G devices on our network increased 34.5% to 12,9 million while the average usage per smart device increased 56% to 1.5 gigs. The increase in the drivers of data growth give us confidence that we will continue to see elasticity to compensate for the price transformation initiatives, which we agreed with the Competition Commission as part of our social contract, which we implemented from the 1st of April.

As part of our strategy to build diverse and sustainable revenue streams, our efforts to introduce one more service to customers continue to gain momentum. In the pie chart on the slide, you will note the contribution to service revenue of our core service revenue categories, namely consumer contract, prepaid, enterprise and wholesale service revenues. What is included in these segments are our new services, which have been stripped out in order to illustrate the amazing growth we are seeing from these new business units. IoT revenue has grown 38.5% this year with fixed revenue growing at 13.5%. Our digital lifestyle services and financial services businesses have grown 13,2% and 21.5%, respectively. But more about these a bit later.

Through our proactive pricing transformation program, we have been bringing down data prices for a few years now. Prices could have dropped faster if we had been allocated spectrum sooner. Looking back on the journey from 2017, we added more data to our integrated price plans. We then made prepaid and analog bundles even more accessible and affordable by adding shorter validity period bundles to our selection in 2018. Last year, we made some dramatic price cuts in our bigger bundles. And in March of 2019, we made the out-of-bundle charging experience better for customers with positive opt-in for out-of-bundle charges as well as a 50% proactive rate cut over and above the regulations implemented by ICASA.

As of the 1st of April 2020 and in line with the agreement we reached with the Competition Commission, in keeping with our social contract, we reduced prices of all our 30-day bundles by up to 40%. Included in our social contract on our ConnectU platform, we have extended further discounted bundled offers to prepaid customers in areas where the majority of people live below the food poverty line. This will benefit more than 2,000 suburbs and villages, ensuring that this benefits people that really need it the most.

Data traffic increased 66% for the year but notably 75% in the second half of the year, which is especially encouraging, considering the expected price -- the expected elasticity due to the price cuts. A windfall from the current crisis is that we will get some increased data elasticity to offset some of these changes. All of the above have assisted in adding close to 2 million more data customers this year and selling more data bundles, which is up 15% and close to 1 billion bundles sold this year.

It has been another stellar year for our International portfolio, where we recorded margin expansion for the second year and further diversified our currency exposure from the South African rand. An increased demand for data and M-Pesa services, together with additional customers in each of our operations, has contributed to a 12.5% increase in service revenue across our International operations. The International operations now contribute 29,7% to group service revenue. Strong customer growth of 11,5% to 38,6 million customers continues to reflect good execution of our strategy being the leading operator in all our operations.

Data services remain a key area of growth with data revenue growing at 17,3% as we added 2,3 million customers to reach 20 million data customers this year. The M-Pesa ecosystem continues to grow across all our operations. A bit more on that later. EBITDA grew 9,4% as margins expanded to 38,6%. We have seen strong commercial growth in Mozambique and DRC this year.

The pie chart on this slide indicates the contribution of each of the International markets to International service revenue. DRC is the biggest contributor at 34%, having grown 8,3% this year. Tanzania's contribution is 30%, having only grown 0.9% this year, being impacted by the barring of 2,9 million customers from January this year. This is in line with the regulatory requirements for customers to biometrically register all SIM cards. We have reconnected 707,000 of these customers. 2,5 million customers remain non-biometrically registered as at the end of March. The barring of these customers has now been delayed in response to the COVID-19 pandemic. Mozambique had a good year, growing service revenue 16,4% despite the impact of Hurricane Idai.

On the back of acquiring 4G spectrum in all our International markets, we've accelerated our 4G rollout in all our operating companies and have grown 4G sites by 68%, spending ZAR 3,2 billion in CapEx, expanding coverage and increasing capacity. Data traffic grew 31% with data revenue growing at 17,3% and contributing 17.1% to International service revenue. Our data customers are up 13,1% to 20 million, of which only 10.2 million customers are on smartphones. 52% of the subscriber base are data users, which also highlights the big opportunity for future growth. We continue to drive the adoption of affordable smartphone devices with average usage per customer reaching almost 1 gig in Tanzania and Mozambique, evidencing continued growth in demand. We will continue prioritizing the monetization of data in our International operations.

Safaricom continues to increase shareholder returns with net profit up 19,5%. Service revenue grew 4,8%, supported by strong customer acquisition and a recovery of market share following price cuts in data. Mobile data has returned to double-digit growth at 12.1% for the year and 20.4% in the second half as its recovery gains momentum driven by increased penetration and usage. Data customers grew at 10.2% to just under ZAR 20 million. M-Pesa continues to perform strongly, growing at 12.6% despite the zero rating of M-Pesa transactions in response to the COVID-19 pandemic. M-Pesa customers grew 10% to 24,9 million. The strong performance that we've seen in our International operations and Safaricom strengthens our strategy of having a portfolio of assets providing resilience in our performance.

The building blocks of our strategy remains largely the same. In the following few slides, I will give you more insight into how we are growing new products and services. As part of our strategy to build diverse and sustainable revenue streams, our efforts to introduce one more service to customers continues to gain momentum. Our digital service business has also produced solid growth, contributing ZAR 1,5 billion in revenues on the back of increasing purchases of our video-on-demand offering and our music, sports, gaming and other platform services.

This year, we saw over 3,5 million purchases on our Video Play platform. Through our music platform, My Muze, we have 1,9 million active subscribers now. And our gaming platform, PlayInc., has 883,000 subscribers. All of these services are in infancy phase but contributing to solid growth in our digital service business. We are also expecting these platforms in our International operations -- we are also expanding these platforms in our International operations, which allow us further opportunities to continue monetizing this business further.

One of the highlights this year is the growth in our Financial Services business. Total Financial Services revenue across the group grew 22% to ZAR 18 billion. This includes our operations in South Africa and the M-Pesa businesses in Safaricom and our International markets. Total Financial Services customers was up 12,8% to 53,2 million, adding 6 million customers in the last year.

Let's take a look at the business in South Africa and M-Pesa. Our Financial Services offering in South Africa continues to expand and shows growth of 21.5% for the year to ZAR 2 billion on the back of our popular Airtime Advance, insurance and VodaPay services. We now have 13,6 million customers using a Financial Service product in South Africa. We advanced ZAR 9,9 billion in airtime via our Airtime Advance platform to 9,9 million customers.

Within the payment space, we launched our VodaPay application during the year, offering direct airtime purchases, electricity, water and bill payments with more to follow in the future. There are numerous benefits of having our own platform, including the savings of third-party processing fees when selling airtime directly and many options for products and functionality. We have also launched our own point-of-sale devices in stores and shops. We've expanded our lending services for SMEs with the launch of VodaLend.

Insurance revenue increased 16,1%, driven by the launch of innovative products. And our insurance policies are up 45,3% to 1,9 million policyholders now. We continue to expand our portfolio with new innovative products in the space, leveraging our customer base and Vodacom brand.

The Financial Services portfolio also includes the Vodacom Trading Bridge, which is a business-to-business e-commerce service that supports the automated and integrated exchange of transactions between businesses. It's enabled the facilitation of managed information flows to support supply chain excellence. In the past year, this platform enabled ZAR 200 million worth of transactions between wholesalers and retailers. We'll continue to expand on our Financial Services offering.

M-Pesa continues to deliver on its promise of delivering financial inclusion. As a group, a total of close to ZAR 2.6 trillion passes through the M-Pesa platform annually, servicing a combined 39,6 million customers. In our International operations, M-Pesa grew revenue 29,8%, contributing 18,3% to service revenue. M-Pesa customers grew 9,2% to 14,7 million, which is 38,2% of the base now using this service. In Safaricom, M-Pesa revenue grew 12,6% in local currency and 19,7% in rands, contributing 33,6% to their service revenue. There are now 24,9 million M-Pesa customers in Kenya, increasing by 10% in the period. 70% of the customer base in Safaricom uses the M-Pesa service.

Underpinning the growth are now new overdraft products in both Kenya and Tanzania. There are 12 million customers in Kenya making use of Fuliza to overdraft facility. In Tanzania, we have seen very good traction in our recently launched overdraft product known as Songesha, with 5,3 million customers utilizing the service, up 178% from 6 months ago. The total nano loans in these 2 countries equates to $2,5 billion. These overdraft products allows customers to take the loan on failed transactions when they're trying to purchase something and don't have sufficient funds. These overdrafts are being used for basic needs such as food. This is true financial inclusion.

We continue to expand M-Pesa ecosystem in all our operations and improve monetization. For example, we have also widened our international remittance partner network, extending interoperability to more banks in Mozambique to ensure easier movement of funds to drive transaction volumes. Vodacom and Safaricom has also acquired the M-Pesa brand support and product development services from Vodafone to a newly created joint venture. The transaction will accelerate M-Pesa's growth in our operations by giving both Vodacom and Safaricom full control of the M-Pesa brand, product development and support services as well as the opportunity to more closely align product road maps to be deployed across all markets. We will continue to expand M-Pesa internationally and our Financial Services business in South Africa with the expectation that these will increasingly contribute to revenue growth.

It's been a year since we announced the acquisition of a strategic stake in IoT.nxt, and the partnership is yielding great results. This is really a success story of a local company going global by providing products and services such as asset tracking solutions in the manufacturing, mining and security industries around the world. IoT revenue was up 38,3% to ZAR 893 million with IoT connections increasing 17.2% to 5,3 million with revenue growth of 38,5%.

We have been leveraging our global reach through our Vodafone global enterprise customer base while our teams collaborate with IoT.nxt to sell various solutions to customers, such as smart building and smart base station solutions. More recently, the teams have been hard at work developing solutions for the COVID-19 crisis, including people counters through app technology, thermal imaging, traffic monitoring and artificial intelligence for the predictive queue management for social distancing rules. Looking ahead, we expect our IoT initiatives, given our portfolio of assets in this space, to continue driving growth.

We announced our strategic collaboration agreement with AWS last year. The AWS Africa region cloud services has now been launched. We now offer services in AWS infrastructure, development operations, advanced services in AI and machine learning, SAP and security. We have created a Vodacom AWS Cloud Centre of Excellence to help small- and medium-sized businesses, enterprises and public sector clients to migrate to the AWS cloud. This will ensure that Vodacom businesses' clients accelerate adoption and benefit from next-generation technologies. We've already built up a pipeline of projects to make use of these opportunities.

We are also excited to have recently partnered with a few consulting companies in establishing our smart service offerings. These partnerships are aimed at creating an industry-specific approach for clients that will enhance their businesses through digitization by providing digital platforms, tools, applications and services. These consulting partners have agreed to add their world-class management consulting expertise, digital capabilities and design thinking skills to our smart service offering program for joint go-to-market [southward] activities. Together, we plan to broaden our digital transformation journey and add digital capabilities, such as cloud, security, analytics, bots and others.

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


Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [2]


Thanks, Shameel. I will now take you through the financial performance. We have delivered pleasing results. From a shareholder perspective, we've had good per share growth in headline earnings as well as dividend. This year, we are lapping our BEE deal, which suppressed earnings in the prior year.

This is also the first year that we are reporting under IFRS 16, the new lease accounting standard, as we've entered the new fiscal year on 1st of April. You will have a like-for-like comparison in regard to our financial results going forward. Lastly, we end the year thoroughly stress-testing our business model and our balance sheet in the wake of the COVID-19 pandemic. The short answer is we are, by and large, in good shape. But before we get into that, let's talk about the results for the year just closed.

Looking at the income statement with reported growth in the first column based on IFRS 16, I will talk mainly to the normalized growth numbers, which from an operational perspective, gives you better insight into what is happening in the business as we exclude ForEx fluctuations, M&A activities and the differences in accounting under the new IFRS 16 standard compared to IAS 17.

Revenue increased by 4.8% or 3.5% on a normalized basis and service revenue was up 5%, normalized 3.5%. This is solid growth at a group level. The International portfolio contributed 29.7% to group service revenue, up 2.7 percentage points year-over-year. EBITDA grew on a normalized basis with the International portfolio -- EBITDA grew 2.3% on a normalized basis with the International portfolio now contributing 23.1% to group EBITDA, up 4.6 percentage points year-over-year. The normalized EBITDA removes operating lease expenses in the prior year, making this a like-for-like comparison. In line with our parent company, Vodafone, we also disclosed EBITDA-aL, which includes the depreciation and finance costs relating to the leases defined in IFRS 16, which is largely comparable to EBITDA closed in prior years.

The net profit from associate and joint ventures of ZAR 4.1 billion includes a profit share from Safaricom of ZAR 3.4 billion as well as the group shares in the bargain purchase gain of ZAR 745 million from the business combination of the M-Pesa Global Services business. M-Pesa Global Services is a joint venture that was created by Vodacom and Safaricom to advance the further development of the M-Pesa products and services, as explained by Shameel earlier.

During the year, we disposed of some of our Vodacom Business Africa entities for ZAR 211 million. This has resulted in a net loss on disposal of these subsidiaries of ZAR 819 million, which relates to the write-off of the total net investment in ordinary shares and preference shares as well as the realization of the net post-acquisition reserves and translation gains now realized through the income statement below operating profit and excluded from HEPS.

Net finance charges increased by 59.7% and include finance costs of ZAR 1.4 billion on lease liabilities. Excluding these, finance charges were up 8% year-over-year. The tax charge was down 2.2% compared to the prior year. Although profit before tax is up 4.4%, taxable income excludes the net profit from associates as these are already net of taxation. Excluding this, the taxable income was lower in the current year.

HEPS was up 8.9% to ZAR 9.45 per share as we lapped the BEE deal in the prior year and earnings per share was up 7.7%. We declared a final dividend of ZAR 4.05 per share, which takes the full year dividend to ZAR 8.45 per share, up 6.3% year-over-year, a well-deserved return to our shareholders especially in these uncertain times.

In South Africa, we note a strong return to growth from Q2 onwards. This was a result of elasticity of demand, which we anticipated, following the out-of-bundle price reductions earlier in the year. Furthermore, it also benefited from onboarding more of the telcom traffic under the roaming agreement, which is now fully completed. Just to remind you, in the prior year, there was a one-off deferral benefit as well as a reduction in MTRs in October. Excluding this, you will note stronger underlying growth of 5% and 5.1% in Q3 and Q4, respectively.

Turning to International. These operations have delivered very good growth consistently over the last 2 years. The last quarter was, however, impacted by the biometric registration in Tanzania. Key drivers of the growth are M-Pesa and data. Normalized M-Pesa revenue growth was strong at 22.7% and now contributes 18.3% to our International service revenue. This is up 2.4 percentage points from the prior year. M-Pesa revenue continues to grow strong in all our markets. In Tanzania, it already contributes 35% of service revenue while our fastest-growing market is Mozambique with growth of 59.4%, where it contributes 15.8% of service revenue.

We have again contained our cost growth well. This was achieved through various initiatives under our Fit for growth program and the digitization of our business. I will highlight 4 cost drivers. The first is cost related to our capacity agreement with Rain, which are included in direct cost. With over 3,000 sites now live and more to come, we recorded an increase in direct cost, which we have quantified was about 1.3 percentage points growth in expenses while benefiting from the added capacity. We have renegotiated the terms of the Rain agreement, opening up for more sites but with improved economics.

The BEE staff costs are for participation of South African-based staff in our BEE deal. Shares in the scheme vests in equal portions in the third, fourth and fifth year. So this cost will recur over the next 2 years and then decline afterwards. In South Africa, excluding the Rain costs and BEE staff expenses, total expenses increased 2.3% on an underlying basis.

Moving to the International expenses. These costs include USD 6.9 million for the extension of our 2G license by an additional 10 years in Vodacom Congo and relate to a penalty settlement and administrative costs.

The biometric registration in Tanzania led to an increase in compliance costs of about ZAR 100 million. On a normalized basis, expenses was up 7.5%. Excluding the effect of the biometric registration costs and the DRC license costs, expenses grew just 5.9%, which is a very credible result while we continue to expand our network, increase our leases and incur higher energy and maintenance costs.

Over to EBITDA. The graphs on the slide show normalized margin that removes the differences between the 2 reporting standards for leases. Group EBITDA grew by 2.3% on a normalized basis with a 0.6 percentage points contraction in margin, mainly reflecting the pressure in South Africa in the first 6 months. South Africa growth was flat on a normalized basis. This number also includes 3 specific items, 1 in the prior year and 2 in the current year: firstly, the ZAR 389 million deferral release in the prior year; secondly, the increased Rain roaming costs of ZAR 445 million, as I already explained; thirdly is the BEE expense charge of ZAR 226 million in South Africa. As a total, it is ZAR 242 million for the group. Excluding these items, growth was 2.2% for the year.

Our International operations continue to perform well with strong commercial execution and strong focus on cost containment. EBITDA grew by 9.4% on a normalized basis while margin improved by 0.8 percentage points. Our International operations now contribute 23.1% to the group compared to 18.5% in the prior year. As they improve profitability, these markets now start to proportionately contribute more to the group's bottom line performance. This is in line with our strategy of diversifying profitability with better contributions with higher margins from these markets.

Let's now look at the net finance charges. These were up 59.7% compared to the prior year. And if we exclude the impact from the finance costs relating to leases, net finance charges increased 8%. The majority of the increase relates to the interest on the YeboYethu preference shares held by external parties accounting for ZAR 130 million of the variance. As the debt in the prior year was raised in September when the deal was concluded, the increase in the finance income relates mostly to interest earned on cash balances held on M-Pesa.

The average cost of debt has decreased to 7.7% compared to 8.2% in the prior year. This is in part due to the interest rates achieved on the third-party debt for the BEE deal and preferential rates procured on new funding, including a ZAR 2 billion sustainability-linked loan with Standard Bank. Net debt, excluding leases, increased ZAR 532 million with bank and cash increasing by ZAR 5.1 billion and borrowings by ZAR 4.5 billion.

I will start with borrowings. The increase relates to the new sustainability-linked loan, where the interest rate is dependent on certain sustainability metrics being met over the next 3 years and evaluated annually, underpinning our evolving focus on ESG. We also increased some of our facilities with Vodafone Luxembourg with an additional ZAR 3.5 billion to fund our capital expenditure. Bank and cash increased by ZAR 5.1 billion mainly due to the increase in loans as explained. This resulted in net debt-to-EBITDA increasing to 0.9x. Excluding these lease -- excluding the lease liabilities, which are under IFRS 16 reported as debt, our net debt-to-EBITDA-aL is at 0.7x, flat year-on-year, again a strong balance sheet position, which is helpful these days.

The tax charge of ZAR 6.4 billion declined by 2.2%, in line with our taxable income as well as the exclusion of the profit from associates from taxable income. The prior year profit before tax included a nondeductible, noncash, nonrecurring IFRS 2 charge of ZAR 1.4 billion, which elevated our effective tax rate. Excluding this, our prior year ETR would have been 27.9%, in line with the current year of 27.8%.

Reconciling our effective tax rate from the statutory South African tax rate of 28%, you will note the largest benefit comes from the inclusion of Safaricom's net profit from associate and our profit before tax as these are already net of taxation. This benefits the ETR by 5 percentage points.

Included in the irrecoverable foreign taxes are the withholding taxes suffered on the intra-group dividend income from Tanzania, Kenya and Lesotho and irrecoverable withholding taxes suffered in the DRC in respect of intra-group loan interest income. Included in the nondeductible OpEx expenditure is marketing expenditure incurred in Mozambique and consulting and legal fees incurred in South Africa. The main components in nondeductible finance costs is the preference shares held in the BEE scheme and unproductive interest on the short-term loan entered into the acquisition of the minorities interest in Vodacom Tanzania earlier in the year.

The loss on disposal of the Vodacom Business Africa subsidiaries contributed 0.4 percentage points to the effective tax rate as no deferred tax asset was recognized for these capital losses. Our key operations in the DRC, Mozambique, Tanzania and Kenya are subject to higher statutory taxes -- tax rates than in South Africa and hence a negative 0.4 percentage points impact on the effective tax rate of these tax rate differences.

Operating free cash flow was up 0.6%. Working capital benefited from some timing variances at the end of the year as a result of inventory shipments and renegotiated terms with suppliers. Capital expenditure was ZAR 13.2 billion, which equates to capital intensity of 14.6%. This is a 0.1 percentage points -- point above the upper end of our target range mainly as we invested for additional capacity ahead of lockdown measures in South Africa. We also invested in additional battery capacity in more sites for periods of extended low trading. So these liability payments amounted to ZAR 4 billion, which includes a capital interest -- the capital and interest repayment. These are the operating lease payments previously accounted for in operating leases included in EBITDA and working capital.

Cash tax paid was ZAR 6.4 billion, 1.8% lower than a year ago, predominantly in line with business performance. The net finance costs paid increased mostly due to the payment of interest on the preference shares relating to our BEE deal for -- now for a full year compared to only a few months in the prior year. And dividend received from associate was higher due to the special dividend received from Safaricom during the year amounting to ZAR 1.1 billion, boosting free cash flow growth to 9.5%.

Now over to HEPS. Headline earnings per share grew 8.9%. The BEE deal cost had an adverse effect on the prior year and hence boosted growth in the year, which equates to ZAR 0.72 impact. This includes impact from staff cost and financing, as explained earlier. Safaricom contributed positively ZAR 0.25 per share. The one-off deferral release is ZAR 0.17, which need to be normalized for, while the core declined ZAR 0.04. Overall, this is a strong result given the pressure in the first half on South Africa performance and evidences the added diversity that the Safaricom investment brings to our results.

The Board has declared a final dividend of ZAR 4.05 per share, which equates to ZAR 7.4 billion. A special dividend was paid out by Safaricom and passed on to our shareholders at our interim results period. Hence, the total dividend declared is ZAR 8.45 per share, which sees an increase of 6.3% on value returned to our shareholders this year. I'm sure this is a well-received return after 2 years of suppressed dividend per share growth due to the shares issued for the Safaricom acquisition and the BEE deal. It is the intention of the Board to continue paying dividends in accordance with the current policy. The Board will give due consideration to the effect that the COVID-19 pandemic could potentially have on the financial position of our business and its solvency and liquidity position.

Over to COVID-19. COVID-19 is now a reality in all our operations. We have varying degrees of lockdowns or mobility restrictions in our operations, all affecting the business in different ways. Shameel has gone through some of the trends that we are seeing from a consumer behavior perspective. I will give you some insights into our balance sheet and further aspects.

But first, I think it is important to note that our share price has held up quite well in the wake of the crisis. We continue to trade at a premium to our emerging market peers, mostly as a result of consistent performance, good execution and a strong balance sheet. We've also made -- we have also shown many times how we can navigate challenging situations and achieve the best possible outcome.

Our balance sheet is one of our key strengths. We have been maintaining a low net debt-to-EBITDA ratio of between 0.6 and 0.7x for the past 5 years. Similarly, for this year, we have maintained net debt-to-EBITDA-aL at 0.7x, excluding the capitalized lease liabilities. Stress-testing this number a bit, if we had to increase net debt to 1.5x, which is still a pretty comfortable level to manage, it would still leave room to take on an additional ZAR 18 billion in debt. Or inversely, all else equal, EBITDA could decline by ZAR 14 billion to reach a 1.5x net debt-to-EBITDA level.

We've also carefully managed our debt profile given the backdrop of the COVID-19 pandemic. We don't have any material near-term debt payment obligation, which enables us to manage the business without this immediate pressure. More than 90% of our debt is rand-based. So the depreciation of the rand does not have a major impact.

Over the past couple of years, we have maintained a market-neutral interest rate exposure between fixed versus floating debt to create predictability during periods of volatility especially given South Africa's ratings agency outlook. We recently fixed ZAR 5.5 billion of our debt at the time when the 3-year swap rate was favorable as part of our refinancing activities to manage risk. And to close out on a final point, we've doubled our committed facilities to ensure sufficient liquidity should any short-term pressure arise.

This brings us to our medium-term targets. COVID-19 is top of mind. Let me summarize the key points in relation to COVID-19. Telecommunications services have been classified as essential services during South Africa's lockdown. And we could see how enormously important it is for countries -- for our countries, societies under COVID-19 to stay connected, work from home and use financial services, truly underpinning our role in enabling digital and financial inclusion.

Short-term revenue dynamics have been varying across our markets. Everywhere, we have seen traffic going up between 10% to 40% month-on-month. This is positive for revenue growth. However, we equally have offered in the International markets and Safaricom, amongst other measures, free P2P M-Pesa transaction. This is negative for revenue growth. On the direct cost side, we save on acquisition and retention spend due to lower trading activity but also less churn.

On OpEx, we naturally save travel, events and variable facility expenditure. Since we launched our Fit for growth program some years ago, you heard me explain how it targets structural cost savings from the transformation to digital. Two comments here: One, the experience to do everything remotely or from home for some weeks is certainly a catalyst to accelerate our digital transformation as customers -- customer behavior is changing. Two, since our Fit for growth program is more structural, more long-term-focused, we have the opportunity to save costs through short-term measures. And we have set ourselves an additional cost savings target to support our bottom line.

Though we have not seen significant volumes of customers or trade partners in arrears, I do expect that some short-term working capital pressure -- I do expect some short-term working capital pressure and also some increase in bad debt. We intend to maintain our CapEx intensity throughout the crisis that allows us to adequately invest into growth in our network and IT capabilities, but we will maintain flexibility in relation to the priorities we will direct it to and also in relation to the amount.

Over to the medium-term target question. There's still a high degree of uncertainty at the moment, and economic downturn will affect both our and other businesses. It is for these reasons that we are postponing our medium-term target guidance until more certainty emerges, both in terms of the economies that we operate in but also in terms of how customer behaviors will change. Once these factors stabilize, we will resume our targets and tell you what we think how the next 3 years can look like.

Finally, this is my last results update to you. I have thoroughly enjoyed the 6.5 years at Vodacom. It was a pleasure working with you and a fantastic team here at Vodacom. And if we had a normal pre-COVID-19 results update with many of you being here in person, we would have shaken hands. But now we stick to social distancing, and I will just wave at you and say thank you, thank you, thank you.

And on that note, a quick reminder that you can post your questions to Shameel and I in the space provided on the webcast link. And I'd like to hand back to Shameel for the priorities.


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [3]


Thanks, Till. So to conclude our presentation today, I would like to highlight our 6 key immediate priorities. Firstly, on the spectrum, we remain optimistic as there has been some good progress by ICASA on the allocation of high-demand spectrum. By their own account, they are aiming to complete this process by the end of this year while the one licensing will happen in the following year. In the meantime, we have been allocated temporary spectrum to manage the increased demand.

Dealing with the effects of the COVID-19 crisis will, of course, be a key priority for us as we will continue to support our staff, governments and our customers. Transforming our revenue into new verticals such as digital services and IoT will continue to be a focus area. These new verticals with the platforms they require are complementary to our traditional revenue streams but also can be further leveraged from our strong brand reach and reputation in the countries where we operate.

Our industry-leading applications of big data and machine learning continue to differentiate us from our competitors. We are very focused on our digital Vodacom project, and we are seeing good results so far. The opportunity for growth in fintech in South Africa and M-Pesa is significant and remains a key priority for us. Data monetization in all our markets remains a priority, ensuring that our capital investment in networks across our footprint yields also desired returns.

As a final note, this will be Till's last results announcement with us as he leaves Vodacom in June. On behalf of the Board and the Exco, I would like to extend my sincere appreciation to Till for his commitment and exceptional contribution to the Vodacom Group as CFO. On a personal note, I've really enjoyed working with Till and wish him the very best of success in his new venture. We will announce a successor in due course.

This concludes our presentation for this morning. Thank you for attending. Till and I will now be taking questions.


Questions and Answers


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [1]


Thank you, Till and Shameel. First question is from John Kim from UBS. A couple of questions. Given the COVID lockdown, is price elasticity with regard to the competition commission price cuts trending as you thought it could? He's also asking, given government time lines on emergency spectrum, how do you see CapEx progressing, focusing on supply chain as well? And then lastly, given the purchase of M-Pesa, any changes in strategy for Vodacom rollouts?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [2]


I think, firstly, on the price elasticity, what we've seen is actually very good elasticity. As we said, we've seen 40% increase in traffic -- or up to 40% increase in traffic. But on average, it's been about 20% uplift. So that's been really, really strong. And so -- and 110% increase year-over-year in terms of traffic growth. So I would say one of the benefits of the lockdown has been that we have seen the elasticity, and it's probably been a little bit above our expectations.

The -- how do we see progress -- the CapEx spend progressing or investment? The temporary spectrum allows us to basically alleviate some of the additional sites that we would have added. So what we're utilizing the CapEx for or the spectrum for is to give us capacity especially in hotspots where we need to alleviate some of the pressure. It does show us what the capability is if we do get access to more spectrum, how can that drive down savings.

In terms of change in strategy, I think really very much what it now gives us is the ability to create a new platform for M-Pesa. And I think that's where a lot of the success will come from. So we can create a common product road map but also ensure the future of M-Pesa going forward. We're not going to add more countries. What we are going to do -- besides Ethiopia, which we're obviously interested in. But other than that, it's making sure that we prepare for a better, let's say, smartphone opportunity, what -- that presents itself through a new M-Pesa platform, where everything can be done from the platform itself.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [3]


The next question is from Jonathan Kennedy-Good from SBG. Please, can you provide some color regarding the impact of renegotiation of the Rain roaming agreement and how the Rain roaming costs will impact SA EBITDA into FY '20 and FY '21? Should we expect further margin compression despite the renegotiations?


Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [4]


Let me take that question. So I've talked already about the cost and normalized for that. And we've given it 1.3 percentage points of basically expense normalization in FY '20. That was just the cost side. Now in terms of your question on EBITDA, of course, remember, we also do have non-service revenue income as we are leasing out our sites to Rain. Hence, the EBITDA effect is actually fairly small that you are looking at from a year-over-year point of view. So that's point one.

Point two, we have extended it from a time line point of view to 10 years' agreement period, and we equally have increased the number of sites that we would be providing, respectively, utilizing the roaming capacity on. And we have also improved the economics of that agreement. But to answer your question at the very end, yes, I do expect, going forward, as we take on more capacity from the Rain network under the roaming agreement, also to have a little more EBITDA margin compression still. But again, as I said, at economic -- at better economics.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [5]


The next question is from Slava from Goldman Sachs. If we are speaking about near- to medium-term outlook, where do you see highest impact and potential mitigating factors across revenues, EBITDA and CapEx?


Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [6]


So let me just clarify first when we talk about near term -- the key question is in actual fact, how long will COVID-19 impact markets and economies? Will it be a 6-month, a 12-month, an 18-month period? I think you can take various views on that question. Sorry, can you just bring the question up again? Thank you.

So the impact on revenue or mitigating factors on revenue, I think you need to look at a couple of things. On the one hand side, you can see that traffic has actually seen a growth. There was a boost in it. On the other hand side, you have seen that we have given in our market, short-term, free-rated P2P, which is basically a negative to revenue growth. Mitigating factors going forward is -- I expect this elasticity. And again, you could see, it's, in essence, a role that we play where people use more voice communication, more data communication to work from home and stay connected.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [7]


Thanks, Till. Next question is from Londiwe Buthelezi from Fin24. Of the USD 2.5 billion in Fuliza loans issued to date, how much is the outstanding loan per customer? Do you plan to roll the service out in South Africa in the future? And then secondly, and how do you do collections?

As for VodaLend for SMEs only in South Africa, would you categorize it as micro loans? Or does it compete with other bank-backed SME-lending product? Is it also an unsecured loan like the nano loans in your International operations?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [8]


I think the first thing to remember on the nano loans and also the SME lending loans is that we don't take the bad debt risk, okay? The bad debt risk is taken by the institutions providing it. But it's sold through our platform. And we take a revenue share from that. So in that context, you're doing $200 million loan. Average loans are paid back in a period of about 2 days. And bad debt ranges between 0.5% and 1% maximum. So that's the kind of -- and you've got machine learning at the back of these products. So you can adjust the amount of loans and so on that you're extending to particular customers based on their individual bad debt risks.

In terms of -- the nano lending will be expanded into South Africa as well, and it will basically be through our VodaPay platform. And we see an opportunity that if we can advance airtime, why can we not advance things like electricity, water and other products and services? So that's the one side. The collection happens from the M-Pesa first, or in South Africa, it will happen from the enhanced VodaPay platform that will be launched later this year.

So -- and then in terms of VodaLend, it's a SME-based loan platform, where essentially we're extending loans to SMEs. That's more like microlending as opposed to nano lending. Again, the platform provides the service to SMEs and the bad debtors sits with the institutions that are providing the lending at the back of that platform. We do see the microlending to SMEs being extended across all our markets.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [9]


Thanks, Shameel. Maybe another one for you, from Arthur Goldstuck from World Wide Worx. Does the COVID-19 crisis represent new opportunity for IoT rollout and new services?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [10]


Definitely. And I think one of the things that we've been looking at, I mean there's not much we can do about the crisis besides providing support to governments and doing as much as we can to help. But there is opportunities as well in terms of new products and services that can be presented. An example would be mobile money solutions. As people want to move -- cashless is a definite opportunity. That's the one. Second opportunity is definitely in the IoT space. We've already created a number of products and services, including thermal imaging products, scanning products, skill management products and so on.

So I think there is definitely opportunities. And then obviously, as businesses will move into a different type of environment, there's going to be more digitization, more goods being sold digitally and so on. And so we've -- through our Enterprise business also lining up a number of different products and solutions that we can provide to customers.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [11]


Thanks, Shameel. Next one is from JP Davids from JPMorgan. Please can you provide some of the scenarios the Board contemplated for medium-term guidance and why you did not choose a middle-of-the-road scenario subject to revision?


Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [12]


Thanks for the question. And I think that's one of the widely debated question probably for all businesses. So you can assume we've done various scenarios, a best-case, a worst-case, middle-of-the-road case with a number of assumptions around that. One of the major factors in all of these scenarios is basically for how long the crisis will going to last. That's one. And the second one is the economic impact it would have. You could see over the past couple of weeks that literally every week or every second week, these forecasts for South Africa and also some of our international markets got actually revised. That's the one point I want to make.

So what you can take for granted is that we've got various scenarios with various sets of measures, how to best manage and how to best progress the business. At the same time, stepping back and looking at all of them, a lot of them are highly assumption-based. And based on that, the Board and us, we have decided that it is more prudent to simply take another look as basically things progress. As the economic outlook becomes clearer, we've got a little more certainty as well around customer behavior. And once that would be the case, we would be coming out -- we would be coming back and giving you a view what we think the next 3 years could look like. It's just a more prudent approach.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [13]


The next one is again from Londiwe Buthelezi. You mentioned that you had received additional spectrum, you would have arrived at the current data prices a lot sooner. Now that you have been given temporary spectrum, will we see more price reductions especially as you gain more data customers who can help you play the volumes game? And secondly, how long do you get to keep the temporary additional spectrum?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [14]


So I think the important thing is, obviously, there won't be any more price reductions this year outside what we've already given. I mean there's a ZAR 2.7 billion package of price cuts that have happened from 1st of April, so there will be no more cuts. This is just helping us cope with the additional traffic because of COVID-19. And I think any further price cuts will only come in the back of new spectrum. And once we can fully implement it into our network, which will then allow us to drive down our cost to produce 1 gig or meg of data, and I think that's the way we said it.

How long do we keep the spectrum? I would say until -- so the spectrum has been given for as long as the crisis goes on. But it has to be given back before the auction takes place. And the auction is supposed to take place towards the end of this calendar year.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [15]


Next question is from Myuran Rajaratnam. He just wants a bit more clarity in terms of the data traffic growth that we saw in April, around 40% and what the 20% related to.


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [16]


So essentially, what happened was you saw your traffic growth going up 40% initially. And as the weeks have gone up with some -- and the lockdown eases into level 5, people are starting to return to work. And so the traffic is now petering off a bit. And so we're seeing an overall 20% uplift in traffic. But you can see it's quite material year-over-year, where we've seen 110% increase in traffic compared to last year April. Now remember, the trends for the second half of the year was very good, but that was 75%. So 110% is quite a big jump in traffic.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [17]


I've got 3 questions from Preshendran Odayar from Nedbank. We'll do them one-by-one. First one, are you still looking for a fiber partner to acquire?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [18]


Yes. I mean we're still looking at fiber. We still think, from a strategic perspective, we need a bigger play in the connectivity space in all forms of connectivity. So I would say yes, definitely, we are interested in expanding fiber both organically and inorganically.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [19]


Okay. Second question, do you plan to spin out your towers as Vodafone has done into a separate Infraco?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [20]


Till, do you want to take that one?


Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [21]


So Vodafone is obviously in the process of setting that up and getting it live. From an infrastructure point of view, that is certainly an attractive topic to look at for our Vodacom markets. Remember, our portfolio and footprint has got sufficient scale. It is a little different market-by-market. In South Africa, we do have already a relatively high degree of sharing, lesser so in our international markets. But at the same time, we do think that in the future, a greater degree of sharing and potentially also with such a tower company model could be an attractive opportunity to look at.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [22]


And then the last question is I saw the Please Call Me matter seems to have popped up again recently. Can you share any color on that in terms of any probable cash settlement, please?


Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [23]


That's correct. So the Please Call Me matter, just give me -- let me just give you context again. About 15 months ago, Shameel in his role as a CEO, as a deadlock breaker, broke the deadlock that the negotiation teams between Kenneth Makate and Vodacom had run into. Since then, it's been in the public that Kenneth Makate and his team would like to launch a judicial review of this deadlock breaking, and they filed an application at the High Court for that.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [24]


Thank you, Till. And just a note from Preshendran, just best of luck for your future endeavors as well.

Next question is from Edward-John Bottomley from Business Insider South Africa. Could you give us a bit more detail on the data discounts for poorer towns that you have talked about? How big are these discounts? And how did you decide on these towns?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [25]


What we've done is looked at the poorest towns based on the data from Stats SA and so on and essentially taking the 2,000 poorest towns or suburbs. And then what we're doing is through our -- through the ConnectU platform and specifically what we call Just 4 You Town, we essentially make data even cheaper in these 2,000 smaller towns.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [26]


Thanks, Shameel. Another question from Slava from Goldman Sachs, maybe to you. Can you elaborate how Vodacom performance is structurally different versus the rest of the Vodafone Group or, let's say, European operators in general during the COVID crisis?


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [27]


Well, I think a lot of what we do in Vodafone is that we share best practices. So I think what's different though is that there's a greater reliance in South Africa on -- and in our markets in general, in Africa in general, on mobile networks, whereas obviously in Europe, you've got a more balanced approach between fixed and mobile. And Vodafone is obviously fortunate to be the largest fiber provider in Europe. So they play in both spaces. But certainly in Africa, I would say the difference is that we have more reliance on mobile networks.

For the rest, I think what we're doing is sharing a lot of practices in terms of making sure that we can -- we take the best practices and learnings from each market and then implement it. And being part of the Vodafone Exco has also been quite beneficial in that respect.


Shaun Van Biljon, Vodacom Group Limited - Managing Executive - IR [28]


That's it. So Shameel, that's all the questions that we've got. Just want to wrap up.


Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [29]


Just to say thank you for joining us. Thank you.


Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [30]


Thank you.