Vodafone Group PLC (VOD) 2020 Q2 法說會逐字稿

Okay.

Well, good morning, everyone, and thank you for attending today.

As usual, I will summarize our commercial performance for H1.

And Margherita then will go through the detailed financial performance.

And finally, I'll conclude on an update and progress on our strategy.

So let's turn to the first slide.

We're making good progress on the strategic priorities that I outlined this time last year, and I'm pleased to see the benefits are already visible in our results today.

We returned to service revenue growth in Q2 with a 90 basis points improvement compared to Q1 driven by both regions.

This was supported by our focus on deepening customer engagement and accelerating digital transformation, which is leading to a more consistent commercial performance across the markets.

During H1, we launched 5G service and speed-tiered unlimited plans in 7 markets and achieved record-low European contract mobile churn for the fourth quarter in a row.

We also maintained good momentum in fixed broadband, adding over 600,000 NGN customers.

And as we transform our operating model through digital, we're achieving meaningful net cost savings, which Margherita will expand on in more detail.

This supported a 1.4% EBITDA growth in H1.

Improving returns on capital through network sharing remains a key priority, and we have now concluded agreements in 5 markets, with active discussions underway in Germany.

Last week, we announced a reciprocal wholesale deal in the U.K. with Virgin Media.

This will improve our scale economics and enhance our ability to invest in our leading network.

On the portfolio side, we completed the Liberty Global deal with limited remedies and have made a fast start on integrating these businesses, which Margherita will expand on.

Finally, we're making good progress on the plan to create and monetize Europe's largest tower company.

In November, we appointed one of our most experienced executives, Vivek, as CEO, and we remain on track to operationalize the company by May.

Looking at our overall commercial performance more closely.

I am encouraged by the continuous year-on-year improvements delivered in European churn, which you can see on the top-left chart, as we focus on our long-term ambition of a single-digit churn rate for all of our markets.

This performance is supporting a good reacceleration of our mobile net adds, as you can see in the chart, bottom left.

One of the key levers to reduce churn is our ability to sell additional products and, in particular, to drive fixed broadband and convergence.

The chart on the right show their progress in Europe in recent quarters.

As expected, our momentum improved in Q2, supported by stabilization in our commercial performance in Spain.

Overall, we are targeting continued improvement in H2.

Delivering a more consistent commercial performance has supported a healthy sequential improvement in service revenue trends for Q2.

As you can see from the chart, the improvements were broad-based.

Our markets in Rest of World and Other Europe led the way where we enjoy good competitive positions.

In South Africa, Vodacom reaccelerated.

Europe also improved overall, particularly in Spain and Italy.

Excluding international calling regulation, the U.K. accelerated, while our performance in Germany was similar to Q1.

Let me go through each of those performances for the key markets.

In our largest market, Germany, which now represents 30% of our pro forma service revenues, as shown on the left chart, our commercial performance improved compared to Q1, particularly in mobile.

In broadband, we saw in cable -- sorry, we grew in cable, but lost DSL customers due to ULL price increases and the migration of Unity customers on to our network.

At the beginning of September, we began marketing Vodafone products to Unity customers and vice versa.

You can see from the chart that our cable net adds almost doubled in September compared to our fast-start integration.

Given these encouraging trends, we expect broadband net adds to continue to improve in H2.

On the right chart, you can see our retail revenue growth, which slowed due to international calling regulation, lower roaming and an uptick in low-end competition, especially impacting reseller volumes.

However, our underlying Q2 retail growth remains robust with a 1% to 2% range over recent quarters.

EBITDA grew by over 3% in the first half as we focus on selling through direct channels and lowering our OpEx.

Italy is trending better.

In the mobile markets, competition intensity between the main brands continues to moderate, with MNP volumes between the 3 main scaled operators down over 50% year-on-year and 0 net ports, showing that the main parts of the market is in competitive balance.

All of the main brands have moved up pricing in H1, including us, improving our mobile service revenue performance.

At the low end, competition between second brands, Iliad and other MVNOs, remains intense.

Following our price increases, we saw an uptick in churn, as expected.

However, these were mainly low-value customers.

In fixed, we continued to see consistent strong revenue growth, supported by consumer price increases and share gains in business.

Broadband market growth has slowed post industry-wide price increases, but we continue to win a high proportion of net adds.

EBITDA margins expanded in H1, reflecting an excellent performance on costs.

In the U.K., we achieved record net adds across fixed and mobile during the quarter.

This significant acceleration was driven by the success of our refreshed price plans, including unlimited and VOXI, a higher share of new iPhone launch and shared gains in broadband.

Service revenue growth also accelerated to 0.5%, excluding the impact of international calling regulation.

And underlying EBITDA was up 4%.

Given our commercial momentum, I am confident that the U.K. will return to reported growth in H2, becoming a contributor to our overall group growth story.

Other Europe now represents 13% of our service revenue, given the acquired Liberty assets in Eastern Europe, now competing with Italy and the U.K. in contribution to the group.

Service revenue growth accelerated strongly in Q2 to 3.3% with all significant markets reporting growth and overall demonstrating broad-based momentum.

EBITDA was up 3% despite lapping a double-digit growth performance in the prior year.

In Spain, we have now repositioned our commercial offerings and restructured our operating model.

As the right chart shows, our fixed and mobile customer base returned to growth in September, supported by our unlimited propositions and a strong performance by Lowi.

Although our competitors had active football promotions over the summer period, our football customer losses were limited, demonstrating the competitiveness of our new commercial lineup across the various segments.

EBITDA declined by 11% despite a 6% reduction in operating cost, given lower revenues.

Looking ahead, the value segment of the market continues to grow at the expense of the premium segment.

Even so, we expect the gradual improvement in our service revenue trends to continue, supported by an improving commercial trend.

And as football costs sharply reduce in H2, we expect EBITDA to stabilize.

Turning to Vodacom.

Service revenue growth reaccelerated in Q2 as South Africa returned to growth and International maintained its strong momentum, supported by M-Pesa and data growth.

Underlying growth in South Africa was closer to 4% as we lapped a one-time last year.

This reflects accelerating data growth, stimulated by our pricing transformation and the ramp-up of our pricing agreement with Telkom.

A key development during the quarter was Cell C's decision to shift towards a national roaming model given its financial constraints.

Moving to our joint ventures.

Vodafone Ziggo's strong results underline the benefits of our strategic focus on convergence and Gigabit networks.

3/4 of branded mobile customers and almost 40% of broadband customers are now on convergence tariffs, supporting record mobile net adds and good fixed performance.

This in turn has allowed the company to upgrade its EBITDA guidance to circa 3% growth this year with shareholder returns expected to be at the top end of the EUR 400 million to EUR 600 million range.

Turning to India.

Following the Supreme Court AGR ruling, on top of the financial stress already present, the situation of the telecom sector in India and Vodafone Idea is critical.

The industry submitted an urgent request for 3 things: a 2-year moratorium for spectrum payments; a reduction for annual license fees and taxes; and the waiver of interest and penalties for the AGR case and the principal paid over 10 years.

The government acknowledged the criticality, have informed the committee of secretaries to immediately review a relief package for the industry and we await the recommendations.

However, for avoidance of doubt, given the significant capital already invested, we will not inject further group equity into India.

And on that, I will now hand over to Margherita.

Thank you, Nick, and good morning, everyone.

Let me start by reminding you that our Half 1 '20 results include Vodafone New Zealand for 4 months and the acquired Liberty Global assets in Germany and CEE for 2 months.

However, for the purpose of comparison, all organic figures presented here exclude the contribution from these assets and any distortions by the adoption of IFRS 16.

Now turning to the results.

Half 1 service revenue grew 0.3%; EBITDA grew 1.4%.

Service revenues returned to growth in the second quarter, as Nick has already highlighted.

EBITDA growth was supported by a further net reduction of operating costs across Europe of EUR 0.2 billion.

As a result, our organic EBITDA margin expanded by 60 basis points to 31.9%, and we remain on track to deliver the fifth consecutive year of margin expansion.

EBIT was flat year-on-year, with EBITDA growth being offset by higher D&A, partly reflecting recent 5G spectrum purchases.

Free cash flow pre-spectrum was EUR 0.4 billion compared to EUR 0.9 billion in the prior year, reflecting the timing of working capital movements.

The bridge on Slide 12 shows the walk between adjusted EBIT to adjusted earnings.

As usual, I do not intend to go through it in detail as these movements are clearly explained in the press release.

However, let me draw your attention to the material items.

First of all, 2 impacts from India.

Our share of results from associates includes Vodafone Idea for the whole of half 1 compared to only 1 month in prior year, hence, reported operating losses were higher.

Also, other income and expenses include a EUR 1.8 billion provision for the Indian AGR ruling, partially offset by a EUR 0.9 billion gain on disposal in New Zealand.

Second, financing costs were higher year-on-year, largely as a result of funding for the Liberty Global transaction.

And finally, our group effective tax rate was 27.5% in half 1 compared to 23.7% in the prior year.

This was primarily due to a change in the group's profit mix following the acquisition of Liberty's assets and lower profits in Spain.

We expect our tax rate to be in the mid-20s going forward.

Now turning on to our service revenue performance.

As you can see from the graph on the left, our organic service revenues returned to growth in Q2, as we expected, up 0.7%.

Looking ahead to the second half of the year, we expect a further acceleration compared to Q2.

This improvement is likely to be mostly in Q4, given tough prior year comparisons in Q3 in both Italy and Turkey, following price increases made last year.

The chart on the right shows the regional breakdown of our revenue performance.

As you can see, Europe has continued to improve with a step-up of 40 basis points in the quarter once you exclude the impact of regulation.

In the Rest of World, quarterly trends accelerated to 8.9% driven by the recovery in South Africa and further improvements in Turkey and Egypt.

Growth was ahead of inflation in most markets, and Rest of World grew 6% in euro terms.

We have also continued to make progress on our cost base.

Last year, I set an ambitious target for net OpEx savings of at least EUR 1.2 billion in Europe and common functions by FY '21.

This represents almost 5% annual reduction on a net basis.

We have already realized 50% of this target and are fully on track to achieve it.

Let me call out some key drivers.

Over the last 18 months, our customer case -- care costs have reduced by 12%, retail costs are 11% lower and we have cut the number of roles in shared services by 12%.

All this is net of our investment in our fixed growth and digitalization.

During Half 2, we expect to make a further EUR 0.2 billion of OpEx savings, meeting our EUR 0.4 billion goal for the year.

And as the graph illustrates, we have already actioned over 75% of the full 3-year target.

The waterfall chart on the right shows the drivers of our Half 1 EBITDA growth.

Direct margin contribution from revenue growth was offset by higher A&R costs, reflecting our good commercial performance in Half 1. We intend to significantly improve our A&R efficiency over time, as I will explain shortly.

You can also see that in addition to realizing net savings in Europe, we continue to achieve the target of keeping organic OpEx growth below local inflation in Rest of World.

Turning to Slide 15.

We recently completed our triennial benchmarking study with A.T. Kearney across our big 4 European markets.

The results validate the significant progress we have made in lowering our total cost base.

As you can see on the left-hand chart, all of our big 4 European markets are now in the top quartile in terms of cost efficiency, having almost halved the gap to best-in-class over the last 3 years.

The chart on the right illustrates our overall efficiency score.

Again, you can see the substantial improvements all of our countries have made.

In both Italy and Spain, over 80% of our business processes are now individually ranked as top quartile.

Despite this marked improvement, there are still significant opportunities to further lower our cost base, particularly in Germany and the U.K. with a EUR [1.1] billion overall gap to close.

Our ambition is clear: to lead the industry in capturing digital efficiencies, achieving a best-in-class cost structure.

And personally, I am looking forward to defining an entirely distinct category just for Vodafone within the A.T. Kearney benchmarking.

Clearly, our Digital First program is the key to unlocking this ambition.

In September, we hosted a Digital Day in which we highlighted the 6 key pillars of the transformation of our operating models, which you can see on the slide.

As I've previously noted, the total cost base that is addressable through digital initiatives is around EUR 7.5 billion, with the breakdown of these costs shown in the red bubbles.

Later on, Nick will highlight the significant commercial benefits that we intend to capture through digital.

But I would like to focus on the structural opportunity for cost reduction from Digital First and the progress we have already made against our targets in each area.

Starting with customer acquisition and retention.

Total commissions paid to third parties were EUR 2.5 billion in FY '19.

Here, we aim to acquire a growing proportion of our customers directly through a range of digital channels with a target to exceed 40% by FY '21.

To date, over 20% of our sales are already through digital channels.

And as we move to digital, the role of retail is changing significantly, as Nick will describe later.

We aim to reduce our retail store count by 15% by FY '23.

And our branded store footprint in Europe has already reduced by 5% over the last year.

In customer services, we are well on our way to achieve our targets as the frequency of human customer contact has already reduced by 15% during the last 18 months, and 19% of all contacts are now managed end-to-end by TOBi.

Finally, through new technologies and automation, we have the ability to reduce our support operations costs as well as increasingly moving our IT and network estate to the cloud.

As a result, we are now reducing these costs at a high single-digit base annually.

A key lever here is Vodafone Shared Services, where we currently have 22,000 employees, providing the group with a best-in-class cost structure below what could be achievable by third-party outsourcers.

VSS is our global center of excellence for robotic process automation and AI.

We currently have over 600 bots in our bot farm, and we have already reduced 2,600 roles in the last 18 months.

Given the magnitude of the opportunity and our systematic approach to implementing these initiatives at speed across the group, I'm highly confident that we have a long-lasting structural opportunity to reduce costs.

Moving back to our performance in Half 1, you can see that we have delivered a further expansion in reported EBITDA margins, now at 31.9%, excluding the contribution from Liberty.

We are on track to deliver a fifth consecutive year of margin expansions, having achieved an average of 70 basis points of annual improvement over the past 5 years.

Now let me provide you with an update on the Liberty integration.

As the charts on the left show, all the assets acquired have maintained a good commercial momentum.

As Nick has highlighted, since our commercial day 1 in September, we are seeing a clear acceleration in cable net adds across our footprint.

In terms of financial performance, Unitymedia in Germany grew by 1% in half 1. Under Liberty's prior reporting, adjusting for the drag created by our more conservative treatment of upfront discounts, the growth would have been almost 2%.

We also exclude carrier activities from service revenues, which contributed to growth under Liberty.

Under our accounting basis, EBITDA grew by 3% in Half 1, and all of our CEE assets have also contributed to growth.

We have made the fast start to integration.

Since deal completion, we have fully validated all of our synergy assumptions, increasing our confidence in delivering the targeted EUR 535 million in annual run rate savings.

Within the first 2 months post-completion, we have fully integrated the management team, started cross-selling and DSL migrations and centralized all procurement activities so that they are now channeled through our shared service operations.

Over the next 6 months, we will rebrand the business and start migrating TV customers on to the Vodafone TV platform.

From FY '21 onwards, we will begin to merge the national and regional network backbone infrastructure and consolidate and simplify IT and billing platforms.

Moving to free cash flow on Slide 20.

There are a few items to call out.

First, working capital outflows were EUR 0.5 billion higher year-on-year.

This was principally driven by timing difference on handset purchases, whilst Half 1 cash flow also benefited from a legal settlement in Germany that will reverse in half 2. And we anticipate broadly stable working capital for the full year.

Second, net interest was similar year-on-year.

However, for FY '20, we now expect total financing cost to be around EUR 1.2 billion, including the cost of Liberty funding.

Third, cash tax was EUR 0.1 billion higher year-on-year, primarily due to Liberty.

For FY '20, we expect total cash tax to be around EUR 1.1 billion.

Fourth, dividend received from associates were EUR 200 million lower in Half 1. This was primarily due to receiving no dividend from Indus Towers.

As a result of these factors, free cash flow pre-spectrum was lower year-on-year.

Finally, restructuring costs were EUR 200 million higher, reflecting the reorganizations in both Italy and Spain.

Turning to our net debt position on Slide 21.

We closed half 1 with net debt of EUR 48.1 billion compared to EUR 27 billion in March '19.

The increase primarily reflect cash outflows of EUR 18.5 billion relating to the acquisition of Liberty's assets.

Other notable movements in the period include the proceeds from the disposal of our New Zealand business, spectrum accruals for the full value of 5G spectrum purchases in Germany and the completion of the buyback for the mandatory convertible bonds issued in 2016.

At year-end, we expect our net debt to be between EUR 45 million and EUR 46 billion, which implies a pro forma leverage of 3x before the completion of the announced INWIT transaction.

We remain highly focused on deleveraging and intend to move to the lower end of our 2.5 to 3x reported range within the next few years.

We have now updated our full year outlook to reflect the acquisitions of Liberty Global's assets and the sale of New Zealand for the final 8 months of the year.

Within the underlying Vodafone business, Europe is in line with our plans and Rest of World is ahead.

As a result, we now expect to achieve the upper half of our original EBITDA guidance range, implying 2% to 3% organic EBITDA growth for the year.

As shown in the chart, the net impact of Liberty and New Zealand transactions on adjusted EBITDA is an increase of approximately EUR 0.8 billion to our original guidance range.

The implied contribution from Liberty's assets is lower than we outlined at the time of the deal in May 2018 after the applications of Vodafone accounting policies.

Under our more conservative capitalization policies, a number of items that Liberty treated as CapEx are now booked within EBITDA.

This includes all costs related to the transitional service agreement.

These changes have no impact on operating cash flows or the business case for the transaction.

We have also updated our CapEx guidance to reflect the inclusion of Liberty's cable assets, which have higher capital intensity than the rest of our business.

Additionally, the adoption of IFRS 15 reporting standards has reduced our total revenues due to the netting of certain commissions in indirect channels, which also increased our capital intensity ratio.

As a result of these 2 perimeter changes, we now expect capital intensity to be around 17% for FY '20 and to remain at this level until FY '22 as we roll out 5G and execute on the Gigabit plan.

To be very clear, this implies the same level of capital expenditure as we anticipated when we set the guidance in May.

Longer term, our network sharing deals as well as digital efficiencies and synergy realization will give us the opportunity to reduce capital intensity.

Finally, let me break down for you our updated outlook for free cash flow for FY '20, which is illustrated on the chart on the right.

The AGR ruling by the Supreme Court in India has created significant uncertainty.

As a result, our guidance now excludes recharges from India or a dividend from Indus Tower during the financial year.

The combined effect of both is a drag of EUR 250 million on our free cash flow.

Additionally, we have lost around EUR 140 million of cash flow from the sale of New Zealand.

These effects are offset by the sizable early free cash flow accretion from the Liberty Global deal and by higher EBITDA, so we now expect to achieve around EUR 5.4 billion of free cash flow, pre-spectrum.

And with that, I will hand back to Nick.

Thank you, Margherita.

Very clear, as always.

So I'd like to quickly remind you of our strategy which underpins our purpose as a business to connect for a better future.

Our purpose has helped us shape our new political and regulatory engagement model, which I call our new social contract for the industry, where we commit to operate responsibly and work together with the industry to deliver important societal goals, including enabling a digital society for which we request a fair return on the investment we make.

I think the recent shared rural network announcement in the U.K. is a fantastic example of what we can achieve as an industry when we work together.

The U.K. operators have committed to collaborate to take 4G geographical coverage from 67% to 92% by 2026, enabling digital inclusion with a reduced environmental impact.

In return, Ofcom will remove onerous coverage obligations from the upcoming 5G spectrum auction, enabling the spectrum to be allocated in an optimal way for the operators.

We are reaching out to all operators in our footprint to embrace this direction as I believe it will improve the reputation and trust of the industry, benefit society and provide better returns for our shareholders.

Turning to our strategic framework.

In the middle of the chart, you can see our geographical and customer segments.

We have concentrated our footprint down to 2 scale differentiated geographical platforms, Europe and Africa, whilst increasing the resilience of the revenue and cash generation through building convergence capability.

This is on top of our business platforms, best gigabit networks and a digital-first, radically simpler operating model further enhancing our strategic differentiation.

Providing our customers with the best or co-best gigabit networks remains a key strategic focus.

With Liberty's assets, we have become Europe's largest NGN network owner, reaching 54 million homes and European businesses.

We plan to upgrade Liberty's assets to DOCSIS 3.1 at pace.

Together with our plans to upgrade Vodafone Ziggo's network by the end of 2022, this will lift the number of gigabit-ready homes from 24 million today to around 50 million during the next 2 to 3 years.

This represents a significant competitive advantage for the group, given incumbent operators in key markets like Germany and the Netherlands are far behind on fiber rollouts.

We have also made rapid progress launching 5G services.

We're already live in 58 cities across the region.

And uniquely, we're able to offer 5G roaming in our largest markets.

These launches have firmly established Vodafone as the European leader in 5G in the minds of consumers, but most importantly, in the minds of business customers where we see strong engagement by businesses from all sectors to understand the potential for their business models.

Moving to our Digital First strategy.

Margherita has already outlined the 6 key pillars that we've identified to drive its systematic transformation of our operating model, improving the customer experience, strengthening our differentiation and, therefore, supporting revenue growth while structurally lowering our cost base.

So let me take the first 3 pillars of the model.

So starting with our approach with customer acquisition.

In the past, marketing was a mass-media execution in which we had to find a single message that would appeal to a very broad audience, managed through a black box of an agency.

By using digital channels, we have been personalized, relevant, real-time and highly efficient, drawing on our own proprietary tools and approach, managed by our in-house team.

The chart on the left shows a real case study in the U.K. It's centered around the popular highbrow Love Island TV series.

Our team, using our platform, drove 38 million hits, helping to drive record net adds through our VOXI sub-brand.

Moving to the right chart, the management of our existing customer base.

Rather than making manual offers, typically through high-cost call centers, we now use our Always On Marketing platform and a wide range of channels to make predictive, personalized and automated offers which can be optimized in real-time on the customers' response.

Crucially, these tailored offers are effectively invisible to our competition, minimizing counter-reactions that above-the-line offers created in the market.

Italy was an earlier adopter given the opportunity in a prepaid market.

As you can see on the chart, the churn was 21% lower year-on-year in Q2 and the ARPU uplift higher from customers targeted by the Always On Marketing platform.

Today, we have 11 markets which have recently implemented the capability, and our target is to expand this to 16 markets by the end of FY '21.

Turning to our channels.

Historically, My Vodafone app was a utility, purely usage and billing information.

In addition, much of the app was customized locally, limiting scale benefits.

Our new app, which we have just launched in the U.K., allows customers to truly be mobile-first.

Our ambition is for our app for all our customers' needs to be serviced through all their service needs.

In addition, we want to drive frequency of use to build loyalty and relevance.

The new app is a key storefront for new product discovery using personalized, highly relevant, AI-driven offers as well as presenting attractive rewards.

Importantly, the new app is far more standardized than before, allowing development costs to be shared.

We intend to launch the new app across 16 markets by the end of this fiscal year.

Secondly, as we acquire and service more customers through the digital channels, the role of retail is changing.

With the use of big data analytics, we have spent the past year developing a new retail market model.

Overall, we aim to significantly increase the efficiency of our retail estate, changing the store formats and mix to complement our Digital First execution.

This will mean much greater use of fully automated express formats and kiosks.

We're also working extensively on the in-store experience with an ambition to transact in 11 minutes for a new connection, clearly, a dream for anyone that's been to a telecom store.

Let me now walk through the key growth levers that we see in each of our customer segments, starting with European consumer, which represents 50% of our service revenues.

During H1, we launched radically simpler pricing plans, including our unlimited data plans.

These plans were primarily targeted at our existing customer base.

As you can see on the left chart, by the end of Q2, 1.8 million customers had adopted unlimited plans.

Average data usage per customer more than doubled, with a high proportion at approximately 70% choosing the mid- and the high-speed tiers.

Customers who have migrated to unlimited plans have meaningfully higher customer satisfaction, reflecting the attractiveness of worry-free simple pricing even though they are typically paying a couple of euros more for the service.

These early results underpin our confidence that as an industry transitions towards unlimited data plans, speed-tiering is the right way to go.

It is simple, intuitive and maintains a pricing ladder for future upselling.

Another key growth area for consumer is the opportunity to drive the penetration of multi-product bundles.

We continue to see significant opportunities to sell additional fixed and convergent products in Europe, supported by our enlarged NGN footprint.

The chart on the left shows our on-net broadband penetration across our 54 million homes with an average of just 28%.

Our ambition is to drive this into the mid-30s over the next few years, unlocking high-margin incremental revenues.

I've said it before, that every 1 million additional on-net broadband customer adds over EUR 200 million in free cash flow for the group.

By simplifying our pricing plans and engaging customers directly through digital channels, we create the opportunity to sell mobile family plans, additional TV and content bundles, security products and consumer IoT.

And as you can see on the right-hand chart, we have significant scale in all of these areas, and all contribute to revenue growth and lowering churn.

Moving now to Vodafone Business, which contributes just under 30% of our service revenue.

This remains a unique and growing global business for Vodafone with a very different profile to nationally focused incumbent operators who are far more exposed to legacy drags.

As you can see on the left chart, business services revenue returned to growth in H1 as mobile trends stabilized and we continued to gain market share in fixed.

IoT has been impacted by the slowdown in automotive, while cloud grew strongly, supported by significant account wins and our new IBM partnership.

Importantly, the SoHo segment, which is predominantly mobile and represents around 25% of our business revenues, has been dragged by consumer price plans, resulting in only 20% of SoHos taking business tariffs.

However, this drag is reducing, given our focus on migrating SoHo customers onto higher ARPU business plans, illustrated on the right chart where we offer dedicated agents, convergence and ultimately, digital productivity services.

Turning to the high-growth area of business.

First, we are capitalizing on the window of opportunity created by the shift to new SD-WAN technologies.

This is a land-grab moment in which we can capture meaningful WAN market share by offering customers superior products at a substantial discount to incumbent legacy product pricing.

As a recognized leader in the Gartner Magic Quadrant for SD-WAN, I'm very encouraged by the building contract pipeline and excited about the long-term growth prospects.

Secondly, we continue to expand our leading global IoT platform.

We recently announced with América Móvil for Latin America a new deal which completes our global footprint.

This is already a circa EUR 800 million business for the group.

And as the right chart shows, we're growing connections strongly across the key industry verticals which we believe have the most potential.

The next stage in the journey is to scale our platform and expand its features whilst moving up the value chain from connectivity to complete solutions and data analytics, as we have done successfully in automotive.

Finally, our Emerging Consumer segment contributed just under 20% of revenues in the first half, and it's growing strongly.

We've discussed the data penetration and smartphone adoption opportunities several times.

So today, I would like to focus on the additional products where we see the potential for another wave of growth.

M-Pesa has become Africa's leading payments platform with 39 million customers processing 5.8 billion transactions in the first half, a platform that is significantly larger than any African bank and already a EUR 1 billion revenue generator for us.

M-Pesa is now moving beyond its origins as a mobile transfer service and is providing enterprise payments, financial services and mobile commerce.

As smartphone penetration grows, we will take the opportunity to expand and develop the functionality on the platform, supporting additional growth opportunities in our countries and potentially other sub-Sahara Africa countries.

Although we are at a much earlier stage, Vodacom South Africa is also succeeding in financial and digital services, leveraging its leading market position to sell insurance and digital entertainment.

We saw financial services revenue grow 37% in H1.

So to summarize.

The consistency of our commercial performance is improving and we have returned to top line growth, with Europe tracking to plan and Rest of World ahead of plan.

We are more than halfway towards our 3-year, EUR 1.2 billion net OpEx reduction target, supported by strong momentum in digital, underpinning our ambition to continue to expand EBITDA margins.

And we have made a fast start on the Liberty integration, building high confidence in achieving our synergy plans.

All this gives us confidence that we will build on our first half performance and see both service revenue and EBITDA growth improved in H2, underpinning our new financial guidance.

Strategically, we are making good progress on improving asset utilization with mobile network sharing deals secured in 5 markets, active discussions in Germany and a reciprocal wholesale deal with Virgin in the U.K. We're also actively working to monetize our tower assets over the coming 15 months, unlocking significant value for our shareholders.

And on that, Margherita, do you want to join me?

(Operator Instructions) So you're first up.

It's Akhil from JPMorgan.

Can I maybe start with the broader commercial strategy?

I guess good KPIs, but obviously, one of the announcements we've had in the last week or so is an MVNO announcement in the U.K. Maybe if you could just expand on the decision-making behind that and what you feel led to that win.

Liberty yesterday was alluding to a more aggressive price point versus what BT had been offering.

And I guess, more broadly, you've talked about your digital channels and how you're going to use that to target the low end.

How do you think about the MVNO strategy outside of the U.K.?

So can we extrapolate anything from the U.K. here?

Yes, I'm sure that was a 3-part question.

But anyway, I will simplify that.

How I'd like you to think about the U.K. is in the following way.

In all markets, we want to invest to have the best gigabit networks, so mobile, fixed, and we will do that consistently through.

That's what our brand is known for.

So then if you take the U.K. as an example, we're making an investment.

We are a scaled business in enterprise, competing really in a 2-player market versus BT.

On the consumer side, though, I would argue we don't have the right level of scale.

So there's 2 parts to the commercial execution, scale our own branded and sub-brands positions, which we're doing.

I think Nick Jeffrey and the management team are doing an outstanding job of reaccelerating the U.K. business in a branded way, and you can see that in the commercial numbers.

But at the same time, an MVNO offers us the ability to basically scale in the consumer position through another player.

What I would say is, regardless of what people are saying or not saying, is the deal that was struck was a commercial deal.

It was not a capacity deal.

It was rational and, I would argue, in line with other deals being struck.

So I do not see it as market-moving in its construct going forward.

And finally, I think it was a good example of a reciprocal deal where there were some advantages both ways for both partners.

Obviously, we got good pricing for backhaul and to enterprise customers relative to Openreach.

So for us, it's a very rational strategic decision for the U.K. business, allows us to get financials that we can reinvest to further the advancement of our overall business and quality of network moving forward.

(inaudible)?

Well, what I'd say is that, that is a specific logic for the U.K. I don't do an automatic read across.

I think that in some markets, we have sub-brands.

So Spain is a good example of the sub-brand.

Italy is a good example of the sub-brand.

In some markets, we may be open to MVNO.

What we would want to do clearly is, as we launch 5G, is move 3G customers off our MVNO arrangements on to 4G, so we can refund the spectrum of 3G.

I don't know if you have any other -- no?

It's Maurice from Barclays.

So I guess a related question, but on cable wholesale.

So obviously, a very extensive deal you announced with Virgin, but I don't think -- are there any element of residential cable wholesales included?

I mean was that on the table to get access to their residential network?

And just in Germany, do you have any plans to extend wholesale deals beyond what you've done with Telefónica now you got the Liberty deal under your belt?

Yes.

Clearly, if Virgin decided to wholesale its cable business, we'd be a keen recipient depending on the pricing.

So they know our phone number.

We remain open.

It wasn't part of the discussion.

We were very much focused on the mobile side and other areas of reciprocal business, as I said.

In terms of Germany, no, the remedy was to find one player.

We found that one player.

We're very happy with the choice of that one player.

Jakob from Crédit Suisse.

Maybe just staying on Germany, which, as you highlight, is now 30% of your revenues.

Could you maybe comment a little bit more on what are some of the drivers that gives you the sort of confidence in the acceleration in commercial performance that you highlighted for later in the year?

Obviously, as you highlighted, the fixed line net adds were a little bit soft.

But I guess, just sort of more broadly, what is it you think that will drive it?

Is it the rebranding?

Is it coming past the one-offs?

Or is there anything sort of particular that you would flag for the German business?

I'll let Margherita go through any sort of technical aspects.

I'd say the broader commercial -- I would say, look, on that -- what I was really trying to highlight in the chart was our retail performance is remaining relatively consistent in that 1% to 2% range.

I would say that we had a decent mobile performance.

We also continue to have a very decent cable performance, both on the Unity side and on our own side.

And then you're bringing the businesses together, and I was trying to highlight by breaking it down by month, that sort of acceleration of the fast start on the integration.

So what you're seeing is a number of factors, I think, that start to show an improving sort of trend, if you like, into the back half of the year for the German business.

From a purely technical perspective, I would say just maybe 2 comments.

One is, because we are looking at Q2, and Nick has called it out, we saw an adverse impact for the roaming and visitors performance.

This is clearly typical of the summer months.

So we should see less of that going forward.

And then, at the moment, our performance is clearly depressed by the reduction of wholesale revenues with 1&1.

And at some point, this will start, of course, reducing its drag.

I think I would do a build here because I know you all love analyzing it every single quarter.

But sort of stand back and look at the German business, how I would represent the German business is 70% of our revenue is fixed or in convergence.

We have a unique asset, 25 million households.

I've said it.

It's getting upgraded by DOCSIS 3.1 in a market that's low fiber penetration.

So we are uniquely differentiated, low penetration level, 32%.

In any other market, like Netherlands, et cetera, you're in the mid-40s.

So we see a huge potential to drive penetration.

We are very focused on doing that, and we've had a very fast start.

Mobile, 30% broadly of the business revenues, and that we've got a 2-tier rational marketplace.

We've got high-quality mobile network.

And I'd say that, that tier is maintained and stable.

And then I'd say, to Margherita's point, on the wholesale side, you're down to 3% of our service revenues on the wholesale side.

So yes, it's been a drag, but at some point, it winds out their numbers.

So I'd sort of look through sort of short-term trading with confidence on a fantastic business and a fantastic asset.

Polo?

I love the color-coordinated on-brand socks with the tie, okay?

You're our type of guy.

Just really sticking with Germany.

Because if you look at what we've seen with Telefónica Deutschland, they've seen improving mobile service revenue momentum.

So are there any indications that they are taking share from you?

And then just to expand on that question, there's been a lot of chatter about a network-sharing deal between yourselves and Telefónica Deutschland.

So you've previously talked about 2-tier market structures, for example, in Germany.

So if you did do a network-sharing deal, would this give Telefónica Deutschland a further leg up?

Again, let me do the high level.

Again, Margherita can do some builds.

But when we analyze market share, because we've seen all the results, if you do it on a retail basis, we are sort of pacing with DT in terms of retail revenue market share in total communications, and I think that's the way to look at it.

And both of us are outpacing TEF in the marketplace.

If you look at it more specifically around mobile, I would say DT are obviously ahead of us due to wholesale, but also a little bit more favorable on the business side.

But our momentum is improving on the business side, and we had a tough comp on last year.

So I would say I'm happy with the broad trends.

TEF being a bit more aggressive in the low end of the market, both on the mobile side and in the DSL space.

So that's how I'd characterize the overall German market.

I would say, specifically to any type of sharing, look at network sharing in Germany sort of in 3 ways.

First way is white spots and gray spots.

So there may be a solution that does -- is different between the 2. The second one is, obviously, all the players have to engage with 1&1 on national roaming.

It's an obligation for us to engage, but it has to be on acceptable commercial terms to us.

Yes?

So we will go through that process.

And then the third is wider sharing arrangements.

We're engaged with all the players.

Clearly, there's always a balance going on between, you want to harvest the industrial synergies but at the same time, you want to protect differentiation.

And we are not going to compromise our differentiation, as will other players don't want to compromise their degree of differentiation.

Just from a more technical perspective.

As you know, wholesale is a headwind for us, and it's a tailwind for Telefónica because, obviously, the traffic is moving in their direction.

And as Nick was mentioning, if you back out wholesale on a total telecom perspective, you can work out that our performance is ahead of Telefónica.

And we are very happy with our progression on convergence.

While it's mobile-only, I think Germany remains a clearly differentiated 2-tier market and a disciplined one as well.

Should we go?

Yes.

We'll be nice and logical.

We'd just go down the rows like this rather than random.

It's easier.

It's Sam from Exane.

Just a question on Spain and Italy, if I can.

I think we've seen some encouraging KPIs in Spain.

And in the past, you've given us some super-helpful charts on the kind of the sub-brands versus the main Vodafone brand in those markets.

Kind of where are we tracking in terms of stabilization of the main Vodafone brands?

Kind of what proportion of the base are on Vodafone versus Lowi in Spain?

And where should we think about it going to when we try to model our revenue forecast for Spain and Italy in the next 12, 18, 24 months?

So if you're doing third-order modeling on spreadsheets, Margherita?

If I start by -- I think I'll break down your question on sort of 2 parts.

One was mix of brands, particularly referring to Spain; and the second, I think, is the outlook for both markets.

So if I start from the mix of brands, as you have seen from the charts that Nick has shown, overall, we have stabilized our commercial performance in Spain.

And if you were breaking it up by brands, you would find that the main brands, so I take Telefónica, Orange, Vodafone, in terms of MNP movements, are now essentially flat in the market.

Clearly then, if you back out from that at the level of the total market, we do still see the market moving down from the main brands to the low-end brands.

And this is part of the reason why market revenues are overall reducing.

So total market, spinning down.

Vodafone brand, on par with the other main brands, behind clearly the stabilization results that we have just seen.

In terms of outlook for both markets, we continue to see an improvement in our performance going forward.

So we see the decline in Spain reducing over the coming quarters on the back of the stabilization of commercial performance and also the fact that we are now seeing ARPU accretion in our main brand through the success of the unlimited offer.

Similarly, in Italy, we also see a gradual improvement in the performance.

You will have seen already in our results in this quarter that the decline in mobile was moderating and the fixed line growth remained very, very strong.

For the case of Italy specifically, just keep in mind, I think (inaudible) that we will have a difficult comparative in Q3.

So Italy will go in the wrong direction for one quarter because last year, we had some significant price rises in the quarter.

But confident that beside that, the trend will continue to move in the right direction.

It's Stephen Howard here at HSBC.

My question is, is it time to have a candid conversation about 5G, right?

So I mean you're talking about the social contract with policymakers.

Do you think they fully understand that perhaps this is not the most important development since the industrial revolution.

Are there expectations set in a reasonable position?

Are you confident that you're not going to find yourself obliged to meet overly ambitious, overly expensive build targets?

I see.

I mean you're making a very good point around coverage obligations.

I think this is the implication at the moment that a lot of governments turn around and say, "5G is so critical to everyone being connected to everything.

It's an IoT world, smart cities, we want inclusion." And so it's the coverage issue that we are constantly battling with.

And that's really why I was highlighting the rural network initiative for the U.K. because that was us as an industry stepping forward with a solution because we didn't like the direction that potentially a spectrum auction was going with heavy coverage obligations.

We saw how Germany played out.

And we saw then what the government did afterwards saying, "that wasn't really our intention.

We want better coverage, but we don't want it to be a financial burden for you.

So how can we support you with the phased payments with our interest?" Which was helpful.

So I'd say the conversation is in a more constructive space.

But what governments need to appreciate is that we as an industry need to work together to do more sharing to accomplish coverage because we want coverage as well.

It's not like we don't want coverage.

We're happy to have coverage.

But we need a different economic model to do it.

So this is why the Italy transaction with INWIT in Europe is a very important transaction, and we're engaged with Europe, just to say, "look, here are all the benefits it brings if you start, say, potentially put another into our Phase 2 type conversation, you are going to delay rollout of 5G into the country." So I think we are very much engaged.

And I think there is a good appreciation for this balance that's been trying to achieve.

And the important thing about it, we want to get the coverage, but we need better returns.

It's John Karidis here from Numis.

I just wanted to ask a question regarding Vodafone Italia and the INWIT deal.

So the INWIT deal was 24x EUR 220 million EBITDA.

So I assume that EUR 220 million is going to be the year 1 costs to Vodafone Italia of leasing those towers back?

Can you sort of confirm that and also talk about what annual escalators you've agreed to?

And also, I think part of the deal involves you committing to taking more POPs, more towers and more small cells over time.

I'd like to really understand what happens to the OpEx to Vodafone Italia as a consequence over the next 2 or 3 years.

Sure.

I can take that.

So first of all, on your first number, which is the leases for Vodafone Italia, your number is correct.

The only addition I would make is that this is a pre S-16 number.

And as you know how it works, it will be therefore slightly higher, no material escalators.

If you want to step back and sort of break out the various impacts on the Vodafone P&L from the INWIT deal, I think, first and foremost, you need to start including the network-sharing benefits.

As you know, this was coming as a package in Italy, first and foremost, industrial benefits from network sharing.

Second, also industrial benefits from the management of the towers in a structured basis.

Then you need to back out, as you were doing, the OpEx for the towers specifically.

And against that, you will have 2 benefits from the Vodafone side.

You clearly will have lower interest costs given that we'll receive cash proceedings from the deal, and we will also get minority dividends.

Again, if you step back from all the sort of pluses and minuses, I think the way we look at the deal from a free cash flow perspective, which is probably where you are going, is broadly neutral once you have considered all these aspects.

Sorry.

Can I (inaudible)

(inaudible) these stations...

I'd say on things like escalators, we're not going to go into commercially sensitive aspects of the deals we do.

But what I would say is we're very focused on ensuring that the contracts we write do not strategically undermine our ability as a commercial business to compete in the marketplace.

So we're not -- the idea is not, let's maximize the value of the tower company.

That is not the philosophy we have.

We want to optimize, but we also want to optimize from our own commercial business.

David?

Very quick question, I expect.

Is the 50-50 interim final split now the -- an expectation for moving forward?

These are the questions we like.

It's Usman from Berenberg.

Just going back to India for a second.

I mean, so I can see from the net debt in the report that there's around EUR 1.3 billion of debt that's secured on Indian assets that's not included in the group debt at the moment.

I believe there is another EUR 1.1 billion that Vodafone Idea, if they were to settle this claim, can come back to the group in terms of an indemnity.

So in terms of -- I just wanted to understand how you manage that roughly more than EUR 2 billion of exposure for the group in terms of what happens if the equity in India goes to 0. I mean -- and also, I mean if the Indus Tower deal doesn't happen, is there a potential for the claims to arise for the group before any monetization -- follow-on monetization reduces that exposure?

Do you want to?

Sure.

If I take the 2 numbers that you have quoted separately, first of all, you have referred to the EUR 1.3 billion loan.

Just to be very clear, this is, I think as we explained previously, a nonrecourse loan that was taken at the time of the equity injection into India, so no recourse to the group.

The second element that you mentioned was the EUR 1.1 billion indemnity mechanism.

This is something we called out at the time of the merger in our annual report.

As it happens when you do a merger, there were some historical potential liabilities, and we set up a mechanism to ensure that we had a sort of a balance on these liabilities.

These liabilities are capped at EUR 1.1 billion.

And it's not -- sorry, the liabilities are, as I was saying, capped at EUR 1.1 billion.

And as you may have noticed in our press release, they are dependent on contractual conditions.

And with the current uncertainty surrounding the AGR case in India, we have not taken any provision on this number.

Nick Delfas from Redburn.

Just a very quick one.

I think, Margherita, you mentioned the EUR 1 billion gap in the A.T. Kearney analysis for the U.K., which sounds rather large.

Could you expand a little bit on that?

Sure.

Actually, the EUR 1 billion gap is not just for the U.K. It's for the big 4 markets in total.

But it's very geared towards 2 of these markets, it's U.K. and Germany.

And this is where our biggest cost opportunities lie.

To be very clear on what the gap actually means, the way the A.T. Kearney benchmark works is they break out -- they break down all the activities and all the costs in our companies in all telcos into, I think, more than 50 processes.

And they look at what would be the cost for each process if you were in the sort of top quartile ranking for that particular process.

If we add up all the opportunities for Vodafone moving towards top quartile in each process, you get to a EUR 1 billion.

I think that we should definitely, as I was mentioning earlier, have a goal to go a little bit also beyond what is the benchmarking of the industry because I think, given our scale in Europe and also our ability to leverage areas such as shared services and replicating best practices across the group, we have to be the best-in-class in this type of benchmarks in the future.

So we will work in the next 2 to 3 years to deliver on the EUR 1 billion and more.

You have to realize that Margherita is relentless in this topic.

And there are many areas where actually we might be better than the rest of the industry in processes.

But she doesn't count those.

She only focuses on the areas for improvement, okay?

So we focus on the sort of growth opportunity.

There is no reason why we shouldn't be.

Yes.

If I could just [spill] out one other one on TV box migration.

How quickly do you think you'll do that?

And what kind of saving versus the TSA could you have from that?

Yes.

We're starting that next year.

So the box itself, the TV platform has been developed for the group.

It's in a number of markets already.

So what -- where the opportunity is that we've been working on is the ability to flash the existing boxes so we don't have to replace in the Unity footprint.

And that was a substantial, let's say, synergy opportunity for us if we can do that execution.

We trialed it.

It's worked.

Of course, you have to -- it's a delicate execution, but if that happens, I think we'll be very encouraged.

James Ratzer from New Street Research.

So a question, please, about your portfolio optimization over, say, the next kind of 2 to 3 years.

You sold out recently from markets like New Zealand and Qatar.

But then there have also been rumors recently in the press, you might be looking to sell Spain, maybe expand into Ethiopia.

So I'd be interested to kind of think about how you're thinking about your geographic focus within the group.

What are you prioritizing going forward?

Yes.

James, I would say we have been very active on the portfolio.

I'd say it reinforces the fact that our core footprint is Europe and Africa.

So we're now getting down to our core portfolio.

You call out 2 examples.

I'd say, on Spain, I just want to make it very clear, we are not engaged with any player in the Spanish market.

We have never put a price on that business ourselves.

It's part of our core European footprint.

In terms of Ethiopia, Ethiopia is an interesting market, I think big growth opportunity.

I think we can bring a lot to that market, especially because we have M-Pesa.

So we're engaged.

We're looking at the opportunity.

But you'll remember when I was running the AMAP region, we looked at several opportunities throughout Africa.

We are very disciplined in the way we look at it.

Don't forget, Myanmar was an example where I also looked at Myanmar and we decided not to proceed because they set the license conditions at too high a level that I didn't feel we could earn sort of local market WACC and earn a good return on that asset.

We will remain disciplined.

Yes, Rob?

It's Robert from Deutsche.

I'd like to pick up on your comments around the capital intensity.

You mentioned that it could come down a bit after full year '22.

It's been creeping up over the last few years.

I think you mentioned lower CapEx on towers from sharing.

Your CTO has been out in the press talking about open WAN and things like that.

What's -- please, could you expand a bit what's you're thinking behind that?

Actually, it could start to go the better way rather than the wrong way.

Sure.

First of all, let me say that our CapEx has not really been creeping up in the last few years.

I think I put it on the graph.

We have maintained our capital intensity at 16% in the last 3 years.

And this year and the following years, we'll continue to remain exactly at the same level.

We have mathematically changed the numbers on the back of the fact that we are adding the Liberty Global CapEx.

And also in terms of ratios, I was explaining earlier, we've had an accounting impact from IFRS 15.

But the absolute level is definitely not changing.

And we are now focused, as you know, on rolling out 5G and delivering the Gigabit plan in Germany.

Now as you pointed out, we definitely will have an opportunity of reduction when, in particular, network sharings will come in the line.

As you know, for the first 2 to 3 years, network sharing are not delivering net savings because you need to effectively set up the sharing.

But starting from year 3 onwards, which is why we call out FY '22, we do expect we will have benefits.

We're saying that 2 other areas of benefits will be additive on top of network sharing.

One is clearly digital efficiencies that we have started to deliver now.

And then the second is the fact that we are still completing some big IT projects in our estate, and also this will move towards completion.

So beyond FY '22, that's why we have been more specific than in the past around the guidance, there is an opportunity for reduction.

Okay.

Just to build on Margherita on that last point.

I mean IT transformations are huge for us because you're increasingly going cloud-based, more modernized, more converged, yes, so this is big work for us.

We started that work about sort of, I would say, 3, 4 years ago.

A number of our big operations, we've already executed.

We're working now in Germany.

We're working -- finishing through on Italy.

So we've got a number.

So I'd say we're reaching at peak points and then we start to move down going forward.

And then we're left with a more efficient IT estate with radical simplification, price plans, product, services, that also helps in terms of the cost of that IT estate.

If I may just add one comment, I'd like to say that I'm just as pleased around our progress of asset utilization than I am on operating expenses.

You may have remembered, last year, I added the wording asset utilization to our presentation in our strategy because I think it's a key element to improve our return on capital.

And if you think about the progress we have made there since last November, we have 5 active sharing deals on the ground already in Europe and starting to execute on those.

We also have the synergies of the Liberty acquisition that are going to support, and we have had the Virgin Media deal in the U.K. now.

So I think we are definitely moving in the right direction in terms of return improvement.

It's Georgios from Citi.

Just a question on network sharing actually.

And you mentioned earlier you are engaging to convince authorities of the scale benefits of network sharing in Italy.

If you could update us on the process because Telecom Italia seemed very confident on Friday, but we are hearing different types of information from different sources around the progress of gaining approval, and whether the active sharing component and the tower deal are interlinked.

And if one needs to be amended, there may be implications for the other.

And then just linked to that, how does that influence your thinking around Germany?

Because I'm guessing 1 of the 2 options you have will have a lower regulatory hurdle than the other.

Yes.

So I think the simple answer would be that the tower deal itself is in Europe at the moment, and we should hear by the end of November on whether that would need to get formal review, Phase 2 review or whether it effectively returns back to Italy.

The active is more of a local national decision.

So clearly, we're making it clear to Europe.

We think this is good for competition to set up a tower company.

There'll be more real estate for additional players.

So that's probably why you were saying Telecom Italia were sounding confident.

We're just saying, well, look, this is a process we have to go through.

We think that there are strong merits of why it should be approved, but we need to go through that process.

Obviously, every situation can be different.

So Germany, depending on what the arrangement is, what the players are, but let's just go back to what we were really doing from a structure perspective.

What we were suggesting is that we do a passive sharing.

And therefore, by setting up a passive tower company, then that's open to other players in the marketplace, so it's not constraining competition at all.

And then we only do active outside of major cities.

So it's a relatively small part of, let's say, the data customer traffic.

And we're doing it because it allows us to give better coverage and meet the sort of coverage obligations, going back to the point about government objectives.

So our view is this is not anticompetitive in any way.

Actually, it's supportive with the lens of a regulatory review.

We'll go to the back and then we'll come across.

It's David Shnaps at CreditSights.

So just given there's been a slippage of your net leverage target, given some of the operating performance weakness over the last year or so since the Liberty deal was announced, I think it was meant to be 3x at close, and that would have been decreased slightly by the hybrids, the mandatory convertibles.

I'm just trying to get -- we're now looking at 3x at the end of the year.

I was not sure if hybrids are included in that or not.

And what's the actual level as of 1H?

I think maybe that's another question that we can also discuss a little bit more in detail later because I think you are taking both the sort of reported leverage angle as well as the rating agencies leverage angle.

But from a reported perspective, if I can stay on that line, we are at 3x net debt to EBITDA, which is where we expected to be at the closing of the Liberty deal.

As you mentioned, we are talking about the upper end of the range that we were targeting.

We were targeting 3x to 2.5x net debt to EBITDA.

So we start the journey at 3x this year and then we plan to move gradually towards the bottom end of the range.

We will start to see the benefits of the INWIT deal.

That's another 0.1.

We are now growing on revenues and EBITDA.

And EBITDA growth is the other lever that will be important in driving down the leverage.

And then adding to that, Nick talked about also our portfolio, further noncore asset sales could benefit that.

So we are moving within our range, as expected, with a clear target to move towards the bottom end.

Andrew?

Two more.

And we've got 2 more hands, so that's perfect.

It's Andrew Lee from Goldman Sachs.

I had a question on the European mobile contract.

Churn rates have come down pretty meaningfully over the last year.

I wonder if you could just help us understand the pace or whether you expect ongoing decline in the pace of that decline.

And what kind of the scale of costs that were associated with that churn, the opportunity of your cost base on that side of things?

Well, maybe I'll let Margherita talk to the latter.

But what I'd say is that the big shift was when we sat down as an exec team when I came into the role, and really, let's not chase the market.

What would -- let's really focus on our customer base and give them a great experience and extend how many services they take from us.

So that's the execution.

We're not buying churn.

We're basically selling more things and giving them a better experience off a great network.

That just means you don't need to go back into the market.

We're seeing a structural decline.

You're seeing it systematically, so it's not like 1 or 2 markets are improving.

I think when you look across in any given quarter, so let's pick the U.K. as an example, new regulation caused a blip in the churn, have come down.

The text-to-switch created the ability to switch quickly.

Actually, when we look at the text-to-switch stats, we're actually a benefit -- it's that the whole market went up in terms of churn rates.

So I would say we're going to expect it to continue.

I can't predict the pace because it's a bit of a dynamic of the competitive landscape where the people are doing promotions in any given quarter.

But everyone is excited on how do I get plans that drive us down into this single-digit ambition, which I think is the right ambition because then when you're at single digit, I think you can genuinely say your customers are starting to love to you as a business.

And that make us distinct from everyone else.

Clearly, the customer lifetime value is always improving as we bring down the churn rate through convergence and selling more products.

So I'd say we're more focused on the customer lifetime value than, I would say, the absolute cost.

Though you would imagine, commercial cost would come down, the lower your churn goes over time.

Yes.

You mentioned costs, and of course, there are cost benefits in reducing churn, process costs, A&R costs, which is I think what you're thinking of.

But I would say, in this case, from a financial perspective, probably the biggest impact we are seeing is more around price points and revenues because as you move from a sort of above-the-line competition where there are action and reactions on pricing that can, as you know, well destroy value in telecoms, as you move to manage your base with your own digital channels, you avoid this type of aggressive dynamics.

And I think this in our financials is the biggest impact of reducing churn for Vodafone and potentially also for the industry.

Jerry, you have the final question.

Yes.

It's Jerry Dellis from Jefferies.

I've got a question about the U.K. broadband business.

I think yesterday, Vodafone U.K. signed an FTTP wholesale deal with Openreach covering, I think, about 0.5 million premises.

Now given that there's still a pretty strong growth opportunity in the retail FTTC business, I've been intrigued by the timing of this Openreach deal.

I think CityFibre still has to deliver to you 900,000 of the 1 million premises that they promised to deliver by 2021.

It's not as if FTTP is really being commercialized in the market yet.

So I would be interested to understand why you decided to switch to the sort of dual-sourcing approach, if that's the right way of looking at it, at this very early stage?

Yes.

I would look at it as switch into a dual sourcing.

I mean we said at the start, we are open to anyone that wants to build.

We can do the CityFibre deal and still be able to do other arrangements with other players.

What we want is access to gigabit speeds at acceptable economics.

And I think that what I was pleased about with the Openreach offer is these economics are a lot more comparable to what we have with CityFibre.

So finally, they stepped forward with a model that we could, let's say, find sufficiently attractive.

I think what it does say is that Vodafone is a fantastic anchor tenant for anyone wanting to do a build because if you look at it, we have a big mobile base.

We have a big brand, and everyone knows that we can be a great anchor tenant.

So we're presenting ourselves as, if you like, the best partner in the market if you want to go down that route.

And if others want to go down that route, we'll certainly think about it.

Thank you very much.

I really still want to know why Polo is allowed past the VIP area.

Have you noticed, there's roping off just for him.

But look forward to seeing you all over the next couple of weeks, I am sure.

And yes, great to see you all.