Vodafone Group - Earnings Call - Q2 2026

Transcript

Speaker 7

Good morning, everyone, and thank you for joining us today. Before moving to Q&A, I will briefly provide an update on our transformation progress and financial performance. I want to specifically talk you through our operational execution in the first half in Germany and the U.K. In Germany, our turnaround continues, and in the U.K., we are now driving the integration of Vodafone Three, both of which remain top priorities. First, a quick recap on our position as a group. As you know, over the past two and a half years, we have changed both where we operate and how we operate. In the last six months, we have completed the reshaping of the group that I announced in May 2023. We have completed the merger of Vodafone Three in the U.K. and the acquisition of Telecom Romania's assets.

All of Vodafone's operations are now in a strong position at scale in all our markets. Importantly, all these markets have sustainable structures. Our capital structure has also been reset, with appropriate investment levels, a stronger balance sheet, and over EUR 5 billion returned to shareholders via buybacks and dividends over the last 18 months, with a further EUR 1 billion of buybacks to come over the next six months. Most importantly, we have also delivered a step change in our operational transformation. Whilst we still have more to do in our drive to operational excellence, we have boosted customer satisfaction, we have simplified our operations, and powered growth beyond traditional connectivity by expanding our digital and financial services. Now, mentioning growth leads me on well to our financial results. We performed well in the first half, in line with our expectations.

Our group service revenue growth has accelerated to 5.8% in Q2, supported by growth across Europe and Africa. On the profitability front, the group EBITDA grew by 6.8% in the first half, with nearly all our markets posting EBITDA growth. With this solid performance across the group and a positive outlook, we have confirmed today that we now expect to close the year at the upper end of the growth guidance that we set out in May. Alongside solid financial results, we have also made good operational progress in Germany and the U.K. Our two largest markets have different starting points and different competitive landscapes, but both markets are demonstrating the impact of our strategic priorities: customer simplicity and growth. Taking it to market in turn, Germany is the largest telecom market in Europe, and we operate at scale across both mobile and fixed.

In mobile, our 5G standalone network covers over 90% of the population and now serves over 40 million customers, including eins und eins, as well as almost 60 million IoT SIMs. On fixed broadband, we can offer gigabit connectivity to three out of four German households, more than any other operator in the country. Our gigabit broadband reach has indeed continued to expand during the quarter. We are now marketing OXG fiber to 1 million homes. Our brand is strong, and customer satisfaction in Germany has stepped up in the last two years. We have simplified customer journeys. We have introduced GenAI in customer care across chatbots and agent assistance, and our improvements across all call center KPIs are being recognized by independent testers. In terms of growth, we have followed a disciplined execution focused on value.

We have introduced new propositions in mobile, driving differentiation and upselling, and we have continued to increase front-book ARPUs in fixed. We also continue to expand our capabilities to satisfy the growing demand for digital services. Just two weeks ago, we announced the acquisition of an established cloud service specialist active across Germany and Europe. Looking at Germany as a whole, we are well positioned to drive structural growth as we have the right assets and the right team in place. A team that is fully focused on becoming the market leader in customer experience, a one-stop shop provider for fixed, mobile, and TV, and a trusted B2B partner of choice. Now on to the U.K.

We are the largest mobile operator in the country, serving almost 30 million mobile customers, and we are also the fastest-growing broadband provider, with the largest gigabit footprint of any operator, just like in Germany, as we are able to sell fiber to about 22 million U.K. households. Vodafone U.K. is already the market leader in customer satisfaction, and we are now extending our customer experience standards to Three customers. All of our customers are set to benefit from our GBP 11 billion network investment as we build the best-in-class 5G network for the U.K. We have made a very fast start. Independent tests are already confirming noticeably better speeds and coverage in less than six months.

In terms of growth, as you know, we have good commercial momentum in the U.K., which is now being supported by our cross-selling opportunities, with Vodafone broadband offers now open to Three customers and FWA open to Vodafone customers. Our multi-brand approach is proving effective in making the most of the market demand opportunities. The combination of these revenue synergies with our GBP 700 million cost and CapEx synergies gives us a strong growth trajectory in the U.K. We will leverage our unique assets in the market to extend our customer experience leadership, monetize our improved mobile network quality, and continue to drive fixed service growth. This is just our two largest markets. We hold leadership positions across our African markets, where yesterday the team reported another strong set of results in line with their medium-term double-digit EBITDA growth guidance.

We are excited about the future in Africa as it combines structural opportunities across all our services, from core connectivity to financial services to B2B. Coming back to the group in closing, our objectives continue to be the same: to improve our customer experience across our market, further simplify our business, and deliver sustainable cash flow growth in fiscal year 2026 and beyond. The turnaround of Germany, the U.K. integration, and our strong positions in growing markets across Europe and Africa all give me confidence in our growth outlook. With the reshaping of the group behind us, now is the right time to deliver on our ambition to grow our dividend over time. We announced today that we are moving to a progressive dividend policy. Luca and I are looking forward to your questions.

Speaker 5

Thank you, Margherita. As a reminder, please only pose one question to give all analysts a chance to speak. The first question this morning comes from Morris Petrick at Barclays. Morris, please go ahead.

Speaker 1

Yeah, hi, guys. Hope you can hear me fine. If I could ask a little bit about the EBITDA run rate for the second half and also next year. So you've delivered 6.8% organic year-on-year growth. You've tightened the guidance towards the upper end of the range. I think if I look at the full-year guidance, it implies 4%-5% growth for the full year. Your guidance, even at the high end, seems to imply a slowdown versus the first half, despite Germany probably having easier comps as you exit the MDU drag. Maybe you could help us understand some of the EBITDA sort of levers in the second half. I know you called out a higher SAC in the U.K., for example.

It is probably a bit early to talk about FY 2027, but if you could give us some indications of some of those building blocks, that would be very helpful. Thank you.

Speaker 7

Sure, Luca, all over to you.

Speaker 4

Excellent. First of all, of course, we are very, very pleased with our performance in H1 on the EBITDA front. This was really a combination of very strong emerging markets growth, the U.K. doing very well, and then Germany improving as well over the last year, given that the MDU impact is now dissipating and we had the benefit of wholesale. If you look forward to the second half, yes, our outlook at the high end of the range implies a slowdown. There are three factors that I would call out for that. On the positive front, we absolutely expect Germany to continue to improve in H2 because then we have zero MDU impact, and we will reach the full run rate of our wholesale migration of eins und eins this quarter. From Q4, we will then be at full run rate, just standing at around 11 million.

We're almost done with the migration there. This will help, of course. On the flip side, first of all, we continue to expect that our emerging markets' growth contribution will trend down, given that inflation moderates. You have seen some of that already in the first half year. I think that trend can be expected to continue. Also, the U.K., which had a very good first half, will see a slowdown in EBITDA growth first because I know I've talked about that already on the last earnings, but there should be a slowdown in top-line growth, in particular in Q3, as we're facing very tough compares, in particular in our B2B business, where we had a positive one-off last year, which should then sequentially increase and improve going into Q4 and beyond into FY 2027, but it will dampen the performance.

We also had some phasing impacts in the strong performance in the first half year in the sense that the marketing expenses that are planned for this fiscal year in the U.K. are more back-end loaded to the second half year. If you pair that up with the emerging markets' slowdown, that is driving the expectations. Now, fiscal year 2027 is, in particular for me, very far out, obviously. I am sure Margherita and Pilar will be back to give you a precise outlook going into fiscal year 2027. From my perspective, perhaps just some high-level puts and takes. First of all, we would expect the U.K. to be a very positive contributor and have a strong EBITDA performance based on the fact that we expect for the first time more sizable synergies from the merger coming together for this year.

There was really basically no contribution from synergies, but it will start to step up in the next year. In Germany, we will face puts and takes. Obviously, in the first half, the benefit from the MDU is being fully out of the numbers, and in Q1, still a ramp-up effect from the wholesale migrations. For the remainder of the year, they will be out of the numbers in terms of a year-over-year help. We will have to see what the market conditions do to see what that means for the German performance. Also, in FY 2027, I would continue to see a year-over-year challenge from an emerging markets' growth perspective.

On the positive note, I think what we are seeing is that the mix in our EBITDA contribution continues to shift back more favorably to Europe now in the balance between emerging markets and Europe, and that obviously drives also good predictability, which should be a net positive.

Speaker 1

Thank you.

Speaker 5

Thank you. The next question this morning comes from Akhil Datani at JP Morgan. Akhil, please go ahead.

Speaker 1

Hi, good morning. Thanks for taking the question. I've got a question around Germany, just to unpack a bit of what you mentioned, Margherita, around the turnaround initiatives that you've taken so far and how we see the fruits of that bearing into the numbers. You talked just through a lot of different things that you've done in Germany. If we look at the moment and we strip out the MDU effect and the eins und eins impact, the German revenue trends are still declining 2%-3%. I'd love to understand what you think it takes and the timeline to see that underlying momentum starting to improve. If we layer onto that the scaling effect of eins und eins, how should we think about the H2 outlook for Germany for revenue and EBITDA? Thanks a lot.

Speaker 7

I will maybe ask Luca to take the last part of your question on eins und eins, and then I'll talk to the actions that we are taking. We seem to have a mic to fix. Apologies for the.

Speaker 4

I hope I was still able to be heard in my first answer.

Speaker 5

Yes, you were. Please go ahead, Luca.

Speaker 7

Thank you.

Speaker 4

Thank you.

Speaker 7

One-on-one first?

Speaker 4

Okay, sure. First of all, in terms of our expectations for Germany overall, we certainly expect that Germany will continue to grow in the second half year. The wholesale support will obviously be a factor in that. I would also expect that towards the end of the year, our B2B performance will start to move upwards because we had very good success of contracting new digital services business. That always takes a while to come into the numbers, but that should be helping also the year-end performance there. In terms of the impact that it has had, I really prefer always to talk about wholesale as a whole because in conjunction with the eins und eins win, so to say, we had also then a subsequent loss of another smaller MVNO, Lycamobile, which went the other way around.

If you make the maths out of those, the contribution of both in the quarter was just above EUR 80 million as a whole. In the second half year, we would expect that the contribution from eins und eins will also be around EUR 100 million. In Q4, we are lapping then the loss of Lycamobile. Those are kind of the puts and takes to take into account in terms of wholesale momentum.

Speaker 7

In terms of underlying performance, so if we exclude wholesale, Akhil, you are absolutely right. It's broadly stable. If I look at the second half of the year, you shouldn't expect to see big step-ups, quarter on quarter. Over time, the actions I was referring to in my introduction, which are all speaking to the long-term health of the business, will actually support our top-line performance. It's a bit early to talk about 2027, as Luca was mentioning before, because I mean, also in Germany, we will obviously have to see what the environment will be, both from a macro and from a competitive perspective. Whilst we should expect the headwind in TV to continue, and equally, we don't have full control of the dynamics in mobile, the top line will benefit from these actions. Let me maybe bring this to life a little bit.

First of all, we have talked about customer experience improving. With customer experience improving, we are seeing churn reducing. It's coming through in our numbers. Clearly, the customer experience is improving because of the investments in our networks, because of the changes to our approach to customer service. Overall, net-net, the NPS is going up. We are continuing to beat record levels for us in fixed and stepping up in mobile. In some subsegments, we are now actually leading in the market. Clearly, there is more to do, but all this is playing in our numbers to churn. I talked to the work we are doing on ARPU and supporting value in the market. We really focus there on all what is in our control, and this is going to, again, help us.

In fixed, you will have seen, for example, us gradually moving up front-book ARPU in the last six months. The last moves were only three weeks ago, and we are seeing the benefits of that. In mobile, we have upselling. Finally, actually, Luca mentioned B2B. B2B is perhaps one of our biggest growth opportunities in Germany. We are investing in digital services. Again, you have heard the Skylink acquisition. It is growing double-digit. We see this as supporting growth going forward. All this as a package is really the result of the actions we have taken supporting our long-term health of the business as we go into FY 2027.

Speaker 4

Great. Thank you very much.

Speaker 5

Thank you. The next question this morning comes from Carl Murdoch-Smith at Citigroup. Carl, please go ahead.

Speaker 6

That's great. Thank you very much. I wanted to ask about the U.K. You touched in the presentation on making a fast start on integration. Can you provide a bit more color on your early actions and synergy delivery, and also comments on in what ways the commercial performance in Q2 and revenue has been a bit better than the decline you had suggested we could expect when you spoke at last quarter's results? Thank you.

Speaker 7

Maybe again, I will let Luca start with the outperformance on the revenue front, and then I will pick up on the integration.

Speaker 4

Yeah, happy to. I mean, normally CFOs don't like surprises, but in this case, I will make an exception because indeed we saw obviously coming into the merger a combination of a slowdown in Three that we have discussed at our last earnings call. Plus, we had the underlying challenge in our own business, so to say, before the merger with the B2B managed services terminations that we had to fight against. That was underpinning, I would say, a cautious stance. Also, if you take into account that the team, of course, was to be very busy on all of the integration steps. I have to say.

The teams together and driving for very, very positive actions in terms of rolling out our base management practices to Three, making early wins on the network quality and improvement front with the sharing of spectrum and now increasingly the activation of Mocken, which obviously is positive, in particular also helping the performance on the Three network. In that sense, we have seen a combination of improving churn trends, very good consumer performance, in particular in home broadband, which I think had the biggest net ads jump in the quarter that we have ever seen in a Q2 in the U.K. Also, initial cross-selling benefits and successes. FWA was a very positive story for us, and that in combination has outweighed the underlying decline in B2B legacy managed services to an extent that frankly was a bit better than what we would have expected. Very positive.

I should perhaps add as a last point that the good actual current commercial trading performance was not only in consumer, but we had actually also a good performance in B2B. Not enough, of course, to change the trends from the managed services side for this year, but of course encouraging if we move further beyond that.

Speaker 7

Just a bit more color on the actions. I'd say and reiterate, as Luca said, the team is doing a really great job. I think we are progressing at a pace that has not been seen before in U.K. telcos in terms of bringing the two companies together. Just to give you a sense, we are only a few months in, and we are already completing the integration of the third levels in the organization. On networks and on other operations, what are the things we are seeing? On the network front, we talked in Q1 about higher speeds for Three customers, the whole customer base of Three because of how we are using the spectrum together. I'd say Q2 was all about rolling out our multi-operator core network to allow customers to use seamlessly both networks.

You may remember me saying that we had a target of 8,000 sites upgraded for Mocken by year-end. Actually, it will be, I think, by tomorrow is the latest. We will get there this week. This obviously talks to the reduction of not spots for our base, you know that we are targeting a surface of 10 times the size of London. It is actually really visible today. You do not need to take my word for it. OpenSignal has already published a report saying it is noticeable and measurable. I cannot wait to tell you more about this in the coming quarters as we will also see the customer reactions, but it is a very strong pace. Operationally, beyond the networks and the teams coming together, what is also coming together really well now is what I would call our multi-brand strategy.

We now have a single team, for example, in consumer managing across all our brands. These brands allow us to cover all market needs and do this in a consistent, coherent way, which is quite powerful. As Luca mentioned, we have been opening cross-selling. That is obviously supporting our commercial momentum. We were already the market leader in growth in broadband. We are now offering our broadband offers to the whole Three base and the FWA offers to the Vodafone base. As you can see, almost the first things we are excited about at the moment are the revenue synergies, and these come, of course, on top of the EUR 700 million cost and CapEx synergies that are, of course, part of our business case. Good momentum in the U.K., and you will see this continuing ahead of us.

Speaker 6

That's great. Thank you very much.

Speaker 5

Thank you. The next question comes from Polo Tang at UBS. Polo, please go ahead.

Speaker 0

Morning. Thank you for taking the question. It's a question on Germany. There are proposed changes to legislation that will make it easier for operators such as Deutsche Telekom to access MDUs and deploy fiber. What's your view on the impact of these potential changes? Can you also talk to the economics for the OXG fiber JV? From memory, it's about EUR 7 billion of CapEx to build a footprint to 7 million homes. Can you remind us what the equity injections that are required for the JV are and how should we think about the wholesale costs that the German unit has to pay to the OXG JV longer term? Thanks.

Speaker 7

Thank you, Polo. I think I will take both sides of your questions, maybe starting from the Draft Telco Act, which is being discussed in Germany. There are a lot of measures as part of this that are all geared towards simplifying and accelerating high-speed network builds in Germany, for example, by simplifying permits processes. This is actually really good. It is good for the fiber build-out. It is good for the 5G build-out. I think the government is really pushing in the right direction in the country. Now, as part of all the discussion going on, there are some elements, and you referred into the in-building wiring debate that we feel are unnecessary, and we are openly sharing what I would call our real-life insights on what is happening on the fiber building.

I think it's very clear to everyone that the bottleneck in fiber building in Germany has nothing to do with housing association and has more to do with other factors such as construction capacity limits. Beyond that, today, these are discussions. There is no draft law to really comment upon, but just to take your point, even if all the discussions that are going on were translating into law for the reasons I've just described, actually the impact is going to be just a marginal maybe acceleration of the fiber building towards the housing associations, and that will benefit all players in the market, including OXG. It's unclear whether this discussion will ever become a draft law, and it's unclear at this point when this draft law will become law.

Assuming it happens, if it happens at some point in 2026, you need to keep in mind, and I'm going to the next part of your question, that by then OXG will be already marketing anyway to millions of customers in the housing associations. Standing back, I don't see this as a major impact on whatever speculation is going on, definitely. The other point I would say is that actually, if you take all the discussions that are going on in Germany across the Telco Act and across the Copper Switch-Off, again, I think it's moving in the right direction overall, and it will be supportive for telecoms overall. You asked about OXG economics, I think. On the equity injections, these are very small.

I mean, obviously, Luca could add any detail, but I think we said this when we were setting up the JV because of the, I would call it self-financing over time. It is really at the margin in terms of equity requirements, very, very small. On the front of the wholesale costs and revenues, depending on which side of the equation you look at, I think I have known that there has been some work going on on trying to, from an analytics perspective, get to these calculations. I think it is really important that you keep in mind that it is a very, let me say there are three nuances to the calculations that maybe are worth sharing, and IR can help you sort of bringing them to life more precisely than I can do in a call.

The first point is that there is no commitment or obligation whatsoever for Vodafone cable customers to be migrated to fiber into OXG. That just is not there. The second aspect is that 20% of the OXG footprint will be actually outside the cable areas. Then finally, obviously, penetration into the OXG households will build over time. It will build during the six years of rollout, which are exactly planned as you were describing, but it will also obviously continue to build after that. All this is very gradual, and I think brings to, I would say, a different conclusion than some of the calculations we have seen, but I would let really the IR team help you out on where to go. I would just say that we are really happy with the progress now with OXG.

You know that the first year, year and a half, obviously were challenging to set things up, but we have now already built to 350,000 households. We are opening the sales. We have opened the sales to 1 million households. We have connected the first customers. We have also opened wholesale. eins und eins and original operator are already connected, and 3 million households are already, let's say, committed in the construction orders. We have more than 30 construction partners. I mean, it's a big building site across many, many cities in Germany, and we now look forward to see this coming through in our numbers.

Speaker 6

Just very quickly on the equity. In three years, the equity contribution and injection was just above EUR 70 million. It is really, to underscore the point from Margherita, very, very small.

Speaker 0

Thank you.

Speaker 5

Thank you. The next question this morning comes from Emmett Kelly at Morgan Stanley. Emmett, please go ahead.

Speaker 3

Yes, good morning everybody, and thank you for taking my question. My question yet again this quarter is on Vodafone Turkey. On my numbers, it represents, I think, almost half of the organic EBITDA growth that we've seen since last year. I guess most notable is the EBITDA margin uptick at your Turkish business. Could you talk a little bit about the top line trends you're seeing there and expect to see on your cost management program, if you could say a few words on that? Thank you.

Speaker 6

Perhaps I can take this because indeed, I mean, Turkey has been a tremendous success story in the last couple of years, not only in terms of the financial success, which has been clearly there. Just to give you some absolute numbers, which are perhaps not so easily visible, just in the last two years, they have increased both EBITDA as well as cash flow by close to EUR 300 million each, which for the size of the business is obviously a tremendous improvement. That is in hard currency, so not in local currency. While that growth, of course, inevitably, as we had already indicated, has started to come down because of the lowering in inflation, it is still significantly outperforming inflation.

In absolute terms in EUR, it has still been in mid-teens on the service revenue front in the last quarter and was more than 20% up in hard currency for the half year. Where is this coming from? It is coming from a set of unique capabilities. Yes, the team has always been very prudent and forward-looking and leaning into the inflation environment by managing costs very successfully, but there is more to it from my perspective. Türkiye is probably among the best digital capabilities that we have across the group. They have a very high proportion of digital sales. They have a very agile base management model, like very targeted micro-segment related calls to provide them access to targeted upsell offerings, post-to-post migrations.

The team has really built a machine there around a set of digital capabilities that are very unique and that we are partially exporting also to other countries, such as the loyalty app, for example, the Happy app that we are now also rolling out in other countries. It is not only a story of cost cutting and riding an inflation wave, not at all. It is actually based on a very proven and successful management model. While I have shared before that as we think forward, certainly the inflationary trends will continue to recede and therefore growth may come down, I think they have been increasing also their relative competitive position in the market. I think that based on the strength of the management team will certainly continue.

Speaker 7

If I can just build on that, Emmett, for a second, looking at the group as a whole, we are extremely proud of Turkey, but I need to say we are equally happy about all our countries. We regularly publish in our reports the service revenue growth ex Turkey, given the hyperinflation environment, and you have seen this growing to 3% in the quarter. This is a reflection of the strength of the portfolio. We have Africa, of course, also growing strongly, double-digit EBITDA growth, which is in line with our upgraded guidance there. Overall, taking on the opportunities in the U.K. that we have just described and the turnaround in Germany, where we have now turned the corner with the top line, we are obviously looking forward to the profitability improvement.

All this taken in aggregate is, I would say, where we wanted to be through the group transformation. It is the reason why you hear us talking about an outlook of mid-term free cash flow growth. Yeah, every part of the group is contributing.

Speaker 0

Super. Thank you very much.

Speaker 5

Thank you. The next question this morning comes from Joshua Mills at Exane BNP Paribas. Joshua, please go ahead.

Speaker 2

Hi guys. Hope you can hear me and thank you for the question. I wanted to come back to the U.K. market and focus on your FWA proposition in particular. Following the Three UK merger, you're in a very strong spectrum position. You mentioned in your comments earlier that you're happy with how the FWA business is developing. Could you give us a bit more detail about the net adds on that business and what your longer-term ambition with FWA might be, how you balance that against the desire to grow on the fixed broadband base as well? Perhaps just one short clarification. When you have your FWA customers, are they included in your broadband numbers or your mobile customer numbers? Thanks.

Speaker 6

Yeah, I'll start from, I'll cover it all in one go. The net adds are in mobile because that's the supporting technology. And if I'm not mistaken, it's 17,000 in the quarter. They have accelerated, but let me talk to you about how we look at FWA more broadly. It's obviously a great opportunity for us to leverage what I would describe as our overall asset superiority in the market. We have, I was talking earlier, the largest fiber footprint available to our customers with 22 million households, but obviously fiber in the U.K. is not everywhere yet, whilst we will be offering FWA to all the population in the U.K. thanks to the capabilities that we have today.

We see it as an opportunity because it allows us to bridge the time until fiber comes and maybe cover areas also where fiber may not come at all in the most rural areas. If fiber comes, it's great to get our customers first on FWA and then moving them on as the time progresses. We really see it as an opportunity in the market. As I said before, it's now open to everybody, whether they are in Three brands or, I would say, ex-Three brands, ex-Vodafone brands. We look forward to see this support our growth.

Speaker 5

Thank you. Now to the next question from David Wright at Bank of America Merrill Lynch. David, please go ahead. David, we cannot currently hear.

Speaker 0

Oh, sorry, I'm on there. Yeah, I do apologize and apologize for no video, although maybe not a bad thing. Just a technical question, I suspect, just for yourself, Luca. Super straightforward. In the first half, adjusted EBITDA common functions was maybe a little, excuse me, surprisingly negative. It shows minus EUR 14 million. It has been running a fairly consistent clip of EUR 22 million-EUR 23 million in the last couple of halves. Just any explanation there and just how we should think about that full year number and maybe even into 2027. That is it from me. Thank you.

Speaker 7

It reminds me of the old days because when I was CFO, that was a recurring question. Ultimately, it's actually quite structured. Maybe you want to go to that.

Speaker 6

Yeah, exactly. If I go back in the history to Margherita's days before I arrived, I think historically common functions EBITDA was actually always negative. In the last two years, it turned positive as a result of some of the M&A activity that was going on, which created one-time effects. Last year, it was also helped through a quite sizable central provision release. That is obviously creating headwinds in the year over year. Structurally, from a go forward perspective, you should actually expect common functions EBITDA to rather be negative than neutral to positive. The reason for that is just simply that the help from kind of the M&A transition to also above the line EBITDA recognition essentially is dissipating.

Speaker 7

Just to come back to why it's been structurally negative, it's a very simple thing, David. It's because you know that our shared operations costs are paid for in the markets, but that's not the case for what we call corporate services. So just the HQ cost. I mean, if I take ourselves and the IR team supporting this call, right? These stay at the central EBITDA level, which is a cost, but don't see these as big movements.

Speaker 0

Okay. Can I take that H1 number and just double it for the full year? Is that reasonable? Just to get a proxy.

Speaker 7

It's an area that, again, because we're talking about small numbers, can have variations. I think we wouldn't be very specific at that level of detail, to be honest.

Speaker 0

That's great. Thank you, guys.

Speaker 5

Thank you. The next question this morning comes from James Fratzer at New Street Research. James, please go ahead.

Speaker 1

Yes, thank you very much. Good morning, Margherita and Luca. We have not yet had a question on the dividend, I think. It would be great just to get a kind of updated kind of thinking on cash return for next year and beyond, because I think in the past you have set out, you had a kind of ambition to grow the dividend and to be progressive. You have now been more quantitative, but just for this year, I think you have just set out the 2.5% for this year, but really not beyond FY2026. I mean, it looks to me like leverage is going to end up right at the bottom end of your 2.25-2.75 times guidance. Going beyond FY2026, how are you then thinking about what progressive dividend could look like and potential scope for any share buybacks going into next year?

Thank you.

Speaker 7

Sure, James. I have to take this one in this round, given that this is going to be the last call from Luca. Let me give you a little bit the broader picture on how we think about returns, as you are saying. First of all, we have given you good visibility on one component, which is dividends. We are talking about a progressive dividend policy, which means that we expect growth year after year going forward. The first year is expected to be 2.5%. We have been quite detailed. Of course, we will have to assess this every year from now on. Why progressive dividend policy? It is simply because you have heard us say when we reshaped the group and we right-sized the dividend according to the new shape, we were very clear from the beginning that our ambition was to grow the dividend over time.

In this half year, we have completed the reshaping with the U.K. The time is now, you know, that we have an outlook supportive in terms of mid-term free cash flow growth. It was appropriate to bring the ambition into reality. As far as buybacks, clearly these are also a component of our toolbox for shareholder returns. We are EUR 3 billion in the EUR 4 billion that we had communicated at the time of the various transactions. Starting today, the penultimate tranche, in the next six months, we will be busy on delivering another EUR 1 billion. Beyond that, we will have to assess our position. We will assess our position depending on, and I think you are spot on, depending on where we will be as a company, where the market environment will be at that point.

We will clearly assess it through the lens of our capital allocation policy that you were referring to earlier, which I think is very well known. Full visibility on the dividend decisions on the buyback when the time is right.

Speaker 0

Thank you.

Speaker 5

Thank you. The next question this morning comes from Paul Sidney at Berenberg. Paul, please go ahead.

Speaker 1

Yeah, thank you very much for taking the question. Good morning, everyone. Actually, the question around the Skylink acquisition, we've seen a lot of excitement in the sector around data centers, AI, cloud services, cybersecurity, you name it. Obviously, Deutsche Telekom announcing a pretty high-profile partnership with NVIDIA to build a data center. And Telecom Italia having a recent event looking at their AI capabilities. Just a very broad question about, is this really a material revenue driver for your business looking forward? Could we expect more similar acquisitions to Skylink in some of your other geographies? Thank you.

Speaker 7

Sure. Paul, let me try and give you a bit of an overview on how I look at this. First of all, digital services are now over a quarter of our B2B revenues. It starts to become quite material. It is growing really well. We continue to use the word double digit. It is basically double digit everywhere. It is double digit in Germany. Overall, I think there is a lot of potential for us to grow in B2B in these domains. That is why we have, even before the acquisition of Skylink, continued to invest. I mean, two years ago, for those of you who remember, I was talking about, again, for the long-term health of the business, stepping up the investment in B2B in these areas. It has all been about building capabilities to essentially respond to the demand of our customers.

Now, in terms of all the points that you have raised, I think it's really important for us to assess where there is demand, where this demand is best served by Vodafone as opposed to other areas, and where there are also good returns. We certainly see big opportunities to continue to grow on IoT. We could go on and talk for hours about IoT. We see equally very good growth for us already today in cloud, where Skylink operates. Cloud is a big contributor to our double-digit growth and also security with cyber in mind. We also think that our, I would say, most biggest opportunity segment-wise are in the SME space on all these services. So middle-sized company, why? Because these are the companies that are used to buy technology from Vodafone. We have been serving connectivity to them. We have strong partnership.

They look at us to help them. In these days, for example, serving cloud is a super big topic of conversations. We are well placed to help them with that. The more you go in the value chain, especially in Europe towards things like gigafactories and other areas, I think you will see us sort of prioritizing in a very clear way because in some areas, the economics have still to be proven. The capacity utilization needs to be proven. Therefore, we are very rigorous in the way we go about the opportunity to serve the demands by starting to address the areas which really for us are low-hanging fruits. To your question, yes, there will be more activity in this space in terms of building capabilities. Sometimes this may continue to involve small bolt-on M&A.

Speaker 1

That's really helpful. Thank you very much.

Speaker 5

Thank you. We have time for one last question this morning to allow all participants to observe the two-minute silence at 11:00 A.M. for Remembrance Day here in the U.K. This last question comes from Robert Grindel at Deutsche Numis. Robert, please go ahead.

Speaker 3

Good morning. Great to see your stock get its mojo back. I hope that translates to Italy and Germany, especially before Luca moves on. Margherita, the footprint's reshaped. You've merged the UK, not to mention all the operational stuff. This was a large intrade. What do you look forward to spending more time on with your new CFO colleague? We had the capital allocation question. You addressed that. More capabilities in digital seem to be underway. Do you see any footprint infill need, any more consolidation opportunity? Conversely, do you see that the Vodafone balance sheet needs further simplification? Thank you.

Speaker 7

As you indicated, we are really pleased to have, I call it, completed the building site after the last couple of years and get the group we wanted and see our position today being at scale with strong brands in all the markets in which we operate and these markets being markets where we have sustainable structure. This is all the foundations we needed for good growth. Looking forward, there is obviously much more to go for, but you should expect that not to make the headlines through M&A. You should expect that to be our continued execution of our transformation. Really, all we need today to make the most of our growth opportunities, be it in Germany, be it in the U.K., be it in Africa, is disciplined execution focused on operational excellence to make the most of what we have.

I mentioned earlier, customer simplicity and growth, our priorities have not changed. Our opportunities have not changed. It's great that today we are in a completely different position on customer experience, but lead and co-lead in 11 out of 15 markets is not enough. My number one priority will continue to be to push on that. Group simplification, we have made lots of inroads. I mean, we are completing this year, for example, roles reduction that we talked about to simplify the group when we announced the strategy. There is always more to do. We have the opportunity to become much more simpler. I mean, one of the slides, by the way, in our PowerPoint today is about AI because there is a lot to go for to make us faster, more agile. You mentioned B2B.

It's been a feature of this call, which I really appreciate because I believe it's a strong opportunity for us. If you think about it, we have a really strong competitive position there. We are trusted by businesses and governments across Europe and Africa. It's a fantastic growth opportunity. In all the areas we operate in, we have strong demand for our services. It's about really bringing, accelerating the growth in the years ahead now. It's in our hands.

Speaker 3

Great to hear. Good luck, Luca.

Speaker 1

Thank you.

Speaker 7

Thank you. We're on time.

Speaker 5

This concludes the Q&A session. I would now like to hand back to Margherita for any closing remarks.

Speaker 7

I would really like to take the opportunity to thank Luca. Last call. Luca has been a great support on, well, all the things we've talked about in this call. Thank you for your time, as always, today. I look forward to see you all in the next quarters. Thank you.