Vodafone Group Plc (VOD)
Half Year 2008 Results Presentation Transcript
November 11, 2008 9:30 a.m. GMT

Executives

Vittorio Colao -- Chief Executive Officer
Andy Halford -- Chief Financial Officer
Steve Pusey, Chief Technology Officer

Analysts

Laura Janssens -- UBS
Robin Bienenstock -- Sanford Bernstein
Paul Howard -- Cazenove
Alan Burkitt-Gray -- Global Telecoms Business
Robert Grindle -- Deutsche Bank
Will Draper -- Execution
Darren Ward -- Liberum Capital
Terry Sinclair -- Citigroup
Justin Funnell -- Credit Suisse
Nick Delfas -- Morgan Stanley
Andrew Beale -- Arete Research
Graham Ruck -- Merrill Lynch
Michael Armitage -- Blue Oar
Mark James -- Collins Stewart
James Hutton-Mills -- Toscafund
Petri Allas -- Redburn Partners
Stephen Howard -- HSBC
Christopher Nicholson -- Oraca

Operator

Welcome to the Vodafone Group Plc half year results presentation, which took place at 9:30 am on the 11th of November 2008. The following presentation is being made only to and only directed at persons to whom presentations may lawfully be made. You may not disseminate any recording of this call in whole or in part to any member of the public or to any person to whom the communication may not lawfully be made. Any information in this communication relating to the price of which relevant informations have been bought or sold in the past or the yield in such investments cannot be relied upon as a guide to the future performance of such investments. These presentations do not constitute any offering of securities or otherwise constitute an invitation or inducements to any person to underwrite, subscribe for or other acquire securities in any company within the group. The presentations contain forward-looking statements which are subject to risks and uncertainties because they relate to future events. These forward-looking statements include without limitation statements in relations to the group’s projected financial results up to 2009 and 2010 financial years. Some of the factors which may cause actual results to differ from these forward-looking statements can be found by referring to the information contained under the heading ‘Under information forward-looking statements’ in the half year financial reports for the six months ending the 30th of September 2008 and principal risk factors and uncertainties in our annual report for the year ended the 31st of March 2008. The half year reports and annual reports can be found in our website www.vodafone.com. The presentations also contains certain non- GAAP financial information. The group’s management believes these measures provide valuable additional information in understanding the performance of the group or the group’s businesses because they provide measures used by the group to assess performance. However, this additional information presented is not uniformly defined by all companies including those in the group’s industry. Accordingly they may not be comparable to similarly titled measures and disclosures by other companies. Additionally, although these measures are important in the management of the business they should not be gauged in isolation or its replacements for or alternatives to but rather as complementary to the comparable GAAP measures such as revenue and other items reported in the consolidated financial statements.

Vittorio Colao -- Chief Executive, Vodafone Group plc

Good morning and welcome to the presentation of Vodafone’s results for the six-month period ended September 30th 2008 and thank you very much for attending my first webcast with the financial community as Chief Executive of Vodafone. Thank you. Let me go through the agenda for the morning. I will start first with the highlights of the results and summarize our revised guidance ranges for the current financial year. Then I will pass to Andy, who will present detailed financial results. Finally, I will get back and I will give you first an overview of our operations in Europe and in emerging markets, and then a detailed account of the strategy review exercise that we have conducted in the last two or three months.

I really look forward to your comments and your questions, and I just would like to remind you that, at 11 o’clock, we’ll observe the two-minute silence for Armistice Day. So let me begin with the summary of results. Revenues, EBITDA, operating profit, free cash flow, EPS, all have experienced double-digit growth in the first half, albeit thanks to foreign exchange benefits. On an organic basis, group revenue has increased by 0.9 percentage points and 2.6 on a pro forma basis, including India. EBITDA has declined about 3% and operating profit about 1% on an organic basis. Group cash flow generation remains strong and has increased 16% to £3.1 billion, benefiting from foreign exchange, improved tax settlements and lower interest charges. EPS increased by 17.1%, of which around 14.5% was due to the foreign exchange benefits.

The Board has reviewed the present dividend policy in the light of recent forex volatility, the impact of acquired intangibles and the current economic environment, and we have concluded that it would provide more certainty to shareholders if the Board adopted a progressive dividend policy instead of the 60% of earnings formula. Essentially, this is a policy through which dividends will rise smoothly over time, and the interim dividends will rise by 3.2%. By now, most of you have probably read and analyzed our statements. So I really would like to start by giving you my condensed view of the status of our operations and our performance across Vodafone in the first half. First, I would say that, despite revenue trends that have been softer than expected in Europe, we have a good position and we have again demonstrated the ability to generate good cash flow, essentially through cost optimization, through more sharing of our platforms and through good purchasing.

In terms of market performance, I look at our performance as good in three out of five of the large markets where we operate, stabilizing in Spain and weaker than expected in the UK. We have taken all the actions, as I will describe later in the day, but it will take some time to see the benefits go through. In Turkey, the turnaround has not yet materialized and we are putting a lot of effort now on fixing what I would call the basics, which basically is network, distribution and commercial offerings to our customers. We have impaired Turkey’s value, largely but not exclusively due to changes in the discount rate, and we will cover this again later. And finally, in the kind of broad overview points, data and emerging markets continue to be engines for growth, offsetting voice pricing pressures. So, in order to deliver our cash flow guidance that I will illustrate in a few seconds, in the second half it will be essential to have very strong focus on execution in all our markets and, of course, an ability to manage external pressures through very good cash management.

Now, updated guidance for the current financial year, revenue will be between £38.8 billion and £39.7 billion. Operating profit will be between £11 billion and £11.5 billion. CapEx range is revised downward to between £5.2 billion and £5.7 billion, and the free cash flow range increases to between £5.2 to £5.7 billion. The decrease in revenue guidance reflects the more challenging market conditions, in particular in the UK and in Spain. The lower revenues result in lower operating profit, but we have reduced the impact by cost reduction and direct cost saving and the increase in free cash flow guidance reflects lower CapEx, better tax and the group focus on free cash flow generation that we are enforcing. I will now pass to Andy for his financial review. Andy?

Andy Halford -- Chief Financial Officer, Vodafone Group Plc

Right, thank you very much Vittorio, and I will just do a quick overview of the key financials, a couple of comments on liquidity, and add a little bit of detail on to the outlook position. So, first of all, key numbers: £19.9 billion of revenues and £5.8 billion of adjusted operating profits. Top right-hand chart here, you can see the walk. So 17.1% headline increase in the revenues and, if you go across, you can see that 12.5% of that was made up of the FX benefit, particularly the euro, 3.7% of it was the contribution particularly from the India and Tele2 acquisitions, and the underlying organic growth was 11.1%. If you actually put India into the equation for both six-month periods then, on a pro forma basis, the growth was 2.6% for the two half years. The EBITDA margin was 3.2 percentage points down across the group, in line with our expectations, and I’ll talk to that in a little bit.

On the adjusted operating profit, the bottom right-hand chart here, the headline was an increase of 10.5% in the adjusted operating profit for the group. 12 percentage points of that came from the foreign exchange. The acquisitions did not have a huge impact on the operating profit, and the underlying was a 1% decline in profit between the two periods. Now, as Vittorio has mentioned, we have decided to take an impairment charge against the carrying value of the asset in Turkey, £1.7 billion. The largest part of that is because the long-term market interest rates have risen over the period since the end of March, and that, when we apply it in the discount calculation, has resulted in about two thirds of that value reduction. The other one third is to do with the operational performance and outlook for the business that Vittorio will talk to in a minute. The adjusted earnings per share, 7.52p per share, an increase of 17.1%, obviously fuelled significantly by foreign exchange.

So, let’s start with the revenues in Europe. So the key numbers in Europe, the revenues were up by 14.3%. 13% of that came from the foreign exchange, particularly the euro. We averaged a rate of 1.26 for the first half of this year, which was 14% down from the equivalent period last year. The impact of the Tele2 acquisitions was about two percentage points of growth and, if you strip those out, the underlying was a 1.1% decline in the revenues in Europe. Now, if you look at it another way, the regulated incoming revenues themselves caused about 1.3 percentage points of reduction in revenues between the two periods. So all the rest of our products, particularly the data products, the growth there very strong, 23% increase in data revenues covered the reduction in the revenues on the out going voice and on the roaming. The chart on the top right is then, looking at sequential quarters and comparing the growth rates with the equivalent quarters in the previous year. We talked in July about a 0.2 percentage reduction in the first quarter revenues. The equivalent number for the second quarter was 1.3%. The 1.3% had a stable impact from Spain and about half the 1.3 came from the performance in the UK business. Interestingly, if you look at that rate of revenue change by customer segment, the consumer segment revenues were sort of flat to very slightly down; the business customers that we’ve got, our revenues were up about 3%, and actually our large business, international business, accounts within that were up like 8%, so a very strong performance on the business front.

Moving then onto the revenues in EMAPA, headline growth there 25.7%, significant growth still. 9% of that came from foreign exchange, 7.7% of it came from the acquisition in India, leaving an underlying organic growth of 8.8%. That was very much driven by the increase in the customer base and also by a very, very strong performance in data, with data revenues in EMAPA up by 56%. Again, on a pro forma basis, so putting India into both periods in full, the growth rate was 14.4%. The chart on the right, again the quarterly changes there, you can see that the rate of increase slowed slightly in the last quarter, primarily due to reductions in the growth rate in India and in Turkey, with the other businesses basically continuing to grow as they were previously.

Now, onto the EBITDA, on the left-hand side, for Europe, the EBITDA grew by £0.4 billion to £5.2 billion for the period, a significant impact from foreign exchange here, with 0.7, which more than covered the slight reduction in the revenues on voice etc that I talked about a second ago. We invested slightly more in customers, which I’ll talk to on the next slide. Operating expenses remained exactly stable year-on-year and, importantly, we did invest a bit more into the fixed and DSL space. That did not have a significant impact upon the EBITDA but, on the top of the chart, you can see the margin movement in Europe, which moved down by two percentage points overall, of which 0.8% was because of the mix of the lower-margin DSL businesses. In EMAPA, on the right-hand side, the growth in the EBITDA there was £0.3 billion, increased to 1.7. The increase was split fairly evenly between the ongoing businesses and India and foreign exchange. The overall margin decreased by 1.7 percentage points to 31.5%, and that was predominantly the margin change in India that Vittorio will talk about later. The rest of the businesses in EMAPA were actually pretty stable on their margin.

European costs, we have split these out into two parts. The left-hand side are the sort of customer-facing costs, and the right-hand side are the technology, network, IT and support costs. So just on the left-hand side, the yellow are the purchase costs of equipment and the commissions that we pay to third parties, and you can see those rows very, very slightly year-on-year about a 1% increase in unit volumes, about a 1% increase in unit price. Volume has been kept down to only the 1% level, partly because of the push to SIM-only. The top part of that chart in blue are the costs of our customer care centers, our sales and distribution and our marketing, and those have been kept exactly flat year-on-year, as have all of the costs on the right-hand side, the network, the IT and the support costs. So all those cost areas kept absolutely stable year-on-year, and I think you should look at this in the context of voice volumes that have gone up about 9% and data volumes which have very nearly doubled during the period, so adjusted operating profit up £0.6 billion to £5.8 billion.