Vodafone Group PLC (VOD) 2003 Q2 法說會逐字稿

Thank you for standing by ladies and gentlemen. Welcome to the Vodafone Panafon Conference Call and the half-year results for the six months ended September 30, 2003. We will now pass the floor to your speaker today Mr. George Koronias. Please go ahead Mr. Koronias.

Thank you for that introduction. Ladies and gentlemen, I would like to welcome you to this conference call. I would also like to inform you that today in this conference call, I have with me the CFO of the company, Babis Mazarakis, Managing Director of the company, Mr. Sokrates Kokkalis and the Investor Relation Officer, Ms. Maria Kaini.

We at Vodafone Panafon announce profitability growth in all our regions. Net income for the six months from September 2003 after a period of major write-offs cleaned up the balance sheet is by 25.7%, €118.8m. Moreover, we recorded double-digit revenue growth as promised. The six months under review we added once more the majority of contract customers in the market, increasing usage and ARPU figures to the highest in the market.

In detail, revenues for the period increased by 17.5%, €726.1m driven by customer growth and usage growth. This has offset the target reductions in both outgoing and incoming calls. Earnings revenues increased by 15.9% representing 90.3 of total revenue. Outgoing airtime this by 24% [inaudible] reduction mainly driven by high usage patterns.

Cost of sales increased to €366.4m, while gross profit margin reduced to 49.5% influenced by high merchandize sales due to the increased additions of post paid customers.

EBITA rose 13.3%, more than €77.4m while EBITA margin reached 38.2%, 1.4 percentage points lower than the previous comparative period due to the dilution effect from the merchandize sales. Excluding the merchandize effect, the EBITA margin remained firmly steady at 42% [effecting] the core business margin.

Selling, General and Administrative Expenses, including depreciation and amortization, totaled €146.8m representing 20.2% of total revenue compared to 22.1% during last year. This reflects the positive result of synergies and increased productivity.

Depreciation and amortization increased, €94.4m, 21.3% higher than the previous comparative period, reflecting accumulated capital expenditure. From a 6 month period under review, recorded earnings from associated companies [inaudible] €4.8m, reversing last year's losses of €2.9m. This is mainly due to the significant improvement in the performance of Vodafone Albania.

Income taxes reached €182.7m, 22.4% higher than the first-half of last year [indiscernible] cleaning up of major write-offs that happened last year, improvement in the earnings from associates and the significant reduction in the interest expenses.

Finally, net income increased by 25.7%, €111.8m compared to €88.9m in the first-half of last year based on all the aforementioned factors.

Capital expenditures in network and other fixed assets for the period under review amounted to €87m, 11% which was dedicated [gap in audio] concentrating on ARPU and usage. All ARPU and usage trends remain [indiscernible] and were in force mainly due to the high quality customer base.

Specifically, during the last three consecutive quarters, ARPU, average minutes of use, has shown a constant growth reflecting the increased usage of the customer base after the last tariff reductions in the product and services Vodafone Live.

Typically, blended ARPU for the quarter July to September is 31.66; blended average minutes of use, 112 minutes. €31.66 ARPU. Annualizing ARPU and usage on the two segments for the quarters July to September, [indiscernible] ARPU €65.93 while usage rates 183 minutes [indiscernible] market. Reflecting the increased usage and spending patterns, customer base after the last tariff reductions and the launch of [indiscernible] products and services such as Vodafone Live.

On the prepaid segment, ARPU is €17.76, while usage reached 46 minutes, despite the increase in [inaudible].

Data revenue, including SMS and WAP, increased by 22.2% during the period representing 12.9% of service revenue contributed to the new Vodafone Live, the business services proposition. Going forward, these propositions are expected to further boost data revenue.

Data ARPU, good at €3.81, representing 12.3% of total ARPU. Vodafone Live, in nine-months, we have reached 107,000 customers, penetrating the total base by almost 3%. For other, Vodafone customers viewed with much higher data ARPU than the average base.

Regarding our total customer base, [indiscernible] review that our business increased by 171.2% versus the previous comparative period bringing the total customer base to 3.782m customers.

Churn for the six months dropped to 15.5, [90%] of which is internal churn. Activity last quarter was maintained at 95%.

In the prepaid segment, churn remained steady at 10.1%. Here we should mention that from October 1, there is a disconnection policy for prepaid users from 12 plus six to 12 plus one months, effectively meaning that we disconnected 2,040 inactive prepaid customers. This will have no effect on our finances, as these customers have remained inactive for a long period of time.

Looking forward, we are confident that our new products and service propositions [inaudible] with the [3G] launched in the Greek market further drives voice and data usage, making higher levels, the future lies in delighting the customers.

Thank you very much. I will now take questions.

The first question comes from Christian Kiano. Please go ahead.

Hi, it is Christian Kiano of Citigroup Smith Barney. Two questions if I may. The first one is can you give us a bit of an outlook on what you expect from the regulatory environment over the next couple of months?

The second one is, you qualified roaming components, three of them, in your release. Can you quantify these a little bit more with regard to Q-Telecom, what was the impact from Vodafone customers and then also from the tourists coming into Greece? Thanks.

Thank you, Chris. I will answer the regulatory framework and Babis Mazarakis will tell you the roaming [indiscernible]. For the next couple of months we do not expect - if you are referring to the fixed mobile question - we are not expecting any further deductions in fixed mobile. We have entered an agreement with the regulators in which we have agreed to a number of [gap in audio] expect in the coming months as far as this is concerned to be stable.

There are other matters referring to the regulators, we have an outstanding issue [inaudible] our network [gap in audio] and we have tried to reduce the effect of this execution [gap in audio]. As far as the roaming is concerned, I will pass you to Babis Mazarakis, who is the CFO to give you the details.

The roaming breakdown [inaudible]. [inaudible] additional part of roaming, which is [inaudible] outside of this. [gap in audio]

Hello Mr. Koronias?

Yes, I am with you.

Hello sir. We keep actually losing your line. Can you come closer to your speakerphone maybe? Your line is very, very faint and it keeps cutting out.

Okay. I am currently using also the headset and the speakerphone at the same time. Can you hear me right now?

I can now; yes.

Have you heard the last sentences from Mr. Mazarakis?

No, we did not; I am afraid.

I will then ask him to repeat it.

Thank you.

All right. On the roaming revenues, we see that €5m are coming from the two telecom roaming revenues, which we [indiscernible] with €62m coming from a traditional source which is inbound and outbound roaming of [indiscernible] customers respectively. Stripping down the [indiscernible] telecom, that means that roaming revenues would have grown 12% [indiscernible] 1% which is including the two telecom roamers. [indiscernible] Christian? Hello?

Christian Kiano, can you press star one, please? Please, go ahead.

Thank you. Just with a follow-on question, with regards to revenue growth, you had 17% revenue growth in the first-half. Is that a trend you would see continuing for the second half or do you think that will slow down?

What we would like to say is we will continue on the double-digit growth.

Okay. Thank you.

Your next question comes from Russell Waller. Please go ahead.

Hi, it is Russ Waller from [indiscernible] Research. I was just actually going to ask if you could repeat your answer that you gave Christian on the regulation question, because when you were talking it kept cutting out.

Okay, so if I can summarize exactly what I said to Christian. As far as the major issues regarding the regulator are mainly fixed mobile rates currently come to an agreement with the regulator and we have progressed with reductions and we currently have now a rate of 17.5 euro cents fixed mobile, which is [inaudible] 27 to 19 and from 19 to 17.5.

For the next months going forward, we do not foresee any significant changes to that. As you understand, changes in fixed to mobile will result in lesser revenues.

The other matter which is outstanding as far as the regulator is concerned is that the season and an issue relating to alternative carriers where we have tried to put in place a commercial policy where alternative carriers [inaudible] on the maximum number of minutes they can use on the network. This has been put on hold and we expect the regulator to come to a decision next month or so. This we would not expect to have any material impact on our finances.

So as far as the regulator is concerned and an issue is what will happen with fixed to mobile and for the next months, we do not expect any changes from the current regime.

Okay, thank you.

Your next question comes from Nick Morris. Please go ahead sir.

Hi, it is Nick Morris from Lehman here. I just wanted to ask a quick question about Albania. It looks like you are running at about 40% EBITA margins there now. Is that the highest that you can go or where should we expect to see that going in the coming quarters?

We expect in the coming months to move northwards to 45%. Going forward, I think this can further improve. Although I think this can be the type of market that can operate in the 50s.

Okay. Do you have any expectation of further competitors coming into the Albanian market?

There is a decision from the government, who are [indiscernible] to the fixed network operators because they are interested in privatizing that [indiscernible] investor coming to take over the business. Right now, we do not see any specific signs of this happening. So it will be a few months before we know something specific.

Okay. Thanks.

Your next question comes from Jonathan Smith. Please go ahead sir.

Hi, it is Jonathan Smith at Dresdner Kleinwort Wasserstein. You mentioned before alternative carriers and the issue of the maximum number of minutes they use. Could you give us any indication of how many contract sims might currently be used in GSM gateway devices by alternative carriers on your network?

Our calculation is about 200m minutes.

Is there any indication of how many actual sim cards that might represent?

That may be something between 2,500 and 3,000 sims.

Thank you.

Your next question comes from Theodore [Listos]. Please go ahead.

Thank you. Just a quick clarification please with respect to CAPEX, which is in the cash flow statement mentioned as being €95.6m for the six month period versus €87m that is reported within the text of presentation. Just a quick clarification there please?

The €87m, the invoice [indiscernible] CAPEX, while in the [indiscernible] according to the [indiscernible] accounting standards, we present [indiscernible] but how many was repaid from the invoice that we received last year. So this is the cash flow on [CAPEX], while the €87m is just the [additions] [indiscernible].

Thank you.

We have one further question from Christian Kiano. Please go ahead.

On your EBITA outlook for Greece, the margin has come down slightly more than a percentage point year-on-year. Do you see margins stabilizing around these levels for the second half? Normally, you lose a bit more in the second half. Can you give us some steering there? Thank you.

I think stabilizing and gradually growing [inaudible], it has been diluted from [indiscernible] merchandize, because we now have in place the Vodafone shops. All the merchandize appears on our revenue. The more successful they are on dilutives, they are on this specific margin. On service revenue, we stand at 42. On service revenue, I think it will remain flat and slightly growing. Maybe for the next financial year, it will be a point up.

Next question please?

The next question comes from Jonathan Smith. Please go ahead, sir.

A follow-up question really from the previous one. You mentioned that margins can stabilize and perhaps gradually grow in the second half because merchandize sales have been the diluting effect previously. Can I infer from that then that subscriber growth might be a bit weaker in the second half than it has been in the first?

Subscriber growth is now at a steady pattern because the commercial premises in the market [indiscernible] subsidies, we would expect to see lower growth of net [indiscernible]. But we would also spend more money on [indiscernible] schemes trying to retain the good customers. Revenue wise, it will have a positive trend. [Indiscernible]-wise we will be at the same levels, slightly lesser merchandize, but then to improve margins.

Thank you.

Your next question comes from [indiscernible]. Please go ahead.

Good afternoon. Could you give us some indication about how you intend to spend the cash generated in the second half of the year? Would it be for debt reduction equally as in the first half of the year?

Cash generation is on a positive trend. So the first priority for the company is to reduce debt. The second is to [estimate] as far as 3G is concerned. Then the other priority goes to dividends and these are not management decisions, these are shareholder decisions. These are decisions [indiscernible] after the [recommendation] of the board.

So it is a bit tricky. Right now, we are on a positive cash flow basis and what we are doing is we are reducing debt to the company, which will ultimately mean better dividends.

Okay, thank you.

Your next question comes from Russell Waller. Please go ahead.

Hi, thanks. You say that debt reduction is your first priority and that you will use the cash. What is the sort of target level of gearing in sort of net debt to EBITDA that you would consider to be efficient before you would then reconsider gearing up the balance sheet, be it through either dividend buyback or investments etc?

There is no target in place. I think the issue regarding the strategy and shareholder desire, the strategy is in place to continue investing. There is going to be a demand for cash for a number of years. I think the level of leverage of the company that will be [indiscernible] decided with the shareholders. So it is very difficult to say what we will do. But it is a positive issue to discuss.

Sure. But you envisage a potential story here where 3G CAPEX spend might be sufficient to re-gear your balance sheet? I mean is that what you are saying or are you saying that there might be investment opportunities outside of Greece?

This is the situation today. Going forward we may have additional opportunities for additional investments [indiscernible] business to be proven in the marketplace. I make a statement and you formulate an opinion on that, it is a fluent issue.

Okay, thanks.

Sir, there are no further questions. Please continue.

There are no further questions? I would like to close the session and thank you very much for participating in this conference call.

That does conclude our conference for today. For those of you wishing to review this conference, the replay facility can be accessed by dialing the UK on country code +44 1452 550 000 or for UK callers on 0800 953 1533 and the reservation number is 727029. Thank you for participating. You may all disconnect.