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Hello, and welcome to today's Vodafone Group Analyst and Investor Call. [Operator Instructions] And just to remind you, this call is being recorded.So today, I'm pleased to present Nick Read, group Chief Executive Officer; and Margherita Della Valle, group Chief Financial Officer. Please begin.
Thank you, Hugh. Good morning, everyone, and thanks for joining us for this Q3 trading update. I'll take you through the commercial and strategic highlights, and then Margherita will concentrate on the trading performance in our major markets.So starting with the highlights on Slide 3, overall, we have executed at pace this quarter as the organization focuses on delivering the strategic priorities I laid out in our November update with momentum across our value drivers. This has not yet translated into better financial performance, with service revenues growing by 0.1% in the quarter, slightly lower than in Q2 given a slowdown in South Africa. However, we improved the consistency of our commercial performance in the quarter with clear improvements in Italy and Spain, in particular. As we looked deep in our customer engagements, selling more products to our existing base, I view churn as an increasingly critical metric. In Europe, our mobile contract churn declined by 1.4 percentage points in the quarter, which is a good start although there is still significant improvement to target. This supported good European contract customer growth of 201,000. Our success in fixed line continues, with 226,000 broadband net adds and 188,000 conversion net adds in Europe. In our Rest of World segment, formerly AMAP, data users and usage continued to grow strongly, up 8%. And for the overall group, we obtained our leading IoT position with 27% growth in connections. My second priority was to accelerate our digital transformation, and as part of this, to move the organization to a radically simpler operating model. We're making good progress as demonstrated by our restructuring announcements in Spain and the U.K., and we are very much on track to reduce net European OpEx by EUR 400 million this year. My third priority was to improve our asset utilization through partnering. We have announced 2 exciting partnerships in the past 2 weeks, extending our existing network sharing agreement with O2 in the U.K. to include 5G and a strategic commercial agreement with IBM for cloud services. I will touch on each of these later in the presentation. Given our progress, we are confident we will deliver our full year guidance objectives of around 3% underlying EBITDA growth and free cash flow of around EUR 5.4 billion.Moving to Slide 4, I would like to highlight the improvement in our mobile contract churn this quarter. We now have single-digit churn rates in a number of our markets which is testament to our leading network quality and customer service, have focus on driving convergence and the use of big data analytics to drive effective personalized offers. As you can see from the chart, the improvement is broad-based across our major markets. I have excluded Italy, given it's predominately a prepaid market.Turning to our European consumer segment on Slide 5, which represents 49% of service revenues. The chart on the left shows that our European commercial momentum improved during the quarter led by a much-improved performance in Spain. Fixed share gains remain a key driver of European revenue growth with 226,000 net adds in the quarter. This includes 414,000 new NGN customers, while a further 188,000 customers adopted converged plans. The right-hand side of the page shows the improving quality of our fixed broadband base compared to last year. 14 million of our 19 million broadband customers are now on NGN, up by 1.7 million year-on-year. Crucially, we now have 10.7 million customers on our NGN infrastructure or in our strategic partner's footprint both with highly attractive economics, as speed advantage versus incumbents remains an important driver of our share gains, with 73% of new customers in Germany now choosing plans with at least 100 megabits per second speeds. And last but not least, over 1/3 of our broadband customers are in converged bundles, which is one of the drivers of our improved mobile contract churn.Turning to Slide 6 and the Business segment, which accounts for 30% of service revenue. Here, we continue to outperform most of our global peers as we take share in fixed and capitalize on our leadership position in IoT, grown by 0.5% year-to-date. These growth opportunities are offsetting ongoing price pressure in mobile both from contract renewals in large corporate accounts and in the SoHo segment where lower consumer prices have an impact. As you can see in the chart on the left, mobile revenues have fallen by 0.9% year-to-date as a 5% ARPU decline offset customer growth. IoT revenues continue to grow strongly up 10% year-to-date, with 17% growth in connectivity offsetting the impact of a slowdown in the automotive market on our hardware-related revenues. Fixed, which represents 32% of segment revenues, grew 3.8% year-to-date, supported by a strong performance in our cloud business. Cloud services are a key opportunity to deepen our customer relationships with large corporates moving forward, which is why the IBM partnership announced this month is so important. Under the terms of this 8-year managed service agreement, we will retain the end customer relationship, and our customers will immediately have access to all of IBM's leading multi-cloud offerings. This multi-cloud concept is important because it enables corporates to access the best of AWS, Microsoft and Google's public cloud services, as well as the benefits of IBM's leading private cloud services. From a business model perspective, there are significant benefits for Vodafone. We will reduce our exposure to capital-intensive legacy data centers and will instead move to a capital-light variable cost model driving substantial long-term cash savings. This is a good example of improving our customer offering through partnering while simplifying our operating model and improving our asset utilization.Moving on to the Emerging Consumer segment on Slide 7, which accounted for 16% of group service revenues and grew at 6.4% during Q3. Here, we continue to see good momentum in contract net adds. However, in South Africa, prepaid gross adds were impacted by initiatives to reduce the one-off use of SIM cards. On the right, you can see how data continues to be the key growth driver for this segment. Data users grow by 8% to 79 million and 4G customers grew by 48% to 38 million. This supported strong data growth of over 50% in the quarter. However, looking at the bubbles below the chart, you can see that we still have a lot of opportunity ahead. Only 69% of customers use data services and only 33% of customers use 4G, although this is increasing rapidly, up 10 percentage points year-on-year. We are successfully monetizing this growth in all markets, bar South Africa, where we are in the middle of a pricing transformation to lower the unitary cost of data, which Margherita will talk about shortly. Another significant growth driver is our African payments platform, M-Pesa. Active customers grew 14% to 37 million.On Slide 8, I want to describe the exciting opportunity I see ahead for the group to improve asset utilization through 5G active and passive network-sharing partnerships. As we approach the rollout of 5G services, the industry has a window of opportunity to unlock significant industrial savings. Therefore, we have been actively engaged in discussions across multiple markets. On the left side of the page, I describe the key principles which are shaping our approach. First and foremost, this is about realizing material OpEx and CapEx efficiencies through sharing both the passive tower grid and the active 5G network elements. Second, we want to work with partners who share our focus on high-quality services maintaining a network differentiation versus value-focused players. Third, we want to share active equipment outside major cities, which we broadly define as cities with less than 100,000 population. As we have discovered in the U.K., traffic management in dense urban areas is highly complex, and this is especially the case where 1 partner takes a different commercial approach to the other. Typically, this approach still leaves scope to find efficiencies across at least 3/4 of the total sites in each market, while leaving the scope for differentiation in cities which is important for the Business segment.Finally, this approach naturally dictates a market-by-market perspective when evaluating different tower ownership scenarios. It also means that any monetization opportunities must wait until active sharing negotiations have concluded, and there is clarity on the planned shape of the newly combined network grid. The announcement on Wednesday of our intention to extend our existing network-sharing agreement with O2 in the U.K. meets all of these principles. We will share 5G services across 14,000 sites based on our existing combined passive infrastructure. We will also explore the scope to share fiber transmission networks driving further savings. At the same time, we will unwind existing 4G active sharing arrangements in around 2,500 sites in the major cities outside London. Once the active sharing group has been finalized, which typically takes around 6 months, we will be able to start exploring a potential monetization for CTIL, the joint venture which owns our passive tower infrastructure.Let me finish on Slide 9 by giving an update on our broader thinking on towers. Clearly, given our focus on driving industrial efficiencies through active and passive sharing on a market-by-market basis, followed by the potential monetization at a country level, we are no longer considering monetization options at a pan-European level for our towers. This approach also recognizes the fact that through our due diligence work, in some of our markets, there are frictional costs in setting up new independent tower legal entities, such as capital gains tax as well as different strategic considerations. However, on top of the market-by-market sharing arrangements, we continue to see a material opportunity to unlock efficiencies and drive the improved tenancy ratios through establishing a virtual TowerCo across our European markets with dedicated management focus. During the quarter, we have progressed a detailed due diligence on our towers, although there is still much to work to do given the volume and complexity. What we can conclude at this stage is quite encouraging. While our average tenancy ratio across the towers we control is around 1.4x, there is a significant difference between urban rooftop towers, which is typically harder to add new tenants given space, emission constraints and landlord-leasing issues; and masts, where there are fewer restrictions. In general, we have done a reasonable job of policing up air masts, with an average tenancy ratio of 1.7x, including 2x in Germany. However, in all markets, we are convinced that there are still further opportunities to improve given dedicated management focus. And with that, let me hand over to Margherita to review our trading performance in the key markets.
Thank you, Nick, and good morning, everyone. I will start by summarizing our overall service revenue performance on Slide 11, before getting into the main markets in more detail. As the chart from the left shows, on an IAS 18 basis, our organic service revenue growth adjusted for U.K. handset financing slowed quarter-on-quarter to 0.1%. The slowdown was primarily driven by Vodacom which reported negative data trends in South Africa yesterday.The chart also shows our growth on an IFRS 15 basis. As you know, we will be fully transitioning to the new standard next year for our management reporting. Based on IFRS 15, our growth would be slightly higher in the quarter at 0.4%. Ultimately, the differences between the 2 accounting approaches are small, as you can see from the prior quarters.The chart on the right shows that growth in Europe remains stable quarter-on-quarter at minus 1.1%. An improvement in Italy was offset by slightly lower growth in Germany, with the U.K. and Spain broadly similar. In the Rest of the World, which is effectively the same perimeter of the former AMAP region, we continue to see good growth in Turkey and Egypt, which partially offset the slowdown at Vodacom. Looking ahead, we expect group service revenue growth in Q4 to be softer, and this reflects a number of factors, including ongoing ARPU dilution from the commercial reset in Spain and the tougher prior year comparison in U.K. Business revenues. However, Q4 is expected to be the low point for European service revenue growth given our improving commercial momentum as well as easier comparisons ahead in Q1.Now moving on to the individual markets on Slide 12, with Spain (sic) [ Italy ]. When we last met in November, there were a lot of questions about our performance in Italy and Spain, so let me start with an update on our progress in these 2 markets. In Italy, the decline in service revenue moderated to minus 4.6% in Q3 compared to minus 6.3% in Q2. This reflected a number of positive dynamics which are summarized on the slide. Overall, competitive intensity reduced significantly quarter-on-quarter primarily because the main mobile network operators reduced their promotional offers. As a result, total mobile number portability volumes in the market were 1/3 lower quarter-on-quarter. And in December monthly volumes were 50% lower than at their 2018 peak, almost returning to pre-new entrant levels.As you can see from the chart on the right, our commercial performance in mobile improved throughout the quarter with minimal port-outs in November and December. Our second brand, ho, launched in June to specifically address the low-value segment of the market, continued to enjoy good momentum and we have now reached around 1 million customers. This is worth maintaining a EUR 2 premium compared to Iliad's current offer. Only around 10% of new ho customers are now coming from the Vodafone brand, well below our fair market share. Our improved performance also reflects last quarter more-for-more actions in prepaid mobile, which helped to mitigate the ongoing ARPU dilution as higher value customers trade down to cheaper plans. Additionally, we maintained a strong momentum in fixed, adding 78,000 customers in the quarter despite a EUR 2.50 price increase at the beginning of October. Turning next to Spain on Slide 13, service revenue declines were similar to the prior year -- prior quarter, at minus 7.4%, as the impact of our commercial repositioning continues to flow through into our financials. However, we have seen a stabilization of our commercial performance in the period, which is highlighted in the right-hand chart. During the quarter, competitive intensity reduced as the aggressive summer football promotions ended. Typically, the duration of promotional offers has reduced to 3 to 6 months compared to 50% discounts for 12 months in the summer. While net ports in October remained challenging due to a lagged effect from the summer offers, our performance improved during the quarter and we achieved broadly stable porting ratios in both mobile contracts and fixed in December. Our porting performance against MÁSMÓVIL remained in line or better than our targeted level of acceptable losses, and we actually recorded the fewest ports out to MÁSMÓVIL of all operators in Q3. Ports versus the incumbent also came back to a neutral position during the quarter as the summer football promotions ended. As a result, our customer trends improved, with broadband losses reducing to 6,000 from 69,000 in Q2, and TV customers growing by 13,000. However, the adoption of new commercial offers across our customer base is driving an ongoing ARPA dilution of minus 4.9% year-on-year. We will begin to lap easier prior-year comparisons from Q2 next year when we fully annualize the impact of our commercial repositioning.Within this challenging competitive context, the Spanish team has been focused on radically simplifying our operating model and then engage with unions on a reduction of up to 1,200 FTEs. Turning now to Vodacom on Slide 14, service revenue growth slowed sharply in the quarter to 1.5% compared to an underlying performance of 4.6% in Q2. As you can see in the right-hand chart, the slowdown was principally driven by South Africa, which declined by 0.9% in Q3 after a long period of steady mid-single-digit growth. This was driven by the impact of our ongoing pricing transformation strategy, which aims to lower unitary data prices, drive data usage and reduce our exposure to out-of-bundle revenues which are now only around 5% of service revenue.As part of this strategy, we offer general data promotions during the summer period. However, in the current recessionary macro environment, customers choose to optimize their spend rather than increase their usage. Consequently, data revenue growth in South Africa was slightly negative in Q3, having grown at 3.9% underlying in the previous quarter.Although our summer promotion have now come to an end improving our underlying performance, new out-of-bundle regulation will be implemented on March 1 with a full quarter negative impact of around 3 percentage points on growth. So we expect South Africa service revenue to be broadly stable for the next few quarters. Longer term, however, we remain optimistic about the potential for significant growth in data usage, which is now only 1.1 gigabit per month device. In this context, the upcoming spectrum auction is important as it will unlock significant additional capacity allowing us to further reduce the unitary cost of data. In addition, the international markets, which now represent over 1/4 of service revenues, continue to grow at a double-digit pace, supported by data growth and the ongoing success of M-Pesa.Moving on to Germany on Slide 15, growth slowed to 1.1% in the quarter compared to 1.7% in Q2. Our retail revenue trends remain robust as you can see in the right-hand chart, with growth of around 2%. However, declining mobile and fixed virtual network operator revenues from 1&1 have become a meaningful drag on our headline growth. As their customers migrate from our wholesale DSL to DT's VDSL, and from our 3G mobile network to Telefónica's 4G network, this drag will continue. Focusing on our retail revenue growth, the quarter-on-quarter slowdown was principally driven by the business mobile segment, which can be lumpy from quarter-to-quarter depending on large deals. However, we maintain good commercial momentum adding 165,000 mobile contract customers and 73,000 broadband customers in the quarter. Our converged customer base also increased by 95,000, and we now have 1.3 million converged customers. This has helped to drive a further notable reduction in mobile contract churn, which was down 1.8 percentage points year-on-year. During the quarter, we also continue to announce our fixed line capabilities. We have successfully switched off analog TV services from over -- for over 70% of our cable customers to support the efficient rollout of DOCSIS 3.1. We are now offering gigabit speed across 6 million homes and we aim to reach over 8 million homes by our fiscal year-end. On to the U.K. on Slide 16, you can see a consistent performance in the U.K., which grew 0.9% excluding the impact of handset financing, similar to the 1.1% reported in Q2. We maintain good commercial momentum across both mobile and fixed, which supported robust consumer service revenue growth of 2.1%. As you can see in the right-hand chart, our customer performance in mobile continued to accelerate, with 109,000 contract net adds supported by a 2.3 percentage point year-on-year improvement in contract churn. This momentum is the result of several successful commercial initiatives. In November, we launched a new loyalty program, VeryMe, which is accessible via the My Vodafone app. The initial take-up has been encouraging, with 1.2 million customers currently accessing the broad range of benefits available. Mobile contract ARPU was stable year-on-year as the impact of RPI-linked price increases was offset by the introduction of the new spend capping regulation in October. Around 1/4 of our customer base has elected to allow 0 monthly average. Additionally, mobile ARPU remains under pressure in the business segment. However, business fixed revenue continued to grow supporting a broadly stable overall business performance.Looking forward, in Q4, we face a tougher comparison in our fixed business, but the U.K. remains on a growth trajectory given our good commercial momentum and a record NPS.I would like to conclude the market review on Slide 17 by touching on the consistently good performance of what I would call our fifth European operating company, the Europe cluster. In aggregate, the cluster markets represent 12% of our service revenues, which means that they are collectively bigger, for example, than Spain. Service revenue growth continued to be very healthy at 2.2% in the quarter, similar to Q2. Customer growth also remains robust across both mobile and fixed, and we have now reached single-digit mobile churn in 4 of our markets. And with that, I will hand back to Nick for the summary.
Thank you, Margherita. If we just turn to Slide 18. Overall, this has been a quarter where we have executed at pace on our strategic priorities. While this is not yet evident in our near-term financial performance, I am confident that we are building the commercial foundations for recovery. We have begun to deliver more consistent commercial momentum, particularly in our key southern European markets, and churn is starting to come down. In South Africa, data pricing transformation will weigh on our performance over a few quarters, but I'm confident in the medium-term revenue growth outlook. We're accelerating digital transformation and are on track to deliver our targeted EUR 400 million in net European OpEx savings this year and to sustain this performance over the next following 2 years. The announcements we've made in Spain and the U.K., where we are rapidly simplify our operating model, also support this objective. And we have now announced important partnerships to improve our asset utilization with more to come. This progress means we are very much on track to deliver our full year guidance.So with that, let me hand over to the operator for your questions. [Operator Instructions]
[Operator Instructions] So we, first of all, go to the line of Akhil Dattani at JPMorgan.
I just wanted to touch on the comments you made around the service revenue outlook from here. You obviously said Q4 will be a bit soft in the quarter. Why? When we think about the message thereafter, is the message thereafter that we actually start getting structural rebound, and if there is, what's driving that, so what markets would you call out in Europe that support that? And linked to that, in Germany, I think you mentioned some B2B pressures you're facing. What exactly -- does this relate to that specific contract? Is that more broadened? I guess it's just linked to the whole message of European revenues. Do we see Germany getting better, too?
Thank you, Akhil. I will probably start from the second question just very simply. B2B in Germany, we see this, I mentioned it before on the slide, more as a lumpy movement. We've had a slowdown in Q3 versus Q2 driven by business mobile, but it is more related to specific deals. And therefore, we expected this to be, if you want, an up and down type of trend at the moment, I wouldn't extend it further. To your earlier question, how do we see the future revenue trends? From a European perspective, as I mentioned, we feel that Q4 should be the bottom. Clearly, you can always think there could be changes in the competitive environment, but what we see at the moment in our business is encouraging trends. We did mention the commercial performance. As you have heard, we are talking about good commercial performance in particular, supported by positive churn trends. And this should be the precursor of better revenue performance. But of course, very importantly also from an ARPU perspective, what we see is that as we get into next year between Q1 and Q2 we should see Southern Europe ARPUs lapping. In Spain, in Q2, we will lap in full the commercial repositioning that we made last year, you may remember we announced it in May. And in Italy, in Q1, we will lap the impact of the 28 days. So generally speaking, encouraging customer trends combined with lapping ARPU trends is what we are looking forward into next year in Europe.
We now go to the line of Robert Grindle at Deutsche Bank.
I'd like to ask a question about CapEx. You flagged today, Nick, on your strategy for greater asset utilization and your progress there, more network sharing, asset-light cloud with IBM, et cetera. On the other side, you've got an issue with Huawei, I think you were on the tapes this morning saying you suspended use of them in the core. How are you feeling about CapEx looking forward with these initiatives? Is the Huawei issue a risk at all? Are you comfortable [Audio Gap] a better outlook for CapEx given all your initiatives?
Yes, Robert, thanks for the question. I would say that we -- I really do believe that this -- as we approach 5G, there is this window of opportunity. And therefore, we are really moving at pace with many players, predominantly around Europe, to understand where's there an opportunity to more passively share and actively share. And I think we have the right formula in our mind now as to what that looks like, and we're seeing some good alignment with a number of other operators. So I think all that just underpins the fact that as we move into a 5G world, we feel very confident in our mid-teens capital intensity guidance. Specifically on Huawei, what I was really trying to make clear is I think we need to move to more a fact-based conversation. I think, at the moment, it is at a simplistic political level. And there is a big distinction between radio and core. We are predominantly using Huawei in radio. We are continuing to use them in radio for 5G. However, in the core, we have put them on pause. They are not significant in the scale of our operations in the core, and therefore it's not a big financial implication. Though if we were having to replace them in the core, that would take a couple of years to execute. So it's more an execution complexity more than it is a financial consideration. Clearly, if there was a complete ban at the radio level, then it would be a huge issue for us, but it would be a huge issue for the whole European telco sector. And what, Huawei have probably, what, 35% market share through the whole of Europe. So look, I think that is a totally different consideration. But we now need to make it a lot more fact-based conversation. And I think you're going to see more and more operators doing that. We're putting the core on pause. We are not replacing at this stage because now is the moment to engage with the security agencies, with politicians and with Huawei to improve everyone's understanding and make it clear these steps that Huawei are doing in terms of the engineering processes that they are committing to for the security agencies.
So we now go to the line of Nick Delfas at Redburn.
So a question on towers, could you just explain a bit more on the timing of monetization in the U.K.? Also, you don't list the split between masts and rooftops. I just want to understand what scope you see for increasing tenancy in the U.K. and where you think those tenancies would come from.
So Nick, just in terms of specifically on timing, we've gone with a nonbinding heads of terms. I think we have very strong alignment between us about the various aspects of what we want to agree. However, we do need to now convert that into a detailed contract between the 2 of us. Typically, going through all of those details takes up to about 6 months to do that. Once you're at that stage, you really have a very clear, if you like, inventory MSA understanding of where you're setting anchor tenancy fees, where you're -- what control points you want. And therefore, we can have a more informed conversation on the monetization side. Just broadly, I'd say rather than just the U.K., in terms of tenancies, rooftops, masts, I would say from the presentation, you can definitely see the opportunity to lease up further. So this is why we still want to go with the virtual tower company in Europe.
Our next question is from the line of Georgios Ierodiaconou at Citi.
It's around Germany, and yesterday we had some news that one of your main wholesale partners would be participating in the auction and is looking to morph into an MNO. I was wondering if you could share with us what are your existing contractual obligations, what are your thoughts around this kind of moves, whether it entices you more to be generous with the MVNO terms or not to be there at all? Anything you can share on that would be great.
Yes, I mean, obviously, the current contract is commercially sensitive and confidential. But I would say broadly speaking on a -- it's a 3G-only contract. We are able to serve notice at any time on that contract. And then there's an orderly transition period because obviously, we would not want to disrupt their business or ours. So I would say it's a contract that has the right terms and conditions in it. More broadly, I think for Drillisch to go and change to an MNO, I think, is more a question for them. I think important considerations they will obviously be going through is the coverage obligations that they will have to meet. The fact that there is no firm obligation from existing MNOs to offer national roaming, clearly, I can imagine that MNOs may engage at rights commercial terms, but whether that ends up meeting the financial requirements is a different thing. And this is a big move for them to go from what has looked to be a very successful asset-light strategy into a slightly less-predictable, asset-heavy strategy, and therefore, what type of returns they can get as they fought infrastructure going in. So look, I think these are early days. Let's see how the spectrum auction turns out. Clearly, at this point, we [ can't ] engage ahead of the spectrum auction.
We now go to James Ratzer at New Street Research.
Question on Spain, please, in particular the kind of commentary you're making around Q4 getting a little bit softer. I want to understand a bit more behind that. The reason I'm asking is if I look at your Spanish trends, I'm trying to disaggregate between what's happening with losses on football customers at the high end and then what might be happening across the broader base. Because it looks to me, if I strip out the impact of the football losses, actually your trends this quarter have improved maybe by up to 100 basis points. So I'm trying to just get a better understanding on what specifically it is that then is causing more of a slowdown in Q4 that didn't happen in Q3.
Well, James, in Q4, we will effectively continue to see the impact of the pricing realignment that we did back in May last year. And we will continue to see the impact of the football customer losses. The impact on football should be seen in 2 ways, by the way. We have the customer losses on one hand, but we also have also the specific, if you want, revenues coming from football on certain customers that have been impacted. Looking ahead to Q4 at the moment, we do not see materializing in the market a widespread more-for-more trend that we had last year at this time. And therefore, we would expect to see, if you want, an inflection in trends with the visibility we have now more into Q2 where we will lap in full the prices of last year.
Okay. Are you able to give us any steer on the magnitude of the slowdown you might see, therefore, in Q4?
We're not giving specific market-by-market guidance on a quarterly basis, I'm afraid.
We [Audio Gap] to the line of Maurice Patrick at Barclays.
Yes, just on the U.K. market. So if I'm not wrong, you added about 40,000, 46,000 fixed broadband customers, another strong quarter. I saw CityFibre recently talking about accelerating their build and they're talking about a very strong 2019 build. I mean, can you share with us early thoughts in terms of the uptake in those CityFibre areas? I mean, the loyalty penalty appears to be a major issue in U.K. pricing right now. Your thoughts about sort of U.K. growth going forwards in CityFibre would be helpful.
Yes, look, we're pleased with the progress on CityFibre. The live -- they're building in 10, we are live in 3. Quarter 4, we'll be live again with another 2. So -- but in terms of actual commercial performance, it's just too early to comment. But I'd say we're pleased with the collaboration. So I can confirm, I think they are doing a decent job and now we need to commercially ramp up behind them.
We now go to [ RBC ] and Wilton Fry.
German manufacturing PMIs have been steadily falling from 62 in early 2018 to pretty much breakeven most recently. How can we be confident that the miss this quarter in Germany is just lumpiness as you said it was? If it isn't, is there any scope to adjust the purchase price of the German assets you'll be getting from Liberty?
I can take the question, thank you. I think if we look at our trends in Germany, clearly, we have continued pressure in enterprise in Germany as we had in previous quarter in terms of 2 areas particularly: the [ sol ] market, where there is a degree of competitive pressure; and the large corporate customers, where there is continued competition on refined. But in terms of the change in these trends, which have been present in the markets for a period of time, this is not the driver of what we have seen in the quarter as I was explaining earlier. Now this being said, I think looking forward and talking about manufacturing slowdown, I think it's important that we remember that our business is increasingly resilient. We have a large proportion of our revenues more broadly, if I look at consumer and enterprise, which are now coming from fixed line and even more so after the Liberty deal. And an increasing proportion of the customer base is also converged, so the mobile is linked to fixed. So I think it's important to keep this trend in mind when you look at the economy evolution.
Yes, and just to build on the Unity acquisition, look, the Unity asset continues to perform very strongly in the marketplace. And this is about a penetration execution. Customers want high-speed broadband. And you can see that we are winning and they are winning share in the marketplace off the back of a superior product in the market, and that product is a very resilient product because, effectively, it's the superior one in the marketplace. So we remain very confident on the asset, on the process and on the synergies and business case that we're holding.
We now go to Polo Tang at UBS.
Just got a question about the joint venture in the Netherlands. It doesn't make sense to divest of the asset in order to reduce group leverage. Or is the asset strategic? And are there any other levers that you have to reduce leverage?
Polo, I'm very pleased with the progress in the Dutch JV. I think that as they move into a growth profile now going forward, clearly, I can't talk about their results, they're due out shortly, but pleased with the momentum they've got. We have another important year ahead in terms of synergy realization. So we're not at the full run rate. They're tracking well, and I'm sure that they will update on their results. So look, I think this is a very strong asset and a strong marketplace. I mean, clearly, the marketplace has now gone down 3 players, and we're very pleased. And we think that it plays a good role in the portfolio we have, and so we're happy with status quo.
We're now over to the line of Jakob Bluestone at Crédit Suisse.
I had a question on Spain and Italy together. I guess in both markets you're sort of in the process of migrating customers across to new commercial offers. Can you maybe just give us a feel for how long you are with your back-book repricing? So what percent of subs have you migrated across to new offers? Just to sort of get a sense of how long we should be modeling out ARPU drag.
Thank you, Jakob. I would say very different dynamics across the 2 markets, first of all. If I think about Italy, clearly Italy is a prepaid market with, I would say, ongoing price movements which are both positive and negative. So as much as we are seeing within our base still the drag of -- [ if you want ] the migration to the more competitive environment that we have seen at the beginning of the fiscal year with after the entrance of Iliad, we are also seeing the opposite. And when you look at our service revenue profile in the quarter, which is better than the one of the previous quarter, it is very much driven by the fact that there have been more-for-more initiatives in mobile. In Italy, over the summer, we have added EUR 2 more-for-more ARPU increase in mobile. And then on the fixed side, also, there was a EUR 2.50 price increase. So I would say, in Italy, we work on a net, which is highly flexible on that basis. Spain is different. And in Spain, we have effectively the dynamic that you were describing, which is gradual adoption of the new offers in May. It is also a very -- a faster movement, I would argue, than compared to other traditional contract markets, simply because, in Spain, you do not have long-term contract, and therefore, the customer are freer to move than they would be, for example, in the U.K. We do expect, as I was mentioning before, to really see the difference in that evolution once we lap the repricing in May.
We now go to Jerry Dellis at Jefferies.
So a follow-up on Italy, really. I really wanted to try to understand exactly what it is that might sort of cause the revenue trend to sort of inflect from next summer onwards. Based on your disclosure, it looks like the retail ARPU of your mobile customers, including VAT, would be between about EUR 15 and EUR 16 at the moment. And obviously, Iliad has a price point of EUR 8. So even as you lap the 28-day billing point, what really is there to stop back-book customers continuing to sort of drift down to lower price points for really quite some time to come? I'd be grateful if you could sort of explain that, please.
So first of all, let me say that thinking about timing of a movement really -- we are in the prepaid market once again, so I need to make that caveat upfront. In terms of confidence in the trends, we are seeing the impact of our own pricing initiatives. And when we look at the mega issues that we see towards our competitors -- first of all, we have seen that in the last couple of months, if you take November and December, we are talking about a position which is effectively net neutral from Vodafone towards the rest of the market. And then when you think about the customers that are actually moving in Italy, you need to think that there is a tranche of the base which is actually, particularly, how can I say, sensitive to the competitive dynamics. There is a certain degree of recycling of customers across operator in the sort of the same price brackets. For us, if we look at the one which have been more sensitive to the movement, we look at the EUR 7 to EUR 13 part of the customer base. So this is the dynamic part, then you have at the other extreme less movement.
Yes, I mean, just to build on Margherita's points, I'd just make a couple of things. I think the point she's making about segmentation is really important. Don't be generic on the base. You have SoHo, you have high-value consumers. They very much care about the quality of the network, and there is a huge difference in network quality between us and Iliad. And frankly, Iliad's quality of network experience has been deteriorating, as basically they've loaded up with very high allowances. So I'd say just think about more the value seekers that tend to move around the market, it's very interesting, really Iliad is just experiencing it now, a churn themselves of value seekers saying I can't tolerate this quality of network and actually I could go to second brands like ours. So I think this is why our net ports are also improving. I think our positioning in the second brand has been really effective in the marketplace. And one of the important thing is we've been managing, if you like, cannibalization from our main brand over time. And now in the most recent months, it's down to about 10%. So 10% of, effectively, second brand customers are coming from Vodafone. So I think we've managed that. And then finally, I'd say, Iliad's sustainability at that current price point has to be questioned given the fact that they're not doing any network builds. So they're on a wholesale-variable model at the moment. And given the usage profile of their customer base, I think that this must be painful for them.
We are now over to Andrew Lee at Goldman Sachs.
So one is a question on your visibility on the top line. So you've given us great visibility on your cost outlook and on your CapEx outlook. And on the top line, I guess, what the market is saying today is it's not confident in your concession or your views of Q4 trough. So you've mentioned customer trends and lapping ARPU is giving you that confidence, but you also mentioned that, obviously, competitive cycles can change. So just wanted to kind of ask you or test your confidence level in calling a structural trough in 4Q. You've mentioned that churn reduction aids that. What other factors have improved to give you satisfactory confidence in the top line outlook? And maybe if you want to refer to the [ fairly to ] Spain and South Africa, which are the biggest uncertainties for investors. I mean, how can we share your confidence structurally that things are improving rather than just lapping into FY '20?
Can I do the simple version and then Margherita will correct me and do the proper version. I think we have called out really the pluses and minuses. Because you look at it, that we've got good commercial momentum. We said that we would compete in a -- more consistently in the high, the mid, the low, and I think you're starting to see evidence of that. You've got the technical lapping effect of Spain and Italy. So you can see that we are on an improving trend in those markets, ultimately commercially, and once we start lapping the pricing and the commercial actions that we took last year, you will start to see -- I mean, whether you want to call that easier comps. We have several markets that have been performing robustly, whether that's Germany, whether it's the U.K., whether it's Other Europe. So I'd say that's on the plus side. And then I'd say we got Germany wholesale, which obviously will continue to decline moving forward. We've got macro in emerging markets, which can be more variable given the uncertainty in the climate. So these would be the big ones I'd be calling out. I don't know, Margherita, if you've got a more -- okay.
Good summary.
Okay.
So we are now over to Stephane Beyazian at MainFirst.
It's a bit speculative, but in the event of a merger of networks in Italy between Telecom Italia and Open Fiber, I was just wondering if you can make any comment on possible implications for you. I guess, what I'm trying to ask here is what sort of guarantees you have in your contract regarding the access to the network at the attractive pricing that you've been able to sign with the company, and for how long.
Yes, what I'd say is -- I mean, I can't really go into the specifics of the confidential agreement, but what I'd say is we got the right protections, provisions in the contract that make us comfortable. I would say that, really, if you look at the subject generally, i.e., are you in favor of the combination going together, what I would say is, fundamentally, you would be because you'd say, one network, open access to all players on a level playing field is a positive development. However, I'd have a lot of question marks about how it would be executed. I think we'd have to be very careful on the governance, would it be true separation? And then the second one for me is, would there be any artificial loading of costs into the wholesale business. In other words, you're transferring economically benefits in TI and loading the wholesale at a disadvantage with higher wholesale cost for the rest of the marketplace. So I think there's a lot of work that needs to become on what looks like a simple -- and I think it'd be a very, very long process as well, which is clearly distracting. So we stay focused on driving with Open Fiber, let's see how it develops.
In that case, our final question is from the line of Adam Fox-Rumley at HSBC.
I had a question on South Africa actually. I wondered if you could talk about ways that you might be able to mitigate the out-of-bundle data revenue loss, which I guess we assume will come in Q4 as the new regulation comes into force. And then Vodafone management -- Vodacom management yesterday, sorry, made it clear that their assumptions were premised on an economic recovery in South Africa. So I wondered if you could talk about potential downside risk if that -- if South Africa doesn't see a recovery in the next 12 months.
Let me just sort of take the high -- look, our view is South Africa, obviously, has challenging macroeconomic at the moment. However, I would say that from a -- the President's perspective, I think they are pulling the right levers to improve the situation, whether we call it an economic recovery is another thing. But I think that we're seeing the right conversations taking place. A good example would be the Huawei, I mean as an example, I think that really is getting rediscussed as to whether it's the right thing, the right formula going forward. In terms of South Africa itself, look, we have been really good at doing transformations on pricing. We did this in voice for 5 years. We did it in a way that we improved the unitary costs while holding well the ARPU. We are going through that for data. Out-of-bundle data, yes, is an element that we have to manage through, we have to give more value. The most important thing we could get as a management team in dealing with the issue is more spectrum. Because if we've got more spectrum, it allows us to have a more efficient cost base, and therefore, we can move the propositions quicker for the customer which helps on that transition. So we're actively working on that spectrum. We hope for good news this year that we go ahead with an auction and we get enough at an appropriate price.
Just a couple of build on South Africa. Just one short term, obviously, the promo -- the summer promo is now terminated and that was a significant impact on our growth. And then longer term, I think supporting the trends with commercial momentum there as well. And then very specific to South Africa, the roaming deal with Telecom, which is building at the moment and will come into fully fledged impacts at the beginning of next year.
So thank you very much. Just to close, I'd say, look, I think it's clear from the Q3 results we are executing at pace on the strategic priorities we outlined. It's not yet evident on the near-term financials, but we are confident we're building those commercial foundations for recovery going forward. And I am sure that there will be news flow over the coming quarter. So look forward to seeing you all soon.
This now concludes this -- today's call. So thank you all very much for attending, and you can now disconnect your lines.