Vodafone Group PLC (VOD) 2016 Q2 法說會逐字稿

Good morning.

Welcome.

Thank you for coming here this day.

I will do the usual business review; then, Nick will follow with the financial review of the quarter and the half year; and then, we'll take your questions.

Overall view, we got a good quarter, another good quarter, of growth: 2.4% at Group level.

This is, I would say, despite the roaming headwinds.

And that has been supported both by growth in emerging markets and in Europe.

And this is a combination of, again, much more-for-more actions; and a stabilizing ARPU, as a result of it; and, of course, customer growth in emerging markets.

Group EBITDA, up 4.3%: strong cost control, operational leverage at work.

Today, Nick and I will talk about India impairment decided, non-cash impairment decided, at EUR5 billion net of tax.

Due to increased competition, Nick and I will share the reasons why we think Vodafone in India is strongly positioned for the future, we will explain the trends, and explain the strategic and financial outlook.

And finally, the Board today decided to increase dividends by 1.9% dividend per share to EUR4.74 (sic, see slide 4 "EUR0.474").

Overall, we cover the engine of growth, the three engine of growth: enterprise, data, and convergence, fixed broadband.

Fixed broadband, particularly good.

We continue to grow.

We are fastest-growing broadband provider in Europe.

And now we have a very large NGN network in Europe, which is, I think, and I will show, a very good opportunity for future growth.

And finally, strategic progress in the quarter.

We acquired spectrum in India.

We'll talk about India again.

And we are progressing with the approvals of both joint ventures: the Vodafone Ziggo one in the Netherlands, and the Vodafone Sky one in New Zealand.

So, let's start.

First of all, as I said, good momentum.

A classic snapshot.

On one hand, good growth, good growth in customers in mobile, 1.4 million; in fixed line, 325,000.

Good -- I have to say also, for the first time we have prepaid also starting to grow again, which is good, in Europe.

As you can see in the center part of the chart, this is now leading into a world of more stable ARPUs, stable both in Europe and in AMAP.

And, as I said, this results in growth in both areas.

This is the seventh consecutive quarter of growth at Group level, and second consecutive quarter of growth in Europe.

So, how are we doing this?

Just two words on our differentiation strategy.

Two pillars of differentiation strategy.

The first one is what comes after Project Spring.

We invested heavily in technology, both fixed and mobile.

As you can see on the graph, 90% 4G coverage now in Europe; 70% of European urban sites have fibre.

And, as a result, the user experience is clearly improving; improving not just in Europe, where now 90% of the data sessions are happening at 3 megabit per second, or higher, which means high quality of video, but also dropped call rates that are going down.

The red line is only the AMAP one.

We don't show the European [arm] because it's below 0.50, so it's kind of a very good performance.

15 out of 20 of our networks now have best rating in data, and 17 out of 20 have best rating in voice.

And this is very important, because this was the first pillar of our differentiation strategy.

In parallel, we are becoming bigger in fixed network, the right part of the chart: 53% NGN coverage in Europe today.

I can say that, essentially, the opportunity is the same as the incumbents.

82 million households followed, of which, 31 million followed directly with our own NGN, and the number will go up to 37 million once the Ziggo integration is happened.

So, large opportunity; largest NGN footprint in Europe, second largest on-net NGN footprint.

Clearly, the Spring has been the basic brick of our strategy.

Now, clearly, the other brick is the experience with the customers, what we call under the name of CARE, the CARE project.

And this is the commercial [exploitment] of the previous fundamental pillar of the strategy.

We now are giving network guarantees to 17 (inaudible) markets.

Kind of thanks to the network performance that we have, we can guarantee that we can reimburse people if they are not happy.

We are granting real-time monitoring in 13 markets.

Our My Vodafone app has now almost a 40% penetration.

This is very important, and I will cover it later also from a cost perspective.

But here, it's the commercial side, and it's what is leading to the increased usage of data from our customers.

We are doing much more personalized offers, 17 markets.

And some of them really have made a science out of this, are now giving personalized offers to customers.

As a result, churn is down more than 1 percentage point.

And finally, 24/7 help in 14 markets, because life is not just digital, is also still human in some aspects.

And this has led to 65% -- 66%, actually, first-contact resolution, which, again, is important if we want to give customers the perception of the value of the service that they get from us.

So, is this giving also any real appreciation from the customer?

The answer is yes.

Left part of the chart, we keep being, by a tiny amount, leading vis a vis the composite of the competitors.

But most importantly, the gap versus number 3s is not only stable, but even increasing.

And this is a very, very important point.

If you do quality, if you do a strategy based on quality and based on differentiation, it's not really about being the leader, it's about really creating a two-tier market.

And this slide, I think these results illustrate that in most markets we have been able to drive that.

As a result, as you can see from the center part of the chart, we lead or co-lead in many markets.

And, let's face it, we still have two or three cases where we need to improve and to work; and these are the ones at the bottom part of the chart.

I will not comment on how we make it, because these are just examples.

It's essentially, as you can see, network guarantees; it's about giving much more-for-more type of offers, [private] offers.

Every market has a different dimension to it, but the outcome is the same.

So, this is basis of what we have been doing.

How are we making growth happening?

First of all, data.

Data clearly keeps being a great engine for growth.

We have around 60 million customers, the red bar, in 4G around the world; and 40 million in Europe.

57% of our data traffic now in Europe is 4G, which is pretty important, and there is still, at per-user level, a hefty increase quarter after quarter.

Numbers are different: 1.4 gigabytes in Europe, around 1 -- or 0.9 gigabytes in AMAP, but still growing in a very healthy base -- way.

Now, the central slide is bit cryptic, but is very important.

There is high growth, 60% of growth in data.

If you look at the absolute amount of data, the last quarter was more the 200 petabytes of increase, which is, more or less, what happened in the first -- in the previous three quarters.

So you might say, oh my God, do these guys have the capacity to do it?

Now the important point is buried in the line below the graph.

Despite this increase, our network utilization went up only 1 percentage point in the quarter, which really means that through investment, but also through smart management, we can really support a continuing of data for quite a bit.

And that's very important, if you look at the right part of the chart, because, despite our perception in this room that everybody has a smartphone and everybody has 4G, in reality, the penetration of smartphone is still only 50%.

And if you look at 4G in particular, in Europe, it's about one-third of the base.

So there's a lot of potential to have further penetration, and we have the capacity to support data growth.

So, this is important.

Is this turning into money?

Yes, it's turning into money.

Different numbers, these are clearly examples, between EUR1 and EUR6, depending on the country.

And, again, this is combination of including roaming, increasing data, giving services, depending on the local marketing priority.

But this is generating more money for us, and, therefore, ARPU stabilization that we have been talking about is now happening.

In some cases, it's even ARPU increase, not just stabilization.

And the central part of the slide is important, because if you turn it into a per-gig price, from a customer perspective, this is a dramatic and very, very positive price reduction: 40% year over year.

I always say this to regulators and to journalists, the unit price is going down in our sector, 40%.

But, of course, the total spending is holding, or is even going up.

And I think this means more value for the customers, more value for the operators, and a much healthier industry for all of us together.

The second engine for growth is enterprise.

Now enterprise, it's something that we chose few years ago as an important engine for growth.

Enterprise is now 28% of Group service revenue, and 32% in Europe, so it is becoming a very important part of Vodafone.

We lead in 15 out of 20 markets.

We have the best 4G IoT footprint in the world, 31 countries.

And we continue to expand in fixed line with IP-VPNs now in 73 countries.

This quarter we have a bit better news, because we continue to grow in fixed line, the central green and black or gray bars: 4.6%, 4.7% growth.

But we have also accelerated a bit in mobile, 2.8%.

And this is because there is ARPU decline in enterprise mobile, but less than in the past.

And then, we gain in market share.

And we gain market share, because, right part of the chart, the three divisions, global enterprise, cloud and hosting, and IoT continue to have healthy growth rates, different, but healthy, growth rates across the piece.

So, enterprise is an important part of our strategy.

And finally, convergence.

We have 327,000 household added in the quarter, which is in line with the previous quarters.

There is a higher number of NGN additions, because we also have some migration, which, again, is healthy from a long-term perspective.

As you can see on the right part of the chart, we have been building quite a bit.

And building means building ourselves, like in Spain, 600,000 homes, or in Portugal 100,000, or in Greece, where we are starting; but also building through others.

And here, I can say few words about the two partnerships, one in Ireland, one in Italy, with electricity companies, both of them; different nature of partnership.

But, essentially, they start to deliver.

In Ireland, we will have 65,000 homes by the end of the year.

In Italy, it's going up by 30,000; we have the first five cities, and it will go up quite significantly longer term.

So our -- apart from the integration of Ziggo, and in the footprint, our own ability to reach through NGN homes in Europe is becoming very material and very significant, which I think indicates a great opportunity.

How big is the opportunity?

Well, today, if you look at the left part of the chart, on our own footprint we have around 19% penetration.

So we have 5.9 million households on-net, and, in theory, we could have a marketable base of 30.7 million; that's 19%.

But, of course, we have a lot of potential in places like Italy, or in other markets, where we are well below the 20%.

And, of course, as I said, this footprint is also expanding.

Another interesting information, we only have 1.9 RGUs per home.

This is kind of low, relative to the industry norm, which is more 2.4, 2.5 RGUs.

So, again, this is an opportunity.

So, what do we do?

We continue to sell converged.

Now we have 28% of fixed broadband homes on converged offers, which is up 3 percentage points versus last year, on a bigger base.

Of course, we will push in a disciplined way.

We don't want to give away too much profitability, too much ARPU, but will continue along this with a strategy.

In the second half, we start seeing here what incumbents have been talking about for quite a while; and, again, we have to recognize that we are seeing the same thing on churn.

If you take the Spanish numbers, the ones on the blue bars, when we move from mobile to triple-play churn halves, from around 27%, 26%, which is high in general in Spain, to 13%.

But when you move to quadruple play it halves again to, in this case, 6%, which, I understand, is more or less what is considered best practice in the world.

So, not only we have an opportunity to expand in fixed line and to consolidate our base, but we also have an opportunity to reduce the churn at the other side.

And finally, in the context of the strategy, regulation.

I have to say, we are pleased, and we support and we welcome the European framework review.

Because, essentially, it reflects what we have been standing for, and what Vodacom has been standing for traditionally, which is a pro investment and pro competition position, which is supporting gigabit investment, and allowing good competitive access to high-capacity networks.

So, I would say we have four ticks.

First tick is on the spectrum, the red part: minimum 25 years' life is pretty good.

The second tick is on access to ducts and poles, and to, I would say, deregulation subject to certain competitive tests, which we think is healthy.

The third tick is, clearly, that cable has not been regulated; and the fourth is the harmonization with a double-lock mechanism of EU regulations.

So, from that point of view, I think, regulation, at least as far as Vodafone is concerned, is going in the right direction.

Now, the only non-tick, or un-tick, or cross, whatever, is the roaming discussion, which is not technically part of the framework.

The roaming caps, clearly, are not helpful.

The theoretical maximum impact for Vodafone this year would be EUR300 million, but we are mitigating it significantly with our own roaming offers.

And next year it will be even a bit higher than that, and I think Nick can comment on it.

But, again, this is pre-mitigation.

And I would say, overall, the broad direction, forgetting for a second roaming, is positive.

And roaming, again, we all knew that at some point would have to become part of the commercial normal offers.

And this is what I have been doing.

I have been talking to you since, probably, three years ago, and that's why we are integrating roaming in our own tariffs more and more.

So, this is the end of the general part.

Let me say a few comments now about how things went market by market.

First of all, Germany, I have to say, I'm pleased with the Germany performance.

As you can see on the chart, in Germany we continued to be co-leading, or close to Deutsche Telekom.

In all fairness, they still have a bit of an advantage on data.

We have an advantage on voice.

But the important thing is that the gap versus the third is opening here.

And we now have pretty good 4G coverage throughout the country, and improved a lot versus last year.

In some cities, we are already getting to the highest possible speeds.

As you see, we are also recovering in terms of commercial performance.

The good thing is that here -- the new thing is that, here, prepaid also is starting to grow again.

Fixed line continues to do well.

Fixed line, this quarter, has also the positive contribution of DSL.

The only area where we are not performing, by choice and by design, is connections in indirect channels.

We still are not convinced that the profitability of indirect channels is the right one.

We know that some, actually one, of our competitors is very heavily in direct channels.

Again, we reserve our judgment, but we don't see the economics completely right in that channel.

And the proof, or at least the comfort, comes from the right part of the chart, where we have 3.1% growth in the quarter, with mobile growing 1.3%; enterprise not yet fully positive, but improved; fixed going up 6%; cable, I mean, the number on the slide really has to be read more as 6% rather than 9%; and also, EBITDA growing 3%.

So, I would say, a good performance in Germany, proving that the strategy is the right one.

And I think I could say the same for Italy.

In Italy, we have lost the NPS leadership, [overall] leadership, because of pricing actions, but we retain a very, very strong network performance perception.

As I said, we are accelerating the deployment with Enel on fiber.

And as you can see in the central part of the chart, we have a steady performance on fixed line, and what looks like a negative steady on mobile.

In reality, we have achieved a stability in the active prepaid base.

The negative number in Italy is because of this washing machines of prepaid, which is peculiar of the market.

And we have reached 2 million fixed broadband, of which 400,000 are now fiber.

So, healthy from a customer-quality point of view.

And again, as a result, 2.2% growth: 1.6% in mobile, 5.2% in fixed.

I have to say, fantastic performance at EBITDA level, plus 10% in Italy.

And this is, clearly, a function of the commercial results, but also a function of the fact that we have done a pretty deep job on costs in the country.

So, I would say, Italy also pretty good, like Germany.

UK, I would call it more of a mixed performance.

We have some positive signs.

The biggest is, clearly, the P3 network test, which gave us the co-lead position in the country, which gave us the clear lead in London, and a clear lead in voice nationwide.

We have some evidence of improvement in customer perception, the NPS of the touch points.

So the NPS of the customers who actually interact with Vodafone is positive now, and a dramatic improvement versus one year ago.

But we are still not completely done with the mitigation of the IT migration problems, and we are still suffering from an overall perception in the market.

KPIs are, actually, not bad.

So, we are back with mobile contract growth; and most important in the quarter, we also had fixed contract growth.

Now, here we only have one month of line rental removal.

That has been taken very positively.

There is an acceleration now in connections in fixed line.

But, as you can see on the right part of the chart, I would call the performance stable, if you take away all the distorting factors, versus the previous quarter.

And at EBITDA level we are losing 6.5%, because we had to invest more in customer and in network costs -- in technology costs to mitigate the migration, the [IT] migration problem.

So, I would say positive signs in the UK.

Not fully happy.

But, most importantly, not fully delivering what the customers need and deserve.

But working on it.

Spain is another case of good performance.

In Spain, we continue to lead in NPS customer experience.

We have a fantastic network, 92% coverage in Spain versus 96% in Italy.

You are talking really, given the size of the Spanish country, about really important numbers.

A very large NGN network: 14.7 million homes passed, 9.5 million on-net.

This number will go up to 10 million by the end of the year.

So, pretty good performance.

Also, commercially, as you can see, we are back.

To regain commercial momentum, we have to change pricing in April.

That has got some impact, short-term impact, but I think it was healthy and right to do.

And, as you can see on the right hand of the chart, I would say, again, this is a case which works the other way around, more or less the same performance as the previous quarter, once you take out the out-of-bundle lapping effect.

And, like in Italy, a remarkable performance at EBITDA level.

Even if this is only plus 5%, this is plus 5% after content costs, which is, as you know, a new feature of the Spanish market.

So, again, another place where, I think, under Nick's great orchestration, all the ZBB and all the Fit for Growth programs are delivering.

Now, moving to India, first of all, the performance in the quarter, I would say, in India we continue to lead.

In NPS, we have number one in network NPS.

We have increased our spectrum holding in India by 62%.

We have bought 4G spectrum, and we will be able to have 4G operational now in 17 circles, which represent 94% of our data revenues.

We had a little bit of a slowdown in the performance.

It's not hugely visible in the financials, but, clearly, you can see the total number of data customers has flattened versus the previous quarter.

The 3G, 4G is still growing.

But the data component, actually, in terms of revenues, is slowing down; and data prices have been going down, due to the arrival of Jio.

So, I would say, if you look at the financial performance, 5.4% growth, 2.6% growth of EBITDA, you could say it starts showing that there is more competition.

But so far, I think sequentially, quarter over quarter, we have the same performance of Bharti and Idea; it's a minus 2%, which is more seasonal.

But again, if you go one level below, you start seeing that there is a little bit more competition already in the quarter numbers.

Let me talk then about competition and Jio.

A few words.

First of all, I always say let's not forget what we are talking about here.

We are talking about a country of 1.3 billion people, of which apparent penetration is 77%, but the real penetration is only 40%.

If you look at the little numbers at the bottom of the left hand of the chart, you have 244 million (sic, see slide 20 - "254 million") estimated devices, smartphones, in India, which is 40% penetration; and 4G handsets is 8%.

So if you only take that part of the chart, you say there's hundreds of millions of people in India who still have to get into data, into smartphones, into 4G.

So the opportunity, in terms of underlying market, remains, probably, I would think, the biggest in the world for telecoms.

In this context, Vodafone is pretty strong, number one brand; number one consumer NPS; number one in enterprise mobility; number one in retail assets, leading CVM; and a history of delivering, in a fairly constant way, across the different tiers.

But there is a new competitor, big competitor, investing 25 billion in the market with free offers out.

What are we doing about it?

Well, we are working on two fronts.

On the commercial front, we have changed our offers to basically mitigate the impact, both at the high end and the low end.

At the high end, we have introduced new Vodafone Red tariffs, which are, clearly, more convenient; and we have introduced promotions which give 10 gig for the price of 1 gig.

At the bottom end, which is more the value seekers, we have introduced a 10p-30p-30p promotion, like our competitors, for voice calls.

And we are introducing the flex concept, which is a concept that we have been very successful in Egypt, of units that can be flexibly allocated by the customers to whatever they want to need.

Now, these are clearly short-term commercial reactions.

Longer term, the strategy has been to buy spectrum to accelerate the deployment of 4G, which Nick and I have encouraged them to do quicker and earlier so that by the end of this year we should have 4G in all of the 17 circles, the 12 leadership and the five where we are a strong challenger.

Nick will cover also the financial aspects of that, so I will not go really deeper.

So, India, yes, it's more competitive.

We are kind of in line with the market.

We expect more competition.

But we have both commercial, and from a technology and from a spectrum point of view, we think we are equipped for being, in the medium and long term, one of the key players in the market.

Now, Vodacom, I usually don't say many words because they present always before us.

Another great story of leadership, NPS, strategy; but, most important here, a great marketing story, a story of customer-based management, direct offers.

The Just4You bundles are actually becoming very successful.

As you can see in the central part of the chart, we have a lot of prepaid bundles, but the personalized ones are becoming a vast part of them, and this shows then in the results.

Growth of customers, 7.6%, reduced churn.

We have 4.8% churn on contract in South Africa; I think it's the lowest I've ever heard anywhere in the world, so I'm really pleased with what we are doing there.

And clearly, data continues to be the booster of our performance.

At Group level, Vodacom Group level, you can see there is a little bit of slowdown in growth.

It's not really in South Africa; it's more in the internationals.

The internationals have got all these customer registration issues, which have slowed down the growth.

But the good news is that now the number of customers is picking up again.

So I think we'll go through this and then Vodacom will be again, across the piece, in a very solid position.

EBITDA growth, 4%; margin, 38.6%.

I think, again, it's another great story.

So, before turning to Nick, let me say, what's next?

What's next?

The strategy remains the same: Vodafone continues its evolution from mobile, from metered, from consumer into kind of data company, converged, enterprise, unmetered, big bundles.

This is a combination of network, 4G, 5G, 4G+ first, and 5G when it comes; fiberization; cloudification and virtualization, which are very important to prepare for the future; and then, clearly, Internet of Things.

So, this is the vision for 2020 that we are working against.

In terms of key programs, the second half of this year, and possibly next year, I would say, don't expect big changes.

We have three pillars of our technology strategy: 4G+ and fiber now, and preparing for 5G, under the leadership of Johan, who sits there.

So if you have questions on 5G, I'm sure that Johan will be happy to take them.

Transforming IT.

At this point, the approach will be country by country, cluster by cluster, because I think we learned how to do well things, and also sometimes, through mistakes, how to not do things.

And then, virtualization and cloud to reduce cost, and, most important, to increase speed.

Commercial strategy, consumer, CXX and CARE will be our carrier for differentiation.

In enterprise, continue to push on the three divisions: VGE, IoT, and cloud and hosting.

We have a fourth one, which is security, but it's very small.

And then, we have just decided to launch a consumer IoT division, given the fact that we think that in 2020, or by 2020, it will be important to be in that space, and to strengthen our data and analytics units across the piece.

And finally, since nothing can happen without financial discipline and focused investment, our efficiency programs.

Nick will talk about Fit for Growth, which continues throughout the period.

We will continue to apply zero-based budget to the central and coordinating functions, to be sure that we squeeze costs to reinvest somewhere else.

And digital, which is very important from a customer point of view, will also be very important to reduce customer care and distribution costs.

And, with that, I think it's time to talk about numbers.

Nick.

Thanks, Vittorio.

Good morning.

Talk about numbers.

By the way, ZBB, you can tell we're building up for the budget with the shortness of my haircut.

Right, turning to the key highlights of our financial performance, starting on the left-hand chart, organic service revenue for H1 grew 2.3% with Q2 slightly stronger at 2.4%.

This was a little ahead of our expectation with good performances in many markets, but especially Germany.

A tight cost control under our Fit for Growth program saw EBITDA accelerate at a faster pace than service revenue at 4.3% year over year, expanding margins.

Headline EBIT returned to growth at 7.5% year over year.

But excluding the D&A benefit from holding the Netherlands asset for sale, the underlying performance was down 3% year over year.

However, with the leverage effect of growing EBITDA and normalized capital intensity, we would expect to see EBIT stabilize as we go into next fiscal year.

Turning to the lower half of the P&L, I just wanted to briefly cover a number of points.

Lower adjusted earnings per share is driven by two factors.

First the increase in financing cost reflects lower capitalized interest in India as we begin to put into service previously acquired spectrum.

In addition, we experienced FX losses on intra-group lending.

Excluding these factors, our underlying net finance cost was stable year over year, despite our higher average debt.

Secondly, our share count has been increased materially, given the mandatory convertible bonds.

But it's our intention to buy back those shares with the proceeds from the Verizon loan notes.

Finally, our reported loss for the period was impacted by a net EUR5 billion non-cash impairment of goodwill and assets in India, driven by our expectation of lower projected cash flows, following increased competition in the market.

Turning to our operational performance, you can see from both charts our service revenue growth is broad based.

Top right, you see Europe continue its acceleration, Q2 plus 1% year over year, versus negative 1% this time last year, even after absorbing the negative impact from roaming this year.

It's pleasing to see that 10 out of 13 European markets are now in growth.

AMAP produced another strong quarter of greater than 7% growth, whilst absorbing price pressure in India, with strong performances in Turkey and Egypt, which you can see on the far left of the main chart.

On the far right, we see the UK and Netherlands still in negative territory.

We expect to see an improvement in Netherlands in H2, as we lap the change in VAT treatment.

In the UK, we see a similar underlying performance in Q2, given the ongoing mix shift towards SIM-only contracts in the marketplace, and a drag from lower MVNO revenues.

Still on service revenue, I wanted to give another view, this time focused on our three growth drivers and the contribution they make.

As you see on the left, mobile data is our largest contributor to growth with Europe consumer mobile delivering the largest improvement year over year, stabilizing as we drive more-for-more pricing strategies in our markets.

AMAP consumer mobile continues to be the largest contributor at 1.8 percentage points.

Consumer fixed contributing 0.6 percentage points, having added 1.5 million customers over the past year.

And finally, enterprise contributing 0.8 percentage points, continuing to take share, given our unique international footprint with deep local roots.

It is worth noting the black bar, where we have taken conscious action to eliminate very low-margin international voice transmit, which represents 0.6 percentage points of the 0.8 percentage points drag highlighted.

This is set to reduce in H2.

If we look at H2 trends in service revenue growth, we see a similar underlying performance to H1 when adjusting for the previously highlighted last-year Q4 70 basis points leap and one-offs, and the MTR cuts in Germany from December, with the Group benefiting from a lower carrier drag and a solid European performance, broadly offsetting the negative impacts on India slowdown.

Turning to EBITDA and our work on costs through our Fit for Growth program, as you can see on the first blue bar, we were able to deliver approximately 60% incremental gross margin in H1, given our focus on more-for-more pricing actions and further penetration of our fixed NGN footprints.

I was pleased with the progress that we made on costs, which overall we held flat, but produced a far higher output in terms of commercial performance, as seen in the top box.

Let's take a closer look at how we are managing to hold our cost base stable, using the key building blocks of Fit for Growth program.

Our direct cost base continues to increase, up 2% year over year, given higher wholesale fees on 0.5 million customers, off-net broadband customers, since H1 last year.

As well as the impact of EUR85 million increase in content cost in Spain and Portugal, content costs are expected to have a further rise of EUR70 million in the second half and should then plateau, given limited content auctions over the next couple of years in our key markets.

Customer costs remain stable, thanks to our focus on A&R efficiency, which further improved by 30 basis points in Europe.

And good progress in Spain, particularly, offset some market pressure in Germany.

Technology costs also increased, due to Project Spring footprint expansion, year over year of about 5%, which moderated in H1 with only a 2% additional build.

This increase in cost was more than offset by a 14% decline in support costs, as our ZBB initiatives began to take an impact.

When looking at the potential of further cost reductions, I want to remind you that our Fit for Growth has two parts to its execution.

First, through A.T. Kearney benchmarking, we break down all of the processes within an OpCo to determine whether the operation is at top quartile by process.

If it's not, we size the opportunity by process.

The OpCos are then targeted on a multi-year improvement program to reduce the performance gaps.

In addition, we have a small program office to coordinate and drive best prices and accelerate progress.

Secondly, we are identifying developed Group programs, where we see the opportunity to see our global scale and bring competitive advantage.

The pie chart on the left gives you an illustration of the mix we have achieved in Phase I. Phase I was 2016 to 2017.

And all initiatives are now identified and being executed, so we remain on track to achieve our FY18 targeted run rate.

We, therefore, took the opportunity to develop Phase II, which has similar savings ambitions to Phase I.

You also see the composition change between the two phases.

Procurement was heavily centralized in Phase I. The opportunity, moving forward, will be to adopt a manufacturing teardown model to cost each component and avoid over-engineering specifications.

Shared services have ramped up quickly, so we are yet to see the full financial benefit to date.

So far, we've been focused on building captive scaled sensors in our emerging markets footprints.

But moving forward, we see significant opportunities from AI and insourcing of application development.

Sales and distribution are constantly optimized as we drive My Vodafone app and direct distribution, whilst improving the customer lifetime value economics of indirect channels.

In network and IT, we achieved material savings in driving network standards during Project Spring.

In Phase II, we are focused on bringing our IT cost, as a percent of revenue, down from the 5.5% to below 4%.

And finally, we used ZBB in Group reviews in Q4 of last year, and it's now being rolled out to all countries, as part of the budget process, in this quarter 4.

Bottom line, our systematic focus on driving efficiency in all areas of the business, while growing our top line, gives us confidence on margin expansion moving forward.

To close on costs, we've concluded our latest A.T. Kearney benchmark review to inform our Phase II execution.

The recent results shown here, we have made the greatest improvement over the last three years when compared to any previous review cycles with some excellent performances, as highlighted by those above the horizontal line.

There is opportunity for all the OpCos.

But this chart shows the largest opportunity to the bottom-left quadrant, where the gap to top quartile is still significant.

It highlights the UK, Ireland, and Germany, where we have further work to do; and the local management teams are working on the plans over the coming quarters.

I have talked, the last two results presentations, about the broad-based nature of our top-line recovery.

I'm now pleased to see the combination of this recovery, along with systematic cost control, feeding into broad-based margin improvement.

In Europe, A&R and OpEx are generally declining, driving higher margins in all our major businesses, except the UK, which, as Vittorio has already stated, has had some well documented operational challenges.

It is worth commenting on Germany, which, despite reaching 100% of our targeted cost and CapEx integration synergies six months ahead of plan, our costs rose year over year, due to increased subsidy levels during H1, given competitive aggression in indirect channels.

Whilst in AMAP, despite inflationary price pressure in costs, we're improving margins everywhere bar India, given our rapidly expanding 4G footprint.

Consequently, as you see on the left-hand chart, our Group EBITDA margin continues to improve, up 70 basis points year over year.

Now, 19 of our 26 OpCos are expanding margins with ambitious three-year improvement targets set for the vast majority of the businesses moving forward.

Moving to capital expenditure, we continue to take a disciplined approach as we drive down investment levels by around 25% following Project Spring, normalizing at mid-teens capital intensity.

During H1, we've invested to support our growth in AMAP, notably, India, where we're executing our 4G plans, post the spectrum auction.

You will see this reflected in seasonally higher CapEx levels in H2, bringing us towards the upper end of our guidance range on capital intensity, as we indicated in May.

In Europe, we have continued to invest in 4G densification and mobile backhaul.

We now have fiber to the sites in 69% of our urban sites, versus the 95% target we have set for 2020.

Despite strong traffic growth, our 4G utilization at busy hour has only increased by 1 percentage point, with the Project Spring investment giving us substantial headroom in the future, allowing us to lower investment levels in capacity.

In fixed line, we are investing in incremental footprint expansion in Southern Europe, predominantly Spain and Portugal, whilst CPE costs remain high, due to strong customer growth.

Finally, we've increased investment in IT, consistent with our long-term cost saving ambition.

It goes without saying that capital expenditure and discipline is also critical when acquiring spectrum.

In the recent Indian auction we invested EUR2.7 billion, in line with our plan.

However, I want to take the opportunity to build on Vittorio's India summary and explain our investment strategy.

Since 2010, post the expansion of competition in India, which brought a step change in the pricing environment and cost of spectrum, we have been focusing our investments in India on the circles where we believe we can earn an appropriate long-term return on capital.

There are 12 circles where we enjoy a leading position, with an average 27% revenue market share, and attractive margins.

As you can see from the chart, 93% of all our spectrum spending since FY10, including 92% of the spend in the recent auction, was focused on these circles.

We now have 3 to 5 data carriers in every circle, giving us significant capacity for future data growth.

In addition, we had the option to re-farm 900 megahertz for low-band data services, reducing our need to participate in future 700 megahertz auctions.

Importantly, we are gaining revenue market share in our leadership circles, both in Q1 and in the last two years.

The spectrum investments we have made in our most profitable circles gives us a position of strength, from which we can shape future potential consolidation.

There are five further circles where we have a strong challenger position, typically, number two and three, with rising revenue market share and improving margins.

You can see from the chart that in FY16 we invested CapEx to roll out 3G in the circles to replace our 3G ICR arrangements.

Moving forward, I think we are well positioned to achieve scale.

Finally, there are five circles where our market share and margins do not justify costly spectrum investments.

Here, we will retain our pan-India presence through ICR arrangements with various partners, on top of our core urban presence.

These contracts have recently been renegotiated on improved terms, and we can expect these circles to be free cash flow breakeven moving forward.

Moving to free cash flow, which was breakeven in H1, mainly as a result of the final payments associated with Project Spring completion in FY16, driving a year-on-year increase of just over EUR700 million in capital creditors.

A large seasonal outflow in working capital is not unusual in H1, and, in fact, the swing was lower than in the prior period.

Cash tax payments reflected the benefit of the reorganization of our Indian businesses, which took place at the end of last year.

For the full year, we expect cash taxes of around EUR1.1 billion, with a similar effective tax rate for the first half.

We continue to expect a mid-20s underlying effective tax rate in the medium term.

Finally, despite a higher gross debt level, our cash interest cost declined in H1.

We expect the full-year to be around EUR1.1 billion, with a higher H2, given the timing of the bond interest payments and KDG minorities paid in October.

Our balance sheet remains robust with leverage at 2.6 times.

Net debt increased, as expected, to EUR40.7 billion, mainly due to the payment of the final dividend and FX impact.

We expect net debt to reduce during the second half, despite payments for spectrum in India and Egypt, given strong free cash flow, and a monetization of the first tranche of Verizon loan notes.

We also expect to close our JV with Ziggo in the Netherlands, which would lead to an approximate EUR0.5 billion net cash inflow, given the refinancing.

We have taken advantage of benign funding conditions during the period to significantly extend the duration of our maturities.

The average life of our debt has now risen to 9.4 years; up from seven years last year.

And we've achieved this while leaving our underlying cash interest cost flat, year over year.

Turning to guidance, overall, we remain on track to hit our internal plan of the year.

Europe is ahead of plan, driving modest upside to our internal expectations in the first half.

However, given increased competition in India, the top end of our original EBITDA guidance range needs to be slightly modified, narrowing the range.

During second half, we expect revenue growth to be broadly similar to the first half, on an underlying basis, as our performance in Europe compensates for lower India growth.

We continue to expect to deliver free cash flow of just above EUR4 billion.

And given our performance and outlook, the Board approved a 1.9% increase in our interim dividend.

And on that, I will hand back to Vittorio.

Don't think I need to summarize too much.

I think, for me, the key chapters are we continue to work on differentiation, technology, and commercial, as I explained.

Pleased with the commercial momentum in Germany, in Italy, in Spain, in South Africa; prepared for competition in India; and, I would say, not deteriorating, but still we need to improve in the UK.

Modestly ahead of expectations in the first half.

And, I have to say, focused on driving operational leverage.

We'll continued to do it in the ways that Nick has illustrated.

And, with that, I think we should open to questions.

Polo Tang, UBS.

I just have two questions.

The first one is on India.

Are you seeing negative service revenues for the December quarter, given promotional activity by Reliance Jio?

And do you think the entry of Jio into the market triggers further consolidation in India?

The second question is really just a follow up in terms of Fit for Growth Phase II.

Is there any -- can you actually give some color in terms of what the financial impact of this Phase II, in terms of Fit for Growth, might involve?

Thanks.

Yes, let me start the answer on India; and then, maybe, you complete India and [you go].

Clearly -- let me take the broader thing.

What's happening in India is very interesting.

You have somebody who invests 25 billion in a market whose EV is, I don't know, what, you tell me probably, 60, 70, 80, I don't know.

But it's basically a massive investment relative to the size of the market.

Clearly, there are a couple of players who are investing.

Eftel is the market leader, so they are basically digging their heels in.

And Vodafone, in the way that Nick has explained, we are strengthening our position a little bit more selectively, because we are smaller.

What will this result into?

I think consolidation is the answer.

And there will be pressure on unit prices.

Not necessarily dramatic declines of ARPUs, but definitely there will be bigger volumes on minutes, bigger volumes of data.

There will be a challenge on how to serve this from an OpEx point of view.

But you cannot defy the rules of economics.

The marginal place on the cost curve will eventually have to consolidate and so it will work back into the [melting].

At some point, a new equilibrium will be found and potentially start -- things will start going up again.

That's a little bit the way we think.

And Vodafone has the ambition to -- in our leadership service, in a very disciplined way, in a very financially smart way have the intention to be one of the players that will enjoy the longer-term consolidation in this sector.

Nick, you want to be more precise?

Yes.

If I just brought it down to visibility over the next one or two quarters, I'd say, one of the trends we're already seeing is we've refreshed, per Vittorio's presentation, our commercial offering, and we're seeing good traction in the market.

So in terms of net add performance, actually, the net add performance for the quarter didn't look so strong.

But if you looked at September and you look at October, we're trading well on customer growth.

So I'd argue we're not losing customers.

We are losing some data growth.

Because, obviously, if there's a free service out there, who's going to be predominantly a second SIM in the marketplace, we're going to lose some of that data.

What we have to see is what happens when, as per the TRAI, the regulator, says the promotion has to stop from December 3, and they have to start charging, what we have to see is how many of the customers want to stay on Jio as a primary SIM, as opposed to being a secondary SIM.

So we could see volumes come back to us on that basis, but we will have to see.

On your second question in terms of -- so, to conclude, on India in terms of top line, Q3, of course, we're going to have a little bit more of a slowdown.

But let's not get overly dramatic is what I would say.

On Fit for Growth in terms of the financial goals, we had said all along that we were driving a systematic approach to efficiency within the Company.

We said that we were targeting 24 out of 26 businesses, on a three-year basis, on a multi-year basis, to improve margin.

I think the first half was a good illustration of how serious we're taking that.

70 basis points improvement year over year is a good start point, I would say.

And clearly, we want to be able to accomplish similar type goals on a multi-year basis.

Now, will we give exact this is the guidance on them?

No, because we're a large group, big portfolio, lot of moving parts, composition can be different.

You've heard it all from me before.

So I don't think we should get down into and it's going to be this number, because that's very hard for us to predict.

But I think H1 is a good illustration of our ambition.

John Karidis, Haitong Securities.

I also have two questions, if I may.

The first one is to do with your fixed line business.

Is it right to assume that the size of the off-net broadband networks is likely to increase faster than your on-net broadband networks?

And, therefore, what does that mean about the profitability of your fixed line revenue, going forward?

And then secondly, specifically in the UK, as you may know, Ofcom is looking for volunteers to help them build the third all-fiber network to about 40% of the country.

Sky have already said thanks, but no thanks.

Under what circumstances would you step up to the plate and be one of those brave volunteers, please?

First of all, I believe we should think about return on capital more than profitability.

We, in this industry, always talk about EBITDA, EBITDA, EBITDA; you should start thinking about EBIT, [EBITDA-only] return, which by the way, next year we have the intention to kind of emphasize stronger.

Yes, you're right, the off-net, the kind of resale is less profitable, but the capital allocated to it is also lower.

So the more we use not our network the more we will require economic conditions that allow a certain margin to be made; hence, a certain kind of [pension] with the incumbents.

At the end of the day, this is also the answer to the second question, the reason why it's important to have access to ducts and poles is exactly to have an alternative, which is economic.

And then, I can look whether I prefer in a specific area to build or to lease.

But if Ofcom helps me, Openreach should have a competitive rate here and should give access to ducts and poles here, and then we will make a tradeoff.

So, it's impossible to give an answer in general.

It's a little bit like in Italy: you have areas of the country where it's going to be very hard to build, to the point that there will be subsidies.

Now, whether to be won by Enel or by Telecom Italia, in the end, we prefer Enel, because we have a better contract.

But if then Telecom Italia at some point improves the condition of their contract, that is still good for us.

So you cannot give a black-and-white answer to that type of question, regardless of conditions and geography.

Maurice, Barclays.

A couple of regulatory questions, please.

The first one on roaming, so you quantified the retail element of roaming on your numbers that drag this year and next year.

There are proposals in Parliament to have a much lower wholesale rate; I believe the EUR8.5 number could become possibly EUR1 per gigabyte.

You, presumably, are insulated against the OpEx risk because of your diversified nature, but, say the Finnish operators are talking about wanting lower rates.

Are you worried about lower rates being imposed at EUR1 levels, and the potential impact that could have on up-charge, or [OTEs] entering?

And just secondly, you've made the point, I think, about 95% of your sites being further back on the urban areas.

And as you start thinking about the European framework review and how the final recommendation will come out, how important is cost-orientated access to backhaul networks to fulfill your 5G vision?

Thanks.

On roaming, it's a combination of two things: it's the price, and it's also the fair usage conditions, which are important.

The price is important.

Clearly, EUR1 per gig is too low.

If you start talking about the current proposal, the one that has been debated, that talks about EUR8.5 going to EUR5, which, okay, some operators are not happy with.

In the end, Vodafone could live with it.

And we are always more [model] than others, of course, because we have more on-net, and we have an advantage, blah-blah.

The real point is the fair usage conditions.

And there was a proposal of 90 days; it has been kind of turned down.

I'm not sure how much higher they can go.

Because if you think of weekends, where you should live in your country, hopefully, and you think about working abroad 50% of your time, you actually get to 145, or 150.

So there's not a huge amount of margin there that can be played.

So these will be the important elements of the discussion.

Now, northern countries don't like it, clearly, for one reason; southern countries don't like it, for another reason.

My sense is that big countries, like Germany or like France, will not allow the wholesale rate to go at a point where their own industry is threatened.

And again, in the current climate, I don't see many people being really very happy to sacrifice their own industry for the greater common good.

So, in that sense, it's probably one of the positives of a balanced situation that has to be found.

Second question was the importance of cost orientation to get to the 95% fiber.

Of course, as I said, the lower we get the better it is.

But also, don't underestimate, we have alternatives.

We can work with third parties, and, especially, and that's why I raised the point about access to infrastructure, we can build ourselves if we have access to ducts.

And that's why access to ducts and the clean conditions for accessing passive elements of the incumbents' infrastructure is very important for competition.

If countries really care about competition, that's the single element that they should work on.

Could I just say one thing on the roaming that sometimes isn't appreciated?

Assuming no domestic arbitrage opportunities, so that's covered, two-thirds of our roaming traffic is on footprint, so it's within our operations.

And that final one-third is on a balanced trade-flow with our partners.

So, actually, you could argue, from an economics perspective, we are in a lot more favorable position to, say, some other operators that maybe have imbalances.

Two questions.

Firstly, just on the outlook, and, I guess, specifically, just on the thoughts you have around India, as you both mentioned, the H1 performance has been better than you'd expected across the board, yet you've chosen to trim the top end of the guidance.

I guess I'm just trying to understand, within that, is that a function of the fact that to keep such a wide range doesn't seem credible, going into H2 it implies too big a range for the second half, so this implicit prudence for H2?

Or are there specific things in India?

And I guess when you talk to India, I completely take your points around there are going to be effects within the business.

But as we look through what you've seen so far, halfway through Q4, are there specifics you're seeing?

Or is it just you're worried about them sustaining the data pricing at free, post December 3?

And then secondly, on Enel, there's been a lot of rumors and discussion around whether their rollout targets are actually on plan at the moment or not, so just any sort of color around what you're seeing.

How comfortable are you with what they're doing?

And you also mentioned that currently your penetration is 5% of your fiber footprint in Italy versus 20% elsewhere, what steps are you thinking to, to try and drive that up to a more peer-group average sort of number?

Thanks.

Just in terms of the thinking on the guidance range, you did a pretty good summary yourself, actually.

When you look at the guidance, clearly, we try to narrow the range down, as we get to this point in the year, to be more helpful.

So how you have to look at that range is sort of what could happen on the top end.

The top end is Jio start charging from December 3. We see reasonable dynamics happen through quarter 4, in other words, a slight normalization of the situation.

We also see potentially Italy, which now, the consolidation happens; what happens to the below-the-line promotional activity that has been pretty aggressive over the first half of the year?

If it gets moderated, that could be quite beneficial for Italy.

So these are, I would say, the two higher ends.

At the lower ends of the guidance range, clearly, can we say Jio will definitely start charging from December 3?

No, we can't.

Therefore, if they sustain free for another quarter that is a big variable and what happens in the marketplace generally?

And, on top of that, could a large European market get suddenly more competitive?

Of course, it can.

So, unfortunately, we have to keep that slightly lower end of the range in place, just in case a number of things go against us in terms of headwinds.

Yes, on the Enel project, what we can report is that Enel is getting up to speed.

So there are now 30,000, 40,000 homes per month, which is pretty good.

No, these are not homes, these are apartments, so it's easier, of course, but it is families in the end.

The theoretical maximum speed that they can get is 100,000, which will come over time.

We don't hear any operational issue in their deployment.

And now, it's up to us to convert existing customers into NGN customers as soon as they come available.

Of course, we have to go by area, because we don't want to go more times into the same area.

If you think about our footprint there we will have 1.5 in Phase I; plus 1 million of metro; plus 2 million of FTTC; which is 4.5.

This will go up to 8 or 9 on Phase I. And then, we see what happens in the, you can call them poor areas, the [C&D] areas, where there will be Telecom Italia versus Enel subsidized rates.

But, potentially, Italy could become, in a matter of a few years, a pretty fiberized country; and I would say, probably, 60% of it competitive, and 40% non.

What we need to do is to, basically, go block by block.

It's geographic marketing, it's not mass marketing.

But again, if you take today's Corriere della Sera, you see Vodafone's advertising at 1 gigabit per second.

Today's.

This morning I saw the first one.

So that's what we are doing.

David, Bank of America.

I had two questions, please.

Just, first of all, on Spain, it's quite clear that Orange has gathered a lot of momentum.

It looks like you guys are holding your own, and Telefonica is starting to really lose, but Orange Jazztel has definitely disrupted a historically favorable environment.

How long are you going to give them before you guys feel the need to react, is my first question?

And then, second of all, it was a curious move to introduce the very aggressive broadband pricing in the UK.

It felt like you would always be a little bit more reactive to BT and EE, rather than necessarily proactive, so I'm just interested in how you guys came about that strategy.

Thank you.

Thanks, David.

Let me answer both questions in a very short way.

How long will we wait to react to Jazztel?

For those who are not familiar, it's the second brand of Orange that plays always systematically EUR7, EUR8, or EUR7, EUR6, EUR5 below our price points.

And the answer is very short: not very long.

We said it last time, and now it's becoming not very long, the answer.

And it is what it is.

On the UK thing, you say our pricing is very aggressive.

I think the UK has done some kind of additional thinking on the situation on the market, and we found two things.

One, that this is a market which is going very quickly over the top, so because of English content, because of, whatever, all the things that we know; therefore, it would have been a better entry strategy to have a clean pricing without line rental, focused on naked broadband, focused on our customer base.

And this is also why we are holding the launch of TV, because we prefer to build scale in our customer base on naked broadband, because there're so many people and so many customers that naturally now are appreciating that.

Now, of course, we are anticipating a request from Ofcom.

So it's not that we are doing something completely crazy.

It's a request from Ofcom to have integrated pricing without the hidden line rental.

We did it, and we did it at commercial level.

And the take up, which is only partially visible in our number, is actually good.

So we are pleased with that.

And we think that to build scale, that's the best entry strategy into the UK, rather than going with traditional offer with TV and then the hidden line rentals, and things like that.

San Dhillon, Exane.

Two questions.

The first question is on organic EBITDA.

Nick, you say it's relatively broad based, and it is, but within the mix AMAP is growing at near enough 10%.

Given what's happening in India, and Egypt as well with the currency devaluation, what level of organic EBITDA growth can we expect with that, within that region?

Secondly, given that organic EBITDA has been in growth phase for some time now, what type of leverage do you think a growing EBITDA company in telecoms can sustain, going forward?

Sorry, I missed the second one.

Levarage.

Was just a question on leverage.

Given that Vodafone has been growing EBITDA sustainably for some period of time now, what leverage can a growing telecom company sustain?

Yes, look, we'd gone out with our range at 3% to 6% type growth.

And we said, when we went out with that guidance range, that the midpoint was broadly where our plans were as a business, and, therefore, we remain in line with our plans.

So, yes, we've had an anticipated slowdown in India, but some of our other AMAP countries are performing very strongly; I pick Turkey, Egypt, etc.

So I remain confident in our outlook in terms of the guidance.

We have -- obviously, as we go into leverage, think about it in terms of more for more.

There're really two things that I would draw out in terms of the growth drivers.

The first is the data side, clearly, if we are monetizing data that has a strong leverage effect; and the second, which is a point already made, which is selling fixed on-net has a big leverage effect as well because we've already got the network there.

So those two have, if you like, high margin throughputs.

Lower margin throughput would be selling off [footprint] in fixed.

So that composition depends on our leverage.

As you say, I think, we've done a good job.

Outside of direct costs, which have a wholesale and a content, we've done a really good job of holding costs down; and we're looking to get further efficiencies, going forward.

Jerry Dellis, Jefferies.

Two questions, please.

Firstly, you mentioned in the slides that you're making personalized offers available to customers in 17 markets.

I just wondered whether you could give us some more detail, perhaps, about the level of customer take up, and what typically happens to a customer's ARPU when they adopt one of these personalized offers.

And then, the second question is really on Italy.

I suppose, Telecom Italia managed to reduce line loss last quarter with quite an effective quad-play campaign, and they seem to be investing with more urgency in fiber.

I just wonder, commercially, on the ground, what impact that is having upon you, and to what extent you now need to act a bit more urgently there.

Yes, it's difficult to give you a general answer on personalized offers because by definition, as the name says, they are personalized.

So, it's very difficult.

But let's say what's the purpose of these things?

These are data analytics-driven strategies which are aimed at identifying opportunities to up-sell, based on a more generous type of offer, so they are usually ARPU accretive and unit-price dilutive.

I give you more of this, of that, if you use it in certain times of the day, in certain months, on certain days; more versus the previous.

There's a huge variety of offers, but, essentially, that's the --

And the take up, it's very difficult to generalize because it depends on what you're talking about.

There are some who have a fantastic take up.

For many of them now we are using the My Vodafone app, the digital app, because, of course, it also creates a certain kind of stickiness to the Vodafone experience.

I think it's actually an interesting question.

We might, in one, maybe do a dedicated investor and analyst focus separately from these events because it's becoming, I think, more important, and it's one of the areas where we're investing.

So, maybe we will follow up.

Second question on Italy, listen, on Italy, yes, Telecom Italia is doing what everybody else is doing, so building more fiber and trying to do quadruple play.

We are going to push ourselves.

We are going to launch TV.

Again, different strategy from the UK, for a different reason.

We are already at a good broadband customer base so we can now add the TV offer.

And what do I see in the market?

I see -- the only thing I don't fully understand is a very aggressive entry point, at EUR19, from Telecom Italia.

You kind of not expect but accept from Fastweb.

From Telecom Italia, I would have expected a bit of a premium versus Fastweb also because Fastweb is their partner on the deployment of fiber, so it's a bit of a strange.

But, having said that, we will play the game that we need to play.

I think there is an opportunity in Italy, with the consolidation of Wind and 3 and the preparation for the arrival of the new entrant in nine months' time, to uplift ARPU in a healthy way.

Andrew Lee, Goldman Sachs.

I thought one of the bright spots from your results was the operational leverage that we started to see more than a glimmer of, particularly in Europe.

Just specifically on Europe, given your confidence on cost control, I wonder if you could talk about what the outlook for that operational leverage trend is on a 12, 18 month horizon?

Should we see that accelerating?

And I wonder if you just could talk about the mix within that between mix improvement in terms of your revenue growth, and the cost control you're delivering.

And then just secondly, on AMAP, where we're not seeing as much of that operational leverage coming through, is there anything that can be done?

Is there anything we should look for that's changing that could start to deliver a bigger gap between revenue growth and EBITDA growth?

Thank you.

What I would say about Europe, it somewhat goes back to my answer before, which is if we can drive more-for-more strategies and monetize data there is clearly strong operational leverage.

Because we did the Project Spring spend, the network is built; it has a higher amount of capacity, therefore, incremental throughput's very high.

We're working very hard on support costs, we're working very hard on customer costs, to bring those down over time; and I think we've demonstrated, in the vast majority of markets, we're doing that.

So, if you like, the jaws should work well, as long as we are monetizing data.

What do we rely on?

We rely on rational incumbents in the tier 1, along with us, to price appropriately and not undermine the more-for-more pricing strategy, and keep strong networks, which we are doing.

I think on the fixed side I don't think we're reliant on anything.

I think we are driving the penetration on the fixed side.

And content is a little bit behind us, because most of those auctions have taken place.

I'd say on the emerging markets, a lot of that was network build.

There is always inflation in emerging markets, and we try and suppress that, as much as possible, through efficiency savings.

So it really does come down to top-line growth in emerging markets, customer growth, and data monetization.

Can I just follow up?

Just on the fixed side, you're very confident in the operational gearing on the fixed side of things, so is that --

All you have to do is look at the results that Vittorio demonstrated.

Our net ad performance on the fixed side has got real momentum; we're the fastest growing in Europe.

So if your commercial engine is running well, yes, we're going to slowly penetrate on to our on-net base.

One question, and two qualifications, actually.

The question is about the emphasis on return on investment that is welcome.

And I was wondering about India.

Over the last six years, I think, more or less, you invested, just in spectrum, EUR11 billion; you generated, after tax, around EUR2 billion to EUR3 billion.

I was wondering, given your projections, when the Indian subsidiary is going to earn its cost of capital, on the back also what's happening with Jio entrants.

And the qualification, the first one is on slide 13.

You talk about 28% convergence of your fixed-line customers, can we have also the same percentage for your mobile customers?

How many of them are convergence?

And the other one is on your CapEx.

You basically, during the speech, referred to the fact that you did 14.3% on the first half.

You mentioned about seasonality.

Looking last three or four years, normally, you do 300 to 500 basis points more for the second part of the year.

And, therefore, you said that we are going to end up on the upper end of the range on the CapEx-to-sales.

The problem, that we never had a range on that one, you only referred to mid-teens.

I was wondering, are we talking about 18%, 19%, 17%?

If you can tell us what sort of upper end of the range means.

Thank you.

Let me take the broader question on India, and maybe a small clarification on the mobile thing; and then, maybe, Nick take the CapEx.

On India, I think you are correct, India is not earning its own return on capital, cost of capital.

It's a market situation.

I have to go back to my answer to Polo.

It's really about consolidation, and it's really about the possibility or the opportunity to be one of the beneficiaries of that.

This is the reason why we have decided to be more focused, more selective.

And as Nick has shown in his chart, we are putting most of our money, 90% of our money, where we have the highest chance, which is where we are leaders, to have a good return.

But we are very minded to continue to be disciplined and to be focused in India: in general, but in India in particular.

The percentage you ask is interesting.

We don't have it yet.

We are trying to measure it.

We're through prepaid, and so on, this is one of the big system changes that is necessary.

So I don't have -- unless you have it, I don't have the number.

You can multiply whatever, take the percentage, multiply 2-point-something seems per household, or something like that.

That is not completely accurate, so we are getting organized to measure also the other number, which, I agree, is very relevant.

On CapEx intensity?

I remember, when we went out with mid-teens, that there was a big debate amongst you all about whether 11 and 12 counted in the range of mid-teens, or whether that was only 13 to 19, and what did it exactly mean?

I would say, the consensus fell ultimately to 14 to 16, 17-type range; and, therefore, we're saying we're at the upper end of that type of range.

So, no, not 18, not 19.

Dhananjay, Bernstein.

Thank you very much for taking my questions.

I have a question on proposition -- the mobile proposition strategy for Europe.

In Germany, we have seen O2 launching its [free proposition bridge] (inaudible - microphone inaccessible) providing pretty decent data experience once you [maxed] out (inaudible).

And, more importantly, do not -- was not allowed an MVNO on (inaudible) basis to easily replicate that type of proposition.

What is preventing the management Board from (inaudible - microphone inaccessible) telecom, for example, from replicating that and utilizing this market (inaudible) on a big scale?

I think that what's stopping them from doing that, well, probably, nothing's stopping them from coming up with similar type of propositions.

I would say if I stand back--

I think the question is what was stopping us?

Correct?

Correct.

Shall I take it?

I think the answer is nothing.

I think it's just a matter of how well you're doing with your main brand and your second brand.

You say a similar experience.

What the German market is telling us is that Deutsche Telekom and Vodafone, on their main brand, clearly have established a gap, which we want to continue.

Clearly, not having unit-based MVNOs is helpful for us.

Are we going to use more aggressively our second brands in the lower -- in the mid-end and low-end of the market?

I'm not so sure.

We might do it a little bit more.

The answer is -- but preserving this kind of separation I think is healthy and it is -- I think, so far, it is proven to be a pretty good strategy.

Will we be a little bit more active with our second brand?

A bit like my earlier reply for Spain, probably, yes.

But we need to be sure that there is no contamination between the direction and indirect channels, and between the main brands and the second brands, because that's the way the market is working today.

I would say, openness of minds, but caution with the wallet.

Nick Delfas, Redburn.

First of all, I just wanted to understand that we've got all the drags that are already in the numbers.

We've got a carrier drag at the top line, which was about 60 basis points.

You've got the content drag, the Spain accounting drag, and the roaming drag EBITDA, which, I guess, has dragged EBITDA by about 3 percentage points.

You've also got a drag in common functions, which is another 60 bps to EBITDA.

I just want to make sure we've got all the things that are already baked into the numbers this half.

And then secondly, a question on BT and Openreach, and the ducts and poles question.

Who do you think is actually going to put real money into fiber in the UK via ducts and poles?

You did a long, long list there.

The only one I wasn't too sure whether you said was MVNO in UK second half.

That's the only -- if you remember, the start of the fiscal year I called out a basket of drags, one of which was MVNO in the UK, of which we haven't seen in the first half, and we are anticipating in the second half tune of about 100.

Actually, one other to that was exceptional items.

You've got a very small exceptional in H1, is that -- should we expect very few exceptional items going forward, as well?

Exceptional items?

It was 37 million, I think, in the first half, which is very low --

I tell you what, let me pick up afterwards.

I can't --

It's just very low relative to some of your peers.

Restructuring?

Yes.

Sorry.

On the Openreach, my instinctive answer is that the first one who should put real money should be Openreach itself.

That's the real answer.

And why they don't do it, I understand very well.

But, at the end of the day, if one wants to preserve a certain status in the industry, should put real money.

In absence of that then the opening of ducts and poles is very important, and the conditions at which they open ducts, poles, and wholesale, which, by the way, is just the same problem we have in Germany.

It's a discussion we have in Germany.

The European Commission has come back on again wholesale conditions, ducts and poles for Germany, despite the fact that Germany has a much lower price.

In absence of that, I think it's the other players in the market, us, Sky, the others, that with the right economic conditions can put money in.

The question is, of course, Openreach, on one hand, does not want to put money; and, on the other hand, want to keep conditions very high so that there is no incentive to invest.

That's why I think we are running in a difficult position, and they are in a difficult debate, because they want to have two things which are not compatible with each other.

And that's why the debate is going in the direction of the split.

Whether the split happens or not, it doesn't really change the reality: they will always be under this pressure, so they need to find a solution.

Now, other players in Europe have found a solution by lowering wholesale costs.

For example, in Germany there is no split debate because Deutsche Telekom have slower wholesale.

In Italy, wholesale is already low.

In Spain, there has been an agreement of competitive, non-competitive areas that works.

UK has been a bit frozen in this discussion and so now the discussion is becoming again heated.

But, again, there is a variety of players who could have -- and, eventually, there could be also private players who start thinking that maybe it's worth, with the right access conditions, to build private networks, like in Germany, for example.

You didn't say that you're willing to put material capital in.

No, I said it depends on the conditions.

I'm back to the earlier point.

Material capital, if it has a good return you can put it, you can co-invest, you can do things like the glass fiber in Germany.

There's plenty of solutions that can -- but there must be the conditions, otherwise why would you do it?

Robert, Deutsche Bank.

I wanted to ask you for your thoughts on your equipment revenue trends, please.

It's been weak in Europe for a few quarters, it was very strong a couple of quarters before that.

Is the handset upgrade cycle over?

Are we in some secular decline on handset upgrades, or are we just in a cycle that's going to recover?

Are you seeing recovery in equipment sales in the quarter?

Is there an enterprise component to it, or is it (inaudible) consumer?

SIM-only is going up.

SIM-only is going up, which is an interesting trend, which, I remember, I talked about it two years ago

The reality is that handsets' evolution is slow, and there's not a huge difference between one generation and the next; therefore, some people are starting to say, you know what, I'm better off getting more data, higher ARPU for us, and wait.

I don't think it's slowing down necessarily, per se.

But they're buying it separately whenever they want, and so on.

We will just do what's right for the customers.

We will follow both models.

And eventually, this turns into more net ARPU for us, this is good.

But it's a net ARPU concept that is starting to creep, and we start using the expression also internally.

And, clearly, convergence is going to be a factor in that, as well, SIM-only.

Follow-on question is have you looked at your service revenues, ex the handset effect?

We do.

And is it stronger?

We do because it's an important element.

As I say, we talk about net ARPU now, net in my pockets, meaning without the handset component.

So is it recovering faster than your headline service revenues?

It's only really the UK we're seeing a sort of shift in the mix.

If you're saying is your service revenue really actually stronger than it looks because of a bigger shift in the marketplace, I would say the UK clearly is moving that way.

And, of course, we've got the only material handset financing impact is in Spain, which is a drag of about 80 million in the first half.

James Ratzer, New Street.

Two questions, please.

The first one was an industry-wide question, please.

You've obviously seen very strong data growth in the first half, but yet you're talking about your capacity utilization only going up by 1 point over the period.

Your other peers are talking about similar trends, as well.

As long as the industry can continue to grow capacity as quickly as you are, do you think it's going to be possible to get pricing power, and, therefore, revenue growth, in your European mobile service revenues?

And then, the second question, please, was just around German profitability.

You are seeing accelerating revenue growth there, but I think EBITDA trends were stable compared to H2.

You called out some of the rising A&R costs there.

Is that something you think can reverse and we can, therefore, see accelerating EBITDA growth in Germany in H2?

James, two different answers.

First, you talk about pricing power.

The way I see it is slightly different.

The way why I mention that is this.

Look at Europe, 1.5 gig per user; look at the Nordics, 7 gig, 10 gig, 13 gig; look at the high end of Europe, us, I don't know, my bet, this room, 5 gig, 6 gig, each, probably, unless you work too much on the Wi-Fi in your office all day.

So there is a potential to increase, not necessarily what you call pricing power, seems you can put a premium on it.

I'm talking up-sell.

I'm talking you spend [EUR30] this month, you go to [EUR35] the next month, maybe you get 5 gig more, which sounds like, oh my God, you're doubling and you're only increasing 15%.

But for us, and that's why I showed the network statistics, it's actually doable.

So we can continue to follow this growth in data, which we have small ARPU increments, without massive capacity problems.

That was the logic.

Now, you call this pricing power.

I don't know.

Pricing power is usually in consumer goods, or in fashion, is used as I can jack-up, because I have a differentiated brand, a differentiate premium, relative to what is [bought].

I think it's more the ARPU, if you want to call it more than pricing power, ARPU power, is probably what we are trying to achieve here.

On Germany, Nick will say something.

But what I say is that, I don't know if you noticed, I praised Italy for the great work that they did on cost.

I praised Spain for the great work they did on cost.

I hope in six months and 12 months from now I will also praise Germany for the great work that they have still to do on cost.

I think that would be a fair summary.

I think that Germany's EBITDA won't accelerate in the second half, it will be somewhat similar performance, mainly because we have to see what our largest competitor does in the marketplace around subsidies and the aggression in commissions in indirect channels.

If they moderate behavior then maybe there could be further improvement.

What I'd say to Vittorio's point, and to my chart in that bottom quadrant, basically said Germany has a significant opportunity in terms of its cost base and we will help them on the plan.

So, hopefully, next year we can see further improvement.

Stephen Howard, HSBC.

I've got a couple of questions, prompted by your generously proportioned risks' section within the results.

The first is how worried should we be by things like the OECD's BEPS proposals, and also the Directive of the European Commission, on tax and financial reporting?

I ask that, obviously, in light, in particular, of things like the case DG competition has against Apple.

And the second thing is I see that you're saying that the outcome of Brexit won't unduly impact your UK investment, which is obviously welcome for those of us living here.

But what I'm wondering is at what point do actual market conditions in the UK begin to impact your level of investment here?

You're at an EBITDA margin of, what, south of 19%; Germany is over 30%; Italy is over 30%; even Spain is towards 30%.

You've got Ofcom and the DCR suggesting that the industry here is generating substantial super-normal returns.

You're not even free cash flow positive.

So never mind investment in fiber, what really is the case for incremental investment in mobile in the UK?

Stephen, thank you for your questions, because this links well with Ottavio's point on return on capital before; and also, with the previous question of Nick about real money.

Yes, the UK is the other place, together with India, where our return on capital is not adequate.

And, again, our Board is now very keen, and the dialog between us and our Board is a lot on return on capital.

I hope and wish that every other telco in the industry starts talking a little bit more about that and a little bit less about EBITDA only.

And UK has, like Germany, a, to do a significant work on cost, because we clearly have a structure which is not appropriate for a 20% or 19% EBITDA margin; and b, we need better conditions around us.

I don't know why you link it to Brexit, because, honestly, it has been the case for the last five years, even before Brexit.

So I don't think it's a Brexit thing.

I think it's, on one hand, a difficulty to compete in fixed line unless you are one of the incumbents, which, essentially, are Virgin and BT; and a need for us to be more efficient in our distribution in the country through a variety of things.

But you're right to point out that we will have to apply to the UK the same logic of everywhere else, and particularly same logic of India, which is a return on capital-based allocation of investment.

And just on BEPs, I don't see any material impact from BEPs.

We've been closely throughout the consultation period.

We have no aggressive structures, no artificial structures, so, therefore, there is no read across from any recent cases with other US multi-nationals.

Guy Peddy, Macquarie.

Very quickly, firstly, Nick, on the UK margin, is there anything that is specifically one-off in this half that we should expect to rollout over time because of CARE, for example?

Secondly, if you're focusing on return on capital employed in the UK, can we assume, therefore, you're going to abandon TV, because it's too late?

And thirdly, can you just give us what is actually now the carrying value of the Indian asset?

Thank you.

On the first one in terms of UK, yes, we have had a number of I wouldn't call them one-offs, but we've had some additional costs related to the service challenges we have.

If we then look to H2, I'd be looking for the EBITDA to stabilize in the second half, year on year, given the additional costs that we've had in the UK business.

Clearly, we don't give out our carrying values for each of our businesses.

All I can say is everyone knows how much we paid for 100% of the asset.

Someone quoted the 11 million in spectrum, and you've got the impairment charge, so I would say that you're heading in the right direction, plus some FX negative movement.

And on the UK TV thing, as I said, we decided to focus now on broadband, because that's where we see better returns.

And, more important, it is more important to be in the base.

We keep the platform there, which is the same platform we are using across the Group in Italy and in other places.

And if needed, when needed, it's going to be ready for launch.

But we are focusing, as I said, today, commercially, on essentially selling broadband to our customers, mostly.

In the future, we will see.

But, yes, the UK will have a more careful return on capital-type of capital allocation.

Simon, you have the privilege of the last question, which will be six questions, probably.

You're, for us at least, one of the more multi-national of our multi-nationals.

And you've touched on Brexit.

But there's more than one country that are potentially re-examining their international trading arrangements and I wonder how you think about that from an operational capital point of view; and if there are any countries where there is a greater risk, at some point, that you'll find challenges in repatriating profits out of those countries that you operate in.

Yes, Brexit, per se, like all the other things, we have local businesses: they are established locally, they have licenses or have spectrum which is issued locally, we have local management.

So while, on one hand, I would prefer, in an ideal world, to have a single space, economic space and a single regulator and single rules, at the end of the day, we were actually born as Vodafone, in a world which was not single and actually was fragmented.

So, we can operate in both worlds pretty well.

And, again, the beauty of Vodafone is that we operate in very different environments, and we have different operating models across Vodafone, so we are very flexible and we can adjust.

In terms of repatriation of money, I would say, so far, the issue is more currencies.

There are some currencies where it's harder to find hard currency to take it out.

So it's not really that there are constraints, but --

No, I would say that, probably, the financial challenge we have is more -- we would ideally like to be matching our debt to the discounted cash flows of our market so that we are economically hedged.

There are situations with some of our markets where we can't inject the debt into those markets, generally, because they're highly profitable and generate a lot of cash.

So, unfortunately, we can't put the debt in.

So I would say, therefore, we run a slight economic imbalance sometimes.

Yes.

Good.

I thank you very much.

Again, I leave you with two comments.

Good quarter, good performance in a number of markets; and the strategy continues, the evolution towards what we call Gigabit Vodafone continues, and, I have to say, continues in a balanced way across data, enterprise, and conversions.

So we will keep working.

Thank you very much.