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Vodafone Group Plc (VOD)

FY 2006 Earnings Call

May 29, 2007 5:00 am ET

Executives

Arun Sarin - CEO

Andy Halford - CFO

Vittorio Colao - CEO of Europe and Deputy CEO

Paul Donovan - CEO of Central Europe and Middle East and Asia Pacific and Affiliates

Analysts

Simon Weedon - Goldman Sachs

Christian Kern - Lehman Brothers

Nick Delfas - Morgan Stanley

Robert Grindle - Dresdner Kleinwort

Terry Sinclair - Citigroup

Laura Janssens - Merrill Lynch

Paul Howard - Cazenove

Justin Funnel - Credit Suisse

Gareth Jenkins - Deutsche Bank

Ed Field - M&G Investment Management

Andrew Beale - Arete

Stephen Howard - HSBC

Amit Kale - New Street Research

Presentation

Arun Sarin

Good morning all and welcome to Vodafone's Preliminary Results Presentation. The agenda for this morning for the next 90 minutes or so is that I will start with an overview of the company. My presentation has three sections, results, progress on strategy and guidance on '07-'08. I'll then be joined by Andy Halford, who will give us a full financial review and then for Q&A I will be joined by Vittorio Colao and Paul who run Europe and EMAPA for us.

The highlights for the year '06-'07 are, one, we met or exceeded our guidance we gave 12 months ago in competitive conditions. We have now been executing for a year our five strategic goals and we continue to make progress on all fronts. We have strengthened our customer base to over 200 million customers and we will add our proportionate share of the 27 million Hutch customers.

We have given an outlook for '07-'08, and many of the trends we saw last year will continue. In Europe we are driving voice usage and data growth and these drivers are being offset by price reductions and regulatory pressures. In EMAPA, we will continue to drive customer growth in under penetrated markets.

Finally, we continue to deliver increasing returns to our shareholders through double-digit earnings and double-digit dividend per share growth.

In summary, we are delivering operationally and continue to execute on our stated strategy.

Let me start with our key financial highlights. Reaching over 200 million customers has meant that we are driving our organic growth by over 16%. Organic revenues grew by 4.3% to over £31 billion. EBITDA was stable year-on-year. Operating profit grew 4%, principally driven by Verizon Wireless. EPS growth of over 11% to 11.26 pence was driven materially by reduction in the share count.

Finally, our free cash flow of £6.1 billion in '06-'07 was lower than the previous year, predominantly because of higher cash taxes, but well in excess of our guidance. The net result of these numbers is that we exceeded or met our guidance on every metric.

Let me touch on our '06-'07 guidance for a moment. First, we grew revenues at 6.3%, against a range of 5% to 6.5%. This is after accounting for certain revenue recognition items without which we would have exceeded the top-end of the range.

Margins were down 90 basis points, pretty much in line with our expectations. CapEx came in at the lower end of expectations from a mixture of cost savings and clear prioritizations of our investments.

We saw good underlying cash generation together with some one-off timing benefits. It pushed us above our expectations. We will get more on this from Andy in a few minutes.

So, let's look at the regional picture. In Europe, revenue growth continues to come from new customers, usage and data. The key negative forces are price declines of 15% to 20% and regulatory pressures. The net impact is a modest revenue growth with margins down year-on-year.

EMAPA has several elements to it. The subsidiaries and joint-ventures containing our emerging markets businesses grew around 20% top-line with stable margins and Verizon Wireless had another stunning year posting 18% revenue growth. Overall, EMAPA posted strong double-digit performance of 15% with robust margins.

Let's do a quick country review among our larger markets. In Italy, underlying performance was strong. However, the Bersani decree has changed the market dynamics, and will negatively impact our business on a going forward basis starting in '07-'08, despite the usage being up 10% year-on-year.

In Germany, we took some strong pricing measures in response to competitive moves last October with there effects now coming through our P&L. Germany is exhibiting strong data growth of 50%, out going voice growth of 36% is helping counter prices which are falling at 28%.

In the UK, we launched a series of tariff initiatives and refreshes such as free weekend and family plans. These initiatives have regained our competitiveness and revenue growth in the last quarter accelerated to 5% albeit at a lower margin which we flagged to you in March.

In Spain, our business had another great year with top-line growth well into the double-digits even after the impact of regulation. In the last quarter, our share of net adds was back about 40%, but now new competitors are entering the marketplace and we expect this to become more competitive.

So in summary, we expect Europe to remain challenging as the growth drivers will continue to be offset by pricing pressure and regulatory pressure.

Let's move to EMAPA. EMAPA, of course, is our growth engine. The good news is that the trends that we have highlighted to you are all continuing.

Turkey continues to perform ahead of expectations, including the first three months of the calendar year when we added over 1 million new customers. We are estimating our incremental market share there to be 55%. Margins for the full year came in at 21%, compared to the 12% when we acquired the business in December '05.

In South Africa, Vodacom continues to perform well. We saw particular success in introducing new data products such as 3G broadband, which is resulted in data rising at 150% year-on-year.

In Egypt, we increased our revenue market share further to 55%. More recently a third entrant has entered the marketplace. Competition is intensifying and will continue to do so in the coming months. Overall, our prospects remain strong.

I want to take a moment to highlight the results of Verizon Wireless. Verizon Wireless is a high performing business, growing in double-digits in virtually every metric. Customers now exceed 60 million, and we are performing very strongly in retail. Verizon Wireless achieved 30% share of net adds in the first quarter, and has a market leading churn in contract of about 11%.

Revenues are growing at 18%. ARPU is expanding, driven by data growth of over 100%, and at the same time, margins have been expanding over the last 12 months. So, we continue to see a healthy business in the United States.

Now moving from operational highlights, I want to return to our five strategic objectives that we laid out for you this time last year. They remain very relevant and very core to what it is we are doing. I will take each of the five in turn, so first on to revenue stimulation.

Revenue stimulation in Europe is where our core focus remains in terms of driving minutes from fixed to mobile. We've seen substantial increase in usage with outgoing minutes up 24% in the second half compared to just 17% same period a year ago. This was caused by many factors, big bundles, family plans, promotions all of which have made us more competitive in the marketplace and have driven higher net adds in several markets.

The impact of these initiatives has been that our prices are coming down 15%, this is price per minute. Elasticity, however, does remain less than one on a customer basis, but our operating companies are clearly better placed in the marketplace.

In addition we continue to make progress on our 3G business. 20% of revenues now come from 3G devices in Europe and 23% of the total minutes in Europe are carried on our 3G networks. Looking forward we now have a 100% of our 3G footprint covered with HSDPA. This will give us a strong platform from which we can grow our wireless broadband business.

We also made good progress on roaming, our Passport customers have reached 11 million. The recent decision in Brussels provides us getter clarity in terms of pricing and the direction of roaming regulation. And we are well positioned to continue on the innovation parts in our roaming products.

Reducing our cost remains a very important part of our strategy and the D&A of our business. All major cost reduction projects we outlined to you a year ago are on track or ahead of schedule. We are implementing local IT outsourcing agreements with EDS and IBM in six markets, with more countries expected to cut over shortly.

Supply chain is now fully centralized for all network activities and has already delivered £200 million of savings in '06-'07. Our regional data centers are running ahead of schedule and we booked savings of £50 million in '06-'07.

We continue to evaluate the potential of network sharing. In Spain, we are live; in the UK our discussions with Orange continue to make good progress. We are in the process of executing further programs such as, network simplification, implementation of a new single ERP system, cost reductions across the board.

Along side these multiyear programs, we’ve remained committed to achieving our European targets of 10% CapEx to sales, and broadly stable OpEx.

Next I want to talk to you about our total communication strategy. In May last year, we talked about three things; we talked about mobile and PC integration, Vodafone at home and at office and mobile advertising. We've made progress in each of these areas and it results in the way we will now be disclosing each of these areas that you see here.

Data is where we are focusing our effort on mobile internet opening up: Vodafone Live! and mobile to PC integration. Vodafone At Home and Office is split between fixed location and DSL, and then there is advertising. Our ambition continues to be to add 10% share of revenues in the next three years. Question is how are we doing?

We are making good progress in each of these areas. We are opening up Vodafone Live!, working with leading internet partners such as Google, MySpace, and with a full commercial launch that will take place in the coming months in the summer.

We now carry 30 times more data on our 3G networks than on our 2G networks and of course this helps our data growth, which is growing at 40% on an underlying basis. We already have 5 million customers receiving fixed location services from Vodafone, and this contributes roughly £400 million in revenues.

With DSL, we've now launched DSL in five countries, several on a wholesale basis such as the UK and Italy where we don’t see a healthy wholesale market. We will be investing in some infrastructure a good example being Portugal where we are now doing ULL and resale.

Finally, we are beginning to sell advertising in full markets with different partners, this is a journey, it’s an important journey for us to be on and we are making good progress. The first signs of mobile advertising are going to occur here in the UK.

Let’s turn to emerging market’s portfolio our third objective. All our major emerging market businesses continue to perform well, driven principally by customer growth. Egypt is growing revenues at 40%, Romania at 29%, South Africa at 22%, Turkey at 40%. Turkey continues to outperform its business case strongly and I am pleased with the progress there.

We continue to work on developing products that will help drive penetration further in emerging markets, and that's what you saw in our recent announcement with ZTE who have now produced two Vodafone handsets retailing prices between $25 and $45.

Moving to India, where we have recently closed the transaction, business is performing well. We added over 3 million additional customers in the first quarter. We are committing significant capital of over £1 billion this financial year to aid in the network rollout and this of course will support significant growth.

Our site sharing discussions with Bharti are progressing well, and this will enable us to realize the synergies of a more efficient rollout. Overall, revenues continue to grow in excess of 50% year-on-year, we will be introducing the Vodafone brand later in the year. I remain confident that acquiring Hutch Essar is a very positive development for Vodafone. More updates on progress as the year develops.

Our fourth strategic objective is around managing our portfolio. We closed the sale of Japan, two of our European associates in Switzerland and Belgium with total cash proceeds of around £10 billion. Together with an increase in gearing we were able to provide a significant one-off return to our shareholders 9 billion share as well as reinvesting 8 billion in emerging markets, Turkey and India.

As you can see, we have now been repositioning our company towards high growth controlled markets. We will continue to monitor our portfolio on a going forward basis.

Our fifth objective is around shareholder returns and capital structure. Dividend for the full year was up 11.4% on a per share basis, providing a payout of 60%. The board remains committed to a 60% payout ratio.

In recognition of the earnings dilution from the Hutch Essar acquisition, the board will target a modest increase in dividend per share until the payout ratio returns to 60%. The balance sheet now carries around £24 billion of net debt, and this level of debt is consistent with a low single-A credit rating.

Turning to the third part, which is around guidance. We have previously signaled modifications we intend to make to our guidance in order to fully align the way we report our numbers and the way our investors look at our numbers. This requires two key changes.

First, revenue and profitability guidance moves from proportionate to statutory. Second, we are moving from EBITDA to adjusted operating profit. The key benefit being with operating profit we capture the net income of our associates, thus reflecting far better the true economics of the value of our business. And as a relatively capital intensive business, operating profit is shown after depreciation and amortization charges, better mirroring our true profit.

Finally, free cash flow and CapEx remained unchanged.

So, on guidance. You can see on the screen what we announced this morning. Revenues trends are likely to be similar in Europe and EMAPA the last year, resulting in a similar and modest increase on a group-wide basis. Despite downward pressure on profitability trends in Europe, we're expecting flattish operating profit at the group level, because of improved profitability in EMAPA and continued positive impact from cost reduction.

CapEx is up, principally because of investments in India. Ex-India CapEx is lower year-on-year driven by our 10% target in Europe.

Cash flow on an operating basis is broadly is flat. However, we expect to report lower free cash flow driven by the inclusion of India and certain non-operating items such as taxes and working capital. Andy will cover this in greater detail.

So in summary, '06- '07 was a year of progress. We have met the challenges and continue to execute on our strategy. In Europe, we will continue to drive usage and '07-'08 is a year when we expect to deliver on our cost targets.

Our total communications ambitions remain unchanged and we have clear programs to deliver additional share of revenues. In EMAPA, the priority remains on growth with the inclusion of Hutch Essar in our plans. Combined with an ongoing review of our portfolio, we are well-positioned to deliver on our strategic goals.

Over to Andy for a full financial review.

TRANSCRIPT SPONSOR

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Andy Halford

Good morning, and thank you very much Arun. I will just give a little bit more insight in to the financials; cover little bit on the regional trends, moving on to the income statements, and finally close on the cash flows.

So, starting off the summary at the group level, which Arun touched upon earlier. Key numbers here 4.3% increase in the organic service revenues that is comparable with the 6.3% on a proportionate basis, both of those numbers being suppressed a little bit by the revenue recognition accounting.

EBITDA at £12 billion was basically stable year-on-year and the adjusted operating profit on the right hand side was up by 4.2 percentage points on an organic basis. On a reported basis, with particular dollar and the Euro moving against us is in the year the numbers would otherwise have been about £0.25 billion higher.

The trends within the regions are clearly somewhat different. So, I am going to start with the Europe region. So, on left hand side, revenues on the face of it very flat year-on year, but do recall that last year we have Sweden in there for part of the year that was £350 million with the revenues a year ago. And year-on-year, we have had a forex impacts of about a £100 million.

So, underlying the organic increases about 1.4% with Spain up significantly £500 million, Germany down by about £300 million in part because of pricing pressures and the tariff cuts, the incoming rate cuts there.

On the EBITDA and the operating profit, that are in the middle block, those are down £400 million and £300 million respectively, a combination of the decision to reposition ourselves into the UK market, as we talked about in the Investor Day recently. The German tariff changes, the incoming rate cuts and we have also put about £100 million of provisions in part for the Greek fines. Offsetting all of those is a strong performance in Spain and also a good performance Arcor.

The operating free cash flow on the right hand side £6.8 billion was down by £200 million that is the EBITDA offset by CapEx savings and tight working capital management. Indeed, Europe is now contributing about 85% of the Group's operating free cash flow.

We'll move than on to the service revenues. 1.4% was the organic number, key components of that broadly voice, flat, messaging up in the mid-single digits and the data up by about 30%.

On the right hand side this chart you can see the quarter-on-quarter changes in service revenue, so an average for year of about 2% also about 2% in the last quarter, 2% of last half year. In the last quarter we had a little bit downturn because of the impact of the Bersani and the German price cuts coming through in the period, offset by very strong performance in the UK business.

If I look now at the outgoing voice, than on this chart in yellow we have got the change in price per minute, in blue we have got the increase in usage per customers and in green we have got the change in the total number of customers.

Key numbers here, prices overall across Europe outbound went down by 17% per minute. The usage per customer went up by 13% and the number of customers increased by about 8%. Of particular note within that UK and Spain have price reductions about 15% and so usage increases per customer between 12% and 18%.

In Germany, on the prepaid side the change was even more significant about a 50% reduction in the price per minute over the course of the year on prepaid, which stimulated the 65% increase in usage per prepaid customer. Indeed Germany in total, contract and prepaid for the first time broke the 100 minutes of use barrier in the last quarter. So as Arun has said overall the elasticity in Europe remaining just below one.

Moving then on to the incoming trends here very similar to previous quarters, the overall revenues were down about 7%. Key numbers here were prices down per minute about 13%, the usage up 1% and the customer base also up 8%. Biggest price reduction was in Germany, where we saw a 24% reduction in the price per minute in large part because of the termination rate price cuts in part also because of the Zuhause product.

The blue on here is also interesting, this the usage trend, you can see we started the year with the usage per customer 4% lower than the previous year, and this is actually improved in each quarter subsequently to the point we are in the fourth quarter, we were actually 2% higher on usage than in the equivalent quarter a year ago. In part this is because of the increase of on net, gross net tariffs across many of the European countries.

And so on to roaming, very typical at the moment. The green here is the retail revenues from roaming and the grey on top is the revenues that we get from international visitors. So overall, good news here 1.8 billion which actually we maintained in both of the last two years despite the fact that we have now got 11 million customers as Arun mentioned on Passport and we have seen our retail customers getting a 40% price reduction over that period of time.

As we look forward with the EU clarification now emerging on the pricing front of use that it is likely that we will see about £250 million of reduction in revenues in '07-'08, which is factored into our guidance. There will be a little bit of offset because the wholesale cost will reduce also by to some degree. So, overall profit impact will be a little bit less than that. So the focus here very much now on usage stimulation as we go forward.

On messaging, I mentioned earlier that growing in mid-single digits, the actual number was 4.6%. The story here this price is down about 10% and volumes up about 16% overall. Most notable was the UK where off a price reduction of 10% through some very targeted promotions. They actually saw a 25% increase in the number of messages year-on-year.

Moving then on to data revenue. Data revenues were up on a reported basis about 30%, but if we normalize the accounting, so the underlying was up about 40% year-on-year, stimulated in large part by the doubling of the number of 3G devices in the market.

On the right hand side, you can see the makeup of the total of the data revenues. In green is the Infotainment that is the on-net and off-net browsing, the SMS and the MMS content, which grew strongly during the year.

In the blue is the connectivity revenues primarily from the Mobile Connect and from the handheld devices and as Arun showed on one of his earlier charts, both of those we have broadly doubled the number of units in the market during the period, and indeed on the handheld devices in some markets now believe we have more than a 50% market share.

Turning now to the EBITDA margin and the costs within Europe. The overall margin in Europe went down by 1.6 percentage point during the period. I am just going across this chart just to show where the key changes were, first of all the interconnect actually, slightly enhanced margin during the period not withstanding the significant increase in the volumes of minutes overall.

And that arose because of the very acute focus on making sure our price plans were encouraging as much on net traffic by calling between Vodafone customers is possible. That's interesting as a group, the proportion of our outbound calls that were made through mobile operators decreased by 4 percentage points, the portion that were made to Vodafone customers increased by 4 percentage points. So that is why that stayed pretty steady.

So in the yellow, we have other direct costs down 1.1 percentage points of margin about £250 million. So just to explain this one, about a third of it is the provisions that I talked about earlier in particular the great lines and one or two restructuring costs.

We also during the period changed the way in the UK that we reward the indirect channels, so some of the commission payments that we make to them, which are now linked to revenues are shown in the direct cost and that is about £85 million increase. And thirdly, these numbers include our core and the ULL costs are obviously included in direct cost for them and that is about £60 million of the increase.

On the customer acquisition retention costs, I have got a couple of slides on those just coming up, but broadly overall the numbers there were fairly neutral. And then finally on the operating expenses, which also went down about one percentage point. I will come on to the slide on that in a minute, but just to observe about a third of this is because as we are centralizing some activities.

Some of the capital costs are actually being recharged into our businesses now as operating expenses and hence the business level they are coming out before the EBITDA margin gets reversed to group level and it does give the appearance to reduced margin.

So if I move then onto the customer acquisition cost £1.6 billion an increase of 11% year-on-year. The change was mostly on the volume side rather than on the pricing side. Volumes were up on prepay in the UK and in Italy a heavily multician market and they were up also on contract in Spain. The unique costs overall were stable to moderately down about 4 percentage points down with the contract being a little bit up as refocus on the high value customers, with the prepay being recently significantly down about 13% year-on-year.

Now on the prepay, we have been very focused in a number of markets, on increasing the number of SIM only sales so avoiding the handset subsidy and indeed in the UK we are now doing about 40% of our prepay sales on a SIM only basis compared with about 30% a year ago.

In terms of retention costs, total cost here £1.2 billion, which was actually down 8% year-on-year. Volumes were broadly fairly flat overall slightly less prepay in Italy, slightly more contracts in Spain. The change was more on the cost side a bit, which was down 7% and a lot of that is to do with the UK and the change in its structure which I referred to earlier. If you put that into the frame, overall customer acquisition retention cost are fairly static year-on-year.

European OpEx, this chart is the European OpEx excluding Arcor and restructuring costs. This is the basis that we said we will in '07-'08, we broadly say when compared with '05-'06. As you can see last year '06-'07 have an increase of 3.5% that was down from the half year when the increase was 6%. And the large part of reason for the 3.5% was actually that we took a conscious decision to invest a bit more in publicity, particularly in Italy, UK and in Greece.

On the right hand side is a list of a number of initiatives many of which Arun touched upon earlier, so I will not go into those in detail that are now actively being persuaded by the business and are the reason why we are confident that we will get the numbers back to the £4.6 billion number for the '07-'08 year.

On the capital expenditure side, 10% has been our target for a while and 10% is what we are absolutely focused upon delivering. We exited '06-'07 at 11.8%, so on a downward trend, not yet at the 10% number, but in part that was because of the final push to get the 3G core coverage in place.

We have, again, a number of initiatives detailed on the right here that how we will get to the 10% number. Indeed, in Germany and in Italy where were either at or below the 10% figure already and hence very confident that we will get that this year.

So, that is a quick run through on the Europe region. Now, I am going to change track and talk about the EMAPA region. In blue here we have the controlled businesses and in yellow and we have got the associates.

Headline revenues and EBITDA, up 35%, 40%, on organic basis up about 21% on each. And in terms of the adjusted operating profit on the right hand side grow to 23%, 28% split between the associates and the controlled businesses. So, very, very strong performance across the piece on the EMAPA region.

If we look at it's revenues, revenues were £6.4 billion. Strong growth particularly from Egypt, Romania, South Africa of the controlled businesses and Turkey, which as we know has had a very, very good first year with the Group revenues up almost 40%, margins near on trebled since the period before we acquired the business. And of course, what is not on these charts is the Hutch Essar business which was come in bit later than this, but whose growth is even higher than these numbers here.

On the adjusted operating profit, £3.75 billion of adjusted operating profit now coming through from the EMAPA region, two-thirds of that coming from the associates, that is an increase overall of £500 million year-on-year more than offsetting the reduction that we have seen in Europe.

On the right hand side here is the walk on margin. Headline, the margin in EMAPA is down 1.5%, but in reality that is totally due to the acquisition of Turkey. Turkey is about 10% of the region's revenues. Its margin is about 15% below the average. So, just arithmetically that is the reason the margin is down.

For the rest of the businesses the margin is very, very stable year-on-year, slight increase, because Egypt has proportionately increased its weight within the region and has an above average margin, slight reduction in South Africa. But overall, the story on margins is a very stable position for the EMAPA region overall.

On the associates, 75% of the contribution from the associates comes from Verizon Wireless and 20% of it comes from SFR, the balance from Switzerland and Belgium, which obviously we have disposed off.

Chart on the right just reinforces the points that Arun made earlier of the strong growth in Verizon Wireless, 17%, 19% on the sterling basis. On the right hand side, SFR clearly much more akin to European markets albeit it did actually improve its EBITDA margin and hence it's overall EBITDA during the period.

So, that is it on EMAPA. I am now going to turn on to the income statements and just highlight four particular line items on the income statement. The first one, net financing cost, just under £800 million for the year, an increase of 29%, interestingly nearly one half of that was the accrual of interest on the tax disputes, which brings our total balance sheet accrual to £1.2 billion for the interest on those alone. The other half relates to largely the slight increase in the average level of debt during the period, offset by a gain on assisting Softbank with the refinancing.

On the tax run, the effective tax rate was 30.5%, which is around 30% we've guided to earlier and we still remain of the view that we will be in the low 30s in the future.

On the CFC case, before we get the question on it, the only progress there is that we have recently been to the UK courts to ask them for their opinion as to whether the Cadbury Schweppes case is now giving sufficient clarity on the principles that should be applied to our case or whether we still need to go to Europe to get our own principles established and we are awaiting the outcome of that over the coming weeks. We have £2 billion of reserve for that.

On impairment, because of the situation in Italy that Arun referred to earlier, the Bersani decree, et cetera, we have had to trim the profit estimates there and hence in carrying value terms because we had no headroom that has caused an impairment charge. So, we have taken the charge of £3.5 billion in the second half of the year, which brings the full year total to £11.6 billion and on the EPS side, growth of 11.4% to 11.26 pence, largely driven by the reduction of the number of shares in issue.

And so, on to cash flows, £6.1 billion was clearly ahead of our guidance range for last year. Just want to talk very briefly to that. We had really two primary groupings as to why it was ahead, some of that was some expenses which we had thought we were going to incur in 06'-'07, which have actually been delayed.

We have a VAT payment relating to the acquisition of the Turkish business, which actually ended up happening in April, 2007 and we had some working capital movements, which essentially have moved themselves into the '07-'08 year. But underneath at all, we have saved between £0.5 billion and £1 billion of absolute cash cost through the normal course of running the business. Some of that through driving the capital expenditure lower, some of it through reduced tax and interest payments.

Moving than onto the guidance on the free cash flow the current year. Starting on the left hand side this is just looking at the'06-'07 year and saying, okay, the £6.1 billion was actually after we had paid about £0.4 billion to settle one-off tax disputes and it had the benefit to £0.3 billion from the working capital shift. So, the underlying was the number of about £6.2 billion.

The range that is in place at underlying for '07-'08 is very much in that space £5.9 billion to £6.4 billion, but during the course of '07-'08 we will have as best we can anticipate it at the moment another £0.6 billion of settlements on tax cases, we will have a total net impact in cash terms of the Hutch Essar purchase about £0.8 billion, that being local cash flows, the CapEx, plus the group borrowing costs.

We will have the Turkey VAT payment and the reversal of the working capital that I referred to a second ago. So £4 billion to £4.5 billion is the number, therefore that we've guided upon for '07-'08.

With the underlying there will be moving parts in that. We will start to see if the cash tax payments normalized more towards the P&L charge for tax, but on the other hand we will see the benefit of the reduced CapEx coming through in Europe.

I would also actually just add one thing to Arun's comments upon the guidance, this is not the cash comment it is more a revenue comment in particular. But, in the past we have guided on proportionate on constant currencies. Because we are now guiding on absolute pound amounts, we are clearly much more open to foreign exchange volatility.

The group at the moment has about 85% of its revenues not in sterling and it has 95% with adjusted operating profit not in sterling and therefore we have actually published our assumption on the exchange rates that will prevail for the balance of this year for the Euro and the dollar, and in future particular in November when we do an update we will distinguish between currency movements and the trading movements.

So net debt, we closed the year at £15 billion of net debt that was after some fairly big moving parts during the year net £7.8 billion on M&A, £3.6 billion of dividend payments to £9 billion on the B shares, and the closing figure up £15 billion.

On the right hand side, we have shown if we had closed the Hutch-Essar deal at that point in time, the balance sheet would actually have had the £24 billion on that Arun referred too earlier that being the 15 plus 5.5 of the cash out for the purchase consideration assumed debt of 1.2 and then the put option accounting of 2.4 to come to £24 billion.

On credit ratings a year ago, we said we are going to move to A-, which is what we did obviously over the last few weeks move this to BBB+. We have two ratings in the A- one and BBB+, we are very comfortable with where we are on the credit rating front.

So in summary, there are four real highlights to me; firstly, the guidance, we gave out back in November '05 in a fairly difficult to predict market. We have absolutely delivered to that and one metric and if you normalize the accounting on two metrics we’ve actually come in slightly ahead of that.

I think we have got real traction on the cost now what we are seeking to do, what we will do on the operating expenses in the capital expenditure collectively is taking £600 million cost out of the business in this year. So, that is a huge area of the focus.

Thirdly the underlying cash flows have clearly been very strong and continue to very strong within the business, and fourthly to a point that Arun made earlier. We have done a considerable amount of portfolio rebalancing here with £10 billion of proceed in £8 billion out.

We have shifted the needle something like 40% of our profits now coming from the EMAPA region compared with 35% a year ago and in the process we returned £9 billion to shareholders through the B share issue, £3.5 billon through the dividends and maintain the low single A credit rating.

So, with that I will now hand back to Arun.

Question-and-Answer Session

Arun Sarin

Okay. It’s time for Q&A and we can start with Simon Weedon.

Simon Weedon - Goldman Sachs

Thanks, I am Simon Weedon from Goldman Sachs. Couple of questions, one is on the CapEx. You've been very clear about the European CapEx profile. I wanted to ask whether or not if anything you are now kind of holding back on radio investment to wait with 900 refarming, in which case could you give us an update on when we might see some real life implementation of that handset supply you mentioned, such as it is necessary. Obviously there is likely to be kind of sense of timing. And also on the flip side if you're deemphasizing radio and spending more on the core network, and what the benefits of that might be from a shareholder perspective.

That was CapEx, second question in respect of the present subordinated debt you received from Softbank. How we should look at those from a elevation point of view what the £84 million one-off benefit referred to and whether or not now with a bit more, I guess with time and a bit more water under the bridge whether that looks that’s more secure whether or not the balance sheet items is sufficient for the real value of the asset? Thanks.

Arun Sarin

Okay. Simon, so first on CapEx and 900MHz refarming, obviously we would like to see 900MHz refarming begin as soon as possible. Our view though is that it is about a year or so away here in Europe. We are doing a little bit of 900MHz refarming in New Zealand, and so we will test how it works handsets all of that, but its very early days. We are spending more on our core networks principally because we want an all IP backbone. And we also want to integrate all of this so we can have lower costs, as our data rates climb as we get into DSL our backbone will be able to carry all of this traffic.

I would say it's not a conscious decision on our part to kind of spend less on radio, how much you spend on radio simply depends on the traffic that is required. We have pretty much built out our 3G HSDPA core network, so we are stable there. And now we have to fill this networks up which will take a couple or three years. So we are in a period now where we feel satisfied with the quality of the network, we've built the platform for the future, we are working on demand and that's where we find ourselves and that's the reason we are highly confident that we can do the 10% CapEx to sales because we are there. On Softbank, Andy?

Andy Halford

Yeah, we took a view when we did the Japan deal. As to what the sort of fair value of the subordinates loans and the preference shares would be, and actually book those on the balance sheet as a lower number than the face value just to take accounts, in fact that there were some complexities, uncertainties that the marketability of those would be a selective market. And so, they are on the balance sheet, at a balance of £1 billion. And we remain of the view that's broadly the right sort of value to be holding the math. So that is not changed.

The £80 million or gain arose from the fact that SoftBank after we had done our transaction wanted to do some refinancing themselves and they found that certain aspects of the agreements with us were making it difficult for them to achieve what they wanted to do. So, we came to a sensible compromise as to how we might help them with their problem and not worsen our own situation.

Arun Sarin

Okay. Christian?

Christian Kern - Lehman Brothers

Thanks Arun. It's a Christian Kern of Lehman Brothers. Just on the fixed-to-mobile substitution and cost initiatives. Can you give us a bit of a vision going forward when you think price elasticity might cross the magic one number? And in terms of cost initiatives, what else is in the pipeline, which would help you on that side?

The second question would be on the US side of things; the Alltel deal has been announced. Are you tempted by the valuations over there, and if not, when will you start the dividend discussions on Verizon Wireless with Verizon? Thank you.

Arun Sarin

Okay. Let me comment on price elasticity, maybe Vittorio you can talk a little bit about cost initiatives and I will come back to the Alltel question. So on price elasticity, frankly we are clearly moving closer to the day when we expect usage demand to exceed the price reduction. The range of prices in Europe are anywhere between 10 eurocents a minute and 15 eurocents a minute today.

This is obviously sharply down from a year ago and two years ago. In the US, just as a comparator because usage is quite high in the US as you know. The rates are approximately seven or eight cents a minute. So we are coming closer to the point when we hope to see elasticity. Frankly, we are not sitting here today and calling when that day is going to be, whether it's in six months, 12 months, 18 months, 24 months, we don't know. All we are doing is we are sensibly marching our business in that direction, making sure we have the network capacity, we have the handsets, we've got the bundles, we've got new products and services. So, when the time comes we can clearly accelerate and move our business forward.

Let me say a word or two about cost. But, I am sure Vittorio would want to add. We've done a number of things. We are beginning to see some real traction in costs. We've highlighted £250 million worth of cost reduction. That number will double at least in this coming year. We are doing new things, such as building the new ERP system, doing more unification of our networks. So, we expect cost to be a permanent feature of our business on a going forward basis. Whether it’s online sales, whether it's ways we can think about acquisition, retention, whatever it is we are kind of working on our cost constantly, principally because our prices are coming down pretty steadily as well. Vittorio?

Vittorio Colao

Yeah. I think we can divide the whole thing in three brackets. First one is all the technical cost, the technical platform cost. The most promising areas are clearly the integration of the European network as Arun referred to in the previous question. The European network initiative which is about getting a single IP-based MPLS network with all transmission access optimized.

SCM, the purchasing function, which is, already as we said in the presentation, delivering the first results, so getting to kind of global purchasing type of thing.

Outsourcing of IT. IT is around £0.5 billion in CapEx today in Europe with the ADLM project and the cooperation with IBM and the EDS. This is another area of work. Centralization of data center, which we have already done, almost two-thirds of it with some £50 million already in savings in the accounts and than the [European] infrastructural project that Arun referred to.

The second bracket is commercial cost, and you know this is a more of kind of the way we manage and acquire customers. We are working on distribution. Distribution is clearly an important commercial cost. Online project is part of that, but it's just online is also the commercial terms on which and how much we can internalized, how much we can get through directly controlled channels as opposed to share channels.

A second area is straight overhead, to be honest. The normal reduction of people and the way we do things in the channels. And the third is outsourcing of certain pieces of them, which is not necessarily offshoring, this could be just outsourcing back-office and the call centers and this type of activities that we have much frankly at local level in Europe.

A third area, which is not exactly, the purpose here is not exactly reducing, but is optimizing this acquisition or retention cost. It was partially, I think in analyst presentation. The acquisition or retention costs have been broadly stable in the last year. The issue is to optimize on which customers you put those acquisition and retention cost in trying to reduce the unit cost without, of course, hurting the churn, which as you have seen in the numbers seems to go in fairly the right direction.

So, we would say these are the three main ways to tackle cost, infrastructure, the way we distribute and optimization, not necessarily reduction, but optimization of acquisition and retention.

Arun Sarin

Christian, to the last part of your question around Alltel, one of the reasons I spent 60 seconds on Verizon Wireless is because our business in the US continues to do very well. 18% growth on a base of 60 million customers, on a base of £20 million of revenue is pretty spectacular. So, we remain happy shareholders.

Christian Kern - Lehman Brothers

Sorry, just following up. If you are happy shareholders when are you going to start talking about reinitiating the dividend?

Arun Sarin

Yeah. So, the amount of debt that sits in Verizon Wireless right now is in the $12 billion range. It has very strong free cash flow production. Our view is that we will hit a kind of zero debt in the next couple of years and that would be the logical time for us to be considering dividend payouts. Nick?

Nick Delfas - Morgan Stanley

Thanks so much. The company is Morgan Stanley. Just three questions, actually first of all on leverage, obviously people always want more. And I guess your leverage including Verizon on a proportional basis is about 1.4 times EBITDA.

I know you are not getting a dividend at a moment, but that’s substantially below where some companies in sector are moving more towards the two times level. What’s preventing you returning even more cash to shareholders? And a similar point could be made on the dividend where the underlying payout is only 50%. So, you've got lots of room to increase in the future.

The second question is on Femto Cells. Is that something you are excited about that you think we will see may be not in FY'08, but in FY'09? And the final question is, what went wrong in Greece and the Netherlands, because those I guess were two new black spots with negative growth of 6% or 7%. And how can you fix that?

Arun Sarin

Okay. May be I will take the leverage and the Femto Cells and you can do the Greece and Netherlands bit. So, first on leverage. Last year when we laid out our strategy to you on Europe and EMAPA and portfolio management, we told you that we were going to be going to A- kind of rating. We have just now reached that rating. My view is you have to look at our strategy in its entirety. You can’t just look at leverage as one aspect of what it is we are doing.

So, we're talking about, which basically compete with Wi-Fi and WiMAX that is a natural progression of technology. Our view is we are still 12 to 24 months away. And when they come, we will clearly look to deploy then in lieu of kind of what people are talking about in terms of Wi-Fi and WiMAX. They obviously provide a good wireless broadband channel into our networks. But, I think it's still kind of early days where technically our people are talking about it. I know we are talking to a number of our Chinese manufacturers in terms of bringing the cost point down, but 12 to 24 months away.

Andy Halford

I will just add one thing on the leverage. Mixing the US up with the rest of the Group, we have to be careful with, because there are only cash flows that are coming through from the US at the moment or essentially to cover our tax bill. If you look at our controlled business EBITDA and our controlled business there then well, £24 billion actually suggest it’s a two to one relationship. This will put in accounting in this and may be little bit lower. But, I think it is nearer to 2 space than the 1.5 space. Vittorio?

Vittorio Colao

Yeah. Greece and Holland, there is two very different stories. Greece, as you know, we've got in the markets and we think we are on the right track now to be back to where we were by the ways of a very strong position because having said that it is not the best year in the company, still we are talking about very profitable, very strong position in the business market. So, it is a good situation.

Holland, the Netherlands are a little bit of a different story. I don't think that Vodafone has got any specific problem in the Netherlands. I think it's just the market which has been over crowded. This is a market with many players, 60 MVNOs, distribution which is very much shared and very, very heated when seasons become strong and therefore we had to become competitive again. It's another case where we have just decided to become competitive.

The good news is that Holland is showing very, very good performance. For example on the data segment we are up almost 67%-68% in the quarter and there are also evidence in the market that consolidation might improve the situation and we think we are well positioned to benefit for a consolidation if it happens.

Arun Sarin

Robert?

Robert Grindle - Dresdner Kleinwort

Robert Grindle from Dresdner Kleinwort. On the one-off tax payments, would you still be assuming the bulk of the repayment of the balance £5 billion the next year, or is that moving out a bit? And also on tax, any news on the German tax front, a big claim you have there?

And then lastly, when do you take more advantage of the increasingly large number of 3G subscribers you have offering flat rate bundles stimulating the consumer and that sort of things. Is that getting really quite close now to that point? Thanks so much.

Arun Sarin

Andy.

Andy Halford

Yeah, the £5 billion, we talked a while ago the sort of the CFC is £2 billion of it. Then there's a number of other things that come to £3 billion. The CFC is still very, very difficult to predict in timing and outcome terms; I referred to the ruling we are awaiting now that is merely going to be what sort of principles to apply. So I guess our best view is that unlike we settled in '07-'08. The [nice of the worlds] is probably an '08-'09 event maybe.

And on the £3 billion, those are coming through in sort of drips and drops so we settled just on the £0.5 billion last year. We are estimating just over £0.5 billion in the current year and sort of that in the next couple of years. We still think we are going to come to around the same number, but we maybe in more of the 3.25 billion a year territory rather a billion a year as maybe we thought earlier.

So and on the German tax not a lot of update there still going through in a little bit big numbers and it just taking a lot of time.

Arun Sarin

Robert, on 3G, I'd say couple of important stats. One is that a third of all our incremental sales these days are 3G handsets. Like I said in my presentation, 20% of the revenues in Europe are being carried on 3G devices, minutes are 23%. I think you should look for a steady increase here, I don't think there is a kind of a tipping point phenomenon here. HSDPA has come in, it's being used principally for kind of PC modems. Handsets will come later on this year. Our mobile internet is being opened up, so that people can access pretty much what they do on their PCs today. All these things are gradual steps that will come into place, nothing phenomenal that will occur in the next 6 to 12 months.

We'll take question from Terry.

Terry Sinclair - Citigroup

Thank you, Terry Sinclair from Citigroup. Three interesting questions if I may. First of all you gained your subscribers faster than the price per minute is falling. Do you expect still that's just begun that you will gain subscribers faster than the price to minute fall?

Secondly, related to that, obviously you try and target your acquisition costs and your retention costs very sharply. Do you have any evidence that the quality of subscribers is improving? Given that minutes per customer are falling faster than the price per minute. It was just questionable?

And the third thing it is fair to say that the cost savings you're making at the next year, you expect to retain a larger share of that for the income statement rather than passing to consumers?

Arun Sarin

Okay. So let me take a shot at it and I am sure Andy and Vittorio you probably want to add to this. First of in broad strokes the year, that we are in now '07-'08 is going to feel a lot like '06-'07 meaning, yes, we will get subscribers pretty much at similar rates. We are not seeing any deceleration anywhere, the momentum continues. Equally prices are falling at a similar rate. Cost reductions will clearly be larger this year than last year. And the net result of that if you look at it on a margin basis is that our margin degradation at the company level is likely to be slightly less than the margin degradation that we just saw. Europe is going to be pretty similar, EMAPA is going to be flat as opposed to Turkey coming in and diluting our margins. So, we will see slightly better margin performance at the group level. Andy, want to add to that?

Andy Halford

Well, I think on the customer growth is still continuing very strongly and therefore the whole issue about how much of that is volume per customer, how much of these customers with more than one device, is quite tricky. So, or might numbers there 13% usage growth, 8% more customers is 21% approximately going on 17. So net we are up. And I would see that sort of relationship continuing to hold. Customer quality, it sort of is probably better to comment on that in the light, but there is massively more focus now upon segmentation tearing the customers by business. And I think in the Italy Investor Day, we showed particularly trying to align very much the retention spend with the customer values in a much more scientific way. On the cost savings clearly, we will try to get as much of that to come through to the bottom line, equally we’ll not get out of the market on the pricing and handset will be about between those two and the overall margin impact will be broadly as Arun had summarized.

Arun Sarin

Vittorio?

Vittorio Colao

I will integrate very quickly, the real relationship that we really look at is more than customers versus price per minute, because price per minute is really driven also by competition is price per minute and volumes. And volumes are going up nicely in a 32%-33%, 20% depending on the market you look at.

Again as I said before elasticity is still below one, but its clearly if you look quarter-on-quarter is coming up while which means people we are providing a service that people use more and more. Data, same story, and going back a little bit also to the question on 3G before. We have data growth of I just said in some cases very high, but also the 30% in Germany and the 30% in Spain, which indicates that 3G networks again are finally delivering, delivering the experience that the customers want. So, these are the type of relationship that we look more into.

In terms of churn you already gave the answer a position of retention, for us the issue is to measure if they go against the customers whose value justified a position retention. I think also in the German, UK day we showed also on top of the Italian one that the great attempt is to tear customers and to have as we are successfully doing for example and either in Portugal in Germany a number of cases.

The investments on the customers proportionate to the value, i.e. the margin and the lifetime value that they bring to us. And this is why before I said it’s not a sheer reduction, it’s just much more a targeted investment on the customers, and this is the name of the game I think.

Arun Sarin

Laura?

Laura Janssens - Merrill Lynch

Good morning it’s Laura Janssens from Merrill Lynch. Just on your EBIT guidance if I could ask you to let us know what you expect the impact of roaming in Bersani to be on EBIT for fiscal '08. So we can get a better feel for the underlying numbers?

And then secondly on the CapEx size on your core network investment. Is there any kind of metric you can give us to give us a feeling of what you think the economies of scale on that investment are relative to single country investment and whether it’s fair to say from your comments that you think economies of scale are perhaps more relevant now than they have been in the last couple of years? Thanks.

Arun Sarin

Laura, so on roaming next year we are expecting £200 million to £250 million reduction, both on the revenue and on the operating profit line. In Bersani, we are expecting at the operating profit line in the £200 million range. So, those would be the quantification of those two impacts.

On CapEx, every time we buy bulk, every time we do e-auctions, we are always pleasantly surprised by the prices we get. We have got things in our business plans and we kind of do that. Than we have our e-auction and the numbers coming below, it’s a good thing. Whether this is larger today than it was a year or two? I am not sure we are necessarily seeing that as much as we are getting very good prices across the board.

Let me go to Paul.

Paul Howard - Cazenove

Thank you. It's Paul Howard from Cazenove. A couple of questions, or just one real question, on the guidance for next year and looking further out, do you feel you now have more visibility further out. I think sort of in present within your strategies to get stabilization in Europe and we are still looking if we're thinking of similar transition to kind of decline in operating profits next year for Europe. Is that the last year, do you think now we can look forward to stable European profits?

Arun Sarin

Paul, I don't think visibility has changed very much in our industry. We are, obviously, looking forward. We can tell you about the price reductions. We can tell you about what we are doing on cost. We can tell you about a number of things. But, I wouldn't say visibility has changed materially in our industry. The likes of Bersani continue to happen; roaming continues to happen, price competition in Germany continues to happen. So, I wouldn't draw any conclusion outside of next year's feeling like last year, beyond that frankly can't tell at this stage. Justin?

Justin Funnel - Credit Suisse

Thanks. You have typically benchmarked your prices against your leading competitors. In the last few months there has been a price cut by TI effectively in Italy, also by Telefonica in Spain, and recently DT is looking at a cheap package for each users. So, do you think there is something to respond to there or are you at the moment happy with how your pricing compares as far as the current quarter's trading goes?

Secondly, US Mobile, they’ve seems to have come from behind to now be a bigger factor in the US and Europe. How do you think that reach across, firstly, to the outlook for Verizon Wireless' margins over the next 12 months? And secondly, what can you take back in to Europe to grow your European business from what you've learned?

Finally, if you had another agency cutting your credit rating to BBB+, what would you do? Would you see a need to get back to A- by recapitalizing? Or would you happy to be temporarily at BBB+?

Arun Sarin

Okay. Do you want to talk about the price cuts in our various markets?

Vittorio Colao

Let me first reiterate what we've said at the Investor Day recently. You mentioned fleet or what we call reference competitors i.e. the big players in the main markets. Our pricing policy vis-à-vis the reference competitors used to be competitive. So, this is a general statement. We don't want to give up the valuable customers in those markets and this remains valid. So, this is our intention, again, linking it back to the answer on A&R and on value customers. For value customers the Vodafone wants to be competitive.

Now, the three stories that you mentioned are different in the nature. Telefonica last week announced what seems to be a minus 9.5% decrease. This is actually happening after a rebalancing of tariffs that Telefonica had done after the introduction of per second billing. We looked at it, we are studying it. We kind of find it smart and we will do whatever it takes to be still competitive in that market. But, again, this is a reduction after rebalancing, so you have put things into the right context.

In Germany, we think we are competitive. I mean, you mentioned the US traffic is more of a normal business as usual. There was an offer on business few months ago. We have done what we had to do. We think in Germany now we are fully competitive versus Deutsche Telekom and I think that the results that we are communicating today indicate that the moves done in last year were expensive, but they were in the right direction.

Italy is kind of a different again situation, because we have noted that after the introduction of the Bersani, Telecom Italia has decided not to rebalance the tariffs and they're actually advertising aggressively price reductions. This is mainly in the consumer segment and very much geared at this transparency type of concept.

For the time being we are I think very competitive. Again, the results are positive. And as usual we will do whatever in a focused, targeted way it is required to be competitive with them.

Arun Sarin

Paul, do you want to take the Verizon data question?

Paul Donovan

Yeah. I mean I think the story from Verizon, the learning we have from Europe is really about execution. Verizon have an extremely good system, which is about targeting customers who have the propensity to use data services and than making sure they are investing selectively to put the right devices in the hands of those customers. And when they upgrade those customers, we see an increase in the level of data revenues on a per sub basis.

So, we are working hard to see how we can translate that execution in to European context. That said if you go in to a Verizon Wireless store today in the US, you will see a higher emphasis on data services than you would see across European businesses or other businesses as norm. And so very clear desire to maximize data revenues and they invest to do it.

Arun Sarin

Andy, could you add anything?

Andy Halford

Yeah. I mean, we are now with one rating agency BBB+ and to at A-. I sincerely hope we don’t inadvertently end up with two BBB+, if we do will be squeezing working capital and various other things hard, I can assure you. I mean the only other route if we were to find something to acquire where it really is worthwhile, temporarily going to BBB+, but to comeback to A-, we’ve said we would not rule that out, but that would be to, sort of, a full back position there.

Justin Funnel - Credit Suisse

Just to follow up, I am sorry. One way of getting back to A- would be to sell assets. I mean, if you find another big emerging market asset to buy, you think that’s the catalyst for selling the US?

Arun Sarin

Justin, two points. First, I will reiterate what I said before which is we are happy shareholders in the United States. The company is performing very well. With regard to portfolio management within the firm, we have a lot of assets. And I'd simply say these assets, the Board looks at them regularly in terms of how they are performing et cetera. And if there was an interesting asset, a good strategic fit, excellent potential versus what you explained to us back as a point of announcing the acquisition, did you accelerate things and see this as some of the CapEx being pulled forward to the current year.

Arun Sarin

Okay. Paul?

Paul Donovan

Well, now the plan is pretty much the plan that we outlined to you a few months ago. I guess the phasing of the CapEx throughout the year is slightly different in as much as between the period when we announced the deal in closure the investment in terms of site bill dropped slightly. We have now accelerated that back up and so we are now absolutely on track against the level of investment that we outlined.

And we are also now at a much more advanced stage in terms of developing the MOU we have with Bharti, and turn that into a really solid agreement, which will actually yield some further benefits, and if anything we think those will come through sooner rather than later. So we should have a more efficient use of the investment, but the phase of the investments are going to be broadly inline with that which we anticipated.

Justin Funnel - Credit Suisse

Okay.

Arun Sarin

Gareth

Gareth Jenkins - Deutsche Bank

Yeah, I wanted just to follow-up. I am Gareth Jenkins from Deutsche Bank. Can you just tell us whether you have seen any elasticity on the roaming in Bersani accounts? And secondly the 3G ARPU out left you are saying an acceleration in the ARPU out left or a deceleration is that still in that 5% to 8% range? Thank you.

Arun Sarin

Yeah, we have assumed some elasticity in those numbers. Although, it is more of a sort of after the science that's because clearly we have now some track record as customers have gone on to Passport, that as we move through other parts of our customer base we don’t know whether the elasticity relationship will continue to be the same as the one we had before. And on the wholesale side where we got a further price reduction to come obviously the elasticity is an indirect elasticity by the provider, so we have taken a view on the elasticity there, but I have to say that that is quite a difficult area to estimate.

Gentleman in black.

Ed Field - M&G Investment Management

Hi. Ed Field from M&G. Question for Paul to keep him in the limelight. On payment platforms in emerging markets, could you just tell us what you are learning about that perhaps with reference to Kenya?

Paul Donovan

Yes, I mean, this is reference to the rollout of our M-PESA payment platform in Kenya, where we have now gone from what was a pilot stage to a full scale launch in the market. We have been extremely pleased with the level of adoption and our folks were down there recently reviewing progress and people are literally queuing around the block from stores in order to be able to use their mobile phones to facilitate payments. So, we are really learning in the market how customers are reacting to the product and service and we have plans to roll it out in a number of other places going forward. As well as adding other functionalities such as international money transfer, which in emerging markets where you've got large numbers of migrating workers is extremely important. So early days, but positive signs in terms the way the customers are reacting.

Arun Sarin

Andrew?

Andrew Beale - Arete

Hi I am Andrew Beale from Arete. Just you mentioned comments obviously about price elasticity, but I feel that you might be missing an opportunity to move to maybe substitute the fixed line a bit faster than some of your competitors. I am just wondering what you built into your guidance for '07-'08. Is it a similar rate of adoption of these sorts of tax or you accelerating moves into substitution?

And also similar tact maybe you have some interesting color that you could share with us on the effect of HSDPA modems in one of the markets like Spain where they are being used I think as an substitute for DSL in some places? And totally different subject, I mean, I think three years taking a fairly aggressive lobbing stands to move towards the sort of trying to keep to all mobile termination model. I just wonder if you have got any perspective on that? Thanks.

Arun Sarin

So Andrew, first of all on substitution products in this year, I don't think you will see a material difference in our execution. On the margin as Bersani kicks in, as more competition in Germany comes in, as more competition comes into Spain, as things change here in the UK, you will see kind of new products, new services from us. But we said are you going to see something dramatic a sea change, highly unlikely. It's just kind of more of the same. We have big bundles. We have got free weekends. We have got family plans. We are doing more things on the mobile Internet. So you just see kind of a gradual move. Our data rates are growing at 30%, 40%. We expect them to continue to grow at 30%, 40% despite the base becoming larger here.

What is our experience with HSPA and how is it coming along? Our experience is actually very good with HSPA. For once we are feeling that when we are selling a product, it is exceeding our expectation and exceeding the customer's expectation in terms of a wireless broadband pipe. So we bought a lot of these from Huawei recently. I mean now we will be putting them into the marketplace when we see the results in places like South Africa where wireless broadband is the main broadband that people buy as opposed to fixed line broadband. It's very encouraging.

In Spain where people have second homes and there is long waiting time, people are buying wireless broadband. Our own marketing, for example, in DSL, as you can take a wireless broadband, HSPA, modem from us today and then we will get you a DSL line in 15 days or 30 days depending upon what the relationship with the local exchange carrier is. And people are using that mobility broadband device. So good, but again I just want us to be cautioned on the pace at which we are going. It's a good pace, a 30%, 40% growth in data, it's good, it's solid, it will continue.

On your question on 3, I can understand why 3 may want a asymmetrical rate. But frankly from where we set, there is no reason to have an asymmetrical rate because termination rates are by and large thought off as cost plus something or the other. It costs the same amount to terminate on our mobiles that it costs to terminate on 3's mobiles. So I think OfCom is actually doing the right thing in terms of setting forward industry structure for the long-term and if there are stresses and strains that are caused by it to have a healthy industry you have to have a level playing field and I think that's what OfCom is doing.

Andrew Beale - Arete

So I think you are actually saying, let's abolish MTRs totally, now and that's a lobbying position and I was more interesting in what you think about.

Arun Sarin

Well, obliviously if you are a net payer you want to abolish it. I understand that. I mean where you stand on these issues depends on where you sit. And so I would simply say, I understand their position, but I think the OfCom position is right and stable for the long-term development of this industry. Stephen?

Stephen Howard - HSBC

Thanks. Stephen Howard with HSBC, couple of questions. One further on elasticity, I appreciate of course it is not rather than the science as you say, but what type of time lag do you build into your assumptions, about how long it takes customers to recognize that they are getting better value from their mini bundles and actually take action on that and spend longer on the phone. And again I appreciate you're not going to give me sort of hard numbers, but a bit of color would be helpful as to how if there is differences between cuts that are essentially forced on you by competitive conditions to those that are your own initiative things like [homes end]? And the second question if I may, just where do you think beyond mobile data roaming, what is the next regulatory flash point for us to watch for in Europe? Thanks.

Arun Sarin

So, you are asking a very important question around elasticity, because our experience would be that where we design packages for our customers, explain it to our customers, we get much better elasticity than when its either a regulatory fiat or we are getting dragged down in the marketplace for example in prepaid in Germany. So, if we can design interesting directed packages towards customers, we get much better elasticity's there then when it feels helter-skelter in the marketplace.

And beyond mobile emanation frankly we have to keep watching the data roaming space and maybe Vittorio you can tell the audience about what you are doing in terms of data roaming here in Europe, and SMS would be the other thing. But frankly as long as our rates are competitive and our prices are coming down, and they are sensible to our customers. I think the regulators will stay away. If for a long period of time, it is felt that the charges are not right that’s when regulator/politicians come to bet.

Vittorio Colao

Yeah, on data roaming this was something that we have focused on, because its clear that this thing is getting traction as people are more and more used to do their own stuff a bit on a computer, on a phone whatever they are. Therefore we announced I think a couple of months ago that as of July we really most of the markets have a special tariff which would cap the data roaming bill to EUR12 per day of uses. Now, you might think that this is high or low depending on where you are. The reality is that this is competitive, for example, with Wi-Fi in the hotels and we don’t limit it to a hotel. We just say wherever you are do it. And so, I personally believe the success of these things will be material. This is going to be another area where we can build very strong customer franchise and we will again see in the market new tariffs and competitors will probably react and we will do other stuff.

But, this is another interesting area I think of growth. And this is, again one more time, Vodafone first moving in Europe into the roaming space because we are conscious that this is one of our key distinctive advantages.

Arun Sarin

I still see a number of hands up. There is a sign that's flashing stop, stop, stop. I am going to take one last question. I will take it from [Amit]. We will all be around if you want to stop by afterwards and ask your questions. But, Amit you have the last question.

Amit Kale - New Street Research

Okay, thanks. It’s Amit Kale at New Street Research. Just a couple of quick ones. Firstly, you have done some pretty big write-downs in Germany and in Italy this year. Can you just tell us are there any big upfront cash tax advantages or cash tax savings from doing those write-downs?

And secondly, bit more of a tricky one relates to Alltel in the US. It seems that while private equity bidding $71 a share, but these guys got a higher cost of capital than you do within Verizon. They also don’t get any synergies from doing the deal. It seems like Verizon Wireless is more of a natural buyer of Alltel given the synergies that they would get from doing the deal?

Could you just tell us how closely you look at the asset? And if you did looked closely at it, why decided not to bid for Alltel?

Arun Sarin

Okay. You will take the tax advantage?

Andy Halford

Yeah. I mean, the simple answer is no. The accounting write-down and the way that it is taxed is going to very, so there is no big write-down that comes off the back of those.

Arun Sarin

I would like to say the same answer no. Let me just go back to Verizon Wireless has grown organically in the last four, five, six years. It's done a great job. Has a market leading position. We continue to grow the business and frankly that's what the company is focused on. And obviously, I am not going to comment on a specific M&A situation, because it's not the policy of our company to comment on a particular situation.

Thank you all very much for coming and have a good day.

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Source: Vodafone Group FY 2006 Earnings Call Transcript
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