Operator: Good afternoon, and welcome to the Vodafone Overseas Investor Conference Call. Throughout today’s call, all participants will be in a listen-only mode, and afterwards there will be an opportunity to ask questions. Just to remind you, this conference call is being recorded. Today I'm very pleased to present Andy Halford. Please begin your meeting.
Andy Halford - CFO: Good morning and thank you for joining the call today. As you know, we announced our full year 2013 results this morning. So let me take you through these at a high level before I open up to your questions. So the headlines.
Group revenue was GBP44.4 billion for the year. Service revenue was GBP40.9 billion, which is an organic decline of 1.9% over the year. Although excluding MTRs, it was a small growth of plus 0.2%. The fourth quarter service revenue was down 4.2% on an organic basis, but suffers from an incremental MTR drag and the impact of lapping the leap year. Underlying, the trend was similar to Q3.
EBITDA was GBP13.3 billion after GBP0.3 billion of restructuring costs of restructuring costs with a margin of 29.9%. This was down by 0.5 percentage points on an organic basis, but flat after taking out restructuring costs, or rather down 0.1percentage point after taking out restructuring costs, so very nearly flat.
Margins declined in Italy due to top line pressures and slightly in Germany, especially in the first half. But we saw continued margin improvements in India and in Vodacom. All of our emerging markets have grown their margin in the year. We expect margins this year to decline slightly given top line trends.
The associates’ contribution of GBP6.5 billion is up 30% year-on-year, with a continuing strong performance from Verizon Wireless. Adjusted operating profit was up 9.3% at GBP12 billion, above our guidance range. Financing costs were down slightly over the year due to lower levels of net debt and lower mark-to-market losses.
The tax charge for the year increased by GBP0.3 billion, with the underlying effective tax rate moving to the high 20s, representing the increased weighting of Verizon Wireless in our overall profit mix. We booked GBP0.5 billion accounting gain after ascribing fair value to the acquired assets of Cable & Wireless, and we recorded a goodwill impairment of GBP1.8 billion in the second half relating to Italy, which added to the impairment charge of the first half totaled GBP7.7 billion for the year.
Adjusted EPS increased by 5% this year to 15.65 pence. This resulted from the higher associate income and 1.5 billion reduction in share count over the year as a result of our share buybacks. Our free cash flow was GBP5.6 billion, towards the top end of our guidance range after maintaining CapEx at GBP6.3 billion. We received GBP2.4 billion of income dividend from Verizon Wireless during the year, and we will shortly, in June, receive GBP2.1 billion that we will retain in the business for spectrum costs.
Just looking at this very quickly by region. Our Northern and Central European region, which represents around half of the Group service revenue, was flat over the year or down 0.2%, supported by strong growth in Turkey of 17.3%, Germany up 0.5%, but offset by weaker performance in the U.K., down 4%, and the Netherlands down just under 3%. AMAP, the emerging markets region which represents around 30% of the control group, saw growth of 3.9% in revenues in the year, with strong performances in India, up 10.7%; Vodacom up 3%; and Egypt up 3.7%; partially offset by Australia, which was down 13%.
Also worth noting the strong growth in the smaller countries within this region. Ghana was up 24% and the Vodacom international businesses were up 23%. Southern Europe, which represents around a quarter of the control group, saw its service revenue fall by 11.6% over the year, with Italy down 12.8% and Spain down 11.5%.
Verizon Wireless continued to deliver very strong growth, with service revenue up 8.1%, led by customer demand for data services and faster LTE speeds. The Company generated $13.2 billion of free cash flow in the year and ended with net debt of $6.2 billion.
In terms of returns to shareholders, we have announced a final dividend of 6.92 pence per share, taking the total dividend per share for the year to 10.19 pence, that’s a 7% increase on last year and concludes our three-year policy. Looking ahead, the Board remains focused on balancing ongoing shareholder remuneration with the longer-term investment needs of the business, and we aim to at least maintain the ordinary dividend per share at its current level.
We are part way through the GBP1.5 billion share buyback program in relation to the (previous) Verizon Wireless dividend, and as mentioned earlier, we’re receiving another GBP2.1 billion in June, which will be retained in the business.
Moving on to guidance for the ’13-’14 year. We expect adjusted operating profit to be in the range of GBP12 billion to GBP12.8 billion, and free cash flow to be around GBP7 billion including the GBP2.1 billion Verizon Wireless dividend. We expect the Group EBITDA margin excluding M&A and restructuring costs to decline slightly year-on-year. On CapEx we expect this to broadly stable on a constant currency basis.
So let me wrap up. We have delivered a solid performance in tough market conditions, generating GBP5.6 billion free cash flow from our controlled assets and GBP8 billion including the Verizon Wireless dividend in the year. We have grown both adjusted operating profit and the EPS, and have maintained a strong balance sheet. We continue to focus on shareholder returns and have grown our dividend per share by 7% in the year, and aim to at least maintain the current level of dividend per share going forwards. Finally, as Vittorio highlighted earlier today, we are making good progress with Vodafone 2015, with positive early signs from Vodafone Red, success in enterprise and emerging markets, and the continued development of our network.
Let me now please take your questions.
Operator: William Power, Robert W. Baird.
William Power - Robert W. Baird: So I guess the first question is, I’d be interested in any commentary you could provide around the timing of the latest dividend announcement. Is this something we perhaps expect to occur twice a year going forward? What was the principal driver, I guess, around the timing of the latest dividend from Verizon? The second question, I guess I’d be interested in any commentary you can provide on the competitive environment. In Germany the subscriber growth has been under some pressure there the last couple of quarters. What’s the opportunity to turn things around in that market?
Andy Halford - CFO: So two questions; the Verizon Wireless dividend timing. I think Verizon have always said that they would be good custodians of the cash in the Verizon Wireless business, i.e., they would not let it accumulate unnecessarily, and clearly the cash balance was starting to rise. So hence why the dividend has come out now. I guess it is a little bit nearer to the last dividend in time terms, which itself was closer to the one before. So the frequency has slightly increased, but underlying the key thing, I think, really is the business continues to generate roughly 1.25 billion of cash per month. Clearly, Verizon are keen that what is not needed in the business will be returned to shareholders, and we were very happy to receive our share of the $7 billion, will be (indiscernible) when it arrives next month. Germany; market there I think is still reasonably robust. Clearly, we have got a very significant presence in the mobile space, and it is that one market in Europe where we pressed on with LTE the earliest of any of our markets, and we’re gaining of good traction on that front. So, I think a combination of pressing on with LTA, the Red price plans and propositions that are going into the market, and also Germany pushing very hard now on smartphones that probably have or had a lower proportion based on smartphones than some of our other big markets, but are now catching up on the front. So, I think as we look forward, hopefully all of those will start to bear fruit.
Operator: Allan Nichols, Morningstar.
Allan Nichols - Morningstar: On Cable & Wireless Worldwide, you talked about that it was significant increase for Northern and Central Europe, but it didn't seem to have much of an impact on the U.K. which was a little surprising, 40% of their business is in the U.K. Can you talk about why that wasn’t there and what are the weaknesses in the U.K. that caused the numbers to be down so much there?
Andy Halford - CFO: First of all, Allan, remember that we only bought Cable and Wireless part way through the year. So, we have got sort of a part year contribution for it from the business. Secondly, when we do the organic calculations, we will exclude businesses that have not been with us for both the current and the previous years and hence Cable & Wireless is excluded from the organic growth calculations. But overall, Cable & Wireless is not as we expected it, so in terms of its ongoing revenues and profitability, it is very much in line with its recent past. What has been, I think, encouraging is the process of integrating it and spending some money to get its network more integrated is progressing well, and we remain very confident of the commitment to get GBP150 million to GBP200 million pounds of cash synergy out of the business in the next three years or so remains very much on track.
Operator: Kevin Roe, Roe Equity Research.
Kevin Roe - Roe Equity Research: Two questions, Andy. First on Italy, earlier this morning, Vittorio characterized that the pricing pressure is pretty belligerent in that country. How is that trended over the past couple of months and do you expect or do you believe the competitive situation could stabilize during the course of this year?
Andy Halford - CFO: Kevin, there is a number of price initiatives that came in from taking the two smaller players in the last quarter that were unusually aggressive. We've chosen not to go and match those, because hopefully those are promotional by nature and they will come back sort of closer to where the normal market prices have been. Clearly, some customers have been persuaded to go take and take those (sort of prices), but overall at this point in time, we all revising our price plans. We have got the Red product out. They are selling through well. We did not respond to lowest price points in the market, and we will not be dragged into doing that. I think it's just a tough market on several fronts at this point in time. Its headline growth rate is clearly also impacted by MTR cuts, which were quite significant in the last quarter. So, the real focus is upon the Red proposition. It is upon retention of customers and the churn management and from time to time there is always players in the market, who are more competitive than others. I think, we just have to wait and see where it settles down to.
Kevin Roe - Roe Equity Research: Did that big drop in the previous quarter continue into this quarter?
Andy Halford - CFO: Yes, though its promotions are broadly still out there.
Kevin Roe - Roe Equity Research: My second question on the latest, the June Verizon-Wireless distribution, you mentioned general corporate purposes, including spectrum auctions. Could you update us on the spectrum auction calendar and thus retaining the latest Verizon-Wireless dividend – does that influence the pace of your share repurchases at all?
Andy Halford - CFO: No. I mean, what we did when we knew that we were going to receive the dividend is we looked at where we are at the moment. We’ve got a preexisting share buyback program that is (mid-flights) and therefore, will already be in the market, buying back shares over the coming weeks. We just announced a 7% increase in the dividend. So, the overall dividend is pretty high, the yield is pretty good. In the upcoming spectrum auctions, we have got India sort of in its third time of rearrangements and quite when it will happen and how much will it costs are not clear at this point in time. We have got potentially an auction in Vodacom South Africa, probably a (re-run) of the auction that was in the Czech Republic that got abandoned. So we have a few options coming up, and we just thought it is better this time around to retain the cash, so that we have essentially pre-funded whatever spend we have to make on those and as and when they do occur.
Operator: Monroe Helm, Barrow, Hanley, Mewhinney & Strauss
H. Monroe Helm, III - Barrow, Hanley, Mewhinney & Strauss: Two questions. One, can you talk about from (belligerent) situation in Germany, you recently entered into an agreement with Deutsche Telecom. It takes place into a network, but can you see down the road that there is still beneath your cable assets in that country or in any other country that you can (indiscernible).
Andy Halford - CFO: What we have said is that we do want to establish a firm presence in the home, in the office, as well as between the two. And that is going to require that we can access technologies other than pure mobile. The access sometimes could be acquired by way of wholesaling from somebody else, sometimes by self-building sometimes by self-building with somebody else like we are doing with Orange and Spain, or occasionally by doing M&A. It really is market by market, it depends upon the regulatory environment. It depends from the state of competition, number of players who have got cable or fiber, or satellite products housed there. The German agreement over a few days ago I think is helpful. That will enable us to offer IP TV type services, but we couldn’t previously do and it is also enabled in such a way that we can’t differentiate the quality of service that is provided to our customers. Also, something that we are very, very keen on. So, we are pleased that we’ve signed that up. It takes us a step forward in terms of being able to provide a broader range of services. We keep on looking in each country what else we need to do, and from time to time, we may (end) to similar agreements or help those agreements to move things forward. But overall, we are just progressively building out the capability, particularly I think in the sort of cable and fiber space, which are clearly the technologies, which have the longer term future in terms of speed and capacity.
H. Monroe Helm, III - Barrow, Hanley, Mewhinney & Strauss: (indiscernible) if you just focus on Germany. Can you talk about the competitive position? Are you certain about competitors are putting pressure on you today to provide these other services, or is that something that you are preparing for the future based on what you think the market demand is going to be down the road?
Andy Halford - CFO: It is more of the latter, but some of the former. I think it is fair to say over the last several quarters that those people who have been offering DSL based services in the fixed space, ourselves included, has been losing share and particularly cable operators have been gaining share. Deutsche obviously are kind of spending more money themselves on fiber, and we as I said do want to get more into the home, more into the office and therefore actually pressing forward with this agreement is a way to actually help to redress some of those nearest term pressure, but also position ourselves better for the future.
H. Monroe Helm, III - Barrow, Hanley, Mewhinney & Strauss: My other question is your opinion as to, if we start to get dividends on a six-month basis from Verizon Wireless, and you’ve completed your share repurchase within the next six-month period; if you got the dividend, would you be more inclined to return the cash to shareholders, institute additional share repurchase, or do you think you will need that cash for future expansion opportunities? I know it’s a Board decision, but just interested in your opinions.
Andy Halford - CFO: First of all, there is when will be receive the next dividend, which clearly is unknown at this point in time. I mean, what we have been consistent on, I think, here is (the base) that as and when we know that we are going to receive money, we will stop and look at our situation at that point in time and decide what is the appropriate thing to do. So two out of three times we have decided to return money to shareholders; this time we have not. When we have returned it to shareholders, one of those times we did it by way of buyback program; the other time we did it by way of dividend. So I think we are pretty eyes open to this. We’re pretty aware that if there is not the need for the money within the business, then clearly a good part of it should be tagged for return to shareholders, but the exact way and the exact amount, obviously, we can only judge at the time.
Operator: (Aletta Navarro).
Aletta Navarro: I have two questions please, and apologies if they were asked . I joined a couple of minutes later. The first one is on the handset subsidies. So we’ve seen what happened in Spain and in other countries, like in France and Germany some of your competitors started SIM-only offers and they’ve been relatively successful with the non-subsidized offers. Has your thinking evolved in the last few months, and if you think maybe in certain places like in Germany the removal of the subsidy is something that could be considered, or the experience has been negative for you?
Andy Halford - CFO: What we have been more focused upon recently is trying to give more visibility to the customer of what is the real price of the phone. In the past, we have bundled in the phone and the service, and often it’s looked as if the device was for free. So on our Red plans now you typically will have a price with a basic phone. There will typically be a monthly price at the higher level if you want to have a medium-end phone or an even higher price if you want to have a top-end phone, or you can take some money out of the call bundle if you are going to go SIM-only. So what that is trying to do is to actually get customers to sort of understand what’s the price decision they’re making when they take the phones. Too many times in the past when people (indiscernible) a free phone as a replacement, people will sort of say, yes, for sure, we’ll have a phone for free, why not. What it’s actually showing is that there is a cost involved, we hope will align the sort of economic activity with the rational activity. The ability just to overtly take subsidy out is very market dependent, as we have seen in Spain and other markets. If others follow, it can be done; if others don’t follow and instead take the view that they will go for the market share that has been left on the table, then it can actually be quite a short-lived experience. So the broader focus is actually on the visibility and sort of in a way offering an installment plan for the payment of handsets.
Aletta Navarro: If I may just follow-up on that, I think in Germany O2 is offering kind of a non-subsidized plan basically with a clear visibility that the handset is separate. Is that something that you should consider? What’s your opinion on their performance with that?
Andy Halford - CFO: On our Red program, that is exactly what you can do. So there is a core price point, and if you don’t want the phone to go with it, then you can just deduct it, and then you can make the separate decision on the phone purchase yourself or you can just take the price plan and bring your own SIM and phone with it.
Aletta Navarro: Is it available only in Germany or in other countries as well?
Andy Halford - CFO: No, it’s a standard structure already in other countries. But standard price which includes the basic phone. If you pay a bit less, you can just have the service and not the price; if you pay a bit more, you can get a better phone.
Aletta Navarro: Second question is on the Verizon Wireless (situation). There’s been a lot of talk about the tax implications of potential theoretical deal that you guys could do. Could you clarify your position on that, what is the current understanding? If you worked out that (indiscernible) Verizon Wireless, what is the tax – what could be the tax implication of that?
Andy Halford - CFO: As you say in your question, it’s always interesting want to try to comment on potential theoretical situation. What is the case, and we’ve been very consistent, I think, on this right the way through, is that there are a number of different ways that (it actually) could be structured for tax purposes. They come with different degrees of complexity, they come with different degrees of certainty, and they have different tax outcomes at the end of them. And in the absence of (indiscernible) even specifically talk about, let alone to know how that would be structured is really very difficult to be definitive. Generally, the lower the tax cost, the greater the uncertainty; the higher tax cost, the less the uncertainty. But in the absence of something definitive to talk about and a clear structure to talk about, it is very difficult to be specific on it.
Operator: William Power, Robert W. Baird.
William Power - Robert W. Baird: If you could just talk about how you’re thinking about the capital intensity of the business generally going forward. I mean, it sounds like you expect capital expenditure to be roughly flat with recent trends. But on the one hand, you have the opportunity potentially to accelerate the LTE builds, which could increase capital intensity. I guess on the other hand, there is this kind of move towards virtualizations, software-defined networks down the road. How do you kind of balance and how should we think about the kind of longer-term capital intensity the business should take from here, at least on the wireless side?
Andy Halford - CFO: We don’t run the capital to a specific target percentage or anything like that. It is very much done on a country-by-country return base sort of allocation of money. We have generally received spectrums of 4G quite a lot late though than in the U.S. and hence we have not rushed into LTE. Germany, our most advanced market, we have got about 60% coverage now and progressively over the next three years, we've said we will move to about 40% of our base stations being LTE enabled. But we are lucky that with HSPA, there are actually some fairly low lost routes to get the speeds up on that which actually will (indiscernible) to putting significant amount of money into LTE. Overall, I’d say where we have been spending on CapEx last three or four years, it’s probably not dissimilar where I would expect it to be going forward in the nearer term. The mix within that is changing slightly. So there is a bit more fiber spend now going in there, but we’re doing that within broadly a static total employed. So, I think directionally bottom line is a fairly similar level of spend to what we have been incurring just recently particularly post the Cable & Wireless acquisition.
Operator: As we appear to have no further questions, I return the conference to you.
Andy Halford - CFO: Okay, well thank you all very much for joining. Just to reiterate, even though it’s been quite tough going in Europe, I think we have made progress overall quite satisfactorily, good profit growth, good earnings growth, and good dividend growth, and we thank you for your continued support. Thank you very much and have a good day.
Operator: This now concludes today’s conference call. Thank you for attending. You may now disconnect your lines.