Vodafone Group Public Limited Company (VOD) Earnings Call Transcript & Summary

Good morning, everyone. Good morning, everyone, and thank you for joining us. I'm with Margherita. We are finally back in the office on a phased basis, and also Vivek has joined us from a different location. So look, we're looking forward to your questions and maybe we could have the first person.

The first question comes from Georgios from Citi Group.

I wanted to start maybe with 2 questions related with China vendors...

Georgios, I'm going to just stop a second. I should have said, really, we need to be on one question or allow just 2. But if we could just do everyone at one, so we could get through as many as possible.

Very clear. And it will be on one topic. And the topic is the Chinese vendors. We've already had decisions in France and the U.K. where it started happening. And obviously, a delay in the decision in Germany, which I understand now will probably come around September, the earliest. So I wanted to ask you, from your perspective, whether that changes any of your planning or your expectations? Whether the time frames allowed are long enough? And also, in general, whether even without formal bans, whether that changes some of you are planning. And linked to that, obviously, there is the IPO process going on for the tower company, does that change at all your thoughts around active sharing in Germany in the sense that you could share perhaps the cost and processes of replacement with some other player, if that will be the case.

Yes. So look, I'd probably start with sort of if I stand back on the Huawei situation. My view is, the U.K. decision, was it unique to the U.K. because of its sort of geopolitical position, being a member of Five Eyes, its relationship with the U.S., et cetera, in the current political, let's say, environment, I do not see it as an automatic translation or simple translation across Europe. In Europe, each of the member states are currently going through a process on the European 5G toolkit. They're then submitting those plans back to the European Commission. So they were supposed to have done that by now. A lot of them have been delayed just because of COVID. So those plans are being submitted. Then what's happening is by the fall, the European Commission will then come out having seen the plans with a 5G European certification process. I think importantly, within the toolkit, they made a distinction between the core and radio. So in radio, it was less sensitive. As you know, we already made the decision to replace Huawei in the core across Europe over the next 4 to 5 years at a cost of EUR 200 million. If I go down to the radio, our stance is always that we want to have vendor diversity. So we're operating with the 3 major vendors today, Ericsson, Nokia and Huawei across Europe. What we're saying is we want more diversity and also we want vendor balancing. So we want to ensure that there is a degree of balancing because what European countries are really focused on is resilience of the network infrastructure, and therefore, to not rely on any one vendor. Then the other aspect is open RAN and get an open RAN up and running. We think we'll have a rural open RAN ready for 2021, and we're looking to an urban, which is a more complex execution, 2022. But we need governments and we need operators to scale this to improve functionality and efficiency going forward. So what I'd say is don't do a simple extrapolation. It's not that simple. We're engaged with each of the governments, good positive engagement by each country as an industry as well, not just Vodafone on its own. To the point of Germany on active, we have been sort of engaged. We went through, as we explained to you, the different scenarios. We are doing some active sharing with Deutsche Telekom. We've agreed a reciprocal 1,800 sites. So we have 1,800 there, 1,800 that we will do a reciprocal sharing moving forward. That could be Phase 1. We could look at whether there's opportunity past that.

Our next question, it's coming from Andrew Lee from Goldman Sachs.

Nick and Margherita, I had a question just based on one of the starkest data points in your release this morning, which is the churn reduction. So the question was actually regarding your cost base and just whether you're seeing any evidence of lasting changing consumer behavior coming out of the COVID lockdown. Your churn's down 320 bps in the quarter. It would be great to hear your thoughts on whether any of this is structural and how you're seeing physical commission trends as we come out of lockdown?

Thank you, Andrew. I think relative to churn, you may remember what we discussed back in May in terms of our own forecast for the year. And if you look back to what we said at the time, we didn't base our outlook on EBITDA or our cash flow guidance on the assumption that there would be a sort of long-lasting hibernation of the industry. We were keen to maintain our commercial momentum. We were seeing potentially some benefits coming through in the lockdown, but we didn't bet on long-lasting effects. And I think if I look at what we see in our markets at the moment, we do not see that. So what we see is benefits from the lockdown. Then as soon as the lockdown ends, volumes start to pick up again. If you look at, for example, Southern Europe, after mobile number portability gates have been opened, everyone has been sort of fast off the gates there. As far as we are concerned, in this environment, we are, number one, very pleased with our own commercial performance. If you look at the numbers that we have released, despite the lockdown, we have had a fantastic quarter, for example, on fixed broadband and even some reliant quarters in mobile. So we are competing effectively. And on the cost front, which was the first part of your question, we do see the benefits of digital coming through. So if I look at the execution on cost for the remainder of the year, both on A&R through different mix, more digital. This is structural. We see the benefit of that, but not the volume sort of substantial drop for a long period of time. And also on OpEx, we guided to at least EUR 400 million of OpEx reduction for another year in Europe, and we are proceeding very well on the execution of that.

The next question comes from Jakob Bluestone from Crédit Suisse.

I had a question on the tower EBITDA that you disclosed. Just if you can maybe help us a little bit with the bridge. You previously disclosed about EUR 900 million of EBITDA. It's now closer to EUR 700 million. Obviously, some of that is the reduction in the stake in INWIT. I think there are some other factors explaining some of the difference as well, some accounting differences, some OpEx. But can you maybe just sort of help us understand what is it that's changed? And is it -- where is any sort of incremental OpEx coming from, just helping us bridge the previous tower EBITDA with what you disclosed today?

Sure, Jakob. Very important bridge today. So let me sort of take it step by step. In our release, we have communicated EUR 680 million of EBITDA on a proportionate basis for our towers as it stands now. As you know, we intend to contribute our stake into CTIL, our U.K. JV, into the perimeter. And once you do that, you get to, call it, EUR 740 million, EUR 750 million. So you are left with a gap versus the EUR 900 million we talked about previously of around EUR 150 million. And this gap is split quite precisely into 2 parts. The first one is our monetization of INWIT, which, as you know, since we discussed towers for the first time, we have progressed at pace. And I think we have already delivered at quite an attractive valuation. So then you are left with a residual, call it, EUR 80 million for scale. So under 10% of what was the original EUR 900 million, which is the result of the fact that at the time, when we first set out on this project, effectively, we tried to size it on the basis of what were publicly available data, whatever was out there, in terms of prevalent and core tenant rates in our markets. Fast forward to today when the tower company is up and running, effectively, we have been able to go into a great level of detail and establish specific MSAs on a market-by-market basis. And we have set the numbers on the back of this precise review. We have set them in a position which is quite important in terms of balance because it allows, on one hand, our markets to be competitive. And on the other hand, I think it offers for the tower company a strong baseline to then build on its own growth for the future. This is really the main reason of this EUR 80 million, let me call it, organic gap. As you mentioned, there are also smaller factors, probably not worth a lot of conversation. There is a little bit of accounting adjustments that, again, we had to do as we went into more details. We have set out the teams. It's effectively the coming to the final framework for the company to operate that has led to these numbers.

Next question comes from Nick Delfas from Redburn.

Can you hear me? So just one for Vivek, maybe on CTIL. Obviously, the numbers you're talking about in there look rather low in terms of EBITDA. Could you talk a little bit about how you anticipate that changing? Obviously, it's a rather complicated situation given O2 and Virgin with their merger.

Maybe, Vivek, just to give a perspective on CTIL. If you remember, CTIL was set up on a cost basis. So it was not set up as a profit center and commercial business, it was just cost-plus basis. So we've had to go through a process of converting it into a commercial business. We are going through that process as we speak. Obviously, then the announcement of O2 and Liberty. So we then reengaged with both of them to understand the process. They're very supportive of the process. They like the strategic direction we're going. So it is very much our intention to roll CTIL stake to Vantage Towers in due course and hopefully ahead of any IPO event. But of course, we have to go through that process.

Okay. Could I just ask a very quick follow-up on physical stores? I just wanted to clarify, is your thinking changing about how quickly those might close?

Well, I think we went out in May talking about retail stores. And the fact -- I mean, in the COVID world, you've seen digital just ramp up, online channels of 50% sales up year-over-year. So we are now looking at how do we optimize our retail stores more as part of the overall channel mix and also indirects as well, what role will indirects play and how much of a mix they are. So yes, I would say -- I'd say more as an acceleration to, let's say, year 1, 2, year 3, how are we advancing that estate to the target operating mode.

COVID really gave us the opportunity to make a step change from that perspective. If you look at the sales numbers in the quarter, which, as I was saying before, have remained strong. They've remained strong with a 50% increase in volumes on our digital channels across Europe. So quite a big difference. And we have taken the opportunity also to stay close to our customers through the pandemic with campaigns and what I would call as education tutorials on how to access digital and we believe that some of these changes will actually would be long-lasting, which is why I was saying earlier to Andrew, I think the channel mix is definitely a long-lasting opportunity.

The next question comes from Akhil Dattani from JPMorgan.

Just a follow-up on -- really on the revenue performance and outlook. I guess firstly, on Italy and Spain, there's some pretty good commercial trends in the quarter. Just keen to understand how much of that is a function of COVID and lower activity during the period and how much do you think is structural and we can extrapolate. And then I guess linked to that, Margherita, you talked about the 3 buckets of COVID impact on revenues between roaming, B2B and other. Can you maybe give us a bit of color on how you think about those 3 buckets as we go forward as well, please?

Sorry, Akhil, I missed -- I think you were asking about U.K. and Spain?

Yes. And then it was roaming, business, how do you think about those 3 buckets that you've got in your slide?

Yes, in terms of...

Yes, those 3 buckets. Then the other bit was just I was saying your commercial trends in Spain and Italy have improved a lot this quarter. And I just wondered how much was COVID and lower activity through the lockdown, and then how much can we extrapolate is maybe being more structural improvements.

Sure. So if I start from this last question on commercial performance, I think that there is a lot on what you have seen in the quarter that I would argue is our structural positioning. Clearly, the volumes of mobile number portability for both markets stepped down a lot across April and May. As I was saying earlier, as soon as you come to sort of mid-May, beginning of June and the lift off of the state of emergency in Spain, you could see the volumes for the market stepping back up again to substantially the levels at which they were pre-COVID, if not slightly higher, where there was even pent-up demand. Within this context, what I think is structural is our competitive positioning. You heard us say this multiple times in the past. We compete effectively in those markets now at all levels, right, from the high end to the lower end with our second brand, and this is the position that we have maintained. I think through COVID, if anything, maybe a bit of an advantage from the fact that having good quality, reliable network has been very appreciated at the peak of the lockdowns. But generally speaking, I think it's our positioning. Spain has been growing this quarter, but has been growing for every single consecutive quarter for the last year on both fixed, mobile, broadband. And in Italy, we already guided towards a more neutral mobile number portability numbers as soon as we left the price increases of 6 months ago, so that's effectively what you see there. In terms of then the revenue blocks, so taking those maybe also in turn, starting from roaming. Roaming, we have seen some recovery in the volumes in starting, I would say, June. However, it's intra-European roaming volumes that are catching up because travel restriction on long-haul largely remain. And therefore, we see the roaming drag on our revenues, which, as I would say, is expected to increase further in the coming quarter because we are going towards the peak summer holiday period. I think over time, as travel restriction lift on the -- out of Europe, we will see there some recovery. And of course, at some point, roaming will become, again, a growth driver. In enterprise, the second area impacted, we called out projects being suspended or delayed. And a bit of weakness in IoT because we are very strong in automotive, and there was less car circulation, car sales and the like. This is actually now starting to recover. We didn't see significant impact from macro yet on Vodafone business, probably because the government initiatives have shielded our customers from taking maybe difficult decisions there. So I think as we move throughout the year, we may see some of that catching up again -- catching up, sorry. In the other, you have a mixed bag of things. Some positive traffic during lockdowns, particularly in Spain -- sorry, in South Africa and Germany, more than offset by some weakness in areas such as prepaid in the smaller market or M-Pesa in our international markets in Africa where the feed-in fees were 0 rated. Overall, I would say, if you step back from all these puts and takes, but as you have heard, very much the net impact of COVID in line with what our expectations for the quarter were and indeed, still very much in line with our expectations for the rest of the year, which is why you have heard us reiterating both our EBITDA outlook and our free cash flow guidance.

Next question comes from Maurice Patrick from Barclays.

Yes, Maurice here. Just a question from me on Vantage, please. Many tower companies are looking at offering additional services beyond just passive access, backhaul services, small cell, distributed antennas, even [ towers ], facilitating edge computing and data centers even. I mean are these in the scope of Vodafone advantage going forward. I mean take backhaul, for example. I mean does Vantage intend to offer backhaul services? I mean, does it currently offer backhaul service to Vodafone or Vodafone control those?

Well, Vivek, why don't you give a summary?

Yes. Yes. Thanks for the question, Maurice. Good to hear you. We -- all of the above are in our intent: services for nonmobile operators, public safety, distributed antenna systems, and I don't -- probably a longer -- with a longer time span, mobile edge computing. It's unlikely to be widespread to the geographic extent of a tower core in the initial phases, but definitely on the plan. As regards fiber, it's obviously a need for all the customers of the TowerCo. So having the ability to offer fiber is a necessity. If you pass the problem, you have sites where Vodafone has fiber and there's no -- I mean, when there is a wholesale intent -- a wholesale offer in the market, the ability to provide this on a wholesale basis is something that we would obviously do. And then we will expect more and more fiberization of these sites. As you move towards 5G, you're going to need more bandwidth. It's going -- that the operators are going to require an increased fiberization of the sites. We do see that there is a lot of scope for increasing the fiberization across some of our geographies. So we'll be definitely looking into that.

The next question comes from Emmet Kelly from Morgan Stanley.

Yes. So I just -- yes, the one question from my side. So in the press release, you have called for a new deal with regulators and governments, which will, you say, allow you to invest more and also to make higher returns. Can you maybe say a few words, Nick, about how you would like to see that new deal manifest itself? Is it through a change in competition law? Is it changes in regulation or maybe changes in the likes of net neutrality?

Yes. I sort of highlighted in the presentation, on the far right of the slide around the social contract, I itemized about 6 or 7 policy areas we want to influence. Because, yes, I want to make it clear, social contract is a contract, i.e., a 2-way flow. And so we're saying we understand what you want to achieve as a government. You want connectivity. You want next-generation connectivity, 5G, et cetera. You want digitization. You want to create jobs. We want to do all of that, too. But what we need is the right framework to be successful as an industry and improve our returns because our returns are at an unacceptable level. And I spent a lot of time highlighting that. And of course, we added it to our recent results to amplify the publication of the return on capital. I think in the short term, I think there's an opportunity around spectrum. So we had a good outcome or a decent outcome, let's say, in Hungary, an okay outcome in Netherlands. We've got Spain and the U.K. that we're engaged saying, could we do different models, take a different approach. We're engaging in Italy in terms of the payment that's due next year, September, I think, 2021. Can we do that either deferred or staged payments. How can you support the industry, I'd say governments are now heightened aware of the state of the industry and how critical we are and understand the need to support us, especially because they want 5G rolled out as quickly as possible. So I'd say spectrum isn't immediate. There's some things around regulation, whether it's the rules and regulations around deployment, how can it make life easier for us. But also there's regulation around, let's say, disruptive value players that ride off the back of people that are willing to put hard money down in the investment. And I think there's increasingly an understanding that we need to earn a return, and that regulation needs to be supportive and pro investment and innovation. So I'd say these are the sort of more immediate ones. And then you can look further out about market structure, can we have more infrastructure consolidation. We're doing a lot more sharing going forward versus retail. So making the distinction between the 2 and sort of supporting the industry going forward.

Next question comes from James Ratzer from New Street.

I was wondering if I could ask particularly about how you see consolidation in the European tower market going forward? I mean it's obviously something you've been involved in so far. You've announced another deal in Greece this morning. I mean I was wondering, in particular, are there other markets where you see more opportunities to do tower deals with the Vantage portfolio? Is it Vodafone's intention to always keep a longer-term majority in Vantage Towers? And how do you see the opening balance sheet of Vantage Towers, will it have enough balance sheet capacity to go and undertake deals of its own if it wishes to?