Telefonica SA (TEF) 2004 Q2 法說會逐字稿

Well good morning to you all. I think we will make a start. Welcome to our interim results presentation, and having served on the board for the past 18 months, this is my first results event as Chairman, and it coincides with our third anniversary as an independent company this week, and what I think amounts to a water ship (ph) in the fortunes of MM02 Plc.

As you will have noticed we have continued to make impressive progress in all our operating businesses during the first half, recording further strong growth in customer numbers, service revenues, and EBITDA. And in addition the whole (ph) life of O2 Airwave is progressing well, with the service currently available to some 80,000 users. Over the past three years, there has been a in the group's operational and financial performance. The continued momentum of the business has allowed us to announce today some important strategic steps, which deliver benefits to shareholders now, and lay the foundations for further value creation in the future.

Firstly, the operational and financial turnaround of O2 Germany over the past three years has been impressive. We particularly confounded expectations in this regard, and we now aim to accelerate the rate of growth of the O2 business in this, the largest market in Europe. This will involve increased investments in our 3G network, aiming to deliver network qualities, and long term population coverage that is competitive with the market leaders. We continue to benefit from our unique roaming agreement with T-Mobile in Germany, which remains in place until towards the end of the decade.

This provides us with the flexibility to build out our own infrastructure on the back of success, and with the growth in our subscriber base we have now reached the point whereby increasing network investments will enable us to offer and enhanced customer experience in Germany, with attractive and high quality mobile services delivered across our own 3G platform. This strategic shift in Germany builds on the strength of the O2 brand, and the position we have established as the most dynamic and innovative competitor in the German market.

Secondly, you will (inaudible) that we expect to plan an all group final dividend for the current financial year, to be paid following approval by shareholders at the annual general meeting in July 2005. Going forward, we are committed to a policy of regular sustainable dividends, grown by weapons to the groups underlying earnings per share. That is before goodwill and license amortization with a medium term target pay out ratio of 50%. From the start of the 2005-2006 financial year, the board intends to pay an interim dividend in January, and a final dividend in August split approximately one-third, two-thirds. The new policy represents the first step towards our commitment to deliver returns for shareholders, and reflects our confidence in the future prospects of our business.

To create the distributable reserves necessary to pay the dividends the group will undertake a corporate reorganization through a court approved scheme arrangements, and the scheme will be subject to shareholder approval at an EGM, which will take place before the end of the current financial year. The board is committed to maintaining a strong investment credit rating, and will ensure that sufficient financial resources are available to enable us to exploit the potential of the business.

The strategic development in Germany that we have announced today, increasing the level of 3G investments by 1 billion to 1.5 billion euros, over the five years, is unquestionably the right strategy for this business. We have tremendous momentum in the market, which has enormous growth potential, and it makes sense to invest to deliver more of this growth and achieve higher margins. We need to leave ourselves with sufficient financial resources to be able to exploit opportunities like this, that deliver long term growth in shareholder value.

Looking forward across all our businesses, we are determined to focus on even better segmentation and CRM, to gain a closer understanding of our customer needs and behaviors. We will work harder to differentiate our business by delivering intuitive, easy to use, and fairly priced products and services, particularly in the data field, that our customers' value highly based on present technology. It will take time for our third generation networks to find the content that consumers, actually value the most. The market for 2.5 G is already huge, and represents the bulk of services and handsets currently on offer in the UK, and it is to an extent already helping to create the market for 3G.

We have always said it's evolutionary not revolutionary. Let's be clear though, that we are totally committed to third generation. We already launched the business and consumer service in Germany, and a business service using our 3G data card in the UK. We are constantly testing the customer experience, and we continue to roll out our 3G networks, but as I said handsets, networks, and contents need to be right to create a great customer experience, and that does take time. To conclude, we are making good progress in remaining ahead of the incoming tide of new governance initiatives, and we intend to remain amongst best in class in corporate governance, and corporate responsibilities.

We have committed substantial resources to ensuring that this is the case, in particular with regard to the internal control verifications soon to be required under the Sarbanes-Oxley Act. You will have seen that we have made some recent changes to the board, and are currently in the process of recruiting an additional non-executive, and I will continue to review the composition of the board going forward, to ensure we have got the best possible team, which reflects the changing shape of our business, and our customer base going forward. So, I would like now to hand over to Peter Erskine, and David Finch to take you through the results in detail, after which we will all be happy to answer your questions. Thank you.

Well good morning everyone, and thanks David. Thanks for coming along to all of you. We are very pleased about this sector's results, not only as a strong performance, but it is across all four of the major businesses. In UK, in a very tough market condition has actually grown by more customers in the first half year than a year ago, the revenue is very strong in the UK, and we will talk more of that. Our German business continues to grow very dramatically, and therefore as David said, we decided to get the margin benefits of investing in our own 3G network.

Indeed that investment is largely cash neutral, because we save on operating costs in roaming revenue. Ireland continues to grow its ARPUs indeed all three of our business have grown there ARPU, and Airwave is now not far at all from being cash positive. As we said before we complete the built the police network by the end of this year, and then other contracts we are tendering for may involve (ph) CapEx next year, but the big police network is complete.

So the highlights of the business. First of all, in the year we have put on 2.8 million customers who have grown by 15%. And indeed, in the first half of this year we grew by 1.3 million customers, and I think to show our momentum that transformed just over a million in the same time last year, and within that 1.3 million we have grown in the half year, the second quarter is actually stronger than the first quarter, and within the second quarter of this year our businesses have added 714,000 customers, of which 45% are postpaid. So all of the trends on customer growth are in the right direction.

Given all of the ARPUs are growing up, as you would expect our revenue is growing very nicely, we were rather proud that last year we grew this business by 1 billion pounds of revenue in the year. Well here we are at the half year stage of this year, and we are actually in half a year grown 605 million pounds of revenue. Our EBIDTA is up 37%, our group operating profits up to 251 million, and the basic earnings per share is 2.7 pence. But the underlining earnings per share and that's important when we talk about dividends later is 4.5 pence and our net debt has a very pleasing track record I think many of you will recall that when we emerged three years ago, and as you know we are three years old on November 19.

The forecast for now were revenue that's somewhat smaller than we are actually delivering, and a EBIDTA is somewhat smaller but the net debt is 3 billion pounds, and we have actually brought the debt down from a year ago of 494, by the end of the year it was 366, and now it is 236. Now, we have been lucky 3G has been very late but we have also performed considerably better, and that's why just six months after we announced our first full year profit, we are able to start to talk about dividend policy. Going business by business, the UK actually grew its service revenue by 20%, and as a result we backed our forecast for the year-end you were aware a couple of months ago we guided to 9 to 12%, well thankfully we had 2/3rd of the month, with Stellar Trading and therefore we are now saying the year end will end somewhere between 12 and 15%, and that is what we estimate now.

We think it will fall in year end in that range, the regulatory impact start at the 1st of September, you are aware that we have to hit termination rate, and obviously that will slow down the growth in the second half year, and also I am pretty impressed and pleased that in the market that has eight players this first half year, and only had 5 on the same time of last year, we actually put on some more customers, and grown our revenue 27%, but inevitably competition will hit.

We are seeing sometimes with play out that you would except that, our churn (ph) is going a little bit in the wrong direction, our post paid churn in the UK at the end of last year is 26%, it's now 27%, so there is a trend in the wrong direction, and text (ph) are off a bit as well we are paying somewhere around 10% more for postpaid customers then we were a year ago, but I still make the point that we are growing more customers in the first half year in the same time last year, and revenues were encouraging.

We also made the commitment that this year our margin would remain stable, after we added and as you recall the extra points of share costs, that was the result of us evolving our on line and our products people falling to the UK, and that hit this years margin compared to the last year's by 1 point. So when we report an EBITDA up by 21%, and the margin of 28.5%, that compares like-to-like, back-to-back if we take the same time last year would have been 29.5%. So we are slightly ahead of the running on last year.

The operating profits are up 98 million pounds, and CapEx up as well to 292 as we invest in 3G, and we're also as you all know, in the middle of investing in a very big billing and CRN system. That has had some isolated incidences of problems as we migrate our customer base, but it really does get us ahead of the curve, and once fully implemented, we are confident it can help our overall goal of very strong customer services, through reliable billing, and much more responsive customer service.

We've also in the UK, today announced 800 more job in the call centers, we're putting some 300 into lease and 500 into barely (ph), simply to make sure that our leasing customer service isn't just backed by assistant it is also backed by people giving quick response. The customer base in the UK is growing very strongly, its growing by 1.23 million in a year, and indeed in the first half of this year our growth in the UK is slightly more in customer numbers than in the same time last year, we got 592 million in the first half year of which 276 are postpaid.

And the second quarter of the year, given today also about quarter results it is all in the right direction, we have added some 331,000 customers in the second quarter. Who would have thought that three years ago the voice (ph) ARPU will be continuing to go up, as well as data ARPU are going up, well it is. Our voice minutes of use are up 14% from a year ago to 131 minutes per month, and that's just since the beginning of the year the minutes are up 6.5%, and the text and data overall continues to grow, and indeed in the last quarter in the UK, data was 23% of our service revenue.

And here is the ARPU picture as well as the net additions. Our blended ARPU is gone up close to 9% in the year, its now 282 pounds mixture of voice data and a better quality mix. What's most pleasing to us is we told you over a year ago, we were investing much more in our own resources in the business market, and that in the (inaudible) corporate sector is bringing us the higher postpaid ARPUs. So a year ago our UK rolling postpaid ARPU is 508 pounds, that's now gone up to 541 pounds at the end of the last half, which is all in the right direction.

But pre-paid has not stayed back either, pre-paid a year ago was 133 and is now 145 pounds per customer. So, ARPU is in the right direction, and it is a mixture of voice and data, and within that overall data revenue now close to 2.5 to 3 % of our data revenues coming from non text, so all elements are growing. And indeed in the last couple of days, to help me remember the numbers, my UK business actually went to 14 million customers, so the projection is very encouraging.

Now to Germany. Well Germany has actually growing 29% in the year, its revenue at the half year stage is 1.184 million pounds, EBITDA was up 50% to 163 million, and we guided towards an EBITDA margin in the high teens, well there you are 18.6 %. CapEx is flat year-on-year, except for on top of the 130 million is an exceptional item, which was a payment to T-Mobile for extra roaming services at some 57 million pounds. The customer numbers really show a picture of a ramp up, since the second half of last year, which is continued this year.

To quantify that, in the last 12 months and in the end of September our German business added 1.4 million customers, compared to in the previous four quarters, we have added 900,000, and that continues to grow quarter-on-quarter. The ARPU is up slightly, the ARPU on post-paid is coming through well, and in total our ARPU is up some 4.5% over the year. Churn is flat, which I'm encouraged to say, and a nice low number in the mid teens, tax are up slightly, not as high as some of our competition, but out post-paid tax up, it's about 280 compared to what was 260 euros before.

And all of these numbers I should say are before the success (inaudible). I should have said with the UK, there is no mention in the numbers, there is no customer addition from Tesco. But in the UK, Tesco is going extremely well, and that's an additional source of customers, and the same here, clearly Tchibo did not launch until the 1 October, and therefore all of these customers numbers are quite pure.

We got a situation, again just illustrating momentum in the first half of 2004, our German business added 687,000 customers of which 395,000 were post-paid, whereas in the first half of last year it added somewhere around 2/3 of the total customer numbers, so we really are on a ramp. ARPU is going in the right direction, and frankly, we constantly challenge, because our ARPU in Germany is undoubtedly market leading. It's a rolling ARPU, blended ARPU, now 32 euros a month, and from all of that reported data, all of the competition is in the 24 to 25 euros a month earlier, partly aided by richer mix, but also we aided by (inaudible) which as you know is somewhere around 70% of the post-paid business, and gives a very strong ARPU.

Our German business perhaps from the 1st of October started to get some traction with Tchibo, and therefore I am pleased to announce perhaps in the last couple of days our German business went to 7 million customers, there is a small amount of Tchibo in there, about 1 month, so obviously, the bulk of that is our own organics growth. So, I think in both the case of Tchibo, and Tesco our joint ventures looks -- early days, but extreme successful.

Now as a result of three years of constant success in Germany, we have decided with our (inaudible) that it's the right thing to invested in our network, because you know we have the (inaudible) insurance policy in the 3G, and indeed parts of the country that 2G roaming deal we have with T-Mobile.

And of course, will carry on for a period of time, but we really have seen across Europe now that the number 3 players can create real value, they used to be the belief that it was only the number 1 and 2. But all of you will have seen the number 3 players in France, Italy, and Spain recently valued at very big numbers, and there is remarkable similarities about those number 3 players, each has a revenue of about 3 billion euros, and the EBITDA margin is about 30%. Well because Germany is so much larger than those other countries, to get to 3 billion euros, you can see we are already within touching distance of it.

And thus our reported margin is 18.6%, we know if we build at (ph) our own network that's worth 4 points of margin, and the extraordinarily rates of growth is worth another 3 or 4%, so without getting too creative we can already see a business, that like-for-like can and is delivering a margin in the mid 20s. So we see by building our own network in Germany, we can really create value by having a number 3 player, but in the largest country in Europe.

And the investment is about another billion-to-billion and a half euros over 5 years, and (inaudible) cash neutral, because we were so quite a lot on operational costs, we are confident we will have a bigger business, because roaming is easier, and more (inaudible) services, and of course we save on some of the roaming charges that we would have otherwise been paying for our network share.

Moving to Ireland, a very penetrated market and very high ARPUs, and yet amazingly grew service revenue 14% compared to the same time last year. And our EBITDA margin when expressed in pounds is up 3%, but when we do it on the like-for-like in euros is actually up 8%. The margin is a little under the end of last year, at the half way stage, because we have invested in growth, but we remain confident that year-end will have a broad and stable margin in Ireland.

And overall we have growing the base to 12% over the year, and ARPU perhaps gone up 1.6%, and incredibly the voice minutes are now up to 203 minutes per customer per month that's very heavy usage, and yet text continues to grow, its up 19% on year ago. Since the ARPU is coming through, I mean undoubtedly our strongly blended is the ARPU across Europe, and as you can see we are continuing to grow the customer base over the last year, so the growth base through ARPU, and customer numbers left in the Irish market.

And finally, before I hand over to David Finch, Airwave. Airwave has actually now achieved 40 of the 51police forces actually as of the last couple of days we put one more on in Lucia and in Scotland, so were 41. And by the end of the year, we will have completed the build of the police network. So the CapEx, that has been a big outflow as you know, it's been of the order of a quarter billion pounds each year for the last three, should end on that. Obviously, if we win further contracts fire and ambulance, and others we are bidding on that's another stories, but the big investments here should be finished by the end of the year when we complete all 51 polices forces.

As we already said this is the year we got a positive EBITDA, so the EBITDA is actually 24 million pounds at the half year stage, and the revenue is 76. The operation profit, there is a new word there for Airwave is 2 million pounds. CapEx at half year was 128. Very difficult to predict when the Fire and Ambulance bids will drop, but at the moment (inaudible) common Ministers have said that they certainly plan to have decisions before the end of the year, so we will await those and then obviously, we will get busy implementing. We are bidding for other contracts, and as those come to some fulfillment, we will obviously tell you more about those. At that stage I will hand over to David Finch to walk you through some more numbers.

Well thanks Peter and good morning. Let's start then by looking at the profit and loss for the group, group turnover from continuing operations is up just over 600 million pounds or 23%, to nearly 3.3 billion. EBITDA up over a third, in fact 37% to 851 million. Depreciation in the first half is done over the first half last year, for a couple of reasons, first or all we wrote off quite a lot of the assets of O2 products, and products sorry -- O2 on line and products O2, the segments that we dissolved, and therefore the depreciation that was running last year has stopped.

Secondly, we realized some of the German network assets where we are building 3G sites on the top of 2G sites, we have expanded the life in line with expanding the lease for the sell (ph) site. So those two reasons have caused the depreciation charge to go down a little bit year over year. Now the amortization here comprises goodwill, and 3G license amortization, and the increase reflects five months worth of German 3G license amortization 50 million pounds. And also, amortization as payments for access under our German network share agreement, which would capitalize.

Group operating profit increased from 66 million to 251 million, net interest has fallen sharply in the period, reflecting essentially two things, lower debt, and also lower effective interest rates now that our borrowings are euro denominated. The tax charge is once again very low, comprising a current tax liability rising principally on Irish profits offset by deferred tax credit in the UK, were we are using bought forward losses. As a result, basic earnings per share has risen nearly 10 folds to 2.7 pence per share, and the underlying earnings per share have risen to 4.5 pence.

Now that we have declared a distribution policy, I wouldn't turn over just yet, there is a bit more on this slide, now that we have declared a distribution policy there is going to be more attention paid to earnings per share, and indeed underlying earnings per share. So first of all, let's be clear of what we mean about underlying earnings per share. This is reported earnings before goodwill amortization UMTS licensed amortization, both not tax adjusted, and of course before exceptional items (ph). Now, we have not provided specific guidance on the big numbers below EBITDA before today, and now we will.

First of all depreciation, I told you that in the first half depreciation is less than last year, because of the write off of O2 on line assets and the realizing of some German network assets. Now, for the full year we expect this 403 million in the first half, to turn out at nearly 900 million. In other words, a bit more than double. And the reason for that is several fold. First of all, during the second half of the year there is rather more 3G asset depreciation as we expect to light up the 3G networks.

Secondly, capital expenditure is running ahead of depreciation, at the moment anyway, and this is tending to drag up the depreciation charge, particularly in Airwave and in Germany. And finally, it has been our practice in the last two years to realize, in other words write off or, shorten the life of assets often in the UK in the second half of the year, certainly that's happened in both of the year ends since we emerged, and in arriving at a projection of 900 million for that full year, I'm assuming the same will be done again this year, perhaps to the order of 30 or 40 million, this is a requirement of the accounting standards for accounting for fixed assets.

So that's depreciation. Now amortization, the 187 million here in the first half comprises a 150 million of goodwill, and 3G license amortization, and 37 million of other intangible amortization, essentially, mainly the charge for access to the T-mobile network in Germany. Now in a full year, the goodwill and 3G license amortization, which was 150 in the first half, will become 370. And that reflects another half year of goodwill, and then a full year of German 3G -- full half year of German 3G license amortization, and the commencement of license amortization for the UK 3G license. And then the other amortization the 37, will run at roughly the same rate, so I expect about 80 in the full year. Therefore, amortization about 450 in the full year.

Next interest. Interest expense simply will be approximately double the half year number, that's our expectation. And then finally tax. For the full year we are expecting a negligible tax charge, and this is probably the last such year. Next year in '05, '06 we are expecting a tax charge in the mid teens percent of reported PBT. That will in fact be virtually all third tax. And then '06, '07, and beyond the tax charge is likely to move approaching the statutory rate, 30% in other words, of reported PBT, and increasingly a current tax liability. In other words, a cash payment starts appearing in the UK, because we have run out of brought forward losses. So in '06, '07 you should start the factor in some facts in the UK, and that will essentially become the whole of the tax charge going forward. It's a very long time before we pay tax in Germany.

Now, if you look at our progress over the last couple of years, 2.5 years, you see the subscriber numbers have grown about 30%. Revenues, both service revenue and total revenues, both growing just under 50%. EBITDA has grown 120%, and EBITDA margin has improved from 17.5% to 25.9%. And there has been an uptick in the rate of capital expenditure in the last 12 months, generally reflecting increase spend on 3G.

The growth in service revenue, has been lead by Germany, which achieved 29% year on year this time. The UK achieved 20% in the first half, reflecting principally larger customer numbers, and increased ARPU. As Peter said, this was slow in the second half, reflecting termination charge regulation, and also the loss of the BT own use account, most of which is likely to be concentrated in the second half of the year. And then in Ireland, service revenue grew 14%, essential reflecting 12% growth in the customer base.

All parts of the business contributed to EBITDA growth. In the UK, EBITDA grew almost 100 million pounds to 581 million, this is 21% growth, and that's even after absorbing the O2 on line, and products O2 costs, and this EBITDA growth therefore, keeping pace with the growth in revenue. In Germany, we saw 50% EBITDA growth in Sterling, the main driver here being the rapid subscriber growth, the fact the constant exchange in euros the growth is about 56%. O2 Ireland's EBITDA grew 3% in Sterling, falling behind the revenue growth, but this reflects a higher level of customer editions leading to or, generated from increased retention spending, and also additional UNTS network operating costs. These two features have compressed the margin approximately 2 percentage points in the first half.

The Euro EBITDA, in fact grew 8%, so there was a 8% EBITDA growth 14% revenue growth. Airwaves EBITDA grew to 24 million, this reflected simply the growth in revenue. The O2 on line and product O2 segment has been developed (ph) into the operating business since April 2004, and these costs have largely been absorbed by O2 UK, and we have not only stated the historic segment analysis. Central overheads have reduced 23%, as the cost savings from the program we described with the preliminary results earlier this year that come through as expected. So overall, EBITDA is up 37% to 851 million.

The UK, EBITDA margin in the first half was 28.5%, as I said this included the online and products costs, previously reported separately, and that's reduced this margin by about 1%. So the 28.5% margin here, is therefore slightly ahead of last year like for like. Acquisition and retention costs were 15.6% of revenue in the first half, pretty similar in fact to the first half of last year. We are aiming to grow as fast as we can in the UK without seeing margin decline, and this philosophy will continue into the second half. Therefore, overall, for the full year 04, '05, we continued to expect the margin like for like, to be similar to last year, but the growth is fairly significantly more than was originally expected, hence the upgrades to the revenue growth expectation. And as Peter said, we are now suggesting 12 to 15% for the full year revenue growth.

In Germany, the EBITDA margins have moved up into high teens, in fact 18.6% in the first half. Acquisition and retention costs represent a 20.4% in the first half, versus 19.2% in the first half of last year. Therefore, the EBITDA margin before acquisition and retention improved to 39% from 34.3 last time. National (ph) roaming costs in the first half were 35 million pounds, and so they depressed the first half margin by 4 percentage points. Now our philosophy in Germany, in many ways is similar to the UK that is to grow as fast as we can, while achieving the high teens margin. So as with the UK we are growing ahead of expectation right now, but we are managing the business to achieve the high teens full year EBITDA margin.

Turning now to the balance sheet. Three points here. First of all, working capital is approximately unchanged, so the growth in current assets is offset by a growth in current liabilities. Secondly, provisions are down, because we have been spending against the exceptional provision we took in the second half of last year, and this has generated significant cost savings as you've seen. And then thirdly, net debt is down a 130 million to 236 million, at the end of September.

Capital expenditure in the half year was 656 million, more than in the same period last year, and almost exactly as expected. And the increase is because we spent more on 3G in the UK and Ireland, again as expected. In fact, we spent about 117 million pounds on 3G in the first half. The Airwaves CapEx is a little bit lower than we expected, reflecting delay to the fire and ambulance contract awards. The police network rollout (ph) is on track. And we've adjusted our full year guidance for Airwave CapEx. We are now saying that we expect the CapEx for the full year to be inline with last year, that is about 250 million pounds. The further 57 million pounds was paid for network sharing arrangements in Germany, bringing the total that we spent on this now to about 200 million pounds over the last two years. This is amortized over the most of the arrangement, and as I said is showing in the amortization line. The full year capital expenditure guidance remains unchanged at 1.3 to 1.4 billion pounds.

Operating cash flow was 185 million in the first half. We spent 28 million pounds against the provisions, generating as you've seen cost savings. Translation of euro borrowings, reflecting the strengthening of the euro against sterling since the end of March '04, has increased net debt by 35 million pounds. This is partly offset by one off inflows from unwinding currency swaps. The main reason for the tax and interest line here being an income, rather than an inflow, rather than an outflow, is that we had a one off benefit of unwinding those swaps.

We've adjusted our position on the hedging of euro assets. As the performance of the euros denominated businesses, that's Ireland and Germany obviously have improved, we've increased the level of hedging of our overseas assets. And the attention here is to reduce the impact of translation on the balance sheet. And this year, has also nearly halved our interest expense, because we benefit from the euro sterling interest rate differential. Overall, then net debt was reduced by 130 million.

I have made the point in previous presentations, that if the Airwaves network rollout is completed, and the profitability of Airwaves builds up, there will be a dramatic effect on group cash flow. Now this has already started, as you can see from the slide. Airwaves cash consumption has reduced in the half year, in fact two thirds of that reduction is caused by the growth in EBITDA. Delays in the award of the fire and ambulance contracts, relative to our expectation have slightly altered the profile of the airwave cash flow turnaround.

In the first half, CapEx is below our expectation as I said, and it probably will be in the second half as well. And this capital expenditure is effectively slipping into next year. As a result, a step change profile of cash flow improvement that I previously talked about will be less dramatic. But turnaround it will, and the overall effect will be no less significant.

Now, our capital structure is based on a commitment to maintain a strong BBB or BAA investment grade credit rating. In fact, we see this rating as something of a flaw. In line with rating agency factors, we look at our ratios on a lease-adjusted basis. The lease commitments in this business, relate to sell-sites, retail stores, and offices. And they amounted to 1.8 billion pounds at the end of March, with a present value of 1.1 billion at the end of March '04. Now the adjustment that we make, involves adding least commitments to reported net debt, and then treating the least payments as interest, to arrive at EBITDA with a R on the end.

And we looked at three measures, cover, gearing and cash flows. Our ability to bear (ph) material additional debt right now, as might be implied by the cover and gearing ratios shown here, is constrained by the relatively weak free cash flows to adjusted net debt ratio. As we have already said, cash flow is expected to strengthen, as the Airwave network rollout is completed.

Now, briefly a word about the re-organization. The group currently lacks the necessary distributable reserves to support the distribution program this is a legacy of the de-merger structure when we de-merged from BT three years ago. The solution that we decided to adopt, is a court approved scheme of arrangements, whereby we will create a new holding company, NewCo will acquire MMO2 Plc, using newly issued shares. A straight share for share exchange. And then NewCo will affect the capital reduction to create distributable reserves.

While doing this, we're exploring options to enable small shareholders to monetize their investment cost effectively, and if this is successful it will significantly reduce the cost of paying dividends. We are also going to review the status of our ADR program, which has been in decline over the last three years. The court and shareholder approvals are planned to be completed and in place before the end of the fiscal year 04, 05, so before the end of March next year.

Now, a word on international financial reporting standards. Everyone will be aware that there is an imminent change to IFRS, and it's going to result in a number of changes to our accounting policies. For us the timetable is as follows, the first results that will be reported by us under IFRS will be the six months to September 05, so a year for now, followed by the full year March '06. And we'll provide restated comparatives for both periods. We will report the year to March '05 in UK GAAP, and our intention is to keep the UK GAAP, and the IFRS numbers quite separate to avoid confusion. Then in the summer of '05, we shall publish the reconciliation of the '04, '05 UK GAAP to international GAAP, so that analysts, investors, and everyone else who's interested is ready for the September '05 interims in IFRS.

Now, in the interim results in front of you in note 10, we've described in words the expected effect of adopting IFRS. And briefly, the main areas effected are as follows, goodwill will no longer be amortized, there will be a revised definition of intangible assets, and some assets currently treated as tangible will be re-classified as intangible. We will adopt the IAS 19 for pension accounting, although that's not particularly a big issue for us. Our scheme is very small, and we have almost no differed or pension in numbers.

Accounting for share schemes will change under IFRS, the principle difference being we no longer have an exemption for the save as you earn scheme, the cost of which is not charged to P&L at the moment, again that wont be a particularly large number. And we will adopt the financial instruments IAS 39, we expect to be able to obtain hedge accounting for those instruments that we do use. And obviously, there will be significant disclosure adjustments. And then finally, in differed tax we will probably have to provide differed tax on the undistributed earnings of our subsidiaries, joint ventures, and associates.

Finally, the outlook. In the UK, full year service revenue growth is expected to be 12 to 15%, with a stable EBITDA margin on a like-for-like basis. In Germany, we expect strong service revenue growth, and we expect to deliver a full year EBITDA margin in the high teens. In Ireland, we expect to see continuing steady growth of service revenue, with overall a broadly stable EBITDA margin. Total capital expenditure will be 1.3 to 1.4 billion, this is slightly more than last year the principle reason being increased in investment in 3G in the UK, and we have just shaded up slightly our expectations for capital expenditure in Germany, offset by a slight reduction in the expectation for Airwave, which is now expected to be similar to last year. Peter?

I must admit, I always fine this IFRS stuff so exciting, I must get the adrenaline out of my blood, and calm down, and I can see most of you feel the same. So in conclusion, what are we saying? Well first of all, we are pleased, we are proud of our first three years performance. And no more so than the half we are reporting to you today. No hiddence (ph) of complacency, yes we have had continuity of senior management, which we think helped enormously, the same team running all of the businesses since we de-merged. We do say that is a plus, by the way, versus some of our competitions, but no complacency we are proud of what we have done, but we know we are as good as the next quarter or half. And if you need to challenge to that, the benefit of a new chairman and a refreshing board ensures no complacency.

We are on track for the good full year. We are not reporting share results today with the hiddence of (inaudible). You can see a German business going like a train, and UK business that's playing through very competitive waters extremely well, and then the Irish business, and in the Airwave business that continue to contribute. And indeed we pick good partners I hope you see, our Tesco alliance is working well, we pick partners who can execute, and execute well. And Tchibo far too early to judge. But one month, and we are encouraged. I mentioned earlier, that we are very much more turning the spotlight within our business on good customer service. We are investing in the new billing and CRM system in the UK, and of course, you get the other isolated incident as you migrate customers. But that puts us in a much stronger place, once that's in place.

And we are taking the same customers focused approach on 3G. We have launched in Germany and frankly sales in the Germany market and there (ph) retriculous customers get used to the service. We are not launching in the UK to the consumer market until the New Year, we launched in the business market, but our judgment is a zero debate, which is a two and half G (ph) Christmas in the UK. We have got strong offers out there excellent handset. The same very powerful marketing machine and brands that served it well. And I think, you have already seen the people out there, the top stones (ph) who tell you what the UK markets will be like this Christmas, will all tell you it's a two and half G Christmas.

We gained zero, we gained a loss I should say, from when we made the decision to launch picture messaging some six months after the rest of the pack in the UK. They got the (inaudible) out, they built the market and then we came, in fact I wish left picture messaging a little longer than six months. Well, we are doing the same with 3G we are ready to go, but will launch in the New Year, and we are very confident that, that's the right time to go. And I think, we're being consistent on 3G, and saying it doesn't get big until well into '05.

Probably the most strategic thing we have announced today, is our investment in Germany. We see real value opportunity there, very close now maybe there, in terms of becoming the number 3 player in revenue, and by building our own network the largely cash mutual decision we can get the margin where it needs to be. And as I mentioned earlier, and then we got to look at the number 3 players in the smaller countries to see the value creation opportunity that was there for the grabbing. It's not magic required, it's not leaps of faith, it's just keep doing what we do, with building our own network.

And finally, we are very pleased and excited about announcing, not only where we are on distribution, but a very clear policy for the coming years. As David said, we are going to retain a strong credit rating, we want to retain very much in our business enough to invest in our German businesses etc. But equally, we have announced today, a progressive policy that will move us in the medium (ph) term to 50% of our underlying earnings. I think that's absolutely clear, it's challenging, and frankly where it can leave us, is not only as a hard growth stock, but very possibly, one of the fastest growing dividends in the FTSE. Thank you, we will be happy to take the questions now.

(Inaudible) so could you - we'll start back on the left there, if we could with the gentleman there. Could you please tell us who you are, and your company before your question please. I just (inaudible) --thank you

Christian (inaudible) from Citigroup, and two questions if I may. Could you help us to understand in your risk profile of the company with the investment in Germany, where could be the risk on that investment? And also, the risk profile of being a fast follower on 3G versus one of your main competitors in the UK, and as well as in Germany? And the second question would be, we struggled to understand the UK market dynamics, in terms of strong growth is that just a relative move here, with a kind of customer base, which comes from a low base on Cellnet or, what's going in the UK market? Thank you.

Peter, I think that's for you.

Taking them in order, what's the risk profile in Germany of building our own network. Clearly there is always risks, but I think it is really covered (ph) off. We are not switching off the network share roaming deal, so we will build up our 3G network more aggressively than originally planned, but obviously, we will keep learning about what cities generate revenues on 3G from our roaming deal, and built there. If the take up is later than we expect on 3G, we will built slower.

Sites are obviously challenging to get, but we've already got a lot in the bag. Interestingly, when we took over the business three years ago from previous management, they had a lot of facts already in the bag, and we just froze (ph) them, so in a way we are sort of half way there anyway. So, I think that risk is well mitigated, and just because we have made the decision now to go investing our 3G network obviously, our German management, and ourselves are too sensible to just keep blindly doing it, we are constantly reviewing that. Risk of being a fast follower in UK is zero, and that sounds rather arrogant, but I think every technology launched in this market, has taken longer to take off than originally expected.

Now, I want to be very clear we completely and utterly believe in 3G, we're supremely confident, it's when. We were the first to built a 3G network in Europe, as you know OK, was the (inaudible) of man, but gosh we learned a lot. We learned a lot about the technology, we learned a lot about the readiness of the customer. We have already done very well in data, we understand it, as I mentioned earlier 21% of the group revenues, and 23% of UK revenues comes from data, but our judgment that this is migratory, customers aren't going to suddenly run around, and say must have 3G. They just want the services, and a awful lot of those they get from us today on two and a half, (inaudible) just go faster, next year on 3G. And I think, what are the UK market dynamics, I can only speak for us.

While our ARPU continuing to grow so well in the UK, 9% in the last year, in three factors. One voice ARPUs going up, two data ARPU is going up revenue from data per customer, and three we are winning better customers. And although we are pleased and proud of our performance getting a post pay ARPU to 540 pounds, from 503 a year ago, the pleased in this is there is more room for improvement. Our major competitor we reported yesterday has got post paid ARPU that's still 40 pounds a ahead of us.

So, the room for improvement isn't down, so we are confident in that dynamic. Why we are continuing to win new customers? I think again, (inaudible) simple, although it took us a long while, we are starting to learn the execution question, we got a great brand, we got the best network in the UK, according to the regulator. We are very powerful marketers, and we are now making sure we get a ahead of the game on service.

Thank you. Lady just on the edge here and (inaudible) thank you.

Thank you Victoria Granger (ph) from Chevreaux, just two questions the first one I am going to ask in two different ways, because you might not answer it the first way. When should we be looking for EBITDA margins of 30% now in Germany or stated the other way, when does your German CapEx levels now mean no dependency on T-mobile, and when will we get those 4 extra percentage points on margins completely? And then the second question, regarding timing of the dividends, you said the medium term, could medium term be defined as fiscal '06, when we get this 50% pay out? Thank you.

OK. Well let's start with the German questions, you deal with that if you would Peter.

Yes, clearly (inaudible) fortune to say it's that time, but I think if you go through the logic I tried to share earlier you can see its quite doable. Today, we have a German business that's growing with exceptional rates, and it's delivering at 18.6% margin at the half year stage, and we will continue to grow that exceptional rate in the second half year. And by the way, we now add Tchibo in as an engine, so we can see that growth continuing.

Roughly, we estimate the cost of roaming is about 4 points of margin, and we roamed quite a lot on 2G, some of that CapEx we will have fill out our 2G network, as well give us some more immediate term benefit. So there is about 4 points. And again very roughly, we see the cost of the exceptional growth, once we are a bigger company, is about another 4 points, so without getting to convoluted one gets to the mid 20's now, just by those actions. So, we can see it in sight, and we don't usually talk about stuff being years and years away, and certainly our German management is very focused in getting it to 30% well before the end the decade. Maybe David, should take the timing of the dividend then.

Where I just might (inaudible) a little bit to what you said about the margin growth in Germany, I think the nature of network build outs is always that they have relatively long lead times, and you'll be aware that we were already planing to build rapidly in the course of calendar '05, in order to achieve the 50% population coverage license requirement in Germany. Now, this additional investment overlays on top of that, so we were already planning a busy year in 2005. And therefore, there is a physical limit to the capacity of our business to rollout network, so the impact on the first year is actually quite modest. It's in subsequent years, that the buy outs of the roaming costs begins to take effect, and then clearly the rate at which the growth occurs, in the future years, which itself will be proportional to our ability to grow in the market, effects the extents to which we can, if you like, scale back to a normalized rate of growth.

On the timing of the dividend pay out, which was your second question, we said that we intend to achieve a 50% distribution of underlying earnings in the medium term. Now it's perhaps - it's difficult to give a very concise quantified answer to that question. But if I was to just give you a glimpse of the sort of considerations that we will take into account, when judging how to grow the dividend, then you will see the sort constraints that we face. I mentioned in my presentation, that we are bounded at the moment by relatively weak cash flow. The notion that we are un-geared is probably incorrect, but the relative strength of the cash flow, not wanting to undermine the investment grade credit rating, is actually going to be the primary driver. So we will start with a final dividend, and that will be approximately two-thirds of a full year's dividend, in other words an interim, and a final added together.

So you will immediately get some growth from '04 -'05 into 05'-'06 simply by the addition of an interim dividend, and we will be looking at the strength of the cash flow, and attempting to move fairly smoothly from the start point, through to a 50% distribution. As I say bounded by the strength of the cash flow, and the growth in earnings. Now when we see medium term, I think it's fair to say we don't mean one or two years, and we also don't mean long-term.

Thank you. A question here (inaudible) gentlemen with the glasses. (Inaudible). Thank you. You got that.

Just to clarify that. Yes, Justin Funnell of CSFB. Just in the absence (ph) of anything else, can we use your free cash flow, as a rough guide for what your dividends will be going forward? And secondly, just looking at the CapEx for next year at the group level. I mean, if Airwave CapEx is being pushed a bit into year if you build more in Germany, should we be assuming that your CapEx goes up materially at a good level next year?

I think your first question, should we see the dividend equals free cash flow. No, you should assume the dividend tends towards half of underlying earnings per share, that's the policy. CapEx for next year, its difficult to give guidance specific. We are not really giving guidance for 05/06 yet. Frankly, we haven't finalized the numbers ourselves internally. You are quite right about this. Some slippage of Airwave into next year, and we have said for a while now that next year was a much bigger year for capital expenditure on 3G in Germany. But a huge change in the overall number now, I don't expect. But I am not really in a position to guide beyond that.

OK. Thank you. Coming close to the gentlemen who nearly grab the microphone then.

Thank you. Jonathan Smith from Dresdner. Two questions. The first one you said in the UK that you are winning incrementally more valuable customers. Are these exclusively from the other operates or, do you believe that there is still value in this non-penetrated part of the market. The second one in the UK, I think the difference between your calculated and reported service revenue is about 6%. Can you give us an idea of how much of that is as a result of your ARPU (ph) sharing arrangement with the retailers, please?

Yes. I think in terms of where we are winning customers from, yes largely from other operators, as you would expect it for heavy users. But there is still actually just the younger views (ph) are getting to still (ph) fixed minutes and things like that. What we are seeing is a generational growth of heavy users, and I put it too simplistically, we went to university student got (inaudible) mobile, frankly isn't using (inaudible) phone now, they are living in an apartment. They are getting older. You know what I mean? They are getting more of a generation, and hence the number of people under 30, let's put it now, who are using us for everything that they can, is a growing share of the market. So, although it is winning from competitors it's also just a generational change in the UK. And David if you can take the ARPU one please?

You are referring to the results of multiplying subscriber (ph) ARPU, and comparing it with service revenue. Yes, I think only a simple answer is, all of it. Is that right? Yes, all of it.

OK. Thank you. We will take one in the (inaudible) the back there, please. The gentleman with his hand up.

Thank you. It's Robert Davis from Lehmann Brothers. Another question on subscribers in the UK. Looking at the UK markets over the period you reported, it's had a - and it looks like more than 3 million customers, including the hush additions. With your comment just now that, most of your customers coming from other networks, I cant' imagine that being clearly different for the others. It sounds like there is a lot of inactivity building up in the base. I wonder if you could comment on that as an industry issue? And then the second question, just on Vodafone 3G launch. I am sorry I hadn't (ph) had a good chance to look at the services. What in that do you think you will be able to do better when you launch your 3G services next year? Thank you.

Well, in terms of the subscribers in the UK, I can only talk to our policy, I mean active customers, and I think we are at the leading edge. We have always been a little spunky, I think similar to (inaudible) customer on prepaid has been active for three months we stop counting them, postpay obviously when in the contract ceases. I think when you saw the flotation in the summer of the BNO they know they had to clean up their numbers quite materially, to move the definition to active. All I know is I say what we do, because that's within my control.

And we are quite religious on that, and I agree with you to see the kind of cost in the numbers appearing out there across all the networks is puzzling, but in the end, that's why not to change the game, I think to look at service revenue growth is really quite useful. We've grown to some extent in the first half-year. (Inaudible) 3G launched it, it is undoubtedly and would be as you'd expect from a such a big company, extremely professional. I am certainly not going to say what we intend to do better. We just remain confident that we will launch it at the right time in the consumer space, and we are very confident that we will get the right share of customers.

OK. Thank you. Now, we've got a see of hands in this block here. So, could we take (inaudible) obviously gentlemen in the glasses.

It's Simon Weeden from Goldman Sachs. And just I know that pressing on the UK. I would be interested to know the churn trends during the half year whether or not postpay churn is higher at the end, than it was at the beginning if you like, and whether or not you expect it to go up more in the second half. And also, if you could talk a bit about the distribution of churn, and are you intending to see higher -- an increase in churn among higher spending customers in particular or vice versa.

And I also noticed again really pretty much a similar related question, -- your (inaudible) margins you talked about it year-on-year, but if you look at it sequentially half on half, I think they were down 2 percentage points in the UK. Is there any function in the way you pay your distributors that's kind of appearing in the other cost basis earning cost related to cost of growth in that or, is there some other reason why sequentially the decrease (inaudible) margin would be down, on more than the amount of the underlying cost? Thanks.

OK. I'll lead. I'll buy David time by answering the first. Then he will answer the (inaudible) I hope. Postpaid churn I said in my presentation it's gone up slightly this year, as you would expect the (inaudible) versus 5 churn is under challenged and it was 26 at the end of last year, 27. We will be working very hard in the second half-year to keep it under control. But I think it would be no need to think that we can arrest that toward that direction in the immediate turn. You really got to -- I always contrast if three had come out three years ago, that they would have hit out UK business extremely hard, and yet here we are with (inaudible) and we are holding churn.

I mean they have, as you see since they have to practice out there fortunately, customers buying a lot, lot more than just plans (ph). And in terms of what kind of customer we're loosing I think it is a spread, but actually as you expect we focussed on the high spending customer a whole lot more, and (inaudible) therefore tending to be the lower spender. But we don't want to lose any customers, we want to acquire and we want to retain them. So, we are doing everything possible. And I think its actually as much about service, we are starting to see some benefits from our new billing system, and also the reason why UK business putting in more (inaudible) people.

We have announced that there are another 800 across our barrier (ph) and leads call center, is to ensure that customers get the best service, then they'll renew (ph). I think its that kind of thing that retains customers as well. But I think overall, the UK market is bound (inaudible) why we continue with the current competitors, so that churn will be a challenge.

Your question about the progress of margins in the UK. It is actually quite a difficult one to answer. I mean the progress of margins is not even sequentially half over half, and it really depends on the levers that are being pulled inside the business, and then of course underlying there's seasonal factors as well. And the earlier years on the chart that we have in the book on this are in the context over a period when the margin was improving from a very unsatisfactory level fairly quickly. We got to around about 30% for the full year last year, and it's getting harder to move that margin up now partly because we are getting closer to the market norm, and partly because there is more churn in the UK market as Peter - as you know --your first question implied. So we have got gross more to stand still as it were, and then I think that the trend is further exaggerated by the addition of this 1% or, the deduction let's say, that this 1% caused by shifting overhead into the UK.

We have not restated. That would have been just too confusing to contemplate. So, you really got to kind of add 1% to the bar -- the end bar on the chart in question. And as such there, I think it's - you know it's quite difficult to draw a conclusion that this is the end of the margin growth in the UK. But it is certainly getting more difficult to keep it going. That's not for today.

OK. Thank you. Gentlemen here.

Thanks. It's Andrew Nel from Bear Stearns. Two questions. You have been linked closely with I-Mode. What is that I-Mode would bring to the business. And as -- I guess a closer tie up with NTT DoCoMo. Is this something that helps you source better 3-G handsets, for example, that you would not perhaps be able to do on your own? Second question to try and get towards the dividend pay out, and general cash distribution philosophy in another way. To the extent that there's more free cash flow in a given year than you are paying out in a dividend, are share buybacks still contemplated in the future?

OK. Well, let's (inaudible) Peter.

Sure. It's been a trap isn't it? Saw what you liked about it, (inaudible) me into trap, so we're bound to want to do it. So let me be very clear. We are looking at I-Mode. We are reviewing it thoroughly. There's lots of things we like about it. Yes, 3G handsets we have been very interested, whereas when we looked last time the European experience is not good. It has been launched in Holland, in Germany then with no great success. Since then, I think other operators some in our own (inaudible) lines, have been much more successful. So there's certainly pluses in there. But no do you (ph) nothing to buy, then as we said before we would advise on that decision before the end of the year. I think, in terms of dividend maybe - either David wants to build on this. But I mean -

For showing some.

Yes.

If take you back to the point I made about cash flow. Well, that is the bounding condition at the moment. That is the limiting factor. The relative weakness through the cash flow. Now we have said that our distribution policy is the first step, in the direction of ensuring the shareholders benefit from the improved financial performance of this group. Clearly growing up to the 50% distribution policy, the 50% distribution of underlying earnings is the thing that would be first in our site, but you know, we haven't ruled anything out in defining this distribution policy. As and when the cash flow strengths, and the degree to which it does, then obviously will take another look, but we cant say more than that now.

OK thank you. This gentleman near the back row, who has been trying to get in for some time (inaudible).

Andre Bear (ph) from ART (ph). Just a couple of questions about Germany. First of all I think you got 17% termination cut in mid December. Can you just tell us the full year impact on revenue and cost of that move? And secondly, in terms of German distribution, is there any quantification you can give at all, on the cheeper effects on the growth rate in ARPU, and also whether there are other distribution channels that you could consider in the German market to boost the growth, and whether you could get away with that from a capacity of standpoint?

If I can take the second bit and then David can talk about the termination rate cut. Its far too early to consider, I mean literally they launched in the beginning of October, but its an encouraging start and it has contributed a bit. (Inaudible)by numbers in our first half, (inaudible) were customer based, which came at 6.6 in our customers. But the fact that it has gone through 7 million now in the last six weeks since that report, has obviously been helped a bit by Tchibo, so it's a good start. Are there other ones out there? I think clearly we have to go very carefully.

I think we got a great partner in the UK with Tesco, and we have arrived at that by saying they really do hit us -- effecting towards the market more cost effectively than we do with our own branch, and so does Tchibo in Germany, the pre-paid customer and you see till now German mix have been very strong in post-paid. And they do again, carry a very strong brand the customers trust them, they're seen as simplicity actually, although they are a different kinds of store a lot of their promise (ph) is the same as Tesco. So we are really not rushing around to do anymore, clearly as opportunities in key segments come long, (inaudible) but we'll pick our winners (ph) very, very carefully I think.

Great, on that can I just ask service providers in Germany as well?

Well, under the 3G license we have to be with service provider its as simple as that and therefore we are abound to revisit that then we are.

OK thank you (inaudible).

Yes I was looking forward to you pointing that out, thank you. The 17% termination CapEx (inaudible). I mean it's probably at the order of 3% or so of total revenue, but frankly in the context with the business growing it's service revenue 30%, it lost. Difficult to identify what the growth might have been if done -- if the termination cut hasn't occurred, and exactly what to suggest you models for the second half its quite hard with a business that is growing as fast as this to actually un-pick the different components, but suffice to say that it's fully embraced in the guidance we've given for Germany for the rest of this year.

OK let's take a couple over this -- quarter here could we. The lady just beside the microphone, and they we will come up to you sir.

Ruth Puera (ph) from Morgan Stanley. Just one question relating to German CapEx, you given us guidance from German CapEx over the next five years, can I get some guidance on the UK side too?

I don't think we got any figures in the market for the UK over the next five years, so the answer is no, not today I am sorry.

OK the gentleman just in the third row, in the front here please (inaudible)

Thank you very much John Gredes (ph) from Commerz Bank. Two questions please. Is it possible for you David to enlarge a little bit more about the margin prospects in the UK, and should we expect them now to stay constant, is there a scope to grow them by another few points, given that you upgraded your service revenue growth that guidance three times? That's the first question. The second question, regarding Vodafone's in UK, 3G hero tariffs. Do you judge them, in respective to what Vodafone themselves say, do you judge them in combination with the handset costs to be relatively aggressive, and if so, do you think that the impact of those tariffs might be dilute by the fact that, in your view that the technology isn't ready as yet?

Shall I talk about that margin first and then --? The guidance we have given for margin in the UK is flat, year over year, like-for-like. Bear in mind, (inaudible) 1% transfer of costs (inaudible), and as I said the philosophy in the UK is that the balance growth with margins, as simple as that. And assuming the market allows us to do this, the constraint, the UK operating business management run under is that, they want to try and achieve that flat margin. Were we to slow the growth down short term, we probably could boost the margin, but we judge that's the wrong course (ph) at the moment at this point in the development of the UK market. We have a formula that works, and we don't particularly want to make it easier than we need for the new entrance. Longer term I would say, having got to the point where the gap between our margin, and the other players is a lot less than it used to be. Opportunity to develop the margin in the UK is harder than it was.

But frankly, the tools we were using to achieve that are still there, and are still available to us. Our ARPU - impressive though I think the growth is, is still below the market leaders, notably on post-paid and indeed the mix of our customer base the relative number of pre and post-paid is still week relative to, in particular one player. Secondly, we have not finished by any stretch penetrating the business in SME segments, so the post-paid market where you beware the wireless trading agreement with DT has ended, and we built our own distribution channels, and we got quite a lot of success in that direction right now. So I don't see any reason why those trends should not be available to us over the next 2 or 3 years, and of course they are tempered by the tick up in churn that we have seen, and no doubt expect to continue. So, that's the answer to the medium to long term trend is not now (ph).

I think in terms of (inaudible) tariff, I think any tariff such as seeking (ph) the customer to spend I think 60 pounds a month for (ph) this fourth quarter month. We are in the right direction frankly, I mean if you can pick up a customer with maybe 720 pounds a year (inaudible) that's a good customer. So, I think in terms of their pricing, I can understand a bit and it's also sensible (ph). As to sort of the comments about will it work in 2.5 and 3G, I think it's -- we (inaudible) project we are going to launch after Christmas and I don't think anyone out there is selling 3G per se, (inaudible) well into 2005. Of course, the player that's only got 3G technology is actually selling (inaudible) and I think that's probably some (inaudible).

OK the gentleman here who is smiling at us.

Its Christian Martin of Vestec (ph) Two questions if I may. Firstly, on the outlook for Christmas, can you give us an idea of how resilient you think the Christmas market will be on the back of these September figures in particular, and how you are going to play those markets, if you like, in the UK and Germany, what your tactics would be? And secondly, could you talk a little about the investment you made in our own distribution channels, particularly in the UK, and some of the success maybe you are seeing? And any metrics you have got around ARPU (inaudible) connections, etc,? Because it does seem to be a theme, from some of the operators, in particular in the UK, around this kind of investment.

Well, I think Christmas will be quite big. I think equally however, we will play it as we always do, we are not going to play around the low end pre-paid. There is no benefits in that. We are just going to (inaudible) low spending customer. And I think, without sounding the least bit arrogant, we got good marketing tools here, undoubtedly amongst the best marketers in the UK market, and we will play it to win the market segments we want to. I think Germany similarly, I think Germany - you've T-Mobile say they're not going to be (inaudible), and they seemed to be doing that, clearly they want to in Germany get their margins up.

Though they look to have taken a short term option to (inaudible) customers that may follow the trend. And I'm encouraged that our sacs (ph) are up a little bit, but not as -- perhaps as much as one or two of the other players. I think we are playing Germany to growth (inaudible) profitable growth, good ARPU growth, but again we aren't going to play (inaudible) silly, and obviously Tchibo can start to win us some more pre-paid customers. And the nice thing about the Tchibo deal is, sort of the sacs are non existent, but equally I don't want to playing at the low end.

In terms of the UK channel performances, we're very encouraged. We, were a year ago getting about 40% of our own channels where providing our business that's for stores and online. We have opened a few more stores, and we are now very close to 50%, and we may take it further. What do we get from our channels? High ARPU, lower churns, the slightly more complicated products like, XPI. And as data comes along, we can be confident when a customer leaves the store they are well trained, they know how to use them, and undoubtedly the UK business, I think will continue to grow that at least above 50%.

OK thank you. Can we take one right at the back there the one that seems to be smiling at me but we have taken it anyway thank you.

Hi its Roger James from (inaudible). You talked about your own channels in the UK, have you got any plans to sort of mirror the differentiated pricing we are seeing emerging from Vodafone in an attempt to attract more people into your own stores?

Well, perhaps (inaudible) mirror will doing already and has been for a while. We had special offers that our channels have, but the others don't, and it works very well its very cost effective. So we will continue with the policy on that, that we have been doing for some while.

OK, the gentleman just besides you looks just take that as well.

Thank you Cyrus Maywater (ph) (inaudible) Capital, I think you mentioned that data's of percentage of ARPU is now at 22% or in that range. As data rises as a percentage (inaudible) people like, companies in the likes of Intel and Microsoft beginning to get interested in your customers, and your revenues. I -- as I understand that some of your products like XDA Microsoft software, in some countries like America you can download Microsoft e-mail, which competes directly with SMS. Do you see -- can you tell me how you view Microsoft as treat to your business, and what steps you are taking to deal with that threat?

Well Microsoft has been sort of playing in the space sometimes as a partner, sometimes not with us for about five years. No valid (inaudible) we certainly understand it. In some places we of course ally with them, as you rightly said XDA uses Microsoft, but we remained very confident that we know how to retain and win our customer, and maximize our revenues from each customer. And I think that what the (inaudible) the way is through friendlier services that are easy to use, none of us in the industry as yet has done a good as job as we can in making the services we launched easy to use, and definitely usable. And I think we got great opportunities to leverage our (inaudible) and keep retaining, and winning more of our customers rather using the basic (inaudible).

OK, thank you there is a gentlemen here that's on the outside of the row, and then we will take the one at the back there.

Hi, Toldel Shadel (ph) from Chevrolet, I have three questions please, first in Germany, correct me if I am wrong, but I think (inaudible) launch products similar to Genium (ph) but it's a tariff for the home zone element. I suppose the question is how much rather has Genium got to one and to what extent can you continue to use it as a kind of all differentiating product? The second with regard to the re-organization, are there any benefits that could result, and I am thinking better tax you saw or tax loss (inaudible) or is the answer just no on that one? Thanks.

Yes we believe (inaudible) has just announced a product but they call Home something or other. And I think it's as thorough as that. It is certainly not (inaudible) product out there, and we (inaudible) said trying to emulate. I think its always important to make (ph) home zone products, to say that lots of people over the years, and I must say that's been in the mobile industry a long while, have a go in this space. The reason Genium is so successful is, end to end it has lot to things. First of all it works so when you are within 500 meters of your designated zip code it really does charge you the fixed rate.

We give out two numbers, so the customer really you actually feature on fixed, and there is a whole host of other things. So usually in this industry, I think what see that the more people who join the (inaudible) in terms of competitors, the bigger the take (ph), that's what we all learned in text. So I have no issue if (inaudible) does have a successful entry. But as to the impact on our product well I think Genium continues quarter on quarter to take very high ARPU, very profitable customers and I see no threat to that in the short, medium or at the long term.

Sorry the question about the reorganization (inaudible).

OK, another question (inaudible)

Yes its Morris Patrick (ph) from Bear Stearns. Just two quick questions. The first one in the UK, your other revenue growth was 62%, could you quantify how much of that was coming from Hutchison, and second question to do with CapEx in Germany. You said you are going to be riding around 50% population coverage soon for the regulation requirements. So how much of additional one to one half billion and euro CapEx if additional population coverage, how much is more in field preexisting from the (inaudible). Thanks.

Well in terms of the second question.

Should I answer the first one first?

Why not, you are quite right the other revenue growth in the U.K was very substantial. And some of that occurs because O2 online had some external revenues, which will moved across into the UK. So, actually hardware sales outside our footprint, and that explains quite a big proportion of that growth in other revenues. We are not in a position to discuss the -- for confidentiality reasons, but with the scale of the wholesale airtime revenue growth unfortunately.

And on Germany I think the answer is a bit of both, yes we had to under the regulatory requirements build the network to 50% population coverage, we will now be building that within the one to one and half billion a little deeper and more thoroughly, but undoubtedly we also (inaudible) to give us a bigger footprint, so it's a bit of both.

OK, thanks.

The question yes this is a (inaudible) the gentlemen behind them afterwards.

Hi its Sean Johnson (ph) from WestLB. Just one question. In terms of the new UK guidance you have rated to 12 to 15% from the 9 to 12% in September, but it actually looks like if you look at increase, that most of that is because of those stronger than expected H1 performance. Can you just give me some clarity of whether there is really any change in your second half guidance that was implied from September?

Well, the reason that the upgrade occurred is because we traded better than we expected in the between that from the previous guidelines, so essentially the assumptions in the back end of the year remain the same, its just a question of how soon they start to cut in. So, you know if we had a, the reason the upgrade has occurred, as I say is because the current trading in the two or three months we have seen, since calculate the last one, was stronger than we expected I don't think, we think that the overall outlook, in the other words the end point, is any different.

(Inaudible). Given the success you achieved in turning around Germany and the U.K, are you not now tempted to start looking beyond that footprint and look at some other assets in Europe given what you have achieved?

Well, I think one never says never, but I think the focus in the medium term. There is so much to be gained in terms of revenue and profit growth as far as concentrating on what we have got. I mean, Germany it's the biggest country in Europe, we are excited about our progress, but we still only have 12% revenue share as a fast growing market. So, if you can get that right. In UK, far from down, I mean lots of people wont take players came along time to (inaudible) but here we are, we are growing 20% on (inaudible) margin in last year. Airwaves you know we get -- we start to get little benefit next year from police, but obviously with other contracts going, we got the Tesco joint venture, we got the Tchibo joint venture there will be others. So I think, of course we are occasionally get thousands of digits saying that this assets great value, I think its is in the medium term.

OK. Getting towards the end I think. The gentleman there beside the lady with the microphone, thank you, and then one here, and then one over there (inaudible).

Ammen Kelly (ph) from (inaudible)Research. Just a quick question on taxes, and on your P&L guidance after 05/06 you said you are expecting your tax charge in the mid teens, and as a tax rate. Does this imply that you are going start paying UK taxes half way through next financial year, i.e. one year from now?

No, it (inaudible) tax. We have actually been building up the differed (ph) tax asset, as a result of recognizing anticipated use that brought forward losses in the UK, and that differed tax asset unwinds as the losses expire. So for '05/'06 I would assume the bulk of the tax charges just the book keeping entry, they'll be the underling Irish current liability running through. We can't shelter that, we can't see how to shelter that for the moment. The UK tax liability comes in the following year, which I think is '06/'07 the third year out. And that's the point where current projections show that we are no longer able to shelter the UK taxable profits, and we start to pay UK tax, and then it comes up quite quickly through that year into the following year, and becomes essentially the whole of the tax charge. Thanks.

The question here, and then right over there, and then I think that (inaudible).

(inaudible) Partners, just two quick things. One is in terms of the build up in Germany. Does that mean that you are confident that you will have handsets that can cope with the jumping of the 3G network, to the 2G network in the same way that 3 does in the UK? And the second question is, you utilized provisions in the period. Can you just tell me what you spent that money on?

I didn't hear the second part.

You utilized provisions in the period, can you tell me what you expect that money on?

I'll answer that first. I think the question was -- the microphones distorted you voice up there I'm sorry, what do we use the provisions for that's what you asked isn't it? It's essentially the cost of people (inaudible) in the business. There was a redundancy program of O2 online and products, and head office staff folk, and it's -- some of those where quite expensive people, and some property costs. And there is quite a long tail on the remaining liability, because we provided for a portfolio of vacant property, some of them are shops, and one or two of them are substantial buildings up in the leads area. And we have been quite cautious about the length of time it will take to actually exit those leases. So you provide upfront to the owners lease, and then charge the ongoing cost of holding the property to the provision over a number of years, so in some cases there will be a long tail on that. So, it's mostly people and a bit of property.

I think, the point about 3G and 2G, that's what pretty well everybody is launching 3G is going to have handsets that will cope with 2. I mean in the case of (inaudible) operation (inaudible) in our network as you know it's 3G, and I don't think anyone in the year building out anything like even (inaudible), so for a long while handsets will hop between the two.

OK, and I think you sir have the honor of asking the last question, so I hope it will be a very good one.

Let's hope so, Jerry Galloson (ph) from JP Morgan here, it's actually two questions please. Firstly, just to hop on the dividend a little bit, so you can hopefully give us a little bit more clarity. What is the floor (ph) in that sensitive free cash flow to adjust the net debt ratio, that we should about as a boundary on your ability to distribute going forwards?

And then secondly, in determining the 30% long-term German margin target. We have two 17% termination rate cuts coming on clearly a fairly small impact on service revenues, but presumably a rather bigger impact on the German EBITDA margin to appreciate what assumptions you've made in arriving at the 30% target, as to the EBITDA margin impact to those two 17% cuts. And then as to any potential future termination rate cuts that we might see in the German market, thank you.

Well let's take the second one first the termination rate cut. I mean first of all don't forget when the termination rate cuts have reduced there is always cost of sell offset, because of the outbound termination. And (inaudible) it is not absolutely the case, but its margin neutral, it's not just a straight hit for revenue. So depending what your margin is -it is quite as naked (ph) a hit as I say, just a straight reduction from revenue.

On the dividend, your question was about the free cash flow to adjusted net debt ratio, I mean that ratio is 21% at the moment, and I think with that is regarded in rating agency circles as a weak ratio. But frankly, it's quite hard to provide an answer to -you'd like me to tell you what percentage that we, you know, magically pass at which point the policy can change.

And I can't answer that, because the way in which the assessment of that business is conducted, and first of all that it is not absolutely hardwired into the numbers it's a judgment call. And it's about the risk profile, and the maturity of the business in question. And it's quite the fact that, as far as I understand it, the rating agencies take into account include the degree to which the business is diversified geographically, and the maturity of the operation, and we are relatively penalized on both of those factors.

In other words, we are in three countries, not a larger number and certainly in Germany, which is very important to our future prospects our business is relatively immature being as the rating agency see it, still a weaker number four. So those two things mean that we generally have to outperform what would be regarded as normal ratios for a given level of credit rating, and there's a degree of judgment involved, and I hope that we're closing the GAAP as well as our business matures. But suffice to say the cash flow needs to be stronger.

OK. Thank you very much. Well thank you very much. I think that brings us to the end. Can I just say I've enjoyed meeting you and learned a lot by listening to your questions, and as you would have gathered we're excited about the future that we are also focused on the job in hand. We have a dynamic business with a strong team, and very good brand, and we do intend to deliver (inaudible) for shareholders. So thank you very much indeed both (ph) of you. Thank you.