· web viewa big opportunity for us to penetrate the asset we already have, going back to sweating...

Vodafone Proprietary classified as C2 - Internal

VodafoneSeptember 13, 2018

08:50 AM EDTSpeaker ID 1

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Vodafone – Communacopia

September 13, 201808:50 AM EDT

Andrew Lee: It means it's probably a good time to start. Gives us a lot of pleasure to welcome Vodafone's CEO designate to the stage, Nick Read. Thanks very much for joining us, Nick. We also have a lot of people viewing on the webcast so I hope I do the questions justice. But I'm just going to give you an opener, Nick. It's been a long summer. This is first time we've hosted you as CEO designate, so congratulations on that.

Nick Read: Thank very much.

Andrew Lee: And I wondered if you wanted to talk through sort of how you've been thinking and preparing for the role and what your strategic priorities are as you get into that role?

Nick Read: Why I think more than just thinking and preparing, I would say what have I really been focused on for the last sort of two, three months? You know what have been the key priorities, because I think there's a sense of urgency for action. I'd say a handful of things. First of all was obviously we've been very much focused on the Liberty Global transaction and engaging with the European Commission. So myself and Vittorio have gone there twice. We were there Monday. We were there in July, good engagement, good positive conversation. I really think that the transaction plays into the agenda of the commission, wanting to build champions, infrastructure builders, people that will take the digital agenda forward for Europe. So I'd say very constructive conversation. And as a result, I think we're confident that the commission will take the case. We will be doing a submission mid to late October. Phase 1 you would expect conclusion Christmas, Phase 2 May/June level. So, good progress there.

The second one was India, being a very long transaction, finally concluded. So, I was out there in July, just making sure we could just get it over the line for the end of August. And in addition, really focusing on the synergy realization, which is obviously critical and just accelerating those plans with the management team. So I'm pleased with the progress.

Third area I would say is just commercial momentum. Vast majority of our business is performing very well, obviously Spain and Italy more challenging, required a little bit more detailed review. I'm pleased with the actions things are taking. And then digital, we have been progressing digital, I really think and I will really stress this is a true transformation of our business and a real transformation of the structural cost of that business. So I'd say it's a real opportunity to give a fantastic customer experience, really differentiated if we act at speed, along with structurally lowering our cost base.

It was also a good opportunity over the summer just to sit back, reflect on all the areas of the strategy, you know where are there further opportunities? And I was specifically




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focusing on opportunities around growth, opportunities around platforms. Are there platforms, so let me give you an example, TV. After Liberty Global deal, we will be one of the biggest TV players in Europe. But we're on many different platforms. So how can we harness the benefits of being on one single platform moving forward? And utilization of assets, really going through and saying, are there opportunities to sweat our assets more and earn a higher return? And a good example is towers, which is something I've been looking at for the last couple of years, trying to balance the strategic aspects of towers along with the benefits of efficiency. And then finally working on portfolio. We did the Australia transaction, further progress on, if you like, non-core assets, creating value.

So I'd say it was very active summer, which is why I have zero tan.

Andrew Lee: We're going to try and touch on each of those points. I think it was commercial momentum, the digital cost cutting where I think investors are not as convinced about that and about your assets in the portfolio. But maybe if we touch on one more broader question before we delve into those and we look at your return on invested capital, which is a hard thing to calculate in teleco, but also your EV to IC. Vodafone has one of the lowest returns in the sector and trades on one of the lowest EV to ICs in the sector. How materially can you change that and how quickly can you?

Nick Read: We haven't really published our return on capital employed and there is a number of reasons why we do that. Sometimes we feel that maybe from a conversation with regulators etc., it doesn't always end up being a positive one. So, but our return on capital employed for our controlled businesses, pretax, is about 5.6%. It's up from 3.7% last year. We have been improving our return on capital. We are very focused on our return on capital. It's front page of our financial report to the board every time. And every time we review the plans that each of our individual businesses, when they lay out their long-range plan, we are benchmarking against the market WACC for them and making sure their long-range plan delivers above it over a period of time. So we're very focused on it.

In the end, what, what we're doing is driving EBITDA growth through modest top line growth at the moment but absolute cost reduction year over year. And this will be the third year we've done it. And at the same time, post spring, we've stabilized our capital intensity so and, therefore, our D&A is stabilizing as well. So the growth from EBITDA, basically falls to EBIT and then we start to get a positive effect from return on capital. So I think we just keep doing the plan that we're planning.

Andrew Lee: Okay, so if we just try and pick through that a little bit and maybe start with the top line, I think investors in the market at the moment are thinking a glass half empty, so on your top line growth outlook and on your portfolio's assets in general. And the growth has come down on organic service revenue growth basis to around 1% from them. And it looks like Q2 will see a slight slowing. So can you, can you talk through the next forces and at what point we can see or hope for a reacceleration in that top line growth.

Nick Read: Yeah, I think when you look at our share price you definitely feel the glass is half empty. I would say that there is obviously people are preoccupied with top line momentum and obviously Spain and Italy are dampening our performance. We have a lot of our other businesses performing well across the portfolio and, of course, we're taking specific




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action in Spain. So Q2 will be down on Q1. We said that at the Q1 and we expect Q2 to be very similar -- sorry H2 to be very similar to Q2 this fiscal year because of Italy and Spain.

But what I would say is I think you should step back and just look at the glass half full agenda, which is you know coming out of the Liberty Global transaction, we are the largest NGN fixed broadband player in Europe. We have 54 million homes covered with our footprint. That footprint is only penetrated 28% today. A big opportunity for us to penetrate the asset we already have, going back to sweating the assets more, penetrate the asset we have. With very strong margins that flow from it. We also market to 114 million homes with wholesale, etc. So I see fixed as being a big opportunity. In addition to that, you've got convergence, which we are also deploying. So we added 1 million fixed broadband customers over the last 12 months, 1 million on convergence as well. So we’ve got real momentum in convergence.

And then I'd say on the enterprise side, we're in a window now where a lot of corporates are starting to say, I used to get my fixed services from the incumbent, but I need to switch to SDN, software-defined networks. And that is a big consideration for corporates. And I think it opens up a really big window as the challenger to say, consider Vodafone, because we can offer those products. So I think we can be a real challenger in this window of transition. And of course, we have the fantastic platform in IoT. We are the global leader in IoT, three quarters of a billion revenue, growing in sort of the mid teens at the moment. There's an opportunity to move out of just pure connectivity and into the service layer going forward. Sort of look at it and say, opportunity on the consumer side, opportunity on the enterprise side and drive digital on the cost base for greater expansion on EBITDA.

Andrew Lee: That sounds like some kind of reacceleration maybe into FY '20 but I don't want to put words into your mouth.

Nick Read: No, you can't.

Andrew Lee: Yes. What's happening in Spain? So I think that's the market that people are most concerned about. I wonder if you could talk through some of the degree of competitive intensity there and how you see that panning out.

Nick Read: Yeah, look the situation in Spain has really been triggered by Orange wholesaling and doing the strategic relationship with Masmovil, that basically has now created a very credible fourth player in the marketplace in the value segment. And that has shifted the market. So we said to ourselves as a management team, this isn't going to be a short-term phenomenon. We have to reposition our business.

And so we sat down and we said, effectively there are four aspects for the repositioning. One is that we needed to compete more with Orange at the high end. So we are doing that. Second one was to use our second brand Lowi to compete with Masmovil. We've executed that. The good part is that we are now sort of pacing in terms of net ports that move or less neutral with Masmovil now from July, which is good.




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Third bit was coming out of football. We made the decision, the way the formula works was effectively like a margin squeeze. So it's a regulated formula and it meant that the cost was borne over your TV base. And in ONO we obviously had a very big TV base, whereas we felt the formula should be more premium paid, which is what football customers are, TV customers. And, therefore, we would have had a lower cost. We're bearing the cost of over 300 million going forward for what is 300,000 customers that we have that are willing to pay football. There are only 2 million customers in Spain willing to pay for football. We have run lots of promotions over the last couple of years and it has not really moved the total universe. So the answer is there are only so many people that like football and are willing to pay for football. There are a lot of homes that want movies, series, and other things, which we want to differentiate on. So we decided let's redeploy the money that we were investing in football and compete more actively, commercially, network quality, movies and series and other content.

So I'd say that that's what's happening at the moment. Obviously, TEF has been very aggressive over August and will be over September and targeting football customers from us because €240 odd million of cost flows back to them cause we're not taking the football right. So, therefore, they're left with the cost or they have to try and recover as much as they can.

Andrew Lee: And just to take off another one of the more troubled markets but Italy before we move onto the more positive ones. Can you give us an update on the impact from Iliad in Italy and how you see that in the next couple of quarters?

Nick Read: Yeah, so if I was summarizing the Italy market I'd say that mobile net ports has jumped up about 60% to high, high activity in the marketplace, movement between operators. If I look at Iliad where they're getting their customers from, about half of them are coming from Wind 3 and MVNOs and a half is coming from ourselves and TI. Clearly, they put the price up a second time. I still think at €8 that's an unsustainable position and I expect pricing in the future to rise further.

I'd say with the second dynamic you're seeing is TI being very aggressive with their own brand. And I think that being aggressive with their own brand because maybe their second brand in the current market is not performing quite where they want it to be. And how I can tell that is when you take their main brand and their second brand and us and our second brand in overall net ports, we're outperforming them in the month of July and August.

I think when you look at our second brand and how that's performing, it's doing very well. I think we -- the team did an excellent job of positioning that second brand and what it stood for in the marketplace. What we have to manage is the cannibalization. So at the moment, it's sort of in line with roughly our fair market share. What we need to do is now tweak a few of the levers around distribution, commissions, etc. just to bring that down below our fair share, which should be the goal.

So I'd say generally pleased. Clearly, you know, we have to assess our own second brand pricing now the market has moved and see what we will do there going forward. But overall I sort of step back and I also think fixed. We're doing very well in fixed. We're putting pricing up €2.50 from the first of October. We’ve got good momentum overall I




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think and open fiber we're very happy with that relationship. So, I will get, it's tough but we deployed a second brand I think very clearly in the marketplace. We're performing on fixed. So when you look back at where we set the guidance for the year, when you're thinking about 1 to 5% EBITDA growth and we said it was prudent, we had to set prudent assumptions for Italy. It's in line with our expectation.

Andrew Lee: Given you've brought up guidance, let's address that now. So how should we think about that FY '19 EBITDA going 1 to 5%. Are you confident in the delivery to that and how should we -- where about should we see?

Nick Read: Yeah, I think it's important to understand what made that guidance up because we, as I've just said in terms of Italy, we said we'd do prudent assumptions. We're in line with our expectation. Spain we did the repositioning plan; the vast majority of the repositioning plan is in line with our expectation. The one difference is TEF’s level of aggression on football. Let's see over the next couple of months how that plays out, our update in November. But then don't forget UK performing really well. Germany performing well. South Africa and Vodacom generally with its international operations performing well. And then we've got a number of smaller operations really performing well and above our expectation. So when you blend it all together, I would say -- if I was sort of using analogy of golf, you know, we're driving down the fairway.

Andrew Lee: And you touched on Germany delivering good growth. UK has also improved. Seeing improving underlying trends. Is that easy comps or should we see a you know a continued acceleration in growth?

Nick Read: Sorry, I missed the country.

Andrew Lee: In the UK.

Nick Read: UK.

Andrew Lee: Yes.

Nick Read: No, I'm really pleased with the UK. Look we dropped the ball a couple of years ago in terms of an IT transformation. We fixed it. Operations are really performing well now and now you're seeing that come through in some really important metrics. So we're at an all-time high in terms of consumer NPS, by all-time high that we've ever had in that business and churn is at a record low. And that really says to me those operations are being felt and, and appreciated by customers. And now you're seeing it translate through into commercial momentum. So we've both got mobile and fixed. We're performing very well. We are the challenger in fixed.

And just to be clear on what we're trying to achieve on fixed, fixed is about we've got a great high quality mobile base and what we want to do is penetrate fixed into that base because in ten years’ time, obviously, most markets in Europe we believe will go converged. So you want to make sure that your base is protected were that to happen. UK convergence is going at a slow pace. But we want to make sure that customers are taking both products from us.




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And so 75% of the net adds that we're adding are our own customers, which again I think is a really important and positive statistic. I would say, so that good commercial momentum is translated into service revenue, if you like on an S15 basis, excluding the handset financing, we'll show steady growth throughout the year. And importantly, they did a really good cost transformation and they're one of the leading businesses on the digital transformation. And you're going to see that in the second half EBITDA performance, which I think will be strong.

Andrew Lee: Maybe if we could move onto digital cost cutting. You were excited about the opportunity. We're excited about the opportunity, but the market does not believe in that opportunity. So I wondered if you could help talk us through about how we can think about sizing that opportunity. How big is the digital cost opportunity for you? And could we ever expect any kind of guidance on that cost opportunity?

Nick Read: So, I would say a couple of things. The last three years, our absolute costs have reduced each year. Now like absolute, total costs. So rather than everyone talking about gross savings and then you can never find it in net savings, net absolute cost down. We believe that's a multiyear opportunity going forward with digital. We highlighted in a number of our presentations €8 billion of addressable cash cost that we can, if you like, attack within our company with digital programs. They sort of break down into three areas. One is around customers. One's around technology. And one's around operations.

Without making it sort of like theoretical, let me just bring out some sort of tangible examples of the shift we're seeing. Because when I say transformation, I really mean it's really changing our structural cost base. So on the customer side, if I -- if I was picking example, let's pick Italy. Italy's the most penetrated MyVodafone app. Now we're up in the 80%s in terms of penetration. With big data analytics sitting within the app and the targeting of propositions, we are now getting 40% of our data bundle subscriptions through the app. Then let me pick customer management in Italy. We deployed AI chat bots in Italy. They're now handling 2 million interactions with customers a month. And if you break down that the interactions and understand the quality of the service being offered, because in the early day’s quality wasn't so great, now what you're finding is over 90% of the questions are answered. Of the answered questions, you've got around 70% are answered first time resolution. And around 50% call deflection. So on a like-for-like basis, you were taking about 60% of the cost out of those transactions versus what it would have been before. So I mean to me that is significant. And we have about €1.5 billion in customer management costs within our business.

Andrew Lee: Still have to take that cost out yet or is it that you achieved the ability to take out the cost?

Nick Read: No we're taking the cost out. I mean this is contributing to Europe and group, structural OpEx. This year we will decline in absolutes over €300 million and we did over €300 million last year. Now, of course, our emerging markets have a degree of inflation, but even they are not growing in line with inflation, we are lower than inflation. So I would say that's on the customer side. I’d say the second one is in terms of technology, we're deploying, data analytics and big data into the way we do capacity management, we're drawing operational, customer, financial data together. And it's allowing us to optimize the way we roll out our capacity and that saved €170 million that's CapEx this year. And then finally in operations, and this is something a lot of people don't appreciate about




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Vodafone versus let's say an incumbent is we have huge shared service centers offshored already, so 20,000 employees say in Egypt, India, Romania in lower cost locations. And we have standardized a lot of these back office processes. We now have 200 robots on trial processing. This year we're aiming to save around about 1,700 FTEs.

Andrew Lee: Okay, helpful. Investors heard cost cutting stories in the past in the sector. What sets this one apart is it should improve the customer experience. But what we've seen in the past is also the benefits are just given back to the consumer in lower prices and that's the pushback we get on this digital cost cutting opportunity. So how would you give investors confidence that you're going to actually retain the benefits of the cost cutting in either your margin or?

Nick Read: Yeah, look, I think it's a really good point because I'm sure every speaker's going to come on stage and say, we're pushing digital. And I think what you all need to do as investors is probe those case studies I was giving to show is it substantial? Are you in action? How fast are you moving? My view is value player. So I always look at the markets as being sort of two tiered. You've got ourselves and the incumbent. We tend to be serving all the enterprises, the businesses in those markets and high value consumers that value high quality networks. And then you have the value players, obviously people that are more value seekers. That is a certain size segment.

Clearly for those players, they need to embrace digital. They need to be simple. Because they don't generate the margins to invest in the capital to sustain a good enough network. So for them it's critical to their business model. We differentiate versus them on the network quality. So then you have to say to yourself, how do you differentiate versus the incumbent? And that's where I think digital comes to bear for us. Cause I think that we have a more flexible cost base, more agile organization, faster afoot, more, more of an opportunity to learn from each other and therefore accelerate at a faster pace. So my point is we can't go at the pace of the industry. We have to accelerate faster. When we accelerate faster then we create opportunity to basically improve our cost base and our margins off the back of that.

Andrew Lee: But we're seeing operational gearing come through over the last couple of years. Haven't seen in the past in Vodafone. You've talked about FY '19 being a year where you're still investing in digitalization and obviously you'll continue to invest. But does that mean that FY '20 we should see bigger impacts on your, on your margins or EBITDA growth from cost cutting?

Nick Read: I'm not going to allow you to bully me into FY '20 guidance.

Andrew Lee: Trying my best.

Nick Read: What I'd say is look, November I really want to bring the digital ambition, the cost ambition to life more because people are saying, okay, can I have more detail? Can I see more? Very happy to do that. So November we'll give you more color.

Andrew Lee: Okay. I'm going to move on from there then. You know CapEx per sales as you said it's come down since project spring. Your guidance has been mid-teens CapEx per sales and I just wondered if could talk about how sustainable that is, especially as we come towards




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5G?

Nick Read: Yeah, we did project spring. We always said that after project spring, the whole point was to create these two tier marketplaces. So, so having superior network along with the incumbent, we always said the incumbent would follow us. So it's a co-best strategy. It's not that we would have a better network than the incumbent. In some cases, we do, but that wasn't the strategic goal. We expected them to pace us. I think we're really pleased that we have established that. And you can see that in the NPS scores. You can see that in the quality scores of metrics, the P1 scores, P3, whatever scores that you see that are on our objective basis. So we've established that. We've normalized our capital expenditure as you say into the mid teens.

We feel very happy that the 4G layer was the key layer and 5G is an incremental evolution on the 4G layer. So if you've established superiority on the 4G, you just build on that superiority on 5G. It's not a replacement technology. So what you'll see us do as we deploy 5G, the important thing for us is to take the CapEx we were spending on 4G and just move it onto 5G. You'll see us stop the investment in 4G. We will just focus on 5G and evolve that going forward.

We obviously have carrier aggregation. We obviously have refarming. But one of the other things I'm really working with the team, how can we accelerate refarming of 3G. We're looking at an envelope by market between 2020-22 of refarming cause that again is real opportunity. The important thing about 5G, forget all the potential user cases and applications of 5G, it is a really efficient technology. So it's 7 to 10 times more efficient than 4G. But once you start deploying, you really want the focus on it, to get the efficiency. And what I'm focused on is driving down that cost per gig. So, so we're going to get a lot more capacity for the amount that we are spending on the technology.

Andrew Lee: We've had some pretty bullish presentations on what 5G can do during this conference so far. When, when is 5G coming? When, when, when are you going to start deploying 5G on a commercial scale? And how is that going to change compared to dynamics? Is it an opportunity or is it even a threat to Vodafone in some markets?

Nick Read: Well look I think from a competitive dynamics perspective, what I'd say is we've created the two tier. We have this co-best. Our intention is to stay co-best. So that doesn't mean that we necessarily lead or lag. We're just going to go at the pace of the next best person in the marketplace. So that's why we feel comfortable we will sustain our capital intensity ratio.

I would say from a - if you like top line perspective, where are the real excited applications, they're all going to come to use 5G going forward. I start with that efficiency that cost efficiency first rationale. Then you go into there could be an opportunity in fixed wireless access. I know some people are very bullish on fixed wireless access. All I would point out is in Europe the ARPUs of fixed, broadband, high speed, you know, are around $30 or let's say $30 to $40. So it's a very different market from a US market. And I would not say that, you know, and especially given customers use let's say 2 to 3 gig on a smart phone and 150 gig on fixed, it would be a big demand on urban areas, on our mobile network. So we don't see this as a substitution in an urban setting. It's more a complementary execution in a rural setting where you currently today




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are under served, normally by DSL, very slow speed that there could be, and you are willing to pay a small premium for that service. I think there's an opportunity. I think there's also opportunities for those of you that have caravans and spend holiday, holiday homes, etc. Fine, there may be some opportunity there. But we're a little bit more targeted I would say on fixed wireless access.

And then I just spent a week at the end of August out on the west coast meeting, you know, Facebook, Google, Apple, Microsoft, etc. asking them the very specific question, what are those services that you see coming? You go a year back, VR, AR, everyone was talking about it. Everyone was saying in two years’ time, 5G is going to be fantastic. Now they're all sort of saying, nah, VR AR, yeah, definitely going to be transformative in five years’ time. So I think we have to moderate our expectation of some of these services. Again the car companies when you start talking about automated cars and interface with infrastructure, they're talking five years plus.

So, so I think let's not get too carried away. I think 5G we will launch next year, next fiscal year. We believe there will be handsets that come to market in the second half. We want to be there. We're already piloting. We're already testing. We will roll out in a logical city by city way and we will be co-best in the market. I'd see this as a normal evolution just like we did with 4G.

Andrew Lee: Okay, so we've -- thanks for that. We've talked through your kind of free cash flow generation and partly through your outlook. And it brings us onto the dividends. And so as we look at the Liberty deal and potential that increases your, your gearing and the direction of travel of your, your top line, some investors have got nervous about sustainability of your dividend, the dividend cover and the dividend growth. I wondered if you could talk about your confidence in, in covering and delivering the dividends.

Nick Read: Yeah, I think it's important to understand how the board think about the dividend cause the board own the policy. And the board have a very specific view. They look at that we, we every year announce how much the cumulative free cash flow long-term incentive plan of management is. So, the midpoint of that range is €17 billion for the next 3 years. So our incentives are tied to delivering €17 billion plus or minus either side in terms of our bonuses and performance.

So they look at €17 billion. Then they say, okay, the dividend is €4 billion a year. So let's call that €12, I'm rounding €12. So they say okay so you got €5 billion of head room to cover spectrum, because that free cash flow is before spectrum. €5 billion to cover spectrum. What is the long-term average of spectrum payments? €1.2 billion, so 3 years, €3.6. So they look at it as we are covered. Yes, we are paying fairly foolish at this point in time. Clearly with €17 billion in a year, one guidance of greater than €5.2, there's growth in the free cash flow profile. And that's driven by EBITDA growth, going back to the conversation we had about absolute costs coming down on a multiyear basis. So they say the dividends covered. We're confident in the dividend policy that we have.

Andrew Lee: Okay say --

Nick Read: And that remains the case. Sometimes there's the confusion with investors about the fact that yeah but hold on a minute, your dividend -- sorry your spectrum cost this year and




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next year is not going to be €1.2 because of 5G auction. And my point to investors is, that is a leverage balance sheet issue not a dividend policy issue. You should separate the two. Look at long-term average for spectrum. Then if you look at leverage, can I cover leverage? Just in the same breath cause it's better, you did the Liberty. We did the Liberty Global transaction. We said we are moving to 2.5 to 3 times leverage, given the profile and the stability and makeup of our business moving forward. The transaction took us to the upper end of that. When we were setting the 3 times goal or target, we said to ourselves, we understood the profile of 5G spectrum this year and next year. That was taken into account. And I would say that spectrum auctions are broadly going in line with our expectations, but it's, you know, we've still got some to go.

Then we said we will de-lever over time. And de-lever it through two levers. One is obviously the expansion of EBITDA, which I talked about. And the other one is obviously disposal of assets, which you know we're actively working the portfolio. And as I said about utilization of assets, of which you know towers is also a consideration going forward.

Andrew Lee: That's really helpful. So if I don't break that down there's kind of four key statements that --

Nick Read: You mean how to answer it better?

Andrew Lee: Yes, just trying not to be patronizing to the CEO of Vodafone. €17 billion of free cash flow is still, you're confident in that over, over the next 3 years. You've lived through two anomalous years of dividends in terms of coverage of the -- I'm sorry two anomalous years of spectrum in terms of coverage of the dividends. You want to get back to the 2.5 to 3 times gearing targets that you have and that within all of that, you see a way to sustain and grow the dividends.

Nick Read: So I think the important part is we do want to de-lever going forward. We do want to move back into the range. We're at the higher end. We said we'd do that for this transaction and then we want to de-lever. I want to make sure that investors feel comfortable that we're not at the edge and I think, therefore, let's bring it back down into the range. And we're actively working on it. Australia was the transaction. New Zealand's another transaction that we’ll work on.

Andrew Lee: How much of a risk is FX for that?

Nick Read: Look the FX -- so I think we've got a lot of experience in managing FX, given our portfolio. If you're looking at the current FX hit and assuming FX rates stayed the same for the rest of the year, you're talking that was a hit of about €400 million on EBITDA but only €200 million on free cash flow. So, you know, yes it's the number, but, but, you know, manageable let's say.

What, what we try to do is effectively match our debt in local currency to that entity because ultimately we would rather have the entity EV percentage of the group, we want to do the same with the debt to obviously manage downside risk from an equity perspective. So we do the matching. Now we don't always -- we're not always able to match. So Vodafone would be a good example in South Africa and therefore we do




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derivative overlays to try and do a comparable position. We also, when we're securing global procurement contracts, we try and procure in local currency. And if we have to do foreign currency for a particular entity, then we hedge that year. So we're active in management, the FX exposure.

Andrew Lee: Last risk, how much of a risk is India, the free cash flow delivery?

Nick Read: India is ring fenced. So we are not going to put more group capital into India. I'd like you to look at India as. We’ve got two businesses, commercial business and the tower business, both will be listed there of course going forward. The commercial business has high leverage, so we're over 10 times on a LTM basis end of June. But that's 10 times before synergies. After synergies, of which we will really aggressively pursue synergies, it drops to 5.7. If the market improves going forward, so there's got to be a point -- the market is in an unsustainable price position. It was to drive out a lot of the value players. Clearly pricing at some point will move up, because pricing's below really the cash cost of everyone that's operating in that market at the moment. A 10% increase in the ARPU is a 3-turn reduction in our leverage. So there's high operational upside or operational leverage upside in an improving market.

So that's the commercial business. Commercial business is sitting on effectively €3 billion of liquidity, cash including the stake in Indus. And then you go on the tower side, and you -- and the value of that stake will be about €2.6 billion for us. And what we're saying is at the moment in the short term, they're intrinsically linked. You know if the prospect for the commercial business dropped, the valuation of the tower company drops. Prospects for the commercial business rise, tower company value will rise. So what we would do is clearly fund any capital need from the tower business at a proportion. Then of course Mr. Birla would be doing his proportion and other people on top.

Finally, what I'd say about India is we, we have a mechanism built into the contract with Mr. Birla that we will lower our position over time to be equal to his. So his shareholding at the moment is 26%, ours is 45%. Contractually, we need to lower our share holding over a period of time. He can either decide to buy. If he decides not to buy from us, we can sell in the marketplace.

Andrew Lee: Thank you. I just wanted to come back to something you made right at the beginning of our conversation which is on tower, tower sales or potential stake sales. In the past, you've been less excited about selling a stake or any of your towers. You seem more open to that. I wonder if you could talk about what's changed and, and how you approach thinking about extracting value from towers?

Nick Read: Yeah, let's not get the word excited. I'm not too sure I'd use. But, but what I would say is I've had a lot of experience with towers. So, so I was involved in the formation of Indus towers in India, so the largest tower company. I was on the board for five odd years in Indus and, therefore, you know I saw the evolution. And bear in mind that was three operators. So we had an aligned strategic interest. But the way we wrote them off the service agreement, the way we handled energy, incentives to reduce energy, there were things we optimized over a period of time. If we had just done that deal with a PE firm, then we would have regretted the deal we, we structured. So we were able to optimize and we learned a lot. But when I came into the group CFO role, I said look, what I did




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see though, fantastic efficiency improvement, utilization improvement, tenancy improvement with that single focus. So I like the single focus. And, therefore, when I came into the group CFO role, how could we get those benefits?

Now the strategic challenge that you have if you're going to partner with a tower company, etc. at the time was tower companies would come along and say, I'm only interested in taking 100%. I don't want you involved anymore. And, then you started to say we have certain number of towers strategic in nature that help us have a differentiated network quality. You know as soon as I sell them to you, the tower company, you're going to market them. My differentiation reduces over time.

Second one is, we took a view, 4G, 5G, coming, we're going to put more equipment on the towers. I don't want you running around the market and loading the towers up and then I come along and say, I need 5G. Oh, sorry, there's no space. So these are the type of strategic challenges.

And the final one was a financing challenge. Our cost of financing is 2.5% Euro terms, 2.5%. Tower companies are typically 5/6%. If I go sell to you, you're going to load back in that higher cost of financing into the charge, which is really inefficient for us. A lot of European players don't have our credit rating, don't have our cost of financing. And, therefore, the delta's not so great. So that's not an issue for them.

So imagine you've got these challenges and I'm not putting hurdles. I'm just saying these are real challenges to make sure we don't make mistakes in the way that we would do a tower venture of any kind. What I'd say now, over the last more 18 months, I think tower companies and other players, PE companies are being a lot more flexible and a more appreciative of the strategic challenges and, therefore, are willing to be more open to different formulas that take into account how important network is to us.

So look we actively work, consider is there anything today? No, but, but this is something that's definitely on our list of things that we're pursuing.

Andrew Lee: We're -- I'm conscious of time. So just going to finish up with a question about the portfolio. You've got a vast portfolio of assets. I wondered if you could just give us an insight into what you see as core, what, what could change in terms of your holdings within the portfolio and where you might need to move inorganically to, to add to your portfolio?

Nick Read: Yeah, I don't know if I'd use the word vast cause that sounds a little bit sort of unfocused. What I would say is that we are very much looking at a core portfolio being converged in Europe. Data leader in sub-Saharan Africa, these are our two strong positions. Clearly, we've ring fenced India and see optionality moving forward, see the opportunity -- I think the asset is really well positioned in the marketplace with the debt to spectrum, the debt to network, great management team, great brand. So we have to work the, the integration and then the market improves and I, I think that, you know, there's potential on the upside in India going forward. We're clearly working a non-core portfolio. So, Qatar we sold. We did the Australia transaction. Ultimately, that's into a listed vehicle. So that gives us optionality in the future. And we're looking to potentially IPO New Zealand. We're just getting ourselves, if you like, ready from a performance perspective, which we'll take this




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year and then I think that will definitely be something we're focused on next year, given, you know, as long as market conditions are good.

Andrew Lee: I think we'll close. Thank you very much, Nick.

Nick Read: Thank you very much.

· web viewa big opportunity for us to penetrate the asset we already have, going back to sweating...

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