Vodafone Group Public Limited Company (VOD) Q2 2007 Earnings Report, Transcript and Summary

Good morning and welcome. Here's the agenda for the nexthour and a half. I'm going to run through the highlights and give you an updateon our strategy. Andy will come next and will give you a detailed financialreview. We'll then be joined by Vittorio Colao and Paul Donovan in aquestion-and-answer session. Our first half results are good and show that we'reexecuting well on each of our five strategic objectives. In Europe,revenues have grown in a tough environment. We're driving strong usage growthand data revenues. Our cost reduction programs are delivering results in anenvironment of falling prices, protecting our margins and our cash flows. EMAPA produced another great set of results with strongcontributions from its markets. Good momentum continues at Verizon Wireless.Our performance in the first half has enabled us to improve our guidance, inparticular on revenue, by GBP1 billion and cash flows, free cash flows by 10%.Our dividend growth of 6% is above our previous guidance, and reflectssuccessful execution in the first half and our view of the future. Here are the key financial results. Revenue was GBP17billion, up 9%, or 4.4% on an organic basis. EBITDA margin has fallen in linewith our expectations by 1.4 percentage points. Operating profits rose 6.1% onan organic basis. The dilution of M&A and foreign exchange has loweredreported growth to 1.6%. EPS rose 7.4%, benefiting from the reduction in sharesassociated with last year's GBP9 billion share B return of capital. CapEx roseby 9%, reflecting increases in EMAPA and reductions in Europe.Free cash flow remained strong, albeit a little lower than last year,principally for tax reasons. And we added 20 million proportionate, organiccustomers taking the base to 241 million customers. Let me dig into the numbers a little bit deeper. In Europe,we saw modest revenue growth of 2% despite the adverse impact of competitiveand regulatory pressures pushing prices down 19% year-on-year. We achievedpositive growth through strong performance in voice usage, messaging and data. In EMAPA, the increasing customer base was the principalfactor behind the 16% revenue growth. Verizon Wireless continues to performwell, increasing revenues by 16%. In terms of margins, Europeperformed as expected, while in EMAPA the reduction reflected the pace ofcustomer growth and the inclusion of Turkey,which has a lower margin. In terms of our main product line, strong data and messaginggrowth has more than compensated for a broadly flat voice revenue. Now, turning to the results of our principal Europeanbusinesses. In Germanylast October's price reduction and roaming regulation have had a significantnegative effect on both revenue and EBITDA margins. However, usage growth of29% remains encouraging in the market. In the context of these revenuedeclines, a 1.3 percentage point reduction in margin is reasonable. In Italy,Bersani was the principal cause for the 2.7% reduction in revenue and 2.5percentage points fall in margin offsetting, otherwise good underlying trendsin the business. In Spain,the growth story continues, despite a slow down due to increased competition.Revenue grew by nearly 11% and margins by three percentage points. In the UK,our winning-in-the-market strategy is working well, driving revenue growth of6.7% and an increase in contract customer share. The margin impact is asexpected. Turning to EMAPA, we've achieved good customer growth of between 22%and 75% in our principal markets. This customer growth in turn has delivered strong revenuetrends across the region. Egyptis growing at 33%, Vodacom at 20%, Turkeyat 28%, Romaniaat 24%. Our recently acquired business in Indiacontinues to achieve high revenue growth and improved its market position. Moreon India later. Moving to Verizon Wireless, we continue to see goodperformance there, as the company continues to outperform in what is still avery attractive market. The business remains an industry leader on manymetrics, total turnover, number of retail customers, lowest churn and thehighest profitability. Positive momentum remains with strong revenue andcustomer growth. Now, a few words about the external environment. Wediscussed the external factors and environment in detail at our Strategy Day inMay 2006. And I just want to update you on what's been going on. First,competitive pressures remain. And on regulation, we've had to deal with theissues of roaming and Bersani. In addition, customer choice is expanding, as broadbandcreates the platform for innovation and new entrants come into our space, forexample the Apple's iPhone, Nokia's Ovi and Google's Android operating system.The strong growth in the emerging market also continues. I'm pleased to say that our strategy remains right andrelevant in the current environment. Our focus on revenue stimulation and costreduction remains central to the challenges of ongoing regulatory andcompetitive pressures. Our total communications strategy proves to be essentialin a market when others are coming in. New entrants will stimulate innovation. Our dataconnectivity businesses will reap the benefits of this innovation. We willcontinue to provide Vodafone live branded services in the marketplace. And insome cases, we will partner with others such as Nokia Ovi. Our emerging marketstrategy has provided an engine for growth for the Group, excellent returns forthe cash invested. Our strategy continues to drive our performance and now, alittle more on each of our five strategic objectives. On revenue stimulation,we remain focused on driving revenue and usage through a tailoredmarket-by-market approach of Voice and Messaging solutions. As a result, we'veenjoyed a 24% rise in usage, 13% on a per customer basis, while our prices havedeclined 19%. Messaging revenues have expanded 8.6%, volumes rose animpressive 28%. Although overall elasticity remains below 1, it is over 1 onselected targeted offers. There is still significant scope to drive usage in amarket where usage is about 150 minutes per month, well below markets such asthe United Statesand India. Enterprise is animportant focus for us as we develop our European business and we maximize thebenefits of our unique, wide coverage and large partner market network. Enterpriseaccounts for 28% of European revenue and is growing at 6%, driven in particularby data services. These customers provide attractive ARPUs and are rapidadopters of our data products. In order to ensure that we remain properly focused in thisarea, we've recently launched Vodafone Global Enterprise. This division willensure that we deliver high quality, integrated services to our largest 142multinational customers. We're growing revenue in this business by 14%. We're makinggood progress on our strategic cost reduction programs. We remain on track interms of timing and mostly ahead in terms of savings. I'm pleased to announcethat we've secured GBP340 million savings to date, with further plannedbenefits to come in the next year, two and three. Additional initiatives under implementation include networksharing, including in Italywhere we have just announced an extension to our arrangement with TIM with anexpanded scope. We're also working on ERP centralization and we're also workingon European co-network integration. European CapEx was 8.1% in the first half,and we are confident of delivering our 10% number for the full year. Andy willgo into these cost reductions in greater detail. Our total communications initiatives now represent 12% ofrevenue and we remain on track to grow this business to 20% of revenue by 2009,2010. Mobile advertising remains a significant future opportunity. We're wellpositioned, having commercial agreements in eight markets. Our focus here is onshaping and developing this growth market. We continue to drive fixed mobilesubstitution through fixed location services, such as ZuHause and VodafoneOffice, where we have 6 million customers and revenue growth of around 33%. I will now cover broadband and data, which account for themajority of our total comms revenue. First, mobile data, data revenues continueto grow rapidly at 45% for the group and has delivered about GBP1 billion ofrevenue in the first half. The number of 3G devices has nearly doubled to over 21million, including our Mobile Connect cards and the increasingly popular plug-and-playUSB modems. We now have 0.5 million mobile Internet users across severalmarkets since our launch in May, and we are working well with our key partnerssuch as Google and eBay. Strong data growth is also supported by the attractivespeeds delivered by our 3G broadband networks, which include HSDPA, combinedwith clear pricing for national and roaming customers. Our 3G network is wellpositioned to benefit from this trend with around 20% average utilization. Weexpect data to generate attractive growth rates in the years ahead. On DSL, the broadband market in Europeis an attractive opportunity albeit on a case-by-case basis. Averagepenetration is around 50% of the households. Countries like Netherlandsand Switzerlandare over 70% penetrated, with Italyand Germany at40% penetrated and Spainat 50%. We now have the platform to offer DSL through ULL and resalein 13 markets. Arcor continues to perform well and Vodafone Germanyis enjoying strong fixed broadband cross selling. The acquisition of Tele2, Italyand Spainaccelerates our entry into these fast growing markets, and provides good scopefor cost and revenue synergies. The acquisition, when completed, takes thetotal fixed broadband customer base to around 3 million customers. Moving onto emerging markets. I've already discussed thestrong customer growth we're enjoying on the back of fast growing economies andrelatively low penetration rates. However, delivering profitable growthrequires us to focus on cost efficiency and product differentiation, just as wedo here in Europe. Our ultra low cost handsets, the $20 handset, is generatingsignificant sales in India,Egypt, Romaniaand South Africaand allows us to address a wider market with affordable and attractive productsand services. In Kenyaour M-PESA, money transfer service is now being used by 1 million people,enhancing our churn performance. Moving on to India.The Indiabusiness has been successfully integrated into the Group and was re-branded toVodafone during September. Good execution of our plans is driving goodperformance, in line with our plans. Revenue growth of 53%, around 1.6 millionnet adds per month and good EBITDA margins. We have a number three market shareon a nationwide basis, but we are number two in our principal 16 circles. Weremain on track to invest GBP1 billion in CapEx this year to aid with thenetwork rollout and support growth. And we continue to seek ways to deliverfurther cost efficiencies, including ongoing, site sharing discussions withother players in the market. In the half year we have completed our acquisition ofVodafone-Essar for a GBP5.5 million, and we've sold a 5% stake in Bhartirealizing GBP700 million. We've also agreed to acquire Tele2 Italy and Spainfor GBP0.5 billion. We continue to reposition ourselves from a low growthnon-controlled position towards a higher growth controlled business. Ourstrategy remains to drive returns for our shareholders from our portfolio andthe areas of developmental interest to us remain Asia, Africaand parts of Central and Eastern Europe. On returns in dividends, the Board has decided to grow ourinterim dividends by 6% to GBP2.49. This reflects the good performance we’veexperienced in the first half and our view of the prospects for the business ona going forward basis. While the Board remains committed to its policy of 60%dividend payout on adjusted EPS, I would restate that we will allow the levelof payout to rise above 60% as we absorb the initial dilutive impact of India.Net debt was GBP23 billion at the end of September and our credit ratingremained in line with our policy. Turning to the outlook. Operating conditions are expected tocontinue to be competitive in Europe with ongoing pricingand regulatory pressure, not withstanding continued positive trends in datarevenue and voice usage. And in EMAPA we expect increasing market penetrationto continue to drive growth. Against this background we've set out our newguidance. Improved operating performance has encouraged us to increasefull-year targets for revenue and operating profit. CapEx guidance is unchanged, with efficiency improvements inEurope offset by increased investments in EMAPA, and in Indiain particular. Free cash flow is also expected to be higher, benefiting fromboth improved operational performance and lower anticipated tax payments. So in summary, we continue to execute well on our fivestrategic initiatives. As a result, in Europe wecontinue to deliver higher data revenue and voice usage alongside importantcost savings. We continue to enjoy strong growth in EMAPA in both emergingmarkets and Verizon Wireless. Overall, I'm pleased with the strong first halfperformance, which has encouraged the Board to improve both our guidance andshareholder returns for the current year. Andy, over to you.

Right. Thank you very much, Arun, and good morning toeverybody. I'm going to go and provide a little bit more color to theoperational performance, touch upon the interest, the tax and the overall debtposition. So, slides permitting, we will go through. Let's start withthe Group income statement. Two key numbers here, as Arun has mentionedalready, highlighted on the top left, GBP17 billion of revenue and GBP5.2billion of adjusted operating profit. The revenue figure headline is up by 9% year-over-year. Ifwe take out the effect of Turkeyand India,which were not in both periods in full, and adjust for some small foreignexchange differences, then the overall increase organically was 4.4% on therevenue. And on the adjusted operating profit, doing the samecomparison, the major effect here was actually the removal of the Belgacom andSwisscom profit contributions from the previous year. So that, plus the ForEx,has the impact of actually increasing the organic growth rate on the profits by6.1%. If you look at this by region, just added in here, a thirdline in the middle of the EBITDA line. So the first column here, is Groupnumbers, I've just been through. And I'm going to pick each of these up in moredetail as we move forward. So, on Europe the key number is 2% upon revenues organically, and about 2% down on the EBITDA and the adjustedoperating profits. In EMAPA, excluding the US, key numbers there, 16% up on therevenues, 13% up on the EBITDA and 11% up on the adjusted operating profit. And in Verizon Wireless, 16% up on the revenues, 17% up onthe EBITDA and a big 26% increase in the adjusted operating profit. VerizonWireless now represents 22.5% of the Group's adjusted operating profit comparedwith 20% a year ago. So, let's just start then with Europe.Headline GBP12.7 billion of revenue, GBP4.8 billon of EBITDA and GBP3.3 billionof adjusted operating profit. The drivers of the revenue I'll go through on thenext slide, but just by country, we have reductions in Germanyand Italy andwe saw good increases, particularly in Spainand in the UK.And on the profit side, where we were down about GBP100 million year-on-year,we were down in Germany,Italy and the UK,but up in Spain. So, let me just start then with the revenue in Europe.Left hand side here is the makeup of the GBP12.7 billion of revenue. And justvery quickly going down the key lines there, you can see that the outgoingVoice was basically stable year-on-year, the incoming was down about 4%. The roaming was down about 10% and I'll go into each ofthese in more detail in a minute. Messaging was up 8.5%. And the data up, asArun has mentioned, a very, very strong 41%. If I step back from the detail, in the period we have takenon the chin the impact of the roaming regulation, the Bersani top-up decree inItaly and the [termination] rate cuts, which have probably trimmed back theoverall revenue growth done between GBP400 million and GBP500 million in theperiod, which is the equivalent of about 3.5 percentage points of growth. But,through the strong work on data and on messages, messaging and on the outboundvoice, we have actually managed to make that up and add another couple of GBP100million as well. The growth rate in the second quarter, if you normalize theaccounting adjustments of the previous year, was very, very similar to theadjustment to the rate of growth in the first quarter. So, I'm just going to go and walk through now, on thefollowing slides, the line items that you can see on the chart there. Sofirstly, on the outgoing voice, as I said the numbers are pretty well stableyear-on-year. In the yellow you can see the price change, this is theprice paid by each customer, which has been typically in a range of between 15%and 20% reduction each quarter now for the last four quarters. The average forthe last two quarters, for the last half-year is a 19% reduction in the averageprice paid per customer. In blue you can see the total volume of minutes thatwe actually sold. And those have typically been in the corridor between 22% and26% over the period. On average, in the last half year, the number there was24%. So 24% up on volume, 19% down on price, a slight reduction in the rate ofgrowth in volumes in Spainand Italy inthe last quarter, but overall still very much tracking in the same range aspreviously. Moving then on to incoming. As expected, we saw a reductionin the revenues here, about 4% down. Using the same color-coding we have nowactually had four consecutive quarters where the price paid by customers hasbeen going down at or around 12%. And we have, for the third consecutivequarter, had an increase in the volume of minutes of around 9%. So, volume isup 9%, price is down 12%, a fairly consistent pattern there on average acrossthe European businesses. Moving then on to the voice roaming. Voice roaming revenuesdown 7.4% organically again, very much as we had expected that is a declineyear-on-year of about GBP80 million. Sales of the Passport products still goingvery, very strong, 16 million customers there and we have obviously applied thenew, regulated pricing. Within these numbers, there is GBP30 million VATbenefit in the UK.So the underlying effect to the roaming is about GBP110 million reduction,which is benefiting from quite good usage uptake about 12% increase in volumes.So overall, we're probably just slightly more optimistic now about the roamingoutcome for the year compared with the guidance that we gave back in May. Now on to data and messaging. On the left hand side, just toremind, that data are up 40.8% and messaging up 8.6%. On the right hand sideyou can see the bar charts here collectively, those have contributed GBP300million more revenue than in the first half of last year. The messaging increaseof 8.6% comprised a volume increase of 28% and price reductions of about 15%.Over the last three years in aggregate, the price per message on average hascome down by over a third. The volume increases there and revenue increasesparticularly strong in Italyand the UK, bothof them saw increases on messaging revenues around 20%. The 41% increase in data was very much driven in thebusiness segment with Mobile Connect cards, the connectivity side of things.1.7 million Mobile Connect cards now in the market. That is an increase of 72%over the last year. And the revenues from that have over doubled. On applications like e-mail and Blackberry we have seen 1.9million handheld devices, which is an increase of 112%, with the revenues fromthose up by 80%. So very, very strong performance on the data front, enabledsignificantly by the greater data speeds from 3G and from HSDPA. Moving then on to the margin change in Europe,the margin for this half-year was 38.2%, which was a reduction of 1.3percentage points compared with a year ago. If I just walk through thecomponent parts of that reduction on this chart, first of all, the Interconnectaccounted for 0.3 percentage points of that change. Let's put this in context.We had a 24% increase in the volume of minutes going through our networks, butwe contained the Interconnect cost increase to only 4.5%, primarily because ofprice changes and also because of keeping as much of the traffic on our ownnetworks as possible. The other direct costs. 0.5 percentage points of that marginreduction, two factors here. First ofall, the direct access charges in the Arcor business and secondly, ongoing, commissionsin contract cost in the UK. Customer acquisition and retention costs took 0.8 percentagepoints off the margin, and I have a slide just coming up on that. And thenfinally and very helpfully, the operating expense controls actually contributedto 0.3 percentage point improvement in the overall margin. And again, I've gota slide coming up on that front. So let's just talk about the customer acquisition andretention costs, 7.38% organic increase here overall. The majority of this wason the contract side; about 80% of the increase was on contract and it wasspread fairly evenly between post paid and -- between acquisition and retentioncosts. On the chart on the right hand side, the green blocks arethe total number of new customers added. And you can see some increase there,particularly in the most recent half year, that was particularly in Germany,Italy and inthe UK. Theblue chart there, the blue blocks there are the number of upgrades. And againthose have increased particularly in Spainand Italy and Germany.Now the consequence of that is that we do have improved contract churn rates ineach of Italy, Spainand the UK. Onthe top right here the single lines are the unit subsidy per customer on boththe upgrades and new customers. And you can see, broadly, a fairly stable trendon that front. And so on to operating expenses, GBP2.3 billion. We've nowgot the operating expenses back to the levels of two years ago, i.e., they areessentially flat. Let's just put this in context. Over that two-year period thenumber of customers has increased by 17%, the number of network minutes hasincreased by 37% and the number of base stations by 39%. So, against all thosemetrics, the operating expenses have basically been held flat. In the secondhalf of the year we may invest a little bit more, particularly on the marketingside, in order to support the increased revenues that are included within theguidance update that we have given today. And so on to CapEx, good controls here as well, GBP1 billionof spend in Europe on capital expenditure in the half-year,took our capital intensity down to 8.1%. And basically, that's a consequence ofthe 3G coverage now having largely been completed and some improvements also onthe 2G side through a number of initiatives, some of which Arun referred toearlier on. Now, typically, we do spend more on capital expenditure on thesecond half of the year. So, we do expect to still be within the 10% figure forthe full year. But overall, good control on the expenditure side in capital. And finally on Europe, the adjustedoperating profit, GBP3.3 billion, that is GBP94 million decrease year-on-yearwith Germany, Italyand UK beingdown slightly, and Spainprimarily offsetting, but also a good performance in the Netherlands.Also worthwhile noting the depreciation trend is now starting to flatten as aconsequence of the CapEx controls that have been in place for some period oftime. So, that's the end of Europe. Nowwe'll change tack and move on to EMAPA. GBP4.3 billion of revenue, GBP1.4billion of EBITDA and GBP0.6 billion of adjusted operating profit, thisexcludes the US,which we'll come on to in a second. So, headline numbers that I referred toearlier, 16% on the top line and 13% on EBITDA and 11% on the adjustedoperating profit. If we have a look at the revenue, first of all, then you cansee on the chart on the left hand side the composition of the revenues byoperating business. The top part are all businesses that have been with usthroughout both of the two comparable half years throughout and at the bottomare India and Turkey which are in for part periods in different durations. So in the top part you can see very, very strong growthcontinuing in Egypt,very strong growth continuing in Romaniaand South Africa.And indeed the blue bars on the right hand side are showing the organic growth,rates for growth in sequential half years. So, slowing down a little bit, butthat is just as penetration rises, overall still a very strong performancethere. What we've done in yellow is to superimpose the Indian andTurkish businesses, which, under our organic definition are not included in theorganic count. And you can see, putting those in on a pro forma basis, puts theactual growth rates back up, above the 20% level, particularly obviouslyassisted by the 52% growth rate in India and the 28% growth rate in Turkey. In terms of adjusted operating profit, GBP563 million ofadjusted operating profit. That is progress in most of our businesses. The onewith the small bracket around it is Indiawith GBP18 million loss. But it must be appreciated that that is arrived atafter taking GBP170 million intangible amortization charge. So the underlyingperformance there is very much inline with what we had expected. The EBITDAmargin at 33.2%, as Arun has mentioned previously, the overall average for theregion was down because of the mix of operating businesses. This is downorganically, just a fraction from the decision to invest a little bit more incustomer growth. And so on to Verizon Wireless. The key numbers here, theseare six month numbers obviously, $22 billion of revenue, $8.7 billion of EBITDAand $6.1 billion of EBIT. Interestingly, down on the bottom left, the net debtfigure in the business is now down at $7.6 billion. And you can see in the lineabove that, just as a point of comparison that the EBITDA less the CapEx is nowrunning at the rate of $5.5 billion. Now obviously that is the six-monthnumber, in other words running at just under $1 billion per month. Now the net debt figure there, $7.6, is before the closureof the Rural Cellular deal, which will put about $2.7 billion on to that figurelater when it closes. But nonetheless, very strong cash generation and a goodlow level of debt in the USbusiness. So, I'm now going to move away from the operational reviewand just comment upon one or two other things in the income statement. First ofall, the net financing costs, at just over GBP0.5 billion, these exclude the putoption accounting just to be more straightforward. This is up 25% year-on-year,primarily because of the increase in the level of debt and the slight increasein interest rates. If we look forward to the second half of the year, justbearing in mind the phasing some of the dividends receivable, the debt and theinterest rates, then we would expect that the second half financing costs wouldbe somewhat higher. On the tax front, the effective tax rate for the half-yearwas 30.1%. And we continue to expect the overall full year tax rate to besimilar to where we were last year, which was about 30.5% overall for the year. Now the CFC case, I know it is always a topical one, we havehad one third of the development on the CFC case in the period since May, whichis a further court hearing. Put simply, there were two issues raised at that. Onewas the question of whether the principles that had been determined in theCadbury Schweppes case were the principles that should be applied to our taxpattern. And the answer to that question was, yes. So, that has at leastprovided clarity as to what principles should be applied to a client on thecase. The second issue was the slightly more profound one ofwhether actually the UK Law is fundamentally incompatible with the EU Law andthere was sort of interesting development there and as it was, we lost that partof it. We only lost it on a split decision based up on the counseling vote ofthe Chairman. So we have decided on the latter that we are going to appeal andthe appeal is set for the spring of next year. So, bottom line is, this isstill moving very, very slowly forward. If I had to estimate, I would say thatfor a case that is already seven years old we are probably still another two tothree years away from concluding it. And then finally on the bottom here, the adjusted earningsper share up by 7.4%, do bear in mind, however, that first half on first halfwe had an 8% reduction in the share count as a consequence of the deemed shareissue over a year ago. And that has clearly weighed heavily on thatcalculation. That does not recur in the second half but all the number ofshares issued in the second half will be similar for the two periods. And it isalso worth bearing in mind that those EPS numbers are obviously after we havetaken into account the contribution for the Indian business without, which theEPS growth numbers would have been about 4 percentage points higher. So, of theorder of magnitude that has been the impact of Indiaslightly lower than we previously indicated. On free cash flow, GBP2.7 billion on the right hand side,the published number. There was one item in here, which was the payment of GBP200million of VAT, which happened in the current first half, with respect to thepurchase of the Turkish business in the previous year, which if you excludethat, then actually, this is sort of working from right to left, the adjustedunderlying was GBP2.9 billion of free cash flow, pretty comparable with thethree of the previous year. And I think it is worthy of note, that even though themargins and the operating profit we're challenging in Europe, we did actually,through the tight capital expenditure control, actually generated more cash outof Europe this first half then we did a year ago. EMAPA also increased its cashcontribution and bearing in mind that that is after in Indiaspending about GBP360 million, on capital expenditure. And then we had slightlyhigher ongoing interest and tax costs, which basically took us to the GBP2.9billion number. But overall, a strong performance on the cash flow. The net debt, we've closed GBP23.3 billion of net debt,which compares with GBP20.2 billion a year ago. Just very quickly to walkthrough that GBP2.7 billion of the free cash flow that I have just referred to,and then the net impact of acquisitions and disposals which is shown on theright hand side, GBP5.5 billion out for India in terms of cash consideration, GBP1.2billion obviously in debt. We have included, as we have to do, the fair value of theoptions there, which are GBP2.4 billion. So overall, the impact of Indiais 9.1 and then we have the inflow from the Bharti part disposal to get 8.4 andthen returning to the left hand chart, the extra dividend payment coming to the23.3. So, 2.4 of the 23.3 is the put option accounting and those numbers arecomfortably in our low single-A credit rating. Now, Arun talked about the outlook statement earlier, I justwanted to make a couple of extra points on this. We have separated out here andin the press release the movements between foreign exchange movements, recentacquisitions and underlying business performance. And we have also actually forthe purists amongst you, slightly narrowed the ranges, so mathematically you'llwork this out. This will not totally add across, but this gives you the buildup across. So, first of all the key points on the foreign exchange isbecause we do not consolidate any of the revenues of the USbusiness. We actually have the full brunt of the Euro currency exchangemovement in revenue, which has given us a boost. Whereas in the adjustedoperating profit, we have the opposite effects of the Euro and the Dollar movements,which very simply have pretty well offset each other. So, actually, even thoughexchange rates themselves have moved in our latest view, it has not overallimpacted the FX line. We have then put in the Tele2 deals assuming that theseclose fairly soon, and the column highlighted in red is therefore the trueupgrade to the operating performance. So, we have upgraded the revenues by GBP0.6billion, the profit by GBP0.2 billion and the free cash flow by 0.3. The key components there on the revenues is the strongerperformance on the data and on the messaging, being slightly more optimistic onthe roaming and good performance in the EMAPA businesses. That flows through tothe adjusted operating profit. Slightly lower one-off tax settlements and wecome to the 0.3 upgrade to the free cash flow, which is up about 7% up on themidpoint of the previous guidance range. So in summary, I think the performance was strong during theperiod, very consistent with our overall strategy. Europethe real story was about driving data to overcome some of the pressures on thevoice side. In EMAPA it was about continuing to grow the businesses there andintegrate India.The US iscontinuing to perform strongly and the debt levels are progressively comingdown. And overall the free cash flow generation for the business remained very,very strong during the period. With that, I will finish and hand back to Arun.

Thank you, Andy. Can I invite Paul and Vittorio up? Okay,with that we're very happy to take the questions. We'll start with Christian uphere.

Thanks Arun. It's Christian Kern of Lehman Brothers. I wasjust interested if you could help us with the revenue growth outlook in termsof the curves you're anticipating for voice. Is it a stabilizing curve or is itstill flattening over couple of half years? The second one would be then on thedata side, we've seen exponential growth curves on subscriber growth in the mid90s in Europe. Is this an exponential curve you seeflattening any time soon, or is the consumer segment coming in? So just to get a feeling for the underlying drivers, how yousee them developing over the next two, three years. You mentioned advertisingon the mobile side, as well in your release and that would be very helpful toget a feeling for? And then a pretty similar one on net debt towards the end,Andy maybe you can help us there, where you see net debt towards the end of theyear? Thank you.

Christian, a very good opening question and it encompasseseverything pretty much. So thank you for that. I'll take a shot at it and I'llask my colleagues to join. If you say kind of what are the real drivers in the business,the real drivers in the business continue to be voice usage growth, which we'regrowing at 24% in the first half; data growth that's growing at 40%; 45%,messaging growth which is growing at 8% or so. In EMAPA the underlying focus ineach of our markets, the kinds of numbers that you're seeing, are numbers thatone can expect to see in the future. Offsetting that are two major downward trends. One iscompetitive pressure, price per minute. We're talking about 19%, which includesboth price pressures from competition and price pressures from regulation. Now,the question is the things that are driving our business forward, I think willcontinue to drive our business forward. I don't expect any major changes there. So, then the question becomes what's kind of pulling back onthe business competition. It's very hard for me to sit here today and say thenumbers are going to be substantially lower. Our own view is that it willremain competitive here in Europe. Exactly plus or minusa few hundred basis points, I'm not trying to be that precise. But we expectthings to remain competitive. On regulatory pressure, we had double and triple whammiesthis year. We had roaming, we had termination rate cuts. We had Bersani.Frankly, we don't expect triple whammies in the years ahead. We will expectsingle whammies and we expect determination rates to continue to decline andwe've got them planned into our thinking. On the margin there might be one or two other smallerthings. But we don't expect the kind of regulatory hits that we've taken thisyear. So, when you net it all out you basically say the positive things arelikely to kind of be similar and the regulatory pressure is likely to lift alittle bit. And that gives you whatever set of numbers you can dial in. Andy, you want to add something to that?

Well, maybe I'll just pick up from there. I think the secondpart of your question was on the net debt side so I'll just go on to that.Broadly, implicit in the guidance is GBP4.6 billion, GBP4.9 billion of freecash flows in the second half of the year 4.4 to 4.9. So, 4.6 or so on average,we've done 2.7 inthe first half. That's implying about GBP2 billion in the second half. So, it'sessentially a similar run rate but more capital expenditure in the second halfparticularly on India is really sort of how the profiling on the cash sideworks.

Vittorio, did you want to add something?

I can get Christian's point on data. I mean data; weperceive it as a great opportunity. If you take just some basic facts, Vodafonetoday we have 1.5 million active e-mail customers, which is a very goodpromising number, but still very small. Data cards and PC based access to datagoing up a lot but still the number is in the sub 2 million thing. In total outof 106 million customers we have in a way and another more or less 20 millionpeople who are active on data, but not a regular tariff. So, the potential wereally feel is there. And now that the speed of the networks clearly have improvedand on the other hand devices are becoming, are very user friendly, alsoconsumer data we perceive is going to be a reality, and here you have tobelieve that the whole society will go into more kind of personalcommunication, e-mail, maps, music listings, which by the way is our dailyexperience. So, that we perceive as a kind of great potential, of course, wehave then as operators to price wisely and to make the services very easy andvery accessible. But that's a great potential that we have to really exploitand compare it to Verizon Wireless. We do a lot of comparison and a lot of kindof sharing best practice and experience. And again the experience is that people will move to biggerkind of tariffs and packets including mobile communication on a data basis,which we think is growing in Europe.

Thank you.

Terry.

Thanks. Terry Sinclair from Citi. The German contract churnis up. Sacks per customer are down. Is there a chance that sacks per customerwill rise in the second half? And secondly, I have seen the guidance does notinclude anything for Spectrum in India.I know we'll talk about this on December 10th. But can you help us think abouthow -- when we should expect Spectrum payments? And finally, can I just askwhether you're able to give any help to us on quantifying the unit -- price perunit reduction in CapEx. You've clearly had -- you're spending more in terms ofstaff but you're getting a better price for it. What's the efficiency gainthere?

Andy, if you take the spectrum guidance question, Vittorio doyou want to take the German question and I'll maybe ask Steve Pusey who's ourChief Technology Officer here to actually comment on what is happening to priceson a unit basis.

Yes, on Germanywhat I can say is that Germanyis and has been a challenging market from the price point of view. At somepoint last year we have taken a decision to be more competitive from a pricepoint of view. And we are now in a way closing the gap, the negative gap interms of revenue growth with our main competitor. We still have much I wouldsay, bigger profitability compared to the main competitor, which for us is ifyou want the cushion that we can reinvest into being more aggressive, which iswhat we are doing in these days. We lead in the data space. Clearly we have been conqueringthat space earlier than our competitors both in the kind of connectivity spaceand in the entertainment, the consumer space. So we think we're doing a prettygood job at defending our share. We are focusing more on higher value customersrather than on lower value customers, which is what you would expect. Butprobably it's going to be for another couple of quarters a challengingenvironment. Now the good thing about Germany is that if you have comparedGermany with the other European markets, Germany is still the market, which hasthe lowest usage in Europe or one of the lowest usage in Europe, which againindicates that every time that we move the price, there is a great potential tobasically catch back in terms of volume. So overall we don't think that thesituation is really as negative as you just described it. But there is stillsome more work to do.

Terry, on the Spectrum side, there are specifically twoparts to this, one is policy and maybe actually Paul can comment just a bitabout what is actually happening out there. This is not specific to Indiabut generally because Spectrum is lumpy and very difficult to predict whenprice changes do occur. We have typically guided and I think it is footnoted inthe press release that we guide exclusive of changes in spectrum and licensecosts on that front. So to the heart of your question, you're absolutely right.We have continued to guide on the basis of the existing regime continuingthrough the balance of this financial year. I don't know, Paul, whether you want to just sort of commenton where that situation is.

Yes, I think the kindest description that I can give of the Spectrumsituation in Indiaat the moment is that it's a bit of a mess. There's been a couple ofpronouncements from the Department of Telecommunications recently. Number one,allowing CDMA operators to obtain GSM Spectrum under the same licenses as theyhad before, the second one is a review of the Spectrum allocation criteria,which is actually done on a per subscriber basis, which is actually introducingthe potential for an up to 800% increase in subscribers before retrieving thenext [chance] of Spectrum. And the majority of the GSM operators do not believe thatthese proposals are neither technically acceptable nor indeed practical interms of their implementation and therefore, have through the industryassociation filed a petition challenging the Ministry's rulings. The issue of Spectrumfees is therefore a follow on and is equally unfair and so we're notanticipating any incremental fees for Spectrum in the near-term, certainlyuntil the fundamentals of allocation become clearer. And indeed, yesterday there were some further announcementson 3G, which are equally unclear in terms of scope and timing. So this issomething, which is clearly going to unfold. We hope that by the time we havethe India Day in December that we have greater clarity on these particularissues. There does seem to be ahead of steam in Indiato get them clarified and give us a certainty in terms of investment outlook.But right now it's a mess.

Well I think the policies will be clarified in the next 30,60 days and I think we're just going to have to kind of walk through the pressreleases that we keep getting from Indiabut more clarity in 30, 60 days. Steve?

Hello, good morning, Steve Pusey. GermanyI'll give you an answer in two areas here. One is if you look on depending thework we're doing in both markets and the price movements in both markets, thetechnology itself is reducing as we exert our volume ability to procure acrossall markets and the scale of India running [assist in] with reverse synergiesthat we can bring to bear with the vendors. But secondly and as importantly as the technologies areevolving quite rapidly and they're offering us an efficiency as we deploy inthe marketplace, it's about service the customers and service the growthparticularly in data that you'll see. And so, there are two measures looking tosupport the growth of our business in all those areas, both net pricing, thepower that we bring being as one large company and the evolution of the technologiesthemselves that are offering better coverage, more customers connected et cetera,et cetera. So two areas there.

Thank you very much.

Nick.

Thanks very much, Nick Delfas from Morgan Stanley. I havetwo questions. The first is on capacity utilization, page 15 of yourpresentation. You say 50% to 60% utilization in busy areas at busy times. Ijust want to clarify, is that the busiest area or is that multiple areas? Itsounds like within a year of data growth that could lead to some congestion. Ijust wanted to get your perspective on capacity utilization and whether youneed to buy any more Spectrum or do something to increase capacity in thoseareas? Secondly, just to Arun's point on trends, obviously Q2 overQ1 maybe there was a slight incremental roaming drag in Q2, although I thinkyou have changed most of your prices in Q1 to comply with the regulations. Butmany of the markets Germany,Italy, Spainand even some of the EMAPA ones, Romania,Egypt, showed aslowdown Q2 on Q1. I wonder if you could just talk about why that was, on anunderlying basis? Thanks very much.

Okay. Let me take the first part of the question and maybeAndy and Vittorio you can reflect on the second one here. So, first off on the 50% usage in our busy areas, those areliterally cell sites or a group of cell sites that are in very high usageareas. The way to kind of solve for the capacity problem there is you canintroduce another carrier. So it's not that we are Spectrum constrained but wemight have to put a little bit of capital on top of those particular sites tomake sure that we're providing good services to our customers. In general, likeI said, we're 20%, 25%, data usage is growing very rapidly and frankly we aregoing to have to augment our networks in the hot spots but not broadly across,which is what costs a lot of money. Andy?

Let me just pick up on this, the growth rates from the firstquarter and the second quarter, the revenue recognition changed from maybe ayear ago, so one has to normalize for that. The roaming price changes havehappened slightly differently in some markets in terms of their exact timing sosome did, as you say, happen very early in the year. There was one or two ofthem that happened sort of late summer. So we'll see some of that comingthrough. But to be honest, I think the actual underlying change in the growthrate between quarters is very, very small. I mean it will really amount to pointsomething of percent. So from my perspective and Vittorio I'm sure will commentthat we are pretty constant on the growth when you strip it back. I don't thinkit's a big change there .

Nothing more to add.

Okay. Robert. Robert Grindle - Dresdner Yes, hi. It's Robert Grindle from Dresdner here. Justactually on the capacity utilization thing again, I'm afraid. Is that 20% to25% before the upgrade to 7.2 megabits HSDPA? And is it possible to knowroughly, on average how many carriers you have activated per base station? Isit still broadly one across the footprint? And then in Italythe agreement you've done with TIM, the expansion of the scope of thatagreement. Is it possible to give a broad idea as to how much extra that mightbe worth? Thanks very much.

Okay, Robert let me, so first of the capacity utilizationnumbers here they are mostly on HSDPA 3.6 because 7.2 is just beginning tolaunch. And we've given you numbers in the last six months so it's before the7.2. Second, in most parts of our network we have deployed only one carrier.Selectively, we'll deploy a second carrier when a need for a second carrierarises. And on the TIM extension, I'm sure Vittorio can add a lot to this. ButI'm very pleased that we're extending this and we're frankly expanding thescope. So, we can do much more than what we've done in the first time around.

Yes, I think it's another very positive type of agreementthat we have reached. The agreement, first of all is very long, of course intime, so it's going to be seven years and it's going to take a lot of time tofully deploy. But we are thinking of sharing thousands and thousands of sites, kindof a big number. Now the savings will come over time because of course, youhave to decommission existing towers and basically replace and put theequipment in the new ones. But here you have probably a very good effect alsoin the rentals, which is in Italya particularly very high cost, much higher than everywhere else because of howthe country has been. Power maintenance, I mean everything, which makes actuallyincreasing our capacity more difficult from an operational point of view notfrom a Spectrum point of view, but from an operational point of view will becomemuch easier. And we think this is not only cost saving but it’s also veryfuture proof in terms of all these improvements that we have to make. So it's avery positive development.

Laura.

Thanks and good morning. It's Laura Janssens from UBS. Firstof all, I wondered if you could comment on the strength of the EBITDA withinthe common functions line in the P&L. And should we interpret this as abetter-cost cutting. And is it fair to assume that most of that is attributableto Europe? And secondly, now data is becoming a moresignificant part of revenue, I wonder if you could comment on whether there'sreason to assume that the margins are very different on the data part ofrevenue compared to the rest of the business? Thanks.

Andy, you want to take that.

Let me just take your first one then. So, on the commonfunctions the comparison year-on-year if you got into that level of detail sofar, there is an increase and sort of a profit contribution from there. Andsome of this is because of reorganization charges we took in the previousperiod. And some of it is because as we're moving more to shared types ofactivities. We are evolving the recharge model for the shared serviceactivities. So, it's the two of those together, which have caused that changethere. Sorry, your second question Laura was?

About the margins on data?

The margins on data vary quite considerably. From messaging,which is obviously very high to a number of the products where we've got sortof built in components and we've got different ranges of profit share. But Iwould say overall the margins are probably a little bit lower than the companyaverage, but not too much different from the company average.

The fastest growing part of data is connectivity andconnectivity has a very good margin. Andrew.

Hi, it's Andrew Beale from Arete. Just a couple ofquestions, one on advertising, and the other on convergence I guess. Onadvertising you've got a very bullish statement -- paragraph in the statementtalking about the prospects for that. I'm just wondering if there's any sort ofnear-term evidence, which supports your great optimism there? And secondly whatthe model is long-term how it's mixed between TV, clicks, banner advertisingand so on? Secondly, on convergence, I think that a few of yourcompetitors are abandoning thoughts of selling fixed and mobile together,whereas you've obviously bought Tele2 Italy and Spain. Given that you've paid aconsolidation multiple for those assets, I'm just wondering how you thinkyou're going to make a return on capital after those acquisitions? Thank you.

Okay, thank you Andrew. So first off, on advertising it'svery early days. The fact that a number of other players such as Google, etceteraare interested in coming to our particular industry is because they think ofmobile advertising as the next place where advertising, digital advertising isgoing to go. Our own view is that we are very well positioned as operators withgood CRM, with billing, with information to actually help monetize all of this.We're doing a number of trials in our markets. I think the most advanced trials that we have are here inthe UK, wherewe're doing it with Yahoo, where we're trying different models, banneradvertising, content, push. And I'd say it is early days for us to say we'velanded on a particular business model in terms of saying this class ofcustomers like this kind of advertising and this is the monetization in termsof CPM. It's still early. The numbers that we've got are still down in the tensof millions of pounds. So, it's not a big number in terms of revenue. But weremain hopeful in the medium-term that this will grow into a good-sized streamof revenue for our business. On your second question around convergence, so first of allI don't think you've heard us talk a lot about triple play and quadruple play.We are in the business of satisfying customers' needs. We believe that mobilityis a strong business. We believe broadband is a strong business. We believe theInternet is a strong business. And the assets that we've got and that we arecollecting are assets that will help us meet either the mobility needs or thebroadband needs or the Internet needs of our customers. So we are perfectly satisfied with what we're doing, buyingin some cases, doing ULL in other cases, doing resell in other cases, to makesure we can satisfy our customers' needs on a country by country by countrybasis.

So just coming back on that point, if you've paid aconsolidation multiple for these assets do you then need to buy other assets tomake the math work in those markets? Or do you think you can make a return onthat existing business as it stands just doing broadband?

Yes, I think the businesses that we're buying are businessesthat we will take and frankly grow. Typically we're buying a 3%, 4%, 5%, 6%market share position and obviously, our mobile market share is in the 30%,35%. And we will grow the broadband businesses that we have to a number higherthan where we have today. Vittorio, you want to add?

No,I can just, I'm not sure what the consolidation multipleis. But basically what we are seeing and I can take Germany,which is a case where we have actually already today presence in both segments.We see that we have at least two strengths, one is distribution power. In Germanywe are selling broadband, which is really given to us by Arcor so it's an Arcorin bred type of thing. And we see that the power of distribution under theVodafone brand is getting traction and secondly it's created the brand. Becauseyou know in high value customers in SOHOs, in small and medium businesses, wehave typically in a position of strength. That per se is what we really want to do. We want to servethose customers with their needs. And again if then one day there is a triple,quadruple play, quintuple whatever is going to be in Spain in these days Orangeis trying again to play this game, fine, we will be in a position to respond.But our main goal is to serve the high value customers with their needs and doit out of our major strength, which are distribution and brand.

Thank you.

We'll take Andrew here.

Thanks. It's Andrew O'Neill from Bernstein, a couple ofquestions if I could. Firstly, it seems looking at the results from theindustry broadly in Western Europe that in the Septemberquarter there was a certain level of competitive reduction. Do you have anysense for why you think that things got a little bit more benign this quartercompetitively? I know you've already said that you don't want to predict whatwill happen next. But what is Vodafone's strategy going forward from here,given some of the reaction of your competitors? And then secondly, thinking through a couple of things, oneis looking at the margin result in Western Europe thishalf year, it looks like half-on-half given the seasonality probably marginsare about flat. You were describing a picture for revenue where the regulatorydrag next year would be diminished. So, are we moving closer to the point wherewe can see EBITDA grow again in the European division?

Okay. So, first of all I would not describe the competitiveenvironment in Europe as benign. I actually think itcontinues to stay competitive. And frankly, whether it's Germanyor Italy or Spainor the UK orany of our other units, I think we're all experiencing competitive markets. Andfrankly we expect these competitive markets to continue in the next six, twelvemonths. In terms of your question around EBITDA actually rising, Idon't see a scenario, at least in the kind of the near-term where we're goingto see EBITDA margins climbing. We think that our prices will continue todecline for the next couple of years. And frankly, we will have lower margins.We're working very hard on the cost side to make sure that the margins don't deteriorateat a fast rate as you saw this time around 1.3, 1.4 percentage points. We’llcontinue to do that, we’ve got programs in place at the present time. We’llhave new programs, constant cost structure reduction to make sure that we canhave good free cash flow and we can have good margin production. So, that’s the scenario that I see for Europehere. Vittorio, do you want to add to that?

Yeah, I mean, I just don't know whether we can define. Imean, if I say look at the price decline quarter-over-quarter, minus 16%, minus21%, minus 20%, minus 18%. I mean, yes, occasionally in one quarter maybe wecan get, because in one country somebody has gone on holiday or something likethat. But eventually the next quarter comes back. The positive thing from mypoint of view is that most of us, most of the operators are really trying toget elasticity out of this price reductions. This is the game that we are alltrying to play. And I think you’re seeing some volume increases, which againthis is not won, yet. But we’re seeing some volume being brought back to us interms of more users and more things. But in Spain,UK, there’salways somebody who basically does in a aggressive mode, if it’s not just acoincidence.

Okay, John?

John Clarke, Brewin Dolphin. Two questions, if I may.Firstly, you talked quite a bit about regulation. What are the prospects and areasonable degree, of regular stability do you think, I mean, my perception isthat search in the past 18 months regulation from the EU has been somewhat onthe captious side, is there something that the industry didn’t have to dealwith before? Can you give us some idea on where do you see stability inEuropean regulation going forward? Secondly, could you just briefly also comeout with one or two areas, where you definitely see your servicesdifferentiating from the growing competition?

So, first on regulatory stability, it's interesting you askedthe question because Commissioner Redding actually this afternoon is going tobe making a presentation about the state of regulation and what's going tohappen in the future. It's very hard for me to kind of pre-judge what she mightsay. But what she's largely expected to say is that there are parts of themarket reviews that will be dropped, which is a good news for us, which meansthat we will be regulated on a more limited basis, on a going forward basis. The second thing is, that she will probably talk aboutcreating a super regulator for Europe. And I thinkthat's going to take a couple of years to kind of thrash out because you've gotlocal regulators and national regulators. And what happens at a national leveland what happens at a European level will be a subject of intense debate. And Ithink that debate needs to be had and sorted. But that will take a couple ofyears. And I think she has said in the past that she will be watching ourindustry closely in terms of data and SMS prices. And frankly our data and SMSprices are falling and we continue to make sure that customers have the bestrates as they travel around Europe. So those are the kinds of things that are likely to comeout. The net of all of this is what I said at the beginning to Christian'squestion around do I expect slightly less revenue pressure from regulation nextyear. The short answer to that is, yes. Now, on your second question aboutnon-differentiated products and services, we try very hard to staydifferentiated. Whether, it's in the provision of our 3G HSDPA data services.Whether, it's the plug-and-go USB modems. Whether, it's the proprietaryhandsets that we have. But obviously, there is a vast majority of handsets that arenon-differentiated. You could always find a price plan with a competitor thatlooks quite like the price plan that we have. So our industry is all aboutconstantly trying to find differentiated elements in our strategy, and tryingto promote those to our customers.

But are you known, can I come back on that? Are you knownfor any single particular application? I mean, not necessarily talking about akiller app here, but I'm perhaps talking about a particular servicedifferentiation?

I wish we had a killer app, which unfortunately does notseem to exist. I would say that Vodafone is recognized from our own marketresearch basically for two areas. One is kind of the ownership and being alwaysahead in the roaming space. And this goes back to the passport tariffs and theseamless working services, the data to the European data tariff and more tocome in that space, which is natural because of our footprint. And second, isthe continuous effort to be leaders, which so far, I think, we are succeedingwith, in the data, in the mobile data space. And going back to Christian'spoint, before we launched mobile Internet, which is again an attempt to putoccasional data users into regular tariffs. We have 0.5 million of thosesubscribers today. In the UKin these days we are launching this very innovative music service. It's a MusicBox, which is a rental type of music service. We are introducing the [7.2A]data card. I would say, if it's not a killer application, but there are clearlytwo areas that we are trying to warn. And one is mobile data, the other one beingroaming. Then, of course it goes back also to good very basic performance. Soin Germany, wehave the best performing network in terms of speed and in terms of data, whichis certified by external people. It's just basic good running. In Italywe have the best customer service in the country. It’s just basically goodrunning of the company. The characteristics that I would really focus on arethe roaming and the mobile data space.

Very good. HSBC.

Hi. It's Stephen Howard here with HSBC. Two questions,please. Firstly, can we have a little bit more detail your thoughts about theOpen Handset Alliance and Google's plans there? To what extent do you fear youmight be disintermediated by that initiative? And, secondly, on the data sideof things, would you agree that it's probably easier to get consumers to startusing data services more aggressively if they are on contracts? I mean,basically it's easier to pitch them the flat rate plan. You can subsidize ahigher end device. And that being the case, what kind of ratio of contract topre-pay would you like to see in the European developed markets in, say, threeyears time? Thanks.

Okay. So first let's talk about the Open Handset Alliance.Let's go back a couple of years when we said that there were 30 operatingsystems in the mobile world. And frankly we'd like to see the 30 operatingsystems converged to a number more like, three, four or five. Symbian is anoperating system here in the mobile space, Microsoft is an operating systemhere. We've always talked about somebody in the industry coming up with a Linuxoperating system. And of course the Google system is a Linux based system.There'll be a couple of others as well. So, we in general welcome the fact that the total number ofoperating systems in the mobile industry is reducing from 30 to some numberhopefully closer to five. This is important because as people developapplications they can't develop applications for 30 operating systems. Theyobviously can develop applications for one, two, three, four, five. So it is agood thing that's going on with Google and the Open Handset Alliance. I don't see this as kind of disintermediation, as much as,like I said, this is an operating system. We can write that operating system,anytime we would like to write that operating system. And what we’ll have tosee is what set of developers come around this operating system and what kindsof new products and services will be sold. I made this remark in my preparedremarks where I said these innovations are good for our industry, becausefundamentally they will increase the kinds of products and services ourcustomers will buy. We’re going to the beneficiary at the data connectivitylevel, because we have the broadband data [pie] and everybody is going to bewriting our broadband data pie. But equally in end services, whether it’s an OV service orVodafone life service or iPhone service or whatever services get developed onGoogle, frankly we’re going to have to compete with that. And there a biggerpie is being constructed and we will probably have a smaller share of a biggerpie in the services layer. But we'll certainly have very good market share atthe data connectivity level. Simon -- I'm sorry, there was a second part to yourquestion. I apologize. Do you want to take that?

Yeah. The prepaid/counter piece, I think you have a point,but I'm afraid, it’s slightly different. In Europe, Vodafonetoday has about two-thirds, lets say customers prepaid and these goes from a lowin Spain to avery high in Italy.The point is not strictly prepaid versus counter but these flat commitmentsversus if you want pay by the meter type of thing. With a flat commitment andwith a flat paying then the worry with using data services goes away and thenpeople do it more, which is why we have introduced this mobile Internet tariff,which goes for GBP7.50 and EUR9.90 in the rest of Europe -- EUR9.90 of coursein the rest of Europe. Which is why we're introducing e-mail entry tariffs as lowas EUR5.00 per month for very basic usage, which can be done also acrossprepaid, it's a little bit technically more complex, but can be done. So theissue for us is really more to kind of educate the customers to get this extracommitment and then be able to build additional ARPU on the services that theyget. So, from the basic e-mail and then move them to more kind of full e-mailand then full e-mail with attachments and then whatever you want. It’s notstrictly just contract, it's kind of more being able to give some kind of flat,no worry type of tariff. And that we do across the board prepaid market and innon-prepaid markets the same way.

Very good. [Simon]?

Thanks, Arun. I've got a couple of device like questions.One of which follows on. You're obviously buying handsets at $20.00 each forsome of the emerging markets. Word on the street is that, Nokia N95 phone sellsat about $750.00, which sounds like quite a big gap. Does the Android concept providea means to chop a piece of cost out to the cost of handset development and perhandset costs? Is that a way of bringing higher functionality phones into asort of lower price point in the market? And second question is relating todevices again but the flipside slightly which is USB modems. You've got acompetitor in the UKthat's selling a monthly package of gigabyte for USB modem for free on a GBP10.00per month tariff plan. Does that sound like the sort of tariff plan that wouldget the market, you know, using up the 80% of your 3G capacity that isn'tutilized at the moment? And finally I wondered if you could give us a little bitmore color on market dynamics in Turkeywhere we saw a little bit of a slip in the margin this half? Thanks.

Okay. Well maybe I'll take the first one. You can take thesecond one. You can take the third one. So the development of an Android operating system will, inits final form, reduce the cost of high-end phones, both because the IPR feesthat are paid are going to be minimal. I don't think they're going to be zero,but they're going to minimal in an Android open system, Linux system. And Iwill say that it there will be more folks who will have access to these openplatforms. And I think they will reduce, frankly, the price of high-end phones.It's going to be good for the consumer in that regard. You want to talk about the GBP10 unlimited?

On USB modems, I would say that in general in Europethere is some kind of, I would call it, convergence on the EUR30.00 kind ofband or GBP25.00 in that range. That seems very consistent with what'shappening also in the fixed broadband space. And we think that going below thator above in terms of users puts a big challenge on the network quite frankly.So we are not sure that it is a very, very wise pricing what we are saying. Butof course not only in the UKthere's the same operator does very aggressive offer in Italyas well. And we don't think that you can deliver a very good experience in thatspace. Now what we are kind of seeing from our customers is whatthey really like is the increased speed of HSDPA. Now you have to trade-offgood customer experience with numbers, we think that customers are happy to paya price, which is inline with fixed broadband for getting a good experience.Getting a lot of peer-to-peer traffic, getting a lot of bandwidth hungry kidsbecause this is what we're talking about, take away the capacity from yourbusiness customers, I'm not sure it's a very wise long-term strategy.

So, we don't actually see the GBP10 unlimited as thelong-term right price in the marketplace. You can do that for short periods oftime. You can do that for certain segments of customers, but that's not thelong-term price. Turkey, Paul?

Yes, Arun. And, Simon a year in Turkeywe had a highly congested network with a limited footprint. We had customerservice that candidly was impossible for our customers to get through to. Wewere living with Telcin brand and therefore not investing in it because we knewwe were going to re-brand. We had no resilience in our IT infrastructure and wewere not really competitive in the channels. A year on, we've increased thenetwork, we've dramatically improved customer service. We've now re-branded asVodafone and are investing in our brand at a higher rate. And our share ofgrowth positions has risen dramatically. All of that has had the short-term effect of depressingmargins. But we did always say to you that the Turkeybusiness was about a medium-term turnaround that was going to requiresignificant investment. So, in terms of the glide path of where we intended toget to, we are on-track. And in the remainder of the year you will see margins,which are in the twenties of percent. So, just as you were pleasantly surprisedat the margin this time last year, why has it gone so high. It's merely areflection of the investment that we've made.

Justin? I'm being signaled here that we need to stop. But wewill take one more question from Justin. After that we will stop. Justin.

Thanks. Just a couple, if possible. Just firstly, to try andunderstand the difference in the messaging trends between the UKand Germany;obviously the bulk of your data revenue is still SMS. The UKdid, I think, it's double-digit growth in revenue. Germanywas high single digit decline. I just wondered, if you could provide a bit morecolor as to compare and contrast those two trends? And which of those twotrends do you think is most close to where you see messaging revenue going overthe next couple of years, growth will decline? And secondly, you've now managed to sustain 40% growth inmessaging -- sorry, non-messaging or data revenue for this last year on agrowing base. I just wondered, if you would care to give us a feel for how yousaw that percentage rate evolve over the next two years? Do you think you cansustain that sort of growth on a growing base going forward? Certainly our ownwork would suggest you might be able to, in which case are we all essentiallyunder-forecasting your European business? You have raised your revenue guidance for Europefor the first time in -- for about eight years. Why not does not this feature intofuture years as well? And on a separate thing on India,you say in the statement that you've had a boost from these new low pay, lowcost handsets. Does that imply that we're now actually running at more than$1.7 million net adds per month in India?

Okay. Vittorio, do you want to take the first question, I'lltake the second and third?

Yes. I would say in Germanyand UKmessaging probably is the two extremes. And here there's several thingshappening. On one-hand, prices of messaging is coming down, if messagingtherefore can be used more. On the other hand, the more you give bundles, themore you give big buckets of minutes, there is, inevitably some kind ofcannibalization. Now where is the future? Is the future Germany,is the future UK?My guess is the future is somewhere in between. And we're not 100% happy withthe results in Germany.But we understand that there is a consequence of introducing those big bundles. And there's a consequence of giving the customers suddenlythe choice to make. And of course which are already included in what they pay,inevitably we had to get some cannibalization as a factor of voice versus -- ondata. On the long-term, I'm not sure who is forecasting what. As I said before,we are confident that data growth is there. Spainis growing a lot. However, if you look at the percentage of non-messaging dataover the total, Spainis not one of the highest. So there is potential to grow. And again, I think everything will depend on how well we wouldintegrate very nice data devices with -- and very easy to use data devices,with tariffs that can take the customers into the experience and then upgradethe experience from whatever they get as a basic service into deeper packages. Butas I said before, we are confident that this is going to be an important thing.And we want to ride it.

Yes. So just specifically on your question about dataforecasts, we obviously are not forecasting any particular number. What ispleasing is that it doesn't matter if you're in the UKor you're in Germanyor you're in Spainor Italy or Netherlands,we're finding very strong 40ish percent data revenues, data revenues in Portugalare at 75%. The data revenues in the United States are 70%. So we're finding good,strong data. We just need to package a number of things together to continue tomake sure that this trend moves. And we are confident. We are not trying topredict a number but we are confident that we're going to see good growth here. And on India,very short simple answer is no. We're not getting up to the 7 million mark onthe back of ultra low cost handsets. We're expanding the distribution. We'reexpanding the marketplace. We're happy with the 1.5, 1.6 that we get and we'llcontinue to do so. Thank you all very much for coming. May I just remind youthat on December 10th we have an Investor Day where we'll be featuring Indiaand a couple of other things. So hope to see you then. In the meantime, have agood day. Good-bye. Thank you for coming again.