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Vodafone Group Plc (NASDAQ:VOD)

Turkey Webinar Conference Call

September 12, 2013 09:00 ET

Executives

Serpil Timuray - Chief Exectuive Officer

Gökhan Öğüt - Consumer Business Unit Director

Frank Krause - Chief Financial Officer

Hasan Süel - Regulatory and Corporate Affairs Officer

Analysts

Nick Lyall - UBS

Simon Weeden - Citigroup

Mandeep Singh - Redburn Partners

Allan Nichols - Morningstar

Operator

Good afternoon and welcome to the Vodafone Turkey Webinar hosted by Serpil Timuray, Vodafone Turkey, Chief Exectuive Officer.

I will now hand over to our first speaker Serpil Timuray to begin.

Serpil Timuray - Chief Exectuive Officer

Good afternoon and welcome to Vodafone Turkey Webinar. I am Serpil Timuray the CEO of Vodafone Turkey since January 2009. I have here with me my three colleagues today and Gökhan Öğüt who will be taking on a broader responsibility as Chief Commercial Operation Officer as of October 1, Frank Krause our Chief Financial Officer and Hasan Süel our Regulatory and Corporate Affairs Officer.

In the next 20 minutes I’ll first provide you an overview of Vodafone Turkey’s position in Turkey's Telecommunication market and our strategy over the last four years. Then I’ll hand over to Gökhan and Frank to take you through the details of how we have implemented our strategy together with our financial performance. At the end I will brief you about our future prospects before moving to the Q&A session.

So I would like to begin with giving you a brief update on Turkey’s demographic and macroeconomic highlights on slide three. Turkey is an attractive market, mainly with its technology savvy young population and growing economy. Out of the 76 million inhabitance 42% is aged under 25 which is one of the key growth factors. Turkey is currently the 18th largest economy and aiming to be in the top 10 economies of the world with ICT market corresponding to 8% of the GDP according to government’s 2023 vision.

In terms of foreign direct investments Turkey is the 24th largest recipient country and is potentially expected to increase its ranking up to number 19 over the next three years. As a result of a strong economic program Turkey’s credit rating was upgraded to investment-grade by Fitch in November 2012 and by Moody’s in May 2013. As seen in the next slide Turkish mobile market has been growing at a higher rate than the Turkish economy over the last five years.

In fiscal year 2012, 2013 mobile market revenue reached to £6.3 billion with 12% growth rate while total mobile customers increased by 3% to 68 million. Postpaid customers demonstrated a significant increase over the last five years reaching up to 40% of the total market from 22% five years ago. Turkey has still relatively low customer penetration at 90% offering future opportunities for market growth. Data remains an up untapped opportunity even that smartphone penetration is at around 25% only.

Now I would like to take you through Vodafone Turkey’s successful performance over the last four years. As you can see on slide five the company was significantly underperforming in the market with decreasing revenue and those of market share in fiscal year 2008, 2009. At the beginning of 2009 we kicked off a comprehensive turnaround program re-launching every commercial and operational aspect of the company. As a result our total revenue doubled over the last four years with continuously high double-digit growth track records.

Our mobile revenue market share increased by 11.3 percentage points and reached to a milestone of 30% revenue market share by the end of fiscal year 2012, 2013. Slide six presents you the main strategies of our turnaround program. With this program we set our objective, has to become the strong challenger brand of the Turkish telecoms market. The brand that they used to change the market paradigms that offers consumers new and innovative solutions has becomes the popular choice. In order to achieve this goal we executed five main strategies. First and foremost was to build a customer-centric brand positioning that wins the hearts and minds of the Turkish community.

Second was to establish a value added segmentation strategy offering innovative and leading propositions separately designed for each focused segment. Third was to step change the quality of service by significantly investing in our network, IT, retail coverage and call center capabilities to enable best M2M customer experience. Fourth, was to start operating as a reliable mobile-centric total telecommunications provider but also investing in fixed line services. Last, was to control costs and reinvest the savings as fuel for growth. We executed these strategies with great team coordination and excellence which resulted in doubling our top-line was restoring our bottom-line to a record performance. Now, Gökhan will provide us more details about the implementation of these strategies.

Gökhan Öğüt - Consumer Business Unit Director

Thank you, Serpil. Let’s start with slide number 7, our first strategy of repositioning our brand as the strong challenger and a truly customer-centric brand. We defined Vodafone to be the hero of the customer, simple to deal with transparent, reliable and confident. We took bold move both in products and services as well as our network. We introduced to Turkish market very daring claims and campaigns such as money back guarantee if not satisfied with our coverage and reimbursement for drop-off together with many other segments first to market old propositions.

To increase our emotional connection with the Turkish people we created what we call Social Business Models for disabled, women and farmers. Special programs targeted at special groups to improve their lives through to use of our mobile technologies. You can find a short video of our Farmers' Club programme on the website after this call. Furthermore, we have implemented a sustainability agenda through engaging in environmental protection activities and establishing a strong and continuous dialog with our stakeholders.

Moving to slide number 8. Let me give you an overview of our strategy segmentation strategy that is in instrumental to our customer-centric brand model. Since 2009, we focused on providing innovative propositions to our customers specifically targeting Postpaid and High Value Customers, Youth and Enterprise segments. For postpaid, we first launched all-net tariffs behind a simple portfolio. And the first hybrid tariff in the market in 2012 that combines the cost control advantage of prepaid with ease-of-use advantage of postpaid.

As Data becoming one of the key (indiscernible) of our sustainable growth, we have launched smartphone campaigns and affordable Vodafone branded smartphones with free data trial to simplify smartphone buying experience for all our postpaid customers. We took our high value customer focus (Technical Difficulty) while making us the most recommended operator among its customers. We are leader in net promoter score for nine consecutive quarters.

I will now hand over to Frank to provide you with the financial results behind these strategies.

Frank Krause - Chief Financial Officer

Thank you, Gökhan. So, let’s move to slide 12 and let’s look at all of our strong commercial propositions and customer-centricity enabled us to enhance our customer base and to grow our ARPU. Since the beginning of turnaround, our customer base has increased by $3.7 million and reached to $90.2 million as of the end of 2013 fiscal year. This led us to be the driving force of customer growth in the Turkish mobile market. In parallel to this, we have also improved our customer mix through increasing our postpaid base, which now corresponds to 36% of total was around 7 million postpaid customers. On the other hand, our blended ARPU also demonstrated an increasing trend over the last four years reaching to 20.8 TL in the last quarter of 2012/2013 with 9.4% year-over-year growth. The increase is mainly driven by the improvement of our customer mix as well as stimulating more voice and data use. During this period, we have also increased our postpaid ARPU significantly up to 36.6 TL.

Moving to slide 13 now, let’s look at how the increase in our customer base and ARPU led to a strong revenue and market performance. As you can see, we have achieved a very good progress in total revenue and practically doubled it over the last four years by increasing it from £1.1 million to nearly £2 million in 2012/2013. In terms of revenue growth, we have sustained our double digit growth over the last three years and we were the highest growing operator in the Turkish mobile market.

In the last fiscal years, we have increased our total revenue by 19% and continued growing our revenue by double-digit in the first quarter of 2013/2014. Looking ahead as you know there has been MTR cuts in the Turkish mobile market, voice MTR cut by 20% and SMS by 75% effective from the 1st of July making Turkey to have the lowest MTR rate in SMS and second lowest rate in voice among European peers. However excluding MTR cuts, which have a high single-digit impact on revenue growth, we continue to expect underlying revenue growth trends to remain broadly consistent as in the prior quarters.

If you look back to our progress in the Turkish mobile market, we have continuously gained market share each year over the last four years and reached a milestone of 30% total mobile revenue market share as of 2012/2013 year end, which we continue to sustain in the first quarter of the fiscal year. All together, we have gained more than 11.5 percentage points since the beginning of our turnaround program.

As you can see on slide 14, we achieved very good progress not only in revenue but also increase our profitability at the same time. As a result of this, our EBITDA reached to an all time high level at £322 million in the fiscal year 2012/2013 with 35% year-over-year growth by doubling our service revenue growth in the same period. Our EBITDA margin, which was minus 0.7% at the beginning of our turnaround period in 2009/2010 reached to 16.5% in 2012/2013.

As you may know, the current tax structure in Turkey is different than in other European countries, where no mobile revenues, (specific) taxation exists. For like-for-like comparison excluding the telco specific taxes and fees in Turkey like treasury share, usage fee and acquisition taxes, our EBITDA margin would be 33% in 2012/2013, which is higher than the Vodafone average.

Through this period, the key drives of our margin improvement were firstly top-line growth mainly by increasing our customer base by 3.7 million and doubling our blended ARPU at the same time. And secondly, we have to focus on efficiency by establishing an extensive costs control program, which also contributed to improve our profitability and to fuel the growth over the last four years.

Another point to highlight is, we have achieved positive adjusted operating profit of £15 million and positive operating free cash flow of £83 million for the first time in 2012/2013. With that, I’ll now hand over back to Serpil to provide you our future growth prospects and to give you the final remarks.

Serpil Timuray - Chief Executive Officer

Thank you, Frank. Let’s look at last slide number 15 building on our strong commercial and financial track records over the last four years; our objective is to continue to generate sustainable growth for Vodafone Turkey. Our future program aims to maximize the growth opportunities in the market by focusing mainly on three areas data, enterprise and value-added consumer segmentation.

Firstly, there is huge growth potential in data in Turkey. Data revenues still constitute relatively a lower portion in service revenue compared to Vodafone Group’s average. This is mainly driven by the gap in smartphone penetration. We have been driving smartphone penetration up through a more integrated data offers together with a new smartphone marketing platform campaign that have generated successful data growth.

On the Enterprise side, we will continue to leverage our global M2M experience to provide data solutions to our Enterprise customers. To focus on convergence by investing selectively in fibres and also to leverage our Vodafone Global Enterprise VGE know-how and customer base.

Thirdly, we will continue our value added segmentation strategy by investing in firstly high value segment through Vodafone Red propositions and secondly Youth segment through Vodafone Freezone offerings. We believe all of these will further strengthen our position in the Turkish telecommunications market and sustain our future growth.

So, this brings our presentation to an end. Thank you all for listening. Now, we will be very happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question today is coming from the web. This is from (indiscernible)

Unidentified Analyst

How are you performing in Enterprise? Anything that you can share on the market – market shares prospect. Thank you.

Serpil Timuray

Our Enterprise business has been growing above our Vodafone Turkey performance. Over the last four years we have tripled our Enterprise revenue. If we look at the top 500 companies of Turkey, we have captured half of the market share from a starting pace which was lower than 10%. So, we’re very happy with our performance so far. The fixed businesses that we have acquired Koc.net and Borusan Telekom have also contributed to this performance. So, we have started to provide convergent services to our Enterprise customers. And we think that the future of the market is very prospective given that there will be an increase of data usage and increasing demand offers a new innovative solutions and M2M.

We have also started to offer the very innovative services on the M2M side. Just very recently in August, we have also established a new data center state-of-the-art technology which is equipped to provide cloud solutions to Enterprise. So, overall we are very optimistic about what we can offer to our Enterprise customers to encourage our future growth opportunity.

Operator

Thank you. The next question comes from the telephone lines. Coming from the line of Nick Lyall of UBS. Nick, your line is open. Please go ahead.

Nick Lyall - UBS

Thank you, Louis. It’s Nick from UBS. Just of firstly, on your One Net telecom duration of Turkcell. Have you seen any price increases problem. How would you think you would respond I mean is this an opportunity to take share or would you raise prices in order to raise margins. And then secondly on the fixed business, in continents and other could you give sort of infrastructure activities and how you think projects bring I mean I know it is very broad because this is not deciding general. What would be your general aims with the cash coming in when projects bring this? Thank you.

Serpil Timuray

Yes. Thank you. Let’s start with your question on the One Net regulation. We are very supportive of the new One Net regulation which will encourage more fair competition in the market. As Vodafone, our pricing strategy has always been to ensure that there is a very good value for money positioning in the market and we have always positioned ourselves in the middle in between the price leader and the number three operators. So, if there is a movement upwards in the pricing of the market, we will continue to adjust.

Coming to your second question about Project Spring we are very enthusiastic about opportunities that Project Spring will offer us in terms of acceleration of our future growth program and our future strategies. We are, we have already prepared a growth program for Vodafone Turkey which concentrates on the seizing the date opportunities the Enterprise opportunities and Project Spring will give us an opportunity to invest more around these pillars as well as we have some pockets of growth in terms of network rollout with positive IRR that we will be also capturing as an opportunity to invest on the network. And lastly we will be building selectively fibres for our, to support our Enterprise strategy.

Nick Lyall - UBS

Thanks so much.

Operator

Thank you. And the next question comes from the web. This is from (indiscernible) Morgan Stanley.

Unidentified Analyst

Can you please share the key managements KPIs for compensation for Vodafone Turkey i.e. market share margins and fee based? Thank you.

Serpil Timuray

So the key managements KPIs for Vodafone Turkey are the same as any up go around the world for Vodafone Group which are financial KPIs, revenue, profit, cash flow as well as market share. And that the other thing I want to also stress as Gökhan has presented in his presentation we also have a specific focus on Net Promoter Score and we have been the outright market leader on NPS for the last nine consecutive quarters.

Operator

Thank you. And the next question also comes from the web which is from Sam Dillon.

Unidentified Analyst

With the turnaround plan having been so successful on the fees objective to continue to face market share or are you focusing more on profitability? Thank you.

Serpil Timuray

Thank you. In our turnaround plan we have not only delivered a significant market share growth and a revenue growth but we have also restarted an all time high record profitability. We have achieved positive EBIT and positive cash flow hence our focus has always been both in terms of growing the business top line as well as restoring the profitability of the company and our future focus will be on tracking both these financials hence we would like to seize the opportunities of market growth to continue to build the revenue of the company as well as continue to build our profitability as we have done in the past.

Operator

Thank you. The next question comes from the web from Simon Weeden.

Simon Weeden - Citigroup

How do you see yourself position against a video telephone since it also sees itself the challenger and wanted to turn its incumbent fixed line network into a convergence advantage?. Thank you.

Serpil Timuray

In our market we think we are a very strong challenger in mobile and we also offer convergence products towards mainly the Enterprise segment where we have achieved outstanding performance so far. When it comes to residential strategy so far the consumer depend towards the convergence products has not been strong yet but we will continue to keep a close eye on the future developments in the consumer convergent demands.

Operator

Thank you. (Operator Instructions). The next question is from the phone. This is from Mandeep Singh from Redburn Partners. Mandeep your line is open. Please go ahead.

Mandeep Singh - Redburn Partners

Thank you for taking the question. Just a quick one you’ve highlighted the gap between your reported advantage and the pre-regulatory adjustments you just done and it was sort of a two-fold gap net. Given in the absence of any material regulatory will be where do you see as the long-term feeling for your redevelopment?

Serpil Timuray

Frank would you like to answer this question.

Frank Krause

Yes. As we said before our EBITDA margin is this we improved it double the revenue growth in the last year and that is mainly due to our top-line growth for us. And secondly, we focus very much on efficiency in our operating expenses and we introduced a few years ago a cost saving program and based on that and top-line growth, we also expect the EBITDA margin to grow further in the future.

Serpil Timuray

Now you, I mean just to complement this, I mean looking forward, our company has a further profitability opportunity to mainly come from scale growth and also better higher value mix in the customer base and also the data opportunity is another booster. Now also when we look at the macro environment of the market looking long-term, we think there could be an opportunity of an adjustment on the tax scheme, government already in Turkey accepts that the Turkish telecommunications tax is high and should be reduced when there is a fiscal space for it. So, long-term, we’re expecting government to adjust the taxes down, which will be positive news for the profitability of the market as well as Vodafone.

Mandeep Singh - Redburn Partners

Thank you.

Operator

Thank you. And the next question comes from the web from (indiscernible).

Unidentified Analyst

Margin improvement (absorbed) in the last year. How much scope is there for further improvement and how about the new logo MTR and SMS interconnection charges effective in the current fiscal year, is there any scope to reduce the sign of the tax status? Thank you.

Serpil Timuray

I think, we’ve covered this question broadly in the previous answer maybe just a word on the effect of the MTR. Frank, do you want to answer it.

Frank Krause

As I said in my presentation, we expect the MTR and SMS, MTR cut on voice and SMS to have a high single digit impact on our reported revenue growth. But as I also mentioned the underlying revenue growth is expected to still be on the same level as before.

Operator

Thank you. The next question also comes from the web (indiscernible).

Unidentified Analyst

What is your local strategy in fixed next-generation network? When is the next spectrum deadline? Thank you.

Serpil Timuray

I think as explained on our fixed strategy, our strategy has been so far to build our enterprise business through offering both mobile and fixed products and Koc.net and Borusan Telekom acquisitions have extremely contributed to this strategy. And looking at the consumer, we’ll be tracking very closely with the consumer to map trend coming up towards convergence products. Now I would like to pass to Hasan regarding the spectrum question.

Hasan Süel

Yeah. Spectrum is the main resource for our operations and we think that currently our spectrum capacity is well enough to drive logo for our customer needs. And just to make you remember that Turkey started 3G in 2009 a little bit late regarding the European countries but it gave - but an advantage to invest with the state-of-the-art technology and currently there is no further need on a new spectrum. And then also, we look at the data revenue and smartphone penetration in the country we may consider it a little bit early to talk about further spectrum needs.

Operator

Thank you. The next question also comes from the web and this is from Ms. Simon Weeden.

Simon Weeden - Citigroup

What is your take of LTE in Turkey? Do you believe (things) at Turkcell may (indiscernible) or losing? Thank you.

Hasan Süel

As I mentioned in the previous question, we think that there will be the right time and right conditions to launch 4G LTE in Turkey and we as Vodafone Turkey are in constant contact and engagement with government to pass our experience worldwide also to explain them what should be the best conditions for the future generation mobile networks.

Operator

Thank you. And we have a follow-up question on the web from (indiscernible) Morgan Stanley.

Unidentified Analyst

Can you please share with us if there is a possibility to see further price increases following those which will be implemented by Avea and Vodafone in May 2013? Thank you.

Serpil Timuray

Gökhan yes.

Gökhan Öğüt

Let me take this question please. As Serpil explained a while ago our pricing strategy is value based pricing and we invest in our brand and network in order to have a premium for our pricing and our unit pricing position right now is in between the two operators. So in this context we expect market leaders to lead the pricing and we will be following any price adjustments any further price adjustments in the market by keeping the same index.

Operator

Thank you. (Operator Instructions). Today’s next question is another question from the web with Simon Weeden.

Simon Weeden - Citigroup

How much additional investment will Turkey receive and the Project Spring and what were the priority will be? Thank you.

Serpil Timuray

Thank you, Simon unfortunately we cannot disclose the numbers regarding our investments. I believe I have answered this question and but just to summarize Project Spring is a tremendous opportunity we think to accelerate our growth program in Turkey. We already had made plans to grow our business mainly on Data and Enterprise and specific targeted segments and we have a rollout plan for network in especially in some special designated areas where there is a very good IRR for these initiatives and as well as selectively building continuing to build fibre.

Operator

Thank you. (Operator Instructions). We do have a question from the web. This is from Allan Nichols from Morningstar.

Allan Nichols - Morningstar

Vodafone has done a great job of turning the company around such as also benefited from Turkcell’s fight over management’s control. If Turkcell becomes more focused and aggressive how will Vodafone respond? Thank you.

Serpil Timuray

So thank you. Over the last four years as we have presented we have made a long-term strategic program for Vodafone Turkey that’s entirely focused on the customer on becoming the Net Promoter Score leader through providing the best end-to-end customer experience. So we have been pursuing a very well developed orchestrated coordinated strategic program that’s entirely based on our customer and we will continue to do so for the future.

Operator

Thank you. We have no further questions coming through from telephone lines or the web. So I would like to hand back to you for your closing comments today.

Serpil Timuray - Chief Executive Officer

So thank you for giving us the opportunity to present to you our business story in Vodafone Turkey. We are very happy with the commercial and financial performance track record we have achieved over the last four years. We think we have an exceptional organization that is really bringing the best of Vodafone Group’s global experience and combining this with the local expertise and local market understanding. And we think that we the market also has a very interesting growth opportunities that we would like to we have already started working on and we would like to capitalize on for our future growth opportunities both in terms of revenue as well as profitability. So thank you for this interest today.

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