Vodafone Group PLC (VOD) 2006 Q2 法說會逐字稿

Welcome to the Vodafone Group PLC interim result conference call for international investors. 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 Promotion 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 are related 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, 2006 and under the heading Risk Factors in our Annual Report for the year ended March 31, 2006. The interim results announcement and our Annual Report can be found on our website, 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 businesses because they provide measures used by the Group to assess performance. Although these measures are important in 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 interim results conference call. Hosting today's call will be Andy Halford, the Company's Chief Financial Officer. Please proceed, sir.

Thank you very much, operator. And, first of all, can I apologize for the slight delay in getting hooked up on this call. Nonetheless, let's press on. So just a high level of the key elements of the half-year results announcement that we released a short while ago and then we'll move on to Q&A.

So, looking at the results overall, very much in line with our expectations in competitive markets. Our published revenues, at GBP15.6b, were up about 4% on an organic basis or up 6% on the proportionate basis that we have been providing guidance on for the current year. So that 6% sits comfortably in the full year guidance range of 5 to 6.5%. Within that, we have seen the two regions performing slightly differently.

Europe has been fairly flat on its revenue growth, in part because of the termination rate cuts, in part because of the competitive environment. And the EMAPA region has, on the other hand, been going strongly with its revenues up about 14%. And, in particular, some of our recently acquired businesses have performed extremely well, with service revenue growth of 31% in Romania, 14% in the Czech Republic, 21% in South Africa. And Turkey, which we have owned since May, is performing ahead of our acquisition plan on pretty well all of the core metrics. So turnover, profit margin, cash flows and CapEx all well ahead of the business plan at the time of the acquisition.

In terms of margins, we guided on a full year basis to being around 1% lower this year than last year. In the first half, we actually were only 0.1% down. Albeit, as we look forward to the balance of the year, we do think that margins will be somewhat lower in the latter half of the year, particularly in the U.K. and in Germany.

We have taken an impairment charge of GBP8.1b in addition to the charge that we took back in February. Half of this relates to interest rate changes in the intervening period, which have had a mathematical impact upon the carrying values. The other half is to do with Germany and the price changes that we put through there recently. So, overall, an GBP8b additional charge there, three quarters of which relates to Germany and one quarter to Italy.

Cash flows for the half-year were strong at GBP3b. Slightly lower than last year but only because of one-off tax payments. If you do it on a pre-tax basis, we're actually 7% up on the cash flows. And our earnings per share were actually GBP0.0598, which is an increase of just under 18% year-on-year, of which about two thirds was due to the reduction of the number of shares in issue.

Turning then on to the execution against the strategy that we communicated in May, I think we are making good progress there. We have launched At Home type products now in six countries and have 1.7m customers using those products. And we have a number of other businesses that are lined up to launch equivalent products before the end of this financial year.

We have been working very, very hard on the cost side of the business, including recent announcements on the outsourcing of IT, the consolidation of data centers, which is running ahead of schedule, the supply chain consolidation in our network area, plus various initiatives to share networks and to have the management of networks externally. So, significant focus upon costs in the period.

We have also made progress on our leg of looking at moving into the total communications space with DSL deals now launched in Germany, Italy and the U.K. On Mobile Plus, we have today announced a link up with Yahoo in the U.K. with regard to advertising, so another step forward on that front. And in terms of the management of our overall portfolio, clearly we have sold the Belgian interest and that has just completed. And we have recently announced the tender offer to increase our ownership in Vodafone Egypt to around 55%.

On the customer side, our proportionate customer base is now 191m, after adding a further 12m customers during the half-year. We have been very focused in this period on getting our pricing aligned with market prices, particularly in Germany and the U.K. where we were a little bit out of line. We have now made changes which we believe put us in a very competitive position and hence we are now focused upon executing on those prices.

We have also been continuing to sell through strongly on our Vodafone Passport product, our At Home products, and also we have now launched some family plans in the U.K. business.

3G customers grew. The base there grew by 1.9m during the period. And we now have 11m 3G devices in the market and approximately just over 10% of our revenues are now coming from those.

So, overall, in terms of the outlook for the balance of the year, we are basically in line with our previous expectations on revenue and retain the guidance at the 5 to 6.5% level. We are in line on the margin, where we are retaining our guidance at around 1% down.

We have actually moved our cash flow guidance up because we think that the settlement of some of our tax cases will actually take longer. And therefore our view is that the full year free cash flows will be in the GBP4.7b to GBP5.2b range, which is GBP0.7b higher than previously indicated.

We have also said on tax that, for the current year, we -- where we came in at 29.2% in the half-year, that we do actually expect the full year tax rate to now be around 30%, slightly lower than we previously indicated. That is two reasons. Some tax restructuring that we had done in Italy. And, secondly, our big CFC case. There has been a parallel hearing by another company in the European Court which has given us slightly more confidence in that, albeit there are a number of uncertainties there. So we have retained the provision that we had at the end of March but we have not further increased it. So that should give us some saving on that front.

If we look forward beyond the current financial year, because of the emerging clarity on the treatment of the U.K. Tax Authorities of profits earned overseas, we are now more optimistic that we will be able to achieve low 30% margins -- sorry, low 30% tax rates going forward rather than mid 30% tax rates, as previously guided.

Finally, on the one-off tax payments of the GBP5b. The CFC case, as I've just mentioned, is moving forwards but we now think it's more likely an '08/'09 settlement. Some of the other lesser tax payments we have actually now settled but others are taking longer to actually come through, which is the reason for the cash flow guidance now being increased.

So the interim dividend was up 6.8% at GBP0.0235 per share and we are still targeting the 60% of the adjusted EPS payout at the end of the year.

So I think those are probably the key issues. If I could, operator, hand it back to you, we'll happily take any questions you have.

[OPERATOR INSTRUCTIONS]. Gentlemen, there -- I do apologize, it does look like we have a question, one moment. And our first question comes from Ajay Sadarangani from Manning & Napier. Please go ahead with your question.

Hi, good morning. Just a question on the churn rates, you mentioned that it was because of activity in the prepaid market. Do you expect these churn rates to stay high, as they were, on a going-forward basis or do you expect them to actually fall down?

Yes. Ajay, let me talk about churn in two respects. On the contract customer base we have actually, in our bigger market, seen some good progression on the churn rates. Three of our four main businesses are now 14% or below on their contract churn rate. But, as you say, the prepaid churn rates are remaining fairly high.

I think, as we go forwards, we're likely, unfortunately, to continue to see fairly high prepaid churn rates, in part because of the sheer competitiveness of the market, in part because of the phenomena of people having more than one SIM per person. So what we are instead very focused on doing is trying to make sure that the subsidy that we are paying upfront to attract prepaid customers is on a downward trend, so that we can protect the economics of that part of our customer base.

In the European market we have nudged down the prepaid subsidy to around the GBP20 level for the Group as a whole. And this is in part because of the mix change with India and Turkey and other lower subsidy markets being in there. We actually now are at a point where our overall prepaid subsidy is down below the GBP10 level, which is the first half-year that we've actually had it at those sorts of levels.

And in the future, as you migrate your customer base over to more plans on contract, do you expect the churn rates to go down just because of the mixture?

Yes. The blended churn should reduce slightly but obviously it depends just how long it takes us to actually make that change from the prepaid to the postpaid. Some markets, like Spain, have been pretty successful in doing that and they've actually moved several percentage points over the last year or two. Other markets, it is taking longer to do. Italy, for instance, is a very, very well-established prepaid market. And whilst we have put a bit more focus in there to get towards the contract base, these things, they do take some time to work through. But, on a blended basis, I would agree with you.

Okay. Great. And could you please talk about what percentage of your customer adds or new customers are taking the offerings on Broadband? And what would be the EBIT margins or the profitability contribution from that side of the revenue?

Yes. So, in the half-year to the end of September, there really, really is little impact from Broadband. Most of those agreements were, of the three that we have got, were only announced just shortly before then and most of the actual product launches either happened after the end of the half-year or are shortly to happen. So the answer is that they are not significant within those numbers. Obviously, the DSL sales that are Arcor business in Germany makes -- are included within our numbers but there is little that is additional to that at this stage.

In terms of the margin impact, it will vary country by country and it varies commercial agreement by commercial agreement. Obviously, we've gone into it on a wholesale basis, therefore we do accept that the margins will be somewhat lower in this space than they would be in our normal mobile business. But, equally, we're not investing a lot into assets, so equally the risk profile is not any higher.

Thank you. And the last question from my side is on wireless data. It seems like the growth in wireless data was pretty good but the margins were down on a year-over-year basis in core Europe. So could you talk about what the margins would be on the wireless data side?

And also, if the tariff cuts that you are planning in the future as well, would that lead to more impairment losses in Germany and Italy? Thank you.

Okay. So the revenues from data products are going up about 30% per annum. So those are growing very strongly. We've been very pleased with the performance there. A variety of products with a variety of different margin profiles. On average, I think it's fair to say that the margins there are lower than the margins on the core mobile business.

If I look, though, at the overall margin profile for this year, maybe just to talk about that, as I said earlier, we have guided and continue to guide at around a 1% margin reduction for the full year, even though we actually only saw about a 0.1% margin reduction in the first year. And just to explain why that profile occurred, firstly, Verizon Wireless actually had a fairly low margin period in the first half of last year. And just mathematically, as they've got back to their current levels, that has actually helped the first year reduction to be lower than it otherwise would have been.

Secondly, going forwards, and this isn't really so much about data, it's a little bit of a mix change towards data, but particularly in the U.K. and in Germany, both of those business actually, for various reasons, had higher than average margins in the last half of last year, which we do not see to be recurring. And moreover, both of those actually have done fairly substantial refreshers on prices in the last few weeks, which will have a full impact in the second half of the year rather than only a very small impact in the first half of the year.

So, if you take those into account, that's why we're saying, overall, full year at around 1% down, which, as I say, is what we expected at the start of the year.

Sure. And with regard to your future tariff cuts in core Europe, would you expect them to also impact the amount of goodwill write-down in the future?

Yes, sorry, I didn't answer that part of your question. Let me answer that and then, if I may, we'll see if we have other questions.

In terms of doing the carrying value review for impairment purposes, we obviously take our best judgment as to what we think margins, what we think revenues, what we think costs are going to be in the businesses going forwards. And therefore we have factored in an amount of margin change, which is actually included in our press release, as we go forwards for both the Italian and the German businesses.

So, in the future, it will depend upon how our projection now compares with the reality as to whether or not there is any further impact there. We hope, obviously, that we have taken a reasonable view and that that will put it in the right place. But, equally, we cannot ever be certain of that. The market obviously moves for reasons which we don't totally control and the interest rate element of it is clearly outside of our control but, as you've seen at the half-year, does have an impact.

Sure. Thank you.

Okay.

Thank you, sir. Our next question comes from Michael Rogers with Conning Asset Management. Please go ahead.

Yes, hello. I wanted to just see if you could update your present thinking with respect to the Verizon Wireless interest. I know Arun was saying something earlier today, I guess.

And, secondly, I wanted to get a little bit of color on the extent and vigor, if you will, of competition in your core, more mature markets. Is it rational or is it bordering on irrational?

And, lastly, aware that Telecom Italia may be interested in selling some of its Brazilian assets. Is that a part of the world that Vodafone, at least in theory, might care about? That's it.

Okay. Michael, let me take them in that order. So Verizon Wireless, the story there is we are very happy with our investment. We're very happy with our position with that business. As you well know, its recent results have been very, very strong and we continue to believe that there is still, with being only at the 75% point on the penetration curve, that there is still a good period ahead for Verizon Wireless. And therefore we continue to be very happy with the investment there.

On the question about competition in Europe, each quarter you end up with different markets that become more competitive and different quarters you have other markets that become slightly less competitive. I think it's fair to say that, probably in the U.K. and in Germany, we ended up with others taking prices down a bit faster than we had. And we have made a number of changes in the U.K. over the last three months or so to get ourselves back into the market there. And, on Germany, we announced three or four weeks ago that we were making some price changes to get back into the market at that stage.

So, overall, we're operating in markets which, in Europe we're seeing 15% per annum price per minute reductions. And obviously the name of the game is trying to get the usage to go up to seek to compensate that. I showed a chart earlier this morning that was showing that, on our outbound voice calls, we have been typically, just to give you some feel for this, we have typically been seeing our customer base growing probably 14% - this is across the Group - on a statutory basis each year. We've seen our price per minute coming down about 14% and, until this most recent quarter, had seen about a 5% increase in the usage per customer. This last quarter has just been slightly more optimistic. We've actually seen a 10% increase in the minutes of use per customer off the back of various promotions that we have done.

So, overall, they are competitive markets. Overall, I think we are now well in the pack on the pricing. And obviously we will wait to see on future quarters where the increase in the usage settles out at. But just slightly encouraging signs in the most recent quarter.

On TIM and Brazil, obviously it is quite difficult to read the tea leaves as to what is happening at TIM at the moment and there seems to be different strategies at different points in time. We have said that we want to focus upon territories in the world where we've got a significant presence. South America has not been one of those to date. But, on the other hand, where we can create value we will look to create value. We've got very strict financial criteria and I think you can see from some of the results from other recent acquisitions that actually those are all doing extremely well.

So, at the moment, it's just a watching brief. And if things come up we'll look at them but they'd have to pass our strict criteria in order for us to progress them any further.

Thank you very much.

Thank you, sir. [OPERATOR INSTRUCTIONS]. And our next question comes from Ido Cohen with Diamondback Capital. Please go ahead with your question.

Hi. I just wanted to ask, you had an announcement this morning with Yahoo about introducing advertising onto some of your phones. I was wondering if you could talk a little bit more about how you view pricing that product and promoting that product.

Yes. So we announced this morning that our U.K. business has done a deal with Yahoo to provide advertising to the business. This comes off the back of a period of doing some research in the market as to what is the opportunity, what is the customer appetite for this. And I think we got clear feedback that said that, so long as customers have the ability to decide whether they want to opt in to having advertising made available to them, so long as they are comfortable that they are getting something for the privilege of getting that advertising, as in some sort of discount on the product, and so long as it is of relevance, the advertising when they get it, that there is a considerable amount of interest there.

The agreement with Yahoo literally has just been announced this morning and it's at a headline level. So we are go through very much with them now, determining exactly which areas we're going to focus upon and when we can get those to market. We would expect product to be coming into market in the middle of next year, May/June time. So I think it's just a little bit premature to actually talk specifics on pricing and so on but we are now actively working with them to see what inroads we can make in this particular space.

Maybe just to talk less specifically, this kind of low-end targeted phone and add-supported phone to penetrate low-end base or is this across the base, in your view?

Well, I think it's across the base but not in a general sense. I think it's quite targeted. Advertising comes in different forms, some of which can be mobile TV-related, some of which can be games-related, some of which can be banner text-related. So I think what you'll find is that we will come up with a number of products which will be targeted at a particular sub-segment within our customer base. And, to be honest, this is going to be a journey where we're going to have to test things out and see what works and see what doesn't.

Okay. Great. Thank you.

Thank you, sir. And we do have a follow-up question from Ajay Sadarangani. Please go ahead, sir.

Andy, thanks again for taking my question. Just one other question which was how -- in your planning, how many years or how long do you think it will take for your pricing to come down to the level of the low-cost operators in Europe, and to the level where again you are price competitive and volumes go up and ARPU starts to stabilize a little? Thanks.

Yes. Ajay, I think in most of our markets we have got some players who are there offering the minimum low-cost, low-support-type price models and you've got a number of players, like ourselves, who are offering a more full service offering. And I don't think our view is that necessarily we've got to take all of our prices down to the level of the former camp there. But what we have got to do is to make sure that whatever is the premium between us and them is at an acceptable level, where people are actually seeing the value that they are getting. So the price changes we've made recently have moved us certainly into line with the more premium players in the market but have left some gap between that and the very, very lowest-cost players.

I think over a period of time what you'll actually see is very much like the U.S. experience, that we will be introducing, and we are introducing, bigger and bigger bundles, putting more value into those bundles, making sure that the amount that people are paying and what they're getting for that amount feel fair and feel reasonable with people, rather than necessarily having to go and hunt down to be matching the lowest-cost provider in every segment in each market. And particularly if I look at the business space, we have got a very, very strong position in the business market across our businesses and that, absolutely, we will protect. And that will be by service innovation and differentiation rather than purely on the pricing dimension.

Thank you.

Thank you, sir. [OPERATOR INSTRUCTIONS]. This does conclude the question and answer session. I will now turn the conference back over to Mr. Halford, please, for further remarks. Please go ahead, sir.

Thank you very much. So I think the bottom line is a good half-year, very much on track for delivering to the full year numbers that we had indicated previously, slightly higher cash flows. But, overall, I think we are in good shape. We are executing on the strategy.

Thank you very much indeed for your time. Have a good day.

Thank you, sir. Ladies and gentlemen, that does conclude our conference call for today. Thank you all for participating. You may now disconnect.