Vodafone dropped its full-year cash flow forecast and lowered its earnings guidance in response to rising energy prices and a decline in performance.

In response to rising energy prices and a decline in performance in Germany, Italy, and Spain, Vodafone dropped its full-year cashflow forecast and lowered its earnings guidance on Tuesday.

The European mobile operator had to deal with a "difficult macroeconomic climate," according to Chief Executive Nick Read, forcing it to lower its cash flow prediction by 200 million euros to about 5.1 billion euros ($5.3 billion) for the year ending in March of next year.

"We are taking a number of steps to mitigate the economic backdrop of high energy costs and rising inflation," he said.

He also added "First and perhaps most important, given the historical deflation in our sector, we've taken proactive price action throughout our European markets."

According to Read, Vodafone is increasing rates in 11 out of 12 markets, with the majority of those price hikes being inflation-linked.

The organisation, which must pay an increased energy bill of 300 million euros this year, also has plans to reduce costs by 1 billion euros over the following three and a half years, including by simplifying rates.

Vodafone cut its projected range for adjusted core earnings from 15 to 15.5 billion euros to between 15 and 15.2 billion euros.

Prior to the release of the half-year results, the market already had low expectations for the British group, with consensus cashflow estimates of 5.14 billion euros and 15.11 billion euros for core earnings. However, analysts forecast a drop in cash flow and earnings expectations for the year to March 31, 2024, which caused its shares to decline 9% to a two-year low of 95 pence.

German Slide

Vodafone blamed a commercial underperformance in Germany, its biggest market, and a one-off litigation settlement in Italy the previous year for the 2.6% fall in adjusted earnings it announced in the first half of the current financial year.

Due mostly to the loss of broadband customers, the fall in service revenue in Germany intensified in the second quarter to minus 1.1% from negative 0.5% in the first quarter.

Due to the fierce competition, it also performed worse in Italy and Spain for one quarter. However, it said that Britain was a bright light, with service revenue strengthening following increases in consumer prices and a return to business segment growth.

Vodafone plans to combine its British network with Hutchison's Three. Nick Read reported that the conversations were going well. Last week, he announced the sale of up to half of Vodafone's majority ownership in its mast subsidiary Vantage Towers to infrastructure investors and last month, he reached an agreement with Altice to create a 7 billion euro fibre network in Germany.

(Sources: investing.com, reuters.com)