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Vodafone Group PLC
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Hello, and welcome to the Vodafone Group plc Trading Update Analyst and Investors Conference Call. [Operator Instructions] And just to remind you, this is being recorded. So today, I'm very pleased to present Vittorio Colao, CEO of the Vodafone Group; and Nick Read, CFO of Vodafone Group. Gentlemen, please begin.
Good morning, everybody. Welcome to our trading update for the first quarter of '18/'19. I will take you through the quarter's highlight and discuss the important positives from Vodafone from the new EU Electronic Communication Code, and then Nick will focus on the trading performance in our major markets and his priorities as the incoming CEO, before we turn then to Q&A. So I will start on Slide 4, with the highlights for the quarter starting on the left. During the first quarter, the group's organic growth rate slowed, in line with our expectations, to 0.3% on our historical accounting basis. This quarter, along with the rest of the industry, we have adopted IFRS 15, which eliminates the drag from handset financing and, therefore, gives a more accurate representation of our performance at 1.1% growth. Nick will explain more about this accounting change later on. The majority of our markets are performing well. However, we were impacted by increased competitive intensity in Italy and Spain, together with the seasonally higher drag from our EU roaming regulation. The foundation of our growth is our differentiated network quality versus the value players, which we continue to extend thanks to sustained investment. In mobile, our 4G coverage increased to 94% of the population in Europe, and we have the best network NPS in 14 out of our 20 largest markets. In fixed, our high-speed broadband coverage is now 70% of the households in the European footprint, pro forma for the acquisition of Liberty's assets in Germany and the CE. We will have access to around 115 million homes, with 54 million on-net, allowing us to compete head-to-head with the main incumbents. And this network leadership drives our 3 growth engine. First, mobile data, which continues to grow fast at 57% in Europe and AMAP, supported by 4G adoption and greater usage. On average, these customers now consume 2.5 gigabytes per month. This data growth reflects the success of our more-for-more plans and personalized offers. However, the benefit to ARPU is typically being offset by a structural mix shift towards lower ARPU SIM-only offers and by the EC roaming regulation, as well as in few specific markets by increased competition. Second, fixed and convergence is the second engine, 196,000 new broadband users in the quarter and a record 289,000 new converged users. And third, Enterprise, which is 30% up on our service revenue, 0.9% growth; or 2%, excluding EU regulation, which is similar to last quarter. This reflect good trends in IoT as well as in fixed and in cloud services where we are gaining market share. And finally, on the right, the sum of all our operational efforts is shown by our Net Promoter Score. We continuously demonstrate our leading or co-leading positions in 17 markets. Critically, we continue to have a very substantial gap versus the third-place player. So overall, I would say that Q1 has been a solid quarter for the group and in line with our expectation, notwithstanding the rise of competitive intensity in Italy and Spain.Moving to Slide 5. Our leading customer perception continues to attract and retain users, translating into solid commercial momentum. On the left of the page, starting with Europe, mobile contract customer growth, in the light red bars, has accelerated in the quarter due to strong growth in Germany, a higher number of second SIMs in Spain and the improvement in customer experience and service in the U.K. In fixed broadband, the darker red bars, our growth in what is traditionally a seasonally slower quarter has been impacted by customer losses in Spain and by an effort to lead a reduction in promotional intensity in Germany. However, consistent with the rising demand for high-speed broadband, we added a very, very positive 351,000 NGN households, similar to prior quarters. On the right, in blue, AMAP. Customer growth continues to be positive in both contract and in prepaid due to our network quality, distribution reach and high standard of customer service. On the bottom of the chart, you can see the impact on service revenue. In Europe, reported service revenue declined, but underlying growth remained positive at 0.5%. This reflected recovery in Germany and in the U.K., offsetting the weaknesses in Italy and Spain. In AMAP, service revenue growth eased slightly but remains very healthy at 7%, which is above inflation in all of the key markets, driven by customer and data growth.Turning to Slide 6. A key indicator of customer satisfaction is churn, and I am encouraged by the improvement year-on-year across most of our markets, with the exception of Italy and Spain, primarily as a result of the competitive environment in both markets. This improvement translates into very low absolute churn rates in a number of markets, as you can see at the bottom of the chart, which is a testament to our network quality, customer service and increased science we are bringing to our attention activity through Big Data analytics and one-to-one marketing. The best example is, once again, South Africa where we have NPS lead of 10 points versus the next-best operator, thanks to our personalized voice and data bundle strategy leading to mid-single-digit churn rates. So moving to Slide 7, which shows the contribution of our 3 growth drivers to our service revenue growth in green; and the dark -- and the drags, which reduced our reported performance in black. Consistent with our guidance in May, European consumer mobile, the first green block, turned negative in the quarter due to Italy and Spain. However, a large part of this fall was the delay in repricing in Italy, following the move from 28-day to monthly billing. As unlike our peers, we complied with the requirements of the regulator. Excluding this, EU customer mobile would have contributed 30 basis points to our growth. The second block is AMAP mobile, which delivered a significant contribution to growth, driven by rising data usage and customer penetration. Our fixed business, the third block, accounts for around 1/4 of group service revenue. Fixed revenue increased 3.6% in the quarter, reflecting broadband consumer -- customer growth and market share gains. Importantly, the quality of our fixed base continues to rise. 68% of the broadband base takes NGN speeds, and 34% of consumer broadband customers are now in converged bundles. In Enterprise, we continue to take share in fixed and expand our IoT business, up 13% in the quarter, due to our unique global footprint and wide product set. Now on the right part of the chart, you can see the drags reducing the growth by almost 2 percentage points. This includes regulation, which will improve, as this is the last quarter of the roaming impact; U.K. handset financing will disappear under IFRS 15; and carrier services and wholesale, which continue to drag as MVNO revenues fall away over time.Now I move on Slide 8, the EC regulation and EC code. As you are all aware, regulation plays a critical role in our sector, so I would like here to make a few comments about the code, which was finally agreed in early June, and in our view is a long -- a key long-term positive for Vodafone's position in fixed line. The most important elements for us are the ones on the left of the page. The clear performance and stimulus for fewer fiber roll-out through prioritizing passive infrastructure access as a key regulatory end remedy creates additional opportunity for us, particularly in Enterprise. A second further positive is that deregulation of fiber access is only possible with credible coinvestment partners, and this removes the risk that incumbents can gain a regulatory holiday with fiber. Third, the nonregulation of genuine wholesale-only operator is also important as it protects fiber builders, like Open Fiber or CityFibre, and strengthens the case for full structural separation by incumbents, which will create again a level playing field in fixed, favorable to Vodafone. Taken together, all these 3 measures create new opportunities for industry consortia and infrastructure firms to invest, increasing long-term optionality for Vodafone, and at the same time, pressuring incumbents operator to provide the reasonable wholesale prices. On the other hand, we think that symmetrical access to regulation on cable is unnecessary, given that the wholesale options will be provided by incumbents. And moreover, the good news is that this can only take place if competition is at risk and it's also subject to an EC veto. And in any case, we do not think that cable wholesale would be likely to have a material impact on us financially as we can offset retail price pressure with wholesale share gains.Now on the right, there are other areas that are less material to us. Slightly longer spectrum licenses will harmonize; the availability is only a small positive. Here, national authorities continue to have a leading role. Regulation of international calls will only have a small financial impact next year. And finally, more level regulatory playing field versus OTT player is clearly welcome. So overall, we think that the cost positively maintains a balance between the need for infrastructure competition and the need for investment, which perfectly reflects our unique position as a pan-European fixed challenger with a scale to invest in Europe's digital future.Moving to Slide 9. I remain very focused on ensuring that our merger in India completes, and Nick and I visited India this month. So let me update you on this market before Nick talks you through the rest of the business. India remains challenging as a result of intense competition between the new entrant and the current market leader. Our customer losses in the quarter mainly reflected customers consolidating spending into a single SIM, driven by the increased penetration of unlimited offers and the rapid disappearance of smaller players. We continue to retain our high-value customers with larger bundled sizes at lower price points, but of course at a significant cost to ARPU, as you can see in the chart. In Q1, data prices fell 81% year-on-year, although this has been partly offset by a fourfold increase in traffic, pushing average usage now to 7.5 gigabytes on 4G. As a reminder, our strategic focus is on our 12 leadership circles, which account for over 90% of our EBITDA. And in these areas, we achieved 1.5% sequential improvement in revenue market share in fiscal Q4, supported by our leading Net Promoter Scores. In the middle of the chart, you can see the service revenue trend in absolute terms, and our growth rate, excluding MTRs, which were cut sharply in October. Year-on-year, the underlying fall was around 10%. However, the sequential decline was less than 1%. Moving on to the merger with Idea. I'm pleased to report that we have received conditional approval from the DoT, and so now, we aim to close the merger before the end of August. Consistent with our previously announced plan, the JV has now paid the spectrum liberalization fee of around EUR 0.5 billion and has provided a bank guarantee and the protest for certain dispute to the historical items. Nick and I are pleased to see that we have moved quickly on preintegration work, and we are targeting a fast start to synergies for Vodafone-Idea. We were also pleased that the Indus-BIL merger has received competition commission approval very quickly, and we are on track to complete the deal by the end of March. Now I will pass to Nick for the rest of the financials and the detailed comments on our key markets.
Thank you, Vittorio, and good morning, everybody. Turning to Page 11. Let me start with a short explanation of the impact of the new S15 accounting standard on our financial reporting. I will not go into the changes in great detail as you have already heard this many times before from our peers with the December year-end. We are adopting S15 for the current fiscal year, and we'll not restate our historical reported results. We will, however, provide you with pro forma data for the last 4 quarters on an S15 basis prior to our H1 results in November. Through this year, we will continue to disclose our results on the historical basis so that you can understand our like-for-like performance. In our presentation today, we're focusing on our growth trends under the historical basis. However, the key impacts can be seen on the chart. Our total revenue was around EUR 300 million lower under S15. This primarily reflects the requirements to net off certain dealer commissions from service revenues. On the other hand, our organic service revenue growth under S15 is 80 basis points higher. This is entirely due to S15 eliminating the impact of handset financing in the U.K., which dragged on our growth rate at a group level under the historical basis. Importantly, our guidance for underlying EBITDA growth of 1% to 5% this year already excludes U.K. handset financing effects as well as settlements, so we do not anticipate a material impact on our EBITDA growth from the move to S15, and there is no impact to our free cash flow guidance.Moving to Page 12. As you can see in the chart on the left, on a historical accounting basis, our underlying service revenue growth, adjusted for EU regulation and U.K. handset financing, slowed this quarter to 1.7% from 2.4% in Q4, as we expected. This slowdown was primarily due to our decision to delay the repricing of our plans in Italy in conjunction with the move from 28-day to monthly billing, following the intervention of antitrust authorities. Secondly, we had a seasonally higher drag from roaming, which, as Vittorio highlighted, will end next quarter. The third factor is the commercial actions we took in Spain to reposition the business, which I will comment on later in more detail.The chart on the right shows our growth by major market on both accounting standards. As you can see, growth rates are not materially different, with a notable exception of the U.K. where the 5.4% drag from handset financing is eliminated. Looking ahead to Q2, we expect a broadly similar performance with slightly lower growth on an S15 basis. Spain will slow further, given a full quarter's impact from the commercial actions we took in May, and there is a tougher quarterly comparison in Germany, somewhat offset by the end of the drag from roaming. Moving to Slide 13, which shows our service revenue growth for Q1 by operating business. You can see that in the majority of our markets, we are performing well, with a clear exception in Spain and Italy. In particular, I'd like to highlight the good momentum in our European cluster markets of Portugal, Greece, Ireland and Central and Eastern Europe. In aggregate, these markets contribute a similar amount of EBITDA to Spain, but are often overlooked given the smaller individual scale. It is inevitable that there will be competitive challenges in some of our markets each year, but this diversification is a core strength for the group and underpins the predictability of our dividend. Overall, we expect a robust financial performance in Germany, the U.K. and the cluster of markets to broadly offset the competitive pressures we are seeing in Italy and Spain, supported by our intensive focus on delivering a material net reduction in OpEx this year. Together with good growth across AMAP, this reinforces our confidence that we will deliver the targeted guidance for EBITDA growth this year.Let me now walk you through the key developments in our major markets during the quarter, starting with Germany on Page 14. We are pleased with the consistent growth our German business is delivering in an environment that I would characterize as competitive but generally stable. The foundation of our success is the wide gap in customer perception of our network quality and customer service compared to the value players, which as you can see in this chart on the left has increased significantly compared to last year. We continue to invest in mobile network performance, now evolving 4G, though with speeds of up to 500 megabits per second in 40 cities. This differentiated experience is driving lower mobile churn and accelerating mobile contract customer growth, along with a strong service provider performance in the quarter, driven by specific handset promotions. Our momentum slowed somewhat in broadband, largely because we attempted to lead a reduction in promotional intensity, which DT did not follow. We have now readjusted and expect a recovery in broadband net adds during Q2. In contrast, we are very pleased by the strong acceleration in convergence, where we added over 400,000 households during the quarter, including the first-time recognition of 200,000 fixed accounts who have prepaid mobile products. As you can see in the right-hand chart, our customer service growth recovered compared to Q4, which was dragged by a tough year-over-year wholesale comp. As a result, mobile growth recovered sharply to 1.7% versus 0.3% in Q4. Looking ahead, we see a slightly tougher comparison during -- given a strong Q2 wholesale performance last year, but remain confident that the business is on a healthy growth trajectory under a strong team. Turning to Italy on Page 15. Let me start by highlighting the effective commercial actions which our team have taken to prepare for and respond to the new entrant. Over the past 18 months, we have used advanced data analytics to make personalized more-for-the-same offers to millions of customers, refreshed our propositions, advertised our leading network quality and driven rapid adoption of converged offers. In addition, we have developed a loyalty program called Vodafone Happy, which offers increasing benefits based on tenure. It is delivering exclusively through My Vodafone app and now has 7.7 million registered customers with around 1.5 million check in at Happy Friday promotions each week. These attractive offers, for example discounted rail tickets or extra data for a month based on tenure, have a minimal cost to Vodafone but drive higher NPS and lower churn. The final commercial action we have taken is the launch of our second brand, Ho, in mid-June, which means I have in Italian. Ho offers only one simple price plan with a launch price of EUR 6.99 for 30 gigabytes of data and is sold online through third-party stores and at news kiosks. We are pleased with the commercial response since the launch, and it allows us to compete effectively in the value segment while minimizing cannibalization risk on our main brands.Moving to the middle chart, we will be able to retain a strong -- a broadly stable active customer base in the quarter despite significantly increased competitive intensity following Iliad's launch, although ARPU is under pressure as value-seeking customers spin down to lower-priced offers. In fixed broadband, we will retain good customer and revenue growth despite Wind's increased commercial activity. TI's recent decision to raise broadband prices by EUR 2.50 will add further tailwind to this market. Moving to the right-hand chart, the service revenue decline compared to Q4 had 2 main components. Firstly, our decision to comply with the antitrust authorities, the delay in the price adjustment driven by the shift from 28-day to monthly billing, accounts for around 1/2 of the quarter-over-quarter decline; with the remainder due to the lapping of prior year price increases, along with heightened competitive intensity. Although the delayed price adjustments have now been fully implemented, we do not expect much improvement in Q2 growth given increased competition in the market. This is in line with our expectation in May and the prudent guidance we gave for EBITDA growth this year.Turning to Spain on Page 16. As we discussed in May, we have taken a number of commercial actions to reposition the business, given Orange's structural decision to wholesale its fixed as well as its mobile network to MASMOVIL on discounted terms. The chart on the left-hand side of the page shows the progress we've made during the quarter in mobile contract portability. After a deteriorating trend through FY '18 and steep losses in Q4, we were pleased to move almost net ports neutral in June following our below-the-line commercial responses to MASMOVIL and the realignment of our pricing plans and promotional offers with our primary competitors in mid-May. This supports an improved mobile contract net add performance in the quarter in addition to higher secondary SIMs in converged bundles. In fixed line, there is still more to do as we address high churn levels of our stand-alone broadband base through below-the-line targeted offers. There will be some further impact on our fixed base in H2 following our decision not to renew the contract rights for the Champions League and the match of the week in La Liga for the '18/'19 season. We may also choose not to renew La Liga rights for '19/'20 onwards unless the price becomes more attractive. Football rights in Spain are quite simply uneconomic. Even if we lost every one of the 300,000 TV customers who pay for football, which we do not anticipate will be the case, we will still be financially better off.We intend to focus this investment in our other commercial activities, which offer higher rates of return, including enriching our film and series propositions, which appeal to a much broader part of the market than the 2.6 million homes, less than 10% of the total, who are willing to pay for football. Together with our leading network quality and customer service, this will maintain our premium brand position in the market.Given these actions, as you can see on the right-hand chart, our revenue growth turned negative during the quarter. We expect an increased decline in Q2 given the full quarter's impact of our commercial actions. However, we are confident that the customer trends will improve in H2, leading to a subsequent recovery in financial performance. Moving to the U.K. on Page 17. We are very encouraged by the significant operational and commercial recovery that has taken place, which is now starting to become apparent in our financial performance. These operational gains are reflected in record-low contract churn, excluding Talkmobile, and a sharp improvement in consumer NPS where we now have overtaken EE. In Enterprise, we continue to enjoy a market-leading position. This in turn is fueling better subscriber momentum in mobile, and we maintained a strong performance in consumer fixed. Excluding the handset financing drags and roaming impacts, which increased in the quarter, our service revenue growth accelerated to 1.8%, also supported by the stabilization of our fixed revenues in enterprise after a lengthy period of decline. Together with significant cost reductions, we expect this to support a strong recovery in profitability during the year. On Page 18, you can see the good growth performances across our AMAP region, where in every major market our growth is ahead of local inflation. The macro and competitive environment is relatively stable across the markets, although inflationary pressures continue to build in Turkey, and our customer growth remains robust. There will be some impact in South Africa from the new regulations on out-of-bundle data, which will be implemented at some point in calendar H2. However, we expect a good overall growth in AMAP to continue in the coming quarters.So to summarize the results on Slide 19. We've performed in line with our expectations. The majority of our markets are producing solid growth, with Germany, our largest market, maintaining good results; and the U.K. gaining momentum. Though we expect highly competitive markets in Italy and Spain throughout the year, we have taken extensive commercial action and continue to evolve our plans to strengthen our long-term position. Revenue declines are moderating in India as the market has rationalized down to 3-plus-1 players and we now focus on the fast starts to synergy realization. In May, we announced an EBITDA guidance range of 1% to 5% underlying growth with a midpoint of 3%, along with the free cash flow pre-spectrum of at least EUR 5.2 billion. Overall, after our Q1 performance, we remain absolutely on track with this plan and confident in meeting our guidance, building on our long track record of consistent delivery.Finally, turning to Slide 20. Before I hand back to Hugh for Q&A, I would like to conclude the call by sharing some of my priorities for the year as I step up to the CEO role at the end of September. Both the board and the management team are highly frustrated by our recent share price development, which does not, in our view, reflect the fact that the majority of our business is performing well or the strategically attractive and financially accretive benefits generating from the acquisition of Liberty Global's cable operations in Germany and CEE. We are directing this frustration into an even stronger focus on execution in 5 priority areas. We must continue to strengthen our commercial performance in order to systematically lower churn. Churn is a significant driver of our cost, and there is still a lot of scope for further improvement in many of our markets. A key enabler of churn reduction is the speed at which we grow in fixed and drive convergence through our base. The acceleration in converged customer growth this quarter is encouraging, and we must sustain this momentum. ,Digital Vodafone is a huge opportunity to transform our business, substantially lowering operating costs, while at the same time improving the customer experience. I believe that speed is of the essence, and there’s is real opportunity to differentiate compared to incumbents who may be more constrained on this journey. This program is accelerating with almost 1,500 employees engaged in our [ job squads ], and I am confident that this intense focus, along with other cost initiatives, will deliver another year of material net OpEx reduction in Europe and at the group operations. Last week, I was in Brussels with Vittorio for the initial discussions with the EC about the Liberty Global asset acquisition. We are on track to make a submission to the commission shortly and remain confident that this will be heard in Brussels and we'll secure the necessary approvals. Finally, as Vittorio already highlighted, we visited India this month. Now that we have clarity over the closing of the merger, we will focus on supporting the JV management team in making a very fast start and synergy capture. The JV management will share its commercial, technical and financial plans at an investor event in Mumbai post-closing. So with that, Vittorio and I are ready to take your questions. [Operator Instructions] Over to you, operator.
[Operator Instructions] And we'll now go to the line of Dhananjay Mirchandani of Bernstein.
First of all, my very best wishes to you, Vittorio, for you future endeavors given that this is, if I'm not mistaken, your last earnings call. Now moving on to my question, which is related to Spain, but is much broader. I mean, given that your portfolio strategy in Europe will see you as a fully converged player with the benefits of owner economics across most of your important markets. I mean, Spain is a converging market, and yet the benefits of churn protection against insurgent pricing has been thrown into doubt. I mean, to what extent is this a peculiarity of the Spanish market versus the fundamental question mark on the benefits of being an integrated operator of fixed and mobile infrastructures?
Yes, Dhananjay, thank you for your kind comment. Let me say that you basically answered yourself. I really believe that Spain is a special case. And it's the only case that I'm aware where one of the -- of other operators, main operators, enabled a newcomer to have not only full unrestricted access to 4G but also access to fiber. So it's the only market that I know where you have 4 players, all of them selling -- have the possibility and capability of selling converged. In the other markets, we see different market structures, and there we see a benefit in churn. The other specific thing of Germany is this thing that we have been -- sorry, Spain. We have been trying to change, which is the fact that there are no contracts in Spain, so you have homes, for example, with students that get a fixed broadband subscription for 9 months, they finish the school year and then they disconnect, and then they reopen in the new apartment where they live or the new ones open in the new. So there is much more fluidity in the market. It's not good practice. And of course, it has to be addressed, but it requires the whole market to go there. So I would say both commercial practices and structural characteristics of the Spanish market are bit unique.
We now have a question from San Dhillon at Exane BNP Paribas.
My question is on the dividend. The market gives you very little credit for the dividend. Put another way, the market sees the current dividend is unsustainable. Is there any point at which you think that it's just better to rebase the dividend to more prudent payout ratio or at the very least change the composition of the shareholder remuneration?
San, look, I think we stand back and we say we're really reinforcing. We are on plan from what we communicated in March. In March, we communicated the fact that at the midpoint LTIP, we had EUR 17 billion of free cash flow before spectrum. So after dividend distribution, you're talking about EUR 5 billion of headroom for spectrum, which is significantly above our sort of long-term average of EUR 1.2 billion. We're reinforcing EBITDA guidance today. That EBITDA guidance is growth going forward. We think digital was a big opportunity to contribute to growth going forward. We're also actively working the portfolios. So I think we have a number of levers on top of also the Liberty Global transaction being accretive to free cash flow over time. So we feel that we're in a good position regarding the dividend, and we remain committed to it.
We're now over to the line of Georgios Ierodiaconou of Citi.
I just wanted to ask your views around some of the coinvestment models that are available. You mentioned the broader approval in Europe for coinvestment arrangement. There are some specific proposals from Virgin telecom both with regards to coinvestment with wholesale-only network [indiscernible], and also for [ RSPs ] to coinvest. If you don't mind sharing your views of the proposal and where you stand.
Yes. I think I can basically reiterate what I said in my remarks. First of all, what was Vodafone objective? Vodafone objective is to be a player in convergence and not be at a disadvantage versus incumbents. Of course, there was very heavy lobbying from incumbents to try to get what I would call not completely genuine coinvestment solutions. The outcome of the EU processes that coinvestment must be genuine in order to kind of relax the regulatory provisions, which we think is fair because if there is genuine coinvestment -- which, by the way, Vodafone might be part of, it is then not restrictive of competition, and therefore, it should be encouraged. This is coming out in the right space. And then, of course, the second one is a wholesale-only network becomes an infrastructure for the market, gives the same conditions to every operators, and therefore -- every operator, and therefore, should not be subject to regulation. This also came out in the right space. So in each market, there will be a situation. You can have the Italian Open Fiber solution. Open Fiber is wholesale, it's open to everybody. We are perfectly happy to cooperate with them, but also of course to have others that will use their infrastructure. There could be instead situations where we decided to coinvest together with others, it could be specialized, it come could be a competitor. In that case, again, it will be open to everybody. It's pro-investment not a restriction or competition. I would not call it a victory of Vodafone, because of course Vodafone is one of the players. But for sure, the outcome of the EU process is very aligned with what Vodafone has been working for the last 3 years, I would say.
We know go to the line of Jakob Bluestone at Crédit Suisse.
I have a question on Italy, please. There are obviously a lot of moving parts during the quarter. Can you maybe comment a little bit on how you exited the quarter? Do you see a significant step-change in competition in terms of sort of net adds, sports, revenue trends during the end of the quarter, just to give a sort of a sense of what sort of impact that Wind Tre has had since they launched?
Yes. I don't think we'll break down by month our results. But what I would say broadly is if we look at Iliad, I think they had a decent commercial entry into the marketplace, so we're not surprised by their numbers. When you analyze the port data, about 25% are coming from us as opposed to, say, 25% from TI, about just over 40% from Wind Tre. MVNO is under a lot of pressure, so I'd say they're the first ones feel a lot of pressure. I would say when you analyze the type of customer profile we're losing, these are customers that are typically -- the ARPUs are lower than average and their usage is higher than average. So I think there is a degree of questioning the sustainability of the offer and profitability potentially for Iliad in that situation. Let's see. I think from our perspective, I think the team has done a very good job in terms of the commercial actions. I think they've done a lot of base management work, driving convergence, done the loyalty scheme, promoting the network. And of course, we launched our second brand. And I'd say our second brand has performed well. The question now is more about optimization. At the moment, its sort of cannibalization is in line with our sort of broader market share, and we want to obviously bring that down over time.
We are now over to the line of Akhil Dattani at JPMorgan.
Just a question on spectrum, please. I guess in the context of both your dividend comments earlier, and I guess just kind of broader debate around industry returns, I'm just keen to kind of get your views around how spectrum conversations are going in your markets at the moment. And where the question is coming from is, firstly, that in France we've seen the French authorities agreed to a new spectrum for free in return for operator agreeing to address white spots. Are you seeing any sort of similar conversations taking place in any of your markets? Are there any kinds of hopes that the way auction processes work are changing at all? And then secondly, in Italy, I don't know to what extent you can comment on this, but there's been a lot of headlines around operators saying that they may not want to participate in sub [indiscernible] auctions. Obviously, I understand the broad rationale given new entrant issues and returns. But just really trying to understand from a [ comfort ] perspective how do you think about need for spectrum, and any sort of color you can give around utilization rates and things like that would be really interesting.
Yes, Akhil, Vittorio here. Let me say, first of all, I don't think we can comment specifically on Italy because I think we are now too close to the moment where making comments could be not completely legal or advisable. Let me give you a general answer rather than an Italian specific one. Of course, we are engaged in a lot of conversation. I had the last one this Monday actually with prime ministers and governments on spectrum. And I would say the type of conversation that you refer to is actually taking place. So it's not that policymakers or governments are not sensitive to the fact that they want and they need quality coverage, introduction of 4.5G, 5G. And they understand that if squeezing too much -- that by squeezing too much out of spectrum, they might actually delay or make the investment more selective. So that conversation, yes, is taking place, and it's more frequent than in the past. In that sense, it's a positive. I cannot tell you that everywhere we are then successful of -- in translating that conversation into the type of solutions like the French one that you described. Because, of course, then there are short-term budget issues in some countries. And in other countries, there are also competitive issues. In the U.K., for example, we had a pretty heated auction, which was, for local reasons, turned out to be expensive. So I would give a mildly, mildly optimistic comment, saying, "Yes, there is more sensitivity to what you say. But still, the budget pressures in some markets might be the #1 factor in the mind of governments." The good news is that with the wide range of spectrum available now and the ability to combine different bands, as I already said in the last call, over time, we are seeing a less dramatic and urgent need to get spectrum at any cost. Now if we do that, our competitors do that, this could ease off some of the pressures in the coming years. But I cannot be country-specific, sorry.
We're over to Mandeep Singh at Redburn.
I wanted to come to EBITDA. I know you've reiterated the range of 1% to 5% consensus, basically anchored firmly at 3%. I'm just trying to think about the quarter you just delivered and the quarter you will deliver next given some of the pressures you've articulated. So I just really want to understand what the moving parts are that should give the market confidence in -- or what the levers are that you have that the market feels confident that the -- you're not going to come at the last end of the range versus the midpoint of the range and anywhere else for that matter. Just -- we understand Italy and Spain are under pressure, but if you could just tell us what the other moving parts are that should give us confidence that consensus is on track as well.
Yes, Mandeep, I think that's a real key question. Because I think that we reinforced, when we went out with the guidance, that it was a prudent guidance. And that was our way of saying that we understood the commercial actions we would need to take in Spain and we did not underestimate Iliad's entry into the market. And I'd say that we have called those correctly in terms of what we anticipated. We have actioned the commercial actions we have planned in the quarter, so we're in line with what we wanted to execute. I think what I would do is just stand back from that situation. So you've got 2 situations where we're on track with our plans of what we're executing -- maybe Spain is a little tougher, but I would say -- and maybe we had the repricing challenge of Italy. But if we stand back from that, I'd say Germany is performing well. Overall, U.K. is recovering well. So U.K. will be a good contributor to our results as we move forward, especially in the second half. You look in the second half and you've got Italy and Spain also will be lapping, if you like, tougher comps, and so that will underpin the results to some extent. And then we're working costs very hard across the portfolio, it was always part of the plan. We see digital as a big opportunity, and we got a comprehensive Fit for Growth program. And then finally, what I'd say is look at the rest of the portfolio, whether it's AMAP, whether it's the cluster of the other smaller European countries, we're getting good performance. So I would say we're a big group, broad-based. We've got some challenges, we always tend to have a few challenges. We've taken the commercial actions and so we're confident that we remain on track.
We're now over to the line of Jerry Dellis at Jefferies.
As you look ahead across the whole year, you've indicated that a main driver of the pace of cost reduction will be your ability to deliver conversions and churn reductions and so forth. So is it current expectation that the pace of net cost reduction in the group will be similar to last year? Or could it be better than last year, leaving aside, I suppose, the discretionary items such as the Spanish football rights?
Yes, I think -- so we have historically talked a lot about operating costs. But actually, if you go one level lower and look at net operating expenditures, so OpEx, last year, Europe and our sort of group activities, we saved broadly EUR 300 million in absolute terms year-over-year, and we'll at least be targeting that level if not higher for the year ahead. So I'd say we definitely see opportunity to keep that pace of improvement. Obviously, last year, we had a slight offset, the reduced net operating cost because of AMAP inflation. Clearly, that remains a factor to consider. But I would say, on Europe and group, we see a substantial improvement year-over-year.
Can I just quickly ask whether -- is it fair to say that, that stuff might be sort of overtaken by whatever sort of commercial initiatives you have to sort of undertake in order to sort of keep competitive in Italy or Spain? Or are you confident that enough is already sort of taken into account in the guidance there?
No, we feel confident that our commercial plans are in line. So if you're looking at the previous definition, if you like, of operating cost being absolute down, they will be absolute down again for the third year running. And we think that there's probably a higher opportunity than we had last year.
We're now over to Jonathan Dann at RBC.
With 5G -- I mean, since the U.K. auction, one of the smaller competitors has talked about 5G as a 4G-like opportunity to take share. Do you think that we'll start to see more 5G announcements from the larger operators, including Vodafone?
Listen, I wouldn't call out a specific country. You will see in the coming months and year more announcement of trials. I mean, we ourselves are running some very large and important pilots of trials in several European countries. Yes, you will see much more of that. Will this be a single technology opportunity for newcomers? I doubt. 5G integrates -- will integrate very well with 4G. 4G is already evolving into 4.5, which gives a lot of speed and a lot of capacity. And over time, as we said many times, networks will be 4, 5 and 2 in overlap, and 2 will remain as a safety layer. So we'll see more 4 and 5 as an integrated network. And a single technology player is not very likely to be at scale, let me say.
We're now over to Andrew Lee at Goldman Sachs.
I just had a question on Germany and the fixed line growth outlook there. So we saw the DT's announcement in terms of the support it will receive to allow fiber to the home there. And I just wondered if you had any updated comments on the regulatory setup and how that affects your confidence in the growth outlook and returns to German cable given the potentially accelerating fiber to the home rollout?
Listen, I can only repeat what we said when we did the acquisition of Liberty. With the completion of Liberty, we'll be able to reach, in a relatively short time frame, 25 million homes in Germany. With DOCSIS, we'll be able to take gigabit speed. We announced an extra plan for business parks. And we have another plan for cooperation with municipalities. So as you could imagine, we see this as a very strong and powerful platform in Germany. If Deutsche builds more fiber, it's fine. It's more competition. I mean, building is slow and expensive, so I'm happy if they do it. It will take time and money. But we are convinced that our acquisition will give us an entry in the majority of the German homes. It doesn't mean that we will be owning all of them, but we will be a formidable competitor to Deutsche. I always welcome when competitors invest, there's no problem with competition at our end.
Okay. We're now over to Usman Ghazi with Berenberg.
I had a question on spectrum again. I mean, if you look at the U.K, there is a coverage obligation or it seems that there's a coverage obligation on the 5G spectrum for 3 years. And I was just wondering how that aligns with the slide that you presented at the last set of results where you were saying that a 5G deployment will happen over a much more extended time frame than 4G, and therefore the CapEx risk can be contained?
I'm not sure I can answer in detail your question. I don't know if, Nick, you have anything. Or let me say...
I'm not aware of any conflict.
Let me say, in general, 5G will start in highly dense areas. So I can see areas of the U.K. where definitely we will go. And of course, we'll then integrate it, as I said, with 4.5. In terms of total envelope, keep in mind that we are already making a lot of investments, again, to extend 4 to many areas and 4.5 to even many more. So the way we see it is with our current guidance of mid-single digit -- sorry, mid-teens, I wish it was mid-single digit. With mid-teens, we can really deploy in an organic way a combination of good wireless, broadband and fiber. It will be progressively more 4, 4.5, and then 5. As I said in my earlier answer, we don't think about a single -- we think about customers and broadband experience. We don't think about single technology.
We're now over to Maurice Patrick at Barclays.
Yes, Maurice here. Just a question on U.K. fiber. Currently, you're using wholesale-only providers as your -- first, you bring fiber in the U.K. But with a change in regulation on passive infrastructure, before it can get just residential access, now there's talk about it being applicable for wireless backhaul and enterprise. I wonder if your ambitions for U.K. fiber investments have changed in terms of your -- whether using others or doing it yourself?
Maurice, thank you for your question. It's -- again, it's very consistent with everything we always said. First of all, we welcome the increased pressure on BT to give an access to passive infrastructure. We welcome the higher pressure for lower prices in accessing their services. All of this, clearly, is consistent with our strategy. From the beginning, we always said we will build or we will co-build or we will cooperate depending on the make-versus-buy economics. Everything that provides an alternative is positive. Having said that, Nick, who will run the company, I'm sure will continue to look at pros and cons and make a very disciplined financial decisions. If there is a case for a co-build or a build accessing existing docks or poles, fine. If the incumbent provide services at reasonable and equitable conditions, fine as well. So it's just more charges, a bit what I said in my presentation. I think we said for a long time that this was going in the right direction, and actually, it is going in the right direction for both the customers and competitors like us.
We're now over to David Wright, Bank of America Merrill Lynch.
I'm just interested a little in Spain. I think, Nick, you made the comment that even if you lost all of your football paying customers, you would be economically, let's use the word, beneficial. It would be economically better. I just want to just double-check on that because I think with a EUR 60, EUR 70 offer, I think with 340,000 customers, you'd be losing about EUR 270 million of EBITDA. I think the content in total cost you with the new contracts and the new rights are probably about sort of EUR 280 million, EUR 290 million. So possibly, yes, you might be sort of EUR 15 million or so EBITDA better, but you're losing 25% of your customers in Spain in that scenario. Does that feel like a risk-reward you could even consider? And then does it not also expose you more to the mid- and lower end of your whole value proposition where competition is clearly much tougher. I just don't quite understand the strategy in Spain. It's clearly not being good over the last 12 months. How you could possibly look to reduce your customer base and expose yourselves more to the price-intense element of the market. But could you explain a little?
David, I mean just on the Math side of it, I would just say that you were mixing somewhat ARPUs, which is just revenue, versus then pure cost that's coming out of the business. So I'd say that the delta is a little bit different from that. You're not taking into account other related costs. But what I would -- I'd stand back from this. When you look at it, we're really saying sort of 10% of households care about and will pay for football. And if you look at those households, we have over the last couple of years done several promotions. Orange has done several promotions. And we've not really expanded that universe of people that are willing to pay. Then you take into account that TEF has locked in effectively over 50% of those customers or that marketplace. So our ability to use it as a lever to attract more customers is proving very difficult. And then you stand back from that and say, "Well, okay, given that amount of investment, could we earn a higher return in other things?" And we still believe in high-quality networks. We still believe in giving compelling commercial offers. And we still believe in premium content, which would be film, series, et cetera. This is a lot of money that we can invest to basically give a stronger commercial offer that people really care about going forward. And at the same time, this formula has a way of basically taking that by cost and putting it back on to our competitors, so the cost for them to service those customers increases.
And just -- I know in your presentation you gave the monthly contract adds, but I think that's the less important statistic. The sensitive one is monthly broadband adds. Can you give us an indication if we launched mid-May of how the broadband adds have kind of progressed through the quarter and the exit run rate, please?
Look, we're not going to break it down by month, but I would say is that the key lever that we've been sort of focused on was in the retention side. So this was very much a retention play. So if you like, we are ramping those retention offers up. We've seen a slight improvement, I would say. But at this point in time, it's about fine-tuning the propositions in retention to drive the redemption rates. So at the moment, the redemption rate is not quite where we want it to be, and that's what we're optimizing going forward. We've obviously -- it goes back a little bit to the point Vittorio is making about contracts. At the same time, we've been wanting to implement contracts also to lower churn. And so we're just trying to get that balance in the market.
We're over to James Ratzer at New Street.
Vittorio, very best wishes for the future. I think my question might be slightly more for Nick at this stage. I mean, we're interested in kind of drilling a bit more down on the cost side of the business, I mean, given that service revenues are currently running below your EBITDA guidance growth rate. And I think a lot of the focus to hitting the full year target will come down to the cost side. I mean, you gave some commentary at the full year results around digitalization and talking about an EUR 8 billion addressable cost base within that. I mean, I was wondering if you could help us kind of quantify a bit more clearly how digitalization can bring that cost base down, the pace of that? You've also, this quarter, talked about churn improving in a number of your markets. How should we think about that variable as well helping to support your cost base for this year?
Can I -- without sort of going back and repeating everything I've said previously for the March results, what I would say is where are we really focused on the digital aspect of the execution. I would say very much in terms of our sales online, so we are driving an increased ratio sales performance. We're very much increasing the amount of data analytics we're applying to CVM, so that we're getting a better return of our retention spend. So I'd say this is in a sort of the commercial space. I would say in terms of customer management, this is where we're doing the AI and the bots, and we're getting good success there. Also, driving My Vodafone app and we're also doing it on the back office activities. So I'd say that sort of digital is improving, if you like, all of our cost metrics across the board as we ramp to scale. And then, of course, I would say, if we stand back, don't forget the rest of the Fit for Growth program. I mean, we are simplifying our business all the time. We are rationalizing areas, whether it's IT, whether it's network, whether it's procurement across all the moving parts. So I would say that we're expanding more detail in the November presentation in terms of where we're seeing the traction and where we're delivering results.
And then do you think the cost reductions from these initiatives in FY '19 should be higher than what was delivered in FY '18? And is there an incremental benefit from that churn improvement, too?
I think you'll see that the net operating cost, which was down, let's say, EUR 100 million last fiscal year, we will deliver a higher number this year. So -- and really, where we see greater opportunity is in the Europe and group activities where we're making faster progress.
We unfortunately now run out of time for today's call. So Vittorio, can I please pass it back to you for any closing comments at this stage.
Yes. Very good. Thank you. As this is the end of Q&A, I would like to give some final remarks as we wrap up my last call as CEO of Vodafone. So clearly, it is very disappointing for me to be departing with the share price at this level. Obviously, I believe it does not reflect the progress that we have made and the significant opportunities that we have ahead of us. Having said that, I'm very confident that Nick, as the new CEO, together with Margherita and the whole team, have now, especially after the Liberty Global acquisition and the merger in India, not only the right assets and commercial strategy, which I will comment a little bit more at the AGM on Friday, but above all, have the personal qualities and determination that will be required to ensure that Vodafone fulfills its potential as a converged communications leader, ready and competitive for the gigabit future and with the share price that will be much higher than today. And as long-term owners of Vodafone, our investors can count on our and their determination to succeed and reward them. Now this is also my last investor interaction other than the AGM, and I hope you give me 30 seconds more. I have counted 40 results calls and 7 M&A calls over the last decade. And I would like to thank all of the analysts, the ones who are in the call today and the ones who were in the calls before, and the investors for the support and engagement over the years. I believe that all of you play a very important role in making the capital markets effective and efficient. But you also have an important role in checking, verifying and, when needed, also challenging our thinking and our strategy. As many of you know, as a CEO, I have truly enjoyed and learned from our interactions, and I'm sure Nick will do the same. And last but not least, for nearly all of this time, our operator, Hugh, who is on the call today, has been an invisible but wonderful orchestrator of these calls. So Hugh, I'm very pleased also to thank you for your help for 47 calls across many years. Best wishes to all of you.
This now concludes today's session, so thank you all very much for attending, and you can now disconnect.