FY21 Preliminary results

Summary ⫶ Resilient financial performance

Financial performance

Total revenue declined by 2.6% to €43.8 billion (FY20: €45.0 billion), as our good underlying momentum and the benefit from the acquisition of Liberty Global's assets in Germany and Central and Eastern Europe was offset by lower revenue from roaming, visitors and handset sales, adverse foreign exchange movements and the disposal of Vodafone New Zealand.

Operating profit increased by 24.3% to €5.1 billion (FY20: €4.1 billion). Compared to the prior year period, we recognised lower gains on disposals, no impairment losses, and we no longer recognised Vodafone's share of losses related to Vodafone Idea following the write down of the asset to nil in FY20. On an underlying basis, performance was broadly stable as lower adjusted EBITDA was partially offset by lower restructuring costs, depreciation and amortisation, and a higher share of profits from associates and joint ventures.

The Group made a profit for the financial year of €0.5 billion (FY20: loss of €0.5 billion). The profit increase was partly driven by higher operating profit and the recognition of mark-to-market gains (FY21: €1.1 billion, FY20: losses of €1.1 billion). These factors were partially offset by higher income tax expense in the current year, primarily due to a non-cash charge of €2.8 billion following a decrease in the carrying value of deferred tax assets.

Basic earnings per share was 0.38 eurocents, compared to a loss per share of 3.13 eurocents in the prior year.

Adjusted EBITDA decreased by 1.2%* to €14.4 billion (FY20: €14.9 billion) as the decline in revenue was partially offset by strong cost control, with a net reduction in our Europe and Common Functions operating expenditure of €0.5 billion.

Cash flow, funding & capital allocation

Cash inflow from operating activities decreased by 0.9% to €17.2 billion (FY20: €17.4 billion).

Free cash flow (pre spectrum, restructuring and integration costs) decreased by 11.9% to €5.0 billion (FY20: €5.7 billion) due to lower adjusted EBITDA and increased investment in network performance during the pandemic, partially offset by working capital movements including lower cash commissions.

Net debt at 31 March 2021 was €40.5 billion, compared to €42.0 billion as at 31 March 2020. Net debt decreased by €1.5 billion, supported by free cash flow of €3.1 billion and net proceeds¹ from the Vantage Towers public offering of €2.0 billion, partially offset by equity dividends of €2.4 billion and payments to purchase KDG shares from minority shareholders of €1.5 billion.

Total dividends per share are 9.0 eurocents (FY20: 9.0 eurocents), including a final dividend per share of 4.5 eurocents. The ex-dividend date for the final dividend is 24 June 2021 for ordinary shareholders, the record date is 25 June 2021 and the dividend is payable on 6 August 2021. 

¹ Net proceeds as at 31 March 2021, excluding proceeds from greenshoe.

 

 

Strategic review ⫶ A new generation connectivity & digital services provider

In November 2018, we set out our ambition to reshape Vodafone and establish a foundation from which the Group can grow in the converged connectivity markets in Europe, and mobile data and payments in Africa. During the first phase of our transformation we have executed at pace to deliver on our priorities, and in this strategic review we highlight that:

A.   we have delivered the first phase of our strategy to reshape Vodafone;

B.   structural trends are accelerating, creating new growth opportunities;

C.   the next phase of our strategy is to become a new generation connectivity and digital services provider for Europe and Africa; and

D.   we are committed to improving returns.

A ⫶ We have delivered the first phase of our strategy to reshape Vodafone

We have now substantially delivered the first phase of our strategic ambition to reshape Vodafone into a stronger connectivity provider. This has been delivered through four key strategic priorities: (i) deepening customer engagement; (ii) accelerating our transformation to a digital first organisation; (iii) improving the utilisation of our assets; and (iv) optimising our portfolio.

During FY21, we have continued to execute at pace across all four priorities. Highlights of activity during the period include:

·   mobile contract customer loyalty improved by 0.9  percentage points year-on-year;

·   we have added 1.4 million NGN broadband customers and 44 million homes are now passed with our 1 gigabit capable fixed-line network in Europe;

·    we have launched 5G in 240 cities across 10 of our European markets;

·  in response to the trading conditions related to the COVID-19 pandemic, we accelerated a series of cost saving activities, resulting in a €0.5 billion net reduction in operating expenditure in Europe and Common Functions;

·   we have secured mobile wholesale agreements with PostePay in Italy and Asda Mobile in the UK; and

·   we completed the IPO of Vantage Towers March 2021, with a market capitalisation of €13.2 billion as at 17 May 2021.

 

 

The table below summarises the progress against our strategic priorities in FY21.

Strategic progress summary			Units	FY21	FY20
Deepening customer engagement
Europe mobile contract customers1			million	65.4	64.4
Europe broadband customers1			million	25.6	25.0
Europe on-net gigabit capable connections1			million	43.7	31.9
Europe Consumer converged customers1			million	7.9	7.2
Europe mobile contract customer churn			%	13.7	14.62
Africa data users3			million	84.9	82.6
M-Pesa transaction volume3			billion	15.2	12.2
Business fixed-line service revenue growth4			%	3.0	3.3
IoT SIM connections			million	123.3	102.9
Accelerating digital transformation
Europe net opex savings5			EUR billion	0.5	0.4
Europe digital channel sales mix6			%	26	21
Europe frequency of customer contacts p.a.			#	1.4	1.4
Europe MyVodafone app penetration			%	63	65
Improving asset utilisation
Average mobile data usage per customer in Europe			GB/month	7.2	5.7
Europe on-net NGN broadband penetration1			%	30	30
Pre-tax return on capital employed (controlled)7			%	5.5	6.3
Post-tax return on capital employed (controlled and associates/joint ventures)7			%	3.9	3.9

Notes:

1. Including VodafoneZiggo | 2. Excluding the impact of inactive data-only SIM losses in Italy during Q3 and Q4 FY20 | 3. Africa including Ghana, Egypt and Safaricom | 4. Organic growth | 5. Europe & Common Function operating costs | 6. Based on Germany, Italy, UK and Spain | 7. These line items are non-GAAP measures. See page 40 for more information. 

 

Deepening customer engagement

Our actions have delivered a more consistent commercial performance, and our service revenue trends have remained resilient, despite the direct impacts of the COVID-19 pandemic on revenue from roaming and visitors.

In mobile, we have launched speed-tiered, unlimited data plans in 10 markets. This has enabled us to stabilise and grow our higher value customer base and increase average revenue per user ('ARPU'). We have also launched and embedded 'second' brands across our markets and now have over 5 million active users across our second brands in Germany, Italy, the UK and Spain.

We have maintained strong commercial momentum in our fixed business and over the past three years we have added 4.3 million NGN broadband customers in Europe. We also have converged customer plans available in all major markets. By deepening the relationship we have with our customers we have been able to drive a significant improvement in customer loyalty, with mobile contract churn in Europe reducing by 2.3 percentage points over the last three years.

In Africa, demand for mobile data remains significant given the lack of fixed line infrastructure. There is also a substantial opportunity to grow M-Pesa (our mobile payments platform) and expand it into new financial and digital services. During the last three years, we have continued to see significant demand for mobile data and monthly average data usage in our markets outside Europe has increased to 4.6 GB (FY18: 2.2 GB). The total number of data users in Africa has grown from 72.4 million to 84.9 million. The number of M-Pesa and other mobile money customers has continued to grow strongly, with a total of 48.3 million active users now registered.

Accelerating digital transformation

We have now exceeded our original three-year target of at least €1.2 billion of net savings from operating expenses in Europe and Common Functions, with cumulative savings of €1.3 billion, equivalent to a c.15% net reduction. This focus on efficiency, delivered through standardisation, integration and digitalisation of our operations, has enabled our adjusted EBITDA margin to be resilient during the pandemic and remain broadly stable at 32.8%. In the last three years, we have introduced 5,500 role efficiencies in our shared service centres ('_VOIS') and approximately 30% of Group employees now work in our shared operations. We are continuing to transform the business and evolve the Group digital toolset - including our AI assistant, TOBi, and Robotic Process Automation ('RPA') - in order to further our productivity leadership. We have also increased our digital sales, now 26% of total sales across Germany, Italy, the UK and Spain, and optimised our retail footprint.

Improving asset utilisation

Three years ago, we began a series of activities to improve our asset utilisation to support a recovery in return on capital employed ('ROCE'). We have reached network sharing agreements with leading mobile network operators in most of our European markets, established Vantage Towers as a separate business to consolidate the ownership and operations of our passive mobile network infrastructure, and signed significant wholesale agreements in both our fixed and mobile networks.

Despite the strong delivery of our strategic priorities at pace, our post-tax return ROCE of 3.9% remains below our cost of capital. In a subsequent section, we have set out our growth model and capital allocation framework and explained how we will drive shareholder returns through efficiency and growth.

Optimising the portfolio

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

Objective	Transactions
1. Focus on Europe & Africa	5 disposals including New Zealand and Malta 4 acquisitions, including purchase of KDG shares from minority shareholders 3 mergers in Australia and India (Vodafone Idea & Indus Towers)
2. Achieve convergence with local scale	3 acquisitions in Germany, Greece and Eastern Europe
3. Enable structural shift in asset utilisation	2 tower mergers in Italy and Greece, as well as subsequent sale of INWIT stake IPO of Vantage Towers

 

 

 

B ⫶ Accelerating structural trends creating new growth opportunities

Whilst the events of the last year have underscored the importance society places on fast, reliable, secure and affordable connectivity, we see this as an acceleration of existing longer-term trends. There are five key mega trends that we see shaping our industry over the medium-term.

1.    remote working;

2.    greater adoption of cloud technology;

3.    connected devices;

4.    digital payments & financial services; and

5.    EU recovery funding.

1 ⫶ Remote working

The trend towards remote working for employees and businesses was strong before the impact of the pandemic, driven by the changing lifestyle priorities of different demographics. COVID-19 has driven a step-change in demand, driving multiple benefits including a more flexible organisational culture and greater productivity. This trend is driving demand for fast and reliable fixed and mobile connectivity for individual workers, but also emerging cloud architecture, digital security and unified communications solutions for employers.

2 ⫶ Greater adoption of cloud technology

Over the last decade, large technology companies have invested heavily in advanced centralised data storage and processing capabilities that organisations and consumers can access remotely through data connectivity (commonly termed "cloud" technology).  As result, organisations and consumers are increasingly moving away from using their own expensive hardware and device-specific software to streaming more efficient shared hardware capacity or services over the cloud. This is popular as it allows upfront capital investment savings, the ability to efficiently scale resources to meet demand, easily update systems and increase resiliency. This is driving demand for fast, reliable and secure connectivity with lower latency.

3 ⫶ Connected devices

A wide array of devices across all sectors and use cases are increasingly becoming connected to the internet. These connected devices, known as the Internet of Things ('IoT'), are expected to double by 2025, driven by continued reductions in the cost of computing components, advances in cross-device operability and software, and the near-ubiquity of mobile networks. There is a wide range of consumer applications such as smartwatches, security systems and tracking devices, as well as business applications such as supply chain management, autonomous vehicles and remote surgery. This trend is driving significant growth in connectivity, but also end-to-end integrated IoT solutions.

4 ⫶ Digital payments & financial services

In Africa, digital payments are primarily conducted via mobile phones through payment networks owned and operated by network operators. In Consumer, increasing smartphone penetration drives higher peer-to-peer transaction volumes and revenue, whilst also driving the adoption of next-generation mobile payment applications. Network operators are leveraging this relationship to offer additional financial services products, ranging from advances on mobile airtime and device insurance to more complex offerings such as life insurance. Businesses are also increasingly reliant on operator-owned payment infrastructure for both consumer-to-business payments, but also for large business-to-business transfers.

5 ⫶ EU recovery funding

The European Commission has launched a series of funding programmes with €750 billion available under the banner "NextGenerationEU". These include the Recovery & Resilience facility, which combines €360 billion of loans and €312.5 billion of grants available to European Union Member States. Of these grants, approximately 70% will be allocated to European Union Member States in which Vodafone has an operating presence. These grants are planned to be 70% distributed by the end of 2022. The range of funding presents a direct and indirect opportunity given that at least 20% of the total funding is planned to support the European Commission's digital transformation agenda.

C ⫶ The next phase in our strategy - a new generation connectivity and digital services provider

Following the significant actions we have taken to reshape the Group, we are focused on growing our converged connectivity markets in Europe, and mobile data and payments in Africa. The next phase of our strategy focuses on three customer commitments and three enabling strategies, all of which work together towards realising our vision to become a new generation connectivity and digital services provider for Europe and Africa, enabling an inclusive and sustainable digital society. In order to achieve our vision, we will:

1.    provide the best connectivity products and services;

2.    provide leading & innovative digital service platforms;

3.    provide an outstanding digital customer experience;

4.    further simplify our operating model to be the most efficient operator in our sector;

5.    leverage our social contract to build partnerships with governments and regulators to shape a healthier industry structure and improve returns for all stakeholders; and

6.    invest in and operate leading connectivity infrastructure.

1 ⫶ Best connectivity products & services

Consumer ⫶ Europe

In Europe, we are a leading converged connectivity provider with 7.9 million converged customers, 113 million mobile connections, 142 million marketable NGN broadband homes, we cover 98% of the population in the markets we operate in with 4G, and we have launched 5G in 240 cities in 10 markets in Europe. We have achieved this leading position by focusing on our core fixed and mobile connectivity. We are enhancing our products through capacity and speed upgrades, unlimited mobile plans, a distinct tiered branding hierarchy and convergent product bundles.

Consumer ⫶ Africa

In Africa, we are the leading provider of mobile data and mobile payment services. We have 178 million mobile customers in 8 markets which represent 40% of Africa's total Gross Domestic Product. We are the leading mobile connectivity provider by revenue market share in 7 markets. Excluding Kenya, we cover 62% of the population in the markets in which we operate with 4G services. Our M-Pesa financial services platform processed over 15 billion transactions during the year.

Further information on our operations in Africa can be accessed here: vodacom.com.

Vodafone Business

In March 2021, we held a virtual briefing on Vodafone Business for investors and analysts (investors.vodafone.com/vbbriefing). This briefing outlined the following four key messages.

1.   We operate in attractive markets ⫶ We serve over 6 million private and public sector customers of all sizes, across Europe and Africa, in addressable markets totalling over €100 billion. With more employees seeking flexible working, gigabit connectivity with low latency and both public and private organisations driving digitalisation, we have a compelling structural opportunity, with expected addressable market growth of c.8% per annum.

2.   We have unique scale & capabilities ⫶ We have the scale, expertise and technology to successfully compete in these attractive markets. We are expanding our portfolio of products and services to enhance our provision of core connectivity services, with in-house innovation in IoT and partnerships with leading technology companies to offer cloud, security and unified communications services.

3.   We have strong operating momentum ⫶ Over the last three years, we have delivered a step-change in our commercial performance, leading to service revenue growth (excluding roaming and visitor revenue) of 1.8% in FY21, with total service revenue now over €10 billion. This has been driven by ongoing improvements in our commercial momentum, strong support to our customers throughout the pandemic, clear understanding of our economic model and disciplined prioritisation of high marginal return on capital opportunities. 

4.   We are on a clear growth pathway ⫶ Our strategy is grounded in our purpose to connect for a better future and is focused on three core elements. Firstly, to be the trusted partner for small and medium-sized enterprises. Secondly, to be the gigabit connectivity provider of choice to large enterprises. Thirdly, to be the leading end-to-end provider of IoT solutions for every organisation.

2 ⫶ Leading innovation in digital services

Alongside optimising our core connectivity services, we are building platforms that will allow 'best on Vodafone' experiences. Our primary areas of focus are premium TV in Europe; financial services in Africa; Vodafone Business specific digital platforms across the Group; and the IoT for both consumers and businesses.

Premium TV

Our consumer TV proposition now has over 22 million subscribers in 11 markets, making Vodafone the 2^nd largest TV provider in Europe. We partner with 18 leading global content producers and distributors such as Disney, ViacomCBS, WarnerMedia, Netflix, Amazon and Comcast. Our premium TV offering is delivered through a seamlessly integrated, multi-device platform. This enables consumers to watch whatever they want, whenever they want on any connected device.

Financial services

We remain focused on embedding Vodacom as a leading pan-African technology company and M-Pesa offers a unique opportunity to extend our reach further into financial services through our investments in financial, digital and lifestyle services. This provides us with opportunities to enhance our relationship with the 178 million mobile customers we serve across our African footprint. In particular, we note our partnership with Alipay and the imminent launch of our single lifestyle app for customers and merchants in South Africa that promotes greater financial inclusion. We see this super-app as a precursor to M-Pesa's evolution, supporting accelerated growth across our financial services' businesses and assisting us in connecting hundreds of millions more in Africa so that no one is left behind.

Vodafone Business digital platforms

We are extending the breadth of our propositions to private and public sector organisations beyond connectivity. We estimate the addressable market for unified communications, cloud applications and digital security is over €50 billion and growing at over 10% per annum. We are partnering with leading technology firms such as Microsoft, Accenture, IBM, Google, Cisco and Amazon to provide our customers with best-in-class products and services. We provided further information on this growth opportunity as part of the Vodafone Business virtual investor briefing.

IoT

Our end-to-end IoT proposition is the largest of its kind globally. Our Business IoT offering for private and public sector clients was discussed at our recent virtual investor briefing. Our addressable market has already reached €10 billion and is expected to grow at 16% per annum over the medium term. At the end of March 2021, we had over 120 million devices connected to our network, including 33 million connected cars. We have also developed over 100 tailored end-to-end solutions for a range of sectors including healthcare, distribution, manufacturing and automotive. 

Our consumer IoT offering has now connected over 1.4 million devices such as the watches through our OneNumber service and our 'Curve' mobile tracking device. In addition, we recently launched a new smart kids watch, developed with The Walt Disney Company. We will be expanding on the opportunity for consumer IoT and other consumer growth opportunities at a virtual investor briefing in December 2021.

3 ⫶ Outstanding digital experiences

Over the last thirty years, Vodafone's approach to retail, distribution and customer care has evolved in line with broader social and technological development. During the 1990s, we operated primarily through a traditional retail 'high street' store mode, whereby the vast majority of customer interaction was face-to-face and involved a high degree of manual process. In the 2000s, we introduced a multi-channel model, in which customers could also choose to interact with us through dedicated websites or contact centres, in addition to the retail stores. In the 2010s, we began to combine the models into an omni-channel experience, through which our customers could move between different channels for different missions.

In the new decade, our ambition is for customers to primarily interact with us in a 'Digital First' manner. Our investments in this area have already resulted in our artificial intelligence-enabled assistant ('TOBi') resolving 63% of customer support interactions with no human interaction and an approximate 5% reduction in the frequency of customer contacts per year to 1.4. As we look ahead, we expect the majority of new customers will join Vodafone through digital channels and the overwhelming majority of customer interaction and queries will be fulfilled through either the MyVodafone app or support provided through 'TOBi'. We will then support the ongoing customer relationship through data-driven and automated targeting of upselling, cross-selling and contract extension. This Digital First customer experience will improve customer loyalty and reduce the service cost per customer.

We will be expanding on our plans for outstanding digital experiences at a virtual investor briefing in December 2021.

4 ⫶ Simplified, most efficient operations

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

In the next phase of our strategy, we are pursuing these opportunities through two significant evolutions in our operating model. Firstly, integrating our network and digital teams in Europe and, secondly, streamlining our approach to product development and customer care within our European commercial teams. These programmes will be key components in delivering the next phase of our ongoing efficiency programme, which targets a total net reduction of Europe and Common Function operating expenses of 20% by FY23 (versus a FY18 baseline).

Integrating network & digital teams

We are integrating our European network and digital teams. This new structure will drive effectiveness, increase our speed of execution, standardise key processes, and support the codification of what is the best solution for Group implementation. We will increase our IT and digital capabilities, standardise key development environments and enhance coding collaboration, while internalising software engineering capabilities, further leveraging our _VOIS shared services environment.

This new operating model for our technology teams will enable our multi-year journey to redefine our technology architecture following a 'Telco as a Service' ('TaaS') model. Our TaaS model is based on two existing layers of inter-connected digital technology. We have created a standardised suite of customer and user-facing interfaces for an entire omni-channel journey and called it OnePlatform. The OnePlatform suite is powered by our Digital eXperience Layer ('DXL'). DXL refers to the abstraction layer in our IT architecture which separates customer-facing micro-services requiring frequent and rapid adjustment from back-end systems such as billing and CRM.

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

Product development consistency & common customer care

To meet the needs of our customers, both individuals and businesses, we need to bring innovative and differentiated products to market and scale them across our footprint much faster than we do today. We also need to further leverage the scale of our footprint and avoid duplication and fragmentation of our resources. We are simplifying and unifying our approach to product development, reducing time and resources for new products from the idea creation phase to launch, with a new process to allocate and sustain funding across our markets. 

We are also accelerating the deployment and adoption of digital tools through common digital platforms with the ambition to move to one 'My Vodafone' app and, over time, one TOBi chatbot platform. This will also help us deliver a more consistent customer experience regardless of geography, with further automation and simplification.

 

 

5 ⫶ Social contract shaping industry structure to improve returns

Over the last decade, the performance of the European telecommunications industry has been weaker than other regions, which market commentators largely attribute to its regulatory environment. European regulation differs in both its fragmented approach to spectrum licensing and market structure, compared with North America or Asia.

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

Following our efforts and society's increasing reliance on our connectivity infrastructure and services, notably during the COVID-19 pandemic, we are beginning to see positive signs of a healthier industry structure emerge. Recent spectrum auctions in the UK, Greece and Hungary were conducted in a positive manner and completed with spectrum being assigned at sustainable prices, in line or below European benchmark levels. Authorities are recognising that operators need to be able to focus available private funds for fast deployment of new infrastructure and services.

We have also seen national governments increase support, such as state-subsidies for rural networks in the UK and Germany. A key area will be shaping Member State recovery funds and how at least 20% of the €750 billion NextGenerationEU funding targeted for digital initiatives is distributed.

We will play our part by investing in our high-quality network infrastructure and will continue to work closely with regulators and policy makers in order to create a more healthy and sustainable industry structure that is truly pro-investment, pro-innovation and supportive of returns.

6 ⫶ Leading gigabit networks

In order to provide our customers with the best connectivity products and 'best on Vodafone' connectivity platforms, we need to have leading gigabit network infrastructure in each of our markets. Importantly, we must also ensure that our customers recognise and value the quality of our gigabit network infrastructure. We will be hosting a dedicated virtual investor briefing on technology and our approach on 17 June 2021.

In mobile, we are currently deploying mobile network infrastructure to deliver 5G connectivity. So far, we have launched 5G services in 240 cities, in 10 markets in Europe. 5G services provide 'real world' speeds well in excess of 100 Mbps, compared with 4G which provides 'real world' speeds of 20-35 Mbps. In addition to the speed advantage, 5G networks that are 'built right' and with longer-term competitive advantage in mind, provide more uses cases, and significant capacity and efficiency advantages, ultimately lowering the cost per gigabyte of mobile data provision. However, the European mobile sector is also utilising dynamic spectrum sharing ('DSS') technology to share existing 4G spectrum to provide a more limited 5G experience.

Underpinning our 5G network infrastructure is our majority shareholding in Vantage Towers AG. Further information on Vantage Towers can be accessed here: https://www.vantagetowers.com/.

Alongside our 5G mobile network infrastructure is our NGN fixed-line network infrastructure. We can now reach 142 million homes across 12 markets in Europe (including VodafoneZiggo). This marketable base is connected through a mix of owned NGN network (56 million homes, of which 44 million are gigabit-capable), strategic partnerships (24 million homes) and wholesale arrangements (62 million homes). This network provides us with the largest marketable footprint of any fixed-line provider in Europe. In Germany, our owned network covering 24 million households is being progressively upgraded to the latest DOCSIS 3.1 standard, which provides us with a structural speed advantage over the incumbent. Over the medium-term we will continue to increase the proportion of our Europe customers that can receive gigabit-capable connections through our owned network and continue to work with strategic partners to provide cable and fibre access.

 

 

 

D ⫶ Committed to improving returns

Disciplined capital allocation to drive shareholder returns

The objectives of our portfolio activities over the last three years have been to focus on our two scaled geographic platforms in Europe and Africa; achieve converged scale in our chosen markets; and deliver a structural shift in asset utilisation. We are now a matrix of country operations, products and platforms and will continue to be disciplined in managing our portfolio, following three principles:

·    we aim to continue to focus on the converged connectivity markets in Europe, and mobile data and payments in Africa;

·    we aim to achieve returns above the local cost of capital in all of our markets; and

·    we consider whether we are the best owner (i.e. whether the asset adds value to the Group and the Group adds value to the asset) and whether there are any pragmatic and value-creating alternatives.

Our capital allocation priorities are to support investment in connectivity infrastructure; maintain a robust balance sheet; and support improved shareholder distribution.

Our growth strategy requires a greater level of investment, in four major areas.

·    We will continue to invest in leading gigabit networks by upgrading our fixed networks and rolling out 5G 'built right'. To help fund this, our new Technology operating model will drive a higher level of efficiency in unitary spend, while greater standardisation will eliminate duplication.

·    We will have a stronger, more comprehensive product offering in every market, particularly in Vodafone Business, to accelerate our revenue and profit growth.

·    We will accelerate our digital capabilities, which will ultimately help us sustain margin expansion, strengthen our direct channels and build further differentiation in our customer offer.

·    We are retaining the flexibility to support Vantage Towers in realising its own growth ambitions, particularly in the high incremental returns opportunities of new build-to-suit sites and ground-lease buyouts.

Medium-term financial ambition

During this next phase of our ongoing transformation to be a new generation connectivity and digital services provider, we are committed to improving returns. The table below sets our model for value creation, alongside our medium-term financial ambition. Alongside this medium-term financial ambition, we have set out financial guidance for FY22 on page 13.

Value model	Medium-term ambition
Consistent revenue growth	Growth in both Europe & Africa
+ Ongoing margin expansion	Mid-single digit adjusted EBITDAaL1 growth
+ Good cash conversion	Mid-single digit adjusted FCF2 growth
+ Disciplined capital allocation	Net debt to adjusted EBITDA: 2.5-3.0x
= Sustainable value creation	ROCE3 greater than WACC
	A minimum dividend of 9.00 eurocents per share per annum

¹ Adjusted EBITDAal is equivalent to FY21 definition and calculation of adjusted EBITDA

²Adjusted free cash flow is free cash flow before spectrum, restructuring, integration costs and Vantage Towers growth capital additions. Growth capital additions is on a cash basis and includes expenditure on new sites, ground lease optimisation and other adjacency opportunities as defined by Vantage Towers

³Pre-tax return on capital employed (controlled)
 

Our purpose ⫶ We connect for a better future

We believe that Vodafone has a significant role to play in contributing to the societies in which we operate and we want to enable an inclusive and sustainable digital society. Our sustainable business strategy helps the delivery of our targets across three purpose pillars: Inclusion for All, Planet and Digital Society. We have continued to make progress against our purpose strategy and will provide a full update on our progress in our FY21 Annual Report.

Our significant role has become even more evident during the COVID-19 pandemic, as our essential network infrastructure has been critical in enabling people to work, allowing businesses to remain operational, supporting emergency services and giving access to education. Through our essential network infrastructure, our services and our targeted initiatives, we have kept people and societies connected. In response to the unprecedented situation, we continued to execute on our social contract five-point plan across all markets to help citizens, businesses and governments manage through the health crisis and cushion its economic impacts. We have also donated over €150 million to support those affected by the crisis through direct contributions and services in-kind, supporting millions of our customers, frontline workers and citizens. The Vodafone Foundation has donated an additional €10 million to local charities in our markets in the form of cash grants, gifts in-kind and from employee donations via the community fund.

In November 2020, we announced a further update with respect to our long-term ambition to minimise our environmental impact. We have committed to reducing our total global carbon emissions to 'net zero' by 2040 and confirmed that our 2030 carbon reduction targets have been approved by the Science Based Targets initiative. Our targets are in line with reductions required to keep warming to below 1.5°C, the most ambitious goal of the Paris Agreement.

This builds on a commitment we made in July 2020 to power 100% of our European network with renewable electricity by July 2021, creating a 'Green Gigabit Net' for customers across 11 markets that will grow sustainably using only power from wind, solar or hydro sources. Our accelerated shift to 100% renewable electricity on our European network, as well as our connectivity products and services, will help our customers reduce their carbon emissions, particularly our Business customers, while helping to create a healthier planet for everyone. This year, 80% of our purchased electricity in Europe was from renewable sources (FY20: 33%) and we are confident that we will meet our July 2021 target.

In December 2020, we were recognised by global environmental non-profit organisation CDP for our actions and transparency with respect to our environmental impact and secured a place on CDP's prestigious climate change 'A List'. This places us in the top 5% of companies that responded to CDP's 2020 climate change questionnaire.

Reporting

Vodafone reports against a number of voluntary reporting frameworks to help stakeholders understand our sustainable business performance. We will shortly be publishing a separate report that summarises our progress towards meeting the recommendations of the Task Force on Climate-related Financial Disclosures ('TCFD'), as well as a comprehensive spreadsheet that includes data on environmental, social and governance ('ESG') topics. We will also be reporting against a number of voluntary reporting frameworks to help our stakeholders understand our sustainable business performance, including guidance provided by the Global Reporting Initiative ('GRI') and Sustainability Accounting Standards Board ('SASB').

Governance

On 11 May 2021, the Board of Vodafone approved the creation of an ESG Committee as a principal committee of the Board. The ESG Committee will provide oversight of the Company's Environment, Social and Governance programme. This covers activities under Vodafone's Purpose - to connect for a better future enabling an inclusive and sustainable digital society, sustainability and responsible business practices, as well as Vodafone's contribution to the societies in which it operates in through its social contract.

Outlook ⫶ Resilient operating model supporting our growth investment plan

Performance against FY21 guidance

In May 2020, we set out our guidance for FY21 with respect to free cash flow (pre spectrum, restructuring and integration costs). Following a resilient performance in the first half of the year, we reaffirmed our free cash flow (pre spectrum, restructuring and integration costs) guidance and provided our expectation for adjusted EBITDA in November 2020. The table below compares the guidance given and our actual performance.

	Original guidance	Updated guidance	FY21 outcome
Adjusted EBITDA	-	€14.4-14.6 billion	€14.4 billion
Free cash flow (pre spectrum, restructuring and integration costs)	At least €5.0 billion	At least €5.0 billion	€5.0 billion

Outlook for FY22

Our performance during FY21 has been in line with our expectations and demonstrates the relative resilience of our operating model. We remain focused on the delivery of the next phase of our strategy.

Adjusted EBITDA will be referred to as 'adjusted EBITDAaL' from FY22 onwards, with no change to the underlying definition. Free cash flow (pre spectrum, restructuring and integration costs) will be referred to as 'adjusted free cash flow'¹, and excludes Vantage Towers growth capital additions.

FY22 Guidance

Based on the current prevailing assessments of the global macroeconomic outlook:

·      Adjusted EBITDAaL is expected to be between €15.0 - €15.4 billion in FY22; and

·      Adjusted free cash flow¹ is expected to be at least €5.2 billion in FY22.

Financial modelling considerations & assumptions

The guidance above reflects the following:

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

-   EUR 1 : GBP 0.86;

-   EUR 1 : ZAR 17.15;

-   EUR 1 : TRY 9.74; and

-   EUR 1 : EGP 18.89.

·      Guidance and medium-term ambition (see page 11) assume no material change to the structure of the Group.

¹ Adjusted free cash flow is free cash flow before spectrum, restructuring, integration costs and Vantage Towers growth capital additions. Growth capital additions is on a cash basis and includes expenditure on new sites, ground lease optimisation and other adjacency opportunities as defined by Vantage Towers