Vodafone Group H1 FY21 revenue declined by 2.3% due to COVID19

Vodafone Group

Vodafone Group plc (LON:VOD) has announced its H1 FY21 results.

Delivering our strategic priorities at pace to reshape Vodafone

·    Resilient financial performance during the first half of FY21, in line with our expectations

·    Deepening customer engagement, with mobile contract customer loyalty improved year-on-year for an 8th successive quarter

·    Launched 5G in 127 cities across 9 of our European markets; 52 million marketable homes passed with Gigabit speeds

·    Reaffirming FY21 free cash flow guidance of at least €5 billion (pre-spectrum and restructuring) and adjusted EBITDA expected to be between €14.4  – €14.6 billion

Financial results Page H1 FY21
H1 FY20
 Change (%)
Group revenue3321,42721,939(2.3)
Operating profit333,472577n/m
Profit/(loss) for the financial period331,555(1,891)n/m
Basic earnings/(loss) per share334.45c(7.24c)n/m
Interim dividend per share444.50c4.50cn/m
Alternative performance measures1   
Group service revenue1318,41818,544(0.8)*
Adjusted EBITDA137,0237,105(1.9)*
Adjusted earnings per share244.11c0.85c+383.5 
Free cash flow (pre-spectrum and restructuring)25451394+14.5 
Free cash flow25(101)34n/m
Net debt**25(43,983)(48,107)+8.6 
Net debt to adjusted EBITDA**273.0xn/mn/m
Pre-tax ROCE (controlled)285.1%n/an/a
Post-tax ROCE284.0%n/an/a

1.  See page 56 for the reconciliation to the closest equivalent GAAP measure.

·   Group revenue declined by 2.3% to €21.4 billion, as good underlying momentum was offset by the effects of COVID-19 on roaming and visitor revenue, as well as lower handset sales

·   Adjusted EBITDA declined by 1.9%* to €7.0 billion as the decline in revenue was partially offset by good cost control with net Europe opex savings of €0.3 billion realised during H1

·   Interim dividend per share of 4.50 eurocents, record date 18 December 2020

Nick Read, Group Chief Executive, commented:  

“Today’s results underline increased confidence in our full year outlook. We are reporting a resilient first half performance and we continue to see good commercial momentum across the Group. The results demonstrate the success of our strategic priorities to date, namely increasing customer loyalty, growing our fixed broadband base, driving digitisation to simplify the company and capture significant cost savings, and deliver 5G efficiently through network sharing.

COVID-19 and the reduction in roaming revenues, through the significant reduction in international travel, is currently obscuring our underlying commercial progress, with Q2 service revenue growing by 1.5% excluding roaming. We are now two years into our longer-term strategy to transform Vodafone into a business that enables a digital society, generating both sustainable growth and attractive returns. We are executing at pace, but there remains more to be done to achieve our goals.

Now, more than ever, the connectivity services we provide are critical for society and the demand is growing for our services. I am proud of how our dedicated employees have worked tirelessly around the clock to keep everyone connected.”

Summary ⫶ Resilient performance

Basis of presentation

All amounts in this document marked with an “*” represent organic growth, which presents performance on a comparable basis, both in terms of merger and acquisition activity and movements in foreign exchange rates. Organic growth is an alternative performance measure. See “Alternative performance measures” on page 54 for further details and page 56 for the location of the reconciliation to the respective closest equivalent GAAP measure.

Net debt at 30 September 2020 marked with a “**” has been adjusted to exclude derivative gains in cash flow hedge reserves, the corresponding losses for which are not recognised on the bonds within net debt and which have significantly increased due to COVID-19 related market conditions. The ratio of net debt to adjusted EBITDA is calculated using adjusted EBITDA for a rolling 12 month period, normalised for acquisitions and disposals within the period. 

Financial performance

Group revenue declined by 2.3% to €21.4 billion (FY20 H1: €21.9 billion), as good underlying momentum and the benefit from the acquisition of Liberty Global’s assets in Germany and CEE was offset by lower revenue from roaming, visitors and handset sales, foreign exchange headwinds and the disposal of Vodafone New Zealand.

The Group made a profit for the period of €1.6 billion reflecting our resilient financial performance during the first half of FY21. Basic earnings per share was 4.45 eurocents, compared to a loss per share of 7.24 eurocents in the six months ended 30 September 2019. Losses were recognised in the comparative period relating to Vodafone Idea Limited, which outweighed a €1.1 billion profit recorded on the disposal of Vodafone New Zealand. The current period includes a gain of €1.0 billion arising on the merger of Vodafone Hutchison Australia into TPG Telecom Limited.

Group service revenue decreased by 0.8%* (Q1: -1.3%*, Q2: -0.4%*) to €18.4 billion (FY20 H1: €18.5 billion) as good underlying momentum was offset by lower revenue from roaming and visitors. Adjusted EBITDA decreased by 1.9%* to €7.0 billion (FY20 H1: €7.1 billion) as a decline in revenue was partially offset by good cost control, with a net reduction in our Europe and Common Functions operating expenditure of €300 million during H1. The adjusted EBITDA margin was 0.1* percentage points lower year-on-year at 32.8%.

Cash flow, funding & capital allocation

Free cash flow (pre-spectrum and restructuring) increased by 14.5% to €0.5 billion (FY20 H1: €0.4 billion) supported by the resilient adjusted EBITDA performance and higher dividends received from associates and investments, partially offset by higher cash interest and tax. Licence and spectrum payments for the period totalled €0.3 billion (FY20 H1: €0.1 billion) and restructuring and other payments totalled €0.3 billion (FY20 H1: €0.3 billion). Free cash flow was -€101 million (FY20 H1: €34 million).

Net debt adjusted for mark-to-market gains deferred in hedging reserves at 30 September 2020 was €44.0** billion compared to €42.2** billion as at 31 March 2020. This increase in net debt reflects the FY20 final dividend payment of €1.2 billion, mark-to-market movements on derivatives, and foreign exchange losses, partially offset by proceeds of €0.4 billion following the subsequent sale of our 4.3% stake in INWIT in April 2020.

We aim to maintain our financial leverage within a range of 2.5-3.0x net debt to adjusted EBITDA. As at 30 September 2020, financial leverage was 3.0x**. The interim dividend per share is 4.5 eurocents (FY20 H1: 4.5 eurocents). The ex-dividend date for the interim dividend is 17 December 2020 for ordinary shareholders, the record date is 18 December 2020 and the dividend is payable on 5 February 2021.

Strategic review ⫶ Delivering our strategic priorities

In November 2018, we set out a long-term ambition to reshape Vodafone and establish a foundation from which the Group can grow in the converged connectivity markets in Europe, and mobile data and payments in Africa. This ambition was to be delivered through three strategic priorities: to deepen engagement with our customers; to accelerate our transformation to a digital first organisation; and improve the utilisation of our assets. Given the ambition to reshape Vodafone, we added a fourth strategic priority to optimise the portfolio of our operations.

During the first half of FY21, we have executed at pace across all four priorities. Highlights of activity during the period include:

·  Deepening customer engagement, with mobile contract customer loyalty improved year-on-year for an 8th successive quarter

·   we have 52 million homes passed with a 1 Gigabit capable fixed-line network;

·   we have launched 5G in 127 cities across 9 of our European markets;

·   in response to the trading conditions related to the pandemic, we accelerated a series of cost saving activities, resulting in a €300 million net reduction in our Europe and Common Functions operating expenditure;

·  we have secured mobile wholesale agreements with PostePay in Italy with more than four million connections, Asda Mobile in the UK, and Forthnet in Greece;

· we completed the merger of Vodafone Hutchison Australia with TPG Telecom to establish a fully integrated telecommunications operator in Australia. We now hold an economic interest of 25.05% in the Australian Stock Exchange listed entity; and

·   we are on track for the IPO of Vantage Towers in early 2021.


1. Including VodafoneZiggo | 2. Africa including Safaricom, Ghana and Egypt | 3. Europe and common function operating costs. | 4. Figure presented in H1 FY21 column reflects Europe digital channel sales mix in Q2 FY21 as the mix in Q1 FY21 was impacted by retail restrictions due to COVID-19.

It is two years since we set out our strategic priorities to focus the Group on the converged connectivity market in Europe, and mobile data and payments in Africa. This first phase of our strategic transformation has progressed well and in this strategic review section we illustrate that:

A.    We are delivering our strategic priorities at pace to reshape Vodafone; and

B.    We are well-positioned for our next phase to create sustainable stakeholder value.

A ⫶ Delivering our strategic priorities at pace to reshape Vodafone

The actions we have taken in the last two years and their results are summarised in the sub-sections below. Our actions have delivered a more consistent revenue growth profile, with our service revenue trends remaining resilient despite the direct impacts of the COVID-19 pandemic on revenue from roaming and visitors.

We are firmly on track to deliver our original three-year target of at least €1.2 billion of net savings from operating expenses in Europe and Group common functions, having reached €1.1 billion of savings between FY19 and H1 FY21. We have extended our ambition to at least another €1 billion of savings over the next three years. This focus on efficiency, delivered through standardisation and integration of our technology support operations, has enabled our adjusted EBITDA margin to be resilient during the pandemic and remain broadly stable at 32.8%.

Through improved asset utilisation and a disciplined approach to balancing our capital allocation priorities, we have delivered €10.7 billion of free cash flow (before spectrum payment and restructuring costs) over the last two years. Despite the strong delivery of our strategic priorities at pace, our post-tax return on capital employed (‘ROCE’) of 4.0% remains below our cost of capital. On page 10, we have set out our growth model and capital allocation framework, and explained how we will drive shareholder returns through efficiency and growth.

Deepening customer engagement ⫶ Delivering more consistent commercial performance

In 2018, we set out our plans to deliver consistent commercial performance in each of our markets, following a period of more mixed results. The major actions we have undertaken include:

·   Launching speed-tiered, unlimited data mobile plans in 9 markets. This has enabled us to stabilise and grow our higher value customer base and increase average revenue per user (‘ARPU’). In Italy, the UK and Spain, the ARPU uplift was approximately by €2-5 per month. We now have over six million active unlimited data customers across our markets.

·    Launching and embedding ‘second’ brands such as, ho. in Italy, VOXI in the UK, Lowi in Spain and Otelo in Germany to compete more effectively and efficiently in the value segment. Alongside our speed-tiered, unlimited data plans, we are now competing effectively across all segments of the markets in which we operate. We now have 4.5 million active users across these four brands.

·    We have maintained strong commercial momentum in our fixed business and over the past 24 months we have added 3.1 million NGN fixed-line customers in Europe. We also have converged customer plans available in all major markets. These include a combination of mobile connectivity, fixed-line connectivity and a range of additional products and services, such as TV and IoT connections.

·    We have invested centrally to develop a unified digital customer experience through shared online platforms and the MyVodafone mobile app. This investment has supported an approximate 10% reduction in the frequency of customer contacts per year to 1.4 and the app is used by 62% of our mobile customers in Europe.

Accelerating digital transformation ⫶ Best-in-class operational efficiency through standardisation

Through standardisation, digitalisation and sharing of processes we recognised an opportunity to significantly improve our operational efficiency. We set an ambitious goal to generate at least €1.2 billion of net savings from our Europe operating expenses over 3 years. In just over two years, we have already delivered €1.1 billion of this original target and have clear line-of-sight to the €1 billion targeted over the FY21-FY23 period. Key activities that have contributed to this performance include:

·    Whenever possible our back office activities are delivered though our three Shared Service Centres (‘_VOIS’) in Egypt, India and Eastern Europe.  Over a third of the targeted €1.2 billion net opex savings in Europe and Common Functions are being generated by integrating activities into _VOIS and driving digitisation at speed.

·    We have invested in customer support technology. Using a combination of artificial intelligence and machine-learning tools, we have developed ‘TOBi’, a fully automated customer support assistant available online and via the MyVodafone app. Our investments in this area have resulted in 64% of customer support interactions with TOBi being resolved with no human interaction.

·   We are investing in shared cross-market digital sales platforms. These enable best-in-class customer journeys enabling full sales activities without manual intervention. This has led to over 22% of our contract mobile and fixed sales in Q2 being completed through a fully digital customer journey in Germany, Italy, the UK and Spain. This in turn has enabled us to reduce our retail footprint by 728 stores over the last two years.

Improving asset utilisation ⫶ Facilitating efficient use of capital through network sharing

Over the last decade, the level of ROCE achieved by the telecommunications sector has significantly reduced to below its weighted average cost of capital. This has been driven by a number of factors, including market structures, capital expenditure requirements for advancements in network infrastructure, mobile spectrum licenses and a challenging regulatory environment. As a result, two years ago we began a series of activities to improve our asset utilisation to support a recovery in ROCE. These actions have included:

·    Reaching network sharing agreements with leading mobile network operators in each of our European markets. This includes Deutsche Telekom in Germany, Telecom Italia in Italy, Telefonica in the UK and Orange in Spain. We estimate the combined effect of network sharing arrangements in Europe reduces our future investment requirement to deploy 5G by c. €2.5 billion over 10 years.

·    Established Vantage Towers as a separate vehicle to consolidate the ownership and operations of our passive mobile network infrastructure, enabling a greater focus on delivering operational efficiencies through dedicated, commercially-oriented and specialised teams.

·    We have signed significant wholesale agreements in both our fixed and mobile networks, on terms that maintain the differentiation of our retail offers. In 2019, we began a wholesale agreement with Telefonica Deutschland for access to our fixed-line infrastructure in Germany and during H1 FY21 we signed mobile wholesale agreements with PostePay in Italy (more than four million connections), with Asda Mobile in the UK and Forthnet in Greece.

Whilst significant progress has been made, much more work is required to both improve our own asset utilisation and to work collaboratively with policy makers and regulators to ensure that we can continue to invest in our Europe and Africa communications infrastructure, whilst also earning a fair return on the capital we deploy.

Vantage Towers

The IPO of Vantage Towers is on track for early calendar 2021. Vantage Towers is one of Europe’s largest and most geographically diverse infrastructure operators, with significant growth opportunities alongside long-term, inflation-linked contracts. The three important aspects relating to Vodafone’s ongoing relationship with Vantage Towers are:

1.   Vodafone is committed to ensuring that Vantage Towers is operationally independent. This is demonstrated through the long-term Master Services Agreement (‘MSA’), clear management incentive structures, and a two-tier governance structure led by an independent Chairman;

2.  Vodafone will strive to ensure that the capital structure for Vantage Towers enables it to take full advantage of its organic and inorganic growth opportunities; and

3.  Vodafone is committed to supporting Vantage Towers’ growth ambition and will ensure shareholder value is being optimised.

Optimising the portfolio ⫶ Significant & fast execution to enable strategic priorities

In order to achieve our strategic objectives to focus on converged connectivity markets in Europe, and mobile data and payments in Africa, we began a large programme to rationalise our portfolio in 2019. Our portfolio optimisation programme had three overriding objectives as set out below.

ObjectiveTotal valueTransactions 
1. Focus on Europe & Africa€4.4 billion€5.1 billionDisposal in New Zealand, Malta and Egypt1Mergers in Australia, Africa and India (Vodafone Idea and Indus Towers1)
2. Achieved convergence with local scale€18.6 billionAcquisitions in Germany, Greece & Eastern Europe
3. Enable structural shift in asset utilisation€6.5 billionTBATower mergers in Italy & Greece1Ongoing IPO of Vantage Towers1

1 Transaction announced but not yet closed

Liberty acquisition ⫶ Transformation into Europe’s leading connectivity provider

The defining corporate transaction of our recent history was the acquisition of Liberty Global’s assets in Germany and Central Eastern Europe, which completed in July 2019. This transaction has enabled Vodafone to become the clear converged Gigabit challenger in Germany with 55.2 million SIM connections, 10.9 million fixed-line connections and 13.5 million TV subscribers.  Following completion of the transaction, we have worked at pace to upgrade the cable network to Gigabit speeds and deliver the targeted cost and capex synergies. Over the past year, we have increased the number of homes in the Gigabit capable footprint from 9.7 million to 21.8 million, representing over half of the country and over 90% of our cable footprint. Our acquisition plans targeted €535 million of cost and capex synergies over five years. We have already executed actions that will deliver over €250 million of these synergies, which is around six months ahead of schedule.

B ⫶ Focused on growth with unique capabilities to create sustainable value

Following our strategic activity to reshape the Group, we are focused on growing our converged connectivity markets in Europe, and mobile data and payments in Africa. We have five principle growth levers available to create shareholder value through building our ROCE to a sustainable level above our weighted-average cost of capital:

1.    We will develop the best connectivity products and the best connectivity platforms;

2.    We will invest in and operate the co-best Gigabit connectivity infrastructure to support our connectivity products and platforms;

3.    We will integrate and operate leading digital technology architecture to support our digital connectivity infrastructure;

4.    We will drive further simplification in our scaled Group operating model in order to support our investments; and

5.   We will use our Social Contract to build partnerships with governments and regulators, shape a healthier industry structure, and improve returns for all stakeholders.

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1 ⫶ Best connectivity products & platforms

In Europe, we are the leading converged connectivity provider with 7.5 million converged customers, 114 million mobile connections, 139 million marketable NGN broadband homes, cover 98% of the population in the markets we operate in with 4G, and have launched 5G in 127 cities in 9 markets in Europe. We have achieved this leading position by focusing on our core fixed and mobile connectivity. We are enhancing our core connectivity products through capacity and speed upgrades, unlimited mobile plans, distinct branding across customer segments and convergence bundles. Alongside optimising our core, we have also developed platforms that leverage our connectivity base further by providing ‘best on Vodafone’ experiences. For example, our TV proposition now has over 22 million subscribers in 11 markets. Our consumer IoT offering has now connected over 500,000 devices such as the Apple Watch OneNumber service and our ‘Curve’ mobile tracking device. In addition, our new smart kids watch, developed with The Walt Disney Company, will launch before Christmas.

In Africa, we are the leading provider of mobile data and mobile payment services. We have 171 million customers in 8 markets and these countries represent 40% of Africa’s total Gross Domestic Product. We are the leading mobile connectivity provider by revenue market share in 7 markets. Excluding Kenya, we cover 70% of the population in the markets in which we operate with 3G mobile services and 60% with 4G. Our M-Pesa financial services platform processed almost 13 billion transactions over the last 12 months. M-Pesa offers a unique opportunity to extend our reach further into financial services. Through a strategic technology partnership with Alipay, we are developing a new ‘super app’ that will offer customers a unified suite of financial services, entertainment, shopping, merchant services and direct marketing.

Vodafone Business accounts for 27% of Group service revenue, has customers in 200 markets, and provides services to SMEs, large national corporates, and 1,240 multinational customers. In each of our four largest European markets, we have a unique position and focus on digital segments that are growing. Our incumbent competitors have greater exposure to declining legacy fixed and managed services businesses, whilst we are able to accelerate our position in digital connectivity services such as SD-WAN, IoT and cloud. As the largest business-to-business connectivity provider in Europe and as a growth business, we are the strategic partner of choice for large global technology companies such as Microsoft, Accenture, Amazon, and IBM. Over the last two years, we have signed agreements with each of these firms in areas such as managed security services, mobile edge computing, managed cloud services and unified connectivity. These strategic alliances provide us with an unrivalled position to provide SME, large and multi-national business customers with a full suite of next-generation connectivity services.

2 ⫶ Co-best Gigabit connectivity infrastructure

In order to provide our customers with the best connectivity products and ‘best on Vodafone’ connectivity platforms, we need to have co-best Gigabit network infrastructure in each of our markets. Importantly, we must also ensure that our customers recognise and value the quality of our Gigabit network infrastructure.

In mobile, we are currently deploying mobile network infrastructure to deliver 5G connectivity. So far, we have launched 5G services in 127 cities, in 9 markets in Europe. 5G services provide ‘real world’ speeds well in excess of 100 Mbps, compared with 4G that provides ‘real world’ speeds of 20-35 Mbps. In addition to the speed advantage, 5G networks that are ‘built right’ and with longer-term competitive advantage in mind, provide significant capacity and efficiency advantages, ultimately lowering the cost per gigabyte of mobile data provision. However, the European mobile sector is also utilising dynamic spectrum sharing (‘DSS’) technology to share existing 4G spectrum to provide a more limited 5G experience. DSS 5G does have a smaller role in a targeted rollout, but requires RAN upgrades and leads to reduced capacity efficiency. We have been targeted and disciplined with our acquisition of spectrum in each of our local market operations, with spectrum available in each of the low, mid and high bands in our major Europe markets. This ensures that we do not need to restrict long-term network infrastructure through DSS technology and can invest in building 5G network the right way, to provide the backbone for Gigabit networks for the decade ahead.

Complementing our 5G mobile network infrastructure is our NGN fixed-line network infrastructure. We can now reach 139 million homes across 12 markets in Europe (including VodafoneZiggo). This marketable base is connected through a mix of owned NGN network (55 million homes, of which 39 million are Gigabit-capable), strategic partnerships (22 million homes) and wholesale arrangements (62 million homes). This network provides us with the largest marketable footprint of any fixed-line provider in Europe. In Germany, our footprint of 24.1 million households is being progressively upgraded to the latest DOCSIS 3.1 standard, which provides us with a structural speed advantage over the incumbent. Over the medium-term we will continue to increase the proportion of our Europe customers that can receive Gigabit-capable connections through our owned network and continue to work with strategic partners to provide cable and fibre access.

3 ⫶ Leading digital architecture

Enhanced digital technology is critical for efficient and reliable converged connectivity networks. We are beginning a multi-year journey to redefine our technology architecture following a ‘Telco as a Service’ (‘TaaS’) model. Our TaaS model is based on two existing layers of inter-connected digital technology.

·    We have created a standardised suite of customer and user-facing interfaces for an entire omni-channel journey – OnePlatform. The OnePlatform suite includes the MyVodafone mobile app, our browser-based portal, our TOBi AI assistant, and the Retail Point of Sale platform that powers our physical and digital stores.

·    The OnePlatform suite is powered by our Digital eXperience Layer (‘DXL’). DXL refers to the abstraction layer in our IT architecture which separates customer-facing micro-services requiring frequent and rapid adjustment, such as prepaid top-ups or customer onboarding, from heavier back-end systems such as billing and CRM. The platform uses common software, with open-source components and standardised APIs to enable easy integration and interconnection.

We have also moved more than half our core network functions to the Cloud in Europe, supporting voice core, data core and service platforms on over 1,300 virtual network functions. In Europe, we now operate a single digital network architecture across all markets, enabling the design, build, test and deployment of next generation core network functions more securely, 40% faster and at 50% lower cost. Similarly, more than half of our IP apps are now virtualised and running in the cloud.

This standardised approach to development and deployment of digital architecture is enabling us to provide an industry-leading digital experience, delivered in line with our expectation to be the most efficient in our sector.

4 ⫶ Simplified & scaled Group operating model

The connectivity value chain involves a high degree of repeatable processes across all of our markets, such as procurement, network deployment, network operations, sales activities, customer support operations, and billing and transaction processing. This has provided us with a significant opportunity to standardise processes across markets, relocate operations to lower cost centres of excellence and apply automation at scale.

We have consolidated our supplier management function into a single, centralised procurement company. The Vodafone Procurement Company manages global tenders and establishes standard catalogues which are made available to our local market operations through a unified end-to-end enterprise resource planning (‘ERP’) system. Leveraging the scale of our combined spend, this allows us to generate over €600m in annual savings compared to standalone operators. Once the equipment is acquired, we efficiently manage our inventory through our Network Stock System and ensure that we minimise time to deployment, including by moving stock across markets as needed.

We monitor Network Operations for all our markets through international centres of excellence that run these processes for the entire Group. Our regional Network Operations Centres monitor operations of our fixed and mobile networks across geographies following standard protocols that maximise productivity and automation. As an example, a third of new Network Operations tickets are fully automated. Similar integrations have been executed across our IT operations as well as Finance and HR processes.

Whenever possible our back office activities are delivered though our 3 Shared Service Centres (‘_VOIS’) in Egypt, India and Eastern Europe.  Over a third of the targeted €1.2 billion net opex savings in Europe and Common Functions are being generated through integrating activities into _VOIS and driving digitisation at speed.

Finally, Vodafone Roaming Services manages our global roaming relationships with other operators and our Partner Market’s team works with 30 local operators in building strategic alliances and extending our reach into different markets.  These functions generate over €250m revenue and cost savings annually.

Approximately 30% of the Group’s headcount works in _VOIS and shared operations, and in the last two and a half years we have automated over 4,600 roles. We are continuing to transform the business and evolve the Group digital toolset – including TOBi and Robotic Process Automation – in order to further our productivity leadership.

5 ⫶ Social Contract shaping industry structure to improve returns

Over the last decade, the performance of the European telecommunications industry has been weaker than other regions, which market commentators attribute to its regulatory environment. European regulation differs in both its fragmented approach to spectrum licensing and market structure, compared with North America or Asia. A firm stance on pursuing four-player market structures in certain Member States has artificially driven further price deflation and has eroded sustainable investment incentives. When combined with the capital-intensive nature of network infrastructure and higher ongoing spectrum costs, this has led to return on capital for the industry being below its weighted-average cost of capital. This limits the ability of operators to invest capital in improving digital connectivity network infrastructure.

In 2019 we introduced our ‘Social Contract’, which represents the partnerships we want to develop with governments, policy makers and civil society. We believe the industry needs a pro-investment, pro-innovation partnership approach to ensure Europe can compete in the global digital economy and be at the forefront of technology ecosystems. This requires an end to extractive spectrum auctions, support for equipment vendor diversity, a defined framework for network sharing, and regulation that enables the physical deployment of network infrastructure, as well as rewards quality – such as security, resilience and coverage – with fair prices.

Following our efforts and society’s increasing reliance on our connectivity infrastructure and services, notably during the COVID-19 pandemic, we are beginning to see positive signs of a more healthy industry structure emerge.

Recent spectrum auctions in 2020 in the Netherlands and Hungary were conducted in a positive manner and completed with spectrum being assigned at sustainable prices, in line with European benchmark levels. Authorities are recognising that operators need to be able to focus available private funds for fast deployment of new infrastructure & services. We have also seen national governments increase support such as state-subsidies for rural networks in the UK and Germany, and planning permission exemptions for tower infrastructure in Germany. A key area of focus for 2021 will be shaping Member State recovery funds and how the 20% of the €750 billion EU Recovery Fund targeted for digital initiatives is distributed. Positive progress has already been achieved through national initiatives with 90% subsidies for infrastructure spend in ‘whitespot’ areas in Germany; vouchers to support new NGN connections in Italy; funding to support the cessation of 3G networks in Hungary; and €3 billion of funding for health initiatives, including eHealth, in Germany.

Our growth model ⫶ Disciplined capital allocation to drive shareholder returns

The objectives of our portfolio activities over the last two years have been to focus on our two scaled geographic platforms in Europe and Africa; achieve converged scale in our chosen markets; and deliver a structural shift in asset utilisation. With these objectives substantially achieved, we are now a matrix of country operations and product & platforms, and will remain disciplined in managing our portfolio. Our ongoing and rigorous assessment of our portfolio is following three principles. Firstly, we aim to continue to focus on the converged connectivity markets in Europe, and mobile data and payments in Africa. Secondly, we aim to achieve returns above the local cost of capital in all of our markets. Thirdly, we consider whether we are the best owner (i.e. whether the asset adds value to the Group and the Group adds value to the asset) and whether there are any pragmatic and value-creating alternatives.

Our growth strategy is grounded in our purpose, to ‘Connect for a better future’ and create value for society and shareholders. Our goal is to deliver a sustainable improvement in ROCE through a combination of consistent revenue growth, ongoing margin expansion, strong cash flow conversion, and disciplined allocation of capital. We have five principle growth levers available to create shareholder value:

1.     Develop the best connectivity products and platforms;

2.     Invest in the co-best Gigabit connectivity infrastructure;

3.     Operate leading digital technology architecture;

4.     Operate a simplified and scaled Group operating model; and

5.     Use our Social Contract to shape a healthier industry structure.

Our capital allocation priorities are to support investment in connectivity infrastructure; reduce leverage towards the lower end of our target range of 2.5-3.0x net debt to adjusted EBITDA; and deliver attractive returns to shareholders.

Looking ahead ⫶ Further investor interaction to discuss key growth drivers

We plan to share further insight into our growth plans during 2021 and will be hosting a series of virtual investor briefings comprising pre-recorded video presentations from functional and technical specialists, together with live webcast Q&A sessions. These events include:

·    Vinod Kumar (CEO Vodafone Business) provides a deep-dive into Vodafone Business operations & strategy on 18 March 2021;

·    Nick Read (Group CEO) & Margherita Della Valle (Group CFO) present full year results and further detail on the next phase of our transformation on 18 May 2021;

·    Ahmed Essam (Chief Commercial Officer) presents our strategy for the best connectivity products and platforms on 9 June 2021;

·    Dr Hannes Ametsreiter (CEO Germany) presents a deep-dive into our largest market, Germany, on 7 September 2021; and

·    Johan Wibergh (Group Technology Officer) presents our 2025 technology vision on 14 December 2021.

Our purpose ⫶ We connect for a better future

We believe that Vodafone has a significant role to play in contributing to the societies in which we operate and our sustainable business strategy helps the delivery of our 2025 targets across three pillars: Digital Society; Inclusion for All; and Planet. We have continued to make progress against our purpose strategy and will provide a full update on our progress at the end of our financial year.

In July 2020, we announced that our Europe network will be powered by 100% renewable electricity no later than July 2021. Our Europe-wide ‘Green Gigabit Net’ commitment brings forward by three years an earlier pledge to source 100% renewable electricity for the company’s fixed and mobile networks by 2025. We have made significant progress as the share of total renewable electricity purchased in Europe more than doubled to over 75% by September 2020. We remain on target to reach 100% renewable electricity in our Europe network by July 2021.

Whilst we are committed to eliminating our own environmental footprint, we are increasingly seeking to use our connectivity and technology to support a more sustainable society, enabling others to reduce their environmental impact. We have also introduced a new target to enable our Business customers reduce their own carbon emissions by a cumulative total of 350 million tonnes globally over 10 years between 2020 and 2030. This target will largely be delivered via Vodafone’s IoT services, including logistics and fleet management, smart metering and manufacturing activities.  Other savings are expected to be made through healthcare services, cloud hosting and home working.

In addition, we are currently finalising a Science Based Target, which we plan to announce before the end of 2020. Our target will be aligned to limiting global temperature rise to below 1.5°C and reaching net-zero emissions no later than 2050. This will require a significant reduction in our direct carbon emissions as well as setting targets for indirect emissions (including suppliers and joint ventures).

We have also embedded our purpose commitments in our supplier selection criteria. From October 2020, ‘purpose’ accounts for 20% of our evaluation criteria for ‘Requests For Quotation’ (‘RFQ’) to provide Vodafone with products or services. Suppliers will be assessed on their commitment to diversity & inclusion, the environment, and health & safety in categories where it is a risk. Our approach to supplier selection supports our aim of building a digital society that enhances socio-economic progress, embraces everyone and does not come at the cost of our planet.

COVID-19 ⫶ Our five-point plan to support economic recovery

During the COVID-19 crisis, the connectivity we provided was a lifeline, enabling people to work, allowing businesses to remain operational, supporting the delivery of emergency services and giving access to education.  We enabled people to stay in touch with their families and their friends. We recognise that our role in society is more vital than ever, underpinned by our commitment to building a resilient, inclusive and sustainable digital society .

As we look at the challenging economic period ahead, just as we were there for the emergency response phase, we are committed to playing a key role in supporting Europe’s economic and social recovery. As a result, we have identified five key areas where Vodafone can clearly prioritise activity and support governments’ digital agenda. We will:

·   expand and future-proof our network infrastructure with next-generation fixed line and mobile technologies;

·   further support governments as they seek to integrate eHealth and eEducation solutions into their “new normal” public service frameworks;

·   enhance digital access for the most vulnerable and support digital literacy;

·   promote the widespread adoption of digital technologies for all businesses, with a particular emphasis on SMEs; and

·   support governments’ pandemic exit strategies through targeted deployment of digital technology.

Vodafone is ready to do everything in its power to support the recovery, whilst emerging a stronger business, playing an ever more critical role in society. In our African markets, we have deployed the same five-point plan approach, but are also prioritising furthering financial inclusion.

Outlook ⫶ Operating model delivering relative resilience

Outlook for FY21

Our financial performance during the first six months of the year has been in line with our expectations and demonstrates the relative resilience of our operating model. We remain focused on the delivery of our strategic priorities and have further improved loyalty, as our customers place greater value on the quality, speed and reliability of our networks.

FY21 Guidance

As a result of our resilient performance in H1, and based on the current prevailing assessments of the global macroeconomic outlook:

·      Adjusted EBITDA is expected to be between €14.4 – 14.6 billion in FY21; and

·      We continue to expect free cash flow (pre-spectrum and restructuring) in FY21 to be at least €5 billion.

Financial modelling considerations & assumptions

The guidance above reflects the following:

·      The de-consolidation of Vodafone Italy Towers following its merger with INWIT (completed in March 2020);

·      The sale of Vodafone Malta (completed in March 2020);

·      Vodafone Egypt remains within guidance;

·      No significant change in the Group’s effective cash interest rate or cash tax rate is assumed;

·      Foreign exchange rates used when setting guidance were as follows:

–   EUR 1 : GBP 0.87;

–   EUR 1 : ZAR 20.59;

–   EUR 1 : TRY 7.50; and

–   EUR 1 : EGP 17.02.

·     Free cash flow guidance excludes the impact of license and spectrum payments, restructuring costs, and any material one-off receipts or tax related payments; and

·    Guidance assumes no material change to the structure of the Vodafone Group or any fundamental structural change to the Eurozone

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