Vodafone

Annual Report 2019

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Introduction

Welcome to our 2019 report.
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Gerard Kleisterlee
Chairman

Evolving our strategy to address industry headwinds

During the past year we have experienced a significant fall in our share price. Despite good performance in most markets, we faced increasing competition in Spain and Italy, as well as pressures in South Africa during the second half of the year. Although we met our financial guidance, our revenue growth slowed during the year and 5G spectrum auction costs were high, reducing our financial headroom and contributing to downward pressure on our share price. A decline in the value of our listed stake in Vodafone Idea was a further headwind.

Rebasing the dividend to support Vodafone’s transformation and rebuild headroom

Vodafone is at a key point of transformation – deepening customer engagement, accelerating digital transformation, radically simplifying our operations, generating better returns from our infrastructure assets and continuing to optimise our portfolio. In order to support these goals and to rebuild headroom, the Board has made the decision to rebase the dividend to 9 eurocents per share. This will help us to reduce debt and move to the lower end of our targeted 2.5x-3.0x leverage range in the next few years. In her review, Margherita describes the comprehensive programme of further deleveraging actions that we are taking, including the sale of our business in New Zealand for €2.1 billion which we announced in May 2019.

The Board’s decision to rebase the dividend was not taken lightly, but we believe it is a necessary step to ensure that we deliver on our ambition to improve returns on capital, grow free cash flow and drive shareholder value. Going forward we intend to maintain a progressive dividend policy.

Executing at pace on our new strategic priorities

Under the leadership of our new Chief Executive, Nick Read, the Board has evolved the Group’s strategy to respond to ongoing industry headwinds. Nick and his team have executed at pace and made encouraging progress on improving the consistency of our commercial performance, particularly in Spain and Italy. Mobile contract churn fell to a record low level in the year, and we have already put in place actions which will deliver over half of our FY21 cost reduction targets. We are also making rapid progress in our efforts to improve capital efficiency through our ‘smart capex’ approach in combination with a number of important industry partnerships, particularly for 5G network sharing. These sharing agreements also unlock potential tower monetisation options.

On track to complete the Liberty Global deal in July

In May 2018, we announced the acquisition of Liberty Global’s assets in Germany, the Czech Republic, Hungary and Romania. This acquisition positions Vodafone as Europe’s largest next generation network (‘NGN’) infrastructure owner, the leading converged challenger to the incumbents in these markets and unlocks synergies with an NPV of over €7.5 billion. We have offered a package of remedies to the European Commission, including a broadband wholesale access agreement with Telefonica Deutschland, and we expect the acquisition to complete in July 2019.

Recapitalising Vodafone Idea in India

We completed the merger of Vodafone India and Idea Cellular in August 2018, creating a new leading player, Vodafone Idea. However, the competitive environment remained challenging during the year as industry prices remain below cash costs. In response, we have accelerated our integration efforts, targeting full realisation of cost synergies by FY21, two years earlier than originally planned. In addition, we decided to strengthen Vodafone Idea’s balance sheet by raising €3.2 billion of new equity through a rights issue, which completed in May 2019. Vodafone contributed €1.4 billion (funded by a loan secured against our Indian assets), and our partner Aditya Birla Group committed €0.9 billion. These funds, together with the opportunity to monetise its tower and fibre assets, will enable Vodafone Idea to continue to invest and to participate fully in a potential industry recovery.

During the year we also made progress in securing regulatory and shareholder approvals for the merger of Indus Towers and Bharti Infratel, which will create India’s leading listed tower company. The Group’s stake in the combined business was worth approximately €3.2 billion at the end of March, as implied by the Bharti Infratel share price.

Good performance in most markets, with challenges in Spain and Italy

We maintained underlying organic growth with service revenues up 0.3%1, EBITDA up 3.1%1 and most importantly EBIT up 9.4%1 in the year.

On a reported basis our business declined due to the sale of Qatar, a lower benefit from handset financing in the UK and a number of settlements in the prior year.

This performance reflected good revenue and profit growth in Germany, UK and Other Europe, offset by earnings declines in Spain and Italy. In Spain we took action to commercially reposition the business given increased price competition in the value segment, while in Italy we faced a new entrant in the mobile market. South Africa also slowed in the second half, impacted by a weak macroeconomic environment and new data regulation.

Delivering ‘a better future’ requires regulators to play their part

One of Nick’s first decisions was to put the company’s refreshed purpose – ‘We connect for a better future’ – at the core of our strategy. We have committed to improve one billion lives and halve our environmental impact by 2025. This ambition to enable the digital society, support inclusion for all and protect our planet is part of our broader commitment to operating responsibly, recognising that over the long-term the success of our business is inextricably linked to the success of the communities in which we operate.

However, policy makers and regulators also need to play their part by ensuring a competitive environment that provides an adequate return on the substantial investments that will be needed to meet these important societal goals. This is especially important in Europe, where returns on capital have fallen to unsustainably low levels.

Improving return on capital and driving commercial and operational performance will be the top priorities for your Board and for the company, aiming to make Vodafone the best value proposition in our industry for customers and for shareholders.

Gerard Kleisterlee
Chairman

  • Excluding UK handset financing and one-off settlements.
Our purpose
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Our purpose
Our goal is to improve one billion lives and halve our environmental impact by 2025.

Our purpose

Our goal is to improve one billion lives and halve our environmental impact by 2025.
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We connect for a better future

We are a communications technology company responsible for connecting over 650 million people, and organisations of all sizes, to the digital society. We are optimistic about how technology and connectivity can enhance the future and improve people’s lives. Through our business, we aim to build a digital society that enhances socio-economic progress, embraces everyone and does not come at the cost of our planet. That is why we have committed to improve one billion lives and halve our environmental impact by 2025, by taking concrete action in three areas: digital society, inclusion for all and planet.

Digital society

We believe in a connected digital society, where data flows at speed, connecting people, communities and things to the internet like never before. Gigabit networks, the Internet of Things (‘IoT’) and mobile financial services enable incredible innovation and technologies to be developed to help make our lives easier, healthier, smarter and more fulfilling.

350 million
people connected to our Gigabit networks by 2025
150 million
vehicles connected to the IoT by 2025
50 million
people and their families connected to mobile money services by 2025

Inclusion for all

We believe that the opportunities and promise of a better digital future should be accessible to all and are committed to ensuring that the more vulnerable are not left behind on the journey towards that future. Through our technology, we will work to bridge the divides that exist and help people to contribute equally and fully to society.

50 million
additional women in emerging markets connected to mobile by 2025
Best employer
in the world for women by 2025
10 million
young people supported to access digital skills, learning and employment opportunities by 2022

Planet

We believe that urgent and sustained action is required to address climate change and that business success should not come at a cost to the environment. Through our commitment to halve our environmental impact, we will help to ensure a sustainable future for all. Our focus on energy efficiency, renewable energy supply and network waste will help us to mitigate the growth of our business and our customer’s increasing demand for data.

50%
reduction in greenhouse gas emissions by 20251
100%
of our electricity purchased from renewable sources by 2025
100%
of our redundant network equipment reused, resold or recycled2
Chief Executive’s review
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Chief Executive’s review
A focus on operational excellence and organic growth.

Chief Executive’s review

A focus on operational excellence and organic growth.
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The acquisition of Liberty Global’s assets will complete Vodafone’s strategic transformation into a converged leader. I believe that success in the next phase of Vodafone’s transformation requires a renewed focus on operational excellence and more consistent commercial performance across the Group.
Nick Read
Chief Executive Officer

A focus on operational excellence and organic growth

The acquisition of Liberty Global’s assets in Germany and Central Eastern Europe will complete Vodafone’s strategic transformation into a converged leader, owning Europe’s largest 4G/5G mobile networks, Europe’s broadest gigabit-capable NGN network and Africa’s leading data networks. We will be strongly positioned to achieve our long-term goals – enabling the digital society, supporting inclusion for all and protecting the planet. This purpose-driven approach underpins our ambition to drive organic revenue growth, expand EBIT margins and increase our cash generation.

I believe that success in this next phase of Vodafone’s transformation requires a renewed focus on operational excellence and more consistent commercial performance across the Group. When I stepped into the Chief Executive role last October, I identified three key priorities for the business. In mature markets we need to focus on deepening engagement with our existing customers, primarily by selling ‘one more product’ to grow revenue and lower churn. We need to accelerate our digital transformation, improving both the customer experience and the efficiency of our operations through a radically simpler approach. And we need to explore all options to improve the utilisation of our leading network assets through a renewed emphasis on partnering.

The decision to rebase our dividend in order to support the execution of our strategy and rebuild financial headroom has not been taken lightly. However, I am convinced that this is the right approach for the Group, and will enhance our ability to deliver much improved total returns for our shareholders.

A new social contract is needed for the industry

At the same time, I believe a new approach is needed by the industry and by governments if society is to gain the maximum benefit from the opportunities presented by the digital society. These opportunities are reflected in the ambitious goals that underpin Vodafone’s purpose: to improve one billion lives and halve our environmental impact by 2025.

During the coming year we will work to develop ‘Vodafone’s social contract’ with policy makers, politicians and regulators based on the shared principles of duty of care, fairness and leadership. Through such contracts our vision is that the industry commits to intensify its efforts to simplify and improve services to customers, and ensures better network coverage, whereas in return regulators reassess their approach to the sector, ensuring a competitive environment that provides an adequate return on the substantial investments that will be needed to deliver an inclusive digital society.

Review of the year

Last year we delivered a good financial performance in Germany, the UK and Other Europe, which offset significant competitive challenges in Spain and Italy and a macro and regulatory driven slowdown in South Africa. Although our service revenue growth slowed in the second half of the year, the recovery in our commercial performance, especially in Italy and Spain, was encouraging, and European mobile churn reduced to a record low in the second half. All else being equal, these improvements lay the foundation for a gradual recovery in our performance in FY20.

In our key customer segments, Europe Consumer service revenues declined by 1.1%1, but grew 2.7%1 excluding Spain and Italy, supported by our strong momentum in broadband where we remained Europe’s fastest growing operator. Vodafone Business grew by 0.3%, with continued competition in mobile offset by market share gains in fixed and good growth in IoT and Cloud. I am excited about the disruptive opportunity for further fixed share gains created by new Software Defined Networking solutions. Emerging Consumer grew at 7.4%, driven by data services and the ongoing success of our unique mobile financial services platform M-Pesa.

Investing and partnering to deliver leading Gigabit Networks

Investing in leading network assets is at the heart of our strategy, and we remain committed to providing a differentiated customer experience compared to value players. However, in all of our markets at least one other leading player shares a similar network vision. Sharing our passive infrastructure assets, such as our towers and fibre backhaul, as well as active radio equipment (outside major cities) allows both parties to reduce operating costs and capital expenditures – without sacrificing quality or differentiation. Most importantly, by sharing in this way our customers benefit from improved coverage and a faster rollout of 5G services than either partner could have achieved on their own, and we significantly reduce our environment impact as a result of fewer sites and less active equipment.

We have announced network sharing discussions in the UK with O2 and in Italy with Telecom Italia, we have concluded an agreement across both mobile and fixed with Orange in Spain, and we see further opportunities across our markets. In addition, these deals unlock a range of tower monetisation options, which we are actively exploring.

Radically simpler, Digital ‘First’ commercial propositions

One of our industry’s greatest operational challenges is a vast range of legacy products and pricing plans. This legacy creates significant complexity for customers, and an immense and costly IT infrastructure for us to manage, which limits our commercial agility.

In order to unlock the full opportunity of digitalisation, we need to make our commercial propositions radically simpler. We have made a good start on this journey with speed-tiered unlimited data plans launched in Spain, and greatly simplified mobile tariffs in Germany.

Additionally, we see an opportunity for growth in the years ahead using second brands and sub-brands such as ho. in Italy, Lowi in Spain and VOXI in the UK. By offering distinct features such as speed-limited products and online only customer service, we can offer more value to this segment without degrading our margins.

Platforms and partnerships – a unique opportunity for Vodafone

The concept of driving better asset utilisation does not only apply to our networks. Vodafone owns a number of commercial platforms with world-leading scale – the myVodafone app for customer service, engagement and loyalty; Vodafone TV for access to leading content; our world-leading IoT platform; and M-Pesa for financial services in Africa. Our scale makes us a partner of choice in each of these areas, unlocking new potential revenue streams. I am pleased that we have already concluded agreements with AT&T and ARM for IoT, and with IBM for cloud services.

Creating the leading converged challenger in Germany and CEE

We are making good progress in securing regulatory approvals for our acquisition of Unitymedia in Germany and the UPC assets in the Czech Republic, Hungary and Romania, and currently expect the transaction to complete in July. I look forward to welcoming Unity and UPC’s employees to Vodafone.

Nick Read
Chief Executive Officer

  • Excluding UK handset financing and one-off settlements.
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Our strategy

A converged communications technology leader, enabling the digital society

Our priorities

To extend our competitive advantage and improve returns by:

Deepening customer engagement

improving loyalty and driving revenue growth in all three customer segments

Supported by our scaled platforms and partnership approach
Europe Consumer

Europe’s leading TV and content distribution platform

MyVodafone app driving loyalty and customer engagement

Vodafone Business

Leading global IoT platform

Emerging Consumer

M-Pesa: Africa’s largest payment platform

Transforming our operating model

for greater efficiency and agility

Digital ‘First’

Radically simpler

Leverage Group scale

Improving asset utilisation

with sustained network leadership

Capital smart infrastructure partnerships

Leading Gigabit networks

Our strategy
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Our strategy
A converged communications technology leader, enabling the digital society.

Our strategy

A converged communications technology leader, enabling the digital society.
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Deepening customer engagement

improving loyalty and driving revenue growth in all three customer segments

Transforming our operating model

A new radically simpler, Digital ‘First’ operating model, leveraging Group scale

Improving asset utilisation

Vodafone enjoys the benefits of market leading assets and infrastructure but we need to improve the utilisation of all our assets, so we can improve our return on capital. We see several opportunities to generate significant value creation and returns.

KPI’s Report

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Financial performance
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Financial performance
Driving better returns, cost transformation and deleveraging.

Financial performance

Driving better returns, cost transformation and deleveraging.
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As Group CFO I am focused on three key objectives for the business. First, to drive better returns on capital in Europe. Second, to transform our cost base by leveraging new digital technologies. And third, deleveraging the balance sheet with the aim to move to the lower end of our targeted 2.5x-3.0x range in the next few years.
Margherita Della Valle
Chief Financial Officer

Driving better returns, cost transformation and deleveraging

As Group CFO I am focused on three key objectives for the business. First, to drive better returns on capital in Europe, where returns are below our cost of capital, in particular through better utilisation of our assets.

Second, to transform our cost base by leveraging new digital technologies, radically simplifying our commercial offers and internal processes, leveraging Group scale benefits and ensuring the successful delivery of targeted cost synergies.

And third, deleveraging the balance sheet through organic EBITDA growth, enhanced cash generation, non-core asset sales and working capital initiatives. We aim to move to the lower end of our targeted 2.5x-3.0x range in the next few years.

Opex reduction supporting further margin expansion

During the year, given strong early progress in our operating transformation we decided to accelerate the implementation timeline for our ‘Digital Vodafone’ programme from five years to three years. As a result we now expect to reduce net operating expenses in Europe and common functions by at least €1.2 billion by the end of FY21 compared to the FY18 levels, implying an annual run rate saving of c.€400 million. I am pleased to confirm that we achieved this run-rate in FY19, and we are well on track to deliver a similar result in FY20. In addition, in our Rest of the World region we grew opex below local inflation levels, a result we expect to sustain going forwards. Combined with further mid-term opportunities to improve distribution efficiency and reduce commercial costs by selling through digital channels, we expect to continue to expand our EBITDA margins, building on the momentum of the past few years.

We will also be highly focused on realising the substantial opex and capex synergies created by the announced Liberty Global transaction. We target €535 million of run-rate synergies in Germany and CEE by the fifth year post completion. In addition, we have significant further synergies to capture in our Joint Ventures in India and the Netherlands.

Capital expenditure stable, spectrum acquisitions peaking

The Group invested a further €10 billion in networks, spectrum and IT modernisation during the year. Capital additions as a percentage of sales remained stable at 16.0%, with spectrum additions of €2.8 billion as we acquired 5G spectrum in the UK, Spain and Italy. The Italian auction stood out at a total cost €2.4 billion, due to an artificial construct in its design as the government sought to maximise auction proceeds. Once the German spectrum auction concludes, this will largely complete the Group’s spectrum portfolio in the key 3.6GHz band in its major markets, and we anticipate lower spectrum needs from FY21 onwards.

Exploring tower monetisation opportunities

Our tower strategy aims to unlock industrial savings, so that we can improve the utilisation of our infrastructure assets, and we are actively exploring a range of monetisation options where we see an opportunity for value creation for the Group.

Specifically, in conjunction with the development of new 5G active and passive network sharing agreements, we have decided to explore a potential monetisation of our tower assets in Italy, Spain and the UK; additionally, we are also assessing tower opportunities at our JV in the Netherlands.

For markets where tower monetisation is either strategically or financially unattractive, we are creating an internal ‘virtual’ TowerCo with a dedicated central management team, in order to drive improved operating efficiency and higher tenancy ratios.

Accelerating deleveraging in order to increase headroom

We have developed a comprehensive programme of deleveraging actions which allow us to increase our financial headroom. These include:

  • Driving organic EBITDA growth, both through top-line recovery, opex reduction and synergy realisation
  • Non-core asset sales, such as the announced disposal of our New Zealand business for €2.1 billion (7.3x EBITDA and 16.2x OpCF)
  • Lower spectrum spending, as noted above, with the peak of 5G auctions passing in FY20
  • Working capital initiatives, including routinely selling all handset receivables going forwards. This will align the cash inflows on customer receivables with the cash outflows on handset purchases, increasing our commercial flexibility to offer customers’ longer payment terms on increasingly costly smartphones without creating a drag on our working capital.

A new dividend policy

Our new dividend policy will also help to increase financial headroom. The rebased dividend level (to 9 eurocents from 15.07 eurocents per share) will contribute an additional 0.3x of deleveraging over the next three years. The new annual dividend obligation of approximately €2.4 billion represents a 60% payout of our free cash flow after historic average spectrum and restructuring costs in FY19, which is highly sustainable.

Adoption of IFRS 15/16 standards

During FY19 we have adopted the IFRS 15 accounting standard (which primarily relates to revenue recognition) for our statutory reporting, but our management reporting has remained on an IAS 18 basis, reflecting our internal budgeting process. For FY20 we will also adopt IFRS 15 for our management reporting. This will have a material impact on our reported service revenue growth, as it will eliminate the large drag from the adoption of handset financing in the UK.

For FY20 we will adopt IFRS 16 for our statutory reporting. However, from a management reporting perspective we intend to adjust for the benefit to EBITDA and FCF arising from the capitalisation of operating leases as finance leases under IFRS 16. This is because we believe that considering our cash generation after leases is more representative of our underlying cost structure.

FY19 guidance delivered & FY20 outlook

In FY19 we achieved the midpoint of our original guidance for 1–5% organic EBITDA growth and delivered €5.5 billion of FCF pre-spectrum at guidance FX rates, well ahead of our original guidance for ‘at least €5.2 billion’. In FY20 we expect an adjusted EBITDA range of €13.8–14.2 billion on an organic basis, based on guidance FX rates and under IFRS 15/16 accounting standards. This implies low single digit organic adjusted EBITDA growth. We expect to generate FCF pre-spectrum of at least €5.4 billion.

Margherita Della Valle
Chief Financial Officer

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Sustainable business
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Sustainable business
Our sustainable business strategy is embedded within and helps to drive Vodafone’s purpose – to connect for a better future.

Sustainable business

Our sustainable business strategy is embedded within and helps to drive Vodafone’s purpose – to connect for a better future.
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Delivering our Purpose

Our sustainable business strategy is embedded within and helps to drive Vodafone’s purpose – to connect for a better future – and is accompanied by our commitment to act responsibly and with integrity wherever we operate.

Our sustainable business strategy

We believe that Vodafone has a significant role to play in contributing to the societies in which we operate. Our sustainable business strategy articulates our intention to deliver significant positive impact in three areas, each of which has the potential to improve the lives of our customers and wider society. We have established long-term targets to drive change that focuses on women’s empowerment, youth skills and jobs, and energy innovation.

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Vodafone’s purpose, to connect for a better future, reinforces our commitment to drive impact against the most relevant of the UN’s Sustainable Development Goals (‘SDGs’). Through our business, our sustainable business strategy, programmes and targets, and the work of the Vodafone Foundation, we will help to deliver a meaningful contribution focused on quality education, gender equality, decent work and economic growth, industry, innovation and infrastructure, and climate action.

Read more about how our networks, products and services make a difference to societies and the SDGs.

Women’s empowerment

By empowering women and promoting gender equality, we can enable communities, economies and businesses – including our own – to prosper. Communications technology plays a critical role in helping women to improve their lives and livelihoods.

Goals:

  • To connect an additional 50 million women living in emerging markets1 to mobile by 2025
  • We aim to be the world’s best employer for women by 2025
  • Democratic Republic of Congo, Egypt, Ghana, India, Kenya, Mozambique, South Africa, Tanzania and Turkey. 2019 annual data only includes data from Vodafone India up to August 2018, prior to the merger of this business with Idea Cellular to create Vodafone Idea.

Youth skills and jobs

In many of the countries where we operate, youth unemployment remains at very high levels: 53% in South Africa; 40% in Greece; 34% in Spain and 32% in Italy1. Together with a growing digital skills gap, this creates a significant social and economic challenge.

Goals:

  • Support ten million young people to access digital skills, learning and employment opportunities
  • Provide 100,000 opportunities for young people to receive a digital learning experience at Vodafone
  • OECD, 2018.

Energy innovation

There is clear evidence that man-made greenhouse gases (‘GHG’) are having a direct negative impact on the climate. We support the view that urgent action is needed to address climate change and we have introduced two targets to reduce our impact. By 2025, we will:

Goals:

  • Reduce our greenhouse gas emissions by 50%
  • Purchase 100% of the electricity we use from renewable sources

Operating responsibly

We are committed to ensuring that our business operates ethically, lawfully and with integrity in all our markets and see this as critical to our long-term success. As part of this, our transparency programme has been designed to provide detailed information on our policies, principles, approach and performance in four main areas, each the focus of intense public debate. The programme is also supported by a number of other annual statutory and material non-financial disclosures.

Human rights

We recognise our responsibility to respect the human rights of every individual who works for us, either as an employee or through our supply chain, and of the communities close to our operations. We acknowledge our responsibility to respect human rights as set out in the International Bill of Human Rights and the eight fundamental conventions on which the United Nations Guiding Principles on Business and Human Rights are based. That respect is embedded in our Code of Conduct which sets the expectations and responsibilities of everyone who works for or with us.

Anti-bribery and corruption

Vodafone does not tolerate bribery and corruption in any form. Our policy on this issue is summarised in our Code of Conduct and states that employees or others working on our behalf must never offer or accept any kind of bribe. Our anti-bribery policy is consistent with the UK Bribery Act and the US Foreign Corrupt Practices Act and any breaches can lead to dismissal or termination of contract.

Our core programs
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