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

Okay. Good afternoon, everyone in Europe, and good morning to everyone in the U.S. This is the first of our fireside chats on European telcos today. My name is Andrew Lee. I head up the telco team at Goldman, and it gives us great pleasure to once again introduce Nick Read, CEO of Vodafone. Hi, Nick, and thanks for joining.

Hi, Andrew. How are you?

Yes. Very good. Just going to run through the plans for the next 40 minutes or so for the benefit of the audience. So we're going to tackle a few themes, regulation and consolidation, give revenue trends across the business, the digital efficiencies that Vodafone has been so successful with, their tower plans and returns on capital structure. So I'm hoping...

Andrew, that's every topic going, yes. Okay.

Yes. We're going to cover everything. And then for the audience, if you do want to ask questions or you feel something is not being asked, you can enter that via the web. But hopefully, we're going to cover everything. So Nick, again, thanks for joining us.

And we should kick off now. And I'll scope in with a kind of broader question around what's uncertainly a lot of businesses at the moment of the corona crisis. Wondering how that's affecting your business? And also, specifically, how has it affected your growth and returns outlook in the near, mid and longer term?

Well, maybe I'll just answer it in the near term. First of all, I mean, we had a good summer of trading and we remain firmly on track to deliver out guidance for the year. If I look at some of the stats for July and August, just to give you an idea of what we saw. If you take roaming, which obviously, has been a big impact for the business, you've got about 1/3, which is roaming within Europe and then 2/3 of our revenue is sort of outside of Europe coming in and in Europe going out. If I take the first bucket, which is just Europe, roaming, Q1, we were down 45% year-over-year in terms of volumes. What we saw in July and August was 30% down. So we saw a lift in activity with more Europeans roaming within Europe. We saw no change at all going out or coming in. So that remains down about 80% to 90%, depending on which market, year-over-year. If I take sort of mobile activity, gross adds, churn, I would say volumes have elevated by about 20% versus lockdown, especially the Italian market and the Spanish market. So we've seen an activity increase. Fixed has been pretty quiet over the July and August, which is not unusual. I'd say mobile data volumes are up about 10% to 15% over the peak of the lockdown period. So we've seen that sort of re-acceleration of mobile volumes in line with our sort of long-term trend of growth on mobile data. And then I'd say, broadly, emerging markets have seen a good level of activity over the summer. So I stand back from all of that, and I'd say a good level of trading. If I look to the second half and I look to the sort of year after that in terms of what are the pluses, the minuses. So I'd say the sort of unknowns or the potential negatives are clearly what's the shape of the COVID? Is there a second wave? When is there a vaccine? What are the implications to our roaming? We know roaming will recover in the long term, but what's the more medium-term outlook? I'd say also, just in terms of economic activity, we have to see how the recession recovers. And then, probably the more near-term one is just the furlough schemes. They expire in October. And so what we need to see is how much corporate restructuring, redundancies, SMEs, et cetera, downsizing happens and what that means in terms of business activity more in the second half and into next year. I'd say they're the sort of, if you like, potential negatives. I'd say on the positives, clearly, roaming will start to recover. And also, the second half seasonally is lower, so the comps are easier for us. I'd say customers are really wanting NGN connectivity and digitization. So we're really seeing a pull for an upgrade on the types of services that we offer. We also, on our digital transformation, are seeing an acceleration of customers using our digital channels, which is a healthy development for us. And then finally, I'd just say about regulation. Regulation has been a drag. I see regulation being more of a positive moving forward as people really understand the criticality of our industry going forward. So we're not immune, but I'd say relatively resilient.

Okay. Thanks, Nick. That's really helpful. There were 2 segues there either into revenue trends or regulation. But since you mentioned regulation laws, maybe we can just pick up on that. So what are we witnessing? Are we witnessing a change in approach for regulation across Europe? And what actions are you taking to influence that?

Yes. I think to my point about government's realized through this crisis, there were critical national infrastructure that they need scaled players to stay competitive as a country and enable business, commerce and society to develop. So I think governments have really understood the value of telcos may be underappreciated before. And so how will that manifest itself? I think in two ways or, let's say, two buckets, as I'm looking at it. The first one is that the European Commission came out with a EUR 750 billion recovery fund. And one of the pillars of the fund that they want to invest in is digitization. So what we're working very actively is make sure a good proportion of the EUR 750 billion goes to digitization. And then of that digitization, what are the priority areas. And essentially, we are targeting 4 areas: the first is 5G and digitization. So how can they help us, through subsidies, roll out 5G quicker across and make each individual country and the European community more competitive against the likes of the U.S., China. Rural network coverage is really important. Everyone wants inclusivity of 5G coverage. That's expensive. How can we make it more economically viable? Germany is a great model, allowed the operators to come together and the state to invest at the same time. Third is open RAN. Everyone wants open RAN to now accelerate and develop and help the ecosystem. That is an advantage for the overall industry for the operators. And we're saying to government, you can support us in that development. And then I'd say, finally, is the decommissioning of 2G, 3G and allowing us to reform that spectrum onto 4G, 5G, which is a lot more efficient, a lot more effective in a digital society. So I'd say those are the 4 things around the EUR 750 billion. I would say, in the other bucket, it's a broader set of longer-term topics. Things like we want a healthy, sustainable market structure, so we need to be scaled, allow us to do that. Secondly, ensure that we end extraction through spectrum auctions. We need spectrum. It's an important part of the capacity that we offer. Please ensure that we've reduced barriers to network sharing. I think that is really happening real-time. And support us develop a wider vendor ecosystem and diversity for long-term resilience. So I think we've got some very tangible, clear areas where we can have a positive conversation about what we really need and what the government needs to do from a policy standpoint to have a better infrastructure as a country.

Yes. So it sounds positive except there are a lot of elements to go for there, specifically on the consolidation and market structure comments that you made and the need for scale. Do you think there is greater scope in Europe for consolidation, be it retail and/or infrastructure?

Yes. I think you make an important distinction between retail and infrastructure. I think there's increasingly an understanding that you can't have multiple infrastructure bills. It's an inefficient use of capital, low returns, and therefore, allow operators to combine infrastructure. I think the leadership we showed with the INWIT transaction and going to the European Commission and saying, allow us to do passive sharing, allow us to do active sharing outside major cities, is the optimal model in terms of infrastructure sharing whilst sustaining competition in the marketplace. And I think that was understood and appreciated, which is why that transaction went through and really set a tone for the rest of Europe, which would be replicated. I would say in terms of just broader consolidation, I would say we've got a couple of important sort of case studies, if you like. The first was Netherlands, where that was a 4 to 3, where the fourth player was financially failing and, therefore, they were allowed to be consolidated out without remedies. I think if there were situations around Europe where someone could demonstrate they are financially failing, they would be allowed to leave without remedies. I'd say the second one was the recent ECJ decision with Three, where Three demonstrated that they were a maturing operator that was not setting the pricing in the marketplace. They were not the price setter, if you like. And given their mature profile, they should be allowed to consolidate out. And again, I think that would be allowed without remedies as well. So I think you're developing a number of cases of where you could see consolidation take place. But I still struggle to see a case where you've got a price setter in the market that has making an excellent return, clearly successful being able to leave the market without some form of remedy. So positive, but maybe not transformational.

Yes. And so in the meantime, we are obviously invested, as you know, very focused on in near-term trends assigned for longer-term trends in and around revenue trends. So let's take a quick whiz around your major markets and talk about the growth for the rest of FY '21 and into FY '22. And I was going to start with the most obvious, probably Germany. You delivered a really strong performance in Q1. Are you seeing commercial momentum accelerating there?

I think with Germany, I'm really pleased with the performance. Importantly, we were very fast to integrate Unity. So we've completed, if you like, the rebranding. And importantly, we now have 20 million homes with 1 gigabit speed. So upgraded with DOCSIS 3.1. Very fast. We'll do the remaining 5 million over the next couple of years. And I think we should put that in contrast to Deutsche, which sits on just below 2 million at 1 gigabit homes with fiber and built in the last 12 months around 400,000, past 400,000 homes. So we have a structural long-term advantage in terms of speed of our network. What we're seeing is, over the last 12 months, we added 400,000 customers onto that cable infrastructure. So our focus is very much drive penetration of our cable network. It stands at 33% today. Our Dutch business is in the sort of mid-40s. So plenty of opportunity on penetration. And secondly, drive upgrading of speeds. What we're seeing is 1/4 of our base today is on 400 megabits or above. So we know people like speed. So this is our focus. Focus on penetration, focus on our base, take them through an upgrade cycle. It isn't focused on DSL. That is not an area of the market we are chasing for numbers. Let's focus on where we have true differentiation and really get a good return on the asset that we have.

Yes. And how quickly can you do all that? Obviously, there's a big checklist there. How should we expect revenue growth to progress from here?

Well, look, I'm not going to go market by market, quarter-by-quarter. I feel that in terms of growth on fixed, for Germany, we were in quarter 1, 2.4%. So I think that was a very decent performance. Take our overall retail business. It's very similar to Deutsche's level of growth. So I look at Germany as being a very good market. We got an incumbent that provides a very good umbrella, if you like, discipline to the market. We have a fantastic set of assets in that marketplace. So I feel good market, and we've got a good business in that market with good momentum. We can always dial up the level of net adds we want to do on fixed. What we did in April was we took the opportunity to unify the pricing of Unity and Vodafone, and we halved the amount of promotion spend from doing 12-month promotion down to 6. That's an opportunity for us to assess the market, where is pricing in the market, and we can always dial back up promotions if we want to.

And so the U.K. is another market where you've been successful in taking share. How sustainable is the underlying success that you've shown there? And how should we think about the B2B risk in that market?

No. I think the U.K. has got really good momentum, commercially. I mean, we are, as you say, taking share both in Consumer and in Business. I would say on Consumer, very successful in driving unlimited. I think we landed that really well along with 5G leadership, which was confirmed again more recently in one of these network studies. And we had an all-time record in terms of fixed broadband net adds in the last quarter. So we know how to sell fixed. So I am really pleased on all the dimensions on Consumer. If I go across, and of course, we have our second brand, which is VOXI, also performing very strongly. If I go across to Business, I think that it's a 2-player market, and we're the one taking share in that marketplace. And we're very much focused on next-generation products like SD-WAN, et cetera, IoT. We are less tracked in the legacy products and pricing, which gives us an advantage. So of course, you rightly say, we'll have to see when the furlough schemes drop away, what does it mean to corporate restructuring, redundancies, et cetera, what implications are there? For sure, the overall sector will be dampened because of that. And of course, roaming is a big roaming market out on business as well. So these are 2 drag factors, but I think you've got to look through that and just say, structurally, are we gaining momentum and I feel we're gaining momentum.

Okay. And moving on to Italy, where you've seen the other side of things got abnormally high levels of competitive intensity. What are you seeing in terms of competitive intensity today? And then how should we think about -- I appreciate you don't want to go through the trend in every market aren't necessarily through the rest of the year. But we know we've got tough comps in Q2. Should we see underlying improvement through competitive intensity through the rest of the year?

Yes. I mean, you're right to point out that in Q2, we lap a price increase we did last year. So it does make the comps difficult. Plus it's a big roaming visit to market. So these will be things that will weigh on the Italy headline performance. But if I stand back from that, I'd actually say that I was looking at the mobile net port activity. I look at below the line, above the line. Where you've got a nice healthy market for a lot of the gross adds are above the line and less healthy if it's a lot below the line because it shows that there's a lot of promotion spend. Actually, below the line is not overly intense at the moment when I looked at the stats. So I wouldn't say the intensity is elevated. I'd just say it remains at steady level. I would say that when you look at our mobile performance in Q1, you saw that we were net port neutral. So I think we have traded well, and we've traded well because we have a very effective dual-brand strategy. So we can compete, if you like, in both areas, high value, medium net value and also the lower value segments. So I think very effective on mobile and competitive. I would then say, in terms of fixed, we've really got strong momentum, good growth rates. We take a good share in the marketplace of fixed broadband net adds. So I sort of stand back and say, yes, it's a tough market. But actually, we're performing very well within that tough market.

Okay. And then, follow-on to another tough market, Spain, where competition is pretty elevated there as well. And we've had a couple of fireside chats yesterday with Orange and Telefónica. I wondered, what is there to be positive about in this market? And how can we think about realistic prospects for an improvement in the growth in Spain?

Well, I think you're right to say the -- this is the one market that has increased intensity of competition through the whole of Europe. This is the one I would point to. I think there are a couple of factors. I think Virgin, obviously, entering the market. I wouldn't say it's overly aggressive, but of course, has knock-on effects in terms of how people react. I think Orange and TEF going into Virgin arriving, were not trading so strongly on the retail performance. So I think that they have increased promotions between them. And I think both of them have also looked at the value end of the market and realize that, really, they've got a lot of brands sitting down there, but they're not really getting any traction. In the low end of the market, there are only really 3 players. And that's MASMOVIL, ourselves and DG that are taking the share of the net adds. So I think you've seen Orange try and relaunch, if you like, one of the second brands to try and be more effective in that segment. If I stand back, I would say more intensity especially in the low end, more promotions selectively across the board. So I'd say that's a general dynamic. Virgin's entered the market, I wouldn't say in a disruptive way, but they're another player in the marketplace. I'd say from our standpoint, I look at it. So if you want to be positive, look at Vodafone. I would say we made a tough call a couple of years ago to restructure our business and de-risk the business model. So we took a view that this was going to be a highly competitive market. It was already, but we felt that MASMOVIL would be structurally lowering or causing down-trading in the market. And therefore, it was really important that we competed at the high, mid and low ends. Otherwise, MASMOVIL would have just taken share continuously. So we repositioned. We repositioned our Lowi brand, our second brand. We repositioned the pricing on our main, launched unlimited. All of that cost us, from a commercial standpoint, in that repositioning. The other thing we did, we came out of football. That hurt us for a while, and we had to restructure our cost base. I think what I'm pleased about is now we've had 4 quarters of stable or growing customer base, which shows that we are competing at all of those segments. And then secondly, we moved into EBITDA growth the second half of last fiscal year. And I expect to see that continue in the first half of this year, even with COVID, even with the increased competitive intensity. So I think we are competing well in this marketplace, but yes, it's a tough market.