Vodafone Group PLC (VOD) 2011 Q2 法說會逐字稿

Good morning. Welcome. Thank you for coming to our presentation of the results for the first half of the year '11/'12.

The program is, I would say, the usual one. I will give you the highlights for the first half. Then Andy will cover the financial review and the guidance. And then I will get back to talk about our commercial performance and the strategic progress, and afterwards we'll be joined by Michel and Nick Read to take your questions. And we have here also several other colleagues, Morten Lundal, CMO, Steve Pusey, CTO, who can cover all topics you're interested in.

So, results for the first half. Group service revenue up 1.4% in the first half; for the Q2 it's up 1.3%. Without the impact of MTRs, it would be 3.7%. Continued strong commercial performance in both mature and emerging markets. Something which is not on the chart, EBITDA up 2.3% to GBP7.5b. This is a margin decline of about 60 basis points, which is in line with our expectations and what we said last year.

We confirmed the $10b dividend from Verizon Wireless. GBP2.8b is our share. We have completed GBP3.9b of our share buyback, of our GBP6.8b share buyback. And this morning the Board has agreed to increase the interim dividend per share by 7% to 3.05p, which has to be added to the special dividend per share of 4p coming from Verizon. And I will talk about the progress on the strategic priorities later on, after Andy does his presentation.

So, Andy, over to you.

Right. Thank you very much, Vittorio, and good morning to everybody. So, let's just quickly go through the key numbers for the half-year.

So GBP23.5b of total revenue, 4.1% increase. Take out the impact of FX and we're at a 2.2% increase for the half-year. Adjusted operating profit was just over GBP6b, slightly down on last year. But remember, last year we had the contribution from SFR in there, so if you do it on a like-for-like basis we are actually up by 4.4% on adjusted operating profit. I'll talk about the financing costs a little bit later.

Tax line there is very much consistent with our medium-term guidance, so 25.2% effective tax rate. The Indian court case has just finished, so we'll hear the outcome of that some time in the coming weeks or months. Otherwise, I think tax is fairly much as planned.

Below the line, we've got three line items there which collectively are about GBP2.7b of gain. Within that, we have got the GBP3.4b gain on the SFR disposal. And we have taken, in an offsetting way, GBP450m of additional impairment charge against the carrying value of our business in Greece.

Adjusted earnings per share, at 7.75p, was down by 11.5%, but 10% of the 11.5% is because of the assets that we have sold in the last year, so the SFR, China Mobile and Softbank assets. And finally, as Vittorio mentioned, we are increasing the interim dividend by 7%, consistent with our medium-term guidance on dividend increases.

So, with that, let me turn then to the service revenues. Service revenue, GBP21.9b. That is an increase of 1.4% for the half-year. And actually the two quarters in the half-year were fairly similar to each other, so the most recent quarter, the second quarter, was 1.3% increase. MTRs, as Vittorio said, had a negative impact of about 2.4 percentage points during the period. If you look at that growth split between the two regions, Europe was down slightly, 1.3%, and AMAP was up strongly at 8.4%.

EBITDA for the half-year just over GBP7.5b, which is an increase of 2.3%. Encouragingly, the rate of margin reduction is declining, as we had expected. So we saw a 0.6% reduction in the margin for the half-year. The associate income line, GBP2.5b, that is now almost exclusively Verizon Wireless, and the Verizon Wireless contribution increased 11% year-on-year.

And the free cash flow, GBP2.6b, somewhat lower than at this stage last year, for reasons I'll come on to later, but nonetheless still very much in line with our expectations for the full year.

So, on this chart, just going back six quarters in time, in gray, looking at the published organic service revenue growth for the Group, so the 1.3% for the most recent quarter, as I referred to. In red, you can see all of those same numbers before MTR reductions, so in the last couple of quarters just a fraction below 4%, but nonetheless in the present environment I think still pretty healthy.

So, let's look then at the service revenue change, first half of the previous year to the first half of this year. So, a year ago GBP21.2b, this year GBP21.9b. The first column is the usual impact of the price reductions through the mobile termination rate, which took about GBP0.5b off the numbers. But the good news is that the data and the messaging growth is easily compensating for the reduction in the voice revenues.

So data for the Group as a whole was up 23.8%, and that is now an annualized run rate of about GBP6.3b. Messaging was also strong, so growth there about 5% for the first half of the year, similar to what we saw last year. And actually, the demand is still very strong. So in the first half of the year, the total number of text messages that was sent across the Group was up 19%. Our total number of messages in Europe was up by 13%.

Fixed revenues also increased, 6.1% increase in fixed revenues, particularly strong in Italy. Wholesale revenues up a bit, a little bit of FX, and GBP21.9b for the full year -- for the full half-year.

So, let me now look into the Europe region and just explain the buildup there. So on the right-hand side, in gray, you can see the 1.3% reduction in the revenues that I just referred to, and across the chart you can see the countries that are contributing to that. So Turkey, UK, Netherlands, Germany all contributing, and Italy, Greece and Spain have weighed the numbers back a little bit, as you would expect. So I'll just provide a little bit of commentary on the major markets here.

So, first of all Turkey. Growth there in service revenues 24%, so a really, really strong quarter, really strong half-year from Turkey. Slightly lower growth than previously, but obviously the lapping effect starts to come into play. Very much driven by data, where we saw revenues there growing by 85%. Smartphones are now 10% of the base in Turkey. The net promoter score, the recommendation of our customers still is market leading, which is extremely encouraging going forwards. And starting to see the scale economies pull through, with the margin improving by 3 percentage points.

So, moving on to the UK, also a very, very strong performance in the UK. A headline service revenue growth of 2.5%. If you strip out the MTR effect that is an increase of 6.3%. Particularly strong in the enterprise space, and I think noteworthy that the overall ARPU for the business as a whole was actually up by 1.4% compared with the first half of last year. Data very much the engine for the growth, so 19% increase in the data revenues. And we've now got 66% of our consumer contract revenues coming from customers on integrated tariffs, i.e. all-in voice, text and data bundles, so 66% coming from there.

So, on to Germany. Germany, there the headline is essentially flat on revenues, MTRs again playing a part here. So without the MTRs, growing at just a fraction under 4%, so I think a strong performance in Germany in clearly a strong market. The effect of the MTR cuts obviously, as we get towards the back end of this year, starts to move away, so that will improve the situation in the second half of the year.

Data very much underpinning this, so increase in data revenues of 24%. Data revenues now account for 20% of the total revenues of the business. Mobile Internet, which has been pushed very hard, grew 36%. Mobile broadband grew by 23%. So really heavy push on the data side. Also, on the enterprise front, we saw very encouraging market share gains in the enterprise space, and customer gains there, 4.8% increase in the enterprise revenues. And the rollout of the LTE network, which Vittorio will touch upon later, is now well in progress with 52,000 customers now on that network.

Now, moving on to Italy, where clearly the macro environment has been somewhat more challenging, albeit I think our performance within the market has remained good. Our service revenues there are 3% down, which is slightly worse than in the first quarter but only a bit. We have been, I think, strong in enterprise, slightly under pressure on the consumer front.

Data has again grown strongly, 19% increase in the data revenues. Mobile Internet, within that, has grown by 71%, particularly off the back of repricing of daily tariffs and more flexible price plans. Fixed has also been a success story in Italy. We've seen the fixed revenues up by 13%. And as you'll know, we have just bought some more spectrum for 4G going forwards.

Now Spain, which continues to be challenging. I think that's been the caption there for a few quarters now. A number of things we've been doing on the commercial front in terms of repricing, commissions, contract extensions. I won't go into those now, because Vittorio will talk about those in a few minutes, but just a couple of factoids here.

Data revenues are up by 15%, very much with mobile Internet pushing that. Smartphones, we have now got 32% of the base with smartphones, which is up from about 22% this time last year. The margin first half on first half is down by 6 percentage points, but remember the margin came down in the second half of last year, so actually the margin is fairly similar to the immediately previous half-year. And encouragingly, on number portability, we've gone back into positive territory there, which is the first time that that has been the case for a number of quarters.

So, this chart just pulls together one or two factoids on Europe as a whole. So on the left-hand chart, in the gray, we've got the proportion of service revenue that comes from data, so now 15%. The green is the proportion of customers who have got smartphones, so 22% of the customer base in Europe have got smartphones. That is up from 15% a year ago. In the blue, proportion of revenues -- of the data revenues that come from mobile Internet. That is now 35%, up from 29% a year ago. And 59%, this is the red, of our smartphone customers have got data plans, which again is up quite significantly. So I think the real drive on data is really progressively pulling through.

On the top right, referring to the fact that there have been selective opportunities to slightly improve prices or to rebalance bundles, which is encouraging. And on the bottom right, just reference to the push on enterprise, which has been a major area of focus. We've seen overall enterprise revenues, which were about 30% of total revenues for Europe, go up by about 2.5%. Interesting, the big international accounts, which are global enterprise team managed, we have seen the revenues there go up by 9% in the second quarter, so very, very significant growth on that front. And mobile penetration and the like are now all moving forwards very nicely.

So, I will now move on from Europe to the AMAP region. On the right-hand side, in the gray, again, you can see the 8.4% that I referred to earlier, and the countries that contribute to that along the chart to the left. So very, very strong contributions from India and Vodacom. Qatar and Ghana also contributing. Egypt, New Zealand, fairly neutral in an overall Group sense. And Australia, which has weighed down a little bit on the numbers here for the region. Again, Vittorio will talk about Australia in a few minutes, so I won't focus on Australia at this point.

But let me move then on to India, where the story is a very, very positive one, service revenue growth there of 20%. There was a small benefit from SMS termination rates being introduced, but that was only 2 percentage points of the 20%, so still very, very strong growth there. Encouragingly, starting to see some of the price increases now holding in the market, so some benefits from pricing.

Number of minutes year-on-year were actually up 22%. On sequential quarters, actually, number of minutes has remained fairly stable, notwithstanding the price changes. Data has been another area, again, of focus here, so a 62% increase in the data revenues, 28m users, which is about 19% of the total customer base now using data products.

On to Vodacom Group, announced its results yesterday. So, for the Group as a whole, we saw revenues up 6.7%, driven again very much by data, 31% increase in data revenues. Within the Vodacom Group, clearly South Africa is the dominant business. Revenues there were up by 4.9%, with good strong margins staying stable at about 35.9%. And encouragingly, the international businesses in the Group actually grew their revenues by 16.4% during the period.

So, just stepping back for the region as a whole, the chart on the left, total revenues up from GBP6.4b to GBP6.9b. On the top right, the focus upon data revenues, so 31.8% increase in data revenues for the region, real traction now. Data revenues 12% of service revenues. And on the bottom right, you can see the customer growth at 23.8%, the overall customer base. Within that, the number of customers using data grew by 80%, but these still only represent about 19% of the customer base, so one in five. So four in five of our AMAP customers have yet to experience data, which I think is a strong opportunity lying in front of us.

So, with that, move away from the regions and just to talk briefly about margin. As I said earlier, 0.6 percentage point reduction in the margin, which was very much on the track that we set ourselves for the current year. In many senses, actually, if one takes Spain and Australia alone, both of which lost about 6 percentage points of margin, actually, those two together are the reason for the reduction in the margin for the Group.

So, if you take all the rest of the businesses put together, actually, net they were slightly positive at 0.3%, i.e. the extra revenue plus what we've been doing on the costs has funded the investment in customers and left a little bit over. So I think that has been encouraging. In the second half of the year, I think we will see a similar level of reduction. Obviously, this is now becoming quite precise. We will have some areas where there are cost pressures, particularly on fuel prices in some markets, but on the other hand we are doing a lot still on the cost front on other areas, to try to create the funding for the investment in the customer growth.

Just let me talk maybe about one or two of those, just very briefly, on this chart here. So the top left chart is showing the prepay commissions as a proportion of our prepay revenues, for Europe on the left and AMAP on the right. And you can see there not big numbers, but every bit helps off such big volumes, a 0.3% reduction in Europe, a 0.8% reduction in AMAP.

The top right chart is showing the total number of customers and the total customer care costs. And you can see customer numbers have gone up about 14%, and we have kept the costs flat.

On the bottom left chart is the cost per terminal, so we are delivering tens of millions of terminals to our customer base over the year. And this is over a four-year period we have seen a 32% reduction through a number of initiatives we've undertaken on that front.

And then on the bottom right we've got the number of network locations that are shared with others, which clearly reduces significantly the costs, a roughly order of magnitude as of today. In terms of new sites in Europe, two out of every three sites are shared, and in AMAP probably four out of every five sites are now shared, which clearly helps significantly.

So, that was the EBITDA. I'll now move on to Verizon Wireless. These numbers published a few days ago by Verizon Comms. But nonetheless, the story here I think is a very, very strong one. Growth in the top line has been of the order of 6% for several quarters. The last quarter was 6.4%. The ARPU for the retail customers is actually up by 2.4%. And the business added 900,000 contract -- net contract customers in the most recent quarter. On the bottom left, you can see the wireless margin for the business, which is still market leading and at very, very strong levels.

And then on the bottom right there is a chart showing the progression of the debt situation in Verizon Wireless, with red being the published net debt. So we've come down from $29b to $3b in the last two years, to something of the order of $12b per annum. In gray is the gross debt, so there is still some debt in the business. So at the end of September, in essence, there was $12b of debt, $9b of cash and $3b of net debt. Nonetheless, the $9b of cash is essentially what will fund the payment of the $10b dividend that will come out in January.

Verizon Wireless, like Vodafone, pushing very, very heavily on the data front. Their growth is of the order of 20%, similar to our own. LTE, the rollout of the network there is very, very much on plan, if not slightly ahead of plan now. So 186m of the population are now covered with the LTE network. And in the second quarter there were 1.4m LTE capable devices that were sold into the customer base.

So, changing tack on to cost of financing, the interest cost in our P&L. So, on the top line here we've got the underlying cost, which has gone up by about GBP130m in the year. So our average cost of debt now is just a fraction under 5%.

And the next couple of lines have got some mark-to-market adjustments which basically relate to the fact that we have made a conscious decision to move much more of our debt to fixed. So in the past we've been more floating. We've now fixed about three-quarters of our debt for the next three years, which we think with current rates is the right thing to do. So that means, at the middle point on here, we've got an increase from about GBP650m to GBP900m on the financing costs line, but buying I think a lot of certainty with that.

And then, down below, last year we got some benefits which are clearly non-recurring from the Softbank asset appreciation and also the dividend from China Mobile.

In terms of free cash flow, GBP2.6b playing GBP3.5b for last year. Really, two major items in here. The capital expenditure, which is slightly higher than last year, GBP200m. And that's particularly about investing in 3G in India. It is about strengthening the transmission system in Vodacom, the LTE rollout in Germany and the upgrade of the network in Australia, so very consistent with our full-year plans but just slightly earlier.

Second one, which is more significant, is the working capital, which was a GBP0.4b outflow last year and a GBP1.3b outflow this year. I've made two comments on this. This is a business that has about GBP1.5b of cash flowing in and out every single week of the year, so this has got a big, big volume through it. Last year was, if anything, abnormally low as an outflow. We took some advantage of some early settlements in the previous year, which actually took some of the cash outflows out.

And secondly, in the current year we are essentially paying -- if you think about our network and capital expenditure, the run rate is such that the fourth quarter typically has a much higher level of spend. When we actually pay suppliers for that will typically be another 70, 75 days later, so we have got the best part of about GBP1b of last year's CapEx which gets paid out as cash in the current year, and essentially that normalizes in the second half.

So put it another way, GBP2.6b at the half-year, GBP5.2b annualized, GBP1b of CapEx, and we're back bang in the middle of the range that we've got for the guidance. So we are very, very comfortable with the guidance and absolutely on track for that.

So, on to net debt. We started the period with GBP30b of net debt and we have ended with GBP26.2b, which equates to about 1.7 times EBITDA. Big ticket item in there, or the biggest single one, is the proceeds from the disposal of SFR at GBP6.8b. The buyback programs, so we have had part of the final stages of the China Mobile and the early stages of the SFR buyback programs gone through, which in aggregate is about GBP1.8b, and I think it's another GBP0.4b has gone out, actually, since the end of September. Small amounts to do with spectrum and the Essar minority, and essentially GBP26b is the closing number.

Second half of the year will have one or two lumpy items, if you like. So Polkomtel we should receive net of tax about GBP0.6b. The Verizon Wireless dividend in January will be GBP2.8b in and GBP2b out, so a net GBP0.8b in. The share buyback program at current run rates will be about, give or take, GBP1.9b in the second half of the year. And we have just paid GBP1.3b for the spectrum in Italy.

Just wanted to step back one second, just in terms of shareholder returns. This is a chart that covers a four-year period, and in red you can see the normal ongoing dividends, which amount over that period to about GBP17b. In blue, we have put the Verizon Wireless dividend that will be paid in early February. And in gray is the share buyback programs, including the current run rate to the end of this financial year, and in aggregate the buybacks are about GBP7b.

So, in total, that is about GBP26b of cash, that is, about 30% of our current market cap, actually being returned back to shareholders in a four-year period. Huge, huge numbers.

Now, ironically, I do remember the days when people were telling Vodafone that proportionate accounting was a complexity and we should abandon it and we should move on. What we actually did was abandoned it, sorted out a lot of our controlling positions, and now essentially we have one minority business that has grown incredibly strongly. And I know a number of people have said, actually, to understand what our numbers look like if we had got our 45% share of Verizon Wireless factored in there. So these are basically Vodafone on a pro forma basis, plus 45% of Verizon Wireless.

And what you -- this goes back to the four quarters ended the end of September, so it's a one-year period leading to September 30. So the actual revenue -- service revenue growth that we reported, 2% for that period. If you included 45% of Verizon Wireless, it would be 3.3%. EBITDA margin would be about 2 percentage points higher. The EBITDA, rather than being a GBP15b EBITDA company, we would be a GBP22b company. And the free cash flow, rather than being GBP6.2b, order of magnitude about GBP9.6b. So I think that just provides a slightly broader context.

So on to guidance, and then I'll draw this piece to a close. So we have decided that with the half-year now under our belt and the general trends we've seen in the business, that we are comfortable to now move the guidance into the upper half of the range that we indicated at the start of the year.

So GBP11.4b to GBP11.8b is where we now think we should end up the full year. The free cash flow we've left in the GBP6b to GBP6.5b range, still of a view that we should see some improvement in the rate of decline of margins. Capital expenditure fairly similar to last year. And the 1% to 4% service revenue range is still the target, obviously slightly lower end in the nearer term, but within that range over the medium term.

So, to pull it together, I think it's a fairly consistent performance with revenues up 1.4%, margin decline halved, free cash flow for the year confirmed, comfortable with the debt levels, dividends going up 7% plus the Verizon Wireless dividend on top. And actually, if you take our normal dividend plus the Verizon Wireless dividend, collectively, we will be about 13% of the FTSE 100 dividend this year on our own.

So, with that, I will hand back over to Vittorio.

Good. So I would like to use 20 minutes now of your time to go through the commercial -- through the assessment of the commercial performance, what has gone well, what has gone less well. Andy has the privilege to talk about things that go well. I have to focus on the part of the glass which is not half glass which is empty, but there is a part which still is empty. I would like to talk about growth opportunities and then discuss the priorities.

So, first of all, at high level how is the Group evolving? And this is a bit the way I look at the business. As you can see on this part of the chart, we're getting more revenues from emerging markets, from data, and a bit less from traditional mature voice. As you can see, we are now 60% coming from the first set of areas and 40% from the latter. It's a positive trend, because this means that our revenue flows are more future proof. In the last quarter, European mobile voice went down 9%, data in Europe up 21% and emerging markets up 13%, and this is a positive, I would say, trend.

If you look at the other part of the chart, we are also managing proactively the risks of the transition to data with integrated and tiered plans. 18% of our revenues are today coming from consumer contract out of bundle plus incoming, which you can see as the more at-risk part of our revenues, and 51% are coming from enterprise and consumer contract in bundle. We moved up the share of consumer contracts that are coming from integrated tariffs. We moved up 9 points in the quarter to 36%.

So I would say the way I look at the business, the profile of our revenues keeps improving quarter after quarter, as a consequence of our actions. And we are more and more of a future proof type of company.

How are we doing commercially? Here we have put the market share relative to the main competitors. We did better -- this is Q1 data -- in 14 out of 18 markets. If you let me put also South Africa, given the big market share that we have there, we have done better than the competitors in 15 out of 18, which I think is good and I'm pleased with it.

We have three situations which we're not pleased with. One is easy to deal with, it's Greece. Clearly in Greece there's an economic situation which is difficult. We want to cooperate with Wind there, if we are allowed, and that's more of a macro type of situation. The other two are Spain and Australia that deserve a few words.

First of all, Spain. Spain is a weak economy. There's strong competition in Spain, but there are also some structural problems, and namely high per minute prices and high commercial costs. So, to improve our competitiveness, we have strengthened our management team there. We have lowered the prices, the EUR0.06 and the EUR0.08 price plans that we have introduced. We have introduced integrated data plans. And to work on the structural problems, we have increased the contract length from 18 to 24 months and worked on distribution costs, and especially on commissions.

And the results, which are indicated on the right part of the chart, the initial results I would say are good. We have an improvement in ARPU, EUR8 from the new contract versus the base. We are back to positive portability, albeit for a small number. We have one-third of the consumer contracts now coming from the longer 24 months term, which again is positive. And we have some reduction in channel costs.

This is good. I think revenue and EBITDA, however, will continue to remain under pressure for a number of quarters. So I don't see any short-term return to growth in revenue in EBITDA, but these are structural measures to improve the Spanish market for the long term.

Australia. Australia is the other situation which we are not pleased with. This is really started with some network issues, due to a switchover that we have to make as a consequence of the merge. That has turned into customer dissatisfaction and then into clear revenue issues.

So what have we done? We have fixed the network problems. We have first upgraded our 3G network to the 900, to the 850 layer, with now the program being beyond half of it, 900 sites out of 1,500. We are swapping out the RAN and introducing the new more modern software and hardware with Huawei. The program is underway. And I have to say we have worked a lot on commercial initiatives, rebranding the shops, closing the wrong ones, fitting the good ones with the new Vodafone system.

The results are there, as you can see from the chart. Network statistics have improved. We now have network metrics which are back where they should be. We have abandoned call rates which have gone down to the normal level, and good service levels. And I have to say also, from a cost perspective, the synergies that we were counting on when we did the merger with 3 are on track. But however, I have to say I'm not pleased until the customer metrics are not right, and that will take a few more quarters.

So these were the two, if you want, situations where I think that the glass is not yet full.

Let me now cover a bit the areas of growth potential, starting with Supermobile, the strategy that we illustrated last year, one year ago, which is not just about network. It's about network, it's about customer experience, it's about devices and it's about pricing and profitability.

First of all, starting from network and going clockwise, we continue to work to reinforce our leadership in this area. It's really four sets of actions. It's not four actions but four sets of actions. First thing, improving and increasing the speed of our networks. We have gone up another 10 percentage points on both the uplink and the downlink on HSDPA, with a target performance that now I think is what I would call the video quality type of target.

And of course we are launching LTE where we can. In Germany we have now about 52,000 customers, we have 1,300 sites. The average speed here, for those of you have not got a chance to try it, is between 6 and 12 megabits per second. Important thing is the latency. Latency is really reduced to DSL type of level, as opposed to the 120, 130 milliseconds that you can have today on any of these phones. On an LTE handset you go down to 35 to 60 milliseconds, which again is a fixed line level. And we're now starting to launch in cities, so not just in urban areas but also in places like Dusseldorf.

The second action is moving to single RAN. Single RAN has clearly an advantage over cost. It means less maintenance and less energy. But it also means that the network will be upgradeable with very little effort to LTE, so in a way it's an action which is at the base of the previous one.

We are improving our backhaul capacity. Sometimes I get questions from investors and analysts on are you really going to be able to carry all the traffic out of the base stations. Now, with IP Microwave, I can tell you we can bring everything that the current technology enables in terms of speed, but we also have fiber or managed Ethernet in about a third of our sites today, up from 20% in the last semester. So we are strengthening also the backbone of our networks.

And finally, we continue to acquire and optimize spectrum. We've got spectrum, of course, in Germany, in Italy, in Spain, in the last six months. We are refarming 900 again, to use the spectrum and the cost of it in the most efficient way.

But network, the results are here. The results are I think positive. Network growth -- the data traffic growth is now aligning with revenue growth at around 20%. This is happening because we are proactively managing this. We have reduced peer-to-peer traffic 20% to 30%. In our key markets we are managing video traffic, again reductions which go in the 15% to 30% range.

There's an interesting point here. Traffic is moving to smartphones. As you can from the bottom part of the chart, now 21% of our traffic comes from smartphones and 79% from mobile broadband. Given the 20% overall traffic, it means that all the increment is in the smartphone part, and actually mobile broadband is gently going down. It's 1% to 2% total reduction.

And as you can see from the right-hand part of the chart, smartphone per user traffic is going up from 100 to 130 megabytes per month, and data cards are going down from 1.6 to 1.4. Now, this is a result, of course, of the fact that we all use smartphones, tablets and other stuff. But you might remember that I always use my metaphor of the motorway and saying we have tracks in the motorways and these are the mobile broadbands, and when you take out one track you can fit in seven cars. And these are the smartphones and this is exactly what is happening. By managing our capacity, we can cope with traffic growth.

And the result is in the usual statistics that I always share with investors and analysts. What is the average utilization rate of our network keeps being 35%, 36%, 37%. What is the percentage of sites which are fully used in the busy hour keeps being 7%. So I think we are managing a good and healthy growth in the smartphone area without any major inconvenience at network level.

Technology is not just about network. Often I'm asked, again, what's the Vodafone advantage in managing technology. Let me talk about IT. Basically, here we are working on two directions. One is standardization, of course, so making sure that we have the same thing everywhere, and simplification.

We are now on standard information systems deployed in 11 markets, ERP systems in 11 markets. We use -- we can optimize the sourcing of our services across three centers, one in Budapest, one in -- actually two in India and one in Egypt. We are consolidating our vendors. We went down from eight to two CRM providers. And we have our cloud infrastructure which is being fully virtualized, which means that today in Europe we have virtualized Dublin, Milan and Ratingen, and by the end of this year we will fully virtualize also South Africa and India.

Which means, right part of the chart, that we can see in the last -- we have seen in the last four years an increase of 20% in the service that we manage, but a decrease in the cost by 40%. So we are basically developing a very efficient Vodafone way of managing data centers. This has been recognized by Gartner, who gave us top quartile in the efficiency ranking.

Second element of Supermobile was the customer experience. This is really about redesigning retail. We have the new format of the stores that we are rolling out across Europe, a very positive reaction from the customers here in the UK. Using more online, 50% of our bills -- more than 50% of our bills in Europe are going online.

Evolving our strategy in the contact centers areas from what used to be called call center strategy into a contact center strategy, using more social media, 55m contacts per year through our social media contact centers. Now, Vodafone deals with customers more outside of call centers than inside call centers, so call centers are not the main thing. And of course there is a big efficiency into this, on top of the fact that customers like this way of interacting.

And we are rolling out in all of our markets, 14 today, mobile self-care apps on smartphones and tablets, which again is a reinforcement of a good customer experience but also a cost reduction across our footprint.

Devices. Devices is a very important element of our Supermobile strategy. 22% penetration of smartphones, up 7% year-on-year. UK and Netherlands are already above 35%. As you can see in the chart, clearly contracts, 37.3% penetration versus prepay only 12.4%, so it's progressing in both segments but clearly quicker in contract.

Essential to get to higher levels is the cost of the smartphone. We said that we had a target to go below the EUR800 kind of mark. We are now below EUR80. And I think my new target, the target that Morten and I gave to our vendors, is now please bring us the EUR50 smartphone. This is very important not just for what is called the democratization of data, i.e. bringing data to emerging markets, but it's also important, as I indicated earlier, for the prepaid segment and for the lower bands of customer segments.

As you can see in the picture, we have some very good Vodafone branded handsets. The 858 will do more than 1m pieces by the end of the year. The Facebook phone is again another interesting way to introduce Facebook in a low-cost way. And we are now getting into tablets with the Vodafone Smart, which will cost about two-thirds of another well-known tablet.

Question about profitability that you always ask. Now, these are the latest numbers. Migration to smartphones creates more revenue, positive 27% contracted over the lifetime revenue increase, which is compensated by an increase in subsidy and acquisition and retentions, plus 123%, leaving a small increase in profits.

Now the good news here are that the average ARPU uplift has marginally gone up a bit in the last quarter. And we still are -- last year I said in the EUR2 to EUR10 range. We are still exactly in the middle of that and gently moving up. But of course I don't think that this is enough. It should be better. And therefore this is what we're doing to improve it.

First of all, working at ARPU level, tiered pricing with a lower entry level to help people get into smartphones. Push integrated tariffs, 24% of European consumer contract base up 8 percentage points is now integrated tariff. And in driving up attach rates. So we need to improve the ARPU component of data in Europe, I would say bring it into the American space.

Second element of the strategy, A&R. I talked about devices. Clearly we need to have a deeper portfolio of devices, so that we make sure that we can work on the economic equation also on this element.

And finally, increasing, lengthening the typical contract length by extending the terms of the contract and therefore improving the lifetime value of the customers. And here we have examples in Spain and Ireland, and even in Machine to Machine in other areas, where if you can go beyond 24 months I think that would be a very good thing.

So pricing and profitability very important, very much driven by devices and by ARPU.

So Supermobile is delivering. I want to say a few words about new services. We talked a lot about new services. First of all, the philosophical approach of Vodafone. Again, most of you know about this.

We have moved from what was the old approach, a Walled Garden type of approach, a fully vertically integrated approach and a single operator approach to something which now calls for more open standards. A strong integration of Vodafone and third party services, so not just relying on our own capability but our own integration capability being the key selling point. And when needed, or when possible, having a joint operator approach like, for example, for payments where you need to work with the industry to establish a standard.

If you look at what new services are today for Vodafone, as you can see in the chart, it's about GBP250m per year of revenue. I can call this like a small OpCo for Vodafone, so new services all together are like a small OpCo. And this includes everything from Machine to Machine, near field communications, mobile advertising, financial services. However, the addressable markets, I mean what the market is expected to be by 2020, is more in the GBP10b range, which would be a kind of a pretty decent large European market. So a small OpCo today with a big market in front tomorrow.

Here I'd like to talk about three things. First of all, Machine to Machine. Machine to Machine is a large opportunity. There's a GBP3b market which is expected to go to GBP6b in a few years. It's a market which in terms of connections could probably go up four times and where Vodafone has, I believe, a strong set of advantages; first scale, second the platform. We have a non-geographically defined platform to manage Machine to Machine, which enables us to do deals with whoever wants to ship everything, from cars to cameras to toys for playing or whatever, to every market, regardless of the geography. And third, we have a network of partners which cover 70 markets, so we can really deliver end-to-end across the world.

Here our performance is good. We have a 33% revenue growth and 6.2m connections. This is an area where we are investing more and where, I would say, everybody who wants to play into the Machine to Machine segment, and namely we're talking about automotive, we're talking about security, we're talking about metering, we're talking about games, sees Vodafone as the preferred partner. So Machine to Machine is the first one.

Secondly is financial services, and typically M-Pesa. You might remember that M-Pesa was a Kenyan type of thing. Now it's not a Kenyan only type of thing. You see there is a blue bar there, which is Tanzania, and there's other markets, still small but going up.

We transfer $670m per month through M-Pesa, and this is up from $300m last year. For Safaricom it's 12% of revenues. And we are very committed and very convinced that there is a big opportunity in other emerging markets. If you just think of India, in India out of, I think, 700m people who are unbanked, 230m of these have a phone. So the opportunity there is really very big. We launched in Rajasthan in July. We plan to launch in other circles in the course of the year and over next year. And we are looking at Egypt, where we're trying to get regulatory approval to go into another market where there's another 80m people who might really enjoy this service.

There's a small additional business that we will go into, which is international remittances. It's not a huge business, but again it's part of a very positive customer experience that we can deliver.

And finally, I would like to talk about operator billing. Now, we all talk about apps. We know that in the world 25b apps are downloaded every year. It's true that 85% of those are free, but there's still 2b to 3b apps for money that are downloaded every year. We have opened our billing -- our operator billing to these developers and to the app stores that are interested in. We now are in eight markets with RIM, Nokia and Google. 70% of the Blackberry downloads are paid through the operators billing. And wherever we open operator billing, we see very positive take-up of download of paid applications.

An interesting aspect of this is also other players, not just the app stores. We put here two examples. In Italy and in Germany, we gave operator apps also to media companies. And I have to say that in Italy the number of downloads through our billing is higher than the number of downloads happening through an i-store that is very popular these days. So there is a great potential, I believe, for operator billing.

There's no point in me talking too much about it. Can we show how it works with a short video?

(Video played).

So why am I convinced this is good? Because this works very well with prepay, this works very well in emerging markets and this works very well for credit challenged segments. It is a very intuitive and easy way of enabling digital commerce. I'm convinced this is going to be important, and we will open to everybody who is interested in all of our markets.

Final thing, total communication. Here I'd like to focus a bit on enterprise. Enterprise is the segment where total communication is opening for Vodafone new opportunities. Let me talk about three trends. First of all, mobilization of workers. We all know that in all companies people are bringing their own devices, people want to use tablets, people want to extend what they usually, normally do on a PC to their personal devices. This is a trend which goes in our direction, because device management becomes very important, because security management becomes very important.

Second trend is companies -- large companies moving to IP networks, which means that once they have them they start looking at unified communications. We've been active in the unified communications across mobile and fixed for a number of years in Europe, so again we are kind of specialists of this.

And third trend, cloud services. Companies going to cloud, especially small companies, buying software more and more as a service from the cloud, where what we have is the distribution, the sales force, the relationship on a daily basis with companies that don't have the sophistication of large companies.

So, again, three trends that in an enterprise space go into our direction. What are our activities here? I would say we want to play selectively here. Clearly, at the fixed data services level we are basically reselling where we have our own services, or the Verizon services, IPVPN on a broader scale, and we have an agreement to do so.

The communication service layer, clearly solutions like the One Net. You have in your appendix the economics, which look very good for One Net. We have 1.7m users in Europe of One Net. We are going to push the One Net solution across all the European countries, and also in the large OpCos outside of Europe.

We don't intend to play at the hosting level. We don't think we can reasonably be very competitive today at the hosting level, so we don't have plans there. And instead we want, especially in the SME segment, and we are already selling in the SME segment, reselling software as a service from the Microsofts, the Googles, or whoever sees an opportunity to work with us.

And finally, at the higher level, ICT services. We don't have an intention to be a direct competitor, or a direct major competitor to IBM and Accenture. But for the VGE parts of the multinational accounts, where we are very strong and we have a very strong and dominant position, we are actually acquiring consulting skills to play for those accounts in that space, an integration of the basic services.

So, convergence in enterprise is giving us actually more opportunities than in the past, and this is how we want to exploit them.

Now, to conclude. Supermobile I think is working. We have a small OpCo in new services, but potentially a big market in front of us. Enterprise can help. What are the priorities going forward?

I would say first of all geographically. In Europe we want to maintain our competitive edge. And of course we need to work on costs, because we didn't talk much about the macroeconomic situation, but we need to be ready for, especially in southern Europe, some continuation of the challenging times. In emerging markets we need to continue to focus on growth and profitability, but particularly stimulate the data take-up. I'm a great believer in data in emerging markets, and therefore we want to play in emerging markets the same role that we have played in Europe. And in the US we need to continue the collaboration on technology, on purchasing, and especially on large accounts.

In terms of business priorities, on data, continuing our network leadership investment, but working also on improvement of the data economics. Develop new services, integrating our own capabilities with third party platforms. And then enterprise, which as I described means not just the big large international accounts, but also SMEs and SoHos.

All of this to continue to deliver, as Andy has illustrated, our cash flow, our profit, to support our commitments to shareholders' returns.

This is the end of my presentation. I will ask my colleagues to join me for your questions.

So let's start from there and then go here. Justin.

Thank you. Could you discuss a little bit what sort of benefit you may have had from entering the iPhone market late in Europe, in terms of market share gain, and at what point that might wear off?

Secondly, whether we should be bracing ourselves for an effect on margin in the second half from the iPhone 4S.

And then otherwise, could we see India, given the high rates of growth, start to go in scale mode, where we start to see margin gains in that business over the next couple of years?

I will start the iPhone answer. Then maybe, Michel, you can integrate on the 4S, and Andy on the India thing.

I don't think we've got a particular benefit for being late on the iPhone, if I have to be honest. Actually, we suffered quite a bit. I think now the situation is normalized. I think we are back to where the normal situation should be. I always said throughout the two years where we have not had the iPhone that there was a clear drag on us coming from not having it. Now customers basically are -- they can choose what they want, and that's where our Supermobile strategy should give us a little bit of a differential advantage. But I don't think that you can say we have got a real advantage. There was a bit of catch-up, but not a huge amount.

On the 4S, Michel?

So, on the first point, yes, catch-up is now done, and I guess that we're quite successful with the iPhone. On the 4S we don't, let's say, see a major impact on margin in the second half. We have had a little bit of impact this month in the UK, for example, because that was the first month of launch. Probably it will substitute to some high-end type of other phones, so we don't, let's say, foresee a major impact of the 4S.

Yes. And Nick, not Andy. I said Andy but --

Yes. Just on India, yes, I do think we're at the point of seeing scale effects moving forward. I think you've got the benefits, obviously, of pricing feeding through, with price increases going in the market, but also greater site sharing, asset sharing just generally, and I would say optimization of A&R.

Good. Nick, Tim, Robin, then we'll come this way.

Thanks. Nick Delfas from Morgan Stanley. Just really a contrast first between Germany, where I think your margins excluding fixed line are rising and probably above 50%, versus Spain where I know there's a very different macro, but you've actually got a decline in EBITDA which is faster than the decline in revenue, which is quite unusual and not what we're seeing from Telefonica. So what is the reason? Is it the starting point that was more difficult in Spain, the price perception? Why is Spain so much worse than, say, Germany?

And the second question is you didn't mention fixed line, I don't think, really in your presentation at all. Is there any point having fixed line bases any more within Vodafone? Is it something you could divest?

Let me take the broad answers for myself, and then eventually if you have more detailed questions we can integrate. First of all, the Spain versus Germany thing, I don't think our mobile margin is above 50% in Germany, but maybe in Italy, maybe. But you're right; directionally it's higher than the 37.8% than the average indicates. It's a very different situation from Spain.

Spain had, as I said, a departure point of very high per minute prices and very high commercial costs. So we made a deliberate decision to say we need to put the market in long-term sustainable conditions, which means lower prices and much lower structural costs, also because a country of 40m people cannot have that type of very expensive distribution. So we need to make an effort which will eat into the customer base revenues for a while, in order to rebalance the market. In the meantime, we're also doing all the other things, so rationalizing distributions, reducing commissions and all these things.

Germany is a very different case. Germany is a case where the average price is more or less, if not even a touch below, the average of Europe, doesn't require that type of treatment. So it's a very different situation. One is the deliberate choice of restructuring; the other one is a great market just continuing to go.

But I guess the issue is that the costs are actually going up in Spain faster than the revenues are coming down, if you see what I mean, so the decline in EBITDA is actually --

Well, the call costs --

Well, the decline in EBITDA is actually bigger than the decline in revenue in Spain, so it indicates that actually you're investing more in the cost base.

So, on the two countries, first I guess that in Germany -- we spoke about Germany in the past few quarters. I guess that we have renewed with growth, and so now we are tackling the cost structure. And that's where you see that we have an improvement in our EBITDA margin for the first time in Germany. And I guess that it's what we were committed to do and are still to -- let's say still to be done in the cost structure in Germany, in order to make sure that we can still improve the profitability there.

As far as Spain is concerned, I guess there are two things that we might highlight in the cost structure, one which is around commercial expense, as Vittorio has just mentioned. In order, let's say, to regain competitive traction we have had to make improvements, of course, in our offers, but also to increase slightly our A&R to push smartphones.

And when you look at the smartphone penetration in Spain, it has increased quite significantly, and our data growth was around 60% on Internet on your mobile in the quarter. So that was a real choice that we have done there. Meanwhile, by the way, we have tried to work also on efficiencies of A&R, pushing for 24 months contracts, or also to aligning our A&R to the high-value type of package, so which means that our A&R intensity, the level of A&R that we spend per commitment from our customers is decreasing, but that's true that in absolute terms it increased slightly.

The second, OpEx. You're right, the cost structure in Spain has always been quite lean, but for different reasons. In customer care, we have faced some issues migrating to data, and so there we have had to make some one-shot investments in our customer care in order to improve it and to improve our customer experience. But there as well, we intend to continue to work on our cost structure in the next coming quarters.

Yes. On fixed line, your second question, we didn't talk about fixed line in broader terms because I always said that fixed line is a local strategy. So I think Andy mentioned Italy is going very well, 13% growth. Germany is going well, especially in enterprise, 7%, 6%, 7% growth in Enterprise in Germany. It really depends a lot. And in other markets it's also -- I can mention Turkey or India with small but going up a lot.

It's a very local type of strategy. It depends on what the competitors do, it depends on the regulatory framework and depends on our infrastructure. So it's difficult for us to generalize. Do we need to dispose of those bases? No, we need just to make the integration of fixed to mobile in whichever way makes sense at a local level, and therefore it's not a generalized strategy.

Thanks very much.

I said Robin. Then we come here, yes. And then we go back, don't worry.

Thanks very much. It's Robin Bienenstock from Sanford Bernstein. This time last year we were all talking about soft SIMS, and now we're seeing iMessaging and iVoice and two increasingly dominant operating systems. So I guess simple question, or high level question, are you more or less worried about value chain threats than you were a year ago? And how do you think you can improve your relative negotiating power, your relative power versus the operating systems, and I guess in particular Apple?

Yes. Last year you were talking about this and you were writing about it, the night before if I remember correctly. I would say we are neither more worried nor less worried. We are aware, which is the important thing. So the reason why I started my presentation with how much is what is exactly because we are aware that there are technological changes. We need to ride these changes, we cannot fight against, and we need to make sure that the revenue composition and how we charge to our customers is consistent with the future.

So is iMessager something that can eat into our SMS revenues? Answer, yes, if you don't have integrated pricing, less if you have integrated pricing, or even nothing if you have integrated pricing, which is why we are stressing how much and what's the progress which we have made in the last six months introducing integrated pricing. We keep watching. We are very alert. We are very aware and we are very [aware].

How can we change our power? I think here we should be careful in not mixing two things. One, what customers want. If something is wanted by the customers, there's no point in fighting against. It's just a matter of pricing in an intelligent way. I cannot go against the will of the customers. If something is good, it's good; end of the story. Different thing is how can I change the balance of power in the economic relationship with these guys, and the only answer is by having more choice, which is why we support Android.

Now, Android is by far our biggest contributor, which is why we would support a third system coming from Windows, Nokia or whoever, which is why we like Blackberry. At the end of the day, the more choice you have, the better it is, which is why I also made the point about the tablets. Tablets cannot be just one single thing. But there's nothing else other than having more competition and having choice.

You can see your pricing going in the right direction on contract more in bundles, etc. Are you also happy that your prepay pricing is going in the right direction structurally as well?

I think Italy went up to EUR2.5, right, Michel? So, again, even prepaid you can do the same thing.

Thanks.

It's not -- at the end of the day, whether I pay EUR2.5, whatever, per day or EUR7 per week or EUR20 per month, it's still a concept of bundled. And that's exactly the reason why Michel is moving all the European companies in that direction.

James, you had a question, and then we'll go back. Yes.

It's James Britton from Nomura. Firstly, around your cost focus of the Company, transitioning towards perhaps more of a growth angle, but can we expect a new Group wide cost saving plan when the current one comes to an end? And are you going to be able to sustain the current cost savings run rate, GBP500m a year?

And then, secondly, you talked about being quite confident about a recovery in top line growth in the second half. I think in the appendix to the pack you've identified the MTR relaxation in the second half, which doesn't seem that significant. How confident are you still today about recovery in the second half?

So, on the cost one, we are -- and we identified a number of initiatives that we've been undertaking. Vittorio talked about some in IT. I talked about some on the network logistics side. We are constantly working away on cost initiatives. The program we've got underway at the moment, which I think we talked about a two-year program, is absolutely on track. We are getting the savings out. We just aren't talking about them maybe as much, but we've given some visibility there.

We've just had another discussion about where the next series of cost reductions will come from. And this is like filling a hopper, because from the idea to actually researching it to starting to put it into motion, to getting it, so we're constantly needing to work a year ahead. So, yes, absolutely working on the cost side, and there's all sorts of areas where we'll be now starting to engage to look at what we can next do.

And the top line recovery?

The top line recovery, the MTR part you touched briefly upon. We get the benefit particularly in Germany, but that starts to roll through in the latter part of the year. So the MTR effect will be slightly lower in the second half than in the first half. What we've said about the generality of the rest of the business, we've got good momentum in many of the markets, and overall I think we're comfortable with the direction of travel at the moment.

So you expect the growth to increase in the second half?

No, I didn't say I'd expect it to increase. I expect that we'll keep the momentum going.

Emmet, Andrew and then we go here, this way, there, yes.

Emmet Kelly from Merrill Lynch. Two questions, please. Firstly, you've increased the prices in some of your key markets. I think outgoing call prices have gone up in India, contract prices have gone up in the Netherlands, and I think there were some prepaid price increases in the UK. Can you just say what impact and traction you've had with those price increases in your second quarter, and what you're expecting going forward?

And the second question is more a big picture question. If we go back two years ago, Verizon Wireless decided to push ahead very aggressively with LTE. Their balance sheet had started to deleverage, and I think they saw an opportunity maybe to grab some market share from some of their competitors, especially from AT&T, who were having problems with their network at the time. Going into 2012/2013, your balance sheet now looks like it's in pretty reasonably shape as well. It's also fair to say that some of your main competitors are quite capital constrained, the likes of Telefonica in Spain or in the UK. Do you think there is any merit in perhaps replicating the Verizon Wireless strategy and maybe pushing ahead a little bit more aggressively with LTE, to maybe win a bit of market share? Thank you.

Yes. Let me take the big picture question. And then, Michel, do you want to answer on pricing? Do you want to?

Oh, now. Sorry, yes. So, let's say in the different markets in which we do operate, yes, that's true that we have tried to improve a little bit our pricing when it is feasible, your two examples. In Netherlands, on one side, what we have done is reduced data allowance. More and more you will see us trying to do that, because we have always said that our strategy was to monetize data in the future, so not to give too much data to start with and then allow our customers to be able to upgrade. And by the way, in Netherlands we have also introduced different type of price plans with additional features in it, and which allows us to increase a little bit the price.

In the UK that was slightly different. We have rounded some prices and we have also increased some out of bundle prices, because customers want to be clear in what is in the bundle and are a little bit less relaxed when it is for spend outside of those bundles. That's things that we've done in the past in Portugal, in Spain, in Italy, so you can expect from us to try to improve the pricing when the conditions are there and where we can get traction.

You were asking me whether it has had any impact. You see in our figures that in the UK and in Netherlands it has translated in revenue growth.

Nick, from emerging markets perspective?

Yes. I think if you take India as the example you used, we put through a 20% effective price increase. Those prices are seeding into the base as we speak, so we're about 20% penetrated at the moment. We're used to flies around the emerging markets. But 20% penetrated as we speak. We expect that to be 60% penetrated by the end of the fiscal year. So you've already seen quarter-over-quarter that our price point has now stabilized, as I'd hope that it would improve going forward.

If I was using Africa, I'd say inflation across Africa has clearly made operators acutely aware of the need to consider pricing. So instead of big headline drops, I think you're seeing a stabilization and more promotional pricing. And Kenya, Safaricom just put up their prices, so.

On the big picture question, let me tell you, first of all, we are not and I'm not shy of investing if we can create a competitive advantage. Which is why, as Andy has said, our CapEx are slightly up, and which is why we have never reduced our investments, even in the horrible 2008/2009 period. So I do believe that technology can be an advantage for a company like Vodafone, or for a company like Verizon, and we would definitely invest if we saw the benefit.

I'm not sure you can translate the Verizon Wireless LTE story straight into Europe, in the sense that we have, as I have indicated, a little bit of a broader approach which has HSPA, which has room to go. We have LTE, so where we get the frequencies like in Germany the answer is, yes, we are getting now into the cities. In other places we will improve first, HSDPA, use single RAN to make sure that at any point in time we can switch and integrate, but there's no point in anticipating big investments if the handsets are not there or if you don't see an opportunity.

So the answer to your question is a philosophical yes, but not exactly the same strategy as Verizon Wireless.

If Apple were to come out with an LTE version of the iPhone next year, does that change your --?

We'll sell it in Germany, where we have an LTE network.

Yes, okay.

Let me go back to Andrew, then Will, and then will come Simon and then we'll go there. Yes, I'm coming there, don't worry. And then we go back to the other side. Yes, sorry.

Hi. It's Andrew Beale from Arete Research. Can I come back to the pricing question? Can you just talk a little bit about the consumer acceptance of pricing increases and whether they are starting to see more benefit from higher -- slightly higher data pricing, and whether it's simply a matter of in-market competition and what your rivals are doing now?

Secondly, just looking at the costs of network and technology more generally, obviously you've talked a bit about the benefits of single RAN. I'm just wondering about some of the other things that seem to be coming out of the vendors now, such as centralizing the OSS/BSS, potentially in the longer term moving the baseband into the cloud, whether that -- those are things that might change the capital intensity or OpEx of the business.

Yes. I think the second is a perfect big picture question for Steve, who is the CTO. And on the first one on pricing, it's very difficult to say can you really increase prices regardless of competitors. Answer, no. Are we seeing a certain willingness on the customers' side to take decent price increases when there is value in them? Answer, yes. What is decent depends a bit on how the competitors react, so in some markets it's GBP1 or GBP2, in others GBP0.5 or EUR0.5 in the Italian prepaid case. In some markets, it's a fraction of a rupee. So you have to go, basically follow what the competitors do.

What we are seeing is that given the low levels of the European prices and the super low levels of the Indian prices, at the end of the day there is not a negative reaction if you do things in an intelligent and proper way. That's what I would characterize it. But it's very difficult to say can you do it regardless of competitors. No, of course not.

Steve, big picture, technical evolutions.

Is this on? Good. Good morning. Yes, two answers to the question. Firstly, similar to that of the IT world, in networks OSS and BSS we can centralize as we are. We used -- for example, used to have 13 core NOCs, network operating centers, in Europe. We now have one in Germany, so we can get the operational efficiencies de facto from our scale.

Secondly, the vendors are indeed enabling new sciences to be more efficient. OSS and BSS centralization is something we're following rapidly and we're employing. It's been a key enabler for that centralization of the NOC. Cloud or radio with baseband in the cloud, we've been trialing that. It has some trade-offs on increased costs in transport, so we're looking for the economic sweet spot of exactly what you'll do and where there. But we're at the forefront of that I think the vendors will tell you, and are certainly a lead proponent in helping shape and design that.

There are others that you don't mention but would fall in the same bucket. IP microwave continues to improve. That can take us over 1 gig now, which takes us right through LTE, so that offers us economics and scale. Eband microwave, which is brand new, this is unlicensed spectrums, yet another example where science keeps pushing the boundaries of efficiencies for us to not so much reduce your CapEx but allow you to get more for your money and to spend on areas that touch customers and, for example, increasing our reach, raising the baseband level or HSDPA and other things that we share with you in our strategy.

So yes is the answer, and I would hope the vendors when you talk to them would say Vodafone is helping shape their future with that.

Will, Simon and then here there were, yes, some questions here.

Thanks. It's Will Draper at Espirito Santo. One on the balance sheet and one on the P&L, if that's okay. Your debt's fallen to pretty low levels now and will keep falling, despite the generous shareholder returns, which brings us to what else you might do with the cash. You've talked a little bit about in-market consolidation and you're trying to do Greece. Maybe you could update us a little on Greece, and if there's anything else that you're thinking of by way of in-market consolidation.

And secondly, on the P&L, there was a good beat at operating profit but earnings was just about in line. Some of that was to do with higher financing costs, but some of it looked like higher tax also. And I wondered if you could just talk about why the effective tax rate had moved up and where you see that for the full year. Thanks.

Yes. Let me give you a very detailed answer on in-market consolidation. I'm sure everybody is ready to take notes. First of all, it's not linked to the debt levels. To be clear, if market consolidation makes sense, if it makes sense, you look at it. And we are looking at every single possible case, as we have been doing for the last three years.

Now, I'm not giving you any detailed update. It takes three to dance, you, the other one and the regulator. Greece, there was some kind of leakage so we said yes, we are in talks. We keep being in talks. There's no real update. We are trying to find a solution which can satisfy the consumers, i.e. the regulator, the investment profile which makes sense for the country, i.e. the macroeconomic situation, and of course the shareholders of both companies. And that's the effort that we are making there, which is more specific of Greece given the situation.

We are looking at all other situations. I said always I'm in favor of supporting third party consolidation or being active. And this is where we are and when we have something to announce we will announce.

Andy?

Tax rate. Well, it all depends whose expectation you're comparing with. We had said mid-20s. 25.2% is about as close as we could get to that, so that was very close to what we were expecting. The previous first half was I think 23%, so it was just fractionally lower, but basically tax was bang in line with where we had expected it to be.

Simon?

Yes. Thank you very much. Simon Weeden from Citigroup. I wondered if I could ask, on Italy, for you to elaborate a little bit on the balance there between competitive pressure versus economic pressure. You've mentioned both, but looking at the numbers the ARPU's fine and the customer base is where the extra weakness came from, particularly mobile. So that looks perhaps a bit more competitive.

And then just if I could ask you to elaborate a little bit more on the swap hit to the P&L and what that might look like going forward, and what it's about. Thank you.

Well, I would say that in Italy probably nothing very new compared to what we have seen in the previous quarters. I guess that the competitive position of Vodafone remains quite strong. You know that we have a very differentiated brand there and that we are doing quite well in the market, whether it's in mobile or in fixed. We still are facing some aggressive behaviors from some of our competitors, mainly Telecom Italia, which had slowed down a little bit a few quarters -- a few months ago but which is back quite aggressive on mobile number portability and also in data allowance.

I have said earlier on that what we were trying to do was to reduce data allowance, in order to allow data monetization in the future. Of course it's better when all the players are moving in the same direction, which is not yet completely the case there. So, a little bit more aggressiveness in the market in the recent weeks.

Despite that, I guess that as you have seen we have posted quite good results driven by data, driven by messaging, with some pressure on voice for what I have said, and also, as Vittorio was mentioning, driven also by fixed. So I would say very strong competitive performance. The macro remains unknown for the next coming quarters, obviously.

The mark-to-market put simply is we took the decision, as I said, to fix more going forwards. We have done that at rates which compared with historic averages are very good. The actual market rates have dropped slightly below that at the moment, and we had to basically account for that difference. So going forwards, I'd hope it wouldn't deteriorate but it is just totally dependent upon market rates.

Any questions here? Yes, back there, and then we come in front and then we go back there again.

Christopher Nicholson from ORACA. I guess that you must have done the necessary scenario planning in case Italy were to go bust.

You mean personally? I still have a house there.

If you want to discuss that. But what is Vodafone's view on its European assets in this case? Do you expect essentially for it to be a disaster for you, or actually something a little less bad?

No, we do not expect a disaster, but we expect hard work. Specifically in Italy, I don't think Italy will go bust, but of course there's a lot of hard work that has as an implication probably consumer confidence being not at the highest and some pressure on the price in business as well. Having said that, as Michel has said, if you ask me Italy is a market where we have already low prices, low price per minute, and a very efficient commercial and distribution cost structure, plus a very strong network, a powerful network which is fixed and mobile but very strong on mobile.

So I would say structurally Vodafone in Italy is pretty strong. So even if the country goes a little bit through hard times, I think that we have all -- if you look at our distribution, it's a franchise distribution mostly, so variable costs, can handle in a pretty flexible way. If you look at our enterprise distribution, again, it's partners; there's a lot of third parties. So we have some flexibilities in it. We have outsourced some parts of the network maintenance. So there is flexibility built in the system in a pretty robust body.

We are trying to go in the same direction in Spain, which is what I mentioned before, because Spain had a different type of structure. And we are trying to take care of Greece in the way that I described before. So this is a bit the plan for this. I wouldn't put Italy, Spain and Greece exactly in the same bucket. They are three different types of pressures.

Yes. Can I come here? Yes.

Yes. Hello. It's James Ratzer from New Street Research. The first question I had was regarding Germany, please. You've got just over 50,000 LTE customers at the moment. What are they buying the service for at the moment? Is that as a fixed line substitute, or are they buying it to enhance their existing mobile activities?

Yes.

As you roll into urban areas next year in Germany, can we see a revenue growth acceleration in Germany like we've seen for Verizon Wireless?

Yes.

And to what extent is that marginally offset by what looks like a worsening voice tariff outlook in Germany?

And the second question, two sub-questions on corporate activity, but I'm not sure you'll be keen to answer either of them. But it looks like the consolidation rules in India are easing. Are you theoretically more interested in consolidating with one of the larger players, or one of the new entrants in India?

And secondly, is Australia still a core asset? Thank you.

Yes, a lot of questions. The question on Germany is easy. For the time being, it's mostly a wireless access in the home. The usage is 9 gig per month, something like that, so it's a very -- it's a classic instead of getting a bad DSL I get a good LTE, which I think is the beauty. And that's why I was stressing low latency and very good speed, 6 to 12, which many countries like this one would be very competitive also with fixed line.

On the corporate activity in India, India, first of all, these are recommendations that have to become rules. We welcome most of it, not the whole of it because there is still some distinction between GSM and CDMA, which we think is not right, but of course we welcome. If the 35 to 65 market share consolidation could be looked at, of course it increases the degrees of freedom of the system.

Will we look at opportunities if they arise? The answer is yes. I wouldn't be prescriptive on saying small or big; it depends. When you have 13 players, the number of possible permutations is very high. But again, we will look at it, we would support. We think that India -- we have already done a little bit through the Indus Towers thing, because we clearly are already consolidating infrastructure. I think we are in a very good position because through the infrastructure company we also have an additional competitive -- or reason for being a (inaudible).

Australia, is it core? Well, now we need to fix it, and we need with the agreement with our partner there is to make sure that the customer side of the story is as good as the saving part of the story. As I said, the savings are there, but of course we need to bring it back in terms of customer confidence and in terms of brand perception. So in the short term, it's hard work and fixing.

So just would German service revenue growth next year accelerate as LTEs rolled into the urban areas?

I don't think we gave guidance by country, and for sure not today.

Yes. One here, one here, and then we have to go. Yes, down there to Robert and then we come back. The extreme.

Hi. Ottavio Adorisio from Societe Generale. I have a couple of questions. The first is for Andy. In the slides we saw a lot of comprehensive analysis on the impact on revenues from MTRs, but as you receive MTRs also you pay MTRs, and ultimately there is the impact on cost. So is it possible to share with us, with MTRs coming down and therefore with the cost from MTRs coming down, what's happened to the other side of the cost? How much they're going up, what's the biggest driver? And especially I'm referring to retention and acquisition cost.

The second one is to Nick, and actually follows from the 20% increase on India. I reckon it's tough always to do a price increase, but when inflation is 9% it's probably easier. As you basically depend more and more on organic growth coming from emerging markets, I was just wondering how we can really offset growth in a hard currency like in Europe with growth coming from emerging markets where differential inflation is going to be reflected in ForEx. And of course when you have to repatriate cash at some stage that will be a problem. So I was wondering if you can give us a bit of granularity about the great growth in emerging markets net to the inflation?

And the last one is a very quick one. On data, how much is the [basically take] on network usage vis-a-vis voice? That's an update. You used to give in the past data as a percentage of network capacity vis-a-vis voice. You used to give in the past and if you can give an update on it.

Shall I take the first one? As a rule of thumb, and this is approximate, 8% of revenue is mobile termination receipts and roughly 7% of revenue is mobile termination rate payments. So a sort of 1% delta is probably order of magnitude the net impact that you should think of.

Nick, inflation (multiple speakers).

Exactly. It sounded a very sophisticated question. Let me make it a simpler one. So, just in terms of the emerging markets, if we look ahead, we basically have three main drivers. So we're still under-penetrated in many of the countries, and so we just get the natural penetration as we roll out network. And what I would say is compared to our competitors we're pretty aggressive at rolling out network and capturing a disproportionate share as we go into rural areas, etc.

I'd say secondly, the sophistication that we have in our mature markets in Europe in terms of CRM, proposition development stimulation, is still something we have yet to really deploy actively in developing markets. So that's an advantage for us, given our knowledge of what works.

And third is data opportunity, which I think Vittorio said was huge in emerging markets. We're sitting around between 5% and 8% of service revenue, as opposed to in Australia at 18%. So we're getting good traction on 2G and 3G to come. So my view is yes, I think we've got strong growth opportunities. Relative to inflation, I'm not too sure.

The answer to the data question is 82% in Europe and 66% Group.

Let's move totally to the other side. Robert, and then we come back.

Yes. Thanks. I'm in self-imposed quarantine over here. In Europe, data traffic growth stabilized after a rapid slowdown. Are we reaching the end of the bulk of the data traffic management techniques you've previously flagged, or is there more behind this from a technical perspective, be it compression or whatever?

And the second question is it seems very logical you get more dividends coming from Verizon Wireless beyond this next one, but the timing and the magnitude of any payments might vary. Would you look at smoothing the new level of Vodafone's total returns using your own strong balance sheet to avoid over-uncertainty of the timing of future VZW dividends? Thanks.

Steve Pusey, are you running out of tricks?

We still have more tricks. The next wave that you'll see, I would venture across the industry but I hope we'll be leading it again, is really storage and where we put data in the network. Part of the cloud and the RAN liquid radio to some vendors, they all brand it differently, that we're experimenting with is exactly where we store the traffic to get best economics out of the network and how we best push to the edge.

The economics run on a triangle, to be very quick, of transport, computing and storage, and right now storage is relatively cheap. Transport is the expensive element of the hub. So if we can push storage deeper in the network and push relatively frequently used content data services out to the edge, to the base station or even the handset, is another wave of data economics to be had. And we're aggressively looking at that right now.

Yes. On the Verizon Wireless question, I don't like to speculate too much. We said it was a year-by-year decision. I wouldn't like to go any further. Andy, do you feel like?

No, I was going to say I think it's a step at a time. Let's get the money in the bank account first, and then we'll think about what happens after.

Good. We have five, six more minutes, so shall we come back a bit. Yes, Stephen, I think you have been waiting patiently.

Thanks very much. Yes, Stephen Howard here at HSBC. Slide 40, there's quite a powerful chart demonstrating that you've managed to align revenue growth and traffic growth in Europe again. What I'm wondering is are there any markets where you are seeing that at risk? So, in other words, are there any destabilizing forces in any particular countries that you're worried about?

And although I appreciate it's well outside of Europe, it's interesting to see you commenting on pricing pressure in the data segment in South Africa in the Vodacom results yesterday. What's going on there? What's the driver? Is it a transient threat, or is it something we should be more concerned about? Thanks.

So why don't we start with South Africa, Nick?

Yes. So we reduced our South African prices by about 20% postpay August, prepay September, and that will have a slowing effect on our service revenue growth in the second half. It was a response to competition. So previously it was promotional pricing, and then that moved to structural pricing. I'd like to say they haven't quite learned the lessons in Europe, so whether that gets adjusted going forward. So we try to pitch at what we think is still a very reasonable level, and we'll see what our level of performance is in the market versus the competition on that basis.

Can we come back to somebody who has not asked questions before? Yes?

Thank you. It's John Davies from Santander. Very quickly on Verizon, it strikes me that there must be opportunities for synergies between Verizon Wireless and Verizon Group which perhaps hadn't been fully addressed when there were perhaps more tensions in the relationship. Is that something you'd be looking at beyond the cost saving synergies that you've talked about already, but more operational ones?

This is a good question for Verizon, right? How can I answer about a question of synergies between a company where I am a shareholder and a company where I am not a shareholder? What I can tell you is -- if you want to ask the detailed questions, you should really ask them.

What I can tell you is that we are trying to take a holistic view of how can we leverage on everything we can do, including what Verizon fixed line can do, in the relationship with suppliers. So, for example, we are going to the Oracles, to the Dells, to the whatever, IBMs of this world, and saying together this is our spending, what can we do together. And of course that's how the other side comes in. But this is Vodafone and Verizon Group, if you want. Between wireless and wire line, it's a question for them.

Yes.

Hi. It's Maurice Patrick from Barclays. You spent a lot of time talking about driving profitable data growth, and you've given examples of where you've seen it. Italy is one where you cited where perhaps you saw aggressive price competition from a competitor, TI. Are there any other markets where you feel as though you're not really controlling or driving those price increases, or where a competitor is driving lower or irrational data prices?

Listen, I cannot get into specific markets. I can make only generic comments; otherwise it could be seen negatively by authorities. Let me say in general data profitability in Europe is lower than in the US, where we compare notes on a regular basis with our friends from Verizon Wireless, and of Asia where we usually have a lot of partner markets and friends. So there is, I think, an opportunity and a need, in order to finance the investments, to bring it up.

The speed at which this is happening is different by market. In some markets there's more sensitivity to it, and in other markets there's less sensitivity to it. I wouldn't go market by market. The positive news is that in the last six months, and this was noted by some analysts in the last year, I would say, it starts trending in the right direction. Slowly, gently back to Andy's question, because of course you cannot rock the customer relationship.

And secondly, when do you think things like charge to bill in emerging markets will become a material part of ARPU we'll see?

Nick?

Well, I'd say we want to deploy it as quickly as possible. So I think you look at emerging markets and we have a bigger opportunity, because obviously smartphone penetration is low single digit. So we need to get ahead of the curve to offer a breadth of services. So I think we have an opportunity to get ahead of a potential threat.

But let me tell you, you need two things. You need 3G networks and you need smartphones with something like the Opera mini browser or something which is affordable there. Once you have those two elements, then immediately, because there's no credit cards and there's no payment methods. So, as soon as possible when the two things are aligned.

So Egypt would be a good example.

Yes. Shall we go back there again? Yes. Let me see, one more, two more, maybe, and -- okay.

Thank you. Lawrence Sugarman.

Sorry. Sorry, Tim. I thought --

Okay. Lawrence Sugarman from RBS. Just a couple of questions, if I could, on India. Potential changes being suggested by the regulator around MTR rates. First of all could you give an indication as to how likely you think those will actually come in, and secondly what sort of financial impact that might have?

And secondly, the tax case in India seemed to have concluded from at least the digital side of it. Do you have anything new on terms of timing, actually getting a result from it?

Well, on MTRs, we find the recent announcement from the regulator a bit strange, because actually the April 2009 current MTR rates are under dispute and are in the Supreme Court. So, basically, we disputed those rates to TDSAT. We won on the basis that they were not including capital costs. So then the regulator went to the Supreme Court, and we are currently in the Supreme Court. So the next hearing is November 17. So, given we were arguing they didn't include capital costs, it's a bit strange they're lower than the current MTRs. So what I'd say is we're firmly opposing them.

So with apologies to Tim -- sorry.

Sorry, just on the tax case, we finished in court three weeks ago, I think it was after a nine-week hearing. Written submissions have now gone in. We do not know what the time period now is for adjudication. So some time in the next few weeks or months; it's a bit vague.

Apologies to Tim, you're right, I checked, you didn't ask the first question. So you have the right to the final question.

Thank you very much. Tim Boddy from Goldman. So just two slightly bigger picture questions. We're obviously heading into a period of much more challenging economic conditions in Europe generally, not just southern Europe. Can you talk about the structure of the mobile market now, compared to how it was in '08/'09? And as we see economic consumer confidence fall, how do you think mobile consumers will react this time?

And secondly, we continue to see very strong growth in SAC, I think 7% growth in customer costs in Europe. The question really is can you stabilize European EBITDA margins before without stabilizing that growth in customer cost?

Yes. Let me try to give you an answer. First question, I am deeply convinced that the shift to smartphones is one of those things that goes a little bit beyond the contingent economic situation. If you think about even Greece, if you think about Italy, if you think about Spain, actually Spain, despite everything, smartphone penetration is going up, data usage is up 15%, smartphone penetration 30%.

So there is an underlying need which is immediately satisfied by these beautiful things and by the tablets and by everything else. I was reading yesterday 10% of American adults have a tablet now. So it will come here. There's no doubt it will come. It can come a little bit later, a little bit faster, but at the end of the day I don't think that this will change the general demand.

Now, your second question is absolutely right, is will it come at a very high cost. I believe that we should actually continue to do what we're doing in Spain, so try to reduce the cost of distribution, be much more efficient, be more focused on giving the right subsidy to the right customer, and eventually moving a bit the ARPU in the direction that Michel indicated.

So I am positive on the first part of the question. I think it's going to be hard work on the second one.

Let me conclude by, if you can put up the last slide, we had a final, final, final slide which probably is the right summary. I think we are delivering solid results. Again, I want to stress the point the revenue profile is going in the right direction. We are becoming a better and safer pool of revenues. We are moving pricing in a way which is consistent with where technology is going and with where demand is going, doing well commercially and being very focused on shareholder returns. 30%, as Andy has said, has been returned in cash. And our commitment is to continue to drive the Company for the long term and for the shareholders' returns.

Thank you very much for all of your questions, and I'm sorry we couldn't take all of them.