VODAFONE GROUP PUBLIC LTD CO annual report, Q4 FY2020

Business context and reporting period

Vodafone Group Plc’s Form 20-F is an annual report for the fiscal year ended 31 March 2020, not a report for calendar-year 2019 Q4. The company provides mobile, fixed-line, converged and business communications services across Europe and Africa, with investments and joint ventures in other markets. The financial statements are prepared under IFRS. IFRS 16 was adopted on 1 April 2019; comparative figures were not restated, which limits year-on-year comparability for some measures.

Financial performance and liquidity

Adjusted EBITDA and organic growth are non-GAAP measures. Reported revenue and EBITDA benefited from the Liberty Global assets acquired in Germany and Central and Eastern Europe, consolidated from August 2019; organic figures exclude material acquisition, disposal and currency effects. The company recorded €1.685bn of impairment charges, mainly in Spain (€840m), Ireland (€630m), Romania (€110m) and Vodafone Automotive (€105m). Net financing costs were €3.301bn, up from €1.655bn, including mark-to-market losses and lease interest. The year’s net loss also reflects these and other items.

Closing net debt was €38.369bn before the company’s adjustment for €3.799bn of derivative gains deferred in cash-flow hedge reserves; the adjusted figure was €42.168bn. The reported net-debt-to-adjusted-EBITDA ratio was 2.8x, compared with 1.9x in FY19. IFRS 16 added €12.1bn of lease liabilities at year-end, which the company excludes from its stated adjusted net debt measure. Cash and cash equivalents were €13.284bn and short-term investments €5.247bn; the company also reported €7.749bn of undrawn committed facilities. Average debt maturity was 12 years, and management reported no significant near-term refinancing requirement.

Material changes versus the prior period

• Revenue and adjusted EBITDA rose, supported by the acquired Liberty Global assets and cost savings; organic service revenue growth was modest at 0.8%.
• Operating profit moved from a loss to a profit, while the net loss narrowed substantially. Prior-year results included a large loss on the disposal of Vodafone India and higher impairment charges.
• Adjusted earnings per share declined 10.7%, mainly due to higher financing costs and a larger average share count.
• Net debt and leverage increased, reflecting the Liberty Global acquisition, spectrum-related payments and IFRS 16 lease accounting.
• Vodafone received €2.35bn of consideration in connection with combining its Italian tower assets with INWIT, including cash and an interest in the joint venture. It also completed the sale of Vodafone New Zealand and Vodafone Malta.

Outlook, commentary, risks and unusual items

Management described commercial momentum as improving and said FY20 results were in line with guidance; free cash flow before spectrum of €5.7bn exceeded its “around €5.4bn” guidance. For FY21, it expected free cash flow before spectrum of at least €5bn, based on prevailing macroeconomic assessments. Vodafone targeted at least €1bn of additional net operating-expense savings during FY21–23, on top of €0.8bn delivered in FY19–20, and expected capital expenditure to remain around 17% of revenue. These are management expectations, not guaranteed outcomes.

COVID-19’s full economic impact was uncertain. Management reported lower roaming revenue from reduced travel and expected economic pressure on customer revenue, while seeing higher data usage and improved loyalty. In April 2020, roaming in Europe was down 65%–75%, mobile data usage was up about 15%, fixed-line usage rose as much as 70% in some markets, churn fell 4–5 percentage points, and new gross consumer additions declined about 40%. The company reported approximately €100m of COVID-19-related goods and services donations.

Other material matters include a €235m provision for a potential payment under the Vodafone Idea contingent-liability mechanism, with maximum Group exposure under that mechanism capped at INR84bn (approximately €1bn). Vodafone advanced US$200m to Vodafone Idea in April 2020. The Indian adjusted-gross-revenue dispute remains a significant uncertainty. Vodafone signed a memorandum of understanding to sell its 55% stake in Vodafone Egypt for approximately €2.18bn; due diligence was extended, and completion was not assured. The company was preparing for a possible European tower-company IPO in early 2021, subject to future decisions. Principal risks include economic disruption, competition and pricing pressure, regulation, cyber and information security, technology failure, supply-chain geopolitics, and integration and transformation execution.

Important facts for investors to verify

• Reconcile reported and adjusted net debt, leverage and cash figures, including the treatment of lease liabilities, Indian secured borrowing and hedge-reserve adjustments.
• Check the scope and comparability of IFRS 16 and the non-GAAP definitions used for adjusted EBITDA, organic growth and free cash flow.
• Review impairment assumptions and sensitivities, particularly for Spain and Ireland, and assess whether COVID-19 or competition changes projected cash flows.
• Track Vodafone Idea’s ability to meet AGR-related obligations and the Group’s contingent exposure and payments.
• Confirm whether the Vodafone Egypt sale, INWIT-related plans and potential tower-company IPO proceed, and what proceeds or control changes result.
• Assess whether FY21 cash flow, cost-saving and capital expenditure expectations were achieved as trading and regulatory conditions evolved.