Good morning, and welcome, and thank you for joining us for our results call. Before we take your questions, I thought I would just cover four key points related to our results. Firstly, our financial performance in the year was good and our results were in line with both the expectations for the year and the medium-term financial ambition we set out earlier in this year. We grew revenues both in Europe and Africa. We grew adjusted EBITDA by 5%. We grew adjusted free cash flow to EUR 5.4 billion and delivered a real inflection point in returns with a 170 basis points increase in return on capital to 7.2%, well on the trajectory for returns to be above our weighted cost of capital.
Second, this good performance is a direct result of all the execution we've been doing on our organic strategy. Alongside that long-term strategy, we have very clear operational priorities, which obviously include Germany. Third, we're not immune to the macroeconomic challenges in Europe and Africa, but we're very well structured to deal with it. We covered a number of those actions in the presentation that give us confidence in setting our FY 2023 guidance of EUR 15 billion-EUR 15.5 billion adjusted EBITDA and maintaining our adjusted free cash flow at around EUR 5.3 billion. Fourth, we remain fully committed to improving returns for shareholders through both a sustainable organic growth strategy and at the same time, targeted actions to strengthen and simplify our portfolio. We clearly have a very full agenda, and it's a tough macroeconomic environment, that we face.
Both the board and management feel very sure to drive forward on the plans that we have, both organically and for our portfolio. On that, let me hand over to questions.
Thank you very much. Our first question today comes from Maurice Patrick from Barclays. Morris, please go ahead.
Yeah. Hi there, guys. Hope you can hear me okay. Thanks for the question. Maybe if you could start off with the elephant in the room, which is the progress on in-market M&A or rather the lack of progress. It's been six months since you've laid out your priorities for mobile level consolidation. We haven't seen any visible progress yet. I mean, the slides, you do talk about German fiber and Spain options, but you've, you seem to have missed out on Spanish M&A with Orange and MásMóvil turning down Iliad. Is mobile level M&A still the same focus it was in November? Maybe you can update us with your latest thinking on that. Then in the prepared remarks, you did talk about a number of live opportunities. Where generally are we in terms of that progress? Thank you.
Yeah, thanks for the question. I would say, first of all, I wanna be in no doubt at all, that the priorities we set out in November on the portfolio are absolutely at the forefront of everything that we are focused and are executing on, both the board and the management team. I think maybe it's important just to reflect on the goals that we're trying to achieve with these moves. The first one is that we want to have strong assets in healthy markets that are producing predictable free cash flow growth for us going forward. Secondly, we wanna simplify our portfolio down to assets that are really leveraging our regional scale. Third, we want to make sure that we move Vantage Towers into a co-control situation. Why co-control?
We wanna take it off balance sheet, have the right financial and capital structure moving forward for Vantage Towers to make the most of the growth opportunities in what is still a consolidating sector, and we want to be part of shaping that consolidation. Obviously, in the process, we would monetize, and that goes to the fourth point, which is we wanna take proceeds from all of the actions that we do to strengthen our balance sheet going forward to ensure that we have more financial flexibility. I think we've done a good job on deleveraging the group. We were at 3x, we're now at 2.7x. We're keen to bring it down to the lower end of the range at 2.5x. It's one of the priorities we laid out.
To your point of progress in market consolidation, we highlighted the markets that we were focused on. We remain focused on all of those markets. We're in active conversations, and we have many conversations taking place as we speak. I'd say when it comes to towers, we're very much focused on that co-control model with both industrial and financial players, and there's very strong interest and engagement from many players. Clearly, if we were to ever get to the point where we were finding co-control was going to be an issue, of course we can always monetize separately and so therefore we can, if you like, sequence that if we want to. The final thing is obviously Egypt. We're going through local clearance in Egypt. We look to complete that transaction by the summer. I mean, clearly these are sensitive transactions.
All I can say at this point is we're actively engaged in many detailed conversations. I can't share blow-by-blow what is happening for obvious reasons, but for sure, the board and management are very much focused on it.
Thank you.
Thank you very much, Maurice. Our next question today comes from Akhil Dattani from J.P. Morgan. Akhil, please go ahead.
Yeah. Hi, good morning, Nick and Margherita. I had a question on Germany, if I could, please, just to better understand your turnaround plans, in the context, obviously, a slightly weak quarter this period. I wonder, firstly, if you'd just comment on what you're doing at the moment in Germany, how far you think you are through addressing the issues, in that market. I guess, as we're trying to understand the implications, could you maybe help us understand, is Q4 the trough on KPI? So will we recover from here? And then how do we think about financially? I guess mechanically, the customer losses will impact financials the next few quarters, but maybe if you can comment on how and when you feel we'll have visibility around the trough here.
Maybe just as a bigger picture to this, obviously there's been CEO change in Germany. Maybe if we just comment on the choice of your new CEO as well. Thanks.
Okay. Akhil, a really important question on a multi-part basis. What, maybe Margherita, you can cover the second part regarding the financial outlook. Let me first of all address the sort of operational challenges and the progress we're making. First of all, I would say, before I start, that the financial performance of Germany has been good over the course of the year. I mean, very good EBITDA progress and growth, and that's been on a multi-year basis. I think that there has been good progress financially. I did call out in November that, however, commercial performance was not where we wanted it to be, and this is due to a number of factors. If I just invest a little bit of time breaking down those factors.
First of all, during the pandemic, we really called out two things that we observed that caused us commercial issues. The first was, obviously, we had a huge volume increase in the pandemic on the network that had a challenge in terms of capacity in some of the clusters. I would say, secondly, our footfall in retail, which is a really important channel for us, was obviously significantly down throughout the pandemic and has been slow to recover. Germany is running around, I'd say, 70% of pre-pandemic levels overall, and there's been more of a shift, I would say, to digital, where I think we could strengthen more going forward.
Add on top of those challenges, the third bit, which was in Q3, that we had the new telecom law and the new regulations, so customers were no longer automatically being renewed for 12 months. We had to re-contract with them. We put through these changes into an IT platform with a new set of processes for customer journeys, and frankly, they're cumbersome, and they did not work well on execution. If I break down what those issues were, well, first of all, we had a process during the recontracting that was email-based, so the customer had to confirm back via email. That was really clunky in terms of the interaction with the customer. We have now migrated that in the fourth quarter into a voice-based system, and that is performing. I'd say the second area was very much one of IT stability.
This was a new system we were implementing with these new rules. We had stability issues. Throughout Q4, we worked on those issues. A lot of our group teams supported the Germany team to recover the situation. In April, we're seeing availability of those systems now greater than 99.5%, which is the targeted level, i.e., less than two hours of downtime for maintenance each month. The third thing was that we had very heavy fraud mechanisms and a number of technical releases go at the same time, and that created us a technical backlog. We have been working through that technical backlog, and we're about 50% of the way through, and we will finish off all the various releases in the first half of the year. I stand back.
It's not what we wanted. We're saying that it was very much an operational execution issue in Germany. We've got the remedial actions underway. This is on top of all of the network capacity upgrades we've been doing on our network over the course of the year. Now we believe that we will have resolved any capacity issues on our network by the summer. We have a few clusters left to work on. I'd say we're very much calling Q4 as the commercial low point in terms of customer losses, and you will see gradual improvement in our commercial KPIs over the course of H1. Maybe financially?
On the financial side, different situation from the commercial side. As Nick has just said, commercially, we will see gradual improvement from there, and it's result of the action as well as the mechanical effect of the pull forward of terms generated by the new telco law, which will wind down in the course of the next few quarters. On the financial side, you're seeing the consistency of our growth in Germany so far. We still need to see the KPIs impact going through the financials. Therefore, what you will see in the near term is a further slowdown of the fixed broadband revenue growth. It has slowed down in Q4 and will slow down further going forward.
The point that is worth making in terms of overall financial performance of Germany is that this is one of our growth drivers. The three oldest growth drivers that we have in Germany are performing very well. You have seen our mobile service revenue growth. We expect this to continue, well. We have seen Vodafone Business accelerating. We are growing more than 3% in business. Again, this trend will continue. Then finally, if I move from service revenue to cost, you have seen us claiming the achievement of the cost and CapEx synergy of the Liberty acquisition, over two years, in advance of the original targets. We now have further opportunities that, will materialize in the coming years to go after. Three out of four working well.
Yeah, Akhil, to just your final point, which was on choice of CEO. Look, I'm delighted to have Philippe join us. Philippe is a strong, inspiring leader. He has strong knowledge both in telco and technology, which I think is increasingly important going forward. He has that commercial agility, so bringing together sales, marketing, brand, products, propositions together for the customer in a great experience. I mean, Microsoft is known for that. I think that we will benefit from that. He also knows how to leverage group efficiencies and scale advantages. I think that he will have a big impact. We've also strengthened the wider team, leadership team in Germany. It isn't a case of waiting for Philippe to come on board. We're working with Hannes on a very smooth transition.
We strengthened the team. We clearly understand the issues. We've got clear plans, and we're in execution, and Philippe will just take that forward.
Great. Thank you.
Thank you very much. Our next question today comes from Andrew Lee from Goldman Sachs. Andrew, please go ahead.
Yeah, thank you. Good morning. I just wanted to slightly follow up on Akhil's question and just ask about what your guidance for EBITDA implies for service revenue growth across the rest of the group, and particularly Europe. Just as a side question to that, I wonder if you could talk about what you're factoring in and what your ambitions are as to your ability to mitigate cost inflation with price rises. Thank you.
Sure. On the guidance, let me try and maybe first paint the picture of what is our, I would describe it as mid-case expectation for service revenue growth, in Europe and broader, EBITDA performance. I'd say first, as Nick was mentioning, we're pleased with our consistent service revenue growth so far in FY 2022. As we look into FY 2023, there is a degree of macro uncertainty for the industry overall. For us specifically, I think the factors you need to think about in terms of evolution of our service revenue growth are three. Number one, what we have just discussed with Akhil, where we see service revenue growth slowing down in Germany in the near term as a result of the weak fixed broadband performance.
This will be offset in the U.K., where you should expect an ongoing acceleration of service revenue growth. What we have seen in the U.K. is very strong commercial momentum. We have connected over 500,000 contract customers in consumer in the last year. Lowest churn on record and also, of course, from April, we are seeing now the benefits in our revenue growth of the pricing measures around inflation. Then finally, the third point to keep in mind, also supportive to growth is the impact the European recovery funds are going to have in Southern Europe. We were explaining a little bit the key elements in the presentation earlier. I would say particularly in Spain, we are seeing strong success in the context of the digital toolkit investment allocation from the government.
You know that they are putting over EUR 3 billion on SME digitization. The first half a billion is being distributed now, and we are really punching above our weight in terms of market share of the connection on this, and this is going to support an acceleration of service revenue growth also in Spain in the coming quarters. Net net, if you take all this at the midpoint of our guidance range, we expect Europe to continue growing in FY 2023 and of course, broadening the picture, good growth also in Africa and in the group as a whole. On the cost front, as I move to EBITDA, you have two offsetting elements.
On one end, our, I would argue, strong efficiency delivery machine is well set to exceed another EUR 300 million of net OpEx reduction in Europe with our own initiatives. However, the net is not net anymore because we have exceptional inflation coming the other way, particularly on energy and wage inflation that will compensate for that. I'd say we're not immune from the overall macro pressures as you can see, but we are resilient, which is why in all scenarios in our guidance, we are guiding for growth on EBITDA 2% at the midpoint of the range and another year of return on capital acceleration, which is clearly very important. You mentioned the role of pricing in all this.
I said the pricing will be supportive in the U.K., but let me say that we have pricing initiatives going on across the board in Europe. It's really critical at this point in time for the sector. We have said before that we have included CPI-plus pricing mechanism in five markets. U.K. and Ireland have already gone live in April, and we will see the others following in the rest of the year. We have also reviewed all our promotions and discounts across our markets in Europe and in the markets without CPIplus, we are working on the base in different ways. I think a good example of that could be what we are doing in Italy.
As we speak, we have done a radical simplification of our back book portfolio, and we are in the progress of migrating our customers to the plans which are more suitable for them, which will be both increasing transparency and the ARPU accretive for us in the end. A range of options and a really critical moment, I think, in terms of delivering this through, for us.
Thank you.
Thank you.
Yeah, no, thank you. That's really, really clear and confident. Just a tiny follow-up, just when you mentioned at the midpoint you expect European growth. I know you guys don't like dealing in tens of basis points of here or there, so I'm presuming when you say European growth at the midpoint, that's more than 10 or 20 basis points of growth.
Yes. If that's what you're looking for, yes. I think what is going to have an impact around this midpoint, if I think about the range overall, is going to be a combination of macro. If you want to build a downside case, you think inflation affecting consumption can't rule out further lockdowns for pandemic reasons. On the positive end, I would like to consider pricing. I think all the actions we're undertaking could have a further push, and also the European Recovery Fund we mentioned earlier. I think the governments are seeing the success, and they could allocate even more funding than they have just done to SME digitization, which would be positive for us.
Thank you.
Thank you. Our next question today comes from James Ratzer from New Street. James, please go ahead.
Yes, hello. Can you hear me okay?
Morning, James.
Yes, yes. Morning, Nick, Margherita. If possible, could I come back to Germany again? Would just love, if possible, to get an update on your thinking around potential FTTH build-out plans. You mentioned some stuff on this in the presentation. I think in November you talked about two-thirds of your homes passed being in housing associations. I think at that stage you'd indicated about a third might be interested, and it seems from the language now you've tightened that up a little bit, talking about specific larger housing associations being interested. Just interested to get a kind of update on the scope potentially that JV might include. When you talk about attractive business case, does that imply ARPU uplift here? You talk about potential for off-footprint expansion. How large might that be?
I mean, I think if this is smaller in scope now, you're giving a bigger vote of confidence, are you, to DOCSIS for going forward. It'd be great to get an update on that topic, please. Thank you.
Yeah. James, important topic. Maybe, I'll let Margherita just touch on sort of business case drivers. Let me just talk about a little bit of the engagement with the housing association. As we've said for the last two earnings releases, we've been engaged with the housing associations really around the conversation of the new regulation coming in in July 2024, which is around, you know, the elimination of collective TV billing. In that process, we've been sort of expanding on our roadmap of the cable upgrade plan that we plan to do.
In the process, we also ask housing associations, you know, "Are you interested in fiber to the building as well?" What I would say is very few so far have said, "I definitely want fiber to the building." I mean, they, we have not had an overwhelmingly, "Yes, I want fiber." We've had many, many more actually say, "Now you've explained the cable upgrade plan, that will suffice for us." There is a logic to that because in the end, we have a strong network. We have an upgrade path. They like the fact that there's no disturbance to the building or outside of the building for that upgrade path. However, the majority still, and we have contacted now, what, 8,000 of our largest housing associations, which represents about 20% of the households covered.
Still, the majority have yet to make a decision. What they're doing is they're having a conversation with us. What's sort of coming out of that conversation is very much you are our natural partner. At some point in the future, I may want to upgrade my building. I like your upgrade of your cable. That might be absolutely all I need, but there could be the option of going to fiber when I upgrade and refurbish my overall building in the future. What I'd say is, I think it's a very encouraging conversation. From the conversations and the analysis, what we said is, we think that there's an opportunity over and above the upgrade plan we're gonna do to our normal cable network, which we talked about high-split, going to DOCSIS 4.0 over a period of time.
We've said, shall we do a targeted JV, FTTB build, to the scope of about 4 million-7 million households? What we would do is primarily target our MDUs, the large housing associations and the surrounding area, because obviously it's more efficient for us to do a build of that nature. What we're engaged with at the moment is a number of players externally that bring two things. Number one, they bring build capability. They have a build engine that can supplement us and our execution so that we have velocity and speed of doing that program. The second thing is that obviously financing at low, affordable, cost. We're doing a JV 'cause obviously this means that it's completely off-balance sheet from a Vodafone perspective. I think we've got a good combination.
Good overall upgrade path for the 24 million households covered, targeted FTTB build on, in a JV model, and we've got some very strong potential partners that we're currently engaged with, and we're advancing in those talks as we speak. I don't know if you wanna talk about the business logic.
Sure. From the financial perspective, clearly, our cable roadmap is well integrated into our long-range plan organically off-balance sheet. When we have been looking at what could be the best solution for those housing association that may want over the longer term to have fiber, we have concluded that there is a business case essentially built on four elements. The first one clearly is increased penetration and responding to those customers, but there is also the opportunity to upsell towards higher value services. There is an opportunity to go off footprint. Nick was saying we will base the rollout around anchor housing associations, but we have then catchment area around those, and this can be on footprint, but also off footprint, so that's new demand for us.
Then finally, there are synergies, as you know, with the mobile network as well. All in all, we have concluded on this four to seven size, but the situation will be refined further as we progress with our discussions.
Thank you. Only one very quick follow-up. Of the four to seven, how much of that would be new build versus existing households?
We need to still decide. As you can see, it's a range, but definitely there will be a portion of new build in it.
Great. Thanks so much.
Thank you.
Thank you very much. Our next question today comes from John Karidis from Numis. John, please go ahead.
Thank you. Thanks for taking the question, and good morning to you both. I just wanted to ask a few questions, short ones, about the United Kingdom specifically, please. Firstly, when it comes to fiber infrastructure and competitive infrastructure, do you feel that there's likely to be enough competitive infrastructure out there for you to continue to have reasonably well-priced network access? So for example, are you confident that CityFibre has the funding and the expertise to build several more millions of FTTP homes? Secondly, very quickly, can I just confirm that talk about Vodafone acquiring TalkTalk is just not credible?
Thirdly, if you were to consolidate the mobile market in the United Kingdom, I'd love to know why is it that you trust Ofcom to do the right thing, given that earlier this year, they published a think piece in which they said that in their view, Vodafone UK earned zero return on capital employed since 2017, EE earned 20%, and even Three had earned a much higher return on capital than Vodafone UK. Thank you.
Okay, John, let me go through the three components. So first of all, in terms of access to competitive fixed infrastructure, actually, I really feel that we're in an excellent position. We are growing extremely fast on fixed broadband. We are, if you like, building a base that increasingly is attractive to an infrastructure player to have on board to drive their returns and economics. We have BT that obviously is building at speed. It's a regulated rate, but they're engaging with Ofcom to say, "Could we offer larger discounts to encourage more people to come onto our network, like we have contingent type models in Europe?" I'm very much supporting that agenda as well. You've got Virgin Media has said they wanna open their network. They're keenly engaged to say, could they get some anchor tenants?
CityFibre is building out as well. I think we have a number of choices. It's a very active market. Pricing is getting keener, and we're seen as an attractive anchor. I'd say, secondly, in terms of TalkTalk, look, I think we've made clear what our priorities are. Our priorities are in-market mobile consolidation, and we have a big enough agenda already in other activities. I think that speaks volumes. Then third, in terms of in-market consolidation, and let's call Ofcom and CMA. I think CMA is clearly an important factor here. I think you have to look back at the U.S. as an example where T-Mobile did the merger, went down to three players, they increased their investment, and then you saw the other two big players increasing their investment.
At this time when governments are looking for strong, resilient, and secure networks, is it better to have three strong networks that are resilient with scaled industrial players? I think increasingly governments, politicians, regulators are understanding the benefits of that and the vulnerabilities of fragmentation. Therefore, they want to ensure that the digital infrastructure that underpins the country is going to allow global competitiveness. Therefore, I think the agenda has very much and the narrative has very much moved on. Of course, it needs to be supported by the fact pattern and therefore, I'm not saying all combinations will be treated the same way, but I think we have an opportunity in the U.K..
Sorry. May I follow up very briefly?
Of course.
Thank you. Given that Ofcom is an evidence-based regulator, and they start the conversation by saying that on our calculations, they say you, Vodafone, have earned nothing, Three has earned more than you, and EE has earned 20% return on capital employed. Doesn't that sort of concern you about how they will approach any deal that you might bring to them over the next few months, hopefully?
John, I'm not quite understanding your line of argument, because if we've earned nothing in terms of returns and Three is below their weighted cost of capital, therefore both are in an unsustainable position as subscale players, and therefore a combination would make a stronger player in the marketplace. I'm not disputing that EE has got scale and earns a return. That's a good example of someone that has reached industrial scale in the market. We've always said local scale matters, and then we add regional scale on top. You can't make up.
Yeah.
For subscale local.
Thank you. I'll leave it at that for now. Thanks very much.
Thank you.
Thank you very much. Our next question today comes from Emmet Kelly from Morgan Stanley. Emmet, please go ahead.
Yes. Good morning.
Hello.
Everybody.
Welcome.
Hi, Margherita. Hi, Nick. My question please is on the Italian market. If you could maybe just give us a few updated thoughts on what you're seeing in Italy. Clearly, the competitive backdrop is still pretty intense there and maybe some emerging macro headwinds. It looks like your business is quite stable at the moment on the mobile side and improving on fixed line. Could you just say a few words on how you see the outlook in Italy for 2023, please? Thank you.
Your home market?
Sure. I need to say we are pleased with our execution in Italy. You mentioned it, you're seeing in the numbers, we have closed the year in which, despite the competitive environment, we have at the same time increased service revenue market share and delivered stable EBITDA once you exclude the exceptional impact of the settlement from a legal perspective. Good results achieved by continuing to outperform on both service revenue and EBITDA, all the established players in the market. Just focusing on the outlook from here, our growth has had the benefit of growing wholesale in the past 12 months. This benefit won't recur, and of course, the market will remain competitive. If I think about the puts and takes, we now have the benefit of the Recovery and Resilience Facility.
You will hear us use these words many times today. Spain has just allocated EUR 500 m illion. Italy has allocated EUR 600 million in vouchers for connectivity, so impacting directly the telcos operators over the next couple of years, and we are performing very well there. Stepping back, I think I would like to call out that in terms of KPIs for our relatively strong performance in Italy, business is a key factor. You know that it's a third of our service revenue there, and we were gaining market share and performing well even before the Recovery and Resilience Facility, particularly through digital. This will accelerate.
In the very contested consumer environment, we are also competing well with our dual brand strategy, and we are now expanding into FWA. If I move to EBITDA, I can't leave EBITDA alone. You know that Italy is considered one of the most efficient operators in the industry in Europe, and we will continue to work on our efficiency levers, digitization and the like. And that's what has allowed us to to deliver stable EBITDA, as well in this context. I would say really good performance in Italy at the moment.
Yeah. That may be just a build on the comment you made in an earlier question regarding sort of pricing and what we're doing with the base within Italy. We're actually doing quite a bold move. Of course, you know, companies like ours get a lot of legacy built up over time, price plans, et cetera. That adds a lot of complexity to the operation. We have a really strong management team under Aldo. He really said, "Look, we really need to try and find a way of radically simplifying down." He did a lot of cohort analysis of customers, price plans, products, services, et cetera. What we're doing is a radical simplification by migrating the whole base onto a narrower set of plans.
As we execute that through, on top of the IT transformation we're doing, we will have a lot cleaner estate moving forward. I think that will mean that we will be a lot more agile, a lot simpler business, and drive further efficiencies, as Margherita said, on top of what is already a very efficient operation. That execution is going according to business plan. We've been working on it for probably, what, the last nine months in terms of the planning, and the execution, and we are rolling that through. If that is successful, of which we've got confidence we will see that through, I think there's application throughout many of our markets in Europe where we could deploy that methodology, going forward.
Yeah, it's an example of how we learn as a group, how we drive synergies, and stay commercially relevant in individual markets.
Super. Thanks very much, both. If we just ask a quick follow-up on Italy, you did decline the offer that Iliad made for your business there, I guess because of the price that was offered. I'm just wondering, are there alternative deals, such as a JV, where you might see merit that you might consider in the future? Because it looks like the market is ripe for repair at some point in the future.
I agree with you. I think there are too many players in that market. Pricing is at an unsustainable level. You're talking currently in mobile, for one gig, EUR 0.15 on an average usage. Then you look at Iliad's convergence fixed pricing, and you don't make any money on that. You stand back from that and say, "Things will have to change." People are gonna have to forced to collaborate, combine, do versions. We are very pragmatic and open and have been, and we remain actively engaged with players to find better routes to more sustainable returns in that market.
Super. Thank you very much.
Thank you very much. Our next question today comes from Polo Tang from UBS. Polo, please go ahead.
Hello. Just have one question just about Etisalat. Were you surprised that they took a 9.8% stake? From your conversations with them, what do you think their intentions are for Vodafone?
Well, Paulo, I got the call on Saturday from Hatem. He explained that he had taken the 9.8% position. In that call, you know, he was at pains to go through the rationale and all the elements of the communication that would be going out. I mean, he really wanted to stress the fact that this was a passive investment, yeah, supportive of the board management strategy in its execution, that all the things we were doing on portfolio were the things that they believed were the right things to do. You know, clearly, you know, we know them, they know us as industry players. Therefore, I really think that there's an opportunity to develop a commercial collaboration moving forward.
I'm sure there's areas in procurement, in R&D, technology, that we can do, maybe shared service centers. There's opportunities, and we will explore those opportunities. Look, we look forward to developing a long-term relationship with them.
Thanks.
Thank you very much. Our next question today comes from Nick Delfas from Redburn. Nick, please go ahead.
Thanks so much. Just two questions on hedging. At what point will you decide whether to hedge for H2? Not that I envy you that choice. Secondly, on Turkey, you had about EUR 300 million of operating free cash flow in FY 2022. Are you able freely to convert that to euros or sterling at the moment? Do you anticipate any difficulties in FY 2023? Thanks very much.
Mar, for you.
Yes. Energy. We are at the moment 75% hedged on FY 2023. Effectively, we have always had rolling hedges over time, and we found ourselves pre Ukraine crisis very well covered, I would say all the way to December. Of course, hedges rolling off after that. Since the Ukraine crisis, we have not changed much in terms of coverage. You're right, it's not an easy decision to make on when and how to intervene. We are monitoring that very closely. I would say the bulk of our effort now is not going onto the hedging strategy, it's going onto alternative mitigation options. You may have seen us recently announcing a big PPA in the U.K. with Centrica on solar.
We can get really good condition on long-term, stable pricing for renewables, and we are stepping this up, all across Europe. Then the second aspect where we are, really focused on, is, the interaction between energy initiatives and the European recovery funds, and whether there can be support for structural energy consumption reductions, and of course, everything that goes together with the general sort of taxes and subsidies around energy. We think this is more important structurally. That's for the energy side. Clearly it would be a headwind in this fiscal year. We are sizing it at current pricing at just under EUR 200 million, so materially in our overall equation. Turkey. Management of Turkey, clearly always from our side, we look at it in hard currency. You know our principles.
You need to grow revenues ahead of inflation and costs below inflation. We've been pretty successful, if you look backwards to another big case, would have been Egypt a few years ago, in ensuring that we come out of the crisis with a better cash flow position than the one we went in. Turkey has been able to maintain operating free cash flow stable. This year we don't have particular issues on a technical front to your specific point. We are really all hands on deck to ensure that also looking forward, we can drive the strategy I was describing. If I take just the example of pricing, which is really critical, you will have seen us raising prices in Turkey three times in six months. The last time was March, 30%.
Very active in ensuring that in the, let's say, midterm, we come out on the other side with stronger cash flow generation.
It's probably worth just noting, of course, it is quite beneficial that the other two major players are government-owned entities, because then they take a view of the overall industry and what's healthy for the overall industry, and I think that's healthy for us.
Thanks. Just to follow up on the hedging. EUR 200 million is the headwind without Q4. If you have roughly EUR 200 million a quarter of cost and it inflated by 100% for Q4 of FY 2023, that would be in addition to the EUR 200 million. That's the uncertainty that you've tried to bake into your guidance, I suppose.
Yes. Our central case includes EUR 200 million, and it's, if you take the forward rates of energy today, that's the effect you have on the full year.
That's the EUR 200 million. Okay, understood. Yeah.
If prices were to go up further, that's where the range comes into play, or go down, because I think over time you could also see that.
Right. Thanks so much.
Thank you. We have time for one more question today, which will come from David Wright from Bank of America Merrill Lynch. David, please go ahead.
Hello, guys. Hopefully you can hear me and everything is working. It's just a question really on the guidance, and specifically the midterm guidance that you've reiterated in the presentation. I guess what would be quite useful is to just understand the kind of timeline around that. Because if it was given at full year 2021, and say it was a three-year outlook, then you've done 5%. I think the guidance for full year 2022 is sort of 2%. To get back to that kind of mid-single level, you're gonna have to do high single digit.
Even if we were to extend it another year or so, it feels like you need to achieve a high single digit run rate, especially given some of those hedging pressures are also gonna be present in full year 2024. I guess I'm just wondering how you bridge that gap to the high single digit EBITDA growth. You know, which is the asset that kind of gets you there? I speak, you know, with Germany, obviously a little slower this year, some TV headwinds, et cetera. If you could just outline that guidance more specifically and.
The first question.
To actually hit it. Thank you.
Sure. Starting from the logic of our midterm ambition, starting point of FY 2021, time horizon, as we said last year, was three to five years, in terms of what midterms mean. We were very clear already last year that it wasn't meant to be a sort of year-by-year reference point. The progression wouldn't necessarily be linear. In terms of how do we stand against that today and your question on bridging, well, first of all, we have just closed the first year in line or exceeding the progression that we had set for ourselves. Growth in Europe and Africa, mid-single-digit EBITDA growth, and return on capital, you have seen the big step up that we have had in year one, which was 170 basis points.
Clearly, FY 2023 is likely to be slower if we take the midpoint of the EBITDA guidance that we have given, which is around 2% for the reasons we have just discussed, including energy. However, let me also take the opportunity to flag that if you look at our free cash flow growth, the circa EUR 5.3 billion expected into FY 2023 is actually underlying representing a 10% increase over the two years. If we think about the mid-single-digit free cash flow growth at the midpoint of our guidance, we are there. Why that is, it's because, as we have flagged earlier this morning, we had a deferral of a EUR 200 million payment across 2022 and 2023 in taxes in Germany.
Underlying effectively, we will be moving from 5%-5.5%, which is bang on the midpoint of our midterm ambition. As we look at return on capital, again, now we are at 7.2% pre-tax, guiding for a further increase above that. I think we are well-positioned to continue in that trajectory.
Yeah, I understand the free cash flow, but how do you get to the high single digit EBITDA?
I think that there is a range of, how can I say, options on how, the outlook may turn on EBITDA for the years beyond FY 2023. This year we have had these impacts, for example, for inflation. You need to assess will that last forever or will at some point, for example, the energy price switch and move into the other direction. I think here we are talking about the midterm, and we are also talking about ranges. Therefore, first we need to see how we close 2023. I think we have a range around that already. Then we need to see how it evolves, longer term.
Of course, we've got pricing, we've got EU recovery funds, we've got further digital transformation. There's many levers that we have delivered in FY 2022 that would be very focused on outer years as well.
Can I just sneak a quick one? I was just very intrigued yesterday, I think, as were most investors, by this shift from Vantage Towers into this sort of hybrid reseller model in Germany, potentially on the build-to-suit. I'm just wondering, was that a push by you guys to kind of, you know, keep the foot down on 5G, and essentially they kinda weren't able to deliver that, so they've had to move to the reseller model? Is it sort of Vodafone driven that they've had to slightly shift that strategy?
David, it's very much a case of Vodafone has coverage and performance obligations that came with the spectrum, and that's where the 5,500 towers came from or BTSs came from. What we were really doing was saying to Vantage, "Look, you have the option to go source them up to 1,200 if you need to, moving forward." It's optionality, it's not an obligation. They don't have to do it. Obviously, it depends on the ease at which they can find locations and do builds. Obviously, you know Germany is notoriously slow as a country to get permits, approvals, and build through. It takes nearly two years. The government and ourselves are working to bring that target down. We just wanna give them operational flexibility to do it.
Okay, super. I appreciate that. Thank you, guys.
Thank you. Given that was the last question, thank you very much for joining Margherita and myself. We had a good financial year in FY 2022, with strong growth in many of the parameters and importantly, return on capital employed. Our guidance points for growth moving forward, even with a challenging macroeconomic backdrop, and we're very clear on both our operational priorities and our portfolio priorities, and remain firmly focused on executing through. We look forward to updating you in future quarters on our progress. Thank you.