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Edited Transcript of VOD.J earnings conference call or presentation 11-Nov-19 8:00am GMT

Q2 2020 Vodacom Group Ltd Earnings Presentation

Vovadavalley, Midrand Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Vodacom Group Ltd earnings conference call or presentation Monday, November 11, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mohamed Shameel Aziz Joosub

Vodacom Group Limited - CEO & Executive Director

* Phil Till Streichert

Vodacom Group Limited - CFO & Executive Director

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Presentation

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

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Good morning, everybody, and welcome to our results presentation. A special welcome to members of the Board and my executive management team.

Before we look at our performance, I thought I would share with you our progress on purpose. Vodacom is transforming to be a purpose-led company with the objective of connecting everyone for a better future. We're optimistic about how technology and connectivity can change the future in a positive way as we continue to play a meaningful role in socioeconomic transformation across all our operations. We acknowledge our responsibility to ensure that every customer has access to technology that can make a meaningful difference in his or her life.

Access to data services is key to driving such accessibility. We have many initiatives, but the one I wanted to highlight today is our new free platform, which we have called, ConnectU, which will launch soon. This best platform offers customers free to access and free to use critical resources, all in one place. ConnectU will allow free data access to schools and university portals, including our own e-school's platform. Health and wellness sites such as Mum & Baby, safety sites and security sites, job sites and free social sites such as Facebook Flex will also be available. It will provide special pricing options for customers in under-serviced areas. All of these are designed to give customers access to improve their lives.

Recently, in partnership with the South African Police Services, we launched My SAPS mobile app. This app will empower us, as citizens, to contribute our own safety as well as the safety of our communities. The My SAPS app will enable South Africans to engage with law enforcement officials to provide tip-offs, find police stations and facilities and also has an emergency alert feature. The app is the first of its kind on the continent and will support national police efforts in South Africa by bringing communities into closer contact with their local police stations.

Let's look at some of the key highlights for the group so far this year. Sustained growth in our international business and improved second quarter in South Africa delivered growth -- group revenue growth of a healthy 3.9% to ZAR 44.4 billion. We added 2.7 million customers in South Africa in our international operations and Safaricom added a further 2.7 million customers. We now serve a customer base of 115 million customers across the group, up 5.8%. The group now has 61.3 million active data customers, an increase of 9.3%.

Again, this year, we continue to invest significantly in all our markets, with 4G expanding in all markets and continued investment into fiber and enhancing our IT systems, platforms and big data capabilities. Our CapEx spend to date was ZAR 6.3 billion, of which close to ZAR 5 billion was invested in South Africa alone. This equates to capital intensity of 14.3%, which is in line with our 3-year target range. EBITDA grew by 9.9% to ZAR 18.2 billion, while operating profit grew 16% to ZAR 12.9 billion, with normalized growth for EBITDA coming in at 0.7% and at 1.2%. This is adjusting for differences in reporting under IFRS 16 and IAS 17 as well as currency translation and M&A, which includes last year's BEE deal. Phil will go more -- into more detail about normalization in each section.

Earnings per share was up 19.4% and headline earnings per share up 18.9% as we left the once-off BEE cost of ZAR 1.5 billion in the prior year. The Board resolved to declare a dividend of ZAR 4.40 per share, which includes a special dividend, which is up 11.4% on the prior year distribution.

In South Africa, I'm pleased to say, service revenue has returned to growth. Customers are responding to our efforts to reduce data prices by increased data usage, which is up 54.6%. The service revenue decline reported in the first 3 months of the financial year was more than offset, resulting in service revenue growth of 0.3% for the 6-month period. Excluding the once-off benefit last year of ZAR 292 million, underlying service revenue growth was 1.5% during the first half and a healthy 4.2% in the second quarter.

The positive growth was from the expected uptick in data usage, which began offsetting the drag from the 50% cut in the out-of-bundle rates in March this year. This was further supported by the full onboarding of our new roaming partner at the beginning of the quarter, boosting other service revenue. This service revenue growth was attained despite a continued weak economic environment.

Underlying EBITDA increased 0.6%. The reported EBITDA number has a few one-offs and accounting changes. Till will unpack these in more detail. This was a credible performance given the subdued top line growth in the first half. EBITDA growth was achieved by managing our cost successfully. Our data customers increased by 4.3% to 21.4 million, with the average data usage for smart device growing at 53.5% to 1.3 gigs as more customers benefit from our pricing transformation program. Our 4G customers increased 28.8% to 11 million, which is very encouraging as we continue to drive down the price of 4G handsets.

Our international operations performed well, contributing double-digit service revenue growth of 15.5%, providing a good hedge against a weaker rand. The growth was a result of strong demand for data, with data revenue up 27.2% and from M-Pesa revenue, which grew 37.4%. Our international operations now contribute 30% to group service revenue. We continue to see good customer growth, adding 2 million customers in the first half to 36.6 million customers, which is up 5.4% despite some new registration challenges.

EBITDA grew 47.7%, boosted by currency and a material impact from accounting standard changes. Normalized growth was 15.4%. Underlying margins improved by 2.2 percentage points as a result of strong revenue growth and efforts to minimize cost through our fit-for-growth cost program. We invested ZAR 1.6 billion in rolling out 4G services, improving capacity and widening our network reach and quality.

Safaricom recently announced the results reporting solid growth with net income increasing 14.4%. Strong net additions of 2.7 million customers, resulted in a growth of 15.5% to 34.6 million customers. M-Pesa continues to perform strongly, growing at 18.2% to ZAR 5.9 billion for the 6 months.

Data revenue performance was subdued in the period, growing at 3.5%, with growth in September above 10% as it led to prior adjustments from -- the price adjustments from the prior year. Data customers grew 14.8% to 20.2 million, while usage increased 43.6% to an average of 919 megs per customer. Between the strong performance that we are seeing -- we have seen in our international operations and Safaricom, it is becoming increasingly evident why it is important to have a portfolio of assets to provide resilience in our performance. About 40% of our performance now comes from our footprint outside of South Africa.

Our strategy remains the same. We are gaining momentum in the growth areas of financial and digital services within the business. Within the next couple of slides, I'll give you some insight into these strategic areas.

Measures to improve one more service to customers as part of our strategy to build diverse revenue streams are quickly gathering momentum. Our digital services in video, music and gaming are providing customers with more reasons to consume data as we increase customer engagements through the one more service strategy. We have over 1 million customers engaged in our video platform with 14.8 million video-on-demand purchases during the period. These vary in validity periods of a day, a week or month, unlike other streaming services through our music platform, My Muze where 5.6 million subscribers buy music and welcome tones from us; and our gaming platform, PlayInc. has close to 350,000 subscribers. All of these services are relatively new, but are growing strongly.

Proactively bringing down data prices to stimulate more data usage is part of our price transformation program. This process has been ongoing for a number of quarters and also talks to changing -- to customers' changing behaviors, and our data is becoming more and more integral in our daily lives.

Let's look at some of the progress on these programs. In 2017, we added more data to our integrated price plans, and this is now complete. In 2018, we made prepaid and ad hoc bundles even more accessible by adding shorter validity period bundles to our selection. In this way, we were able to make bundles more affordable and give customers the option to purchase as and when they use data. Today, 4 out of 5 bundles we sell are these shorter validity period bundles, which are super competitive.

To put this into perspective, we now sell 2.4 billion voice and data bundles a year. Recently, we made some dramatic price cuts in our bigger bundles. This gives opportunities for home usage for streaming, in-house family sharing in a more connected world. From March 2019, we've also 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 new regulations implemented by ICASA. We have seen out-of-bundle data as a percentage of service revenue decline from close to 10% 2 years ago to a mere 3.8% today. And most recently, we started reducing our 30-day bundle prices between 20% to 30%, which we are introducing in a phased approach. All of the above have assisted in adding more data customers, selling more data bundles, which are up 47.9% (sic) [7.9%] and exiting the last quarter with 9.4% growth in data bundles.

On the back of acquiring 4G spectrum in all our international markets, we've accelerated our 4G rollout. Data revenue grew 27.2% to ZAR 1.8 billion and now contributes 16.7% to international service revenue. Our data customers are up 9.5% to 19.7 million. We have increased the availability of affordable data devices across all our operations with active smartphone users up 6.9% to 11 million with the same strategies of personalized just-for-you offers implemented across all markets. Only 54% of our customers are using data today and only 11.8 million have a smart device, which means 7.9 million customers are using data on a non-smart device. This is a big opportunity for future growth. We continue to prioritize the monetization of data in all our operations.

Moving on to financial services, where we now service more than 50 million customers across the group, making us the largest fintech player in Africa. Our strategic focus on creating new revenue streams to financial services in South Africa has been experiencing exceptional growth over the last 2 years, with revenues of ZAR 972 million for the half, up 37.1%. This is now a ZAR 2 billion annualized business for us. Underpinning the growth has been our airtime advance and insurance businesses. Insurance revenue increased 21.8%, driven by launch of innovative products and our insurance policies, up 55.1% to 1.6 million policyholders. We continue to expand our portfolio with new innovative products in the space, leveraging our customer base and Vodacom brand. We advanced ZAR 4.9 billion in airtime via our Airtime Advanced platform to 9.9 million customers.

In June this year, we launched VodaPay enabling direct airtime purchases and bill payments for electricity and other payments. There are numerous benefits of having our own platform, including the saving of third-party processing fees when selling airtime directly and many options for products and functionality. We will 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 2.4 trillion passes through the M-Pesa platform annually, servicing a combined 37.9 million customers and representing ZAR 7.9 billion in transaction revenue for the past 6 months alone.

In our international operations, M-Pesa revenue grew 28.9%, contributing 18% to service revenue. M-Pesa customers grew 8.9% to 14.3 million, which is 39% of the customer base is now using our M-Pesa service.

In Safaricom, M-Pesa revenue grew 18.2% in local currency, contributing 33.8% to their service revenue. There are now 23.6 million M-Pesa customers in Kenya, increasing by 12.4% in the period. 68.2% of the customer base in Safaricom uses the M-Pesa service. Underpinning the growth on new overdraft products in both Kenya and Tanzania, Fuliza, the overdraft facility in Kenya is transacting $1.3 billion of loans to 16.8 million customers this financial year.

In Tanzania, we have seen very good traction in our recently launched overdraft product known as Songesha, with 1.9 million customers utilizing the service. These overdraft products allows customers to take a loan on failed transactions when they try to purchase something and don't have sufficient funds. It is being used for basic needs, such as food.

This is financial inclusion. We launched a number of initiatives during the year to drive the uptick of M-Pesa in all operations, improving monetization, and we continue to expand our services in the ecosystem, such as micro loans, merchant payments and further interconnection with banks and other operators. We will continue to expand M-Pesa internationally and often end our financial service business in South Africa with expectation that these will increasingly contribute to our revenue growth.

Enterprise service revenue increased 2.8%, driven by the strong growth in national roaming revenue as Telkom onboarded during the period. This has largely offset the decline we have seen in mobile customer revenue from the reduction in the out-of-bundle spend. Improved usage in the segment has also seen the rate of decline in mobile revenue having -- halving during the second quarter of this year, which is encouraging.

Mobile revenue is starting to show strong signs of improvement having been hardest impacted by the out-of-bundle regulations as enterprises have used the regulation for cost management before allowing larger data bundle purchases for employees.

Fixed line revenue increased 11.1%, supported by strong growth in cloud hosting and IP-VPN revenues. Enterprise solutions are becoming increasingly competitive, while our partnership with AWS and new service offerings support future growth.

We announced our acquisition of a strategic stake in IoT.nxt in May of this year and I'm pleased to advise that we have received competition commission approval. Our IoT base is now at 4.6 million with our connections having increased 14.2% in the period. IoT.nxt will allow us to unlock the opportunities across a variety of industries and will also provide us the opportunity to bridge legacy technology and unify disparate systems. IoT.nxt is a very innovative IoT platform with a number of use cases across multiple industries, ranging from power savings, to proactive maintenance of plants, to geo-locking services to name a few. This platform will give us a strategic competitive advantage that we can scale across our markets and even globally.

We have seen success in our IoT.nxt smart solutions utilizing it across our base stations, allowing us to reduce our own power utilization. There are numerous other solutions we are implementing for cost savings in the network together with IoT.nxt. We are already leveraging our global reach through our Vodafone global enterprise customer base, whilst our teams collaborate with IoT.nxt to sell various solutions to customers. In addition, we continue to utilize our global GDSP platform to create innovative solutions for customers in IoT. One such example is the recent announcement of our partnership with Toyota and Altron, in which every new Toyota and Lexus sold in South Africa will come standard with in-car Wi-Fi and 15 gigs of data. Toyota Connect offers customers a variety of services, including connectivity, convenience features such as service reminders, and safety features including roadside assist with realtime support.

Through this partnership, we are also able to connect vehicle owners to smart features, such as bolt-in entertainment streaming and access to real-time traffic information. Looking ahead, we expect the benefits from our acquisition of a strategic stake in IoT.nxt will become increasingly evident in both our consumer and enterprise businesses.

Another partnership we announced in May of this year was our strategic collaboration agreement between ourselves and Amazon Web Services, which makes AWS our primary cloud provider. We have now launched our Vodacom AWS business group, which makes us Africa's only AWS Business group. This will assist in building on the success of our current cloud services, which we have built from the ground up. We have established our AWS Cloud Center of Excellence, which will help us to sell cloud-based technology and move from product-led services to solution-based services. 4 out of the 5 required -- training requirements have already been achieved. Our agreement with AWS will ensure we bring best-in-class services and products to customers right across the group. All this effort will ensure that we are fully capable and ready to deploy AWS cloud and hosting services and scale our existing successful cloud business. We're planning to officially launch this service in the early part of 2020.

Looking at technology, we have now reached 99% 4G coverage in urban areas in South Africa, with 83% in rural areas. In July this year, using a temporary spectrum license in the 3.5 gigahertz range, we were able to showcase Africa's first live 5G data session on a commercially ready 5G mobile phone and network.

On the IT side, we once again witnessed this year in the Gartner IT4C evaluation, winning by margin of 134 points. The IT4C evaluates IT as a software product by assessing customer-facing IT capabilities and performance and is a competitive benchmark against our peers locally and in other countries around the world. We are very proud of this achievement as it measures customer experience across all customer-facing channels such as web, app, retail and contact centers.

For a while now, we have been working on exposing APIs to external customers and partners through an API gateway. The platform is currently implemented as part of an initiative in digital lifestyle services and we'll be able to unlock significant value for not only this division, but also Vodacom business and our consumer business unit. We have 5 partners live in the gateway currently and intend to expand this in the future.

Our chatbot TOBi is gaining momentum with over 2.8 million chats having taken place in the period. Till will elaborate on how TOBi is contributing to cost savings.

On the regulatory side in South Africa, ICASA has issued the long-awaited information memorandum on the licensing process for spectrum. Spectrum in the 700, 800, 2.3, 2.6 and 3.5 bands are to be licensed simultaneously via auction. This is a positive step as it will make much needed spectrum available. There will be a wholesale open access network in addition to spectrum being allocated to the industry in keeping with the hybrid model discussion. They are -- still are even certain items in the information memorandum that we'll be commenting on by the deadline date being the 31st of January next year. I'm very encouraged by the inclusion of 5G spectrum in this conversation, but an area which is crucial is the conclusion of the digital migration.

We continue to cooperate with both the Competition Commission and ICASA in terms of the data market review and the inquiry into mobile broadband services, respectively. In terms of the Competition Commission's process, we have submitted comments to the commission's initial findings and recommendations. And we have also included updated information on outdated pricing FX used in the preliminary report. We anticipate that the findings from the data service market inquiry will be used as an input into ICASA's inquiry into mobile broadband services.

In Tanzania, the Tanzanian Telecommunications Authority directed biometric registration of customers using national IDs. This was effective from 1 of May. The implementation of biometric registration is challenging, given the low penetration of national identification cards as well as the ambitious deadline of 31st of December 2019, set by the regulator. We are taking all the reasonable necessary measures to ensure compliance and in alignment with the industry are engaging with the TCRA to ensure compliance and practical steps.

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

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

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Thanks, Shameel, and good morning, everyone. 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. The performance in South Africa was slightly challenged during the period, but this was expected, given both the regulatory changes for out-of-bundle data pricing and a challenging economic backdrop. Encouragingly, we are already seeing the expected recovery materialize in the second quarter, which I will highlight in more detail as we go through the presentation. This year, we are lapping our BEE deal. The result is that we don't have any effect from share issuances following 2 years where we did that for the Safaricom acquisition and the YeboYethu deal. This is also the first year that we are reporting under IFRS 16, the new lease accounting standard. So I will start with that before we go -- before we are going through the numbers.

So let's start with the main differences between the reporting of last year under IAS 17 and now under IFRS 16. This will assist you in understanding the comparisons and the growth rates that I quote. IFRS 16, which deals with lease accounting, has been adopted 1st of April 2019. The key change introduced by IFRS 16 is that all leases are required to be reported on the balance sheet. A right-of-use assets and corresponding lease liability is recognized for all leases. This accounting will improve transparency on the company's financial position and enhance comparability between companies that lease assets and companies that buy assets as a treatment and disclosure will largely be the same now.

On the income statement, there are 3 main items to consider. In the prior year, we expensed operating leases. These costs are, therefore, largely absent in the current year. The total cost included in the last year for the first 6 months was ZAR 1.3 billion, affecting operating expenses, EBITDA and operating profit. In the current year, we are now capitalizing these same leases as right-of-use assets and depreciating them over their useful lives. The depreciation on the right-of-use assets amounts to ZAR 1.4 billion for the group and is accounted for in depreciation and amortization. We now also record the corresponding lease liabilities, which is the present value of the future payments. As a result, we recognized finance costs arising from these lease liabilities. This was about ZAR 650 million for the group for the first 6 months of the year.

And finally, on the balance sheet, the right-of-use assets amount to ZAR 11 billion, and the lease liabilities were ZAR 11.5 billion in the current reporting period. This also includes previously disclosed finance leases.

Looking at the income statement, with reported growth in the first column based on IFRS 16, I will talk mainly to the normalized growth column, 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 now also the differences in accounting under the new IFRS 16 standard.

Revenue increased by 3.9% or 2.5% on a normalized basis, and service revenue was up 4.2% and normalized 2.5%. This is solid growth at group level, despite the already mentioned headwinds in South Africa. Our international operations delivered again good top line performance of 8.7% on a normalized basis. EBITDA grew 0.7% on a normalized basis with the international portfolio now contributing 23.7% to group EBITDA. In line with our parent, Vodafone, we also disclosed EBITDAL, which includes the depreciation and finance costs related to those -- to these leases, which is largely comparable to EBITDA previously disclosed.

Net finance charges increased by 68.1% and includes ZAR 650 million finance cost on lease liabilities, inclusive of finance leases designated as such in the prior year. Excluding the finance costs on lease liabilities, finance charges were flat year-over-year. The tax charge is down 8.4% compared to the prior year, mainly in line with operational performance and lower realized foreign exchange gains on U.S. dollar funding loans.

HEPS was up 18.9% to ZAR 4.60 per share as we led the BEE deal in the prior year, and EPS is up 19.4%. We declared an interim dividend of ZAR 3.80 per share and a special dividend of ZAR 0.60 per share which is a well-deserved return to our shareholders.

In South Africa, we note a strong recovery in the second quarter service revenue growth. This was a result of elasticity of data demand which we were hoping for and expected. Furthermore, it has also benefited from onboarding more of the Telkom traffic under our roaming agreement, which is now fully completed. Just to remind you, in the prior year, there was a once-off deferral benefit. And excluding this, you will note for the second quarter, much stronger underlying growth of 4.2%. For the second half of the year, we have some softer comparatives ahead of us due to the last year -- due to last year's weaker third quarter and the reduction of out-of-bundle prices in March.

Turning to international. These operations have delivered very good growth consistently now for 6 quarters. The successful execution of our strategic priorities has led to double-digit service revenue growth in the quarter, boosted as well by currency translation from the weaker rand. This is despite the various challenges faced by the markets over these periods, including competitive pressures, continued customer registration requirements, now focusing on biometric registration in Tanzania and the impact of the cyclone in Mozambique. The cornerstone of the growth is M-Pesa and data revenue. Normalized M-Pesa revenue growth was strong at 28.9% and now contributes 18% of our international service revenue. M-Pesa revenue continues to grow strong in all our markets. In Tanzania, it already contributes 34.4% of service revenue, while our fastest-growing market is Mozambique, with year-over-year growth of 68%.

Over to expenses. We have again contained our cost growth well and kept it well below inflation. This was achieved through various initiatives under our fit-for-growth program and the digitization of our business. I will highlight 2 cost drivers. The first one is the BEE staff costs and the second is the cost associated with the roaming -- with our roaming deal on Rain's data network. The BEE staff costs are for participation of staff in our new 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 3 years and then diminish in year 4 and 5.

The costs related to our capacity agreement with Rain, as mentioned previously, 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 quantified was about 1.4 percentage points growth in expenses, while on the flip side, of course, we benefited from the added capacity on our network. On a normalized basis, expenses was up 3.5%. And excluding the effect of the roaming costs associated with the Rain agreement and the BEE deal, expenses grew only 1.6%, which is a very credible result compared to inflation, while we continued to still roll out more sites to grow our network.

In South Africa, excluding the Rain cost and BEE staff expenses, total expenses increased 1.9% on a normalized basis.

Our international operations continue to execute well under our fit-for-growth program and delivered significant savings in areas like M-Pesa commissions and renegotiation of supplier contracts. On a normalized basis, total costs grew 3.8% which was well below total revenue growth of 8.7%, resulting into great margin expansion.

Okay. Over to TOBi. TOBi is a chatbot that we started using for customer engagement. It can be accessed via various channels like WhatsApp, SMS and MyVodacom app. And it is a great example of how we are using digital to reduce costs, and at the same time, increasing customer engagement. This chart shows a number of calls answered via the call center, and the interactions with TOBi. TOBi containment, implying the successful completion of an engagement with TOBi, has increased to almost 70%. Total call volumes have reduced 25% year-over-year, thanks to various operational improvements and TOBi. So this is not just helping us to reduce inbound call volumes, but at the same time, it significantly helps to reduce our costs per engagement. And just to illustrate that TOBi engagements just cost a fraction of a traditional engagement call.

Now covering Big Data. Our Big Data team is becoming smarter and faster. Speaking just about South Africa, we are producing an enormous amount of data from our 44 million customers. These customers spend 27 billion minutes on phone calls, sent more than 4.5 billion text messages, use 170 terabytes of data with 650 million financial services transactions, while connecting to 13,000 base stations across the country. All of this gives us a multitude of iterations and opportunities to create insights into our customer behaviors. And just to illustrate this further, if we only look at Internet URLs and call interactions, we've got 500 billion points of interactions that we can analyze with our customers during these first 6 months. Progressively, we are finding ways to harness this information better and better to make us more efficient, responsive and ultimately proactive in our customer engagement.

Over the past 6 months, we've improved our Big Data journey along 3 key strategic areas. We've seen faster delivery times, reducing development times from several weeks to a lot less on many of our projects. We did this by building reusable machine learning, building blocks and removing operational bottlenecks. We are improving our models and platforms to ensure that we build one solution that can be used by a multitude of use cases and business areas. And we've now embedded and deepened the expertise in the teams, by deploying -- by employing more data scientists and deploying them across the business. These scientists now work closely with business units in deploying Big Data solutions everywhere, utilizing the data science center of excellence for best practice and continuous development. And with that, I believe we are at the forefront on developing our expertise in that space and in this way, also staying ahead of competition.

Group EBITDA grew by 0.7% on a normalized basis, with a 0.7 percentage points contraction in margin, mainly reflecting the pressure in South Africa in the first 6 months. South Africa declined by 3.9%. This decline includes 4 items, 1 in the prior year and 3 in the current year: Firstly, the ZAR 292 million deferral release in the prior year, which was a benefit at that time; secondly, the increased Rain roaming costs, as I already explained; thirdly, the BEE expense charge of ZAR 113 million in South Africa, and as a total it is ZAR 124 million for the group; and finally, an IFRS 15 adjustment from refinements of the IFRS 15 model amounting to ZAR 177 million. By the way, that is a noncash item.

Altogether, this impacted EBITDA growth negatively by 4.5 percentage points, implying an underlying EBITDA growth of 0.6% for the first 6 months. Our international operations continue to perform very well, with strong commercial execution and relentless focus on cost containment. EBITDA grew by 15.4% on a normalized basis, and our international operations now contribute 23.7% to the group compared to 17.6% in the prior year. As the international markets improved profitability, these markets now start to proportionately contribute to the group's bottom line performance.

Let's look at finance charges. These were up 68.1% compared to the prior year. The ZAR 625 million increase in net finance costs relates, first and foremost, to the ZAR 650 million relating to the interest on lease liabilities recognized under IFRS 16 and ZAR 115 million interest on the YeboYethu preference shares, held by external parties compared to ZAR 14 million that we had in the prior period. This was offset by higher interest earned on the increased M-Pesa float balances that we are seeing. And the average cost of debt has decreased to 7.7% compared to 8.2%, in the prior year. This is also in part due to the interest rates achieved on the third-party debt for the BEE deal.

Net debt increased ZAR 18 billion in the 6 months and includes lease liabilities of ZAR 11.5 billion from the take on of IFRS 16. Bank and cash reduced by ZAR 4.8 billion, mainly due to 3 items, namely the funding of the purchase of 588 million shares in Vodacom Tanzania from our local partner, funding the acquisition of the IoT.nxt acquisition and payments of dividends during the first 6 months period.

Total borrowings increased by ZAR 1.7 billion due to a ZAR 1.5 billion facility obtained from Vodafone Luxembourg and USD 98 million short-term loan funding from Vodafone Group to facilitate the payment of additional shares in Tanzania. This resulted in net debt-to-EBITDA increasing to 1.1x. And excluding the lease liabilities, which are under IFRS 16 recorded as debt, our net debt-to-EBITDAL is at 0.9x, just marginally up from last year.

Vodacom has signed an innovative ZAR 2 billion sustainability linked loan facility with Standard Bank South Africa, which aligns sustainability incentives with our financing structure. It's a 3-year fixed rate loan and will be utilized to convert short-term debt into long-term debt and linking our cost of debt to our ESG performance underlines our commitment to sustainability as an integral part of how we do business as a purpose-led organization.

The tax charge declined by 8.4% to ZAR 3.1 billion. The prior year profit before tax included a nondeductible, noncash, nonrecurring IFRS 2 charge of ZAR 1.4 billion that resulted in an increased tax charge. This nondeductible IFRS 2 charge also elevated our effective tax rate in the prior year. And excluding this, our ETR would have been 28.8% in the prior year. Using this as a starting point, the effective tax rate decreased by 1.5 percentage points to 27.3%. Reconciling our effective tax rate from the statutory tax rate of 28%, you will note the largest contributor is the inclusion of Safaricom's net profit from associate in our profit before tax, benefiting the ETR by about 4.2 percentage points. Included in the recoverable withholding tax is a dividend withholding tax in South Africa, DRC and Lesotho and withholding tax payable on future dividends on Safaricom profits, including in our numbers.

Included in the nondeductible capital expenditure, our legal costs and marketing costs as well as the penalty paid in Tanzania, which are -- which we are not able to deduct for tax purposes. The main components in nondeductible finance costs is a preference shares held in the BEE scheme.

Over to cash flow. Operating free cash flow was up 5.7%. Working capital was well managed due to lower inventory levels in South Africa from timing -- and from timing differences on payables following extended payment terms.

Capital expenditure of ZAR 6.3 billion equates to 14.3% of group revenue. This was on the top end of our target of 13% to 14.5%. And the main reason for this was front-loading of our spend to ensure competitive advantage. And as a reminder, the capital creditor is accounted for in our working capital movements. The lease liability payments amounted to ZAR 1.9 billion, which includes a capital interest repayment. These are the operating lease payments previously accounted for in operating leases and working capital. Cash tax paid was ZAR 3.2 billion, 4.7% lower than a year ago, predominantly in line with business performance in the period.

The net finance cost paid increased mostly due to the payment of interest on the preference shares relating to our BEE deal. Overall, this has resulted in a ZAR 2.7 billion free cash flow, which was up 10.6% year-over-year, I think, a really pleasing result.

Now over to HEPS. Headline earnings per share grew 18.9%. The core business declined with ZAR 0.03. However, if we adjust for the one-offs, which reduced HEPS by ZAR 0.20, core contributing a strong ZAR 0.17 and Safaricom contributed ZAR 0.19 per share. This is a strong result, given the pressure in the first half in South Africa performance.

The BEE deal cost had an adverse effect on the prior year, hence boosted growth in this half, which equates to a ZAR 0.74 impact. And the IFRS 16 adoption had a drag of about ZAR 0.17 per share on earnings. This is mainly due to timing of finance charges, which is weighted more towards the initial part of the lease and over the period of the lease will equalize.

The Board has declared an interim dividend of ZAR 3.80 per share, which equates to ZAR 7 billion. Following the special dividend paid out by Safaricom, the Board has resolved to pass this on to shareholders as well in the form of a special dividend, which adds ZAR 0.60 per share, taking the total interim dividend declared to ZAR 4.40 per share, which sees an increase of 11.4% on value returned to 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.

Over to our medium-term targets. We are encouraged by the recovery that we have been seeing in South Africa. We sustained good performance in our international operations. We have completed a number of pricing transformation changes in South Africa and continue to introduce and scale up on our new businesses. Our international operations are showing strong commercial momentum in both data and financial services. And with this in mind, we maintain group service revenue growth at mid-single digits, group operating profit at mid- to high single digit. We maintain our group capital intensity to the range of 13% to 14.5% of group revenue.

And that concludes my part, and I would like to hand back to Shameel.

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

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Thanks, Till. To conclude our presentation today, I would like to highlight our 6 key immediate priorities. First is spectrum. We remain optimistic on the progress and we'll continue to engage with government and relevant stakeholders in achieving a positive outcome.

The growth of more customers in our markets is all our markets -- the growth of customers in all our markets remains a key priority for us. We remain focused on data pricing, especially in South Africa.

We will continue to manage the process of price transformation. Transforming our revenues into new verticals, such as digital services and IoT will continue to be a focus area. These new verticals, together with the platforms that we have both partnered or acquired, are complementary to our traditional revenue streams, but also can be further leveraged from our strong brand and customer base.

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.

And finally, we are very excited about our new partnerships and the value that they will be -- the value that will be unlocked in these new areas of our business. We look forward to much success with IoT.nxt and AWS with more partnerships to come. This concludes our presentation for morning. Thank you for attending.

Till and I will now be taking questions.

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Questions and Answers

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Unidentified Analyst, [1]

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Firstly, a question on South Africa and prepaid. So it looks like the trade (inaudible) in prepaid South Africa remains subdued. The market is subdued (inaudible) as pricing can be (inaudible) accessibility of the various products. It's an area that looks like it's a bit (inaudible) in particular, (inaudible) I was wondering if you can talk just a little bit about (inaudible) the prepaid segment (inaudible)?

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

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So yes, so there's a couple of things playing out in prepaid. One is basically in the customer numbers, there's a cutting back of the washing machine sums and some of the bad behaviors that we were seeing in the SIM cards. So that's one. Secondly, there's the whole price transformation is very much focused on the prepaid part is, Rob, because remember in contract, you get an allocation, in prepaid you're buying bundles all the time. So the monthly bundled transformation is very much happening in the prepaid space. So what's not evident and it came a little bit through in the later slide, is that we were also transforming monthly data prices. And so that -- so the ease of price transformation continuing. There's also still the impact of the out-of-bundle data revenue cuts. Remember, out-of-bundle was more prevalent in prepaid than it was in contract because bundles are allocated. So that's still working its way out. The elasticity we're seeing is more or less the same, which is about 54 -- 54.6% growth in the half. And the numbers are more or less the same for prepaid and contract. In fact, prepaid is generally a little bit better than contract.

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Unidentified Analyst, [3]

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And then the second question would be just on the information memorandum. Is it quite possible if there are companies (inaudible) that would be interesting to (inaudible). Your access to spectrum, for example, (inaudible) coverage in individual assets, et cetera, can you (inaudible) particular concerns you would think about on a different level of invested capital. Say, in particular, maybe rural coverage, where (inaudible)...

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Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [4]

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No. And actually, in fact, I think it's our responsibility to deliver the rural coverage and we continue to do that. I think if it becomes an obligation, there will probably be an opportunity there for the One as well. Because always remember that One's biggest customers will be the network operators. So the highest demand for the One will be areas outside the urban areas. So that could be an opportunity there for the One to pick up on rural coverage. And it had some kind of share infrastructure. But I think more and more, you'll also see shared parts in areas where it's less economical. So that's the One part.

In terms of the other -- the other concerns, the MVNOs and so on, we are submitting comments because some of it doesn't completely make sense. An example would be why would you want us to take on the MVNOs, when the customers of the One is the MVNOs. If all the MVNOs are with us, then the sustainability of the One is -- will be difficult. That said, we're happy to do business with MVNO. So if that's a pre-requirement, we don't see that as an issue.

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Unidentified Analyst, [5]

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Just a final one. So I think the customer (inaudible) inflation. They start actually bringing to cost inflation. (inaudible) cost savings on European (inaudible) on digital. So I was wondering if you (inaudible) comes in your cost base (inaudible).

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

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Look, I think what you need to consider is still is the inflationary environment, which obviously is in Europe, less than half of what we are facing here. So if you consider that, you could almost say, on a like-for-like basis to Europe, our 1.9%, 1.6% normalized actually translates close to a flat, I would say. So in that sense, I do think we've got a lot of scope to go forward in terms of digitizing the business, managing our cost base well below inflation. But going straight in our environment, in South Africa, also our international markets, where you've got a 5% inflation or a 5% to 8% inflation, some of the markets would probably be a little aggressive.

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Mohamed Shameel Aziz Joosub, Vodacom Group Limited - CEO & Executive Director [7]

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Any other questions? No? Thank you for joining us.

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Phil Till Streichert, Vodacom Group Limited - CFO & Executive Director [8]

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Good.