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

Good morning, everyone, and thank you for joining me for our third quarter update. Before I open to questions from our analysts, I wanted to set out some context to our performance and my priorities for the year ahead. The challenges we face are evident in our performance during the quarter. Service revenue grew 1.8%, but we only grew 0.5%, excluding Turkey, where inflation levels are very high. In Europe, our service revenue declined 1.1%, with Germany declining 1.8%, Italy declining 3.3% and Spain declining 8.7%. But sustainable growth in Europe is possible. This is demonstrated by our ongoing good growth in the U.K. at 5.3% in the quarter and also in our other European markets. Sustainable growth is possible when we have the right combination of market conditions and strong commercial plans focused on customers' needs. Declining service revenue in 3 of our 4 largest European markets is simply not good enough, and I know we are capable of doing better. In order to create the right conditions to improve performance, I have reprioritized our efforts on 3 key areas: customers, simplicity and growth. Looking first at how we serve our customers. In order to perform well in all of our markets, we need to deliver a consistent experience: high-quality connectivity provided in a way which is simple and frictionless as our customers expect. Over the last few weeks, we have already made some changes to our processes to ensure they better reflect our customers' needs. We have fully empowered our markets to make the right commercial decisions locally, which brings decision-making closer to our customers. We have also changed the resource allocation processes to ensure they are directly guided by what customers actually want, market by market as opposed to what we think they may want. Let me give you an example. In our sector, we are always very focused on deploying the newest technology. More often than not, our customers care more about having a seamless experience. Therefore, within our cost and CapEx envelope, we will be reallocating more investments to key aspects of our customer service that need intervention. Second, we need to become simpler. From a financial perspective, our productivity has improved significantly, and we have reached a sector-leading position. We've achieved this by leveraging our scale, standardizing best practices and deploying digital technologies. However, we have also become more complex. We're not as agile as we once were, and it does not need to be this way. As we have moved decision-making into the markets, we've now reduced the commercial and support teams in the group center. We will also ensure that the rigorous industrial model is applied to any operational activity that is shared for the benefit of the markets. The actions we have already undertaken will deliver around 50% of the EUR 1 billion OpEx target I set in November. And finally, on to growth. My key target is to continue broadening our price actions across our markets to meet the ongoing cost pressures and support our investments. We also need to reengineer our commercial model in Germany. We have a new management team in place who have identified clear opportunities to improve our sales and marketing effectiveness. We will redefine the range of propositions available across our channels as well as simplifying both our front book and back book plans. We'll also continue to reallocate more investment towards Vodafone Business, where we are growing consistently and gaining share in almost all our markets. I thought it would be useful today to share as clearly as possible what I am working on and what our direction of travel is. I'll now hand over to the moderator for your questions.

[Operator Instructions] Our first question comes from David Wright at Bank of America.

Okay. I think I've done all the clicks. I hope you can hear me, Margherita and see me, too. So if we just think Nick's departure above you, report suggested there was a frustration with the execution of the strategy -- the pace of execution of the strategy. Now that may or may not be true, but I think the share price clearly tells the story from investors' perspectives. It seems to me today that you are changing some of that strategy. And in particular, there seems to be more focused on the autonomy -- the local market autonomy, for example. I guess the question I have is, to what extent are you empowered to change the portfolio strategy, potential M&A actions, et cetera? Now for instance, if there was an approach to acquire an asset from Vodafone, are you empowered to accept that? And I say that again with a mind on reports of potential change in the management structure. So are you empowered to facilitate large-scale M&A? And I guess on that particular point, maybe an update on the U.K. deal. Or is that something that is now perhaps not on the agenda? So I guess that's my question, to what extent beyond the operational strategy do you feel empowered to change the portfolio or accelerate that part of the original strategy? I hope that's clear.

Very clear, David. First of all, let me say that there are no constraints in terms of managing the portfolio. In terms of focus, I'd say my priorities remain the same, and I would say 2 directions. The first is completing in the Towers joint venture. You have seen the minority tender offer results now coming through. And we continue to progress within our target of closing the JV by the first half of calendar '23. So no changes there. And then the second priority remains very much consolidation. Again, nothing changes, still 4 markets we see as key in terms of opportunities for consolidation, and these remain Italy, Spain, the U.K. and Portugal. And to your question around the U.K., again, continuing to progress the discussions with Hutch on a U.K. merger, which we think would be very important and beneficial to us but also to the U.K. market more broadly. On top of that, of course, you will have seen us completing the sale of Hungary just yesterday and then completing also the transfer of Egypt into Vodacom in December. I was focusing in my introduction very much, as you pointed out, on our organic performance because I think in the portfolio, we need to continue to progress in the directions we have outlined, but it's really important for me that we bring Europe back to growth, and we improve our operational performance. And we have said today, we are expecting to see a gradual improvement from now on in European performance, but it's really important for me to create the right conditions operationally, and that's where I have focused to the changes that we have made as a team in the last few weeks. I was mentioning earlier the evolution of full authority on commercial decisions and customer decisions to the markets so that we are more agile and closer to our customers, the simplification of our central functions and also the changes we have made to the management team. As I was saying earlier, the actions we have taken also in the last few months collectively allow me to say today that of the EUR 1 billion additional cost target we mentioned in November, effectively, around 50% is now fully operationalized. So I would say, key focus is reacceleration of organic growth for me.

And just to clarify, when you say consolidation in those markets, that could be Vodafone consolidated. They could be asset sales just as easily as it could be assets acquired. Is that correct?

Nothing has changed on our portfolio management criteria. You will remember, we -- and I think we have proven also with the recent transaction that we can be pragmatic, we are testing our assets against possibility of delivering return, fits within our regional scale, and importantly, are we the best owner of the business. Nothing has changed on that perspective.

Our next question comes from Andrew Lee at Goldman Sachs.

Just following on from David's on portfolio management. So just a specific question on German commercial momentum. You highlighted at the last -- on the last call, better commercial momentum in Germany, and you raised prices in October on the back of that, but we've seen worse KPIs as a result this quarter. So for us, at least, tangible evidence of improved commercial momentum is thin on the ground. So the question is what are you seeing that gives you confidence? And how do you turn around that poor performance? What part does pricing play within that?

Thank you, Andrew. I think this is a -- it's an important question for today. So let me take a little bit of time to go through what we see. So first of all, you are absolutely right. Our performance in Germany is clearly disappointing. On the service revenue side, we did say in November that the second half of the year would be the low point for the market as we have the historic losses that we have suffered from in the last year flowing through, and this is what's happening today. On the net adds, you mentioned the net adds, specifically there, it's the change in trend, if you want, is very much the result of our price moves that we did in the middle of November. So we have been the first to reflect the inflationary pressure in our pricing in Germany, and we are suffering a degree of pain for that, negative net adds in fixed broadband and also roughly stable customer base in mobile. This is a direct consequence of our price actions. Very simply, we have seen our gross share moderating as a consequence. Now the flip side of the volume impact is ARPU. And I think it's important we always look at these 2 in conjunction. And on the ARPU front, our inflow ARPUs actually increased by the same percentage in both fixed and mobile. Fixed, we increased our headline prices. Mobile, we reduced the promotion, but the result was the same, a 15% inflow ARPU increase since mid-November in Germany. Now it's worth for me calling out the fact that the dynamics of the market around us have been very different, though, in fixed and in mobile. I'd say somehow surprisingly, in mobile, we have reduced our promotions, but the wider market has remained very promotional, very high data allowances in particular. Fixed was a different story because in fixed, promotional intensity in the market has actually moderated since we have taken our price actions. And for us having taken a price action on the front book on the new customers is also now giving us the optionality to take action on the back book on our existing customer base. So that's for pricing. In terms of then maybe operations, definitely, we have the opportunity to unlock better performance, as I said. On one hand, the remedial actions of the telco are now complete. Our systems are working. The -- if you want, COVID impacts on the cable network are behind us. I think it's great to have seen our Net Promoter Score on the cable network continuously growing month after month after month, how we have invested there, and we are now actually back to the level of customer satisfaction that we had pre-COVID. So that's good. However, the observation I'm making is that as we were busy resolving our operational issues, I think the market in Germany has also moved on, moved on in terms of retail. It's not what it was pre-COVID, moved on in terms of proposition. For example, family plans are very much in focus. So we have remained a little bit behind from that perspective, but we have a new team now, not just Philippe, the new CEO, but also a new Consumer Commercial Director, and they are busy effectively reengineering our sales and marketing approach in Germany. And in a nutshell, because I know I'm taking too long, although everyone is very interested in Germany, we are changing 3 things. First of all, simplifying the front book and the back book offers in the market. This is something you have seen us doing in the other markets in the last 18 months, but Germany had not done it yet. Number two, we are reviewing the range of propositions that we distribute in the various channels to make sure, particularly we regain competitiveness in direct. And then number three, we are investing in, I would say, the quality and simplicity of our customer services. Net-net, we continue to see the same evolution on the revenues that we were seeing before in terms of reacceleration starting from half 2 into FY '24. These are a little bit the things we are currently working on.

Our next question comes from Carl Murdock-Smith at Berenberg.

I just wanted to ask if you could provide us with an update on the energy cost headwinds that you gave us at H1 and give us updated values.

Sure. In a nutshell, we said we had a EUR 500 million headwind into FY '24. This is now just under EUR 400 million. Clearly, you have seen the dynamics of the energy markets moderating, and we have effectively gone back to our normal hedging policy. So when I say just under EUR 400 million, it's on the back of having hedged 80% roughly of FY '24. Effectively, it's 100% all the way to December already locked in. And then for the final quarter still hedging to progress during the year, together with the PPAs plan. The other element we have now more visibility on is the dynamics beyond FY '24. The full FY '24 headwinds, so the EUR 400 million I've just mentioned is going to unwind in FY '25 and '26. We see it from the prices we have locked in with PPAs as well as obviously the forward curves.

The next question today comes from Emmet Kelly at Morgan Stanley.

My question is actually the same as I asked in November, which is if you could give a quick update on Italy, the competitive and pricing trends you're seeing there and any preliminary thoughts, Margherita, on a potential VAT change in Italy and what that could mean for Vodafone.

Sure. First, maybe starting from the end. I don't see major movements in our performance in Italy in the coming quarters. There are a number of puts and takes I wouldn't get into. We see our business revenues accelerating. We clearly will see the MVNO impacts going away, but roughly similar is how we should expect it to be. In terms of competition, again, very, very intense in general. There have been little changes at the back end of the low end for the consumer market. We have seen the lowest price point moving from what used to be EUR 5 to EUR 7 today. Admittedly, still incredibly low, especially for the allowances that are being given. So we're still selling effectively traffic well below cost. So that's not changing. You mentioned the discussion on VAT. I think this is an important point. I think there is a clear acknowledgment in the new government that the situation of the telco industry as it is today is not delivering sufficient sustainable returns for all the players involved to actually invest, and Italy is falling behind on 5G deployment even relative to the rest of Europe. So it's a clear issue. The VAT discussions are ongoing. The point on the table is moving from 22% down to the numbers, which is most widely referred to is 10%. And this is allowed by the European rules now. So it's a local decision. The reason why the discussions are ongoing is clearly, this requires funding from the government. And therefore, if the funding has to be found, then the final decision has to be taken, but it could be an important step to support the market there.

Our next question this morning comes from John Karidis at Numis.

I wanted to ask, please, about the likely -- the quantum of the proceeds that you like to get from Vantage Towers now that the voluntary takeover offer has completed. Are you in a position to sort of narrow the range a little bit for us, please?

Sure, John. The number is EUR 6.6 billion in the 50-50 JV closure that is being targeted. So it's a bit higher than it was at -- in November when we talked about EUR 5.8 billion because as a result of the closing of the minority tender offer in Germany, which is giving the JV partners an 89% ownership level in the near term, we will have higher proceeds.

And you feel comfortable that it will be 50-50 by the time the deal closes?

That's what everyone is targeting. And as you know, if for any reason, anything happening between now and then that wasn't the case, we still have the possibility to sell down ourselves. But the consortium is firmly targeting 50-50. And as I was saying earlier, we are on track to complete by mid-2023.

[Operator Instructions] And with that, we are going to Akhil Dattani at JPMorgan.

Can I ask a question on pricing? You mentioned in your introduction that you've got 8 markets now where you've effectively got CPI-linked pricing mechanisms implemented, and I guess I wanted to understand how you think about the sustainability and benefits of that. Obviously, the whole industry is starting to move down that direction, but obviously, as yet, share prices haven't benefited. So clearly, the market is quite skeptical. I guess what I'd love to understand is a couple of things. I mean, firstly, when you think about conviction around these price changes, how do you marry that versus your comments earlier out more mixed commercial performance in recent quarter. So I guess, how easy or how much confidence do you have that price increases can work when maybe the commercial momentum is not quite yet where you want it to be? And then I think the second piece of it was just on regulation in both Portugal and the U.K. The regulators have commented around their disapproval about the scale of price increases the telco industry is putting through. Can you maybe just help us understand the conversations you're having with these parties? And what gives you the confidence they won't intervene or do something that could derail this pricing ambition?

Thank you. So 3 parts. I'd say, first of all, the CPI model itself and how we are applying it. I think it's really important to introduce this model wherever possible because it's what gives the biggest transparency to the customers. It's very predictable. We introduced it into the contracts as we have done in, for example, Spain, where we have started activating the close now in January. We have introduced it into the contract in October, November. And then from then on, I would say, you keep going. There are 2 very important aspects for me in the, if you want, sustainability or points that you raised on the mechanism. The first is to be very clear, and I think this is relevant to your question on regulators as well, that these price increases are not going to impact our vulnerable customers. This is something that we are doing all across Europe. If I take the U.K. as an example you may be more familiar with, we have been the first operator in the market to introduce social tariffs on both fixed and mobile. We have the same approach across all our markets. These social tariffs are not subject to price increases so that the people who are really challenged by this are effectively protected. And this is really critical in the conversation with the regulators. I would say the regulators are looking for this and are looking for transparency, which I would argue the CPI models are best suited to deliver this as opposed to ad hoc price increases. The second point beyond vulnerable customers that is important for sustainability is making sure whatever possible to maintain alignment on the front book and the back book pricing. And again, we could discuss separately where it is possible, where it is more difficult. But I think you are seeing that all across Europe, the industry is taking action on pricing, and it's not surprising given the returns we start from and the cost pressures we are under, which is why you even hear discussions like the one we had with Emmet before around VAT. So actions need to be taken. And then to your last point on -- and I think it's actually a good opportunity for me to really say this very clearly. To your last point on volume, I really think that we need to change the focus in the narratives from volume to value. All we care about, all you care about is the net acquired or lost value that we bring in, in a quarter. It's not the net adds volume. It has to be the full value equation. And I think it's really critical. You probably have heard me say this before. It's really critical at this point in time for the industry that that's what we all focus on.

Our next question comes from Stan Noel at Bernstein.