Vodafone Group PLC (VOD) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Interim Results Presentation. I'd like to take this opportunity to welcome the various participants on our webcast as well.

The agenda for today, or for the next hour or so -- can I go back 1, please? The agenda for today is that I will be presenting to you the first year -- first half highlights. Ken Hydon will follow me, and he will talk about the financial review of the Company. Sir Julian Horn-Smith will follow Ken, and he'll talk about our operating highlights. And for the first time we're going to be talking about Spain, which is very exciting.

Following him is Peter Bamford, who is our Chief Marketing Officer, and he'll be talking about 3G. And in particular, the commercial thinking and the pricing in our major markets, which I know is a subject of some interest to all of you.

And finally I'll come back and talk about the outlook, both for this year and for next year.

When I think about the last 6 months, the key highlights for me are 1, that our businesses are performing well. No matter if you think about our business here in the UK or in Japan or in Germany or in Italy or in the United States or in Spain, our businesses are performing well. And it's on that basis that we are giving you guidance that we are reiterating this year's guidance for the rest of the year.

The second thing that's exciting is that we have launched 3G. Finally, I might add. It's out, the product is good, the services are good, the content is good, the pricing is good, and frankly, we are feeling very good about the fact that it's out in the marketplace and it's doing well.

The third thing that's exciting is that we are making really good progress on our One Vodafone. I know we talked to you about this before, there are a number of programs that we're engaged in. We're pressing hard and frankly, we are beginning to realize some of the benefits that we've talked to you about in the past.

And finally, very exciting is the increasing returns to our shareholders. On behalf of the Board, I want to say we are absolutely thrilled that we've raised our dividends by 100%. We've re-based them, and we've increased our buyback from £3b to £4b. It's a wonderful thing, and we're very happy to be sharing the success of our business and our cash flow with our shareholders.

Those are the highlights for me, and I'm sure we'll have many other things to talk about as well. Let's just go back and look at the financial highlights first.

The Group revenues are at £16.8b for the half year, up 7% on an organic basis. Organic here meaning without the effects of currency and without the effect of the fact that we've sold our Japanese landline business. So if you ex those 2 things out, we're growing at 7%. If you look at our earnings per share, we're growing at 10%. We're growing at 10% because our tax is slightly lower than what we thought, and of course, we are engaged in buybacks that helps our earnings per share. And obviously there is good underlying growth in the business.

If you think about our business not on a statutory basis but on a proportionate basis, and here of course we'll bring in the value from our assets in the United States and in France, Group revenues are £21.2b for the half year. And organically, we're growing at 10%. Our Group EBITDA is growing at 10%, and our Group EBITDA margin is at 39.2%.

If you ex the increase in our Japanese business, we've taken our Japanese business ownership from 70% to almost 98%. So if you do it on a proportionate basis, we are flat year-over-year. Obviously Japan is a lower margin business, and therefore pulls down our Group margin by either 0.4% or 0.8%, as you can see on the slide.

The bottom line is we are growing nicely. Our margins are relatively stable, our businesses are performing well.

If you then go to free cash flow, we produced £4.3b of free cash flow in this half year, which is up almost £500m year-over-year on an underlying basis. If you take away the hedging gains that we had and again, Japan Telecom like-for-like underlying our free cash flow, is up by £500m. Again, a very good performance. We are on our way. We've previously guided you to £7b. We're well on our way to producing the £7b.

Let's go back to customers for a moment, because customers are fundamentally what is driving our revenue growth here. We now have over 146m proportionate customers on a global basis. In this past half year, we've added 7.4m customers around the world on an organic basis. If you combine the organic and the stake changes, our customers went up 13.3m customers. We're seeing strong growth in Spain, strong growth in the United States, strong growth in the UK. We are seeing good growth in our customers around the world.

If you look at our ARPU trends, there are 2 fundamental drivers to ARPU. 1 is basically what's happening to our minutes of use and our data revenues, which are increasing, and what's happening to our incoming termination rates, which are coming down. When you net for all of that, we see ARPUs in line with our plans. UK, Spain and Italy are doing well. Germany's off a little bit, macroeconomic reasons and prepaid cards, and Japan is down because of certain tariffs and competitive positioning in Japan. Julian will go into the details of our ARPU trends, but from a top line perspective they're in line with what we're thinking.

Talking about fundamentally what's driving our business, we've talked about customers. We should talk about minutes of use. Our minutes of use, year-on-year on this half year, are up 9% to almost 84b minutes of use. If you think about our non-voice services, data services, as a percentage of service revenue, we've gone from 15.5% up to 16.5%, good growth in our data revenue as well. Fundamentally, it's customers, minutes and data that are driving our business forward.

If we then move onto the commercial side of the house, 1 of the things I hope you're noticing is that we are beginning to address our customers on a segment-by-segment basis. So for example, if you look at our Vodafone Mobile Connect Card. We've launched this product in service, we've now launched it with 3G. We have over 100,000 3G data cards out there, and between GPRS and 3G, we have 323,000 data cards out there. Impressive growth.

If you think about our new Vodafone Blackberry, which we have launched. A Push Email product, it too is doing very well in the marketplace. If you come down to our flagship product, Vodafone Live, we have 11.3m customers in our controlled subsidiaries, and when you add our affiliates, we have got 13m customers for Vodafone Live.

The reason is really 2-fold. 1 is we are segmenting our customer base and delivering products to our customers on that basis. And frankly, all these products give us comfort that when our Vodafone Live with 3G comes into full bloom, that customers will be willing to spend money on these products and services.

Talking about 3G, we launched our 3G services, consumer services, last week. We've talked about this being a new era. It's a new era because it lets us go after the big telecommunications pie, more minutes coming to our networks. And of course, you've seen our big bundles here in the UK, the £40 and £60 500 minute/1,000 minute bundles. Good stuff. It's coming our way. We'll be pressing hard. Peter's going to talk more about that. We're entering Wireless Broadband IT Space, again good stuff, with our data cards. We're entering the entertainment information space with Vodafone Live and Vodafone Live 3G. Again, we are beginning to press in other areas where we can get revenue for our business.

The second thing I'd like to say on 3G is that Vodafone is in the lead here in Europe. We're in the lead not just because we've got great terminals, not just because we've got great products and services, whether it's full length music downloads, not just because we've got great portals and content, not just because we've got attractive pricing or attractive networks. It's the combination of the whole package. And again, Peter will talk to you more about that. We feel very good that on any 1 dimension, a customer -- a competitor can come and compete with us, but on all the 6 or 7 dimensions, it's pretty hard to compete. And here we're demonstrating the scale and scope that we have in our business.

The last thing I'd like to say about 3G is that we're taking 3G sensibly. We know we're in the lead. We're pressing down, but we're not pressing down in a way that is meant to provoke a negative competitive response. So we're doing things, and again, Peter will talk more about the different business models we're using in different countries and different pricing thoughts that we have. But fundamentally, we're putting a stake in the ground and saying in 15 or 16 months we expect to have about 10m customers on a global basis. Half of which come from Japan, the other half will come from Europe, and we expect to see better ARPUs with these customers than with Vodafone Live or with our average customers.

When we met last, at the Investor Day, we spent a fair amount of time talking about One Vodafone. One Vodafone is an important program in the business. We have told you that by the year 2007/2008 we expect £2.5b in pre-tax cash flows on an annual benefit basis to be realized by the Group being 1 company. That's a big number. We're going hard for it. As you know, £1.4b of that is coming from capital expenditure, operating expenditure, hand sets, those kinds of cost issues. And £1.1b is coming from revenue and market share.

We will be giving you more visibility as to where we are on each of our 6 programs when we come back and see you in May. But just to let you know, we're making good progress on each of the things that are listed here. Whether it's service platforms or supply chain management or IT systems or terminals or customer management or roaming, we're making good progress on each 1 of them.

Coming back to dividends, we've announced today that the Board has authorized us to increase our dividends by 100%. This is on an interim basis, but of course we are expecting a similar increase for the full year. And when you add the 2 numbers, fundamentally we have re-based our dividend. And on a going forward basis, we will be increasing our dividends at the rate at which our underlying earnings growth is increasing. So whether it's earnings, earnings per share, those will be good metrics to think about when you think about at what rate will the dividend grow in the future.

In terms of buybacks, the Board has authorized an increase from £3b to £4b, to be completed by March 31, 2005. Up until now we have bought back roughly £1.8b of our shares, so we have roughly £2.2b worth of shares to buy back between now and March 31.

If you then look at what the total amount of return has been or is likely to be, last year we returned £2.5b. £1.1b was from dividends, and -- sorry, I'll take that back. £1.1b was from buybacks, and roughly £1.4b was from dividends. This year we're expecting a payback of £6b. And as you can see, £4b in buybacks and £2b in dividends. On that very happy note, I'd like to invite Ken Hydon, our Chief Financial Officer, to tell you more about our financial position. Ken.

Well, good morning everyone. As you've heard from Arun, our financial results show good operational growth, and a healthy financial position. Total statutory turnover was £16.8b. Growth was impacted by foreign exchange on the sale of our fixed line businesses in Japan.

Mobile turnover grew to £16.4b, an increase of 6% on an organic basis, with particularly strong growth in Spain. This included 12% more non-voice revenues, particularly from data services, which grew faster than messaging. And 4% more voice revenues. And increased usage was partially offset by tariff reductions and regulatory intervention.

Total mobile costs of £8.1b before depreciation, goodwill and exceptional items, and net of other revenues, grew by 4% during the period, leading to a small reduction in the controlled mobile margin. As you can see, we are giving more disclosure on costs. And Julian will go through all those extra details for all our major countries in this presentation.

Increases in net acquisition and retention costs were the main contributors to the increase in total costs. These were due to strong customer growth in both the UK and Spain, where net additions more than doubled, and increased UK investment in targeted retention initiatives. And also our focus on retention in Japan, before the new 3G handsets come through. In total, interconnect and other direct costs remain stable, whilst operating costs in payroll grew by less than 1%. As a result of our global scale driving cost efficiencies, particularly in the areas of network and IT.

Finally, depreciation and license amortization increased by £0.3b, reflecting the timing of the commercial launch of our 3G services.

Organic growth in operating profit before goodwill, amortization and exceptionals, was £0.3b, of which £0.2b came from the mobile operations. With strong contributions in the US, France, Spain and Italy, offset a little by the highly competitive UK and Japanese markets. This organic growth was offset by the impact of foreign exchange movements and the disposal of Japan Telecom last year. The net result was a stable operating profit of £5.7b.

Net interest payable fell by 18%, as a £29m increase in provisions for interest on tax was more than offset by the effects of lower net debt levels. The effective tax rate of 28.9% was 1.5 percentage points lower than in the 2004 financial year. Further reorganization in Germany, creating a more efficient tax grouping, which was partially offset by lower recurring tax incentives in Italy and last year's one-off benefit from the French restructuring. This effective tax rate excludes an exceptional £572m deferred tax credit following the merger of our holding operating companies in Japan.

Excluding any benefits from resolving tax planning issues, next year's effective tax rate is expected to be higher, due to lower recurring benefits in general. Adjusted earnings per share increased 10% to 5.28p, including a 2 percentage point uplift from the share purchase program and a 2 percentage point uplift from lower minority interests as a result of the tender offer we made in Japan. After charging goodwill amortization of £7.3b and exceptional items, the Group recorded a loss for the period of £3.2b, giving a basic loss of 4.78p per share.

Underlying free cash flow, which did not have the benefit of last year's one-off hedge closes. All free cash flows generated by the Japanese fixed line businesses prior to their disposal grew by £0.5b to £4.3b. This included £0.4b of dividends received from Inch of SFR and Verizon Wireless, and a £0.3b of additional capital spend, due to the deferral of payments on capital expenditure from last year.

For the full year we expect tax payments to be around £1.8b, slightly lower than our estimate in May, as a result of timing differences in respect of closing of tax audits and the benefits of the restructuring in Germany.

Acquisitions and disposals include the £2.4b purchase of the Japanese minorities, and £0.2b refund of withholding tax on the disposal of Japan Telecom. Tangible fixed asset additions were £2.1b for the period. 3G additions represented over 60% of Network additions and around 30% of total additions, with over one-third being spent in Japan. For the full year we continue to expect tangible fixed asset additions to be around £5b, with a similar proportion on 3G but a little lower additions in Japan. Next year we expect tangible fixed asset additions to be of the order of £5b a day.

At September 2004 net debt was £8.7b. £0.2b up on March 2004, with a maturity profile that should enable us to refinance in an orderly manner. For credit rating purposes, approximately £1b of AirTouch preference shares should be added to the net debt.

We're committed to maintaining our solid credit profile, also retaining sufficient headroom to finance potential investment opportunities that meet our strict investment criteria. And also, we're committed to further returns to shareholders. All of which means that net debt levels are not expected to fall.

As you've heard from Arun, we've re-based dividends by doubling the interim dividends to 1.91p per share. We intend to double the final dividend as well, and future dividend increases, as you heard from Arun, are expected to reflect the underlying growth in earnings. We've also announced an increase in the amount allocated to this year's share purchase program, to around £4b by March 2005, of which £2.2b still has yet to be done.

To cover these distributions, we have around £8b of distributable reserves in Vodafone Group plc, plus at least a further £12b available in subsidiaries if required. Our healthy cash flows comfortably exceed the dividend. Share purchases will vary, dependent upon maintaining our credit rating and opportunities to continue to invest in growth as we're still in a growth business.

Before I finish, I'd just like to provide you with a brief update on our transition to International Finance Reporting Standards. This project continues to go well. Further to the IFRS update we provided at our recent investor day, I can confirm that our existing UK GAAP goodwill balances will be the same under IFRS as they are under UK GAAP, but of course will no longer be amortized.

On January 20 next year, we're going to provide you with a restated financial information covering the last 18 months, restated outlook statements, and detailed reconciliations from those back to UK GAAP. Whilst our full-year results for the year ending March 2005 must be prepared in accordance with UK GAAP, from April 1, 2005 all financial reports, including key performance indicators, will be on an IFRS basis only.

So in summary, I think you'll agree that we have produced a robust set of results whilst continuing to grow our customer base, rolling out 3G, and managing competitive regulatory pressures. We've also increased cash returns to shareholders by re-basing the dividend and increasing this year's share purchase program to around £4b. These increases came on the back of strong results and the expectation of continued good progress, particularly with the rollout of 3G and the One Vodafone initiatives.

I'll now hand over to Julian. Thank you.

Thank you Ken. Good morning, ladies and gentlemen. This has been a good operational performance during the first half. And I'm delighted to be able to tell you that we're firmly on track to achieve our targets for the full year.

Now a particular highlight of the first half has been sustained strong customer growth across many of our operations, with both quarters showing significant growth over the same period last year.

I'll now review the operational highlights of our major businesses, and for the first time I'll be including a summary of our operational performance in Vodafone in Spain. So here we go.

In the UK we've had a strong first half under the new management team led by Bill Morrow. Focused and intensified acquisition and retention efforts have led to more than twice as many net additions compared to the same period last year. We've also focused on more direct channels, leading to better visibility of these new customers.

This more targeted approach to customer management has contributed to a reduction in churn, particularly in contract churn, which fell from over 26% in the second half of last year to just 22% for the first half of this year. As a result, the UK base reached 14.6m customers by the end of September.

ARPU has continued to benefit from the acquisition of Singlepoint. However, we did see an underlying increase in ARPU as well. And this resulted in part from higher non-voice revenue, which rose to 17.3% of total revenue, driven by text messaging, Vodafone Live usage and the uptake of remote access products such as our 3G data card and of course, Blackberry.

In addition, a higher mix of inbound off-net calls also benefited ARPU, driven by the growth of bundle offerings in the marketplace, which increasingly include off-net minutes. In service revenue terms, the UK had a strong first half with organic growth of 7% driven by customer growth, and a further 6% arising from the acquisition of Singlepoint.

Now the breakdown of costs shows the additional year-on-year effect of our refocused efforts on acquisition and retention. The increase in other direct costs reflects the impact of acquiring lower margin, non-Vodafone customers through Singlepoint. Other operating expenses as a percentage of service revenue remained steady, and payroll reduced slightly following the restructuring program at the end of last year.

The UK business is executing a structured plan to drive cost efficiency that will be realized over a number of years. These trends led to an EBITDA margin of 33.3%, down 3 percentage points on last year. However, this was a strong performance given the UK competitive environment and we continue to expect full-year margins to be up year-on-year, despite the 30% reduction in termination rates in September as we drive further cost efficiencies and benefit from our focused acquisition and retention initiatives.

We've also had a good performance in Germany. Customers are up nearly 10% over the previous half year through a targeted acquisition policy, with a particular focus on controlled channels. Churn has also reduced through focused retention activities. Germany ended the period with over 26m customers and market leadership in net customer additions.

The ARPU trend continued, with a further reduction in the rolling 12-month ARPU to €305, but a combination of factors has impacted ARPU. We continue to see a positive ARPU impact from our bundle and Happy Option Contract offerings. However, the ongoing success of our low spending but very high margin Partner Card continues to be dilutive to blended ARPU. In addition, the last quarter saw a higher level of prepay additions, in part driven by promotions, which further reduced blended ARPU.

In the second half we will also see the previously announced 7.7% reduction in fixed to mobile termination rates. Non-voice as a percentage of service revenue was stable compared to the second half of last year, with SMS penetration and usage remaining broadly stable.

Costs in our German mobile business continued to be managed very diligently. Acquisition and retention costs were slightly lower as a percentage of service revenues, showing the benefits of a highly targeted approach.

Our operating expenses as a percentage of service revenue continue to be driven down. This strong control over cost and drive for efficiency has delivered a continued uplift in EBITDA margin, which now stands at nearly 47%. Germany has turned a very solid performance during the first half, and is poised for continued growth and improvement in margin year-on-year.

Now to Italy. Our Italian business has continued to perform well in all key areas. Customer growth at 549,000 was similar to last year, raising the total number of customers to 21.7m. Targeted retention initiatives, including the ongoing success of Vodafone Italy's loyalty program, have continued to have a favorable impact on churn.

Rolling 12-month ARPU was up 1.4% to €360. ARPU benefited from strong growth, especially in non-voice services, especially messaging, as well as from various voice promotions. Now these benefits were partly offset by the impact of the increasingly competitive marketplace that has seen a 2% reduction in activity levels from the same time last year.

Service revenue growth in quarter 2 was impacted by extended summer promotions, providing reductions in airtime costs to customers, which have been successful in stimulating higher usage. This contributed to a service revenue growth in quarter 2 of 6% compared to 10% seen in quarter 1, giving an overall growth of 8%. While growth in average customers and total minutes was in line with previous trends.

Vodafone Italy has continued to manage expenses tightly. While subsidies remain low by Group standards, the increasingly competitive marketplace led to a small increase of acquisition and retention costs as a percentage of service revenues. Higher usage levels did, however, lead to an increase in direct costs, with increased international roaming leading to higher interconnect costs. However, Vodafone Italy continued to maintain strong control of operating expenses.

So the first half EBITDA margin was only slightly lower than last year, but at over 53% it remains the highest in our principle markets. The competitive dynamics of Italy are likely to remain challenging for the near term, and we see -- and we're likely to see flattish margins. But nevertheless, at that level for the full year.

The recent performance of our Spanish business has been very strong by most measures, based on a highly focused segmented approach to the marketplace. Customer growth was strong, with successful targeting of contract customers, a high percentage of which were business users.

We've launched tariffs targeting higher-value segments, combined with products like our 3G Connect Card. Together with more effective channel management, this has helped to drive this positive result.

Retention initiatives, including a new loyalty program, helped to stabilize churn during the period. The closing customer base of 10.5m was up over 11% on last year. The favorable ARPU trend reflected Vodafone Spain's successful focus on higher-value segments and the use of stimulation promotions.

From November, though, we have seen a further reduction in terminal rates of 10.5%, that will impact the growth rate. ARPU rose 9% on the back of higher contract voice usage and an overall increase in non-voice services fueled by higher SMS penetration and Vodafone Live, which is now enjoyed by 15% of the customer base.

So the combination of strong customer growth and usage increased propelled the service revenue growth rate up to 21%, which is, I think you will agree, a very strong performance.

Looking at the cost base, we see that acquisition spend naturally rose by this -- but this, excuse me, was primarily targeted to the contract base. While direct costs as a percentage of service revenue was stable compared to the same period last year. Operating expenses improved by nearly 1 percentage point to 20.4% of service revenue.

The combination of strong revenue growth and expense control generated a 15% year-over-year increase in absolute EBITDA, with an EBITDA margin of 36.3%. All in all, this was a very strong performance, which has given Vodafone Spain good momentum for the second half.

Japan's customer base increased to 15.1m by the end of September. Customer growth was low in the period, although our market share in Japan has remained above the 18% level. ARPU continued to decline year-on-year, much as expected. We withdraw the Happy Time One tariffs, which had been dilutive to ARPU, and at the end of quarter 1 replaced them with new tariffs that have had a more positive impact on ARPU trends in quarter 2. The slower customer growth and change in mix also led to a small decline in total minutes.

The net result has been a 5% decline in service revenue for the first half, although we expect a lower level of decline for the full year. Year-on-year, expenses were slightly lower, but increased as a percentage of service revenue. Strong competitive dynamics have required higher expenditure on customer retention, as previously highlighted, although tighter inventory control has resulted in a reduction in the provision for slow-moving handsets.

We've also reduced our cost base in the period, through a series of initiatives that are part of our ongoing transformation plan. Higher retention activity and lower revenue have been the main reasons behind the lower EBITDA margins year-on-year. For the full year, we continue to expect margins broadly similar to last year's second half, as we begin to become more competitive with our imminent wider launch of 3G.

As you know, we've started to transform our Japanese business in recent months. I'm confident that we've taking the right initiatives to once again become a stronger competitor in the Japanese mobile market.

I'll now conclude with a brief review of our US affiliate, which furthered its truly remarkable performance during the period. Verizon Wireless was the market leader on nearly every KPI. The first half saw record net additions of over 3m, and a market share gain amongst the national operators of 0.4 percentage points.

Targeted customer retention initiatives, attractive tariff plans and growing brand preference drove churn measures measurably lower, enabling Verizon Wireless to close the period with over 42m customers. The growing popularity of larger higher-value bundles and strong take-up of non-voice services, although still small as a percentage of service revenue, drove a 4.6% increase in ARPU year-on-year.

Verizon Wireless benefited from the combined effects of strong cost control and scale benefits, thus lifting the EBITDA margin to an all-time high of 39.3%. The momentum Verizon Wireless has built up positions the business well for a continued strong performance.

So, this has been a solid operational performance from our Group in the first half. Our margin performance has been robust given the strong customer growth and increasing competition, and we have delivered good underlying growth in service revenues. We are well positioned to deliver further benefits as we launch 3G and drive efficiencies from our scale and scope.

Thank you. Peter.

Good morning. I thought the music wasn't going to stop. I would like to update you on our progress in launching and commercializing 3G. And in particular, to focus on a number of aspects of our commercial strategy.

The key highlights are that during 2004 we have launched the 3G Mobile Connect Card in 13 countries. Sales are now over 100,000. Customer satisfaction continues to be extremely good and the rate of sale continues to increase.

And secondly, of course, in the consumer market we announced the global launch of Vodafone Live with 3G last week, in 13 countries again. And it's important to say at the outset that the market reaction that we have had from customers and distribution channels in particular has been extremely positive. There is, I think, a realization that Vodafone has begun to make a reality of many of the things that with 3G have been talked about for a number of years.

So when we announced Vodafone Live with 3G, we described how we were enhancing Live itself, the established platform, with the power and the speed and the bandwidth of 3G. We described 10 new terminals, the 7 exclusives, the new and enhanced services in particular. All aspects of video, 3D games, full-track music downloads. We also described the new, more exciting and easier to use portal and the expanded range of content to support the new services.

And the pricing on both voice and data, and the underlying strategy by which we built our networks to focus on quality, on depth, on seamless handover with 2 and 2.5G. And to focus the build on where we know our existing Vodafone Live customers are and where they use their phones.

So since you have heard and seen most of what lies behind this over the course of the last few days, I'm not going to go into any more detail except with regard to the pricing and the commercial strategy.

So firstly, and importantly, on pricing. 3 key elements here - the new data and content model, the data and content promotions, and the voice pricing. So the data and content model, and this is about the principles we're applying in Europe and the principles that we're applying, there are 1 or 2 local variations. But fundamentally, it's a move from an old model, which was around customers paying to browse, paying then to download services, and those charges being related to the amount of data. The volume of data, the number of kilobits.

Now, our customers say to us this is difficult to understand and we know that it is a barrier to usage. So what we've sought to do with the new model is to simplify that with free browsing on-net, paying for the service with a service and event or a subscription charge, and those charges being related to the value of the service to the customer as best we can judge that. And in a number of markets we then overlay for a fixed charge a bundle of content and data services. So a mixture of downloads, in some cases video calling, but there's a bundle to a fixed charge.

So from a customer point of view, this delivers greater transparency, much easier to understand. From our shareholders' point of view, the differentiation we're creating here between what is on-net or on-portal and off-net, combined with the other aspects, we believe gives a good opportunity to increase usage and revenue and value.

Again, overlaid on this in the local markets are a series of promotions. And basically the promotions are about free access to packages of content for a limited period, anywhere between 1 and 6 months. And those are designed to stimulate trial, penetration, usage and in the long term, revenue from those services.

Now, where we've put that model in place and where we've had the new portal in place with it, we've tested this in Germany, and we're seeing some very significant increases in browsing and some very significant increases in usage. Now, these numbers I'm showing here are indicative but it does give you a measure of what the potential is for making -- by making life easier for our customers.

So if I now move to voice pricing, the principles here are that we align with the established local pricing and tariff structures. Which, as you will appreciate, are different in each market. But the focus is on more value for higher-spending, higher-usage customers, and about structuring the tariff so that it specifically encourages more voice usage. And if you like, what we're doing here is a very measured and careful move along the elasticity curve.

So if I go into some specifics of our major markets, and there is -- as the slide describes, there is a spectrum of approaches here, which is for 2 reasons. 1 is each market is different, but also it gives us some opportunity for some learning to see which mechanisms are going to be best geared to generating usage in the future.

So if I start with the UK, which is firmly at the more aggressive end of the spectrum, 1 of the more competitive markets. We described the Hero tariffs, the big bundles, at 500 and 1,000 minutes with text and content built in. These are positioned above the average level of spend in the consumer market. And they're also very, very precisely targeted to offer more value than the long-term established competitors but still at a significant premium above 3 which we judge that our proposition has the quality and breadth to sustain.

It's also important to say in the short term that these tariffs are available through direct distribution channels only.

In Germany we have built on the success of the off-peak bundles which have been running. An offer for an incremental €5 a month, a package which gives 1,000 weekend minutes and a package of content with that.

In Italy there are no new voice tariffs but we're offering at point of sale €200 of on-net airtime at the point of sale to stimulate the penetration and the take-up.

In Spain there are 2 tariffs which, for thresholds of €50 and €100 a month, offer customers the opportunity to have reduced rate, significantly reduced rate calls to 3 customer -- 3 numbers which the customer selects.

And finally, in Japan there are no new voice tariffs. We are, with the launch of 3G in Japan, launching new data pricing, which is a combination of a flat rate data tariff, a new bundle tariff, and for the first time event pricing on picture and video messaging.

So if I then come back to really my second key point, which is on the overall commercial strategy. It's a combination here.

First of all, of subsidies, where with the Live with 3G we're not changing our subsidy strategy in each market and there is no significant increase in subsidies to support 3G. Now, it is true that the higher-priced terminals will in many instances require higher subsidies to ensure the take-up in the marketplace. But that is absolutely in the context of the kind of subsidies we've put behind Vodafone Live to drive penetration over the last 2 years.

It's also about driving higher ARPU, where there is clearly an implied investment in the new bundles on voice and data, where they exist, and with free browsing. But the return and the greater offset comes through increased voice usage, increased data usage, and driving the share of high-value customers.

And the final point here is that we will actively manage through our customer bases the upgrade programs to make sure that we optimize the trade up opportunities and the trade down risks associated with putting the new voice bundles into place in the markets where they are in place.

So in summary, I believe that Vodafone, with the quality of our offerings in both the business and the consumer market, leads the way. Vodafone Live in particular is a complete integrated end-to-end proposition, where the combination and the totality is the thing that will ensure that it wins in the marketplace. We have put in place a commercial strategy aimed at driving trial for the new services and value enhancement.

And put it all together, the combination of 3G and our existing Live and Connect Card propositions, gives us the platforms for sustainable differentiation and incremental revenue growth in the future.

Thank you. Arun.

Thank you Peter, Ken, Julian. You've now heard the story of Vodafone in the last 6 months. I'm here to tell you a little bit about the outlook, where we're going from here and what does next year look like.

We've described to you that we're having stronger than expected customer growth. On that basis, we're taking our guidance up to around 10% from high single digits. On every other measure, we're simply reiterating our guidance for this year. So on revenue growth we're in the high single digits, on EBITDA margins we're broadly stable, on fixed asset additions we're around £5b, and on free cash flow we're around £7b.

When we look forward to the following year, fiscal year '05/'05, first of all, this guidance that we're providing you is in UK GAAP format. When we meet again in January and we talk more about IFRS, we will then translate this into IFRS guidance. That'll happen in January.

But on a UK GAAP basis, customer growth for next year is expected to be in the high single-digit category. Our organic proportionate mobile revenue growth is likely to be in the high single-digit growth category. Our proportionate mobile EBITDA margin is likely to be flattish, and our fixed asset additions are likely to be around £5b again.

So fundamentally we're growing in the high single digits and we are doing the best job we can with customers and revenue and earnings.

In summary, we've had very good performance of our businesses. Japan is still on a turnaround path. We said this to you before. We said this to you 6 months ago, that Japan was a 12, 18, 24-month turnaround. We're 6 months into it. We're pleased with the kinds of things they're doing, but we have a ways to go yet in Japan.

3G is off and running. One Vodafone is doing well. We've reorganized the Company so that we can provide more organizational efficiency and direct line of sight to the customer. The guidance for this year is reiterated broadly, and the guidance for next year is high single digits. And frankly, we're delighted to have substantially increased the returns to our shareholders.

So with that, I'd like to invite my colleagues to come up on stage and we'll be very happy to take your questions. While colleagues are coming up, I just want to briefly introduce Tom Geitner, who's our Chief Technical Officer and also our One Vodafone Director. If I can ask you to be so kind as to raise your hand and when I spot you, please state your name and your affiliation so that everybody on the webcast can hear the question and hear, hopefully, the answer as well.

I'll start with the gentlemen up front here, Paul Ruddle.

Thanks Arun. Paul Ruddle from UBS. Can I just ask a couple of questions on the details within the cost analysis? First of all, in terms of what's going on in the UK. You made the point that the other direct costs in the UK had risen by about 69%, I think was the figure you disclosed, which is pretty much the 3 percentage point decline in the UK margin from that other direct costs. And you were saying that's non-Vodafone customer additions through the service providers. Can you just explain what's going on there and whether this is a transition that we're seeing or whether this is a new structural base in terms of how that cost line is working? That's the first question.

And the second question is in Japan. From my calculations, it looks as though despite the fact that you've had the revenue coming down organically, the pre-customer investment gross margin has gone up by 1 percentage point, the EBITDA reported margin is obviously well ahead of what you're guiding to for the full year. And I guess what I'm trying to understand is whether the position that you stand in today is better than the 1 that you thought you would have 6 months ago, and whether this gives you the chance to be slightly more aggressive now that you've got the 3G rollout in Japan for the rest of the second half.

Paul, let me take your second question first and maybe I'll talk a bit about the UK. Peter or Julian, you can add in as well.

So let's go back to Japan. Japan, we're exactly where we thought we would be 6 months or so ago. We have a new Chief Executive. We have some new commercial and pricing policies. We're pressing on on direct distribution. We are going from 9 companies to 1 company aggressively. We've just launched 3G there and handsets will come in in quantities, and we'll start making the difference in the next 6 months or so.

So I would say we're no better, no worse off. The margins are a bit higher but on the other hand our customer growth has not been as robust either. So I'd say we're in the zone that we were expecting to be in, and frankly the next 6, 12, 18 months are critical in making sure that we can get traction in Japan.

On the UK, I'll ask my colleagues to join in but let's just understand the UK story in broad terms first of all. In the last 6 months we've clearly been more aggressive in the UK marketplace. We're taking a little bit of share. Most of our additions that we're taking are coming from our direct channels, which we feel good about because they give us better ARPU and better churn.

As we look forward, we're guiding to a margin which is higher on a year-over-year basis. That takes into account all the Singlepoint issues, etc. One actually doesn't have to drive down there because it's on the basis of strong revenue and stable customer growth in the first half, and strong cost controls in the second half. That's the reason we feel good about the fact that even though interconnect costs are coming down 30% we will have a margin improvement, albeit a modest improvement, year-over-year.

Julian, Peter, do you want to add anything to that?

I'll deal with the other costs, if you like. The other costs [are unusual] but the increase is due to the fact, as Arun just mentioned, we have bought a business called Singlepoint. And that, whilst it has a lot of Vodafone customers, it has some O2 customers as well. So the costs that O2 charges us for those customers, which we bill, that goes into other costs. And that's through the increase in other costs year-on-year. It's a very low margin business, I might say.

Paul Howard.

It's Paul Howard at Cazenove. A couple of questions. Firstly on the voice strategy going forward. You talk about targeting price elasticity, the high end of the customer segments. How convinced are you there is price elasticity at that end of the customer segment? I'm probably -- I suspect there is at the bottom end but I'm not sure there is at the top end, if you like.

And then the second question, there is some improvement on non-direct -- sorry, on other direct costs in the year for the Group. Where's that coming from and is there scope to do that going forward? Reduce interconnect, lease line costs, etc., as a percentage of revenue.

And then a final question on 3G spends. I may be wrong in this, but I think your guidance for 3G spend may have slipped by 5 percentage points from 35% to 30% in total CapEx. Is that -- is there anything going on there? Are you spending less on 3G than you thought a few months ago?

So Paul, let's go to that price elasticity question first. Different markets are on different pieces of the demand curve. Markets such as Germany, for example, are high on the price point and we will see less elasticity in some of those markets. As you start coming down on the price point, you find greater elasticity. We'll find that, for example in the United States. There's clearly elasticity but they're even further down on the demand curve. Markets such as the UK would be in the middle zone there, and then markets like the US will be even further down.

So 1 of the points that Peter is making is he's saying we're at different points in different places. We are where we are, and we will gently, gradually make sure that we understand where we are on the price elasticity curves before we change our pricing model. Because 1 of the things we absolutely want to maintain going forward is the business model that we have in our business. We don't want to be in a -- we don't want to find ourselves that we have fundamentally changed the business model, which is not as profitable for our shareholders. So we are careful about how quickly we march down the elasticity curve.

On the 3G capital, there is no fundamental change to our 3G strategy here. We're building out our networks. By and large we're 60% cover. We will continue to make our networks where there is lots of usage to be dense, because I think that's 1 of the things we've learnt from Japan. And we'll keep going from 60% to 70%, 80%, so there's nothing material about that.

Ken, do you want to take the other costs in terms of places we might go there? Or even Thomas, because you've thought about reduction in lease line costs here?

We have clearly not reduced our 3G costs, I think. But indeed we are reshuffling the cost structure quite a bit as we're introducing 3G, simply because we want to avoid 3G increasing our costs because we have a broad -- a bigger network and require more leased lines, and you'll see that is reflected in some of the numbers reported.

Victoria.

Good morning. Victoria Granger from Cheuvreux. Can I kick off with something I heard you saying on Bloomberg TV this morning, that the dividend growth was going to be linked to earnings growth going forward? So does that mean whatever payout ratio we end this year on is the 1 we should extrapolate forward on?

And then secondly, your aggression and your relative strength in Spain. Is the aggression likely to continue in the second half?

And finally, if I can, on churn and stickiness. Year-on-year, all your churn stats improved except in the UK and sequentially they all improved, including the UK. Are you seeing some material change in stickiness problems with your data services or whatever it might be? Thank you.

Thank you Victoria. So first of all, I think I said that here as well. We've re-based our dividends. On a going forward basis we'll be looking at the underlying earnings growth of the Company. The Board will obviously look at a number of other factors, but that will be the key factor in deciding at what rate we grow our dividends in the future. So that's fundamentally the path that we're on. We've got a certain payout ratio and the payout ratio will change according to what the Board decides the dividend increase is to be.

In Spain we have robust performance. We are competing well. We've got good products. Now with our launch of 3G, both on the consumer and on the business side, I think we will continue to see traction in that market. We've got good customer satisfaction statistics coming out of Spain. We have a good management team in Spain. So we expect Spain to continue on this track for the foreseeable future.

With regard to churn, what I'd say is that I think all our management teams around the world are paying a lot of attention to churn. Churn is the single biggest cost in our business. Obviously we would like to find a way to reduce churn. There's a lot of emphasis in the Company on churn management. And yes, we're seeing somewhat better statistics across the board, which is good, but I wouldn't draw the conclusion, and therefore fundamentally there is more stickiness.

Frankly, as we move into the 3G world, as we move into Vodafone branded terminals and the strategy with terminals, and the strategy with bundles, and the strategy with other kinds of things that customers might use us for, we are hoping and expecting to see that our churn performance improves. Because they can only get these services from Vodafone. But it'll be too early to call it today.

Simon.

Thank you Arun. Can I just -- it's Simon Weedon from Goldman Sachs. Can I just ask you 2 questions? Both -- well yes, 2 questions. Both really related to dividends paid, either minorities or subsidiaries -- either minorities or associates. You mentioned in the release that Verizon has the right to ask for a dividend, out of Italy there may be a tax change that may cause a dividend to be paid out of Italy. If a sizeable dividend were paid and Italy was to, say, gear up, would you then be liable for a withholding tax payment on the balance? And can you give us some -- on the bit that you get, this 76% that you get. And can you give us a sense of how much that might be as a percentage and whether or not it's provisioned for already in your balance sheet?

And the other way round, looking at Verizon Wireless, my understanding of the shareholders' agreement, which may be wrong, is that if Verizon Wireless goes down to net debt zero at some later point and then moves into a cash balance, Verizon Wireless cannot lend that money to Verizon Communications. So they can't effectively do what you've done, which is put funding on deposit with the Group from Italy. Is that right and is there a way round that from Verizon's point of view? Essentially are you saying that unless they start to distribute at some later point, the cash balance will just get bigger and bigger of Verizon Wireless?

Simon, I'll take the easier of the 2 questions and I'll give Ken the harder 1. Ken, you're getting the Italy question and I'm going to take the US question.

So your description of what happens if no dividends are paid on the United States in Verizon Wireless is accurate. So fundamentally we have $15b worth of debt on Verizon Wireless' books today. We've just announced in the last 2 weeks that we are purchasing $3b worth of NextWave spectrum. And frankly, from time to time we might buy other spectrum, just so that we can fill out our footprint. We have a sizeable amount of debt. We will now be using the cash flows of the Company to pay down the debt. In many years, the debt will be paid down and at that stage cash will start building up. It's a hermetically sealed system, and so the cash has to stay here. And frankly, we're hoping that in time we'll be able to talk about what a sensible dividend policy on a going forward would be.

Italy, Ken.

Italy. Your question has 2 parts. Do we have a provision in the balance sheet for tax payable on a dividend from Italy? No, we don't.

Is there a tax payable on a dividend from Italy? In principle, yes. We've got a lot of very clever tax people in the tax area in Vodafone, so they'll be working hard to optimize the situation. And so today it's impossible to say how much that tax might be, not only for the reason that we're working on it but also no one has declared a dividend yet, no one has asked for a dividend. And if Verizon were to ask for a dividend, then how much is the dividend would determine partially what the tax solution's going to be. So that's not predictable really today.

Damien.

Hello. [Damien Gedham] from Morgan Stanley. A couple of questions. Firstly, in the domestic mobile operations of Deutsche Tel, TI, Telefonica, they've all shown a big slowdown since you started to push to take a little bit of market share, about a year ago. I just wondered if you'd seen any recent evidence of changes in their commercial policies that would suggest they're starting to think about fighting back.

And my second question was on something, like Victoria, I saw on Bloomberg this morning, which was Arun Sarin, CEO of Vodafone, says ARPU going up. Now, obviously your guidance for next year implies ARPU flattish, subscriber growth in line with revenue growth. So I just wondered if there was a timing difference there? Or is it the Bloomberg journalist was getting a bit over-excited or what's the background? And if ARPU can go up, where is it going to come from?

Okay. So your first question first. Sounds like many of you watch Bloomberg. 2 out of 2 data points there. In terms of are we seeing our competitors systematically saying that they want to change their commercial policies that are visible in the marketplace, the answer to that is no. Now, we've just done 3G and we've announced some new pricing plans, which Peter has given you a spectrum of what -- Our sincere hope here is that frankly, that as an industry we march from 2G to 3G in a sensible way. And frankly, being a big player, being a leader, we want to exercise prudence and judgment as to how we go forward in time.

But the short answer is no. On the other hand, we do have the entire business system of 3G worked out, and frankly, it's taken many, many hundreds and thousands of employees on our side to perfect the system. And it's going to be a while before people can actually say - and I have this entire business system as well. So we have a competitive advantage, and we will use this competitive advantage but we'll use it prudently.

Now, on the Bloomberg question, I've got to tell you I can't remember talking about ARPUs going up, knowing fully well that I was coming to you here a little later today to talk about ARPUs being flattish, etc. The question may be in the context of longer term. Could we see ARPUs going up? As we've described, we are taking substantial reductions in incoming termination rates. The basic things in our business, such as customers, minutes, data, are all going up.

So at some stage, when we've bottomed out some of these termination cuts, etc., could we see ARPUs going up? That is our sincere hope. As we take more and more customers from 2G to 3G, given that in a 2.5G world we see 7 plus percent of ARPU lift, we certainly hope that 3G will be an even better experience for our customers.

Fanos.

Yes. It's Fanos Hira from Bear Stearns. A couple of points of clarification, please. Firstly just with respect to Italy. You mentioned this £4.4b cash on deposits. Is that a good proxy for distributable reserves within Italy now?

And secondly, I understand totally what you said about dividends going forward. But should we still view organic cash flow as being for the shareholders and the balance sheet for acquisitions, [running] almost a perpetual buyback in place at Vodafone? Thank you.

Ken, do you want to take the first part and I'll attempt the second part?

Yes. Dividend distributions are set out in the shareholders' agreement, and there are all sorts of caveats and conditions. So I won't go into them all here now. So you can't just look at 1 figure and say that is automatically distributable but I think it's fair to say that with the Company in the stage it's at now, the cash balances are distributable. Whether the full distributable reserves would be distributable, that's a separate assessment.

Fanos, on your second question. As you can appreciate, it's really a question for the Board to decide year after year after year, what the dividend policy is and what the share buyback policy is. But in broad strokes we've said that we don't want to de-lever the firm. Clearly we have free cash flows that are greater than our likely dividend payments in the future. If you're not going to de-lever and we don't have any bolt-on acquisitions, we will have to do something. And that something, of course, is likely to be share buybacks.

So I would say that as the Board thinks about returning monies to shareholders, the Board thinks both in terms of dividends and in terms of share buybacks. And the question of course is what is the proportion of each of those 2 in any given year, given the financial performance and the prospects of the Group.

Jerry. If it isn't entirely clear, I'm trying to go 1 question on this side of the aisle, and another question on that side of the aisle.

Jerry Sinclair from Citigroup. Just 1 question. You've got a lot of discretion about gross adds, about how fast you invest in customers, and the customer growth has been very strong. If we leave churn to 1 side, which obviously drives net adds, can you go into more detail about how you think about the current level of customer growth? Do you believe that you're in a land-grab phase while competitors don't have [a quick] competitive product? Or would you rather say that the current level of expenditure is a cyclical norm, this is what we should expect indefinitely? And would you put that in terms of the absolute amount of expenditure or in terms of SACs per gross add or SACs as a percentage of sales?

Julian, you want to take this question?

It's a big question, actually. Well, first of all, when we looked at gross adds, we took a view that this year we -- looking back at the, let's say the mistakes and the good things that we've done in the past, we would take a more aggressive position in the first half of the year. And we've seen that come through successfully. We cannot really divorce churn rate, as you did, as part of the formula, because we look very carefully at how we will use SACs and SRCs in an optimal manner.

Now to gross additions themselves in isolation, we look at where the most effective targeted acquisitions of customers will come from by looking at the different distribution channels that will deliver them. We know full well that certain distribution channels will actually give better ARPU and lower churn rates than others. Thus our growth at some of our own outlets, indeed our tendency to focus on certain distribution channels, it is actually quite a big subject. But in essence, I don't think we're likely to see a reduction in our marketing -- market activity, certainly for the rest of this year and possibly beyond.

I guess that must be for me then. The very long-term answer is -- to your question about land grab, this is not about land grab, this is about having a competitive position and exercising it with a prudent outlook here. Like I said a little while ago, we are market leaders. We want to make sure that we transition to the world of 3G in a sensible commercial way, so that the business model is not negatively impacted. And you will see us follow that track in time.

Christian.

Thank you. This is Christian Maher at Investec. Can I just ask 2 questions? Firstly, on -- coming back to this point on distribution channels and the investment you're making in your own distribution channels. Could you just expand a little bit on that? And also on why some of the early 3G packages aren't available in any other stores other than your own, I think, in some territories?

And secondly, just on Japan. Given that you're going to have a better product in the second half, can you talk a little bit about how you anticipate the competition to react?

So, we are strengthening our direct distribution channels virtually everywhere around the world. Our experience is that when we get customers through our direct channels, they give us higher ARPUs, have lower churn, and we're able to spend time with the customer, training the customer on these new things that phones are becoming, essentially. So it's more and more important that we try and bring as many customers as we can. Obviously indirect channels have a very important role to play, but to the extent we can control that, we'd like to see more and more customers coming in through our direct channels.

If you use that strategy and then you apply it against 3G, hence some of our Hero tariffs, etc., are available only through our direct channels in the beginning. And we will see how it goes, and of course over a period of time we want complete market coverage. So we will go indirect at some stage. That'll be a decision that the local market will take.

On the question of Japan, we're just now bringing new handsets into the marketplace. Prices I would say are relatively stable. After people -- after everybody has created data bundle tariffs, prices in Japan are stable at this time. I cannot predict for you where we will be 6 months from now and where DoCoMo and KDDI will be. But we're playing close attention to the situation there and I think our competitive position will improve in the next 6 to 12 months.

Gentleman in the middle.

Yes, good morning. It's Jerry Dellis from JP Morgan here. 2 questions, please. Firstly, within your high single-digit revenue growth guidance, are there any businesses that you anticipate growing a little more slowly? I'm thinking of the 6 to 8% local currency service growth that we've been seeing in the 3 major European markets, obviously with termination rates to come.

And then the second question, just on free cash flows into the March '06 year. I appreciate there are various uncertainties associated with dividends, but when you look through that, how should we be thinking about free cash flows progressing relative to the £7b guidance for the march '05 year? Thank you.

Thank you Jerry. So first on ARPU, we have not broken down at this stage our guidance into slower growth and double-digit growth for an average of high single digit. Frankly, we're still 6 months away from completing this year and then looking forward. So at this stage all we'd like to say to you is that we think our business as a whole, on a proportionate basis, is growing. On an organic basis, it's growing at high single digits.

On free cash flow, I think what we can say to you is that the underlying free cash flow of the business is likely to grow nicely next year. What precisely happens or doesn't happen with Italian dividends, what happens or doesn't happen on taxes, what happens or doesn't happen on the amount of tax dividend that we're likely to receive from Verizon Wireless, not the entire £1b but the tax dividend, there are lots of uncertainties that will become clearer in time. When they become clearer in time, we'll come back. In the [May] timeframe we'll give you our guidance at that stage.

Justin.

Thanks. You may have answered this already. Just firstly on the EPS growth. You're saying dividends are growing in line or broadly in line with underlying EPS growth. Is underlying -- is that EPS excluding license amortization or is it your headline-adjusted EPS?

Secondly, we're seeing other Telco's go through a similar sort of journey from low distribution to higher distribution, and something that other Telco's have done is actually start disclosing of some non-core assets. Could we see a second phase of this Vodafone increasing returns to shareholders, could we see you start to disclose some assets?

And finally, the tax rate for next year, and obviously there's a big one-off from this German reorganization this year. Do we get any -- do we return just back to the 31, 32% tax rate that we're modeling in for next year or actually are we going to get some ongoing benefits from this reorganization that lower the tax rate for next year as well? Thank you.

Justin, thank you. Ken, if you'll take the third question, I'll take the first and second.

So, when we talk about earnings growth and EPS growth, etc., it's clearly without the effects of goodwill, etc. 1 of the things that IFRS will do next year, it'll actually normalize all of that so that you'll be able to look at our underlying EPS growth. So that would be the answer to that.

In terms of non-core assets, we clearly have a landline business in Germany that we could well sell some time in the next 12, 24 months, depending upon who comes to the party and how much people are willing to value that. Outside of that, the Company doesn't have too many non-core assets. Most of the assets that we have are strategic assets that help us build a franchise and helps our customers roam in 1 place or another. So there aren't a tremendous number of opportunities at Vodafone to sell non-core assets outside of our core.

Ken?

[Inaudible]. I think you spotted the fact that as we've got a one-off benefit in Germany this year, the nature of one-off benefits is they don't recur, and so that would mean the tax rate would go up next year.

Interesting to think that next year the tax rate will be completely different from this year as well, because under IFRS we calculate the tax or we [provide] the tax inclusive [indiscernible] undistributed earnings in your subsidiaries and associates. Therefore -- not associates, subsidiaries. And therefore the whole tax regime in terms of the percentage effective tax rate will change next year. So it's not perhaps very relevant to go into too much detail here.

[Inaudible question - microphone not accessible].

Sure, Justin.

[Inaudible question - microphone not accessible].

Yes.

Could you please repeat the question?

I'm sorry. The question was - do we get any ongoing benefit from the German reorganization. The answer is yes. It's like the French one we did and the other German one we did. You reorganize, you're then able to utilize previously unutilized losses, [which there's a] catch up. And then going forward, it's just on a year-by-year basis. So there is a much smaller ongoing benefit, yes.

[Inaudible question - microphone not accessible].

Right. You're right. Under IFRS, the goodwill piece will stop being amortized, but of course the licenses and the fixed assets will continue to be amortized. And all I would say is that we want to find the best measure that describes the underlying growth in earnings without too many factors that are of a one-time nature interfering with it. And Justin, we'll come back and give you clearer guidance as to exactly which line might we be looking at. As you can imagine, when the Board has these discussions they're looking at a number of factors, that being 1 of the factors, total earnings being another factor. So why don't we come back and talk a bit more about that, but think of it as underlying earnings growth.

Gentleman in the back.

Thank you. It's Christian Kern of Citigroup. 2 questions, if I may. 1 on the quality of your customers which you are acquiring right now. How confident are you on the quality of these?

And secondly on competition, and Italy has also shown that the service revenue is not growing as fast as, for example, in other countries like Spain. And I assume that is because of free minutes which you have to give away as part of retention promotions. Should we treat that as a one-off or is that something you feel that competition puts on you on an ongoing basis? Thank you.

Julian?

Well, first of all dealing with the quality of customers. We've got the highest proportion of Vodafone Live gross connections that -- or customers that we've had since we launched the product. And although we've yet to share the impact of that on stickiness, going back to an earlier question, the fact is that there's no reason to believe that they're any worse than any other -- or any better than any customers we've had in the past. Except to say, we do know that where we upgrade with Vodafone Live we see an improved usage. So I would say the quality of customers that we've been taking on should be sound.

Do you want to take the second part?

[Inaudible] second part.

On the Italian service revenue and the promotional activities, promotional activities of course in Italy, as everywhere else in the world, tend to be tactical rather than strategic. However, the underlying competitive environment in Italy is likely to remain as it is at the moment. And so consequently I would expect to see a similar sort of pattern, but as I mentioned earlier this is tactical.

I'm getting a flashing red light here that says "Stop, stop and stop". So I will stop. If some of you have questions, please come on up afterwards. We can chat about it. Thank you very much for coming to our interim results, and have a wonderful day.