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

Good morning, everyone, and thank you for joining us for our Q1 trading update. Before going to Q&A, I would like to provide you with a brief summary outlining the key highlights from our Q1 results as well as the broader set of actions we are taking to transform Vodafone. Overall, our Q1 results were in line with our expectations and consistent with our full-year guidance, which we have reiterated today. We continued to deliver strong revenue growth in Africa and Turkey. Whilst in Europe, top line trends slowed, largely due to the lapping of higher inflation-linked price rises in the prior year and the phasing of project work in business. In parallel, group EBITDA accelerated to plus 5.1% in Q1 as lower inflation drive good operational leverage across the group. In our largest market, Germany, service revenue declined as expected as we continue to navigate the significant MDU TV law change. We have now successfully signed 2.6 million households onto the new commercial terms, and customer retention is tracking in line with the around 50% guidance we provided in May. However, I'm not yet satisfied with our commercial performance in Germany. Our new team are taking the actions needed to drive better results and support the broader turnaround of the business. Finally, in B2B, while growth slowed this quarter due to project phasing, we have visibility of strong demand, therefore we expect growth to improve sequentially throughout the rest of the year with our Q4 exit rate expected to be above FY '24 levels. Beyond these results, we have continued to make good progress on our transactions. We successfully completed the sale of Spain in May and subsequently commenced a EUR 2 billion share buyback program. We also continue to progress our transactions in Italy and the U.K. And earlier this week, we announced the last step in our plans to deliver the co-control structure we had originally envisaged for Vantage Towers. As a result, we now have a 50-50 JV and will receive a further EUR 1.3 billion in cash, taking the total net proceeds from the sell-down and IPO of Vantage to EUR 8.8 billion. Finally, we are continuing to drive the broader transformation of the group through our strategic priorities focusing on customers, simplicity and growth. This requires a continuous reallocation of resources and relentless focus on operational excellence. And we're starting to make real progress. All markets are moving in the right direction with tangible improvements in customer satisfaction across Europe. We are also taking significant steps to become a simpler business, having already actioned 7,000 role reductions and implemented a new simplified Exco structure. And on growth, we expect good performance in business for the year as a whole, supported by our new team and the additional investments we are making to broaden our product set and expand our managed service capabilities. We are taking now the actions needed to deliver an improved performance and underpin the broader turnaround of Vodafone. With that, Luka and I are looking forward to your questions.

Thank you, Margherita. [Operator Instructions] Our first question this morning comes from Robert Grindle at Deutsche Numis.

If I may take you straight back to Germany. Service revenue growth was broadly in line, though, of course, slowing TV loss is similar to last quarter. And you said just now in line with plan, broadband [indiscernible] also similar to last quarter. Taking a step back, how would you frame the Germany performance in the context of your turnaround plan? Are there puts and takes as to where you're hoping to get to?

Thank you, Robert. I will let maybe Luka deal with the puts and takes and the financial mechanics. I suspect there will be more questions on Germany today. So maybe it can make sense for me to start by sharing my perspective on where we are in terms of what has changed already, what's progressing and where there is more to be done. If we look to where we are today, I think we have seen 4 really significant changes in our German operations. Number one, you mentioned it, the MDUs. In the last 12 months, we have prepared our sales machines to this execution. Admittedly, we are still in the middle of the peak because it's July. But as we said, it's progressing very well, fully in line with our expectations. Number two, the investment we have put, and you've heard me talking about this before. In our networks, both fixed and mobile, particularly fixed, are starting to pay off. In the last, I think, couple of months, our fixed network in Germany has been rated as best quality and most reliable network in the country across all technologies, not by 1, but by 3 different independent testers. Number three, on commercial. We have, as you know, changed significantly our approach to our channels, and we have been refocusing the customer -- the company away from the low-value resellers towards branded channels. And then finally, we are now midway through a very significant simplification of our operations, 3,300 roles reductions. This will make our company much more agile and effective in the market. Now obviously, a transformation of this scale takes time and there is much more to do. As I was just saying a minute ago, we cannot be satisfied with our commercial performance, but we keep progressing. And if I just give you a sense of the priorities that we are focusing on now. First of all, we are completing a new team composed of industry-leading experts. We have upped again this year, as we explained at year-end in May, our investment in a number of areas. Number one, customer experience and brand and also B2B. And this is going to continue to strengthen our improvement that we're already seeing now in customer satisfaction as well as the effectiveness of our execution. As we said in May, again, this is a year of transition in Germany for more than 1 reason. You know this very well. But I'd like to say I'm really very pleased with the actions that the new team is taking, and we are setting today the foundations of the reacceleration you are going to see exiting this year and into FY '26. But here, I'm moving to Luka on the results.

Yes. And in particular, on the puts and takes. First of all, obviously, the big theme in Germany all the way through FY '25 will be, of course, the TV transformation. I think we have done our best to outline the impacts that we are seeing. And what is very positive is that this is becoming more and more certain because we have not only the further data from Q1 now, which has certainly confirmed the conversion rates that we were looking for, but we have also now data for July, which is obviously the biggest impact that we are expecting. And that is also in line. So from that perspective, I see this as a very positive. It's taking, I would say, basically any remaining uncertainty out of the equation, which is good. What is also as expected, honestly speaking, standard performance that we have seen in fixed broadband overall, you have seen that the declines in fixed broadband from a revenue perspective with the minus 2% are essentially all down to the TV transformation. We have seen as well, and that was fully expected, too, that there is in the underlying only a very small to no growth. But that is due to the fact that our price increases from last year started to lap, and we can expect the full impact of that than in the second quarter as well. But that is all really as expected. On the mobile side, where we had a decline of 0.8%, that is mainly down to the business performance. Consumer Mobile has continued to grow. But in business, we had the phasing impacts that Margherita had highlighted already. So IoT is posted in mobile and in IoT. We had a slowdown. And we also had some effects from corporate resigns of the past year that played a role in this respect as well. When I then come to the operational performance, there, I would say, the 1 element that we still need to work on, but that we are confident. We will see improvement now is actually the net adds performance in fixed broadband. You're right, it has seen some improvement. But we believe that with the new CBM measures that have come in place and the right attention to it, our ambition, of course, remains to further make progress in this respect. So when you then add everything together and asked me about how against my expectation, we are third in Germany. I would say pretty much in line. Perhaps the project phasing impact in B2B has been a little bit more pronounced than I would have expected. I would have always expected a slowdown, but perhaps there was 0.5% in there that we did not fully see. On the flip side, we had a very strong order entry performance in the first quarter in digital services, and that will not only in Germany, by the way, but also for the rest of the portfolio drive growth, in particular as we go into the second half year. So in general, B2B will be a sequential growth story from now on for the remainder of the year. So from that perspective, we are actually in a good place.

So we are on the very famous now.

The next question comes from Andrew Lee at Goldman Sachs.

So my question is also on Germany. And you've just given us a lot of useful information there on how and what kind of what you're doing structurally to improve things. Margherita, one of your comments within that was we'll really see the benefits come through as we exit FY '25 and into FY '26. And I guess the key question that everyone is trying to get on top of is, what is that run rate? Can you get that run rate of underlying organic service revenue growth back to where it was last quarter at 1.5% ex MDU impact or above? We understand that you've got this heavy headwind from price lapping in the second quarter, which probably means underlying growth around -- or underlying declines of around 2.5% or so, 2% to 2.5%. Can you help us understand what things look like and the scale of improvement, the scale of growth that can be at the back end of the year? Because it seems like it's only then your execution that's the issue rather than kind of comp issues or anything like that?

Thank you, Andrew. And I think you are spot on in a way in your conclusions because Germany is a growth market, which continues to grow well. And therefore, it's going to be in our hands to take our fair share of that market growth. And from that perspective, we will have a number of tools in our hands in terms of tailwinds coming in FY '26 effectively. We lose the headwind of the MDUs. And then at that point, it's down to having stabilized and taken then our fair share of the market value growth also in fixed broadband, which will turn into a positive. It's down to B2B. We're talking a lot about phasing in this quarter. But as Luka mentioned, we have a strong tailwind of demand coming through in digital services. So we see this improving as we move forward. And then, of course, we will also benefit from the on-boarding of the 1-on-1 national roaming deal. So, fair share of market growth is how I would describe the reasonable expectation.

And perhaps if I may just add to that. Of course, this will also then impact positively the bottom line performance in Germany as we will see this top line acceleration coming through. Plus on top of it, we had this year an extra EUR 100 million working capital headwind from the MDU transformation that will also to anticipate. So therefore, we expect Germany to be a positive contributor across the board, not only on the top line, but also in terms of profits and cash flow in FY '26.

Can I just ask one clarification? Just your comment, Margherita, on the fair share of market growth. It looks like market growth is kind of 2% to 3%. Are you including the 1-on-1 on-boarding within that fair share of market growth expectation? Or is that on an underlying structural basis?

Honestly, it depends on what your timeframe is, Andrew. And we're not yet guiding on sort of the quarterly profile of FY '26. So I would say it's too early to tell exactly what the number will be. But the important point is this is our objective, and the actions we are putting in place now are going in that direction. We will then see what the phasing of 1-on-1 will be or the phasing of the market profile will be. I think this is far too early now.

The next question this morning comes from Siyi He, Citigroup.

My question is on the U.K. I think at the beginning of this year, you highlighted that the pressure from the low price inflation and the recontracting with lower front book. But in Q1, you reported a stable service revenue and you have kept the low single-digit growth in the U.K. top line guidance unchanged. It seems to me that the ARPU impact is a bit better than expected. I'm just wondering if you can make some comments on the market dynamics in the U.K. and where you see the drivers to help you meet the growth target for the year?

Actually, we are really progressing well in the U.K. We have a strong commercial momentum. As you said, we have had a sort of step down on the top line driven entirely by the different levels of inflation in the market now, but lower inflation is obviously not just good for our customers. It's also good for us because we see the benefit in costs, which is why we continue to say expect good EBITDA performance in the U.K. this year with better operational leverage. But if I stick to what's going on in the market and what we see, maybe taking in turn consumer and business. On business, we have had the impact of the price dilution also affecting B2B because SME and so obviously are also impacted. But as elsewhere, we see good demand building up, good momentum and therefore, we are very confident that business will be back to be a growth driver in the U.K. for this fiscal year. In consumer, we have -- we are leading in growth in fixed broadband, as you know. So it's a nice growth momentum that we are getting there. And also in mobile, we are growing nicely. You may have seen our 22,000 net adds in this quarter. And this is now starting to show the very positive impact of all the work we have done on customer experience. Also in the U.K., we are recording in this quarter, the lowest churn ever in the U.K. and the number of, let's say, an Epi customer in the base has reduced 40% versus where it was about a year ago. So healthy net adds performance. Stepping back, I mean, the low single-digit growth rate indication we gave in May will -- remains absolutely valid, but you should expect good growth in terms of EBITDA and continued commercial momentum in the market.

The next question comes from Maurice Patrick at Barclays.

Hope you can hear me fine. If I ask you a question maybe more widely around pricing rather than just Germany. But some -- if you think about pricing, you've had tailwinds coming through on your pricing plans because of inflation. You talked about that in the U.K. But you saw the impact of German pricing increase seems to be a lot of broadband market share. Just keen to understand a little bit about your thoughts more widely on pricing. Like do you think the consumer has scope to take greater price increases when you think about your value of volume approach you've talked about, how do you think about pricing in that context. So why the thoughts about pricing across your European assets? Why it would be very helpful?

Sure, Maurice. Maybe I'll say the sort of value versus volume point is always valid, whatever, I would say, the pricing points are and wherever the inflation is. Despite the focus that tends to be put on net adds in mobile, which I think are a very imperfect KPI. I would say fixed broadband is a different thing because they come with a certain ARPU. We will continue to remain disciplined in all circumstances and focus on where we get good customer lifetime value. A key example of that, I'm sure we'll talk more about this later, is the reseller market in Germany, where sometimes the customer numbers can be big, but the lifetime value is very small. So you won't see us pursuing these volumes. More broadly on prices, I think probably, I don't know, when it was 3 years ago, when we were having this conversation, we were thinking can the industry actually adapt to an inflationary environment. And I think our efforts have proven that this is actually possible. Now we are in a good phase, as I was saying earlier, because everyone prefers, including us, a much lower inflation dynamic, but we have adopted across Europe, effective mechanisms. It varies across countries and obviously situation, you know this better than me, that allow us to continue to progress in this direction, again, very much depending on where the inflation levels are today. One point you mentioned, which is important to me, is the fixed broadband impacts in Germany. And it's true that as we are today, we are suffering from this hangover churn that comes from having repriced by EUR 7.5 million. It's over 70% of our base. So if you take the churn in isolation, clearly, it's negative. But if you stand back and look at the whole execution, which actually has been made possible, as you know, by the step-up on the network front, then it's definitely value-accreting and will continue to be value accretive for Vodafone significantly. Because if you look at the last 5 quarters, more or less, we would have lost, well, less than 5% of the base and the price increase was very different. And as Luka was mentioning, we are now seeing this moderating, so it's not going to last forever. So overall, I need to say the execution on price increases has been different in every market, better success here, less success there, it depends. But overall, I think the industry has stepped up, and we are pleased with the position we are now, including the fact that inflation is stepping down, which is great news.

Next up this morning is David Wright from Bank of America Merrill Lynch.

Hopefully, everyone can hear me. Germany again. Just digging into this dynamic. And I think you've talked about it there, Margherita. But the German broadband losses number has not really improved quarter-on-quarter, and yet this price lapping, you talked about the hangover, but what is that exactly? Because what I'm struggling to understand is you talk about the better network quality scores. You are cheaper than Deutsche Telekom in terms of your headline price with superior speeds, yet there's just no evidence at all of you being able to take price -- taking prices being a huge churn event for you guys, not huge, but it's been a churn event that, as you said, continues to hang over. So how can we be confident that you can continue to take any price in Germany if your network scores are good, you are cheaper, but you're still losing customers?

Thank you, David. Let me rebuild the whole history here. We have, as I said earlier, repriced 7.5 million customers. We have completed the exercise back in January. And as we were going through the mechanics of notifying the price increases, as you may remember, we have seen very low level of churn, actually substantially below the original business case. However, some of those reactions have been somehow delayed, and that's what we have seen in the numbers now. The most important point is what you are querying on, which is, is it going to improve? We need to see it getting better. And there are 2 reasons why it will get better. One is the distance simply from the price increase execution, and the second is the actions that you mentioned. The network, the best experience we have ever had today, and this is kind of gradually thinking through, let's put it this way. And then on the second front, we have introduced much more dynamic customer value management on our base, which we were lacking. As a result of this effect, you can expect step down quarter-on-quarter on the negative net adds going forward quarter after quarter. And it's fair to say that we have already seen in June and July, a very different profile with a material improvement in the trends. So it takes a little bit of patience to see it through. But as I said earlier, it was worth it. And you will see it in this continuous improvement of the net adds performance. Not yet satisfied where we are today, I was very clear, but it will keep improving.

And do those expectations, do they also take into account the risk of Deutsche Telekom Housing Association penetration?

So, yes is the short answer. The longer answer is we're not really seeing any difference in the housing association relationships that we have. We can talk more about the MDU transition more broadly. But if anything, the perimeter of our housing association partnerships in the last 6 months have net-net increased a little bit. So I think that the MDU transition is not making a difference in that aspect.

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

I'm afraid this is another question on pricing, but I'll jump back over to the U.K. I wanted to ask about the move to pounds and pence pricing that you enacted at the start of July. And specifically, how did you reach the GBP 3 a month for broadband with GBP 1 a month for mobile figures. It's interesting that you've matched BT's increase in broadband, but you've gone for a discount in mobile to BT's GBP 1.50 per month increase when you've got lower market share in fixed than you do in mobile. And how proactive will you be in trying to migrate customers onto those new packages versus letting existing customers stay on CPI plus 3.9% packages?

Sure, Carl. On the latter, it's the normal dynamic of the market that will get the mix to evolve over time. All new contracts that are being signed from the 1st of July are going to be with these new conditions. And we've been very supportive of these conditions because understand that, in this case, the customers value transparency. And so we have supported the Ofcom consultation and have actually as you say, implemented this straight away even before it was conclusive because of the certainty it gives to our customers, which obviously is a key priority for us. In terms of how we got there, actually, let me enter the numbers, I mean, are vary depending on the offers we are talking about. So it's not as black and white as you were describing. There is a variation in the mobile space across plans on what the price increase is, and we have taken our view of what was appropriate in the circumstances with a very important element that is worth noting, which is that we have not applied any price increase to our social tariffs in the U.K. It's been our approach ever since we introduced the social tariffs, we are protecting our vulnerable customers for inflation, and it's been like this for the last 3 years. But then there are ranges depending on the price plans where we are. If I just maybe add 1 point, we are really pleased, as I was saying earlier, about our execution in the U.K. in terms of competitive dynamics. And we are commercially having good momentum and expect this to continue.

The next question comes from Akhil Dattani at JPMorgan.

If I could maybe ask a question on the broader European service revenue picture. Margherita, you commented on a U-shape recovery. I guess, firstly, it would be helpful to understand as we look into Q2 how deep that you look. But I guess what I'm really trying to understand is what are the drivers that are giving you confidence as we get to the back end of the year that revenue trends improve? Is it primarily project phasing in one-on-one? Or are there any sort of commercial actions within that? And if I can just layer on top of the question around Germany on the same topic, which is that you've talked a lot about pricing and what you're doing commercially. But maybe just to challenge the overall topic, you've probably seen earlier this month Deutsche Telekom in broadband, has actually shifted its strategy to push fiber more aggressively. So where they have fiber, they're no longer marketing VDSL. They have an entry-level offer for 150 meg, and they're actually cutting price to focus instead of actually driving upsell. So maybe if you can just talk to us around what gives you confidence you can continue to focus on pricing, where at least from the outside, it seems like Deutsche is more driving upsell rather than pressuring price?

Yes. Maybe I'll take this last part, and then let Luka comment on the moving parts on the European growth rate. In terms of pricing movements in the market, in broadband, I would say a couple of observations. The first is that clearly, they are -- they seem to be focused on driving more fiber penetration, which today is relatively limited, let's put it this way, in the German environment. And then it also looks like they have been focusing rationally on monetizing the sort of upsell across speeds and bundles, which I think is a logical thing to do. At our end, as it was mentioned earlier, we remain competitive and also, more importantly, the level of overlap between the areas where these offers will apply, and so where fiber is marketed and our network is still very limited. And therefore, from that perspective, I would say this is not really impacting our competitiveness.

And in terms of Europe, thanks a lot for the question because it gives me finally an opportunity also to talk about the rest of Europe at least a bit because so far, we have only discussed Germany and the U.K. and actually, other Europe has been doing quite well in Q1. Of course, you have seen there also a step down in growth because we're applying CPI indexation on the top line side as well. But 2.3% growth in Q1 and 3.3% in B2B, it's still holding up quite well. And I would expect there, the trends to also develop favorably, mainly driven by B2B sequential improvement as we also see there that the sign-up success that we have had early in the year in digital services will translate into incremental growth in half year, too. Then you have the U.K., where we would expect through the remainder of the year actually a positive development. We stand firm on our low single-digit expectation for the full year. So that tells you that there will be some, not massive, but there will be some improvement as we move through the year, also driven by the B2B performance and continued solid performance in consumer, where I think we have proven again our competitive strengths in the quarter. So that leaves Germany. And Germany is at the end of the day, what will drive the U-shape also at the European level. We are going to reach now the eye of the storm, so to say, and the peak of the volume in Q2 with 2 effects coming to full fruition. One is the peak impact of the MDU transition. This is the big quarter where almost the entire remaining base will make their moves. So we'll see a big impact on that. You have to expect a sequential quarter-over-quarter impact of around 3% incremental negative drag from that. So year-over-year, that will translate into 4 percentage points out of the MDUs alone. And then on top of this, we will have the full lapping of the price increases in fixed broadband from the prior year. That adds another 2 percentage points quarter-over-quarter. So that means that, of course, Germany will be significantly in negative growth, and that will also affect the growth rates at the European level. Ex the MDUs, we will expect Europe to remain in positive growth territory. But including the MDUs, there will be certainly a step down. Until then, in the second half year, things will start to improve, let's not forget, we are talking about for the full year, EUR 400 million top line impact coming from the MDUs alone. Q1 has seen EUR 40 million roughly. So that leaves EUR 360 million that we will have to counter with, again, Q2 then being in the full impact range. So call it EUR 120 million essentially that we will face in Q2. But apart from this, I absolutely remain confident in the overarching momentum in Europe. We have now made the right moves. We're in the right markets. And if we see through FY '25, we will also see Europe, of course, not only Germany, back to growth, that's clear.

That's clear. Luka, sorry, just as a very quick follow-up to your comments on Germany. You mentioned 5 percentage points of quarter-on-quarter drag when we take the MDU impact and the full lapping of prices. So that takes you at around 6.5% decline in Germany. Is that the sort of starting point? Or are there any other things that we're missing here for Q2?

That's the major math. As I said, we would expect some sequential improvement in B2B compared to Q1, but that's not yet going to be a massive countering impact. That should rather start to build up for the second half year.