Vodafone Group F1H06 (Half Year End 9/30/06) Earnings Call Transcript

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Vodafone Group Plc (NASDAQ:VOD)
F1H06 Earnings Call
November 14, 2006 5:00 am ET


Arun Sarin – Chief Executive Officer
Andy Halford – Chief Financial Officer
John Bond – Chairman
Vittorio Colao – CEO of Europe and Deputy CEO
Paul Donovan - Chief Executive Officer, Central Europe, Middle East, Asia Pacific and Affiliates


Paul Howard - Cazenove
Andrew O'Neill - Sanford Bernstein
Kristian Kohn - Lehman Brothers(?)
Nick Delfas - Morgan Stanley
Laura Conigliaro - Goldman Sachs
Terry Sinclair - Citigroup
Simon Weedon - Goldman Sachs
Robert Grindle - Dresdner Kleinwort Wasserstein
Justin Funnel - Credit Suisse
Gareth Jenkins - Deutsche Bank
Fanos Hira - Bear Stearns
Stephen Howard(?) - HSBC
Jerry Dulles(?) - JP Morgan
Unidentified Analyst

Earnings Results Presentation

Arun Sarin, Chief Executive Officer

Good morning everyone. Welcome to Vodafone's interim results. I am joined here by Andy Halford, our CFO. The agenda for this morning is for me to say a few words about the highlights of H1. Andy will come up next, he’ll talk about the financial review. Then we’ll take your questions. Before I get started I want to introduce some of my senior Vodafone colleagues. I’d like to start with John Bond, our Chairman; Vittorio Colao, CEO of Europe and Deputy CEO; Paul Donovan EMAPA. In the next 20 minutes I want to cover three things: first highlights of the half year. Second, our performance in our key markets and third, the progress we are making on the five?prong strategy we announced on May 30.

Let’s start with the highlights. First, we have delivered in line H1 results. In competitive markets, revenues and margin progression has been in line with our expectations. The development of CAPEX and free cash flow is also in line with our expectations.

Second, in May we talked about our five strategic objectives and we are making good progress on each one of them. We have an ongoing rollout program of Vodafone At Home and Vodafone At Office. We’re making good progress on our costs structure, whether that’s IT outsourcing, network sharing, supply chain management and other programs that we have. Third, we are delivering on our total communications to our customers, through broadband ventures in Italy, the UK and Germany. We continue to refine our portfolio, we’re delivering good results from our recent acquisitions with Turkey being in particular focus and good news coming out of our market in Turkey.

Third, we continue to develop our customer franchise. We now have over 191 million customers. I’m pleased that we have reduced our prices in Germany and in the UK and I believe we are now competitive in most of our markets. We continue to produce segmented and differentiated offers. There are some offers that you are now aware of – whether it’s Passport, At Home – but equally we’ve launched new products in the UK – Family Plan; Italy – Bongiorno; and Spain – Vitamina. The list goes on.

With regard to 3G, we see good growth with our 3G customers. We added 1.9 million customers and we now have over 1 million Vodafone data connect cards. The last point I want to make here is that our expectations for the full year are in line and there are three parts to this: there is a tax component, there is a guidance component and there is a returns component. Starting with tax, we now see both a lower full year effective tax rate of around 30% and a lower longer-term effective rate of the low 30s in percentage.

Second, on guidance, we are reiterating our revenue and margin guidance and we are increasing our cash flow by £700 million, principally because we are deferring some one-off taxes. Finally, on returns, we are announcing today that our interim dividend will be £0.0235, an increase of 6.8% and we are reiterating our 60% payout ratio for the full year.

Those are fundamentally the highlights of the company. I would now like to drill down a little bit on the Group results. First, our customer growth remains well into double digits at almost 14%. At a time when elasticities are less than one, this is a key driver to our 6% revenue growth. Our adjusted operating profit is up 7.4% and this is driven by Verizon Wireless which was up 30%. Our reported operating profit is in negative territory, impacted by the £8 billion impairment charge. Of the £8 billion, around £3.7 billion is interest rate related, and the remainder is in Germany where we have taken a recent price cut.

Andy will talk more about our impairment.

Free cash flow is down 9%, however our operating cash flow is stable to slightly up and the real driver of the negative growth is higher cash taxes that we signal to you on a one-off basis last year at this time. The net of all of this is that our adjusted EPS is up almost 18%, driven in particular by a lower share count.

Our business has different trends in different parts so I want to highlight our regional performance to you. In Europe, our first half margins were down 1% on the back of flattish revenue growth. This is in line with the expected trend that we outlined in May when we said in Europe, we expect modest revenue growth and declining margins. In EMAPA, overall growth of 14% driven by both our subsidiaries and our joint ventures and by the United States. In EMAPA, margins were up just over 1%, which offset the decline in our European businesses. The notable driver of EMAPA margins was Verizon Wireless, whose margins were up 1.5% YoverY.

Moving to the second section, which is around country reviews, I will review for you Italy, Spain, Germany, the UK, US and the rest of EMAPA. I would like to start with Italy and Spain. Many of you were there for our day in Milan. In Italy, we saw strong customer adds in the second quarter of over 1 million. This of course compares with only 90,000 in the previous quarter. You will remember from Milan that our Italian team showed you good minute volume growth on the back of our summer promotions.

That now translates into a reversal of previous negative growth trends in service revenue on an underlying basis. One of the other things that is going on here is that most of our growth in minutes was on-net minutes, which has helped reduce our costs and keeps our interconnect costs under control. We have also launched Casa, which is doing well in the marketplace. We have created a DSL partnership with Fastweb. My view on Italy is that margins in Italy are still quite high and we can continue to expect a gradual erosion over a period of time.

Spain. Spain continues to perform well. Vodafone Spain took 44% market share in Q2, continuing the previous trend. Ongoing migration of minutes to mobile means that there are more mobile minutes in Spain now than fixed line minutes. Coupled with good customer growth, our Q2 was able to produce service revenues of a healthy 19% on an underlying basis. There are clearly challenges ahead in Spain, whether it’s the fourth operator, MVNOs etc, but I think we are well prepared for those challenges.

Moving on to Germany and the UK and we will have an investor day in March 2007 – as you know, in Germany, we’ve had high prices historically and low volumes. We’ve made a number of changes and as prices come down our volumes are going up and will become more in line with the rest of Europe. Our own recent contract tariff refresh means we are more competitive with T-Mobile and frankly we’re more competitive with our other competitors.

Our Zuhause product is going well, we’re adding about a half a million new customers per quarter and it already contributes 2.5 percentage points to our revenues on an annual run rate basis. You can also see on the chart that our prepaid pricing is dropping. It’s down 42% YoverY. Equally, we’re seeing some good usage growth and an increase of 39%. It is still not an elasticity of one.

In the UK, we’ve been busy. I see new momentum in our UK business. We’ve announced four major tariff changes since July, the latest being the family plans we announced two to three weeks ago. What is really interesting here is that family plans offers big bundles and you can have contract and prepaid customers belonging to a family or affinity group that can suck from the bundle. I think this is a good innovation and will hold us in good stead in the marketplace.

If you look at our enterprise business here, we continue to take market share. Our market share now stands at 46%. The steps that we have taken in Germany and in the UK will result in lower margins in H2.

Moving on to EMAPA, let me start with the US. There is an EMAPA day coming up in early December and we look forward to seeing you there. In the US, Verizon Wireless is leading on all metrics. Revenues are up 18%, ARPUs are above $50 and churn is below 1%. The company continues to take market share. We are very happy with our position in this attractive asset.

In our EMAPA businesses, subsidiaries and joint ventures growth in service revenues was 19%. There was strong growth in Egypt, Romania and South Africa. Growth in customers is the key thing that’s driving service revenue growth. Margins are stable, principally because of scale benefits. In summary, as you can see we have a portfolio of companies at different points in their life cycle, each performing well in the market place.

Before I move to the third section, I want to chat for a moment about HSDPA and the underlying mobile platform that we have built, of which obviously all our new products and services are built from. Let me start with 3G first. 3G continues to develop well. 20-25% of our gross sales come from 3G. We made very good progress on HSDPA and we have launched HSDPA in 20 markets. HSDPA is a core wireless broadband technology for us, whether it’s in fixed mobile substitution, mobile plus, advertising – it’s going to help us as we go forward in time. At this stage we are focusing our efforts of HSDPA principally on the business segment but come next year we’ll be focusing on the consumer segment as well.

Moving on to the third section, these are the five strategic objectives that we discussed with you in May. The question is how are we doing? First, on revenue stimulation in Europe, in our mature markets here in Europe we are going from a per minute scheme to a big bundle scheme to a flat rate scheme. This transition that we go through will take several years to complete. Our challenge is how do we keep the top line growing in this time period.

You can see on this chart there are several campaigns across Europe. We have big bundles in markets like Germany, where we have over 5 million customers who subscribe to this. We see prepaid to contract migration in markets like Spain, which is a real driver of growth. We see roaming propositions, Vodafone passport, 11 million customers. We’ve launched family plans here in the UK. We are running promotions in our various markets. The result of all of this is that we are still targeting a 1% out-performance versus our principle competitors and we are well on our way to meeting that.

Moving on to cost reduction, we have stepped up our cost reduction activities. We started with One Vodafone. Our prices now are falling 15% YoverY. We have stepped it up to a new level. The key initiatives are IT outsourcing, where we’ve signed a deal with IBM and EDS and we expect 25-30% reduction in costs on a historical spend of £560 million. Around data center, we again see 25-30% savings on an annual spend of £320 million. Around supply chain, we’re making excellent progress, saving almost 8% on an annual spend of £3.3 million. Around network sharing, we have announced a recent deal with Orange in Spain. All of these cost programs will help us hit our 10% capex to sales target for next year and we continue to target broadly flat opex from FY2006 to FY2008.

Moving on to EMAPA, it remains our growth engine. We said in May we would come back and talk to you about our recent acquisitions and keep you updated on the progress. The good news is that our newly acquired businesses, whether it is in Romania, the Czech Republic, Turkey, South Africa or India, are all doing well and all ahead of the plans at the time of acquisition.

In Romania and South Africa, service revenues are growing at 31% and 21% respectively. India is growing at 59%, the shares today are 15% higher than when we bought them a year ago.

Let me also say a word about Turkey. Turkey is also ahead of our expectations on all core metrics. The starting customer base was higher when we acquired the business in May and today we stand over 12 million. Of course higher customers is driving higher revenues. We continue to make progress on optimizing the network. We have raised the prices because our network is playing better. We’ve installed a good management team, we’re going to launch our brand in the coming months. The results is that our margins are over 20%, while we were expecting our margins to be in the high single digits.

Our capex is lower because we haven’t made the investments yet that we thought we would make initially. Fundamentally, Turkey is a good market. We are using our operating skill to be able to fix the core operations and we are saving costs through better procurement practices. Overall, I’m encouraged by the progress, but there’s a lot of work yet to do in Turkey.

Moving on to Mobile Plus, our third strategic goal which was around total communications. This is a multi-phase execution of At Home, At Office, complemented with DSL. In May we launched Vodafone At Home in Germany and Italy and since then we’ve launched in Greece, Portugal, Hungary and most recently the UK. The propositions are different in every market, depending upon local market conditions and local competition. We remain on track with further announcements on DSL to come before our financial year in March 2007.

Most of the DSL deals we are doing are wholesale relationships on a predominantly infrastructure light basis. My message here is whether it’s At Home, At Office or DSL, we’re on track and we’re moving along.

We also talked about two further elements of Mobile Plus. One was the integration of communications with PCs and mobile phones, so to the extent you wanted instant messaging on a mobile phone, or to the extent you wanted social networking on a mobile phone, you could get that. We have not made any major announcements yet, but in the coming months you can expect us to be talking more about this. Also today we’ve announced a transaction with Yahoo for mobile advertising.

Let me step back just for a moment, because in the last few months, what we’ve done is a number of trials and we’ve found that customers are saying if you get our permission to send advertising, we’d like that, so it’s an opt in approach. If you share the benefits of what you get from advertisers with us, we’d like that. Which simply means share the benefits with us. Finally, since you know something about me, would you please make the advertising interesting.

Those are the three things we’ve learned in the last six months in all the trials that we’ve done. We’re very pleased with the Yahoo transaction, principally because it brings together the best company in online display advertising with our UK company. We’ll be using their sales force, their technology engine and we’ll be providing the inventory in terms of the phones that we have here in the UK.

Products in this area will start flowing in the April-May-June time period. Equally, back in May we said we were doing a transaction with Google on Google Search. Google Search will appear in January-February-March in our European markets. It’s not something that we’re doing exclusively with Yahoo. We’re dealing with Google. Two weeks ago, we announced a transaction with Microsoft on operating systems. The point here is we are playing with all the market leaders in each of these spaces.

Moving on to our fourth objective, which was around portfolio management – in the first half we closed two important deals. One was the sale of Japan and the second was the acquisition of Turkey. We’ve also made two new announcements, namely the sale of Proximus for €2 billion and picking up a 5% stake in Vodafone Egypt. We stay on track with regard to our portfolio management in terms of the kinds of things we are looking at and the financial discipline we are exercising.

Moving on to returns on capital structure, you’ve seen our dividend announcement today, £0.0235 and the Board is targeting 60% payout for the full year adjusted EPS. There are no other changes to policy with regard to capital structure. Before I conclude, just a word about regulation.

Regulation presses on our business in a variety of different ways. I want to talk about three particular forms of regulation. One is regulation of termination rates. Ofcom of course produce their review, other jurisdictions will apply in the coming months. What is clear to us as a trend here is that what’s likely to happen is that the Ofcom review which suggests €0.08 per minute termination rate over the medium term is likely to be the place where most jurisdictions will fall. We are currently at about €0.11. We’re falling from €0.11 to €0.08 in the coming years.

Second, on roaming, the debate around retail and wholesale European roaming rates, the debate continues. As more and more stakeholders get involved, such as the parliament and the council of ministers in addition to the commissioners, we’re finding that the process is getting delayed. We continue to believe that wholesale regulation is appropriate in this market place, but retail regulation is not because this is a competitive market. We have over 10 million customers using Passport enjoying a 50% reduction in prices using passport.

The final point I want to make here is around Spectrum and Spectrum auctions that are likely to come up in late 2007, early 2008. We’ll be hearing a lot more about this. This is at the extension bands of 2.1GHz, 2.5GHz, 3.5GHz and we will watch this space closely.

Coming on to the outlook: on outlook let me just reiterate that our outlook remains fundamentally unchanged. The only real difference here is in our free cash flow number, which is up to £4.7-5.2 billion, up £700 million on the basis of deferring some one-off taxes to the tune of £700 million.

In summary, we’ve got good progress in the first half results. We continue to make progress on our five strategic objectives, we are constantly trying to innovate and strengthen our customer franchise and finally we remain on track for the full year. With that, I’ll hand over to Andy for our financial review.

Andy Halford, Chief Financial Officer

Thank you, Arun, and good morning everybody. I will try to put some color behind the financials. Just before I do that, can I just draw your attention to the fact we have tried to further improve our disclosure and particularly page 42 of the press release, which I think is now pretty well for me Vodafone on one page. It does give you a very clear summary of all of our major operating businesses on the turnover, EBITDA, operating profit, capex and cash flow metrics so that hopefully things are clearer and particularly for the businesses within the EMAPA region, there is a little bit more visibility there going forwards.

With that, let me move onto the numbers. The top half of here is the revenues on a statutory basis. Key numbers here are 7.2% increase in reported revenues, on an organic basis that is 4.1%. Adjusted operating profit is up by 7.5% on a reported basis, 7.4% on an organic basis and the adjusted EPS at £0.0598 is an increase of 17.7% compared with last year. About two thirds of that increase comes from the reduction in the number of shares in issue.

The bottom half of this table has got one-off items in it, in part Japan and the final stage of the disposal there. Then the bigger item is the £8.1 billion impairment charge. Just to talk about that briefly, obviously we took a big impairment charge back in February. The reason we have got a charge here is two fold. Firstly, long term interest rates. Those have increased in the period since February. Mathematically, that reduces the value and that causes an increase in the impairment charge. That is £3.7 billion of the £8.1 billion so just under half of it is purely interest which clearly unfortunately is outside of our control.

The other half is to do with Germany. We talked about the price reductions that we have made in that market recently. That plus to a smaller extent the termination rate outlook has caused us to take a reduction in the value of the German business which is the remainder of the £8.1 billion. Overall, about three quarters of it is Germany and about one quarter of it is Italy.

Let me move then onto the revenues in more detail. 4.1% organic growth overall, if you look at this in terms of the regions, it is basically flat revenues in Europe, 0.6% increase, EMAPA up 20.6% and the Arcor business up around 14%. Just going into Europe in a little bit more detail: reductions in revenue in Germany, Italy and the UK, in differing parts impacted by termination rate cuts and general trading environment. The 0.6% would actually have been a 4% increase if it were not for the termination rate cuts and other minor adjustments. Overall, fairly flat revenues in Europe. In EMAPA on the other hand, very strong growth really across the board here. 20% overall, but particularly noteworthy, we have Egypt up 41%, Romania up 28%, South Africa up 20% all contributing to that overall performance.

Organic numbers here exclude the Czech Republic, India and Turkey, all of which had stake changes during the period and therefore are excluded from that calculation. Moving onto service revenues, overall 4.4% up. The voice revenues were up 2.4% and I’ll go into a little bit more detail in a minute on the detail behind that. The messaging was up by 6.3% and the data revenues were up by 30%. Just to explain the chart on the right hand side, this is taking successive quarters and showing how the revenue growth has changed compared with the equivalent quarter of the previous year.

The blue lines on here are the reported numbers and you can see over the earlier period here, we had successive reductions in the rate of increase in our revenues. The red lines here are if you were to add back the impact of the termination rate cuts. The little gray bar on the very right hand side of this chart is the result of us looking, during this period, at some of the content products in more detail to make sure that we are accounting for those in line pretty well with whether we’re acting as principle or whether we’re acting as agent.

We have made a very small change which has no profit effect whatsoever but it just reflects the accounting on a net versus a gross basis for some of those. If we had not made that change, then clearly you can see that the most recent quarter would have been somewhat higher than in the previous quarters. If I actually step back and allow for the fact that Easter occurred in Q2 we have actually had three quarters now more stable at around the 5% level. Some early signs, hopefully, that it is starting to stabilize.

Within voice, looking at the outgoing revenues, the overall organic growth was 5.5%. The chart on the right hand side endeavors to explain that in a little bit more detail. There are three moving parts. The blue bars show the change in the overall size of the customer base, the gray bar shows the reduction in the price per minute that the customer paid and the yellow bar shows the increase in the usage per customer. You can see broadly on here, we’ve had around 14% increase in the customer base for the first half of the year as a whole so that’s the last two quarters. We’ve had about a 14% reduction in the price per minute but we have seen no average about a 7.5% increase in usage but slightly more encouragingly we have now gone up as a consequence of many promotions. We have actually got the usage going up by over 10%, which is the first time we have seen that for a period.

This is still lower than elasticity of one, but obviously tentatively it is a trend in the right direction. For the Group as a whole in the first half, we handled 113 billion minutes of traffic which was an organic increase of 18% YoverY.

If I move on to incoming, this time we have got a reduction in the organic revenues of around 6%. The same structure as the chart on the right, albeit with one key difference so we’ve got overall customer base again up about 14%. We have actually got a similar price reduction of about 14% but as in previous quarters, we have got a reduction, not an increase, in the number of minutes used per customer. Of course, the more bigger bundles that we put out to our customers, the more times that they call other Vodafone customers, the more that does mean we have traffic flows coming in from Vodafone customers rather than from fixes lines, so that’s part of the reason why that trend occurs.

Moving then onto other voice revenues, £1.4 billion, two thirds of that is roaming. As you can see from this, and particularly the chart on the right, we have had pretty good stability of roaming revenues. Arun referred earlier to the Passport customers, 10 million of them now, who have seen a near 50% reduction in the price per minute that they are paying. Notwithstanding that, we have actually seen stable revenues overall from roaming. That is because (a) elasticity is good, and (b) we have got evidence of more customers now using their phones whilst abroad when in the past they did not always do that.

Overall in terms of our commitment to getting our roaming prices down across the whole of our base by 40% by the spring of next year, we are now over halfway to achieving that and basically on a trend to get to that point.

Messaging and other data revenues – 6.3% growth in the messaging revenues, if we haven’t made that adjustment of the gross to net accounting that number would actually be 10%. The volume of messages showed an increase in Europe of 13% half year on half year and in EMAPA the equivalent number was 24%. It’s still good growth in volumes on the messaging front and on the data front, data has grown by 30% YoverY, fueled by our 30 million Vodafone Live customers and our 11 million 3G devices. Overall 3G devices generated over 10% of our revenues during H1 this year.

Changing now onto costs and margin, let me start with the bottom left of this chart, the margin. On a statutory basis, and this obviously is the basis we’ll be using next year and onwards, 40% margin which went down by 0.5% during the period. That can split out into Europe, which went down 0.9% and EMAPA, which went up 0.7%. We have relatively seen savings on interconnect and upgrades. On interconnect, we’ve been very focused upon promotions that encourage traffic on our network and not off our network, thereby reducing the third party interconnect costs, which have stayed at an increase well below the rate of increase and revenues, and on the upgrades we have controlled both volumes and prices so the numbers there are pretty flat YoverY.

We have seen some increases in other direct costs and on opex. I’ll come onto opex on the slide that follows. The other direct cost is because we’re paying a little bit more by way of commission on the sale of contract customers to third party distributors and also because in these numbers for the first time, we have got the Arcor costs and they are part of the reason for the increase. Before I move onto the operating expenses, just to relate this back to what Arun was talking about on the EBITDA margin on a proportionate basis, the proportionate number at the half year is down only 0.1%, in part that is assisted by the fact that the US was somewhat low on margin in the first half of last year and has risen to more normalized levels this year. Mathematically, that has just helped us.

We are still maintaining our guidance at around one percent for the full year. Implicitly, we have got around 2% reduction implied for the second half of the year, particularly Germany and the UK, both countries have relatively high margins in the second half of last year. Both countries have made a number of price changes recently, which will have a bigger consequence in the second part of this year than in the first part. Overall, still very much around the 1% arena that we anticipated at the start of the year.

Let me move then on to operating expenses. We talked in May about putting more granularity to our targets here and explicitly said that our aim is that the European and common cost areas will be broadly stable on last year’s opex numbers. Just to give a read out on where we are on this, despite significant increases in numbers of customers in terms of traffic flows of voice and of data, we have actually got the costs here up only 6% to £2.4 billion.

Inside that, we have got savings on technology costs, so the various initiatives we’ve got on the network front, the IT front and the supply chain front are now bearing fruit and we’re actually seeing the technology costs coming down slightly compared with a year ago. However we did make the conscious decision in certain markets during this period to invest a little bit more in our direct distribution. We tend to get higher quality customers there and in some countries where we focus slightly more on post pay, we have made that as a conscious decision to take some costs out of the indirect channels, particularly the UK, Italy and Spain.

We’re still absolutely targeting broadly stable for 2007/2008 but where it does make economic sense, we will clearly invest in the direct distribution channels. Following on from that, we also said that our target for Europe would be our capital expenditure being no more than 10% of revenues in the 2007/2008 year, just again to give you a progress report on that, our total group capex in H1 was £1.8 billion, of that £1.2 billion was in Europe. We typically see a slightly higher spend profile in H2 on capex, so it is encouraging that in H1 we were at the 10% number. We would expect the percentage in H2 to be slightly higher, but overall we are on a trend from the 13 – 13.5% we were at a year ago to get to the 10% next year and therefore are very, very comfortable with the targets there.

Profiling of this, just a couple of comments on that: we’re actually now spending less on 2G radio networks. We have sufficient capacity on this 3G and are now moving traffic there that the spend on 2G is now starting to decrease. On the 3G, we are on track to get to 60-65% population coverage by the end of March and within these numbers is a reasonable amount of investment in HSDPA. By the end of March, we would anticipate that about 60% of our 3G sell sides will be HSDPA enabled.

On transmission we have invested a bit more there, very deliberately so that we can actually take out some of our higher-cost leased lines and instead have lower-cost owned transmission and that again is part of the structuring to get our costs down for the 2007/2008 year.

Moving back into the operating profit, overall this has a very, very similar feel to it to the revenue trends. You can see on this chart that we were 2.7 percentage points down on the European operating profits, but on the other hand we were very significantly up 26% in the EMAPA region and also up in the Arcor business, around 12%. Overall, about a 7% increase. The EMAPA region is now representing about 37.5% of the overall operating profits of the business compared with about 32.5% in the equivalent period last year.

Just talking a little bit more about the EMAPA results, the controlled businesses there had a very, very strong growth. You can see 32%, that was driven really across the board – 20% up in Eastern Europe powered by Romania, 26% up in the Middle East and Africa, with Egypt being particularly strong. 12% up in the Pacific, with Australia leading the way there. Overall, controlled businesses are doing very well. Verizon Wireless, as I think many of us are aware, are also going very, very strongly. Key statistics there: revenues YoverY up 18%, EBITDA up 24% and operating profit up 34%, so a very, very strong performance from the US business.

Tax – three sort of areas to cover here. Firstly, the current year effective tax rate, secondly the longer term outlook for the tax rate and thirdly an update on the one-off payments. First of all, on the current year tax rate, we’ve come in with a 29.2% charge for the half year. We are now guiding to around 30% for the full year, so slightly lower than where we were previously. Part of that is due to some restructuring we have done in Italy. The bigger part of it is the CFC arena, where as you’ll be aware the Cadbury case has now come to the European courts and guidance has now been given for the UK courts to consider.

We have looked at our position on this and have concluded that with the £2 billion reserve provision that we had at the end of March, that there is no longer any need to be increasing that. The Cadbury case, we think overall is slightly positive for us, there are still uncertainties – the Cadbury case does not apply directly to us therefore our situation will have to be looked at separately but we have decided that from now onwards we will not further build our provision, we will purely continue to accrue interest on the £2 billion. So that is giving us about a 3 percentage point benefit, which is part of the reason for the guidance now being 30% for the current year.

Secondly, in terms of the outlook thereafter, with the emerging clarity on the way that the UK authorities will look at overseas earnings, we are now of a view that structurally we should be looking at tax rates that are in the low 30s, rather than heading towards the mid 30s as we have previously indicated. Finally, the £5 billion – if you recall this is two parts, £2 billion on CFC and £3 billion on a number of other tax issues. The CFC we’ve said maybe is a 2007/08 settlement. Clearly it is difficult to interpret right now when that may happen. Possibly it could be 2008/09. On the other £3 billion, we’re of a view probably that £2 billion of those are more likely to occur in the 2008/09 period and the rest will be split fairly evenly between this year and next year.

For the current year, we’re now saying that we think the settlements will be about £0.5 billion and I would add to that that the majority of that has actually been settled and paid in the H1 2006. Overall, think lower tax rates going forwards.

Free cash flow: just under £3 billion which is slightly down on the previous year but the reason for the reduction is totaled back to the tax line where you can see there has been increased spend during the year and the increase is very largely because of those one off settlements. If you look at it pre tax, the operating free cash flow here is actually up 6.9% compared with the previous year. We had earlier guided that net of £1.2 billion of one off tax payments, we would be in the 4-4.5 free cash flow range for the year, with the reduced expectation that now those cash flows will only be 0.5, we have increased the range to 4.7 to 5.2 and envisage the settlements occurring now in later periods.

Net debt closing: £20.2 billion. Nature swing factors in here, payment for the Turkish business 2.5, the net impact of the close of Japan at 7.4, the b-share issue at £9 billion, a consequence of all of that is a £20.2 billion closing debt position which is an increase YoverY of 44%.

So finally, in summary, I think we are very much on track for our full year guidance. We’re clear that the margins in H1 have been a bit more robust partly because of the US and that in H2 we will see a reduction in the margins. Cost initiatives are now taking significant effect. The high free cash flow because of the reduced expectation of the tax payments and finally that we are now expecting the current year and future year’s tax rates to be somewhat lower than previously indicated.

With that, I’ll hand back to Arun. Thank you.

Arun Sarin

Thank you, Andy. I’m very happy to open up the session for questions. If you wouldn’t mind raising your hand – I think you have to press a little button. That’ll turn on a red light and that will suggest that you’re on. Let’s take the first question from Paul Howard, in the back there.

Question-and -Answer Session

Q - Paul Howard, Cazenove

Thanks, Arun, it’s Paul Howard at Cazenove. A couple of questions – firstly just to try and understand your guidance a bit better, I think you’re effectively saying a 200bps fall in margins in H2 which does feel quite aggressive. I wonder if you could say how much of that will come from Germany and the UK in terms of tariff cuts already announced? And how much reflects the competitive activity that you’ve yet to announce? Then secondly, on the tax situation, is it consistent that you’ve reduced your long term effective tax rate but you’ve left the provision, the £2 billion provision, on the balance sheet? If the CFC case goes in your favor, then presumably you won’t have to pay that £2 billion. Just some clarity around that, that would be great, thank you.

A – Arun Sarin

Great. I’ll take the first question, Andy will take the second question. First on Germany and the UK, as you know in Germany we announced our price reductions in October so there is nothing pretty much in our H1 for major price reductions and that’s what you’re seeing in Germany in H2. In the UK, I would say a small portion of our contract and prepaid tariff refresh occurred in H1 but most of it is happening in H2. Those two things, together with the fact that if you think about our business, H2 traditionally has always been a lower half margin-wise for us. We’re going back to that normalized trend. Those are the fundamental trends that are occurring. Andy pointed out that there were two or three businesses that actually had higher margins in the last year, whether it was Germany, Italy or the US, and I think we’ll see some reversing of those trends. When you take those two or three things into account, that’s what is the major driver of the guidance that we’re giving you, which is about 100 bps points down YoverY.

A – Andy Halford

On the CFC, it’s quite a difficult area to call because you know, at one extreme the answer could be zero, at the other extreme the answer could be £2 billion. What we’ve done is said look, what we have to provide for is essentially a sort of weighted average of what we think is a probably outcome and our view is that the weighted average of that is probably reduced slightly with the Cadburys hearing and that therefore maintaining at £2 billion is a reasonable place to be in terms of having a fair estimate of where in that range we might end up. I don’t think there is any inconsistency although I can understand that there might appear to be between not continuing to build it but nonetheless continuing to hold it at that level.

Q - Andrew O'Neill, Sanford Bernstein

You talked about the progression of pricing and volume in the business in Europe particularly. I’m wondering, as you talk about going from a per minute model to a big bundle and then a flat rate model over the next several years, how are you seeing at this point already, volume growth play out? What are some of the downsides of pushing volume harder for example I think you mentioned the SMS growth in Germany has slowed as a consequence of cheaper voice. What are some of the areas where you’re seeing stronger usage growth? Is it on-net and fixed substitution primarily? Really some color about how you see that whole transition playing out over the next several years based on trends you see just now?

A – Arun Sarin

Let me first say we are in various markets, creating big bundles, and where we can create big bundles and take them into the market place, we’re actually finding good elasticity. The place where we find elasticity less than one is where there’s a freefall, like we’re seeing in Germany in the prepaid market. If you take it all together, I would say our elasticity is anywhere between 0.8 and 0.9 if not one, so we’re clearly not there yet. But we’re encouraged by what we’re seeing in terms of usage take up. Much of this usage take up is on-net. Some of it is off net. Stop the clock here in the UK is costing us money in terms of interconnect costs. The regime is different. In Italy, we’re seeing a lot of on-net. Here in the UK we’re seeing some off net and we’re making these judgments country by country by country because frankly the situation is different country by country. What you can see in the next few years is pricing continuing to come down at rates that you’re seeing today and I don’t know if it’s 15 or 12 or whatever, but clearly double digit price reductions. Equally, you’re seeing usage growth and hopefully we can get more and more minutes on that.

Q - Kristian Kohn, Lehman Brothers(?)

Thanks, Arun. Two questions, if I may. First of all, I would like to understand your thinking behind the dividend a little better in terms of having a much lower payout ratio in H1, which implies a much higher payout ratio than 60% for H2. What drove your decision behind that? Because investors probably look at this time terms of you having a better EPS number in H1 than H2, but pay out less. What about the confidence on the business there? The second question would be could you comment on your capex position? You’ve done that in terms of retrading the 10%, but you haven’t spent too much on capex in H1 so do you feel that you have to accelerate capex in H2 quite dramatically and if so, in which areas would it be? Turkey comes to mind as one of the areas.

A – Arun Sarin

On the dividend, our EPS are up almost 18%. We’ve said roughly half of that is the share count issue here, essentially, so the dividend that the board has authorized is very much consistent with the underlying EPS that we’re seeing in the business. This is following a patterns we started last year in terms of what we were paying in H1 and what we pay in H2. Obviously the board wants to see what the full year performance is before they want to reply on what kind of dividend increases we have. We think we’re very much in the line with underlying growth rates in terms of suggesting what the EPS and dividend rise is likely to be.

Q - Kristian Kohn, Lehman Brothers(?)

Would it be fair to assume a much higher dividend payout ratio than 60% for the full year?

A – Andy Halford

It will be whatever we need to get to the 60% number at the end of the year.

A – Arun Sarin

On capex, again traditionally we tend to spend a little more money in H2. There are some one time things that we are doing. Turkey is a good example of where we might spend more money and again I think Andy showed the chart in terms of where it is we are spending our capex. Those are the categories in which we will be spending our monies.

Q - Nick Delfas, Morgan Stanley

On the Spectrum re-farming, that seems to be quite a big deal given the relatively poor performance still of the 3G network. Do you think you will be able to re-farm 900MHz within 2007? What I’d heard was that commission would be just communicating on it but not necessarily doing anything, so just some clarification on the timing of the re-farming. Then secondly, on page 28 you helpfully give the reasons for your impairment of Germany and Italy and you have about a 5% decline over five years in German EBITDA. I know you’re not giving separate guidance for Germany, but that’s a reasonably bearish outcome. It’s probably what we and other analysts have in our models anyway, but is that something you think is a base case? Or do you think it’s actually more of a bear case?

A – Arun Sarin

Nick, on Spectrum and Spectrum re?farming in particular, obviously we are supporters of Spectrum re?farming so we can take WCDMA, put it on 900MHz and cover the rural areas etc. The various authorities around Europe are looking at this issue. There are some other stakeholders in this. Our view is that it’s not very sensible for governments to be thinking about additional spectrum while there are still issues to be resolved on re-farming, on extension bands etc. We are certainly saying we need to kind of line up all of these issues, regulators need to take care of issue number one before they go to issue number three or four. Whether we can actually organize the world that way, we shall see, but that is our intent. Frankly, that’s what brings the greatest value to our shareholders if things are organized so that we have a point of view as to frankly how much Spectrum we might or might not need, simply because we are able to re?farm.

Q - Nick Delfas, Morgan Stanley

Do you think you might be able to re-farm during 2007?

A – Arun Sarin

Our hope is that we will be able to re-farm, but before we can re-farm we need a ruling from the various regulators. We are pressing pretty hard.

A – Andy Halford

On the German impairment, obviously we have looked at a number of scenarios over multiple years for the German market and our business within that market. We all know this is quite a difficult market to predict a year out, let alone multiple years out. When we have looked at those I don’t think it should surprise you that we have taken the more cautious end of that range in terms of what we have put into the impairment calculations. I think you should see that 5% number in that light. It is the more cautious end of the range.

Q – David(?)

One more question on the write-down. It tends to be one of those assumptions you’re looking at potentially 7.4 to 7.7 % of revenue for capex within Germany. I mean, over a five-year period that’s an interesting figure, particularly I guess you’ve got your 10% guidance out there. Does that suggest that you believe you can actually take capex levels lower still than the 10% you guided to? And linked to that, I guess, is there any sort of linkage between – does that go under ‘threat’, given the volume growth we’ve really started to see picking up in recent quarters?

A – Andy Halford

So the 10% was a 2007/08 number. It’s an average number. We’ll have some businesses that are higher and some businesses that are lower. As we have done the projections going forward, you’re quite right that we have assumed for Italy and for Germany but in different ways, that actually we’ll go below that 10% number over a period of time. So yes, you know, we don’t believe that 10% is the resting point on this. In terms of the capacity of the network, we have made estimates as best we can do as to what capacity we have got there. Remember, a lot of the 3G capacity is still unused at this point in time. Those projections taking account of our best estimate of what the volume metrics are likely to do with our requirements.

Q - Laura Conigliaro, Goldman Sachs

I have a couple of questions, the first one on guidance just to make sure I’ve understood correctly. On a guidance basis, what would be the impact of that accounting change that you mentioned to revenue recognition? Am I right in thinking it’s about 50bps on revenues for the full year as well as having a slight impact on the margin guidance as well? Then secondly on churn, a few weeks ago your Italian colleagues gave us some very interesting statistics on churn and the very low churn levels of the most profitable customers in that market. Can you say whether those numbers are similar for the other major markets so we can get a little bit of comfort on the fact that the overall churn levels seem to be trending up?

A – Andy Halford

Yes, the impact of that accounting change is around 50bps, you’re quite right on the revenue growth. So if it had not been for that, we would have been reporting on an proportionate basis. That’s important for revenue growth, being about 0.5 higher than the numbers we’ve actually reported. Mathematically because it reduces the top line but still leaves the profit line the same, it does also have a small impact upon margin. The order of magnitude is probably about half of the 50bps we see on the revenue and it’s down on the margin line. They work in opposite directions, one uplifts and one reduces. So directionally, those are the sorts of numbers.

A – Arun Sarin

On churn, there are two broad themes. One is if you look at our churn on a contract basis. All our major markets are showing better churn performance on contract which is a good thing. It’s a good sign, but equally if you look at our prepaid markets, and I’ll leave Italy out for a second because it’s primarily a prepaid market, our churn rates are going up. They’re going up because we’re in multi-system environment. The key thing we’re doing is making sure that in prepaid we’re bringing the cost of prepaid down. The cost of prepaid is now at about £20 or less on an aggregate basis. So it’s good performance there. The only other thing I would say about churn is – and we saw this from our Italian colleagues – is that we do focus more retention money on high value business. That was a phenomenon that was visible on the Italian day.

Q - Terry Sinclair, Citigroup

Would I be out of order in asking the terminals question? You’ve moved from one very global platform to another, one with a rather different balance of development versus emerging businesses and I wonder how you read the right balance between developed business and emerging market business within Vodafone?

A - John Bond – Chairman

I came here for a quiet morning. It’s very nice to be sitting where I am and not sitting where Arun and Andy are. There are 2.3 billion handsets in this world. Our estimates as a company are that for a population of just under 7 billion. Incidentally, there are only a billion PCs, which shows you that I think the world at large is much more comfortable with the mobile phone and handset than it is with a PC. Our calculation is that most of the growth in handsets over the next five to ten years is going to come from emerging markets – perhaps 70% of the growth in handsets. I think you would expect as representatives of the shareholders, the Vodafone management team most importantly, and the Board, to pay a lot of attention to emerging markets.

Q - Simon Weedon, Goldman Sachs

That’s a splendid introduction to one of my questions and if you don’t mind I’ll ask that first. It’s on M&A and whether or not you might provide any clarification on your current views on Russia and also on in-country consolidation where you have existing assets? On a slightly separate note, could you comment on how much of the improved performance in Turkey came from the visitors and whether or not there’s a big Vodafone switch somewhere which you can throw and suddenly your preferential roaming cards all find the right network? How much of an impact has that made?

A – Arun Sarin

First off on Russia, we have said in the past that Eastern Europe is an interesting area for us to explore. We have some good assets in this area. If we can grow these assets, that would be excellent. There is nothing for us to report on Russia. We look at Russia from time to time but there’s nothing imminent in Russia. I’m presuming your question is coming from the article that sprang two weeks ago, but my view is that was a nonsensical article, there’s nothing imminent. Equally, Russia is an interesting country for us to look at. The penetration rates in Russia are increasing very rapidly so we just have to be cautious about where in the cycle we are. The second question is about in-market consolidation. If you look at all the pressures that are existing here in Europe – pricing pressures, cost pressures, competitive pressures – my view is that there will be some level of in-market consolidation. Obviously markets that have lots of networks and lots of competitors are going to be prime candidates for where the consolidation is going to come. My view is that regulators will look at all of this but I don’t think that this is a regulatory issue as much as it is a participant issue. I mean, certain players have to decide on the economics that they are seeing and whether they want to fold their cards and sell their businesses or continue to take losses or continue to make marginal incremental rates of return. I do expect some level of in?market consolidation. In Turkey, the switch that you refer to is not the major part of what we have seen in the last six months, but will it be an important part? I think it will be an important part on a going forward basis. I think the key is we’ve gone in there – Paul and his team have done a terrific job of making sure we have assessed the networks, we fine-tuned the networks, we’ve optimized the networks and we’ve actually found that there was a lot of low-hanging fruit there. This was in receivership for many years. With a little bit of capital, we’ve been able to make disproportionate gains in network improvement. On the back of that, we’ve been able to take some price increases and I think the business is now working well. More to come on EMAPA there and frankly more to come in May as we celebrate our first anniversary there. But we’re pleased with the progress we’re making.

Q - Robert Grindle, Dresdner Kleinwort Wasserstein

The network sharing in Spain – is there more to come in other big countries, or is it just the Spanish geography that’s special there? Was it actually capex saving or is it rolled out to areas where you wouldn’t normally have gone to? Then just a couple of points of clarification – is it all content revenues which are now reported net regardless of whether it’s principle and agent? And please could Andy repeat the one-off cash tax phasing?

A – Arun Sarin

In network sharing, there is more to come. What we’re doing in Spain I think gives you a sense for the logic and the logic is we’re covering our markets with 3G, HSDPA about 60%, then in some of the smaller towns and rural areas, 25,000 population and less, we’re sharing the network with Orange. I think you’ll see this pattern recur in a number of our markets. It’s sensible from everybody’s point of view, because you are not actually differentiating your brand in the outer areas. Equally, you can build a network for far less money. Some of this was factored into our thinking about a lower capex guidance – whether it’s capex to sales or others. Clearly there will be some incremental benefits and in some ways this dovetails with what Andy said earlier about 10% may not be the place we stop longer term. We could find other benefits here on a going forward basis.

A – Andy Halford

Right. Part C, revenue and whatever – I think we’ve had to do a very, very detailed trawl because this is literally contract by contract, lots of indicators we have to look for and we have to see which ones we need to come out with. Directionally I’d say about one third of our content agreements we’re accounting for net, roughly two thirds gross. Okay? So the adjustment is to get the one third from a gross to a net level. On the one-off taxes, let me go through that again. The £3 billion is the pot of various sundry issues, a small part of which we’ve settled but generally things are taking longer to get settled. We said roughly £2 billion of that £3 billion in the 2008/09 year and the other £1 billion split between the current year and next year. So 0.5, 0.5. On the CFC, it is difficult to understand exactly when that will get resolved – possibly the 2008/09 year. If that is the case, then in total it will be a half and half four split. They are quite difficult to predict. Those are all exclusive of the interest as well.

Q - Justin Funnel, Credit Suisse

(Off-mic) When you look at the US business on the (inaudible) as the US market goes up, so that in theory these (inaudible). When you look at the right price to sell, do you generally consider the multiple that you should be setting basically comes down as the EBITA goes up, or to put it another way, the multiple you would be happy with six months ago, (inaudible) to change as we roll over to 2007. (Inaudible). Secondly, on wireline DSL, obviously that’s six months to develop your (inaudible), you mentioned in your guidance that opex is going to be flat excluding the potential impact from developing new services. I’m just wondering if you can start to guide us at all on the cost impact of wireline and the EBITDA impact of wireline. It did seem through the UK pricing it’s not going to be a huge product for Vodafone, but I just wondered if you could say anything more on that?

A – Arun Sarin

In the US, at 75% penetration rates, we still think there’s a lot of gas left in the tank. Our business is growing at 18%, we’re taking market share and the issues that Sprint is having in bringing together the various technologies will stay with them for the next several years. Think about T-Mobile and them building out a 3G network. Our view is Verizon Wireless is very well positioned in the marketplace and will continue to outperform. We are clearly mindful of the fact that this is not something that will carry on in perpetuity. We are mindful of it but equally we’re not seeing the proverbial reduction in growth coming around the corner. We feel good but we obviously think about this stuff when we think about our asset in the US. With regard to DSL and I will ask Andy to comment about how we keep our costs broadly flat and what we exclude etc. The DSL market is a changing market. Just this morning, BT has announced lower prices on the wholesale side and frankly we’ll be the beneficiaries of these changes. The situation in Germany is different from Italy is different from Spain and is different from here. We’re monitoring all of these as we go along and we’re obviously experiencing just the beginning parts of our broadband journey here. We’ll stay tuned, but what we do here is obviously driven by the underlying economics. Obviously the DSL market here is very competitive, margins are thin. Chances are we will use this more as a defensive tool here in the UK so we can protect our high value customers unless something changes in the economics. In other markets, such as Germany, we might be more bullish, simply because there better economics in Germany than there are here in the UK.

A – Andy Halford

On the cost side of it, I look at it in two parts. We’ve got the existing business and the operating costs structure we have there, where we said ‘broadly stable’ is what we’re trying to achieve. Clearly there will be costs associated with the DSL and other areas and just because we do not know the volume take up on those, we said to think about those as being separate. In future, when we show you our progress, there’ll be a headline number. There’ll be the amount we’ve taken out because it relates to new business and the net number is what the broadly stable relates to.

Q - Gareth Jenkins, Deutsche Bank

Firstly your long term tax guidance – does that include a lower corporate tax rate in Germany? If not, can you quantify the impact? Secondly on the 3G ARPU uplift, I think we went from 11-13% to 5-8% a year ago. If I use your numbers given at the Italian day, it’s closer to 2%. Is it just a question of putting 3G handsets into people’s hands and hoping that they’ll work? Then finally on Turkey, it sounds like things are running slightly better than expected. Is it just low hanging fruit and therefore it’s a timing difference, or are you more confident in the longer term marginability of that business?

A – Andy Halford

On the tax, we’ve not broken this out obviously by country and our tax affairs are fairly complicated. They’re multi-territory so what we have done is taken a best view of the profile of the group as we can see it now, the profit flows and the tax rates that we’ve got. I’m not particularly going to highlight Germany or any other business there, but just to say we have got more clarity now as to how the UK looks at the overseas profits and how those should be taxed. 3G, the 5-8% range was the one we most recently talked about in terms of the uplift there and the data we’ve got today is still in that sort of range so basically that remains the uplift we’re seeing on 3G.

A – Arun Sarin

On Turkey, clearly there is some low-hanging fruit when you go into a marketplace and into a company, things we can do better, but equally we have a plan for longer term improvements in margins and cash flows as well. We expect to outperform our business case on a multiple layer basis here.

Q - Fanos Hira, Bear Stearns

Just a couple of points of clarification. The £0.9 billion of roaming revenues – how many minutes does that refer to, please? And if you could give us the data for visitors that would be very useful in just trying to ascertain what could happen if the EU were to implement what it suggests it wants to do. Then just on the impairment loss review, am I right in thinking that’s a five?year business plan from 30 September 2006?

A – Andy Halford

First question, I honestly do not have the answer to mind so we can come back to you on that. The business plans for impairment, yes you’re right for the vast majority of our businesses and specifically Germany and Italy here, it’s a five-year business plan that we do.

Q - Fanos Hira, Bear Stearns

Sorry, from 30 September 2006?

A – Andy Halford

Yes, it is one that’s being done from a recent date, so it’s been done actually in November but yes.

Q - Stephen Howard(?) – HSBC

First, fairly straightforward, what do you think the EBITDA margin dilution is at present from parallel running 3G and 2G? I’d just like an update on how that’s impacting your projections. Secondly, a bit more ornately, my familiar question of what do you think the rate of expansion is in the ration of accounts to human users, because obviously if you add that back to your MOU per account growth you could get a rather different answer on your elasticity and I was wondering how that might affect your estimate of outbound human elasticity at present?

A – Andy Halford

To be honest, the parallel running costs issue, as the world is moving on now we’re in a much more combined environment in some cells that are 2G, some that are 3G and some that are both. It’s a very, very difficult thing to actually monitor physically the difference between those. Is there some element of parallel running costs? Yes. I don’t think it’s particularly big in terms of the costs that we’re bearing within the business, so I don’t think of it as being a major part of the margin story here any longer. This is a journey we’re going along and it’s evolutionary. We’ll then have HSDPA, we’ll have HSUPA and it’ll be pretty difficult to split the difference between all of those. On the sort of relationship between SIMs and humans, we have done some sample data in some countries. I think low penetrated countries, the relationship is still around the 1:1 sort of factor. I think Italy is now at the highest level. We’ve got – I forget the exact number but I think we’re sort of 1.5 or 1.6 even SIMs per human being. You’re quite right that if you then recalculate the ARPU trends on an implied per human basis, you actually find that the per human consumption patterns are much more stable if not slightly rising rather than the per SIM based calculation which suggests everything is on a downward slope.

Q - Stephen Howard(?) – HSBC

But you’ve not actually re-run the elasticity calculation on that basis?

A – Andy Halford

No, we haven’t. But it is something – I mean, because of prepay it’s actually difficult to get all of the data here because we don’t always know who the prepay customer is let alone the relationship between one SIM and another. Where we can do sample data, we will do it, but not specifically to your question.

Q – Andrew(?)

When you take account of the content revenue de-grossing, obviously it doesn’t have a massive effect on a Group basis, but on some of the sort of individual assets that are growing slowly or even declining, it has a bigger impact. When you think through that and when you back that out, are those operations now performing a little bit better than you had thought back in May, or is that a little too much to hope for? Secondly on the pre-pay side, leaving aside the base clear ups that you’ve obviously done in a few markets, there still seems to be a very high level of gross additions in pre pay. Is it really upgrades that are going on? Its it multi SIM? Is there something else that’s happening in prepay that we’re not really understanding? Then finally on Vodacom, you obviously had some discussions reported in the press with Telcom over Vodacom. Just wondering if you could tell us about the scope of those discussions? Are you talking about adding some of your north African operations into Vodacom? Are you looking at taking control? What is the basis of the discussions you’re having there?

A – Andy Halford

The adjustment for the gross to net does impact different businesses differently because they have got different profiles, different agreements. Spain has got a higher adjustment than the average. Germany and Italy have got a sort of middling adjustment. The UK has relatively little adjustment, so overall the average of that on the proportionates comes out at about 0.5 on the statutories it’s a little bit higher, but of that sort of order. Obviously if you adjust up the 6% published proportionate revenue growth by that half a percent, we are near the top of the range of where we hoped to be on the full year. Overall, I think when you sort of lift that factor in here, clearly the trends generally have been at the higher range of our expectations. On your prepay question, the markets – you have two aspects here. Prepay gross will be higher because some of the markets we’ve gone into more recently like Turkey and India are prepay largely, so that has a geographical aspect to it. Secondly, I think of our specific businesses, Italy is the one with one million net adds in the period, that has very significantly put more investment into prepay. As Arun said earlier, we have equally been very focused on saying that the subsidy has got to be very low to be able to afford to do that. Just to clarify, the overall subsidy on prepay in Europe is now about the £20 level which is down to where it’s been before, actually for the Group as a whole, taking account of lower cost markets, we’re now at around the £10 level, so we’re really, really trying to get the prepaid subsidy to a point where the churn and return becomes something we’re economically reasonably ambivalent to, where directionally we need to head. There is plenty further where we need to go on that front, but I think Italy is the big one and then just the mix change towards India and Turkey is the other factor in there.

A – Arun Sarin

On your question about Vodacom, you’ll recall a year ago we took up our shareholding from 35 to 50%. We’re now 50/50 owners with Telcom. This is a good partnership that we’ve got. What you’re hearing from the Vodacom management essentially is our encouragement. Telcom and Vodafone’s encouragement to go find other countries in Africa where we can be present on a mobile or mobile plus basis. Technically, we are not permitted to be north of the equator because that’s what the original contract required. We’re saying go fish, let’s see what kinds of opportunities you can bring up and then the management Board will decide whether it passes the strategic and financial test for us to be able to invest in these markets. It is nothing more than that it’s a good partnership and we’re moving along.

Q – Andrew(?)

Can I come back on that question? If you think it’s a good market, why would you only want to own 50% of the asset rather than 100%? Why in north of the equator markets would you want to allow them to have that?

A – Arun Sarin

Some of these markets are honed off of Vodacom. We have a presence in Egypt and that does very well for us. The other part of your question was were we going to drop any assets into it. We aren’t dropping any assets into Vodacom. This is simply giving people the right to go fish and see where we can get it. Like I said, there are some geographical affinities in terms of people who work in Vodacom having a much greater empathy for how business is done in Ghana for example, than for us to send somebody from Newbury.

Q – Will(?)

Continuing the theme of portfolio management, we’ve not mentioned Swisscom so far today. I wondered if you could just update us on discussions with Swisscom and whether we should expect anything imminently. Secondly in France, it seems to me that’s a market where you have options. One is to sell out and invest in emerging markets, another might be to sell out and reinvest in another asset in France. A third still might be to do nothing. I’m just wondering what your intentions are in France?

A – Arun Sarin

First off on Swisscom, we own 25% there. It’s a good business, we have lots of discussions with our partner there. If there is a fair and full price put on the table we would certainly look at that asset as part of our portfolio management. On France, we are happy, 44% shareholders in SFR. The company works well. They take all our products. They’re part of the buying club and frankly we are where we are and frankly our position hasn’t changed from May 30 when we said if the remainder of this asset becomes available at a reasonable price, we will look at it, but equally we are happy with our 44% because we’ve got good dividend arrangements here.

Q - Jerry Dulles(?) - JP Morgan

A question on on-net, please. You mentioned that a lot of your growth has been weighted towards on-net in the recent period. I think in the past you said that on-net minutes now account for around 60% of total in Italy and in Spain. I was wondering whether you think this on-net growth has a lot of scope to continue and what the possible margin consequences might be if you see a bit of a shift towards off net going forwards? Secondly on price elasticity, you’ve talked about tentative signs of price elasticity of demand improving. Is that sustainable into H2, because I guess we’re going to see the UK and German tariff refreshes starting to kick in at that point.

A – Arun Sarin

On net, is there more to go in on net as Vodafone Group? Clearly there’s more to go because we’re just beginning bundles and flat rates and all of that, so I think there’s more to go. Clearly, when we go on-net, it is economically advantageous to us. Equally when we go off net, it hurts us, much like we see with stop the clock here in the UK.

A – Andy Halford

I think on the elasticity of demand, Germany we have already been taking prepay prices down quite sharply and we’ve actually the minutes of use per customer rise pretty well 40%. There has been a significant increase in use, we have now got our German business with usage overall in the 90 minute range from the 75 minute range it used to be in, so there’s still some way to go there. I do think that it will be interesting in H2, in answer to your question, to see with the revision to the prices to get more back into market partly on the contract side as well as to just what it does on the elasticity front. I mean, generally we are getting more into the sort of relationship between fixed and mobile pricing that suggests we should see some improvement in elasticity but you know, to be honest, time will tell and we’ll come back and give you more information when we have it.

Q - Unidentified Analyst

I’m trying to picture Vodafone in the Vodafone customer service offering in a couple of years and I wonder if you could give me some guidance. I’ve got the Mobile Plus strategy here, and you’re moving obviously from pure mobile to limited fixed line services – I wonder if you could just rule in or out certain communications sectors? Specifically, let’s say content provision and ICT? So in the same way that NTL is talking to ITV, would you rule out content provision, and in the same way that some of your competitors have an ICT division, is that in or out of your Mobile Plus strategy?

A – Arun Sarin

Just to clarify, when you say ICT, what do you mean?

Q - Unidentified Analyst

I mean building IP VPN networks for your corporate customers, or combining IPTV with IT etc.

A – Arun Sarin

You’re absolutely right when you think about our company on a going forward basis, there will be new products and services, whether it is zonal price services like At Home or whether it’s broadband, mobile, advertising – those things are very clear to us. As we get more and more into broadband, the question that the company will have is do we get into IPTV, do we get into content and do we get into VPNs etc. Sitting here today, it is hard for me to think about being original producers of content. I can see us buying content, packaging it and passing it on to our customers, but actually originating music or television shows or movies is from where I’m sitting here today a bridge too far. Equally with respect to large customers and getting into a systems integration house capability, now will we get into systems integration for small and medium sized customers? Absolutely, because Vodafone has a wonderful position to say that we are the CIO in the box – when you open the box, we do virtually everything that a CIO does but on a smaller scale. The minute you go to the Fortune 500 companies, the complexity of systems integration is great. Again, sitting here today, I would say that’s a little early for us. What we’re doing is basically building the blocks for us to get to where we want to get to and on the margins, we will have to take a decision, do we get into IPTV when we have a lot of broadband or don’t we? Do we get into systems integration for a Fortune 500 company or don’t we? But everything else is within the playing field that we have described. I think our time has come to an end. Thank you very much for being here. Have a wonderful day. Thank you.

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