Vodafone Group PLC (VOD) 2005 Q2 法說會逐字稿

Welcome to the Vodafone Group plc Interim Results Conference Call. Hosting the call will be Mr. Arun Sarin, Chief Executive, and Andy Halford, Chief Financial Officer. You are invited to join this call on the basis that you are an investment professional, within the Financial Services and Markets Act 2000 Financial Profession Order 2001. You may not disseminate any recording of this call in whole or in part to any member of the public, or to any person to whom the communication may not lawfully be made.

The presentation contains forward-looking statements which are subject to risks and uncertainties because they relate to future events. Some of the factors which may cause actual results to differ from these forward-looking statements can be found by referring to the information contained under the heading, Forward-Looking Statements in our Interim Results Announcement for the six months to September 30, 2005, and under the heading Risk Factors in our Annual Report for the year ending March 31, 2005. The Interim Results Announcement and our Annual Report can be found on our website at www.vodafone.com.

The presentation also contains certain non-GAAP financial information. The Group's management believes these measures provide valuable additional information in understanding the performance of the Group or the Group's business, because they provide measures used by the Group to assess performance. Although these measures are important to the management of the business, they should not be viewed as replacements for, but rather as complementary to the comparable GAAP measures such as turnover and reported items on the consolidated profit and loss account, or the consolidated statement of cash flows.

You will now be granted access to the Vodafone Group's plc Interim Results Presentation. I would now like to turn the conference over Vodafone's Chief Executive, Arun Sarin. Please go ahead sir.

Thank you operator. Good morning everybody. I am here with Andy Halford, I'd like to maybe spend five minutes just reviewing the key highlights of our results. And then we will open up for Q&A.

So the key highlights for the six months are one, we have produced strong operational performance. If you look at our European businesses in particular, they have performed very well, with stable margins and flat margins. The second point around operational performance would be investing in our Japanese turnaround, and I'll come back to this in a minute.

We have laid out a multi-year plan for you in May. We are very much on the milestones of that plan. We have produced basically a net zero customer growth in the last couple of months. We are looking forward to producing much better retention and acquisition as we march forward in the next six to twelve months, so more to come on that in a couple of minutes. Verizon Wireless continues to win in the market place. And we are very pleased with the performance of that company.

The second highlight of the six months is that we are investing in growth. In the last six months we have added 10m new customers. And we now have 5m 3G devices. In addition to all the organic growth being produced in the business, we are also entering markets such as the Czech Republic and Romania, and investments in India and South Africa, to continue the growth of the Company.

The third highlight would be we are delivering global products and services. Whether it's 3G products, whether it's Passport or Wireless Office or simply we are producing differentiated products that is helping us win in the market place in most of our franchises. We will continue to invest in 3G and expand the footprint to about 65% by March '07. And we will introduce HSDPA in the summer of '06.

The fourth highlight will be we are increasing returns to our shareholders. The Board has authorized a 15% increase in dividends this year. And next year we will target 50% of net income as a payout for the year '06/'07. We are increasing our share repurchase program by £2b to a total £6.5b.

And finally for this year we are reiterating our guidance, and for next year we are pointing out certain trends that we see, that I will come back and explain in greater detail. So those are the key highlights of the six months results.

Let me start with Japan. Back in May we had highlighted to you a turnaround plan. Part of the turnaround plan was to improve management, handsets, network content and we've done that and we are continuing to do that. We are finding that we will have higher net gains in the second half than we've had in the first half. The first half was simply around arresting the decline in our customers. We've done that successfully.

In a minute or two I will talk about the guidance for Japan for next year. One of the things you will have noticed from our press release is that our margins were up about 600 basis points in this half year, year-on-year. Most of this margin decline is because we are retaining customers, we are changing our price plans to be competitive in the market place.

In the highlights for next year I will be pointing out to you that our margins will decline further. Further meaning to the high teens, just under 20%, this is because we are accelerating the acquisition of customers. So if we accelerate the acquisition of customers, we will find a decline in our margins. And that's what we are prepared to do, given that next year is going to be a [NMT] year. As we look forward we do see margins then returning back up further. We see a good future for our business, whether it's on the retail side of the house, or the wholesale potential that we see for the business. So all in all we are very much on track vis a vis the plan that we laid out for you in May.

I would like to say a word or two about 3G. 3G is coming along well, 5m customers, handsets are 30% cheaper this year. The handsets have better services, have better battery life, have better functionality. Our run-rate on 3G is clearly accelerating. And one of the most interesting numbers for me is that our ARPU uplift is 10 to 15% like-for-like, 3G compared to 2.5G.

When we were together in September for Analyst Day, the number at that stage was 11%, we now have two more months of data. And as we upgrade our data and look at the data and see what our customers are doing, we think the number now is between 10 and 15% depending on the geography.

Also from a revenue point of view, 3G generated over 7% of the Group's service revenues in September. Back in March the number was only 3%. So very quickly we are finding 3G services becoming very material to our revenue growth.

A word about dividends. We are going to grow our dividends at 15% this year even though the EPS growth is only 8.5%. Next year we are targeting 50% payout for the whole year '06/'07. Future growth in dividends after '06/'07 will remain tied to underlying earnings growth. We think this is a competitive dividend in the market place. And the Board is pleased to be moving in this direction.

Share repurchases, we've added £2b to our share repurchase program, that takes the total number to £6.5b. If you add the £6.5b and the dividends we will be having cash returns of greater than 10% of our market GAAP by returning more than £9b worth of dividends and share buybacks. We've said in the past that we will gradually take our leverage up in our business, as we have distributions, as we do selected M&A, and that's exactly what's happening.

Back in March we had £11b of debt, in September we had £14b of debt and as you fast forward into March of '06, given the M&A that we have announced, and the free cash flow of £6.5 to £7b we expect our net debt to up to about £17b. So this is completely consistent with leveraging the firm appropriately over a period of time, whilst simultaneously investing in our customers, investing in the future, and returning capital to our shareholders.

That brings me to the outlook for fiscal '05/'06. On proportionate mobile revenue terms we are likely to be in the middle of the 6 to 9% range on an organic basis. In mobile EBITDA margin terms we are likely to be at the lower end of the zero to minus 100 basis points that we have guided you in the past. We are going to be bang on in terms of fixed assets. In free cash flow we are going to be between £6.5 and £7b. And, of course, our share repurchases are going up to £6.5b.

Now it may be worth discussing the operating environment in '06/'07 before I tell you what the directional guidance here is. In customer terms, we will continue to focus on building a market leading franchise with customers, which means that we will continue to take a little bit of share from our competitors. We will continue to grow the franchise. In Japan, we expect to gain more customers next year than this year. And the migration from 2G and 2.5G customers to 3G will continue.

On the competitive front, competitive intensity from existing players and new entrants will continue to increase. We also see ongoing termination rate cuts further impacting growth. And the new areas where termination rate cuts are going to be significant are Germany, Italy and Spain. And in terms of capital we continue to build out our systems to a 65% coverage. And we will have HSDPA next summer.

So that's the big picture operating environment, and what that means for our outlook for '06/'07. We are expecting slightly lower organic proportionate mobile revenue growth, principally because of greater impact from changes in termination rates. So we are expecting slightly lower revenue growth next year vis a vis this year. We are expecting, leaving Japan to the side for a moment, a small reduction in organic proportionate mobile EBITDA margin, here in Europe principally but other joint ventures as well, principally because of increased competition.

In Japan we expect further investment in customers that will lead to a reduction in EBITDA margin in Japan. We are expecting slightly higher fixed asset capitalized additions, principally because of HSDPA, and because we want to complete our 65% coverage. We are expecting significantly higher cash tax payments for next year, with a similar increase in effective tax rate.

The result of the above statements on the outlook will result in a slightly lower free cash flow compared to this year. And we will provide much more precise numeric guidance when we come back to you, and talk to you in May, when we will have much greater exposure and understanding of some of the things that we have outlined here.

Those are my opening comments, I am very happy to now go back to the operator. Operator, please set up the questions.

Thank you sir. [OPERATOR INSTRUCTIONS]. We will take our first question from David Slabworth with Highland Capital.

Thank you. Just trying to clarify a couple of things, for the fiscal 2007 guidance, the modest decline in revs, can you quantify that? And secondly in that, how much can you quantify what may be the terminate -- the impact from termination rate changes that you are anticipating in '07? Can you quantify that in any way?

David, I think it’s going to be hard for us to quantify it at this stage, outside of saying that the termination rate cuts are likely to be slightly higher. And that slightly higher termination rate cut is the principal reason for us to be slightly below where we are going to be coming out this year. And I think this will be a good subject for me. Andy do you want to add something to that?

Yes, I think the one thing I would add is this year, if we had not had the termination rate cuts we would probably have been seeing proportionate revenue growth about 1.3 percentage points higher than we have actually experienced. Next year our feeling is that it will be similar in order of magnitude, possibly slightly higher, but in that sort of ballpark.

Okay great. The -- I don't want to beat a dead horse with Japan here, but you just upped your stake there, you have a lot of changes, in the last six months you made some progress. But the -- when you went in and you increased your ownership there, did you expect this type of hurdle, as it's become, to take this long to play out? Or is this something that you had forecasted for, for quite a while?

So we took up our stake in May last year, and we were launching 3G in December and we are sitting here in October the following year. I'd say obviously there have been bumps along the way we haven't been able to see all the bumps. When we first introduced 3G we got a few things wrong from a Japanese setting point of view. We clearly did not see those kinds of things. But equally, as we look at the business now, and we ask ourselves we are investing more capital in the grounds, we've got management there, we've got distribution, we've got content, we've got handsets, and we are feeling good about the turnaround that we highlighted to you in May. The answer to that question is yes.

I just want to make -- get this straight that in fiscal 2007 the margin deterioration is primarily driven by subscriber acquisition costs, if you will? Just putting new users onto the network versus the retention costs that's hitting you right now. Is that correct?

That's correct, principally this year it's the retention costs, and next year, as we grow the business, it's going to come out of acquisition costs. So we are saying that it will be a further reduction, but the reduction is likely to cause a net result of high teens kind of margin. And then beyond that we see a recovery, positive margin beyond that.

So you are looking at less than 500 basis points in the EBITDA margin decline just using this quarter as a, or using this half as a bench mark right, you are in high teens to 20%?

Yes whatever it turns out to be.

Okay. Thank you very much.

Thank you David.

[OPERATOR INSTRUCTIONS]. We will go next to Edward Snyder with Charter Equity Research. Mr. Snyder please go ahead, your line is open.

Hello, I am sorry can you hear me?

Yes we can.

I apologize for that. Regarding 3G, you've got quite a few devices out now, and you've seen revenue increase on a proportional basis. When do you anticipate breaking above say 10%? Messaging still winds up being the largest portion of your data usage, and you were getting most of that before you ever reached the high street system. The question is when do you expect the acceleration to overtake what you've been getting for years already, with the messaging? And when do you start scaling your investment based on the return that you are getting for this for the data portion of it now?

So our data growth is running at about 30% growth per annum. We are very pleased with the take-up of data services when people go on to 3G. I think we reported this morning that compared to 2G and 2.5G, 3G users use data 85% more than 2G and 2.5G customers.

I don't have a precise accurate point for you in the future as to when new data services overtake text etc. But clearly all the signals in our business are good, as we add 3G customers the data services are being taken up. Most of the data services that we are talking about here are things like mobile TV and downloading music, and internet access. And these services are only likely to grow. So we've just scratched the surfaces with regard to many of these services today.

And in terms of the 3G devices you are deploying now you are acquiring more of an operating cost to deploy those, for example in terms of subsidies? Or is the cost of basically getting these devices into the hands of your subscribers the same as some of the lower class GSM phones?

No, the cost of actually putting a 3G phone in the hands of a customer is somewhat higher, but the lifetime value is much better than a 2G or a 2.5G customer.

And how do you calculate?

In economic terms it's a good thing for us to do. But in the near term we obviously take a slight ding for that. We've got many other forces such as cost reduction and one Vodafone's attempt to offset it. And in Europe we are able to offset it completely. But in Japan we cannot offset it.

Thank you.

[OPERATOR INSTRUCTIONS]. We will go next to [Don Sweeney] with [Douglas Lehman & Associates].

I just have a question on the share buyback program as we look into fiscal year '07 and how should we view that, in light of the 50% dividend policy on net income? Thanks.

Okay Don. We will produce a certain level of free cash flow that we are signaling is likely to be lower than this year's free cash flow which is between £6.5 and £7b. It's lower principally because we are likely to pay higher cash taxes. And so whatever that number is, we've signaled already that we want to be at 50% of net income for next year, in terms of dividend payments. So you subtract the second from the first and whatever is left, which would imply that the Board is inclined to return 100% of the free cash flow of the business to its shareholders.

Now this year we are returning much more than 100%, that's the choice of the Board. This is not necessarily a pattern that the Board will engage in, in the future. But equally the Board is interested in returning capital to shareholders both via dividends and via share buyback.

We will go next to [Wei Wong] with Philadelphia International Advisors.

Hi, I have just a general question. Can you help me think about the long-term margin for mobile operators? I am thinking back in the early 1990s the [monopoly] fixed-line operators tend to have EBITDA margins in the 30s, lower 30s or close to 30%. And that right now, mobile operators have EBITDA margin close to 40s. And you have pressure from regulators in terms of the termination rates. And you have new entries from companies like Hutchinson and CapEx is going up again. Just wondering where is this margin going in the long run? Are mobile operators too profitable right now?

First of all it's a question that has multiple forces acting on it. If you start at the top line and say over the next several years, we have more and more 3G customers, in a few years with more 3G customers, more services, higher ARPU uplifts, clearly the revenue line is likely to be trending up. Equally termination rate cuts are something that have been going on for the last couple of years, and will likely last for a couple of years. That has a downward trend. As we are in many saturating markets and we have to go for second sims and third sims, the incremental ARPU from a customer is lower, that's also a downward pressure. So the net of all of that is hard to predict, but in the near term it's going down, in the longer term it's likely to trend up.

In cost terms, when you are putting in 3G it costs the Company money, and when Vodafone programs are kicking in, in much larger chunks next year and the following year and the years after that. So we will see better cost performance from the business on a going forward basis. Very hard to predict what's going to happen to competition. And how much value our competitors put back into the market place through lower prices, that's I think a complete wild card. The more rational competitors you have the less of that that goes on. And by the time you add all of that you've got a picture which you can change depending upon what you believe. We are obviously optimistic about where we are taking our Company, because you know the Board just authorized £6.5b worth of buybacks. The Board clearly thinks this is a good investment to make in Vodafone shares.

Okay. Thanks.

[OPERATOR INSTRUCTIONS]. We will go next to Jeremy Taylor with Lazard Asset Management.

Hi, I've got a question for Andy Halford that I didn't manage to ask at the London presentation this morning. But Andy I think you mentioned a £5b tax liability that you would have to pay back on top of the increase in cash taxes over the next three years. Could you give us a bit more granularity to that liability please?

Yes, we have got in total about £9b of net tax liabilities sitting on our balance sheet, and that number has been increasing slightly year by year. Included within that are some ongoing taxes which we are paying on our normal trading profits. Part of it is what I would call, deferred taxes, which are probably rolling forwards, and for the foreseeable future would be unlikely to crystallize in payment. And then the third chunk for £5b are a number of different situations that have been, and continue to be under discussion with various tax authorities in different countries in the world.

And the point that we are making today is that if we look forwards over the next three years, we think that a high proportion of those will reach the point, sometime during that period, when we will settle them. And obviously at that point in time they will move from being a provision on the balance sheet to actually being a tax cash payment going out of the business. £5b is our best estimate at this point in time as how they are likely to get settled.

But because there are a number of them, and they are complex, and there are discussions in different parts of the world, it is slightly difficult to phase them within the three-year period. But overall we believe that the number order of magnitude will be around £5b. If we can settle them for less, then obviously we will do that. But that is what we have reserved and seeing a prudent reserve on our balance sheet at this point in time.

What does the largest lump actually refer to?

There is disclosed in our annual report from March one particular what is called the CFC dispute with the Inland Revenue authorities in the U.K. which at that time I think, amounted to about £1.6b plus interest. The rest of them are smaller amounts that make up the balance.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. At this time we have no further questions. At this time I would like to turn the conference back to Mr. Sarin for concluding remarks.

Operator thank you very much. Thank you all very much for joining us. And hope to see you on the roadshow in the next couple of weeks. Bye, bye, have a good day.

Once again this concludes today's conference call. We thank you for your participation. And you may disconnect your phone lines at this time.