Vodacom Group Ltd Ord

Good morning and welcome to Vodacom Group's interim results. My name is JP Davids, Head of Investor Relations at the group. We're going to kick off in a moment with a couple of video presentations done by Shamil and Reisebi covering our strategy and results for the period. And then we will move into a live Q&A session and look forward to your participation then. Enjoy the videos.

Welcome to our strategy and results highlights for the six months to September 2022. My presentation is structured into three sections. Firstly, and most importantly, I will give you an update on our purpose-led business model, which drives our strategy. Secondly, I will provide an update on how we are accelerating our multi-product strategy called the System of Advantage. Finally, I am pleased to announce a good set of financial results as we continue to invest for long-term growth. Vodacom is a purpose-led company. We connect for a better future and are uniquely positioned to reach and empower millions of African consumers with our connectivity, digital and financial solutions. We remain focused on our strong governance and our three pillars, digital society, inclusion for all and planet. Our inclusion for all pillar embraces the drive to provide access for all. This will be achieved by enabling connectivity, financing affordable smartphones, providing free access platforms, and transforming pricing. Leveraging our big data and customer value management capabilities, we've accelerated contextualized and bite-sized offers to customers, improving access for all. These bite-sized offers help our customers navigate through the challenging economic conditions and the periods of sporadic income generation. In South Africa, more than 60% of data bundles sold are now personalized. This outcome was enhanced by our commitment to lower prices to South Africa's poorest towns and provide free access via our ConnectU platform. These initiatives are being replicated across our international markets. I'm particularly proud of our mobile healthcare program in Tanzania called EMAMA. This service provides emergency transport for pregnant and postpartum women. Tanzania has one of the highest maternal mortality rates in the world, many of which could be prevented by reducing delays in receiving care. It is estimated that the service has already helped reduce the maternal mortality rate by 30% in the Lake Zone region in Tanzania. Beyond Tanzania, we are working with the Vodafone Foundation and USAID to expand EMAMA to more markets in Africa, having already launched it in the DRC and the SUTU. To improve food security, we are harnessing the power of digital technologies. We are leveraging the platform capabilities of Mezzanine and M-Pesa to improve productivity, revenue and resilience for farmers. One such solution is called Connected Farmer, and it already has 1.5 million registered small scale farmers in Africa, connecting them to information, inputs, credit, and buyers to improve their outcomes. Our IoT solutions are also supporting energy saving solutions, creating cleaner and more efficient communities. We're engaged in these capabilities extensively at COP27. Beyond IoT, Vodacom is pursuing numerous other climate projects, some of which include renewable energy powered rural sites and pilot renewable energy solutions in South Africa with ESCOM. These are just some of the initiatives we supported in the period, but there are many more, which we provide more detail on in our sustainable reporting. Vodacom is a clear and powerful strategy that sets us apart from the competition and is expected to deliver superior returns to you as the shareholders. We call our strategy the System of Advantage and it has 10 drivers of success. The first two drivers relate to our core connectivity offering. We are strengthening our footprint with a greenfield rollout in Ethiopia and the Vodafone Egypt acquisition. We're extending our connectivity leadership through smartphone adoption, rural access, and scaling fiber. Whether customers want to connect via mobile, land or even space, we want to be their connectivity partner of choice. With the Egypt acquisition, our population reach will exceed 500 million people across Africa, as connectivity remains a clear growth path for Vodacom. Our leading market share positions in connectivity provide us with the platform to scale our digital ecosystems. This ecosystem spans across big data, IoT, financial and digital services. Leveraging our big data capabilities, we can improve customer offerings and incentivize their next best activities. Today, we know about 5,000 big data attributes about each customer. These insights support our world-class CVM and personalized pricing. but it also underpins our behavioral loyalty program and financial services products. By the way, compared with the 5,000 attributes we know about you, how many things do you know about yourself? In the enterprise space, we are partnering with business to accelerate their growth. We are transforming their operations through digital technology in high growth areas like cloud, hosting, managed security, managed services, and IoT. These solutions are enabled and enhanced by our subsidiaries IT.Next, Axelink, Nexio, Mezzanine, and our associate, Afriges. In the financial services space, we have built a formidable business across our existing markets with products that cut across consumers and merchants. Vodacom's success in this segment is a function of strategic focus. This focus has seen us continuously scale the breadth and value of our financial service products and offerings, as we leverage world-class tech such as Alipay. As we pull our connectivity, digital and financial service capabilities together, we create a ring around the customer. This is critical to our growth story. As we expand our addressable market, we are also making the customer proposition so much more than just a decision based on price. As we implement our system of advantage, we put an equal focus on considerations to improve our overall customer proposition, return on capital employed, and value creation. A key part of this is optimizing returns and using the power of scale and sharing to drive down the cost to communicate. This is particularly relevant as we accelerate our deep rural and fiber aspirations. Of all the elements on the slide, the most important is number 10. Our purpose-led model shapes our outlook and our business strategy. Our mezzanine platform is a good example of this in practice. It played a vital role in the vaccine rollout during COVID-19. Mezzanine is now scaling smart agricultural solutions to subsistence and commercial farmers from the US to Australia and everything in between. Our smart agricultural solutions are a good example of our strategy enabling our purpose and positively influencing our societal value. We have made major strides in accelerating our system of advantage in the six-month period. In support of Safaricom's long-term growth outlook, we are very pleased to have obtained a mobile license in Ethiopia. In October, we commercially launched operations in Ethiopia and attracted 740,000 customers by end of the month. Further, the government of Ethiopia announced that we'll be awarded a mobile money license. This will help us accelerate our ambition to transform lives in Africa's second most populous country. In Egypt, our acquisition of a controlling 55% stake now awaits approval from the Financial Regulatory Authority in Egypt. We expect Vodafone Egypt to contribute positively to our growth profile from the date of acquisition. To give you an idea of the scale of the group after the conclusion of the Vodafone Egypt deal, we will add their 44 million customers to reach almost 180 million customers in the group. In financial services, Vodafone Egypt already has 4 million customers, which will add to our base of 63 million. Smartphone penetration will be just below 60% across the group, providing a long-term instructional growth opportunity for data. We will also have access to 40,000 network sites and will be one of Africa's largest tower owners, if not the largest. In September, we launched Tanzania's first 5G network, an important technology milestone for the country. Our 5G network will offer our customers greater customer experience through faster speeds and lower latency. This will support the development of emerging technologies. In October, we acquired 110 MHz of spectrum in Tanzania, almost doubling our spectrum portfolio in the market. Our financial services strategy is supported by a dual-sided ecosystem that provides a comprehensive product suite to consumers and merchants. A notable highlight in the period was the acceleration of our merchant growth, with active merchants across international up fourfold to almost 137,000, while Safaricom's merchant base was up 39.3% to 539,000. This growth helps expand our revenue pool beyond peer-to-peer payments and withdrawals into both online and offline commerce. Consistent with our focus on optimizing returns but also connecting people, we have made good inroads on innovative new financing models for rural base stations. In the fiber space, we are working on co-investment models to accelerate rollout across our international markets. I will have more on this later in the presentation. The first element of our strategy speaks to strengthening of our footprint. Safaricom has provided guidance for Ethiopia, including a long-term range 40% EBITDA margin target. In this slide, we compare Ethiopia with Egypt to highlight the massive addressable market opportunities. For example, Ethiopia, with a larger population size in Egypt, generates $1 billion of telecoms revenue. By comparison, Egypt is a $5 billion revenue market, with Vodafone Egypt a clear market leader, generating $2 billion of revenue at a 45% EBITDA margin. Switching from connectivity to financial services. If we consider that almost 80 million people in each of Ethiopia and Egypt are unbanked, the opportunity to drive financial inclusion is very exciting. Since M-Pesa's launch in Kenya, it has contributed to a 30 percentage point increase in financial inclusion. We intend to leverage the combined strength of M-Pesa Africa and Vodacom Financial Services to accelerate the opportunities in these markets, including the rollout of our super app. Vodafone Egypt is delivering excellent financial results with service revenue growth of 18.6% and EBITDA up 21.4% in the six month period. Further, the scale of Vodafone Egypt means that it will diversify the composition of the group's operating profit. Based on the results for this period, South Africa's contribution would reduce from 73.1% down to around about 55%. Looking ahead, Vodafone Egypt's growth is supported by leadership across both the consumer and enterprise segments. It has a clear network and spectrum advantage versus peers and a brand synonymous with technology leadership. Building on this connectivity scale, Vodafone Egypt also offers a very exciting fintech opportunity. We look forward to closing the transaction in the near term. Aligned with our ambition of digital inclusion, we are working to reach more under-serviced rural areas across our markets. To extend our rural reach, we have developed a ring-fenced SPV model for base station deployment. We have commenced with a proof of concept in the DRC with 100 new rural sites. The learnings from this POC will help shape the rollout of infrastructure in deep rural areas across our markets. To drive both rural and next-generation mobile access, spectrum is key. In addition to the 110 MHz of spectrum we secured in South Africa, we recently acquired another 110 MHz of low and mid-band spectrum in Tanzania. The investment will help unlock a very exciting growth path for fixed wireless access on the continent. To compliment our mobile leadership, we are committed to establishing more scale in fixed services across the continent. Last year, we announced a major step forward in the scaling of our fiber footprint in South Africa through the acquisition of an up to 40% stake in CIVH's fiber assets. In addition to accelerating fiber reach in South Africa, the transaction provides a blueprint for shared cost fiber rollouts across our markets. Providing customers with access to smartphones remains a high priority. Affordability of these devices is, however, a challenge, especially with foreign exchange volatility and supply chain challenges. In Kenya and South Africa, we have developed innovative models for prepayments and financing, which we intend to scale across all markets. we have built a formidable financial service business. To capture more of the addressable FinTech market, we are building a dual-sided ecosystem that aims to deliver exceptional and personalized experiences relating to entertainment, lifestyle, e-commerce, payments, savings, investments, lending, and insurance services. Our super apps are a key driver of this strategy as they create an open platform where we can integrate our own products with thousands of external service providers. It removes the barrier of physical limitations for both consumers and merchants, which then gives them the opportunity to expand their offerings well beyond their geographical boundaries. And put simply, as a transactions compound, we take our cut, a bit like an iOS or Google Play Store. To complement our super apps, we are also scaling our merchant-acquiring products. We have launched our own Android-powered physical point-of-sale devices in South Africa, adding to the already scaled M-Pesa TIL service. This payment ecosystem provides insurance and lending opportunities, such as invoice financing and SME lending. Further, our enterprise resourcing planning tool called Vodatrade facilitates transactions between merchants and FMCG operators. Across our M-Pesa footprint, we are seeing strong traction across both our consumer and merchant propositions. At the heart of this is the M-Pesa app, which is already scaled in payments and we are building out more capabilities. Across our M-Pesa footprint, including Safaricom, 30-day active app users now exceeds 3.2 million. In just six months, we have granted loans via M-Pesa of $2.8 billion and facilitated $2.1 billion of international money transfers. On the merchant side, we now have a base of 676,000, up 63%, with Tanzania passing 100,000 merchants in the quarter. This merchant scale helps us diversify our business and opens up significant addressable markets in day-to-day commerce. For example, in Tanzania alone, our merchant solution called Lipa Quasimu processed payments of 1.1 billion US dollars in the six-month period. In South Africa, our lifestyle super app Vodupay is supported by the world-class technology of Alipay. It offers services ranging from loans, seamless QR codes, and person-to-person payments, to entertainment, personalized shopping experiences, with many more services, such as savings and investments on the product roadmap. Launched almost a year ago, our super app Vodupay reached 2.2 million registered users and 3.5 million downloads by the end of September. We expect good user adoption for the Super App in the coming quarter, as we have made it central to our summer campaign and will add critical new functionality, including cash-in and cash-out capabilities soon. We already have over 100 mini-apps on Vodapay, offering customers a wide variety of products and services. These mini-apps act like a virtual mall, with the tenants able to acquire customers significantly cheaper than a go-it-alone strategy. Airtime advance revenue accelerated to 7.5% in the second quarter, supported by customer growth. We advanced an impressive 6.3 billion rand of airtime in the period. Leveraging our dual-sided financial services strategy in South Africa, we have introduced new products with encouraging progress in areas such as merchant acquiring. We have processed 2 billion rand in merchant payments in the period and executed on 4 billion rand in supply chain financing. Our insurance portfolio had excellent growth with policies up 19.4% to 2.6 million. Leveraging on the success of Vodashure in South Africa, we intend to scale our insurance products across our footprint. Turning to the group's financial results. Despite ongoing financial market volatility and weaker prospects for the global economy, Vodacom delivered strong revenue growth, evidenced by a 7.7% increase in group revenue to R53.7 billion in the period. Service revenue grew at 7.2% to R41.7 billion, supported by resilient performance in South Africa and accelerating growth in international. Group service revenue growth was underpinned by data revenue growth in new services, which includes digital and financial services fixed in IoT. We invested R7.6 billion into capital expenditure, excluding the costs of acquiring Spectrum. Capital expenditure increased 9.8% as we accelerated investment into network performance. Pleasingly, our continued investment in South Africa has extended our network NPS leadership score. Group EBITDA increased 0.6% to R20.2 billion and was subdued by an acceleration of network operating expenditure in South Africa, higher energy costs across the group and a lease contract separation in the DRC. We do expect a clear improvement in EBITDA growth into the second half of the financial year as we accelerate cost initiatives and lap the impact of accelerated network operational expenditure in South Africa, the lease contract separation, and levies on mobile money transactions in Tanzania. Our efforts to deepen financial inclusion continue to thrive, supported by the double-digit increase in financial service customers to 63 million. It was particularly pleasing to report a strong recovery in Tanzania's M-Pesa customers, supported by lower mobile money levies and strong traction for new financial services. Headline earnings per share declined 9.5% to 457 cents per share. The decline was largely attributable to startup losses in Ethiopia and higher finance costs. ICBM will unpack this more in a presentation. Separately, the Board declared an interim dividend of 340 cents per share, which reflects our updated and simplified dividend policy. Pleasingly, we delivered growth across each of our segments. Group service revenue was up 7.2% on a reported basis, while normalized service revenue was up 3.9%. South Africa grew at 3%. Our international operations reported service revenue growth of 17.9% and normalized service revenue growth of 5.6%. Safaricom service revenue grew 4.6% in the period. Group operating profit decreased 5.6% to 13.3 billion rand as EBITDA growth was offset by higher depreciation and amortization. The higher depreciation was as a result of a deliberate step up in capex intensity over recent periods to improve network resilience in South Africa and expand 4G coverage across our international markets. This investment supported our revenue resilience in the period. Further, Safaricom's contribution declined 7.3%, reflecting the expected startup losses in Ethiopia. On a normalized basis, group operating profit decreased 5.1%, and excluding the impact of the startup losses in Ethiopia, Safaricom's contribution to operating profit grew 4.9%. When looking at our customers, 67% of our 133 million customers are outside South Africa. The split will increase further as we add Egypt's 44 million customers into the portfolio. Shifting to a product lens, this slide sets out the contribution of our high-growth new services to each of our geographic segments. Our new services comprise IoT, fixed, financial, and digital services. These services follow a similar product lifecycle. This starts with innovation, which is driven by dedicated innovation hubs and is data-driven. Services are then integrated into our system of advantage and scaled to support our growth ambitions. Our optimization phase for these assets could take different forms in the future and could include structural separation and potentially partial monetization to better reflect the underlying value of these assets. In South Africa, 14.5% of service revenue is now attributable to new services. We intend to scale each of these new revenue streams into formidable businesses. Across our international portfolio, the contribution of new services is closer to 29%, while Safaricom sets the benchmark at 44.2%. This slide sets out metrics that highlight the scale of our financial service business. We are now processing US$355 billion of transactions through our platforms. This is up 17.6%. In the period, our revenue on a consolidated basis was up 10.7% to 4.4 billion rand. This included revenue in South Africa of 1.4 billion rand, up 8.1%. Growth in South Africa was underpinned by our insurance business with policies up 19.4% to 2.6 million and an acceleration of airtime advance revenue growth. Our international business delivered M-Pesa revenue of R3 billion in the period, up 25.2%. As we show on the right-hand side of the slide, half of this growth was fueled by new services such as business payments, international money transfers, loans, and saving products. These new growth drivers now make up more than a quarter of international's M-Pesa revenue, confirming that our dual-sided ecosystem is scaling. Safaricom, which sets the benchmark for product scale, generated a PESA revenue equivalent to R7.9 billion in the period. The growth of 8.7% was subdued by the August election cycle. Encouragingly, the underlying growth drivers, including the super app evolution, continues to make excellent progress. In South Africa, service revenue grew 3% to R29.5 billion, supported by the mobile contract segment, a resilient performance in prepaid, and a growth in our new services. New services were up 7.6% and contributed R4.3 billion of service revenue. In the second quarter, service revenue growth accelerated modestly to 3.1%. This was supported by the excellent traction of our personalized bundles, which offer lower rates and bite-sized options to the most price-sensitive lower-income consumers. Our prepaid data revenue growth accelerated to 11.8% in the second quarter despite the economic headwinds. Vodacom Business made up almost 30% of service revenue in the period. Growth of 2.1% was dampened by the RT15 government contract and wholesale revenue as we lapped a strong prior year period. Encouragingly, Farukom business mobile contract revenue was up 7.2%, supported by a 6.2% increase in business customers. Data traffic for South Africa was up 30.3% in the period. we added 800,000 data customers, reaching 23.8 million customers, up 4.1%. Smart devices were up by 11.8% to 27.6 million, while 4G and 5G devices increased by 24.1% to 20.3 million. The average usage per smart device increased by 24% to 2.8 gigs per customer per month. EBITDA declined by 0.6% to R15.8 billion as we accelerated network operating expenditure and reverted to pre-COVID levels of back-to-office expenses such as publicity, office accommodation and travel. The Network Resilience Program was initiated in the second half of the previous financial year to address power challenges and higher rates of theft and vandalism. Importantly, this focus on network OPEX, along with our sustained CAPEX investment, extended our network NPS leadership. Further, on the expense side, consumer price inflation accelerated to 7.1% in the period, above normal trends. As Raisa Bey will discuss in her presentation, we intend to accelerate cost initiatives into the second half to address these inflationary pressures and accelerate EBITDA growth. Our international operations reported service revenue growth of 17.9% to R12.6 billion, supported by strong growth in data, recovery in M-Pesa and foreign exchange translation tailwinds. Normalized service revenue growth was 5.6% in the period and accelerated to 8.7% in the second quarter. M-Pesa was the key contributor of the second quarter acceleration, supported by excellent growth in new financial services and a further reduction of mobile money levies in Tanzania from July 2022. Data revenue growth remained strong throughout the period, increasing 32% to R2.8 billion. Data traffic was up 34.7%, with an encouraging uptick in smartphone penetration of 1.8 percentage points. The potential for increased smartphone adoption and data usage remains high and will be accelerated by the innovative prepaid handset finance solutions I mentioned earlier. Our customer base increased 3.3% to 43.9 million. with net additions of 1.2 million in the second quarter, supported by our price transformation in Mozambique. Customer growth for our international operations is critical for us to achieve our 2025 ambition of improving the lives of the next 100 million customers. A PESA revenue of R3 billion contributed 23.8% of service revenue. In the second quarter, growth accelerated meaningfully to 39.3%. This acceleration was driven by Tanzania, which lapped the impact of levies on mobile money that was introduced last year. On a reported basis, EBITDA grew 9.5% to R4.8 billion. However, international EBITDA margin contracted by 2.7 percentage points. The EBITDA performance was impacted by the accounting for lease contract separation in the DRC. Looking ahead, we expect an improved EBITDA performance in the second half of the current financial year as we lap the DRC lease impact and the levies on mobile money in Tanzania. Safaricom delivered a good set of results given the challenging macro backdrop, reduction in mobile termination rates and investment into Ethiopia. Service revenue of 4.6% was supported by recovery in mobile data growth and an excellent performance in the fixed business. M-Pesa revenue grew 8.7%, subdued by the August election cycle. Encouragingly, platform growth was excellent, with total M-Pesa transaction values up 32% to 18.1 trillion Kenyan shillings. M-Pesa revenue now contributes close to 40% of Safaricom's service revenues. fixed service revenue grew 23% to 6.8 billion Kenyan shillings, supported by 26.8% growth in fibre-to-the-business revenue and 16.2% growth in fibre-to-the-home revenue. Fibre-to-the-business customers grew 16.6%, while fibre-to-the-home customers were up 13%. Mobile data revenue grew 11.3%, accelerating from the prior year growth rate as price transformation supported excellent usage growth. EBITDA for the Kenyan operations was up 3.1%, with margins broadly flat at 52.2%. Safaricom's overall EBITDA, including Ethiopia, declined 4.3%, reflecting the startup losses associated with the Ethiopian rollout. As mentioned earlier, Ethiopia represents a transformational opportunity for Safaricon.

In this video, I will unpack our results for the six-month period ended 30 September 2022. We have delivered excellent revenue growth in this period, despite mounting macroeconomic challenges. We are also sharpening our focus on costs, but more on this in my presentation. From a shareholder perspective, we have declared an interim year dividend of 340 cents per share and this dividend reflects our new policy which positions Vodacom to accelerate growth going forward. Moving to our financial performance, our income statement sets out reported and normalized growth. I will primarily draw attention to the normalized growth numbers, which provide better insights adjusted for Forex fluctuations as well as M&A activity. Our revenue increased by 7.7% or 5% on a normalized basis, supported by service revenue growth, which was up 7.2% on a reported basis and 3.9% on a normalized basis. EBITDA declined 1.8% on a normalized basis at the margin of 37.6%, and this was impacted by some one-off factors and phasing of OPEX, which I will unpack later. The net profit from associate and joint ventures of 1.5 billion rand was impacted by finance costs and startup losses associated with our rollout of Ethopia. On a normalized basis and excluding the impact of Ethopia, Safaricom's contribution to our operating profit increased 4.9%, reflecting a resilient underlying performance from the Kenyan operations. Headline earnings per share decreased 9.5% to $0.457 and was impacted by higher finance costs and the expected startup losses for Ethiopia. Our underlying operational earnings performance was broadly stable year on year. As set out on the previous slide, normalized service revenue growth for the group was 3.9% in the six-month period. Notably, group normalized growth improved from 2.9% in the first quarter to 4.9% in the second quarter of this financial year. While South Africa delivered a fairly consistent level of growth quarter on quarter, our international business delivered a clear improvement in the second quarter. Normalised growth accelerated from 2.4% in the first quarter to 8.7% in the second quarter. M-Pesa was the key contributor of the second quarter acceleration, supported by excellent growth in new financial services and a further reduction of mobile money levies in Tanzania from July 2022. At a group level, our EBITDA growth tracked below our medium-term target. In this slide and the next one, I will provide some more color on our expense and EBITDA trends and why we see improved prospects into the second half of the financial year. Starting with operating expenses in South Africa, this were 9.7% in this period. There were a few factors that impacted expense growth in the period, and these are set out in the waterfall chart. Foreign exchange related to our day-to-day trading added 1.1 percentage points, while our accelerated network spend and high energy costs added 3.7 percentage points. The network costs were as a result of our resilience program that was initiated in the second half of the previous financial year to address power challenges and higher rates of theft and vandalism. Pleasingly, this intervention extended our market-leading network NPS position in the period. Back to the waterfall, the back-to-office expenses such as office, travel, and publicity contributed 2.1 percentage points. Then, of course, there was the impact of inflation, which affects areas like payroll costs as we increase salaries by 5% at the start of the financial year. While not presented in this slide, direct costs were up 7.8% in the period. A key driver of this growth was higher enhanced cost of sales. This was offset by strong growth in equipment revenue, but does weigh on EBITDA margin. The second half outlook for South Africa's expenses is better. We will lap the impacts of the accelerated network and back to office costs. Additionally, and mindful of inflationary pressures, we have already implemented new cost initiatives in supply chain management and payroll and in discretionary areas like travel and events. In this slide, we provide more context around our group EBITDA growth drivers. The chart on the left hand side provides a year on year bridge for EBITDA. Overall growth was a modest 0.6%. And however, as you can see, it was negatively impacted by a few factors that we do not expect to impact in the second half. This includes one-off lease contract separation in the DRC and certain expenses in South Africa, such as network OPEX acceleration. The lease separation in the DRC increased operating expenses, but was offset by reduced right-of-use depreciation and interest, and so there was no impact on net income. As we look into the second half of the year, it is also important to note some of the growth headwinds at play in the prior period. Notably, the impact of the lease contract in DRC was very material in the second half of the last year. This is highlighted on the slide on the right hand side. And also we will lap the impact of Tanzanian levies, the back to office and higher network costs in South Africa. This combined with our incremental cost initiatives provides scope for an improved EBITDA performance in the second half. While we reported Group EBITDA of 0.6%, our net profit was down 9%, and this slide sets out the key drivers of the decline. From EBITDA, higher depreciation and amortization, startup costs related to Ethiopia, and restructuring costs more than offset the underlying growth in associates. The higher depreciation and amortization is as a result of capital expenditure growth over the recent years and the translation impact of a weaker rent. Below the operating profit line, higher finance costs were offset by lower taxation with the result that net profit declined 9%. The change in finance costs were as a result of the higher net debt and interest costs and adverse foreign exchange movements. I will unpack the net debt movements in the upcoming slides. Taxation was lower in part due to the recognition of deferred tax asset in Tanzania. The recognition of this asset reflects improved medium-term profitability prospects for our GSM business in Tanzania. Into the second half, EBITDA growth is a key lever to addressing the shape of net profit outcome for the financial year. Still focused on the bottom line, our HEPs decreased 9.5% to $0.457 per share. And as already mentioned, earnings were impacted by a few notable factors. In this chart, we show the aftertakes after non-controlling shareholder impact of these factors on earnings per share. The most significant of this related to the startup losses in Ethiopia and the higher finance costs. The Ethiopia losses weighted on the contribution from Safaricom in the period and impacted our HEPS by 20 cents per share. After tax, higher group finance costs had a 23 cents per share impact. Other notable earnings factors included M&A and restructuring costs, which were offset by the recognition of deferred tax assets in Tanzania. Accounting for all these notable factors, our underlying operational earnings base was broadly flat year on year. We are not satisfied with delivering flat operational growth, and therefore we target an improvement going forward. Shifting focus to cash flow and operating free cash flow, this was 4.8 billion rands down, i.e. 25.6% year-on-year. While this is a material change, it is in line with our budgeting and free cash flow phasing for the year. In the first half, we posted a seasonal working capital outflow of 5.7 billion rands. This was higher than last year as we paid capex creditors from the prior year and invested more into inventory. Both these factors were taken to mitigate supply chain challenges and foreign exchange volatility. Additionally, CAPEX of R7.6 billion was also up 9.8%. Lease liability payments, which is also captured in operating free cash flow, amounted to R2.4 billion. From operating free cash flow, we received dividend from Safaricom and paid cash taxes and finance costs. On this basis, we generated free cash flow of R2 billion. As I mentioned, while free cash flow was down year on year, this was in line with our own expectations. The timing of tax payments and the capex creditors were material factors. Our cash tax payment of 3.6 billion rands was higher year on year despite a 15% lower profit and loss charge. This reflects the timing of provisional and final tax payments and should correct in due course. The capital creditor of $1 billion relates to the cash payment for higher capex incurred in the final quarter of the prior year. We had accelerated this capex to capture a stronger rent and just as well given the rent's volatility. In the current period, capex was higher year-on-year as were our finance costs. While free cash flow generation in this period was modest, this is very much in line with our multi-year pattern. The chart on the right shows our free cash flow generation, which is skewed in the second half. We expect the same trend to play in this year. We communicated a change in dividend policy with our Vodafone Egypt and CIVH transactions announced in November 2021. Given the regulatory progress on the Vodafone Egypt acquisition, the board has implemented the policy from this period. Our simplified policy is to pay out at least 75% of the group headline earnings per share, which remains one of the highest payout ratios on the JSC. For this period, the board has declared an interim dividend of 340 cents per share, and this is based on a payout ratio of 80%, slightly above the minimum threshold. This recognizes that our acquisition of Vodafone Egypt has not yet completed. Our net debt to EBITDA ratio increased from 0.9 times to 1.1 times in this period. We provide the key drivers of this change in the waterfall chart. As discussed already, free cash flow of $2 billion was seasonally low. Additionally, we paid $3.2 billion rents for Spectrum in South Africa. Looking ahead to the second half, we expect significantly stronger free cash flow generation and lower dividend payment to improve the leverage outlook. We do, however, anticipate some further lumpy payouts, including the balance of the spectrum costs in South Africa, which is 2.2 billion rands, and a separate 600 million cash payment for the recently acquired Tanzanian spectrum. And then from an M&A perspective, we are working to close the Vodafone Egypt transaction as soon as possible. The Vodafone Egypt transaction is not expected to meaningfully change our leverage ratio given the acquisition is 80% equity funded and Vodafone Egypt itself has limited gearing. Looking at the composition of our borrowings, our near-term facilities increased due to upcoming maturities of debt with Vodafone Luxembourg. We do not foresee any refinancing risk related to these borrowings, some of which is already in progress. More than 90% of our debt, excluding leases, is rent-based, limiting our exposure to foreign exchange movements. From an interest rate perspective, our debt structure is split 56% fixed and 44% floating rates. If we exclude leases and focus on financial debt, the fixed component is 40%, while floating rate debt is 60%. This mix suggests in the current interest rate cycle, our average cost of debt will increase, but not by the full extent of the interest rate hikes. We intend to optimize this mix of debt as we undertake future funding obligations, such as the Vodafone Egypt and CIVH transactions. And now to our medium-term targets. We aim to grow service revenue in mid-single digit and EBITDA at mid to high single digits. Our group capital intensity ratio remains in a range of 13% to 14.5% of revenue. Notably, this guidance excludes Egypt and it is based on the prevailing economic climate. Clearly, the Russia-Ukraine war poses a material risk to the outlook for inflation and growth across our markets. While we are optimistic that our strategy and business model are resilient, we are also realistic that the cost of living is a challenge that we will need to overcome with our customers. Finally, we expect the Vodafone Egypt NCIV-H fiber asset acquisitions will enhance our system of advantage and provide scope for diversity and accelerate our group growth profile. In my concluding slide, I would like to reconcile our medium-term growth target with the shape of our business in the years to come, and in particular, our ambitions around new services. These new services encompass digital and financial services, fixed and IoT, and are key to us diversifying our revenue portfolio and improving our customer proposition. On a consolidated basis, with South African international business in scope, we see our new service revenue contribution increasing from 18.9% to around 25 to 30% in the medium term. On that exciting note, I will conclude and thank you for your attention.

To conclude our presentation, I would like to set out how we plan to create value for our shareholders. Firstly, we will continue to execute on our multi-product approach, our system of advantage, by completing our M&A transactions announced last year. We are hopeful that the Egypt transaction will be completed soon, subject to the final regulatory approvals. The CIVH deal will accelerate fibre reach in South Africa, fostering economic development. The regulatory approval process is proceeding with us having received the Regulatory CASA approval. This is a big step with only the Competition Authority's approval now standing. The opportunity for growth in FinTech in South Africa and in Bayside is significant and remains a key priority for us. We are very excited about the scaling of our super apps, considering the exceptional growth we have witnessed so far this financial year. Transforming to a tech core will include the optimization of our assets, and to this end, we aim to unlock benefits from separating our towers in South Africa this year. We will continue to adopt a disciplined capital structure and allocation of capital resources. We have simplified and updated our dividend policy, still offering one of the highest payouts on the GSE. In terms of capital expenditure, we will invest within the framework of our capital intensity guidance. Accelerating and diversifying returns to our investors remains a key priority and we will continue to accelerate the group's growth potential with earnings and free cash flow, whilst at the same time improving our return on capital employed. Finally, we will always prioritize our contribution to the societies in which we operate and our purpose-led ambitions. We will focus on increasing our female representation at management level, reducing our greenhouse gas emissions across the footprint, and driving financial inclusion. These targets are included in management's long-term incentives. We look forward to engaging with you over the coming weeks on our investor roadshows. This concludes my presentation. Thank you for your attention.

Okay, good morning again everyone. So we're going to kick off a Q&A session in a second. May I ask that if you do have questions, you try and limit them to two rather than five. We don't have, well, I don't have a little scratch pad. But perhaps before we get to the Q&A, I'll just hand over to Shamil for a quick update on the Egypt transaction.

Thank you, JP. Yesterday, in some big news, we got the FRA approval in Egypt. So it was granted yesterday, and it now leaves us with a few procedural processes for the deal to be fully complete. A very big step for us. Indeed.

Okay, if anyone has questions in the audience, please raise your hands. Here we go. Louise in front.

Hello, it's Louise from Investec. I'll be kind this time and ask one question. I think on your cost-saving initiatives, you said you are going to be sharpening your focus in the next half. Can you be more direct and give us specific cost-saving initiatives and which areas of the businesses you are targeting? I think generally the third quarter is quite a good quarter for handset sales. So we do expect some margin compression to come through in the third quarter. But if you can just give us more color to understand how the shape would work. Thanks. Thanks, Louis.

So we actually started noting the high inflationary impacts. So we're looking at energy costs, negotiating with the oil majors in terms of the diesel side of things, negotiating with the oil majors to get wholesale pricing. So that applies currently in SA, but we're looking at expanding that reach to the other markets. The discretionary costs, just limiting some of the activities to do with travel, to do with the functions, and just basically scaling them and leaving them on a need basis. We are looking at the suppliers across the board renegotiating some of the contracts where possible and applicable and where we can limit the effects-based implications in terms of the cost so that our costs are basically in local currency denominations. So it's a scale of activities, and this is something that is not new. For us, it's really just a continuation of the work that has been done in the past, but obviously in recognition of the current environment, it's really just to continue to sharpen the pencil.

In addition, there's also the lapping of the costs because we had a lot of the pre-COVID costs that came back last year, and in the second half, we lapped those costs as well as the DRC lease adjustment.

Thanks. Hello. Hi, it's Prashendran from NetBank. Firstly, Shamil, congrats on getting that deal. Most people come back from Egypt with chocolates. You came with a much better present for the rest of shareholders, so well done on that. I'll ask my two questions. I thought if I use the Vodapay app, I'll get one more free, but we'll try later. Firstly, some guidance on balance sheet in the second half. Obviously, you have to pay the dividend, and there's a second spectrum payment. What's your target gearing for 2H? And then the second question, your thoughts for both Shamil and Raisibe on Cell C post its recap. How do you see this play in the market affecting your business, particularly any impact you might see on Capitech and their MVNO on your network base? Thanks.

So starting with the net debt to EBITDA, so in the second half, Wiles would have paid the $2 billion of the spectrum, but that is also the period when we expect our EBITDA to grow better than the first half. And for that reason, we expect that our net debt to EBITDA should not be materially higher than the 1.1 times. and we do make a point that should we have the Egypt transaction consolidated in that period, obviously it will increase the debt that comes with the 20% that is settled in cash. But the consolidated component is actually a positive contributor to the overall percentage. The net debt to EBITDA in Egypt is way below the levels at which we are operating. It's below one times. So for that reason, we guide that at peak, we still expect our net debt to EBITDA to still be below 1.5 times.

I think on South Sea, I think the recap is very encouraging in that, of course, it's a very big customer for us with their contract roaming revenue going through us. So I think having gotten that financial stability or improved financial stability I think is a good thing for the market. In terms of Capitec, we're monitoring the progress. The way we see it is our offers are, if you're looking at our effective rates, they're still well below the rates that Capitec is seeking to charge. But we will closely monitor any developments in that space.

Any other questions in the room before I switch to the online questions? No? Okay. Oh, there we go. One more.

Good morning. It's Ndanda from the MoneyWeb. We currently in South Africa are operating in an environment that is increasingly facing load shedding. And I just wanted to know if you've seen any material reductions in data usage because of it. And what is the group doing to sort of combat and mitigate against the effects of load shedding?

So we've done a number of things, and I think we have an advantage of our competitors in this respect. We've invested quite heavily in terms of creating network resiliency. We spent over $2 billion in the last two years. Some of the consequences you're seeing in the financials to be frank. But from a network perspective, we've seen our network resilience be much better than competition. That's coming through in our NPS scores. So the investment has definitely paid off. In terms of traffic, we've had a 30% increase in traffic, so a very good increase in traffic as well. What we do see during, let's say, the load sharing is we actually see an increase in data utilization. for as long as the site stays up. Because if it's rolling blackouts, what happens then is that you only have that additional data revenue for as long as the sites are up. And then, of course, eventually, you know, when the batteries will die. And that's where you kind of lose. But we've tried to make sure that with the batteries rollout that we've put in, that we've created a lot of resilience. It's not perfect, but of course, it's much better than competition.

Okay, I'm going to shift gear to some of the online questions. The first one I'll take, because it's the simplest we've had so far, so I'll feel comfortable with that one, from Nadim at SBG Securities. He's asking the impact of M-Pesa levies I cited of around 200 million rand. How much did this impact the second quarter compared to the first quarter? The answer there, nice and simple, that impact is all related to the first quarter of the financial year. There was no material impact in the second quarter of the year as we had started lapping the levies. And then as was called out in the video, there have been further reductions in the levies from the 1st of October And that is positioning M-Pesa for a significantly better second half of the year than first half of the year. Then we got a few questions from Maddy Singh from HSBC. He was asking for an update on the Egypt transaction, which I think we've given. But he has a specific question as to whether there will have to be a bid for minority shareholders, but specifically Telecom Egypt, their 45% stake as a result of this transaction. And then I will go to his next question once that's dealt with.

Yeah, I think there will be a mandatory offer for the 0.015 shareholder, but there's a waiver in terms of the Telecom Egypt, so there's no mandatory offer for Telecom Egypt.

And then coming back to... Cost inflation, Maddy had another question just around, I guess, higher diesel costs, but perhaps better just to frame it around energy costs, how those have impacted in the first half of the year, and maybe perhaps, I guess, a bit of reference for where we can land for the full year in terms of energy inflation across the group.

So overall, we expect the increase to be roughly in the ballpark of about half a billion. We are putting a lot of initiatives, obviously, that doesn't run rate into years to come. So as an example, we announced a few months ago that we will be putting solar panels across this whole campus. And we'll also look at other areas where we can be able to use alternative energy. We're looking at getting into more impactful IPP arrangements so that we can alleviate those costs. And again, it is pretty much in line with the ESG strategy to migrate in that direction.

Okay. Those are the questions I had online, and it seems like we're done in the room also. So with that, we will close out with a very exciting – pardon me. There's one more question at the top there, and then we will close out.

Hi, everyone. Thanks for the opportunity to ask a question. My name is Tando from HSBC. So my question is with load shedding happening, what sort of trends do you see on the Super App happening? Do you see users using the vendors that are enrolled in the app, like offerings of food and stuff like that? What sort of trends do you see users taking part in the Super App? Thanks.

Honestly, no real linkage besides the buying of electricity through the super app, but I wouldn't say any linkages directly to load sharing. We more see the load sharing part coming through on the network side where effectively when the power's out, people go to their phones, and there you do see an increase in utilization.

One last look around the room for hands. Okay. In that case, we will now close out with a very exciting video from the launch of our Ethiopian operations. It's just two and a half minutes long, so I'd encourage you to enjoy it. Thank you.