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Vodafone Group Plc (NASDAQ:VOD)

Q4 2014 Results Earnings Conference Call

May 20, 2014 08:00 AM ET

Executives

Vittorio Colao - Chief Executive

Nick Read - Chief Financial Officer

Philipp Humm - Regional CEO Europe

Serpil Timuray - Regional CEO AMAP Region

Paolo Bertoluzzo - Group Chief Commercial and Operations Officer

Analysts

Maurice Patrick - Barclays

Akhil Dattani - JP Morgan

James Britton - Nomura

Stephen Howard - HSBC

Tim Boddy - Goldman

Polo Tang - UBS

Guy Peddy - Macquarie

John Davies - Santander

James Ratzer - New Street

Jerry Dellis - Jefferies

Vittorio Colao

So good afternoon, thank you very much for coming today again. We will follow today the usual program. I will give you the highlight for the quarter just ended and the year then I would hand over to Nick who will do the usual financial review then I come back and I will this time talk about the six large units, their performance and their priorities. And then go through the key elements of our strategy and of course then we will be joined by our colleagues for Q&A.

So full year highlights first of all financial performance, our Q4 service revenue declined 3.8%, 4% if you include Italy at 100%. This is really two stories, one is Europe where service revenue declined 8.5% we have to say and we’ll comment we have seen some improving trends in UK and Spain. And then a very good performance in emerging markets 6% with India and 12% Vodacom 5.1, data and the data will be a key topic here.

In this quarter, we had improved our fixed broadband performance. Our customer base is now 9.3 million customers, the third largest in Europe and despite some headwinds and some underperformance that we will talk about, we have met our full year guidance both in terms of AOP at £4.9 billion and in terms of free cash flow at £4.8 billion.

Key topics for the strategic review that I will call later Vodafone Red 12 million customers in 20 markets some good signs of improvement in churn and MPS 4G now available in 14 markets with again good ARPU and good usage data that we will share with you. Good Enterprise acceleration in our key growth areas Vodafone Global Enterprise and machine-to-machine growth and I would say more growth in the recent quarters than in the average of year which is a good sign.

[Further string] has started underway we are accelerating that have been down initial focus has been on India and Germany with common debt and then of course unified communication with the fiber being laid down in Spain, Portugal continuing and actually continuing to the commercial effort now and Italy about to start.

On is about to come is expected to be completed in the second quarter and of course just for the records we have closed the U.S. transaction with $85 billion return to shareholders. We then turn to Nick and then getting back for the operation review.

Nick Read

Thanks Vittorio, good afternoon everyone. So firstly, I'd like to take the opportunity to go through financial highlights of the year and then move on to my personal financial priorities for the year ahead.

The first point I'd like to point out is that this is a more complicated set of results than normal, given the very basis of preparation and the M&A activity over the course of the year. To keep things simple, I prepared the presentation on a management basis unless otherwise stated which obviously means that we account on a proportionate basis and include five months of the Verizon Wireless profits.

So, turning to slide five, the highlights are as follows: Total group revenue declined 3.5% to £43.6 billion year-on-year with group organic service revenue down 4.3%. If you remove the MTR impact, it’s 2%. Our AMAP region continued to perform strongly, growing at 6.1%. However, this was offset by ongoing pressures in Europe.

As Vittorio has already highlighted in the first slide, group service revenue in the fourth quarter was down 3.8%, a 1 percentage point improvement in the third quarter which was primarily MTR effect. EBITDA at $12.8 billion gives us an organic margin of 29.4%, down 1.3 percentage points as the impact of revenue declines and increased customer investment in Europe offset improving margins in AMAP. Adjusted operating profit for the period fell 9.4% year-on-year and this includes a £3.2 billion contribution from Verizon Wireless up until the 2nd September.

Moving onto the lower half of the income statement on slide six which is presented on a statutory basis, financing costs, which I will take you through in more detail later are little lower than the previous year, primarily due to mark-to-market gains. Tax at 4.4 billion is higher than the prior year and includes tax paid for the reorganization of our U.S. Group prior to sale. I will expand on our tax position later.

On impairments, we've taken a £6.6 billion charge in the second half related to Germany, Spain, Portugal, Czech Republic and Romania. These were driven by lower projected cash flows within the business plans resulting from the tougher macroeconomic environment and heavy price competition we have suffered over the course of the last 12 months. We've recognized the deferred tax asset of £19.3 billion, slightly up on H1 due to finalization of the calculations. This deferred tax relates to historically losses that we disclosed in our accounts.

The U.S. disposal gave us better clarity and certainty over the future structure of the group and removed significant uncertainty around the utilization of those tax losses and future income streams. This takes our total deferred tax assets to £20.6 billion. As a result of the Verizon Wireless transaction and the disposal of our U.S. Group, we also recognized a £45 billion pre-tax gain on disposal. For the purposes of our earnings per share calculation and to align with our peers we have excluded the amortization of customer basis and brand intangible assets and as a result our overall statutory profit for the period was 59.3 billion and our earnings per share was 17.54 pence down 12.8% year-on-year. Finally we have announced the final dividend per share of 7.47 pence giving total dividend of 11 pence an 8% increase year-over-year.

Now on to slide seven, now Vittorio will be talking about outperformance of each of the countries a little bit more detail later. However I thought it would be helpful to go through the changing profile of the group, looking at the pie charts at the top in red we have Europe and in blue we have AMAP. As you can see from the metrics AMAP is strong and growing, the AMAP customer base is up 9% in the year and now accounts for over 70% of the total group. In terms of service revenue and EBITDA AMAP grew by 6.1% and 16% respectively with margins continuing to expand now well over 30% and finally 38% of the operating free cash flow of the group now comes from the AMAP region.

On the bottom of the slide you can see full year service revenue growth pre MTRs the group as a whole was down 2% with AMAP growing at 7.8% and Europe declining at 6.5%. Clearly on the left hand side we see the countries from emerging markets growing strongly and on the right the more challenged European markets.

Now going through a service revenue walk. Full year reported service revenue declined 2.4% to £39.5 billion. On an organic basis after adjusting for foreign exchange and M&A this figure was declined of 4.3%. As you can see, we continue to increase our mobile in-bundle revenues up £1.2 billion in the year.

With 61% now of our mobile revenues in Europe now in-bundle, clearly that comes as a cost on our out-of-bundle, which was down £1.8 billion. Finally we lost £900 million because of MTRs. Now one of the important positives looking forward is that the MTR drag this year was around 2%.

Next year’s projected to be around 1.3% to 1.4% and that includes the South African recent rate reduction. As we previously highlighted a number of that MVNO relationships did not fit as strategic priorities. In total we terminated five contracts in four countries and renewed further three. Though the impact was relatively small this year in ‘14-‘15 the impact will have a drag factor of around 150 million to 200 million on both service revenue and EBITDA.

Turning to our EBITDA performance on slide nine. Across the group our reported margin declined by 1.1% and 1.3 percentage points on an organic basis. In Europe competitive pricing and increased customer investments in the second half of the year resulted in a compression of the margins. The impact of this was partially mitigation by the ongoing cost optimization program we have and we manage to save a net $0.3 billion in Europe OpEx in year. In AMAP we continue to grow and expand margins through strong topline performance, good cost control and I'm very pleased to see that Australia also contributed as we have now started to turn the business.

Moving to slide 10, financing cost, which on an underlying basis were £1.2 billion broadly consistent with the prior year. However on a fully reported statutory basis, our net financing cost had decreased primarily due to the recognition of mark to market gains. Overall the average cost of debt decreased slightly to 4.7% in 13, ‘14. For ‘14, ‘15 the cost of net debt will increase to slightly over 6% and this is a factor of U.S. debt being retired whilst the mix of India as an overall composite going up.

On to slide 11 and tax, our group effective tax rate for the year was 27.3%. This was higher than the prior year primarily due to the lower UK tax rate reducing the value of the UK capital allowances and the impact of UK [CFC] rules.

You will recall we quoted a $5 billion estimated tax liability communicated at the [influence] to do with the Verizon Wireless transaction, we finalized our tax position and we estimate that to be $3.6 billion. In ‘14, ‘15 we expect our effective tax rate to be in the high 20s, which is in line with the group's continuing operations current year rates.

Turning to slide 12 and our cash flow. We generated £4.4 billion of cash in the year, which was down year-on-year, primarily due to those difficult trading conditions in Europe that you can see on the top impacted EBITDA, capital additions were higher, primarily due to investments made in UK; India; Spain; and Germany. Our working capital position was elevated in the year, primarily around the £0.5 billion that we spent to do with Project Spring, though the cash payment will be in ‘14-‘15. We received £2.8 billion of Verizon Wireless tax dividend -- distributions during the year and we have received the final distribution in May which was £362 million.

So overall reported free cash flow per share was 16.6 pence. However, it should be noted in addition to the free cash flow reported here that we also received an income dividend of £2.1 billion from Verizon Wireless.

Moving on to our balance sheet on slide 13, net debt at the start of the year was £27 billion and it closed the year £15.5 billion. The key drivers were the acquisition of KDG for £8.5 billion which includes not only our ownership but also the minorities at £1.4 billion, more than offset obviously by the U.S. transaction of [£19.5 billion], also included in the year end figure is the tax payment on the reorganization related to the Verizon Wireless transaction, and finally also included was the deferred India spectrum license cost of £1.5 billion and the debt from joint ventures was also included.

Looking at pro forma debt for 14-15, we start by moving from a management view to a statutory view to reach the opening position of £13.7 billion. We are expecting outflows of £6 billion related to the acquisition of Ono; positive free cash flow for the year post all of our capital investments; and finally a dividend of around £3 billion. As a result, our net debt position at the end of the year will be approximately £23 billion or 2 times net debt to EBITDA. We remain comfortable at this level of leverage, maintaining a degree of flexibility as long as we see a clear path back to 2 times in the medium term. It’s worth noting, the pro forma debt position does not include the Verizon loan notes or potential spectrum.

So turning to slide 14, my priorities as the incoming CFO and there is essentially three. First of all delivering the integration synergies from acquisitions; secondly, delivering project spring returns; and finally, keeping a relentless focus on cost reduction for the group.

So let’s take each of those in order, so the first is our recent acquisitions, starting with Cable & Wireless. We consciously prioritized the integration of the assets which represented about 90% of the value we ascribe to the business. So, what have been our achievements to-date? 75% of the new high speed UK network is now complete; over 50% of our international IP traffic is now on net; and additionally, we have done further reviews and see additional opportunities around network synergies going forward. All of this was launched in unified communication products through an integrated sales force. TelstraClear is also ahead of expectations where 87% of the cost and CapEx synergies have already been secured and we have launched converged products to market, both for enterprise and for consumers. Finally, KDG integration started on the 1st of April this year, we already have completed our post acquisition review, confirmed our cost CapEx synergies, and have started to do joint commercial activities together.

Moving on to the second priority which is Project Spring. It's fully underway and it forms obviously a material part of the 19 billion investment, we planned to make over the next two years.

Project Spring really has four clear phases as you see on the chart. For each of the phases, we’re committed to report on a quarterly basis so that you can track the KPIs on the slides. Obviously to achieve phase four, the financial returns, we have to deliver on the first three phases. And I look at my colleagues in the front row, firstly Steve executing the network build on-time and on-budget; secondly, Paolo delivering the propositions to leverage the differentiating build in our network; and thirdly Philipp and Serpil driving the commercial momentum across the regions. And my job is report back to you on the returns that we get.

Turning to slide 17, third priority of cost. As we said, we've delivered the European net cost reduction objective of £0.3 billion. So look at cost in three phases that are overlapping. The first phase in our sort of history as a company has been around the centralization and driving central procurement and roaming; the second phase was around backend services utilizing shared service centers; and now, we're really trying to push aggressively on the third phase which is standardization of the front end processes. These will revolve around driving penetration of online use and mCare apps which will allow us to give a superior service experience obviously without the cost of expensive person support. We want to drive tariff and product rationalization and common IT architecture in each of their up course, this is more complex area of execution so we need a lot of careful management.

On to guidance on page 18. So, as Vittorio already said in his opening slide. We have met pro forma guidance of AOP of £4.9 billion and free cash flow £4.8 billion. We reflected on what was a proper profit measure post Verizon Wireless and we concluded and strongly felt that EBITDA being the industry standard should be the metric on which we should close our guidance going forward and we established to range with £11.4 billion to £11.9 billion.

Now I thought it is pretty important to have if you like a waterfall to show how we get to that guidance. As you can see we started £12.8 billion for this year, we then restated that to guidance exchange rates and a drop to £0.6 billion. We put in KDG for full a year effect, so adding £0.4 billion. We adjust the JV accounting to get to a like for like £12.5 billion. Obviously we set prior at the entrance, we would be investing in Spring this year and the estimate is around £0.5 billion and then of course we have that drag factor of MVNO as I mentioned earlier of between £150 million and £200 million that will also be a hit to us in ‘14-‘15. So, that brings us down to the range of £11.4 billion to £11.9 billion.

We also feel that once we've done the two year investment program of £19 billion, we will then have a leading operation in each of our markets and therefore can bring our capital intensity down to 13% to 14% on an ongoing basis given us plenty of headroom for our dividends, which we have the intention to grow from 11 pence that we announced today.

So in summary financial performance this year has been mixed, clearly Europe is being challenging AMAP continues to strongly grow. '14-'15 is an important year to deliver some critical priorities namely successful integration of our acquisitions driving the returns our Project Spring and being relentless about cost reduction going forward. We have a healthy balance sheet well positioned for a £19 billion investments and our inorganic program. And finally during the year, we delivered record returns to shareholders following the Verizon Wireless transaction and while cash flows will be depressed during the organic investment phase our intention is to grow dividends per share annually.

And with that, I will hand back to Vittorio.

Vittorio Colao

So let's now go to first the performance of the six live units. And let me start with probably the two more challenging situation. The first one is clearly Germany. In Germany, we have got what I would call a tough year with some under performance on our side. A marginal improvement as you can see from the chart in the last quarter but quite frankly very marginal. The story in Germany I think is well known by now, we had some network issues in the previous year both in voice and in data, we had also a little bit of an inconsistent commercial strategy very focused on discounting and while our main competitor was focused more on delivering commercial investment, quite frankly also supported by what in those days was a net of priority. And in general there was a reset of the prices that in Germany historically have been high.

We are now regaining momentum. First of all as you can see in the bottom part of the chart we are again in positive territory for our contract net adds and we are stabilizing the ARPU decline. In the second half of the last year we have improved network and I have to say not in the eyes of the customers yet but in the actual parameters and metrics we have recovered quality of our network. We have an improved fixed line performance not yet positive but going up as I will show later and of course KDG which in the meantime has come into the family continues to do well.

This general situation has created a contraction of our EBITDA margin which is down 3.4 points due to commercial spend that we have increased in the second half. So what are our priorities for Germany, first of all continue to improve the commercial performance, second clearly leverage on the KDG integration not only on the cost side of course but also on the offer side and then continue to consolidate the network improvements on the 4G direction, on the voice direction and also invest the Spring money into the improved distribution for the consumer business.

Overall, I would say we are improving in Germany. It will take some time. My expectation is that towards the second half of the year, the signals would be visible and measurable of the successful turnaround.

The second challenging situation is Italy. Here, Italy is now 100% owned. It’s a little bit of a different story. And I have to say Italy is still challenging. We had this massive price war last year. A couple of price increases that actually very successful but still have brought the prices below where there were (inaudible) there is a continuing impact on the customer base. And I have to say that recently we have also have seen very recently, in the last quarter we also have seen some resurgence of tactical promotions or below the line promotions which are coming little bit on the fixed side and a little bit on the mobile side, which are not completely signaling that the market has really repaired.

On the positive, there is good 4G opportunity. 4G, as you know in Italy was launched a little bit later because of the release of spectrum but the opportunity here is the same as in Germany which is pretty good. Enterprise, bottom part of the chart, is doing very well. We have re-launched enterprise very successfully; churn is down, the red line and activations are up. And [most] of the fixed broadband base is now growing plus 4.5%, we now have 1.8 million customers. And I have to say and I will make the same comments for Spain, we are very well placed here to reap and get the benefits of convergence.

EBITDA margin down 4.7 percentage points; the result of revenue effect, the general revenue effect, we have reduced cost but clearly this was not enough to compensate for the revenue impact.

Priorities: Clearly, drive ARPU; drive the ARPU recovery through Red, through our 4G services, and of course the broadband plans; continue the good momentum in enterprise and in fixed line; continue to reduce cost, Italy has a good tradition of reducing cost; and continue the network differentiation services especially on the fixed side where we have at this point working our resale offer from Telecom Italia, the possibility of using [Metro] alliance in the places where [Metro] are [dis-present] and of course our own FTTC plan which has 6 million homes into the works.

So, I would say in Italy, we have a very strong focus on improvement, but I also want to say we will have to respond to the tactical price moves of some of our competitors to discourage further deterioration of the structure or pricing on the market.

Now two good stories, the two challenging ones, the first one is clearly India. India, we had another strong year. We have as you can see in the top part of the chart, consistent double-digit revenue growth; we have margin improvement, it says somewhere in the text to almost 32% EBITDA margin; and most importantly, very, very good accelerating data metrics. The bottom part of the chart indicates that in less than what is five quarters, we have increased our data volumes by 2.5 times. Now India is the biggest carrier of data in the Vodafone Group. Some of you might remember that a year and half ago, I said data is going to be the second biggest opportunity in Vodafone after India, now data is in India the second biggest opportunity after India.

So, we are very pleased with the progress there. We also have achieved in India increase in the actual price per minute, which was quite an interesting exercise. Don't expect this to continue, at some point there will be a lapping effect with last year, but clearly again another positive of the market. Classic as I said doubled. 3G roll out is good but not only 3G roll out is good, we have got back after the decision of TDSAT the possibility of doing intra-circle roaming which at some point was suspended.

This happens in a country where smartphone penetration, data penetration still relatively low, we have 50 million customers on data but only 7 or 8 on 3G, but also in urban areas where smartphone penetration is 30%. So, and actually the usage of smartphone in urban areas in India is exactly the same as in Europe. So, we have a very good continuing data story ahead of us and we also launched M-Pesa which we'll cover a little bit later.

So what is the plan for India? Accelerate, thanks to spring 3G and 2G, 2G for coverage and 3G for data and roll out. We are starting to including India, thanks that you are familiar with in Europe, so small cells and fiber, because the fiberization of our Indian network is an important element of our future strategy; strengthen enterprise, continue to strengthen enterprise and fiber to the premises; and then continue to work on the optimization of the commercial offer if there is an opportunity to increase price. So India is a good story and continues to be a good story.

The other good storage is Vodacom and particularly here I'm talking about South Africa. As you can see from the graph, we are again back into positive territory in terms of growth 0.7%, 5% group level. And I have to say how they did it is really through let me say two things: One, the traditional network superiority that comes from investment and comes from a very big infrastructure that we always had there, but also through very smart pricing. The bottom part of the chart indicates that we have been proactive in reducing prices to face competition but this, and this is the blue line, but this has actually been done through very dynamic, intelligent dynamic pricing and that has brought up the usage which is the red line. And as a result, the green ARPU has remained relatively flat.

Now add to that data, data is growing 22% in South Africa; add to that the fact that the penetration of data is only 21%. And you can see why we are very confident that the South African operation is very, very solid one. There will be MTR cuts. We are planning to react to the MTR cuts a little bit same way through dynamic pricing, trying to increase usage, and make sure that we can stimulate a much more [home owner] type of strategy. EBITDA margins are flat despite the fact that we gained share and we are big.

International, just one word, they are growing 15%; it’s very good. We have M-Pesa everywhere. And again it’s another area where in the past there was a bit of doubt that you could really succeed outside of South Africa. And I think my South African colleagues are demonstrating that they are capable to work also very well in Africa.

Priority going forward I would say for South Africa, keep doing what we are doing essentially, so continue to invest in network differentiation; 3G; 3G; integrate Neotel which we announced yesterday; and if we can accelerate our 2G and 3G coverage in the known South African business where we have of course the frequencies and the possibility because we are very convinced that those stories would be good as well; and of course M-Pesa as I said even here will be an important element of the strategy.

Now, two stories which instead are not -- I would not define them challenging but they are not yet where we would like them to be. First one is UK, UK you can see on the top chart some improvements in the trends but we are still in negative growth which is not the right place to be. We now have 2.6 million Red customers in the UK, they make 42% of our contract base, we have over 600,000 4G customers with almost 50% of them activating the higher paying content package which again is ARPU accretive and we have bottom part of the chart improved our commercial performance from the 75,000 net ads per quarter of one year ago to be about 150 recently. And I have to say we are now I think in terms of commercial performance where we should be.

On the network side, we have improvements I have now 99.2% availability of the network in the UK, it’s not the 99.6, 99.7 that I would like to have and that we are working to have. We still have to improve some of the indoor coverage in London and some of the major roots outside the country, but clearly this is going to come this year with project Spring, we are not there yet, but we would be there.

EBITDA margin is a little bit down this clearly reflects the inclusion of cable and wireless and the cable and the wireless dilution on the UK. Cable and wireless integration is going well. We are on time, we are actually little bit ahead on the financial case and also includes the higher commercial investments that we have made.

Priority continue to work on enterprise cable and wireless integration and strengthening of our enterprise presence fix and improve and even further our network really get into the best network position including landline, including indoor, get to 99% 4G outdoor coverage, strengthening the distribution we announced a 150 new stores, 1,500 more people in retail to try to manage in a more effective way our commercial costs which are big in the U.S. And of course continue to grow through the cost reductions with the joint venture with O2 and our own internal effort, because there are also some regulatory headwinds coming, roaming being one and of course premium rate numbers being the other one. So, more work to do finding gently in the right direction, but not there yet.

Now Spain is the other -- some again case of positive trend versus the recent past with I have to say a still negative number, therefore not where we would like to be. But again here we see positive things for sure for 4G which is going well 800,000 customers with 50% coverage of 4G in Spain. Our convergence proposition in Spain are doing fine. Now this is an important point, you might remember one year ago, more or less, one year and a half ago we have launched Fujion in the whole Telefonica, we're going to completely change the market. There was a sense Vodafone doesn't have a strategy in Spain, actually we said we would have a strategy and now the numbers are coming through. We have 6% growth in broadband, we have fixed line net addition going positive, we have 5 percentage points of churn improvement, thanks to Red and we have positive enterprise net additions in the fourth quarter.

So, I would say even before talking about fibre, which is just launched you know that the program is to go 3 million homes together with Orange plus the Ono thing that will clearly change the game for better clearly our position. I would say Spain is starting to turnaround in a positive way. Prioritizes we go ahead with our converged market offers at this point including also fiber, do more differentiation with 4G and retake more control over distribution and continue to build fiber also to complement the Ono network and again two investments would be very complementary and we would leveraged on each other and once it's completed integrate Ono in a successful way.

So this is the situation of the large six too challenging, too good, too improving but not that yet. Let me now go to broader topics. Now this is the chart I used last time to say what is Vodafone after Verizon. And Vodafone after Verizon I said is an European consumer business and emerging market consumer business and an enterprise business. And the three of them with clear objectives will be accelerated or I said would be accelerated through project strength which is supercharging the possibility of pushing each of the three businesses deeper and stronger into the new phase of Vodafone’s history.

So let's start from 4G. These are some interesting statistics, we have doubled our 4G based, the red bars on the left top in one quarter to around 5 million customers, these are active paying 4G customers. If you look at how many people have 4G phones in their hands you will get the number which is double debt and of course we are going to push that up. The 4G usages around two times. The 3G usages in data terms, these are two examples of the UK and Spain, but the same applies to the other market. And important thing is and this is an interesting point that for the first time we raise that all applications get use more in a 4G environment, it’s not just a matter of YouTube or BBC or these things. As you can see the use of everything goes up. We have to say the interesting thing is that the propensity to use Wi-Fi goes down because once you liberate, a good experience, a really good experience and a decent pricing package, people use Wi-Fi where Wi-Fi is really worth using and not necessarily as a way to reduce their cost which was exactly part of our strategy. And I have to say anecdotally, no signs, please quote me in your notes, but I hear more and more people saying once you have two, three gig, you don’t need Wi-Fi anymore. Now I don’t think it’s completely true but I think it is a sign that our fear of integrating technologies was the right one.

An important element of this is content. In the UK as you know, we have integrated packages with Sky and Spotify. Again this doubles the usage again versus 3G. The question on how much net ARPU this offers to us gets tentative answer on the right; it’s let me say around £4 or equivalent of £4 in other markets, once you pay for content cost, which is of course an ARPU increasing action.

The interesting stat is the one on the bottom left which is what would customers on 3G choose in terms of data allowance versus 4G. And I don’t pretend that this is 100% linked to the previous content point because of course there is no science behind this but clearly there must be something there. Before on 3G, the majority of customers, 57% tend to get packages of 1 gig and below; on 4G they tend to get packages of 2 gig and above, part of it is our commercial push. But again the picture that I am giving you with this kind of two slides is really that we are not just in an evolutionary moment, we are in a big discontinuity moment where customers are really starting to look more American if I can use that expression, the model seems to be moving in that direction. And customers who low bundles, the light blue lines, actually tend to exceed and grow over more than in past, so they should eventually move to the higher bundles.

All of these are encouraging signs for us that our strategy which is right 4G content in European consumer markets is going in the right direction.

Before moving to convergence and unified communication, sorry that is Red. I want to give you the update on the Vodafone Red. Now Vodafone Red is 12 million customers, it is clearly something that we have done also toward the rest of the concerns of business intermediation the WhatsApp, the Skype, the over the top risk.

Vodafone Red has 12 million customers. These customers churn between 6 and 11 points of less than the equivalent customers on no Red plans, so they seem to be happier. They have a much higher satisfaction with the service, they use more data but they also use more voice. And again here we are a bit different if they use our voice or -- and over the top voice because in many case they are included in the plan, but it seems that they are still using more also our voice. And as a result, bottom left chart, 61% of our revenues in Europe now are in bundle, I cannot say guaranteed but protected from this intermediation. This is a very important point because Red is not simply a price plan, Red is a way that is chosen with some cost, I have to say with some commercial cost to immunize our revenue base for the future. And the more successful we are in Red, the more relaxed we are in the discussions with the over the top and we can say to our shareholders that we have a more stable revenue base with some cost in the short term.

Final point on the bottom right chart, what is happening in the world of multi-device and family? Clearly we are starting to push multi-device and family plans. You see Italy and Spain in two different ways; and Spain, the family is more important; in Italy, the tablets seem to be more important. But they are going up nicely and we will do it more everywhere.

And interesting, the start which left me surprised when I was preparing for this presentation; in Europe, there are 70 million tablets, of these 22 million have radio capability non-Wi-Fi, which means that two-thirds actually don't. And of the 22 million, only 12 million actually are active today on a 3G or 4G network; and Vodafone has 4 million of the 12 million, so 30%.

Now, this tells you the opportunity of the multi-device thing that is out there today that are already today without any further penetration, there are 48 million tablets that can be connected. Now, this is clearly our attempt to move Europe into more of the American model probably to not be at the same price level, but the opportunity is there.

Second pillar of our strategy, sorry again, I forgot the roaming point. Roaming, again another area that I often hear as a concern is roaming is going to be regulated in Europe, yes it will but let me say, first of all roaming is 6% of our European revenues and 60% of it is outside of Europe. So, the kind of exposed part is a small part. I'm pleased to say that thanks to our take your home tariff abroad tariff and which works in all the countries which are either Red or Purple, so Vodafone and friends.

Today, we have 14 million customers using the take your home tariff abroad and again a different percentage is clearly across the markets, it depends whether it's obtained of doubt, clearly in some markets we have more difficulty; in other markets, it’s easier. But the interesting thing is that once they get there, the usage of data goes up immensely. And this is very intuitive. I think we all -- you all experienced going abroad, going to Barcelona, going to places and turning off data roaming because you perceived it with cost too much.

Now for [three times] per day it is included in you package. Now put this together with Vodafone Red, put this together with 2 gig, with 3 gig, suddenly roaming data is another great opportunity to increase our usage and the customer’s loyalty. So I am pleased that what was a threat is being turned proactively. And if you take some time to get to the big numbers, but it is done proactively into an advantage for us.

Now moving to unified communication, we have made great progress this year. If you look at the chart in the enterprise segment in all major markets, we have the possibility to offer an enterprise converged service either through an NGN resale or through our own fiber or cable.

In the consumer markets, in most markets we have already activated our offers and the results are positive. As you can see on the right part of the chart, all the plans in fixed lines are going up including Germany which is still negative, but still going up. And in most of them, we also have what it makes sense, Italy being the exception, Italy offer which is either an IPTV or a cable TV offer. UK is the market where from a consumer point of view, we are looking at, first of all whether we need it and second at our alternatives. But I have to say clearly this is another area where we have made good progress this year.

Emerging markets, I said already a lot. What is really striking is the growth of data in emerging markets. Keep in mind that emerging markets has 70 -- as Nick said, 70% of our customers; 28% of revenues; 40% of cash flow with data this can really actually increase significantly. And I have to say the absence of fixed line as we were saying a couple of years ago is actually proving a great booster for broadband both in the companies and in the residential areas. So data would be a great story.

The other great story is quite frankly M-Pesa. M-Pesa is not just a Kenya thing. For years we have been talking about M-Pesa and everybody used to say yes, but that’s only Kenya, it’s a kind of strange thing happening in Kenya. Now it’s active in eight or nine markets. We have 17 million active customers in countries like Tanzania, it’s 19% of their revenues. We have worldwide 200,000 active M-Pesa agents and we process 2.8 billion transactions last year. It’s becoming really meaningful in the economies where we work and clear big opportunity is India.

In India we are now nationwide we have 56,000 agents. This means 65% coverage of rural areas. To give you an idea the banks in India cover 5% of the rural areas. Now this does not mean that we want to replace the banks this means that we can actually be the fertilizers before them. We are the pre-banking facility that is coming to India, 1.1 million registered customers and clearly P2P business and utility to the payment is going to be the first area of growth. I am very, very optimistic about the potential of M-Pesa in emerging markets.

Enterprise. Enterprise I want to be honest and transparent, what is not in this pages that overall enterprise is still negative and it is still negative because of Southern Europe essentially, but we have a very good traction in the verticals that we are on across the group. First of all Vodafone Global Enterprise service revenue plus 2.1% so the interesting number is a second one, plus 5% in the second half, so reaccelerating again. Of course part of it is more positive economy around the world, but also it is our formula that as soon as the economy turns positive actually delivers more.

Even more interesting in emerging markets VGE is going up 15%, 16%. And again the importance of places like India and South Africa, Turkey to Vodafone also come very evident when you look at this number. And interesting enough we have a pipeline of £6.5 billion which of course means nothing to you because there is a probability that you need to touch [grid], but the interesting number is 60% of this pipeline is in total communication is not a mobile only. And so in the high end of the market in Enterprise and I showed you before Vodafone is already a player into that converged space. Of course now the job will be come down into the smaller and medium enterprise which we do through a number of offers, essentially under the one net brand which is our brand for converged services. It is now in 10 markets, we are going to add another 10 or 15 next year. Nick, right? 3.5 million customers plus 20%; to-date 23% of our Enterprise services are already fixed line, so again the transformation of Vodafone in Enterprise is already more advanced.

Good results from machine-to-machine. 21% growth in revenues and 16 million connections; we have got Audi, we have got Volkswagen, we have got BMW. There are some verticals in which clearly we have established a leadership here. And small, but I have to say for the first time growing again cloud and hosting which we got out of our German and our cable and wireless business and created a business unit again is starting to grow.

So positive signs in enterprise and I have to say I am more opportunistic because of also what I said about Italy and what I said about Spain where we start again having positive numbers.

Before concluding, one word on project Spring as Steve doesn't have a presentation today. I have to say we started and we are happy we started we are now I would say 20% into the program. Our objective is to really deliver a better experience. The first top chart indicates [what, we] improved experience today and the experience today is, and yet be careful because we use a more stringent requirement and most competitive new measure 3 megabit per second downlink which is what you need to had an HD video on a relatively bigger screen not on a TV screen, but the second bigger screen, not on the first, on the second which is the tablet or whatever the PC or the large desk screen. In three quarters of the cases we deliver already 3 megabit per second. Our goal is to get to 90%, which is where people would say it always works. So, our objective is 3 megabit per second it always works with Vodafone. Of course always is not always, always is 90%.

Now, it's very important that it also works everywhere and therefore our objective for coverage which is the second is to go to 91% 4G coverage by March 16. You see that in some countries like Germany we are ahead, hence my more positive comments about Germany going forward. In other countries where we've got the frequencies later, we are a little bit more behind and Spain is in intermediate situation. What countries have a 90% again target in the next two years.

Where are we in the plan, you can see the first set of numbers to the left of the arrows are what we have done in six months. It’s pretty impressive. They are all pretty good numbers digging into this yearend ‘16 target which is on one on the right of the arrows. The clear big effort and big challenge I want to be again transparent is the 4G side. We have done 7,000 we need to do 70,000. So there is another 70,000 to be done in two years.

The good news is that what we always said; we are preparing our networks, we are doing single run, we are preparing the network for the future is now there. So it's a lot of work [still fussy] and the technology people will have a lot of work, but good day is there for deliver and I have to say also the partners are helping a lot there.

So heading towards the conclusion. The wrap up is we are investing massively organically, this is a great moment of this continuity for Vodafone. We are massively investing organic. We are also investing commercially. At the same time where we do the organic investment and we are trying and working hard to make the turnaround of couple of situations that I mentioned quicker and deeper. We didn't talk about other countries that actually are doing pretty well, if you figure out the mark clearly the rest of Europe is doing better, but again Turkey whatever Ireland and some [in this game of things] they are smaller, but I'm pleased that they're going well.

We are very focused on the transformation of Vodafone, but of course we are still privatizing shareholders returns as an important element of what Vodafone is. I cannot promise that I will return another £57 billion in the near, nor in the median term and I don't know about the long, I never say never but still £57 billion is a pretty challenging number. But for sure our Board is very focused in its intention to grow the dividends. And as Nick has said some of you, in your knowledge, you said given dividends would not be recovered and the answer is technically they will not be recovered for a couple of years, because we are in a massive investment transformational phase which was financed by the Verizon transaction.

Once the investment level returns to the normal level, which could be 13, 14 potentially less maybe not, but at least that is what we think is normal, again we think that the intention to grow the dividend would be very clear and they show up two years of cover or not cover would be a temporary issue.

And of course I also have to add relative to the comments that Nick has made about our target leverage, we -- the Board has a very strong intention to remain very disciplined in capital allocation. And so our balance sheet structure will clearly take shareholders’ interest as the most important metric for any evaluation of potential acquisitions or others things that you might read about in the newspaper almost every day.

So to conclude, we are in an important transformation phase. We are going from being a mobile company to unified communication company, from Europe to Europe but more and more emerging markets from consumer to consumer enterprise and from metered old voice into data and new services.

The year that just closed has been challenging from the regulatory and competitive position. I also have to say we have underperformed in a couple of places. We are already addressing it, the results will come I hope more towards the second part of the year. We still have very strong engines in emerging markets, unified communications and enterprise. And despite all of this we have met anyhow, our full year guidance for the year.

So Nick talked about his priorities, let me talk about my priorities now. My first priority is clearly the better performance in commercial, driven by both network and customer experience. That’s the priority number one for my coming 10 months. The second is the operation and integration of KDG and Ono. Nick will make sure that also the financial integration would be successful but the operational integration is clearly one priority because we have spent a lot of money for those two assets. Continue the progress in unified communication, enterprise, and emerging markets. I would have to dedicate sometime to supporting a more favorable regulatory environment; I have to say especially in Europe in light of the net neutrality discussions. And then finally, I want to make sure that the money that we spend on Project Spring have adequate returns in as short as a timeframe possible.

Thank you very much for your attention. And I now ask my colleagues to join me for Q&A.

Question-and-Answer Session

Vittorio Colao

So, we start here and we go there and then we come back as always.

Maurice Patrick - Barclays

Hi. It’s Maurice from Barclays. Question around on there is [diplomatic] commercial spend, [exactly] your capital spending in Europe. Are we at a level where we’re at even more catching up from past under spends of previously, should we think about the current [micro] spending as a more normalized level or perhaps as you all look at increasing set further in the March ‘15?

Vittorio Colao

Yes, Maurice, I take this answer because if I give it to Philipp, he would say it’s not enough. But your question same time is easy to answer and difficult to answer. It is obvious that we have invested more in the second part of the year and we have all supported Philipp in his turnaround effort. We were under-spending in Germany clearly; we were a tad under-spending UK, now it’s not the case anymore for both of these things. Are we going to say, we call it what it is. Well, we are making a lot of investment in retail also to take back into our hands more control over commercial spending. So, can I see a future where through online and retail, we start reducing that investment, yes but of course it depends also on what the competitors do.

So, the first part of my answer is easy, my answer is yes that increased our commercial spending and we are now competitive, as competitive as the main players. Can we reduce it or can we keep it there? It will depend a lot also on the market.

Maurice Patrick - Barclays

And the guidance range you’ve given for the March ‘15 year, did that assume an increase in total [site] for the year?

Nick Read

I don't think we really want to be explaining component by component, but I think it's fair to say that we uplifted our spend especially in the second half of the year. And that will have a degree of momentum into the first half as well and of course you are annualizing on the second half.

Vittorio Colao

Yes, let’s go Akhil.

Akhil Dattani - JP Morgan

Hi. Akhil, JP Morgan, firstly just continuing on Maurice’s question on the commercial momentum. We have to started to see you mentioned improving contract net ads trends in a couple of markets. I guess what I'm trying to understand here, particularly in the context of the EBITDA guidance you have said, do you feel that we're at a point where excluding all the MTR drags and changes that we have, we're at a point where the underlying momentum at the group really is starting to improve or do you think some of the other points you made around Italy, maybe some re-pricing on Germany, are there other issues that you need to deal with, that we need to factor in here.

The second thing was just on your comments around net debt and investments and I guess the importance of dividends. Your leverage is going to be around two times post Ono. And I guess one of the big initiatives over the last 12 months has been doubling up in key markets to strengthening your businesses. I just wondered if it makes sense in that context to consider any sort of portfolio restructuring, maybe reducing exposure to non-core markets so you have ongoing flexibility in the main regions. And I’ll leave it there.

Vittorio Colao

Well, let me give you the second answer and a bit of the first and then I will pass to Philipp for the rest.

The answer for your second question is yes. Yes, of course it makes sense to consider non-core market. It’s obvious that when you decide to go deeper in important situations where either you don't want or you cannot go deeper, you should consider alternatives. That does not mean that we have made any decisions on but of course as I said many times, the Board regularly looks at all the situations and we will make whatever appropriate decision we have to make. So there is no secret cow, if this was your equation that we consider in our portfolio outside of the core areas as we have to certainly find them.

So the answer to the first question on momentum and these things, let me give, there is one situation which is difficult for us to predict and it’s Italy. Because three months ago I would told you it’s going in the right direction, price phases, blah, blah, blah. Today, I have heard from Philipp and from the CEO of the market that again funding offers, below the [end] offers are being pushed into the market. Telecom Italia has priced their at [€29], which seems a little bit aggressive to me. So we might have to respond now. it’s very then difficult to see what happens to the response, back to the response, will this drag again the market into a chaos or not. But that is the only one that makes a little bit difficult. For the rest, Philipp, you…?

Philipp Humm

Maybe just add to it, I mean we see some strong improvement on net adds overall and net add trends. That being said, we still have ARPU pressure and as ARPU -- as the re-pricing [washes] through the base, which is mainly in the first half of the year, you’re still [north of start rate]. And thereafter it will really dependent a bit as Vittorio was saying how the market continues to react. We tried in Italy and successfully did sort of repricing of our prepaid space, we repriced more than 3 million customers and so we are trying to do whatever is possible to stay calm and work on improvements.

Akhil Dattani - JP Morgan

Can I have a very quick follow up just to that. In Germany do you think initiatives that you have taken so far were sufficient to drive that edge to reflection or do you think there is anything more that you might feel was necessary in market given competitive pricing levels at in moment?

Philipp Humm

No I think if you at our rate plan portfolio overall I think we have a very competitive rate plan portfolio right now in the market. If you look at our A&R levels we are following very closely competition again with a same objective not to drive but to more follow so if there is possibility to take out our money than we have done so in the past. That’s why we are very cautious there. But I think we have all the plans in place. We now started on the second with our first integration commercial offers, which started quite promising it’s obviously a little bit early to tell, but started very well. We were focusing on cross selling in each other’s basis and we really got the organization, both organizations very excited to sell the respective products. So I think we have all the necessary momentum and element in place now in Germany commercially.

Vittorio Colao

Gents, if you can raise your hands again so I see and I put down, James Britton, yes.

James Britton - Nomura

Thanks James with Nomura. Two quick financial questions and a strategic one. Firstly how much will Projects Spring OpEx increase to [news turn] free when the network is fully laid down? Secondly just a twist on Akhil’s momentum question, I would direct it to Nick. So in terms of margin momentum for Vodafone. If you strip out the Project Spring breakeven, strip out synergies from the acquisitions, do you think the underlying business can actually improve margins in the medium term? And then strategic one is really around price increases is being pretty rare in mobile I would say. But the Projects Spring guidance does imply that will turn to pricing power as you make return on this investments. So how do you envisage these price increases being presented to the consumer, is it going to be part of a brand new cycle, obviously can you see it?

Vittorio Colao

This is the easy one. If anything I showed in terms of usage of data, higher packages, possibly reducing the association of the handsets to the price plan and putting more emphasis on the value of the price plan and also more competition among handset manufacturers and device tablet manufacturers and so on keep growing at this space, I would call about our countries not price increase as a customer and getting much more. So and this is what is happening in the UK, this is what is happening in the Netherlands. Now we need to work everywhere I cannot promise you James, but this is where we are doing. There are some interesting sign, I mean India is another interesting one. Nick they are the two questions then we will go to Steven and then Tim.

Nick Read

Yes, I mean just in terms of Project Spring year two, three. If you remember when we came out with the original program those metrics we still stand behind. So we are saying that this year 14-15 we are at half a billion and then we said by year three it would be EBITDA neutral going forward. So I mean you can bridge between the two points. I think in terms of margin momentum as it pick up on the point that Philipp break in. so you look at the second half what we have done, we have suffered from Italy sort of price erosion and also Germany reprising and to some degree Enterprise in the UK. So, these are the three sort of repricings going through, so obviously they would be seen through to the first half of next year as well.

So, it is only when you get to the point of the second half, do you start to have a little bit more stabilization, as always pricing stays at the current level and of course A&R spend will have stabilized year-over-year as well.

So, I would look to the second half, showing more positive signs in terms of the trajectory on margin.

Vittorio Colao

Stephen, Tim, Justin, Andrew and then I will look at another. I will move that.

Stephen Howard - HSBC

So this is Stephen Howard, HSBC. So I have got a question about on German consolidation and guidance. DT has been pretty vocal recently, and criticizing some of the relatives that have been tabled in Germany. And questioning the impact of the concessions that have been offered to the MVNOs.

Now given the MVNOs of the one thing that you have particularly called out in that waterfall chart of the EBITDA guidance. What is the risk remitters necessitate your negative impact larger? And sort of a tendon question if you will, I mean currently you are doing an off a lot in terms of investing in Project Spring, it seems only fair that you would be given credit for that by the regulators and Brussels. How are you communicating the fact to them that you are putting your money where your mouth is to preserve, this is an industry that in the past is often being criticized for underinvesting and leaving your opinion short? Thanks

Vittorio Colao

Yes, it's kind of, it's a multidimensional question Stephen. So first of all [Tim Hodges] and his position, Tim is very vocal in this. I think he is right, he is right in saying, but this is more for the previous we think the journalist, he is saying that there is not pointing in allowing consolidation if you then mitigate away the benefit of it which does not makes sense, so I think he is right.

I think our choice is not to cut out MVNOs, but not to keep MVNOs who are not willing to pay the full price of the services is the right one, because you avoided direct comparison and direct intermediation. You’ve had us make different choices and they want to give away their 4G 2 gig, 3 gig for whatever €5 that's their choice. But eventually I can guarantee to you, they would be cannibalized by their own MVNOs, which is fine if it's part of their strategy. We are not willing to that.

On the other hand good MVNOs who are willing to pay, who say like I have a channel, I have something. I pay a decent discount and I contribute to actually amortizing the infrastructure, those were perfectly find with them. So we have to qualify what we have done. We are not continuing the relations with those who are not willing to pay and that's I think the best commercial response.

Brussels. Brussels is in a transition as you know. I think they give us credit for the investment. They don't fully yet understand this point on consolidation. So they don't understand completely that consolidation actually will lead more concentrated investments and therefore to more ability to reinvest in the business and therefore in the end in better services for the customers and (inaudible) we always make is the U.S. and they need some condensing it's going to very crucial to see the new commission, it's not by coincidence that my second last priority for the year that I shared with you is work on regulatory. I will have to spend more of my personal time on that.

I think we had Tim and Justin and Andrew and then we'll move there. Yes, and then Robert and then the -- go ahead.

Tim Boddy - Goldman

Thanks very much; Tim Boddy at Goldman. My question was around your kind of conviction that this is a trough. I mean you clearly laid out a scenario where there is a number of levers the group are working on to drive the return to growth. But I guess the question I have is just how long will that take, how fast can you turn around customer perception if you got any case studies you can share with us? And then I guess related to your point now about MVNO, is there ever any signs that the signals you are making are being picked? Because I think it’s the typically the other leading mobile player in the market follows your lead who we would say yes this is working, there is going to be a clear differentiation between the leaders and the lag out some quality. And so again, any anecdotes you can share there will be very [assuring]?

Vittorio Colao

I am looking at our Legal Counsel sitting here, I am not so sure how much you want me to go into the second question, right? You have to be very careful. I mean this is a territory where public comments have to be really only about facts that are known. And so I cannot -- what I cannot tell you is that there are different positions and different players, some players are important more long-term oriented players; they have taken senior position to ours, I think from what I see in the market, other clearly not. This is part of what is call free market. What I said before in my early answer I think is a point. In the short-term you always get a benefit from MVNOs because it’s money that flows directly to your bottom line. So if you have a one, two maybe three years horizon, then you would take out the MVNOs of the tariff because it adds and it fits your capacity and you look good.

After two, three, four years, customer starts saying you know what I am better off if I take, I don’t know -- I speak about my and not about the others (inaudible) than Vodafone because it is the same service as Vodafone for half the price and then it’s where you start losing traction with your own customers. Now I don’t have two, three years or long-term, short-term orientation, I think company should be run for shareholders forever. Therefore, we made this decision but I cannot comment on what others will do or case studies or things like that because it’s not a territory where I have been taught I should go.

The first part is how fast, Nick, you want to have a comment on that. We don’t give long term guidance, so we don’t want to be specific in the numbers. I think you are seeing the numbers, we are gaining 1.5 to 2 percentage points quarter-over-quarter which should be a good indication. Now some situations, as I said in Italy, could take longer, where we see and clearly Italy was one of the places where clearly you could have come back earlier rather than later but it depends a lot on the competition also.

Nick Read

Yes. I think Tim, you’re also saying how committed are you to spring and whether differentiation will start to show and come through in the metrics. And I was giving an example this morning of India where we made a sustained investment for two years in a market of 14 players. And you look at the market now and the top three players are taking 95% of the incremental revenue market share. And I would argue that we have created a two tier market with ourselves and Bharti and to some extent Idea separated from the rest of the market. So I think you can’t build network differentiation because we certainly didn’t have it when we bought the business. And we distanced from the rest and you will see in the results and returns from it now. But we’re big infrastructure company, and we said Project Spring was a seven year payback, so you’ll have to be a long term investor to get those returns.

Vittorio Colao

Justin, and then I have to go there and then I come back for Simon and then we go here again.

Unidentified Analyst

Thanks [Tim]. Could you -- maybe this has been answered already in a way. Could you quantify what your revenue [avatar] is from MVNO in Europe and year March ‘14, I guess just ballpark? And how far are we through this decision whether to cut MVNO contracts, have you done it basically or is there more to come?

Vittorio Colao

Nick has indicated a 150 million to 200 million impact next year. I'm not sure we disclose what sort of competitive reasons, exactly the amount by country and by partner.

Unidentified Analyst

Is it done pretty much?

Nick Read

It's a reasonable percentage 150 million to 200 million.

Unidentified Analyst

Okay. Thank you. Secondly, margins and growth in AMAP, you got M-Pesa; you got data growth; not too much risk from SMS cannibalization, Nick. And this surprises over the next 12 months, because you see revenues accelerating margin expansion and what does M-Pesa do to margins for example, what is data growth due to margins? And against that you are saying that lapping a price increase in India, how much is that a headwind over the next 12 months?

Vittorio Colao

Why don't you pass the question to Serpil with a clear instruction on not meeting specific guidance, so answer qualitatively please.

Serpil Timuray

First of all, during the fiscal year, we have seen AMAP significantly increasing its profit contribution as well as cash contribution. Now AMAP represents about 40% of the total group's cash. So, that's very encouraging to see. And already the total AMAP portfolio is yielding a margin of 31%, which is 16% growth. So, we can already see that there is a very encouraging trend already. And this is coming on the back of couple of things, one of them is there is continued customer growth still in AMAP, which is the first point. So, we have seen a 9% net customer growth in there. Second, we have also effectively increased pricing especially in the bigger markets. One example is definitely India where we have increased the revenue price per minute by 6% across the year and we're also seeing ARPU effect on it. And the third lever is the mix of the customer. So we have really opted a better quality of the mix, so we have seen activity ratios increasing and the data is also picking up, so data growth is 40% growth year-on-year in India.

So all of this is going to continue, so I would say the data configuration is still in its early phases, so we should even see a further pick up in the next year ahead.

M-Pesa, I think we need to look at this business differently than the core mobile business. And here what’s really important is that loyalty contribution of M-Pesa to the customer base. So we’re seeing the stickiness effect of M-Pesa and that's the big learning already from Kenya and in Tanzania right now M-Pesa is about 20% of our revenue already. In India it’s very early days, but we've already hit 1 million customers.

But we need to look at M-Pesa in a different -- with a different view, because it is really generating a commission out of the big transaction and it's yielding immediately to the bottom-line, but you need to look at this as a different business, I would say, but look at the incremental loyalty effect M-Pesa is bringing.

Unidentified Analyst

Just finally, I mean you talk about asset disposal, and I guess you say something about Australia and [3G] so I mean could we (inaudible) bigger, I mean people some argue that you can spin off a map. Is it crazy to think about spinning off M-Pesa at some point, I mean are there actually bigger things you could do?

Vittorio Colao

If you listened to what Serpil said, the answer is no, because she said M-Pesa is great, delivers to the bottom-line, requires big volumes of transaction and is great for the loyalty of the customer. So it requires the support of a vast dealership or dealers network and it require and it gives back also in loyalty terms, so why would you spin it off, why would you not get the benefits on one that allows the funding of the other.

So the answer is no to M-Pesa. And to AMAP quite frankly it’s another no as a whole because it’s an engine for growth as I said in enterprise not being in India is a disadvantage, in the relationship with the over the top, the Google, the Facebook [has this words], Turkey, India, South Africa are becoming more and more of the topics that Paolo has to deal with and quite frankly we have more and more of a great contribution to the group of five. I don’t perceive that the multiple [argumentary] works very well to be honest. Every time we do the math with the Board we go back always to the same conclusion that the some of the part applies different multiples but in the end you get the way to leverage. And so the answer is no, that does not mean that we are seeing the portfolio of Europe or emerging markets that could not be assets that we are willing to kind of dispose to somebody who believes that there is higher value in their hands.

Andrew then definitely need to go there, yes, John and the follow -- yes.

Unidentified Analyst

Hi. Can I ask you about your view on the split of equipment storm plans and service plans, the accounting that relates to it and all of that. I mean I guess some of your competitors doing it; in Europe it’s been pushed very, very hard in the U.S. at the moment. The consumer seems to have some attractions to the ability to upgrade a bit faster to have no national contract to have zero down in some cases particularly in the U.S. and on the low headline service price. There is also a sort of financial presentational benefit in terms of earnings and EBITDA drag when you push harder for gross size and obviously that is something that you are doing on planning staying more as you get through Spring. So what I really want to understand is what’s your view on the consumer attractions to that offer or that lower that proposition and also what do you think is only thing in the financial presentational side as well?

Vittorio Colao

Yes, perfect question for Paulo. I would just pick one thing that you said I and the Broad have not came to do things because of the financial representation of things. So I don’t think we are willing to do things for the sake of presenting or embellishing or doing cosmetic stuff to our numbers. So there is a genuine customer advantage, we like to do things but it my internal cost of financing for example is lower than the external cost of financing, why should I take a higher cost just to look better and there are very good notes that have been written on this topic. So yes we are looking into it and we are doing it in some markets, but it must be following the customer not following the cosmetics of it.

[Multiple speakers]

Vittorio Colao

Sure. But I think it is really the way we are approaching it because normally you take it from the accounting point of view which is really around, we are doing a lot of work in this space and we are really staffing from the customer perception of what they are buying and what they are locating the valuing between the device and the traffic. Reality is that there is not one answer which fits all the market because very much it depends also in your competitive the dynamics. some markets we are convinced that by splitting, we may be perceived that even if higher price, if our quality is much higher more competitive what we can be perceived if we still bundled, because obviously the total bill is higher. In some markets we still believe that by bundling can call a higher premium, which is really the nature of the discussion, which is based on what the customers perceives, how we can capture more value independently from the accounting.

We believe that there is a clear advantage if you split, if you can separate the duration of the contracts of the device from the contract of the traffic, because sometimes we realize that the first customers are negotiate traffic price and simply because they want to have a new device. And this is the reason why more and more in different markets for example Germany recently, for example Spain last year. We are starting to launch the device options and device solutions which already going that direction where basically are an ongoing traffic plan and then you can renew the device on top of it separately.

So, not one solutions, but overtime, I think we will see more of this coming on a market by market basis.

Philipp Humm

Maybe just to add a few elements to it. If you look at the different countries already today, if you take Germany, we do more than 40% at SIM only which is if you want [fronthouse] good contract, because it's really a SIM only base rate and then you get the device separately, we do installments in Italy already today, we do the combination in Czech Republic today, we do a leasing model in Spain. So we have different base on the market needs, different models in the markets today already.

Unidentified Analyst

Thank you, Vittorio. Just first of all just to clarify, when you showed the ARPU between 3G and 4G in the UK, was that net or gross of the pay away to the lights of sky and (inaudible).

Vittorio Colao

Net.

Unidentified Analyst

Net. Okay. Thank you. And then I know that you have models and you don't basically spend money unless you can see the revenue sometime in the future. But given what you said about 4G ARPU in the UK, given that BTs plan seem to be a bit more credible let's say than their previous attempt of this. And given also that Ofcom as of this morning has made it much easier for you, if you wish to wholesale broadband. Why wouldn't you preemptively, preemptively I stress an underline that get into fixed broadband before BT comes out with it's own core play or equivalent tariff offering?

Vittorio Colao

Are you asking me why would I not consider that?

Unidentified Analyst

Well.

Vittorio Colao

The answer is I would.

Unidentified Analyst

Right. Can you enlarge upon this please?

Vittorio Colao

No.

Unidentified Analyst

Thanks very much.

Vittorio Colao

No, the answer is very simple. I mean of course it is exactly what I said in my comment, I said we have a variety of alternatives, we have proven in a number of European market that the combination of your own build, rent and eventually buy, if you need to buy can be actually affective and from a capital point of view better. Don't forget that in these countries we're already in a thousand rental -- changes, thanks to cable and wireless.

So again it's we will consider all possibilities, but I would not like to elaborated at this stage, I don’t believe too much in the preemptive, non-preemptive thing because believe really need to play like the strategic game to its hand, if you do something somebody else would do something else. So you need to think very carefully about all your moves. But clearly we are contemplated all possible moves.

Polo Tang - UBS

Yes. Hi, it’s Polo Tang from UBS. I just have two questions; the first one is on Spain. If you look at Telefonica, they’ve obviously moved to acquire a Digital Plus or Prisa TV. So, I was wondering in terms of where your thoughts in terms of how this changes the dynamics in terms of the Spanish market. So for example, would you believe Ono will still get wholesale access to Digital Plus’s content? And second question is really just about what you have done in the UK already? You mentioned that things like Sky and Spotify that content has significantly driven data usage but can you remind us in terms of where you are with content deals across the rest of Europe? Thanks.

Vittorio Colao

Isn’t this a good question for I don’t know Paolo or Philipp I mean whatever…

Paolo Bertoluzzo

Yes, if you want, I can comment more in general. I think the UK experience is probably our flagship experience, also because we are here in the UK and is one of the most visible ones but actually in fact we already have content partnerships of a similar type in most of our European countries. And by the way we are extending this to some of the emerging markets, the most advanced part of the emerging markets. Music is if you like the easiest one and most visible one with Spotify in most of the places where we can and then also Napster or these are [bigger] is the other one that we are extending with local solutions. Obviously as you can imagine we are having conversation also in other spaces but what you are seeing here in the UK is an experience that we are replicating everywhere else because we really believe that the content here in music in particular are going to be a big driver.

On Spain, I think the situation is very specific in a sense that today we have access and consolidation of content in terms of Telefonica, in case it happens, will probably create again a risk of monopoly. And therefore I think from the regulatory point of view, there is a discussion to be -- to have.

Vittorio Colao

Yes. But that will be a bit more -- a big plant. We will not clearly allow Telefonica to buy what they want to buy and not be obliged to wholesale content because that would be a completely unacceptable position from a European legislation point of view. I don’t know about the Spanish one because Spain, they are interpreting their own way. But for sure in Europe that would not go through.

Yes. I think we have another couple there and then we start coming back. Yes.

Guy Peddy - Macquarie

Hi, thanks. It’s Guy Peddy from Macquarie, just a question really for Nick. I just want to get a picture of this guidance profile because essentially if I look at your range, you’re either settling very slow down EBITDA or down 5%, so can you talk about what are the drivers for the differences and variances and how much of that range is dependent on what happens in the second half of your financial year as you start to annualize the reinvestment levels and you start to talk about little bit better hopefully revenue trend, can you just give us a sense of what you are looking at to see whether it would come out towards top or the bottom?

Nick Read

What I would say that there is a number of leads as I think are quite clear with the result ANR et cetera. I mean of course our competitors can increase the level of ANR intensity but I would say is that a reasonable level of intensity now. But I mean I think it goes back to pricing in the marketplace. And if re-pricing goes annualized and then pricing drops again in a number of markets, if price was breakout again in the number of markets, it’s very difficult for us to sort of mitigate all of the downside of the re-pricing in the marketplace regardless of we have to be competitive. And so the bottom line is we see a number of positives whether it’s the net add performance, whether it’s churn coming down, whether it’s data growth, whether it’s enterprise traction with macroeconomic, we see all of these positives breaking overwhelm by re-pricing in market, if the base drops again. So, that would be the delta.

Vittorio Colao

One more that side and then we start coming back to you. Yes.

Unidentified Analyst

Yes. Hi, thanks. It’s [Robert from Espirito], thanks. Just (inaudible) have made some proposals, some more helpful than others but on the spectrum side they seem to be talking about 25 year lives. Do you think that's an opportunity for scale operator like yourselves maybe other operators can't afford to pay as much for those extended durations, or is it just more cash out when those spectrum renewals come up in Germany and Italy in the year or so? I mean just going back to the UK, I wonder, were you invited to join the Sky Talk Talk trials up in York on the fiber? Thanks.

Vittorio Colao

Second question for Philipp, because I follow in detail the group but I don’t get to York. It's a level of detail which goes a bit beyond. And 25 years is good, it's I'm not sure I would really bank on the fact that others cannot afford, but it's good, because the longer is the life of the spectrum, the more inclined you are to invest to eventual anticipate investment, to have a long-term view and take away the sense if I have success in the last three years, then I will pay more at the renewal. Now of course I was for eternity, I mean my position with the Vice President was forever. They should be ours and I think they are willing to pay more and that having forever rather than having today. But anything which is longer is better, because it stabilizes the long term view of the industry. Philipp, York?

Philipp Humm

I haven’t been in York either, I was just looking at Rosemary whether she knows whether it’s been there. But I would assume that it's an assumption so not a fact, I would assume we have not gone there because we don't really have a business yet to represent there, but we are very active observers of what has happened and are supportive if needed. But I don't think we went to York, or we can check.

Nick Read

Fairly (inaudible).

Vittorio Colao

Shall we get back here in the middle and then we go there. Anybody here in the middle? Yes.

John Davies - Santander

It’s John Davies from Santander, just on [burning] outside of the EU, it’s obviously a still very a pleasant experience if you go outside the EU and make a data connection. Clearly you have many assets outside of the area. Is anything technical stopping you from providing sort of on net rooming as a more sensible, but still quite a high rate or you obliged the customer leads the country that there resident tend to roaming across obviously to the host networks?

Vittorio Colao

Paolo?

Paolo Bertoluzzo

Well, I think [per asset] was a honestly very important to learn from experience on European side which is what we launched last summer and I think Vittorio shown you the results which are positive for what we are reminded, even if we are not satisfied at all in seeing that we are still at 19%, because that that proposition be taken by 100% to our roamers in Europe and it's actually our real ambition. Based on that experience, we will extend very rapidly to outside the footprint, European footprint more or less with the same logic; none is the same as we can imagine the same price points.

And again, as you extend beyond Europe, you have to be obviously cautious of where your own customers go because people from Portugal roam very different places from were Germans and Roman or Italians roam. And based on that mark-to-market, we’ve segmented market and we'll have different areas and zones and obviously our own footprint the Vodafone branded footprint which is more important for (inaudible) and the others is going to be a part of this initiative.

John Davies - Santander

Thanks.

Vittorio Colao

So something is coming. Shall we go here? Yes.

James Ratzer - New Street

Yes, thank you. James Ratz from New Street. I have two questions please. The first one is just regarding your cost structure. So is this the revenue trends that you see something we hear also from a lot of your other peers, but a lot of your other peers talk more publicly about being very aggressive trying to reduce the cost base to offset some of the revenue pressures. I mean last year you set a £300 million cost reduction target in Europe that you hit, but you don’t seem to have quantified a target for this year. I was wondering if you could help us in kind of thinking around that why haven’t you quantified it, is that something you can exceed this year, just any kind of discussion around what you can do on cost to support margins would be helpful?

And then the second question I had was regarding your fixed line strategy in Italy, so you have reiterated the FTTC build to 6.4 million homes Telecom Italia though on their conference call suggested you signed a contingent fibre deal with them and in conversations I had with them indicated they were now no longer expecting you as a result of build out this FTTC network. So maybe the truth lies somewhere halfway in between. So if you just help me to understand what’s going on there? Thank you.

Vittorio Colao

So let me pass the second question to the specialist of Italy, Philipp and I will give you the answer to the first one. We do have a quantification of our reduction targets, but we have said not to communicate externally. To be honest it’s a very practical reason, there are many moving parts, there is Spring, there is change of parameter, there is incoming companies like KDG for the full year like Ono for a part of the year, we felt it to have been incredibly complicated to give a target and then present all the explanations. And Nick and I made the decision that at the end of the day what really matters is EBITDA and cash flow. And so we had internal programs and from time-to-time in countries you see the impact sometimes because of full cost reductions or sometimes because of agreements of things, but we prefer not to complicate too much our reporting in the year where the year-on-year would be very complicated to manage. So we will talk about it as an actual not as a separate target. Philipp, Italy.

Philipp Humm

Yes. Maybe before that to underline how serious we are about costs, you might have read in the press for example that in Germany we have made a major redundancy voluntary redundancy programs, we have more than 800 in certain FTEs reduction in a very short period of time. So that tells you how serious we are in adopting our cost structure in the different markets to simply reflect the European relatives.

Now on the contingent model in Italy which is a German word actually applied now to Italy. We have some limited agreements there with Telecom Italia to some extent, but it is limited in scopes overall so that we are not changing our plan to basically connect 6.4 million homes with FTTC through our own fibre build to FTTC.

James Ratzer - New Street

(Inaudible).

Philipp Humm

It will be a sub quantity of the 6.4 million.

Vittorio Colao

The areas where essential we don’t go.

Philipp Humm

Yes. So it’s still limited in scope, if it becomes more, one day we can substitute more, but that a fewer let’s say cost calculation.

Vittorio Colao

Yes, exactly. At the end of the day, it's a matter if anybody, not that (inaudible) anybody gives fantastic conditions you just say I don't build, if they give you medium conditions you say you know what I build where I can have a very good case and a good market share for me and I use that which is not great but still better than building; and if we give you bad conditions, you just build yourself. So, it's a continuous reassessment of the make versus buy thing. What I think sometimes the incumbents do is to try to slowdown your decision making by often a little bit and hoping that the little bit is enough, the best part of a very well non gain in our industry, so fine.

Nick Read

But the way you should think of it is really it's a costs versus CapEx trade off not more, right.

Unidentified Analyst

Yes. Good after noon. It’s (inaudible) Morgan Stanley. And just one broad brush question please, we saw a very interesting deal announced in the U.S. a couple of days ago with AT&T making move for DirecTV, I guess it's interesting at a number of levels, first say the size of the take, it involved I think nearly $50 billion. Secondly, I think a few people surprised by how much paper AT&T used in the acquisition as well. And then thirdly, if you listened to the conference call, an awful lot of chat about video on mobile devices and the needs to own content. Just wondering if you just give us a few, just broad brush comments on whether you see any read across from that deal to Europe? Do you think you need to own your own content or are you happy having content agreements mutual distribution? And lastly on the paper issue, if you were to find any very attractive acquisition opportunities given that your net debt to EBITDA is now two times, would you be happy to look at issuers for any acquisitions as well that you might look at?

Vittorio Colao

Yes. Listen, the AT&T question is very and DirecTV question is a very interesting one. Of course, we’ve been thinking about it and of course there is one element that we fully understand and it is the video for the future. The time horizon could be different by country or could be very different if you own fixed line and if you don't own fixed line and could be very different if you have strong competition from a cable guy or somebody who can't from the TV. What is very interesting for us we are learning from Ono, from KDG and then we will learn from Ono.

How important this relationship with content guys is when you are in that business? So my prediction is yes it would be a very important relationship for us. It is -- we still need to be there. Whether in every environment you will need to own or not, I don't know. I think it depends so much, I mean U.S. is very vast; there are areas whether we’ll never get with [U-verse] with [FiOS], there are errors where maybe satellite plus LTE will work.

Again there will be a market of technical solutions to deliver video. And I understand very well why for a company like AT&T there could be an appeal but don't ask me to comment on the detail, because I don't understand enough of the market to say it's brilliant move or not. I understand intuitively that content will be important. But whether you really need to own or not, I think we’ll have very different answers also depending on your history a little bit. If you are Rogers in Canada, you can from that and you consider just to mention an example of [my colleague] is now, for him now content is much more important but in our trajectory, we are still probably in a little bit of a different space. Having said that, these things kind of accelerate a lot, so watch, we analyze with a lot of attention.

On the second question quite frankly, it’s a theoretical question. So I strongly believe that if you find a good acquisition, you first have to be very, very convinced of the synergies and starting from the cost synergies and going through the revenue synergies and the merit of the acquisition on its own kind of content, then you look at the financing. And if it is very good, you do what you need to do, but it’s a bit of a theoretical question at this stage.

Jerry and then -- yes. Sorry.

Jerry Dellis - Jefferies

Hello, it’s Jerry Dellis from Jefferies, two questions please, one on the Project Spring budget. Is it certain that you will spend the whole budget and how do the Project Spring milestones have to sort of turnout if you decide not to spend the whole lot, on what sort of time scale would you make that sort of decision? And then just a question on pricing, you have referred quite a lot to competitor pricing action. And my understanding of Project Spring was that it was intended to at least some extent to separate you from pricing action in the market and to give you a bit of at least relative pricing power. So at what point do you think you will get to the stage where Project Spring is sufficiently complete, you don’t have to respond to every single competitor pricing move?

Vittorio Colao

It’s really two different questions, one -- the first one is we’re going to spend the Spring money under current conditions but let me go back to the earlier question, if tomorrow Telecom Italia or Telefonica or somebody they completely change their position and they say you know what you don’t need to be the at this, you actually can get access to my own thing; I make the investment. We would clearly reevaluate as Philipp said, reevaluate the make versus buy case and we could transform some of the money from CapEx to OpEx or from -- so the intension is to spend it under the current information, the current conditions but we have to retain the flexibility. If Steve will have done some brilliant negotiation and we still concluding some on Project Spring gets a better price as he is partially getting and then what we thought we would have the charge to decide whether we put the saving into more I don’t know from 70,000 to 80,000 for stations or maybe we just say, we just need to stay at 70 and we just pocket the money.

So I don’t want to lock myself into something if conditions change, I have to be flexible. On the price move, single price move, my comment was especially in Italy and was specifically on the fact that not one competitor but there seems to be a gain depend euro price point being mentioned in Italy, EUR 6 -- I mean saw EUR 6 to dig private offer which really after the 80 is a 450 or 460 which don’t make any sense now. Those things you have to respond to because otherwise they can take the market down very quickly. But it’s a different think to talk about tactical that’s why I used tactical as opposed to structural. And finally you deserve.

Can we go here up please? You still have any question or is gone?

Unidentified Analyst

I have a few. The first is for Nick, it’s on cash flow. I thought of your cash flow this year looks to be underpinned by working capital, and going forward as we Project Spring in full fashion probably to think about working capital, how much of the cash flow would be underpinned by that going forward? The second one is for you Vittorio, it’s about dividends, even no [raise] to that for the next couple of years because of Project Spring going to cover the dividend but in the three years’ time hopefully things will get better. So if you can just give us -- you talked about adequate cover, so if you can just put a number what is an adequate cover for dividends going forward?

And the third, it's for Philipp, it's about Germany. You've been investing [higher than Deutsche] on LTE, you have the same spectrum holding, actually higher for base station, let's explain the fact that there have been performing particularly better than you in that country, that's something that I would be interested to hear and how you basically fix it, because you said that's now basically going to fix.

And fourth if I may, it's on the CGT into [capital game] packs, you changed that assumption from 5 down to 3.6. And I was wondering if that basically is -- the change is triggered by the discussion with IRS or basically apply different sort of assumptions you used for the calculating CGT? Thanks.

Nick Read

Can I suggest, I because mine are both relatively straight forward. So in terms of working capital, I think we have done a good job over the last I'd say 3 years actually in terms of really improving our working capital. I would expect that going forward, the amount of contribution we can make from working capital will diminish, because we have really been systematic at how we have made working capital really work for us as a group.

And secondly that capital game, I was very specific on saying that it's tax due to the reorganization, so wasn't capital going game tax yes, due, we had to reorganize that group ahead of the disposal. So there was an element of tax due in the U.S. as corporation and there was an element of tax due in Netherlands which was withholding tax. So why was it lower, was just we had an estimate before and we were able to go through it and it's a very complex process, many steps and throughout the process we've refined it.

Unidentified Analyst

(Inaudible).

Nick Read

No.

Vittorio Colao

No.

Nick Read

I’d said the vast majority owed to the U.S. and small amount to Netherlands.

Vittorio Colao

Philipp, do you want to answer about Germany?

Philipp Humm

Yes. So I think on Germany, the relative performed really in ROIs two things, one I think on the network side for a quite some time we overinvested rural LTE and not enough on the voice side and neglected voice. And we have fixed that in the meantime, so we again call best in voice, so we are again at par here and we get the feedback from our enterprise customers so this topic is fixed.

The second one is more on the commercial side, where we were trying to let's say improve our overall margin in Germany, as we said the market needs to cool down. [Deutsche] really ramped up our investment quite significantly, which was somewhere in June 2013. And so, we did not follow straightaway, but we first waited because we thought this would be over after certain period of time, on a temporary nature was not, we followed but obviously we followed them relatively speaking late which is seen on this year's numbers. And on the meantime, the good news is quarter-by-quarter our service revenue is improving again so we have 0. 3% better. As I said the network voice is recovered, our net-adds are positive, even our fixed time is trending in the right direction and our ARPU base is leveling all the time. So we are basically seeing that this things working then.

Vittorio Colao

On the dividend cover, we don’t disclose numbers but since we gave you all the elements, I don’t think it is very difficult to work out that with the 13%, 14% normalized or usual recurrent CapEx level with a more or less 3 billion dividend intention with a current cash flow performance of this year, we have in mind something which is north 4, 4.5, I mean it’s something that gives a margin which is enough to preserve the dividend and still have room for the other things that are non-recurrent.

Any more question, any? Then I thank you very much and thank you for your questions and thank you for your time. And I look forward to meeting you in the coming days in other settings and other meetings.

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Source: Vodafone Group's (VOD) CEO Vittorio Colao on Q4 2014 Results - Earnings Call Transcript
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