Vodafone Group PLC

LSE:VOD

Earnings Call Transcript 2021-Q1

[Nicholas Jonathan Read, CEO & Executive Director]

Good morning, everyone. I hope you're staying safe, and thank you for taking the time to join us. I'll be joined by Margherita. And between us, we will run through the key highlights for the quarter and our trading performance. I'm also delighted that Vivek is here to present to you as well. He will introduce Vantage Towers, Europe's leading tower company. Let me start with the highlights for Q1. Overall, our performance in the quarter was in line with our expectations. While we have seen the direct impact of COVID-19 on our revenue, largely because of travel restrictions, we've maintained a consistent commercial performance that we've achieved through the whole of last year. And in our largest market, Germany, our performance was particularly resilient. As a result, we are reconfirming both our EBITDA outlook and our free cash flow guidance for the year. We've continued to execute at pace on our 4 key strategic priorities, which will support us in what is likely to be a tough economic environment. We've seen a further improvement in customer loyalty, with churn down a 7th consecutive quarter. And we have accelerated our digital transformation, fundamentally changing how we operate and engage with our customers. I'm also pleased with the progress we've made on further improving our asset utilization through network sharing builds and optimizing the portfolio with our Greek Towers merger announced this week and the completion of the merger between VHA, our Australian business, with TPG in July. We are also dedicated to playing a key role in supporting society, keeping people connected and businesses functioning through our committed teams in critical network infrastructure. We've donated over EUR 100 million across our markets, which includes over EUR 1.3 million in donations from our employees to local charities. Just as we were there for the emergency response phase, we will continue to support Europe's economic and social recovery in the next phase. As a result, we've evolved our 5-point plan and identified key areas where Vodafone can clearly prioritize and support government's digital agenda. We are working closely with policymakers on this shared ambition. I'm delighted to announce the launch of Vantage Towers today. A year ago, I set out a 3 phase plan for our tower assets: firstly, to generate industrial synergies from network sharing; secondly, to facilitate operational synergies and improve asset utilization by establishing a dedicated towers management team; and finally, to realize value for our shareholders through targeted portfolio action. While there is still work to do on the proposed capital structure, which we will update you on in due course, the IPO of Vantage Towers is firmly on track for early 2021. Vivek will take you through the significant progress we've made to date, provide a financial overview and update you on the IPO timetable. Now looking at our overall commercial performance, which in Q1 has been good, with further consistency of execution. This is reflected in our improved rates of customer loyalty, which churned down year-over-year for a 7th consecutive quarter in Europe. While the impact of COVID-19 has reduced the number of customers, moving provider, the underlying trend is still both clear and encouraging and a strong indication of the commercial actions we've taken across each of our markets. In fixed, our broadband performance was good despite COVID-19. Overall, we added 230,000 broadband customers in the quarter, and we added almost 430,000 NGN customers. As a result, our on-net penetration has continued to improve to around 30%. This sustained commercial momentum has been driven by a comprehensive set of commercial actions that we've implemented over the past 18 months. We're now competing effectively across all market segments with unlimited data offers at the high end through to second brands in the value segment. We also have a clear relative price positioning versus all other brands in the marketplace, allowing us to rapidly respond to price moves or promotions, ensuring we always remain competitive. We've also reduced our reliance on above-the-line offers. We are instead using a range of digital CR rentals to drive ARPU accretion across our customer base. As Europe's largest converged operator, we are leveraging our significant mobile base and further deepening the relationships we have with our customers by selling them bundled propositions or additional products to meet all of the communication needs. We've worked hard over the past few years to build and develop digital tools that not only make our operations more efficient, but are also better for our customers to engage with. In particular, My Vodafone app has enabled our customers to top up, upgrade and receive help from our virtual assistant, TOBi, throughout the lockdown. We also used the app as a platform to educate customers on our digital services. As a result, we saw our online sales increase by over 50% year-over-year. We are also working closely with our business customers through the COVID crisis and are developing a range of new propositions to support them in managing the more complex hybrid home office environment we will be facing in the foreseeable future. So to sum up, our commercial performance has been good, and we are tracking in line with the scenario we outlined in May. While clearly, there have been some negative effects from COVID, we have a relatively resilient business model, and I'm pleased with our continued consistent commercial performance. As I mentioned earlier, we are committed to supporting society, and we have further increased our focus during COVID-19. During the initial phase of the crisis, we executed well in delivering on our social contract through our rapid, comprehensive and coordinated 5-point plan. Our priorities were to maintain the quality of our networks, support critical services and keep people working, communicating and able to access education and essential information. As we look at the challenging economic period ahead, just as we were there for the emergency response phase, we're committed to playing a key role in supporting Europe's economic and social recovery. As a result, we've evolved our 5-point plan and identified 5 key areas where Vodafone can prioritize activity and support government's digital agenda. These are shown on the slide. This next phase gives us an opportunity not only help rebuild the economy but also drive positive sustainable industry change. We need to be bolder and set our goals higher with a more comprehensive agenda to support society's recovery and resilience in the future. However, we will not be able to do this alone. In order to achieve our objectives and the actions outlined on this slide, governments and regulators will need to support us as an industry with measures that promote a healthy, sustainable market structure that are supportive of network investment and enables us to make a fair return on the capital we deploy. We have some encouraging initial policy reviews such as announce stimulus and policy programs with digital infrastructure, reassessment of spectrum auctions and the approval of network-sharing agreements across our markets. However, more still needs to be done. So we will continue to work hard on this shared ambition of a more resilient, sustainable and digital Europe. I will now hand over to Margherita, who will go through our Q1 trading review.

[Margherita Della Valle, CFO & Director]

Thank you, Nick, and good morning, everyone. I will start by summarizing our overall service revenue performance on Slide 8 before then highlighting the impacts of COVID-19 and the performance of each of our major markets with a particular focus on our largest market, Germany. As Nick has already mentioned, we have delivered a good commercial performance during lockdowns, and our service revenue performance in Q1 was in line with our expectations. COVID-19 has a significant impact in the quarter, bringing to a halt our accelerating growth trend. As you can see in the top left-hand chart, our service revenue growth reduced from plus 1.6% in Q4 to minus 1.3% in Q1. While we experienced similar COVID-19 dynamics across all of our markets, the impact on service revenues varied depending on local conditions. As outlined earlier, the performance of our German business was particularly resilient, thanks to the combination of rapid COVID-19 response in the country and our robust revenue mix. Across the rest of Europe, particularly Southern Europe, the drag from roaming and visitors was more material, and the net impact of order lockdown effects was clearly negative. Within Africa, higher usage in South Africa was offset by macro pressures and free M-Pesa transfers in Vodacom international markets. Taking these trends into account, we are reconfirming our flat to slightly down EBITDA outlook for FY '21, and we remain on track to deliver our guidance of at least EUR 5 billion of free cash flow prespectrum. Before discussing the performance of our markets in more detail, I think that for this quarter, it is worth taking a look at the overall trend first. You can analyze this in a number of ways. But for simplicity, I have broken the revenue growth step down into 3 broad categories: roaming and visitors, business and other. As you can see on the chart, directly observable lockdown impacts dominate each category, but I will also highlight more marginal movements due to factors unrelated to COVID-19. Starting first with roaming and visitors. During Q1, we experienced around 70% fall in roaming revenue. And in some markets, we also saw a significant reduction in prepaid SIM sales to tourists and migrant workers. As lockdown measures have now eased, we are starting to see an improvement in intra-Europe roaming, albeit it still remains significantly below prior year levels. However, non-EU roaming, which is the key driver of our roaming margins, remained subdued. And given the degree of travel restrictions, we don't expect a recovery in the near term. Due to the seasonality of traffic over the peak summer holiday period, we also expect that the drag from roaming on our overall revenue performance will further increase in Q2. In business, we have experienced project deferrals as expected and a slowdown in IoT revenue growth, principally driven by lower automotive activity in Europe where we have a significant presence. This has only been partially offset by higher business connectivity revenues with many of our customers' employees working from home. We are now starting to see a recovery in IoT volumes, but expect corporate project deferrals to continue. To date, in Vodafone business, we have not seen any significant impact from company closures, headcount reductions or any material collection issues. However, we should expect this to become a feature in the coming quarters, especially as government support schemes come to an end. Finally, in Q1, we also experienced negative COVID impacts in consumer, which is reflected in the other category. We did see some positive revenue impact from the increase in voice traffic at the beginning of lockdowns. But these were more than compensated by other factors, and in particular, the drop of out-of-bundle prepaid traffic, top-up challenges in some of our smaller market, and the 0 rating of peer-to-peer M-Pesa transfers in Vodacom International markets. Now turning to Germany, which represents around 35% of group EBITDA and 40% of free cash flow. As the chart on the left illustrates, service revenue was flat year-on-year. Our Q1 organic growth rate includes, for the first time, the contribution of Unitymedia. On a like-for-like basis, revenue growth slowed by only 50 basis points quarter-on-quarter despite the impact of COVID-19, demonstrating good resilience. The drag from roaming and visitors was over 100 basis points quarter-on-quarter. However, this was partially offset by higher variable usage during lockdown and the lapping of international call rate regulation. Excluding the ongoing drag from wholesale, retail revenues grew by 0.4%, and fixed service revenue remained stable at 2.4%. Our commercial momentum also remains solid despite the lockdown, supported by the rapid redeployment of our retail employees to online sales support. We added 74,000 cable customers in Q1 and continued to up-sell higher-speed plans within our customer base. We added 74,000 cable customers in Q1 and continued to up-sell higher speed plans within our customer base. 1.8 million out of our 10.8 million broadband base now enjoys speeds of at least 400 megabit per second, a position unique to Vodafone in the market. In mobile, customer additions in the quarter were impacted by COVID-19-related shop closures. However, in both consumer, branded and business segments, contract churn dropped to single-digit levels. Finally, on TV, we will be launching a new harmonized offering across our entire cable footprint in August, bringing our superior Vodafone portfolio to the Unitymedia footprint and delivering the full potential of our premium TV offer. We have continued to make rapid progress on integrating Unitymedia. We now offer gigabit speeds to nearly 20 million households and are also completing the organizational integration, having reached agreements with the Work Councils in June. Overall, we remain on track against our synergy targets. Now turning to our other markets in Europe and Africa. First, Italy. Service revenue declined by 6.5% in Q1, a slowdown of 2.8 percentage points quarter-on-quarter. This deterioration was entirely COVID-19 related, with the drag from roaming and visitors being around 2.5 percentage points due to Italy's greater exposure to travel. Our commercial performance remains solid. In fixed, we continued to gain market share, adding 45,000 broadband customers. And in mobile, we delivered net neutral ports despite the fact that competition in the market remain challenging with mobile number portability volumes in June returning broadly to pre-COVID levels. Throughout the crisis, we have leveraged our popular app to direct customers towards digital channels. And this, for example, has supported an increase in the proportion of top-ups carried out digitally to over 60%. Looking forward to Q2, we expect further pressure on service revenue as we lap price actions taken in the prior year and the drag from roaming increases during the summer holiday period. In the U.K., service revenue declined by 1.9% compared to plus 1.2% in Q4. Again, the quarterly slowdown was COVID-19 related, reflecting lower roaming, combined with a decline in business revenue due to project delays and IoT. In response to the crisis, we rapidly developed new services for our business customers, allowing them, for example, to get a virtual customer contact center up and running in just 4 days with a strong pickup by retailers and the NHS. Despite a slowdown in overall market activity, our commercial performance remained strong. Mobile contract net additions increased by 61,000, and we hit a new high in broadband, adding 74,000 customers in the quarter. In Spain, customer porting was significantly restricted by the government during April and May. But in June, market volumes exceeded pre-COVID levels with pent-up demand. We have also seen an increase in promotional activity by our competitors with 50% discounts for new customers being extended once again from 3 to 6 months and aggressive offers in both the high- and low-end segments. The particularly extensive lockdown measures during Q1 significantly impacted our service revenue performance, which was 4.2 percentage points lower quarter-on-quarter. On top of roaming, we were impacted by a number of industry customer support measures such as extra data offers and temporary service suspensions in business. We continue to compete effectively across all segments of the market, adding 170,000 new connections, and our base has now been growing for 4 consecutive quarters. In our other markets across Europe, service revenues declined by 3.1% in Q1 after a 3.4% growth in Q4. This was the only area in Europe with a non-COVID-related slowdown with increased competition in 2 markets, Greece and Ireland, as well as the lapping of prior year price increases in Romania. Finally, looking at Vodacom, the lockdown has seen mobile data usage in South Africa double year-on-year. Increased consumption was driven by new offers, specifically designed for working from home and remote learning as well as extensive government support packages. It was a very different picture in Vodacom's International markets who do not benefit from the same support structures as South Africa. There, we saw increased macroeconomic pressures and drags from the 0 rating of peer-to-peer M-Pesa transfers and from the recent implementation of government SIM registration requirements in Tanzania. As a result, Vodacom Group service revenues grew by 1.5% in Q1 compared to 3.2% in the prior quarter. In summary, I am pleased with how we have performed commercially throughout this first full quarter of the COVID-19 crisis, reflecting our relatively resilient business model, our focus on digital customer journeys and our broad range of commercial offers across all segments of the market. Looking ahead, there is still uncertainty on the macro environment. However, we are trading in line with our expectations, and therefore, are reconfirming our EBITDA outlook for the year and our free cash flow guidance of at least EUR 5 billion prespectrum. And with that, I'm delighted to hand over to Vivek, who will now introduce Vantage Towers.

[Vivek Badrinath, Chief Executive of European TowerCo]

Good morning. My name is Vivek Badrinath, and I have been in this industry for about 25 years in various roles in technology, in enterprise and B2B roles, and as well have had a short foray into the hospitality industry as deputy CEO of the Accor Group. Since last year, I've been leading the TowerCo project for Vodafone. And it's been a very unusual project, as you can imagine, especially in the last few months. In effect, we have mobilized several hundreds of people across Vodafone, both in the future TowerCo organization as well as in all the group functions to come to this point. And in the spirit of the legendary startup, we have been borne not in a garage, but in hundreds of living rooms, home offices and bedrooms across Europe. And today, it's a very important day for us. It's the first day of a new name, a new brand, and in effect, a new company, Vantage Towers. It has a distinctive and a refreshing branding, and it symbolizes stability in a changing world. That is what we want to be for our customers, for our investors, for our employees and for the communities in which we serve. Let me start by stating our clear ambition. We want to accelerate Europe's digital transformation in a sustainable way altogether. And for this, we have 3 pillars to our strategy, which inform our plans: people, planet and performance. We have an experienced management team with varied competencies and backgrounds within the sector and with different functional expertises. The team is now fully onboard, working together, working very well together, and it has been setting up this company and putting in place the operational processes. I am joined by Thomas Reisten, our CFO, who has deep experience across several geographies and several functions in the finance area; Sonia Hernandez, who has been both on the vendor side, on the procurement side and more recently was the CEO of Vodafone's Malta operations. We also are joined by Christian Sommer, who has been involved in most of the legal corporate work that the Vodafone Group has seen over the last years; as well as Jose Rivera, who as Deputy CTO of Portugal, has had to drive a huge number of projects, in particular, in deployment. We are -- we also have Niko Rama, who is our HRD and knows our German operations extremely well for having been the HRD of the technology function for Vodafone Germany. I do measure the responsibility which comes from the sheer scale of this asset base. We're talking about 68,000 macro sites across 9 different countries and an aggregated pro forma EBITDA, including -- in which equity accounted of EUR 680 million. We're talking about #1 or a #2 position in almost all markets when you compare to other tower companies. And we have also, in addition, the potential to include the U.K., whereas regards Cornerstone, we're in ongoing discussions with our partner, Telefónica. To go into a bit more detail on the geographical split, you see here the large-scale of our holdings in Germany and Spain as well as Greece being a significant contributor on the basis of the announcement we made today of our transaction with Wind Hellas. We have great tenancies with marquee customers already and a clear potential to grow across several dimensions, which we will detail in our plans to come. This is the first time there has been a dedicated management team focused on driving increased asset utilization on this portfolio. We see growth on the organic side and also for other applications, which come from the fact that intrinsically, we are a national grid of locations with energy readily available and connectivity, and this can be applied to several more areas. And we also have the opportunity, as required, to execute M&A in a disciplined way. We believe today that there are 6 big reasons to consider Vantage Towers as a very attractive investment proposition. First of all, Europe has a lot of potential to still commercialize towers, and we are well behind other geographies in terms of the commercialization of tower assets. Second, we come out of the door with a pre agreed, long-term inflation index agreement with our high-quality customer base, and that includes, obviously, Vodafone. And Vodafone is a very strong anchor tenant, and in itself, it has a leading position in mobile across Europe. Third, we have already, in 5 of our markets, long-term sharing agreements with at least 2 operators, which means, in essence, that our infrastructure is a significant part of the coal grid for 2 of the major players in those markets. This increases the resilience of our revenue flows. Fourth, we understand this business well, and we are confident that we will deliver strong EBITDA levels, powerful cash conversion, and it is a predictable returns proposition. Fifth, we do have a real intent to leverage the growth potential, and we're focused on it. There's a clear site growth that is needed due to the coverage requirements that have been either imposed or chosen by the operators and also with the pattern of spectrum awards that are emerging in Europe to prepare for 5G. And these over the both the short and the long term will generate the need for coverage. We also identified work on adjacent services as well as best practice sharing, industrialization of our methods and processes to generate efficiencies within the operations. Also, as mentioned, we are open to disciplined M&A with a focus on return. And sixth, finally, we believe that what we are building is essential for our connected future. We believe that it enables operators to operate more efficiently to deliver their services to their customers at a lower cost with good performance. We also believe that the way we will operate will allow us to minimize the environmental impact of our business. I'm delighted to confirm that today, we have announced a very important transaction in this respect, creating our third largest TowerCo within Vantage Towers with a combination of Vodafone Greece and Wind Hellas' assets. The combined entity will be the leading TowerCo in Greece. It represents 5,200 sites with a 1.6 tenancy ratio at start and already holds 500 commitments for build-to-suit sites. The MSAs are pre-agreed and they are CPI-linked as well. This represents another EUR 55 million EBITDA for Vantage Towers pro forma '20. So in summary, we present a pro forma financials of Vantage Towers today, and for financial year '20, they would have read as follows. The revenue would be EUR 950 million. The adjusted EBITDA would be EUR 810 million. The adjusted EBITDA reaches EUR 523 million. And the adjusted operating free cash flow, taking out the maintenance CapEx, as is customary for such assets, is EUR 494 million. At EBITDA level, you should also add INWIT for EUR 157 million, which means an equity accounted EBITDA of EUR 680 million. In addition, we could consider if we reach an agreement with our partner, CTIL's EBITDA for EUR 50 million to EUR 70 million approximately. And you can also see on this slide the breakdown by geography. Looking now at the next steps of our journey. We approach them with great confidence. Because the preparation work is progressing well, we've hit all our milestones so far in spite of all the circumstances, and we continue to move at pace. Our next date together will be a November disclosure of our pro forma H1 financial year '21 results, and that will give us an opportunity to update you in more detail on our progress ahead of an IPO, which we intend to position in the early '21. We're planning for prime standard listing in Frankfurt. As the largest proportion of our business is in Germany, it makes sense to incorporate the company in Düsseldorf and to list in Frankfurt. Our shareholder, Vodafone, has stated its intent to retain majority ownership. We will, of course, ensure a strong and balanced governance. And if I may refer to Vodafone's track record in JV, such as Vodacom and others, the mechanisms will be fully in place to provide a respectful and equitable treatment of all shareholders. This will be a 2-tier structure with a Management Board and a Supervisory Board chaired by an independent chairperson. I would just like to conclude my presentation by stating how exciting I find this project. It has a lot of scale. And at the same time, it draws on our agility as we set up a new business, which is very meaningful for the future of our sector in Europe, and it aims to create value in a sustainable way for all our stakeholders. Thank you very much.

[Nicholas Jonathan Read, CEO & Executive Director]

Thank you, Vivek. A year on from our first announcement, it is great to be able to celebrate the official launch of Vantage Towers today. And I look forward to realizing with you and your team the opportunities to drive growth, efficiencies and unlock significant value for shareholders through the IPO in early 2021 and beyond. So to conclude, Q1 was another quarter of good commercial momentum despite the majority of end markets being in lockdown for most of the quarter. This clearly highlights the relative resilience of our operating model and improving customer loyalty. Overall, the impact of COVID-19 has been in line with our expectations so far. Our commercial performance has been good. We are reconfirming our EBITDA outlook, and our free cash flow guidance remains unchanged. And finally, we aim to play a key role in the economic recovery, whilst also shaping a more resilient, sustainable, inclusive telecom sector, building back better such as our announcement last week to have our entire Europe network powered by renewable electricity by July next year. We look forward to working with policymakers to accelerate their digital agenda while also positioning Vodafone to emerge even stronger and play an ever more critical role in enabling the digital society. Thank you, and I look forward to speaking to you all soon.