Vodafone Group Plc (VOD) Q1 2023 Earnings Call Transcript

Vodafone Group Plc (NASDAQ: VOD) Q1 2023 earnings call dated Jul. 25, 2022

Corporate Participants:

Nick Read — Chief Executive Officer

Margherita Della Valle — Chief Financial Officer

Analysts:

Andrew Lee — Goldman Sachs — Analyst

Emmet Kelly — Morgan Stanley — Analyst

Polo Tang — UBS — Analyst

Georgios Ierodiaconou — Citigroup — Analyst

Sam McHugh — Exane — Analyst

Robert Grindle — Deutsche Bank — Analyst

James Ratzer — New Street — Analyst

Jakob Bluestone — Credit Suisse — Analyst

Carl Murdock-Smith — Berenberg — Analyst

Jerry Dellis — Jefferies — Analyst

David Wright — Bank of America Merrill Lynch — Analyst

Presentation:

Nick Read — Chief Executive Officer

Good morning, and thank you for joining both of us for the Q1 updates.

Margherita Della Valle — Chief Financial Officer

Hello, everyone.

Nick Read — Chief Executive Officer

So before we start with the questions, I thought I’d make four points on the results that we went out with. First of all, we’ve executed in line with expectations for Q1, delivering another quarter of service revenue growth, both in Europe and Africa. Group Service revenue was up 2.5%, European service revenue up a 0.5%, and we saw an acceleration in business revenues up 1.7%. Particularly pleased with the UK business, so service revenues grew 6.5% and a double-digit performance in consumer and that was supported not only by price increases, but also the very strong commercial momentum that we have in the UK. I think it really is a good demonstration of the value versus volume formula that we think is positive for the overall industry and supports healthy returns and good investment.

Ssecond, we made good initial progress towards stabilizing our commercial performance in Germany. Our contract mobile customer base was stable in Q1 and our broadband customer losses halved in the quarter. We’re on track in terms of our customer journey and IHC issues in terms of resolving them within Germany by the end of summer as planned, and we should see a further gradual recovery in our commercial performance.

Third, we’re not immune to the current macro situation, but our business is resilient and with results in the quarter, in line with our expectation, we are reiterating our guidance for the year as we set out in May. And fourth, our near-term portfolio priorities remain unchanged. We continue to actively pursue opportunities for Vantage Towers and to strengthen our market positions across Europe.

And on that, we welcome your questions. If I could remind you please, can we stick to one question each so that everyone gets a chance. Thank you.

Questions and Answers:

Operator

Thank you very much. Our first question today comes from Andrew Lee from Goldman Sachs. Andrew. Please go ahead.

Andrew Lee — Goldman Sachs — Analyst

Yeah, good morning, Nick and Margarita. Is a a question around Germany where the key kind of investors, I guess is at the moment. The question was just specifically how you’re progressing with your actions to resolve those operational issues post the telecom law change and specifically whether you can or when you can stabilize the broadband base and what that means for service revenues? And if I may, just a broader question that everyone’s debating and in light of Telenet recently becoming yet another cable operator to accelerate its upgrade to full fiber network. Just if you could talk us through what the characteristics of your German cable business are that gives you the confidence that cable can really compete versus fiber. Thank you.

Nick Read — Chief Executive Officer

Andrew that was a multi-part single question. So you’ve managed to cover a lot of topics within that. I’ll let Margherita maybe talk to a bit around the outlook. But if kind — on Telenet I’ll just be very sure. I think you should look at cable executions on a market by market basis. There can’t be a read across because every market has very different circumstances, so Telenet, as an example, had a very specific JV arrangements and that JV partner had to basically agree to the path going forward, and I think therefore, it’s not a complete read across to others.

If I move across to Germany and the progress we’re making. First of all, let me start with the network then as you raised it. Very pleased with the progress we’re making on the network. I mean, we have been heavily investing and upgrading the network over, I would say the last 18 months specifically, and now we have just gone below our targeted congestion levels across footprint and we are confident that we can hold below those levels moving forward. So we’re pleased with what we’ve been doing on the network side and actually this summer we will be doubling the uplink capacity in, let’s say the heavier segments within the network. So even further enhancing the customer experience, and we will continue to do upgrade programs moving forward.

I’d say, specific to the challenges — the operational challenges we had, obviously we had IT and the customer journeys and we’ve made substantive progress there. First of all, in terms of IT stability. So our, sort of front-end system stability. We’re now achieving for the quarter 99.6%. We’d like to get to 99.7%. That’s the goal for the coming quarter. But stability is no longer an issue for us. We’ve also been working in a Pareto [Phonetic] basis, the key customer journies and made very good progress on the journies that count, though there are more to do over the summer period. And what I’d say is finally the backlog of IT tickets. So this is, if you like, the changes we need to do to our IT system. We had a backlog. We have cleared 75% of that backlog and on track to do the remainder 25% over the summer period. So I look back and say, look, we worked hard, we’re in line with our expectation. And as an aggregate, if you like, therefore of all of those actions were doing, we think we will have gradual progress on our broadband performance and we will see our sales stabilized during H2. I don’t know from a revenue…

Margherita Della Valle — Chief Financial Officer

From a revenue or from a service revenue perspective you have seen the sequential slowdown that we have had in Q1 ouarter-on-quarter. This is largely driven by the customer base dynamics, of course, and the decline we have seen, but particularly in fixed broadband because fixed broadband has been a key growth lever for Germany so far, and in the near term you should expect the service revenue to continue to slow in the coming quarter as a result of these dynamic. Now, there is always a lag in the flow-through from commercial performance into service revenue and this will also be the case, I’d say on the way up. As Nick mentioned, we have now stabilized the mobile base without the losses in the fixed broadband base and we are heading towards stabilization there as well. So in time this will also support the financials going forward.

Andrew Lee — Goldman Sachs — Analyst

Okay, thank you.

Operator

Thank you very much. Our next question today comes from Emmet Kelly from Morgan Stanley. Emmet, please go ahead.

Emmet Kelly — Morgan Stanley — Analyst

Yes, good morning, everybody. Thank you for taking the question. So you recorded Group service revenue growth of 5% in Q1. Can you maybe just talk a little bit, Margherita, about the puts and takes on the service revenue growth rate for the next couple of quarters, and if you could maybe just throw a reference into B2B or enterprise into the service revenue mix as well given the warning we had from AT&T and Verizon in the states last week? Thank you.

Margherita Della Valle — Chief Financial Officer

Sure. As you have seen, we have continued to deliver good growth in both Europe and Africa, 2.5% for the Group, 0.5% for Europe. Now, specifically for Europe, you should expect our growth to be a little bit more challenged in the next couple of quarters for the reasons I was just sharing wwith Andrew in terms of what the dynamics are in Germany at the moment, but also because we were in the near term had a bit of a drag from wholesale. We will lap the cost MVNO in Italy, exit Virgin in the UK. So that will be a headwind. On the older end we are expecting to get a good tailwind from the European recovery fund in the second half, particularly in Spain, it is going to become material. And we also expect good growth to continue across the Group with Africa reaccelerating.

Now you mentioned business and you mentioned the comments that you heard eleswhere and it’s I think important as we look to the mid-term that we mentioned the macro environment around the [Indecipherable] There is material uncertainty, inflation, war in Ukraine, is this going to have an impact on consumption. I can say that as far as we are concerned, in Europe we didn’t have any signal so far any optimization going on. If I think specifically about B2B, we have seen a good acceleration in our service revenue. We are not seeing any signals of any slowdown in the project work, which for example, could be a KPI indicative of that. But of course, we will continue to monitor and particularly as we look forward to the winter months, I think we will need to keep our eyes open to that. What I can say is that as far as our own performance is concerned, our execution at the moment is tracking well in line with our expectations and you have seen that we have reconfirmed the guidance for this fiscal year.

Emmet Kelly — Morgan Stanley — Analyst

Thank you very much.

Margherita Della Valle — Chief Financial Officer

Thank you.

Nick Read — Chief Executive Officer

Glad you made it through the tunnel. One of the few, yeah.

Operator

Thank you very much, Emmet. Thank you. Our next question today comes from Polo Tang from UBS. Polo, please go ahead.

Polo Tang — UBS — Analyst

Good morning, everybody. Just one question in terms of M&A. You’ve been very clear in terms of your desire to undertake M&A on Towers and pursue in-market consolidation in Spain, UK and Italy. However, with Orange formally announcing its merger with MasMovil Spain and Deutsche Telekom selling a controlling stake in tariffs suprise equity, how do you see your options going forward and cCan you give us your latest thoughts in terms of M&A in the portfolio?

Nick Read — Chief Executive Officer

Polo, I’d like to keep the discussion around M&A fairly high level because a lot is going on behind the scenes and we’re making good progress. But if I was going to sort of touch on the four areas, I would say first of all Towers. We have had and continue to have extensive conversations with a number of players around Towers. The objective is very clear and I have shared with you before the fact that we want to partially monetize. We want to deconsolidate was staying in co-control, and we believe we can achieve that objective and working hard on it as a priority area.

I’d say secondly Egypt, I would say, has been a slightly longer process. You have to get to regulatory clearances. One is the national regulator authority and then the second one is the financial regulator authority. We are nearly at the phase of closing out the first and then we will have to move to the second. So that has been slightly protracted. But we are confident that we can close that out in the near term.

I’d say the third area is the market consolidation, and I really can’t go into any details. We are active across the four markets that we said were a priority. And then finally in terms of Germany, fiber JV. Very strong appetite in the market for obvious reasons I would say, and we are just at the process in the coming weeks that we will go into a down selection to a smaller number of players to advance those conversations. So clearly we’re working we’re all of these things and we’ll have more to share by the time we get to November results.

Polo Tang — UBS — Analyst

Great, thanks.

Operator

Thank you very much, Polo. Oour next question today comes from Georgios Ierodiaconou from Citigroup. Georgios, please go ahead.

Georgios Ierodiaconou — Citigroup — Analyst

Yes, good morning, and thank you for taking my question. I wanted to focus more on an update on opex and capex. I know the results are more about service revenues, but if you could share with us any thoughts — we are hearing from a lot of your peers are on labor cost, energy cost, calculations changing as we pass through the year, it will be great if we could get out this from you. And if you dont mind, just a clarification on the answer you just gave regarding Vantage. You mentioned partners, I just wanted to clarify whether that could include financial partners or whether you are still more focused on finding like-minded M&Os as your partners? Thank you.

Nick Read — Chief Executive Officer

Regarding partners for Vantage Towers, I mean we’re not restricting the list of partners that we engage with. Like minded just means that we share the same vision and strategy for Vantage Towers and what the potential opportunity can be for organic growth and inorganic growth. So it’s, but that’s more what we meant by like minded.

Margherita Della Valle — Chief Financial Officer

On costs and inflation, I would say two different sets of circumstances between, you mentioned energy and wages. I’ll start from the wage front because it simpler. We have now gone through effectively the cycle for this fiscal year in Italy, Spain, UK. Germany, we will move to the next round for the following year in January. So the situation is quite stable for us and we can reconfirm what we said in May, which is low single-digit increases on this front.

Energy is a completely different set of circumstances and we see very high volatility in energy prices in the market. If I go back to where we were in May, I think you’ve heard me say that we were at the time three quarters hedged for this fiscal year, roughly 75%. But even with that we were forecasting a 200 [Phonetic] million year-on-year increases of energy opex. And well fast forward to today, two months on, prices have gone up again, our hedging has progressed as well. So we are now 85% hedged. But on the back of the geopolitical news flow, prices have continued to increase. And if we were using the current spot prices, the year-on-year increase that was 200 [Phonetic] million two months ago is approaching now 300 [Phonetic] million for for us. There is a substantial level of uncertainty surrounding the energy, environment, clearly the key driver is the geopolitical news flow, as I mentioned, but also what will the governments do about this, will they take action as we have seen happening in Spain or not, where will consumption go, will consumption decrease and ease on prices or not. I think it’s very difficult for us to speculate on that. What I can maybe build on it is what we are doing about it. We are clearly working on the edges like everyone is at the moment we are hedged almost 40% also into FY’24. But the most important lever we have is to progress more long-term structural deals like PPAs, power purchase agreements. It’s a much quieter market, has not been as volatile. So we are working to expand on that front.

Georgios Ierodiaconou — Citigroup — Analyst

Quite clear. Thank you.

Operator

Thank you very much, Georgious. Our next question today comes from Sam McHugh from Exane. Sam, please go ahead.

Sam McHugh — Exane — Analyst

Good morning, guys. Just to follow up on that last question actually. I was trying to the the mental gymnastics, but I’m not awake enough this morning. For next year, FY’24 assuming energy prices were to remain as our spot prices, what is the step up in energy costs for FY’24 versus FY’23? Thanks.

Margherita Della Valle — Chief Financial Officer

We’re still a very long way away from FY’24, Sam. So I think it’s early to do to do sort of calculations on that basis. But if I can, again sort of go back to what — how we look at it. So first of all, we have hedges in long-term contracts in place that are helping mitigate that and we think there is a good opportunity to expand. We used to have only about 5% — 5% to 10% of PPAs in our renewable portfolio and clearly this can be extended. And if you look at the pricing in the PPA market, it’s a fraction of what the forward curves are. But also beyond that, the uncertainty is just very significant on the elements I was calling out before, particularly around government intervention. And also I would say you shouldn’t consider this in isolation. I’d say if prices were to remain at same level as they have today in the forward curves for FY’24, I think we will have to see much bigger adjustments in the broader economy if we get there and also for the industry and in that context, certainly pricing has also to be — to become a keythrough in that respect. But there is still some way to go and we need to sell how the geopolitical environment evolves.

Nick Read — Chief Executive Officer

And as you can through the loyalty, we are targets in a 15% reduction across any aspects of our business.

Sam McHugh — Exane — Analyst

And I’ll keep to just one question that way as all, reduce time on the conference call. Anyway, I was going to ask on the [Indecipherable] and hedging know, can you say what price the [Indecipherable] hedged out, is that higher than in the current prices, I don’t know if it makes sense to give any detail on what’s been locked in already.

Margherita Della Valle — Chief Financial Officer

Yeah, so maybe, the best way to describe it is more than half of that was already locked in before the Ukraine war.

Sam McHugh — Exane — Analyst

Okay awesome.

Margherita Della Valle — Chief Financial Officer

So we have a long-running base to count on. And again, we are extending the structural 10-year deals, which are PPAs, which as you will have seen are not anywhere near the multipels of historic highs that I think are what the current — the forward curves indicate at the moment. By the way, as I said already in May, clearly there is a lot of uncertainty. At some point, this headwind will have to turn into a tailwind and you see it in the forward curves, you see it in the PPA pricing, it’s not going to last let’s say forever, but there is uncertainty clearly.

Sam McHugh — Exane — Analyst

Excellent. Thank you very much.

Operator

Thank you very much, Sam. Our next question today comes from Robert Grindle from Deutsche Bank. Robert, please go ahead.

Robert Grindle — Deutsche Bank — Analyst

Good morning. Thank you. Nick, I’d like to pick up on your value versus volume point. I reckon the UK is seeing mobile service revenue per gigabyte falling by around 12% year-on-year, which is probably lower than the annual deflator of your unit capital perhaps for the very first time. It feels like a big deal. Behind your comment, is it that you’re optimistic you will see slowing mobile volumes, thouugh a much better return economics as unit price deflation improves across the Group is not just the UK, but saying lower falls in unit revenues. Thanks.

Nick Read — Chief Executive Officer

I’m sure, Margherita and I have some builds, but I sort of stand back and think this industry needs to improve returns and governments want investment, and they want to accelerated investment to be globally competitive. And so with that mindset I think that there is a view that when you look at the pressures coming from energy, we are not going to recover that just by chasing customer volume. I mean, I think that’s — that would not be a productive path to better returns and therefore pricing has a part to play. Now of course, we can’t really talk about pricing too much, but what we’re saying is we need to be very proactive and I think we need to be systematic and structured and sequence in at the right time, various actions market by market, depending on the circumstances. These two things I think are really important.

From a structural perspective, there is; number one, the market leader, if you like, the largest player in each market needs to play their part on driving a healthy sector. So what are they doing. And then I’d say secondly is very important that there is front book discipline if you going to take pricing action. And if we use in the UK, as an example, we led on the front book both mobile and fixed — fixed stock. So I’d say that basically everyone followed in the marketplace. Mobile, we have yet to see that movement on the front book. Now, of course, there’s time and energy will be an increase in pressure for people to reconsider, but these are the things that need to be in place. So the leader needs to play a role and there needs to be from book discipline. But I don’t know if you want to comment on other markets and Mechanism.

Margherita Della Valle — Chief Financial Officer

Yes, exactly. I think each — we are very engaged on this topic and we have been for some time now, different mechanisms and approaches in different markets. The UK model is now embedded in the contracts across five of our European markets, UK, Ireland and three other cluster markets. And where t’s been activated so far, it’s landed. Well. I think it has established itself well. We are not progressing exactly on the same way across markets and if you move towards Southern Europe, in Italy and Spain at the moment our focus is on simplification of our range of pricing plans and options. So if I take Italy as an example, we may have mentioned this in the past, we are currently midway through a migration of our full customer base in Italy from hundreds of legacy tariffs and options layered over the years to just five mobile plans, and this is an ARPU accretive migration. We have already contacted almost 4 million customers there and we are looking forward in the second half of the year to see the support from that in our results.

Nick Read — Chief Executive Officer

But what I’d finally say just to the point of the UK because everyone can get a little bit fixated on the percentage. We’re talking GBP1 to GBP2 price increase per month per customer. When you put in that contrast of what the inflation is in food or fast moving goods or fule for your car or the energy bill, I mean, put it in perspective, these are very small. So we offer a huge value for money for consumers. Of course, we want to give a good network experience, service experience, wo we have to win [Technical Issues]

James Ratzer — New Street — Analyst

Consumer bills at the moment from meeting kind of inflationary targets are reasonably modest absolute sums of money, but yet saying that it seems that apart from in the UK industry as a whole is actually struggling to pass those relatively small euro per month increases through to consumers. So think if we could just kind of drill into the front book pricing in a bit more detail. I mean, Margherita, you just mentioned some examples of contract simplification you’re trying to do in Italy, but what else are you trying to do in, say, Germany and Spain, and in particular what are you seeing from the competitors in those markets because I’ve kind of get the feeling that it is still a struggle to push through front book price increases potentially because of competitive pressures as well. So it will be interesting just if you could dig into that in a bit more detail, please.

Nick Read — Chief Executive Officer

Want to give a perspective on our book?

Margherita Della Valle — Chief Financial Officer

Sure. As we were mentioning earlier, it really depends of circumstances. What I think is common to all of us at the moment is the impact of inflation on costs. And as Nick was mentioning earlier, we cannot expect to recover that, neither us nor our competitors can expect to recover that through volume growth. And if these increases remain structural, which as I was saying earlier, remains to be seen, particularly as we are heading towards the winter, it’s important that pricing becomes the tool. We cannot comment specifically on every market, but clearly we are closely following the competitive dynamics, and as you know, they depend on the market. So for example, in Spain, there have been some prices increases put through recently and we will keep our options open and under review in each of those individual markets.

Nick Read — Chief Executive Officer

Yeah, Jones, and I I would just build on some of Margherita’s point, and I’m just sort of reflecting on the various conversations that we’re having more sort of structurally is this yeah, you need to look at high-value customers. I think that tends to be [Technical Issues] and more converged. I think there is an opportunity through management, etc., and obviously the front book has to follow, but I think you’re seeing a number of countries putting through price increases at the high end, then you’ve got the value brands. I think the value brands to date have not been putting through price increases. However, everyone is going to be on the cost pressure, yeah, because of energy and various other things. So, this is might play the first year where you see those value brands having to respond. Otherwise, they’re going to face severe margin squeeze, and a lot of these don’t make a lot of money anyway or could even be negative. So I think suddenly there may be a reappraisal at the low end, just what they do.

I think importantly for the sector and something I talk to a lot of governments about is we need to do this to improve returns. However, at the same time we do an execution very much focused on the vulnerable. And so we have as a whole series of special social tariffs that we are executing and making it very clear what we’re doing in the area of full governments and also as part of that people that are struggling with payments. We’re not really seeing signs of that at the moment, but we anticipate when it comes to the winter, etc. So setting up dedicated teams to help customers understand how they can reschedule the payments to us, whilst maintaining service and connectivity. So we want to be proactive in that part of the social responsibility area, but that shouldn’t sort of whole despite from doing more broad price actions just like every other industry sectors to it.

James Ratzer — New Street — Analyst

And so on that, would you say relative to, say, three months ago when you last reported earnings, there is actually more receptivity within the industry to engaging on constructive pricing changes than we were back in May.

Nick Read — Chief Executive Officer

James, don’t make it souund like we’re coordinating pricing across Europe because that definitely is not happening. So what I’d say, pricing is very difficult to talk about. All I’m saying is the pressure from energy, it’s the I hear starting to feed through to the industry to say hold a minute, we’re not going to meet this up on customer volume, we’ve got to pull the price lever. Every other sector is doing it, why are we not doing it. I think there needs to be a response industry-wide.

James Ratzer — New Street — Analyst

Okay, clear. Thank you.

Operator

Thank you very much, James. Our next question today comes from Jacob Bluestone from Credit Suisse. Jacob, please go ahead.

Jakob Bluestone — Credit Suisse — Analyst

Hi, good morning. Thanks for taking the question. I just wanted to get back to Germany where you’ve had the improvement in net adds for both postpaid and fixed. But the one that adds metric that seems to be getting worse in Germany is for convergent customers. So a year ago you were adding about 300,000 consumer converged customers and by now it’s sort of small declines. Could you just help us understand what’s going on there? And is there sort of a shift in commercial strategy in Germany away from convergence? Thank you.

Margherita Della Valle — Chief Financial Officer

No, I think, Jacob, it’s very mechanical. Think about it in the context of the [Indecipherable] acceleration we have seen. For the last couple of quarters fixed broadband net adds have been negative. So by definition this influences the base for convergence. We were offsetting that until last quarter because we were running marketing campaigns, specifically on convergence, these have paused in this particular quarter and why you have seen the numbers broadly flat. But we continue to see a significant opportunity to grow convergence in Germany, and as the fixed broadband base numbers we stabilize and then grow again, then you should expect to see this continuing to grow.

Nick Read — Chief Executive Officer

And just why we paused, it was just we’ve been dealing with the customer journey and prioritization within the business. So we just said, utimately we just paused while we work on some other things that are higher priority and then we’ll start here.

Jakob Bluestone — Credit Suisse — Analyst

Very clear. Thank you.

Operator

Thank you very much, Jakob. Our next question today comes from Carl Murdock-Smith from Berenberg. Carl, please go ahead.

Carl Murdock-Smith — Berenberg — Analyst

Good morning. I wanted to. I wanted to follow up on James’s question [Technical Issues] receptivity in the market with regards to kind of operators, I wanted to kind of go back to the social contract [Technical Issues] briefing, but obviously that looke to, there is more political uncertainty and instability and change in leadership now across several markets than we’ve seen in recent years and our politicians are kind of balancing the long-term importance since you’re talking about the need for investments with the near term paying and potentially populist agenda of control the cost of living process, how receptive the governments to conversations around the social contracts now versus where they were say say six months ago. And then also just a follow-up on the Virgin MVNO revenues. At what rate should we expect those to fall off across the coming quarters. Thank you.

Nick Read — Chief Executive Officer

Well, I’ll let Margherita deal with the second. In terms of the social contract, what I’d say is that the pandemic created a tailwind of engagement. In other words, the intensity the governments deal with us, and I don’t see that diminishing. So frankly, if I go into a market, governments want me, I want to talk about investment because in the end, let’s not forget, okay we’ve had the UK more, but essentially the biggest thing they’re trying to drive is the digital agenda because they know that that’s huge for economic growth of Europe moving forward. So it’s a very prominent in the mind about the long-term drive and investment that they need and so they want to engage on that, what can I do. And of course, the EU recovery funds has a big digital agenda component to it. And all of the markets have said what the programs are going to be and now they’ve got a very short period of time to execute through those programs. So they’re very engaged with us through that.

I’d say secondly, our response for the Ukraine has been excellent, I believe, as a company we’ve been recognized by Europe and many of the countries for the proactivity that we had in terms of supporting refugee camps, migrants here, just all the problems and issues that surfaced from Ukraine. Of course, we continue to support a partner in that market. So what I’d say is that the gain itself is just increase the conversation, adding security, resilience to the conversation. So I’d say no, there has been no — the one thing that we do need to make sure that they understand is all the things we are doing for the vulnerable in society and the comments I was making before. And I think we’ve been very proactive in that and we draw that to the retention as well. So what I’d say is good positive dialog with governments. I think the sector is definitely moved into a different position of strategic importance critical and a sector that’s lend into supporting society, understands its societal role. And so, no, I would say continue to be supported.

Georgios Ierodiaconou — Citigroup — Analyst

On the Virgin MVNO, Carl, see it as neutral to the year-on-year growth of the UK in FY’23 over the full year. We expect the same identical contribution that we had last year on the basis of our timing of exit expectations. Clearly within the year it is front-end loaded to the first half, will become negative in the second half in terms of how many 10s of basis points that means you can work it out of the other revenue line in the UK, that’s the important driver that. But overall for the year, neutral.

Carl Murdock-Smith — Berenberg — Analyst

Okay, thanks so much.

Operator

Thank you very much, Carl. Call our next question today comes from Jerry Dellis from Jefferies. Jerry, please go ahead.

Jerry Dellis — Jefferies — Analyst

Yes, good morning. Thank you for taking my question. When Deutsche Telecom announced the divestment of stake in its tower asset to infrastructure investors, they were of course willing to give up control in return for some quite strong contractual protections. So as you think about your own sort of opportunities around Vantage Towers, does co-control really still need to be a red line? And then on top of that, I’d be interested in whether there is a possibility that you might be willing to, for example, reframe elements of the MSA contracts in order to get a deal done? And then finally, perhaps if you could comment on whether you see this as being sort of an urgent situation to resolve or whether really it’s just still mostly important just to make the right decision and take whatever time that requires? Thank you.

Nick Read — Chief Executive Officer

I think my short answer to these, because I mean we have, obviously, we’re actively involved in discussions, so I don’t really want to go into too much detail. I wouldn’t call it an urgent situation. What I call is that top priority and there is a slight difference about we want to get the best outcome for our shareholders and that’s what we’re focused on in terms of value creation and therefore we will look at variants, of course, to deliver the best outcome for our shareholders.

What I’d say about co-control is I don’t think that us co-control in the construct that we are discussing is inhibiting anything around value. So I think we have a strong interest by serious players and so for our objectives do not stand in the way of value from a transaction perspective. In terms of the MSA, I mean if there was a strong reaction to some of the closes, of course, we’ll sit down and discuss and you have to go through the equation, we must remain competitive as a commercial business. So we’re not about maximizing the tower value at the expense of competitiveness of our commercial business, it’s got to be a balance. Yeah, so we think we pitch the MSA currently with that amount balance and bear in mind, I was on in this Towers board for about four years. We took a lot of advice from the American operators and other operators rto see what the optimal MSA would be. So there’s a long process to get to. What we felt was the right MSA. So we would — we would challenge hard the need to change it, put it that way, but of course we’re always open.

Jerry Dellis — Jefferies — Analyst

Thank you.

Operator

Thank you very much, Jerry. We have time for one more question today and that will come from David Wright from Bank of America Merrill Lynch. David, please go ahead.

Margherita Della Valle — Chief Financial Officer

David, we can’t hear you.

Nick Read — Chief Executive Officer

There had to be one David, you are it.

David Wright — Bank of America Merrill Lynch — Analyst

There you go, there you go in so many ways. Okay. Yes, thank you for squeezing me in. And my question is, you mentioned the EU recovery fund as a a supportive tailwind in H2 and I think you’ve identified Spain as notably beneficial. What I wanted to understand is a lot of the opportunities with that also include, you — I’d say effective to resell products for some of the exposed sort of B2B clients perhaps. So, could we see a situation where we’re driving service revenues or put actually these are extremely low margin revenues so it drives the service revenue up, but we actually see the margins dilute a little, is that the way we could be thinking about that dynamic in the second half? Thank you.

Margherita Della Valle — Chief Financial Officer

Yes, not in any significant way, David. We have worked on our business cases very hard to make sure that we have the right margin from this product, I perfectly understand your angle. But actually we do quite a little — quite a lot of work on behalf of our SME customers because we are talking, if we talk about the Spanish plans of SME customers, we are doing quite a lot of work in aggregating and packaging the servicers and bringing them to the market from what could be a small companies themselves that are effectively offering those services. From that perspective, we are getting what I would consider a good margin, in the 30% space for the current digital toolkit activities in Spain, which I think is good and was clearly a key focus at our end. So maybe not the same margin as your — if you want at EBITDA level, pure connectivity, the adjusted EBITDA level, different versions on cash, but still quite good.

Nick Read — Chief Executive Officer

And David, one of the things, we made a very conscious choice because I agree with you, there is going to be a range of these EU recovery fund projects, some of which may now will a little margin and we made a very conscious decision. We have a bandwidth as an organization. We’re going to get very focused on where there’s good returns and where we can excel, and we are really focus down into three areas which we believe is good margin area, whether connectivity or digital services.

Ssecond was health, because these are big projects, have a lot of connectivity as part of them. Yeah, the thrid was in public sector where the connectivity was the main component we would build and someone else would do the fronting for the overall project. So we didn’t want to get into the complexity of some of those projects. We just wanted to be the connectivity provider.

Margherita Della Valle — Chief Financial Officer

We have really opted for overall capex light approach and therefore Group margins on EBITDA translate in good cash flow margin.

David Wright — Bank of America Merrill Lynch — Analyst

If I could follow up on that particular capex light approach, one of the obvious drivers to improve the return on capital in Spain is to move to a more capex light approach. I did notice the Masmovil deal selling cable and cable investors, bit of a classic sort of telco infrastructure deal. You did mention about, I guess Nick in your sort of portfolio of summary. But is that the kind of deal that you guys could consider sort of a de-capitalization of the network capex in Spain?

Nick Read — Chief Executive Officer

Yeah, so we are actively looking at the fixed network and looking at options for that. If you look at the objectives that we’re trying to achieve. First of all, we want to future proof the network and access. Secondly, we want to drive high utilization. And third is, we think there’s an opportunity to create value for shareholders. So we’ve started that process, we’re going through with it. There are obvious players that would be talking to, and then there are other players. So is is a very interesting space and it’s definitely something that we will be able to update in November.

David Wright — Bank of America Merrill Lynch — Analyst

Okay, thank you for your answers.

Nick Read — Chief Executive Officer

I think on that look. Thank you for joining us on the Q1 updates. We look forward to engaging going forward. And obviously, see you in the November results. As you saw from our results, very in line performance, in line with our expectation and reiterating guidance for the year. So, thank you. Have a great break for those who are taking it. Take care.

Margherita Della Valle — Chief Financial Officer

Thank you.