SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | |
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: March 31, 2006 |
|
OR | |
TRANSITION REPORT PURSUANT
TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to |
|
OR | |
SHELL COMPANY REPORT PURSUANT
TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report: |
|
Commission file number: 1-10086
VODAFONE
GROUP PUBLIC LIMITED COMPANY
(formerly VODAFONE AIRTOUCH PUBLIC LIMITED COMPANY)
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization)
Vodafone House, The Connection,
Newbury, Berkshire RG14 2FN, England
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Name
of each exchange on which registered |
Ordinary shares of $0.10 each | New York Stock Exchange* |
* | Listed, not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the
Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. | |||
Ordinary Shares of $0.10 each | 60,118,575,455 | ||
7% Cumulative Fixed Rate Shares of £1 each | 50,000 | ||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act | |||
Yes No |
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. | |
Yes No |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: |
Yes No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): | |
Large accelerated filer Accelerated filer Non-accelerated filer |
Indicate by check mark which financial statements item the registrant has elected to follow: |
Item 17 Item 18 |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): | |
Yes No |
To
enrich our customers lives through the unique, expanding power of mobile communication. |
||||
This constitutes the Annual Report on Form 20-F (the “20-F”)
of Vodafone Group Plc (the “Company”) in accordance with the
requirements of the US Securities and Exchange Commission (the “SEC”)
and is dated 14 June 2006. This document contains the information set out
within the Company’s Annual Report in accordance with International
Financial Reporting Standards (“IFRS”) and with those parts
of the Companies Act 1985 applicable to companies reporting under IFRS,
dated 30 May 2006, as updated or supplemented at the time of filing of
the 20-F with the SEC, which may be later amended if necessary. References
to IFRS refer to the application of International Financial Reporting Standards,
including International Accounting Standards (“IAS”) and interpretations
issued by the International Accounting Standards Board (“IASB”)
and its committees, and as interpreted by any regulatory bodies applicable
to the Group and adopted for use in the European Union (“EU”).
Financial information for the year ended 31 March 2005, presented as comparative
figures in this report, has been restated from UK GAAP in effect at 31
March 2004 in accordance with IFRS. The content of the Group’s website
(www.vodafone.com) should not be considered to form part of this Annual
Report or the Company’s Annual Report on Form 20-F. References to the Group or Vodafone are references to the Company and its subsidiary undertakings and, where the context requires, its interests in joint ventures and associated undertakings. In the discussion of the Groups reported financial position and results for the year ended 31 March 2006, information in addition to that contained within the Consolidated Financial Statements is presented on the basis that it provides readers with additional financial information regularly reviewed by management. This information is provided to assist investor assessment of the Groups performance from period to period. However, |
the
additional information presented is not uniformly defined by all companies
in the Groups industry. Accordingly, it may not be comparable with
similarly titled measures and disclosures by other companies. Definitions
of the terms presented are shown on page 49. In presenting and discussing the Groups reported financial position, operating results and cash flows, certain information is derived from amounts calculated in accordance with IFRS but this information is not itself an expressly permitted GAAP measure. Such non-GAAP measures should not be viewed in isolation as an alternative to the equivalent GAAP measure. An explanation as to the use of these measures and reconciliations to their nearest equivalent GAAP measure can be found on pages 47 to 48. The Report of the Directors, incorporating the Business Review, covers pages 6 to 70 of this Annual Report. This Annual Report contains forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 with respect to the Groups financial condition, results of operations and business management and strategy, plans and objectives for the Group. For further details, please see Cautionary Statement Regarding Forward-Looking Statements and Outlook and Risk Factors for a discussion of the risks associated with these statements. Vodafone, Vodafone live!, Vodafone Mobile Connect, Vodafone Wireless Office, Vodafone Simply, Vodafone Passport, Vodafone Zuhause, Vodafone Casa, Oficina Vodafone, Stop the Clock and Vodafone Radio DJ are trademarks of the Vodafone Group. Other product and company names mentioned herein may be the trademarks of their respective owners. |
|||
Highlights for the Year | ||
Financial performance: | ||
| Group
revenue of £29.4 billion from continuing operations. Mobile telecommunications revenue increased to £28.1 billion, representing growth of 9.3% |
|
| Loss
before taxation for the year was £14.9 billion after impairment losses
of £23.5 billion |
|
| Free
cash flow of £6.4 billion, and net cash inflow from operating activities,
after net taxation paid of £1.7 billion, up 10.3% to £10.2 billion from continuing operations |
|
Operational highlights: | ||
| Net proportionate customer additions of 21.5 million in the year | |
| Closing
proportionate customer base of 170.6 million, with organic growth of 14.9% in the year |
|
| Non-messaging
data revenue grew by 61.2% to £0.8 billion, with organic growth of 60.4% |
|
| Mobile
voice usage increased by 24.6% to 178.3 billion minutes, with organic growth of 18.9% |
|
Increasing returns to shareholders: | ||
| Total
dividends per share increased by 49%, to 6.07 pence, with a final dividend per share of 3.87 pence, giving a dividend pay out ratio of 60% on underlying earnings per share and a total pay out of £3.7 billion for the financial year |
|
| £6.5
billion expended on the share purchase programme in the 2006 financial year, reducing shares in issue by 7.5% |
|
| £9.0
billion to be returned to shareholders in the 2007 financial year via B share arrangement, including an additional £3 billion announced on 30 May 2006 |
|
| Total returns to shareholders announced over the year of £19.2 billion |
Financial Highlights
The selected financial data set out on the following pages is derived from the Consolidated Financial Statements of the Company on pages 71 to 130 and as such should be read in conjunction with them. Certain trends within the financial data presented below have been impacted by business acquisitions and disposals, the most significant of which are described in Business Overview History and Development of the Company.
The Consolidated Financial Statements are prepared in accordance with IFRS, on the basis set out in note 1 to the Consolidated Financial Statements, which differ in certain significant respects from US GAAP. For further details, see note 38 to the Consolidated Financial Statements, US GAAP information. Solely for convenience, amounts represented below in dollars have been translated at $1.7393: £1, the Noon Buying Rate on 31 March 2006.
At/year ended 31 March | ||||||||||||
2006 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||
$m | £m | £m | £m | £m | £m | |||||||
Consolidated Income Statement Data | ||||||||||||
IFRS | ||||||||||||
Revenue | 51,048 | 29,350 | 26,678 | |||||||||
Operating (loss)/profit | (24,496 | ) | (14,084 | ) | 7,878 | |||||||
Adjusted operating profit (Non-GAAP measure)(1) | 16,348 | 9,399 | 8,353 | |||||||||
(Loss)/profit before taxation | (25,833 | ) | (14,853 | ) | 7,285 | |||||||
(Loss)/profit for the financial year from continuing operations | (29,973 | ) | (17,233 | ) | 5,416 | |||||||
US GAAP | ||||||||||||
Revenue | 41,319 | 23,756 | 21,370 | 19,637 | 15,487 | 13,447 | ||||||
Net loss(2)(3) | (23,081 | ) | (13,270 | ) | (13,752 | ) | (8,105 | ) | (9,072 | ) | (16,769 | ) |
Consolidated Cash Flow Data(4) | ||||||||||||
IFRS | ||||||||||||
Net cash flows from operating activities | 17,723 | 10,190 | 9,240 | |||||||||
Net cash flows from investing activities | (11,573 | ) | (6,654 | ) | (4,112 | ) | ||||||
Net cash flows from financing activities | (7,896 | ) | (4,540 | ) | (7,242 | ) | ||||||
Free cash flow (Non-GAAP measure)(1) | 11,163 | 6,418 | 6,592 | |||||||||
Consolidated Balance Sheet Data | ||||||||||||
IFRS | ||||||||||||
Total assets | 220,435 | 126,738 | 147,197 | |||||||||
Total equity | 148,383 | 85,312 | 113,648 | |||||||||
Total equity shareholders funds | 148,580 | 85,425 | 113,800 | |||||||||
Total liabilities | 72,052 | 41,426 | 33,549 | |||||||||
US GAAP | ||||||||||||
Shareholders equity | 151,291 | 86,984 | 107,295 | 129,141 | 140,580 | 141,016 | ||||||
2 | Vodafone Group Plc Annual Report 2006 |
Highlights | |
At/year ended 31 March | ||||||||||||
2006 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||
Earnings Per Share (EPS)(5) | ||||||||||||
Weighted average number of shares (millions) | ||||||||||||
Basic | 62,607 | 66,196 | 68,096 | 68,155 | 67,961 | |||||||
Diluted | 62,607 | 66,427 | 68,096 | 68,155 | 67,961 | |||||||
IFRS | ||||||||||||
Basic (loss)/earnings per ordinary share | ||||||||||||
Continuing | (48.11 | )¢ | (27.66 | )p | 8.12 | p | ||||||
Discontinued | (12.78 | )¢ | (7.35 | )p | 1.56 | p | ||||||
Diluted (loss)/earnings per ordinary share | ||||||||||||
Continuing | (48.11 | )¢ | (27.66 | )p | 8.09 | p | ||||||
Discontinued | (12.78 | )¢ | (7.35 | )p | 1.56 | p | ||||||
Basic (loss)/earnings per ADS | ||||||||||||
Continuing | (481.1 | )¢ | (276.6 | )p | 81.2 | p | ||||||
Discontinued | (127.8 | )¢ | (73.5 | )p | 15.6 | p | ||||||
Diluted (loss)/earnings per ADS | ||||||||||||
Continuing | (481.1 | )¢ | (276.6 | )p | 80.9 | p | ||||||
Discontinued | (127.8 | )¢ | (73.5 | )p | 15.6 | p | ||||||
US GAAP(2)(3) | ||||||||||||
Basic and diluted loss per ordinary share | (36.87 | )¢ | (21.20 | )p | (20.77 | )p | (11.90 | )p | (13.31 | )p | (24.67 | )p |
Basic and diluted loss per ADS | (368.7 | )¢ | (212.0 | )p | (207.7 | )p | (119.0 | )p | (133.1 | )p | (246.7 | )p |
Cash Dividends(5)(6) | ||||||||||||
Amount per ordinary share | 10.56 | ¢ | 6.07 | p | 4.07 | p | 2.0315 | p | 1.6929 | p | 1.4721 | p |
Amount per ADS | 105.6 | ¢ | 60.7 | p | 40.7 | p | 20.315 | p | 16.929 | p | 14.721 | p |
Other Data | ||||||||||||
IFRS | ||||||||||||
Ratio of earnings to fixed charges(7) | | | 7.0 | |||||||||
Deficit | $(28,733 | )m | £(16,520 | )m | | |||||||
US GAAP | ||||||||||||
Ratio of earnings to fixed charges(7) | | | | | | | ||||||
Deficit(8) | $(24,133 | )m | £(13,875 | )m | £(9,756 | )m | £(9,059 | )m | £(8,436 | )m | £(14,425 | )m |
Notes: | |
(1) | Refer to Non-GAAP Information on pages 47 to 48 for a reconciliation of this non-GAAP measure to the most comparable GAAP measure and a discussion of this measure. |
(2) | 2005 net loss includes the cumulative effect of accounting changes related to intangible assets and post employment benefits that increase net loss by £6,372 million or 9.63p per ordinary share. Net loss and shareholders equity for 2005, 2004, 2003 and 2002 have been restated to give effect to the modified retrospective adoption of SFAS No. 123 (Revised 2004). See note 38 to the Consolidated Financial Statements for further details on these changes in accounting policy. |
(3) | 2002 net loss includes the cumulative effect of accounting changes related to derivative financial instruments reducing net loss by £17 million or 0.02p per ordinary share. |
(4) | Amounts reported refer to continuing operations. |
(5) | See note 8 to the Consolidated Financial Statements, (Loss)/earnings per share. Earnings per American Depository Share (ADS) is calculated by multiplying earnings per ordinary share by ten, the number of ordinary shares per ADS. Dividend per ADS is calculated on the same basis. |
(6) | The final dividend for the year ended 31 March 2006 was proposed by the directors on 30 May 2006. |
(7) | For the purposes of calculating these ratios, earnings consist of profit before tax adjusted for fixed charges, dividend income from associated undertakings, share of profits and losses from associated undertakings and profits and losses on ordinary activities before taxation from discontinued operations. Fixed charges comprise one-third of payments under operating leases, representing the interest element of these payments, interest payable and similar charges and preferred share dividends. |
(8) | The deficits for the 2002, 2003 and 2004 financial years are presented on the same basis as the Form 20-F for the year ended 31 March 2004. These deficits have not been restated for the effect of discontinued operations, because the UK GAAP information, which forms the basis of the US GAAP information presented, has not been restated. Even if any such adjustments were made, it is expected that the ratio of earnings to fixed charges would still show a deficit. |
Vodafone Group Plc Annual Report 2006 | 3 |
Group at a Glance
Vodafone is the worlds leading mobile
telecommunications company
with
mobile operations in 26
countries
around the world and Partner
Network
agreements
in a further 32 countries.
Germany |
Italy |
Spain |
|||
Closing
proportionate customers (000) |
29,191 | 18,490 | 13,521 | |||||||||||
Average
proportionate customer growth (%) |
8.4% | 6.8% | 18.5% | |||||||||||
3G devices (000) |
2,025 | 2,250 | 902 | |||||||||||
Average
monthly ARPU |
€23.3 | €28.5 | €35.6 | |||||||||||
Non-voice
revenue as a percentage of service revenue (%) |
20.2% | 16.7% | 14.4% | |||||||||||
Revenue
(£m) |
5,754 | 4,363 | 3,995 | |||||||||||
Operating (loss)/profit(1) (£m) |
(17,904) | (1,928) | 968 | |||||||||||
Total
assets (£m) |
25,029 | 20,310 | 13,039 | |||||||||||
Employees
(000s) |
10,124 | 7,123 | 4,052 | |||||||||||
Note: | |
(1) | The operating (loss)/profit in Germany, Italy and Other Mobile Operations is stated after impairment charges of £19,400 million, £3,600 million and £515 million, respectively. |
4 | Vodafone Group Plc Annual Report 2006 |
Highlights | |
UK |
US
|
Other
Mobile Operations |
Total
Mobile |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.304 |
23,530 |
69,535 |
170,571 |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.8% |
17.0% |
34.0% |
18.8% |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033 |
|
1,511 |
7,721 |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£24.0 |
$51.4 |
|
|
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.3% |
8.9% |
14.3% |
17.0% |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,048 |
|
9,250 |
28,137 |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698 |
1,732 |
2,008 |
(14,203) |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,486 |
17,898 |
23,937 |
111,722 |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,620 |
|
22,895 |
57,442 |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vodafone Group Plc Annual Report 2006 | 5 |
Chairmans Statement | |
Lord MacLaurin of Knebworth, DL |
It
has been my privilege
to
be the Chairman of a
company that has proved
to be one of the outstanding international success stories
of the last decade.
My last year as Chairman of Vodafone has been a watershed in the history of your Company. We have been undergoing significant change whilst operating in the most challenging market environment the telecommunications sector has seen. Nevertheless, our ability to deliver good growth in the face of increasing competition reflects the unique characteristics of our business, compared to many other mobile operators, particularly the benefits derived from our increasing exposure to faster-growing markets and the opportunity to generate further benefits from our scale.
We maintained strong customer growth across many of our markets and grew our proportionate mobile customer base to over 170 million, representing organic growth of 15% since last year. Importantly, we achieved our 10 million 3G target, which included Japan, during March, which was ahead of plan.
Over the year, we have announced total returns to shareholders of £19.2 billion. We have purchased over 4.8 billion shares in the Company at a cost of £6.5 billion and are paying out £3.7 billion in dividends for the year, including the proposed final dividend of 3.87 pence per share. We are also returning £9.0 billion to shareholders, including £6.0 billion following the sale of our Japanese business. Full details are in the documentation accompanying this Report.
When I became Chairman in July 1998 we had fewer than 6 million customers in 12 countries producing some £2.5 billion of turnover. In the summer of 1999, we acquired AirTouch of the US, followed in 2000 by the acquisition of Mannesmann in Germany. This was a period of huge expansion which formed the basis of the transformation of Vodafone into the worlds leading mobile telecommunications group that has equity interests in 26 countries across five continents with over 170 million proportionate customers worldwide, as well as 32 partner networks, generating turnover this year from our ongoing businesses of over £29 billion. Not only have we extended our geographic reach but we have also transformed our industry by becoming a leader in innovation, introducing groundbreaking services such as Vodafone live! with 3G, thereby setting standards for the mobile industry as a whole. It has been a remarkable achievement.
6 | Vodafone Group Plc Annual Report 2006 |
Strategy | |
However, the Group now faces many challenges, particularly of competition, regulation and new technology. During the year, we conducted, in the face of these challenges, a review of the future growth prospects for the Group and our analysis indicated a lower view of growth, particularly in the medium to long term, and led to an impairment of the Groups goodwill by £23.5 billion, the majority of which is attributable to Vodafone Germany. This charge does not impact this years reported cash flows or distributable reserves, out of which we are making returns to shareholders.
However, in this challenging market the Chief Executive has spent a great deal of time reviewing the management structure and future planning required to take the Company forward. In April he announced his new management team and in May they produced a clear forward-looking strategy. I believe that through this statement the Chief Executive sets out a clear vision for the future. I congratulate him on these changes and wish him and his impressive team well.
It has been my privilege to be the Chairman of a company that has proved to be one of the outstanding international success stories of the last decade. The development and expansion of the Group has been made possible by the excellence of the management team whose flair and vision has enabled us to identify international opportunities for profitable growth while at the same time introducing technological advances to enhance the mobile experience for our customers.
It was announced earlier this year that Sir Julian Horn-Smith had decided to retire from the Board following the Annual General Meeting in July. Julian has been with Vodafone for 22 years and a Board member for 10 years. He has had an outstanding career, being a major contributor to the creation of the UK network and subsequently leading the early development of our international presence. More recently he was Group Chief Operating Officer and then Deputy Chief Executive, with responsibility for our affiliates and business development. I am sure all shareholders will join with me in wishing him well for the future.
Peter Bamford, Chief Marketing Officer, who left the Company in early April, was instrumental in developing our brand both within the UK and internationally and developing a number of major initiatives, including the launch of Vodafone live! with 3G. I wish him well and thank him for his contribution to the success of the Company.
At the AGM, we say farewell to Paul Hazen, our Deputy Chairman, who has served with distinction as a non-executive director since 1999. We also say goodbye to Penny Hughes, a fine non-executive director for eight years and who was an exceptional Remuneration Committee Chair for five years. Her contribution cannot be overstated. Paul and Penny leave with our best wishes. Taking Pauls place as Deputy Chairman and senior independent director will be John Buchanan, who has been a non-executive director since April 2003, shortly after his retirement from BP p.l.c. I am sure that John will discharge his new duties very effectively.
During the year, we welcomed two new non-executive directors to the Board. In September, Philip Yea, Chief Executive Officer of 3i Group plc, was appointed and he was joined in November by Anne Lauvergeon, the Chairman of the Executive Board of AREVA, the leading French energy company. On 1 May, we welcomed Anthony Watson to the Board. Until his recent retirement, he was Chief Executive of Hermes Pensions Management Limited. I know that their collective experience in their different areas of business will be of great benefit to the Company.
Finally I come to my own retirement. As I have said, it has been a great privilege for me to have been Chairman of a truly outstanding British company. I have, however, been particularly saddened this year by the nature of some of the media coverage and particularly by the suggestion of boardroom splits. There are no factions within the Board and any claim that your Board is not united is unfounded. I leave with the knowledge that Vodafone, which is now very different to the company which I first chaired, is well placed to continue to enjoy an exciting and profitable future. I wish Sir John Bond, my successor, Arun Sarin, your Chief Executive, and everyone at Vodafone the very best for the future and thank you all for your support during the last eight years as your Chairman.
Lord
MacLaurin of Knebworth, DL
Chairman
Vodafone Group Plc Annual Report 2006 | 7 |
Chief Executives Review
Arun Sarin
We delivered another set
of robust financial and
operational results amidst a
more competitive landscape
and announced returns to
shareholders over the year
of £19.2 billion.
Review of the year
We have delivered another year of robust financial performance against a backdrop of increasing competition and regulation, meeting our expectations for revenue, EBITDA margin and
free cash flow.
Proportionate customer growth was strong with nearly 22 million organic net additions in the year taking the closing proportionate customer base to over 170 million across 26 countries. Our unrivalled presence provides the platform for the next stage of our strategy.
These results have enabled us to significantly increase returns to shareholders. We have increased dividends per share by 49% to 6.07 pence, purchased £6.5 billion of our shares and announced a special distribution of £9.0 billion.
Financial review
Statutory
revenue
increased by 10% to £29.4 billion, with over 9% growth in our mobile operations.
Excluding the net benefit from acquisitions, disposals and exchange rate movements,
we achieved organic revenue growth of 7% in mobile and 8% for the Group as a
whole. Strong performances in Spain and several of our emerging markets, including
South Africa, Egypt and Romania, helped offset lower growth this year in
several of our more established markets. Notwithstanding this lower growth, we
outperformed substantially all of our principal competitors in our major markets
on revenue and EBITDA growth.
Our focus on profitability delivered an 11% organic increase in adjusted operating profit, with 13% growth in total. The competitive environment led to a necessary increase in net customer acquisition and retention costs but this was mitigated by our ongoing success in delivering operating efficiencies. A key part of this growth has been the strong overall performance from our associates, increasing by over 20% this year, and in particular from Verizon Wireless in the US, growing by nearly 28% as it consolidated its market leadership.
Capital expenditure on fixed assets was £4.0 billion as we continue to invest in broadening our 3G presence. Free cash flow of £6.4 billion was slightly lower than last year as expected, with increases in capital expenditure and lower dividends from Verizon Wireless offsetting an increase of £1.0 billion in net cash flow from operating activities.
Operational highlights
We have been focused on six strategic goals, including delighting our customers and leveraging scale and scope.
A core part of delighting our customers is our 3G offering. When we launched 3G late in 2004, we targeted 10 million consumers by the end of March 2006, including Japan. We reached this during March, shortly before we agreed to sell our Japanese operation.
8 | Vodafone Group Plc Annual Report 2006 |
Strategy | |
We
have updated our strategy to reflect our changing environment |
||
3G brings an enhanced mobile experience to our customers, who want more speed, greater personalisation and richer content, and provides the platform for our future growth. For consumers, we launched mobile TV capability during the year and will further enhance our music offering during 2006 with the launch of Vodafone Radio DJ, a personalised, interactive radio service streamed to both 3G phones and PCs.
For our business customers, we increased the number of mobile email solutions and range of email devices available. 3G broadband through HSDPA technology was launched in the year offering an enhanced data experience through greater speeds than 3G and faster access to the network. This will improve our already successful Vodafone Mobile Connect offering for laptop users, who have more choice with mobile capability now being built in to the laptop.
Another key part of delighting our customers is measuring customer satisfaction and brand preference. With rising customer expectations and a tougher competitive environment, we are pleased that we continue to outperform our principal competitors in terms of customer satisfaction and that customers continue to show preference for the Vodafone brand.
The second strategic area of focus has been leveraging our scale and scope which delivers benefits through our One Vodafone programme, details of which we set out last year.
We are beginning to deliver real benefits in network supply chain management, as standardised designs lead to a reduced number of vendors and better terms. Our shared service platforms, which centrally host services such as Vodafone live!, are also now established.
Our strategic goals are ultimately designed to deliver shareholder value. With respect to Japan, given the relative competitive position of the business there, the reduced prospects for superior long term returns and an attractive offer from SoftBank, we decided to sell our 97.7% stake based on a value for the business of £8.9 billion. The sale completed in April, with Vodafone receiving £6.9 billion in cash, £6.0 billion of which we are returning to shareholders as part of the £9.0 billion special distribution.
Rapidly changing environment
Overall, we have performed strongly during the last year, meeting our expectations and delivering on our strategic objectives. We have continued to outperform our principal
competitors on revenue and EBITDA growth, as well as customer satisfaction. We have established a strong brand around our customer base and increased returns to shareholders significantly. However, our marketplace is changing and we need to change
to ensure we can leverage our unique position and continue to outperform our competitors.
There are several key drivers to the changing environment. Competition is increasing not only from established mobile operators but also from new entrants, particularly mobile virtual network operators (MVNOs). There are also new types of competitor. Established fixed line operators are increasingly combining fixed and mobile service offerings. In addition, internet based companies are extending their services to include telecommunications. All of these factors are putting pressure on pricing.
The regulatory environment also remains challenging, with continued regulator-imposed rate reductions on incoming calls across many markets, ongoing pressure to provide access to MVNOs to our networks and a high level of focus on the costs of roaming.
Developments in technology also mean that our customers have far more choice and have changing communication needs, but at the same time they demand simplicity and value for money. In addition to the core benefits of mobility, customers want greater personalisation, faster data speed and richer applications through services centred on the home and the office.
Finally, our growth historically has principally come from developed markets, particularly in Europe. With average penetration now around 100%, these markets are maturing and delivering lower growth. Whilst growth in these markets has slowed, significant growth is now coming from emerging markets where average penetration is below 30%. This is creating greater diversity between our markets than previously. Transactions over the last year in Turkey, South Africa, India and Romania have combined with existing operations in markets such as Egypt to provide us now with greater exposure to this growth potential.
Developing our strategy
These factors require our strategy to evolve so that we can continue to maintain our strong performance and deliver value to customers and shareholders. We have established five key
strategic objectives:
| In Europe, to focus on both cost reduction and revenue stimulation; |
| To deliver strong growth in emerging markets; |
| To satisfy our customer needs and extend our current mobile only offering by innovating and delivering total communications solutions; |
| To actively manage our portfolio to maximise returns; and |
| To align our financial policies regarding capital structure and shareholder returns to support our strategy. |
Vodafone Group Plc Annual Report 2006 | 9 |
Chief
Executives Review
continued
In order to deliver on these objectives, we have reorganised ourselves into three key business units.
In our European businesses, where competition is most intense, we will be focused on leveraging our regional scale to deliver cost reduction and revenue stimulation.
The principal focus in the Eastern Europe, Middle East, Africa, Asia Pacific and Affiliates (EMAPA) region is to deliver strong growth from our businesses in emerging markets.
The new objective of our third business unit, New Businesses, is to enable us to serve the total communications needs of our customers by taking advantage of evolving technology and new opportunities to deliver new services.
Cost reduction
Our primary objective here is to leverage our regional scale and reduce our cost structure in Europe through several approaches in order to maintain our competitiveness.
We will outsource further, particularly for IT development of billing and customer management systems, as a key means to reduce our costs. We will also continue to drive scale benefits, either at a global level, in areas such as network supply chain management as we achieve greater standardisation across the Group, or regionally, such as through the establishment of regional data centres to support our European operations. As the size of the Group evolves, we need to ensure the appropriate balance between local and group, particularly in respect of central functions, and this is expected to result in over 400 fewer group positions.
Revenue stimulation
In Europe, our customers use their mobiles on average for only four minutes a day and approximately two-thirds of voice traffic continues to travel across fixed lines. We therefore
aim to stimulate additional voice usage and substitute fixed line usage for mobile in a way that enhances both customer value and revenue.
For our consumers, we will seek to enhance revenues by continuing to deliver innovative bundles and tariffs to stimulate usage, building on success in areas such as 3G bundles, targeted promotions, family plans that focus on community groups and roaming through Vodafone Passport.
We are already targeting fixed to mobile substitution in the home through offerings such as Vodafone Zuhause in Germany and Vodafone Casa in Italy and aim to target office communications by building on our success in business with leading edge services, such as Oficina Vodafone in Spain, and applications through the benefits of broadband.
Deliver strong growth
in emerging markets
A source of growth is through emerging markets. Our focus here is to build on our strong track record of creating value in emerging markets, having delivered strong performances over
time in markets such as Egypt and South Africa. Our aim is to outperform not only our competitors but also our acquisition business plans. For example, since we achieved control in Romania last year, the business has performed strongly and ahead of
our original expectations.
We will seek selective opportunities to increase our emerging markets footprint as well as taking opportunities to increase our stakes in existing markets, with a view to gaining control where possible over time.
Delivering our customers total
communication needs
Customers have access to new technologies, devices and services. As a complement to mobility, they want Vodafone to provide a number of new services within the home and the
office.
We will extend our reach into the home and the office to deliver richer business applications and integrated fixed and mobile services, such as higher speed internet access. We will use technologies such as HSDPA, DSL and WiFi to do this. Later this year, we will be enhancing our Vodafone Zuhause offering to incorporate DSL.
Developments in technology will also enable us to provide integrated mobile and PC offerings to give customers a consistent experience whether they are at home or on the move, with core services such as VOIP and instant messaging. We also aim to extend our business model to generate revenue from advertising in ways that customers find attractive.
We will continue to pursue a mobile centric approach, focusing on the core benefits to customers of mobility and personalisation, and will resell fixed line technologies only according to customer needs.
Actively managing our portfolio
We seek to invest only where we can generate superior returns for our shareholders in markets that offer a strong local position, with focus on specific geographic regions. It is our
policy to apply strict investment criteria to ensure that transactions yield a return above the cost of capital within three to five years and overall create substantial value for our shareholders. Equally, we will consider exiting businesses which
do not meet our performance requirements or provide an opportunity to create shareholder value.
There has been much speculation about our position in the US. Verizon Wireless is the market leader on nearly all key metrics and has significant local and regional scale, with over 50 million customers. We will always consider the most appropriate way to deliver shareholder value. However, we expect continued strong growth in the US and are therefore happy to remain with our existing stake.
10 | Vodafone Group Plc Annual Report 2006 |
Strategy | |
We
have a significant opportunity to deliver value to both our customers and shareholders. |
||
Financial implications
Our One Vodafone programme, which primarily has been focused on our mature mobile markets in Europe, delivers efficiencies in operating costs, being payroll and other operating
expenses, and in capital expenditures. We have previously targeted keeping these total costs broadly stable between the 2004 and 2008 financial years, with operating costs expected to rise at a lower rate than revenue. Through our new strategic
objectives, we now expect underlying operating costs alone to be broadly stable between the 2006 and 2008 financial years for the total of our European operations and central costs.
On the same basis, we continue to target expenditures on fixed assets to be 10% of revenue for the 2008 financial year. We also continue to expect at least 1% additional revenue market share between the 2005 and 2008 financial years, measured against our established principal competitors in Germany, Italy, Spain and the UK.
Our strategic changes also have implications on returns to shareholders and our capital structure. We have previously indicated an intention to pay out approximately 50% of adjusted earnings per share for the 2007 financial year onwards. We now consider it appropriate to target a 60% payout ratio, with effect for the full 2006 financial year, with a view to growing the dividend per share in line with underlying earnings per share thereafter. Dividends per share have, therefore, increased by 49% to 6.07 pence for the year.
As we enter a new phase in our development, we believe that the most appropriate capital structure, which meets the needs of both the business and shareholders, is one that reflects a higher level of gearing. The incremental borrowing capacity this provides enables an additional return of £3.0 billion to shareholders, which will be combined with the £6.0 billion return of cash from the sale of Japan in early August. As a result, we do not currently plan any further share purchases or other one-off returns to shareholders.
This £9.0 billion one-off return, together with the £6.5 billion share purchase programme completed during the last year and £3.7 billion of dividends, gives an overall return to shareholders of £19.2 billion.
Prospects
for the year ahead
While
we are delivering on cost reduction, revenue stimulation and emerging market
growth in the shorter
term, the potential benefits from serving our customers total
communications needs will materialise over a longer timeframe.
For the year ahead, we expect operating conditions to remain challenging, with a continued intense competitive environment and further regulatory pressure, but nevertheless see continued growth in Group revenue. We are anticipating higher customer investment, pricing pressures and further termination rate reductions to impact growth in adjusted operating profit, however initiatives to deliver further cost efficiencies are expected to mitigate this effect.
Capital expenditure on fixed assets is expected to be in the range of £4.2 billion to £4.6 billion, higher than last year due to the investment needs for recent acquisitions and the wider rollout of HSDPA. Free cash flow is anticipated to be in the range of £4.0 billion to £4.5 billion. Higher tax payments, including around £1.2 billion, with interest costs, from settling some long standing disputes, increased capital expenditure and higher financing costs from our increased borrowing, are expected to offset continued growth in underlying operating cash flows.
Executing our strategy
We have a good track record of delivering against our plans and demonstrating outperformance against the majority of our principal competitors. However, our environment is changing
and we need to adapt to ensure we continue to meet our customer needs and deliver superior returns to shareholders.
We have established clear strategic objectives: cost reduction and revenue stimulation in Europe; innovating and delivering total communications solutions; delivering strong growth in emerging markets; actively managing our portfolio to maximise returns; and aligning our financial policies to our strategy. We have reorganised the business as we begin to deliver against these objectives.
Vodafone is well placed to execute on this strategy. Our scale makes us the clear partner of choice for others and we have a track record for innovation. We have a strong brand and an unrivalled customer reach. As customer demands evolve and technology converges, we remain focused on the core benefits of mobility and personalisation as we seek to deliver total communications solutions. We have a significant opportunity to deliver value to both our customers and shareholders.
On a final note, on behalf of the Board, I would like to express sincere thanks to Ian MacLaurin, who is retiring as Chairman, for his service and support to the Company since 1997. We wish him continued success.
Arun Sarin
Chief Executive
Vodafone Group Plc Annual Report 2006 | 11 |
Contents | |||
Page | |||
Business Overview | 12 | ||
Introduction | 12 | ||
Mobile Telecommunications | 12 | ||
Non-mobile Telecommunications | 19 | ||
History and Development of the Company | 19 | ||
Regulation | 21 |
Business Overview
Introduction
Vodafone
Group Plc is the worlds leading mobile telecommunications company, with a significant presence in Europe, the Middle East, Africa, Asia Pacific and the United States
through the Companys subsidiary undertakings, joint ventures, associated
undertakings and investments.
The Groups mobile subsidiaries and joint venture in Italy operate under the brand name Vodafone. In the United States, the Groups associated undertaking operates as Verizon Wireless. During the last two financial years, the Group has also entered into arrangements with a number of its associated undertakings and with network operators in countries where the Group does not hold an equity stake. Under the terms of these Partner Market agreements, the Group and its Partner Markets co-operate in the development and marketing of certain services, often under dual brand logos. This has expanded the Groups global footprint in Europe, Asia Pacific and, most recently, South America.
The Group provides a wide range of voice and data mobile telecommunications services, including text messages (SMS), picture messages (MMS) and other data services, and is continually developing and enhancing service offerings, particularly through third generation (3G) mobile technology which is being deployed in the majority of the Groups operations. Services are provided to both consumers and corporate customers, through a variety of both prepaid and contract tariff arrangements.
The Groups mobile services are currently offered over a Global System for Mobile Communications (GSM) network, on which a General Packet Radio Service (GPRS) service is also provided and, in certain operations, over a Wideband Code Division Multiple Access (W-CDMA) 3G network. The Groups discontinued operation in Japan operated a different technology to GSM. Where licences have been issued, the Group has secured 3G licences in all jurisdictions in which it operates through its subsidiary undertakings and continues to roll out mobile 3G network infrastructure. Vodafone offered 3G services in 11 of its controlled operations at 31 March 2006.
The Group is managed and organised by business and geography. The Group has mobile and fixed line telecommunications businesses, with the latter referred to as Other Operations. Vodafones principal mobile operations are located in Germany, Italy, Spain, the UK and the US with the Groups Other Mobile Operations covering operations in Europe, the Middle East, Africa and Asia Pacific. In addition, there are a number of central functions which provide services to the mobile operations and allow the Group to leverage its scale and scope and manage risk effectively. Other Operations principally consists of the Groups controlling interest in a fixed line telecommunications business in Germany. On 1 May 2006, changes to the organisational structure were effected with the objective of focusing the Groups mobile businesses according to different market and customer requirements.
The Companys ordinary shares are listed on the London Stock Exchange and the Companys ADSs are listed on the New York Stock Exchange (NYSE). The Company had a total market capitalisation of approximately £72 billion at 26 May 2006, making it the fifth largest company in the Financial Times Stock Exchange 100 index and the twenty second largest company in the world based on market capitalisation at that date.
Mobile Telecommunications
Local operations
The
Company has equity interests in 26 countries, through its subsidiary undertakings,
joint ventures, associated undertakings and investments. Partner Market arrangements
extend the
Groups footprint to a further 32 countries.
At 31 March 2006, based on the registered customers of mobile telecommunications ventures in which it had equity interests at that date, the Group had approximately 170.6 million customers, calculated on a proportionate basis in accordance with the Groups percentage interest in these ventures, and 518.0 million registered venture customers. The table on the following page sets out a summary of the Companys worldwide mobile operations at 31 March 2006 and venture customer growth in the year then ended (the 2006 financial year).
Competition
The Group faces a high degree of competition in each of its geographic markets. It is subject to indirect competition from providers of other telecommunications services in the
domestic markets in which it operates in addition to direct competition from existing mobile telecommunications network operators and MVNOs who do not operate a mobile telecommunications network. There are also new types of competitors, such as
fixed line operators offering combined fixed and mobile service offerings, and internet based companies extending their services to include telecommunications. Competitive pressures have adversely impacted the level of customer churn, although this
has been managed by reductions in tariffs and a continued focus on customer acquisition and retention initiatives.
The Group expects that competition will continue from existing operators as well as from a number of new market entrants, including those arising following the award of new 3G licences and MVNOs. The scope of this increased competition, and the impact on the results of operations, is discussed further in Performance Risk Factors, Trends and Outlook.
Many of Vodafones key markets are highly penetrated with over 100% penetration rates in some, largely due to a number of customers owning more than one subscriber identity module (SIM), which is, broadly, the Groups basis for defining a customer. The Group has estimated penetration rates at 31 December 2005 for its principal markets as follows:
Market | Penetration (%) |
Germany | 96 |
Italy | 122 |
Spain | 98 |
UK | 109 |
US | 69 |
A summary of the significant mobile competitors in its markets at 31 March 2006 is also provided in the following table.
12 | Vodafone Group Plc Annual Report 2006 |
Business | |
Summary of Group mobile telecommunications businesses at 31 March 2006(1)
Registered | ||||||||||||
Venture | Venture | proportionate | Registered | |||||||||
Percentage | customers | (4) | customer | customers | prepaid | |||||||
Country by region(2) | ownership | (3) | (000) | growth (%) | (5) | (000) | prepaid (%) | (6) | Names of significant mobile competitors | (7) | ||
Germany | 100.0 | 29,191 | 7.2 | 29,191 | 53.3 | E-Plus, O2 , T-Mobile | ||||||
Italy(8) | 76.9 | 24,056 | 6.9 | 18,490 | 92.2 | TIM, Wind, 3 | ||||||
Spain | 100.0 | 13,521 | 17.9 | 13,521 | 50.4 | Amena, Telefónica Móviles, Xfera | (9) | |||||
UK | 100.0 | 16,304 | 6.4 | 16,304 | 61.1 | Orange, O2, T-Mobile, 3, Virgin Mobile | ||||||
US(10) | 44.4 | 53,020 | 16.7 | 23,530 | 5.5 | National operators(11): Cingular Wireless, | ||||||
Sprint Nextel, T-Mobile | ||||||||||||
Other mobile operations | ||||||||||||
Subsidiaries | ||||||||||||
Albania | 99.9 | 773 | 19.1 | 772 | 96.8 | AMC | ||||||
Australia | 100.0 | 3,177 | 16.3 | 3,177 | 74.0 | Optus, Telstra, 3 | ||||||
Czech Republic | 100.0 | 2,214 | | 2,214 | 47.5 | T-Mobile, Eurotel Praha | ||||||
Egypt | 50.1 | 6,615 | 59.9 | 3,314 | 90.4 | MobiNil | ||||||
Greece | 99.8 | 4,479 | 11.9 | 4,471 | 66.4 | Cosmote, Q-Telecom, TIM | ||||||
Hungary | 100.0 | 2,063 | 18.9 | 2,063 | 68.9 | Pannon GSM, T-Mobile | ||||||
Ireland | 100.0 | 2,075 | 6.3 | 2,075 | 73.7 | Meteor, O2, 3 | ||||||
Malta | 100.0 | 175 | 4.8 | 175 | 89.8 | Go Mobile | ||||||
Netherlands | 99.9 | 3,913 | 3.2 | 3,909 | 52.4 | KPN Mobile, Orange, T-Mobile, Telfort | (12) | |||||
New Zealand | 100.0 | 2,068 | 9.4 | 2,068 | 77.6 | Telecom | ||||||
Portugal | 100.0 | 4,276 | 19.2 | 4,276 | 79.7 | Optimus, TMN | ||||||
Romania | 100.0 | 6,384 | 27.1 | 6,384 | 64.9 | Orange, Cosmorom, Zapp | ||||||
TOTAL | 38,212 | 28.8 | 34,898 | 71.8 | ||||||||
Other joint ventures | ||||||||||||
Fiji | 49.0 | 206 | 32.9 | 101 | 94.0 | | ||||||
India | 10.0 | 19,579 | | 1,958 | 82.8 | Hutch, Idea, BSNL/MTNL, Reliance Infocom, | ||||||
Tata Teleservices | ||||||||||||
Kenya | 35.0 | 3,944 | 56.9 | 1,380 | 98.2 | Celtel | (13) | |||||
Poland | 19.6 | 9,779 | 32.9 | 1,918 | 56.5 | Orange, ERA | ||||||
South Africa(14) | 49.9 | 23,520 | 51.9 | 10,968 | 89.5 | Cell C, MTN | ||||||
TOTAL | 57,028 | 123.6 | 16,325 | 82.2 | ||||||||
Other associates and investments | ||||||||||||
Belgium | 25.0 | 4,338 | 1.0 | 1,085 | 57.7 | BASE (KPN), Mobistar (Orange) | ||||||
China | 3.3 | 260,645 | 20.9 | 8,523 | 76.0 | China Netcom, China Telecom, China Unicom | ||||||
France | 44.0 | 17,282 | 8.2 | 7,612 | 44.0 | Bouygues, Orange | ||||||
Switzerland | 25.0 | 4,370 | 10.2 | 1,092 | 39.0 | Orange, Sunrise, Tele2 | ||||||
TOTAL | 286,635 | 19.5 | 18,312 | 73.2 | ||||||||
GROUP TOTAL | 517,967 | 24.2 | 170,571 | 65.9 | ||||||||
Notes: | |
(1) | The above information is presented for continuing operations only. Japan is classified as a discontinued operation and had 15,210,000 venture customers and14,858,000 registered proportionate customers at 31 March 2006. |
(2) | All controlled networks and the jointly controlled network in Italy operate under the Vodafone brand, with the exception of Vodafone Romania, which operates under the dual brand Connex Vodafone. Networks in which the Company does not have a controlling interest operate under the following brands: Belgium Proximus; China China Mobile; Fiji Vodafone; France SFR; India Airtel; Kenya Safaricom; Poland Plus GSM; South Africa Vodacom; Switzerland Swisscom Mobile; US Verizon Wireless. |
(3) | All ownership percentages are stated as at 31 March 2006 and exclude options, warrants or other rights or obligations of the Group to increase or decrease ownership in any venture as detailed in Financial Position and Resources Liquidity and Capital Resources Option agreements Ownership interests have been rounded to the nearest tenth of one percent. |
(4) | See page 49 for a definition of a customer. |
(5) | Venture customer growth is for the year to 31 March 2006. |
(6) | Prepaid customer percentages are calculated on a venture basis at 31 March 2006. |
(7) | Includes significant MVNOs which do not operate a mobile telecommunications network. |
(8) | Vodafone Italy is a joint venture. |
(9) | Licensed network operator, scheduled to commence commercial service during the 2007 financial year. |
(10) | The Groups ownership interest in Verizon Wireless is 45.0%. However, the Groups proportionate customer base has been adjusted for Verizon Wirelesss proportionate ownership of its customer base across all its network interests of approximately 98.6%, at 31 March 2006. In the absence of acquired interests, this proportionate ownership will vary slightly from period to period depending on the underlying mix of net additions across each of these networks. |
(11) | This is not a full list of US network operators. In the United States, in addition to the national operators shown, there are several regional and numerous local operators. |
(12) | Telfort was acquired by KPN Mobile during the financial year but still operates its own network. |
(13) | The Kenyan Government has awarded a third licence but the operator had not commenced service at 30 May 2006. |
(14) | On 20 April 2006, the Groups ownership percentage increased to 50%. |
Vodafone Group Plc Annual Report 2006 | 13 |
Business
Overview
continued
Partner Markets
Partner Markets
are operations in which the Group has entered into a partnership agreement
with a local mobile operator, enabling a range of Vodafones global products and
services to be marketed in that operators territory. The Groups
Partner Market strategy enables the Group to implement its global services
in new territories,
extend its brand reach into new markets and create additional revenue without
the need for equity investment.
Similar agreements also exist with a number of the Groups associated undertakings.
Details of the partnership agreements in place as at 31 March 2006 are provided on the Groups website.
Licences and network infrastructure
Licences
The
Group is dependent on the licences it holds to operate mobile telecommunications
services. Further detail on the issue and regulation of licences can be found
in Regulation. The table below summarises the significant licences held by the Groups mobile operating subsidiaries and the Groups
joint venture in Italy:
Date of | ||||
Country by | Licence | Licence expiry | Network | commencement of |
region | type | date | type | commercial service |
Germany | 2G | December 2009 | GSM/GPRS | June 1992 |
3G | December 2020 | W-CDMA | February 2004 | |
Italy | 2G | January 2015 | GSM/GPRS | December 1995 |
3G | December 2021 | W-CDMA | February 2004 | |
Spain | 2G | July 2023(1) | GSM/GPRS | October 1995 |
3G | April 2020 | W-CDMA | February 2004 | |
UK | 2G | See note(2) | GSM/GPRS | December 1991 |
3G | December 2021 | W-CDMA | February 2004 | |
Other mobile operators | ||||
Albania | 2G | June 2016 | GSM | August 2001 |
Australia | 2G | June 2017(3) | GSM/GPRS | September 1993 |
3G | October 2017 | W-CDMA | October 2005 | |
Czech Republic | 2G | November 2020 | GSM/GPRS | March 2000 |
3G | February 2025 | W-CDMA | See note(4) | |
Egypt | 2G | May 2013 | GSM/GPRS | November 1998 |
Greece | 2G | September 2012 | GSM/GPRS | July 1993 |
3G | August 2021 | W-CDMA | July 2004 | |
Hungary | 2G | July 2014(5) | GSM/GPRS | November 1999 |
3G | December 2019 | W-CDMA | December 2005 | |
Ireland | 2G | December 2014 | GSM/GPRS | March 1993 |
3G | October 2022 | W-CDMA | May 2003 | |
Malta | 2G | September 2010 | GSM/GPRS | July 1997 |
3G | August 2020 | W-CDMA | – | |
Netherlands | 2G | February 2013(1) | GSM/GPRS | September 1995 |
3G | December 2016 | W-CDMA | February 2004 | |
New Zealand | 2G | See note(6) | GSM/GPRS | July 1993 |
3G | March 2021(6) | W-CDMA | August 2005 | |
Portugal | 2G | October 2006 | GSM/GPRS | October 1992 |
3G | January 2016 | W-CDMA | February 2004(7) | |
Romania | 2G | December 2011 | GSM/GPRS | April 1997 |
3G | March 2020 | W-CDMA | April 2005 | |
Notes: | |
(1) | Date relates to 1800MHz spectrum licence. Vodafone Netherlands and Vodafone Spain also have separate 900MHz spectrum licences which expire in March 2010 and February 2020, respectively. |
(2) | Indefinite licence with a one year notice of revocation. |
(3) | Date refers to 900MHz spectrum licence. Various licences are held for 1800MHz licences, which are issued by specific regional regulators. The earliest expires in June 2013 and the latest in March 2015. |
(4) | Planned for the 2007 financial year. |
(5) | There is an option to extend this licence for seven years. |
(6) | Vodafone New Zealand owns three GSM 900 licences (2x21MHz) and one GSM1800 licence (2x15MHz). The GSM900 licences expire in November 2011, July 2012 and September 2021. The GSM1800 licence expires in March 2021. |
(7) | Portugal launched the Vodafone Mobile Connect 3G/GPRS data card in February 2004, and the launch of 3G voice services took place in May 2005. |
Mobile network infrastructure
Network infrastructure is fundamental to the Group being able to provide mobile services. The mobile network enables the Groups customers to place and receive voice calls and allows the Group to provide other services, such as text messaging.
When a voice call or data transmission is made on a mobile device, voice or data is sent from the device and transmitted by low powered radio signals to the nearest base station, which in turn is connected to the Groups network. Each base station provides coverage over a given geographic area, often referred to as a cell. Cells can be as small as an individual building or as large as 20 miles across. Each cell is equipped with its own radio transmitter and receiver antenna. This network of cells provides, within certain limitations, coverage over the service area. When a customer using a mobile device approaches the boundary of one cell, the mobile network senses that the signal is becoming weak and automatically hands over the call to the transmission unit in the next cell into which the device is moving.
If the voice call or data transmission is intended for delivery to another device which is not on the Vodafone network, the information is delivered through a public or private fixed line telephone network or the internet.
In a second generation (2G) network, each cell contains a base station using a number of radio frequencies or channels. A group of base stations is connected to a base station controller, which in turn is connected to a mobile switching centre and then via a gateway support node for access to a fixed line network or the internet.
In a 3G network, voice or data traffic is passed through a node B, being similar to a base station in a 2G network, to a radio network controller, which is then connected to a mobile switching centre, similar to a 2G network.
Base stations and node Bs form a core element of a mobile network and an insufficient number of base stations can result in loss of service for customers. In addition, the correct deployment of the right base stations is instrumental in achieving the network quality and coverage that are crucial to customer satisfaction.
2G
Vodafone operates
2G networks in all its mobile operating subsidiaries, principally through GSM
networks, offering customers services such as voice, text messaging and basic
data
services. In addition, all of the Groups controlled networks, with the exception of Albania, operate GPRS, often referred to as 2.5G. GPRS allows mobile devices to be used for sending and receiving data over an internet protocol
(IP) based network, enabling wireless access to data networks like the internet.
The GPRS data service offering includes internet and e-mail access allowing the customer to be always connected at download speeds slightly below a dial-up modem. Vodafone also offers a great variety of services on its Vodafone live! portal, such as picture and video messaging, download of ringtones, news and many other services.
3G
Vodafones 3G networks, operating the W-CDMA standard, provide customers with mobile broadband data access, allowing data download speeds of up to 384 kilobits per second
(kbps), which is up to seven times faster than a dial-up modem. Vodafone
has expanded its service offering on 3G networks with high speed internet and
e-mail access, video telephony, full track music downloads, mobile TV and other
data services in addition to existing voice and data services.
The Group has secured 3G licences in all jurisdictions in which it operates through its subsidiary undertakings and in which such licences have been awarded to date, as well as in Italy through its joint venture. Vodafone expects to participate in additional 3G licence allocation procedures in other jurisdictions in which it operates. No assurances can be given that the Group will be successful in obtaining any 3G licences for which it intends to apply or bid.
Roll out of the 3G network infrastructure has continued throughout the 2006 financial year across the Groups mobile operations, with additions to property, plant and equipment and computer software amounting to approximately £4.0 billion during the financial year, including approximately £1.1 billion expenditure on 3G network infrastructure. By the end of March 2006, over 33,000 node Bs were in operation in the Groups controlled operations and the Groups joint venture in Italy. In many of the Groups markets, Vodafone has achieved the leading position on 3G coverage and quality of service.
14 | Vodafone Group Plc Annual Report 2006 |
Business | |
High
Speed Downlink Packet Access (HSDPA)
After successful field tests, Vodafone has started to upgrade existing 3G networks with HSDPA.
HSDPA enables data transmission speeds of up to two megabits per second (Mbps) in the first phase, with up to 14.4 Mbps achievable with later releases. This will provide customers with faster access speeds than experienced on existing 3G networks.
HSDPA is enabled through the deployment of new software in the 3G radio network and expanding the processing capabilities of the node B. Significant performance benefits are achieved by using mechanisms that use the radio interface more effectively and are further adapted to bursty packet based data traffic using IP. A Vodafone Mobile Connect data card which supports HSDPA is available commercially, and compatible Vodafone live! handsets will be launched in the summer of 2006.
HSDPA has been launched commercially by a number of the Groups mobile operations, including Germany and Portugal, and will be launched by other operating companies in the Group during the 2007 financial year.
While HSDPA focuses on downlink (network to mobile), Vodafone is also working on improving the data speeds in the uplink (mobile to network) to achieve speeds of up to 384kbps.
Global services
Supply chain management
Handsets,
network equipment, marketing and IT services account for the majority of Vodafones purchases, with the bulk of these purchases from global suppliers. The Groups
Global Supply Chain Management (GSCM) team is responsible for managing most of the Groups
relationships with these suppliers.
As GSCM has expanded its scope of activities, Vodafone has seen significant progress in reducing per unit capital and operational expenditures, by leveraging the Groups scale.
GSCM works with more than 250 strategic suppliers. A consistent supplier performance management process has been implemented across the Groups mobile operations and Vodafone is actively managing a growing number of key suppliers in this way. Key suppliers are evaluated across six areas, covering aspects of financial stability, technological and commercial criteria, delivery and quality management requirements and corporate responsibility. This process is also being applied to consider relationships with new suppliers, and recently several Chinese suppliers have been qualified for business through GSCMs China Sourcing Initiative.
GSCM also strives to identify best practice across the Groups mobile operations with the aim of harmonising business processes, which will bring the benefits of further reducing procurement costs and reducing time to market.
Global suppliers are required to comply with the Groups Code of Ethical Purchasing which sets out the labour and environmental standards the Group expects suppliers to meet. The Code is based on the Groups values and international standards, including the Universal Declaration of Human Rights and the International Labour Organisation Conventions on Labour Standards.
A business-to-business electronic commerce strategy is currently being implemented to further increase transparency and control. In the 2006 financial year, purchases of more than £0.8 billion have been effected through e-auctions, driving significant cost savings.
More recently, a global demand management application has been implemented as part of the One Vodafone programme. This web-based application has been developed to provide improved co-ordination of the global purchase of handsets, providing benefits such as the reduction of inventory and obsolescence risk, improved availability and improved effectiveness to allow the Group to respond better to market changes.
It is the Groups policy to agree terms of transactions, including payment terms, with suppliers and it is the Groups normal practice that payment is made accordingly. The number of days outstanding between receipt of invoices and date of payment, calculated by reference to the amount owed to suppliers at the year end as a proportion of the amounts invoiced by suppliers during the year, was 36 days (2005: 35 days) in aggregate for the Group.
Products and services
Voice services
Revenue from
voice services makes up the largest portion of the Groups revenue and the
Group is undertaking a wide range of activities to encourage growth in the usage
of these services. In increasingly competitive local markets where value for
money is an important consideration, improving use of existing products and developing
a range of new offerings for customers has helped the Group to continue to grow
total voice
revenue.
Value for money is an important factor for customers when choosing a mobile phone network and is also important in encouraging usage of services whilst maximising revenue and margins. Two main charging or payment models exist in the mobile market contract and prepaid. Contract customers are usually governed by a written contract and credit facilities are granted to them to enable access to mobile network services. In most cases, contracts have a term of 12 to 24 months with monthly payments for services and, in many of the Groups mobile operations, the option of purchasing a subsidised handset. A prepaid customer pays in advance in order to gain access to voice and other services. The take-up of these models in the markets in which the Group operates varies significantly, from the US, where the vast majority of customers are on contract plans, to Italy and Egypt, where the market is predominantly prepaid.
The Group has made pricing more customer friendly and value inclusive in a number of its mobile operations. In many cases, these new price structures include large minute bundles that allow customers to talk more for longer. These larger bundle packages and promotions have driven significant usage growth in many of the markets in which the Group operates, although the price per minute is falling across most markets.
Revenue is generated by incoming as well as outgoing calls. Interconnect revenue is received when a customer of a fixed line or other mobile operator network calls a Vodafone customer. Approximately a fifth of mobile voice revenue is derived from incoming calls.
The Group continues to invest in providing enhanced network coverage for services in response to Group-wide customer feedback. In parallel, the Group is improving network service quality to ensure that customers can use their mobile phone whenever and wherever they want.
Social products
Work has continued this year on making mobile services more accessible to people with special communication needs. Vodafone has undertaken significant research to better understand
the levels of exclusion relating to use of mobile technology, which is helping to inform relevant areas of the business.
A new Social Investment Fund has been formed to provide incremental resources going forward and to seed initiatives that can demonstrate high social value. One of the initiatives likely to benefit from this is M-pesa, an innovative mobile micro-finance service now on trial in Kenya. This service, run in conjunction with a local bank and Vodafones Kenyan joint venture, Safaricom, enables customers to move money in and out of accounts, between other customers and to withdraw cash, all using secure mobile messaging.
Non-voice services
Messaging services
All
of the Groups mobile operations offer SMS, which allows customers to send
and receive text messages using mobile handsets and various other devices. SMS
usage continued to grow in the 2006 financial year and is the largest contributor
to total messaging revenues. MMS, which offers customers the ability to send
and receive multiple media, such as pictures, music, sound, video and text, to
and from other compatible
devices is also available in all Group mobile operations, with the exception
of Albania. MMS has enjoyed strong revenue growth in the 2006 financial year
across the Group.
Vodafones mobile instant messaging service (Vodafone Messenger) was re-launched during November 2005 in Italy, Spain and the Netherlands and is currently available in 11 countries. The service has full compatibility with Microsofts MSN Messenger in order to address growing customer needs for instant communications.
Vodafone live!
Vodafone
live!, the Groups integrated communications and multimedia proposition initially launched in October 2002, has continued to grow strongly. The proposition, targeted
primarily at the young adult (young active fun) segment, has been launched in four new markets since 31 March 2005, bringing the total number of countries now offering Vodafone live! to 24. The new markets added in the 2006 financial
year were Luxembourg, Iceland, Cyprus and South Africa. At 31 March 2006, there were 27.1 million Vodafone live! active devices on the Groups controlled and jointly controlled networks, with an additional 5.9 million devices connected in the
Groups associated undertakings.
Vodafone Group Plc Annual Report 2006 | 15 |
Business
Overview
continued
Vodafone has continued to develop the Vodafone live! proposition by offering a new range of services, content, handsets and tariffs. The design of the Vodafone live! portal, through which customers can access a range of online services including games, ringtones, news, sports and information is being continually enhanced to provide richer content and to make it easier for customers to find and purchase content.
The important ringtones market has continued to develop with mass market adoption of real-tones where customers are able to purchase samples of real music recordings as ringtones from artists signed to labels including EMI, Sony BMG Music Entertainment, Universal Music and Warner Music.
Tariff structures have been updated, with a range of messaging and content based bundles now available to customers. These have delivered improved customer value, particularly when offered in conjunction with a handset purchase. In addition, browsing charges for accessing the mobile internet have been simplified in many markets, making it more attractive for customers to browse the web using their mobile phones.
23 new 2.5G phones have been added to the Vodafone live! portfolio in the 2006 financial year, with an increased emphasis on exclusive and customised devices. The new handsets have offered improved camera capabilities, better connectivity, with a significant proportion of devices now offering Bluetooth (a wireless link function), and increased memory card storage to enable customers to save content on their devices.
Throughout the 2006 financial year, Vodafone has continued to develop standards in the areas of terminals, platforms, games, digital rights management and MMS. These initiatives are expected to lead to increased speed to market and better services for customers.
Vodafone live! with 3G
In November 2004, the Group launched Vodafone live! with 3G across 13 markets, with an initial portfolio of 10 devices. Vodafone live! with 3G is now available in 10 controlled
markets, two joint venture markets, three associated company markets and three Partner Markets. At 31 March 2006, there were 7.1 million devices registered on the controlled and jointly controlled networks capable of accessing the Vodafone live!
with 3G portal, and the portfolio of Vodafone live! with 3G devices had expanded to 35. 17 new 3G phones have been added to the portfolio during the 2006 financial year.
An enhanced mobile experience gives Vodafone live! with 3G customers access to a range of high quality content and communication services. Vodafone live! with 3G customers can now experience news broadcasts, sports highlights, music videos, movie trailers and other video content at a quality approaching that of digital television.Vodafone continues to work with leading content partners, including HBO, Eurosport, MTV, UEFA Champions League, Fox and Discovery, to enhance the mobile TV and film content offering. The wide bandwidth of 3G supports access to sophisticated 3D games and the portfolio of mobile games is continually expanding.
The 3G service also supports full track music downloads which allow customers to use their phone to listen to music, choosing from a range that currently includes more than 600,000 music tracks. Vodafone has secured music from some of the worlds greatest artists through agreements with EMI, Sony BMG Music Entertainment, Universal Music, Warner Music and other independent record labels. Using the 3G service, customers can also download live performance videos and stream clips direct to their mobiles.
In the coming year, Vodafone will continue to enhance the music offering with the introduction of Vodafone Radio DJ, a personalised, interactive radio service streamed to both 3G phones and PCs. Customers will have access to hundreds of thousands of tracks and will be able to personalise radio channels to their taste. This service will be offered on a monthly subscription, giving unlimited listening time, and is due for release in more than 20 countries over the next year.
In February 2006, a deal was signed with Google giving Vodafone customers access to the Google search engine via the Vodafone live! portal. The addition of the Google search engine (to be available from October 2006) will help customers access content more easily both on-portal and on the wider mobile internet. The agreement also sees the introduction of a new advertising based revenue stream to Vodafone live! by incorporating relevant sponsored links within customer search results. The partnership provides a future framework for other innovative collaborations between Vodafone and Google, bringing new opportunities to further expand consumer offerings by incorporating other existing Google products.
Content standards
Vodafone
has continued to provide a leadership role in content standards with the launch
of a global
access control programme and an off-net filter. The access control programme
demonstrates Vodafones commitment to deliver content responsibly and provides
the capability for parents to restrict access to content that may be inappropriate
for younger users. Ensuring that the mobile needs of parents and their children
are satisfied will remain a priority during the 2007 financial year.
As new media channels evolve, a number of Vodafone initiatives are designed to ensure protection for our customers from inappropriate content, contact and commercialism. These include providing supporting guidelines around the marketing of content to customers, signing up to the codes of practice on spam content and the development of editorial guidelines to provide more robust parental controls.
Vodafone Mobile Connect data cards
First launched in April 2003, the Vodafone Mobile Connect data card provides simple and secure access to existing business information systems such as email, corporate applications,
company intranets and the internet for customers on the move. Access speeds vary depending on which technology the data card is using but typically ranges from 384 kbps when connected to a 3G network up to 1.2 Mbps when connected to a network
enabled with HSDPA technology. The Vodafone Mobile Connect with 3G broadband data card, which utilises HSDPA technology, has been launched in five markets, with other markets to follow during the 2007 financial year.
The Vodafone Mobile Connect 3G/GPRS data card has now been rolled out across 11 controlled markets, two joint venture markets, three associated companies markets and ten Partner Markets. Vodafone Mobile Connect data cards are available in an increasing number of distribution channels.
During the 2006 financial year, Vodafone announced the launch of built-in 3G broadband connectivity with Acer, Dell and Lenovo notebooks. The roll out of the notebooks will further enhance the choices available to Vodafone customers for high speed mobile working.
The product portfolio was enhanced during the financial year with the launch of an EV-DO data card allowing customers to connect with Verizon Wireless high speed data network whilst travelling in the US. In addition, Vodafone also launched a 3G router in conjunction with Cisco and Linksys, which enables mobile connectivity for groups of employees.
At 31 March 2006, there were 0.7 million registered Vodafone Mobile Connect data cards in the Groups controlled and jointly controlled markets.
Vodafone Wireless Office
Vodafone Wireless Office offers companies the opportunity to reduce the number of fixed desk phones they have and facilitates the move of voice minutes from the fixed to the mobile
network through a solution that includes elements that can match or better fixed line call costs, desk phone functionality and user experience. A closed user group tariff, allowing employees to call each other for a flat monthly fee, is a key part
of the offer. Another optional element allows a customer to control their mobile phone from their PC or laptop.
At 31 March 2006, Vodafone Wireless Office was available in 14 markets and had over 1.5 million customers.
Other business services
Beyond the wireless enablement of notebook computers, there is an increasing demand for handheld solutions that allow real-time access to email, calendar, contact and other
applications. During 2004, Vodafone launched its BlackBerry® from Vodafone proposition,
which is now available in 11 controlled markets, two joint venture markets, three associated company markets and nine Partner Markets.
There were 0.4 million BlackBerry from Vodafone customers on the Groups controlled and jointly controlled networks as at 31 March 2006.
On 21 April 2005, the Group announced the roll out of Vodafone Push email, a service providing real-time, secure and remote access to email, contacts and calendar direct to a range of business-focused mobile devices. The service has been rolled out in six controlled markets, one joint venture market, two associated company markets and two Partner Markets. At 31 March 2006, the service was supported by ten global devices and a varied number of local devices in the controlled markets.
Roaming services
When travelling abroad roaming allows mobile phone users to make and receive calls using another mobile network in the visited country. The Group continued to expand its roaming
coverage and services during the 2006 financial year. The focus of the year, however, was to provide reduced, clearer and easier to understand prices to our customers under the Vodafone Travel Promise roaming campaign launched in May 2005.
On 8 May 2006, the Group announced that average European roaming costs for Vodafone customers will be cut by at least 40% by April 2007, when compared to the period from June to August 2005. This is expected to benefit over 30 million Vodafone customers who roam every year, and will see the average cost of roaming in Europe fall from over 90 eurocents per minute to less than 55 eurocents per minute. The average
16 | Vodafone Group Plc Annual Report 2006 |
Business | |
saving was determined by calculating the expected cost per minute for all Vodafones European customers who roam within the EU during the month of April 2007 and comparing this to the average cost per minute for all European customers who roamed within the EU during the period from June to August 2005 (see Regulation).
Vodafone also announced that it will enter into reciprocal wholesale arrangements with any other European operator at no more than 45 eurocents per minute for voice calls within the EU from October 2006. This will enable both Vodafone and other European mobile operators to continue to lower the cost of roaming to customers outside of their own networks.
Vodafone Passport
Vodafone
Passport introduced a new roaming pricing architecture for calls made on Vodafone
and
Partner Networks, enabling customers to take their home tariff abroad.
The Vodafone Passport price architecture offers greater price transparency and
certainty to customers when using roaming services abroad. Whilst abroad, customers
can make calls using their domestic tariff, in some cases including free minute
bundles,
and receive calls at no charge for a one-off connection fee per call.
Vodafone Passport is now available in 10 controlled markets, one joint venture market, one associated company market and one Partner Market. By 31 March 2006, the service had attracted 5.6 million customers in the Groups controlled and jointly controlled operations and a further 0.4 million customers in one of the Groups associated undertakings and a Partner Market. Results show that on average, customers are both talking more and paying less per call when abroad. In addition, Vodafones cost per minute for roaming customers fell by over 30% from summer 2004 compared with summer 2005.
Wholesale strategy
During
the year, the
commercial management of the Groups business with its main roaming partners
has been consolidated in order to better leverage the scale and scope of the
Groups branded footprint. This arrangement has successfully secured a number
of important wholesale roaming discount agreements with other networks on behalf
of the Group. These provide cost structures that support the development of our
roaming customer propositions, promote the mutual development of roaming services
with our Partner Markets, and deliver significant cost savings.
Managed roaming, the network technology that automatically directs Vodafone customers to the networks of Partner Markets, is now operating in ten markets, delivering a strong Vodafone customer experience and allowing the Group to benefit from an improved cost structure.
Data propositions
Several
actions were taken to complement Vodafone Passport by providing simplicity, price
predictability and value for money across data services. Vodafone Group took
the initiative
to reduce substantially up to 66% in some markets the cost per
megabyte for standard data usage across its controlled markets. This move was
followed by most joint ventures, associated companies and Partner Markets, enabling
customers to benefit from a conveniently priced data platform across a wide footprint
of 30 markets.
In addition, after pioneering flat monthly data roaming tariffs with its BlackBerry from Vodafone offer in 2004, Vodafone launched a monthly bundle for its Vodafone Mobile Connect 3G/GPRS data card in August 2005, which eliminated price uncertainty and further reduced the nominal cost per megabyte by over 80%. This has significantly increased usage and contributed to the revenue growth in data services seen over the 2006 financial year.
Vodafone Simply
The
Vodafone Simply proposition, launched in May 2005, is predominantly targeted
at the adult personal user segment. The integrated proposition has been developed
to help customers who are less comfortable with mobile technology but would still
like to access
the mobile experience. The proposition includes exclusively developed, easy
to use mobile phones with uniquely developed user interfaces accompanied
with tariff plans
and a tailored retail and customer support experience.
At 31 March 2006, Vodafone Simply was available in a total of 17 markets, with 0.4 million Vodafone Simply enabled devices registered on the Groups controlled and jointly controlled networks.
Marketing and brand
Brand
Brand
marketing focuses on defining a superior, consistent and differentiated experience
for our customers. A programme has been undertaken to identify the heart of the
Vodafone brand,
that is, Vodafones brand essence which evokes passion, dependability
and a constant striving for improvement. The brand essence has been used to bring
the Vodafone brand to life for Vodafone employees, so that they can do the same
for customers in every interaction.
Customer communications
Communication
to drive brand preference and service usage is facilitated through various integrated
advertising media including radio, television, print and outdoor sites. Global
advertising has been developed to communicate the brand essence and to drive
revenue growth by encouraging our customers to make the most of Now.
Advertising is supported by strong sponsorship relationships, such as those with
Ferrari and the UEFA Champions League, which have global exposure and allow for
benefits to be realised at the local level. Media activity is based on customer
insight, and is designed to ensure a consistent and effective brand experience
across
Vodafones footprint.
Customer strategy and management
Vodafone
uses a customer
management system called customer delight to measure customer satisfaction
in the Groups controlled markets and the jointly controlled market in Italy
at a local and global level. This is a proprietary diagnostic system which tracks
customer satisfaction across all the points of interaction with Vodafone, and
identifies the drivers of customer delight and their relative impact. This information
is used to optimise satisfaction and maximise the financial benefit from differentiated
marketing propositions and programmes.
Distribution
The
Group distributes its products and services through a wide variety of direct
and indirect channels, with different approaches used in the consumer and business
sectors.
Products and services are available directly to both consumer and business customers in the majority of markets. Over 1,000 stores are directly owned and managed by Vodafone, with an additional 6,500 Vodafone branded stores. In addition, local websites offer products and services online and local sales forces are in place to discuss terms with business customers.
The extent of indirect distribution varies between markets but may include using third party service providers, independent dealers, agencies and mass marketing. Marketing to third party service providers includes maintaining a competitive tariff structure, providing technical and other training to their staff and providing financial incentives for service providers, their dealers and sales people. It also entails providing assistance on advertising campaigns and supporting the development of both specialist retail outlets and programmes with multiple retailers.
Vodafones engagement with IT resellers and distributors has strengthened during the year, with global and local partnerships now fully operational in 12 countries across the Vodafone footprint. In support of this channel capability, Vodafone has launched a channel marketing programme to engage with the IT reseller community via the internet. The programme allows Vodafone marketing and communication access to the IT channel and incentivisation for the sale of Vodafone data products. The programme is operational in eight controlled markets and will be extended across the rest of the Vodafone footprint during the 2007 financial year. This engagement with the IT channel considerably extends Vodafones ability to sell to small and medium enterprises and small business customers as well as providing a key platform to support the launch of notebooks with built in 3G broadband during the coming year.
The last few years have seen the growth of MVNOs who buy access to existing networks and re-sell them to customers under a different brand name and proposition. Where such a relationship generates profitable use of network capacity and does not impact the Vodafone brand, a mobile operating subsidiary may consider entering into a partnership with an MVNO.
Multinational
corporates (MNC)
In
April 2005, Vodafone launched the first global business unit aimed at serving
a specific customer
segment the multinational corporate market. The MNC business unit currently
serves many of the worlds largest enterprises with a differentiated global
MNC proposition. The sales and service teams are located across the globe, aligned
with the customers locations. Customers of the business unit also benefit
from a central service unit to develop specific propositions and pricing specifically
targeted to meet the needs of a global Chief Information Officer, helping to
purchase, manage, monitor and administer mobile telecommunications centrally
within a
global organisation.
The Vodafone MNC units initial focus is on providing consistency across Vodafone markets for existing corporate solutions, together with dedicated global customer service and global account management. The MNC vision is worldwide communications made easy for global businesses. In the year since launch, the Vodafone MNC unit can offer a consistent BlackBerry from Vodafone solution in 12 markets, a Master Service Agreement covering nine countries, a global helpdesk offering third line support to the administrator of the global accounts, account and service management at a global and local level in over 20 markets with full support from a technical team to implement existing solutions, and help develop tailored solutions.
Vodafone Group Plc Annual Report 2006 | 17 |
Business Overview
continued
Summary of Group products and services
The
following table summarises the availability of the Groups most significant
products and services as at 31 March 2006. Only the markets in which Vodafone
products and
services are available to customers are represented below:
Vodafone | |||||||||
Vodafone | Mobile | ||||||||
Mobile | Connect | Black- | |||||||
Vodafone | Connect | 3G/GPRS | Berry | Vodafone | Vodafone | ||||
Vodafone | live! | data | data | from | Push | Wireless | Vodafone | Vodafone | |
Country | live! | with 3G | card | card | Vodafone | Office | Passport | Simply | |
Subsidiaries(1) | |||||||||
Germany | | | | | | | | | |
Spain | | | | | | | | | |
UK | | | | | | | | | |
Albania | * | | |||||||
Australia | | | | | | | | ||
Egypt | | | | ||||||
Greece | | | | | | | | | |
Hungary | | * | | | | | | | |
Ireland | | | | | | | | | |
Malta | | | | | | ||||
Netherlands | | | | | | | | | |
New Zealand | | | | | | | | ||
Portugal | | | | | | | | | |
Romania | | ||||||||
Joint Ventures | |||||||||
Fiji | | ||||||||
Italy | | | | | | | | | |
South Africa | | | | | |||||
Associates | |||||||||
France | | | | | | | | | |
Belgium | | | | | | ||||
Switzerland | | | | | | ||||
Partner Markets | |||||||||
Austria | | | | | | ||||
Bahrain | | | |||||||
Croatia | | | | | | ||||
Cyprus | | * | |||||||
Denmark | | | | ||||||
Estonia | | | | ||||||
Finland | | | | ||||||
Hong Kong | | | |||||||
Iceland | | | | | |||||
Kuwait | | ||||||||
Luxembourg | | | | ||||||
Singapore | * | | |||||||
Slovenia | | | | ||||||
Sweden | | | | | | | | | |
Total markets | 24 | 17 | 24 | 26 | 25 | 12 | 14 | 13 | 17 |
Note: | |
(1) | The following information is presented for continuing operations only. Japan is classified as a discontinued operation. |
Key: | |
| Available throughout the 2006 financial year |
| Launched in the 2006 financial year |
* | Launched since 31 March 2006 |
One
Vodafone
The
One Vodafone initiatives are aimed at achieving cost savings and enhancing revenue
for the Groups controlled mobile businesses and the Groups
jointly controlled mobile business in Italy. The Group has previously targeted
that, in the 2008 financial year, the total of operating expenses (being the
aggregate of payroll and other operating expenses) and capitalised fixed asset
additions, would be broadly similar to those for the 2004 financial year, assuming
no significant changes in exchange rates and after adjusting for acquisitions
and disposals.
The Group has also previously targeted mobile capitalised fixed asset additions in the 2008 financial year to be 10% of mobile revenue as a result of the initiatives.
Further, revenue enhancement initiatives were expected to deliver benefits equivalent to at least 1% additional revenue market share in the 2008 financial year compared with the 2005 financial year, which the Group is measuring in Germany, Italy, Spain and the UK against its principal competitors.
The Group has updated its One Vodafone targets to reflect both the new organisational structure and additional cost saving initiatives.
Capitalised fixed asset additions are expected to be 10% of revenues in the 2008 financial year for the total of the Groups Europe region and its common functions.
The Group now expects the aggregate of payroll and other operating expenses to be broadly stable in the 2008 financial year when compared to the 2006 financial year for the total of the Groups Europe region and its common functions, assuming no significant changes in exchange rates, after adjusting for acquisitions and disposals, and excluding the potential impact from its New Businesses unit and any one off business restructuring costs.
The objective for the 2006 financial year has been to commence implementation of the plans outlined last year. Significant benefits are expected in the 2007 financial year, with the full targets expected to be met in the 2008 financial year.
The One Vodafone programme has focused on six key initiatives, as follows:
| The network and supply chain management initiative has driven prices down over the last two years in the radio network area through competitive bidding via e-auctions and standardising specifications for base stations, accessories and operating costs. In core networks, the Group is advancing towards an all IP based network, thereby simplifying and reducing the number of component parts and leading to lower costs. Through increasing the amount of self built transmission, both through microwave links and owned dark fibre, costs are being reduced and future cost escalation will be limited as the volume of data traffic grows. |
| The service platforms initiative has created a shared service organisation to host the European development and operations of services. The shared service organisation is now providing a hosting service for the Vodafone live! portal for seven of the Groups mobile operating subsidiaries, the Groups joint venture in Italy and two Partner Markets. Other platforms are also being migrated and new services are being implemented, for the first time, solely on the shared service platform. The centralisation is designed not only to reduce costs but also to increase revenue through reduced time to market for new products and services. |
| The IT initiative focuses on the two areas of data centres and application development. For data centres, which host the servers to support billing and customer relationship management systems, consolidation is underway, with migrations of all of the Southern European, German and Dutch data centres completed in the year, and work is progressing on the UK and Ireland data centres following the completion of the planning phase in the 2006 financial year. The remaining part of the IT effort is focused on driving efficiencies in application development and maintenance, which will continue through to 2008 and beyond. Activities in both these areas are enabling the Group to leverage its global purchasing power and drive operational excellence. |
| The customer management programme is focused on driving segment and value based service differentiation to improve customer satisfaction, generate revenue and reduce churn. During the 2006 financial year, achievements included the launch of a common customer management service strategy, the implementation of a cross operating company network of specialised roaming customer care teams to improve service for our roaming customers and the roll out of a number of best practice activities to a number of operating companies. |
| The focus of the terminals programme is to provide an end to end process for delivering terminals to our customers, driving benefits from scale and reduced time to market. At present, the procurement of approximately four out of five handsets in the Groups mobile operating subsidiaries and joint venture in Italy is negotiated globally, providing the Group with scale advantages. In addition, complexity in handsets is being reduced by standardising components and the move to a smaller number of technology platforms. It is expected that these activities, together with the launch of |
18 | Vodafone Group Plc Annual Report 2006 |
Business | |
exclusive Vodafone branded handsets, will drive incremental revenue benefits, as well as cost savings, through reduced churn and higher ARPU per handset. | |
| Finally, the focus of the roaming initiative is to transform customers roaming experience, primarily through reducing barriers to usage by providing better value when they travel abroad. In addition, providing the best value inter-operator tariffs and consolidating certain roaming support activities are key goals of the programme. Vodafone Passport has been launched in 13 markets and over 6 million customers have signed up to the service at 31 March 2006. Improvements in customer satisfaction and a higher proportion of customers roaming on to Vodafone networks have been observed. |
Research
and Development (R&D)
The
Groups R&D function comprises an international and multicultural team
for applied research in mobile telecommunications and its applications. The majority
of the
Groups R&D function is undertaken through the Groups centres
of excellence, located in Newbury, Maastricht, Munich, California, Milan and
Madrid, and in an associate centre in Paris belonging to Vodafones associated
undertaking
in France, SFR. In the 2006 financial year, the R&D Centre in Tokyo was re-absorbed
into the Japanese operation and ceased to engage in research and development
for the Vodafone Group. The work of the centre in California was refocused to
activities where a presence in the US was essential in order to carry them out
and the size of the centre reduced accordingly. Early in 2006, the Groups
R&D function was given full responsibility for intellectual property across
the Vodafone
Group.
The Groups R&D function provides technical leadership, and a programme of research support, into technology that will typically start to be used in the business in three years and beyond. Governance is provided by the Group R&D Board which is chaired by the Group R&D Director and consists of the chief technology officers from four of the mobile operating subsidiaries, together with the heads of Future Products, Business Strategy, Terminals and Technology Development.
The Groups R&D function focuses on applied research that is positioned between the basic research undertaken by universities and commercial product development. The emphasis of the Groups R&D work programme is on providing technology analysis and vision that can contribute directly to business decisions, enabling new applications of mobile telecommunications, using new technology for new services, and research for improving operational efficiency and quality of the Groups networks. The work programme is organised into technology research and application research. The technology research is concerned with core radio, network and service enabling technologies. It includes business modelling techniques, application of social science and analysis of disruptive technologies. The application research is concerned with developing new business applications of radio based technologies for commercial launch. Both areas of research are directed to expanding business boundaries and opportunities through advances in technology, science and business practice.
The work of the Groups R&D function is delivered through a series of programmes with a substantial number of trials, demonstrations and protoypes. All work is set in a business and social context. There is growing emphasis on work that secures intellectual property rights or can otherwise lead to Vodafone having stronger influence on the technology it will deploy in the future. In addition, the Groups R&D function provides leadership for funding research into health and safety aspects of mobile telecommunications and technical leadership for the Groups spectrum strategy.
The main themes currently being researched are the evolution of 3G, new application areas for mobile communications and convergence with the internet. The basis of the Groups 3G radio technology is W-CDMA and enhancements to provide a higher speed version, usually referred to as HSDPA, or High-Speed Uplink Packet Access (HSUPA), are currently being rolled out. The focus over the last year has been on setting scientifically justifiable targets for the long term evolution of the 3G radio interface and establishing these within the industry. Evolutions to the core network based on ubiquitous use of internet protocols and web services complement this, and are leading to a convergence of internet and mobile technologies. Several internet based or converged services have been prototyped and demonstrated within the Vodafone community. Significant R&D effort has also been dedicated to transferring previous research results in mobile TV to the Groups marketing and technology functions to provide the basis for the Vodafones mobile TV programme. Applications of mobile telecommunications to health and well being, intelligent transport systems and the digital home are also being researched.
Much of the work of the Groups R&D function is done in collaboration with others, both within the Group and externally. Joint R&D facilities have been set up with three major infrastructure suppliers. Infrastructure and handset suppliers work with the Groups R&D function on many of its projects, from providing equipment for trials, through coauthoring research reports, to being a partner in some of the R&D programmes. At the more academic end of the spectrum of applied research, the Groups R&D function continues to develop relationships with a number of universities. These relationships include sponsoring research students, collaboration in European research activities, funding specialised research centres and working with Vodafone funded chairs and readerships. This year, the Groups R&D function hosted an Academic Conference where
it brought together its academic partners to consolidate its academic research programme.
The R&D programme provides the Group with long term technical policy, strategy and leadership, as well as providing technical underpinning for the Groups public policies and government relations, and is shared with all of the Groups mobile operations and common functions. They are able to influence the programme through working relationships that are designed to allow delivery of the results of the programme directly into the business units where they are needed.
The Group expensed £206 million in the 2006 financial year on R&D, compared with £198 million in the 2005 financial year, and capitalised development costs of £10 million (2005: nil). Besides the core R&D outlined above, this expenditure was incurred principally on developing new products and services, billing systems and network development.
Non-mobile Telecommunications
The
Groups non-mobile telecommunications businesses comprise interests in Arcor,
Neuf Cegetel and Bharti Airtel (Bharti), previously named Bharti
Tele-Ventures.
Arcor is the second largest fixed line telecommunications provider in Germany. Based on its own Germany-wide voice and data network, Arcor offers its customers a range of services for voice and data transfer, with a focus on direct access based broadband and internet protocol enabled virtual private network (IP-VPN) products. The Groups ownership interest in Arcor is 73.7% and it is accounted for as a subsidiary.
The merger of Cegetel and Neuf Telecom completed on 22 August 2005, creating the leading alternative operator for fixed telecommunication services in France, offering a wide range of fixed line telephone services to residential and business customers as well as special corporate services ranging from internet and customer relations management to internet and intranet hosting services. The new entity, Neuf Cegetel, has the largest alternative broadband network in France, with 70% population coverage. The Groups indirect ownership interest in Neuf Cegetel is 12.4% and it is accounted for as an associated undertaking. In May 2006, the Groups indirect ownership interest increased to 15.4%.
Bharti is an Indian based mobile fixed line telecommunications operation with three strategic business units: mobility, enterprise services and broadband. The Groups ownership interest in Bharti is 10% and it is accounted for as a joint venture.
History and Development of the Company
The
Company was incorporated under English law on 17 July 1984 as Racal Strategic
Radio Limited (registered number 1833679), as a subsidiary of Racal Electronics
Plc, and changed its name to Racal Telecommunications Group Limited in September
1985. In September 1988, it became Racal Telecom Limited then re-registered as
Racal Telecom Plc, a public limited company. In October 1988, approximately 20%
of the Companys capital was offered to the public. The Company was fully
demerged from Racal Electronics Plc and became an independent company in September
1991, at which time it changed
its name to Vodafone Group Plc.
Between 1991 and 1999, the Group consolidated its position in the United Kingdom and enhanced its international interests through a series of transactions. At 31 March 1999, the Group had subsidiary mobile network operating companies (mobile operating subsidiaries) in six countries (the UK, the Netherlands, Greece, Malta, Australia and New Zealand), as well as equity interests in a further seven countries, and a proportionate mobile customer base of 10.4 million.
The Group completed a number of business transactions between 1999 and 31 March 2003, which transformed the Company into the worlds leading international mobile telecommunications company. The most significant transactions were:
| The merger with AirTouch Communications, Inc. (AirTouch), which completed on 30 June 1999. The Company changed its name to Vodafone AirTouch Plc in June 1999. The combined Group had mobile operating subsidiaries in 10 countries, (adding Sweden, Portugal, Egypt and the US) and equity interests in an additional 12 countries. |
| The acquisition of Mannesmann AG (Mannesmann), which completed on 12 April 2000. Through this transaction the Group acquired subsidiaries in two of Europes most important markets, Germany and Italy, and increased the Groups indirect holding in SFR, a French mobile telecommunications operator. Subsequent to the acquisition, the Group sold a number of non-core businesses acquired as part of the Mannesmann transaction. Following approval by its shareholders at the Annual General Meeting (AGM), the Company reverted to its former name, Vodafone Group Plc, on 28 July 2000. |
Vodafone Group Plc Annual Report 2006 | 19 |
Business Overview
continued
| The combination of the Groups US mobile operations with those of Bell Atlantic Corporation and GTE Corporation to form the Cellco Partnership, which operates under the name Verizon Wireless, on 10 July 2000. The Group owns 45% of Verizon Wireless and accounts for it as an associated undertaking. |
| The acquisition of Airtel Móvil S.A., a mobile network operator in Spain, which became a subsidiary of the Group in December 2000. |
| The acquisition of Eircell Limited, a mobile network operator in Ireland, following a public offer for shares which closed in May 2001. |
| The acquisition of the Groups operations in Japan. The Groups initial investment in Japan resulted from the AirTouch merger and between the date of the merger and October 2001, the Group increased its effective interest in the Japanese mobile telecommunications company, J-Phone Co. Ltd to 69.76% through a number of transactions. The Group also acquired a 66.7% stake in the fixed line operator, Japan Telecom Co., Ltd (Japan Telecom). |
By 31 March 2003, the Group controlled mobile operations in 16 countries and held equity investments in mobile operations in a further 12 countries. The proportionate mobile customer base was 119.7 million at that date.
Transactions since 31 March 2003
Acquisitions
Subsidiary undertakings
Turkey
On
13 December 2005, the Group announced it had agreed to acquire substantially
all the assets and
business of Telsim Mobil Telekomunikasyon (Telsim) from the Turkish
Savings Deposit and Investment Fund. The transaction was completed on 24 May 2006, with cash paid of $4.67 billion (£2.6
billion). Telsim was consolidated as a subsidiary undertaking from that date.
Czech Republic and Romania
On 31 May 2005, the Company announced that its wholly owned subsidiary, Vodafone International Holdings B.V., had completed a transaction with Telesystem International Wireless Inc.
of Canada to acquire:
| 79.0% of the share capital of MobiFon S.A. (MobiFon) in Romania, increasing the Groups ownership in MobiFon to approximately 99.1%; and, |
| 99.9% of the share capital of Oskar Mobil a.s. (Oskar) in the Czech Republic |
for cash consideration of approximately $3.5 billion (£1.9 billion) which was funded from the Groups cash resources. In addition, the Group assumed approximately $1.0 billion (£0.6 billion) of net debt. The remaining 0.9% of MobiFon was acquired in a separate transaction in the 2006 financial year.
On 1 February 2006, Oskar was renamed Vodafone Czech Republic.
Egypt
On
16 May 2003, the Group increased its shareholding in Vodafone Egypt from 60.0%
to 67.0%. Subsequently,
the Group has reduced its effective interest in Vodafone Egypt to 50.1%. Further
details are provided in Performance Financial Position and Resources Option
agreements and similar arrangements on
page 42.
Greece
On
1 December 2003, following the purchase of a 9.433% stake in Vodafone Greece
from Intracom S.A.,
the Group announced a public offer for all remaining shares not held by the Group.
As a result of the offer and subsequent market purchases, the Group increased
its effective interest in Vodafone Greece to 99.4% at 31 March 2004. The total
aggregate cash consideration paid in the 2004 financial year was £815 million.
Vodafone Greeces shares were delisted from the Athens and London Stock Exchanges on 15 July 2004 and 20 August 2004 respectively.
Between 24 January 2005 and 31 March 2005, the Group acquired a further 0.4% interest in Vodafone Greece through private transactions at a price equal to the price paid in the public offer.
Hungary
On
10 June 2003, the Group increased its stake in Vodafone Hungary to 87.9% by subscribing
for Antennas share of an issue of C shares.
In the first half of the 2005 financial year, the Group subscribed for HUF 89,301 million (£248 million) shares in Vodafone Hungary, increasing the Groups stake to 92.8%. On 24 September 2004, the Group entered into a sale and purchase agreement to acquire the remaining 7.2% shareholding from Antenna. This transaction completed on 12 January 2005 with the effect that Vodafone Hungary became a wholly owned subsidiary of the Group.
Japan
During
the 2004 financial year, the Group sold its interest in Japan Telecom, as described
under Disposals.
In addition, J-Phone Co., Ltd was renamed Vodafone K.K. on 1 October 2003 and
Japan Telecom Holdings Co., Ltd. was renamed Vodafone Holdings K.K. on
10 December 2003.
On 25 May 2004, the Groups wholly owned subsidiary, Vodafone International Holdings B.V., announced offers for the shares not held by the Group in Vodafone Holdings K.K. and Vodafone K.K. As a result of these offers, the Group increased its effective shareholding in Vodafone K.K. to 98.2% and its stake in Vodafone Holdings K.K. to 96.1% for a total consideration of £2.4 billion. On 1 October 2004, the merger of Vodafone K.K. and Vodafone Holdings K.K. was completed and the Group held a 97.7% stake in the merged company, which was renamed Vodafone K.K. Subsequently, on 1 August 2005, shares in Vodafone K.K. were delisted from the Tokyo Stock Exchange.
Vodafone K.K was subsequently sold on 27 April 2006. Further details are provided in the section on Disposals below.
Malta
On
1 August 2003, the Group increased its shareholding in Vodafone Malta from 80%
to 100% by purchasing
Maltacom Plcs 20% interest in Vodafone Malta for cash consideration of €30 million.
The Netherlands
During
the 2004 financial year, the Group increased its effective interest in Vodafone
Netherlands to 99.9%
as a result of private transactions. The Group has exercised its rights under
Dutch law and initiated compulsory acquisition procedures in order to acquire
the remaining shares. Following these procedures, Vodafone Netherlands will become
a wholly owned subsidiary of the Group. Vodafone Netherlands shares have
been de-listed from the Euronext Amsterdam Stock Exchange.
Portugal
Having
achieved an effective interest of greater than 90% at the start of the 2004 financial
year,
the Group implemented compulsory acquisition procedures to acquire the remaining
shares, which became effective on 21 May 2003, for a further consideration of £74
million. As a result, Vodafone Portugal became a wholly owned subsidiary of the
Group.
Sweden
Under compulsory acquisition procedures, on 15 March 2004, Vodafone Holdings Sweden AB obtained advanced access to an aggregate of 2,377,774 shares in Vodafone Sweden, giving the
Group ownership of, and title, to these shares.
On 31 March 2004, the Group increased its effective interest in Vodafone Sweden to 100% by the purchase of 1,320,000 shares which were held in treasury by Vodafone Sweden.
Vodafone Sweden was subsequently sold on 5 January 2006. Further details are given on page 115.
UK
On
22 September 2003, the Group acquired 100% of Singlepoint (4U) Limited for a
consideration of £417 million. In addition, as a result of a recommended cash offer announced on
5 August 2003, the Group acquired 98.92% of Project Telecom plc, after the offer was declared unconditional on 19 September 2003, and subsequently acquired the remaining 1.08% in November 2003, for a total consideration of £164 million. These
businesses have been integrated into the Groups UK operations.
Joint ventures
India
On
18 November 2005, the Group acquired a 5.61% direct interest in Bharti from Warburg
Pincus LLC
and, on 22 December 2005, the Group acquired a further 4.39% effective shareholding
in Bharti by subscribing for convertible debentures in Bharti Enterprises Private
Limited, bringing the Groups effective shareholding in Bharti to 10.0%. Bharti is a national mobile operator in India which also provides fixed-line services.
The total consideration paid for these transactions was Rs. 67 billion (£858
million).
South Africa
On
26 January 2006, the Group announced that its offer to acquire a 100% interest
in VenFin Limited
(VenFin) had become wholly unconditional. VenFins principal asset
was a 15% stake in Vodacom Group (Pty) Limited (Vodacom) and VenFin has disposed of substantially all of its assets other than its stake in Vodacom for a cash consideration of R5 billion (£0.5
billion) to a new company owned by certain of the former shareholders in VenFin.
At 31 March 2006, the Group held an effective economic interest in VenFin of
98.7% and an effective voting interest of 99.3%. On 20 April 2006, the Group
completed the compulsory acquisition of the
remaining minority shareholdings in VenFin, from which date the Group holds 100%
of the issued share capital of VenFin. As a result the Group holds 50% of the
share capital of Vodacom.
20 | Vodafone Group Plc Annual Report 2006 |
Business | |
Associates
SFR and Cegetel
In
December 2003, in order to optimise cash flows between Cegetel Group and its
shareholders, SFR
was merged into Cegetel Group and this company was renamed SFR. The fixed line
businesses, Cegetel S.A. and Télécom Développement, previously controlled by SNCF, were merged to form Cegetel S.A.S. (Cegetel), a company in which SFR had a 65% stake, giving the Group an effective interest of 28.5%
at that date. The Groups interest in SFR remained at approximately 43.9%
as a result of this reorganisation.
On 11 May 2005, SFR announced an agreement to merge its fixed line business, Cegetel, with Neuf Telecom, subject to competition and regulatory authority and employee council approvals which were received, and the transaction completed, on 22 August 2005. Under the agreement, SFR purchased SNCFs 35% minority interest in Cegetel, according to a pre-existing contract, and then contributed 100% of the capital of Cegetel to Neuf Telecom. In return, SFR received a 28% interest in the combined entity, Neuf Cegetel, together with a €380 million bond to be issued by Neuf Cegetel, bringing the Groups effective shareholding in Neuf Cegetel to 12.4%.
Disposals
During the three year period ended on 31 March 2006, the Group has also disposed of interests in a number of Group companies.
Japan
On
14 November 2003, Vodafone Holdings K.K. completed the disposal of its 100% interest
in Japan Telecom.
The Group ceased consolidating the results of Japan Telecom from 1 October 2003.
Receipts resulting from this transaction were ¥257.9 billion (£1.4 billion), comprising ¥178.9 billion (£1.0 billion) of cash, ¥32.5 billion (£0.2 billion) of transferable redeemable preferred equity and ¥46.5
billion (£0.2 billion) recoverable withholding tax, which was received during the 2005 financial year. In October 2004, the preferred equity was sold to the original purchaser for ¥33.9 billion (£0.2
billion).
On 17 March 2006, the Group announced an agreement to sell its 97.7% holding in Vodafone Japan to SoftBank. The transaction completed on 27 April 2006 for cash consideration of approximately ¥1.42 trillion (£6.9 billion) including the repayment of intercompany debt of ¥0.16 trillion (£0.8 billion). In addition, the Group received non-cash consideration with a fair value of approximately ¥0.23 trillion (£1.1 billion), comprised of preferred equity and a subordinated loan. SoftBank also assumed debt of ¥0.13 trillion (£0.6 billion).
Sweden
On
5 January 2006, the Group completed the disposal of its 100% interest in Vodafone
Sweden to Telenor
Mobile Holding AS (Telenor). Net cash proceeds after assumption of
net debt by Telenor were €970
million (£678 million).
Other disposals
During the 2004 financial year, the Group disposed of its interests in its associated undertakings in Mexico, Grupo Iusacell, and India, RPG Cellular.
On 26 January 2005, the Group completed the disposal of a 16.9% stake in Vodafone Egypt to Telecom Egypt, reducing the Groups effective interest to 50.1%.
Regulation
Introduction
The Groups operating companies are generally subject to regulation governing the operation of their business activities. Such regulation typically takes the form of industry
specific law and regulation covering telecommunications services and general competition (anti-trust) law applicable to all activities. Some regulation implements commitments made by Governments under the Basic Telecommunications Accord of the World
Trade Organisation to facilitate market entry and establish regulatory frameworks. The following section describes the regulatory framework and the key regulatory developments in the EU and selected countries in which the Group has significant
interests. Many of the regulatory developments reported in the following section involve ongoing proceedings or consideration of potential proceedings that have not reached a conclusion. Accordingly, the Group is unable to attach a specific level of
financial risk to the Groups performance from such matters.
European Union
Although
most Member States of the EU (Member States) have now implemented the EU Regulatory Framework for the communications sector (the EU Framework),
which was adopted in 2002, there remain both ongoing and new infringement proceedings
against a number of Member States for late or inadequate implementation.
The EU Framework consists of four principal Directives outlining matters such as the objectives to be pursued by national regulatory authorities (NRAs), the way in which telecommunications operators are to be licensed, measures to be taken to protect consumers and ensure universal provision of certain telecommunications services and the terms and basis upon which operators interconnect and provide access to each other.
The EU Framework introduces a number of important changes to the previous framework. It is intended to align the techniques for defining where sector specific regulation may be applied and the threshold for when such regulation can be applied with those already employed in EU competition law. It is also intended to ensure greater consistency of approach amongst NRAs within the Member States. All NRAs are required to take utmost account of the list of markets which are specified by the European Commission (the Commission) in a Recommendation when deciding which markets to investigate. The first such Recommendation was published by the Commission in February 2003 and includes markets at a wholesale level, for voice call termination on individual mobile networks (the call termination market), the wholesale national market for international roaming (the roaming market) and the wholesale market for access and call origination (the access market) on public mobile networks (together the relevant markets). NRAs may, with the Commissions consent, also propose markets not included in the Recommendation. The Commission will periodically review the Recommendation and the Commission has said it expects to complete the first such review by the end of 2006. This review may lead to an increase or a decrease in the number and scope of markets subject to sector specific regulation. Changes to the Recommendation are expected to become effective at the conclusion of the review,
while any changes to the framework would become effective following their transposition into national law, from approximately 2010 onwards. So far, the Commission has signalled that only minor changes to the regulatory framework will be considered. Whether the reviewed regulatory framework will increase or decrease the regulatory burden on the Group will depend on the changes being adopted by the EU, the manner in which revised directives are subsequently implemented in Member States and how the revised regulatory framework will be applied by the respective NRAs.
Regulation, under the EU Framework, can only be applied to undertakings with significant market power (SMP) (either individually or collectively) in the relevant markets, subject to the Commissions consent. SMP under the EU Framework accords with the concept of dominance under existing EU competition law. This generally implies a market share of at least 40%, although other factors may also be taken into consideration. The SMP threshold under the previous framework required only a 25% share of the relevant market. The Commission published SMP Guidelines in July 2002, which set out principles for use by NRAs in the analysis of markets to determine if undertakings have SMP under the EU Framework.
Spectrum
In September 2005, the Commission published proposals for spectrum reform across the EU, including proposals to allow holders of spectrum greater flexibility on the use to which it is
put, to allow holders to trade spectrum within a spectrum market and to improve harmonisation of certain bands. The Commission has proposed that these reforms be enacted by 2010 and has commenced a number of actions to pursue its proposals,
principally through the work of the Radio Spectrum Policy Group, a spectrum policy working group comprising the Commission and Member States.
Data retention
In 2005, the
European Parliament passed a new Directive on the retention of electronic communications
data for law enforcement purposes. Member States must now proceed with national
implementation. The Directive sets out the data that network operators and service
providers must store and, if requested, make available to law enforcement authorities
for the purpose of the prevention, investigation, detection and prosecution of
serious criminal offences. The initial investment and recurring annual operating costs to the Group of this data retention requirement may be material. It depends on how it is implemented nationally and the extent to which the total of such costs
are compensated.
International Roaming
In February
2006, the Commission announced that it is proposing to enact new legislation
by way of a regulation under Article 95 of the EU Treaty (which would have immediate
effect) to reduce what it considers to be excessive prices charged by mobile
network operators for international roaming services. The Commission has concluded
its consultation on proposals for a regulation which it proposed would include
both retail price regulation aimed at ensuring that the costs of calls when roaming
are no more than equivalent domestic calls and the regulation of wholesale prices
charged between mobile operators for roaming services.
Vodafone Group Plc Annual Report 2006 | 21 |
Regulation
continued
On 12 June 2006, the Commission announced that it had ‘fine tuned’ its proposals so as to set the maximum wholesale roaming charge for a local call (within the visited country) at twice the average EU mobile termination rate and that the price of international calls (from the visited country) will be set at three times the mobile termination rate. Retail prices would be capped at wholesale rates plus an allowance for retail costs of 20-30%. These proposals are now subject to consultation within the European Commission before being presented for consideration by the European Parliament and Member States, expected in July. The Commission expects the regulation to become law during 2007. In July 2005, the Commission, supported by the European Regulation Group (ERG), a body established under the EU Framework and comprising all EU NRAs, also called for greater transparency of roaming tariffs and in October 2005 launched a website to inform the public about roaming tariffs within the EU. The website was updated in March 2006.
Anti-trust proceedings in relation to international roaming continue. In July 2004, the Commission issued a statement of objections, a document detailing its proposed findings, following its investigation into the UK market for wholesale international roaming and, in January 2005, the Commission issued a statement of objections following its investigation of the German market. In both cases, the statement of objections was addressed to both the national mobile operating subsidiaries and to the Company and, in both cases, Vodafone has responded both in writing and in oral proceedings.
The Commissions proposed findings are that Vodafone has monopoly power over its wholesale customers in both the UK and Germany. Vodafone UK and Vodafone Germany are alleged to have engaged in excessive or unfair pricing. The Commission alleges that the abuse occurred from 1997 to at least September 2003 in the UK and from 2000 to December 2003 in Germany. In the event the Commission finds that there has been a breach of competition law, it may impose a fine on any addressee who had committed the breach.
Separately, the roaming market is one of the relevant markets in the Recommendation. In May 2005, the ERG adopted a common position on international roaming and several NRAs have since then commenced their reviews of the roaming market but no NRA has proposed any regulation in this market. NRAs in Finland and Italy have concluded their market analysis and found no operator to have SMP. The French regulator has concluded that no operator has SMP in the traditional sense but has proposed an extended definition of joint SMP which, if approved, could lead to a finding that all three French operators are jointly dominant. In addition, it has asked the Commission to take action using instruments outside of the existing Framework.
Germany
Germany enacted
a law implementing the EU Framework in June 2004. Vodafone Germany agreed to
and subsequently reduced its mobile call termination rate with Deutsche Telekom
for
incoming calls from Deutsche Telekoms network in December 2004 from14.32
eurocents to 13.2 eurocents and in December 2005 to 11.0 eurocents. The NRA has
found all mobile network operators to have SMP in the call termination market
and has announced that it will now propose ex-ante price regulation in the absence
of agreement to further reductions amongst the mobile network operators.
In February 2004, the NRA decided to award licences for 450MHz spectrum for the provision of public access mobile radio services. Vodafone Germany is appealing this decision.
The NRA has concluded that it will seek to harmonise the expiry of all 2G licences in 2016 and it will extend the terms of all licences ceasing prior to this date, including the licence held by Vodafone subject to agreement on fees. The NRA has also decided to award certain 900MHz frequencies to O2 and EPlus. The NRA is now developing proposals to license new spectrum at 2.6 GHz, often referred to as the 3G extension band, and is considering the auction of unused 3G spectrum at 2 GHz at the same time.
Italy
Italy enacted national law implementing the EU Framework in September 2003.
The NRA has concluded that all mobile network operators have SMP in the call termination market and has imposed obligations on Vodafone Italy of cost orientation, non-discrimination and transparency. In September 2005, Vodafone Italy reduced its rates by 19% from 14.95 eurocents to 12.10 eurocents. The NRA foresees further reductions to 11.20 eurocents from 1 July 2006 and by 13% below the retail prices index on both 1 July 2007 and 1 July 2008. Vodafone Italy has appealed the NRAs decision.
The NRA concluded its review of the access market in February 2006 and found that no operator had SMP but has said it will keep the market under review.
In March 2005, the National Competition Authority (NCA) in Italy conducted unannounced inspections of the offices of mobile network operators in Italy, including Vodafone Italy, seeking evidence of collusion following complaints by resellers and potential MVNOs about alleged anti-competitive conduct. In November 2005, Vodafone Italy received a further request for information from the NCA. In February 2006, the NCA decided to prolong the duration of the proceeding until December 2006. If the NCA were to decide that there had been a breach of competition law, it would be able to impose a fine on any operator who had committed the breach.
In March 2006, the NRA published for consultation the draft analysis of the roaming market and found no operator to have SMP.
Spain
Legislation implementing the EU Framework was enacted in November 2003, and the main sections of secondary legislation were approved during 2004 and 2005.
In September 2005, the NRA announced a 10.57% reduction in Vodafones mobile termination rates, which was implemented by Vodafone Spain in November 2005. On 23 February 2006, the Spanish NRA found all mobile network operators to have SMP in the call termination market and imposed obligations including non-discrimination, cost orientation and accounting separation on Vodafone Spain. A further reduction in rates is expected on 1 September 2006.
In February 2006, the NRA found that the three mobile network operators held a position of joint SMP in the access markets. This decision was reviewed by the European Commission and the NRA allowed to proceed. The NRA has decided to impose a wholesale network access obligation at reasonable prices facilitating the entry of firms including MVNOs. Vodafone has appealed the decision of the NRA to find Vodafone as holding SMP in the Spanish courts and has appealed the decision of the European Commission to allow the NRA to proceed to the Court of First Instance at Luxembourg.
United Kingdom
The new Communications Act, implementing the EU Framework, was enacted in July 2003.
The NRA conducted and concluded its review of the access market and found that no operator had SMP. The NRA found that all mobile network operators have SMP in the call termination market and required Vodafone UK to reduce its termination charge for calls conveyed over the 2G network, with effect from September 2004, to a target average charge of 5.6 pence per minute. In December 2005, the NRA decided to maintain this price control until 31 March 2007. The NRA has now embarked upon consultation on proposals to regulate the call termination market in respect of calls conveyed over both 2G and 3G networks from April 2007.
The NRA has proposed that 2G mobile frequencies will be tradable in 2007. The NRA is assessing whether holders of 2G spectrum can use it to provide 3G services. The NRA is also consulting on a specific proposal to liberalise spectrum usage rights more generally.
United States
The Federal
Communications Commission (FCC), the United States NRA, commenced
a Notice of Inquiry in 2004 into the level of termination rates charged by
foreign mobile network operators to US international operators. The FCC sought
inputs on the status of foreign mobile termination rates, including actions
taken to date by foreign regulators to address the issue. This proceeding remains
pending.
The NRA plans to award spectrum via auction in the 1.7 and 2.1 GHz bands beginning in June 2006.
Other Mobile Operations
Subsidiaries
Albania
In
March 2006, the NRA issued for consultation to the operators its analysis
of the mobile market
in Albania, where the NRA proposed to designate the mobile networks operators
including Vodafone Albania as having SMP in two markets: the call termination
market and the market of mobile services to end users. As a result,
the NRA proposes obligations of transparency, non-discrimination and access
obligations. The NRA may also impose retail price controls.
Vodafone Albania has submitted its comments and objections on the NRAs market analysis. In addition, Vodafone Albania has been notified by the NCA of an investigation into alleged excessive pricing of mobile services. In May 2006, a Parliamentary Investigation Commission was established to investigate the two mobile operators and to prepare recommendations for liberalisation of the market.
Australia
The
NCA released its final decision on the regulation of mobile termination in June
2004. In its review,
it proposed that all mobile network operators have market power with respect
to mobile termination and proposed a pricing principle that requires mobile call
termination rates to fall from 21 Australian cents per minute to 12 Australian
cents per minute. Vodafone Australias appeal of this decision was rejected. In
addition, Vodafone Australia lodged an access undertaking proposing
alternative rates, which the NCA has rejected. Vodafone Australia is now appealing
that decision. The NCA has also received various requests for adjudication of
disputes between Vodafone Australia and certain other operators, the results
of which will apply from the date the dispute was lodged with the NCA.
22 | Vodafone Group Plc Annual Report 2006 |
Business | |
Czech Republic
In
February 2005, Vodafone Czech Republic was awarded a 3G licence. There have been
one or more complaints that the award may have breached EU competition law and
the Commission is
investigating the award process.
In May 2005, a new law implementing the EU Framework came into effect. Mobile number portability was implemented in January 2006.
Egypt
Egypt
enacted a new telecommunications law in 2003, which gave new powers to the NRA
and imposed new obligations on licensees, including obligations in relation to
universal service provision. During 2004, Vodafone Egypt finalised an agreement
with the NRA that covered most of these new obligations while obtaining additional
spectrum in the 1800MHz range to facilitate business expansion.
In February 2005, the NRA announced proposals to award a third mobile licence. The licence will be technology neutral and enable both 2G and 3G services. The licence is expected to be awarded by September 2006. The NRA is planning to negotiate the award of 3G licences to the two existing mobile network operators by September 2006. Mobile number portability and national roaming are expected to be implemented in Egypt by April 2007.
Greece
Greece
enacted national law implementing the EU Framework in February 2006. Vodafone
Greece agreed to reduce its mobile termination rate from approximately 17.0 eurocents
to 14.5 eurocents per minute on 1 October 2004. The NRA has found all firms to
have SMP in the call termination market and has developed a Long Run Incremental
Cost
model (LRIC model) to determine cost oriented mobile call termination
rates. Vodafone Greece will reduce its rate to 12.0 eurocents on 1 June 2006
and further reductions to approximately 10.0 eurocents will be made in one or
more steps prior to 1 June 2007.
In August 2005, each of the mobile network operators was fined €500,000 for failing to implement mobile number portability.
In March 2006, the three largest mobile network operators were found by the NRA to have colluded in the setting of retail SMS prices and were fined €1 million each. Vodafone Greece has filed an administrative appeal.
In April 2005, the Council of State issued a judgement that base stations erected by mobile operators prior to August 2002 did not meet legal requirements. The new law seeks to remedy this but also prohibits the installation of base stations in schools and hospitals and decreases EMF exposure limits.
In March 2005, Vodafone Greece was made aware of a security issue in its network. Software foreign to the network, and capable of performing interception, had been installed in the network without Vodafones knowledge. The software was created, supported and maintained by an external supplier. The foreign software was removed without delay and the Greek authorities promptly informed. The authorities conducted investigations and subsequently made the matter public in February 2006. Since then, further investigations have taken place and continue. Vodafone Greece is co-operating with the Greek authorities.
Hungary
Hungary
implemented the EU Framework in January 2004 as part of its preparations for
joining the EU on 1 May 2004. In its review of the call termination market, the
NRA has proposed that all mobile network operators have SMP and has imposed obligations
of cost orientation, non-discrimination, accounting separation and transparency.
Vodafone Hungary has appealed this finding. In May 2005, Vodafone Hungary complied
with a requirement to reduce its call termination rates by 16%. Vodafone Hungary
has appealed the decision. In its review of the access market the NRA found that
no mobile network operator had SMP.
Ireland
Regulations
implementing the EU Framework were adopted in June 2003. In December
2005,
an appeal
court annulled the NRAs finding that Vodafone and O2 have joint SMP
in
the access market.
In its review of the call termination market, the NRA has found that all mobile network operators have SMP. The NRA has imposed obligations of cost orientation and non-discrimination on all operators and accounting separation and transparency on Vodafone and O2. The NRA is also considering the use of price controls. Vodafone Ireland has agreed to reduce its rates by 11% below the retail price index per annum for the 24 months commencing January 2006.
In February 2006, the NRA withdrew a 3G licence it had awarded to Smart Telecom in November 2005. Smart Telecom is appealing this decision.
Malta
Legislation
implementing the EU Framework in Malta was enacted during 2004. In the call termination
market, the NRA has found both mobile network operators as having SMP and has
imposed obligations on Vodafone Malta of cost orientation, non-discrimination,
accounting separation and transparency. Vodafone Malta reduced its mobile termination
rates by 5% from 11.5 eurocents per minute to 10.9 eurocents per minute in January
2006. The NRA is consulting on proposals to find Vodafone and Go Mobile, the
two Maltese mobile network operators, as having joint SMP in the access market,
with obligations to offer cost based access to MVNOs and indirect access to other
parties.
Vodafone Malta and Go Mobile were awarded 3G licences in August 2005. The third 3G licence remains unassigned. In October 2005, Vodafone Malta was awarded a Broadband Wireless Access frequency licence to operate a nationwide network.
Number portability was implemented on 31 March 2006.
The Netherlands
The
Netherlands implemented the EU Framework during 2004. In December 2003, mobile
network operators reached agreement with the NRA and the NCA to reduce mobile
call termination rates on 1 December 2004 from 15.4 eurocents per minute to 13.0
eurocents per minute, and on 1 December 2005 to 11.0 eurocents per minute. In
addition, the NRA has finalised its review of the call termination market and
has found that all operators have SMP and proposes remedies of cost orientation,
non-discrimination and transparency.
In its review of the access market, the NRA found that no mobile network operator had SMP.
The Government is consulting on the extension or renewal of the existing 2G 900 MHz licences which expire in 2010.
New Zealand
The
NRA released a report proposing regulation of mobile termination rates, including
a rate reduction of 44% from 27 New Zealand cents per minute to 15 New Zealand
cents per minute and reducing further to 12 New Zealand cents per minute by 2010/2011.
These proposals were submitted to the Minister for approval, who has requested
the NRA to reconsider them. The NRA has done so and published a further position
in which its key findings remain essentially unchanged. These will now be resubmitted
to the Minister.
The NRA is also reviewing regulation of national roaming and co-location and disputes submitted by Vodafone in relation to certain local interconnection services. It has also recently announced a review to determine whether further regulation or changes to existing regulation are necessary to promote competition in the mobile services market.
The NRA has approved industry plans for the introduction of mobile number portability and has set a date of April 2007 for its introduction.
The government is in the process of determining the price for renewal of 2G licences which expire in 2011.
Portugal
Portugal
enacted national law implementing the EU Framework in February 2004. Following
its review of the call termination market, the NRA found all three mobile network
operators as having SMP and it has imposed obligations on Vodafone Portugal including
cost orientation, non-discrimination, accounting separation and transparency.
Vodafone Portugal reduced its mobile termination rates in July 2005 to 13.0 eurocents
per minute
and in January 2006 to 12.5 eurocents per minute.
Vodafone Portugal has requested the renewal of its 2G licence, which is due to expire in October 2006, and the Government has proposed terms which remain largely unchanged from those which already apply to the licence.
Romania
In
March 2003, the
NRA determined MobiFon, the Groups subsidiary in Romania, as having SMP
in the national interconnection market so, under national law, MobiFons
mobile termination rates were reduced from 12.0 US cents to 10.0 US cents. In
March 2005, the NRA granted a 3G licence to MobiFon.
Number portability will be implemented in Romania during the 2007 financial year, with the obligation for all mobile and fixed operators to provide number portability to customers no later than June 2007.
Vodafone Group Plc Annual Report 2006 | 23 |
Regulation
continued
Joint ventures
Fiji
Vodafone
Fiji has been required to make wholesale and retail price reductions of between
from 15% to 70% for a range of services. In December 2005, Vodafone Fiji issued
proceedings to prevent the government from issuing a second licence in breach
of Vodafones
exclusivity rights.
India
From
1 March 2006, a new Interconnection Usage Charge regulation became effective.
Interconnection charges remained at Rs.0.30 per minute. However, changes were
made to reduce by 33% the total access deficit charge paid by operators to BSNL.
It is proposed that the charge be removed by the 2008 financial year.
In March 2006, the NRA recommended to the Department of Telecommunications that mobile number portability should be implemented by 1 April 2007.
In November 2005, the government announced a lifting of the foreign direct investment ceiling from 49% to 74% in the telecom sector, subject to certain preconditions. The deadline for compliance is 2 July 2006.
The Department of Telecommunications is expected to issue a new national spectrum policy before the end of 2006. The new policy is expected to include plans for allocation of 3G spectrum.
Kenya
In
March 2006, the Kenyan Government issued a new Information and Communications
Bill for public comment. The new legislation will replace the Communication Act
1998, and is expected
to be finalised before the end of 2006.
In April 2006, the NRA commenced a review of interconnection and retail prices, which may result in new interconnection and retail price regulations.
Safaricom, Vodafones joint venture, has been given until December 2006 to relinquish 2.5MHz of paired 900 MHz spectrum in return for the allocation of 1800MHz spectrum. It is proposed that the relinquished 900 MHz spectrum will be given to a new third mobile licensee. In September 2005, Safaricom filed an application for permanent 3G spectrum.
Poland
Legislation
implementing the EU Framework in Poland, which joined the EU on 1 May 2004, was
enacted during 2004 and the Polish NRA has commenced its market reviews. The
NRA, in its review of the call termination market, proposes to find all mobile
network operators to have SMP and to impose obligations of cost orientation,
transparency and non-discrimination.
The NRA awarded a fourth 3G licence in 2005, which Polkomtel is appealing. In November 2005, the President of the NRA initiated the process to issue a new 2G licence. In January 2006, three companies submitted offers which are now under consideration.
Mobile number portability for contract customers was implemented by the mobile network operators in January 2006.
South Africa
A
new Electronic Communications Bill was adopted by Parliament in November 2005,
and is awaiting signature of the President. The new Bill will replace current
telecommunications and
broadcasting legislation.
An Information Communication Technologies Black Economic Empowerment Charter (the Charter) is expected to be finalised in 2006. The Charter will set targets to evaluate a companys contribution to Broad-Based Black Economic Empowerment, which is the Government policy to increase economic empowerment of historically disadvantaged individuals in South Africa. Targets will be set in terms of equity ownership, management and control, employment, skills development, procurement, enterprise development and corporate social investment.
In May 2005, the NRA commenced an investigation to assess whether Vodacom, the Groups joint venture in South Africa, has major operator status, which is similar to SMP, in the interconnection market. Vodacom has challenged the grounds for this investigation in court, with a hearing expected before the end of 2006.
In 2005, the NRA commenced investigations on mobile pricing and handset subsidies. Separately, in May 2005, the NCA commenced an investigation into alleged excessive pricing of mobile termination rates. These investigations remain ongoing. Vodafone has been notified of the commencement of judicial review proceedings of the decision under competition law approving its acquisition of VenFin.
Associated undertakings and investments
Belgium
Belgium
implemented the EU Framework during 2005. The NRA has commenced its market reviews
and in the call termination market proposes to find all operators as having SMP
and has commenced a process to develop a LRIC model to set rates. The proposals
include decreases of mobile termination rates of each firm by around 12% every
six months from July 2006 to July 2008, and confirms the existing degree of asymmetric
termination
rates between the three network mobile operators.
The NRA held an initial consultation on the renewal of Vodafones associated undertaking, Proximus, 2G licence which expires in 2010.
In January 2006, the NCA conducted unannounced inspections of the offices of Proximus seeking evidence of anti-competitive behaviour in relation to the market for corporate customers following a complaint by a competitor. These enquiries are continuing. If the NCA decides that there had been a breach of competition law, it would be able to impose a fine on any operator who had committed the breach.
China
The
Chinese Government is expected to award 3G licences in 2006 and to implement
related changes to its telecommunications regulatory framework.
France
France
implemented the EU Framework during 2004. In its review of the call termination
market, the NRA concluded that all mobile network operators have SMP and imposed
obligations of cost orientation, non-discrimination, accounting separation and
transparency.
It set a price cap for Vodafones associated undertaking, SFR, of 9.5 eurocents
per minute from 1 January 2006. During 2006, the NRA commenced work on a new
price cap
for the period from 1 January 2007.
In December 2003, a French consumers association lodged a complaint with the NCA alleging collusion amongst the three French mobile operators on SMS retail pricing. The NCA is still investigating this complaint. Independently, the NRA has commenced a review of SMS termination and is consulting on proposals for wholesale price regulation and the notification of a wholesale SMS market to the Commission under the EU Framework. If it proceeds, the French NRA would be the first to do so in Europe. In its consultation, the NRA proposes a price cap for wholesale termination of no greater than 2.5 eurocents per minute. In addition, following two complaints against SFR and Orange France, the NRA ordered Bouygues and SFR, and Bouygues and Orange, respectively, to reduce their symmetric wholesale SMS termination rates to 4.3 eurocents per message with effect from 1 July 2005.
In December 2005, the NCA decided that SFR and the other mobile network operators had contravened competition law during the period from 1997 to 2003 by sharing information and during the period from 2000 to 2002 by entering into an agreement aimed at stabilising the development of market shares. SFR has been fined €220 million. SFR has appealed against this decision.
Following the NRAs review of the access market, the NRA proposed that all three mobile network operators, including SFR, had joint SMP in the market and it proposed access obligations as a remedy. The proposals were notified to the Commission in April 2005 but the NRA has subsequently withdrawn its proposals.
Switzerland
In
April 2005, the
Swiss NCA issued proposals finding that Swisscom Mobile, Vodafones associated
undertaking, had abused a dominant position in the call termination market. In
April 2006, the NCA announced that it intends to fine Swisscom Mobile CHF489
million (£216 million). Additional interconnection disputes between Swisscom
Mobile and its
mobile competitors are pending.
In July 2005, the Swiss NCA started a preliminary investigation concerning access to mobile networks. At the end of November 2005, the Swiss NRA commenced a process to award three licences for broadband wireless access and Swisscom Mobile is participating in an auction which will take place in the summer of 2006.
24 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Introduction
The
following discussion is based on the Consolidated Financial Statements included
elsewhere in this Annual Report.
On 19 July 2002, the European Parliament adopted Regulation No. 1606/2002 requiring listed companies in the Member States of the European Union to prepare their Consolidated Financial Statements in accordance with IFRS from 2005. This is the first time the Companys Annual Report has been prepared under IFRS. Consequently, financial information for the year ended 31 March 2005, presented as comparative figures in this report, has been restated from UK GAAP in accordance with IFRS, as disclosed in note 40 to the Consolidated Financial Statements.
The Consolidated Financial Statements, which are prepared in accordance with IFRS, differ in certain significant respects from US GAAP. Reconciliations of the material differences in the IFRS Consolidated Financial Statements to US GAAP are disclosed in note 38 to the Consolidated Financial Statements, US GAAP information.
The Group faces a number of significant risks that may impact on its future performance and activities. Please see Risk Factors, Trends and Outlook.
Foreign Currency Translation
The
Company publishes its Consolidated Financial Statements in pounds sterling. However,
the majority
of the Companys subsidiaries, joint ventures and associated undertakings
report their revenue, costs, assets and liabilities in currencies other than
pounds sterling and the Company translates the revenue, costs, assets and liabilities
of those subsidiaries, joint ventures and associated undertakings into pounds
sterling when preparing its Consolidated Financial Statements. Consequently,
fluctuations in the value of pounds sterling versus other currencies could materially
affect the amount of these items in the Consolidated Financial Statements, even
if their
value
has not changed in their original currency.
The following table sets out the pounds sterling exchange rates of the other principal currencies of the Group, being: euros, € or eurocents, the currency of the EU Member States which have adopted the euro as their currency, and US dollars, $, cents or ¢, the currency of the United States.
At / year ended 31 March | Change | |||||
Currency (=£1) | 2006 | 2005 | % | |||
Average: | ||||||
Euro | 1.47 | 1.47 | | |||
US dollar | 1.79 | 1.84 | (2.7 | ) | ||
At 31 March: | ||||||
Euro | 1.43 | 1.46 | (2.1 | ) | ||
US dollar | 1.74 | 1.89 | (7.9 | ) | ||
Merely for convenience, this Annual Report contains translations of certain pounds sterling amounts into US dollars at specified rates. These translations should not be construed as representations that the pounds sterling amounts actually represent such US dollar amounts or could be converted into US dollars at the rate indicated or at any other rate. Unless otherwise indicated, the translations of pounds sterling into US dollars have been made at $1.7393: £1.00, the Noon Buying Rate in the City of New York for cable transfers in sterling amounts as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) on 31 March 2006. The Noon Buying Rate on 26 May 2006 was $1.8566: £1.00.
The following table sets out, for the periods and dates indicated, the period end, average, high and low Noon Buying Rates for pounds sterling expressed in US dollars: £1.00, to two decimal places.
Years ended 31 March | Period end | Average | High | Low | ||||
2002 | 1.42 | 1.43 | 1.48 | 1.37 | ||||
2003 | 1.58 | 1.54 | 1.65 | 1.43 | ||||
2004 | 1.84 | 1.69 | 1.90 | 1.55 | ||||
2005 | 1.89 | 1.85 | 1.96 | 1.75 | ||||
2006 | 1.74 | 1.79 | 1.92 | 1.71 | ||||
Month | High | Low | ||
November 2005 | 1.78 | 1.71 | ||
December 2005 | 1.78 | 1.72 | ||
January 2006 | 1.79 | 1.74 | ||
February 2006 | 1.78 | 1.73 | ||
March 2006 | 1.76 | 1.73 | ||
April 2006 | 1.82 | 1.74 | ||
May 2006(1) | 1.89 | 1.83 | ||
Note: | |
(1) | In respect of May 2006, for the period from 1 May to 26 May 2006, inclusive. |
Inflation
Inflation
has not
had a significant effect on the Groups results of operations and financial
condition during the two years ended 31 March 2006.
Presentation of Information
In
the discussion
of the Groups reported financial position and results, information in addition
to that contained within the Consolidated Financial Statements is presented.
Refer to page 49 for definition of terms.
Vodafone Group Plc Annual Report 2006 | 25 |
Critical Accounting Estimates
The Group prepares its Consolidated Financial Statements in accordance with IFRS, the application of which often requires judgements to be made by management when formulating the Groups financial position and results. Under IFRS, the directors are required to adopt those accounting policies most appropriate to the Groups circumstances for the purpose of presenting fairly the Groups financial position, financial performance and cash flows. The Group also prepares a reconciliation of the Groups revenue, net profit and shareholders equity between IFRS and US GAAP.
In determining and applying accounting policies, judgement is often required in respect of items where the choice of specific policy, accounting estimate or assumption to be followed could materially affect the reported results or net asset position of the Group should it later be determined that a different choice would be more appropriate.
Management considers the accounting estimates and assumptions discussed below to be its critical accounting estimates and, accordingly, provides an explanation of each below. Where it is considered that the Groups US GAAP accounting policies differ materially from the IFRS accounting policy, a separate explanation is provided.
The discussion below should also be read in conjunction with the Groups disclosure of significant IFRS accounting policies, which is provided in note 2 to the Consolidated Financial Statements, Significant accounting policies and with the Summary of differences between IFRS and US GAAP provided in note 38 to the Consolidated Financial Statements.
Management has discussed its critical accounting estimates and associated disclosures with the Companys Audit Committee.
Impairment reviewsIFRS requires management to undertake an annual test for impairment of indefinite lived assets, and for finite lived assets, to test for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Group management currently undertakes an annual impairment test covering goodwill and other indefinite lived assets, and also reviews finite lived assets and investments in associated undertakings at least annually to consider whether a full impairment review is required. In the year to 31 March 2006, the Group has recognised impairment losses amounting to £23,515 million relating to the Groups mobile operations in Germany, Italy and Sweden, of which £23,000 million was recognised following completion of the annual impairment test.
US GAAP
Under US GAAP, the requirements for testing the recoverability of intangible assets and property, plant and equipment differ from IFRS. US GAAP requires the carrying value of such
assets with finite lives to be compared to undiscounted future cash flows over the remaining useful life of the primary asset of the asset group being tested for impairment, to determine if the asset or asset group is recoverable. If the carrying
value exceeds the undiscounted cash flows, the carrying value is not recoverable and the asset or asset group is written down to the net present value of future cash flows derived in a manner similar to IFRS.
For purposes of goodwill impairment testing under US GAAP, the fair value of a reporting unit including goodwill is compared to its carrying value. If the fair value of a reporting unit is lower than its carrying value, the fair value of the goodwill within that reporting unit is compared with its respective carrying value, with any excess carrying value written off as an impairment. The fair value of the goodwill is the difference between the fair value of the reporting unit and the fair value of the net assets of the reporting unit.
Following the issuance of EITF Topic D-108, Use of the Residual Method to Value Acquired Assets Other Than Goodwill, in the year ended 31 March 2005, the Group, in respect of the indefinite lived licences in Verizon Wireless, was required to perform a transitional impairment test on indefinite lived intangible assets other than goodwill by comparing the carrying amount with the fair value of the asset determined on a standalone basis. In the year ended 31 March 2005, the cumulative effect on net loss of adopting this standard was £6,177 million, net of taxes of £5,239 million.
Assumptions
There are a number of assumptions and estimates involved in calculating the net present value of future cash flows from the Groups businesses including managements
expectations of:
| growth in EBITDA, calculated as adjusted operating profit before depreciation and amortisation; |
| timing and quantum of future capital expenditure; |
| uncertainty of future technological developments; |
| long term growth rates; and |
| the selection of discount rates to reflect the risks involved. |
The Group prepares and internally approves formal ten-year plans for its businesses and uses these as the basis for its impairment reviews. Management uses the initial five years of the plans, except in markets which are forecast to grow ahead of the long term growth rate for the market. In such cases, further years will be used until the forecast growth rate trends towards the long term growth rate, up to a maximum of ten years.
For mobile businesses, a long term growth rate into perpetuity has been determined as the lower of:
| the nominal GDP rates for the country of operation, using forecast nominal GDP rates from external sources; and |
| the long term compound annual growth rate in EBITDA implied by the business plan. |
For non-mobile businesses, no growth is expected beyond managements plans for the initial five year period.
Changing the assumptions selected by management, in particular the discount rate and growth rate assumptions used in the cash flow projections, could significantly affect the Groups results. The Groups review includes the key assumptions related to sensitivity in the cash flow projections.
The following changes to the assumptions used in the impairment review would have (increased)/decreased the combined impairment loss recognised in the year ended 31 March 2006 in respect of the Groups mobile operations in Germany and Italy:
Increase by 1 /2 % | Decrease by 1 /2 % | |||
£bn | £bn | |||
Discount rate | (2.2 | ) | 2.4 | |
Budgeted EBITDA(1) | 0.3 | (0.3 | ) | |
Capital expenditure(2) | (0.2 | ) | 0.2 | |
Long term growth rate | 2.9 | (2.5 | ) | |
Notes: | |
(1) | Represents the compound annual growth rate for the initial five years of the Groups approved financial plans. |
(2) | Represents capital expenditure as a percentage of revenue in the initial five years of the Groups approved plans. |
These assumption changes in isolation would not have resulted in an impairment loss in any other of the Groups continuing operations.
US GAAP
Under US GAAP, the assumptions and estimates involved in reviewing for impairment are similar to IFRS, with the exception of the requirement to determine the primary asset of an asset
group. For asset groups represented by the Groups operating companies, the primary asset is determined as the 3G licence, except for operating companies where no 3G licence has been acquired, in which case the 2G licence is the primary asset.
If the primary asset of the Groups mobile operations in Germany were the 2G rather than the 3G licence, the carrying value would exceed the undiscounted cash flows and result in a significant impairment loss.
Business combinations
Goodwill
only arises in business combinations. The amount of goodwill initially recognised
is dependent on the allocation of the purchase price to the fair value of the
identifiable assets acquired and the liabilities assumed. The determination
of the fair value of the assets and liabilities is based, to a considerable
extent, on managements judgement.
Allocation of the purchase price affects the results of the Group as finite lived intangible assets are amortised whereas indefinite lived intangible assets, including goodwill, are not amortised, and could result in differing amortisation charges based on the allocation to indefinite lived and finite lived intangible assets.
On the acquisition of mobile network operators, the identifiable intangible assets may include licences, customer bases and brands. The fair value of these assets is
26 | Vodafone Group Plc Annual Report 2006 |
Performance | |
determined by discounting estimated future net cash flows generated by the asset, assuming no active market for the assets exist. The use of different assumptions for the expectations of future cash flows and the discount rate would change the valuation of the intangible assets.
IFRS
On transition to IFRS, the Group has elected not to apply IFRS 3, Business Combinations, retrospectively as the difficulty in applying these requirements to the large number of business combinations completed by the Group from incorporation through to
1 April 2004 exceeded any potential benefits. Goodwill arising before the date of transition to IFRS, after adjusting for items including the impact of proportionate consolidation of joint ventures, amounted to £78,753 million.
If the Group had elected to apply the accounting for business combinations retrospectively, it may have led to an increase or decrease in goodwill and increase in licences, customer bases, brands and related deferred tax liabilities recognised on acquisition.
US GAAP
For acquisitions prior to 29 September 2004, the key difference from IFRS is that for the acquisition of mobile network businesses, the excess of purchase price over the fair value of
the identifiable assets and liabilities acquired other than licences (the residual) was allocated to licences, as opposed to goodwill. However, subsequent to this date and due to the prohibition of this method of accounting following the
issuance of EITF Topic D-108 licences are valued using a direct valuation approach, with the residual being allocated to goodwill. For other acquisitions, the residual has been and will continue to be allocated to goodwill.
Intangible assets, excluding goodwill
Other intangible
assets include the Groups aggregate amounts spent on the acquisition
of 2G and 3G licences, customer bases, brands, computer software and development
costs. These assets arise from both separate purchases and from acquisition
as part of business combinations.
The relative size of the Groups intangible assets, excluding goodwill, makes the judgements surrounding the estimated useful lives and basis of amortisation critical to the Groups financial position and performance.
At 31 March 2006, intangible assets, excluding goodwill, amounted to £16,512 million (2005: £16,149 million) and represented 13.0% (2005: 11.0%) of the Groups total assets.
Estimation of useful life
The useful life used to amortise intangible assets relates to the future performance of the assets acquired and managements judgement of the period over which economic benefit
will be derived from the asset. The basis for determining the useful life for the most significant categories of intangible assets is as follows:
Licences and spectrum fees
The estimated useful life is, generally, the term of the licence, unless there is a presumption of renewal at negligible cost. Using the licence term reflects the period over which
the Group will receive economic benefit. For technology specific licences with a presumption of renewal at negligible cost, the estimated useful economic life reflects the Groups expectation of the period over which the Group will continue to
receive economic benefit from the licence. The economic lives are periodically reviewed, taking into consideration such factors as changes in technology. Historically, any changes to economic lives have not been material following these
reviews.
Customer bases
The estimated useful life principally reflects managements view of the average economic life of the customer base and is assessed by reference to customer churn rates. An
increase in churn rates may lead to a reduction in the useful life and an increase in the amortisation charge. Historically, changes to churn rates have been insufficient to impact the useful life.
Capitalised software
The useful life is determined by management at the time the software is acquired and brought into use and is regularly reviewed for appropriateness. For computer software licences,
the useful life represents managements view of expected benefits over which the Group will receive benefits from the software, but not exceeding the licence term. For unique software products controlled by the Group, the life is based on
historical experience with similar products as well as anticipation of future events, which may impact their life, such as changes in technology.
Historically, changes in useful lives have not resulted in material changes to the Groups amortisation charge.
Property, plant and equipment
Property, plant
and equipment also represent a significant proportion of the asset base of the
Group and hence the estimates and assumptions made to determine their carrying
value and
related depreciation are critical to the Groups financial position and performance.
Estimation of useful life
The charge in respect of periodic depreciation is derived after determining an estimate of an assets expected useful life and the expected residual value at the end of its life.
Increasing an assets expected life or its residual value would result in a reduced depreciation charge in the Groups income statement.
The useful lives of Group assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their life, such as changes in technology. Furthermore, network infrastructure cannot be depreciated over a period that extends beyond the expiry of the associated licence under which the operator provides telecommunications services.
Historically, changes in useful lives have not resulted in material changes to the Groups depreciation charge.
Cost capitalisation
Cost includes
the total purchase price and labour costs associated with the Groups
own employees to the extent that they are directly attributable to construction
costs, or where they comprise a proportion of a department directly engaged
in the purchase or installation of a fixed asset. Management judgement is involved
in determining the appropriate internal costs to capitalise and the amounts
involved. For the year
ended
31 March 2006, internal
costs capitalised represented approximately 7% of expenditure on property, plant
and equipment and computer software and approximately 1% of total operating
expenses.
Taxation
The Groups tax charge on ordinary activities is the sum of the total current and deferred tax charges. The calculation of the Groups total tax charge necessarily involves
a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until resolution has been reached with the relevant tax authority or, as appropriate, through a formal legal process. The final
resolution of some of these items may give rise to material profit and loss and/or cash flow variances. See Financial Position and Resources.
The growth in complexity of the Groups structure following its rapid expansion geographically has made the degree of estimation and judgement more challenging. The resolution of issues is not always within the control of the Group and it is often dependent on the efficiency of the legal processes in the relevant taxing jurisdictions in which the Group operates. Issues can, and often do, take many years to resolve. Payments in respect of tax liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result, there can be substantial differences between the tax charge in the income statement and tax payments.
Significant items on which the Group has exercised accounting judgement include a provision in respect of an enquiry from UK HM Revenue and Customs with regard to the Controlled Foreign Companies tax legislation (see note 31 to the Consolidated Financial Statements), legal proceedings to recover VAT in relation to 3G licence fees (see Contingencies on page 39) and potential tax losses in respect of a write down in the value of investments in Germany (see note 6 to the Consolidated Financial Statements). The amounts recognised in the Consolidated Financial Statements in respect of each matter are derived from the Groups best estimation and judgement, as described above. However, the inherent uncertainty regarding the outcome of these items means eventual resolution could differ from the accounting estimates and therefore impact the Groups results and cash flows.
Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future, against which the
reversal of temporary differences can be deducted. Recognition, therefore, involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised.
Historical differences between forecast and actual taxable profits have not resulted in material adjustments to the recognition of deferred tax assets.
Vodafone Group Plc Annual Report 2006 | 27 |
Critical Accounting Estimates
continued
Revenue recognition and presentation
Revenue from mobile telecommunications comprises amounts charged to customers in respect of monthly access charges, airtime charges, messaging, the provision of other mobile
telecommunications services, including data services and information provision, fees for connecting users of other fixed line and mobile networks to the Groups network, revenue from the sale of equipment, including handsets, and revenue
arising from the Groups Partner Market agreements.
Deferral period
Customer connection fees, when combined with related equipment revenue, in excess of the fair value of the equipment are deferred and recognised over the expected life of the customer
relationship. The life is determined by reference to historical customer churn rates. An increase in churn rates would reduce the customer relationship life and accelerate revenue recognition. Historically, changes in churn rates have been
insufficient to impact the expected customer relationship life.
Any excess upgrade or tariff migration fees over the fair value of equipment provided are deferred over the average upgrade or tariff migration period as appropriate. This time period is calculated based on historical activity of customers who upgrade or change tariffs. An increase in the time period would extend the period over which revenue is recognised.
Presentation
When deciding
the most appropriate basis for presenting revenue or costs of revenue, both
the legal form and substance of the agreement between the Group and its business
partners are
reviewed to determine each partys respective role in the transaction.
Where the Groups role in a transaction is that of principal, revenue is recognised on a gross basis. This requires turnover to comprise the gross value of the transaction billed to the customer, after trade discounts, with any related expenditure charged as an operating cost.
Where the Groups role in a transaction is that of an agent, revenue is recognised on a net basis, with turnover representing the margin earned.
Allowance for bad and doubtful debts
The allowance
for bad and doubtful debts reflects managements estimate of losses arising from the failure or inability of the Groups customers to make required payments.
The estimate is based on the ageing of customer accounts, customer credit worthiness and the Groups
historical write-off experience.
Changes to the allowance may be required if the financial condition of the Groups customers improves or deteriorates. An improvement in financial condition may result in lower actual write-offs.
Historically, changes to the estimate of losses have not been material to the Groups financial position and results.
28 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Key Peformance Indicators
The Board and the Executive Committee monitor the Groups progress against its strategic objectives and the financial performance of the Groups operations on a regular basis. Performance is assessed against the strategy, budgets and forecasts using financial and non-financial measures.
The following details certain of the most significant Key Performance Indicators (KPIs) used by the Group, their purpose, the basis of calculation and the source of the underlying data. Definitions of certain of the terms are provided on page 49.
Financial
The Group uses
the following primary measures to assess the performance of the Group and its
individual businesses. A number of these measures at a Group level are presented
on an organic basis, which provides an assessment of underlying growth excluding
the effect of business acquisitions and disposals and changes in exchange rates.
Financial measures presented on an organic basis are non-GAAP financial measures.
For more
information on these measures and the basis of calculation of organic growth
see Non-GAAP Information on pages 47 to 48.
Revenue
Revenue
and its growth for the Group, and its principal markets, covering the 2006
and 2005 financial year, is provided in Operating Results on pages
30 to 37.
Revenue and revenue growth are used for internal performance analysis and by investors to assess progress against outlook statements provided externally by the Group.
Adjusted operating profit
Adjusted operating
profit is used by the Group for internal performance analysis as it represents
the underlying operating profitability of the Groups businesses. The measure is
presented both for the Group and its principal markets, covering the 2006 and 2005 financial years, in Operating Results on pages 30 to 37. The basis of calculation, along with an analysis of why the Group believes it is a useful
measure, is provided in the section titled Non-GAAP Information on
pages 47 to 48.
Free cash flow
Free cash flow
provides an evaluation of the Groups liquidity and the cash generated by the Groups operations. The calculation of free cash flow, along with an analysis of
why the Group believes it is a useful measure, is provided in the section titled Non-GAAP Information on
pages 47 to 48. The Group has provided an outlook for free cash flow in the 2007
financial year on page 45.
Adjusted earnings per share
Adjusted earnings per share is calculated as basic earnings per share from continuing operations excluding items such as impairment losses, non-recurring amounts related to business
acquisitions and disposals and changes in the fair value of equity put rights and similar arrangements. The items excluded from basic earnings per share for the 2006 and 2005 financial years and the per share impact are detailed in note 8 to the
Consolidated Financial Statements.
Operational
Certain operational
measures relating to customers and revenue for the Groups mobile telecommunications business and its principal makets, covering the 2006 and 2005 financial
years, are provided in Operating Results on pages 30 to 37, with
the exception of customer delight. These measures are commonly used in the mobile
telecommunications industry.
Customers
The Group highly
values its customers and strives to delight them. As a result, customer based
KPIs are important measures for internal performance analysis. Management also
believes that certain of these measures provide useful information for investors
regarding the success of the Groups customer acquisition and retention activities. For customer numbers and churn, the data used to calculate the KPIs is derived from the
customer relationship management systems of each of the Groups operations.
Customer numbers
The
Group prepares customer numbers on a venture and proportionate basis for its
mobile operations. A summary of the customer numbers on both bases is presented
in Business Business Overview Summary of Group mobile
telecommunications businesses at 31 March 2006 on page 13.
Churn
Churn
represents the disconnection rate of customers in each of the Groups
mobile operations. It is calculated as the total gross customer disconnections
in the period
divided by the average total customers in the period. Churn rates stated in this Annual Report are calculated for the entire financial year.
Customer delight
The
Group uses a proprietary customer delight system to track customer
satisfaction across its controlled markets and jointly controlled market in
Italy. More information on the benefits of the system are provided in Business
Business Overview Products and services Customer strategy
and management on page 17.
Customer delight is measured by an index based on the results of surveys performed by an external research company which cover all aspects of service provided by Vodafone and incorporates the results of the relative satisfaction of the customers of competitors. An overall index for the Group is calculated by weighting the results for each of the Groups operations based on service revenue.
Increased customer expectations are putting a downward pressure on customer satisfaction for the Group and many of its competitors. Despite this trend, the Group outperformed its target for customer delight in the 2006 financial year and the index was broadly stable compared to the previous financial year.
Revenue based measures
Management believes that revenue based measures provide useful information for investors regarding trends in customer revenue derived from mobile telecommunications services and the
extent to which customers use mobile services.
The data used to calculate these KPIs is derived from a number of sources. Financial information, such as service revenue, is extracted from the Groups financial systems, whilst operational information, including customer and usage metrics, is derived from the customer relationship management and billing systems of each of the Groups operations.
Average
revenue per user (ARPU)
ARPU
represents the average revenue by customers over a period and is calculated
as service revenue, being total revenue excluding equipment revenue and connection
fees, divided by the weighted average number of customers during the period.
ARPU disclosed in this Annual Report is presented on a monthly basis and represents
the total ARPU for the financial year divided by twelve.
Voice usage
Voice
usage is the total number of minutes of voice use on the Groups mobile
networks, including calls made by the Groups customers, often referred
to as outgoing usage, and calls received by the Groups customers, often
referred to as incoming usage.
Messaging and data revenue
Messaging
and data revenue represent the non-voice element of service revenue. In recent
years, these revenues have grown at a faster rate than voice revenue as customers
increasingly use these services and new products and services have been launched.
As competition has intensified in many of the markets in which the Group operates
and penetration rates have increased, the ability of the Group to grow messaging
and data revenue has become an increasingly important factor, internally and
for investors.
Costs
One Vodafone
The
One Vodafone initiatives are targeted at achieving savings in operating expenses
and capital expenditure and are discussed in more detail on pages 18 to 19.
Reporting on performance against these targets will be disclosed in the Annual
Report for the year ending 31 March 2008, including reconciliations to amounts
included in the Consolidated Financial Statements.
Capitalised fixed asset additions as a percentage of mobile revenue
In
the mobile telecommunications industry, significant investment is required
to roll out network infrastructure in order to improve service capacity. This
performance indicator is used by Vodafone management to compare capitalised
fixed asset additions to prior periods and internal forecasts. Management
believes that this measure provides useful information for investors to measure
the capital investment required to support revenue growth.
This measure is calculated as capitalised fixed asset additions for the mobile telecommunications business (note 3 to the Consolidated Financial Statements) as a percentage of the revenue of the mobile telecommunications businesses (note 3 to the Consolidated Financial Statements). In the 2006 financial year, capitalised fixed asset additions as a percentage of mobile revenue was 13.7% compared with 16.4% for the previous financial year.
Vodafone Group Plc Annual Report 2006 | 29 |
Operating Results
Group Overview
Years ended 31 March | ||||
2006 | 2005 | |||
£m | £m | |||
Revenue | ||||
Mobile telecommunications | 28,137 | 25,740 | ||
Other operations | 1,339 | 1,095 | ||
Less: revenue between mobile and other operations | (126 | ) | (157 | ) |
29,350 | 26,678 | |||
Operating (loss)/profit | (14,084 | ) | 7,878 | |
Mobile telecommunications(1) | 9,280 | 8,334 | ||
Other operations(1) | 119 | 19 | ||
Adjusted operating profit(1) | 9,399 | 8,353 | ||
Impairment of intangible assets | (23,515 | ) | (475 | ) |
Other | 15 | | ||
Non-operating income in associated undertakings | 17 | | ||
Non-operating income and expense | (2 | ) | (7 | ) |
Investment income | 353 | 294 | ||
Financing costs | (1,120 | ) | (880 | ) |
(Loss)/profit before taxation | (14,853 | ) | 7,285 | |
Tax on profit | (2,380) | (1,869 | ) | |
(Loss)/profit for the financial year from continuing operations | (17,233 | ) | 5,416 | |
Loss)/profit for the financial year from discontinued operations | (4,588 | ) | 1,102 | |
(Loss)/profit for the financial year | (21,821 | ) | 6,518 | |
Note: | |
(1) | Before impairment losses and non-recurring amounts related to business acquisitions and disposals. |
2006 financial year compared to 2005 financial year
Revenue increased
by 10.0% to £29,350 million in the year to 31 March 2006, resulting from organic growth of 7.5%, favourable movements in exchange rates of 0.5% and a further
2.0% from the acquisitions in the Czech Republic, India, Romania and South Africa, partially offset by the impact of the disposal of the Groups
operations in Sweden.
The Group recorded an impairment charge to the carrying value of goodwill in the Groups operations in Germany (£19,400 million) and Italy (£3,600 million) reflecting a revision of the Groups view of the prospects for these businesses, particularly in the medium to long term, and a further £515 million was recorded in respect of the Swedish business following the announcement of its disposal. This was the primary reason for the operating loss of £14,084 million in the current financial year compared with an operating profit of £7,878 million in the previous financial year. Adjusted operating profit increased by 12.5% to £9,399 million, with organic growth of 11.4%, following organic growth of 10.3% in the Groups mobile business. Favourable exchange rate movements benefited reported growth for the Group by 1.0% whilst the net impact of acquisitions and disposals improved reported growth by 0.1%.
Mobile telecommunications | ||||||
Years ended 31 March | ||||||
2006 | 2005 | Change | ||||
£m | £m | % | ||||
Total service revenue | 25,881 | 23,547 | 9.9 | |||
Other revenue(1) | 2,256 | 2,193 | 2.9 | |||
28,137 | 25,740 | 9.3 | ||||
Trading results | ||||||
Voice services | 21,493 | 19,888 | 8.1 | |||
Non-voice services | ||||||
Messaging | 3,556 | 3,143 | 13.1 | |||
Data | 832 | 516 | 61.2 | |||
Total service revenue | 25,881 | 23,547 | 9.9 | |||
Net other revenue(1) | 532 | 546 | (2.6 | ) | ||
Interconnect costs | (4,210 | ) | (3,815 | ) | 10.4 | |
Other direct costs | (1,936 | ) | (1,756 | ) | 10.3 | |
Net acquisition costs(1) | (1,541 | ) | (1,446 | ) | 6.6 | |
Net retention costs(1) | (1,444 | ) | (1,234 | ) | 17.0 | |
Payroll | (2,127 | ) | (2,009 | ) | 5.9 | |
Other operating expenses | (3,625 | ) | (3,264 | ) | 11.1 | |
Acquired intangibles amortisation | (157 | ) | | |||
Purchased licence amortisation | (947 | ) | (919 | ) | 3.0 | |
Depreciation and other amortisation | (3,581 | ) | (3,341 | ) | 7.2 | |
Share of operating profit in associated undertakings | 2,435 | 2,025 | 20.2 | |||
Adjusted operating profit(2) | 9,280 | 8,334 | 11.4 | |||
Notes: | |
(1) | Revenue for the mobile telecommunications business includes revenue of £1,724 million (2005: £1,647 million) which has been deducted from acquisition and retention costs and excluded from other revenue in the trading results. |
(2) | Before impairment losses and non-recurring amounts related to acquisitions and disposals. |
30 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Revenue
Revenue
in the mobile business increased by 9.3%, or 6.7% on an organic basis, for
the year to 31 March 2006 due to a 7.2% increase in service revenue on an
organic basis offset by lower growth in other revenue. Service revenue growth
reflected a 15.2% organic increase in the average customer base of the controlled
mobile networks and the Groups share of jointly controlled mobile networks, offset by the impact of lower
ARPU in a number of the Groups markets. Competitive pressures have intensified
recently following a significant number of new market entrants and greater competition
from incumbents, specifically in the mature markets of Western Europe. Many of
these markets have penetration rates over 100% which, together with termination
rate cuts and a higher proportion of lower spending prepaid customers across
the Group, have led to the decline in ARPU. The estimated impact of termination
rate cuts
on the growth in service revenue in the current financial year is as follows:
Impact of | Service revenue | |||||
termination | growth excluding | |||||
Reported growth | rate cut on | the impact of | ||||
in service | service revenue | termination rate | ||||
revenue | growth | cuts | ||||
% | % | % | ||||
Germany | 1.4 | 1.7 | 3.1 | |||
Italy | 1.9 | 3.4 | 5.3 | |||
Spain | 22.0 | 2.9 | 24.9 | |||
UK | 1.6 | 1.6 | 3.2 | |||
Other Mobile Operations | 22.3 | 2.7 | 25.0 | |||
Mobile
telecommunications business |
9.9 | 2.4 | 12.3 | |||
Voice revenue increased by 8.1%, or by 5.3% on an organic basis, due to by the growth in average customers and a successful usage stimulation programme leading to 24.6% growth in total minutes, or 18.9% on an organic basis, offset by tariff declines from competition and termination rate cuts. Revenue from outgoing calls was the primary driver of voice revenue growth, whilst incoming voice revenue increased marginally as a significant increase in the proportion of incoming calls from other mobile networks was offset by the impact of termination rate cuts, particularly in the second half of the current financial year.
Messaging revenue rose by 13.1%, or 10.6% on an organic basis, as an increase in the average customer base and the number of messages sent per customer was offset by tariff declines.
The success of 3G, Vodafone live! and offerings in the business segment, including Vodafone Mobile Connect data cards and BlackBerry from Vodafone, were the main contributors to a 61.2% increase, or 60.4% on an organic basis, in non-messaging data revenue. An additional 6,321,000 3G devices were registered on the Groups networks in the current financial year, bringing the total to 7,721,000 at 31 March 2006, including 660,000 business devices such as Vodafone Mobile Connect 3G/GPRS data cards. Prior to the announcement of the disposal of Vodafone Japan in March 2006, the Group registered its ten millionth consumer 3G device, when including 100% of the devices in Italy.
Other revenue increased to £2,256 million, principally due to growth in revenue related to acquisition and retention activities in Spain, partially offset by a reduction in net other revenue, resulting principally from to a fall in the number of customers connected to non-Vodafone networks in the UK. A 32.5% rise in the number of gross customer additions, partially offset by a fall in the average revenue for handset sales to new prepaid customers and a 24.3% increase in the number of upgrades, led to a 4.7% growth in revenue related to acquisition and retention activities to £1,724 million.
Adjusted operating profit
Adjusted
operating profit increased by 11.4% to £9,280 million, comprising organic
growth of 10.3% and favourable exchange rate movements of 1.1%.
Interconnect costs increased by 7.2% on an organic basis, as strong growth in outgoing voice usage was partially offset by cuts in termination rates in a number of markets and an increased proportion of outgoing traffic being to other Vodafone customers, which does not result in interconnect expense. The rise in the number of upgrades and the increased cost of upgrading customers to 3G were the primary contributors to an 9.4% organic growth in acquisition and retention costs, net of attributable revenue, to £2,985 million. Payroll and other operating expenses as a percentage of service revenue continued to fall, reaching 22.2% for the year to 31 March 2006 compared to 22.4% for the previous financial year.
The charge relating to the amortisation of acquired intangible assets was £157 million following acquisitions in the Czech Republic, India, Romania and South Africa in the current financial year. Depreciation and other amortisation increased, principally due to the net impact of the acquisitions and disposal in the current financial year and the ongoing expansion of 3G networks.
The Groups share of the result in associated undertakings, before non-recurring amounts related to business acquisitions and disposals, grew by 20.2% after the deduction of interest, tax and minority interest, and 16.8% before the deductions, primarily due to growth at Verizon Wireless in the US. The Groups share of the result in Verizon Wireless increased by 25.5% to £2,112 million, before deduction of interest, tax and minority interest, with a particularly strong performance in the second half of the current financial year.
Non-mobile telecommunications
Revenue
from Other Operations increased by 22.3% to £1,339 million for the current
financial year, principally due to growth in Arcor, the Groups non-mobile
operation in Germany. Adjusted operating profit increased to £119 million
from £19 million in the previous financial year as a result of the revenue
growth and cost efficiencies in Arcor and a reduced loss in the Groups
other non-mobile operations.
Impairment losses
The
Group recorded an impairment charge to the carrying value of goodwill in the
current financial year of £23,515 million in respect of the Groups
operations in Germany (£19,400 million) and Italy (£3,600 million)
reflecting a revision of the Groups view of the prospects for these
businesses, particularly in the medium to long term, and a further £515
million in respect of the Swedish business following the announcement of its
disposal. An impairment loss was recognised in the previous financial year
of £475 million in respect of the Groups Swedish operations and
reflected fierce competition along with onerous 3G licence obligations.
Investment income and financing costs | ||||||
Years ended 31 March | ||||||
2006 | 2005 | Change | ||||
£m | £m | % | ||||
Net
financing costs before dividends from investments |
(318 | ) | (293 | ) | 8.5 | |
Potential
interest charges arising on settlement of outstanding tax issues |
(329 | ) | (245 | ) | 34.3 | |
Changes
in the fair value of equity put rights and similar arrangements |
(161 | ) | (67 | ) | 140.3 | |
Dividends from investments | 41 | 19 | 115.8 | |||
Net financing costs | (767 | ) | (586 | ) | 30.9 | |
Net financing costs before dividends from investments increased by 8.5% to £318 million as an increase in average net debt compared to the previous year was partially offset by gains on mark-to-market adjustments on financial instruments in the current financial year.
Potential interest charges arising on the settlement of outstanding tax issues represents the Groups estimate of any interest that may be due to tax authorities when the issues are settled. This charge varies due to the interest rates applied by the tax authorities, the timing of tax payments and status of discussions on tax issues with the relevant tax authorities. At 31 March 2006, the provision for potential interest charges arising on settlement of outstanding tax issues was £896 million.
The change in the fair value of equity put rights and similar arrangements comprises the fair value movement in relation to the potential put rights held by Telecom Egypt over its 25.5% interest in Vodafone Egypt and the fair value of a financial liability in relation to the minority partners of Arcor, the Groups non-mobile operation in Germany. Further details in respect of these arrangements are provided in the section titled Liquidity and Capital Resources Option agreements and in note 24 to the Consolidated Financial Statements.
Taxation
The effective
tax rate for the year to 31 March 2006 is (16.0)% compared to 25.7% for the prior
year. The negative effective tax rate arises as a result of the £23,515 million
impairment losses recognised in the current financial year. These losses are not expected to be deductible for tax purposes so are not expected to create a future benefit. The effective tax rate, exclusive of the impairment losses, is 27.5% for the
current financial year, which is lower than the Groups weighted average tax rate as a result of the repurchase of shares in Vodafone Italy and favourable tax settlements, but has increased compared to the previous year as the prior year
benefited from finalising the reorganisation of the Groups German operations.
Basic loss per share
Basic earnings per share from continuing operations fell from 8.12 pence to a loss per share of 27.66 pence for the current year. The basic loss per share is after a charge of 37.56
pence per share in relation to an impairment of the carrying value of goodwill, a further charge of 0.26 pence per share for the change in fair value of equity put rights and similar arrangements, and a credit of 0.05 pence per share for
non-recurring amounts relating to business acquisitions and disposals.
Vodafone Group Plc Annual Report 2006 | 31 |
Operating
Results
continued
(Loss)/profit for the financial year from discontinued operations
Years ended 31 March | ||||||
2006 | 2005 | Change | ||||
£m | £m | % | ||||
|
||||||
Revenue(1) | 7,268 | 7,396 | (1.7 | ) | ||
Adjusted operating profit | 455 | 664 | ||||
Impairment loss | (4,900 | ) | | |||
|
||||||
Operating (loss)/profit | (4,445 | ) | 664 | |||
Non-operating income and expense | | 13 | ||||
Net financing costs | (3 | ) | (11 | ) | ||
|
||||||
(Loss)/profit before taxation | (4,448 | ) | 666 | |||
Tax on (loss)/profit(1) | (140 | ) | 436 | |||
|
||||||
(Loss)/profit for the financial year | (4,588 | ) | 1,102 | |||
Note | |
(1) | Included a deferred tax credit of £599 million in the year to 31 March 2005 in respect of losses in Vodafone Holdings K.K. which became eligible for offset against profits of Vodafone K.K. following the merger of the two entities on 1 October 2004. |
On 17 March 2006, the Group announced that an agreement had been reached to sell its 97.7% interest in Vodafone Japan to SoftBank. This resulted in the Groups operations in Japan being classified as an asset held for sale and being presented as a discontinued operation. The disposal was completed on 27 April 2006.
Following the announcement on 17 March 2006, the Group recognised an impairment loss of £4,900 million in respect of Vodafone Japan. The recoverable amount of Vodafone Japan was the fair value less costs to sell.
On completion of the disposal of Vodafone Japan in April 2006, a loss on disposal was recognised as the difference between the final sale proceeds less costs to sell and the carrying value at the date of disposal. The loss on disposal includes, among other items, the cumulative exchange differences in respect of Vodafone Japan previously recognised in equity from 1 April 2004 through to completion.
Review
of Operations
Please refer
to the Summary of Key Performance Indicators for Principal Markets on page
37 and note 3 to the Consolidated Financial Statements.
Mobile
businesses
Vodafone
operating companies are licensed on an arms length basis to use the
Vodafone brand and related trademarks. These arrangements have been reviewed
and the charges for the use of the Vodafone brand and related trademarks were
revised with effect from 1 April 2005 to reflect the positioning of the brand
in the current markets. There is no material impact on the Groups overall
operating profit. The impact of the change is to reduce individual operating
company profitability with a corresponding increase in the profit attributable
to the common functions segment, which forms part of the mobile telecommunications
business.
In April 2006, the Group announced changes to the organisational structure of its operations, effective from 1 May 2006. The following results are presented in accordance with the organisation structure in place for the year to 31 March 2006.
Germany
Years ended 31 March | Local | |||||||
currency | ||||||||
2006 | 2005 | Change | change | |||||
£m | £m | % | % | |||||
|
||||||||
Revenue(1) | 5,754 | 5,684 | 1.2 | 1.2 | ||||
Trading results | ||||||||
Voice services | 4,304 | 4,358 | (1.2 | ) | (1.3 | ) | ||
Non-voice services | ||||||||
Messaging | 836 | 800 | 4.5 | 4.6 | ||||
Data | 254 | 162 | 56.8 | 56.8 | ||||
|
||||||||
Total service revenue | 5,394 | 5,320 | 1.4 | 1.4 | ||||
Net other revenue(1) | 114 | 122 | (6.6 | ) | (6.9 | ) | ||
Interconnect costs | (732 | ) | (734 | ) | (0.3 | ) | (0.3 | ) |
Other direct costs | (281 | ) | (314 | ) | (10.5 | ) | (10.3 | ) |
Net acquisition costs(1) | (366 | ) | (348 | ) | 5.2 | 5.2 | ||
Net retention costs(1) | (349 | ) | (330 | ) | 5.8 | 5.6 | ||
Payroll | (412 | ) | (425 | ) | (3.1 | ) | (3.0 | ) |
Other operating | ||||||||
expenses | (665 | ) | (646 | ) | 2.9 | 3.1 | ||
Purchased licence | ||||||||
amortisation | (342 | ) | (342 | ) | | | ||
Depreciation and other | ||||||||
amortisation(2) | (865 | ) | (830 | ) | 4.2 | 4.3 | ||
|
||||||||
Adjusted operating | ||||||||
profit(2) | 1,496 | 1,473 | 1.6 | 1.3 | ||||
Notes: | |
(1) | Revenue includes revenue of £246 million (2005: £242 million) which has been excluded from other revenue and deducted from acquisition and retention costs in the trading results. |
(2) | Before impairment losses |
The German market has seen recent intensification in price competition, principally from new market entrants, together with high levels of penetration and further reductions in termination rates. Despite this, Vodafone has continued to lead the market in the number of 3G customers, and has launched innovative products such as mobile TV and Vodafone Zuhause, which allows users to replace fixed line networks installed in their homes. In addition, Vodafone launched HSDPA technology in March 2006.
Total revenue increased by 1.2% as the benefits of a larger customer base and an increase in non-voice service revenue were partly offset by reduced voice pricing, in response to aggressive competition, and a further termination rate cut in December 2005 from 13.2 to 11.0 eurocents per minute. The average customer base grew by 8.4% due to the attractiveness of promotions, including an offer which allowed prepaid customers to pay a fixed charge for calls to fixed lines and other Vodafone customers, which was taken up by more than one and a quarter million customers, and new products such as Vodafone Zuhause, which had 448,000 registered customers at 31 March 2006. New prepaid tariffs, including a low priced internet only offer, and ongoing promotional activity, particularly in the last four months of the year, contributed to total voice usage increasing by 13.7%. Excluding the termination rate cut in December 2005, service revenue growth would have been 3.1% in local currency. A further cut in termination rates is currently expected by the end of 2006.
Non-voice service revenue increased by 13.4% in local currency, driven primarily by strong growth of 56.8% in non-messaging data revenue. Vodafone maintained its leadership in the 3G market, demonstrated by Vodafone live! with 3G customers generating over 3.1 million full track music downloads in the current financial year for Vodafone, more than any other mobile network operator in Germany. The number of active Vodafone live! devices continued to increase, with 28.3% growth in the year. In the business segment, there were 241,000 Vodafone Mobile Connect 3G/GPRS data cards and 226,000 wireless push e-mail enabled devices registered on the network at 31 March 2006. Messaging revenue increased 4.6%, in local currency, mainly as a result of promotional activities.
Overall cost efficiencies, counteracted by investments in customer acquisition and retention and an increase in Group charges for the use of the brand and related trademarks, which represented 1.1% of service revenue, lead to an increase in adjusted operating profit of 1.3% in local currency to £1,496 million. Growth in 3G customers and increased gross additions, partially offset by a rise in the proportion of low subsidy prepaid
32 | Vodafone Group Plc Annual Report 2006 |
Performance | |
additions, led to a 5.2% increase in net acquisition costs. Interconnect costs decreased by 0.3%, as the termination rate cuts in the current and previous financial years more than offset the effect of higher voice usage. An increase in the number of customer upgrades resulted in a 5.6% increase in net retention costs. Adjusted operating profit was further impacted by additional depreciation charges from continued 3G network deployment.
Italy
Years ended 31 March | Local | |||||||
currency | ||||||||
2006 | 2005 | Change | change | |||||
£m | £m | % | % | |||||
|
||||||||
Revenue(1) | 4,363 | 4,273 | 2.1 | 2.0 | ||||
|
||||||||
Trading results | ||||||||
Voice services | 3,472 | 3,492 | (0.6 | ) | (0.7 | ) | ||
Non-voice services | ||||||||
Messaging | 600 | 532 | 12.8 | 12.9 | ||||
Data | 98 | 67 | 46.3 | 45.2 | ||||
|
||||||||
Total service revenue | 4,170 | 4,091 | 1.9 | 1.8 | ||||
Net other revenue(1) | 15 | 14 | 7.1 | 2.8 | ||||
Interconnect costs | (681 | ) | (701 | ) | (2.9 | ) | (3.1 | ) |
Other direct costs | (241 | ) | (232 | ) | 3.9 | 3.8 | ||
Net acquisition costs(1) | (78 | ) | (71 | ) | 9.9 | 9.6 | ||
Net retention costs(1) | (93 | ) | (74 | ) | 25.7 | 25.1 | ||
Payroll | (250 | ) | (250 | ) | | | ||
Other operating | ||||||||
expenses | (572 | ) | (497 | ) | 15.1 | 15.1 | ||
Purchased licence | ||||||||
amortisation | (74 | ) | (74 | ) | | | ||
Depreciation and other | ||||||||
amortisation(3) | (524 | ) | (512 | ) | 2.3 | 2.0 | ||
|
||||||||
Adjusted operating | ||||||||
profit(3) | 1,672 | 1,694 | (1.3 | ) | (1.3 | ) | ||
|
Notes | |
(1) | Revenue includes revenue of £178 million (2005: £168 million) which has been excluded from other revenue and deducted from acquisition and retention costs in the trading results. |
(2) | Italy is a joint venture and is proportionately consolidated by the Group and hence the results reported represent the Groups average effective interest, being 76.8%. |
(3) | Before impairment losses |
Competition in Italy has continued to intensify with the mobile network operators competing aggressively on subsidies and, increasingly, on price, particularly in the second half of the year. Vodafone achieved average customer growth of 6.9% driven by successful promotions despite the competitive environment and a market penetration rate well in excess of 100% due to customers having more than one SIM.
In local currency, total revenue rose by 2.0%, reflecting the increase in service revenue which was driven primarily by continuing growth in non-voice services as voice revenue declined marginally following an average 20.5% reduction in termination rates from September 2005. Excluding the impact of the termination rate cut, service revenue increased by 5.2% in local currency. Strong promotional activities, for example free calls after the first minute and free text messages for a small activation fee which were taken up by more than ten million customers, and the increase in the customer base led to a rise of 5.1% in voice usage and a 41.7% increase in messaging, including a 261% growth in MMS usage. An increase in the number of SIMs per user and competitive pressures led to a reduction in activity rates, especially in the second half of the year, and an increase in blended churn from 17.2% to 18.7%.
Non-voice service revenue rose by 16.5% in local currency, primarily driven by a 12.9% rise in messaging revenue. Increased penetration of 3G devices, a focus on retaining high value customers, increased usage of Vodafone live! and Vodafone Mobile Connect data cards and attractive data promotions were the main contributors to 45.2% growth in non-messaging data revenue.
In local currency, adjusted operating profit fell by 1.3% due to the impact of an increase in Group charges for the use of brand and related trademarks, which represented approximately 1.1% of service revenue, investment in customer acquisition and retention and higher marketing spend in response to the competitive pressures, along with the increased costs from the continued roll out of the 3G network. Strong upgrade
activities and a focus on high value customers in response to aggressive competition led to the rise in retention costs, whilst handset promotions adversely impacted acquisition costs, especially in the first half of the year. Interconnect costs fell due to the cut in termination rates combined with promotions focusing on calls to other Vodafone and fixed-line numbers, which incur lower interconnect costs, especially in the second half of the year. Other direct costs increased 3.8%, primarily as a result of an increase in content provision costs arising from the increase in data service usage.
Spain
Years ended 31 March | Local | |||||||
currency | ||||||||
2006 | 2005 | Change | change | |||||
£m | £m | % | % | |||||
|
|
|||||||
Revenue(1) | 3,995 | 3,261 | 22.5 | 22.6 | ||||
|
|
|||||||
Trading results | ||||||||
Voice services | 3,093 | 2,558 | 20.9 | 20.9 | ||||
Non-voice services | ||||||||
Messaging | 417 | 340 | 22.6 | 23.0 | ||||
Data | 105 | 65 | 61.5 | 62.1 | ||||
|
|
|||||||
Total service revenue | 3,615 | 2,963 | 22.0 | 22.0 | ||||
Net other revenue(1) | 6 | 2 | ||||||
Interconnect costs | (634 | ) | (540 | ) | 17.4 | 17.5 | ||
Other direct costs | (329 | ) | (263 | ) | 25.1 | 25.4 | ||
Net acquisition costs(1) | (274 | ) | (246 | ) | 11.4 | 11.7 | ||
Net retention costs(1) | (249 | ) | (172 | ) | 44.8 | 45.3 | ||
Payroll | (151 | ) | (140 | ) | 7.9 | 7.8 | ||
Other operating | ||||||||
expenses | (611 | ) | (468 | ) | 30.6 | 30.7 | ||
Purchased licence | ||||||||
amortisation | (69 | ) | (69 | ) | | | ||
Depreciation and other | ||||||||
amortisation | (336 | ) | (292 | ) | 15.1 | 14.8 | ||
|
|
|||||||
Adjusted operating | ||||||||
profit | 968 | 775 | 24.9 | 24.6 | ||||
|
|
Note | |
(1) | Revenue includes revenue of £374 million (2005: £296 million) which has been excluded from other revenue and deducted from acquisition and retention costs in the trading results. |
Vodafone continued to perform strongly in Spain, in revenue growth and profitability, despite an increasingly competitive market, through promotions and competitive tariffs attracting new customers and encouraging prepaid customers to migrate to contract tariffs.
Total revenue for the financial year increased by 22.6% in local currency, due principally to a rise in service revenue achieved from an 18.5% growth in the average customer base and an improvement in ARPU, notwithstanding a 10.6% cut in the termination rate in November 2005. The launch of attractive tariffs, successful promotional campaigns and the offer of an appealing handset portfolio increased the average customer base and encouraged a further increase in the proportion of contract customers from 46.9% at 31 March 2005 to 49.6% at 31 March 2006. These factors contributed to a 34.0% increase in total voice usage compared with the previous financial year and a reduction in blended churn from 21.9% at 31 March 2005 to 20.9% at 31 March 2006.
The principal driver behind the 23.0% growth in messaging revenue in local currency was a 23.1% increase in messaging usage due to the higher customer base and targeted promotions. The growth of 62.1% in non-messaging data revenue was due to an increase of 814,000 in the number of registered 3G devices and the success of data solutions, which have contributed to Vodafone leading the 3G market in Spain, along with an 84.3% increase in the number of Vodafone live! devices.
Adjusted operating profit increased as a percentage of service revenue, as cost reductions were only partially offset by the impact of the increased Group charge for use of the brand and related trademarks. Interconnect costs fell as a proportion of service revenue, due to promotions which encouraged calls to be made to Vodafone and fixed-line numbers, which incur lower interconnect costs, and the cut in termination rates. A higher proportion of prepaid gross customer additions, which have a lower per unit acquisition cost, particularly in the first half of the financial year led to acquisition costs
Vodafone Group Plc Annual Report 2006 | 33 |
Operating
Results
continued
falling as a proportion of service revenue compared to the previous financial year. These relative cost reductions were offset by the cost of upgrading customers to 3G handsets, migrating prepaid customers to contract tariffs and a larger customer base, reflected in a 45.3% increase in net retention costs. Other direct costs increased mainly due to increased content provision costs resulting from higher usage of the expanded offering on the Vodafone live! platform.
United Kingdom
Years ended 31 March | ||||||
2006 | 2005 | Change | ||||
£m | £m | % | ||||
|
||||||
Revenue(1) | 5,048 | 5,065 | (0.3 | ) | ||
|
||||||
Trading results | ||||||
Voice services | 3,642 | 3,672 | (0.8 | ) | ||
Non-voice services | ||||||
Messaging | 705 | 684 | 3.1 | |||
Data | 221 | 142 | 55.6 | |||
|
||||||
Total service revenue | 4,568 | 4,498 | 1.6 | |||
Net other revenue(1) | 135 | 177 | (23.7 | ) | ||
Interconnect costs | (862 | ) | (771 | ) | 11.8 | |
Other direct costs | (355 | ) | (367 | ) | (3.3 | ) |
Net acquisition costs(1) | (380 | ) | (388 | ) | (2.1 | ) |
Net retention costs(1) | (395 | ) | (391 | ) | 1.0 | |
Payroll | (391 | ) | (403 | ) | (3.0 | ) |
Other operating expenses | (697 | ) | (646 | ) | 7.9 | |
Purchased licence amortisation | (333 | ) | (333 | ) | | |
Depreciation and other amortisation | (592 | ) | (597 | ) | (0.8 | ) |
|
||||||
Adjusted operating profit | 698 | 779 | (10.4 | ) | ||
Note | |
(1) | Revenue includes revenue of £345 million (2005: £390 million) which has been excluded from other revenue and deducted from acquisition and retention costs in the trading results. |
Vodafone UK continued to see strong growth in its customer base, without a corresponding increase in acquisition and retention investment, despite the UK being one of the most competitive markets in which the Group operates, with mobile penetration rates in excess of 100%. Enhanced data offerings led to strong growth in non-messaging data revenue and Vodafone now has over 1 million registered 3G devices.
Total revenue fell by 0.3%, as a 1.6% increase in service revenue was offset by a fall in equipment and other revenue. Service revenue grew by 3.2%, excluding the effect of the September 2004 termination rate cut, benefiting from an increase in average customers of 7.8%, partially offset by falling ARPU, notwithstanding a rise in usage. New customer offerings, including Stop the Clock, helped to stimulate a 10.1% increase in total voice usage, but this was offset by changes in prices during the year to improve competitiveness in the market, leading to an overall 0.8% decrease in voice revenue, which grew by 1.2% excluding the effect of the termination rate cut. A continuing focus on customer retention and an increasing proportion of customers on 18 month contracts had a positive impact on contract customer churn which fell from 22.7% to 21.5%, although blended churn increased to 32.1%, including the effect of increased prepaid customer self-upgrades, consistent with market trends.
Non-voice service revenue increased by 12.1%, driven largely by the success of enhanced data offerings. Growth of 843,000 over the financial year in registered 3G devices and the continued success of Vodafone Mobile Connect data cards and wireless push e-mail devices contributed to non-messaging data revenue increasing by 55.6%. Combined voice and messaging promotions led to an 18.1% increase in total messaging usage, although this was partially offset by a decline in the average price per message, and resulted in a 3.1% rise in messaging revenue.
The rise in interconnect costs and the cost of one-off call centre closures, as well as an increase in Group charges for use of the brand and related trademarks, which represented approximately 1.1% of service revenue, were partially offset by efficiencies in overheads and acquisition and retention costs, leading to a fall in adjusted operating profit of 10.3%. Interconnect costs increased by 11.8%, following an increase in total usage, combined with an increase in the proportion of voice calls made to customers of other mobile network operators, as customers optimise cross-network bundled tariffs, partially offset by the termination rate cut. Despite higher gross additions and upgrades, especially in the first half of the year, and a higher proportion of 3G connections, acquisition and retention costs were kept stable with the prior year, mainly due to an
increase in direct sales activity, SIM only promotions and a higher proportion of prepaid additions with lower subsidies. Payroll was 3% lower than the prior year and other operating expenses were lower than the prior year, excluding one-off call centre closures and the increase in Group charges for use of the brand and related trademarks, driven by the continued benefits of a structured cost reduction plan.
US Verizon Wireless
Years ended 31 March | Local | |||||||
currency | ||||||||
2006 | 2005 | Change | change | |||||
£m | £m | % | % | |||||
|
||||||||
Adjusted operating | ||||||||
profit | 1,732 | 1,354 | 27.9 | 23.8 | ||||
|
||||||||
Share of result in | ||||||||
associated | ||||||||
undertaking | ||||||||
Operating profit | 2,112 | 1,683 | 25.5 | 21.5 | ||||
Interest | (204 | ) | (187 | ) | 9.1 | 5.4 | ||
Tax | (116 | ) | (91 | ) | 27.5 | 22.5 | ||
Minority interest | (60 | ) | (51 | ) | 17.6 | 14.9 | ||
|
||||||||
1,732 | 1,354 | 27.9 | 23.8 | |||||
The US mobile telecommunications market has seen continued significant growth in customer numbers over the last twelve months, with penetration reaching an estimated 72% at 31 March 2006. In this environment, Verizon Wireless continued to increase its market share and improve its market leading margin performance.
Verizon Wireless outperformed its competitors with record net additions, increasing the proportionate customer base by 16.6% over the financial year to 23,530,000 and improving customer market share to approximately 25% whilst also maintaining the proportion of contract customers at 94.5% of the total customer base at 31 March 2006. The strong customer performance benefited from continuing improvements in customer loyalty, with a reduction in blended churn of 2.5 percentage points to 14.7% compared with the previous financial year, the lowest in the US mobile telecommunications industry.
In local currency, Verizon Wireless revenue increased by 14.9% due to the strong customer growth, partially offset by a fall in ARPU of 1.9%. The ARPU decline primarily resulted from an increase in the proportion of family share customers and voice tariff pricing changes implemented early in 2005, which included increases in the size of bundled minute plans.
Non-voice service revenue increased by more than 100% compared with the previous financial year and represented 8.9% of service revenue for the current year. Continued increases in messaging revenues were augmented by strong growth from data products, including Verizon Wireless consumer broadband multimedia offering, wireless email and broadband data card service. Verizon Wireless next-generation EV-DO network is currently available to about 150 million people, approximately half the US population. This investment has paved the way for the launch of innovative new data services in areas such as full track music downloads and location based services.
In local currency, the Groups share of Verizon Wireless operating profit increased by 21.5%, driven by revenue growth and maintaining a leading cost efficiency position in the US market. The Groups share of the tax attributable to Verizon Wireless of £116 million for the year ended 31 March 2006 relates only to the corporate entities held by the Verizon Wireless partnership. The tax attributable to the Groups share of the partnerships pre-tax profit is included within the Group tax charge.
Vodafone and Verizon Wireless are engaged in a number of joint projects, predominantly focusing upon bringing global services to their customers. The financial year saw the introduction of two new data roaming services for Verizon Wireless customers, in addition to the launch of new handsets for the global phone proposition, all of which leverage the Vodafone footprint.
Verizon Wireless continued to strengthen its spectrum position with the completion of the purchase of several key spectrum licences, including licences from Nextwave, Leap Wireless and Metro PCS and through participation in the FCCs Auction 58, which took place in February 2005, with licences being granted in May 2005.
34 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Other Mobile Operations
Years ended 31 March | Local | ||||||||
|
currency | ||||||||
2006 | 2005 | Change | change | ||||||
£m | £m | % | % | ||||||
|
|
|
|
|
|
|
|
||
Total revenue | |||||||||
Subsidiaries | 7,812 | 6,474 | 20.7 | ||||||
Joint ventures | 1,470 | 1,184 | 24.2 | ||||||
Less: intra-segment revenue | (32 | ) | (21 | ) | 52.4 | ||||
|
|
|
|
|
|
|
|
||
9,250 | 7,637 | 21.1 | 12.6 | ||||||
|
|
|
|
|
|
|
|
||
Adjusted operating | |||||||||
profit(2) | |||||||||
Subsidiaries | 1,445 | 1,368 | 5.6 | ||||||
Joint ventures | 363 | 305 | 19.0 | ||||||
Associated | |||||||||
undertakings | 695 | 671 | 3.6 | ||||||
|
|
|
|
|
|
|
|
||
2,503 | 2,344 | 6.8 | 6.4 | ||||||
|
|
|
|
|
|
|
|
||
Trading results | |||||||||
Voice services | 7,313 | 6,070 | 20.5 | ||||||
Non-voice services | |||||||||
Messaging | 1,017 | 790 | 28.7 | ||||||
Data | 200 | 113 | 77.0 | ||||||
|
|
|
|
|
|
|
|
||
Total service revenue | 8,530 | 6,973 | 22.3 | ||||||
Net other revenue(1) | 137 | 110 | 24.5 | ||||||
Interconnect costs | (1,698 | ) | (1,367 | ) | 24.2 | ||||
Other direct costs | (727 | ) | (568 | ) | 28.0 | ||||
Net acquisition costs(1) | (443 | ) | (393 | ) | 12.7 | ||||
Net retention costs(1) | (358 | ) | (267 | ) | 34.1 | ||||
Payroll | (624 | ) | (531 | ) | 17.5 | ||||
Other operating | |||||||||
expenses(2) | (1,531 | ) | (1,140 | ) | 34.3 | ||||
Acquired intangibles | |||||||||
amortisation | (157 | ) | | ||||||
Purchased licence | |||||||||
amortisation | (129 | ) | (100 | ) | 29.0 | ||||
Depreciation and other | |||||||||
amortisation(2) | (1,192 | ) | (1,044 | ) | 14.2 | ||||
Share of result in | |||||||||
associates(2) | 695 | 671 | 3.6 | ||||||
|
|
|
|
|
|
|
|
||
Adjusted operating profit(2) | 2,503 | 2,344 | 6.8 | 6.4 | |||||
|
|
|
|
|
|
|
|
||
Share in result of associates | |||||||||
Operating profit(2) | 1,044 | 1,020 | 2.4 | ||||||
Interest | (20 | ) | (7 | ) | 185.7 | ||||
Tax | (329 | ) | (342 | ) | (3.8 | ) | |||
|
|
|
|
|
|
|
|
||
695 | 671 | 3.6 | |||||||
|
|
|
|
|
|
|
|
Notes: | |
(1) | Revenue includes revenue of £583 million (2005: £554 million) which has been excluded from other revenue and deducted from acquisition and retention costs in the trading results. |
(2) | Before impairment losses and non-recurring amounts related to acquisitions and disposals. |
Total revenue for the Groups Other Mobile Operations increased by 21.1%, or 12.6% on an organic basis. The net impact of acquisitions in the Czech Republic, India, Romania and South Africa and the disposal of the Groups Swedish operations during the year ended 31 March 2006 increased reported revenue growth by 6.8%. Favourable exchange rate movements accounted for 1.7% of the remaining difference between reported and organic growth. The increase in total service revenue was principally driven by an increase in the average customer base of 26.5% excluding the impact of the acquisitions and disposal and of 44.0% including the impact of the acquisitions and disposal. This effect was partially offset by cuts in termination rates in certain markets, reduced ARPU from the launch of more competitive tariffs and an increase in the number of lower usage prepaid customers.
Excluding the impact of termination rate cuts, service revenue growth would have been 25.0%. Messaging and non-messaging data revenue grew strongly, increasing by 18.6% and 74.1%, respectively, on an organic basis and by 28.7% and 77.0%, respectively, including the impact of acquisitions, disposals and exchange rate movements.
Adjusted operating profit increased by 6.8%, or 6.4% on an organic basis, over the comparative period, with 0.5% of the difference due to the acquisitions and disposal in the current financial year, offset by 0.9% resulting from favourable foreign exchange rate movements. The reported growth in adjusted operating profit in the year was impacted by a reduction in the profitability of certain highly competitive markets, in particular Australia and the Netherlands, though these factors were partially offset by the profit contributed by acquisitions in the year and the impact of the disposal of the Groups Swedish operations, as well as higher depreciation and purchased licence amortisation, following the launch of 3G services in Australia and New Zealand, and the amortisation of identifiable intangible assets from the acquisitions in the current financial year.
Other
Mobile subsidiaries
In Greece,
service revenue grew by 9.4% when measured in local currency, due primarily
to a 13.6% rise in the average customer base. ARPU decreased by 3.7% year-on-year,
mainly due to a reduction in termination rates of 16.8% in September 2004.
In local currency, service revenue growth was 12.0% excluding the termination
rate cut. An increasing emphasis on retaining customers by encouraging prepaid
to contract customer migration resulted in churn decreasing to 25.0% for the
current financial year from 29.7% in the previous year.
Service revenue in Egypt, when measured in local currency, grew by 36.2%, primarily as a result of an increase in the average prepaid customer base of 82.0% which was driven by new innovative tariffs improving access and affordability in the market place. Revenue market share increased by 3.8 percentage points in the 2006 financial year to 51.8%.
Competition in Portugal intensified during the year with aggressively priced no-frills offerings by competitors which, combined with cuts in the termination rate which resulted in the average termination rate this year being 28.3% lower than last year, led to local currency service revenue growth being restricted to 1.6%.
In the Netherlands, an increase of 3.5% in service revenue and a 10.0% growth in the average customer base was achieved.
Vodafone Australia increased its customer base by 16.0%, and local currency service revenue by 11.8% due to the popularity of the capped plans, which have resulted in a significant increase in outgoing voice usage, whilst adversely impacting outgoing voice revenue per minute and interconnect costs. 3G services were launched on 31 October 2005, with strong uptake resulting in 171,000 consumer 3G devices being registered on the network by 31 March 2006.
New Zealand achieved service revenue growth of 8.5%, driven by a 12.3% growth in the average customer base, due principally to the launch of competitive promotions during the year. 3G services were launched on 10 August 2005, with 103,000 3G devices registered by the end of the financial year.
In Ireland, service revenue grew by 5.9%, primarily due to an increase of 9.2% in total voice usage following a 5.9% increase in the average customer base. Voice usage per customer in Ireland remains the highest of all Vodafones European subsidiaries.
On 5 January 2006, the Group announced that it had completed the sale of its 100% interest in Vodafone Sweden to Telenor, the pan-Nordic telecommunications operator. Vodafone and Telenor have agreed the terms of a Partner Market Agreement in Sweden, allowing Telenors mobile customers in Sweden and Vodafone customers to continue to benefit from Vodafones global brand, products and services in Sweden.
Service revenue growth in Hungary and Albania, when measured in local currency, was 13.9% and 16.2% respectively. Vodafone Romania increased service revenue by 39.0% in local currency compared with the previous financial year, assuming the Groups increased equity interest is reflected in the whole of the current and prior financial year. Additionally, Vodafones newly acquired subsidiaries in the Czech Republic and Romania have performed ahead of the Groups expectations at the time of the acquisition.
Other
Mobile joint ventures
Average
proportionate customers for the Groups joint ventures, excluding Italy,
grew organically by 43.4% in the year to 31 March 2006, with strong growth
in markets with relatively low penetration rates. The customer growth was
the primary reason for the 19.0% increase in adjusted operating profit for
other mobile joint ventures.
During the financial year, the Group completed the acquisition of a 10% economic interest in Bharti Tele-Ventures Limited (now renamed Bharti Airtel Limited), a leading national mobile operator in India.
Vodafone Group Plc Annual Report 2006 | 35 |
Operating
Results
continued
The Group also increased its effective shareholding in its joint venture in South Africa, Vodacom, from 35% to approximately 50% following the acquisition of VenFin.
Other
Mobile associated undertakings
SFR,
the Groups associated undertaking in France, reported strong growth
in revenue and operating profit, principally as a result of an 8.1% increase
in average customers compared with the previous financial year. Usage of both
voice and non-voice services increased in the year and SFR had a total of
5,268,000 Vodafone live! customers at 31
March 2006. SFR continues to grow its 3G base and at 31 March 2006 had registered
1,352,000 3G devices on its network.
On 30 November 2005, the French competition authority fined SFR €220 million for engaging in anti-competitive agreements that distorted market competition. SFR is in the process of appealing this decision.
On 7 April 2006, the Swiss Competition Commission notified Swisscom Mobile, the Groups associated undertaking in Switzerland, of its intention to impose a fine of CHF489 million in relation to abusive pricing on the mobile wholesale call termination market between 1 April 2004 and 31 May 2005.
Other
Mobile investments
China
Mobile, in which the Group has a 3.27% stake, and is accounted for as an investment,
grew its customer base by 21.9% in the year to 260.6 million at 31 March 2006.
Dividends of £41 million were received in the year.
Common functions
Years ended 31 March | |||||||
|
|||||||
2006 | 2005 | Change | |||||
£m | £m | % | |||||
|
|
|
|
||||
Revenue | 145 | 123 | 17.9 | ||||
|
|
|
|
||||
Adjusted operating profit/(loss) | 211 | (85 | ) | ||||
|
|
|
|
||||
Common functions include the results of Partner Markets and unallocated central Group costs and charges. Adjusted operating profit increased primarily due to a revision of the charges made to Vodafone operating companies for the use of the Vodafone brand and related trademarks which took effect from 1 April 2005.
Other operations
Years ended 31 March | |||||||
2006 | 2005 | Change | |||||
£m | £m | % | |||||
|
|
||||||
Revenue | |||||||
Germany | 1,320 | 1,095 | 20.5 | ||||
Other | 19 | | |||||
|
|
||||||
1,339 | 1,095 | 22.3 | |||||
|
|
||||||
Adjusted operating profit/(loss) | |||||||
Germany | 139 | 64 | 117.2 | ||||
Other | (20 | ) | (45 | ) | (55.6 | ) | |
|
|
||||||
119 | 19 | 526.3 | |||||
|
|
Other operations comprise interests in fixed line telecommunications businesses in Germany, France and India.
Germany
In
local currency, Arcors revenue increased by 20.7%, primarily due to
customer and usage growth, partially offset by tariff decreases in the competitive
market. The incumbent fixed line market leader continues to drive this intensive
competition, although Arcor further strengthened its position as the main
competitor. Contract ISDN voice customers increased by 103% to 1,447,000 and
DSL (broadband internet) customers by 166% to 1,209,000 in the current financial
year. Arcor increased its share of the DSL market to 11%. Revenue growth and
cost efficiencies led to the substantial improvement in adjusted operating
profit.
Other
The
merger of Cegetel, the Groups associated undertaking, and Neuf Telecom
closed on 22 August 2005, giving the Group a proportionate interest of 12.4%
in the leading alternative operator for fixed line telecommunications services
in France. The new entity, Neuf Cegetel, has the largest alternative broadband
network in France, with 70% population coverage.
US
GAAP Reconciliation
The
principal differences between US GAAP and IFRS, as they relate to the Consolidated
Financial Statements, are the accounting for goodwill and intangible assets
before 29 September 2005, the accounting for income taxes, the capitalisation
of interest and the timing of recognition of connection revenue and expenses.
In the year ended 31 March 2006, revenue from continuing operations under US GAAP was £23,756 million compared with revenue from continuing operations under IFRS of £29,350 million for the same period. The difference relates to the equity accounting of Vodafone Italy under US GAAP, the treatment of Vodafone Sweden as discontinued under US GAAP and the release of connection revenue deferred prior to the adoption of EITF 00-21 on 1 October 2003, which is required to be recognised over the period a customer is expected to remain connected to the network under US GAAP.
Net loss under US GAAP for the year ended 31 March 2006 was £13,310 million, compared with a loss for the financial year under IFRS of £21,821 million for the same period. The lower net loss under US GAAP was mainly driven by higher amortisation charges of other intangible assets and share of result in equity method investments, more than offset by income taxes and the reversal of impairment losses.
The reconciliation of the differences between IFRS and US GAAP is provided in note 38 to the Consolidated Financial Statements.
36 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Summary
of Key Performance Indicators
for Principal Markets
2006 | 2005 | ||||
|
|
||||
Germany | |||||
Customers (000s)(1) | 29,191 | 27,223 | |||
Prepaid (%) | 53.3 | 52 | |||
Activity level (%)(1)(2) | 90.6 | 93.7 | |||
Churn (%)(1) | 20.2 | 18.3 | |||
Average monthly ARPU (€)(1) | |||||
Prepaid | 8.5 | 9.8 | |||
Contract | 39.2 | 39.9 | |||
Blended | 23.3 | 24.9 | |||
Total voice minutes (millions) | 26,787 | 23,560 | |||
Vodafone live! active devices (000) | 6,214 | 4,845 | |||
3G devices (000)(1) | 2,025 | 358 | |||
|
|
||||
2006 | 2005 | ||||
|
|
||||
Italy | |||||
Customers (000s)(1) | 18,490 | 17,280 | |||
Prepaid (%) | 92.2 | 92 | |||
Activity level (%)(1) | 91.2 | 92.3 | |||
Churn (%)(1) | 18.7 | 17.2 | |||
Average monthly ARPU (€)(1)(2) | |||||
Prepaid | 24.3 | 25.4 | |||
Contract | 74.7 | 76.8 | |||
Blended | 28.5 | 29.9 | |||
Total voice minutes (millions) | 29,604 | 28,170 | |||
Vodafone live! active devices (000) | 4,097 | 2,113 | |||
3G devices (000)(1) | 2,250 | 511 | |||
|
|
||||
2006 | 2005 | ||||
|
|
||||
Spain | |||||
Customers (000s)(1) | 13,521 | 11,472 | |||
Prepaid (%) | 50.4 | 53 | |||
Activity level (%)(1) | 94.3 | 94.6 | |||
Churn (%)(1) | 20.9 | 21.9 | |||
Average monthly ARPU (€)(1)(2) | |||||
Prepaid | 15.1 | 15.1 | |||
Contract | 56.9 | 57.4 | |||
Blended | 35.6 | 34.5 | |||
Total voice minutes (millions) | 23,835 | 17,793 | |||
Vodafone live! active devices (000) | 5,514 | 2,992 | |||
3G devices (000)(1) | 902 | 88 | |||
|
|
||||
2006 | 2005 | ||||
|
|
||||
United Kingdom | |||||
Customers (000s)(1) | 16,304 | 15,324 | |||
Prepaid (%) | 61.1 | 61 | |||
Activity level (%)(1) | 88.4 | 90.3 | |||
Churn (%)(1) | 32.1 | 29.7 | |||
Average monthly ARPU (£)(1)(2) | |||||
Prepaid | 9.4 | 10.3 | |||
Contract | 45.7 | 47.4 | |||
Blended | 24.0 | 25.5 | |||
Total voice minutes (millions) | 28,059 | 25,486 | |||
Vodafone live! active devices (000) | 4,181 | 3,443 | |||
3G devices (000)(1) | 1,033 | 190 | |||
|
|
||||
2006 | 2005 | ||||
|
|
||||
US Verizon Wireless | |||||
Customers (000s)(1) | 23,530 | 20,173 | |||
Churn (%)(1) | 14.7 | 17.2 | |||
Average monthly ARPU ($)(1)(2) | |||||
Blended | 51.4 | 52.4 | |||
Acquistion
and retention costs as a percentage of service revenue (%) |
12.4 | 12.9 | |||
|
|
Notes: | |
(1) | See page 49 for definitions. |
(2) | During the year ended 31 March 2006, the definition of an active customer was revised to one who either pays a monthly fee or has made or received a chargeable event in the last three months. The information for the year ended 31 March 2005 has been restated using this revised definition. |
Vodafone Group Plc Annual Report 2006 | 37 |
Financial Position and Resources
Non-current
assets
Intangible
assets
At 31 March
2006, the Groups intangible assets were £69.1 billion, with goodwill
comprising the largest element at £52.6 billion (2005: £81.0 billion).
The balance has decreased from £97.1 billion (£88.1 billion excluding
discontinued operations) at 31
March 2005 mainly as a result of a £23.5 billion impairment charge in
the 2006 financial year in respect of the carrying value of goodwill of Germany,
Italy and Sweden. Refer to note 10 to the Consolidated Financial Statements
for further information on the impairment losses. Other movements resulted from
£4.7 billion of intangible assets arising on acquisitions in the 2006
financial year, £0.6 billion of additions, primarily in relation to computer
software, £1.0 billion of exchange movements, partially offset by £1.6
billion of amortisation charges and £0.2 billion of disposals, mainly
in relation to the goodwill related to Vodafone Sweden.
Property,
plant and equipment
The most significant
component of property, plant and equipment is network infrastructure, which
is fundamental to the Group being able to provide its services. Property, plant
and equipment decreased from £17.4 billion (£12.9 billion excluding
Japan) at 31 March 2005 to £13.7 billion at 31 March 2006 as a result
of £3.4 billion of additions during the year and £0.9 billion of
additions arising on acquisition as well as £0.3 billion of foreign exchange
movements, partially offset by £3.1 billion of depreciation charges and
£0.7 billion of disposals including £0.6 billion in relation to
the sale of the Groups operations in Sweden. At 31 March 2006, network
infrastructure assets of £10.1 billion (2005: £14.1 billion) represented
73.6% (2005: 80.8%) of total property, plant and equipment.
Investments
in associated undertakings
The Groups
investments in associated undertakings increased from £20.2 billion at
31 March 2005
to £23.2 billion at 31 March 2006, mainly as a result of £2.4 billion
from the Groups share of the results of its associates after the deductions
of interest, tax and minority interest, and favourable exchange rate movements
of £1.4 billion, offset by £0.8 billion of dividends received.
Other
non-current assets
Other non-current
assets mainly relates to other investments held by the Group, which totalled
£2.1 billion at 31 March 2006 compared to £1.2 billion at 31 March
2005, with the movement representing an increase in the listed share price
of China Mobile in which the Group has an equity investment and foreign exchange
movements, offset by a
£0.5 billion decrease in deferred tax assets, excluding discontinued operations see non-current liabilities below.
Current assets
Current assets
decreased to £7.5 billion at 31 March 2006 from £9.4 billion at
31 March 2005, mainly as a result of a £1.0 billion reduction in cash
and liquid investments and the reclassification of Vodafone Japan as discontinued
operations.
Equity
shareholders funds
Total equity
shareholders funds decreased from £113.8 billion at 31 March 2005
to £85.4 billion at 31 March 2006. The decrease comprises of the loss
for the year of £21.9 billion, equity dividends of £2.8 billion,
purchases of the Companys own shares of £6.5 billion, a loss on
the re-issue of treasury shares of £0.1 billion and £0.1 billion
of other movements, partially offset by £0.4 billion of own shares released
on vesting of share awards, issue of new share capital of £0.2 billion,
a £0.1 billion share-based payments charge and £2.3 billion of other
accumulated other recognised income and expense.
Non-current liabilities
Non-current
liabilities increased to £23.4 billion at 31 March 2006 from £18.9
billion at 31 March 2005, mainly due to the increase in borrowings, which is
discussed further in Liquidity and Capital Resources. The deferred
tax liability increased from £4.8 billion at 31 March 2005 to £5.7
billion at 31 March 2006, which together with the £0.5 billion decrease
in deferred tax assets, arose primarily from a net £0.4 billion in relation
to acquisitions and disposals in the year, £0.6 billion additional tax
charges to the income statement and £0.2 billion of foreign exchange movements
refer to note 6 to the Consolidated Financial Statements. Non-current
liabilities also includes £0.1 billion (2005: £0.1 billion) in relation
to the deficit on defined benefit pension schemes refer to note 25 to
the Consolidated Financial Statements.
Current liabilities
Current liabilities
increased to £15.5 billion from £14.6 billion.
Equity
Dividends
The table
below sets out the amounts of interim, final and total cash dividends paid or,
in the case of the final dividend for the 2006 financial year, proposed in respect
of each financial year indicated both in pence per ordinary share and translated,
solely for convenience, into cents per ordinary share at the Noon Buying Rate
on each of the respective payment dates for such interim and final dividends.
Pence per ordinary share | Cents per ordinary share | ||||||||||||
Year ended | |
||||||||||||
31 March | Interim | Final | Total | Interim | Final | Total | |||||||
2002 | 0.7224 | 0.7497 | 1.4721 | 1.0241 | 1.1422 | 2.1663 | |||||||
2003 | 0.7946 | 0.8983 | 1.6929 | 1.2939 | 1.4445 | 2.7384 | |||||||
2004 | 0.9535 | 1.0780 | 2.0315 | 1.7601 | 1.9899 | 3.7500 | |||||||
2005 | 1.91 | 2.16 | 4.07 | 3.60 | 4.08 | 7.68 | |||||||
2006 | 2.20 | 3.87 | (1) | 6.07 | 3.83 | 6.73 | (1) | 10.56 | |||||
Note: | |
(1) | The final dividend for the year was proposed on 30 May 2006 and is payable on 4 August 2006 to holders of record as of 7 June 2006. This dividend has been translated into US dollars at the Noon Buying Rate at 31 March 2006 for ADS holders, but will be payable in US dollars under the terms of the deposit agreement. |
The Company has historically paid dividends semi-annually, with a regular interim dividend in respect of the first six months of the financial year payable in February and a final dividend payable in August. The Board expects that the Company will continue to pay dividends semi-annually. In November 2005, the Board declared an interim dividend of 2.20 pence per share, representing a 15.2% increase over last years interim dividend.
In considering the level of dividends, the Board takes account of the outlook for earnings growth, operating cash flow generation, capital expenditure requirements, acquisitions and divestments, together with the amount of debt and share purchases.
Consistent with this, and developments to the Groups strategy, the Board has decided to target a 60% dividend pay out ratio taking effect for the 2006 financial year. The Board is therefore recommending a final dividend of 3.87 pence, representing a 79.2% increase over last years final dividend and bringing the total dividend for the year to 6.07 pence, an increase of 49.1% on last years total dividend. The dividend pay out ratio, being the declared interim and proposed final dividends per share as a percentage of adjusted earnings per share from continuing operations, in respect of the 2006 financial year of 60%, compared favourably with a pay-out ratio for the 2005 financial year of 45%. It is the intention to grow future dividends on an annual basis in line with underlying earnings growth, maintaining dividends per share at approximately 60% of adjusted earnings per share.
Cash dividends, if any, will be paid by the Company in respect of ordinary shares in
38 | Vodafone Group Plc Annual Report 2006 |
Performance | |
pounds sterling or, to holders of ordinary shares with a registered address in a country which has adopted the euro as its national currency, in euro, unless shareholders wish to elect to continue to receive dividends in sterling, are participating in the Companys Dividend Reinvestment Plan, or have mandated their dividend payment to be paid directly into a bank or building society account in the United Kingdom. In accordance with the Companys Articles of Association, the sterling: euro exchange rate will be determined by the Company shortly before the payment date.
The Company will pay the ADS Depositary, The Bank of New York, its dividend in US dollars. The sterling: US dollar exchange rate for this purpose will be determined by the Company shortly before the payment date. Cash dividends to ADS holders will be paid by the ADS Depositary in US dollars.
Contractual
Obligations
A summary
of the Groups principal contractual financial obligations is shown below.
Further details on the items included can be found in the notes to the Consolidated
Financial Statements.
Payments due by period £m | |||||||||
Contractual obligations(1) | Total | <1 year | 1-3 years | 3-5 years | >5 years | ||||
Borrowings(2) | 28,101 | 4,308 | 6,175 | 7,373 | 10,245 | ||||
Operating lease commitments(3) | 3,644 | 654 | 956 | 742 | 1,292 | ||||
Capital commitments(4) | 813 | 813 | | | | ||||
Purchase commitments(5) | 1,159 | 855 | 187 | 89 | 28 | ||||
Telsim asset acquisition agreements | 2,600 | 2,600 | | | | ||||
Total contractual cash obligations(1) | 36,317 | 9,230 | 7,318 | 8,204 | 11,565 | ||||
Notes: | |
(1) | The above table of contractual obligations excludes commitments in respect of options over interests in Group businesses held by minority shareholders (see Option agreements and similar arrangements) and obligations to pay dividends to minority shareholders (see Dividends from associated undertakings and dividends to minority interests). Disclosures required by Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, are provided in note 31 to the Consolidated Financial Statements. The table also excludes obligations under post employment benefit schemes, details of which are provided in note 25 to the Consolidated Financial Statements. The table also excludes contractual obligations relating to the Groups discontinued operations in Japan, which were disposed of on 27 April 2006. |
(2) | See note 24 to the Consolidated Financial Statements. |
(3) | See note 30 to the Consolidated Financial Statements. |
(4) | Primarily related to network infrastructure. |
(5) | Predominantly commitments for handsets. |
Contingencies
Details of
the Groups contingent liabilities are included in note 31 to the Consolidated
Financial Statements.
A number of Vodafone subsidiaries acquired 3G licences through auctions in 2000 and 2001. An appeal was filed by Vodafone Group Services Limited on behalf of Vodafone Limited, along with appeals filed by other UK mobile network operators which were granted a 3G licence, with the VAT and Duties Tribunal on 18 October 2003 for recovery of VAT on the basis that the amount of the licence fee was inclusive of VAT. The amount claimed by Vodafone Limited is approximately £888 million. In August 2004, these claims were referred, jointly, to the ECJ and a hearing took place on 7 February 2006. A decision by the ECJ is expected within the next 12 to 15 months. The Group has not recognised any amounts in respect of this matter to date. In addition, the Group has made a claim for recovery of VAT in relation to 3G licence fees in Portugal, the Netherlands, Germany and Ireland. The Group may also pursue similar claims in certain other European jurisdictions.
Liquidity
and Capital Resources
Cash
flows
The major
sources of Group liquidity for the 2006 financial year have been cash generated
from operations, dividends from associated undertakings, borrowings through
short term and long term issuances in the capital markets and asset disposals.
For the year ended 31 March 2005, sources of Group liquidity were from cash
generated from operations and dividends from associates. The Group does not
use off-balance sheet special purpose entities as a source of liquidity or
for other financing purposes.
The Groups key sources of liquidity for the foreseeable future are likely to be cash generated from operations and borrowings through long term and short term issuances in the capital markets, as well as committed bank facilities. Additionally, the Group has a put option in relation to its interest in Verizon Wireless which, if exercised, could provide a material cash inflow. Please see Option agreements and similar arrangements at the end of this section.
The Groups liquidity and working capital may be affected by a material decrease in cash flow due to factors such as reduced operating cash flow resulting from further possible business disposals, increased competition, litigation, timing of tax payments and the resolution of outstanding tax issues, regulatory rulings, delays in development of new services and networks, inability to receive expected revenue from the introduction of
new services, reduced dividends from associates and investments or dividend payments to minority shareholders. Please see the section titled Risk Factors, Trends and Outlook, on pages 43 to 45. The Group anticipates a significant increase in cash tax payments and associated interest payments over the next three years due to the resolution of long standing tax issues. The Group is also party to a number of agreements that may result in a cash outflow in future periods. These agreements are discussed further in Option agreements and similar arrangements at the end of this section.
Wherever possible, surplus funds in the Group (except in Albania, Romania and Egypt) are transferred to the centralised treasury department through repayment of borrowings, deposits and dividends. These are then on-lent or contributed as equity to fund Group operations, used to retire external debt or invested externally.
Decrease
in cash in the year
During
the 2006 financial year, the Group increased its net cash inflow from operating
activities by 7.9% to £11,841 million, including a 10.3% increase to £10,190
million from continuing operations. The Group generated £6,418 million
of free cash flow from continuing operations, a reduction of 2.6% on the previous
financial year, and an additional £701 million from discontinued operations.
Free cash flow from continuing operations decreased from the prior financial
year due to a reduction in the dividends received from associated undertakings,
principally Verizon Wireless, and an increase in capital expenditure which more
than offset the increase in the net cash inflow from operating activities.
The Group holds its cash and liquid investments in accordance with the counterparty and settlement risk limits of the Board approved treasury policy. The main forms of liquid investments at 31 March 2006 were money market funds and bank deposits.
2006 | 2005 | |||
£m | £m | |||
Net cash flows from operating activities | 11,841 | 10,979 | ||
Continuing operations | 10,190 | 9,240 | ||
Discontinued operations | 1,651 | 1,739 | ||
Taxation | 1,682 | 1,578 | ||
Purchase of intangible fixed assets | (690 | ) | (699 | ) |
Purchase of property, plant and equipment | (4,481 | ) | (4,279 | ) |
Disposal of property, plant and equipment | 26 | 68 | ||
|
||||
Operating free cash flow | 8,378 | 7,647 | ||
Taxation | (1,682 | ) | (1,578 | ) |
Dividends from associated undertakings | 835 | 1,896 | ||
Dividends paid to minority shareholders in | ||||
subsidiary undertakings | (51 | ) | (32 | ) |
Dividends from investments | 41 | 19 | ||
Interest received | 319 | 339 | ||
Interest paid | (721 | ) | (744 | ) |
|
||||
Free cash flow | 7,119 | 7,547 | ||
Continuing operations | 6,418 | 6,592 | ||
Discontinued operations | 701 | 955 | ||
Net cash outflow from acquisitions and disposals | (3,587 | ) | (2,017 | ) |
Other cash flows from investing activities | (56 | ) | 113 | |
Equity dividends paid | (2,749 | ) | (1,991 | ) |
Other cash flows from financing activities | (1,555 | ) | (5,764 | ) |
|
||||
Decrease in cash in the year | (828 | ) | (2,112 | ) |
Capital
expenditure
During the
2006 financial year, £4,481 million was spent on property, plant and equipment,
an increase of 4.7% from the previous financial year. From continuing operations,
the amount spent increased to £3,634 million.
The cash outflow in intangible assets reduced from £699 million in the previous financial year to £690 million in the current financial year, with the largest element being expenditure on computer software.
Dividends
from associated undertakings and investments and dividends to minority shareholders
Dividends
from the Groups associated undertakings and investments are generally
paid at the discretion of the board of directors or shareholders of the individual
operating
Vodafone Group Plc Annual Report 2006 | 39 |
Financial
Position and Resources
continued
companies and Vodafone has no rights to receive dividends, except where specified within certain of the companies shareholders agreements, such as with SFR, the Groups associated undertaking in France. Similarly, the Group does not have existing obligations under shareholders agreements to pay dividends to minority interest partners of Group subsidiaries, except as specified below.
Included in the dividends received from associated undertakings and investments was an amount of £195 million received from Verizon Wireless. Until April 2005, Verizon Wireless distributions were determined by the terms of the partnership agreement distribution policy and comprised income distributions and tax distributions. Since April 2005, tax distributions have continued and a new distribution policy is expected to be set in the future by the Board of Representatives of Verizon Wireless. Current projections forecast that tax distributions will not be sufficient to cover the US tax liabilities arising from the Groups partnership interest in Verizon Wireless until 2015 and, in the absence of additional distributions above the level of tax distributions during this period, will result in a net cash outflow for the Group. Under the terms of the partnership agreement, the board of directors has no obligation to provide for additional distributions above the level of the tax distributions. It is the expectation that Verizon Wireless will re-invest free cash flow in the business and reduce indebtedness for the foreseeable future.
During the year ended 31 March 2006, cash dividends totalling £511 million were received from SFR in accordance with the shareholders agreement.
Verizon Communications Inc. (Verizon Communications) has an indirect 23.1% shareholding in Vodafone Italy and, under the shareholders agreement, can request dividends to be paid, provided that such dividends would not impair the financial condition or prospects of Vodafone Italy including, without limitation, its credit rating. No dividends were proposed or paid by Vodafone Italy during or since the year ended 31 March 2006 but a share purchase programme occurred during the financial year, further details of which are provided on page 41.
Acquisitions
and disposals
The Group
invested a net £3,643 million in acquisition and disposal activities,
including a net cash outflow of £56 million from the purchase and disposal
of investments, in the year to 31 March 2006. The acquisitions are described
in more detail under Business Overview History and Development
of the Company.
An analysis of the main transactions in the 2006 financial year, including the changes in the Groups effective shareholding, is shown below:
£m | |||
Acquisitions: | |||
Czech Republic (nil to 100%) and Romania (20.1% to 100%)(1) | 1,840 | ||
South Africa (35.0% to 49.9%)(1) | 1,444 | ||
India (nil to 10.0%)(1) | 849 | ||
Disposals: | |||
Sweden (100% to nil) | (658 | ) | |
Other net acquisitions and disposals, including investments | 168 | ||
3,643 | |||
Note: | |||
(1) | Amounts are shown net of cash and cash equivalents acquired. |
On 17 March 2006, the Group announced an agreement to sell its 97.7% holding in Vodafone Japan to SoftBank. The transaction completed on 27 April 2006 with the Group receiving cash of approximately ¥1.42 trillion (£6.9 billion), including the repayment of intercompany debt of ¥0.16 trillion (£0.8 billion). In addition, the Group received non-cash consideration with a fair value of approximately ¥0.23 trillion (£1.1 billion), comprised of preferred equity and a subordinated loan. SoftBank also assumed external debt of approximately ¥0.13 trillion (£0.6 billion).
Special
distribution of £9 billion
On 17 March
2006, the Group stated that it will make a special distribution of approximately
£6 billion in the 2007 financial year of the £6.9 billion cash received
following the completion of the sale of the Groups interest in Vodafone
Japan. Through targeting a lower credit rating, the Group now plans to return
a further £3 billion, resulting in a total distribution of approximately
£9 billion.
This equates to 15p per ordinary share. Subject to shareholder approval, the method of distribution will be in the form of a B share arrangement with a share consolidation, which will reduce the Companys shares in issue. The B share arrangement provides for shareholder flexibility as to when and how cash is received, thereby allowing income tax and capital gains management for some shareholders. The Company will post a circular to shareholders, with full details of the B share arrangement and the consolidation, on or around 13 June 2006.
The consolidation, which will replace existing ordinary shares with fewer new ordinary shares, is intended to maintain the share price, subject to normal market movements, and, consequently, historic comparability. For non-US shareholders, the B shares will be redeemed by default, with shareholders receiving a capital distribution. They may, however, elect for certain alternatives. Non-US shareholders can elect to receive the 15 pence as a one off dividend or elect to receive the capital distribution over time at pre-determined dates. Payment in respect of the initial redemption is intended to be made on 11 August 2006 and for any shareholders electing to receive the one off 15 pence per B share dividend payment is also intended to be made on 11 August 2006. It is expected that US shareholders and American Depositary Receipt (ADR) holders will only be entitled to receive the return as a one off dividend.
Share purchase
programme
When considering
how increased returns to shareholders can be provided in the form of share purchases,
the Board reviews the free cash flow, anticipated cash requirements, dividends,
credit profile and gearing of the Group.
On 24 May 2005, the Board allocated £4.5 billion to the share purchase programme for the year to 31 March 2006, which was subsequently increased to £6.5 billion. For the period from 1 April 2005 to 31 March 2006, the Company purchased 4,848 million shares at a cost of £6.5 billion. The average share price paid, excluding transaction costs, was 133.37 pence, compared with the average volume weighted price over the same period but excluding the period when shares could not be purchased, due to the announcement of the discussions which led to the disposal of Vodafone Japan, of 133.87 pence. No shares have been purchased since 31 March 2006. In addition to ordinary market purchases, the Company placed irrevocable purchase instructions prior to the start of some of the close periods and in advance of quarterly KPI announcements.
At its AGM on 26 July 2005, the Company received shareholder approval to purchase up to 6.4 billion shares of the Company. This approval will expire at the conclusion of the Companys AGM on 25 July 2006. Shares can be purchased on market on the London Stock Exchange at a price not exceeding 105% of the average middle market quotation for such shares on the five business days prior to the date of purchase and otherwise in accordance with the rules of the Financial Services Authority. Purchases are only made if accretive to adjusted earnings per share.
As a result of targeting a lower credit rating and the £9 billion special distribution, the Group has no current plans for further share purchases or other one off shareholder returns.
Details of shares purchased under the programme are shown below:
Total | ||||||||
number of | ||||||||
shares | ||||||||
Average | purchased | |||||||
price | under | Maximum | ||||||
paid per | publicly | value of | ||||||
Total | share, | announced | shares | |||||
number of | inclusive of | share | purchased | |||||
shares | transaction | purchase | under the | |||||
purchased | costs | programme | (1) | programme | (2) | |||
Date of share purchase | 000 | Pence | 000 | £m | ||||
|
|
|
|
|
||||
1 30 April 2005 | 321,000 | 139.33 | 321,000 | 4,053 | ||||
1 23 May 2005 | 84,500 | 139.00 | 405,500 | 3,935 | ||||
24 31 May 2005 | 110,000 | 139.49 | 515,500 | 3,782 | ||||
1 30 June 2005 | 508,500 | 136.80 | 1,024,000 | 3,086 | ||||
1 10 July 2005 | 145,500 | 137.23 | 1,169,500 | 2,887 | ||||
11 27 July 2005 | 225,700 | 144.32 | 1,395,200 | 2,561 | ||||
28 31 July 2005 | | | 1,395,200 | 2,561 | ||||
1 31 August 2005 | 297,900 | 150.57 | 1,693,100 | 2,112 | ||||
1 30 September 2005 | 273,900 | 151.21 | 1,967,000 | 1,698 | ||||
1 31 October 2005 | 368,000 | 146.76 | 2,335,000 | 1,158 | ||||
1 14 November 2005 | 71,500 | 150.83 | 2,406,500 | 3,050 | ||||
15 30 November 2005 | 564,000 | 128.23 | 2,970,500 | 2,327 | ||||
1 31 December 2005 | 362,500 | 126.49 | 3,333,000 | 1,868 | ||||
1 9 January 2006 | 165,500 | 129.63 | 3,498,500 | 1,654 | ||||
10 24 January 2006 | 504,000 | 124.99 | 4,002,500 | 1,024 | ||||
25 31 January 2006 | 76,500 | 121.17 | 4,079,000 | 931 | ||||
1 28 February 2006 | 411,000 | 119.84 | 4,490,000 | 439 | ||||
1 31 March 2006 | 358,000 | 122.42 | 4,848,000 | | ||||
Total | 4,848,000 | 134.07 | 4,848,000 | | ||||
Notes: | |
(1) | No shares were purchased outside the publicly announced share purchase programmes. |
(2) | On 24 May 2005, the Company announced it was allocating £4.5 billion to the share purchase programme to cover the year to 31 March 2006, including those shares purchased between 1 April 2005 and 23 May 2005 under irrevocable purchase instructions. This superseded the £4 billion programme announced in November 2004. On 15 November 2005, the Company announced that it was increasing the allocation to £6.5 billion completing by March 2006. |
40 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Treasury
shares
The Companies
Act 1985 permits companies to purchase their own shares out of distributable
reserves and to hold shares with a nominal value not to exceed 10% of the nominal
value of their issued share capital in treasury. If shares in excess of this
limit are purchased they must be cancelled. Whilst held in treasury, no voting
rights or preemption rights accrue and no dividends are paid in respect of treasury
shares. Treasury shares may be sold for cash, transferred (in certain circumstances)
for the purposes of an employee share scheme, or cancelled. If treasury shares
are sold, such sales are deemed to be a new issue of shares and will accordingly
count towards the 5% of share capital which the Company is permitted to issue
on a non pre-emptive basis in any one year as approved by its shareholders at
the AGM. The proceeds of any sale of treasury shares up to the amount of the
original purchase price, calculated on a weighted average price method, is attributed
to distributable profits which would not occur in the case of the sale of non-treasury
shares. Any excess above the original purchase price must be transferred to
the share premium account.
Shares purchased are held in treasury in accordance with section 162 of the Companies Act 1985. The movement in treasury shares during the financial year is shown below:
Number | ||||
million | £m | |||
1 April 2005 | 3,814 | 5,121 | ||
Repurchase of shares | 4,848 | 6,500 | ||
Cancellation of shares | (2,250 | ) | (3,053 | ) |
Re-issue of shares | (279 | ) | (370 | ) |
31 March 2006 | 6,133 | 8,198 | ||
Vodafone
Italy share purchase
On 19 April
2005, the board of directors of Vodafone Italy approved a proposal to buy back
issued and outstanding shares for approximately €7.9
billion (£5.4 billion), which was subsequently approved by the shareholders
of Vodafone Italy. The buy back took place in two tranches, the first on 24
June 2005 and the second on 7 November 2005. As a result, Vodafone received
€6.1 billion (£4.2 billion)
and Verizon Communications received €1.8 billion (£1.2 billion).
After the transaction, Vodafone and Verizon Communications shareholdings in
Vodafone Italy remained at approximately 77% and 23%, respectively. At 31 March
2006, Vodafone Italy had net cash on deposit with Group companies of €2.3
billion (£1.6 billion).
Funding
The Groups
consolidated net debt position for continuing operations is as follows:
2006 | 2005 | |||
£m | £m | |||
|
|
|||
Cash and cash equivalents (as presented in the | ||||
consolidated cash flow statement) | 2,932 | 3,726 | ||
Bank overdrafts | 18 | 43 | ||
Cash and cash equivalents for discontinued operations | (161 | ) | | |
|
|
|||
Cash and cash equivalents (as presented in | ||||
the consolidated balance sheet) | 2,789 | 3,769 | ||
|
|
|||
Trade and other receivables(1) | 310 | 408 | ||
Trade and other payables(1) | (219 | ) | (79 | ) |
Short-term borrowings | (3,448 | ) | (2,003 | ) |
Long-term borrowings | (16,750 | ) | (13,190 | ) |
|
|
|||
(20,107 | ) | (14,864 | ) | |
|
|
|||
Net debt as extracted from the consolidated balance sheet | (17,318 | ) | (11,095 | ) |
Net debt related to discontinued operations | | 920 | ||
|
|
|||
Net debt related to continuing operations | (17,318 | ) | (10,175 | ) |
|
|
Note: | |
(1) | Trade and other receivables and payables include certain derivative financial instruments (see notes 17 and 27). |
Net debt increased to £17,318 million, from £10,175 million at 31 March 2005, principally as a result of the cash flow items noted above, share purchases, equity dividend payments and £34 million of foreign exchange movements. This represented approximately 24% of the Groups market capitalisation at 31 March 2006 compared with 11% at 31 March 2005. Average net debt at month end accounting dates over the 12 month period ended 31 March 2006 was £13,391 million, and ranged between £9,551 million and £17,318 million during the year.
Consistent with development of its strategy, the Group is now targeting low single A long term credit ratings from Moodys, Fitch Ratings and Standard & Poors having previously managed the capital structure at single A credit ratings. Credit ratings are not a recommendation to purchase, hold or sell securities, in as much as ratings do not comment on market price or suitability for a particular investor, and are subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently.
The Groups credit ratings enable it to have access to a wide range of debt finance, including commercial paper, bonds and committed bank facilities.
Commercial
paper programmes
The Group
currently has US and euro commercial paper programmes of $15 billion and £5
billion, respectively, which are available to be used to meet short term liquidity
requirements and which were undrawn at 31 March 2005. At 31 March 2006, $696
million (£400 million) was drawn under the US commercial paper programme
and $80 million (£46 million) and £285 million were drawn under
the euro commercial paper programme. The commercial paper facilities are supported
by $10.9 billion (£6.3 billion) of committed bank facilities, comprised
of a $5.9 billion Revolving Credit Facility that matures on 24 June 2009 and
a $5.0 billion Revolving Credit Facility that matures on 22 June
2012. At 31 March 2006 and 31 March 2005, no amounts had been drawn under either
bank facility.
Bonds
The Group
has a €15
billion Euro Medium Term Note programme, a $12 billion US shelf programme and
a ¥600 billion Japanese shelf programme, which are used to meet medium to
long term funding requirements. At 31 March 2006, the total amounts in issue
under these programmes split by currency were $13.4 billion, £1.5 billion, €8.7
billion and ¥3 billion. In addition, the Groups discontinued operation
in Japan had bonds in issue of ¥125 billion, which were transferred to SoftBank
following completion of the sale of Vodafone Japan.
In the year to 31 March 2006, bonds with a nominal value £5.2 billion were issued under the US Shelf and the Euro Medium Term Note programme. The bonds issued during the year were:
US Shelf / Euro | |||||
Medium Term | |||||
Note (EMTN) | |||||
Date of bond issue | Maturity of bond | Currency | Amount Million | programme | |
|
|
|
|
||
8 August 2005 | 15 September 2015 | USD | 750 | US Shelf | |
8 September 2005 | 8 September 2014 | GBP | 350 | EMTN | |
29 November 2005 | 29 November 2012 | EUR | 750 | EMTN | |
29 December 2005 | 29 June 2007 | USD | 1,850 | US Shelf | |
29 December 2005 | 28 December 2007 | USD | 750 | US Shelf | |
8 February 2006 | 17 July 2008 | EUR | 1,250 | EMTN | |
16 March 2006 | 28 December 2007 | USD | 750 | US Shelf | |
16 March 2006 | 15 June 2011 | USD | 350 | US Shelf | |
16 March 2006 | 15 June 2011 | USD | 750 | US Shelf | |
16 March 2006 | 15 March 2016 | USD | 750 | US Shelf | |
At 31 March 2006, the Group had bonds in issue with a nominal value of £15,389 million, including $207 million of bonds that were assumed as part of the acquisition of MobiFon S.A. and Oscar Mobil a.s. on 31 May 2005, plus a further ¥125 billion bonds in the Groups discontinued operations in Japan.
On 7 June 2006, the Company agreed to issue €1 billion of bonds due on 13 January 2012 and €300 million of bonds due on 14 June 2016 under the Euro Medium Term Note programme. The bonds were issued on 14 June 2006. |
Vodafone Group Plc Annual Report 2006 | 41 |
Financial
Position and Resources
continued
Committed
facilities
The following table
summarises the committed bank facilities available to the Group at 31 March
2006:
Committed Bank Facilities | Amounts drawn | |
|
||
24 June 2004 | ||
$5.9 billion Revolving Credit Facility, maturing 24 June 2009. | No drawings have been made against this facility. The facility supports the Groups commercial paper programmes and may be used for general corporate purposes including acquisitions. | |
24 June 2005 | ||
$5.0 billion Revolving Credit Facility, maturing 22 June 2012. | No drawings have been made against this facility. The facility supports the Groups commercial paper programmes and may be used for general corporate purposes including acquisitions. | |
21 December 2005 | ||
¥259 billion Term Credit Facility, maturing 16 March 2011, entered into by Vodafone Finance K.K. and guaranteed by the Company. | The facility was drawn down in full on 21 December 2005. The facility is available for general corporate purposes, although amounts drawn must be on-lent to the Company. | |
Under the terms and conditions of the $10.9 billion committed bank facilities, lenders have the right, but not the obligation, to cancel their commitments and have outstanding advances repaid no sooner than 30 days after notification of a change of control of the Company. The facility agreements provide for certain structural changes that do not affect the obligations of the Company to be specifically excluded from the definition of a change of control. This is in addition to the rights of lenders to cancel their commitment if the Company has committed an event of default.
Substantially the same terms and conditions apply in the case of Vodafone Finance K.K.s ¥259 billion term credit facility, although the change of control provision is applicable to any guarantor of borrowings under the term credit facility. As of 31 March 2006, the Company was the sole guarantor.
In addition, Vodafone Japan has a fully drawn bilateral facility totalling ¥8 billion (£39 million) which expires in January 2007 and which was included in the sale of Vodafone Japan.
Furthermore, three of the Groups subsidiary undertakings are funded by external facilities which are non-recourse to any member of the Group other than the borrower, due to the level of country risk involved. These facilities may only be used to fund their operations. Vodafone Egypt has a partly drawn (EGP250 million (£25 million)) syndicated bank facility of EGP900 million (£90 million) that fully expires in September 2007. On 1 April 2006 the undrawn EGP 650 million (£65 million) element of the facility lapsed. Vodafone Albania has a fully drawn (€60 million (£42 million)) syndicated bank facility that expires at various dates up to and including October 2012. Vodafone Romania has a fully drawn € 200 million syndicated bank facility that expires at various dates up to October 2010.
In aggregate, the Group has committed facilities of approximately £7,833 million, of which £6,362 million was undrawn and £1,471 million was drawn at 31 March 2006.
The Group believes that it has sufficient funding for its expected working capital requirements. Further details regarding the maturity, currency and interest rates of the Groups gross borrowings at 31 March 2006 are included in note 24 to the Consolidated Financial Statements.
Financial
assets and liabilities
Analyses of
financial assets and liabilities, including the maturity profile of debt, currency
and interest rate structure, are included in notes 18 and 24 to the Consolidated
Financial Statements. Details of the Groups treasury management and policies
are included within note 24 to the Consolidated Financial Statements.
Option
agreements and similar arrangements
Potential
cash inflows
As part of
the agreements entered into upon the formation of Verizon Wireless, the Company
entered into an Investment Agreement with Verizon Communications, formerly Bell
Atlantic Corporation, and Verizon Wireless. Under this agreement, dated 3 April 2000, the Company has the right to require Verizon Communications or Verizon Wireless to acquire interests in the Verizon Wireless partnership from the Company with an
aggregate market value of up to $20 billion during certain periods up to August 2007, dependent on the value of the Companys 45% stake in Verizon Wireless. This represents a potential source of liquidity to the Group.
Exercise of the option could have occurred in either one or both of two phases. The Phase I option expired in August 2004 without being exercised. The Phase II option may be exercised during the periods commencing 30 days before and ending 30 days after any one or more of 10 July 2006 and 10 July 2007. The Phase II option also limits the aggregate amount paid to $20 billion and caps the payments under single exercises to $10 billion. Determination of the market value of the Companys interests will be by mutual agreement of the parties to the transaction or, if no such agreement is reached within 30 days of the valuation date, by appraisal. If an initial public offering takes place and the common stock trades in a regular and active market, the market value of the Companys interest will be determined by reference to the trading price of common stock.
Potential
cash outflows
In respect
of the Groups interest in the Verizon Wireless partnership, an option
granted to Price Communications, Inc. by Verizon Communications is exercisable
at any time up to and including 15 August 2006. The option gives Price Communications,
Inc. the right to exchange its preferred limited partnership interest in Verizon
Wireless of the East LP for either equity of Verizon Wireless (if an initial
public offering of such equity occurs), or common stock of Verizon Communications.
If the exercise occurs, Verizon Communications has the right, but not the obligation,
to contribute the preferred interest to the Verizon Wireless partnership, diluting
the Groups interest. However, the Group also has the right to contribute
further capital to the Verizon Wireless partnership in order to maintain its
percentage partnership interest at the level just prior to the exercise of the
option. Such amount is expected to be $1.0 billion.
During the 2005 financial year, the Group sold 16.9% of Vodafone Egypt to Telecom Egypt, reducing the Groups effective interest to 50.1%. Both parties also signed a shareholder agreement setting out the basis under which the Group and Telecom Egypt would each contribute a 25.5% interest in Vodafone Egypt to a newly formed company to be 50% owned by each party. Within this shareholder agreement, Telecom Egypt was granted a put option over its entire interest in Vodafone Egypt giving Telecom Egypt the right to put its shares back to the Group at fair market value. On 31 October 2005, the shareholder agreement between Telecom Egypt and Vodafone expired and the associated rights and obligations contained in the shareholder agreement terminated, including the aforementioned put option. However, the original shareholders agreement contained an obligation on both parties to use reasonable efforts to renegotiate a revised shareholder agreement for their direct shareholding in Vodafone Egypt on substantially the same terms as the original agreement, which may or may not lead to a new agreement containing a put option under the terms described above. As of 31 March 2006, the parties have not agreed to abandon such efforts and as such, the financial liability relating to the initial shareholder agreement has been retained in the Groups balance sheet at 31 March 2006.
In respect of Arcor, the Groups non-mobile operation in Germany, the capital structure provides all partners, including the Group, the right to withdraw capital from 31 December 2026 onwards and this right in relation to the minority partners has been recognised as a financial liability.
Off-balance
sheet arrangements
The Group
does not have any material off-balance sheet arrangements, as defined by the
SEC. Please refer to notes 30 and 31 to the Consolidated Financial Statements
for a discussion of the Groups commitments and contingent liabilities.
Quantitative
and qualitative disclosures about market risk
A discussion
of the Groups financial risk management objectives and policies and the
exposure of the Group to liquidity, market and credit risk is included within
note 24 to the Consolidated Financial Statements.
42 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Risk Factors, Trends and Outlook
Risk
Factors
Regulatory
decisions and changes in the regulatory environment could adversely affect the
Groups business.
Because the
Group has ventures in a large number of geographic areas, it must comply with
an extensive range of requirements that regulate and supervise the licensing,
construction and operation of its telecommunications networks and services.
In particular, there are agencies which regulate and supervise the allocation
of frequency spectrum and which monitor and enforce regulation and competition
laws which apply to the mobile telecommunications industry. Decisions by regulators
regarding the granting, amendment or renewal of licences, to the Group or to
third parties, could adversely affect the Groups future operations in
these geographic areas. The Group cannot provide any assurances that governments
in the countries in which it operates will not issue telecommunications licences
to new operators whose services will compete with it. In addition, other changes
in the regulatory environment concerning the use of mobile phones may lead to
a reduction in the usage of mobile phones or otherwise adversely affect the
Group. Additionally, decisions by regulators and new legislation could affect
the pricing for, or adversely affect the revenue from, the services the Group
offers. Further details on the regulatory framework in certain countries and
regions in which the Group operates, and on regulatory proceedings can be found
in Regulation on pages 21 to 24.
Increased
competition may reduce market share or revenue.
The Group
faces intensifying competition. Competition could lead to a reduction in the
rate at which the Group adds new customers and to a decrease in the size of
the Groups market share as customers choose to receive telecommunications
services, or other competing services, from other providers. Examples include,
but are not limited to, competition from internet-based services and MVNOs.
The focus of competition in many of the Groups markets continues to shift from customer acquisition to customer retention as the market for mobile telecommunications has become increasingly penetrated. Customer deactivations are measured by the Groups churn rate. There can be no assurance that the Group will not experience increases in churn rates, particularly as competition intensifies. An increase in churn rates could adversely affect profitability because the Group would experience lower revenue and additional selling costs to replace customers, although such costs would have a future revenue stream to mitigate the impact.
Increased competition has also led to declines in the prices the Group charges for its mobile services and is expected to lead to further price declines in the future. Competition could also lead to an increase in the level at which the Group must provide subsidies for handsets. Additionally, the Group could face increased competition should there be an award of additional licences in jurisdictions in which a member of the Group already has a licence.
Delays
in the development of handsets and network compatibility and components may
hinder the deployment of new technologies.
The Groups
operations depend in part upon the successful deployment of continuously evolving
mobile telecommunications technologies. The Group uses technologies from a number
of vendors and makes significant capital expenditures in connection with the
deployment of such technologies. There can be no assurance that common standards
and specifications will be achieved, that there will be inter-operability across
Group and other networks, that technologies will be developed according to anticipated
schedules, that they will perform according to expectations or that they will
achieve commercial acceptance. The introduction of software and other network
components may also be delayed. The failure of vendor performance or technology
performance to meet the Groups expectations or the failure of a technology
to achieve commercial acceptance could result in additional capital expenditures
by the Group or a reduction in profitability.
Expected
benefits from integration may not be realised.
The One Vodafone
programme represents the Groups principal plan to achieve integration
across the Groups operating companies, particularly in Europe, and is
designed to maximise the benefits of Vodafones scale and scope. The programme
is premised on six core initiatives, further details of which can be found on
pages 18 to 19. The Group has previously stated publicly that it expects to
realise operational revenue benefits by the year ending 31 March 2008. These
expected benefits have been formulated by management on the assumption that
all of the core initiatives which comprise the One Vodafone programme generate
the results anticipated and that the Group is able to take advantage of its
size and exploit the associated economies of scale to their fullest extent.
Management considers these targeted revenue enhancements set out on pages 18
to 19 to be achievable, although no assurance can be given that the full extent
of the anticipated benefits of the One Vodafone programme will be realised.
In addition, the ability to deliver tangible business benefits from the convergence
of the Groups IT systems could be compromised by the technical complexity
of such a process or other difficulties associated with converging multiple
systems architectures.
Changes
in assumptions underlying the carrying value of certain Group assets could result
in impairment.
Vodafone completes
a review of the carrying value of its assets annually, or more frequently where
the circumstances require, to assess whether those carrying values can be supported
by the future cash flows derived from such assets. This review examines the
continued appropriateness of the assumptions in respect of highly uncertain
matters upon which the carrying values of certain of the Groups assets
are based. This includes an assessment of discount rates and long term growth
rates, future technological developments and timing and quantum of future capital
expenditure, as well as several factors which may affect revenues and profitability
identified within other Risk Factors in this section such as intensifying competition,
pricing pressures, regulatory changes and the timing for introducing new products
or services. Due to the Groups substantial carrying value of goodwill
under IFRS and licences under US GAAP, the revision of any of these assumptions
to reflect current or anticipated changes in operations or the financial condition
of the Group could lead to an impairment in the carrying value of certain assets
in the Group. Whilst impairment does not impact reported cash flows, it does
result in a non-cash charge on the income statement, and thus no assurance can
be given that any future impairments would not affect the Companys reported
distributable reserves and therefore its ability to make distributions to its
shareholders or repurchase its shares. See Critical Accounting Estimates
Impairment Reviews on page 26.
The Groups
business would be adversely affected by the non-supply of equipment and support
services by a major supplier.
Companies
within the Group source their mobile network infrastructure and related support
services from third party suppliers. The removal from the market of one or more
of these third party suppliers would adversely affect the Groups operations
and could result in additional capital expenditures by the Group.
The Companys
strategic objectives may be impeded by the fact that it does not have a controlling
interest in some of its ventures.
Some of the
Groups interests in mobile licences are held through entities in which
it is a significant but not controlling owner. Under the governing documents
for some of these partnerships and corporations, certain key matters such as
the approval of business plans and decisions as to the timing and amount of
cash distributions require the consent of the partners. In others, these matters
may be approved without the Companys consent. The Company may enter into
similar arrangements as it participates in ventures formed to pursue additional
opportunities. Although the Group has not been materially constrained by the
nature of its mobile ownership interests, no assurance can be given that its
partners will not exercise their power of veto or their controlling influence
in any of the Groups ventures in a way that will hinder the Groups
corporate objectives and reduce any anticipated cost savings or revenue enhancement
resulting from these ventures.
Expected
benefits from investment in networks, licences and new technology may not be
realised.
The Group
has made substantial investments in the acquisition of licences and in its mobile
networks, including the roll out of 3G networks. The Group expects to continue
to make significant investments in its mobile networks due to increased usage
and the need to offer new services and greater functionality afforded by new
or evolving telecommunications technologies. Accordingly, the rate of the Groups
capital expenditures in future years could remain high or exceed that which
it has experienced to date.
Please see Business Overview Licences and network infrastructure on pages 14 to 15 for more information on expected expenditure in connection with the roll out of 3G services. There can be no assurance that the introduction of new services will proceed according to anticipated schedules or that the level of demand for new services will justify the cost of setting up and providing new services. Failure or a delay in the completion of networks and the launch of new services, or increases in the associated costs, could have a material adverse effect on the Groups operations.
The Group
may experience a decline in revenue or profitability notwithstanding its efforts
to increase revenue from the introduction of new services.
As part of
its strategy to increase usage of its networks, the Group will continue to offer
new services to its existing customers and seek to increase non-voice service
revenue as a percentage of total service revenue. However, the Group may not
be able to introduce commercially these new services, or may experience significant
delays due to problems such as the availability of new mobile handsets or higher
than anticipated prices of new handsets. In addition, even if these services
are introduced in accordance with expected time schedules, there is no assurance
that revenue from such services will increase ARPU or maintain profit margins.
Vodafone Group Plc Annual Report 2006 | 43 |
Risk
Factors, Trends and Outlook
continued
The Groups business and its ability to retain customers and attract new customers may be impaired by actual or perceived health risks associated with the transmission of radiowaves
from mobile telephones, transmitters and associated equipment.
Concerns
have been expressed in some countries where the Group operates that the electromagnetic
signals emitted by mobile telephone handsets and base stations may pose health
risks at exposure levels below existing guideline levels and may interfere with
the operation of electronic equipment. In addition, as described under the heading Legal Proceedings in note 31 to the Consolidated Financial Statements, several
mobile industry participants, including the Company and Verizon Wireless, have had lawsuits filed against them alleging various health consequences as a result of mobile phone usage, including brain cancer. While the Company is not aware that such
health risks have been substantiated, there can be no assurance that the actual, or perceived, risks associated with radiowave transmission will not impair its ability to retain customers and attract new customers, reduce mobile telecommunications
usage or result in further litigation. In such event, because of the Groups
strategic focus on mobile telecommunications, its business and results of operations
may be more adversely affected than those of other companies in the telecommunications
sector.
Trend Information
The growth in the mobile telecommunications industry in terms of customers, revenue and cash flows has been substantial over the past decade. Vodafone believes that the mobile
industry will continue to experience growth, although as the markets in which the Group operates mature, the rate of growth will depend on the demand for enhanced voice and data products and services and the amount of voice and data traffic moving
from fixed networks to mobile networks. The most significant current trends which are expected to impact the Group are:
Increasing penetration rates and competition between network operators for customers
For
the Groups operations which operate in less penetrated markets, the Group expects customer growth to be the principal source of revenue growth. Gaining new customers depends
on many factors, including network coverage and quality, customer satisfaction, product offerings and handset range but a key factor is often the pricing of handsets and tariffs. In general, as penetration rates rise in a market, competition
intensifies as operators invest more in retaining their existing customers whilst offering incentives to potential new customers. These competitive pressures, along with new mobile users who generally spend less than existing users, exert a downward
pressure on ARPU and result in increased acquisition and retention costs. The Group anticipates that this trend will continue, though it will endeavour to offset the impact by usage stimulation campaigns, new product offerings and leveraging the
Groups scale and scope.
In markets with high penetration rates, the Group expects usage stimulation and new products and services to be the main drivers of revenue growth. Building on the success of recent campaigns in many of the Groups markets, bundled offerings are expected to expand to provide better value to customers and encourage increased use of the Groups services. Such stimulation initiatives are expected to increase ARPU in the medium and longer term as higher usage more than offsets the reduced average revenue per minute or per message. The Group also expects that technology innovation will lead to the improved integration of PCs and laptops with mobile services and provide opportunities for the Group to expand its product offering, resulting in a larger market for its services.
A number of national regulators are considering allocating additional spectrum or offering new licences for the provision of mobile telecommunications services. If the additional spectrum or new licences are acquired by new or existing competitors, the competitive pressures in the local market may increase.
Impact of new competitors
New service providers, or MVNOs, in a number of markets in which the Group operates are increasing the competitive pressures in certain market segments with low cost offerings.
Certain national regulators require, or have stated their intention to require, network operators to provide network access to such service providers. The Group expects that in markets in which new service providers have a significant competitive
impact, ARPU is likely to reduce and this competition may result in the need for the Group to invest further amounts in customer retention.
Downward pressure on termination rates from regulatory action
In
recent years, action by NRAs has led to reductions in the income the Group
receives for terminating calls from fixed or other mobile networks and, similarly,
reductions in the cost charged by other operators for connecting a call on their
fixed or mobile network. Vodafone expects such regulatory pressure to persist
for the foreseeable future.
Development of and demand for data services
Since
the Groups introduction of data service offerings, revenue from these services
has increased each year, although there can be no assurance that this will continue
to be the case. With continued growth in the use of data services as more customers
utilise 3G services, including video calling and full track music downloads,
the Vodafone Mobile Connect data card, new business focused offerings and the
recent launch of
3G broadband, the Group expects continued growth in non-messaging data service
revenue and for this revenue to increase as a percentage of total service revenue
over time.
Benefits of regional scale and scope
As
the worlds leading international mobile telecommunications company, the
Group is able to benefit from its regional scale and scope. The One Vodafone
initiatives (see pages 18 to 19) are targeted at maximising the future value
of these benefits.
Impact of convergence and disruptive technologies
The
emergence of new technologies, which enable core and radio access networks to
be increasingly based on internet protocols, is likely to provide the Group with
opportunities to
reduce costs and target the replacement of customers fixed line phone services.
However, they will also provide opportunities for new competitors to enter the
telecommunications services market. Vodafone believes it is well placed to take
advantage of these opportunities, as demonstrated by the launch of Vodafone Zuhause
in Germany.
Depreciation expense
Depreciation
expense is driven largely by capital expenditure on building and upgrading the
Groups networks. Capital expenditure on network equipment has increased
in recent years with the construction of 3G networks. As network equipment generally
has an expected useful life of between three and ten years, the resulting depreciation
expense in the medium term is likely to be higher than in the current financial
year.
The One Vodafone initiatives are expected to reduce capital expenditure, and
hence depreciation, relative to revenue in the longer term.
Seasonality
The
Groups
financial results and cash flows have not, historically, been subject to significant
seasonal trends between the first and second half of the financial year, although
there are a number of offsetting trends.
Traditionally, the Christmas period sees a higher volume of customer connections, contributing to higher equipment and connection revenue in the second half of the financial year. Ongoing airtime revenue also demonstrates signs of seasonality, with revenue generally lower during February, which is a shorter than average month, and revenue from roaming charges higher during the summer months as a result of increased travel by customers.
There is no assurance that these trends will continue in the future. For additional considerations related to these trends, please see Risk Factors in this section.
44 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Outlook
2007 financial year
While we
are delivering on cost reduction, revenue stimulation and emerging market growth
in the shorter term, the potential benefits from serving our customers
total telecommunications needs will materialise over a longer timeframe.
For the year ahead, we expect operating conditions to remain challenging, with a continued intense competitive environment and further regulatory pressure, but nevertheless see continued growth in Group revenue.
We are anticipating higher customer investment, pricing pressures and further termination rate reductions to impact growth in adjusted operating profit; however, initiatives to deliver further cost efficiencies are expected to mitigate this effect.
Group capitalised fixed asset additions are expected to be in the range of £4.2 billion to £4.6 billion, which is higher than the 2006 financial year due to the effect of recently completed acquisitions and disposals and the Group’s rollout of HSDPA.
Free cash flow is expected to be in the range of £4.0 billion to £4.5 billion after an estimated
£1.2 billion of tax payments, including associated interest, in respect of the potential unfavourable resolution of a number of long standing tax issues. The Group currently forecasts a further significant increase in cash tax and associated interest payments in the 2008 financial year, including a potentially material amount related to the CFC litigation which could be paid should the litigation be resolved unfavourably in that year. Further information on the CFC litigation is provided in note 31 in the Consolidated Financial Statements.
The Group has previously indicated that in the three year period ending 31 March 2009, it expects a number of long standing tax issues to be resolved. The Group estimates that tax payments of approximately £5 billion could be made over that period, together with associated interest costs, including a potentially material amount relating to CFC litigation.
The section
entitled “Business
Overview – Global Services – One
Vodafone” on pages 18 to 19 provides additional outlook statements in
relation to the expected future benefits of One Vodafone initiatives on cash
flow, capital
expenditure and operating expenditure.
Vodafone Group Plc Annual Report 2006 | 45 |
Cautionary Statement Regarding Forward-Looking Statements
This document contains forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 with respect to the Groups financial condition, results of operations and businesses and certain of the Groups plans and objectives. In particular, such forward-looking statements include statements with respect to Vodafones expectations as to launch and roll out dates for products, services or technologies offered by Vodafone; intentions regarding the development of products and services introduced by Vodafone or by Vodafone in conjunction with initiatives with third parties; the ability to integrate all operations throughout the Group in the same format and on the same technical platform and the ability to be operationally efficient; the development and impact of new mobile technology; anticipated benefits to the Group of the One Vodafone programme; the results of Vodafones brand awareness and brand preference campaigns; growth in customers and usage, including improvements in customer mix; future performance, including turnover, average revenue per user (ARPU), cash flows, costs, capital expenditures and margins, non-voice services and their revenue contribution; share purchases; the rate of dividend growth by the Group or its existing investments; expectations regarding the Groups access to adequate funding for its working capital requirements; expected effective tax rates and expected tax payments; the ability to realise synergies through cost savings, revenue generating services, benchmarking and operational experience; future acquisitions, including increases in ownership in existing investments and pending offers for investments; future disposals; contractual obligations; mobile penetration and coverage rates; the impact of regulatory and legal proceedings involving Vodafone; expectations with respect to long-term shareholder value growth; Vodafones ability to be the mobile market leader, overall market trends and other trend projections.
Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as anticipates, aims, could, may, should, expects, believes, intends, plans or targets. By their nature, forward-looking statements are inherently predictive, speculative and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These factors include, but are not limited to, the following:
| changes in economic or political conditions in markets served by operations of the Group that would adversely affect the level of demand for mobile services; |
| greater than anticipated competitive activity, from both existing competitors and new market entrants, including MVNOs, which could require changes to the Groups pricing models, lead to customer churn and make it more difficult to acquire new customers and reduce profitability; |
| the impact of investment in network capacity and the deployment of new technologies, or the rapid obsolescence of existing technology; |
| slower than expected customer growth and reduced customer retention; |
| changes in spending patterns of existing customers; |
| the possibility that new products and services, including mobile internet platforms, 3G, Vodafone live!, Vodafone Radio DJ and other products and services, will not be commercially accepted or perform according to expectations or that vendors performance in marketing these technologies will not meet the Groups requirements; |
| the Groups ability to win 3G licence allocations; |
| the Groups ability to realise expected synergies and benefits associated with 3G technologies; |
| a lower than expected impact of GPRS, 3G, Vodafone live!, Vodafone Radio DJ and other new or existing products, services or technologies on the Groups future revenue, cost structure and capital expenditure outlays; |
| the ability of the Group to harmonise mobile platforms and delays, impediments or other problems associated with the roll out and scope of 3G technology, Vodafone live!, Vodafone Radio DJ and other new or existing products, services or technologies in new markets; |
| the ability of the Group to offer new services and secure the timely delivery of high quality, reliable GPRS and 3G handsets, network equipment and other key products from suppliers; |
| the Groups ability to develop competitive data content and services that will attract new customers and increase average usage; |
| future revenue contributions of both voice and non-voice services; |
| greater than anticipated prices of new mobile handsets; |
| changes in the costs to the Group of or the rates the Group may charge for terminations and roaming minutes; |
| the Groups ability to achieve meaningful cost savings and revenue improvements as a result of its One Vodafone initiative; |
| the ability to realise benefits from entering into partnerships for developing data |
and internet services and entering into service franchising and brand licensing; | |
| the possibility that the pursuit of new, unexpected strategic opportunities may have a negative impact on the Groups financial performance; |
| developments in the Groups financial condition, earnings and distributable funds and other factors that the Board takes into account in determining the level of dividends; |
| any unfavourable conditions, regulatory or otherwise, imposed in connection with pending or future acquisitions or disposals and the integration of acquired companies in the Groups existing obligations; |
| the risk that, upon obtaining control of certain investments, the Group discovers additional information relating to the businesses of that investment leading to restructuring charges or write-offs or other negative implications; |
| changes in the regulatory framework in which the Group operates, including possible action by regulators in markets in which the Group operates or by the EU regulating rates the Group is permitted to charge; |
| the impact of legal or other proceedings against the Group or other companies in the mobile telecommunications industry; |
| the possibility that new marketing or usage stimulation campaigns or efforts and customer retention schemes are not an effective expenditure; |
| the possibility that the Groups integration efforts do not reduce the time to market for new products or improve the Groups cost position; |
| loss of suppliers or disruption of supply chains; |
| the Groups ability to satisfy working capital requirements through borrowing in capital markets, bank facilities and operations; |
| changes in exchange rates, including particularly the exchange rate of pounds sterling to the euro and the US dollar; |
| changes in statutory tax rates and profit mix which would impact the weighted average tax rate; |
| changes in tax legislation in the jurisdictions in which the Group operates; |
| final resolution of open issues which might impact the effective tax rate; and |
| timing of tax payments relating to the resolution of open issues. |
Furthermore, a review of the reasons why actual results and developments may differ materially from the expectations disclosed or implied within forward-looking statements can be found under Risk Factors, Trends and Outlook Risk Factors on pages 43 to 44. All subsequent written or oral forward-looking statements attributable to the Company or any member of the Group or any persons acting on their behalf are expressly qualified in their entirety by the factors referred to above. No assurances can be given that the forward-looking statements in this document will be realised. Neither Vodafone nor any of its affiliates intends to update these forward-looking statements.
46 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Non-GAAP Information
Presentation of Adjusted Operating Profit
The Group presents
operating profit excluding impairment losses and non-recurring amounts related
to business acquisitions and disposals for the Group and the Groups reported
business segments, being mobile telecommunications and other operations. The
Group believes that it is both useful and necessary to report these measures
for the following reasons:
| these measures are used by the Group for internal performance analysis; |
| the presentation by the Groups reported business segments of these measures facilitates comparability with other companies, although the Groups measures may not be comparable with similarly titled profit measurements reported by other companies; and |
| it is useful in connection with discussion with the investment analyst community and debt rating agencies. |
Reconciliation of these measures to the closest equivalent GAAP measure, operating (loss)/profit, is provided in note 3 to the Consolidated Financial Statements.
Organic Growth
The
Group believes
that organic growth, which is not intended to be a substitute, or
superior to, reported growth, provides useful and necessary information to investors
and other interested parties for the following reasons:
| it provides additional information on underlying growth of the business without the effect of factors unrelated to the operating performance of the business; |
| it is used by the Group for internal performance analysis; and |
| it facilitates comparability of underlying growth with other companies, although the term organic is not a defined term under IFRS, or US GAAP, and may not, therefore, be comparable with similarly titled measures reported by other companies. |
Reconciliation of organic growth to reported growth is shown below:
Impact of | |||||||||
Organic | Impact of foreign | acquisitions | Reported | ||||||
growth | exchange | and disposals | growth | ||||||
% | % | % | % | ||||||
Mobile telecommunications | |||||||||
Voice revenue | 5.3 | 0.6 | 2.2 | 8.1 | |||||
Non-voice revenue | Messaging | 10.6 | 0.4 | 2.1 | 13.1 | ||||
Data | 60.4 | (0.4 | ) | 1.2 | 61.2 | ||||
Total service revenue | 7.2 | 0.5 | 2.2 | 9.9 | |||||
Acquisition and retention revenue | 2.3 | 0.8 | (0.2 | ) | 2.9 | ||||
Total revenue | 6.7 | 0.5 | 2.1 | 9.3 | |||||
Interconnect costs | 7.2 | 0.7 | 2.5 | 10.4 | |||||
Group revenue | 7.5 | 0.5 | 2.0 | 10.0 | |||||
Reported | Impact of impairment | |||||||||||
Impact of | Impact of | growth in | losses and non-recurring | Reported growth | ||||||||
Organic | foreign | acqusitions | in non-GAAP | amounts related to business | in equivalent | |||||||
growth | exchange | and disposals | measure | acquisition and disposals | GAAP measure(2) | |||||||
% | % | % | % | % | % | |||||||
Adjusted operating profit | ||||||||||||
Mobile telecommunications profit(1) | 10.3 | 1.1 | | 11.4 | (290.2 | ) | (278.8 | ) | ||||
Total operating profit(1) | 11.4 | 1.0 | 0.1 | 12.5 | (291.3 | ) | (278.8 | ) | ||||
Notes: | |
(1) | Before impairment losses and non-recurring amounts related to business acquisitions and disposals. |
(2) | Closest equivalent GAAP measure is operating (loss)/profit. |
Cash Flow Measures
In
presenting and
discussing the Groups reported results, free cash flow and operating free
cash flow are calculated and presented on the basis of methodologies other than
in accordance with IFRS. The Group believes that it is both useful and necessary
to communicate free cash flow to investors and other interested parties, for
the following reasons:
| free cash flow allows the Company and external parties to evaluate the Groups liquidity and the cash generated by the Groups operations. Free cash flow does not include items determined independently of the ongoing business, such as the level of dividends, and items which are deemed discretionary, such as cash flows relating to acquisitions and disposals or financing activities. In addition, it does not necessarily reflect the amounts which the Group has an obligation to incur. However, it does reflect the cash available for such discretionary activities, to strengthen the balance sheet or to provide returns to shareholders in the form of dividends or share purchases; |
| free cash flow facilitates comparability of results with other companies, although the Groups measure of free cash flow may not be directly comparable to similarly titled measures used by other companies; |
| it is used by management for planning, reporting and incentive purposes; and |
| it is useful in connection with discussion with the investment analyst community and debt rating agencies. |
The Group believes that the presentation of operating free cash flow is useful and necessary for investors and other interested parties as it provides the quantitative basis for the cash flow targets of the One Vodafone initiatives outlined on pages 18 to 19. This measure may not be directly comparable to similarly titled measures used by other companies.
A reconciliation of net cash inflow from operating activities, the closest equivalent GAAP measure, to operating free cash flow and free cash flow, is provided in Performance Financial Position and Resources Liquidity and Capital Resources Cash Flows on page 39.
Vodafone Group Plc Annual Report 2006 | 47 |
Non-GAAP Information
continued
Net Debt
In
presenting and
discussing the Groups indebtedness and liquidity position, net debt is
calculated. There is no definition of net debt within IFRS. The Group believes
that it is both useful and necessary to communicate net debt to investors and
other interested parties, for the following reasons:
| net debt allows the Company and external parties to evaluate the Groups overall indebtedness and liquidity position; |
| net debt facilitates comparability of indebtedness and liquidity with other companies, although the Groups measure of net debt may not be directly comparable to similarly titled measures used by other companies; |
| it is used by management for planning and reporting purposes; and |
| it is used in discussions with the investment analyst community and the debt rating agencies. |
A reconciliation of short-term and long-term borrowings, the closest equivalent GAAP measures, to net debt is shown on page 41.
Presentation of Other Revenue in Discussion of Trading Results
The
discussion of the trading results of the Group and principal markets on pages
30 to 37 presents the cost of sales related to acquisition and retention costs,
net of revenue attributable to these activities. The Group believes that this
basis of presentation provides useful information for investors for the following
reasons:
| it provides trends in net subsidies with respect to the acquisition and retention of customers; and |
| it facilitates comparability of results with other companies operating in the mobile telecommunications business. This performance indicator is commonly used in the mobile telecommunications industry and by Vodafone management to compare net subsidies provided to acquire and retain customers to prior periods and internal forecasts. Net acquisition costs and Net retention costs as used in the trading results are defined on page 49. |
Reconciliation of Net other revenue to the closest equivalent GAAP measure, revenue, and Net acquisition costs and Net retention costs to their closest equivalent GAAP measure, gross acquisition and retention costs, are shown below:
Mobile | Other Mobile | |||||||||||
telecommunications | Germany | Italy | Spain | UK | Operations | |||||||
£m | £m | £m | £m | £m | £m | |||||||
Year ended 31 March 2006: | ||||||||||||
Net other revenue | 532 | 114 | 15 | 6 | 135 | 137 | ||||||
Acquisition and retention revenue | 1,724 | 246 | 178 | 374 | 345 | 583 | ||||||
Other revenue | 2,256 | 360 | 193 | 380 | 480 | 720 | ||||||
Total service revenue | 25,881 | 5,394 | 4,170 | 3,615 | 4,568 | 8,530 | ||||||
Revenue | 28,137 | 5,754 | 4,363 | 3,995 | 5,048 | 9,250 | ||||||
Year ended 31 March 2005: | ||||||||||||
Net other revenue | 546 | 122 | 14 | 2 | 177 | 110 | ||||||
Acquisition and retention revenue | 1,647 | 242 | 168 | 296 | 390 | 554 | ||||||
Other revenue | 2,193 | 364 | 182 | 298 | 567 | 664 | ||||||
Total service revenue | 23,547 | 5,320 | 4,091 | 2,963 | 4,498 | 6,973 | ||||||
Revenue | 25,740 | 5,684 | 4,273 | 3,261 | 5,065 | 7,637 | ||||||
Year ended 31 March 2006: | ||||||||||||
Net acquisition costs | 1,541 | 366 | 78 | 274 | 380 | 443 | ||||||
Net retention costs | 1,444 | 349 | 93 | 249 | 395 | 358 | ||||||
Acquisition and retention revenue | 1,724 | 246 | 178 | 374 | 345 | 583 | ||||||
Gross acquisition and retention costs | 4,709 | 961 | 349 | 897 | 1,120 | 1,384 | ||||||
Year ended 31 March 2005: | ||||||||||||
Net acquisition costs | 1,446 | 348 | 71 | 246 | 388 | 393 | ||||||
Net retention costs | 1,234 | 330 | 74 | 172 | 391 | 267 | ||||||
Acquisition and retention revenue | 1,647 | 242 | 168 | 296 | 390 | 554 | ||||||
Gross acquisition and retention costs | 4,327 | 920 | 313 | 714 | 1,169 | 1,214 | ||||||
Other
Certain
of the statements
within the section titled Chief Executives Review on pages
8 to 11 and the section titled One Vodafone, on pages 18 to 19 contain
forward-looking non-GAAP financial information for which at this time there is
no comparable GAAP measure and which at this time cannot be quantitatively reconciled
to comparable GAAP financial information.
Certain of the statements within the section titled Risk Factors, Trends and Outlook on pages 43 to 45, contain forward-looking non-GAAP financial information which at this time cannot be quantitatively reconciled to comparable GAAP financial information.
48 | Vodafone Group Plc Annual Report 2006 |
Performance | |
Definition of Terms
The
definition of terms used throughout the performance section is detailed below.
These terms are not uniformly defined by all companies in the Groups
industry. Accordingly, such measures may not be comparable with similarly titled
measures and disclosures by other companies.
3G broadband | A technology which enables data transmission at speeds of up to two megabits per second. |
3G device | A handset or device capable of accessing 3G data services. |
Acquired
intangibles amortisation |
Amortisation relating to intangible assets identified and recognised separately in respect of a business combination in excess of the intangible assets recognised by the acquiree prior to acquisition. |
Active customer | A customer who either pays a monthly fee or has made or received a chargeable event in the last three months. The active customers are expressed as a percentage of the closing customer base. Contract and prepaid activity is reported separately. |
ARPU | Total revenue excluding handset revenue and connection fees divided by the weighted average number of customers during the period. |
Capitalised
fixed asset additions |
This measure includes the aggregate of capitalised property, plant and equipment additions and capitalised software costs. |
Churn | Total gross customer disconnections in the period divided by the average total customers in the period. |
Controlled
and jointly controlled networks |
The networks include the Groups mobile operating subsidiaries and joint ventures. Measures for controlled and jointly controlled networks include 100% for subsidiaries and the Groups proportionate share for joint ventures. |
Customer | A customer is defined as a Subscriber Identity Module (SIM), or in territories where SIMs do not exist, a unique mobile telephone number, which has access to the network for any purpose (including data only usage) except telemetric applications. Telemetric applications include, but are not limited to, asset and equipment tracking, mobile payment and billing functionality (for example, vending machines and meter readings) and include voice enabled customers whose usage is limited to a central service operation (for example, emergency response applications in vehicles). SIM information is derived from local operating company billing systems. |
Data revenue | Data revenue includes all non-voice service revenue excluding messaging. |
Depreciation
and other amortisation |
This measure includes the profit or loss on disposal of property, plant and equipment. |
EBITDA | Adjusted operating profit before depreciation and amortisation. |
Interconnect costs | A charge paid by Vodafone to other fixed line or mobile operators when a Vodafone customer calls a customer connected to a different network. |
Messaging revenue | Messaging revenue comprises revenue from providing SMS and MMS services including wholesale messaging revenue, revenue from the use of messaging services by Vodafone customers roaming away from their home network and customers visiting the local network. |
Net acquisition costs | The total of connection fees, trade commissions and equipment costs, net of related revenue, relating to new customer connections. This performance indicator is commonly used in the mobile telecommunications industry and by Vodafone management to compare net subsidies provided to acquire customers to prior periods and internal forecasts. Management believes that this measure provides useful information for investors regarding trends in net subsidies to acquire customers for mobile telecommunications services from period to period. |
Net retention costs | The total of trade commissions, loyalty scheme and equipment costs, net of related revenue, relating to customer retention and upgrade. This performance indicator is commonly used in the mobile telecommunications industry and by Vodafone management to compare net subsidies provided to retain customers to prior periods and internal forecasts. Management believes that this measure provides useful information for investors regarding trends in net subsidies to retain customers for mobile telecommunications services from period to period. |
Organic growth | The percentage movements in organic growth are presented to reflect operating performance on a comparable basis. Where an entity, being a subsidiary, joint venture or associated undertaking, was newly acquired or disposed of in the current or prior period, the Group adjusts, under organic growth calculations, the results for the current and prior period to remove the amount the Group earned in both periods as a result of the acquisition or disposal of subsidiary or associated undertakings. Where the Group increases, or decreases, its ownership interest in a joint venture or associated undertaking in the current or prior period, the Groups results for the prior period are restated at the current periods ownership level. Further adjustments in organic calculations exclude the effect of exchange rate movements by restating the prior periods results as if they had been generated at the current periods exchange rates and excludes the amortisation of acquired intangible assets. |
Proportionate customers | The proportionate customer number represents the number of mobile customers in ventures which the Group either controls or invests, based on the Groups ownership in such ventures. |
Purchased
licence amortisation |
Amortisation relating to capitalised licence and spectrum fees purchased directly by the Group, and such fees recognised by an acquiree prior to acquisition. |
Service revenue | Service revenue comprises all revenue related to the provision of ongoing services including, but not limited to, monthly access charges, airtime usage, roaming, incoming and outgoing network usage by non-Vodafone customers and interconnect charges for incoming calls. |
Termination rate | A per minute charge paid by a telecommunications network operator when a customer makes a call to another mobile or fixed line network operator. |
Vodafone live! active device | A handset or device equipped with the Vodafone live! portal which has made or received a chargeable event in the last month. |
VOIP | Voice over internal protocol is the routing of voice calls over the internet or through another IP based network. |
WiFi | WiFi refers to underlying technology of wireless local area networks which enable a user, with WiFi devices, to connect to the internet in range of a WiFi access point. |
Vodafone Group Plc Annual Report 2006 | 49 |
Board of Directors and Group Management
Directors and Senior Management
The business
of the Company is managed by its board of directors (the Board).
Biographical details of the directors and senior management at the date of this
report are as
follows:
Directors
Chairman
1. Lord MacLaurin of Knebworth, DL, aged
69, joined the Board in January 1997 and became Chairman in July 1998. He is
Chairman of the Nominations and Governance Committee. Lord MacLaurin was Chairman
of Tesco Plc from 1985 to 1997 and has been a director of Enterprise Oil Plc,
Guinness Plc, National Westminster Bank Plc and Whitbread Plc. He is also a non-executive
director of the investment bank
The Evolution Group Plc and a member of the Supervisory Board of Heineken NV.
Lord MacLaurin will retire from the Board at the conclusion of the Companys
AGM on 25 July 2006. Upon his retirement Lord MacLaurin will become an advisor
to the
Company and Chairman of The Vodafone Group Foundation.
Deputy Chairman and senior independent director
2. Paul Hazen, aged
64, has been a member of the Board since June 1999 and became Deputy Chairman
and senior independent director in May 2000. He is a member of the Nominations
and Governance Committee. Paul Hazen became a director of AirTouch Communications
Inc. in April 1993. In 2001, he retired as Chairman and Chief Executive Officer
of Wells
Fargo & Company and its principal subsidiary, Wells Fargo Bank, NA. He is Chairman of KKR Financial Corp and Accel-KKR and is also a director of Safeway, Inc., Willis Group Holdings Limited and Xstrata AG. Paul Hazen will retire from the Board
after the Companys AGM on 25 July 2006.
Executive Directors
3. Arun Sarin, Chief Executive, aged 51, became a member of the Board in June 1999. He was appointed Chief
Executive in July 2003 and is a member of the Nominations and Governance Committee. Arun Sarin joined Pacific Telesis Group in San Francisco in 1984 and has served in many executive positions in his 20 year career in telecommunications. He was a
director of AirTouch Communications Inc. from July 1995 and was President and Chief Operating Officer from February 1997 to June 1999. He was Chief Executive Officer for the Vodafone United States and Asia Pacific region until 15 April 2000, when he
became a non-executive director. He has served as a director of The Gap, Inc., The Charles Schwab Corporation and Cisco Systems, Inc., and is a non-executive director of the Court of the Bank of England.
4. Sir Julian Horn-Smith, Deputy Chief Executive, aged 57, has been a member of the Board since June 1996. Previously the Group Chief Operating Officer, Sir Julian was appointed Deputy Chief Executive in January 2005. Since then, he has been responsible for Business Development, which includes delivering Vodafones product and services portfolio to Vodafones affiliates and Partner Networks and expanding and consolidating Vodafones footprint. He is a director of China Mobile (Hong Kong) Limited and several of the Groups overseas operating companies, including Chairman of the Supervisory Boards of Vodafone Deutschland GmbH and Vodafone D2 GmbH. Sir Julian is also a non-executive director of Lloyds TSB Group plc, Smiths Group plc and Sage Group PLC. Sir Julian will retire from the Board at the conclusion of the AGM on 25 July 2006 and he will become Chairman of Sage Group PLC on 1 August 2006.
5. Thomas Geitner, Chief Executive Officer, New Businesses, aged 51, was appointed to this role on 1 May 2006. New Businesses will focus on the delivery of new revenue streams beyond pure mobile. He was appointed to the Board in May 2000 during which time he established and managed Global Products and Services. He was responsible for the single Vodafone brand, Vodafone live! and Vodafone Wireless Office and the partner networks franchise. In July 2003, he was appointed Chief Technology Officer responsible for the rollout of 3G, the consolidation of data centres and service platform operations and the establishment of the Global Supply Chain organisation. Prior to joining the Group, he was a member of the Management Board of RWE AG.
6. Andy Halford, Chief Financial Officer, aged 47, joined the Board in July 2005. Andy joined Vodafone in 1999 as Financial Director for Vodafone Limited, the UK operating company, and in 2001 he became Financial Director for Vodafones Northern Europe, Middle East and Africa Region. In 2002, he was appointed Chief Financial Officer of Verizon Wireless in the US and is currently a member of the Board of Representatives of The Verizon Wireless partnership. Prior to joining Vodafone, he was Group Finance Director at East Midlands Electricity Plc. Andy holds a bachelors degree in Industrial Economics from Nottingham University and is a Fellow of the Institute of Chartered Accountants in England and Wales.
Non-executive directors
7. Sir John Bond, aged 64, was appointed to the Board in January 2005 and is a member of the Nominations
and Governance and Remuneration Committees. Sir John Bond is a non-executive director of Ford Motor Company. He retired from the position of Group Chairman of HSBC Holdings plc on 26 May 2006, after 45 years of service. Other previous roles include
Chairman of HSBC Bank plc and director of The Hong Kong and Shanghai Banking Corporation and HSBC North America Holdings Inc. Previous non-executive directorships include the London Stock Exchange, Orange plc, British Steel plc and the Court of the
Bank of England. Sir John will succeed Lord MacLaurin as Chairman of the Company on conclusion of the AGM on 25 July 2006.
8. Dr Michael Boskin, aged 60, became a member of the Board in June 1999 on completion of the merger with AirTouch Communications Inc. and is Chairman of the Audit Committee and a member of the Remuneration Committee. Dr Boskin was a director of AirTouch Communications Inc. from August 1996 to June 1999. He has been a Professor of Economics at Stanford University since 1971 and was Chairman of the Presidents Council of Economic Advisers from February 1989 until January 1993. Dr Boskin is President and CEO of Boskin & Co., an economic consulting company, and is also a director of Exxon Mobil Corporation, Shinsei Bank Limited and Oracle Corporation.
50 | Vodafone Group Plc Annual Report 2006 |
Governance | |
9. Lord Broers, aged 67, joined the Board in January 1998 and is a member of the Audit Committee and the Nominations and Governance Committee. He is President of the Royal Academy of Engineering and a former Vice-Chancellor of Cambridge University. He spent many years with IBM, in senior roles within the research and development function, and is a Fellow of the Royal Society, the Institute of Electrical Engineers and the Institute of Physics. Lord Broers is also a Foreign Associate of the US National Academy of Engineering, a trustee of the British Museum and Chairman of the House of Lords Science and Technology Select Committee. He chairs The Vodafone Group Foundation and the Companys UK pension trustee company.
10. John Buchanan, aged 62, has been a member of the Board since April 2003. He is a member of the Audit Committee and, solely for the purposes of relevant legislation, is the Boards appointed financial expert on that Committee. He retired from the board of directors of BP Plc in 2002 after six years as Group Chief Financial Officer and executive director following a wide-ranging career with the company. He was a member of the United Kingdom Accounting Standards Board from 1997 to 2001. He is Chairman of Smith & Nephew plc and a non-executive director of AstraZeneca PLC and BHP Billiton. John Buchanan will succeed Paul Hazen as the Deputy Chairman and senior independent director after the Companys AGM on 25 July 2006.
11. Penny Hughes, aged 46, has been a member of the Board since September 1998 and is a member of the Audit Committee. She has particular expertise in marketing and has developed experience in many human resource areas, including leadership development, motivation and retention. She is President of the Advertising Association, a member of the advisory committee of Bridgepoint Capital Limited and a non-executive director of Reuters Group PLC, Scandinaviska Enskilda Banken AB and The Gap, Inc. Penny Hughes was President of Coca-Cola Great Britain and Ireland, and has been a non-executive director of Next Plc, Trinity Mirror Plc and The Body Shop Plc. She will retire from the Board after the Companys AGM on 25 July 2006.
12. Anne Lauvergeon, aged 46, joined the Board in November 2005 and is a member of the Audit Committee. She is Chairman of the Executive Board of AREVA, the leading French energy company, having been appointed to that role in July 2001. She started her professional career in 1983 in the iron and steel industry and in 1990 she was named Adviser for Economic International Affairs at the French Presidency and Deputy Chief of its Staff in 1991. In 1995, she became a Partner of Lazard Frères & Cie, subsequently joining Alcatel Telecom as Senior Executive Vice President in March 1997. She was responsible for international activities and the Groups industrial shareholdings in the energy and nuclear fields. In 1999, she was appointed Chairman and CEO of COGEMA. Anne Lauvergeon is currently also Vice Chairman of the Supervisory Board of Safran and a non-executive director of Total and Suez.
13. Professor Jürgen Schrempp, aged 61, has been a member of the Board since May 2000 and is a member of the Remuneration Committee and the Nominations and Governance Committee. He is former Chairman of the Board of Management of DaimlerChrysler and one of the principal architects of Daimler-Benzs merger with Chrysler in 1998. He became Chairman of Daimler-Benz in 1995. He is a non-executive director of the South African Coal, Oil and Gas Corporation (SASOL) and Compagnie Financière Richemont SA, Switzerland. Professor Schrempp is Chairman Emeritus of the Global Business Coalition on HIV/AIDS. He has received numerous awards and has also been recognised for his civic leadership and charitable contributions. Amongst other distinctions, he is Commander of the French Legion of Honor and holds South Africas highest civilian award, the Order of Good Hope, conferred upon him by President Nelson Mandela.
14. Luc Vandevelde, aged 55, joined the Board in September 2003 and is Chairman of the Remuneration Committee. He is Chairman of the Supervisory Board of Carrefour SA and a director of Société Générale. He is the Founder and Managing Director of Change Capital Partners LLP, a private equity fund. Luc Vandevelde was formerly Chairman of Marks & Spencer Group Plc and Chief Executive Officer of Promodes, and he has held senior European and international roles with Kraft General Foods.
15. Philip Yea, aged 51, became a member of the Board in September 2005 and is a member of the Remuneration Committee. He is the Chief Executive Officer of 3i Group plc, having been appointed to that role in July 2004. Prior to joining 3i, he was Managing Director of Investcorp and, from 1997 to 1999, the Group Finance Director of Diageo plc following the merger of Guinness plc, where he was Finance Director, and Grand Metropolitan plc. He has previously held non-executive roles at HBOS plc and Manchester United plc.
Appointed
since 31 March 2006
Anthony
Watson, aged
61, was appointed to the Board on 1 May 2006, having retired from his role
as Chief Executive of Hermes Pensions Management Limited, a position he had
held since 2002. Previously he was Hermes Chief Investment Officer,
having been Managing Director of AMP Asset Management and the Chief International
Investment Officer of Citicorp Investment Management from 1991 until joining
Hermes in 1998. He is Chairman of Marks & Spencer Pension Trust Ltd, the
Strategic Investment Board in Northern Ireland and also a non-executive director
of Hammerson Group Plc and Witan Investment Trust Plc.
51 | Vodafone Group Plc Annual Report 2006 |
Board of Directors and Group Management
continued
Senior Management
Members of the Executive Committee who are not also executive directors are regarded as senior managers of the Company.
Executive Committee
Chaired
by Arun Sarin,
this committee focuses on the Groups strategy, financial structure and
planning, succession planning, organisational development and Group-wide policies.
The Executive Committee membership comprises the Executive Directors, details
of whom are shown on pages 50 to 51, and the senior managers who are listed below:
Brian Clark, Group Human Resources Director, aged 57, was appointed to this position in April 2005. He joined Vodafone in 1997 and, before his current position, was Chief Executive, Asia Pacific Region. Prior to joining Vodafone, he was Managing Director and Chief Executive Officer of Telkom SA Limited, South Africa.
Paul Donovan, Chief Executive Officer, EMAPA (Central Europe, Middle East, Asia Pacific and Affiliates), aged 47, was appointed to this position on 1 May 2006. He joined Vodafone in 1999 as Managing Director Commercial, was appointed Chief Executive of Vodafone Ireland in 2001 and became Chief Executive Officer, Other Vodafone Subsidiaries in January 2005, managing fourteen of Vodafones controlled entities. He has over fifteen years experience in the telecommunications and IT industries and has held senior roles at BT, One2One and Optus Communications and, prior to that, marketing roles at the Mars Group, Coca Cola and Schweppes Beverages.
Warren Finegold, Chief Executive, Global Business Development, aged 49, was appointed to this position and joined the Executive Committee on 24 April 2006. He was previously a Managing Director of UBS Investment Bank and head of its technology team in Europe. He is responsible for Business Development, M&A and Partner Networks.
Alan Harper, Group Strategy and Business Integration Director, aged 49, joined Vodafone in 1995 as Group Commercial Director and he subsequently became Managing Director of Vodafone UK. He was appointed to his current position in July 2000. Prior to joining the Group, he held the post of Business Strategy Director with Mercury One2One and senior roles with Unitel and STC Telecoms. He is also a member of the Vodafone D2 GmbH Supervisory Board and Chairman of the Vodafone UK Foundation
Simon Lewis, Group Corporate Affairs Director, aged 47, joined Vodafone in November 2004. He previously held senior roles at Centrica Plc including Managing Director, Europe and Group Director of Communications and Public Policy. Prior to that he was Director of Corporate Affairs at NatWest Group and the Head of Public Relations at SG Warburg plc. He was President of the Institute of Public Relations in 1997 and is a Visiting Professor at the Cardiff School of Journalism. In 1998, he was seconded to Buckingham Palace for two years as the first Communications Secretary to the Queen. He is a Fulbright Commissioner and a trustee of The Vodafone Group Foundation.
Tim Miles, Global Chief Technology Officer, aged 48, was appointed to this position on 1 April 2006. He joined Vodafone New Zealand in 2001 as Director of Business Markets and was appointed Managing Director of Vodafone New Zealand in 2002. In April 2005, he joined Vodafone UK as Chief Executive Officer before moving to his present role. He has over twenty years experience in the IT and telecommunications industry. Prior to joining Vodafone, he was Vice President for Global Industries, Unisys Corporation, USA and, before that, held executive positions with Data General and IBM.
Bill Morrow, Chief Executive Officer, Europe, aged 46, was appointed to this position on 1 May 2006 after ten years with the Vodafone Group. Over the last ten years, he has held various positions, including President of Vodafone Japan, Chief Executive of Vodafone UK and President of Japan Telecom. He has twenty-six years of experience in the telecommunications industry, holding senior leadership roles in the USA, Asia and Europe. Bill Morrow is widely recognised for operational performance lifts, technology management and company restructuring.
Frank Rovekamp, Global Chief Marketing Officer, aged 51, was appointed to this position and joined the Executive Committee on 1 May 2006. He joined Vodafone four years ago as Marketing Director and a Member of the Management Board of Vodafone Netherlands and later moved to Vodafone Germany as Chief Marketing Officer and a member of the Management Board. Before joining Vodafone, Frank held roles as President and Chief Executive Officer of Beyoo and Chief Marketing Officer with KLM Royal Dutch Airlines.
Stephen Scott, Group General Counsel and Company Secretary, aged 52, was appointed Group General Counsel and Company Secretary in 1991, prior to which he was employed in the Racal Group legal department, having moved into industry in 1980 from private law practice in London. He is a director of the Companys UK pension trustee company and of ShareGift (the Orr Mackintosh Foundation Limited) and is a director and trustee of LawWorks (the Solicitors Pro Bono Group Limited).
Strategy Board
The Strategy Board meets two or three times per year to discuss strategy. This is attended by Executive Committee members and the Chief Executive Officers of the major operating
companies and other selected individuals based on Strategy Board topics.
Other Board and Executive Committee members
The following members also served on the Board or the Executive Committee during the 2006 financial year:
Peter Bamford was an executive director until 7 March 2006.
Ken Hydon was an executive director until he retired on 26 July 2005.
Sir David Scholey CBE was a non-executive director until he retired on 26 July 2005.
Pietro Guindani, Chief Executive Italy, was a member of Executive Committee until 1 May 2006.
Fritz Joussen, Chief Executive Germany, was a member of Executive Committee until 1 May 2006.
Jurgen von Kuczkowski was a member of the Executive Committee until he retired on 30 September 2005.
Shiro Tsuda, Executive Chairman and Chairman of the Board, Vodafone K.K., was an Executive Committee member until the completion of the sale of the Japanese business on 27 April 2006.
Phil Williams was a member of the Executive Committee until he retired on 31 July 2005.
52 | Vodafone Group Plc Annual Report 2006 |
Governance | |
Introduction
Statement
of corporate governance policy
The Board
of directors of the Company is committed to high standards of corporate governance,
which it considers are critical to business integrity and to maintaining investors
trust in the Company. The Group expects all its directors and employees to act
with honesty, integrity and fairness. The Group will strive to act in accordance
with the laws and customs of the countries in which it operates; adopt proper
standards of business practice and procedure; operate with integrity; and observe
and respect the culture of every country in which it does business.
The Combined
Code
The Companys
ordinary shares are listed in the United Kingdom on the London Stock Exchange.
As such, the Company is required to make a disclosure statement concerning its
application of the principles of and compliance with the provisions of the revised
Combined Code on corporate governance (the Combined Code). For the
year ended 31 March 2006, the Board confirms that the Company has been in compliance with the provisions of section 1 of the Combined Code. The disclosures provided below are nevertheless
intended to provide an explanation of the Companys corporate governance policies and practices.
US listing
requirements
The Companys
ADSs are listed on the NYSE and the Company is, therefore, subject to the rules
of the NYSE as well as US securities laws and the rules of the SEC. The NYSE
requires US companies listed on the exchange to comply with the NYSEs
corporate governance rules but foreign private issuers, such as the Company,
are exempt from most of those rules. However, pursuant to NYSE Rule 303A.11,
the Company is required to disclose a summary of any significant ways in which
the corporate governance practices it follows differ from those required by
the NYSE for US companies. A summary of such differences is set out below.
The Company has established a Disclosure Committee with responsibility for reviewing and approving controls and procedures over the public disclosure of financial and related information, and other procedures necessary to enable the Chief Executive and Chief Financial Officer to provide their Certifications of the Annual Report on Form 20-F that is filed with the SEC.
Section 404 of the Sarbanes-Oxley Act of 2002 (US) requires the Company to annually assess and make public statements about the quality and effectiveness of its internal controls over financial reporting. As a non-US company, Vodafone is first required to report on its compliance with section 404 for the year ended 31 March 2007. Managements report must describe conclusions about the effectiveness of the Companys internal control over financial reporting based on managements evaluation as of the end of the Companys most recent fiscal year.
The Company has established a Steering Committee to provide strategic direction to the Companys section 404 compliance efforts and a Programme Management Office which monitors progress and provides detailed guidance to the compliance teams that have been set up in the Groups subsidiaries and central functions. The Companys Audit Committee also plays an active role in monitoring these efforts. The Audit Committee receives progress updates at each of its meetings as well as a bi-annual status presentation from the Programme Management Office. The Companys external auditors have been consulted throughout the project and will continue to be involved as the Company finalises its review.
The Company has reviewed the structure and operation of its entity level control environment: the overarching structure of review and monitoring essential to the management of its business.
Each of the Companys subsidiaries and central functions has ensured that the relevant processes and controls are documented to appropriate standards, taking into account the guidance provided by the US Public Company Accounting Oversight Boards Auditing Standard No. 2 and subsequent SEC Staff Questions and Answers related to the standard. The approach taken has been to identify the key financial reporting processes so that, in aggregate, the Company has reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements.
The Company is making satisfactory progress on the work required to enable it to report on its compliance with section 404 at 31 March 2007.
The Company has also adopted a corporate Code of Ethics for senior executive, financial and accounting officers, separate from and additional to its Business Principles, described below. A copy of this code is available on the Groups website at www.vodafone.com.
Differences
from New York Stock Exchange corporate governance practices
Independence
The NYSE rules
require that a majority of the Board must be comprised of independent directors
and the rules include detailed tests that US companies must use for determining
independence. The Combined Code requires a companys board of directors
to assess and make a determination as to the independence of its directors.
While the Board does not explicitly take into consideration the NYSEs
detailed tests, it has carried out an assessment based on the requirements of
the Combined Code and has determined in its judgement that all of the non-executive
directors are independent within those requirements. As at the date of this
Annual Report, the Board comprised the Chairman, four executive directors and
eleven non-executive directors.
Committees
Under NYSE
rules, US companies are required to have a nominating and corporate governance
committee and a compensation committee, each composed entirely of independent
directors with a written charter that addresses the Committees purpose
and responsibilities. The Companys Nominations and Governance Committee
and Remuneration Committee have terms of reference and composition that comply
with the Combined Code requirements. The Nominations and Governance Committee
is chaired by the Chairman of the Board, and its other members are non-executive
directors of the Company and the Chief Executive. The Remuneration Committee
is composed entirely of non-executive directors whom the Board has determined
to be independent. The Companys Audit Committee is composed entirely of
non-executive directors whom the Board has determined to be independent and
who meet the requirements of Rule 10A-3 of the Securities Exchange Act. The
Company considers that the terms of reference of these committees, which are
available on its website at www.vodafone.com, are generally responsive to the
relevant NYSE rules but may not address all aspects of these rules.
Corporate
governance guidelines
Under NYSE
rules, US companies must adopt and disclose corporate governance guidelines.
Vodafone has posted its statement of compliance with the Combined Code on its
website at www.vodafone.com. The Company also has adopted a Group Governance
Manual which provides the first level of the framework within which its businesses
operate. The manual is a reference for Chief Executives and their teams and
applies to all directors and employees. The Company considers that its corporate
governance guidelines are generally responsive to, but may not address all aspects
of, the relevant NYSE rules.
Vodafone Group Plc Annual Report 2006 | 53 |
Corporate
Governance
continued
Business
principles
In addition
to the formal requirements of the Listing Authorities and Stock Exchanges described
above, the Group has developed and implemented its own Business Principles which
define its relationships with all of its stakeholders, govern how Vodafone conducts
its day-to-day business and represents the additional commitments the Group
makes to its stakeholders. These can be found on the Groups website at
www.vodafone.com.
The Business Principles apply to all subsidiary companies in the Group. Chief Executives are responsible for ensuring application of the Business Principles within their business. Vodafone also promotes the Business Principles to its joint venture companies, associated undertakings, business partners and third parties.
Every employee is expected to act in accordance with the Business Principles. A confidential email facility has been established for employees to report any concerns.
The Group tracks the implementation of its Business Principles through its internal audits.
Directors
and Organisation
Board composition
The Companys
Board consists of 16 directors, 12 of whom served throughout the 2006 financial
year. At 31 March 2006, in addition to the Chairman, Lord MacLaurin, there were
four executive directors and ten non-executive directors. The Deputy Chairman,
Paul Hazen, is the nominated senior independent director and his role includes
being available for approach or representation by directors or significant shareholders
who may feel inhibited from raising issues with the Chairman. He is also responsible
for conducting an annual review of the performance of the Chairman and, in the
event it should be necessary, convening an annual meeting of the non-executive
directors.
Philip Yea, Anne Lauvergeon and Anthony Watson joined the Board as non-executive directors on 1 September 2005, 1 November 2005 and 1 May 2006 respectively. Peter Bamford ceased to be a member of the Board on 7 March 2006. Lord MacLaurin, Sir Julian Horn-Smith, Paul Hazen and Penny Hughes will retire on conclusion of the Companys AGM on 25 July 2006. Sir John Bond will become the Chairman of the Company following the retirement of Lord MacLaurin and John Buchanan will succeed Paul Hazen as the Deputy Chairman and senior independent director. The Company considers all of its present non-executive directors to be fully independent. The executive directors are Arun Sarin (Chief Executive), Sir Julian Horn-Smith, Thomas Geitner and Andy Halford.
The following table shows directors attendance at meetings during the 2006 financial year:
Nominations and | ||||||||
Audit | Governance | Remuneration | ||||||
Board | Committee | Committee | Committee | |||||
|
|
|
|
|||||
Number of meetings | ||||||||
during the year | ||||||||
to 31 March 2006 | 8 | 5 | 3 | 5 | ||||
|
|
|
|
|||||
Lord MacLaurin | 8 | 2 | (1) | |||||
Paul Hazen | 8 | 1 | 2 | |||||
Arun Sarin | 8 | 3 | ||||||
Sir Julian Horn-Smith | 8 | |||||||
Peter Bamford(2) | 7 | |||||||
Thomas Geitner | 8 | |||||||
Andy Halford(3) | 6 | |||||||
Ken Hydon(4) | 2 | |||||||
Sir John Bond | 7 | 2 | 4 | |||||
Dr Michael Boskin | 8 | 5 | (1)(5) | 5 | ||||
Lord Broers | 7 | 5 | 1 | |||||
John Buchanan | 7 | 5 | ||||||
Penny Hughes | 8 | 4 | 2 | |||||
Anne Lauvergeon(6) | 3 | 1 | ||||||
Sir David Scholey(4) | 2 | 1 | ||||||
Professor Jürgen Schrempp | 8 | 2 | 5 | |||||
Luc Vandevelde | 7 | 4 | (1)(7) | |||||
Philip Yea(8) | 6 | 2 | ||||||
Notes: | |
(1) | Committee Chairman. |
(2) | Peter Bamford ceased to be a member of the Board on 7 March 2006. |
(3) | Andy Halford joined the Board on 26 July 2005 and from then until 31 March 2006 there were six Board meetings. |
(4) | Ken Hydon and Sir David Scholey retired from the Board on conclusion of the AGM on 26 July 2005. |
(5) | Dr Michael Boskin succeeded Paul Hazen as Chairman of the Audit Committee during the year. |
(6) | Anne Lauvergeon joined the Board on 1 November 2005 and from then until 31 March 2006 there were four Board meetings. |
(7) | Luc Vandevelde succeeded Penny Hughes as Chairman of the Remuneration Committee during the year. |
(8) | Philip Yea joined the Board on 1 September 2005 and from then until 31 March 2006 there were six Board meetings. |
In addition to regular Board meetings, there are a number of other meetings to deal with specific matters. Directors unable to attend a Board meeting because of another engagement, as was the case for a number of directors in the year, are nevertheless provided with all the papers and information relevant for such meeting and are able to discuss issues arising in the meeting with the Chairman or the Chief Executive.
Re-election
of Directors
Although not
required by the Articles, in the interests of good corporate governance, the
directors have resolved that they will all submit themselves for annual re-election
at the AGM. Accordingly, at the AGM to be held on 25 July 2006, other than Lord
MacLaurin, Sir Julian Horn-Smith, Paul Hazen and Penny Hughes who are retiring
at the conclusion of the AGM, all the directors will be retiring and, being
eligible and on the recommendation of the Nominations and Governance Committee,
will offer themselves for re-election.
Performance
evaluation
Performance
evaluation of the Board, its Committees and individual directors takes place
on an annual basis and is conducted within the terms of reference of the Nominations
and Governance Committee with the aim of improving individual contributions,
the effectiveness of the Board and its Committees and the Groups performance.
The Chairman leads the assessment of the Chief Executive and the non-executive
directors, the Chief Executive undertakes the performance reviews for the executive
directors and the senior independent director conducts the review of the performance
of the Chairman. Each Board Committee undertakes a review of its own work and,
in relation to the performance of the Board, each director is required to complete
a comprehensive questionnaire, the results of which are analysed and discussed
by the Nominations and Governance Committee prior to the presentation of recommendations
to the Board. The evaluation process is designed to cover Board processes, the
structure and capability of the Board, strategic alignment, Board dynamics and
the skills brought to the Board by each director. A series of questionnaires
has also been developed to facilitate the evaluation processes for each Board
Committee.
54 | Vodafone Group Plc Annual Report 2006 |
Governance | |
The evaluations found the performance of each director to be effective and concluded that the Board provides the effective leadership and control required for a listed company. The Nominations and Governance Committee confirmed to the Board that the contributions made by the directors offering themselves for re-election at the AGM in July 2006 continued to be effective and the Company should support their re-election.
Information
and professional development
Each member
of the Board has immediate access to a dedicated online team room and can access
monthly information including actual financial results, reports from the executive
directors in respect of their areas of responsibility and the Chief Executives
report which deals, amongst other things, with investor relations, giving Board
members an opportunity to develop an understanding of the views of major investors.
These matters are discussed at each Board meeting. From time to time, the Board
receives detailed presentations from non-Board members on matters of significance
or on new opportunities for the Group. Financial plans, including budgets and
forecasts, are regularly discussed at Board meetings. The non-executive directors
periodically visit different parts of the Group and are provided with briefings
and information to assist them in performing their duties. The non-executive
directors and the Chairman regularly meet without executives present.
The Board is confident that all its members have the knowledge, ability and experience to perform the functions required of a director of a listed company. On appointment, all directors are provided with appropriate training and guidance as to their duties, responsibilities and liabilities as a director of a public and listed company and also have the opportunity to discuss organisational, operational and administrative matters with the Chairman, the Chief Executive and the Company Secretary. When considered necessary, more formal training is provided.
Matters
for the Board
The Board
has a formal schedule of matters specifically referred to it for decision, including:
| the approval of Group commercial strategy; |
| Group strategic and long-term plans; |
| major capital projects; |
| approving annual budgets and operating plans; |
| devising and reviewing the Groups corporate governance structure; |
| Group financial structure (including tax and treasury policy); |
| approving statutory accounts and shareholder communications; |
| Group risk management; and |
| material contracts not in the ordinary course of business. |
This schedule is reviewed periodically. It was last formally reviewed and updated by the Nominations and Governance Committee in January 2004 and its proposals were subsequently approved by the Board. Its currency and continued validity were assessed as part of the performance evaluations conducted in the 2006 financial year described earlier in this Report. The agendas for Board meetings are initially developed by the Chief Executive and the Company Secretary and are finalised by the Chairman. The directors have access to the advice and services of the Company Secretary and, both as a group and individually, are entitled to take independent professional advice at the cost of the Company on matters relating to the proper discharge of their responsibilities.
Executive
Management
The executive
directors, together with certain other Group functional heads and regional chief
executives, meet 12 times a year as the Executive Committee under the chairmanship
of the Chief Executive. The Executive Committee is responsible for the day-to-day
management of the Groups businesses, the overall financial performance
of the Group in fulfilment of strategy, plans and budgets and Group capital
structure and funding. It also reviews major acquisitions and disposals.
Committees
of the Board
The standing
Board Committees are the Audit Committee, the Nominations and Governance Committee and the Remuneration Committee. The composition and terms of reference of these committees are published on the Groups website at www.vodafone.com. The
Secretary to these standing Board Committees is the Company Secretary or his nominee.
The Audit
Committee
The Audit
Committee is comprised of financially literate members having the necessary
ability and experience to understand financial statements. Solely for the purpose
of fulfilling the requirements of the Sarbanes-Oxley Act and the Combined Code,
the Board
has designated John Buchanan, who is an independent non-executive director, satisfying the independence requirements of Rule 10A-3 of the US Securities Exchange Act 1934, as its financial expert on the Audit Committee. Further details of John Buchanan can be found in Board of Directors and Group Management.
Under its terms of reference, the Audit Committee is required, amongst other things, to oversee the relationship with the external auditors, to review the Companys preliminary results announcement, interim results and annual financial statements, to monitor compliance with statutory and listing requirements for any exchange on which the Companys shares are quoted, to review the scope, extent and effectiveness of the activity of the Group Internal Audit Department, to engage independent advisers as it determines is necessary and to perform investigations.
The Audit Committee reports to the Board on the quality and acceptability of the Companys accounting policies and practices, including without limitation, critical accounting policies and practices. The Audit Committee also plays an active role in monitoring the Companys compliance efforts for section 404 of the Sarbanes-Oxley Act and receives progress updates at each of its meetings as well as a bi-annual status presentation from the Programme Management Office.
At least twice a year, the Audit Committee meets separately with the external auditors and the Group Audit Director without management being present. Further details on the oversight of the relationships with the external auditors can be found under Auditors and the Report from the Audit Committee which are set out on page 57.
The Nominations
and Governance Committee
The Nominations
and Governance Committee, which provides a formal and transparent procedure
for the appointment of new directors to the Board, generally engages external
consultants to advise on prospective Board appointees. This year, the Committee
recommended the appointment of three further non-executive directors. Detailed
role profiles were agreed by the Committee before external search consultants
were engaged to prepare a shortlist of potentially suitable candidates. Only
after a rigorous interview process were the appointments recommended to the
Board.
The Committee also reviewed the Groups succession plans, directed the performance evaluations described earlier in this Annual Report, discussed matters of corporate governance and assessed the independence of non-executive directors prior to reporting to the Board.
The Remuneration
Committee
The Remuneration
Committee is responsible to the Board for the assessment and recommendation
of policy on executive remuneration and packages for individual executive directors.
The Committee has regular private sessions without executive directors present.
Further information on the Committees activities is contained in the Boards
Report to Shareholders on Directors Remuneration.
Statement
on Internal Control
Introduction
The Board
has established procedures that implement in full the Turnbull Guidance, Internal
Control: Guidance for Directors on the Combined Code, for the year under
review and to the date of approval of the Annual Report. These procedures, which
are subject to regular review, provide an ongoing process for identifying, evaluating
and managing the significant risks faced by the Group.
Responsibility
The Board
has overall responsibility for the system of internal control. A sound system
of internal control is designed to manage rather than eliminate the risk of
failure to achieve business objectives, and can only provide reasonable and
not absolute assurance against material misstatement or loss. The process of
managing the risks associated with social, environmental and ethical impacts
is also discussed under Corporate Responsibility and Environmental Issues,
on pages 59 to 60.
Control
structure
The Board
sets the policy on internal control that is implemented by management. This
is achieved through a clearly defined operating structure with lines of responsibility
and delegated authority. The Executive Committee, chaired by the Chief Executive,
manages this on a day-to-day basis.
The Groups brand essence, which encapsulates the Groups commitment to integrity and continuous improvement, in combination with the Groups Business Principles, sets the tone of the Group and reflects the control consciousness of management.
Written policies and procedures have been issued which clearly define the limits of delegated authority and provide a framework for management to deal with areas of
Vodafone Group Plc Annual Report 2006 | 55 |
Corporate Governance
continued
significant business risk. These policies and procedures are reviewed and, where necessary, updated at Executive Committee meetings.
Control Environment
The Groups
operating procedures include a comprehensive system for reporting information
to the directors. This system is properly documented and regularly reviewed.
Budgets are prepared by subsidiary management and subject to review by both regional management and the directors. Forecasts are revised on a quarterly basis and compared against budget. When setting budgets and forecasts, management identifies, evaluates and reports on the potential significant business risks.
The Executive Committee and the Board review management reports on the financial results and key operating statistics.
Emphasis is placed on the quality and abilities of the Groups employees with continuing education, training and development actively encouraged through a wide variety of schemes and programmes. The Group has adopted a set of values to act as a framework for its people to exercise judgement and make decisions on a consistent basis.
Directors are appointed to associated undertakings and joint ventures and attend the board meetings and review the key financial information of those undertakings. Clear guidance is given to those directors on the preparation that should take place before these board meetings and their activity at the board meeting. It is the Groups policy, where possible, that its auditors are appointed as auditors of associated companies and joint ventures.
The acquisition of any business requires a rigorous analysis of the financial implications of the acquisition and key performance figures. A sensitivity analysis takes place of the key assumptions made in the analysis. Post investment appraisals of the Groups investments are conducted on a periodic and timely basis.
The Board reviews a half-yearly report detailing any significant legal actions faced by Group companies.
The Executive Committee monitors legal, environmental and regulatory matters and approves appropriate responses or amendments to existing policy.
Monitoring and review activities
There
are clear processes for monitoring the system of internal control and reporting
any significant control failings or weaknesses together with details of corrective
action.
A formal annual confirmation is provided by the chief executive officer and chief financial officer of each Group company certifying the operation of their control systems and highlighting any weaknesses. Regional management, the Audit Committee and the Board review the results of this confirmation.
The Chief Executive and the Chief Financial Officer undertake a review of the quality and timeliness of disclosures that includes formal annual meetings with the operating company or regional chief executives and the Disclosure Committee.
The Group Internal Audit Department, reporting directly to the Audit Committee, undertakes periodic examination of business processes on a risk basis and reports on controls throughout the Group.
Reports from the external auditors, Deloitte & Touche LLP, on certain internal controls and relevant financial reporting matters, are presented to the Audit Committee and management.
Review of Effectiveness
The
directors, the Chief Executive and the Chief Financial Officer consider that
any controls and procedures, no matter how well designed and operated, can provide
only reasonable and not absolute assurance of achieving the desired control objectives.
The Groups management is required to apply judgement in evaluating the
risks facing the Group in achieving its objectives, in determining the risks
that are considered acceptable to bear, in assessing the likelihood of the risks
concerned materialising, in identifying the companys ability to reduce
the incidence and impact on the business of risks that do materialise and in
ensuring the costs of operating particular controls are proportionate to the
benefit.
The directors, the Chief Executive and the Chief Financial Officer confirm that they have reviewed the effectiveness of the system of internal control and the disclosure controls and procedures through the monitoring process set out above, which as noted separately on page 55 does not include any statement of compliance with section 404
of the Sarbanes-Oxley Act, and are not aware of any significant weakness or deficiency in the Groups system of internal control. The directors, the Chief Executive and the Chief Financial Officer have evaluated the effectiveness of the disclosure controls and procedures and, based on that evaluation, have concluded that the disclosure controls and procedures are effective as at the end of the period covered by this Annual Report.
During the period covered by this Annual Report, there were no changes in the Companys internal control over financial reporting that have materially affected or are reasonably likely to materially affect the effectiveness of the internal controls over financial reporting.
Relations with Shareholders
The
Company is committed to communicating its strategy and activities clearly to
its shareholders and, to that end, maintains an active dialogue with investors
through a planned programme of investor relations activities. The investor relations
programme includes formal presentations of full year and interim results and
quarterly statements on key performance indicators. The Company holds briefing
meetings with its major institutional shareholders in the UK, the US and in Continental
Europe, after the interim results and preliminary announcement, to ensure that
the investing
community receives a balanced and complete view of the Groups performance
and the issues faced by the Group. Telecommunications analysts are invited to
presentations of the financial results and senior executives across the business
attend relevant meetings and conferences throughout the year. During the year,
the Company hosts investors and analysts sessions at which senior management
from its largest operating subsidiaries, its largest joint venture and certain
associated undertakings deliver presentations which provide an overview of each
of the individual businesses. The Company, through its Investor Relations team,
responds to enquiries from shareholders. The Chief Executive and the Chief Financial
Officer meet regularly with institutional investors and analysts, who also have
access to the Chairman
if they so
require, to discuss business performance.
The principal communication with private investors is through the provision of the Annual Review and Summary Financial Statement, the interim results and the AGM, an occasion which is attended by all the Companys directors and at which all shareholders present are given the opportunity to question the Chairman and the Board as well as the Chairmen of the Audit, Remuneration and Nominations and Governance Committees. A summary presentation of results and development plans is also given by the Chairman at the AGM before dealing with the formal business of the meeting. The AGM is broadcast live on the Groups website, www.vodafone.com, and a recording of the webcast can subsequently be viewed on the website. All substantive resolutions at the Companys AGMs are decided on a poll. The poll is conducted by the Companys Registrars and scrutinised by Electoral Reform Services. The proxy votes cast in relation to all resolutions are disclosed to those in attendance at the meeting and the results of the poll are published on the Companys website and announced via the regulatory news service. Financial and other information is made available on the Companys website, www.vodafone.com, which is regularly updated.
Political Donations
At
the AGM on 26 July
2005, the Board sought and obtained shareholders approval to enable the
Group to make donations to EU Political Organisations or incur EU Political Expenditure,
under the relevant provisions of the Political Parties, Elections and Referendums
Act 2000 (the Act). The approval given restricted such expenditure
to an aggregate limit of £100,000 in the period of 12 months following
the date of the AGM.
The Group has made no political donations during the year.
At this years AGM, to be held on 25 July 2006, the directors propose to seek a renewal of shareholders approval for a period of three years (until the AGM in 2009). The amount of the approval for each year until the AGM in 2009 will again be restricted to an aggregate amount of £100,000 (£50,000 in respect of donations to EU Political Organisations and £50,000 in respect of EU Political Expenditure).
Although the directors are seeking shareholders approval for the next three years, as with previous annual approvals, the Group has no intention of changing its current policy and practice of not making political donations and will not do so without the specific endorsement of shareholders. The Board seeks the approval on a precautionary basis, to avoid any possibility of unintentionally breaching the Act.
Directors Indemnities
The
Companies (Audit Investigations and Community Enterprise) Act 2004 came into
force on 6 April 2005 and, amongst other things, changed the provisions of Section
310 of the Companies Act 1985 to give companies the power to extend indemnities
to directors against liability to third parties (excluding criminal and regulatory
penalties)
and to pay directors legal costs as incurred provided that they are reimbursed
to the Company if the individual is convicted or, in an action brought by the
Company, judgment is given against the director. Accordingly, the Company sought
and obtained
56 | Vodafone Group Plc Annual Report 2006 |
Governance | |
shareholder approval at the AGM in July 2005 to amend its Memorandum and Articles of Association to give it authority to provide funding for directors defence costs. Following that approval, the Company indemnified its directors and will indemnify new directors to the extent permitted by legislation.
Auditors
Following
a recommendation by the Audit Committee and, in accordance with section 384 of
the Companies Act 1985, a resolution proposing the re-appointment of Deloitte & Touche
LLP
as auditors to the Company will be put to the AGM.
In their assessment of the independence of the auditors and in accordance with the US Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, the Audit Committee receives in writing details of relationships between Deloitte & Touche LLP and the Company that may have a bearing on their independence and receives confirmation that they are independent of the Company within the meaning of the securities laws administered by the SEC.
In addition, the Audit Committee pre-approves the audit fee after a review of both the level of the audit fee against other comparable companies, including those in the
telecommunications industry, and the level and nature of non-audit fees, as part of its review of the adequacy and objectivity of the audit process.
In a further measure to ensure auditor independence is not compromised, policies have been adopted to provide for the pre-approval by the Audit Committee of all permitted non-audit services by Deloitte & Touche LLP. Should there be an immediate requirement for permitted non-audit services to be provided by Deloitte & Touche LLP which have not been pre-approved by the Audit Committee, the policies provide that the Group Audit Director will consult with the Chairman of the Audit Committee for pre-approval.
In addition to their statutory duties, Deloitte & Touche LLP are also employed where, as a result of their position as auditors, they either must, or are best placed to, perform the work in question. This is primarily work in relation to matters such as shareholder circulars, Group borrowings, regulatory filings and business acquisitions and disposals. Other work is awarded on the basis of competitive tender.
During the year, Deloitte & Touche LLP and its affiliates charged the Groups subsidiary undertakings £4 million (2005: £4 million) for audit services and a further £4 million (2005: £3 million) for non-audit assignments. An analysis of these fees can be found in note 4 to the Consolidated Financial Statements.
Report
from the Audit Committee
The
composition of the Audit Committee is shown in the table on page 54 and its terms
of
reference are discussed under Committees of the Board The Audit
Committee.
During the year ended 31 March 2006, the principal activities of the Committee were as follows:
Financial statements
The
Committee considered reports from the Chief Financial Officer and the Group Financial
Controller on the half-year and annual financial statements. It also considered
reports from
the external auditors, Deloitte & Touche LLP, on the scope and outcome of
the annual audit.
The financial statements were reviewed in the light of these reports and the results of that review reported to the Board.
Risk management and internal control
The
Committee reviewed the process by which the Group evaluated its control environment,
its risk assessment process and the way in which significant business risks
were managed. It
also considered the Group Audit departments reports on the effectiveness
of internal controls, significant frauds and any fraud that involved management
or employees with a significant role in internal controls.
The Committee also reviewed and approved arrangements by which staff could, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. This was achieved through using existing reporting procedures and a web site with a dedicated anonymous email feature.
External auditors
The
Committee reviewed the letter from Deloitte & Touche LLP confirming their independence and objectivity. It also reviewed and pre-approved the scope of non-audit services
provided by Deloitte & Touche LLP to ensure that there was no impairment
of independence.
The Committee pre-approved the scope and fees for audit services provided by Deloitte & Touche LLP and confirmed the wording of the recommendations put by the Board to the shareholders on the appointment and retention of the external auditors.
Private meetings were held with Deloitte & Touche LLP to ensure that there were no restrictions on the scope of their audit and to discuss any items the auditors did not wish to raise with management present.
Internal audit
The
Committee engaged in discussion and review of the Group Audit Departments
audit plan for the year, together with its resource requirements. Private meetings
were held with
the Group Audit Director.
Audit Committee effectiveness
The Audit Committee conducts a formal review of its effectiveness annually and concluded this year that it was effective and able to fulfil its terms of reference.
Dr Michael Boskin
On
behalf of the Audit Committee
Vodafone Group Plc Annual Report 2006 | 57 |
Employees
Vodafone employs approximately 60,000 people worldwide, with a goal to recruit, develop and retain the most talented, motivated people that are well aligned with the Vodafone brand essence. The Company aims to do this by providing a good, safe working environment, treating people with respect and offering attractive incentives and opportunities. Training and development programmes help employees to develop their skills and experience and to reach their full potential, benefiting themselves and the Company.
Employee Involvement
The
Boards aim is to ensure that Vodafone people understand the Groups
strategic goals and the mutual obligations of working in a high performing,
values-based
organisation.
Vodafones values continue to provide a common way of doing things and are implicit in all that the Group does for and with its shareholders, customers and employees. During the year, Vodafone launched a major employee engagement initiative to bring alive the essence of the Vodafone brand. Red, Rock Solid, Restless is the cornerstone to changing the culture of the Group by inspiring the behaviour of employees in their interactions with customers and other stakeholders.
The Board places a high priority on effective employee communications to create a dialogue with the Groups people. In addition to the more traditional channels, the Group increasingly uses its own products and services, such as SMS and audio based messaging, and is currently trialling 3G video based internal communications media in some local markets. This is the natural next step in the evolution of VTV, the Groups successful intranet based business television service.
The Chief Executive and other members of the executive management team continue to host the Talkabout programme, which aims to visit each of the Groups local operating companies every year. In the Talkabout sessions, the executive team use the opportunity to discuss the Groups strategic goals with as wide an audience of Vodafone people as possible, listening to their views and talking about the issues that matter most to them, as well as exchanging ideas about how Vodafone can serve its customers as a single, global team.
All of these initiatives are supported and enhanced by a comprehensive range of award winning in-house publications for effectively sharing information with employees on key performance indicators for the business. The Vodafone intranet was recently included by Nielsen Norman Research in their authoritative list as one of the ten best intranets in the world.
Vodafones success is driven by the passion and effort of the Groups employees. In return, Vodafone values employees opinions on improving the performance of the Group. Within European subsidiaries, employee representatives meet annually with members of the executive management team in the Vodafone European Employee Consultative Council to discuss the performance and prospects of the Group and significant trans-national issues.
In 2005, Vodafone carried out its second biennial Employee Survey to measure the levels of employee satisfaction and engagement. 89% of employees from 17 countries, including Japan, took part to inform the Company on its progression on the key issues highlighted by the first survey in 2003.
The results showed that Vodafone employees had responded more positively in 2005 than in 2003. Specific results indicated that the overwhelming majority of employees are proud to work for Vodafone, understand the importance of Vodafones values, know the results expected of them in their jobs and have a good understanding of Vodafones strategic goals and priorities. The number of employees agreeing with the statement I am proud to work for Vodafone was equal to the high performance norm for companies on the Fortune list of Most Admired Companies.
Vodafone is focused on continually improving and, as a result, the Company has identified three areas to be addressed through co-ordinated global and local action:
| To take a genuine interest in employees and their development, by taking a more proactive approach to developing employees, with a specific emphasis on coaching and feedback. This area will be supported by the global launch of a performance management process in the next financial year and the launch of selected functional Academies which focus on the professional and skills development offered to employees; |
| To improve the Groups understanding of the underlying customer focus issues in each market and identify improvements in the service offered. Meeting customers requirements remains at the heart of the business and will continue to differentiate Vodafone from our competition; and |
| To develop practical global frameworks and guidelines to help employees effectively manage change within the business. |
The next Employee Survey is scheduled to take place in the 2007 financial year.
Employment Policies
The
Groups employment policies are consistent with the principles of the United Nations Universal Declaration of Human Rights and the International Labour Organisation Core
Conventions and are developed to reflect local legal, cultural and employment requirements. High standards are maintained wherever the Group operates, as Vodafone aims to ensure that the Group is recognised as an employer of choice. Employees at all
levels and in all companies are encouraged to make the greatest possible contribution to the Groups
success. The Group considers its employee relations to be good.
Equal Opportunities
Vodafone does not condone unfair treatment of any kind and operates an equal opportunities policy for all aspects of employment and advancement, regardless of race, nationality, sex,
age, marital status, disability or religious or political belief. In practice, this means that the Group is able to select the best people available for positions on the basis of merit and capability, making the most effective use of the talents and
experience of people in the business, providing them with the opportunity to develop and realise their potential.
The Disabled
The
directors are conscious of the special difficulties experienced by people with
disabilities.
Every effort is made to ensure ready access to the Groups facilities
and services and a range of products has been developed for people with special
needs. In addition, disabled people are assured of full and fair consideration
for all vacancies for which they offer themselves as suitable candidates
and efforts are made
to meet their special needs, particularly in relation to access and mobility.
Where possible, modifications to workplaces have been made to provide access
and, therefore, job opportunities for the disabled. Every effort is made
to continue the employment of people who become disabled via the provision
of additional facilities, job design and the provision of appropriate training.
Health, Safety and Wellbeing
The
health, safety and wellbeing of the Groups customers, employees and others
who could be affected by its activities are of paramount importance to Vodafone
and the Group
applies rigorous standards to all of its operations.
The health and safety management in each operating company is audited annually and the results are submitted in a report for discussion by the Board. The Groups annual global health and safety audit has shown a consistent rise in scores every year since inception in 2002. New standards, policies and a health and safety management system have been implemented, with an increase in consultation, participation and best practice sharing by health and safety professionals from the operating companies. These will be further developed in the next financial year.
58 | Vodafone Group Plc Annual Report 2006 |
Governance | |
Corporate Responsibility and Environmental Issues
Corporate Responsibility
Vodafone
sees corporate responsibility (CR) as the process of understanding
the expectations of stakeholders in the Group and taking appropriate action to
meet those expectations where they are realistic and legitimate. Stakeholders
include customers, investors, employees, suppliers, the communities where the
Group operates and where networks are based, governments and regulators and representatives
of civil
society.
CR is relevant across all aspects of business strategy and is encapsulated in the Groups strategic goal of being a responsible business. The Executive Committee, chaired by the Chief Executive, receives regular information on CR and the Director of Corporate Responsibility provides an annual report to the Board. All mobile operating companies have a representative on their management boards with responsibility for CR. For purposes of this section of the Annual Report, all mobile operating companies refers to the Groups mobile operating subsidiaries and the Groups joint venture in Italy, with the exception of the newly acquired operations in Czech Republic and Romania and the Swedish operations which were disposed of in the year. The CR impact of the Japanese operations has been included in the information presented in this section, reflecting the Groups responsibility for its impact throughout the 2006 financial year. Systems for data collection on corporate responsibility and environmental issues are being put in place for the 2007 financial year for the Czech Republic and Romania.
CR is at the heart of Vodafones values and is clearly linked to one of the Groups four passions, Passion for the world around us. Vodafones approach to business is underpinned by the Business Principles which cover, amongst other things, environment, employees, individual conduct and community and society. The Business Principles are available on www.vodafone.com/responsibility/businessprinciples and are communicated to employees in a number of ways, including induction processes, websites and briefings. In the 2006 financial year, CR matters were included within the Groups development programme for directors and senior managers.
Vodafone aims to integrate CR into the business and this is being reflected in governance, policy, process and reporting. For example, CR is integrated into Vodafones risk management processes such as the formal annual confirmation provided by each mobile operating company detailing the operation of their controls system, as outlined on page 55.
CR performance is closely monitored and reports are provided to most mobile operating company boards on a regular basis. This has driven demonstrable performance improvement and is valuable in benchmarking.
These processes are supported by stakeholder engagement, which seeks to provide a clear understanding of expectations of performance. The Group engages with stakeholders in a variety of different ways. For example, during the financial year, meetings relating to CR issues were held with 15 investors; a quantitative perception survey was carried out with 146 opinion leaders (including academics, non governmental organisations and policy makers) in 11 European countries and face to face meetings were held with non governmental organisations and opinion formers. This process of stakeholder engagement helps to ensure Vodafone is aware of the issues relevant to the business and that it is focused on the priority areas. This is covered in more detail in the Companys CR Report for the 2006 financial year, which can be found at www.vodafone.com/responsibility.
Vodafone has maintained last years level of independent assessment and assurance of the CR programme and performance data. The scope of work for the Groups auditors includes a review of certain environmental, community and health and safety performance data across the business, the progress achieved against commitments set in the 2005 financial year, as well as to review the management and reporting of CR matters against the requirements of the assurance standard AA1000 AS, issued by AccountAbility. This identifies, in all material respects, whether reporting reflects the material CR issues of the Group as defined by the standard, whether processes are in place to ensure a complete understanding of the issues, and whether Vodafone is responding adequately to identified stakeholders expectations. The assurance statement is published in the Companys CR Report.
Over the last year, progress has been made in responding to the Groups stakeholders expectations. The most significant developments are summarised below and further details are provided in the Companys CR Report and on www.vodafone.com/responsibility. In addition to the Companys CR Report, ten mobile operating subsidiaries have produced their own CR reports.
Vodafone is included in the FTSE4Good and Dow Jones Sustainability Index.
Socially inclusive products
Vodafone
is working to improve peoples access to mobile communications and is developing products and services that support health and personal security and use secure mobile
messaging to facilitate micro-finance in developing countries. In February 2006, Vodafone announced a commitment of £5 million over a period of four years to the Groups
Social Investment Fund. The fund facilitates the development of commercially
viable products and services with high social value, particularly those that
increase accessibility. Examples of initiatives during the year include:
| The Vodafone Speaking Phone with screen reader software for the blind and visually impaired, has been fully launched in six markets and test launched in one other. An assessment of the availability of handsets with accessibility features and an investigation into the compatibility of hearing aids and mobile phones have been completed. |
| A mobile micro-finance platform called M-pesa has been trialled in Kenya, with support from the UK Department for International Development. The payment platform is being used to enable customers without local bank infrastructure to move money between accounts and to make remittances. |
Parental controls
Two mobile operating companies have implemented parental control tools to enable customers to protect their children by restricting access to adult oriented wap and internet sites. A
further three mobile operating companies have launched access controls for Vodafone live!
Group guidelines on premium rate subscription services have been developed. The guidelines recommend that mobile operating companies require providers of premium rate subscription services to advertise clearly and send a confirmation text to customers when they sign up explaining applicable charges and clearly stating how to opt out.
Earning the trust of customers
Vodafone
values its long-term reputation with customers. Several issues are key to maintaining
customers trust, including the clarity of the pricing, marketing communications
and the way Vodafone handles the confidentiality of customers communications
and personal information.
During the year, two major initiatives that provide clearer and easier to understand costs for customers were launched:
| Vodafone Passport offers clearer pricing for international roaming, with a one off connection fee per call. Vodafone Passport won the 2006 GSM Association award for Best Roaming Product or Service. To date, over 6 million customers have subscribed to Vodafone Passport. |
| For the Vodafone Mobile Connect data card tariffs, which offer high speed internet connection to laptops, a monthly roaming bundle was developed to make roaming costs more predictable. |
In November 2005, Vodafone adopted a group wide privacy policy that covers the collection, storage and use of our customers personal information. The policy is overseen by a Privacy Steering Group, a cross functional body made up of senior management, and requires the appointment of a Privacy Officer by each Vodafone mobile operating company with day-to-day responsibility for compliance. An overview of Vodafones Privacy Policy is available at www.vodafone.com/responsibility.
The programme of responsible marketing and advertising continued, shifting the focus from control to awareness raising. Upheld complaints received by advertising regulatory bodies were monitored throughout the markets. Most of these related to price claims and clarity.
Supply chain
The
Group continues to implement Vodafones Code of Ethical Purchasing (CEP),
which sets out environmental and labour standards for suppliers.
| Corporate responsibility is one of six pillars in Vodafones overall Supplier Performance Management system. |
| Over 80% of purchasing managers and staff from across the Group have received training on the CEP. |
| A risk based approach has been introduced across the Group to prioritise which suppliers require further assessment for compliance against the CEP. In the 2006 financial year, over 600 suppliers have been reviewed for risk and over 80 suppliers have completed a self assessment process. 15 site evaluations have been completed. |
Vodafone continues to work with other information and communication technology companies to develop a common approach to managing CR in the supply chain.
Vodafone Group Plc Annual Report 2006 | 59 |
Corporate
Responsibility and Environmental Issues
continued
Socio-economic potential of mobiles
Following on from research published in the 2005 financial year on the broader impact of mobile telecommunications in Africa, the Group commissioned and published research into the
impact of mobile phones in healthcare. The study demonstrated how existing voice and text message applications could increase productivity, improve patient health and enable greater access to health services in the developed and developing world.
Further information is available at www.vodafone.com/healthcare.
Social investment
The Vodafone Group Foundation and family of local foundations have continued to implement a programme of grant making activity. In the 2006 financial year, the process of establishing
new local foundations in the Czech Republic and Albania was initiated.
During the year ended 31 March 2006, the Company made cash charitable donations of £24.0 million to The Vodafone Group Foundation. In addition, Group operating companies donated a further £10.0 million to local Vodafone Foundations and a further £6.9 million directly to a variety of causes. These donations total £40.9 million and include donations of £2.5 million made as required by the terms of certain network operating licences. More details regarding the activities of The Vodafone Group Foundation and local Vodafone Foundations can be found in the Companys CR Report for the 2006 financial year.
Environmental Issues
The Group continues to monitor and manage the impact of its activities on the environment and is committed to minimising adverse impacts in an appropriate manner. Over the last 12
months, progress has been made across a series of projects that address environmental issues, including mobile phones, masts and health; responsible network deployment; energy use and efficiency; and the reuse and recycling of equipment.
Mobile phones, masts and health
Vodafone
supports research, aligned to World Health Organisation (WHO) priorities,
to resolve scientific uncertainty relating to mobile phones, masts and health,
and is committed to reducing public concern by making objective information
widely available to stakeholders and by engaging in open, transparent dialogue.
In the 2006 financial year, the Group engaged with a wide range of external and internal stakeholders through surveys, guidelines (consistent with WHO advice), Vodafone websites and other existing forms of communications, to promote a consistent and high level of understanding on the subject. Vodafone also led the industry on the introduction of bodyworn testing of all handsets sold in Europe. This involves testing exposure to RF (Radio Frequency) fields not only to the head but to other parts of the body.
Please also refer to note 31 to the Consolidated Financial Statements for further information.
Responsible network deployment
Vodafones mobile services rely on a network of base stations that transmit and receive calls. The Group recognises that network roll out can cause concern to communities,
usually about the visual impact of base stations or health issues concerning RF fields. This year, Vodafone was found in breach of planning regulations relating to 46 mast sitings. Fines levied by regulatory bodies or Courts in relation to offences
under environmental law or regulations were approximately £63,000. To address
these challenges, Vodafone began implementing a Group policy and guidelines on
responsible network deployment. These set out consistent standards for all mobile
operating companies on legal compliance, environmental impact, RF emissions,
site planning and selection, communication and consultation, and landlord relationships.
Energy use and efficiency
A
consequence of the Groups business growth is increasing energy demand to run the network. This is Vodafones most significant environmental impact and limiting the
Groups contribution to climate change is a priority. In partnership with
equipment manufacturers, Vodafone is improving the energy efficiency of the network
so that data and voice can be transmitted with greater efficiency. In the 2006
financial year:
| Energy use increased 23% to 3,198 GWh, equating to 1.31 million tonnes of carbon dioxide. |
| There has been a 22% increase from the previous year in the amount of renewable energy used by the Group and this has resulted in 12% of total grid energy being sourced from renewables. Vodafone has also trialled onsite renewable energy technologies including the use of hydrogen fuel cells, wind generators and solar power. |
Reuse and recycling
Mobile phones, accessories and the networks on which they operate require upgrading, replacement and decommissioning. Whilst Vodafone does not manufacture mobile phones or equipment,
the Group is committed to working closely with suppliers to improve the sustainability of mobiles and network equipment. Waste management involves minimisation, reuse and recycling before waste disposal. The following were achieved during the
year:
| 1.37 million phones have been collected for reuse and recycling and collection programmes are in place in 15 mobile operating companies. |
| Initiatives have been launched to raise awareness and encourage recycling. These include offering incentives for customers and promoting handset recycling with corporate customers and employees. |
| 97% of network equipment waste was sent for reuse or recycling. |
Environmental Performance Indicators | |||||
2006 | (1) | 2005 | (1) | ||
Number
of mobile operating subsidiaries undertaking independent RF field monitoring |
15 | 14 | |||
Total energy use (GWh) (direct and indirect) | 3,198 | 2,600 | |||
Total carbon dioxide emissions (millions of tonnes) | 1.31 | 1.2 | |||
% of energy sourced from renewables | 12 | 11 | |||
Number of phones collected for reuse and | |||||
recycling (million) | 1.37 | 1.27 | |||
%
network equipment waste sent for reuse or recycling |
97 | 96 | |||
Note: | |
(1) | These performance indicators were calculated using actual or estimated data collected by the Groups mobile operating companies. The data is sourced from invoices, purchasing requisitions, direct data measurement and estimations where required. The carbon dioxide emissions figure is calculated using the Kwh/CO2 conversion factor for the electricity provided by the national grid and for other energy sources in each operating company. The data collection and reporting process is within the assurance undertaken by Deloitte & Touche LLP on the Companys CR Report. The data for the 2005 financial year excludes newly acquired operations in the Czech Republic and Romania and operations in Sweden that were sold during 2006. It includes the Groups joint venture in Italy and the discontinued operation in Japan. |
60 | Vodafone Group Plc Annual Report 2006 |
Governance | |
Boards Report to Shareholders on Directors Remuneration
Dear Shareholder
Since
the introduction
of the current Executive Remuneration Policy in 2002 (the Policy),
the Remuneration Committee has conducted annual reviews to ensure that the Policy
continues to serve the Company and shareholders. Following my appointment as
Chairman of the Committee, we have undertaken a review again this year.
As a result of this years review, the Remuneration Committee has concluded that the existing Policy remains appropriate but wishes to make three minor changes. These are as follows:
| the deferred bonus scheme will be extended to members of the Executive Committee based outside of the UK, and the mechanics amended in light of recent US tax legislation; |
| we have considered the weighting of performance shares and options within our long term incentives, and will place a greater weighting on performance shares for 2006 awards, thus increasing the emphasis on total shareholder return performance; and |
| dividends will be accrued on performance shares awarded from 2006 and transferred as shares on the vesting of awards, to increase the alignment of executive and shareholder interests. |
The key principles of the Policy, which are being maintained, are:
| the expected value of total remuneration will be benchmarked against the relevant market; |
| a high proportion of total remuneration will be delivered through performance related payments; |
| performance measures will be balanced between absolute financial measures and sector comparative measures to achieve maximum alignment between executive and shareholder objectives; |
| the majority of performance related remuneration will be provided in the form of equity; and |
| share ownership requirements will be applied to executive directors. |
The Committee continues to monitor how well incentive awards made in previous years align with the Companys performance. The Policy continues to work well and forecast rewards are commensurate with actual performance. I am confident that the Policy continues to align executives interests with the interests of shareholders, whilst enabling the Company to engage a high calibre team to successfully lead the Company. I hope that we receive your support at the AGM on 25 July 2006.
Luc Vandevelde
Chairman
of the Remuneration Committee
30 May 2006
Remuneration Committee
The
Remuneration Committee is comprised to exercise independent judgement and consists
only
of independent non-executive directors. Luc Vandevelde (Chairman), Sir John
Bond, Dr
Michael Boskin and Professor Jürgen Schrempp continue as members. Philip
Yea joined the Committee on 1 January 2006. The Chief Executive and Chairman
are invited to attend meetings of the Remuneration Committee, other than when
their own
remuneration is being discussed.
The Remuneration Committee met on five occasions during the year. The Committee appointed and received advice from Towers Perrin (market data and advice on market practice and governance) and Kepler Associates (performance analysis and advice on performance measures and market practice) and received advice from the Group Human Resources Director and the Group Compensation and Benefits Director. The advisers also provided advice to the Company on general human resource and compensation related matters.
Remuneration Policy
The Policy was approved by shareholders in July 2002. The Policy is set out below:
The overriding objective of the Policy on incentives is to ensure that Vodafone is able to attract, retain and motivate executives of the highest calibre essential to the successful leadership and effective management of a global company at the leading edge of the telecommunications industry. To achieve this objective, Vodafone, from the context of its UK domicile, takes into account both the UK regulatory framework, including best practice in corporate governance, shareholder views, political opinion and the appropriate geographic and nationality basis for determining competitive remuneration, recognising that this may be subject to change over time as the business evolves. The total remuneration will be benchmarked against the relevant market. Vodafone is one of the largest companies in Europe and is a global business; Vodafones policy will be to provide executive directors with remuneration generally at levels that are competitive with the largest companies in Europe. A high proportion of the total remuneration will be awarded through performance related remuneration, with phased delivery over the short, medium and long term. For executive directors, approximately 80% of the total expected remuneration will be performance related. Performance measures will be balanced between absolute financial measures and sector comparative measures to achieve maximum alignment between executive and shareholder objectives. All medium and long term incentives are delivered in the form of Vodafone shares and options. Executive directors are required to comply with share ownership guidelines. |
||
The structure of remuneration for executive directors under the Policy (excluding pensions) is illustrated below:
The Policys key objective is to ensure that there is a strong linkage between pay and performance. This is achieved by approximately 80% of the total package (excluding pensions) being delivered through performance-linked short, medium and long term incentive plans. Therefore, the only guaranteed payment to executive directors is their base salary.
The Remuneration Committee selects performance measures for incentive plans that provide the greatest degree of alignment with the Companys strategic goals and that are clear and transparent to both directors and shareholders. The performance measures adopted incentivise both operational performance and share price growth.
Vodafone Group Plc Annual Report 2006 | 61 |
Boards
Report to Shareholders on Directors Remuneration
continued
Each element of the reward package focuses on supporting different Company objectives, which are illustrated below:
Purpose | Performance Measure(s) | ||||
|
|||||
Base salary |
|
Reflects competitive market |
|
Individual contribution | |
|
level, role and individual |
|
|||
|
achievement |
|
|||
|
|
|
|
|
|
Annual |
|
Motivates achievement of |
|
Adjusted operating profit | |
deferred |
|
annual business KPIs |
|
Free cash flow | |
share bonus |
|
Provides incentive to co-invest |
|
Total service revenue | |
|
Motivates achievement of |
|
Customer satisfaction | ||
|
medium term KPIs |
|
Adjusted EPS growth on share | ||
|
Aligns with shareholders |
|
deferral | ||
|
|
|
|
|
|
Share options |
|
Incentivise earnings growth |
|
Adjusted EPS growth | |
|
and share price growth |
|
|||
|
Aligns with shareholders |
|
|||
|
|
|
|
|
|
Performance |
|
Incentivise share price and |
|
Relative Total Shareholder | |
shares |
|
dividend growth |
|
Return (TSR) | |
|
Aligns with shareholders |
|
The principles of the Policy are cascaded, where appropriate, to executives below Board level as set out below:
Cascade of policy to Executive Committee | |||
|
|||
Base salary | Set
against national market |
||
|
|||
Annual Deferred | Target bonus level competitive in local market, | ||
Share Bonus | payout conditional on business performance | ||
relevant to individual executive | |||
Opportunity to defer bonus to be extended to | |||
Executive Committee members based overseas | |||
in 2006 | |||
|
|||
Long Term Incentive | Annual awards of performance shares and share | ||
options with performance conditions |
Report
on Executive Directors Remuneration for the 2006
Financial Year and Subsequent Periods
Total
remuneration levels
In accordance
with the Policy, the Company benchmarks total remuneration levels against
other large European domiciled companies, using externally provided pay data.
Total remuneration for these purposes means the sum of base salary and short,
medium and long term incentives. The European focus was selected because Europe
continues to be Vodafones major market and the Company is one of the
top ten companies in Europe by market capitalisation. The competitive data
is used as one input to determine the remuneration level of the Chief Executive
and Board. The Committee also takes into account other factors, including
personal and Company performance, in determining the target remuneration level.
Components
of executive directors remuneration
Executive
directors receive base salary, short and medium term incentive (annual deferred
share bonus), long term incentives (performance shares and share options)
and pension benefits. Vesting of all incentives is dependent on the achievement
of performance targets that are set by the Remuneration Committee prior to
the awards being granted.
Base
salary
Salaries
are reviewed annually and adjustments may be made to reflect competitive national
pay levels, the prevailing level of salary reviews of employees within the
Group, changes in responsibilities and Group and individual performance. External
remuneration consultants provide data about market salary levels and advise
the Committee accordingly. Pension entitlements are based only on base salary.
Incentive
awards
Short
and medium term incentive: annual deferred share bonus
The
purpose of the annual deferred share bonus is to focus and motivate executive
directors to achieve annual business KPIs that will further the Companys
medium term objectives. Awards made in July 2003 under the Vodafone Group
Short Term Incentive Plan (STIP) vested in July 2005. Details
of STIP awards are given in the table on page 66.
The Company has reviewed the current STIP in light of changes to US tax legislation and will make future awards under the Vodafone Global Incentive Plan Rules approved by shareholders in 2005. This will enable the plan to be operated for members of the Executive Committee based overseas. Whilst the mechanics of the plan will change, the quantum of awards will remain the same.
The STIP comprises two elements: a base award and an enhancement award. Release of both elements after three years is dependent upon the continued employment of the participant.
Base
award
The
base award is earned by achievement of one year KPI linked performance targets
and is delivered in the form of shares. The target base award level for the
2006 financial year was 100% of salary with a maximum of 200% of salary available
for exceptional performance. From 2006, the base award will be deferred into
shares, net of tax.
The Remuneration Committee reviews and sets the base award performance targets on an annual basis, taking into account business strategy. The performance measures for the 2006 financial year relate to adjusted operating profit, total service revenue, free cash flow and customer delight. Each element is weighted according to the responsibilities of the relevant director. For the Chief Executive, in the 2006 financial year, the adjusted operating profit target was 30% of the total, total service revenue 35%, free cash flow 20% and customer satisfaction 15%, and the payout achieved was 118.7%. The targets are not disclosed, as they are commercially sensitive. For the 2007 financial year, no changes will be made to the performance measures or weightings. More information on Company performance against KPIs in the 2006 financial year can be found in Key Performance Indicators on page 29.
The Group may, at its discretion, pay a cash sum of up to the value of the base award in the event that an executive director declines the share award. In these circumstances, the executive director will not be eligible to receive the enhancement award or any cash alternative.
Enhancement
award
An
enhancement award of 50% of the number of shares comprised in the pre-tax
base award is earned by achievement of a subsequent two year EPS performance
target following the initial twelve month period. For awards made in the 2006
financial year, which will vest in July 2007, the performance measure related
to growth in adjusted EPS. Three quarters of the enhancement award will vest
for achievement of EPS growth of 11% rising to full vesting for achievement
of EPS growth of 16% over the two year performance period.
Long term
incentives
Awards of
performance shares and share options were made to executive directors following
the 2005 AGM on 26 July 2005. The awards for the 2006 financial year will
be also be made following the AGM.
Awards in the 2006 financial year were made under the Vodafone Group Plc 1999 Long Term Stock Incentive Plan. Awards of performance shares and options in the 2007 financial year will be made under the Vodafone Global Incentive Plan.
Awards are delivered in the form of ordinary shares of the Company. All awards are made under plans that incorporate dilution limits as set out in the Guidelines for Share Incentive Schemes published by the Association of British Insurers. The current estimated dilution from subsisting awards, including executive and all-employee share awards, is approximately 2.6% of the Companys share capital at 31 March 2006 (2.4% as at 31 March 2005).
Performance
shares
Performance
shares are awarded annually to executive directors. Vesting of the performance
shares depends upon the Companys relative TSR performance. TSR measures
the change in value of a share and reinvested dividends over the period of
measurement. The Companys TSR performance is compared to that of other
companies in the FTSE Global Telecommunications index as at the date of grant,
over a three-year performance period.
In the 2006 financial year, the Chief Executive received an award of performance shares with a face value of two times base salary; the Deputy Chief Executive and other executive directors one and a half times their base salary.
Performance shares will vest only if the Company ranks in the top half of the ranking table; maximum vesting will only occur if the Company is in the top 20%. Vesting is also conditional on underlying improvement in the performance of the Company. Awards will vest to the extent that the performance condition has been satisfied at the end of the three-year performance period. To the extent that the performance target is not met, the awards will be forfeited. The following chart shows the basis on which the performance shares will vest:
62 | Vodafone Group Plc Annual Report 2006 |
Governance | |
For awards made in the 2007 financial year, dividend equivalents will be awarded at vesting. Initial award levels will be adjusted to take into account the increased expected value of awards and the proportion of dividend equivalents transferred will reflect TSR performance achievement.
Previously disclosed performance share awards granted in the 2003 financial year vested in the 2006 financial year. Details are given in the table on page 67.
Share
options
Share
options are granted annually to executive directors. The exercise of share
options is subject to the achievement of a performance condition set prior
to grant. The Remuneration Committee determined that the most appropriate
performance measure for awards relating to the 2006 financial year was absolute
growth in adjusted EPS. One quarter of the option award will vest for achievement
of EPS growth of 8% p.a. rising to full vesting for achievement of EPS growth
of 16% p.a. over the performance period. In setting this target the Remuneration
Committee has taken the internal long range plan and market expectations into
account. The Remuneration Committee has decided that for the 2007 financial
year grants, the performance range will be 5% 10% p.a. The following
chart illustrates the basis on which share options granted in the 2006 financial
year will vest:
Options have a ten year term and will vest after three years, subject to performance achievement. To the extent that the performance target is not met, the options will lapse. Re-testing of performance is not permitted.
The price at which shares can be acquired on option exercise will be no lower than the market value of the shares on the day prior to the date of grant of the options. Therefore, scheme participants only benefit if the share price increases and vesting conditions are achieved.
In July 2005, the Chief Executive received an award of options with a face value of six and a half times base salary; the Deputy Chief Executive and the other executive directors five times their base salary.
Illustration
To
help shareholders understand the value of the package provided to the Chief
Executive, the following illustration demonstrates that in order to gain value
from the incentive plans, considerable shareholder value must be created.
For example, if the Companys share price increases by over 50% from 127.0 pence to approximately 190.0 pence, the Companys value increases by £42 billion, and there was a 50% vesting of long term incentives, the Chief Executive would have a pre-tax gain of approximately £4 million, representing less than a hundredth of 1% of the total increase in shareholder value.
Measurement
of performance under IFRS
From
1 April 2005, the Company has prepared its financial statements under IFRS.
The Remuneration Committee has reviewed the impact of the introduction of
IFRS for incentive scheme purposes, to ensure that EPS performance achievement
is measured on a consistent basis and that the introduction of the new standard
does not advantage or disadvantage participants. For the schemes affected,
EPS under IFRS is adjusted to reflect UK GAAP measurement so that performance
may be measured on a consistent basis. In each case, an independent auditor
is requested to review and verify the achievement level.
Share
ownership guidelines
Executive
directors participating in long term incentive plans must comply with the
Companys share ownership guidelines. These guidelines, which were first
introduced in 2000, require the Chief Executive to have a shareholding in
the Company of four times base salary and other executive directors to have
a shareholding of three times base salary.
It is intended that these ownership levels will be attained within five years from the director first becoming subject to the guidelines and be achieved through the retention of shares awarded under incentive plans.
Pensions
The
Chief Executive, Arun Sarin, is provided with a defined contribution pension
arrangement to which the Company contributes 30% of his base salary. The contribution
is currently held in a notional fund outside the Company pension scheme.
During the 2006 financial year, Sir Julian Horn-Smith, Peter Bamford, and Andy Halford, being UK based directors, were contributing members of the Vodafone Group Pension Scheme, which is a UK defined benefit scheme approved by the Inland Revenue. The scheme provides a benefit of two-thirds of pensionable salary after a minimum of 20 years service. The normal retirement age is 60, but directors may retire from age 55 with a pension proportionately reduced to account for their shorter service but with no actuarial reduction. Where directors benefit levels are restricted by Inland Revenue limits, the Company made contributions to the defined contribution Vodafone Group Funded Unapproved Retirement Benefit Scheme (FURBS).
Sir Julian Horn-Smith has elected to receive his pension from 6 April 2006, prior to his actual retirement from the Company, in accordance with the new UK pension rules effective from April 2006. Sir Julian is planning to retire at the end of the 2006 AGM and the Committee authorised a pension allowance of 30% of base salary for four months until he steps down from the Board.
Thomas Geitner is entitled to a defined benefit pension of 40% of salary from a normal retirement age of 60. On early retirement, the pension may be reduced if he has accrued less than 10 years of Board service.
All the plans referred to above provide benefits in the event of death in service.
Further details of the pension benefits earned by the directors in the year ended 31 March 2006 can be found on page 66. Liabilities in respect of the pension schemes in which the executive directors participate are funded to the extent described in note 25 to the Consolidated Financial Statements, Post employment benefits.
A-Day
proposals
As
a result of the new UK legislation affecting the taxation of pensions, the
Company has reviewed the pension arrangements it provides to UK based executives.
From April 2006, executives participating in UK pension arrangements may choose
to continue membership of the Vodafone Group Pension Scheme or opt out and
instead receive a non-pensionable cash allowance. Participation in an Inland
Revenue approved defined contribution plan or a non-pensionable cash allowance
will be provided in place of the current FURBS arrangement.
All-employee
share incentive schemes
Global
All Employee Share Plan
As
in the 2005 financial year, the Remuneration Committee has approved that an
award of shares based on the achievement of performance conditions be made
to all employees in the Vodafone Group. The 2006 award will be made on 3 July
2006. These awards have a dilutive effect of approximately 0.03%.
Sharesave
The
Vodafone Group 1998 Sharesave Scheme is an Inland Revenue approved scheme
open to all UK permanent employees.
Vodafone Group Plc Annual Report 2006 | 63 |
Boards
Report to Shareholders on Directors Remuneration
continued
The maximum that can be saved each month is £250 and savings plus interest may be used to acquire shares by exercising the related option. The options have been granted at up to a 20% discount to market value. UK based executive directors are eligible to participate in the scheme and details of their participation are given in the table on page 68.
Share
Incentive Plan
The
Vodafone Share Incentive Plan (SIP) is an Inland Revenue approved
plan open to all UK permanent employees. Eligible employees may contribute up
to £125 each month and the trustee of the plan uses the money to buy shares
on their behalf. An equivalent number of shares is purchased with contributions
from the employing company. UK based executive directors are eligible to participate
in the SIP and details of their share interests under these plans are given
in the table on page 69.
Non-executive
directors remuneration
The remuneration
of non-executive directors is periodically reviewed by the Board, excluding
the non-executive directors. Basic fee levels were increased in April 2005 to
reflect directors considerably increased workload and the increased complexity
of managing an international group. The fees payable are as follows:
Fees
payable from 1 April 2005 |
||
£000 |
||
Chairman | 510 | |
Deputy Chairman and Senior Independent Director | 130 | |
Basic Non-Executive Director fee | 95 | |
Chairmanship of Audit Committee | 20 | |
Chairmanship of Remuneration Committee | 15 | |
Chairmanship of Nominations and Governance Committee | 10 | |
In addition, an allowance of £6,000 is payable each time a non-Europe based non-executive director is required to travel to attend Board and Committee meetings, to reflect the additional time commitment involved.
Details of each non-executive directors remuneration are included in the table on page 65.
Non-executive directors do not participate in any incentive or benefit plans. The Company does not provide any contribution to their pension arrangements. The Chairman is entitled to the provision of a fully expensed car or car allowance.
Service
contracts and appointments of directors
Executive
directors
The
Remuneration Committee has determined that, after an initial term that may be
of up to two years duration, executive directors contracts should
thereafter have rolling terms and be terminable on no more than one years
notice. All current executive directors contracts have an indefinite term
(to normal retirement date) and one year notice periods. No payments should
normally be payable on termination other than the salary due for the notice
period and such entitlements under incentive plans and benefits that are consistent
with the terms of such plans.
All the UK based executive directors have, whilst in service, entitlement under a long term disability plan from which two-thirds of base salary, up to a maximum benefit determined by the insurer, would be provided until normal retirement date. In the event of disability, Thomas Geitner would receive his normal retirement pension based on his accrued service.
Sir
Julian Horn-Smith
Sir
Julian Horn-Smith, the Companys Deputy Chief Executive, will retire from
the Company following the AGM on 25 July 2006. Sir Julian will be entitled to
subsisting awards, pro-rated for both time and performance, in accordance with
the standard rules of each incentive plan in which he participates. Sir Julian
will receive a pension in line with the standard rules of the plan in which
he participates, described in more detail in Pensions on page 63.
The Remuneration Committee agreed that he would be offered the opportunity to
purchase his company car on leaving the Company. No severance payment will be
payable to him.
Peter
Bamford
Peter
Bamford left the Company on 1 April 2006 and will receive salary and compensation
for loss of office in accordance with his legal entitlement. The total payment
is in the order of £1.25 million, including pension contribution. He will
receive his annual bonus for the 2006 financial year and the Remuneration Committee
has exercised discretion to allow him access to long term incentive awards,
pro-rated for time and performance.
Fees
retained for non-executive directorships in other companies
Some
executive directors hold positions in other companies as non-executive directors.
The fees received in respect of the 2006 financial year and retained by directors
were as follows:
Fees
retained by the |
||||
individual
in the |
||||
Company
in which non- |
2006
financial year |
|||
executive
directorship is held |
£000(1) |
|||
|
||||
Arun Sarin | Bank of England | 5.0 | ||
Thomas Geitner | Singulus Technologies AG | 61.9 | ||
Sir Julian Horn-Smith(2) | Smiths Group plc | 50.0 | ||
LloydsTSB Group plc | 74.0 | |||
Sage Group plc | 3.4 | |||
Ken Hydon(3) | Reckitt Benckiser plc | 20.0 | ||
Tesco PLC | 18.5 | |||
|
Notes: | |
(1) | Fees were retained in accordance with Company policy. |
(2) | An option over 400,000 shares was granted to Sir Julian in November 2005 by China Mobile (Hong Kong) Limited for his duties as non-executive director, which are held for the benefit of the Company and will lapse on his retirement. |
(3) | Fees retained in the period to 26 July 2005. |
Chairman
and non-executive directors
In
December 2005, the Company announced that Lord MacLaurin, the Companys
Chairman, will retire from the Company following the AGM on 25 July 2006. Lord
MacLaurin will receive fees in accordance with his service contract until the
end of the 2006 calendar year. The Company has entered into an agreement with
Lord MacLaurin that he will provide advisory services to the Company for a period
of three years following his retirement. During this period he will receive
an annual fee of £125,000, which he has advised the Company he intends
to donate to charity.
In December 2005, Sir John Bond accepted the invitation of the Board to be appointed as Chairman of the Company following the 2006 AGM. As Chairman, he will receive a fee of £475,000 per annum. The appointment is indefinite and may be terminated by either party on one years notice.
Non-executive directors, including the Deputy Chairman, are engaged on letters of appointment that set out their duties and responsibilities. The appointment of non-executive directors may be terminated without compensation.
The terms and conditions of appointment of non-executive directors are available for inspection by any person at the Companys registered office during normal business hours and at the AGM (for 15 minutes prior to the meeting and during the meeting).
Philip Yea, Anne Lauvergeon and Tony Watson were appointed to the Board as non-executive directors with effect from 1 September 2005, 1 November 2005 and 1 May 2006 respectively, and hold office on the same terms as other non-executive directors.
TSR performance
The following
chart shows the performance of the Company relative to the FTSE100 index and
the FTSE Global Telecommunications index, which are the most relevant indices
for the Company.
Graph provided by Towers Perrin and calculated according to a methodology that is compliant with the requirements of Schedule 7A of the Companies Act. Data Sources: FTSE and Datastream
Note: Performance of the Company shown by the graph is not indicative of vesting levels under the Companys various incentive plans.
64 | Vodafone Group Plc Annual Report 2006 |
Governance | |
Audited
Information
Remuneration for the year ended 31 March 2006
The
remuneration of the directors serving during the year ended 31 March 2006 was
as follows:
Salary/fees | Incentive schemes | Benefits | Total | |||||||||||||||||
|
|
|
|
|||||||||||||||||
2006 | 2005 | 2006 | (1) | 2005 | 2006 | (2) | 2005 | 2006 | 2005 | |||||||||||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
Chairman | ||||||||||||||||||||
Lord MacLaurin | 520 | 485 | | | 57 | 32 | 577 | 517 | ||||||||||||
Deputy Chairman | ||||||||||||||||||||
Paul Hazen(3) | 173 | 130 | | | | | 173 | 130 | ||||||||||||
Chief Executive | ||||||||||||||||||||
Arun Sarin | 1,254 | 1,175 | 1,424 | 1,148 | 54 | 183 | 2,732 | 2,506 | ||||||||||||
Executive directors | ||||||||||||||||||||
Peter Bamford | 804 | 771 | 908 | 663 | 48 | 37 | 1,760 | 1,471 | ||||||||||||
Thomas Geitner | 734 | 679 | 851 | 665 | 148 | 37 | 1,733 | 1,381 | ||||||||||||
Andy Halford | 342 | | 396 | | 16 | | 754 | | ||||||||||||
Sir Julian Horn-Smith | 1,022 | 970 | 1,169 | 966 | 48 | 34 | 2,239 | 1,970 | ||||||||||||
Ken Hydon | 253 | 779 | 264 | 776 | 91 | 30 | 608 | 1,585 | ||||||||||||
Non-executive directors | ||||||||||||||||||||
Sir John Bond | 95 | 21 | | | | | 95 | 21 | ||||||||||||
Dr Michael Boskin(3) | 144 | 85 | | | | | 144 | 85 | ||||||||||||
Lord Broers | 95 | 85 | | | | | 95 | 85 | ||||||||||||
John Buchanan | 95 | 85 | | | | | 95 | 85 | ||||||||||||
Penny Hughes | 100 | 95 | | | | | 100 | 95 | ||||||||||||
Anne Lauvergeon | 40 | | | | | | 40 | | ||||||||||||
Sir David Scholey | 32 | 85 | | | | | 32 | 85 | ||||||||||||
Professor Jürgen Schrempp | 95 | 85 | | | | | 95 | 85 | ||||||||||||
Luc Vandevelde | 105 | 85 | | | | | 105 | 85 | ||||||||||||
Philip Yea | 55 | | | | | | 55 | | ||||||||||||
Former directors(4) | | 191 | | | 1,283 | 229 | 1,283 | 420 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||
5,958 | 5,806 | 5,012 | 4,218 | 1,745 | 582 | 12,715 | 10,606 | |||||||||||||
|
|
|
|
|
|
|
|
Notes: | |
(1) | These figures are the cash equivalent value of the base share awards under the Vodafone Group Short Term Incentive Plan applicable to the year ended 31 March 2006. These awards are in relation to the performance achievements against targets in adjusted operating profit, total service revenue, free cash flow and customer delight for the 2006 financial year. |
(2) | Benefits principally comprise cars and private health and disability insurance. Thomas Geitner relocated from Germany to the UK during the 2006 financial year. The benefits figure disclosed includes relocation expenses and a monthly allowance to reflect the higher cost of living in the UK. |
(3) | Fees include allowances paid in respect of a non-executive director based outside of Europe to reflect the additional time commitment involved when required to travel to attend Board and Committee meetings. |
(4) | Under the terms of an agreement, Sam Ginn, a former director of the Company, provides consultancy services to the Group and was entitled to certain benefits. The estimated value of the benefits received by him in the year to 31 March 2006 was £29,852. During the year, the agreement was terminated by mutual agreement. Mr Ginn received a payment of $2.23m (£1.25m) as compensation for benefits for the outstanding term. |
The aggregate compensation paid by the Company to its collective senior management(1) for services for the year ended 31 March 2006, is set out below. The aggregate number of senior management as at 31 March 2006 was ten, the same number as at 31 March 2005.
2006 | 2005 | ||||
£000 | £000 | ||||
|
|
||||
Salaries and fees | 4,555 | 2,972 | |||
Incentive schemes(2) | 5,155 | 2,875 | |||
Benefits | 3,125 | 1,066 | |||
|
|
||||
12,835 | 6,913 | ||||
|
|
Notes: | |
(1) | Aggregate compensation for senior management is in respect of those individuals who were members of the Executive Committee during the year ended 31 March 2006, other than executive directors and reflects compensation paid from date of appointment to the Executive Committee, to 31 March 2006 or date of leaving, where applicable. |
(2) | Comprises the incentive scheme information for senior management on an equivalent basis to that disclosed for directors in the table at the top of this page. Details of share incentives awarded to directors and senior management are included in footnotes to Short term incentives and Long term incentives on pages 66 and 67. |
Vodafone Group Plc Annual Report 2006 | 65 |
Boards
Report to Shareholders on Directors Remuneration
continued
Pensions
Pension
benefits earned by the directors serving during the year ended 31 March 2006
were:
Employer | ||||||||||||||||
Transfer value | allocation/ | |||||||||||||||
Change in transfer | of change in | contribution to | ||||||||||||||
Total accrued | Change in | value over year | Change in accrued | accrued benefit | to defined | |||||||||||
benefit at | accrued benefit | Transfer value at | Transfer value at | less member | benefit in excess | net of member | contribution | |||||||||
31 March 2006 | (1) | over the year | (1) | 31 March 2005 | (1) | 31 March 2006 | (2) | contributions | of inflation | contributions | plans | |||||
Name of Director | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Arun Sarin | | | | | | | | 360.0 | ||||||||
Peter Bamford | 30.8 | 3.5 | 348.8 | 529.9 | 177.4 | 2.8 | 44.2 | 202.4 | ||||||||
Thomas Geitner | 115.8 | 23.1 | 1,163.2 | 1,971.4 | 808.2 | 20.6 | 350.7 | | ||||||||
Andy Halford | 13.3 | 2.3 | 110.1 | 182.8 | 69.0 | 2.0 | 23.7 | 73.6 | ||||||||
Sir Julian Horn-Smith | 605.2 | 57.1 | 9,090.3 | 13,231.0 | 4,106.2 | 42.3 | 890.0 | | ||||||||
Ken Hydon(3) | 516.6 | 10.4 | 10,241.1 | 12,637.2 | 2,396.1 | | | 79.2 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: | |
(1) | The accrued pension benefits earned by the directors are those which would be paid annually on retirement, based on service to the end of the year, at the normal retirement age. The increase in accrued pension excludes any increase for inflation. |
(2) | The transfer values have been calculated on the basis of actuarial advice in accordance with the Faculty and Institute of Actuaries Guidance Note GN11. No director elected to pay additional voluntary contributions. The transfer values disclosed above do not represent a sum paid or payable to the individual director. Instead they represent a potential liability of the pension scheme. |
(3) | Ken Hydon reached 60 years of age on 3 November 2004 and retired from the Company following the AGM on 26 July 2005. In accordance with the standard rules of the scheme, he received an immediate pension based on his accrued benefit without actuarial reduction or any enhancement. From 1 December 2004, Ken Hydon accrued a cash allowance equivalent to 30% of his base salary, which ceased on leaving the Company. |
In respect of senior management, the Group has made aggregate contributions of £829,582 into pension schemes. The Companys proposals in light of the changes in pension legislation are detailed under Pensions on page 63.
Directors
interests in the shares of the Company
Short
term incentives
Conditional
awards of ordinary shares made to executive directors under the STIP, and dividends
on those shares paid under the terms of the Companys scrip dividend scheme
and dividend reinvestment plan, are shown below. STIP shares which vested and
were sold or transferred during the year ended 31 March 2006 are also shown
below.
Shares conditionally | Shares conditionally | |||||||||||||||||||
awarded during the | awarded during the year | |||||||||||||||||||
Total interest | year as base award | as enhancement shares | Shares sold or transferred | |||||||||||||||||
in STIP at | in respect of STIP awards | in respect of STIP awards | during the year in respect | |||||||||||||||||
1 April 2005 | for the 2005 financial year | for the 2005 financial year | of the 2003 financial year | (1) | Total interest in STIP as at 31 March 2006 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Value at | Value at | In respect of | Number | Number of | ||||||||||||||||
Total number | date of award | (2)(3) | date of award | ((3) | In respect of | enhancement | of base | enhancement | Total value | (4) | ||||||||||
of shares | Number | £000 | Number | £000 | base awards | shares | award shares | shares | £000 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arun Sarin | 1,520,600 | 840,498 | 1,148 | 420,249 | 574 | | | 1,854,231 | 927,116 | 3,352 | ||||||||||
Peter Bamford | 1,958,447 | | | | | 704,311 | 352,155 | 601,320 | 300,661 | 1,087 | ||||||||||
Thomas Geitner | 329,205 | 285,453 | 390 | 142,726 | 195 | 219,470 | 109,735 | 285,453 | 142,726 | 516 | ||||||||||
Andy Halford | 565,211 | | | | | 181,941 | 90,971 | 194,866 | 97,433 | 352 | ||||||||||
Sir Julian Horn-Smith | 1,324,070 | | | | | 882,713 | 441,357 | | | | ||||||||||
Ken Hydon | 1,081,324 | | | | | 720,883 | 360,441 | | | | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: | |
(1) | Shares in respect of the STIP awards for the 2003 financial year were transferred on 1 July 2005. |
(2) | Previously disclosed within directors emoluments for the year ended 31 March 2005. |
(3) | Value at date of award is based on the price of the Companys ordinary shares on 1 July 2005 of 136.25p. |
(4) | The value at 31 March 2006 is calculated using the closing middle market price of the Companys ordinary shares at 31 March 2006 of 120.5p. |
The aggregate number of shares conditionally awarded during the year as base award and enhancement shares to the Companys senior management, other than executive directors, is 514,603. For a description of the performance and vesting conditions, see Short and medium term incentive: annual deferred share bonus on page 62.
66 | Vodafone Group Plc Annual Report 2006 |
Governance | |
Long
term incentives
Performance
shares
Conditional
awards of ordinary shares made to executive directors under the Vodafone Group
Long Term Incentive Plan and Vodafone Group Plc 1999 Long Term Stock Incentive
Plan, and dividends on those shares paid under the terms of the Companys
scrip dividend scheme and dividend reinvestment plan, are shown below. Long
Term Incentive shares that vested and were sold or transferred during the year
ended 31 March 2006 are also shown below:
Shares sold or | ||||||||||||||||
Shares | Shares forfeited in | transferred in | ||||||||||||||
Total interest in | added during the | respect of awards | respect of awards | |||||||||||||
Long Term Incentives | 2006 financial year | for the 2003, | for the 2003, | |||||||||||||
at 1 April 2005 or | Shares conditionally awarded | through dividend | 2004 and 2005 | 2004 and 2005 | Total interest in long term | |||||||||||
date of appointment | (1) | during the 2006 financial year | reinvestment | financial years | financial years | incentives at 31 March 2006 | ||||||||||
Value at | ||||||||||||||||
date of award | (2) | Number | Total value | (4) | ||||||||||||
Number | Number | £000 | Number | Number | (3) | Number | (3) | of shares | £000 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Arun Sarin | 3,861,669 | 1,717,120 | 2,494 | | | | 5,578,789 | 6,722 | ||||||||
Peter Bamford | 2,934,630 | 876,532 | 1,273 | 15,609 | 592,145 | 492,367 | 2,742,259 | 3,304 | ||||||||
Thomas Geitner | 2,429,377 | 811,127 | 1,178 | 11,949 | 453,321 | 376,934 | 2,422,198 | 2,919 | ||||||||
Andy Halford | 514,616 | 539,975 | 784 | 3,110 | 118,013 | 98,126 | 841,562 | 1,014 | ||||||||
Sir Julian Horn-Smith | 3,717,872 | 1,117,080 | 1,623 | 20,387 | 773,413 | 643,092 | 3,438,834 | 4,144 | ||||||||
Ken Hydon | 2,948, 684 | | | 15,609 | 592,145 | 788,719 | | | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes: | |
(1) | Restricted share awards under the Vodafone Group Long Term Incentive Plan and Vodafone Group Plc 1999 Long Term Stock Incentive Plan. |
(2) | The value of awards under the Vodafone Group Plc 1999 Long Term Incentive Plan is based on the price of the Companys ordinary shares on 26 July 2005 of 145.25p. |
(3) | Shares in respect of awards for the 2003 financial year were sold or transferred on 1 July 2005 and 19 August 2005. The closing middle market price of the Companys ordinary shares on 1 July 2005, the date of vesting, was 136.25p. |
(4) | The value at 31 March 2006 is calculated using the closing middle market price of the Companys ordinary shares at 31 March 2006 of 120.5p. |
(5) | All employees, including Executive Directors with the exception of those retiring in the 2006 financial year, received an award of 320 shares on 1 July 2005, under the Global All Employee Share Plan. The awards vest after two years and are not subject to performance conditions. |
The aggregate number of shares conditionally awarded during the year to the Companys senior management is 3,192,815 shares. For a description of the performance and vesting conditions see Long term incentives on pages 62 to 63. In some cases local performance conditions attach to the awards.
Share
options
The
following information summarises the directors options under the Vodafone
Group Plc Savings Related Share Option Scheme, the Vodafone Group 1998 Sharesave
Scheme, the Vodafone Group Plc Executive Share Option Scheme and the Vodafone
Group 1998 Company Share Option Scheme, all of which are HM Revenue and Customs
approved schemes. The table also summarises the directors options under
the Vodafone Group Plc Share Option Scheme, the Vodafone Group 1998 Executive
Share Option Scheme, the AirTouch Communications, Inc. 1993 Long Term Stock
Incentive Plan and the Vodafone Group Plc 1999 Long Term Stock Incentive Plan,
which are not HM Revenue and Customs approved. No other directors have options
under any of these schemes. Only under the Vodafone Group 1998 Sharesave Scheme
may shares be offered at a discount in future grants of options. For a description
of the performance and vesting conditions see Long term incentives
on pages 62 to 63.
Options held at | ||||||||||||||||
1 April 2005 | Options granted | Options exercised | Options lapsed | Weighted average | ||||||||||||
or date of | during the 2006 | during the 2006 | during the 2006 | Options held at | exercise price at | Earliest date | ||||||||||
appointment | (1) | financial year | financial year | financial year | 31 March 2006 | 31 March 2006 | from which | Latest | ||||||||
Number | Number | Number | Number | Number | Pence | exercisable | expiry date | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Arun Sarin(2)(3) | 20,704,987 | 5,711,292 | | | 26,416,279 | 152.5 | Jun 2000 | Jul 2015 | ||||||||
Peter Bamford | 19,073,022 | 2,915,424 | 4,350,652 | 2,053,776 | 15,584,018 | 148.5 | Jul 2002 | Mar 2007 | ||||||||
Thomas Geitner | 17,334,854 | 2,697,882 | | 1,635,776 | 18,396,960 | 140.5 | Jul 2003 | Jul 2015 | ||||||||
Andy Halford | 921,485 | 1,796,003 | 13,395 | | 2,704,093 | 147.6 | Jul 2002 | Jul 2015 | ||||||||
Sir Julian Horn-Smith | 23,332,869 | 3,715,505 | | 1,847,776 | 25,200,598 | 134.9 | Jul 2002 | Jul 2015 | ||||||||
Ken Hydon | 18,717,166 | | 8,338,371 | 7,280,782 | 3,098,013 | 213.9 | Jul 2002 | Jul 2006 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
100,084,383 | 16,836,106 | 12,702,418 | 12,818,110 | 91,399,961 | ||||||||||||
Notes: | |
(1) | The weighted average exercise price of options over shares in the Company granted during the year and listed above is 145.25 pence. The earliest date from which they are exercisable is July 2008 and the latest expiry date is 25 July 2015. For a description of the performance and vesting conditions see Long term incentives on pages 62 to 63. |
(2) | Some of the options held by Arun Sarin are held in the form of ADSs, each representing ten ordinary shares of the Company, which are traded on the New York Stock Exchange. The number of ADSs over which Arun Sarin holds options is 625,000. |
(3) | The terms of the share options granted over 6,250,000 shares in 1999 to Arun Sarin allow exercise until the earlier of the date on which he ceases to be a director of the Company and the seventh anniversary of the respective dates of grant. |
(4) | In accordance with the terms of the plan rules, options granted to Ken Hydon became exercisable on retirement, being pro-rated for both time and performance. |
The aggregate number of options granted during the year to the Companys senior management, other than executive directors, is 10,454,900. The weighted average exercise price of the options granted to senior management during the year is 145.24 pence. The earliest date from which they are exercisable is July 2008 and the latest expiry date is 25 July 2015.
Vodafone Group Plc Annual Report 2006 | 67 |
Boards Report to Shareholders on Directors Remuneration
continued
Further details of options outstanding at 31 March 2006 are as follows:
Exercisable: Market price | Exercisable: Option price | |||||||||||||||||
greater than option price | (1) | greater than market price | (1) | Not yet exercisable | ||||||||||||||
Weighted average | Latest | Weighted average | Latest | Weighted average | Earliest date from | |||||||||||||
Options held | exercise price | expiry date | Options held | exercise price | expiry date | Options held | exercise price | which exercisable | ||||||||||
Number | Pence | Number | Pence | Number | Pence | |||||||||||||
Arun Sarin(2) | | | | 6,250,000 | 236.3 | Jul-06 | 20,166,279 | 126.5 | Jul-06 | |||||||||
Peter Bamford | | | | 3,307,713 | 207.2 | Mar-07 | 12,276,305 | 132.7 | Jul-06 | |||||||||
Thomas Geitner | 3,507,178 | 97.0 | Aug-12 | 3,259,679 | 209.3 | Jul-11 | 11,630,103 | 134.4 | Jul-06 | |||||||||
Andy Halford | 94,444 | 90.0 | Jul-12 | 344,800 | 214.6 | Jul-11 | 2,264,849 | 139.8 | Jul-06 | |||||||||
Sir Julian Horn-Smith | 5,753,505 | 97.0 | Aug-12 | 3,701,990 | 201.7 | Jul-11 | 15,745,103 | 133.1 | Jul-06 | |||||||||
Ken Hydon | | | | 3,098,013 | 213.9 | Jul-06 | | | | |||||||||
9,355,127 | 19,962,195 | 62,082,639 | ||||||||||||||||
Notes: | |
(1) | Market price is the closing middle market price of the Companys ordinary shares at 31 March 2006 of 120.5p. |
(2) | Some of Arun Sarins options are in respect of American Depositary Shares, each representing ten ordinary shares in the Company, which are traded on the New York Stock Exchange. The number and option price have been converted into the equivalent amounts for the Companys ordinary shares. |
The Companys register of directors interests (which is open to inspection at the Companys registered office) contains full details of directors shareholdings and options to subscribe. These options by exercise price were:
Options held at | ||||||||||||
1 April 2005 | Options granted | Options exercised | Options lapsed | |||||||||
or date of | during the 2006 | during the 2006 | during the 2006 | Options held at | ||||||||
Option price | appointment | (1) | financial year | financial year | financial year | 31 March 2006 | ||||||
Pence | Number | Number | Number | Number | Number | |||||||
Vodafone Group Plc Share Option Scheme (Unapproved 1988) | 155.90 | 855,000 | | | 855,000 | | ||||||
Vodafone Group 1998 Company Share Option Scheme (Approved) | 255.00 | 502,500 | | | | 502,500 | ||||||
Vodafone Group 1998 Executive Share Option Scheme (Unapproved) | 282.30 | 1,131,000 | | | | 1,131,000 | ||||||
Vodafone Group Plc Savings Related Share Option Scheme (1988) | 70.92 | 63,521 | | 40,185 | | 23,336 | ||||||
Vodafone Group 1998 Sharesave Scheme | 95.30 | 16,710 | | | | 16,710 | ||||||
108.84 | 8,705 | | | | 8,705 | |||||||
Vodafone Group Plc 1999 Long Term Stock Incentive Plan | 90.00 | 94,444 | | | | 94,444 | ||||||
97.00 | 17,935,197 | | 8,674,514 | | 9,260,683 | |||||||
119.00 | 20,794,632 | | 1,079,081 | 2,246,855 | 17,468,696 | |||||||
119.25 | 23,119,811 | | 2,908,638 | 831,039 | 19,380,134 | |||||||
145.25 | | 16,836,106 | | | 16,836,106 | |||||||
151.56 | 2,000,400 | | | | 2,000,400 | |||||||
157.50 | 16,943,043 | | | 2,342,112 | 14,600,931 | |||||||
236.34 | (2) | 6,250,000 | | | | 6,250,000 | ||||||
291.50 | 10,369,420 | | | 6,543,104 | 3,826,316 | |||||||
100,084,383 | 16,836,106 | 12,702,418 | 12,818,110 | 91,399,961 | ||||||||
Notes: | |
(1) | Includes options held by Andy Halford as at 26 July 2005 on appointment to the Board |
(2) | These share options are in respect of American Depositary Shares, each representing ten ordinary shares in the Company, which are traded on the New York Stock Exchange. The number and option price have been converted into the equivalent amounts for the Companys ordinary shares. |
Details of the options exercised by directors of the Company in the year ended 31 March 2006 are as follows:
Options | Market price | |||||||
exercised | at date of | Gross | ||||||
during the year | Option price | exercise | pre-tax gain | |||||
Number | Pence | Pence | £000 | |||||
Peter Bamford | 13,395 | 70.9 | 152.0 | 10.9 | ||||
Andy Halford | 13,395 | 70.9 | 152.0 | 10.9 | ||||
26,790 | 21.8 | |||||||
Note: | |
The aggregate gross pre-tax gain made on the exercise of share options in the 2006 financial year by the Companys above directors was £21,721 (2005: £3,076,276). The closing middle market price of the Companys shares at 31 March 2006 was 120.5p, its highest closing price in the 2006 financial year having been 155.0 pence and its lowest closing price having been 109.0 pence. |
68 | Vodafone Group Plc Annual Report 2006 |
Governance | |
Beneficial interests
The
directors beneficial
interests in the ordinary shares of the Company, which includes interests in
the Vodafone Group Profit Sharing Scheme and the Vodafone Share Incentive Plan,
but which excludes interests in the Vodafone Group Share Option Schemes, the
Vodafone Group Short Term Incentive or in the Vodafone Group Long Term Incentives,
are shown below:
1 April 2005 or date | ||||||
26 May 2006 | 31 March 2006 | of appointment | ||||
Lord MacLaurin | 92,495 | 92,495 | 92,495 | |||
Paul Hazen | 360,900 | 360,900 | 360,900 | |||
Arun Sarin(1) | 4,932,560 | 4,932,560 | 4,832,560 | |||
Thomas Geitner | 451,556 | 451,556 | 417,700 | |||
Andy Halford(2) | 108,293 | 107,895 | 91,336 | |||
Sir Julian Horn-Smith | 1,829,385 | 1,828,987 | 1,818,257 | |||
Sir John Bond | 134,423 | 134,423 | 34,423 | |||
Dr Michael Boskin | 212,500 | 212,500 | 212,500 | |||
Lord Broers | 20,483 | 20,483 | 19,819 | |||
John Buchanan | 208,124 | 208,124 | 104,318 | |||
Penny Hughes | 22,500 | 22,500 | 22,500 | |||
Anne Lauvergeon(3) | 31,000 | 31,000 | | |||
Professor Jürgen Schrempp | 10,000 | 10,000 | 10,000 | |||
Luc Vandevelde | 20,000 | 20,000 | 20,000 | |||
Philip Yea(3) | 70,000 | 70,000 | | |||
Notes: | |
(1) | Arun Sarin also has a non-beneficial interest as the trustee of two family trusts, each holding 5,720 shares. |
(2) | Andy Halford was appointed to the Board on 26 July 2005. |
(3) | Non-executive directors appointed to the Board as follows: Anne Lauvergeon: 1 November 2005, Philip Yea: 1 September 2005. |
Changes to the interests of the directors of the Company in the ordinary shares of the Company during the period from 1 April 2006 to 26 May 2006 relate to shares acquired either through Vodafone Group Personal Equity Plans or the Vodafone Share Incentive Plan. As at 31 March 2006, and during the period from 1 April 2006 to 26 May 2006, no director had any interest in the shares of any subsidiary company.
Other than those individuals included in the table above who were Board members at 31 March 2006, members of the Groups Executive Committee, as at 31 March 2006, had an aggregate beneficial interest in 2,078,326 ordinary shares of the Company. At 26 May 2006, Executive Committee members at that date had an aggregate beneficial interest in 2,079,522 ordinary shares of the Company, none of whom had an individual beneficial interest amounting to greater than 1% of the Companys ordinary shares.
Interests in share options of the Company at 26 May 2006
At
26 May 2006, there had been no change to the directors interests in share
options from 31 March 2006.
Other than those individuals included in the table above, at 26 May 2006, members of the Groups Executive Committee at that date held options for 34,714,916 ordinary shares at prices ranging from 48.3 pence to 293.7 pence per ordinary share, with a weighted average exercise price of 141.60 pence per ordinary share exercisable at dates ranging from July 1999 to July 2015, and options for 172,669 ADSs at prices ranging from $13.65 to $45.3359 per ADS, with a weighted average exercise price of $26.6056 per ADS, exercisable at dates ranging from July 2001 to July 2013.
Lord MacLaurin, Paul Hazen, Sir John Bond, Dr Michael Boskin, Lord Broers, John Buchanan, Penny Hughes, Anne Lauvergeon, Professor Jürgen Schrempp, Luc Vandevelde and Philip Yea held no options at 26 May 2006.
Directors interests in contracts
None of the current directors had a material interest in any contract of significance to which the Company or any of its subsidiary undertakings was a party during the financial
year.
Luc Vandevelde
On behalf of the Board
Vodafone Group Plc Annual Report 2006 | 69 |
Directors Statement of Responsibility
United Kingdom company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss of the Group for that period. In preparing those financial statements, the directors are required to:
| select suitable accounting policies and apply them consistently; |
| make judgements and estimates that are reasonable and prudent; |
| state whether the Consolidated Financial Statements have been prepared in accordance with IFRS as adopted for use in the EU; |
| for the Company Financial Statements, state whether applicable UK accounting standards have been followed; and |
| prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company and the Group will continue in business. |
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation. They are also responsible for the system of internal control, for safeguarding the assets of the Company and the Group and, hence, for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Disclosure of Information to Auditors
Having
made the requisite enquiries, so far as the directors are aware, there is no
relevant audit information (as defined by Section 234ZA of the Companies Act
1985) of which the
Companys auditors are unaware, and the directors have taken all the steps they ought to have taken to make themselves aware of any relevant audit information and to establish that the Companys
auditors are aware of that
information.
Going Concern
After
reviewing the Groups and Companys budget for the next financial year,
and other longer term plans, the directors are satisfied that, at the time of
approving the financial statements, it is appropriate to adopt the going concern
basis in preparing the financial statements.
By Order of the Board
Stephen Scott
Secretary
30 May 2006
70 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Financials
Vodafone Group Plc Annual Report 2006 | 71 |
Consolidated Income Statement for the years ended 31 March
2006 | 2006 | 2005 | ||||||
Note | $m | £m | £m | |||||
|
|
|||||||
Revenue | 3 | 51,048 | 29,350 | 26,678 | ||||
Cost of sales | (29,689 | ) | (17,070 | ) | (15,800 | ) | ||
|
|
|||||||
Gross profit | 21,359 | 12,280 | 10,878 | |||||
Selling and distribution expenses | (3,263 | ) | (1,876 | ) | (1,649 | ) | ||
Administrative expenses | (5,941 | ) | (3,416 | ) | (2,856 | ) | ||
Share of result in associated undertakings | 14 | 4,223 | 2,428 | 1,980 | ||||
Impairment losses | 10 | (40,900 | ) | (23,515 | ) | (475 | ) | |
Other income and expense | 26 | 15 | | |||||
|
|
|||||||
Operating (loss)/profit | 3,4 | (24,496 | ) | (14,084 | ) | 7,878 | ||
Non-operating income and expense | (3 | ) | (2 | ) | (7 | ) | ||
Investment income | 5 | 614 | 353 | 294 | ||||
Financing costs | 5 | (1,948 | ) | (1,120 | ) | (880 | ) | |
|
|
|||||||
(Loss)/profit before taxation | (25,833 | ) | (14,853 | ) | 7,285 | |||
Tax on (loss)/profit | 6 | (4,140 | ) | (2,380 | ) | (1,869 | ) | |
|
|
|||||||
(Loss)/profit for the financial year from continuing operations | (29,973 | ) | (17,233 | ) | 5,416 | |||
(Loss)/profit for the financial year from discontinued operations | 29 | (7,980 | ) | (4,588 | ) | 1,102 | ||
|
|
|||||||
(Loss)/profit for the financial year | (37,953 | ) | (21,821 | ) | 6,518 | |||
Attributable to: | ||||||||
Equity shareholders | (38,118 | ) | (21,916 | ) | 6,410 | |||
Minority interests | 165 | 95 | 108 | |||||
|
|
|||||||
(37,953 | ) | (21,821 | ) | 6,518 | ||||
(Loss)/earnings per share | ||||||||
From continuing operations: | ||||||||
Basic | 8 | (48.11 | )¢ | (27.66 | )p | 8.12 | p | |
Diluted | 8 | (48.11 | )¢ | (27.66 | )p | 8.09 | p | |
From continuing and discontinued operations: | ||||||||
Basic | 8 | (60.89 | )¢ | (35.01 | )p | 9.68 | p | |
Diluted | 8 | (60.89 | )¢ | (35.01 | )p | 9.65 | p | |
Consolidated
Statement of Recognised Income and Expense
for the years ended 31 March
2006 | 2006 | 2005 | ||||||
Note | $m | £m | £m | |||||
|
|
|||||||
Gains on revaluation of available-for-sale investments, net of tax | 1,226 | 705 | 106 | |||||
Exchange differences on translation of foreign operations | 2,599 | 1,494 | 1,488 | |||||
Actuarial losses on defined benefit pension schemes, net of tax | (52 | ) | (30 | ) | (79 | ) | ||
Asset revaluation surplus | 28 | 195 | 112 | | ||||
Transfer to the income statement on disposal of foreign operations | 63 | 36 | | |||||
|
|
|||||||
Net income recognised directly in equity | 4,031 | 2,317 | 1,515 | |||||
(Loss)/profit for the financial year | (37,953 | ) | (21,821 | ) | 6,518 | |||
|
|
|||||||
Total recognised income and expense relating to the year | (33,922 | ) | (19,504 | ) | 8,033 | |||
Attributable to: | ||||||||
Equity shareholders | (34,101 | ) | (19,607 | ) | 7,958 | |||
Minority interests | 179 | 103 | 75 | |||||
|
|
|||||||
(33,922 | ) | (19,504 | ) | 8,033 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
The unaudited US dollar amounts are prepared on the basis set out in note 1.
72 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Consolidated Balance Sheet at 31 March
2006 | 2006 | 2005 | ||||||
Note | $m | £m | £m | |||||
Non-current assets | ||||||||
Goodwill | 9 | 91,497 | 52,606 | 80,999 | ||||
Other intangible assets | 9 | 28,719 | 16,512 | 16,149 | ||||
Property, plant and equipment | 11 | 23,759 | 13,660 | 17,442 | ||||
Investments in associated undertakings | 14 | 40,346 | 23,197 | 20,234 | ||||
Other investments | 15 | 3,686 | 2,119 | 1,181 | ||||
Deferred tax assets | 6 | 244 | 140 | 1,184 | ||||
Post employment benefits | 25 | 33 | 19 | 12 | ||||
Trade and other receivables | 17 | 628 | 361 | 585 | ||||
|
|
|||||||
188,912 | 108,614 | 137,786 | ||||||
|
|
|||||||
Current assets | ||||||||
Inventory | 16 | 517 | 297 | 440 | ||||
Taxation recoverable | 14 | 8 | 38 | |||||
Trade and other receivables | 17 | 7,718 | 4,438 | 5,164 | ||||
Cash and cash equivalents | 18 | 4,851 | 2,789 | 3,769 | ||||
|
|
|||||||
13,100 | 7,532 | 9,411 | ||||||
|
|
|||||||
Assets included in disposal group held for sale | 29 | 18,423 | 10,592 | | ||||
|
|
|||||||
Total assets | 220,435 | 126,738 | 147,197 | |||||
Equity | ||||||||
Called up share capital | 19 | 7,244 | 4,165 | 4,286 | ||||
Share premium account | 21 | 91,216 | 52,444 | 52,284 | ||||
Own shares held | 21 | (14,259) | (8,198) | (5,121 | ) | |||
Additional paid-in capital | 21 | 174,194 | 100,152 | 100,081 | ||||
Capital redemption reserve | 21 | 223 | 128 | | ||||
Accumulated other recognised income and expense | 22 | 7,114 | 4,090 | 1,781 | ||||
Retained losses | 23 | (117,152) | (67,356) | (39,511 | ) | |||
|
|
|||||||
Total equity shareholders funds | 148,580 | 85,425 | 113,800 | |||||
Minority interests | (197) | (113) | (152 | ) | ||||
|
|
|||||||
Total equity | 148,383 | 85,312 | 113,648 | |||||
|
|
|||||||
Non-current liabilities | ||||||||
Long-term borrowings | 24 | 29,133 | 16,750 | 13,190 | ||||
Deferred tax liabilities | 6 | 9,862 | 5,670 | 4,849 | ||||
Post employment benefits | 25 | 209 | 120 | 136 | ||||
Provisions for liabilities and charges | 26 | 461 | 265 | 319 | ||||
Trade and other payables | 27 | 984 | 566 | 438 | ||||
|
|
|||||||
40,649 | 23,371 | 18,932 | ||||||
|
|
|||||||
Current liabilities | ||||||||
Short-term borrowings: | ||||||||
Third parties | 24 | 5,340 | 3,070 | 861 | ||||
Related parties | 24 | 657 | 378 | 1,142 | ||||
Current taxation liabilities | 7,736 | 4,448 | 4,353 | |||||
Trade and other payables | 27 | 13,005 | 7,477 | 8,033 | ||||
Provisions for liabilities and charges | 26 | 242 | 139 | 228 | ||||
|
|
|||||||
26,980 | 15,512 | 14,617 | ||||||
|
|
|||||||
Liabilities included in disposal group held for sale | 29 | 4,423 | 2,543 | | ||||
|
|
|||||||
Total equity and liabilities | 220,435 | 126,738 | 147,197 | |||||
The Consolidated Financial Statements were approved by the Board of directors on 30 May 2006 and were signed on its behalf by:
Arun
Sarin Chief Executive |
Andy
Halford Chief Financial Officer |
The accompanying notes are an integral part of these Consolidated Financial Statements. The unaudited US dollar amounts are prepared on the basis set out in note 1.
Vodafone Group Plc Annual Report 2006 | 73 |
Consolidated Cash Flow Statement for the years ended 31 March
2006 | 2006 | 2005 | ||||||
Note | $m | £m | £m | |||||
Net cash flows from operating activities | 29, 32 | 20,595 | 11,841 | 10,979 | ||||
Cash flows from investing activities | ||||||||
Purchase of interests in subsidiary undertakings and joint ventures, net of cash acquired | (7,280 | ) | (4,186 | ) | (2,461 | ) | ||
Disposal of interests in subsidiary undertakings, net of cash disposed | 1,042 | 599 | 444 | |||||
Purchase of intangible assets | (1,200 | ) | (690 | ) | (699 | ) | ||
Purchase of property, plant and equipment | (7,794 | ) | (4,481 | ) | (4,279 | ) | ||
Disposal of property, plant and equipment | 45 | 26 | 68 | |||||
Purchase of investments | (99 | ) | (57 | ) | (19 | ) | ||
Disposal of investments | 2 | 1 | 22 | |||||
Loans to businesses sold or acquired businesses held for sale | | | 110 | |||||
Dividends received from associated undertakings | 1,452 | 835 | 1,896 | |||||
Dividends received from investments | 71 | 41 | 19 | |||||
Interest received | 555 | 319 | 339 | |||||
Net cash flows from investing activities | 29 | (13,206 | ) | (7,593 | ) | (4,560 | ) | |
Cash flows from financing activities | ||||||||
Issue of ordinary share capital and reissue of treasury shares | 619 | 356 | 115 | |||||
Net movement in short-term borrowings | 1,231 | 708 | | |||||
Proceeds from the issue of long-term borrowings | 9,142 | 5,256 | | |||||
Repayment of borrowings | (2,385 | ) | (1,371 | ) | (1,824 | ) | ||
Loans repaid to associated undertakings | (82 | ) | (47 | ) | (2 | ) | ||
Purchase of treasury shares | (11,230 | ) | (6,457 | ) | (4,053 | ) | ||
Equity dividends paid | (4,781 | ) | (2,749 | ) | (1,991 | ) | ||
Dividends paid to minority shareholders in subsidiary undertakings | (89 | ) | (51 | ) | (32 | ) | ||
Interest paid | (1,254 | ) | (721 | ) | (744 | ) | ||
Net cash flows from financing activities | 29 | (8,829 | ) | (5,076 | ) | (8,531 | ) | |
Net decrease in cash and cash equivalents | (1,440 | ) | (828 | ) | (2,112 | ) | ||
Cash and cash equivalents at beginning of the financial year | 18 | 6,481 | 3,726 | 5,809 | ||||
Exchange gains on cash and cash equivalents | 59 | 34 | 29 | |||||
Cash and cash equivalents at end of the financial year | 18 | 5,100 | 2,932 | 3,726 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
The unaudited US dollar amounts are prepared on the basis set out in note 1.
74 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Notes to the Consolidated Financial Statements
1. Basis
of preparation
The
Consolidated Financial Statements are prepared in accordance with International
Financial Reporting Standards (IFRS) (including International
Accounting Standards (IAS) and interpretations issued by the International
Accounting Standards Board (IASB) and its committees, and as interpreted
by any regulatory bodies applicable to the Group as adopted for use in the
European Union (EU), the Companies Act 1985 and Article 4 of the
IAS Regulations. The Consolidated Financial Statements have been prepared
in accordance with IFRS, which differs in certain material respects from US
generally accepted accounting principles (US GAAP) see
note 38.
The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. For a discussion on the Groups critical accounting estimates see Performance Critical Accounting Estimates elsewhere in this Annual Report. Actual results could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Certain amounts in relation to the previous financial year have been reclassified to conform presentation with the requirements of IFRS.
Amounts in the Consolidated Financial Statements are stated in pounds sterling (£), the currency of the country in which the Company is incorporated. The translation into US dollars of the Consolidated Financial Statements as of, and for the financial year ended, 31 March 2006, is for convenience only and has been made at the Noon Buying Rate for cable transfers as announced by the Federal Reserve Bank of New York for customs purposes on 31 March 2006. This rate was $1.7393: £1. This translation should not be construed as a representation that the sterling amounts actually represented have been, or could be, converted into dollars at this or any other rate.
2. Significant
accounting policies
The
Groups significant accounting policies are described below.
Accounting convention
The Consolidated Financial Statements are prepared on a historical cost basis except for certain financial and equity instruments that have been measured at fair value.
Basis of consolidation
The Consolidated Financial Statements incorporate the financial statements of the Company and entities controlled, both unilaterally and jointly, by the Company.
Accounting for subsidiaries
A subsidiary
is an entity controlled by the Company. Control is achieved where the Company
has the power to govern the financial and operating policies of an entity so
as to obtain
benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Minority interests in the net assets of consolidated subsidiaries are identified separately from the Groups equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minoritys share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minoritys share of changes in equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.
Business combinations
The acquisition
of subsidiaries is accounted for using the purchase method. The cost of the
acquisition is measured at the aggregate of the fair values, at the date of
exchange, of assets given, liabilities incurred or assumed, and equity instruments
issued by the Group in exchange for control of the acquiree, plus any costs
directly attributable to the business combination. The acquirees identifiable
assets and liabilities are recognised at their fair values at the acquisition
date.
Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Groups interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised.
The interest of minority shareholders in the acquiree is initially measured at the minoritys proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.
Previously held identifiable assets, liabilities and contingent liabilities of the acquired entity are revalued to their fair value at the date of acquisition, being the date at which the Group achieves control of the acquiree. The movement in fair value is taken to the asset revaluation surplus.
Interests in joint ventures
A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control, that is when the strategic financial
and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control.
The Group reports its interests in jointly controlled entities using proportionate consolidation. The Groups share of the assets, liabilities, income, expenses and cash flows of jointly controlled entities are combined with the equivalent items in the results on a line-by-line basis.
Any goodwill arising on the acquisition of the Groups interest in a jointly controlled entity is accounted for in accordance with the Groups accounting policy for goodwill arising on the acquisition of a subsidiary.
Investments in associates
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to
participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
The results and assets and liabilities of associates are incorporated in the Consolidated Financial Statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Groups share of the net assets of the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Groups interest in that associate are not recognised. Additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.
Any excess of the cost of acquisition over the Groups share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment.
The licences of the Groups associated undertaking in the US, Verizon Wireless, are indefinite lived assets as they are subject to perfunctory renewal. Accordingly they are not subject to amortisation but are tested annually for impairment, or when indicators exist that the carrying value is not recoverable.
Intangible assets
Goodwill
Goodwill
arising on the acquisition of an entity represents the excess of the cost of
acquisition
over the Groups interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities of the entity recognised at the date of
acquisition. Goodwill is initially recognised as an asset at cost and is subsequently
measured at cost less any accumulated impairment losses. Goodwill is held in
the currency of the acquired entity and revalued to the closing rate at each
balance
sheet date.
Goodwill is not subject to amortisation but is tested for impairment.
Negative goodwill arising on an acquisition is recognised directly in the income statement.
On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss recognised in the income statement on disposal.
Goodwill arising before the date of transition to IFRS, on 1 April 2004, has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.
Vodafone Group Plc Annual Report 2006 | 75 |
Notes to the Consolidated Financial Statements
continued
2. Significant
accounting policies continued
Licence
and spectrum fees
Licence
and spectrum fees are stated at cost less accumulated amortisation. The amortisation
periods range from 3 to 25 years and are determined primarily by reference
to the unexpired licence period, the conditions for licence renewal and whether
licences are dependent on specific technologies. Amortisation is charged to
the income statement on a straight-line basis over the estimated useful lives
from the commencement of service of the network.
Computer software
Computer
software licences are capitalised on the basis of the costs incurred to acquire
and bring into use the specific software. These costs are amortised over their
estimated
useful lives, being 3 to 5 years.
Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that are expected to generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include software development employee costs and directly attributable overheads.
Software integral to a related item of hardware equipment is accounted for as property, plant and equipment.
Costs associated with maintaining computer software programmes are recognised as an expense as incurred.
Research and development expenditure
Expenditure
on research activities is recognised as an expense in the period in which it
is incurred.
An internally-generated intangible asset arising from the Groups development activity is recognised only if all of the following conditions are met:
| an asset is created that can be separately identified; |
| it is probable that the asset created will generate future economic benefits; and |
| the development cost of the asset can be measured reliably. |
Internally-generated intangible assets are amortised on a straight-line basis over their estimated useful lives. Where no internally-generated intangible asset can be recognised, development expenditure is charged to the income statement in the period in which it is incurred.
Other intangible assets
Other
intangible assets with finite lives are stated at cost less accumulated amortisation
and impairment losses. Amortisation is charged to the income statement on a straight-line
basis over the estimated useful lives of intangible assets from the date they
are available for use. The estimated useful lives are as follows:
Brands | 1 - 10 years |
Customer bases | 3 - 8 years |
Property, plant and equipment
Land and buildings held for use are stated in the balance sheet at their cost, less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
Assets in the course of construction are carried at cost, less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use.
Equipment, fixtures and fittings are stated at cost less accumulated depreciation and any accumulated impairment losses.
The cost of property, plant and equipment includes directly attributable incremental costs incurred in their acquisition and installation.
Depreciation is charged so as to write off the cost or valuation of assets, other than land and properties under construction, using the straight-line method, over their estimated useful lives as follows:
Freehold buildings | 25 - 50 years |
Leasehold premises | the term of the lease |
Equipment, fixtures and fittings | 3 - 10 years |
Network infrastructure | 3 - 25 years |
Depreciation is not provided on freehold land.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
Impairment of assets
Indefinite lived assets
Goodwill
and other assets that have an indefinite useful life are not subject to amortisation
but are tested for impairment annually or whenever there is an indication that
the asset
may be impaired.
For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash-generating units. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
Property, plant and equipment and finite lived intangible assets
At
each balance sheet date, the Group reviews the carrying amounts of its property,
plant and equipment and finite lived intangible assets to determine whether there
is any indication that those assets have suffered an impairment loss. If any
such indication exists, the recoverable amount of the asset is estimated in order
to determine the extent of the impairment loss (if any). Where it is not possible
to estimate the recoverable amount of an individual asset, the Group estimates
the recoverable amount of the cash-generating unit to which the asset belongs.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the income statement.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the income statement.
Disposal groups held for sale
Disposal groups held for sale are stated at the lower of carrying value and fair value less costs to sell.
Revenue
Group revenue
comprises revenue of the Company and its subsidiary undertakings plus the Groups
share of the revenue of its joint ventures and excludes sales taxes and
discounts.
Revenue from mobile telecommunications comprises amounts charged to customers in respect of monthly access charges, airtime usage, messaging, the provision of other mobile telecommunications services, including data services and information provision, fees for connecting users of other fixed line and mobile networks to the Groups network, revenue from the sale of equipment, including handsets and revenue arising from Partner Market Agreements.
Access charges and airtime used by contract customers are invoiced and recorded as part of a periodic billing cycle and recognised as revenue over the related access period, with unbilled revenue resulting from services already provided from the billing cycle date to the end of each period accrued and unearned revenue from services provided in periods after each accounting period deferred. Revenue from the sale of prepaid credit is deferred until such time as the customer uses the airtime, or the credit expires.
Other revenue from mobile telecommunications primarily comprises equipment sales, which are recognised upon delivery to customers, and customer connection revenue. Customer connection revenue is recognised together with the related equipment revenue to the extent that the aggregate equipment and connection revenue does not exceed the fair value of the equipment delivered to the customer. Any customer connection revenue not recognised together with related equipment revenue is deferred and recognised over the period in which services are expected to be provided to the customer.
76 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Revenue from data services and information provision is recognised when the Group has performed the related service and, depending on the nature of the service, is recognised either at the gross amount billed to the customer or the amount receivable by the Group as commission for facilitating the service.
Incentives are provided to customers in various forms and are usually offered on signing a new contract or as part of a promotional offering.
Where one-off incentives are provided on connection of a new customer or the upgrade of an existing customer, revenue representing the fair value of the incentive, relative to other deliverables provided to the customer as part of the same arrangement, is deferred and recognised in line with the Groups performance of its obligations relating to the incentive.
For equipment sales made to intermediaries, revenue is recognised if the significant risks associated with the equipment are transferred to the intermediary and the intermediary has no general right of return. If the significant risks are not transferred, revenue recognition is deferred until sale of the handset to an end customer by the intermediary or the expiry of the right of return.
Intermediaries are incentivised by the Group to connect new customers and upgrade existing customers. Where such incentives are separable from the initial sale of equipment to an intermediary, the incentive is accounted for as an expense upon connection, or upgrade, of the customer.
Revenue from other businesses primarily comprises amounts charged to customers of the Groups fixed line businesses, mainly in respect of access charges and line usage, invoiced and recorded as part of a periodic billing cycle.
Inventory
Inventory is stated at the lower of cost and net realisable value. Cost is determined on the basis of weighted average costs and comprises direct materials and, where applicable,
direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership of the asset to the lessee. All other leases are
classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments as determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in the income statement.
Rentals payable under operating leases are charged to the income statement on a straight line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the lease term.
Foreign currencies
In preparing
the financial statements of the individual entities, transactions in currencies
other than the entitys functional currency are recorded at the rates
of exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary items denominated in foreign currencies are retranslated at
the rates prevailing on the balance sheet date. Non-monetary items carried
at fair value that are
denominated in foreign currencies are retranslated at the rate prevailing on
the date when fair value was determined. Non-monetary items that are measured
in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the income statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.
For the purpose of presenting Consolidated Financial Statements, the assets and liabilities of entities with a functional currency other than sterling are expressed in sterling using exchange rates prevailing on the balance sheet date. Income and expense items and cash flows are translated at the average exchange rates for the period and exchange differences arising are recognised directly in equity. Such translation
differences are recognised in the income statement in the period in which a foreign operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated accordingly.
In respect of all foreign operations, any exchange differences that have arisen before 1 April 2004, the date of transition to IFRS, are deemed to be nil and will be excluded from the determination of any subsequent profit or loss on disposal.
Borrowing costs
All borrowing costs are recognised in the income statement in the period in which they are incurred.
Post employment benefits
For defined
benefit retirement plans, the difference between the fair value of the plan
assets and the present value of the plan liabilities is recognised as an asset
or liability on the balance sheet. The Group has early adopted the amendment
to IAS 19, Employee Benefits, issued by the IASB on 16 December
2004 and applied it from 1 April 2004. Accordingly, actuarial gains and losses
are taken to the statement of recognised income and expense. For this purpose,
actuarial gains and losses comprise both the effects of changes in actuarial
assumptions and experience adjustments arising because of differences between
the previous actuarial assumptions and what
has actually occurred.
Other movements in the net surplus or deficit are recognised in the income statement, including the current service cost, any past service cost and the effect of any curtailment or settlements. The interest cost less the expected return on assets is also charged to the income statement. The amount charged to the income statement in respect of these plans is included within operating costs or in the Group's share of the results of equity accounted operations as appropriate.
The values attributed to plan liabilities are assessed in accordance with the advice of independent qualified actuaries.
The Group's contributions to defined contribution pension plans are charged to the income statement as they fall due.
Cumulative actuarial gains and losses as at 1 April 2004, the date of transition to IFRS, have been recognised in the balance sheet.
Taxation
Income tax expense represents the sum of the current tax payable and deferred tax.
Current tax payable or recoverable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because some items of income or expense are taxable or deductible in different years or may never be taxable or deductible. The Groups liability for current tax is calculated using UK and foreign tax rates and laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable in the future arising from temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. It is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted by the balance sheet date.
Tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they either relate to income taxes
Vodafone Group Plc Annual Report 2006 | 77 |
Notes to the Consolidated Financial Statements
continued
2. Significant accounting policies continued
levied by the same taxation authority on either the same taxable entity or on different taxable entities which intend to settle the current tax assets and liabilities on a net
basis.
Tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the tax is also recognised directly in equity.
Financial instruments
Financial
assets and financial liabilities, in respect of financial instruments, are
recognised on the Groups balance sheet when the Group becomes a party
to the contractual
provisions of the instrument.
The Group has applied the requirements of IFRS to financial instruments for all periods presented and has not taken advantage of any exemptions available to first time adopters of IFRS in this respect. The Group has early adopted IFRS 7, Financial Instruments: Disclosures, amendments to IAS 39, Financial Instruments: Recognition and Measurement and IFRS 4, Insurance Contracts, regarding Financial Guarantee Contracts and amendments to IAS 39 regarding The Fair Value Option and Cash Flow Hedge Accounting of Forecast Intragroup Transactions and applied them from 1 April 2004.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Estimated irrecoverable
amounts are based on the ageing of the receivable balances and historical experience. Individual trade receivables are written off when management deems them not to be collectible.
Investments
Investments are recognised and derecognised on a trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the
timeframe established by the market concerned, and are initially measured at cost, including transaction costs.
Investments are classified as either held for trading or available-for-sale, and are measured at subsequent reporting dates at fair value. Where securities are held for trading purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity, determined using the weighted average costs method, is included in the net profit or loss for the period.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and call deposits, and other short term highly liquid investments that are readily convertible to a known amount of cash and are
subject to an insignificant risk of changes in value.
Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
Financial liabilities and equity instruments
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a
financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities and includes no obligation to deliver cash or other financial
assets. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.
Capital market and bank borrowings
Interest bearing loans and overdrafts are initially measured at fair value (which is equal to cost at inception), and are subsequently measured at amortised cost, using the effective
interest rate method, except where they are identified as a hedged item in a fair value hedge. Any difference between the proceeds net of transaction costs and the settlement or redemption of borrowings is recognised over the term of the
borrowing.
Equity instruments
Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments and hedge accounting
The
Groups activities
expose it to the financial risks of changes in foreign exchange rates and interest
rates.
The use of financial derivatives is governed by the Groups policies approved by the board of directors, which provide written principles on the use of financial derivatives consistent with the Groups risk management strategy. Changes in values of all derivatives of a financing nature are included within investment income and financing costs in the income statement. The Group does not use derivative financial instruments for speculative purposes.
Derivative financial instruments are initially measured at fair value on the contract date, and are subsequently re-measured to fair value at each reporting date. The Group designates certain derivatives as either:
• | hedges of the change of fair value of recognised assets and liabilities (fair value hedges); or |
• | hedges of net investments in foreign operations. |
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting.
Fair value hedges
The
Groups policy
is to use derivative instruments (primarily interest rate swaps) to convert a
proportion of its fixed rate debt to floating rates in order to hedge the interest
rate risk arising, principally, from capital market borrowings. The Group designates
these as fair value hedges of interest rate risk with changes in fair value of
the hedging instrument recognised in the income statement for the period
together with the changes in the fair value of the hedged item due to the hedged
risk, to the extent the hedge is effective. The ineffective portion is recognised
immediately in the income statement.
Net investment hedges
Exchange
differences arising from the translation of the net investment in foreign operations
are
recognised directly in equity. Gains and losses on those hedging instruments
designated as hedges of the net investments in foreign operations are recognised
in equity to the extent that the hedging relationship is effective. These amounts
are included in exchange differences on translation of foreign operations as
stated in
the statement of recognised income and expense. Any ineffectiveness is recognised
immediately in the income statement for the period. Gains and losses accumulated
in the translation reserve are included in the income statement when the foreign
operation is disposed of. The Group has adopted the Amendments to IAS 21, The Effect of Changes in Foreign Exchange Rates,
with effect from 1 April 2004, being the date of transition to IFRS for the Group.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation.
Provisions
are measured
at the directors best estimate of the expenditure required to settle the
obligation at the balance sheet date, and are discounted to present value where
the effect is material.
Share-based payments
The Group
issues equity-settled share-based payments to certain employees. Equity-settled
share-based payments are measured at fair value (excluding the effect of non
market-based vesting conditions) at the date of grant. The fair value determined
at the grant date of the equity-settled share-based payments is expensed on
a straight-line basis over the vesting period, based on the Groups estimate
of the shares that will eventually vest and adjusted for the effect of non
market-based vesting conditions.
Fair value is measured using a binomial pricing model which is calibrated using a Black-Scholes framework. The expected life used in the model has been adjusted, based on managements best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
Advertising costs
Expenditure on advertising is written off in the year in which it is incurred.
78 | Vodafone Group Plc Annual Report 2006 |
Financials | |
3. Segmental analysis
The
Groups business is principally the supply of mobile telecommunications services and products. Primary segmental information is provided on the basis of geographic regions,
being the basis on which the Group manages its worldwide interests. Other operations primarily comprise fixed line telecommunications businesses. The segmental analysis is provided for the Groups
continuing operations. Revenue is determined by location of assets, which is
not materially different from revenue by location of customer. Inter-segment
sales are charged at arms length prices.
Mobile telecommunications | Other operations | Group | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Other | Common | |||||||||||||||||||||
Germany | Italy | Spain | UK | US | mobile | functions | Total | Germany | Other | |||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
31 March 2006 | ||||||||||||||||||||||
Service revenue | 5,394 | 4,170 | 3,615 | 4,568 | | 8,530 | 26,277 | 1,320 | 19 | 27,616 | ||||||||||||
Equipment and other revenue | 360 | 193 | 380 | 480 | | 720 | 2,133 | | | 2,133 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Segment revenue | 5,754 | 4,363 | 3,995 | 5,048 | | 9,250 | 28,410 | 1,320 | 19 | 29,749 | ||||||||||||
Subsidiaries | 5,754 | | 3,995 | 5,048 | | 7,812 | 22,609 | 1,320 | | 23,929 | ||||||||||||
Joint ventures | | 4,363 | | | | 1,470 | 5,833 | | 19 | 5,852 | ||||||||||||
Less: intra-segment revenue | | | | | | (32 | ) | (32 | ) | | | (32 | ) | |||||||||
Common functions | 145 | 145 | 145 | |||||||||||||||||||
Inter-segment revenue | (64 | ) | (44 | ) | (105 | ) | (65 | ) | | (121 | ) | (19 | ) | (418 | ) | | | (418 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Net revenue | 5,690 | 4,319 | 3,890 | 4,983 | | 9,129 | 126 | 28,137 | 1,320 | 19 | 29,476 | |||||||||||
Less: revenue between mobile and other operations | (91 | ) | | | | | (1 | ) | (92 | ) | (34 | ) | | (126 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Group revenue | 5,599 | 4,319 | 3,890 | 4,983 | | 9,128 | 126 | 28,045 | 1,286 | 19 | 29,350 | |||||||||||
|
||||||||||||||||||||||
Segment result | (17,904 | ) | (1,928 | ) | 968 | 698 | | 1,296 | (16,870 | ) | 139 | 4 | (16,727 | ) | ||||||||
Subsidiaries | (17,904 | ) | | 968 | 698 | | 933 | (15,305 | ) | 139 | | (15,166 | ) | |||||||||
Joint ventures | | (1,928 | ) | | | | 363 | (1,565 | ) | | 4 | (1,561 | ) | |||||||||
Common functions | 215 | 215 | 215 | |||||||||||||||||||
Share of result in associated undertakings | | | | | 1,732 | 712 | 8 | 2,452 | | (24 | ) | 2,428 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Operating (loss)/profit | (17,904 | ) | (1,928 | ) | 968 | 698 | 1,732 | 2,008 | 223 | (14,203 | ) | 139 | (20 | ) | (14,084 | ) | ||||||
Non-operating income and expense | (2 | ) | ||||||||||||||||||||
Investment income | 353 | |||||||||||||||||||||
Financing costs | (1,120 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Loss before taxation | (14,853 | ) | ||||||||||||||||||||
Tax on loss | (2,380 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Loss for the year from continuing operations | (17,233 | ) | ||||||||||||||||||||
|
||||||||||||||||||||||
Operating loss | (17,904 | ) | (1,928 | ) | 968 | 698 | 1,732 | 2,008 | 223 | (14,203 | ) | 139 | (20 | ) | (14,084 | ) | ||||||
Add back: | ||||||||||||||||||||||
Impairment losses | 19,400 | 3,600 | | | | 515 | | 23,515 | | | 23,515 | |||||||||||
Non-recurring items related to acquisitions and disposals | | | | | | (20 | ) | (12 | ) | (32 | ) | | | (32 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Adjusted operating profit | 1,496 | 1,672 | 968 | 698 | 1,732 | 2,503 | 211 | 9,280 | 139 | (20 | ) | 9,399 | ||||||||||
|
||||||||||||||||||||||
Non-current assets(1) | 24,360 | 19,422 | 12,596 | 8,743 | | 17,200 | 1,907 | 84,228 | 754 | 64 | 85,046 | |||||||||||
Investment in associated undertakings | | | | | 17,898 | 5,182 | 37 | 23,117 | | 80 | 23,197 | |||||||||||
Current assets(1) | 669 | 888 | 443 | 743 | | 1,555 | 79 | 4,377 | 266 | 13 | 4,656 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total segment assets(1) | 25,029 | 20,310 | 13,039 | 9,486 | 17,898 | 23,937 | 2,023 | 111,722 | 1,020 | 157 | 112,899 | |||||||||||
Unallocated non-current assets: | ||||||||||||||||||||||
Deferred tax assets | 140 | |||||||||||||||||||||
Trade and other receivables | 231 | |||||||||||||||||||||
Unallocated current assets: | ||||||||||||||||||||||
Cash and cash equivalents | 2,789 | |||||||||||||||||||||
Trade and other receivables | 79 | |||||||||||||||||||||
Taxation recoverable | 8 | |||||||||||||||||||||
Assets included in disposal group for resale(3) | 10,592 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total assets | 126,738 | |||||||||||||||||||||
|
Vodafone Group Plc Annual Report 2006 | 79 |
Notes
to the Consolidated Financial Statements
continued
3. Segmental analysis continued
Mobile telecommunications | Other operations | Group | ||||||||||||||||||||
Germany | Italy | Spain | UK | US | Other | Common | Total | Germany | Other | |||||||||||||
mobile | functions | |||||||||||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Segment liabilities(1) | (753 | ) | (1,370 | ) | (914 | ) | (827 | ) | | (2,638 | ) | (1,458 | ) | (7,960 | ) | (362 | ) | (26 | ) | (8,348 | ) | |
Unallocated liabilities: | ||||||||||||||||||||||
Current taxation liabilities | (4,448 | ) | ||||||||||||||||||||
Deferred tax liabilities | (5,670 | ) | ||||||||||||||||||||
Trade and other payables | (219 | ) | ||||||||||||||||||||
Short-term borrowings | (3,448 | ) | ||||||||||||||||||||
Long-term borrowings | (16,750 | ) | ||||||||||||||||||||
Liabilities included in disposal group for resale(3) | (2,543 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total liabilities | (41,426 | ) | ||||||||||||||||||||
Other segment items: | ||||||||||||||||||||||
Capitalised fixed asset additions(2) | 592 | 541 | 502 | 665 | | 1,456 | 112 | 3,868 | 129 | 8 | 4,005 | |||||||||||
Expenditure on other intangible assets | | 1 | | 11 | | 4 | | 16 | | | 16 | |||||||||||
Non-cash items: | ||||||||||||||||||||||
Depreciation | 653 | 398 | 281 | 486 | | 1,113 | 6 | 2,937 | 140 | 2 | 3,079 | |||||||||||
Amortisation of intangible assets | 514 | 190 | 114 | 438 | | 186 | 183 | 1,625 | | | 1,625 | |||||||||||
Impairment of goodwill | 19,400 | 3,600 | | | | 515 | | 23,515 | | | 23,515 | |||||||||||
Bad debt expense | 39 | 5 | 41 | 9 | | 64 | | 158 | 10 | | 168 | |||||||||||
Share-based payments | 6 | 7 | 5 | 18 | | 17 | 54 | 107 | 2 | | 109 | |||||||||||
Notes: |
(1) | Excluding unallocated items. |
(2) | Includes additions to property, plant and equipment and computer software, included with intangible assets. |
(3) | See note 29 for information on discontinued operations. |
80 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Continuing | Discontinued | |||||||||||||||||||||||||
Mobile telecommunications | Other operations | operations | operations | Group | ||||||||||||||||||||||
Germany | Italy | Spain | UK | US | Other | Common | Total | Germany | Other | |||||||||||||||||
mobile | functions | |||||||||||||||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||
31 March 2005 | ||||||||||||||||||||||||||
Service revenue | 5,320 | 4,091 | 2,963 | 4,498 | | 6,973 | 23,845 | 1,095 | | 24,940 | 5,610 | |||||||||||||||
Equipment and other revenue | 364 | 182 | 298 | 567 | | 664 | 2,075 | | | 2,075 | 1,786 | |||||||||||||||
Segment revenue | 5,684 | 4,273 | 3,261 | 5,065 | | 7,637 | 25,920 | 1,095 | | 27,015 | 7,396 | |||||||||||||||
Subsidiaries | 5,684 | | 3,261 | 5,065 | | 6,474 | 20,484 | 1,095 | | 21,579 | 7,396 | |||||||||||||||
Joint ventures | | 4,273 | | | | 1,184 | 5,457 | | | 5,457 | | |||||||||||||||
Less: intra-segment revenue | | | | | | (21 | ) | (21 | ) | | | (21 | ) | | ||||||||||||
Common functions | 123 | 123 | 123 | |||||||||||||||||||||||
Inter-segment revenue | (51 | ) | (36 | ) | (80 | ) | (47 | ) | | (84 | ) | (5 | ) | (303 | ) | | | (303 | ) | (1 | ) | |||||
Net revenue | 5,633 | 4,237 | 3,181 | 5,018 | | 7,553 | 118 | 25,740 | 1,095 | | 26,835 | 7,395 | ||||||||||||||
Less: revenue between mobile and | ||||||||||||||||||||||||||
other operations | (110 | ) | | | | | | (1 | ) | (111 | ) | (46 | ) | | (157 | ) | | |||||||||
Group revenue | 5,523 | 4,237 | 3,181 | 5,018 | | 7,553 | 117 | 25,629 | 1,049 | | 26,678 | 7,395 | ||||||||||||||
Segment result | 1,473 | 1,694 | 775 | 779 | | 1,198 | 5,919 | 64 | | 5,983 | 664 | |||||||||||||||
Subsidiaries | 1,473 | | 775 | 779 | | 893 | 3,920 | 64 | | 3,984 | 664 | |||||||||||||||
Joint ventures | | 1,694 | | | | 305 | 1,999 | | | 1,999 | ||||||||||||||||
Common functions | (85 | ) | (85 | ) | (85 | ) | ||||||||||||||||||||
Share of result in associated undertakings | | | | | 1,354 | 671 | 2,025 | | (45 | ) | 1,980 | | ||||||||||||||
Operating profit/(loss) | 1,473 | 1,694 | 775 | 779 | 1,354 | 1,869 | (85 | ) | 7,859 | 64 | (45 | ) | 7,878 | 664 | ||||||||||||
Non-operating income and expense | (7 | ) | 13 | |||||||||||||||||||||||
Investment income | 294 | 9 | ||||||||||||||||||||||||
Financing costs | (880 | ) | (20 | ) | ||||||||||||||||||||||
Profit before taxation | 7,285 | 666 | ||||||||||||||||||||||||
Tax on profit | (1,869 | ) | 436 | |||||||||||||||||||||||
Profit for the financial year | 5,416 | 1,102 | 6,518 | |||||||||||||||||||||||
Operating profit/(loss) | 1,473 | 1,694 | 775 | 779 | 1,354 | 1,869 | (85 | ) | 7,859 | 64 | (45 | ) | 7,878 | 664 | ||||||||||||
Add back: | ||||||||||||||||||||||||||
Impairment losses | | | | | | 475 | | 475 | | | 475 | | ||||||||||||||
Adjusted operating profit/(loss) | 1,473 | 1,694 | 775 | 779 | 1,354 | 2,344 | (85 | ) | 8,334 | 64 | (45 | ) | 8,353 | 664 | ||||||||||||
Non-current assets(1) | 44,101 | 22,768 | 12,288 | 9,014 | | 12,443 | 884 | 101,498 | 752 | | 102,250 | 13,754 | 116,004 | |||||||||||||
Investment in associated undertakings | | | | | 15,039 | 5,096 | 33 | 20,168 | | 66 | 20,234 | | 20,234 | |||||||||||||
Current assets(1) | 811 | 844 | 356 | 741 | | 1,301 | 118 | 4,171 | 221 | | 4,392 | 1,168 | 5,560 | |||||||||||||
Total segment assets(1) | 44,912 | 23,612 | 12,644 | 9,755 | 15,039 | 18,840 | 1,035 | 125,837 | 973 | 66 | 126,876 | 14,922 | 141,798 | |||||||||||||
Unallocated non-current assets: | ||||||||||||||||||||||||||
Deferred tax assets | 1,184 | |||||||||||||||||||||||||
Trade and other receivables | 364 | |||||||||||||||||||||||||
Unallocated current assets: | ||||||||||||||||||||||||||
Cash and cash equivalents | 3,769 | |||||||||||||||||||||||||
Trade and other receivables | 44 | |||||||||||||||||||||||||
Taxation recoverable | 38 | |||||||||||||||||||||||||
Total assets | 147,197 | |||||||||||||||||||||||||
Vodafone Group Plc Annual Report 2006 | 81 |
Notes
to the Consolidated Financial Statements
continued
3. Segmental analysis continued
Continuing | Discontinued | |||||||||||||||||||||||||
Mobile telecommunications | Other operations | operations | operations | Group | ||||||||||||||||||||||
Germany | Italy | Spain | UK | US | Other | Common | Total | Germany | Other | |||||||||||||||||
mobile | functions | |||||||||||||||||||||||||
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||
Segment liabilities(1) | (848 | ) | (1,237 | ) | (735 | ) | (939 | ) | | (2,295 | ) | (1,180 | ) | (7,234 | ) | (364 | ) | | (7,598 | ) | (1,477 | ) | (9,075 | ) | ||
Unallocated liabilities: | ||||||||||||||||||||||||||
Current taxation liabilities | (4,353 | ) | ||||||||||||||||||||||||
Deferred tax liabilities | (4,849 | ) | ||||||||||||||||||||||||
Short-term borrowings | (2,003 | ) | ||||||||||||||||||||||||
Long-term borrowings | (13,190 | ) | ||||||||||||||||||||||||
Trade and other payables | (79 | ) | ||||||||||||||||||||||||
Total liabilities | (33,549 | ) | ||||||||||||||||||||||||
Other segment items: | ||||||||||||||||||||||||||
Capitalised fixed asset additions(2) | 827 | 538 | 490 | 789 | | 1,333 | 136 | 4,113 | 112 | | 4,225 | 885 | ||||||||||||||
Expenditure on other intangible assets | | 8 | | | | 118 | | 126 | | | 126 | | ||||||||||||||
Non-cash items: | ||||||||||||||||||||||||||
Depreciation | 640 | 403 | 253 | 464 | | 961 | 11 | 2,732 | 153 | | 2,885 | 1,114 | ||||||||||||||
Amortisation of intangible assets | 514 | 184 | 101 | 468 | | 142 | 7 | 1,416 | | | 1,416 | 100 | ||||||||||||||
Impairment of goodwill | | | | | | 475 | | 475 | | | 475 | | ||||||||||||||
Bad debt expense | 50 | 13 | 35 | 36 | | 39 | | 173 | 10 | | 183 | 39 | ||||||||||||||
Share-based payments | 3 | 4 | 2 | 15 | | 11 | 94 | 129 | 1 | | 130 | 7 | ||||||||||||||
Notes: |
(1) | Excluding unallocated items. |
(2) | Includes additions to property, plant and equipment and computer software, included with intangible assets. |
82 | Vodafone Group Plc Annual Report 2006 |
Financials | |
4. Operating
(loss)/profit
Operating
(loss)/profit has been arrived at after charging/(crediting):
2006 | 2005 | |||
£m | £m | |||
Net foreign exchange gains | | (10 | ) | |
Depreciation of property, plant and equipment: | ||||
Owned assets | 3,069 | 2,871 | ||
Leased assets | 10 | 14 | ||
Amortisation of intangible assets | 1,625 | 1,416 | ||
Impairment of goodwill | 23,515 | 475 | ||
Research and development expenditure | 206 | 198 | ||
Advertising costs | 670 | 660 | ||
Staff costs (see note 34) | 2,310 | 2,185 | ||
Operating lease rentals payable: | ||||
Plant and machinery | 35 | 37 | ||
Other assets including fixed line rentals | 933 | 873 | ||
Loss on disposal of property, plant and equipment | 69 | 68 | ||
Own costs capitalised attributable to the construction or acquisition of property, plant and equipment | (256 | ) | (250 | ) |
The total remuneration of the Groups auditors, Deloitte & Touche LLP, and its affiliates for services provided to the Groups subsidiary undertakings is analysed below:
2006 | 2005 | |||
£m | £m | |||
Audit fees | 4 | 4 | ||
Audit-related fees: | ||||
Audit regulatory reporting | 1 | | ||
Due diligence reviews | 1 | 1 | ||
Tax fees | 1 | 1 | ||
Other fees | 1 | 1 | ||
8 | 7 | |||
The total remuneration includes £1 million (2005: £1 million) in respect of the Groups discontinued operations in Japan.
In addition to the above, the Groups joint ventures and associated undertakings paid fees totalling £2 million (2005: £2 million) and £4 million (2005: £5 million), respectively, to Deloitte & Touche LLP and its affiliates during the year.
A description of the work performed by the Audit Committee in order to safeguard auditor independence when non audit services are provided is set out in the Corporate Governance section on page 57. In the year ended 31 March 2006, the Audit Committee pre-approved all services.
Vodafone Group Plc Annual Report 2006 | 83 |
Notes to the Consolidated Financial Statements
continued
5. Investment income and financing costs
2006 | 2005 | |||
£m | £m | |||
Investment income | ||||
Available-for-sale investments: | ||||
Dividends received | 41 | 19 | ||
Loans and receivables | 153 | 201 | ||
Fair value adjustments recognised in the income statement: | ||||
Derivatives - foreign exchange contracts and interest rate futures | 159 | 74 | ||
353 | 294 | |||
Financing costs | ||||
Items in hedge relationships: | ||||
Other loans | 510 | 472 | ||
Interest rate swaps | (118 | ) | (198 | ) |
Dividends on redeemable preference shares | 48 | | ||
Fair value hedging instrument | 213 | 231 | ||
Fair value of hedged item | (186 | ) | (213 | ) |
Other financial liabilities held at amortised cost: | ||||
Bank loans and overdrafts | 126 | 129 | ||
Other loans | 78 | 68 | ||
Dividends on redeemable preference shares | | 46 | ||
Potential interest charge on settlement of tax issues | 329 | 245 | ||
Fair value adjustments recognised in the income statement: | ||||
Derivatives - forward starting swaps | (48 | ) | 25 | |
Equity put rights and similar arrangements(1) | 161 | 67 | ||
Finance leases | 7 | 8 | ||
1,120 | 880 | |||
Net financing costs | 767 | 586 | ||
Note: | |
(1) | The fair value adjustments for equity put rights and similar arrangements relates to the Groups arrangements with Telecom Egypt and its minority partners in the Groups other operations in Germany. Further information is provided in Options agreements and similar arrangements on page 42. |
84 | Vodafone Group Plc Annual Report 2006 |
Financials | |
6. Taxation
(Loss)/profit
before tax is split as follows:
2006 | 2005 | |||
£m | £m | |||
United Kingdom profit before tax | 491 | 765 | ||
Overseas (loss)/profit before tax | (15,344 | ) | 6,520 | |
Total (loss)/profit before tax | (14,853 | ) | 7,285 | |
Income
tax expense Tax on (loss)/profit from continuing operations, as shown in the income statement, is as follows: |
||||
2006 | 2005 | |||
£m | £m | |||
United Kingdom corporation tax expense/(income) at 30%: | ||||
Current year | 169 | 339 | ||
Adjustments in respect of prior years | (15 | ) | (79 | ) |
154 | 260 | |||
Overseas current tax expense/(income): | ||||
Current year | 2,077 | 1,774 | ||
Adjustments in respect of prior years | (418 | ) | (154 | ) |
1,659 | 1,620 | |||
Total current tax expense | 1,813 | 1,880 | ||
Deferred tax on origination and reversal of temporary differences: | ||||
United Kingdom deferred tax | 444 | 234 | ||
Overseas deferred tax | 123 | (245 | ) | |
Total deferred tax expense/(income) | 567 | (11 | ) | |
Total tax on (loss)/profit from continuing operations | 2,380 | 1,869 | ||
Tax recognised directly in equity | ||||
2006 | 2005 | |||
£m | £m | |||
Current tax credit | (6 | ) | (10 | ) |
Deferred tax credit | (11 | ) | (35 | ) |
Total tax credited directly to equity | (17 | ) | (45 | ) |
Factors affecting tax expense for the year
The
table below explains the differences between the expected tax expense on continuing
operations, at the UK statutory tax rate of 30% for 2006 and 2005, and the Groups total
tax expense for each year. Further discussion of the current year tax expense can be found in the section titled Performance Operating Results Group Overview 2006 financial year compared to 2005 financial year Taxation.
2006 | 2005 | |||
£m | £m | |||
(Loss)/profit before tax on continuing operations as shown in the income statement | (14,853 | ) | 7,285 | |
Expected tax (credit)/ charge on profit from continuing operations at UK statutory tax rate | (4,456 | ) | 2,186 | |
Effect of taxation of associated undertakings, reported within operating profit | 133 | 134 | ||
Non deductible impairment losses | 7,055 | 143 | ||
Expected tax charge at UK statutory rate on profit from continuing operations, before impairment losses and taxation of associates | 2,732 | 2,463 | ||
Effect of different statutory tax rates of overseas jurisdictions | 411 | 433 | ||
Other expenses not deductible for tax purposes | 299 | 367 | ||
Deferred tax on overseas earnings | (78 | ) | (66 | ) |
Effect of previously unrecognised temporary differences | (71 | ) | (463 | ) |
Prior period adjustments | (470 | ) | (417 | ) |
Exclude taxation of associated undertakings | (443 | ) | (448 | ) |
Total tax expense on (loss)/profit from continuing operations | 2,380 | 1,869 | ||
Vodafone Group Plc Annual Report 2006 | 85 |
Notes
to the Consolidated Financial Statements
continued
6. Taxation
continued
Deferred tax
Analysis
of movements in net deferred tax balance during the year:
2006 | ||
£m | ||
1 April 2005 | (3,665 | ) |
Reclassification as held for sale | (717 | ) |
Exchange movements | (217 | ) |
Charged to the income statement | (567 | ) |
Credited to the statement of recognised income and expense | 8 | |
Acquisitions and disposals | (372 | ) |
31 March 2006 | (5,530 | ) |
Deferred tax assets and liabilities in respect of continuing operations, before offset of balances within countries, are as follows:
Net recognised | Amount credited | |||||||||
Less: | deferred tax | /(charged) in | ||||||||
Gross deferred | Gross deferred | amounts | asset/ | income | ||||||
tax asset | tax liability | unrecognised | (liability) | statement | ||||||
£m | £m | £m | £m | £m | ||||||
Accelerated tax depreciation | 155 | (1,702 | ) | (48 | ) | (1,595 | ) | (91 | ) | |
Accelerated tax depreciation | 155 | (1,702 | ) | (48 | ) | (1,595 | ) | (91 | ) | |
Tax losses | 9,565 | | (9,191 | ) | 374 | (85 | ) | |||
Deferred tax on overseas earnings | | (4,025 | ) | | (4,025 | ) | (318 | ) | ||
Other short term timing differences | 4,073 | (1,418 | ) | (2,939 | ) | (284 | ) | (73 | ) | |
31 March 2006 | 13,793 | (7,145 | ) | (12,178 | ) | (5,530 | ) | (567 | ) | |
Analysed in the balance sheet, after offset of balances within countries, as: | £m | ||
Deferred tax asset | 140 | ||
Deferred tax liability | (5,670 | ) | |
(5,530 | ) | ||
Net recognised | Amount credited | |||||||||
Less: | deferred tax | /(charged) in | ||||||||
Gross deferred | Gross deferred | amounts | asset/ | income | ||||||
tax asset | tax liability | unrecognised | (liability) | statement | ||||||
£m | £m | £m | £m | £m | ||||||
Accelerated tax depreciation | 293 | (1,604 | ) | (20 | ) | (1,331 | ) | (175 | ) | |
Tax losses | 8,248 | | (7,370 | ) | 878 | 69 | ||||
Deferred tax on overseas earnings | | (3,427 | ) | | (3,427 | ) | (245 | ) | ||
Other short term timing differences | 5,017 | (1,065 | ) | (3,737 | ) | 215 | 362 | |||
31 March 2005 | 13,558 | (6,096 | ) | (11,127 | ) | (3,665 | ) | 11 | ||
Analysed in the balance sheet, after offset of balances within countries, as: | £m | ||
Deferred tax asset | 1,184 | ||
Deferred tax liability | (4,849 | ) | |
(3,665 | ) | ||
Deferred tax balances at 31 March 2005 above are inclusive of discontinued operations. The amounts reported for the 2005 income statement are for continuing operations. Further deferred tax credits of £35 million for accelerated tax depreciation, £433 million tax losses and £103 million other short term timing differences are included within amounts related to discontinued operations in the 2005 income statement.
Factors affecting the tax charge in future years
Factors
that may affect
the Groups future tax charge include one-off restructuring benefits, the
resolution of open issues, future planning opportunities, corporate acquisitions
and disposals, changes in tax legislation and rates, and the use of brought forward
tax losses.
In particular, the Groups subsidiary Vodafone 2 is responding to an enquiry by HM Revenue & Customs (HMRC) with regard to the UK tax treatment of one of its Luxembourg holding companies under the controlled foreign companies (CFC) rules. Further details in relation to this enquiry are included in note 31 Contingent Liabilities. At 31 March 2006, the Group holds provisions of £1,822 million tax and £276 million interest in respect of the potential UK tax liability that may arise from this enquiry (2005: £1,600 million tax and £157 million interest). Management considers these amounts are sufficient to settle any assessments that may result from the enquiry. However, the amount ultimately paid may differ materially from the amount accrued and, therefore, could affect the overall profitability of the Group in future periods. In the absence of any material unexpected developments, the provisions are likely to be reassessed when the views of the European Court of Justice become known.
86 | Vodafone Group Plc Annual Report 2006 |
Financials | |
At 31 March 2006, the gross amount and expiry dates of losses available for carry forward are as follows:
Expiring within | ||||||
5 years | Unlimited | Total | ||||
£m | £m | £m | ||||
Losses for which a deferred tax asset is recognised | 1 | 1,451 | 1,452 | |||
Losses for which no deferred tax is recognised | 172 | 31,331 | 31,503 | |||
173 | 32,782 | 32,955 | ||||
Included above are losses amounting to £1,939 million (2005: £1,870 million) in respect of UK subsidiaries which are only available for offset against future capital gains and since it is uncertain whether these losses will be utilised, no deferred tax asset has been recognised.
The losses above also include £27,545 million (2005 £20,898 million) that have arisen in overseas holding companies as a result of revaluations of those companies investments for local GAAP purposes. Since it is uncertain whether these losses will be utilised no deferred tax asset has been recognised.
In addition to the losses described above, the Group has potential tax losses of £35,250 million (2005: £34,674 million) in respect of a write down in the value of investments in Germany. These losses have to date been denied by the German tax authorities. Vodafone is in continuing discussions with them regarding the availability of the losses, however the outcome of these discussions and the timing of the resolution are not yet known. The Group has not recognised the availability of the losses, nor the income statement benefit arising from them, due to this uncertainty. If upon resolution a benefit is recognised, it may impact both the amount of current income taxes provided since the date of initial deduction and the amount of the benefit from tax losses the Group will recognise. The recognition of these benefits could affect the overall profitability of the Group in future periods.
The Group holds provisions in respect of deferred taxation that would arise if temporary differences on investments in subsidiaries, associates and interests in joint ventures were to be realised after the balance sheet date. No deferred tax liability has been recognised in respect of a further £23,038 million (2005: £15,060 million) of unremitted earnings of subsidiaries, associates and joint ventures because the Group is in a position to control the timing of the reversal of the temporary difference and it is probable that such differences will not reverse in the foreseeable future.
7. Equity dividends
2006 | 2005 | |||
£m | £m | |||
Declared and paid during the financial year: | ||||
Final dividend for the year ended 31 March 2005: 2.16 pence per share | ||||
(2004: 1.078 pence per share) | 1,386 | 728 | ||
Interim dividend for the year ended 31 March 2006: 2.20 pence per share | ||||
(2005: 1.91 pence per share) | 1,367 | 1,263 | ||
2,753 | 1,991 | |||
Proposed or declared after the balance sheet date and not recognised as a liability: | ||||
Final dividend for the year ended 31 March 2006: 3.87 pence per share | ||||
(2005: 2.16 pence per share) | 2,327 | 1,386 | ||
Vodafone Group Plc Annual Report 2006 | 87 |
Notes to the Consolidated Financial Statements
continued
8. (Loss)/earnings per share
2006 | 2005 | |||
Millions | Millions | |||
Weighted average number of shares for basic (loss)/earnings per share | 62,607 | 66,196 | ||
Effect of dilutive potential shares: restricted shares and share options | | 231 | ||
Weighted average number of shares for diluted (loss)/earnings per share | 62,607 | 66,427 | ||
£m | £m | |||
(Loss)/earnings for basic and diluted earnings per share | ||||
Continuing operations | (17,318 | ) | 5,375 | |
Discontinued operations | (4,598 | ) | 1,035 | |
Total | (21,916 | ) | 6,410 | |
Pence per share | Pence per share | |||
(Loss)/earnings per share from continuing operations: | ||||
Basic (loss)/earnings per share | (27.66 | ) | 8.12 | |
Diluted (loss)/earnings per share(2) | (27.66 | ) | 8.09 | |
(Loss)/earnings per share from continuing and discontinued operations(1): | ||||
Basic (loss)/earnings per share | (35.01 | ) | 9.68 | |
Diluted (loss)/earnings per share(2) | (35.01 | ) | 9.65 | |
£m | £m | |||
Basic and diluted (loss)/earnings per share for continuing operations is stated inclusive of the following items: | ||||
Impairment losses (note 10) | (23,515 | ) | (475 | ) |
Other income and expense | 15 | | ||
Share of associated undertakings non-operating income (note 14) | 17 | | ||
Non-operating income and expense | (2 | ) | (7 | ) |
Changes in fair value of equity put rights and similar arrangements (note 5)(3) | (161 | ) | (67 | ) |
Tax on the above items | | (3 | ) | |
Pence per share | Pence per share | |||
Impairment losses | (37.56 | ) | (0.72 | ) |
Other income and expense | 0.02 | | ||
Share of associated undertakings non-operating income | 0.03 | | ||
Non-operating income and expense | | (0.01 | ) | |
Changes in fair value of equity put rights and similar arrangements(3) | (0.26 | ) | (0.10 | ) |
Tax on the above items | | | ||
Notes: | |
(1) | See note 29 for further information on discontinued operations including the per share effect of discontinued operations. |
(2) | In the year ended 31 March 2006, 183 million shares have been excluded from the calculation of diluted loss per share as they are anti dilutive. |
(3) | Comprises
the fair value movement in relation to the potential put rights held by
Telecom Egypt over its 25.5% interest in Vodafone Egypt and the fair value
of a financial liability in relation to the minority partners of Arcor,
the Groups non-mobile operation in Germany. Following the sale of 16.9% of Vodafone Egypt to Telecom Egypt, the Group signed a shareholder agreement with Telecom Egypt setting out the basis under which the Group and Telecom Egypt would each contribute a 25.5% interest in Vodafone Egypt to a newly formed company to be 50% owned by each party. Within this shareholder agreement, Telecom Egypt was granted a put option over its entire interest in Vodafone Egypt giving Telecom Egypt the right to put its shares back to the Group at deemed fair value. In the 2006 financial year, the shareholder agreement between Telecom Egypt and Vodafone expired and the associated rights and obligations contained in the shareholder agreement terminated, including the aforementioned put option. However, the original shareholders agreement contained an obligation on both parties to use reasonable efforts to renegotiate a revised shareholder agreement for their direct shareholding in Vodafone Egypt on substantially the same terms as the original agreement, which may or may not lead to a new agreement containing a put option under the terms described above. As of 31 March 2006, the parties have not agreed to abandon such efforts and as such the financial liability relating to the initial shareholder agreement has been retained in the Groups balance sheet as at 31 March 2006. Fair value movements are determined by the reference to the quoted share price of Vodafone Egypt. For the year ended 31 March 2006, a charge of £105 million was recognised. The capital structure of Arcor provides all partners, including Vodafone, the right to withdraw capital from 31 December 2026 onwards and this right in relation to the minority partner has been recognised as a financial liability. Fair value movements are determined by reference to a calculation of enterprise value of the partnership. For the year ended 31 March 2006, a charge of £56 million was recognised. The valuation of these financial liabilities is inherently unpredictable and changes in the fair value could have a material impact on the future results and financial position of Vodafone. |
88 | Vodafone Group Plc Annual Report 2006 |
Financials | |
9. Intangible assets
Licences and | Computer | |||||||||
Goodwill | spectrum fees | software | Other | Total | ||||||
£m | £m | £m | £m | £m | ||||||
Cost: | ||||||||||
1 April 2004 | 78,753 | 15,178 | 2,432 | | 96,363 | |||||
Exchange movements | 1,519 | 254 | 39 | (5 | ) | 1,807 | ||||
Arising on acquisition | 1,239 | 229 | | 654 | 2,122 | |||||
Additions | | 126 | 528 | | 654 | |||||
Disposals | (37 | ) | | (35 | ) | | (72 | ) | ||
31 March 2005 | 81,474 | 15,787 | 2,964 | 649 | 100,874 | |||||
Reclassification as held for sale | (8,295 | ) | (214 | ) | (36 | ) | (620 | ) | (9,165 | ) |
73,179 | 15,573 | 2,928 | 29 | 91,709 | ||||||
Exchange movements | 1,291 | 216 | 51 | 22 | 1,580 | |||||
Arising on acquisition | 2,802 | 1,196 | 20 | 699 | 4,717 | |||||
Additions | | 6 | 616 | 10 | 632 | |||||
Disposals | (1,142 | ) | | (43 | ) | (5 | ) | (1,190 | ) | |
31 March 2006 | 76,130 | 16,991 | 3,572 | 755 | 97,448 | |||||
Accumulated impairment losses and amortisation: | ||||||||||
1 April 2004 | | 361 | 1,378 | | 1,739 | |||||
Exchange movements | | 12 | 21 | (2 | ) | 31 | ||||
Amortisation charge for the year(1) | | 926 | 494 | 96 | 1,516 | |||||
Impairment losses | 475 | | | | 475 | |||||
Disposals | | | (35 | ) | | (35 | ) | |||
31 March 2005 | 475 | 1,299 | 1,858 | 94 | 3,726 | |||||
Reclassification as held for sale | | (8 | ) | (7 | ) | (90 | ) | (105 | ) | |
475 | 1,291 | 1,851 | 4 | 3,621 | ||||||
Exchange movements | 513 | 38 | 33 | 4 | 588 | |||||
Amortisation charge for the year | | 1,030 | 493 | 102 | 1,625 | |||||
Impairment losses | 23,515 | | | | 23,515 | |||||
Disposals | (979 | ) | | (38 | ) | (2 | ) | (1,019 | ) | |
31 March 2006 | 23,524 | 2,359 | 2,339 | 108 | 28,330 | |||||
Net book value: | ||||||||||
31 March 2006 | 52,606 | 14,632 | 1,233 | 647 | 69,118 | |||||
31 March 2005 | 80,999 | 14,488 | 1,106 | 555 | 97,148 | |||||
Note: | |
(1) | The amortisation charge for the year includes £100 million in relation to discontinued operations |
The net book value at 31 March 2006 and expiry dates of the most significant purchased licences, are as follows:
2006 | ||||
Expiry date | £m | |||
Germany | December 2020 | 5,165 | ||
UK | December 2021 | 5,245 | ||
Vodafone Group Plc Annual Report 2006 | 89 |
Notes
to the Consolidated Financial Statements
continued
9. Intangible
assets continued
Goodwill,
analysed by reportable segment, is as follows:
Other | Other | |||||||||||||||
mobile | operations | |||||||||||||||
Germany | Italy | Japan | Spain | UK | operations | Germany | Total | |||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||
Cost: | ||||||||||||||||
1 April 2004 | 34,824 | 19,291 | 7,523 | 10,125 | 713 | 6,237 | 40 | 78,753 | ||||||||
Exchange movements | 941 | 521 | (428 | ) | 274 | | 210 | 1 | 1,519 | |||||||
Arising on acquisition | | | 1,200 | | | 39 | | 1,239 | ||||||||
Disposals | | | | | | (37 | ) | | (37 | ) | ||||||
31 March 2005 | 35,765 | 19,812 | 8,295 | 10,399 | 713 | 6,449 | 41 | 81,474 | ||||||||
Reclassification as held for sale | | | (8,295 | ) | | | | | (8,295 | ) | ||||||
35,765 | 19,812 | | 10,399 | 713 | 6,449 | 41 | 73,179 | |||||||||
Exchange movements | 595 | 330 | | 172 | | 192 | 2 | 1,291 | ||||||||
Arising on acquisition | | 15 | | | 3 | 2,784 | | 2,802 | ||||||||
Disposals | | | | | | (1,142 | ) | | (1,142 | ) | ||||||
31 March 2006 | 36,360 | 20,157 | | 10,571 | 716 | 8,283 | 43 | 76,130 | ||||||||
Accumulated impairment losses: | ||||||||||||||||
1 April 2004 | | | | | | | | | ||||||||
Impairment losses | | | | | | 475 | | 475 | ||||||||
31 March 2005 | | | | | | 475 | | 475 | ||||||||
Exchange movements | 442 | 82 | | | | (11 | ) | | 513 | |||||||
Impairment losses | 19,400 | 3,600 | | | | 515 | | 23,515 | ||||||||
Disposals | | | | | | (979 | ) | | (979 | ) | ||||||
31 March 2006 | 19,842 | 3,682 | | | | | | 23,524 | ||||||||
Net book value: | ||||||||||||||||
31 March 2006 | 16,518 | 16,475 | | 10,571 | 716 | 8,283 | 43 | 52,606 | ||||||||
31 March 2005 | 35,765 | 19,812 | 8,295 | 10,399 | 713 | 5,974 | 41 | 80,999 | ||||||||
90 |
Vodafone Group Plc Annual Report 2006 |
Financials | |
10. Impairment
The
following cash-generating units, being the lowest level of asset for which
there are
separately identifiable cash flows, have carrying amounts of goodwill that
are considered
significant in comparison with the Groups total goodwill balance:
2006 | 2005 | |||
£m | £m | |||
Germany | 16,518 | 35,765 | ||
Italy | 16,475 | 19,812 | ||
Spain | 10,571 | 10,399 | ||
Japan(1) | | 8,295 | ||
43,564 | 74,271 | |||
Multiple units without significant goodwill | 9,042 | 6,728 | ||
52,606 | 80,999 | |||
Note: | |
(1) | Goodwill of £8,295 million relating to the Groups mobile operations in Japan has been reclassified to assets included in the disposal group held for sale, following the Groups announcement of its intention to dispose of its operations in Japan on17 March 2006. |
In accordance with accounting standards, the Group undertakes an annual test for impairment of its cash generating units. The most recent test was undertaken at 31 January 2006. The tests in the years ended 31 March 2006 and 2005 were based on value in use calculations.
Impairment losses
The impairment losses recognised in the income statement, as a separate line item within operating profit, in respect of goodwill are as follows:
2006 | 2005 | |||
£m | £m | |||
Germany | 19,400 | | ||
Italy | 3,600 | | ||
Other Mobile Operations Sweden | 515 | 475 | ||
23,515 | 475 | |||
Germany and Italy
The
carrying value
of goodwill of the Groups mobile operations in Germany and Italy, with
each representing a reportable segment, has been impaired due to Vodafone having
revised its view of longer term trends for these businesses given certain developments
in the current market environment.
The German market has seen recent intensification in price competition, principally from new market entrants, together with high levels of penetration and continued regulated reductions in incoming call rates.
In Italy, competitive pressures are increasing with the mobile network operators competing aggressively on subsidies and, increasingly, on price.
The impairment losses were determined as part of the annual test for impairment and were based on value in use calculations using the pre-tax risk adjusted discount rates disclosed on page 92.
Sweden
The
impairment of
the carrying value of goodwill of the Groups mobile operation in Sweden in the years ended 31 March 2006 and 2005 resulted from fierce competition in the
Swedish market combined with onerous 3G licence obligations. Vodafone Sweden forms part of the Groups
Other Mobile Operations, which is a reportable segment.
Prior to its disposal in the year in the year ended 31 March 2006, the carrying value of goodwill was tested for impairment at an interim date as increased competition provided an indicator that the goodwill may have been further impaired. The recoverable amount of the goodwill was determined as the fair value less costs to sell, reflecting the announcement on 31 October 2005 that the Groups 100% interest in Vodafone Sweden was to be sold for €953 million (£653 million). The sale completed on 5 January 2006.
In the year ended 31 March 2005, the impairment was determined as part of the annual test for impairment and was based on value in use calculations. A pre-tax risk adjusted discount rate of 9.7% was used in the value in use calculation.
Key assumptions used in the value in use calculations
The Group prepares and internally approves formal ten year plans for its businesses. For the year ended 31 March 2005, the Group used these plans for its value in use calculations.
The plans included cash flow projections for the mobile businesses which were expected to have growth rates in excess of the long-term average growth rates, beyond an initial five year period, for the markets in which they operate.
In the year ended 31 March 2006, the most recent management plans have shown that the need to reflect a differing growth profile beyond an initial five year period has diminished in a number of the Groups key operating companies as the Group has revised its view of longer term trends. Accordingly, the directors believe it is now appropriate to use projections of five years for its value in use calculations, except in markets which are forecast to grow ahead of the long term growth rate for the market. At 31 March 2006, the value in use calculation for the Groups joint venture in India used a ten year plan reflecting the low penetration of mobile telecommunications in the country and the expectation of strong revenue growth throughout the ten year plan.
Vodafone Group Plc Annual Report 2006 | 91 |
Notes
to the Consolidated Financial Statements
continued
10. Impairment
continued
The key assumptions
used in determining the value in use are:
Assumption | How determined | |
Budgeted EBITDA | Budgeted EBITDA, calculated as adjusted operating profit before depreciation and amortisation, has been based on past experience adjusted for the following: | |
| voice and messaging revenue is expected to benefit from increased usage from new customers, the introduction of new services and traffic moving from fixed networks to mobile networks, though these factors will be partially offset by increased competitor activity, which may result in price declines, and the trend of falling termination rates; | |
| non-messaging data revenue is expected to continue to grow strongly as the penetration of 3G enabled devices rises and new products and services are introduced; and | |
| margins are expected to be impacted by negative factors such as an increase in the cost of acquiring and retaining customers in increasingly competitive markets and the expectation of further termination rates cuts by regulators; and by positive factors such as the efficiencies expected from the implementation of One Vodafone initiatives. | |
Budgeted capital expenditure | The cash flow forecasts for capital expenditure is based on past experience and includes the ongoing capital expenditure required to provide enhanced voice and data products and services and to meet the population coverage requirements of certain of the Groups licences. Capital expenditure includes cash outflows for the purchase of property, plant and equipment and computer software. | |
Long term growth rate | For mobile businesses, a long term growth rate into perpetuity has been determined as the lower of: | |
| the nominal GDP rates for the country of operation; and | |
| the long term compound annual growth rate in EBITDA implied by the business plan. | |
For non-mobile businesses, no growth is expected beyond managements plans for the initial five year period. | ||
Pre-tax risk adjusted discount rate | The discount rate applied to the cash flows of each the Groups operations is based on the risk free rate for ten year bonds issued by the government in the respective market, adjusted for a risk premium to reflect both the increased risk of investing in equities and the systematic risk of the specific Group operating company. In making this adjustment, inputs required are the equity market risk premium (that is the required increased return required over and above a risk free rate by an investor who is investing in the market as a whole) and the risk adjustment (beta) applied to reflect the risk of the specific Group operating company relative to the market as a whole. | |
In determining the risk adjusted discount rate, management have applied an adjustment for the systematic risk to each of the Groups operations determined using an average of the betas of comparable listed mobile telecommunications companies and, where available and appropriate, across a specific territory. Management have used a forward looking equity market risk premium that takes into consideration both studies by independent economists, the average equity market risk premium over the past ten years and the market risk premiums typically used by investment banks in evaluating acquisition proposals. | ||
The following assumptions have been applied in the value in use calculations as follows: |
Pre-tax risk adjusted discount rate | Long term growth rate | |||||||
2006 | 2005 | 2006 | 2005 | |||||
% | % | % | % | |||||
Germany | 10.1 | 9.6 | 1.1 | 2.7 | ||||
Italy | 10.1 | 9.2 | 1.5 | 4.1 | ||||
Spain | 9.0 | 9.3 | 3.3 | 3.4 | ||||
Impact of
a reasonably possible change in a key assumption
For those cash generating units, or the aggregate of cash generating units which are not individually significant, where a reasonably possible change in a key assumption would lead to
an impairment loss, the following provides additional information on the sensitivity of such a change on the recoverable amount.
Germany | Italy | |||
£m | £m | |||
Amount by which recoverable amount exceeded the carrying value at 31 January 2006 | | | ||
% |
% |
|||
Key assumptions: | ||||
Budgeted EBITDA(1) | 0.3 | (1.8 | ) | |
Budgeted capital expenditure(2) | 9.3 to 9.0 | 13.4 to 8.5 | ||
Notes: | |
(1) | Compound annual growth rates in the initial five years of the Groups approved financial plans. |
(2) | Range of capital expenditure as a percentage of revenue in the initial five years of the Groups approved plans. |
As noted above, there has been an impairment loss recognised in the year ended 31 March 2006 in respect of Germany and Italy, whose carrying values, therefore, equalled their respective recoverable amounts at 31 January 2006, the date of the Groups annual impairment test. As a result, any adverse change in key assumption would cause a further impairment loss to be recognised.
92 | Vodafone Group Plc Annual Report 2006 |
Financials | |
11. Property, plant and equipment
Equipment, | ||||||||
Land and | fixtures and | Network | ||||||
buildings | fittings | infrastructure | Total | |||||
£m | £m | £m | £m | |||||
Cost: | ||||||||
1 April 2004 | 1,193 | 3,893 | 22,759 | 27,845 | ||||
Exchange movements | 8 | 38 | (54 | ) | (8 | ) | ||
Additions | 125 | 1,393 | 3,064 | 4,582 | ||||
Disposals | (23 | ) | (253 | ) | (368 | ) | (644 | ) |
31 March 2005 | 1,303 | 5,071 | 25,401 | 31,775 | ||||
Reclassification as held for sale | (209 | ) | (201 | ) | (7,599 | ) | (8,009 | ) |
|
|
|
||||||
1,094 | 4,870 | 17,802 | 23,766 | |||||
Exchange movements | 11 | 199 | 252 | 462 | ||||
Arising on acquisition | 3 | 404 | 492 | 899 | ||||
Additions | 55 | 984 | 2,350 | 3,389 | ||||
Disposal of businesses | (6 | ) | (111) | (820 | ) | (937 | ||
Disposals | (67 | ) | (257 | ) | (412 | ) | (736 | ) |
Reclassifications | 22 | 306 | (328 | ) | | |||
|
|
|
||||||
31 March 2006 | 1,112 | 6,395 | 19,336 | 26,843 | ||||
|
|
|
||||||
Accumulated depreciation and impairment: | ||||||||
1 April 2004 | 280 | 2,060 | 8,393 | 10,733 | ||||
Exchange movements | 4 | 16 | (6 | ) | 14 | |||
Charge for the year(1) | 81 | 791 | 3,127 | 3,999 | ||||
Disposals | (9 | ) | (204 | ) | (200 | ) | (413 | ) |
|
|
|
||||||
31 March 2005 | 356 | 2,663 | 11,314 | 14,333 | ||||
Reclassification as held for sale | (44 | ) | (101 | ) | (3,347 | ) | (3,492 | ) |
|
|
|
||||||
312 | 2,562 | 7,967 | 10,841 | |||||
Exchange movements | 3 | 90 | 132 | 225 | ||||
Charge for the year | 62 | 905 | 2,112 | 3,079 | ||||
Disposal of businesses | (1 | ) | (75 | ) | (281 | ) | (357 | ) |
Disposals | (26 | ) | (243 | ) | (336 | ) | (605 | ) |
Reclassifications | 3 | 306 | (309 | ) | | |||
|
|
|
||||||
31 March 2006 | 353 | 3,545 | 9,285 | 13,183 | ||||
|
|
|
||||||
Net book value: | ||||||||
31 March 2006 | 759 | 2,850 | 10,051 | 13,660 | ||||
|
|
|
||||||
31 March 2005 | 947 | 2,408 | 14,087 | 17,442 | ||||
Note: | |
(1) | The depreciation charge for the year includes £1,114 million in relation to discontinued operations. |
The net book value of equipment, fixtures and fittings and network infrastructure includes £2 million and £50 million, respectively (2005: £3 million and £118 million) in relation to assets held under finance leases (see note 24).
Included in the net book value of land and buildings, equipment, fixtures and fittings and network infrastructure are assets in the course of construction, which are not depreciated, with a cost of £30 million, £290 million and £677 million, respectively (2005: £15 million, £360 million and £837 million).
Borrowings of £426 million (2005: £327 million) have been secured against property, plant and equipment.
Vodafone Group Plc Annual Report 2006 | 93 |
Notes
to the Consolidated Financial Statements
continued
12. Principal
subsidiary undertakings
At 31 March
2006, the Company had the following subsidiary undertakings carrying on businesses
which principally affect the profits and assets of the Group. They have the
same year end date as the Company, unless otherwise stated, and have been included
in the Consolidated Financial Statements.
Unless otherwise stated, the Companys principal subsidiary undertakings all have share capital consisting solely of ordinary shares and are indirectly held. The country of incorporation or registration of all subsidiary undertakings is also their principal place of operation.
Country of | ||||
incorporation | Percentage | (1) | ||
Name | Principal activity | or registration | shareholdings | |
Arcor AG & Co. KG(2) | Fixed line operator | Germany | 73.7 | |
Vodafone Albania Sh.A.(3) | Mobile network operator | Albania | 99.9 | |
Vodafone Americas Inc.(4) | Holding company | USA | 100.0 | |
Vodafone Czech Republic a.s.(5) | Mobile network operator | Czech Republic | 100.0 | |
Vodafone D2 GmbH | Mobile network operator | Germany | 100.0 | |
Vodafone Egypt Telecommunications S.A.E. | Mobile network operator | Egypt | 50.1 | |
Vodafone Espana S.A. | Mobile network operator | Spain | 100.0 | |
Vodafone Europe B.V. | Holding company | Netherlands | 100.0 | |
Vodafone Group Services Limited(6) | Global products and services provider | England | 100.0 | |
Vodafone Holding GmbH(3) | Holding company | Germany | 100.0 | |
Vodafone Holdings Europe S.L. | Holding company | Spain | 100.0 | |
Vodafone Hungary Mobile Telecommunications Limited | Mobile network operator | Hungary | 100.0 | |
Vodafone International Holdings B.V. | Holding company | Netherlands | 100.0 | |
Vodafone Investments Luxembourg S.a.r.l. | Holding company | Luxembourg | 100.0 | |
Vodafone Ireland Limited | Mobile network operator | Ireland | 100.0 | |
Vodafone K.K.(7) | Mobile network operator | Japan | 97.7 | |
Vodafone Libertel N.V. | Mobile network operator | Netherlands | 99.9 | |
Vodafone Limited | Mobile network operator | England | 100.0 | |
Vodafone Malta Limited | Mobile network operator | Malta | 100.0 | |
Vodafone Marketing S.a.r.l. | Provider of Partner Network services | Luxembourg | 100.0 | |
Vodafone Network Pty Limited | Mobile network operator | Australia | 100.0 | |
Vodafone New Zealand Limited | Mobile network operator | New Zealand | 100.0 | |
Vodafone-Panafon Hellenic Telecommunications Company S.A. | Mobile network operator | Greece | 99.8 | |
Vodafone Portugal-Comunicações Pessoais, S.A. | Mobile network operator | Portugal | 100.0 | |
Vodafone Romania S.A.(3)(8) | Mobile network operator | Romania | 100.0 | |
Notes: | |
(1) | Rounded to nearest tenth of one percent. |
(2) | Arcor AG & Co. KG is a partnership and, accordingly, its share capital is comprised solely of partners capital rather than share capital. |
(3) | Vodafone Romania S.A., Vodafone Albania Sh.A. and Vodafone Holding GmbH have a 31 December year end. Accounts are drawn up to 31 March 2006 for inclusion in the Consolidated Financial Statements. |
(4) | Share capital consists of 597,379,729 ordinary shares and 1.65 million class D and E redeemable preference shares, of which 100% of the ordinary shares are held by the Group. |
(5) | On 1 February 2006, Oskar Mobil a.s. changed its name to Vodafone Czech Republic a.s. |
(6) | The entire issued share capital of Vodafone Group Services Limited is held directly by Vodafone Group Plc. |
(7) | On 27 April 2006, the Group disposed of its 97.7% interest in Vodafone K.K. to a wholly-owned subsidiary of SoftBank Corporation. |
(8) | On 18 April 2006, MobiFon S.A. changed its name to Vodafone Romania S.A. |
94 | Vodafone Group Plc Annual Report 2006 |
Financials | |
13. Investments
in joint ventures
Principal joint ventures
Unless otherwise
stated, the Companys principal joint ventures all have share capital consisting
solely of ordinary shares, which are indirectly held, and the country of incorporation
or registration is also their principal place of operation. The accounts of
the joint ventures are drawn up to 31 March 2006 for inclusion in the Consolidated
Financial Statements. Summarised financial information of joint ventures is
disclosed in note 37.
Country of | ||||
incorporation | Percentage | (1) | ||
Name | Principal activity | or registration | shareholdings | |
|
|
|
||
Bharti Airtel Limited(2) | Mobile network and fixed line operator | India | 10.0 | (3) |
Polkomtel S.A.(4) | Mobile network operator | Poland | 19.6 | |
Safaricom Limited(5) | Mobile network operator | Kenya | 35.0 | (3) |
Vodacom Group (Pty) Limited | Holding company | South Africa | 50.0 | |
Vodafone Fiji Limited | Mobile network operator | Fiji | 49.0 | (3) |
Vodafone Omnitel N.V.(6) | Mobile network operator | Netherlands | 76.9 | (7) |
|
|
|
Notes: | |
(1) | Rounded to nearest tenth of one percent. |
(2) | On 28 April 2006, Bharti Tele-Ventures Limited changed its name to Bharti Airtel Limited. |
(3) | The Group holds substantive participating rights which provide it with a veto over the significant financial and operating policies of these entities and which ensure it is able to exercise joint control over these entities with the respective majority shareholder. |
(4) | Latest statutory financial statements were drawn up to 31 December 2005. |
(5) | The Group also holds two non-voting shares. |
(6) | The principal place of operation of Vodafone Omnitel N.V. is Italy. |
(7) | The Group considered the existence of substantive participating rights held by the minority shareholder which provide that shareholder with a veto right over the significant financial and operating policies of Vodafone Omnitel N.V. and determined that, as a result of these rights, the Group does not have control over the financial and operating policies of Vodafone Omnitel N.V., despite the Groups 76.9% ownership interest. |
Effect
of proportionate consolidation of joint ventures
The following
presents, on a condensed basis, the effect of including joint ventures in the
Consolidated Financial Statements using proportionate consolidation:
2006 | 2005 | |||
£m | £m | |||
|
|
|
||
Revenue | 5,756 | 5,423 | ||
Cost of sales | (2,832 | ) | (2,805 | ) |
|
|
|
||
Gross profit | 2,924 | 2,618 | ||
Selling and distribution expenses | (251 | ) | (230 | ) |
Administrative expenses | (634 | ) | (389 | ) |
Impairment losses | (3,600 | ) | | |
|
|
|
||
Operating (loss)/profit | (1,561 | ) | 1,999 | |
Net financing costs | 27 | 64 | ||
|
|
|
||
(Loss)/profit before tax | (1,534 | ) | 2,063 | |
Tax on (loss)/profit | (711 | ) | (782 | ) |
|
|
|
||
(Loss)/profit for the financial year | (2,245 | ) | 1,281 | |
|
|
|
||
Intangible assets | 20,985 | 21,925 | ||
Property, plant and equipment | 2,506 | 1,951 | ||
Other non-current assets | 27 | 470 | ||
|
|
|
||
Non-current assets | 23,518 | 24,346 | ||
|
|
|
||
Cash and cash equivalents | 1,345 | 3,931 | ||
Other current assets | 1,148 | 1,013 | ||
|
|
|
||
Current assets | 2,493 | 4,944 | ||
|
|
|
||
Total assets | 26,011 | 29,290 | ||
|
|
|
||
Current liabilities | 2,059 | 1,583 | ||
Other non-current liabilities | 535 | 363 | ||
|
|
|
||
2,594 | 1,946 | |||
Total equity shareholders funds | 23,402 | 27,340 | ||
Minority interests | 15 | 4 | ||
|
|
|
||
Total equity and liabilities | 26,011 | 29,290 | ||
|
|
|
Vodafone Group Plc Annual Report 2006 | 95 |
Notes
to the Consolidated Financial Statements
continued
14. Investments
in associated undertakings
The Companys
principal associated undertakings all have share capital consisting solely of
ordinary shares, unless otherwise stated, and are all indirectly held. The country
of incorporation or registration of all associated undertakings is also their
principal place of operation. The accounts of the associated undertakings are
drawn up to 31 March 2006 for inclusion in the Consolidated Financial Statements.
The latest statutory financial statements of the associated undertakings were
drawn up to 31 December 2005. Summarised financial information of associated
undertakings is disclosed in note 37.
Percentage | (1) | |||
Country of | shareholding/ | |||
incorporation or | partnership | |||
Name | Principal activity | registration | interest | |
|
|
|
||
Belgacom Mobile S.A. | Mobile network operator | Belgium | 25.0 | |
Cellco Partnership(2) | Mobile network operator | USA | 45.0 | |
Société Française du Radiotéléphone S.A. | Mobile network and fixed line operator | France | 44.0 | |
Swisscom Mobile A.G. | Mobile network operator | Switzerland | 25.0 | |
|
|
|
Notes: | |
(1) | Rounded to nearest tenth of one percent. |
(2) | Cellco Partnership trades under the name Verizon Wireless. The registered or principal office of the partnership is 180 Washington Valley Road, Bedminster, New Jersey 07921, USA. |
The Groups share of the aggregated financial information of equity accounted associated undertakings is set out below:
2006 | 2005 | |||
£m | £m | |||
|
|
|
||
Revenue | 12,480 | 10,546 | ||
|
|
|||
Operating profit | 3,133 | 2,668 | ||
Non-operating income and expense | 17 | | ||
Net interest | (227 | ) | (197 | ) |
Tax on profit | (443 | ) | (448 | ) |
Minority interest | (52 | ) | (43 | ) |
|
|
|
||
Share of result in associated undertakings | 2,428 | 1,980 | ||
|
|
|||
Non-current assets | 29,055 | 25,739 | ||
Current assets | 2,183 | 2,331 | ||
|
|
|
||
Share of total assets | 31,238 | 28,070 | ||
|
|
|
||
Non-current liabilities | 4,141 | 2,476 | ||
Current liabilities | 3,468 | 4,938 | ||
Minority interests | 432 | 422 | ||
|
|
|
||
Share of total liabilities | 8,041 | 7,836 | ||
|
|
|
||
Share of net assets in associated undertakings | 23,197 | 20,234 | ||
|
|
|
15. Other
investments
Other investments
comprise the following, all of which are available-for-sale:
2006 | 2005 | |||
£m | £m | |||
|
|
|
||
Listed securities: | ||||
Equity securities | 1,938 | 1,117 | ||
Unlisted securities: | ||||
Equity securities | 7 | 16 | ||
Public debt and bonds | 20 | 16 | ||
Cash held in restricted deposits | 154 | 32 | ||
|
|
|
||
2,119 | 1,181 | |||
|
|
The fair values of listed securities are based on quoted market prices, and include the Groups 3.3% investment in China Mobile (Hong Kong) Limited, which is listed on the Hong Kong and New York stock exchanges and incorporated under the laws of Hong Kong. China Mobile (Hong Kong) Limited is a mobile network operator and its principal place of operation is China.
Unlisted equity securities are recorded at cost, as their fair values cannot be reliably measured as there is no active market upon which they are traded.
For all other unlisted securities, the carrying amount approximates the fair value.
The total unrealised gain in respect of listed securities was £1,080 million (2005: £330 million).
96 | Vodafone Group Plc Annual Report 2006 |
Financials | |
16. Inventory
2006 | 2005 | |||
£m | £m | |||
|
|
|
||
Goods held for resale | 297 | 440 | ||
|
|
Inventory is reported net of allowances for obsolescence, an analysis of which is as follows:
2006 | 2005 | |||
£m | £m | |||
|
|
|
||
At 1 April | 121 | 189 | ||
Transfer in respect of discontinued operations | (40 | ) | | |
Exchange movements | 1 | (4 | ) | |
Amounts charged/(credited) to the income statement | 15 | (64) | ||
|
|
|||
At 31 March | 97 | 121 | ||
|
|
Cost of sales includes amounts related to inventory amounting to £3,662 million (2005: £3,205 million).
17. Trade and other receivables
2006 | 2005 | |||
£m | £m | |||
|
|
|
||
Included within non-current assets: | ||||
Trade receivables | 37 | 42 | ||
Other receivables | 28 | 113 | ||
Prepayments and accrued income | 65 | 66 | ||
Derivative financial instruments | 231 | 364 | ||
|
|
|
||
361 | 585 | |||
|
|
|||
Included within current assets: | ||||
Trade receivables | 2,462 | 2,802 | ||
Amounts owed by associated undertakings | 12 | 22 | ||
Other receivables | 399 | 396 | ||
Prepayments and accrued income | 1,486 | 1,900 | ||
Derivative financial instruments | 79 | 44 | ||
|
|
|
||
4,438 | 5,164 | |||
|
|
The Groups trade receivables are stated after allowances for bad and doubtful debts, an analysis of which is as follows:
2006 | 2005 | |||
£m | £m | |||
|
|
|
||
At 1 April | 474 | 441 | ||
Transfer in respect of discontinued operations | (41 | ) | | |
Exchange movements | 4 | 5 | ||
Amounts charged to administrative expenses | 168 | 222 | ||
Trade receivables written off | (174 | ) | (194 | ) |
|
|
|
||
At 31 March | 431 | 474 | ||
|
|
Concentrations of credit risk with respect to trade receivables are limited due to the Groups customer base being large and unrelated. Due to this, the directors believe there is no further credit risk provision required in excess of the allowance for bad and doubtful debts.
The carrying amounts of trade and other receivables approximate their fair value. Trade and other receivables are predominantly non-interest bearing.
Vodafone Group Plc Annual Report 2006 | 97 |
Notes
to the Consolidated Financial Statements
continued
17. Trade
and other receivables continued Included within Derivative financial instruments is the following: |
|||||
2006 | 2005 | ||||
£m | £m | ||||
Fair value through the income statement: | |||||
Interest rate swaps | 19 | | |||
Foreign exchange swaps | 30 | 42 | |||
Option contracts | 1 | | |||
Other derivatives | | 1 | |||
50 | 43 | ||||
Fair value hedges: | |||||
Interest rate swaps | 260 | 365 | |||
310 | 408 | ||||
The fair values of these financial instruments are calculated by discounting the future cash flows to net present values using appropriate market interest and foreign currency rates prevailing at the year end.
Bank balances and money market funds comprise cash held by the Group on a short-term basis with original maturity of three months or less. The carrying amount of these assets approximates their fair value.
All commercial paper and repurchase agreements have a maturity of less than three months and the carrying value approximates the fair value.
All repurchase agreements represent fully collateralised bank deposits.
Note: | |
(1) | At 31 March 2006, the Group held 6,132,757,329 (2005: 3,814,233,598) treasury shares with a nominal value if £353 million (2005: £205 million). The market value of shares held is £7,390 million (2005: £5,359 million). |
Allotted during the year | ||||||
Nominal | ||||||
value | Net proceeds | |||||
Number | £m | £m | ||||
UK share awards and option scheme awards | 85,744,935 | 5 | 122 | |||
US share awards and option scheme awards | 34,721,310 | 2 | 37 | |||
Total for share option schemes and restricted stock awards | 120,466,245 | 7 | 159 | |||
Cancelled during the year
During the year 2,250,000,000 (2005: nil) treasury shares were cancelled in order to comply with Companies Act 1985 requirements in relation to the amount of issued share capital that
can be held in treasury.
98 | Vodafone Group Plc Annual Report 2006 |
Financials | |
20. Share-based
payments
The Company currently uses a number of equity settled share plans to grant options and shares to its directors and employees.
Share options
Vodafone Group savings related and Sharesave schemes
The
Vodafone Group 1998 Sharesave Scheme (the Sharesave Scheme) enables UK staff to acquire shares in the Company through monthly savings of up to £250 a year over a
three or five year period, at the end of which they also receive a tax free bonus. The savings and bonus may then be used to purchase shares at the option price, which is set at the beginning of the savings contract and usually at a discount of 20%
to the then prevailing market price of the Companys shares. Invitations
to participate in this scheme are usually made annually.
Vodafone Group executive schemes
The Company has a number of discretionary share option plans, under which awards are no longer made. The current share options plans in place are the Vodafone Group 1998 Company Share
Option Scheme and Vodafone Group 1988 Executive Share Option Scheme (which are UK HM Revenue and Customs approved) and the Vodafone Group 1998 Executive Share Option Scheme and the Vodafone 1988 Share Option Scheme (which are unapproved). Options
under discretionary schemes are subject to performance conditions. Options are normally exercisable between three and ten years from the date of grant.
Vodafone Group 1999 Long Term Stock Incentive Plan and ADSs
The Vodafone Group Plc 1999 Long Term Stock Incentive Plan is a discretionary plan under which both share option grants and share awards may be made. For grants made to US employees,
prior to 7 July 2003 the options have phased vesting over a four year period and are exercisable in respect of ADSs. For grants made after 6 July 2003, options are normally exercisable between three and ten years from the date of grant, subject to
the satisfaction of predetermined performance conditions and are exercisable in respect of ordinary shares listed on the London Stock Exchange, or ADSs for US employees.
Other share option schemes
Share
option schemes are operated by certain of the Groups subsidiary and associated
undertakings, under which options are only issued to key personnel.
Share plans
Share Incentive Plan
The
Share Incentive Plan enables UK staff to acquire shares in the Company through
monthly purchases
of up to £125 per month or 5% of salary, whichever is lower. For each share
purchased by the employee, the Company provides a free matching share.
In addition to the above, all permanent employees at 1 April 2005 received an award of 320 shares (2005: 350) (known as "All Shares") in Vodafone Group Plc on 1 July 2005 (5 July 2004), under the Vodafone Group Plc Global All Employee Share Plan. The awards vest after two years and are not subject to performance conditions other than continued employment.
Restricted share plans
Under the Vodafone Group Short Term Incentive Plan, introduced in 1998, shares are conditionally awarded to directors based on achievement of one year performance targets. Release of
the shares is deferred for a further two years and is subject to continued employment. Additional shares are released at this time if a further performance condition has been satisfied over the two year period.
Under the Vodafone Group Long Term Incentive Plan and the Vodafone Group Plc 1999 Long Term Stock Incentive Plan referred to above, awards of performance shares are granted to directors and certain employees. The release of these shares is conditional upon achievement of performance targets measured over a three year period.
Under these restricted share plans, the maximum aggregate number of ordinary shares which may be issued in respect of options or awards will not (without shareholder approval) exceed:
a. | 10% of the ordinary share capital of the Company in issue immediately prior to the date of grant, when aggregated with the total number of ordinary shares which have been allocated in the preceding ten year period under all plans; and |
b. | 5% of the ordinary share capital of the Company in issue immediately prior to the date of grant, when aggregated with the total number of ordinary shares which have been allocated in the preceding ten year period under all plans other than the Sharesave Scheme and the Vodafone Group Plc All Employee Share Plan. |
Vodafone Group Plc Annual Report 2006 | 99 |
Notes
to the Consolidated Financial Statements
continued
20. Share-based
payments continued Movements in ordinary share options and ADS options outstanding |
|||||||||||
ADS | Ordinary | ||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||
Millions | Millions | Millions | Millions | ||||||||
1 April | 11 | 18 | 1,123 | 1,184 | |||||||
Granted during the year | | | 64 | 60 | |||||||
Forfeited during the year | | (2 | ) | (40 | ) | (61 | ) | ||||
Exercised during the year | (2 | ) | (5 | ) | (325 | ) | (60 | ) | |||
Expired during the year | (1 | ) | | (35 | ) | | |||||
31 March | 8 | 11 | 787 | 1,123 | |||||||
Weighted average exercise price: | |||||||||||
1 April | $24.49 | $23.36 | £1.25 | £1.16 | |||||||
Granted during the year | | | £1.35 | £1.17 | |||||||
Forfeited during the year | | $28.52 | £1.46 | £1.43 | |||||||
Exercised during the year | $15.08 | $16.75 | £0.93 | £0.94 | |||||||
Expired during the year | $36.83 | | £1.83 | | |||||||
31 March | $26.53 | $24.49 | £1.32 | £1.25 | |||||||
Summary of options outstanding and exercisable at 31 March 2006 | |||||||||||||
Outstanding | Exercisable | ||||||||||||
Weighted | Weighted | ||||||||||||
Weighted | average | Weighted | average | ||||||||||
Outstanding | average | remaining | Exercisable | average | remaining | ||||||||
shares | exercise | contractual life | shares | exercise | contractual life | ||||||||
Millions | price | Months | Millions | price | Months | ||||||||
Vodafone Group Savings Related and Sharesave Scheme: | |||||||||||||
£0.01 £1.00 | 21 | £0.84 | 24 | | | | |||||||
£1.01 £2.00 | 12 | £1.10 | 39 | | | | |||||||
33 | £0.93 | 30 | | | | ||||||||
|
|
||||||||||||
Vodafone Group Executive Schemes: | |||||||||||||
£1.01 £2.00 | 17 | £1.58 | 29 | 17 | £1.58 | 29 | |||||||
£2.01 £3.00 | 33 | £2.75 | 49 | 33 | £2.75 | 49 | |||||||
50 | £2.34 | 42 | 50 | £2.34 | 42 | ||||||||
|
|
||||||||||||
Vodafone Group 1999 Long Term Stock Incentive Plan: | |||||||||||||
£0.01 £1.00 | 227 | £0.91 | 75 | 227 | £0.91 | 75 | |||||||
£1.01 £2.00 | 446 | £1.39 | 78 | 213 | £1.56 | 60 | |||||||
£2.01 £3.00 | 12 | £2.92 | 16 | 12 | £2.92 | 16 | |||||||
685 | £1.26 | 76 | 452 | £1.27 | 66 | ||||||||
|
|
||||||||||||
Other Share Option Plans: | |||||||||||||
£0.01 £1.00 | 2 | £0.73 | 16 | 2 | £0.73 | 15 | |||||||
£1.01 £2.00 | 14 | £1.37 | 37 | 11 | £1.47 | 36 | |||||||
£2.01 £3.00 | 3 | £2.17 | 25 | 3 | £2.17 | 25 | |||||||
19 | £1.45 | 33 | 16 | £1.54 | 32 | ||||||||
|
|
||||||||||||
Vodafone Group 1999 Long Term Stock Incentive Plan: | |||||||||||||
$10.01 $20.00 | 2 | $13.96 | 76 | | | | |||||||
$20.01 $30.00 | 3 | $21.60 | 53 | 1 | $22.55 | 28 | |||||||
Greater than $30.01 | 3 | $42.59 | 7 | 3 | $42.59 | 7 | |||||||
8 | $26.49 | 44 | 4 | $35.20 | 15 | ||||||||
|
|
100 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Movements in non-vested shares during the year ended 31 March 2006 is as follows:
All Shares | Other | Total | ||||||||||
Weighted | Weighted | Weighted | ||||||||||
average fair | average fair | average fair | ||||||||||
value at grant | value at grant | value at grant | ||||||||||
Millions | date | Millions | date | Millions | date | |||||||
1 April 2005 | 19 | £1.11 | 103 | £1.07 | 122 | £1.08 | ||||||
Granted | 19 | £1.27 | 73 | £1.22 | 92 | £1.23 | ||||||
Vested | (1 | ) | £1.12 | (16 | ) | £1.04 | (17 | ) | £1.04 | |||
Forfeited | (2 | ) | £1.19 | (19 | ) | £1.02 | (21 | ) | £1.04 | |||
31 March 2006 | 35 | £1.19 | 141 | £1.16 | 176 | £1.17 | ||||||
Fair value | ||||||||||||
ADS Options | Ordinary Share Options | |||||||||||
Board of directors and | ||||||||||||
Other | and Executive Committee | Other | ||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||
Expected life of option (years) | 8 9 | 6 7 | 6 7 | 5 6 | 8 9 | 6 7 | ||||||
Expected share price volatility | 17.9 18.9% | 25.6 26.6% | 17.6 18.6% | 24.3 25.3% | 17.9 18.9% | 25.6 26.6% | ||||||
Dividend yield | 2.8 3.2% | 1.7 2.1% | 2.6 3% | 1.7 2.1 % | 2.8 3.2% | 1.7 2.1% | ||||||
Risk free rates | 4.2% | 5.1% | 4.2% | 5.2% | 4.2% | 5.1% | ||||||
Exercise price | £1.36 | £1.40 | £1.45 | £1.40 | £1.36 | £1.40 | ||||||
The fair value of the options is estimated at the date of grant using a lattice-based option valuation model (i.e. binomial model) that uses the assumptions noted in the above table. Lattice-based option valuation models incorporate ranges of assumptions for inputs and those ranges are disclosed above. The executive options have a market based performance condition attached and hence the assumptions are disclosed separately.
The Group uses historical data to estimate option exercise and employee termination within the valuation model; seperate groups of employees that have similar historical exercise behaviour are considered separately for valuation purposes. The expected life of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given above results from certain groups of employees exhibiting different behaviour. Expected volatilities are based on implied volatilities as determined by a simple average of no less than three international banks excluding the highest and lowest numbers. The risk-free rates for periods within the contractual life of the option are based on the UK gilt yield curve in effect at the time of grant.
Shares used for the Groups employee incentive plans can be newly issued shares, shares held in treasury or market purchased shares either through the Company's employee benefit trust or direct from the market or a combination of sources. The source of the shares is determined by the Company having regard to what is considered the most efficient source at the relevant time.
Some share awards have an attached market condition, based on Total Shareholder Return (TSR), which is taken into account when calculating fair value of the share awards. The valuation methodology for the TSR was based on Vodafones ranking within the same group of companies (where possible) over the past 10 years. The volatility of the ranking over a three year period was used to determine the probability weighted percentage number of shares that could be expected to vest and hence affect fair value.
Other information
The weighted
average grant-date fair value of options granted during the year 2006 was £0.30 (2005: £0.34).
The total intrinsic value of options exercised during the year
ended
31
March 2006 was £164 million (2005: £28 million). The aggregate intrinsic value of fully vested share options outstanding at the year end was £68 million and the
aggregate intrinsic value of fully vested share options exercisable at the year end was £58 million. Cash received from the exercise of options under share options schemes was £356 million and the tax benefit realised from options
exercised during the annual period was £24 million.
The total fair value of shares vested during the year ended 31 March 2006 was £18 million (2005: £5 million).
The compensation cost that has been charged against income in respect of share options and share plans for continuing operations was £109 million (2005: £130 million), which is comprised entirely of equity-settled transactions. Including discontinued operations, the compensation cost charged against income in respect of share options and share plans in total was £114 million (2005: £137 million). The total income tax benefit recognised in the consolidated income statement was £50 million (2005: £17 million). Compensation costs capitalised during the years ended 31 March 2006 and 31 March 2005 were insignificant. As of 31 March 2006, there was £162 million of total compensation cost relating to non-vested awards not yet recognised, which is expected to be recognised over a weighted average period of two years.
No cash was used to settle equity instruments granted under share-based payment schemes.
The average share price for the financial year was 136 pence.
Vodafone Group Plc Annual Report 2006 | 101 |
Notes
to the Consolidated Financial Statements
continued
21. Transactions with equity shareholders
Capital | ||||||||
Share premium | redemption | Own shares | Additional paid | |||||
account | reserve | held | in capital | |||||
£m | £m | £m | £m | |||||
1 April 2004 | 52,154 | | (1,136 | ) | 99,950 | |||
Issue of new shares | 130 | | | (28 | ) | |||
Purchase of own shares | | | (3,997 | ) | | |||
Own shares released on vesting of share awards | | | 12 | | ||||
Share-based payment charge, inclusive of tax credit of £22 million | | | | 159 | ||||
31 March 2005 | 52,284 | | (5,121 | ) | 100,081 | |||
Issue of new shares | 152 | | | (44 | ) | |||
Purchase of own shares | | | (6,500 | ) | | |||
Own shares released on vesting of share awards | 8 | | 370 | (8 | ) | |||
Cancellation of own shares held | | 128 | 3,053 | | ||||
Share-based payment charge, inclusive of tax credit of £9 million | | | | 123 | ||||
31 March 2006 | 52,444 | 128 | (8,198 | ) | 100,152 | |||
102 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Maturity of borrowings
The maturity
profile of the Groups non-derivative financial liabilities, using undiscounted
cash flows and which, therefore, differs to both the carrying value and fair
value,
is as follows:
Redeemable | Finance | Loans in fair | ||||||||||||
Bank | preference | lease | Other | value hedge | ||||||||||
loans | shares | obligations | Bonds | liabilities | relationships | Total | ||||||||
£m | £m | £m | £m | £m | £m | £m | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Within one year | 58 | 49 | 12 | 167 | 1,858 | 2,164 | 4,308 | |||||||
In one to two years | 36 | 49 | 11 | 2,044 | 295 | 1,521 | 3,956 | |||||||
In two to three years | 36 | 49 | 11 | 936 | | 1,187 | 2,219 | |||||||
In three to four years | 39 | 49 | 11 | 55 | | 5,548 | 5,702 | |||||||
In four to five years | 1,290 | 49 | 10 | 55 | | 267 | 1,671 | |||||||
In more than five years | 13 | 1,387 | 42 | 1,375 | | 7,428 | 10,245 | |||||||
1,472 | 1,632 | 97 | 4,632 | 2,153 | 18,115 | 28,101 | ||||||||
Effect of discount/financing rates | | (730 | ) | (22 | ) | (704 | ) | | (6,447 | ) | (7,903 | ) | ||
31 March 2006 | 1,472 | 902 | 75 | 3,928 | 2,153 | 11,668 | 20,198 | |||||||
Within one year | 27 | 45 | 21 | 43 | 1,683 | 590 | 2,409 | |||||||
In one to two years | 1,176 | 45 | 21 | 43 | 192 | 2,143 | 3,620 | |||||||
In two to three years | 4 | 45 | 20 | 43 | | 1,488 | 1,600 | |||||||
In three to four years | 5 | 45 | 18 | 43 | | 1,056 | 1,167 | |||||||
In four to five years | 8 | 45 | 17 | 43 | 10 | 5,619 | 5,742 | |||||||
In more than five years | 21 | 1,323 | 76 | 1,196 | | 4,806 | 7,422 | |||||||
1,241 | 1,548 | 173 | 1,411 | 1,885 | 15,702 | 21,960 | ||||||||
Effect of discount/financing rates | | (703 | ) | (32 | ) | (505 | ) | | (5,527 | ) | (6,767 | ) | ||
31 March 2005 | 1,241 | 845 | 141 | 906 | 1,885 | 10,175 | 15,193 | |||||||
The maturity profile of the Groups financial derivatives, using undiscounted cash flows, is as follows: | ||||||||
2006 | 2005 | |||||||
Payable | Receivable | Payable | Receivable | |||||
£m | £m | £m | £m | |||||
Within one year | 14,012 | 14,009 | 5,701 | 5,855 | ||||
In one to two years | 609 | 600 | 412 | 515 | ||||
In two to three years | 545 | 556 | 391 | 435 | ||||
In three to four years | 456 | 523 | 345 | 393 | ||||
In four to five years | 332 | 315 | 273 | 357 | ||||
In more than five years | 2,839 | 2,851 | 2,045 | 2,176 | ||||
18,793 | 18,854 | 9,167 | 9,731 | |||||
The currency split of the Groups foreign exchange derivatives, all of which mature in less than one year, is as follows:
2006 | 2005 | |||||||
Payable | Receivable | Payable | Receivable | |||||
£m | £m | £m | £m | |||||
Sterling | | 2,971 | 350 | 920 | ||||
Euro | 6,387 | 157 | 1,553 | 66 | ||||
US dollar | 3,646 | 9,655 | 1,258 | 3,961 | ||||
Japanese yen | 2,017 | 190 | 2,054 | 141 | ||||
Other | 1,323 | 361 | 91 | 247 | ||||
|
||||||||
13,373 | 13,334 | 5,306 | 5,335 | |||||
The £39 million net payable (2005: £29 million net receivable) foreign exchange financial instruments, in the table above, are split £69 million (2005: £13 million) within trade and other payables and £30 million (2005: £42 million) within trade and other receivables.
The present value of minimum lease payments under finance lease arrangements under which the Group has leased certain of its equipment is analysed as follows:
2006 | 2005 | |||
£m | £m | |||
Within one year | 7 | 11 | ||
In two to five years | 31 | 64 | ||
In more than five years | 37 | 66 | ||
Vodafone Group Plc Annual Report 2006 | 103 |
Notes
to the Consolidated Financial Statements
continued
24. Borrowings
continued
The
fair value and carrying value of the Groups financial liabilities, for
short-term borrowings and long-term borrowings, is as follows:
Fair | Fair | Carrying | Carrying | |||||
value | value | value | value | |||||
2006 | 2005 | 2006 | 2005 | |||||
£m | £m | £m | £m | |||||
Financial liabilities measured at amortised cost: | ||||||||
Bank loans | 58 | 27 | 58 | 27 | ||||
Bank overdrafts | 18 | 43 | 18 | 43 | ||||
Finance lease obligations | 7 | 11 | 7 | 11 | ||||
Other liabilities | 1,840 | 1,640 | 1,840 | 1,640 | ||||
Loans in fair value hedge relationships: | ||||||||
1.27% Japanese yen 25bn bond due 2005 | | 124 | | 124 | ||||
1.93% Japanese yen 25bn bond due 2005 | | 124 | | 124 | ||||
6.35% US dollar 200m bond due 2005 | | 34 | | 34 | ||||
0.83% Japanese yen bond due 2006 | 15 | | 15 | | ||||
5.4% euro400m bond due 2006 | 281 | | 293 | | ||||
5.75% euro1.5bn bond due 2006 | 1,063 | | 1,091 | | ||||
7.5% US dollar 400m bond due 2006 | 126 | | 126 | | ||||
|
|
|
|
|||||
Short-term borrowings | 3,408 | 2,003 | 3,448 | 2,003 | ||||
|
|
|
|
|||||
Financial liabilities measured at amortised cost: | ||||||||
Bank loans | 1,414 | 1,214 | 1,414 | 1,214 | ||||
Redeemable preference shares | 902 | 845 | 902 | 845 | ||||
Finance lease obligations | 68 | 130 | 68 | 130 | ||||
Bonds: | ||||||||
US dollar FRN due June 2007 | 1,064 | | 1,064 | | ||||
US dollar FRN due December 2007 | 859 | | 867 | | ||||
Euro FRN due July 2008 | 873 | | 875 | | ||||
US dollar FRN due June 2011 | 201 | | 202 | | ||||
5.125% euro 500m bond due 2015 | 366 | 375 | 376 | 371 | ||||
5% euro 750m bond due 2018 | 540 | 554 | 544 | 535 | ||||
Other liabilities | 295 | 202 | 295 | 202 | ||||
Loans in fair value hedge relationships: | ||||||||
0.83% Japanese yen 3bn bond due 2006 | | 15 | | 15 | ||||
1.78% Japanese yen 25bn bond due 2006 | | 126 | | 123 | ||||
5.4% euro 400m bond due 2006 | | 284 | | 296 | ||||
5.75% euro 1.5bn bond due 2006 | | 1,080 | | 1,102 | ||||
7.5% US dollar 400m bond due 2006 | | 120 | | 115 | ||||
4.161% US dollar 150m bond due 2007 | 86 | 79 | 85 | 79 | ||||
2.575% Japanese yen 25bn bond due 2008 | | 132 | | 140 | ||||
3.95% US dollar 500m bond due 2008 | 281 | 261 | 281 | 260 | ||||
4.625% euro 250m bond due 2008 | 178 | 180 | 172 | 175 | ||||
5.5% euro 400m bond due 2008 | 34 | 35 | 34 | 34 | ||||
6.25% sterling 250m bond due 2008 | 257 | 258 | 255 | 255 | ||||
6.25% sterling 150m bond due 2008 | 154 | 155 | 145 | 148 | ||||
6.65% US dollar 500m bond due 2008 | 147 | 141 | 140 | 129 | ||||
4.625% euro 500m bond due 2008 | 316 | 359 | 355 | 357 | ||||
4.25% euro 1.4bn bond due 2009 | 990 | 1,000 | 1,008 | 1,017 | ||||
4.25% euro 500m bond due 2009 | 354 | 357 | 360 | 364 | ||||
4.75% euro 3bn bond due 2009 | 624 | 633 | 593 | 587 | ||||
2.0% Japanese yen 25bn bond due 2010 | | 131 | | 121 | ||||
2.28% Japanese yen 25bn bond due 2010 | | 133 | | 125 | ||||
2.50% Japanese yen 25bn bond due 2010 | | 135 | | 121 | ||||
7.75% US dollar 2.75bn bond due 2010 | 1,702 | 1,543 | 1,693 | 1,600 | ||||
5.5% US dollar 750m bond due 2011 | 428 | | 430 | | ||||
3.625% euro 750m bond due 2012 | 505 | | 514 | | ||||
5.0% US dollar 1bn bond due 2013 | 549 | 513 | 559 | 528 | ||||
4.625% sterling 350m bond due 2014 | 333 | | 349 | | ||||
5.375% US dollar 500m bond due 2015 | 307 | 260 | 274 | 260 | ||||
5.375% US dollar 400m bond due 2015 | 220 | 208 | 220 | 208 | ||||
5.0% US dollar 750m bond due 2015 | 419 | | 415 | | ||||
5.75% US dollar 750m bond due 2016 | 423 | | 427 | | ||||
4.625% US dollar 500m bond due 2018 | 258 | 245 | 260 | 245 | ||||
5.625% sterling 250m bond due 2025 | 254 | 253 | 271 | 258 | ||||
7.875% US dollar 750m bond due 2030 | 499 | 496 | 542 | 512 | ||||
5.9% sterling 450m bond due 2032 | 477 | 468 | 480 | 454 | ||||
6.25% US dollar 495m bond due 2032 | 293 | 268 | 281 | 265 | ||||
|
|
|
|
|||||
Long-term borrowings | 16,670 | 13,188 | 16,750 | 13,190 | ||||
|
|
|
|
Fair values are calculated using discounted cash flows with a discount rate based upon forward interest rates available to the Group at the balance sheet date.
104 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Borrowing
facilities
At 31 March
2006, the Groups most significant committed borrowing facilities comprised
two bank facilities of $5,925 million (£3,407 million) and $5,025 million
(£2,890 million) expiring between two and five years and in more than
five years, respectively (2005: two bank facilities of $5,525 million (£2,926
million) and $4,853 million (£2,570 million)), and a ¥259 billion
(£1,265 million, 2005: ¥225 billion (£1,112 million)) term credit
facility, which expires between two and five years. The bank facilities remained
undrawn throughout the year and the ¥259 billion term credit facility was
fully drawn down on 21 December 2005.
Under the terms and conditions of the $5,925 million and $5,025 million bank facilities, lenders have the right, but not the obligation, to cancel their commitment 30 days from the date of notification of a change of control of the Company and have outstanding advances repaid on the last day of the current interest period. The facility agreement provides for certain structural changes that do not affect the obligations of the Company to be specifically excluded from the definition of a change of control. This is in addition to the rights of lenders to cancel their commitment if the Company has committed an event of default. Substantially the same terms and conditions apply in the case of Vodafone Finance K.K.s ¥259 billion term credit facility, although the change of control provision is applicable to any guarantor of borrowings under the term credit facility. As of 31 March 2006, the Company was the sole guarantor of the ¥259 billion term credit facility.
In addition to the above, certain of the Groups subsidiaries had committed facilities at 31 March 2006 of £271 million (2005: £168 million) in aggregate, of which £65 million (2005: £77 million) was undrawn. Of the total committed facilities, £121 million (2005: £28 million) expires in less than one year, £109 million (2005: £100 million) expires between two and five years, and £41 million (2005: £40) expires in more than five years.
Redeemable
preference shares
Redeemable
preference shares comprise class D and E preferred shares issued by Vodafone
Americas, Inc. An annual dividend of $51.43 per class D and E preferred share
is payable quarterly in arrears. The dividend for the year amounted to £48
million (2005: £46 million). The aggregate redemption value of the class
D and E preferred shares is $1.65 billion. The holders of the preferred shares
are entitled to vote on the election of directors and upon each other matter
coming before any meeting of the shareholders on which the holders of ordinary
shares are entitled to vote. Holders are entitled to vote on the basis of twelve
votes for each share of class D or E preferred stock held. The maturity date
of the 825,000 class D preferred shares is 6 April 2020. The 825,000 class E
preferred shares have a maturity date of 1 April 2020. The class D and E preferred
shares have a redemption price of $1,000 per share plus all accrued and unpaid
dividends.
Interest rate and currency of borrowings
Fixed rate borrowings | ||||||||||
|
||||||||||
Weighted | ||||||||||
average | ||||||||||
Floating | Fixed | Weighted | time for | |||||||
Total | rate | rate | average | which rate is | ||||||
borrowings | borrowings | borrowings | interest rate | fixed | ||||||
Currency | £m | £m | £m | % | Years | |||||
Sterling | 1,511 | 1,511 | | | | |||||
Euro | 6,941 | 5,996 | 945 | 5.1 | 10.8 | |||||
US dollar | 8,905 | 8,905 | | | | |||||
Japanese yen | 1,296 | 1,296 | | | | |||||
Other | 1,545 | 1,545 | | | | |||||
|
|
|
|
|
|
|
|
|
||
31 March 2006 | 20,198 | 19,253 | 945 | 5.1 | 10.8 | |||||
|
|
|
|
|
|
|
|
|
||
Sterling | 1,123 | 1,123 | | | | |||||
Euro | 6,216 | 5,238 | 978 | 5.0 | 11.6 | |||||
US dollar | 5,107 | 5,107 | | | | |||||
Japanese yen | 2,061 | 2,061 | | | | |||||
Other | 686 | 686 | | | | |||||
31 March 2005 | 15,193 | 14,215 | 978 | 5.0 | 11.6 | |||||
Interest on floating rate borrowings is based on national LIBOR equivalents or government bond rates in the relevant currencies.
The figures shown in the tables above take into account interest rate swaps used to manage the interest rate profile of financial liabilities.
At 31 March 2006, the Group had entered into foreign exchange contracts to decrease its sterling and US dollar borrowings above by amounts equal to £2,971 million (2005: £570 million) and £6,009 million (2005: £2,703 million) respectively and to increase its euro, Japanese yen and other currency borrowings above by amounts equal to £6,230 million (2005: £1,487 million), £1,827 million (2005: £1,913 million) and £962 million (2005: £156 million decrease to other borrowings) respectively.
Further protection from euro and Japanese yen interest rate movements on debt is provided by interest rate swaps. At 31 March 2006 the Group had euro and Japanese yen denominated interest rate swaps for amounts equal to £1,536 million and £3,720 million respectively. The effective rates, which have been fixed, are 3.54% and 0.36% respectively. In addition the Group has entered into euro denominated forward starting interest rate swaps for amounts equal to £698 million, £2,793 million and £698 million, which cover the periods June 2007 to June 2008, June 2008 to June 2009 and September 2008 to September 2009 respectively. The effective rates, which have been fixed, range from 2.62% per annum to 3.02% per annum.
Vodafone Group Plc Annual Report 2006 | 105 |
Notes
to the Consolidated Financial Statements
continued
24. Borrowings
continued
Financial risk management
The
Groups treasury function provides a centralised service to the Group
for funding, foreign exchange, interest rate management and counterparty risk
management. Treasury operations are conducted within a framework of policies
and guidelines authorised and reviewed annually by the Companys Board
of directors, most recently on 31 January 2006. A Treasury Risk Committee,
comprising of the Groups Chief Financial Officer, Group General Counsel
and Company Secretary, Group Treasurer and Director of Financial Reporting,
meets quarterly to review treasury activities and management information relating
to treasury activities. In accordance with the Group treasury policy, a quorum
for meetings is four members and either the Chief Financial Officer or Group
General Counsel and Company Secretary must be present at each meeting. The
Group accounting function, which does not report to the Group Treasurer, provides
regular update reports of treasury activity to the Board of directors. The
Group uses a number of derivative instruments that are transacted, for risk
management purposes only, by specialist treasury personnel. The Groups
internal auditors review the internal control environment regularly. There
has been no significant change during the financial year, or since the end
of the year, to the types of financial risks faced by the Group or the Groups
approach to the management of those risks.
The Groups policy is to borrow centrally, using a mixture of long term and short term capital market issues and borrowing facilities, to meet anticipated funding requirements. These borrowings, together with cash generated from operations, are on-lent or contributed as equity to certain subsidiaries. The Board of directors has approved three debt protection ratios, being: net interest to operating cash flow (plus dividends from associated undertakings); retained cash flow (operating cash flow plus dividends from associated undertakings less interest, tax, dividends to minorities and equity dividends) to net debt; and operating cash flow (plus dividends from associated undertakings) to net debt.
These internal ratios establish levels of debt that the Group should not exceed other than for relatively short periods of time and are shared with the Groups debt rating agencies, being Moodys, Fitch Ratings and Standard & Poors.
Liquidity
risk
As at 31
March 2006, the Group had $10.9 billion committed undrawn bank facilities
and $15 billion and £5 billion commercial paper programmes, that are
supported by the $10.9 billion committed bank facilities, available to manage
its liquidity.
Market
risk
Interest
rate management
Under the
Groups interest rate management policy, interest rates on monetary assets
and liabilities are maintained on a floating rate basis, unless the forecast
interest charge for the next eighteen months is material in relation to forecast
results, in which case rates are fixed. In addition, fixing is undertaken
for longer periods when interest rates are statistically low.
At 31 March 2006, 29% (2005: 31%) of the Groups gross borrowings were fixed for a period of at least one year. A one hundred basis point fall or rise in market interest rates for all currencies in which the Group had borrowings at 31 March 2006 would increase or reduce profit before tax by approximately £91 million, including mark-to-market revaluations of interest rate and other derivatives and the potential interest on outstanding tax issues.
Foreign
exchange management
As Vodafones
primary listing is on the London Stock Exchange, its share price is quoted
in sterling. Since the sterling share price represents the value of its future
multi-currency cash flows, principally in euro, yen (until disposal of its
Japan operation on 27 April 2006), sterling and US dollars, the Group has
a policy to hedge external foreign exchange risks on transactions denominated
in other currencies above certain de minimis levels.
The Group also maintains the currency of debt and interest charges in proportion with its expected future principal multi-currency cash flows. As such, at 31 March 2006,113% of net debt was denominated in currencies other than sterling (73% euro, 21% yen, 14% US dollar and 5% other), whilst 13% of net debt had been purchased forward in sterling in anticipation of sterling denominated shareholder returns via share purchases, dividends and B share distribution. This allows debt to be serviced in proportion to expected future cash flows and, therefore, provides a partial hedge against income statement translation exposure, as interest costs will be denominated in foreign currencies. A relative weakening in the value of sterling against certain currencies in which the Group maintains debt has resulted in an increase in net debt of £182 million from currency translation differences.
When the Groups international net earnings for the year ended 31 March 2006 are retranslated assuming a 10% strengthening of sterling against all exchange rates, the operating profit for the year would have increased by £1,344 million (2005: reduced by
£645 million), and would have been reduced by £1,642 million (2005: increased by £789 million) if sterling weakened by 10%.
The change in equity due to a 10% fall or rise in sterling rates against all exchange rates for the translation of net investment hedging instruments would be a decrease of £1,669 million or an increase of £1,365 million. However, there would be no net impact on equity as there would be an offset in the currency translation of the foreign operation.
Credit
risk
The Group
considers its maximum exposure to credit risk to be as follows:
2006 | 2005 | ||||
£m | £m | ||||
Bank deposits | 948 | 343 | |||
Money market fund investments | 1,841 | 2,708 | |||
Commercial paper investments | | 512 | |||
Repurchase agreements | | 206 | |||
Derivative financial instruments | 310 | 408 | |||
|
|
||||
3,099 | 4,177 | ||||
|
|
Concentrations of credit risk with respect to trade receivables are limited due to the Group's customer base being large and unrelated. Due to this, management believes there is no further credit risk provision required in excess of the normal provision for bad and doubtful receivables (note 17).
The deposits shown in the table equate to the principal of the amount deposited. The foreign exchange transactions and interest rate swaps shown in the table have been marked-to-market.
For repurchase agreements, collateral equivalent to the investment value is satisfied by triple-A rated government and/or supranational instruments and collateral is replenished on a daily basis. In respect of financial instruments used by the Groups treasury function, the aggregate credit risk the Group may have with one counterparty is limited by reference to the long term credit ratings assigned for that counterparty by Moodys, Fitch Ratings and Standard & Poors. While these counterparties may expose the Group to credit losses in the event of non-performance, it considers the possibility of material loss to be acceptable because of this policy.
Consistent with development of its strategy, the Group is now targeting low single A long term credit ratings from Moodys, Fitch Ratings and Standard & Poors having previously managed the capital structure at single A credit ratings. Credit ratings are not a recommendation to purchase, hold or sell securities, in as much as ratings do not comment on market price or suitability for a particular investor, and are subject to revision or withdrawal at any time by the assigning rating organisation. Each rating should be evaluated independently.
25. Post
employment benefits
Background
As at 31
March 2006, the Group operated a number of pension plans for the benefit of
its employees throughout the world, which vary depending on the conditions
and practices in the countries concerned. The Group's pension plans are provided
through both defined benefit and defined contribution arrangements. Defined
benefit schemes provide benefits based on the employees' length of pensionable
service and their final pensionable salary or other criteria. Defined contribution
schemes offer employees individual funds that are converted into benefits
at the time of retirement.
The principal defined benefit pension schemes are in the United Kingdom and Germany. The Group also operated defined benefit schemes in Japan, its discontinued operation, and in Sweden until it was disposed of on 5 January 2006. In addition, the Group operates defined benefit schemes in Greece, Ireland, Italy and the United States. Defined contribution pension schemes are provided in Australia, Belgium, Egypt, Germany, Greece, Hungary, Ireland, Italy, Malta, the Netherlands, New Zealand, Portugal, Spain, the United Kingdom and the United States. A defined contribution scheme is also operated in the Groups discontinued operation in Japan. There is a post retirement medical plan in the United States for a small closed group of participants.
The Group accounts for its pension schemes in accordance with IAS 19, Employee Benefits (IAS19). The Group has also early adopted the amendment to IAS 19 that was published in December 2004 regarding actuarial gains and losses, group plans and disclosures.
Scheme liabilities are assessed by independent actuaries using the projected unit funding method and applying the principal actuarial assumptions set out below. Assets are shown at market value.
106 | Vodafone Group Plc Annual Report 2006 |
Financials | |
The measurement date for the Groups pension assets and obligations is 31 March. The measurement date for the Groups net periodic cost is 31 March of the previous year. Actuarial gains and losses are recognised in the period in which they arise. Payments to defined contribution schemes are charged as an expense as they fall due.
In the UK, the majority of the UK employees are members of the Vodafone Group Pension Scheme (the main scheme), which was closed to new entrants from 1 January 2006. This is a tax approved defined benefit scheme, the assets of which are held in an external trustee-administered fund. The investment policy and strategy of the scheme is the responsibility of the plan trustees, who are required to consult with the Company as well as taking independent advice on key investment issues. In setting the asset allocation, the Trustees take into consideration a number of criteria, including the key characteristics of the asset classes, expected risk and return, the structure and term of the member liabilities, diversification of assets, minimum funding and solvency requirements, as well as the Companys input on contribution requirements. The plan has a relatively low level of pensioner liabilities already in payment, meaning that the overall duration of plan liabilities is long term. A significant percentage of assets has currently been allocated to equities although this approach is reviewed regularly.
The main scheme is subject to quarterly funding updates by independent actuaries and to formal actuarial valuations at least every three years. The most recent formal triennial valuation of this scheme was carried out as at 31 March 2004.
As a result of the triennial actuarial valuation, the Groups UK subsidiaries agreed to make a special lump sum contribution of £30 million (2005: £100 million) during the financial year. The special contributions brought the funding position to 99% at 31 March 2006.
There are a number of separate pension and associated arrangements in Germany. There is no requirement to fund liabilities, however the Group funds pension obligations via a Contractual Trust Arrangement, in a separate legal agreement. The investment policy and strategy is controlled by Group appointed trustees. The investment approach followed is similar to that adopted by the Trustees of the UK plan although a higher proportion of assets are allocated to bond securities than to equities, reflecting the more mature nature and shorter duration of the liability commitments. The German schemes are subject to annual valuations, with the last formal valuations having been completed at 31 March 2006.
Income statement expense | ||||
2006 | 2005 | |||
£m | £m | |||
|
|
|||
Defined contributions schemes | 28 | 18 | ||
Defined benefit schemes | 52 | 52 | ||
|
|
|||
Total amount charged to the income statement (note 34) | 80 | 70 | ||
|
||||
Defined
benefit schemes
The most recent
full formal actuarial valuations for defined benefit schemes have been updated
by qualified independent actuaries for the financial year ended 31 March 2006
to provide the IAS 19 disclosures below.
Major assumptions used | ||||||||||||
Germany | UK |
Other |
(1) | |||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||
% | % | % | % | % | % | |||||||
|
|
|
|
|
|
|||||||
Weighted average actuarial assumptions used to determine | ||||||||||||
benefit obligations: | ||||||||||||
Rate of inflation | 1.9 | 1.9 | 2.8 | 2.8 | 2.0 | 2.0 | ||||||
Rate of increase in salaries | 2.9 | 2.9 | 4.8 | 4.8 | 3.0 | 2.9 | ||||||
Rate of increase in pensions in payment and deferred pensions | 1.9 | 1.9 | 2.8 | 2.8 | 2.0 | 2.0 | ||||||
Discount rate | 4.4 | 4.5 | 4.9 | 5.4 | 4.6 | 4.3 | ||||||
|
|
|
|
|
|
|||||||
Weighted average actuarial assumptions used to determine net | ||||||||||||
periodic benefit cost: | ||||||||||||
Rate of inflation | 1.9 | 2.0 | 2.8 | 2.5 | 2.0 | 2.1 | ||||||
Rate of increase in salaries | 2.9 | 3.0 | 4.8 | 4.5 | 2.9 | 3.0 | ||||||
Discount rate | 4.5 | 5.3 | 5.4 | 5.5 | 4.7 | 4.4 | ||||||
Expected long term rate of return on plan assets during the year | 4.9 | 5.3 | 6.8 | 6.9 | 6.4 | 6.4 | ||||||
|
|
|
|
|
|
|||||||
Expected rates of return: | ||||||||||||
Equities | 6.7 | 6.6 | 7.4 | 7.7 | 6.7 | 6.6 | ||||||
Bonds | 4.0 | 4.0 | 4.4 | 4.8 | 4.0 | 4.0 | ||||||
Other assets | 2.8 | 2.1 | | 4.9 | 5.3 | 2.8 | ||||||
|
|
|
|
|
|
Note: | |
(1) | Figures shown for other schemes represent weighted average assumptions of individual schemes. |
For the US post retirement medical plan, the immediate trend rate for valuing the dental benefits was 6.5 per cent, which is assumed to reduce gradually to 5.25 per cent in 2008. The immediate trend rate for medical benefits was 12.0 per cent, which is assumed to reduce gradually to 5.25 per cent in 2013.
The expected return on assets assumption is derived by considering the expected long term rates of return on plan investments. The overall rate of return is a weighted average of the expected returns of the individual investments made in the group plans. The long term rate of return on equities and property are derived from considering current risk free rates of return with the addition of an appropriate future risk premium from an analysis of historic returns in various countries. The long term rates of return on bonds and cash investments are set in line with market yields currently available at the balance sheet date.
Mortality and life expectancy assumptions used are consistent with those recommended by the individual scheme actuaries, and in accordance with statutory and local funding requirements. The mortality tables in Germany have been updated at 31 March 2006 in line with newly published tables.
Vodafone Group Plc Annual Report 2006 | 107 |
Notes
to the Consolidated Financial Statements
continued
25. Post employment benefits continued
Charges
made to the consolidated income
statement and consolidated statement of
recognised income and expense on the basis of the assumptions stated above:
Germany | UK | Other | Total | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2006 |
2005 |
2006 |
2005 |
2006 |
2005 |
2006 |
2005 |
|||||||||
£m |
£m |
£m |
£m |
£m |
£m |
£m |
£m |
|||||||||
|
|
|
|
|
||||||||||||
Current service cost | 7 | 6 | 38 |
37 | 12 | 10 | 57 |
53 | ||||||||
Interest cost | 10 | 9 | 36 |
26 | 6 | 6 | 52 |
41 | ||||||||
Expected
return on scheme assets |
(9 | ) | (8 | ) | (44 |
) | (31 | ) | (4 | ) | (3 | ) | (57 |
) | (42 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Total
included within staff costs (note 34) |
8 |
7 |
30 |
32 |
14 |
13 |
52 |
52 |
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Consolidated
statement of recognised income
and expense: |
||||||||||||||||
Total
actuarial (gains)/losses recognised in consolidated
statement of recognised income
and expense |
(5 | ) | 20 | 56 |
72 | (8 | ) | 10 | 43 |
102 | ||||||
|
|
|
|
|
|
|
|
All actuarial gains and losses are recognised immediately.
Figures relating to the income statement are for continuing operations only.
The cumulative recognised actuarial losses for Germany, the UK and the other schemes was £15 million, £128 million and £2 million respectively.
Fair
value of the assets and liabilities of the schemes
The
amount included in the balance sheet arising from the Groups obligations
in respect of its defined benefit retirement schemes is as follows:
Germany | UK | Other | Total | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in assets: | ||||||||||||||||
1 April | 181 | 165 | 628 | 433 | 65 | 42 | 874 | 640 | ||||||||
Reclassification as held for sale | | | | | (3 | ) | | (3 | ) | | ||||||
Expected return on scheme assets | 9 | 8 | 44 | 31 | 4 | 3 | 57 | 42 | ||||||||
Actuarial gains/(losses) | 10 | (1 | ) | 99 | 23 | 12 | 2 | 121 | 24 | |||||||
Employer cash contributions | 11 | 14 | 65 | 137 | 9 | 16 | 85 | 167 | ||||||||
Member cash contributions | | | 10 | 11 | 1 | 1 | 11 | 12 | ||||||||
Benefits paid | (10 | ) | | (11 | ) | (7 | ) | (6 | ) | | (27 | ) | (7 | ) | ||
Other movements | | (9 | ) | | | | | | (9 | ) | ||||||
Exchange rate movements | 4 | 4 | | | 1 | 1 | 5 | 5 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
31 March | 205 | 181 | 835 | 628 | 83 | 65 | 1,123 | 874 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||
Movement in scheme liabilities: | ||||||||||||||||
1 April | 213 | 192 | 619 | 457 | 166 | 145 | 998 | 794 | ||||||||
Reclassification as held for sale | | | | | (31 | ) | | (31 | ) | | ||||||
Service cost | 7 | 6 | 38 | 37 | 12 | 15 | 57 | 58 | ||||||||
Interest cost | 10 | 9 | 36 | 26 | 6 | 7 | 52 | 42 | ||||||||
Member cash contributions | | | 10 | 11 | 1 | 1 | 11 | 12 | ||||||||
Actuarial (gains)/losses | 5 | 19 | 155 | 95 | 4 | 12 | 164 | 126 | ||||||||
Benefits paid | (10 | ) | (9 | ) | (11 | ) | (7 | ) | (6 | ) | (14 | ) | (27 | ) | (30 | ) |
Other movements | | (9 | ) | | | (8 | ) | | (8 | ) | (9 | ) | ||||
Exchange rate movements | 4 | 5 | | | 4 | | 8 | 5 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
31 March | 229 | 213 | 847 | 619 | 148 | 166 | 1,224 | 998 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||
Accumulated benefit obligation | 222 | 208 | 746 | 545 | 113 | 151 | 1,081 | 904 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||
Analysis of net assets/(deficits): | ||||||||||||||||
Total fair value of scheme assets | 205 | 181 | 835 | 628 | 83 | 65 | 1,123 | 874 | ||||||||
Present value of funded scheme liabilities | (207 | ) | (191 | ) | (847 | ) | (619 | ) | (74 | ) | (108 | ) | (1,128 | ) | (918 | ) |
|
|
|
|
|
|
|
|
|||||||||
Net assets/(deficits) for funded schemes | (2 | ) | (10 | ) | (12 | ) | 9 | 9 | (43 | ) | (5 | ) | (44 | ) | ||
Present value of unfunded scheme | ||||||||||||||||
liabilities | (22 | ) | (22 | ) | | | (74 | ) | (58 | ) | (96 | ) | (80 | ) | ||
|
|
|
|
|
|
|
|
|||||||||
Net assets/(deficits) | (24 | ) | (32 | ) | (12 | ) | 9 | (65 | ) | (101 | ) | (101 | ) | (124 | ) | |
|
|
|
|
|
|
|
|
|
|
|
||||||
Net assets/(deficits) are analysed as: | ||||||||||||||||
Assets | 10 | 3 | | 9 | 9 | | 19 | 12 | ||||||||
Liabilities | (34 | ) | (35 | ) | (12 | ) | | (74 | ) | (101 | ) | (120 | ) | (136 | ) | |
|
|
|
|
|
|
|
|
|
|
|
||||||
The funding policy for the German and UK schemes is reviewed on a systematic basis in consultation with the independent scheme actuary in order to ensure that the funding contributions from sponsoring employers are appropriate to meet the liabilities of the schemes over the long term. | ||||||||||||||||
The deficit in respect of other schemes at 31 March 2006 primarily relates to internally funded schemes in Italy and the United States. |
108 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Actual return on scheme assets
Germany | UK | Other | Total | |||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Actual return on scheme assets | 19 | 7 | 143 | 54 | 16 | 5 | 178 | 66 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Analysis of scheme assets at | ||||||||||||||||
31 March is as follows: | % | % | % | % | % | % | ||||||||||
|
||||||||||||||||
Equities | 34.1 | 29.8 | 79.9 | 66.6 | 85.0 | 81.0 | ||||||||||
Bonds | 59.1 | 63.6 | 20.1 | 16.7 | 10.0 | 9.7 | ||||||||||
Property | | | | | 5.0 | 4.7 | ||||||||||
Other | 6.8 | 6.6 | | 16.7 | | 4.6 | ||||||||||
|
||||||||||||||||
100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||
The scheme has no investments in the Groups equity securities or in property currently used by the Group. | ||||||||||||||||
History of experience adjustments | ||||||||||||||||
Germany | UK | Other | Total | |||||||||||||
2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | |||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Experience adjustments on | ||||||||||||||||
scheme liabilities: | ||||||||||||||||
Amount (£m) | (3 | ) | (3 | ) | (1 | ) | (56 | ) | | (1 | ) | (4 | ) | (60 | ) | |
Percentage of scheme liabilities (%) | 1% | 1% | | 9% | | 1% | | 6% | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Experience adjustments on scheme assets: | ||||||||||||||||
Amount (£m) | 10 | (1 | ) | 99 | 23 | 12 | 2 | 121 | 24 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Percentage of scheme assets (%) | 5% | 1% | 12% | 4% | 14% | 3% | 11% | 3% | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Expected contributions and benefit payments | |||||||||
Germany | UK | Other | Total | ||||||
£m | £m | £m | £m | ||||||
|
|
|
|
|
|
|
|||
Expected
employers contributions in the year ending 31 March 2007 |
16 |
36 |
9 |
61 |
|||||
|
|
|
|
|
|
|
|||
Expected benefit payments in the year ending 31 March: | |||||||||
2007 | 16 |
11 |
7 |
34 |
|||||
2008 | 15 |
11 |
7 |
33 |
|||||
2009 | 15 |
11 |
7 |
33 |
|||||
2010 | 15 |
12 |
7 |
34 |
|||||
2011 | 15 |
12 |
7 |
34 |
|||||
2012-2017 | 76 |
66 |
38 |
180 |
|||||
|
|
|
|
|
|
|
|||
Provisions have been analysed between current and non-current as follows: | ||||
2006 | 2005 | |||
£m | £m | |||
|
|
|||
Current liabilities | 139 | 228 | ||
Non-current liabilities | 265 | 319 | ||
|
|
|||
404 | 547 | |||
Vodafone Group Plc Annual Report 2006 | 109 |
Notes
to the Consolidated Financial Statements
continued
26. Provisions
for liabilities and charges continued
Asset retirement obligations
In the course
of the Groups activities, a number of sites and other assets are utilised
which are expected to have costs associated with exiting and ceasing their use.
The associated cash outflows are generally expected to occur at the dates of
exit of the assets to which they relate, which are long term in nature.
Legal
The
Group is involved in a number of legal and other disputes, including notification
of possible claims. The directors of the Company, after taking legal advice,
have established provisions after taking into account the facts of each case.
The timing of cash outflows associated with legal claims cannot be reasonably
determined. For a discussion of certain legal issues potentially affecting the
Group, refer to note 31 Contingent liabilities.
Other provisions
Other provisions primarily comprise amounts provided for property and restructuring costs. The associated cash outflows for restructuring costs are substantially short term in nature.
The timing of the cash flows associated with property is dependent upon the remaining term of the associated lease.
2006 | 2005 | |||
£m | £m | |||
Included within non-current liabilities: | ||||
Other payables | 61 | 14 | ||
Derivative financial instruments | 148 | 48 | ||
Accruals and deferred income | 357 | 376 | ||
566 | 438 | |||
Included within current liabilities: | ||||
Trade payables | 2,248 | 3,013 | ||
Amounts owed to associated undertakings | 29 | 8 | ||
Other taxes and social security payable | 412 | 314 | ||
Derivative financial instruments | 71 | 31 | ||
Other payables | 440 | 470 | ||
Accruals and deferred income | 4,277 | 4,197 | ||
7,477 | 8,033 | |||
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing operating expenses.
The fair values of the derivative financial instruments are calculated by discounting the future cash flows to net present values using appropriate market interest and foreign currency rates prevailing at the year end.
Included within Derivative financial instruments is the following:
2006 | 2005 | |||
£m | £m | |||
Fair value hedges: | ||||
Interest rate swaps | 148 | 48 | ||
Fair value through the income statement: | ||||
Interest rate swaps | 2 | 18 | ||
Foreign exchange swaps | 69 | 12 | ||
Foreign exchange forwards | | 1 | ||
71 | 31 | |||
219 | 79 | |||
110 | Vodafone Group Plc Annual Report 2006 |
Financials | |
28. Acquisitions
The
principal acquisitions made by the Group during the financial year are as follows:
Czech Republic and Romania ClearWave N.V.
On
31 May 2005, the Group acquired 99.99% of the issued share capital of ClearWave
N.V. for cash consideration of £1,905 million. ClearWave N.V. is the parent
company of a group of companies involved in the provision of mobile telecommunications
in the Czech Republic and Romania. This transaction has been accounted for by
the purchase method of accounting.
Book | Fair value | Fair | ||||
value | adjustments | value | ||||
£m | £m | £m | ||||
Net assets acquired: | ||||||
Intangible assets | 87 | 770 | 857 | (1) | ||
Property, plant and equipment | 562 | (23 | ) | 539 | ||
Inventory | 7 | | 7 | |||
Trade and other receivables | 106 | (12 | ) | 94 | ||
Cash and cash equivalents | 65 | | 65 | |||
Deferred tax liabilities | | (129 | ) | (129 | ) | |
Short and long-term borrowings | (550 | ) | (64 | ) | (614 | ) |
Current tax liabilities | (11 | ) | | (11 | ) | |
Trade and other payables | (153 | ) | (3 | ) | (156 | ) |
113 | 539 | 652 | ||||
Minority interests | (2 | ) | ||||
Asset revaluation surplus(2) | (112 | ) | ||||
Goodwill | 1,367 | |||||
Total cash consideration (including £9 million of directly attributable costs) | 1,905 | |||||
Net cash outflow arising on acquisition: | ||||||
Cash consideration | 1,905 | |||||
Cash and cash equivalents acquired | (65 | ) | ||||
1,840 | ||||||
Notes: |
(1) | Intangible assets consist of licences and spectrum fees of £461 million and other intangibles of £396 million. |
(2) | The asset revaluation surplus relates to the recognition of the fair value of intangible assets on the Groups existing 20.1% stake in MobiFon S.A. |
The goodwill is attributable to the profitability of the acquired business and the synergies expected to arise within those businesses after the Group's acquisition of ClearWave N.V.
The acquired entities and percentage of voting rights acquired was as follows:
% | ||
MobiFon S.A. (renamed Vodafone Romania S.A.) | 78.99 | |
Oskar Mobil a.s. | 99.87 | |
ClearWave N.V. | 99.99 | |
MobiFon Holdings B.V. | 99.99 | |
Oskar Holdings N.V. (renamed Vodafone Oskar Holdings N.V.) | 99.99 | |
Oskar Finance B.V. (renamed Vodafone Oskar Finance B.V.) | 99.99 | |
ClearWave Services (Mauritius) Ltd. | 99.99 | |
Results of the acquired entities have been consolidated in the income statement from the date of acquisition, 31 May 2005.
Subsequent to the completion of the acquisition on 31 May 2005, a further 0.9% of Vodafone Romania S.A. was acquired for consideration of £16 million.
From the dates of acquisition, these entities contributed a profit of £26 million to the net loss of the Group.
Vodafone Group Plc Annual Report 2006 | 111 |
Notes
to the Consolidated Financial Statements
continued
28. Acquisitions
continued
India Bharti Airtel Limited
On
18 November 2005, the Group acquired a 5.61% direct interest in Bharti Airtel
Limited (previously Bharti Tele-Ventures Limited) from Warburg Pincus LLC, and
on 22 December 2005 the Group acquired a further 4.39% indirect interest in
Bharti Airtel Limited, bringing the Groups effective shareholding to 10.0%.
Total cash consideration was Rs.67 billion (£858 million).
Book | Fair value | Fair | ||||
value | adjustments | value | ||||
£m | £m | £m | ||||
Net assets acquired: | ||||||
Intangible assets | 49 | 345 | 394 | (1) | ||
Property, plant and equipment | 142 | (1 | ) | 141 | ||
Inventory | 1 | | 1 | |||
Trade and other receivables | 30 | | 30 | |||
Cash and cash equivalents | 9 | | 9 | |||
Deferred tax liabilities | (2 | ) | (126 | ) | (128 | ) |
Short and long-term borrowings | (56 | ) | | (56 | ) | |
Current tax liabilities | | (2 | ) | (2 | ) | |
Trade and other payables | (73 | ) | (1 | ) | (74 | ) |
100 | 215 | 315 | ||||
Goodwill | 543 | |||||
Total cash consideration (including £1 million of directly attributable costs) | 858 | |||||
Net cash outflow arising on acquisition: | ||||||
Cash consideration | 858 | |||||
Cash and cash equivalents acquired | (9 | ) | ||||
849 | ||||||
Note: | |
(1) | Intangible assets consist of licences and spectrum fees of £343 million and other intangibles of £51 million. |
The goodwill is attributable to the profitability of the acquired business and the synergies expected to arise within those businesses after the Group's acquisition of the shares in Bharti Airtel Limited.
Results of the acquired entity have been proportionately consolidated in the income statement from the dates of acquisition.
From the date of acquisition, the entity contributed a loss of £8 million to the net loss of the Group.
112 | Vodafone Group Plc Annual Report 2006 |
Financials | |
South Africa VenFin Limited
On
26 January 2006, the Group announced that its offer to acquire a 100% interest
in VenFin
Limited (VenFin) had become wholly unconditional. VenFins principal
asset
was a 15% stake in Vodacom Group (Pty) Limited (Vodacom). At 31 March
2006, the Group held an effective economic interest in VenFin of 98.7% and an
effective voting interest of 99.3%.
The combined cash consideration for the Groups 98.7% economic interest in VenFin was ZAR15.8 billion (£1,458 million).
Book | Fair value | Fair | ||||
value | adjustments | value | ||||
£m | £m | £m | ||||
Net assets acquired: | ||||||
Intangible assets | 24 | 600 | 624 | (1) | ||
Property, plant and equipment | 216 | | 216 | |||
Inventory | 8 | | 8 | |||
Trade and other receivables | 74 | | 74 | |||
Cash and cash equivalents | 14 | | 14 | |||
Deferred tax liabilities | (1 | ) | (180 | ) | (181 | ) |
Short and long-term borrowings | (36 | ) | | (36 | ) | |
Current tax liabilities | (20 | ) | | (20 | ) | |
Trade and other payables | (110 | ) | | (110 | ) | |
169 | 420 | 589 | ||||
|
||||||
Minority interests | (9 | ) | ||||
Goodwill | 878 | |||||
Total cash consideration (including £7 million of directly attributable costs) | 1,458 | |||||
Net cash outflow arising on acquisition: | ||||||
Cash consideration | 1,458 | |||||
Cash and cash equivalents acquired | (14 | ) | ||||
1,444 | ||||||
Note: | |
(1) | Intangible assets consist of licences and spectrum fees of £391 million and other intangibles of £233 million. |
The goodwill is attributable to the profitability of the acquired business and the synergies expected to arise within that business after the Group's acquisition of VenFin.
Results of the acquired entities have been proportionately consolidated in the income statement from the date of acquisition.
From the date of acquisition, the acquired part of the entity contributed a loss of £30 million to the net loss of the Group.
On 20 April 2006, the Group completed the compulsory acquisition of the remaining minority shareholdings in VenFin, from which date the Group holds 100% of the issued share capital of VenFin. As a result, the Group holds 50% of the share capital of Vodacom.
Across the acquisitions mentioned above, the weighted average life of licences and spectrum fees is 10 years, the weighted average life of other intangible assets is five years and the weighted average of total intangibles is eight years.
Turkey Telsim Mobil Telekomunikasyon
On 24 May 2006,
the Group completed the acquisition of substantially all the assets and business
of Telsim Mobil Telekomunikasyon (Telsim) from the Turkish Savings Deposit
and Investment Fund. The cash paid on this date was US$4.67 billion (£2.6
billion). It is impracticable to provide further information due to the proximity
of the acquisition date to the date of approval of the Consolidated Financial
Statements.
Pro forma full year information
The following unaudited pro forma summary presents the Group as if all of the businesses acquired in the year to 31 March 2006 had been acquired on 1 April 2005 or 1 April 2004,
respectively. The pro forma amounts include the results of the acquired companies, amortisation of the acquired intangibles assets recognised on acquisition and the interest expense on debt incurred as a result of the acquisition. The pro forma
amounts do not include any possible synergies from the acquisition. The pro forma information is provided for comparative purposes only and does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of
future results of operations of the combined companies.
2006 | 2005 | |||
£m | £m | |||
Revenue | 29,924 | 27,709 | ||
(Loss) /profit for the financial year | (21,870 | ) | 6,239 | |
(Loss) /profit attributable to equity shareholders | (21,966 | ) | 6,131 |
Pence per share | Pence per share | |||
Basic (loss)/earnings per share from continuing and discontinued operations | (35.09 | ) | 9.26 | |
Diluted (loss)/earnings per share from continuing and discontinued operations(1) | (35.09 | ) | 9.23 | |
Note: | |
(1) | In the year ended 31 March 2006, there are no dilutive ordinary shares as the Group recorded a loss for the financial year. |
Vodafone Group Plc Annual Report 2006 | 113 |
Notes to the Consolidated Financial Statements
continued
29. Discontinued operations and disposals
Japan Vodafone
K.K.
On
17 March 2006, the Group announced an agreement to sell its 97.7% holding in
Vodafone
K.K. to SoftBank. The transaction completed on 27 April 2006 with the Group receiving
cash of
approximately ¥1.42 trillion (£6.9 billion) including the repayment of intercompany debt of ¥0.16 trillion (£0.8 billion). In addition, the Group received non-cash consideration with a fair value of approximately ¥0.23
trillion (£1.1 billion), comprised of preferred equity and a subordinated loan. SoftBank also assumed debt of approximately ¥0.13 trillion (£0.6
billion). Vodafone K.K. represented a separate geographical area of operation.
On this
basis, Vodafone K.K. has been treated as a discontinued operation.
Income statement and segment analysis of discontinued operation | ||||
2006 | 2005 | |||
£m | £m | |||
Service revenue | 5,264 | 5,610 | ||
Equipment and other revenue | 2,004 | 1,786 | ||
Segment revenue | 7,268 | 7,396 | ||
Inter-segment revenue | (2 | ) | (1 | ) |
Net revenue | 7,266 | 7,395 | ||
Operating expenses | (5,667 | ) | (5,417 | ) |
Depreciation and amortisation(1) | (1,144 | ) | (1,314 | ) |
Impairment loss | (4,900 | ) | | |
Operating (loss)/profit | (4,445 | ) | 664 | |
Non operating income and expense | | 13 | ||
Net financing costs | (3 | ) | (11 | ) |
(Loss)/profit before taxation | (4,448 | ) | 666 | |
Taxation relating to performance of discontinued operations | 7 | 436 | ||
Taxation relating to the classification of the discontinued operations | (147 | ) | | |
(Loss)/profit for the financial year from discontinued operations | (4,588 | ) | 1,102 | |
(Loss)/earnings per share from discontinued operations | ||||
2006 | 2005 | |||
Pence per share | Pence per share | |||
Basic (loss)/earnings per share | (7.35 | ) | 1.56 | |
Diluted (loss)/earnings per share | (7.35 | ) | 1.56 | |
Note: | |
(1) | including gains and losses on disposal of fixed assets |
Assets and liabilities of disposal group at 31 March 2006
2006 | |||
£m | |||
Intangible assets | 3,957 | ||
Property, plant and equipment | 4,546 | ||
Other investments | 29 | ||
Cash and cash equivalents | 161 | ||
Inventory | 131 | ||
Trade and other receivables | 1,113 | ||
Deferred tax asset | 655 | ||
Total assets | 10,592 | ||
Current taxation liability | (1 | ) | |
Short and long-term borrowings | (677 | ) | |
Trade and other payables | (1,579 | ) | |
Deferred tax liabilities | (246 | ) | |
Other liabilities | (40 | ) | |
Total liabilities | (2,543 | ) | |
114 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Cash flows from discontinued operations | ||||
2006 | 2005 | |||
£m | £m | |||
Net cash flows from operating activities | 1,651 | 1,739 | ||
Net cash flows from investing activities | (939 | ) | (448 | ) |
Net cash flows from financing activities | (536 | ) | (1,289 | ) |
Net increase in cash and cash equivalents | 176 | 2 | ||
Cash and cash equivalents at the beginning of the financial year | 4 | 3 | ||
Exchange loss on cash and cash equivalents | (19 | ) | (1 | ) |
Cash and cash equivalents at the end of the financial year | 161 | 4 | ||
Sweden Europolitan Vodafone AB
On 5 January 2006, the Group completed the disposal of its 100% interest in Europolitan Vodafone AB to Telenor Mobile Holding AS. The assets and liabilities of Europolitan Vodafone AB
at the date of disposal, and the cash effects of the transaction, were as follows:
£m | ||
Intangible assets | 171 | |
Property, plant and equipment | 581 | |
Inventory | 10 | |
Trade and other receivables | 155 | |
Cash and cash equivalents | (5 | ) |
Deferred tax liabilities | (77 | ) |
Short and long term borrowings | (20 | ) |
Trade and other payables | (157 | ) |
Net assets disposed of | 658 | |
Total cash consideration | 653 | |
Other effects(1) | 8 | |
Net gain on disposal | 3 | |
Net cash inflow arising on disposal: | ||
Cash consideration | 653 | |
Cash and cash equivalents disposed of | 5 | |
658 | ||
Note: | |
(1) | Other effects include the recycling of currency translation on disposal and professional fees related to the disposal. |
Vodafone Group Plc Annual Report 2006 | 115 |
Notes to the Consolidated Financial Statements
continued
30. Commitments
Operating lease commitments
The Group has entered into commercial leases on certain properties, network infrastructure, motor vehicles and items of machinery. The leases have various terms, escalation clauses,
purchase options and renewal rights.
Future minimum lease payments under non-cancellable operating leases comprise:
2006 | 2005 | |||
£m | £m | |||
Within one year | 654 | 662 | ||
In more than one year but less than two years | 509 | 456 | ||
In more than two years but less than three years | 447 | 403 | ||
In more than three years but less than four years | 397 | 351 | ||
In more than four years but less than five years | 345 | 305 | ||
In more than five years | 1,292 | 1,170 | ||
3,644 | 3,347 | |||
In addition to the amounts disclosed above as at 31 March 2006, there were additional operating lease commitments of £120 million relating to the Groups discontinued operations in Japan, which were sold on 27 April 2006.
The total of future minimum sublease payments expected to be received under non-cancellable subleases is £60 million (2005: £51 million).
Capital and other financial commitments
Group | Share of joint ventures | |||||||
2006 | 2005 | 2006 | 2005 | |||||
£m | £m | £m | £m | |||||
Contracts placed for future capital expenditure not provided in the financial statements:(1)(2) | 651 | 656 | 162 | 121 | ||||
Purchase commitments(2) | 996 | 1,201 | 163 | 80 | ||||
Share purchase programme | | 565 | | | ||||
Purchase of MobiFon and Oskar | | 1,858 | | | ||||
Purchase of Telsim(3) | 2,600 | | | | ||||
4,247 | 4,280 | 325 | 201 | |||||
Notes: | |
(1) | Commitment includes contracts placed for property, plant and equipment and intangible assets. |
(2) | In addition to the amounts disclosed above as at 31 March 2006, there were additional commitments of £90 million for future capital expenditure and £368 million other purchase commitments relating to the Groups discontinued operations in Japan, which were sold on 27 April 2006. |
(3) | In addition to the consideration price of $4.67 billion (approximately £2.6 billion), the Group will be required to pay approximately $0.4 billion of VAT which will be recoverable against Telsim's future VAT liabilities. The Group expects to recover this payment over the short to medium term. |
116 | Vodafone Group Plc Annual Report 2006 |
Financials | |
31. Contingent liabilities
2006 | 2005 | |||
£m | £m | |||
Performance bonds | 189 | 382 | ||
Credit guarantees third party indebtedness | 64 | 67 | ||
Other guarantees and contingent liabilities | 19 | 18 | ||
Performance bonds
Performance bonds require the Group to make payments to third parties in the event that the Group does not perform what is expected of it under the terms of any related
contracts.
Group performance bonds include £152 million (2005: £149 million) in respect of undertakings to roll out 3G networks in Spain and £nil (2005: £189 million) in respect of undertakings to roll out 2G and 3G networks in Germany.
Credit guarantees third party indebtedness
Credit guarantees
comprise guarantees and indemnities of bank or other facilities including those
in respect of the Groups associated undertakings and investments.
Other guarantees and contingent liabilities
Other guarantees principally comprise commitments to support disposed entities.
In addition to the amounts disclosed above, the Group has guaranteed financial indebtedness and issued performance bonds for £33 million (2005: £36 million) in respect of businesses which have been sold and for which counter indemnities have been received from the purchasers.
The Group also enters into lease arrangements in the normal course of business, which are principally in respect of land, buildings and equipment. Further details on the minimum lease payments due under non-cancellable operating lease arrangements can be found in note 30.
Legal proceedings
The Company and its subsidiaries are currently, and may be from time to time, involved in a number of legal proceedings, including inquiries from or discussions with governmental
authorities, that are incidental to their operations. However, save as disclosed below, the Company and its subsidiaries are not involved currently in any legal or arbitration proceedings (including any governmental proceedings which are pending or
known to be contemplated) which may have, or have had in the twelve months preceding the date of this report, a significant effect on the financial position or profitability of the Company and its subsidiaries.
The Company is a defendant in four actions in the United States alleging personal injury, including brain cancer, from mobile phone use. In each case, various other carriers and mobile phone manufacturers are also named as defendants. These actions are at an early stage and no accurate quantification of any losses which may arise out of the claims can therefore be made as at the date of this report. The Company is not aware that the health risks alleged in such personal injury claims have been substantiated and will be vigorously defending such claims.
In 2002, a class action lawsuit was brought in the United States District Court for the Southern District of New York against the Company and certain of its officers and directors under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder alleging principally that Vodafone had improperly delayed taking and disclosing goodwill impairment losses relating to certain fixed line and non-controlled mobile assets that Vodafone reported in the financial year ended 31 March 2002. Vodafone firmly denied any wrongdoing and believes the allegations are wholly without merit. On 4 March 2005, the parties entered into a definitive settlement agreement for a cash payment by Vodafone and its insurance carriers of $24.5 million, before fees and expenses, which was approved by the Court on 15 July 2005. The settlement, which covers all current and former defendants, does not involve any admission or evidence of wrongdoing by any of them. The plaintiffs application for reimbursement of costs and an award of attorneys fees to be paid form the settlement fund remains pending.
A subsidiary of the Company, Vodafone 2, is responding to an enquiry (the Vodafone 2 enquiry) by the UK Inland Revenue (now called Her Majestys Revenue and Customs and hereinafter referred to as HMRC) with regard to the UK tax treatment of its Luxembourg holding company, Vodafone Investments Luxembourg SARL (VIL), under the Controlled Foreign Companies section of the UKs Income and Corporation Taxes Act 1988 (the CFC Regime) relating to the tax treatment of profits earned by the holding company for the accounting period ended 31 March 2001. Vodafone 2s position is that it is not liable to corporation tax in the UK under the CFC Regime in respect of VIL. Vodafone 2 asserts, inter alia, that the CFC Regime is contrary to EU law and has made an application to the Special Commissioners of HMRC for closure of the Vodafone 2 enquiry. On 3 May 2005, the Special Commissioners referred certain questions relating to the compatability of the CFC Regime with EU law to the European Court of Justice (the ECJ) for determination. Vodafone 2s application for closure has been stayed pending delivery of the ECJs judgment. In its judgement, the ECJ will only determine questions referred to it and does not have jurisdiction to determine the outcome of Vodafone 2s application. Instead, the Special Commissioners will apply the ECJs judgement to the particular facts of Vodafone 2s application. Although it is not possible to address all possible outcomes, it should be noted that even if the CFC Regime is held by the ECJ to be entirely lawful, Vodafone 2 would continue to resist the imposition of corporation tax liability on other grounds. On 15 June 2005, HMRC appealed to the High Court challenging the Special Commissioners decision to refer questions to the ECJ. This appeal was dismissed and HMRC has since appealed this dismissal to the Court of Appeal. A decision in the latter appeal is expected to be rendered in the second half of 2006. In addition to the Vodafone 2 enquiry, on 31 October 2005, HMRC commenced an enquiry into the residence of VIL which is ongoing (the VIL enquiry). VILs position is that it is resident for tax purposes solely in Luxembourg and therefore it is not liable for corporation tax in the UK. The Company has taken provisions, which at 31 March 2006 amounted to £2,098 million, for the potential UK corporation tax liability and related interest expense that may arise in connection with the Vodafone 2 and VIL enquiries, if the Company is not successful in its challenge of the CFC Regime. The provisions relate to the accounting period which is the subject of the proceedings described above as well as to accounting periods after 31 March 2001 to date.
The judgement of the ECJ is expected to be delivered at the beginning of 2007 at the earliest. In the absence of any material unexpected developments, the provisions are likely to be reassessed when the views of the ECJ become known.
Vodafone Group Plc Annual Report 2006 | 117 |
Notes to the Consolidated Financial Statements
continued
32. Reconciliation of net cash flows to operating activities
2006 | 2005 | |||
£m | £m | |||
(Loss)/profit for the financial year from continuing operations | (17,233 | ) | 5,416 | |
(Loss)/profit for the financial year from discontinued operations | (4,588 | ) | 1,102 | |
Adjustments for(1): | ||||
Tax on profit | 2,520 | 1,433 | ||
Depreciation and amortisation | 5,834 | 5,517 | ||
Loss on disposal of property, plant and equipment | 88 | 162 | ||
Non operating income and expense | 2 | (6 | ) | |
Other income and expense | (15) | | ||
Investment income | (353 | ) | (303 | ) |
Financing costs | 1,123 | 900 | ||
Impairment losses | 28,415 | 475 | ||
Share of result in associated undertakings | (2,428 | ) | (1,980 | ) |
Operating cash flows before movements in working capital | 13,365 | 12,716 | ||
Decrease in inventory | 23 | 17 | ||
Decrease/(increase) in trade and other receivables | 54 | (321 | ) | |
Increase in payables | 81 | 145 | ||
Cash generated by operations | 13,523 | 12,557 | ||
Tax paid | (1,682 | ) | (1,578 | ) |
Net cash flows from operating activities | 11,841 | 10,979 | ||
Note: | |
(1) | Adjustments include amounts relating to continuing and discontinued operations. |
33. Directors
and key management compensation
Directors
Aggregate emoluments of the directors of the Company were as follows:
2006 | 2005 | |||
£m | £m | |||
Salaries and fees | 6 | 6 | ||
Incentive schemes | 5 | 4 | ||
Benefits | 2 | 1 | ||
13 | 11 | |||
The aggregate gross pre-tax gain made on the exercise of share options in the year ended 31 March 2006 by directors who served during the year was less than £1 million (2005: £3 million).
Further details of directors emoluments can be found in Boards Report to Shareholders on Directors Remuneration Remuneration for the year to 31 March 2006 on pages 61 to 69.
Key management compensation
Aggregate compensation for key management, being the directors and members of the Group Executive Committee, were as follows:
2006 | 2005 | |||
£m | £m | |||
Short term employee benefits | 26 | 18 | ||
Post-employment benefits: | ||||
Defined benefit schemes | 2 | 2 | ||
Defined contribution schemes | 2 | 1 | ||
Share-based payments | 16 | 22 | ||
46 | 43 | |||
118 | Vodafone Group Plc Annual Report 2006 |
Financials | |
34. Employees
An analysis of the average employee headcount by category of activity is shown below.
2006 | 2005 | |||
Number | Number | |||
By activity: | ||||
Operations | 12,541 | 11,923 | ||
Selling and distribution | 17,315 | 16,410 | ||
Administration | 31,816 | 29,426 | ||
61,672 | 57,759 | |||
By segment: | ||||
Mobile telecommunications: | ||||
Germany | 10,124 | 10,183 | ||
Italy | 7,123 | 7,213 | ||
Spain | 4,052 | 3,949 | ||
UK | 10,620 | 11,260 | ||
Other Mobile Operations | 22,895 | 18,858 | ||
Common functions | 2,628 | 2,201 | ||
57,442 | 53,664 | |||
Other operations: | ||||
Germany | 4,086 | 4,095 | ||
Other | 144 | | ||
4,230 | 4,095 | |||
Total continuing operations | 61,672 | 57,759 | ||
Discontinued operations: | ||||
Japan | 2,733 | 3,033 | ||
2006 | 2005 | |||
£m | £m | |||
Continuing operations: | ||||
Wages and salaries | 1,879 | 1,752 | ||
Social security costs | 242 | 233 | ||
Share based payments | 109 | 130 | ||
Other pension costs (see note 25) | 80 | 70 | ||
2,310 | 2,185 | |||
Note: | |
(1) | From continuing operations. The cost incurred in respect of employees (including directors) from discontinued operations was £155 million (2005: £191 million). |
35. Subsequent
events
On
17 March 2006, the Group announced an agreement to sell its 97.7% holding
in Vodafone Japan to SoftBank. The transaction completed on 27 April 2006,
with the Group receiving cash of approximately ¥1.42 trillion (£6.9
billion) including the repayment of intercompany debt of ¥0.16 trillion
(£0.8 billion). In addition, the Group received non-cash consideration
with a fair value of approximately ¥0.23 trillion (£1.1 billion),
comprised of preferred equity and a subordinated loan. SoftBank also assumed
debt of approximately ¥0.13 trillion (£0.6 billion).
On 13 December 2005, the Group announced it had agreed to acquire substantially all the assets and business of Telsim Mobil Telekomunikasyon (Telsim) from the Turkish Savings Deposit and Investment Fund. The acquisition completed on 24 May 2006. The cash paid on this date was US$4.67 billion (£2.6 billion).
Vodafone Group Plc Annual Report 2006 | 119 |
Notes
to the Consolidated Financial Statements
continued
36. Related
party transactions
Transactions
with joint ventures and associated undertakings
Transactions
between the Company and its subsidiaries, joint ventures and associates represent
related party transactions. Transactions with subsidiaries have been eliminated
on consolidation. Transactions between the Company and its joint ventures
are not material to the extent that they have not been eliminated through
proportionate consolidation. Except as disclosed below, no material related
party transactions have been entered into, during the year, which might reasonably
affect any decisions made by the users of these Consolidated Financial Statements.
2006 | 2005 | |||
£m | £m | |||
Transactions with associated undertakings: | ||||
Sales of goods and services | 288 | 194 | ||
Purchase of goods and services | 268 | 243 | ||
Amounts owed to joint ventures included within short term borrowings(1) | 378 | 1,142 | ||
Note: | |
(1) | Loan arises through Vodafone Italy being part of a Group cash pooling arrangement. Interest is paid in line with short term market rates. |
Amounts owed by and owed to associated undertakings are disclosed within notes 17 and 27.
Dividends received from associated undertakings are disclosed in the consolidated cash flow statement.
Group contributions to pension schemes are disclosed in note 25.
Compensation paid to the Companys Board of directors and members of the Executive Committee is disclosed in note 33.
Transactions
with directors
During the year ended 31 March 2006, and as of 26 May 2006, neither any director nor any other executive officer, nor any associate of any director or any other executive officer, was
indebted to the Company.
Since 1 April 2005, the Company has not been, and is not now, a party to any other material transaction, or proposed transactions, in which any member of the key management personnel (including directors, any other executive officer, senior manager, any spouse or relative of any of the foregoing, or any relative of such spouse), had or was to have a direct or indirect material interest.
37. Financial information of joint ventures and associated undertakings
Summary aggregated financial information of 50% or less owned entities accounted for using proportionate consolidation or under the equity method, extracted on a 100% basis from
accounts prepared under IFRS at 31 March and for the years then ended, is set out below.
2006 | 2005 | |||
Entities classified as associated undertakings | £m | £m | ||
Revenue | 30,204 | 25,141 | ||
Gross profit | 12,506 | 12,358 | ||
Profit for the financial year | 5,768 | 4,883 | ||
Non-current assets | 42,776 | 36,385 | ||
Current assets | 5,868 | 5,763 | ||
Total assets | 48,644 | 42,148 | ||
Current liabilities | 8,365 | 11,475 | ||
Non-current liabilities | 9,367 | 5,579 | ||
Total liabilities | 17,732 | 17,054 | ||
Total equity shareholders funds | 29,951 | 24,155 | ||
Minority interests | 961 | 939 | ||
Total equity and liabilities | 48,644 | 42,148 | ||
120 | Vodafone Group Plc Annual Report 2006 |
Financials | |
2006 | 2005 | |||
Entities classified as joint ventures | £m | £m | ||
Revenue | 4,919 | 3,946 | ||
Gross profit | 2,071 | 1,611 | ||
Profit for the financial year | 786 | 658 | ||
Non-current assets | 7,631 | 2,983 | ||
Current assets | 1,389 | 1,056 | ||
Total assets | 9,020 | 4,039 | ||
Current liabilities | 2,384 | 1,458 | ||
Non-current liabilities | 1,164 | 362 | ||
Total liabilities | 3,548 | 1,820 | ||
Total equity shareholders funds | 5,432 | 2,207 | ||
Minority interests | 40 | 12 | ||
Total equity and liabilities | 9,020 | 4,039 | ||
Summary aggregated financial information of Vodafone Omnitel N.V., extracted on a 100% basis from financial statements prepared under IFRS at 31 March and for the years then ended, is set out below.
2006 | 2005 | |||
£m | £m | |||
Revenue | 5,619 | 5,518 | ||
Gross profit | 2,995 | 2,779 | ||
(Loss)/profit for the financial year | (2,134 | ) | 1,507 | |
Non-current assets | 20,280 | 24,186 | ||
Current assets | 2,837 | 6,117 | ||
Total assets | 23,117 | 30,303 | ||
Current liabilities | 1,915 | 1,719 | ||
Non-current liabilities | 78 | 312 | ||
Total liabilities | 1,993 | 2,031 | ||
Total equity shareholders funds | 21,124 | 28,272 | ||
Total equity and liabilities | 23,117 | 30,303 | ||
Vodafone Group Plc Annual Report 2006 | 121 |
Notes
to the Consolidated Financial Statements
continued
38. | US GAAP information |
The following is a summary of the effects of the differences between US GAAP and IFRS. The unaudited translation of pounds sterling amounts into US dollars is provided solely for convenience based on the Noon Buying Rate on 31 March 2006 of $1.7393: £1. Amounts at 31 March 2005 and for the year then ended have been restated to give effect to the modified retrospective adoption of SFAS No. 123 (Revised 2004), discussed in (j) below. |
Net loss for the years ended 31 March
2006 | 2006 | 2005 | ||||||
Restated | ||||||||
Reference | $m | £m | £m | |||||
Revenue (IFRS) | 51,048 | 29,350 | 26,678 | |||||
Items (decreasing)/increasing revenues: | ||||||||
Discontinued operations | (1,642 | ) | (944 | ) | (1,108 | ) | ||
Basis of consolidation | a | (10,011 | ) | (5,756 | ) | (5,423 | ) | |
Connection revenue | b | 1,924 | 1,106 | 1,223 | ||||
Revenue (US GAAP) | 41,319 | 23,756 | 21,370 | |||||
(Loss)/profit for the financial year (IFRS) | (37,953 | ) | (21,821 | ) | 6,518 | |||
Items (increasing)/decreasing net loss: | ||||||||
Investments accounted for under the equity method | c | (2,139 | ) | (1,230 | ) | (5,440 | ) | |
Connection revenue and costs | b | 17 | 10 | 16 | ||||
Goodwill and other intangible assets | d | (24,870 | ) | (14,299 | ) | (15,534 | ) | |
Impairment losses | e | 26,745 | 15,377 | 475 | ||||
Amortisation of capitalised interest | f | (188 | ) | (108 | ) | (105 | ) | |
Interest capitalised during the year | f | 63 | 36 | 19 | ||||
Other | g | (74 | ) | (42 | ) | 99 | ||
Income taxes | h | 15,483 | 8,902 | 6,680 | ||||
Minority interests | i | (165 | ) | (95 | ) | (108 | ) | |
Cumulative effect of change in accounting principle: post employment benefits | j | | | (195 | ) | |||
Cumulative effect of change in accounting principle: intangible assets | j | | | (6,177 | ) | |||
Net loss (US GAAP) | (23,081 | ) | (13,270 | ) | (13,752 | ) | ||
Shareholders equity at 31 March
2006 | 2006 | 2005 | ||||||
Restated | ||||||||
Reference | $m | £m | £m | |||||
Total equity (IFRS) | 148,383 | 85,312 | 113,648 | |||||
Items (decreasing)/increasing shareholders funds: | ||||||||
Investments accounted for under the equity method | c | (3,978 | ) | (2,287 | ) | (982 | ) | |
Connection revenue and costs | b | (9 | ) | (5 | ) | (14 | ) | |
Goodwill and other intangible assets | d | 56,618 | 32,552 | 31,714 | ||||
Capitalised interest | f | 2,510 | 1,443 | 1,529 | ||||
Other | g | 365 | 210 | 104 | ||||
Income taxes | h | (52,795 | ) | (30,354 | ) | (38,856 | ) | |
Minority interests | i | 197 | 113 | 152 | ||||
Shareholders equity (US GAAP) | 151,291 | 86,984 | 107,295 | |||||
122 | Vodafone Group Plc Annual Report 2006 |
Financials | |
US GAAP condensed consolidated statement of operations
2006 | 2006 | 2005 | ||||||
Restated | ||||||||
Reference | $m | £m | £m | |||||
Revenue | 41,319 | 23,756 | 21,370 | |||||
Cost of sales | (48,920 | ) | (28,126 | ) | (27,803 | ) | ||
Selling, general and administrative expense | (7,552 | ) | (4,342 | ) | (3,779 | ) | ||
Operating loss | (15,153 | ) | (8,712 | ) | (10,212 | ) | ||
Share of results in investments accounted for under the equity method | (1,816 | ) | (1,044 | ) | (2,179 | ) | ||
Non-operating income and expense | (1,151 | ) | (662 | ) | (465 | ) | ||
Loss before income taxes | (18,120 | ) | (10,418 | ) | (12,856 | ) | ||
Income tax benefit | 5,614 | 3,228 | 4,994 | |||||
Minority interests | (170 | ) | (98 | ) | (108 | ) | ||
Loss from continuing operations | (12,676 | ) | (7,288 | ) | (7,970 | ) | ||
Discontinued operations, net of taxes | (10,405 | ) | (5,982 | ) | 590 | |||
Cumulative effect of changes in accounting principles, net of taxes | | | (6,372 | ) | ||||
Net loss | (23,081 | ) | (13,270 | ) | (13,752 | ) | ||
Basic and diluted loss per share: | Cents | Pence | Pence | |||||
Loss from continuing operations | (20.25 | ) | (11.64 | ) | (12.03 | ) | ||
Discontinued operations | (16.62 | ) | (9.56 | ) | 0.89 | |||
Cumulative effect of changes in accounting principles | | | (9.63 | ) | ||||
Net loss | k | (36.87 | ) | (21.20 | ) | (20.77 | ) | |
Discontinued operations
As discussed in note 29, the Group disposed of its interests in Vodafone Sweden during the year ended 31 March 2006. Vodafone Sweden has been classified as discontinued under US GAAP.
Summary of differences between IFRS and US GAAP
The Consolidated Financial Statements are prepared in accordance with IFRS, which differ in certain material respects from US GAAP. The differences that are material to the Group
relate to the following:
a. Basis
of consolidation
The
basis of consolidation under IFRS differs from that under US GAAP. The Group
has interests in several
jointly controlled entities, the most significant being Vodafone Italy. Under
IFRS, the Group reports its interests in jointly controlled entities using proportionate
consolidation. The Groups share of the assets, liabilities, income, expenses and cash flows of jointly controlled entities are combined with the
equivalent items in the Consolidated Financial Statements on a line-by-line basis. Under US GAAP, the results and assets and liabilities of jointly controlled entities are incorporated in the Consolidated Financial Statements using the equity method
of accounting. Under the equity method, investments in jointly controlled entities are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Groups share of the net assets of the jointly controlled
entity, less any impairment in the value of the investment. The Groups
share of the assets, liabilities, income and expenses of jointly controlled entities
which are included in the Consolidated Financial Statements are reported in note
13.
b. Connection
revenues and costs
Under IFRS and, for transactions subsequent to 30 September 2003, under US GAAP, customer connection revenue is recognised together with the related equipment revenue to the extent
that the aggregate equipment and connection revenue does not exceed the fair value of the equipment delivered to the customer. Any customer connection revenue not recognised together with related equipment revenue is deferred and recognised over the
period in which services are expected to be provided to the customer.
For transactions prior to 1 October 2003, connection revenue under US GAAP is recognised over the period that a customer is expected to remain connected to a network. Connection costs directly attributable to the income deferred are recognised over the same period. Where connection costs exceed connection revenue, the excess costs were charged in the statement of operations immediately upon connection. The balances of deferred revenue and deferred charges as of 30 September 2003 continue to be recognised over the period that a customer is expected to remain connected to a network.
c. Investments
accounted for under the equity method
This
line item includes the net effect of IFRS to US GAAP adjustments affecting net
loss and shareholders equity
related to investments accounted for under the equity method, other than the
cumulative effect of change in accounting principle related to intangible assets,
which has been disclosed separately. The differences are:
Adjustment to the share of results in investments accounted for under the equity method
2006 | 2005 | |||
£m | £m | |||
Goodwill
and other intangible assets associated with investments accounted for
under the equity method |
(7,772 | ) | (8,864 | ) |
Impairment loss | 3,600 | | ||
Income taxes | 2,863 | 3,362 | ||
Other | 79 | 62 | ||
Total | (1,230 | ) | (5,440 | ) |
Adjustments to the carrying value of investments accounted for under the equity method
2006 | 2005 | |||
£m | £m | |||
Goodwill
and other intangible assets associated with investments accounted for
under the equity method |
9,539 | 13,549 | ||
Income taxes | (11,997 | ) | (14,615 | ) |
Other | 171 | 84 | ||
Total | (2,287 | ) | (982 | ) |
Vodafone Group Plc Annual Report 2006 | 123 |
Notes
to the Consolidated Financial Statements
continued
38. | US GAAP information continued |
d. | Goodwill and other intangible assets |
The differences related to goodwill and other intangible assets included in the reconciliations of net loss and shareholders equity relate to acquisitions prior to the Groups adoption of SEC guidance issued on 29 September 2004. In determining the value of licences purchased in business combinations prior to 29 September 2004, the Group allocated the portion of the purchase price, in excess of the fair value attributed to the share of net assets acquired, to licences. The Group had previously concluded that the nature of the licences and the related goodwill acquired in business combinations was fundamentally indistinguishable. |
Following the adoption of the SEC guidance issued on 29 September 2004, the Groups US GAAP accounting policy for initial and subsequent measurement of goodwill and other intangible assets, other than determination of impairment of goodwill and finite lived intangible assets, is substantially aligned to that of IFRS described in note 2. However, there are substantial adjustments arising prior to 29 September 2004 from different methods of transition to current IFRS and US GAAP as discussed below.
Goodwill arising before the date of transition to IFRS has been retained under IFRS at the previous UK GAAP amounts for acquisitions prior to 1 April 2004. The Group has assigned amounts to licences and customer bases under US GAAP as they meet the criteria for recognition separately from goodwill, while these had not been recognised separately from goodwill under UK GAAP because they did not meet the recognition criteria. Under US GAAP, goodwill and other intangible assets with indefinite lives are capitalised and not amortised, but tested for impairment at least annually. Intangible assets with finite lives are capitalised and amortised over their useful economic lives.
Under IFRS and US GAAP, the purchase price of a transaction accounted for as an acquisition is based on the fair value of the consideration. In the case of share consideration, under IFRS the fair value of such consideration is based on the share price on the date of exchange. Under US GAAP, the fair value of the share consideration is based on the average share price over a reasonable period of time before and after the proposed acquisition is agreed to and announced. This has resulted in a difference in the fair value of the consideration for certain acquisitions and consequently in the amount of goodwill capitalised under IFRS and US GAAP.
The Groups accounting policy for testing goodwill and finite lived intangible assets for impairment under IFRS is discussed in note 2. For the purpose of goodwill impairment testing under US GAAP, the fair value of a reporting unit including goodwill is compared to its carrying value. If the fair value of a reporting unit is lower than its carrying value, the fair value of the goodwill within that reporting unit is compared to its respective carrying value, with any excess carrying value written off as an impairment loss. The fair value of the goodwill is the difference between the fair value of the reporting unit and the fair value of the identifiable net assets of the reporting unit. Intangible assets with finite lives are subject to periodic impairment tests when circumstances indicate that an impairment loss may exist. Where an assets (or asset groups) carrying amount exceeds its sum of undiscounted future cash flows, an impairment loss is recognised in an amount equal to the amount by which the assets (or asset groups) carrying amount exceeds its fair value, which is generally based on discounted cash flows.
As a result of the above, there are significant amounts reported as goodwill and not amortised under IFRS which are reported as licences, customers and deferred tax liabilities under US GAAP.
During the year ended 31 March 2005, the Group undertook a number of transactions, including a stake increase in Vodafone Hungary. Under US GAAP, these transactions have resulted in the Group assigning £65 million to intangible assets, of which £21 million was assigned to cellular licences and £20 million to customer bases. A corresponding deferred tax liability of £8 million was recognised. All intangible assets acquired, other than goodwill, are deemed to be of finite life, with a weighted average amortisation period of 8 years, comprising licences of 10 years and customer bases of 5 years.
Finite-lived intangible assets | ||||
2006 | 2005 | |||
Licences | £m | £m | ||
Gross carrying value | 154,135 | 152,831 | ||
Accumulated amortisation | (75,170 | ) | (61,188 | ) |
78,965 | 91,643 | |||
Customer bases | ||||
Gross carrying value | 1,663 | 5,952 | ||
Accumulated amortisation | (1,071 | ) | (5,333 | ) |
592 | 619 | |||
The total amortisation charge for the year ended 31 March 2006, under US GAAP, was £15,011 million (2005: £15,400 million). The estimated future amortisation charge on finite-lived intangible assets for each of the next five years is set out in the following table. The estimate is based on finite-lived intangible assets recognised at 31 March 2006 using foreign exchange rates on that date. It is likely that future amortisation charges will vary from the figures below, as the estimate does not include the impact of any future investments, disposals, capital expenditures or fluctuations in foreign exchange rates.
Year ending 31 March | £m | |
2007 | 15,448 | |
2008 | 15,362 | |
2009 | 15,264 | |
2010 | 12,367 | |
2011 | 3,754 | |
e. Impairment
losses
As
discussed in note 10, during the year ended 31 March 2006, the Group recorded
impairment losses
of £23,000 million in relation to the goodwill of Vodafone Germany and
Vodafone Italy under IFRS. Under US GAAP, the Group evaluated the recoverability of the long-lived assets, comprised primarily of licences, in Vodafone Germany and Vodafone Italy using undiscounted cash flows and determined that the carrying amount
of these assets was recoverable. As a result, the IFRS impairment losses of £23,000
million related to Vodafone Germany and Vodafone Italy were not recognised under
US GAAP.
During the year ended 31 March 2006, the Group also recorded an impairment loss under IFRS of £515 million and £4,900 million in relation to the goodwill of Vodafone Sweden and Vodafone Japan, respectively. Under US GAAP, the Group recognised impairment losses of licences of £883 million and £8,556 million in Vodafone Sweden and in Vodafone Japan. As a result of these impairment losses, the Group released related deferred tax liabilities of £247 million and £3,508 million, which have been included in the adjustment for income taxes. The impairment losses on Vodafone Swedens and Vodafone Japans licences have been included in discontinued operations under US GAAP.
Cumulative cumulative foreign currency gains and losses arising on the translation of the assets and liabilities into sterling have been included in the carrying value of a discontinued operation when assessing that carrying value for impairment.
f. Capitalised
interest
Under IFRS, the Group has adopted the benchmark accounting treatment for borrowing costs and, as a result, the Group does not capitalise interest costs on borrowings in respect of the
acquisition or construction of tangible and intangible fixed assets. Under US GAAP, the interest costs of financing the acquisition or construction of network assets and other fixed assets is capitalised during the period of construction until the
date that the asset is placed in service. Interest costs of financing the acquisition of licences are also capitalised until the date that the related network service is launched. Capitalised interest costs are amortised over the estimated useful
lives of the related assets.
g. Other
Financial instruments
Under IFRS, the equity put rights and similar arrangements are classified as financial liabilities. The liabilities are measured as the present value of the estimated exercise prices
of the equity put rights and similar arrangements, which is the fair value of the underlying shares on the date of exercise, with any changes in this estimate recognised in the consolidated income statement each period. Under US GAAP, these equity
put rights and similar arrangements are generally classified as derivative instruments. Consequently, this financial liability is eliminated for US GAAP purposes and the equity put rights and similar arrangements are accounted for at fair value.
Pensions
Under both IFRS and US GAAP, the Group recognises actuarial gains and losses as they are incurred. Under IFRS, these gains and losses are recognised directly in equity. These gains
and losses are included in the determination of net loss under US GAAP.
Other recognised income and expense
Under both IFRS and US GAAP, the cumulative foreign currency gains and losses arising on the translation of the assets and liabilities of entities with a functional currency other
than sterling are reclassified from accumulated other recognised income and expense and included in the determination of profit for the period or net loss on sale or liquidation of a foreign entity. Differences in the amount reclassified arise due
to differences in the carrying values of the underlying net assets and because the Group deemed the cumulative translation differences at the date of transition to IFRS to be zero.
124 | Vodafone Group Plc Annual Report 2006 |
Financials | |
During the year ended 31 March 2006, £9 million of foreign currency losses were reclassified from other recognised income and expense and included in the determination of US GAAP net loss as a result of the disposal of Vodafone Sweden. During the year ended 31 March 2005, £63 million of foreign currency losses were reclassified from other recognised income and expense and included in the determination of US GAAP net loss as a result of the partial disposal of Vodafone Egypt. Under IFRS, these gains amounted to £36 million for the year ended 31 March 2006.
h. Income taxes
The
most significant component of the income tax adjustment is due to temporary differences
between the book basis and tax basis of intangible assets other than goodwill
acquired in business combinations prior to 29 September 2004, resulting in the
recognition of deferred tax liabilities under US GAAP. This line item also includes
the tax effects of the other pre-tax IFRS to US GAAP adjustments described above.
Under IFRS, the Group does not recognise a deferred tax liability on the outside basis differences in its investment in associates to the extent that the Group controls the timing of the reversal of the difference and it is probable the difference will not reverse in the foreseeable future. Under US GAAP, the Group recognises deferred tax liabilities on these differences.
i. Minority interests
Minority
interests are reported as a component of total equity under IFRS and, accordingly,
profit for the period does not include an adjustment for profit for the period
attributable to minority interests. Under US GAAP, minority interests are reported
outside
of shareholders equity and the minority interest in the income of consolidated
subsidiaries is an adjustment to US GAAP net income.
j. Changes
in accounting principles
Post
employment benefits
During
the second half of the year ended 31 March 2005, the Group amended its policy
for accounting for actuarial gains and losses arising from its pension obligations
effective 1 April 2004. Until 31 March 2004, the Group used a corridor approach
under SFAS
No. 87, Employers Accounting for Pensions in which actuarial
gains and losses were deferred and amortised over the expected remaining service
period of the employees. The Group now recognises these gains and losses through
the income statement in the period in which they arise as the new policy more
faithfully represents the Groups financial position and more closely aligns
the Groups US GAAP policy to its IFRS policy of immediate recognition of
these items.
The cumulative effect on periods prior to adoption of £288 million has been shown, net of tax of £93 million, as a cumulative effect of a change in accounting principle in the reconciliation of net loss. The effect of the change in the year ended 31 March 2005 was to increase loss from continuing operations by £55 million (or 0.08 pence per share).
Intangible assets
On
29 September 2004, the SEC Staff issued new guidance on the interpretation of
SFAS No. 142 in relation to the valuation of intangible assets in business combinations
and impairment testing. This guidance has been codified as EITF Topic D-108.
Historically, the Group assigned to mobile licences the residual purchase price
in business combinations in excess of the fair values of all assets and liabilities
acquired other than mobile licences and goodwill. This approach was on the basis
that mobile licences were indistinguishable from goodwill. The new SEC guidance
requires the Group to distinguish between mobile licences and goodwill. However,
the new guidance does not permit the amount historically reported as mobile licences
to be subsequently reallocated between mobile licences and goodwill.
The new guidance will affect the allocation of the purchase price in future business combinations involving entities with mobile licences. The Group has applied the guidance relating to the allocation of purchase price to all business combinations consummated subsequent to 29 September 2004. This has resulted in values being assigned to licences using a direct valuation method, with any remaining residual purchase price allocated to goodwill.
In impairment testing of mobile licences associated with the Verizon Wireless equity method investment accounted for under SFAS No. 142, the Group has used a similar residual approach to determine the fair value of the licences when testing the asset for recoverability. In their announcement, the SEC Staff stated that the residual method of accounting for intangible assets should no longer be used and that companies should perform an impairment test using a direct method on all assets which were previously tested using a residual method. The Groups licences in other businesses are not tested for recoverability using a residual method and are, therefore, not affected by the new guidance.
The Group completed its transitional impairment test of Verizon Wireless mobile licences as of 1 January 2005. This resulted in a pre-tax charge of £11,416 million. This impairment loss is included, net of the related tax of £5,239 million, in the cumulative effect of change in accounting principle in the reconciliation of net loss. The tax effect comprises the release of £1,220 million representing the Groups share of Verizon Wireless deferred tax liabilities and £4,019 million deferred tax liabilities representing taxes recognised by the Group on its investment in Verizon Wireless. Fair value was determined as the present value of estimated future net cash flows allocable to the mobile licences. Verizon Wireless is included in the segment Mobile telecommunications US.
Share-based payments
The
Group adopted
SFAS No. 123 (Revised 2004), Share-based Payment, and related FASB
staff positions on 1 October 2005. SFAS No. 123 (Revised 2004) eliminates the
option to account for share-based payments to employees using the intrinsic value
method and requires share-based payments to be recorded using the fair value
method. Under the fair value method, the compensation cost for employees and
directors is determined at the date awards are granted and recognised over the
service period.
Concurrent with the adoption of SFAS No. 123 (Revised 2004), the Group adopted Staff Accounting Bulletin (SAB) 107. SAB 107 summarises the views of the SEC Staff regarding the interaction between SFAS No. 123 (Revised 2004) and certain SEC rules and regulations and provides the staffs views regarding the valuation of share-based payment arrangements for public companies.
The Group has adopted SFAS No. 123 (Revised 2004) using the modified retrospective method. Under this method, the Group has adjusted the financial statements for the periods between 1 April 1995 and 30 September 2005 to give effect to the fair value method of accounting for awards granted, modified or settled during those periods on a basis consistent with the pro forma amounts disclosed under the requirements of the original SFAS No. 123, Accounting for Stock-Based Compensation. The provisions of SFAS No. 123 (Revised 2004) will be applied to all awards granted, modified, or settled after 1 October 2005. The effect of applying the original provisions of SFAS No. 123 under the modified retrospective method of adoption on the year ended 31 March 2005 was to decrease loss before income taxes, loss from continuing operations and net loss by £66 million, £30 million and £30 million respectively (six months ended 30 September 2005: increases of £4 million, £8 million and £8 million respectively). The adjustment also had the effect of decreasing both basic and diluted loss per share from continuing operations and net loss by 0.05 pence (six months ended 30 September 2005: increase 0.01 pence). The adoption of SFAS No. 123 (Revised 2004) increased shareholders equity at 1 April 2004 by £112 million.
k. Loss per share
The
share options and shares described in note 20 were excluded from the calculation
of diluted loss per share as the effect of their inclusion in the calculation
would be
antidilutive due to the Group recognising a loss in all periods presented.
39. New
accounting standards
The
Group has not adopted the following standards, which have been issued by the
IASB or the International Financial Reporting Interpretations Committee (IFRIC).
The Group does not currently believe the adoption of these standards will
have a material impact on the consolidated results or financial position of
the Group.
| IAS Amendment, Amendment to IAS 1, Presentation of Financial Statements Capital Disclosures (effective for annual periods beginning after 1 January 2007, with earlier application encouraged). |
| IFRIC 4, Determining whether an Arrangements contains a Lease (effective from 1 April 2006). |
| IFRIC 5, Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds (effective from 1 April 2006). |
| IFRIC 6, Liabilities arising from Participating in a Specific Market Waste Electrical and Electronic Equipment (effective from 1 April 2006). |
| IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies (effective from 1 April 2006). |
| IFRIC 8, Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006, with early application encouraged). This interpretation has not yet been adopted for use in the EU. |
| IFRIC 9, Reassessment of Embedded Derivatives (effective for annual periods beginning on or after 1 June 2006, with early application encouraged). This interpretation has not yet been adopted for use in the EU. |
Vodafone Group Plc Annual Report 2006 | 125 |
Notes
to the Consolidated Financial Statements
continued
40. Transition
to IFRS on first-time adoption
Basis
of preparation of IFRS financial information
The
Groups Annual Report for the year ended 31 March 2006 is the first annual
Consolidated
Financial Statements that comply with IFRS. The Consolidated Financial Statements
have been prepared in accordance with the significant accounting policies
described in note 2. The Group has applied IFRS 1, First-time Adoption
of International Financial Reporting Standards in preparing these statements.
IFRS 1 exemptions
IFRS 1 sets out the procedures that the Group must follow when it adopts IFRS for the first time as the basis for preparing its Consolidated Financial Statements. The Group is
required to establish its IFRS accounting policies as at 31 March 2006 and, in general, apply these retrospectively to determine the IFRS opening balance sheet at its date of transition, 1 April 2004. This standard provides a number of optional
exemptions to this general principle. These are set out below, together with a description in each case of the exemption adopted by the Group.
Business combinations that occurred before the opening IFRS balance sheet
date (IFRS 3, Business Combinations)
The
Group has elected not to apply IFRS 3 retrospectively to business combinations
that took place before the date of transition. As a result, in the opening balance
sheet, goodwill arising from past business combinations remains as stated under
UK GAAP at 31 March 2004.
If the Group had elected to apply IFRS 3 retrospectively, the purchase consideration would have been allocated to the following major categories of acquired intangible assets and liabilities based on their fair values: licence and spectrum fees, brands, customer bases, and deferred tax liabilities. Goodwill would have been recognised as the excess of the purchase consideration over the fair values of acquired assets and liabilities retrospective application may have resulted in an increase or decrease to goodwill. The fair values of the acquired intangible assets would have been amortised over their respective useful lives.
Employee benefits actuarial gains and losses (IAS 19, Employee
Benefits)
The
Group has elected to recognise all cumulative actuarial gains and losses in relation
to employee benefit schemes at the date of transition.
Share-based payments (IFRS 2, Share-based Payment)
The
Group has elected to apply IFRS 2 to all relevant share-based payment transactions
granted but not fully vested at 1 April 2004.
Financial instruments (IAS 39, Financial Instruments: Recognition
and
Measurement and IFRS 7, Financial Instruments:
Disclosures)
The
Group has applied IAS 32 and IAS 39 for all periods presented and has therefore
not taken advantage of the exemption in IFRS 1 that would enable the Group
to only apply these standards from 1 April 2005.
Cumulative translation differences (IAS 21, The Effects of Changes
in
Foreign Exchange Rates)
The
Group has deemed the cumulative translation differences at the date of transition
to IFRS to be zero. As a result, the gain or loss of a subsequent disposal
of any foreign operation will exclude the translation differences that arose
before the date of transition to IFRS.
If the Group had not applied the exemption, the gain or loss on any disposals after the transition date would include additional cumulative transaction differences relating to the businesses disposed of.
Fair value or revaluation as deemed cost (IAS 16, Property, Plant
and
Equipment and IAS 38, Intangible Assets)
The
Group has not elected to measure any item of property, plant and equipment
or intangible asset at the date of transition to IFRS at its fair value.
Impact of transition to IFRS
The following
is a summary of the effects of the differences between IFRS and UK GAAP on the
Groups total equity shareholders funds and profit for the financial
year for the years previously reported under UK GAAP following the date of transition
to IFRS.
Total equity shareholders funds
1 April 2004 | 31 March 2005 | ||||
Note | £m | £m | |||
Total equity shareholders funds (UK GAAP) | 111,924 | 99,317 | |||
Measurement and recognition differences: | |||||
Intangible assets | a | (164 | ) | 13,986 | |
Proposed dividends | b | 728 | 1,395 | ||
Financial instruments | c | 385 | 350 | ||
Share-based payments | d | 12 | 63 | ||
Defined benefit pension schemes | e | (257 | ) | (361 | ) |
Deferred and current taxes | f | (1,011 | ) | (774 | ) |
Other | (66 | ) | (176 | ) | |
Total equity shareholders funds (IFRS) | 111,551 | 113,800 | |||
Profit for the year ended 31 March 2005 | |||||
Note | £m | ||||
Loss on ordinary activities after taxation (UK GAAP) | (6,938) | ||||
Measurement and recognition differences: | |||||
Intangible assets | a | 14,263 | |||
Financial instruments | c | (174 | ) | ||
Share-based payments | d | (91 | ) | ||
Defined benefit pension schemes | e | 7 | |||
Deferred and current taxes | f | 10 | |||
Other | (130 | ) | |||
Presentation differences: | |||||
Presentation of equity accounted investments | g | (45 | ) | ||
Presentation of joint ventures | h | (384 | ) | ||
Profit for the financial year (IFRS) | 6,518 | ||||
There were no significant differences between IFRS and UK GAAP on the Groups cash flow statement for the year ended 31 March 2005.
126 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Principal differences between IFRS and UK GAAP
Measurement and recognition differences
a. Intangible
assets
IAS
38, Intangible Assets requires that goodwill is not amortised. Instead
it is subject to an annual impairment review. As the Group has elected not to
apply IFRS 3 retrospectively to business combinations prior to the opening balance
sheet date under IFRS, the UK GAAP goodwill balance, after adjusting for items
including the impact of proportionate consolidation of joint ventures, at 31
March 2004
(£78,753 million) has been included in the opening IFRS consolidated balance
sheet and is no longer amortised.
Under IAS 38, capitalised payments for licences and spectrum fees are amortised on a straight line basis over their useful economic life. Amortisation is charged from the commencement of service of the network. Under UK GAAP, the Groups policy was to amortise such costs in proportion to the capacity of the network during the start up period and then on a straight-line basis thereafter.
b. Proposed
dividends
IAS
10, Events after the Balance Sheet Date requires that dividends declared
after the balance sheet date should not be recognised as a liability at that
balance sheet date as the liability does not represent a present obligation as
defined by IAS 37, Provisions, Contingent Liabilities and Contingent Assets.
c. Financial
instruments
IAS
32, Financial Instruments: Disclosure and Presentation and IAS 39, Financial
Instruments: Recognition and Measurement address the accounting for, and
reporting of, financial instruments. IAS 39 sets out detailed accounting requirements
in relation to financial assets and liabilities.
All derivative financial instruments are accounted for at fair market value whilst other financial instruments are accounted for either at amortised cost or at fair value depending on their classification. Subject to certain criteria, financial assets and financial liabilities may be designated as forming hedge relationships as a result of which fair value changes are offset in the income statement or charged/credited to equity depending on the nature of the hedge relationship.
d. Share-based
payments
IFRS
2, Share-based Payment requires that an expense for equity instruments
granted be recognised in the financial statements based on their fair value at
the date of grant. This expense, which is primarily in relation to employee option
and performance share schemes, is
recognised over the vesting period of the scheme.
While IFRS 2 allows the measurement of this expense to be calculated only on options granted after 7 November 2002, the Group has applied IFRS 2 to all instruments granted but not fully vested as at 1 April 2004. The Group has adopted the binomial model for the purposes of calculating fair value under IFRS, calibrated using a Black-Scholes framework.
e. Defined
benefit pension schemes
The
Group elected
to adopt early the amendment to IAS 19, Employee Benefits issued
by the IASB on 16 December 2004 which allows all actuarial gains and losses to
be
charged or credited to equity.
The Groups opening IFRS balance sheet at 1 April 2004 reflects the assets and liabilities of the Groups defined benefit schemes totalling a net liability of £154 million. The transitional adjustment of £257 million to opening reserves comprises the reversal of entries in relation to UK GAAP accounting under SSAP 24 less the recognition of the net liabilities of the Groups and associated undertakings defined benefit schemes.
f. Deferred
and current taxes
The
scope of IAS 12, Income Taxes is wider than the corresponding UK
GAAP standards, and requires deferred tax to be provided on all temporary differences
rather than just timing differences
under UK GAAP.
As a result, taxes in the Group's IFRS opening balance sheet at 1 April 2004 were adjusted by £1.0 billion. This includes an additional deferred tax liability of £1.8 billion in respect of the differences between the carrying value and tax written down value of the Group's investments in associated undertakings and joint ventures. This comprises £1.3 billion in respect of differences that arose when US investments were acquired and £0.5 billion in respect of undistributed earnings of certain associated undertakings and joint ventures, principally Vodafone Italy. UK GAAP does not permit deferred tax to be provided on the undistributed earnings of the Groups associated undertakings and joint ventures until there is a binding obligation to distribute those earnings.
IAS 12 also requires deferred tax to be provided in respect of the Groups liabilities under its post employment benefit arrangements and on other employee benefits such as share and share option schemes.
Presentation differences
g. Presentation
of equity accounted investments
Under
IFRS, in accordance
with IAS 1, Presentation of Financial Statements, Tax on profit on
the face of the consolidated income statement comprises the tax charge of the
Company, its subsidiaries and its share of the tax charge of joint ventures.
The Groups share of its associated undertakings tax charges is shown
as part of Share of result in associated undertakings rather than
being disclosed as part of the tax charge under UK GAAP.
In respect of the Verizon Wireless partnership, the line Share of result in associated undertakings includes the Groups share of pre-tax partnership income and the Groups share of the post-tax income attributable to corporate entities (as determined for US corporate income tax purposes) held by the partnership. The tax attributable to the Groups share of allocable partnership income is included as part of Tax on profit in the consolidated income statement. This treatment reflects the fact that tax on allocable partnership income is, for US corporate income tax purposes, a liability of the partners and not the partnership. Under UK GAAP, the Groups share of minority interests in associated undertakings was reported in minority interests, under IFRS this is reported within investments in associated undertakings.
h. Presentation
of joint ventures
IAS
31, Interests in Joint Ventures defines a jointly controlled entity
as an entity where unanimous consent over the strategic financial and operating
decisions is required between the parties sharing control. Control is defined
as the power to govern the financial and operating decisions of an entity so
as to obtain economic benefit from it.
The Group has reviewed the classification of its investments and concluded that the Groups 76.9% (31 March 2005: 76.8%) interest in Vodafone Italy, classified as a subsidiary undertaking under UK GAAP, should be accounted for as a joint venture under IFRS. In addition, the Groups interests in South Africa, Poland, Kenya and Fiji, which were classified as associated undertakings under UK GAAP, have been classified as joint ventures under IFRS as a result of the contractual rights held by the Group. The Groups interest in Romania was classified as a joint venture until the acquisition of the controlling stake from Telesystem International Wireless Inc. of Canada completed on 31 May 2005. The Group has adopted proportionate consolidation as the method of accounting for these six entities.
Under UK GAAP, the revenue, operating profit, net financing costs and taxation of Vodafone Italy were consolidated in full in the income statement with a corresponding allocation to minority interest. Under proportionate consolidation, the Group recognises its share of all income statement lines with no allocation to minority interest. There is no effect on the result for a financial period from this adjustment.
Under UK GAAP, the Groups interests in South Africa, Poland, Romania, Kenya and Fiji were accounted for under the equity method, with the Groups share of operating profit, interest and tax being recognised separately in the consolidated income statement. Under proportionate consolidation, the Group recognises its share of all income statement lines. There is no effect on the result for a financial period from this adjustment.
Under UK GAAP, the Group fully consolidated the cash flows of Vodafone Italy, but did not consolidate the cash flows of its associated undertakings. The IFRS consolidated cash flow statement reflects the Groups share of cash flows relating to its joint ventures on a line by line basis, with a corresponding recognition of the Groups share of net debt for each of the proportionately consolidated entities.
Other differences
i. Reclassification
of non-equity minority interests to liabilities
The
primary impact of the implementation of IAS 32 is the reclassification of the
$1.65 billion
preferred shares issued by the Groups subsidiary, Vodafone Americas Inc.,
from non-equity minority interests to liabilities. The reclassification at 1
April 2004 was £875 million. Dividend payments by this subsidiary, which
were previously reported in the Groups income statement as non-equity minority
interests, have been reclassified to
financing costs.
j. Fair
value of available-for-sale financial assets
The
Group has classified certain of its cost-based investments as available-for-sale
financial assets as defined in IAS 39. This classification does not reflect the
intentions of management in relation to these investments. These assets are measured
at fair value at each reporting date with movements in fair value taken to equity.
At
1 April 2004, a cumulative increase of £233 million in the fair value over
the
carrying value of these investments was recognised.
Vodafone Group Plc Annual Report 2006 | 127 |
Notes to the Consolidated Financial Statements
continued
40. Transition
to IFRS on first-time adoption continued
Reconciliation of the UK GAAP consolidated profit and loss account to the IFRS consolidated income statement
Year ended 31 March 2005
Measurement | |||||||||||
Presentation | and recognition | Discontinued | |||||||||
UK GAAP | differences | differences | operations | IFRS | |||||||
UK GAAP format | £m | £m | £m | £m | £m | IFRS format | |||||
Turnover | 34,133 | | (60 | ) | (7,395 | ) | 26,678 | Revenue | |||
Cost of sales | (20,753 | ) | | (711 | ) | 5,664 | (15,800 | ) | Cost of sales | ||
Gross profit | 13,380 | | (771 | ) | (1,731 | ) | 10,878 | Gross profit | |||
Selling and distribution costs | (2,031 | ) | | (15 | ) | 397 | (1,649 | ) | Selling and distribution expenses | ||
Administrative expenses | (16,653 | ) | 315 | 12,812 | 670 | (2,856 | ) | Administrative expenses | |||
404 | 1,576 | | 1,980 | Share of result in associated | |||||||
undertakings | |||||||||||
(315 | ) | (160 | ) | | (475 | ) | Other income and expense | ||||
Operating loss | (5,304 | ) | 404 | 13,442 | (664 | ) | 7,878 | Operating profit | |||
Share of result in associated undertakings | 1,193 | (1,193 | ) | ||||||||
Exceptional non-operating items | 13 | (13 | ) | ||||||||
8 | (2 | ) | (13 | ) | (7 | ) | Non-operating income and expense | ||||
324 | (21 | ) | (9 | ) | 294 | Investment income | |||||
Net interest payable and similar items | (604 | ) | (113 | ) | (183 | ) | 20 | (880 | ) | Financing costs | |
Loss on ordinary activities before taxation | (4,702 | ) | (583 | ) | 13,236 | (666 | ) | 7,285 | Profit before taxation | ||
Tax on loss on ordinary activities | (2,236 | ) | 538 | 265 | (436 | ) | (1,869 | ) | Tax on profit | ||
Loss on ordinary activities after taxation | (6,938 | ) | (45 | ) | 13,501 | (1,102 | ) | 5,416 | Profit on ordinary activities after | ||
taxation from continuing operations | |||||||||||
| | | 1,102 | 1,102 | Profit on ordinary activites after | ||||||
taxation from discontinued | |||||||||||
operations | |||||||||||
(6,938 | ) | (45 | ) | 13,501 | | 6,518 | Profit for the financial year | ||||
Minority interest | (602 | ) | 45 | 449 | | (108 | ) | Profit for the financial year | |||
attributable to minority interests | |||||||||||
Loss for the financial year | (7,540 | ) | | 13,950 | | 6,410 | Profit for the financial year | ||||
attributable to equity shareholders | |||||||||||
128 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Reconciliation of the UK GAAP consolidated balance sheet to the IFRS consolidated balance sheet
1
April 2004
Measurement | |||||||||
Presentation | and recognition | ||||||||
UK GAAP | differences | differences | IFRS | ||||||
UK GAAP format | £m | £m | £m | £m | IFRS format | ||||
Fixed assets: | Non-current assets: | ||||||||
Intangible assets | 93,622 | | 1,002 | 94,624 | Intangible assets | ||||
Tangible assets | 18,083 | | (971 | ) | 17,112 | Property, plant and equipment | |||
Investments in associated undertakings | 21,226 | | (800 | ) | 20,426 | Investments in associated undertakings | |||
Other investments | 1,049 | | 233 | 1,282 | Other investments | ||||
671 | 136 | 807 | Deferred tax assets | ||||||
221 | (9 | ) | 212 | Trade and other receivables | |||||
133,980 | 892 | (409 | ) | 134,463 | |||||
Current assets: | Current assets: | ||||||||
Stocks | 458 | | 10 | 468 | Inventory | ||||
Debtors | 6,901 | (6,901 | ) | ||||||
372 | (103 | ) | 269 | Taxation recoverable | |||||
5,148 | 305 | 5,453 | Trade and other receivables | ||||||
Investments | 4,381 | (4,381 | ) | ||||||
Cash at bank and in hand | 1,409 | 4,381 | 61 | 5,851 | Cash and cash equivalents | ||||
13,149 | (1,381 | ) | 273 | 12,041 | |||||
Total assets | 147,129 | (489 | ) | (136 | ) | 146,504 | Total assets | ||
Capital and reserves: | Equity: | ||||||||
Called up share capital | 4,280 | | | 4,280 | Called up share capital | ||||
Share premium account | 52,154 | | | 52,154 | Share premium account | ||||
Own shares held | (1,136 | ) | | | (1,136 | ) | Own shares held | ||
Other reserve | 99,640 | | 310 | 99,950 | Additional paid-in capital | ||||
| 233 | 233 | Other reserves | ||||||
Profit and loss account | (43,014 | ) | | (916 | ) | (43,930 | ) | Retained losses | |
Total equity shareholders funds | 111,924 | | (373 | ) | 111,551 | Total equity shareholders funds | |||
Minority interests | 3,007 | | (2,198 | ) | 809 | Minority interests | |||
114,931 | | (2,571 | ) | 112,360 | |||||
Creditors amounts falling due after more than one year | 12,975 | (12,975 | ) | Non-current liabilities: | |||||
12,224 | 1,859 | 14,083 | Long-term borrowings | ||||||
3,314 | 1,421 | 4,735 | Deferred tax liabilities | ||||||
(73 | ) | 227 | 154 | Post employment benefits | |||||
Provisions for liabilities and charges | 4,197 | (3,858 | ) | 5 | 344 | Provisions for liabilities and charges | |||
751 | (449 | ) | 302 | Trade and other payables | |||||
17,172 | (617 | ) | 3,063 | 19,618 | |||||
Creditors amounts falling due within one year | 15,026 | (15,026 | ) | Current liabilities: | |||||
2,054 | 788 | 2,842 | Short-term borrowings | ||||||
4,275 | (356 | ) | 3,919 | Current taxation liabilities | |||||
8,643 | (1,068 | ) | 7,575 | Trade and other payables | |||||
182 | 8 | 190 | Provisions for liabilities and charges | ||||||
15,026 | 128 | (628 | ) | 14,526 | |||||
147,129 | (489 | ) | (136 | ) | 146,504 | Total equity and liabilities | |||
Vodafone Group Plc Annual Report 2006 | 129 |
Notes
to the Consolidated Financial Statements
continued
40. Transition
to IFRS on first-time adoption continued
31
March 2005
Measurement | |||||||||
Presentation | and recognition | ||||||||
UK GAAP | differences | differences | IFRS | ||||||
UK GAAP format | £m | £m | £m | £m | IFRS format | ||||
Fixed assets: | Non-current assets: | ||||||||
68,673 | 12,326 | 80,999 | Goodwill | ||||||
Intangible assets | 83,464 | (68,673 | ) | 1,358 | 16,149 | Other intangible assets | |||
Tangible assets | 18,398 | | (956 | ) | 17,442 | Property, plant and equipment | |||
Investments in associated undertakings | 19,398 | | 836 | 20,234 | Investments in associated undertakings | ||||
Other investments | 852 | | 329 | 1,181 | Other investments | ||||
1,084 | 100 | 1,184 | Deferred tax assets | ||||||
12 | | 12 | Post employment benefits | ||||||
613 | (28 | ) | 585 | Trade and other receivables | |||||
122,112 | 1,709 | 13,965 | 137,786 | ||||||
Current assets: | Current assets: | ||||||||
Stocks | 430 | | 10 | 440 | Inventory | ||||
Debtors | 7,698 | (7,698 | ) | ||||||
268 | (230 | ) | 38 | Taxation recoverable | |||||
5,049 | 115 | 5,164 | Trade and other receivables | ||||||
Investments | 816 | (816 | ) | ||||||
Cash at bank and in hand | 2,850 | 816 | 103 | 3,769 | Cash and cash equivalents | ||||
11,794 | (2,381 | ) | (2 | ) | 9,411 | ||||
Total assets | 133,906 | (672 | ) | 13,963 | 147,197 | Total assets | |||
Capital and reserves: | Equity: | ||||||||
Called up share capital | 4,286 | | | 4,286 | Called up share capital | ||||
Share premium account | 52,284 | | | 52,284 | Share premium account | ||||
Own shares held | (5,121 | ) | | | (5,121 | ) | Own shares held | ||
Other reserve | 99,556 | | 525 | 100,081 | Additional paid-in capital | ||||
| 1,781 | 1,781 | Accumulated other recognised | ||||||
income and expense | |||||||||
Profit and loss account | (51,688 | ) | | 12,177 | (39,511 | ) | Retained losses | ||
Total equity shareholders funds | 99,317 | | 14,483 | 113,800 | Total equity shareholders funds | ||||
Minority interests | 2,818 | | (2,970 | ) | (152 | ) | Minority Interests | ||
102,135 | | 11,513 | 113,648 | ||||||
Creditors amounts falling due after more than one year | 12,382 | (12,382 | ) | Non-current liabilities: | |||||
11,613 | 1,577 | 13,190 | Long-term borrowings | ||||||
3,481 | 1,368 | 4,849 | Deferred tax liabilities | ||||||
(171 | ) | 307 | 136 | Post employment benefits | |||||
Provisions for liabilities and charges | 4,552 | (4,235 | ) | 2 | 319 | Provisions for other liabilities and | |||
charges | |||||||||
797 | (359 | ) | 438 | Trade and other payables | |||||
16,934 | (897 | ) | 2,895 | 18,932 | |||||
Creditors amounts falling due within one year | 14,837 | (14,837 | ) | Current liabilities: | |||||
392 | 1,611 | 2,003 | Short-term borrowings | ||||||
4,759 | (406 | ) | 4,353 | Current taxation liabilities | |||||
9,717 | (1,684 | ) | 8,033 | Trade and other payables | |||||
194 | 34 | 228 | Provisions for other liabilities and | ||||||
charges | |||||||||
14,837 | 225 | (445 | ) | 14,617 | |||||
133,906 | (672 | ) | 13,963 | 147,197 | Total equity and liabilities | ||||
130 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Report of Independent Registered Public Accounting Firm to the Members of Vodafone Group Plc
We have audited the Consolidated Financial Statements of Vodafone Group Plc, which comprise the consolidated consolidated balance sheets at 31 March 2006 and 2005, the consolidated income statements, consolidated cash flow statements, the consolidated statements of recognised income and expenses for each of the two years in the period ended 31 March 2006 and the related notes numbered 1 to 40. These Consolidated Financial Statements have been prepared under the accounting policies set out therein. We have also audited the information in the directors remuneration report that is described as having been audited.
We have reported separately on the individual Company Financial Statements of Vodafone Group Plc for the year ended 31 March 2006.
Respective responsibilities of directors and auditors
The
directors responsibilities for preparing the annual report, the directors remuneration report and the Consolidated Financial Statements in accordance with applicable
law and International Financial Reporting Standards (IFRS) as adopted for use in the European Union are set out in the statement of directors responsibilities.
Our responsibility is to audit the Consolidated Financial Statements and the part of the directors remuneration report described as having been audited in accordance with relevant United Kingdom legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the Consolidated Financial Statements give a true and fair view in accordance with the relevant financial reporting framework and whether the Consolidated Financial Statements and the part of the directors remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.
We report to you if in our opinion the information given in the directors report is not consistent with the Consolidated Financial Statements. We also report to you if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors transactions with the Company and other members of the Group is not disclosed.
We also report to you if, in our opinion, the Company has not complied with any of the four directors remuneration disclosure requirements specified for our review by the Listing Rules of the Financial Services Authority. These comprise the amount of each element in the remuneration package and information on share options, details of long term incentive schemes, and money purchase and defined benefit schemes. We give a statement, to the extent possible, of details of any non-compliance.
We review whether the corporate governance statement reflects the Companys compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the boards statement on internal control covers all risks and controls, or form an opinion on the effectiveness of the Groups corporate governance procedures or its risk and control procedures.
We read the directors report and the other information contained in the annual report for the above year as described in the contents section including the unaudited part of the directors remuneration report and we consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Consolidated Financial Statements.
Basis of audit opinion
We conducted
our audit in accordance with International Standards on Auditing (UK and Ireland)
issued by the Auditing Practices Board and with the standards of the Public
Company Accounting Oversight Board (United States). The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Consolidated Financial Statements and the part of the directors remuneration report described as having been audited. It
also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the Consolidated Financial Statements, and of whether the accounting policies are appropriate to the Groups
circumstances,
consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Consolidated Financial Statements and the part of the directors remuneration report described as having been audited are free
from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Consolidated Financial Statements and the part of the directors remuneration report described as having been audited.
Opinions
IFRS opinion
In our opinion:
| the Consolidated Financial Statements give a true and fair view, in accordance with IFRS as adopted for use in the European Union, of the state of the Groups affairs as at31 March 2006 and of its loss for the year then ended; |
| the Consolidated Financial Statements and the part of the directors remuneration report described as having been audited have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and |
| the information given in the directors report is consistent with the Consolidated Financial Statements. |
As explained in note 1 of the Consolidated Financial Statements, the Group, in addition to complying with its legal obligation to comply with IFRS as adopted for use in the European Union, has also complied with the IFRS as issued by the International Accounting Standards Board. Accordingly, in our opinion the financial statements give a true and fair view, in accordance with IFRS, of the state of the Groups affairs as at 31 March 2006 and of its loss for the year then ended.
US opinion
In our opinion the Consolidated Financial Statements present fairly, in all material respects, the consolidated financial position of the Group at 31 March 2006 and 2005 and the
consolidated results of its operations and cash flows for each of the two years in the period ended 31 March 2006 in conformity with IFRS as adopted for use in the European Union and as issued by the International Accounting Standards Board.
IFRS vary in significant respects from the accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 38 to the Consolidated Financial Statements.
Deloitte & Touche LLP
Chartered
Accountants and Registered Auditors
London
United Kingdom
30 May 2006
Vodafone Group Plc Annual Report 2006 | 131 |
Company Financial Statements of Vodafone Group Plc at 31 March
2006 | 2005 | |||||
(restated) | ||||||
Note | £m | £m | ||||
Fixed assets | ||||||
Other investments | 3 | 133 | | |||
Shares in group undertakings | 3 | 67,395 | 94,446 | |||
67,528 | 94,446 | |||||
Current assets | ||||||
Debtors: amounts falling due after more than one year | 4 | 236 | 370 | |||
Debtors: amounts falling due within one year | 4 | 99,417 | 77,466 | |||
Investments | 5 | | 28 | |||
99,653 | 77,864 | |||||
Creditors: amounts falling due within one year | 6 | (76,591 | ) | (89,740 | ) | |
Net current assets/( liabilities) | 23,062 | (11,876 | ) | |||
Total assets less current liabilities | 90,590 | 82,570 | ||||
Creditors: amounts falling due after more than one year | 6 | (13,487 | ) | (9,380 | ) | |
77,103 | 73,190 | |||||
Capital and reserves | ||||||
Called up share capital | 7 | 4,165 | 4,286 | |||
Share premium account | 8 | 52,444 | 52,284 | |||
Capital redemption reserve | 8 | 128 | | |||
Capital reserve | 8 | 88 | 88 | |||
Other reserves | 8 | 1,012 | 1,048 | |||
Own shares held | 8 | (8,186 | ) | (5,085 | ) | |
Profit and loss account | 8 | 27,452 | 20,569 | |||
Equity shareholders funds | 77,103 | 73,190 | ||||
The Financial Statements were approved by the Board of directors on 30 May 2006 and were signed on its behalf by:
Arun Sarin | Andy Halford |
Chief Executive | Chief Financial Officer |
The accompanying notes are an integral part of these Financial Statements.
132 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Notes to the Company Financial Statements
1. Basis of preparation
The
separate financial statements of the Company are drawn up in accordance with
the Companies
Act 1985 and UK generally accepted accounting principles (UK GAAP).
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
As permitted by Section 230 of the Companies Act 1985, the profit and loss account of the Company is not presented in this Annual Report.
The Company has taken advantage of the exemption contained in FRS 1 Cash flow statements and has not produced a cash flow statement.
The Company has taken advantage of the exemption contained in FRS 8 Related party disclosures and has not reported transactions with fellow Group undertakings.
2. Significant accounting policies
The
Companys significant accounting policies are described below.
Accounting convention
The Company Financial Statements are prepared under the historical cost convention and in accordance with applicable accounting standards of the UK Accounting Standards Board and
pronouncements of the Urgent Issues Task Force.
New accounting standards
The
Company has adjusted its accounting policies to adopt the following new standards:
FRS 17 Retirement Benefits, FRS 20 Share-based Payments, FRS 21
Events after the Balance Sheet Date, FRS 22 Earnings per share, FRS 23 The Effects of Changes in Foreign Exchange Rates, FRS 26 Financial Instruments: Measurement and FRS 28 Corresponding
Amounts. The Company has also early adopted FRS 29 Financial Instruments: Disclosures, which replaces the disclosure requirements of FRS 25 Financial Instruments: Disclosure and Presentation. Comparative figures have
been restated accordingly for changes in accounting policy. Details of the effect of the prior year adjustment are set out below and the full impact on the Companys
net asset position as at 1 April 2005 is analysed in note 8.
FRS 17 impacts the Company in its role as sponsoring employer of the Vodafone Group Pension Scheme, a defined benefit pension scheme. The adoption of FRS 17 had no effect on the Companys profit or net assets as the Company was unable to identify its share of the underlying assets and liabilities of the Vodafone Group Pension Scheme on a consistent and reasonable basis. Therefore the Company has applied the guidance within FRS 17 to account for defined benefit schemes as if they were defined contribution schemes and recognise only the contribution payable each year. The Company had no contributions payable for the years ended 31 March 2006 and 31 March 2005 as it has no employees.
FRS 20 requires that the fair value of options and shares awarded to employees is charged to the profit and loss account over the vesting period. The Company does not incur a charge under this standard. However, where the Company has granted rights over the Companys shares or share options to the employees of its subsidiary undertakings, an additional capital contribution has been deemed to have been made by the Company to its subsidiary undertakings. This results in an additional investment in subsidiaries and a corresponding increase in shareholders equity. The additional capital contribution is based on the fair value of the grant issued allocated over the underlying grants vesting period. As a result of adopting FRS 20, the Companys net assets at 31 March 2005 increased by £419 million.
FRS 21 requires that dividends declared after the balance sheet date should not be recognised as a liability at the balance sheet date as the liability does not represent a present obligation. Under FRS 21, interim dividends are recognised when they are paid, and final dividends are recognised when they are approved by shareholders. As a result of adopting FRS 21, the Companys net assets at 31 March 2005 increased by £1,395 million.
FRS 23 sets out additional guidance on the translation method for transactions in foreign currencies and on determining the functional and presentational currencies. The adoption of FRS 23 had no impact on the Companys profit or net assets.
The Company has adopted the presentation requirements of FRS 25. This deals with the classification of capital instruments issued between debt and equity and the implications of that classification for dividends and interest expense.
FRS 26 sets out the requirements for measurement, recognition and de-recognition of financial instruments. The main impact of this change in accounting policy is to recognise the fair value of foreign exchange contracts and interest rate swaps on the balance sheet with effect from the transitional date of 1 April 2004. The adoption of FRS 26 increased the Companys net assets at 31 March 2005 by £182 million.
FRS 28 gives the requirements for the disclosure of corresponding amounts for items shown in an entitys primary financial statements and the notes to the financial statements. The adoption of FRS 28 had no effect upon the Companys profit or net assets.
FRS 29 sets out the requirements for the disclosures relating to financial instruments. The Company has early adopted FRS 29 and applied its requirements from 1 April 2005. The Company is exempt from the requirements of the standard as full FRS 29 disclosures are available in the Vodafone Group Plc Annual Report 2006.
Investments
Shares in Group undertakings are stated at cost less any provision for permanent diminution in value.
The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. If any such indication of impairment exists, the Company makes an estimate of the recoverable amount. If the recoverable amount of the cash-generating unit is less than the value of the investment, the investment is considered to be impaired and is written down to its recoverable amount. An impairment loss is recognised immediately in the profit and loss account.
For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity, determined using the weighted average costs method, is included in the net profit or loss for the period.
Foreign currencies
In
preparing the financial statements of the Company, transactions in currencies
other than
the Companys functional currency are recorded at the rates of exchange
prevailing on the dates of the transactions. At each balance sheet date, monetary
items denominated in foreign currencies are retranslated at the rates prevailing
on the balance sheet date. Non-monetary items carried at fair value that are
denominated in foreign
currencies are retranslated at the rate prevailing on the date when fair value
was determined. Non-monetary items that are measured in terms of historical
cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the profit and loss account for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the profit and loss account for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.
Vodafone Group Plc Annual Report 2006 | 133 |
Notes
to the Company Financial Statements
continued
2. Significant
accounting policies continued
Borrowing costs
All
borrowing costs are recognised in the profit and loss account in the period
in which they are incurred.
Taxation
Current tax,
including UK corporation tax and foreign tax, is provided at amounts expected
to be paid (or recovered) using the tax rates and laws that have been enacted
or substantively enacted by the balance sheet date.
Deferred tax is provided in full on timing differences that exist at the balance sheet date and that result in an obligation to pay more tax, or a right to pay less tax in the future. The deferred tax is measured at the rate expected to apply in the periods in which the timing differences are expected to reverse, based on the tax rates and laws that are enacted or substantively enacted at the balance sheet date. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. Deferred tax is not provided on timing differences arising from the revaluation of fixed assets where there is no binding commitment to sell the asset. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.
Financial
instruments
Financial
assets and financial liabilities, in respect of financial instruments, are recognised
on the balance sheet when the Company becomes a party to the contractual provisions
of the instrument.
Financial
liabilities and equity instruments
Financial
liabilities and equity instruments issued by the Company are classified according
to the substance of the contractual arrangements entered into and the definitions
of a financial liability and an equity instrument. An equity instrument is any
contract that evidences a residual interest in the assets of the Company after
deducting all of its liabilities. The accounting policies adopted for specific
financial liabilities and equity instruments are set out below.
Capital
market and bank borrowings
Interest-bearing
loans and overdrafts are initially measured at fair value, and are subsequently
measured at amortised cost, using the effective interest rate method, except
where they are identified as a hedged item in a fair value hedge. Any difference
between the proceeds net of transaction costs and the settlement or redemption
of borrowings is recognised over the term of the borrowing.
Equity
instruments
Equity instruments
issued by the Company are recorded at the proceeds received, net of direct issue
costs.
Derivative
financial instruments and hedge accounting
The Companys
activities expose it to the financial risks of changes in foreign exchange rates
and interest rates.
The use of financial derivatives is governed by the Groups policies approved by the board of directors, which provide written principles on the use of financial derivatives consistent with the Groups risk management strategy. The Company does not use derivative financial instruments for speculative purposes.
Derivative financial instruments are initially measured at fair value on the contract date, and are subsequently re-measured to fair value at each reporting date. The Company designates certain derivatives as hedges of the change of fair value of recognised assets and liabilities (fair value hedges). Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting.
Fair value
hedges
The Companys
policy is to use derivative instruments (primarily interest rate swaps) to convert
a proportion of its fixed rate debt to floating rates in order to hedge the
interest rate risk arising, principally, from capital market borrowings. The
Company designates these as fair value hedges of interest rate risk with changes
in fair value of the hedging instrument recognised in the profit and loss account
for the period together with the changes in the fair value of the hedged item
due to the hedged risk, to the extent the hedge is effective. The ineffective
portion is recognised immediately in the profit and loss account.
Share
based payments
The Group
operates a number of equity settled share based compensation plans for the employees
of subsidiary undertakings, using the Companys equity instruments. The
fair value of the compensation given in respect of these share based compensation
plans is recognised as a capital contribution to the Companys subsidiary
undertakings, over the vesting period. The capital contribution is reduced by
any payments received from subsidiary undertakings in respect of these share
based payments.
Dividends
paid and received
Dividends
paid and received are included in the financial statements in the period in
which the related dividends are actually paid or received or, in respect of
the Companys final dividend for the year, approved by shareholders.
134 | Vodafone Group Plc Annual Report 2006 |
Financials | |
3. Fixed
assets
Other
investments
The
Companys fixed asset investments comprises £133 million (2005: £nil)
representing 30,252,460 ordinary shares in VenFin Limited (2005: £nil).
The investment is held at fair value.
Shares in group undertakings
£m | ||
|
||
Cost: | ||
1 April 2005 | 98,789 | |
Adjustment for adoption of FRS 20 | 419 | |
|
||
1 April 2005, as restated | 99,208 | |
Additions | 3,642 | |
Capital contributions arising from share based payments | 114 | |
Contributions received in relation to share based payments | (150 | ) |
Disposals | (30,654 | ) |
|
||
31 March 2006 | 72,160 | |
|
||
Amounts provided for: | ||
1 April 2005 | 4,762 | |
Amounts provided for during the year | 3 | |
|
||
31 March 2006 | 4,765 | |
|
||
Net book value: | ||
31 March 2006 | 67,395 | |
|
||
31 March 2005, as restated | 94,446 | |
|
At 31 March 2006, the Company had the following principal subsidiary undertakings:
Country of | ||||||
incorporation | Percentage | |||||
Name | Principal activity | or registration | shareholding | |||
|
|
|
|
|||
Vodafone International Operations Limited | Holding company | England | 100 | |||
2006 | 2005 | |||
(restated) | ||||
£m | £m | |||
|
|
|||
Amounts falling due within one year: | ||||
Amounts owed by subsidiary undertakings | 99,174 | 77,246 | ||
Taxation recoverable | 72 | 37 | ||
Group relief receivable | | 43 | ||
Other debtors | 171 | 140 | ||
|
|
|||
99,417 | 77,466 | |||
|
|
|||
Amounts falling due after more than one year: | ||||
Deferred taxation | 5 | 5 | ||
Other debtors | 231 | 365 | ||
|
|
|||
236 | 370 | |||
|
|
2006 | 2005 | |||
£m | £m | |||
|
||||
Liquid Investments | | 28 | ||
|
|
The Companys liquid investments at 31 March 2005 comprised of short term foreign exchange forward contracts.
Vodafone Group Plc Annual Report 2006 | 135 |
Notes
to the Company Financial Statements
continued
6. Creditors
2006 | 2005 | |||
(restated) | ||||
£m | £m | |||
|
|
|
||
Amounts falling due within one year: | ||||
Bank loans and other loans | 2,143 | 42 | ||
Amounts owed to subsidiary undertakings | 74,229 | 89,652 | ||
Group relief payable | 89 | | ||
Other creditors | 120 | 34 | ||
Accruals and deferred income | 10 | 12 | ||
|
|
|
||
76,591 | 89,740 | |||
|
||||
Amounts falling due after more than one year: | ||||
Bank loans | | 16 | ||
Other loans | 13,321 | 9,316 | ||
Other creditors | 166 | 48 | ||
|
|
|
||
13,487 | 9,380 | |||
|
|
|
Included in amounts falling due after more than one year are other loans of £5,942 million, which are due in more than five years from 1 April 2006 and are payable otherwise than by instalments. Interest payable on this debt ranges from 3.625% and 7.875%.
2006 | 2005 | |||||||
|
|
|||||||
Number | £m | Number | £m | |||||
|
|
|
|
|||||
Authorised: | ||||||||
Ordinary shares of US$0.10 each | 78,000,000,000 | 4,875 | 78,000,000,000 | 4,875 | ||||
Ordinary shares allotted, issued and fully paid: | ||||||||
1 April | 68,380,866,539 | 4,286 | 68,263,933,048 | 4,280 | ||||
Allotted during the year | 120,466,245 | 7 | 116,933,491 | 6 | ||||
Cancelled during the year | (2,250,000,000 | ) | (128 | ) | | | ||
|
|
|
|
|||||
31 March | 66,251,332,784 | 4,165 | 68,380,866,539 | 4,286 | ||||
|
|
|
|
Notes: | |
(1) | At 31 March 2006 the Company held 6,120,129,348 (2005: 3,785,000,000) treasury shares with a nominal value of £352 million (2005: £205 million). |
(2) | At 31 March 2006, 50,000 (2005: 50,000) 7% cumulative fixed rate shares of £1 each were authorised, allotted, issued and fully paid by the Company. |
Allotted during the year
Nominal | ||||||
value | Proceeds | |||||
Number | £m | £m | ||||
|
|
|
|
|||
UK share awards and option scheme awards | 85,744,935 | 5 | 122 | |||
US share awards and option scheme awards | 34,721,310 | 2 | 37 | |||
|
|
|||||
Total for share option schemes and restricted stock awards | 120,466,245 | 7 | 159 | |||
|
|
Cancelled
during the year
During
the year 2,250,000,000 (2005: nil) treasury shares were cancelled in order to
comply with Companies Act requirements in relation to the amount of issued share
capital that can be held in treasury.
Share-based
payments
The
Company currently uses a number of equity settled share plans to grant options
and shares to the directors and employees of its subsidiary undertakings, as
listed below.
Share
option schemes
Vodafone Group
savings related and sharesave schemes
Vodafone Group executive schemes
Vodafone
Group 1999 Long Term Stock Incentive Plan and ADSs
Other share option plans
Share
plans
Share Incentive
plan
Restricted share plans
As at 31 March 2006, the Company had 786.9 million ordinary share options outstanding (2005: 1,122.6 million) and 7.7 million ADS options outstanding (2005: 11.2 million).
The Company has made a capital contribution to its subsidiary undertakings in relation to share based payments. At 1 April 2005, the capital contribution net of payments received from subsidiary undertakings was £419 million. During the year ended 31 March 2006, the capital contribution arising from share based payments was £114 million, with payments of £150 million received from subsidiary undertakings. The Company does not incur a profit and loss account charge in relation to share based payments.
Full details of share based payments, share option schemes and share plans are disclosed in note 20 to the Consolidated Financial Statements.
136 | Vodafone Group Plc Annual Report 2006 |
Financials | |
8. Reserves and reconciliation of movements in equity shareholders funds
Share | Capital | Profit | Total equity | |||||||||||||
premium | redemption | Capital | Other | Own shares | and loss | shareholders | ||||||||||
Share capital | account | reserve | reserve | reserves | held | account | funds | |||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||
1 April 2005 as previously reported | 4,286 | 52,284 | | 88 | 629 | (5,085 | ) | 18,992 | 71,194 | |||||||
Prior year adjustment implementation of FRS 20 | | | | | 419 | | | 419 | ||||||||
Prior year adjustment implementation of FRS 21 | | | | | | | 1,395 | 1,395 | ||||||||
Prior year adjustment implementation of FRS 26 | | | | | | | 182 | 182 | ||||||||
1 April 2005 | 4,286 | 52,284 | | 88 | 1,048 | (5,085 | ) | 20,569 | 73,190 | |||||||
Issue of new shares | 7 | 152 | | | | | | 159 | ||||||||
Purchase of own shares | | | | | | (6,500 | ) | | (6,500 | ) | ||||||
Own shares released on vesting of share awards | | 8 | | | | 346 | | 354 | ||||||||
Cancellation of own shares held | (128 | ) | | 128 | | | 3,053 | (3,053 | ) | | ||||||
Profit for the financial year | | | | | | | 12,671 | 12,671 | ||||||||
Dividends | | | | | | | (2,753 | ) | (2,753 | ) | ||||||
Capital contribution given relating to share based payments | | | | | 114 | | | 114 | ||||||||
Contribution received relating to share based payments | | | | | (150 | ) | | | (150 | ) | ||||||
Other movements | | | | | | | 18 | 18 | ||||||||
31 March 2006 | 4,165 | 52,444 | 128 | 88 | 1,012 | (8,186 | ) | 27,452 | 77,103 | |||||||
In accordance with the exemption allowed by section 230 in the Companies Act 1985, no profit and loss account has been presented by the Company. The profit for the financial year dealt with in the accounts of the Company is £12,671 million (2005 restated: £10,583 million). Under English law, the amount available for distribution to shareholders is based upon the profit and loss reserve of the Company and is reduced by the amount of own shares held and is limited by statutory or other restrictions.
The auditor remuneration for audit services to the Company was £0.6 million (2005: £0.5 million). The Company paid no audit fees in relation to non audit services to the Company for the years ended 31 March 2006 and 31 March 2005.
The directors are remunerated by Vodafone Group Plc for their services to the Group as a whole. No remuneration was paid to them specifically in respect of their services to Vodafone Group Plc for either year. Full details of the directors remuneration are disclosed in the Directors Remuneration Report in the Vodafone Group Plc Annual Report 2006.
There were no employees other than directors of the Company throughout the current or the preceding year.
2006 | 2005 | |||
£m | £m | |||
Declared and paid during the financial year: | ||||
Final dividend for the year ended 31 March 2005: 2.16 pence per share | ||||
(2004: 1.078 pence per share) | 1,386 | 728 | ||
Interim dividend for the year ended 31 March 2006: 2.20 pence per share | ||||
(2005: 1.91 pence per share) | 1,367 | 1,263 | ||
2,753 | 1,991 | |||
Proposed or declared after the balance sheet date and not recognised as a liability: | ||||
Final dividend for the year ended 31 March 2006: 3.87 pence per share | ||||
(2005: 2.16 pence per share) | 2,327 | 1,386 | ||
Vodafone Group Plc Annual Report 2006 | 137 |
Notes
to the Company Financial Statements
continued
10. Contingent liabilities
2006 | 2005 | ||||
£m | £m | ||||
Performance bonds | 172 | 176 | |||
Credit guarantees third party indebtedness | 1,570 | 1,424 | |||
Other guarantees and contingent liabilities | 1 | 1 | |||
Performance bonds
Performance bonds require the Company to make payments to third parties in the event that the Company or its subsidiary undertakings do not perform what is expected of it under the
terms of any related contracts.
Company performance bonds include £152 million (2005: £149 million) in respect of undertakings to roll out third generation networks in Spain.
Credit guarantees third party indebtedness
Credit guarantees comprise guarantees and indemnities of bank or other facilities.
At 31 March 2006, the Company had guaranteed debt of Vodafone Finance K.K. amounting to £1,268 million (2005: £1,111 million) and issued guarantees in respect of notes issued by Vodafone Americas, Inc. amounting to £302 million (2005: £311 million). The Japanese facility expires by March 2011 and the majority of Vodafone Americas, Inc. bond guarantees by July 2008.
Other guarantees and contingent liabilities
Other guarantees principally comprise commitments to support disposed entities.
Legal proceedings
Details regarding certain legal actions which involve the Company are set out in note 31 to the Consolidated Financial Statements.
138 | Vodafone Group Plc Annual Report 2006 |
Financials | |
Independent Auditors Report to the Members of Vodafone Group Plc
We have audited the individual Company Financial Statements of Vodafone Group Plc for the year ended 31 March 2006 which comprise the balance sheet and the related notes 1 to 10. These individual Company Financial Statements have been prepared under the accounting policies set out therein.
The corporate governance statement and the directors remuneration report are included in the Group annual report of Vodafone Group Plc for the year ended 31 March 2006. We have reported separately on the Consolidated Financial Statements of Vodafone Group Plc for the year ended 31 March 2006 and on the information in the directors remuneration report that is described as having been audited.
Respective responsibilities of directors and auditors
The directors responsibilities
for preparing the annual report and the individual Company
Financial Statements in accordance with applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice) are set out
in the
statement of directors responsibilities.
Our responsibility is to audit the individual Company Financial Statements in accordance with relevant United Kingdom legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the individual Company Financial Statements give a true and fair view in accordance with the relevant financial reporting framework and whether the individual Company Financial Statements have been properly prepared in accordance with the Companies Act 1985. We report to you if in our opinion the information given in the directors report is not consistent with the individual Company Financial Statements. We also report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not disclosed.
We read the directors report and the other information contained in the annual report for the above year as described in the contents section and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the individual Company Financial Statements.
Basis of audit opinion
We conducted
our audit in accordance with International Standards on Auditing (UK and Ireland)
issued by the Auditing Practices Board. An audit includes examination, on a
test basis, of evidence relevant to the amounts and disclosures in the individual
Company Financial Statements. It also includes an assessment of the significant
estimates and judgements made by the directors in the preparation of the individual
Company
Financial Statements, and of whether the accounting policies are appropriate
to the Companys circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the individual Company Financial Statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the individual Company Financial Statements.
Opinion
In our opinion:
| the individual Company Financial Statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company's affairs as at 31 March 2006; |
| the individual Company Financial Statements have been properly prepared in accordance with the Companies Act 1985; and |
| the information given in the directors report is consistent with the Company Financial Statements. |
Deloitte & Touche
LLP
Chartered
Accountants and Registered Auditors
London
United Kingdom
30 May 2006
Vodafone Group Plc Annual Report 2006 | 139 |
Note: | |
(1) | Payment date for both ordinary shares and ADSs. |
Dividend payment methods
Holders of ordinary shares can:
| have cash dividends paid direct to a bank or building society account; or |
| have cash dividends paid in the form of a cheque; or |
| elect to use the cash dividends to purchase more Vodafone shares under the Dividend Reinvestment Plan (see below). |
If a holder of ordinary shares does decide to receive cash dividends, it is recommended that these are paid directly to the shareholders bank or building society account via BACS or EFTS. This avoids the risk of cheques being lost in the post and means the dividend will be in the shareholders account on the dividend payment date. The shareholder will be sent a tax voucher confirming the amount of dividend and the account into which it has been paid.
Please contact the Companys Registrars for further details.
Holders of ADSs can:
| have cash dividends paid direct to a bank account; or |
| have cash dividends paid by cheque; or |
| elect to have the dividends reinvested to purchase additional Vodafone ADSs (see below for contact details). |
Dividend reinvestment
The Company offers a Dividend Reinvestment Plan which allows holders of ordinary shares who choose to participate to use their cash dividends to acquire additional shares in the
Company. These are purchased on their behalf by the Plan Administrator through a low cost dealing arrangement. Further details can be obtained from the Plan Administrator on +44 (0) 870 702 0198.
For ADS holders, The Bank of New York maintains a Global BuyDIRECT Plan for the Company, which is a direct purchase and sale plan for depositary receipts, with a dividend reinvestment facility. For additional information, please call toll-free from within the US on +1 800 233 5601, or write to:
The
Bank of New York Shareholder Relations Department Global BuyDIRECT P.O. Box 1958 Newark New Jersey 07101-1958 USA |
For calls
from outside
the US, call +1 212 815 3700.
Please note that this number is not toll-free.
Telephone share dealing
A telephone
share dealing service with the Companys Registrars is available for holders
of ordinary shares. The service is available from 8.00 am to 4.30 pm, Monday
to Friday,
excluding bank holidays, on telephone number +44 (0) 870 703 0084.
Detailed terms and conditions are available on request by calling the above number.
Postal share dealing
A postal share dealing service is available for holders of ordinary shares with 1,000 shares or fewer who want to either increase their holding or sell their entire holding.
Further information about this service can be obtained from the Companys Registrars on +44 (0) 870 702 0198.
Registrars and transfer office
The Companys
ordinary share register is maintained by:
Computershare
Investor
Services PLC P.O. Box 82 The Pavilions, Bridgwater Road Bristol BS99 7NH England |
|
Telephone:
+44 (0)
870 702 0198 Fax: + 44 (0) 870 703 6101 Email: web.queries@computershare.co.uk |
Holders of ordinary shares resident in Ireland should contact:
Computershare
Investor
Services (Ireland) Limited P.O. Box 9742 Dublin 18 Ireland |
|
Telephone:
+353 (0)
818 300 999 or Fax: +353 (0) 1 216 3151 Email: web.queries@computershare.ie |
Any queries about the administration of holdings of ordinary shares, such as change of address, change of ownership or dividend payments, should be directed to the Companys Registrars at the relevant address or telephone number immediately above. Holders of ordinary shares may also check details of their shareholding, subject to passing an identity check, on the Registrars website at www.computershare.com
The Depositary Bank for the Companys ADR programme is:
The
Bank of New York Investor Relations Dept, P.O. Box 11258 Church St. Station New York, NY 10286-1258 USA |
|
Telephone: +1 (800) 233 5601 (Toll free) |
ADS holders should address any queries or instructions regarding their holdings to The Bank of New York at the above address or telephone number. ADS holders can also, subject to passing an identity check, view their account balances and transaction history, sell shares and request certificates from their Global BuyDIRECT Plan at www.stockbny.com.
140 | Vodafone Group Plc Annual Report 2006 |
Shareholder Information | |
Online shareholder services
The Company provides a number of shareholder services online at www.vodafone.com/shareholder, where shareholders may:
| Register to receive electronic shareholder communications. Benefits to shareholders include faster receipt of communications such as annual reports, with cost and time savings for the Company. Electronic shareholder communications are also more environmentally friendly; |
| View a live webcast of the AGM of the Company on 25 July 2006. A recording will be available to review after that date; |
| View and/or download the Annual Report and the Annual Review & Summary Financial Statement 2006; |
| Check the current share price; |
| Calculate dividend payments; and |
| Use interactive tools to calculate the value of shareholdings, look up the historic price on a particular date and chart Vodafone ordinary share price changes against indices. |
Shareholders and other interested parties can also receive Company press releases, including London Stock Exchange announcements, by registering for Vodafone News via the Companys website at www.vodafone.com/news.
Registering for Vodafone News will enable users to:
| be alerted by free SMS as soon as news breaks; |
| access the latest news from their mobile; and |
| have news automatically e-mailed to them. |
Annual General Meeting
The twenty-second AGM of the Company will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1 on 25 July 2006 at 11.00 a.m. or, if later, on
conclusion of the Extraordinary General Meeting to be held immediately before it at 10.45 a.m.
The Notice of Meeting, together with details of the business to be conducted at the Meeting, is being circulated to shareholders with this Annual Report or the Annual Review & Summary Financial Statement and can be viewed at the Companys website www.vodafone.com/agm.
The AGM will be transmitted via a live webcast and can be viewed at the Companys website www.vodafone.com/agm on the day of the meeting and a recording will be available to review after that date.
To find out more about the AGM and how to view the webcast, visit www.vodafone.com/agm.
Corporate sponsored nominee service for shareholders
Subject to
changes to the Companys Articles of Association being approved at the Annual General Meeting on 25 July 2006, the Company intends to establish a Corporate Nominee
Service for Shareholders, which would be operated by the Companys Registrar. The service provides a facility for shareholders to remove their shares from the Vodafone Group Plc share register and hold them, together with other shareholders
through a nominee. There would be no need for a share certificate and, in addition, shareholders details
will not be held on the main register and so will remain confidential.
Details will be available frollowing the AGM on the Companys website at www.vodafone.com/shareholder.
ShareGift
The Company supports ShareGift, the charity share donation scheme (registered charity number 1052686). Through ShareGift, shareholders who have only a very small number of shares
which might be considered uneconomic to sell are able to donate them to charity. Donated shares are aggregated and sold by ShareGift, the proceeds being passed on to a wide range of UK charities. Donating shares to charity gives rise neither to a
gain nor a loss for UK Capital Gains purposes and UK taxpayers may also be able to claim income tax relief on the value of the donation.
ShareGift transfer forms specifically for the Companys shareholders are available from the Companys Registrars, Computershare Investor Services PLC and, even if the share certificate has been lost or destroyed, the gift can be completed. The service is generally free. However, there may be an indemnity charge for a lost or destroyed share certificate where the value of the shares exceeds £100. Further details about ShareGift can be obtained from its website at www.ShareGift.org or at 5 Lower Grosvenor Place, London SW1W 0EJ (telephone: +44 (0) 20 7828 1151).
The Unclaimed Assets Register
The Company participates in the Unclaimed Assets Register, which provides a search facility for financial assets which may have been forgotten and which donates a proportion of its
public search fees to a group of three UK charities (Age Concern, NSPCC and Scope). For further information, contact The Unclaimed Assets Register, Garden Floor, Bain House, 16 Connaught Place, London W2 2ES (telephone: +44 (0) 870 241 1713), or
visit its website at www.uar.co.uk.
Share price history
Upon flotation of the Company on 11 October 1988, the ordinary shares were valued at 170 pence each. On 16 September 1991, when the Company was finally demerged, for UK taxpayers the
base cost of Racal Electronics Plc shares was apportioned between the Company and Racal Electronics Plc for Capital Gains Tax purposes in the ratio of 80.036% and 19.964% respectively. Opening share prices on 16 September 1991 were 332 pence for
each Vodafone share and 223 pence for each Racal share.
On 21 July 1994, the Company effected a bonus issue of two new shares for every one then held and, on 30 September 1999, it effected a bonus issue of four new shares for every one held at that date. The flotation and demerger share prices, therefore, may be restated as 11.333 pence and 22.133 pence, respectively.
The share price at 31 March 2006 was 120.50 pence (31 March 2005: 140.50 pence). The share price on 26 May 2006 was 119.75 pence.
The following tables set out, for the periods indicated, (i) the reported high and low middle market quotations of ordinary shares on the London Stock Exchange, (ii) the reported high and low sales prices of ordinary shares on the Frankfurt Stock Exchange, and (iii) the reported high and low sales prices of ADSs on the NYSE.
The Companys ordinary shares were traded on the Frankfurt Stock Exchange from 3 April 2000 until 23 March 2004 and, therefore, information has not been provided for periods outside these dates.
Five year data on an annual basis
London Stock | Frankfurt | ||||||||||||
Exchange | Stock Exchange | NYSE | |||||||||||
Pounds per | Euros per | Dollars | |||||||||||
ordinary share | ordinary share | per ADS | |||||||||||
Financial Year | High | Low | High | Low | High | Low | |||||||
2001/2002 | 2.29 | 1.24 | 3.70 | 2.00 | 33.26 | 17.88 | |||||||
2002/2003 | 1.31 | 0.81 | 2.15 | 1.26 | 20.30 | 12.76 | |||||||
2003/2004 | 1.50 | 1.12 | 2.22 | 1.59 | 27.88 | 18.10 | |||||||
2004/2005 | 1.49 | 1.14 | | | 28.54 | 20.83 | |||||||
2005/2006 | 1.55 | 1.09 | | | 28.04 | 19.32 | |||||||
Two year data on a quarterly basis
London Stock | ||||||||
Exchange | NYSE | |||||||
Pounds per | Dollars | |||||||
ordinary share | per ADS | |||||||
Financial Year | High | Low | High | Low | ||||
2004/2005 | ||||||||
First Quarter | 1.44 | 1.21 | 25.90 | 21.87 | ||||
Second Quarter | 1.34 | 1.14 | 24.21 | 20.83 | ||||
Third Quarter | 1.49 | 1.32 | 28.54 | 24.06 | ||||
Fourth Quarter | 1.46 | 1.35 | 27.53 | 25.60 | ||||
2005/2006 | ||||||||
First Quarter | 1.47 | 1.34 | 26.87 | 24.32 | ||||
Second Quarter | 1.55 | 1.36 | 28.04 | 23.90 | ||||
Third Quarter | 1.52 | 1.23 | 26.65 | 21.29 | ||||
Fourth Quarter | 1.33 | 1.09 | 23.39 | 19.32 | ||||
2006/2007 | ||||||||
First Quarter(1) | 1.30 | 1.14 | 24.23 | 21.07 | ||||
Note: | |
(1) | Covering period up to 26 May 2006. |
Vodafone Group Plc Annual Report 2006 | 141 |
Investor information
continued
Six month data on a monthly basis
London Stock | ||||||||
Exchange | NYSE | |||||||
Pounds per | Dollars | |||||||
ordinary share | per ADS | |||||||
Financial Year | High | Low | High | Low | ||||
November 2005 | 1.52 | 1.25 | 26.65 | 21.55 | ||||
December 2005 | 1.29 | 1.23 | 22.66 | 21.29 | ||||
January 2006 | 1.33 | 1.18 | 23.39 | 20.86 | ||||
February 2006 | 1.25 | 1.09 | 21.81 | 19.32 | ||||
March 2006 | 1.30 | 1.12 | 22.74 | 19.55 | ||||
April 2006 | 1.30 | 1.21 | 23.70 | 21.07 | ||||
May 2006(1) | 1.30 | 1.14 | 24.23 | 21.53 | ||||
Note: | |
(1) | High and low share prices for May 2006 only reported until 26 May 2006. |
The current authorised share capital comprises 78,000,000,000 ordinary shares of $0.10 each and 50,000 7% cumulative fixed rate shares of £1.00 each. |
Markets
Ordinary
shares of Vodafone Group Plc are traded on the London Stock Exchange and, in
the form of ADSs, on the New York Stock Exchange.
ADSs, each representing ten ordinary shares, are traded on the New York Stock Exchange under the symbol VOD. The ADSs are evidenced by ADRs issued by The Bank of New York, as Depositary, under a Deposit Agreement, dated as of 12 October 1988, as amended and restated as of 26 December 1989, as further amended and restated as of 16 September 1991 and as further amended and restated as of 30 June 1999, between the Company, the Depositary and the holders from time to time of ADRs issued thereunder.
ADS holders are not members of the Company but may instruct The Bank of New York on the exercise of voting rights relative to the number of ordinary shares represented by their ADSs. See Memorandum and Articles of Association and Applicable English Law Rights attaching to the Companys shares Voting rights below.
Shareholders at 31 March 2006
Number of | % of total | |||
ordinary shares | Number of | issued | ||
held | accounts | shares | ||
1 1,000 | 439,814 | 0.19 | ||
1,001 5,000 | 102,534 | 0.33 | ||
5,001 50,000 | 28,540 | 0.57 | ||
50,001 100,000 | 1,451 | 0.15 | ||
100,001 500,000 | 1,292 | 0.45 | ||
More than 500,000 | 1,937 | 98.31 | ||
575,568 | 100.00 | |||
Geographical analysis of shareholders
At
31 March 2006, approximately 52.68% of the Companys shares were held in
the UK, 32.04% in North America, 12.86% in Europe (excluding the UK) and 2.42%
in the Rest of the
World.
Major shareholders
The
Bank of New York, as custodian of the Companys ADR programme, held approximately 12.8% of the Companys
ordinary shares of $0.10 each at 26 May 2006 as nominee. The total number of
ADRs outstanding at 26 May 2006 was 773,146,523. At this date, 1,147 holders
of record of ordinary shares had registered addresses in the United States and
in total held approximately 0.006% of the ordinary shares of the Company. As
at 26 May 2006, the following percentage interests in the ordinary share capital
of the Company, disclosable under Part VI of the Companies Act 1985, have been
notified to the directors:
Shareholder | Shareholding | |
The Capital Group Companies, Inc. | 5.56% | |
Barclays PLC | 3.92% | |
Legal & General Investment Management | 3.67% | |
The rights attaching to the ordinary shares of the Company held by these shareholders are identical in all respects to the rights attaching to all the ordinary shares of the Company. The directors are not aware, as at 26 May 2006, of any other interest of 3% or more in the ordinary share capital of the Company. The Company is not directly or indirectly owned or controlled by any foreign government or any other legal entity. There are no arrangements known to the Company that could result in a change of control of the Company.
Memorandum
and Articles of Association and Applicable
English law
The following
description summarises certain provisions of the Companys Memorandum
and Articles of Association and applicable English law. This summary is qualified
in its entirety by reference to the Companies Act 1985 of Great Britain (the
Companies Act), as amended, and the Companys Memorandum
and Articles of Association. Information on where shareholders can obtain
copies of the Memorandum and Articles of Association is provided under Documents
on Display.
All of the Companys ordinary shares are fully paid. Accordingly, no further contribution of capital may be required by the Company from the holders of such shares.
English law specifies that any alteration to the Articles of Association must be approved by a special resolution of the shareholders.
The Companys Objects
The
Company is a public limited company under the laws of England and Wales. The
Company is registered in England and Wales under the name Vodafone Group Public
Limited Company, with
the registration number 1833679. The Companys objects are set out in the fourth clause of its Memorandum of Association and cover a wide range of activities, including to carry on the business of a holding company, to carry on business as
dealers in, operators, manufacturers, repairers, designers, developers, importers and exporters of electronic, electrical, mechanical and aeronautical equipment of all types as well as to carry on all other businesses necessary to attain the
Companys objectives. The Memorandum of Association grants the Company a
broad range of powers to effect its objects.
Directors
The
Companys Articles of Association provide for a Board of directors, consisting
of not fewer than three directors, who shall manage the business and affairs
of the
Company.
Under the Companys Articles of Association, a director cannot vote in respect of any proposal in which the director, or any person connected with the director, has a material interest other than by virtue of the directors interest in the Companys shares or other securities. However, this restriction on voting does not apply to resolutions (a) giving the director or a third party any guarantee, security or indemnity in respect of obligations or liabilities incurred at the request of or for the benefit of the Company, (b) giving any guarantee, security or indemnity to the director or a third party in respect of obligations of the Company for which the director has assumed responsibility under an indemnity or guarantee, (c) relating to an offer of securities of the Company in which the director participates as a holder of shares or other securities or in the underwriting of such shares or securities, (d) concerning any other company in which the director (together with any connected person) is a shareholder or an officer or is otherwise interested, provided that the director (together with any connected person) is not interested in 1% or more of any class of the companys equity share capital or the voting rights available to its shareholders, (e) relating to the arrangement of any employee benefit in which the director will share equally with other employees and (f) relating to any insurance that the Company purchases or renews for its directors or any group of people, including directors.
The directors are empowered to exercise all the powers of the Company to borrow money, subject to the limitation that the aggregate amount of all liabilities and obligations of the Group outstanding at any time shall not exceed an amount equal to 1.5 times the aggregate of the Groups share capital and reserves calculated in the manner prescribed in the Articles of Association, unless sanctioned by an ordinary resolution of the Companys shareholders.
In accordance with the Companys Articles of Association, directors retiring at each AGM are those last elected or re-elected at or before the AGM held in the third calendar year before the current year. In 2005, the Company reviewed its policy regarding the retirement and re-election of directors and, although it is not intended to amend the Companys Articles in this regard, the Board has decided, in the interests of good corporate governance, that all the directors should offer themselves for re-election annually. Accordingly, all the directors will submit themselves for re-election at the 2006 AGM, except for Lord MacLaurin of Knebworth, Sir Julian Horn-Smith, Paul Hazen and Penny Hughes, who are retiring.
142 | Vodafone Group Plc Annual Report 2006 |
Shareholder Information | |
No person is disqualified from being a director or is required to vacate that office by reason of age. If, at a general meeting, a director who is 70 or more years of age is proposed for election or re-election, that directors age must be set out in the notice of the meeting.
Directors are not required, under the Companys Articles, to hold any shares of the Company as a qualification to act as a director, although executive directors participating in long term incentive plans must comply with the Companys share ownership guidelines. In accordance with best practice in the UK for corporate governance, compensation awarded to executive directors is decided by a remuneration committee consisting exclusively of non-executive directors.
In addition, as required by The Directors Remuneration Report Regulations, the Board has, since 2003, prepared a report to shareholders on the directors remuneration which complies with the Regulations (see pages 61 to 69). The report is also subject to a shareholder vote.
Rights attaching to the Companys shares
Dividend rights
Holders
of the Companys ordinary shares may by ordinary resolution declare dividends
but may not declare dividends in excess of the amount recommended by the directors.
The Board of directors may also pay interim dividends. No dividend may be paid
other than out of profits available for distribution. Dividends on ordinary shares
will be announced in pounds sterling. Holders of ordinary shares with a registered
address in a euro-zone country (defined, for this purpose, as a country that
has adopted the euro as its national currency) will receive their dividends in
euro, exchanged from pounds sterling at a rate fixed by the Board of directors
in accordance with the Articles of Association. Dividends for ADS holders represented
by ordinary shares held by the Depositary will be paid to the Depositary in US
dollars, exchanged from pounds sterling at a rate fixed by the directors in accordance
with the Articles of Association, and the Depositary will distribute them to
the ADS holders.
If a dividend has not been claimed for one year after the later of the resolution passed at a general meeting declaring that dividend or the resolution of the directors providing for payment of that dividend, the directors may invest the dividend or use it in some other way for the benefit of the Company until the dividend is claimed. If the dividend remains unclaimed for 12 years after the relevant resolution either declaring that dividend or providing for payment of that dividend, it will be forfeited and belong to the Company.
Voting rights
The
Companys Articles of Association provide that voting on Substantive Resolutions
(i.e. any resolution which is not a Procedural Resolution) at a general meeting
shall be decided on a poll. On a poll, each shareholder who is entitled to vote
and is present in person or by proxy has one vote for every share held. Procedural
Resolutions (such as a resolution to adjourn a General Meeting or a resolution
on the choice of Chairman of a General Meeting) shall be decided on a show of
hands, where each shareholder who is present at the meeting has one vote regardless
of the number of shares held, unless a poll is demanded. In addition, the Articles
of Association allow persons appointed as proxies of shareholders entitled to
vote at general meetings to vote on a show of hands, as well as to vote on a
poll and attend and speak at general meetings. Holders of the Companys
ordinary shares do not have cumulative
voting rights.
Under English law, two shareholders present in person constitute a quorum for purposes of a general meeting, unless a companys articles of association specify otherwise. The Companys Articles of Association do not specify otherwise, except that the shareholders do not need to be present in person, and may instead be present by proxy, to constitute a quorum.
Under English law, shareholders of a public company such as the Company are not permitted to pass resolutions by written consent.
Record holders of the Companys ADSs are entitled to attend, speak and vote on a poll or a show of hands at any general meeting of the Companys shareholders by the Depositarys appointment of them as corporate representatives with respect to the underlying ordinary shares represented by their ADSs. Alternatively, holders of ADSs are entitled to vote by supplying their voting instructions to the Depositary or its nominee, who will vote the ordinary shares underlying their ADSs in accordance with their instructions.
Employees are able to vote any shares held under the Vodafone Group Share Incentive Plan and My ShareBank (a vested share account) through the respective plans trustees, Mourant ECS Trustees Limited.
Liquidation rights
In
the event of the liquidation of the Company, after payment of all liabilities
and deductions in
accordance with English law, the holders of the Companys 7% cumulative
fixed rate shares would be entitled to a sum equal to the capital paid up on
such shares,
together with certain dividend payments, in priority to holders of the Companys ordinary shares. The holders of the fixed rate shares do not have any other right to share in the Companys surplus assets.
Pre-emptive rights and new issues of shares
Under
Section 80 of the Companies Act, directors are, with certain exceptions, unable
to allot relevant securities without the authority of the shareholders in a general
meeting. Relevant
securities as defined in the Companies Act include the Companys ordinary
shares or securities convertible into the Companys ordinary shares. In
addition, Section 89 of the Companies Act imposes further restrictions on the
issue of equity securities (as defined in the Companies Act, which include the
Companys ordinary shares and securities convertible into ordinary shares)
which are, or are to be, paid up wholly in cash and not first offered to existing
shareholders.
The Companys Articles of Association allow shareholders to authorise directors
for a period up to five years to allot (a) relevant securities generally up to
an amount fixed by the shareholders and (b) equity securities for cash other
than in connection with a rights issue up to an amount specified by the shareholders
and free of the restriction in Section 89. In accordance with institutional investor
guidelines, the amount of relevant securities to be fixed by shareholders is
normally restricted to one third of the existing issued ordinary share capital,
and the amount of equity securities to be issued for cash other than in connection
with a rights issue is restricted to 5% of the existing issued ordinary share
capital.
Disclosure of interests in the Companys shares
There are
no provisions in the Articles of Association whereby persons acquiring, holding
or disposing of a certain percentage of the Companys shares are required
to make disclosure of their ownership percentage, although such requirements
exist under the Companies Act.
The basic disclosure requirement under Sections 198 to 211 of the Companies Act imposes upon a person interested in the shares of the Company a statutory obligation to provide written notification to the Company, including certain details as set out in the Companies Act, where:
(a) | he acquires (or becomes aware that he has acquired) or ceases to have (or becomes aware that he has ceased to have) an interest in shares comprising any class of the Companys issued and voting share capital; and | |
(b) | as a result, EITHER he obtains, or ceases to have: | |
(i) | a material interest in 3%, or more; or | |
(ii) | an aggregate interest (whether material or not) in 10%, or more of the Companys voting capital; or | |
(iii) | the percentage of his interest in the Companys voting capital remains above the relevant level and changes by a whole percentage point. |
A material interest means, broadly, any beneficial interest (including those of a spouse or a child or a step-child (under the age of 18), those of a company which is accustomed to act in accordance with the relevant persons instructions or in which one third or more of the votes are controlled by such person and certain other interests set out in the Companies Act) other than those of an investment manager or an operator of a unit trust/recognised scheme/collective investment scheme/open-ended investment company.
Sections 204 to 206 of the Companies Act set out particular rules of disclosure where two or more parties (each a concert party) have entered into an agreement to acquire interests in shares of a public company, and the agreement imposes obligations/restrictions on any concert party with respect to the use, retention or disposal of the shares in the company and an acquisition of shares by a concert party pursuant to the agreement has taken place.
Under Section 212 of the Companies Act, the Company may by notice in writing require a person that the Company knows or has reasonable cause to believe is or was during the preceding three years interested in the Companys shares to indicate whether or not that is correct and, if that person does or did hold an interest in the Companys shares, to provide certain information as set out in the Companies Act.
Sections 324 to 329 of the Companies Act further deal with the disclosure by persons (and certain members of their families) of interests in shares or debentures of the companies of which they are directors and certain associated companies.
There are additional disclosure obligations under Rule 3 of the Substantial Acquisitions Rules where a person acquires 15% or more of the voting rights of a listed company or when an acquisition increases his holding of shares or rights over shares so as to increase his voting rights beyond that level by a whole percentage point. Notification in this case should be to the Company, the Panel on Takeovers and Mergers and the UK Listing Authority through one of its approved regulatory information services no later than 12 noon on the business day following the date of the acquisition.
Vodafone Group Plc Annual Report 2006 | 143 |
Shareholder Information | |
Investor information
continued
The City Code on Takeovers and Mergers also contains strict disclosure requirements on all parties to a takeover with regard to dealings in the securities of an offeror or offeree company and also on their respective associates during the course of an offer period.
General meetings and notices
Annual general meetings are held at such times and place as determined by the directors of the Company. The directors may also, when they think fit, convene an extraordinary general
meeting of the Company. Extraordinary general meetings may also be convened on requisition as provided by the Companies Act.
An annual general meeting and an extraordinary general meeting called for the passing of a special resolution need to be called by not less than twenty-one days notice in writing and all other extraordinary general meetings by not less than fourteen days notice in writing. The directors may determine that persons entitled to receive notices of meetings are those persons entered on the register at the close of business on a day determined by the directors but not later than twenty-one days before the date the relevant notice is sent. The notice may also specify the record date, which shall not be more than forty-eight hours before the time fixed for the meeting.
Shareholders must provide the Company with an address or (so far as the Companies Act allows) an electronic address or fax number in the United Kingdom in order to be entitled to receive notices of shareholders meetings and other notices and documents. In certain circumstances, the Company may give notices to shareholders by advertisement in newspapers in the United Kingdom. Holders of the Companys ADSs are entitled to receive notices under the terms of the Deposit Agreement relating to the ADSs.
Under Section 366 of the Companies Act 1985 and the Companys Articles of Association, the annual general meeting of shareholders must be held each calendar year with no more than fifteen months elapsing since the date of the preceding annual general meeting.
Variation of rights
If, at any
time, the Companys share capital is divided into different classes of
shares, the rights attached to any class may be varied, subject to the provisions
of the Companies Act, either with the consent in writing of the holders of
three fourths in nominal value of the shares of that class or upon the adoption
of an extraordinary resolution passed at a separate meeting of the holders
of the shares of that
class.
At every such separate meeting, all of the provisions of the Articles of Association relating to proceedings at a general meeting apply, except that (a) the quorum is to be the number of persons (which must be at least two) who hold or represent by proxy not less than one-third in nominal value of the issued shares of the class or, if such quorum is not present on an adjourned meeting, one person who holds shares of the class regardless of the number of shares he holds, (b) any person present in person or by proxy may demand a poll, and (c) each shareholder will have one vote per share held in that particular class in the event a poll is taken.
Class rights are deemed not to have been varied by the creation or issue of new shares ranking equally with or subsequent to that class of shares in sharing in profits or assets of the Company or by a redemption or repurchase of the shares by the Company.
Limitations on voting and shareholding
There are no
limitations imposed by English law or the Companys Articles of Association on the right of non-residents or foreign persons to hold or vote the Companys
shares other than those limitations that would generally apply to all of the
shareholders.
Documents on display
The Company
is subject to the information requirements of the US Securities and Exchange
Act of 1934 applicable to foreign private issuers. In accordance with these requirements,
the Company files its Annual Report on Form 20-F and other related documents
with the SEC. These documents may be inspected at the SECs public reference rooms located at 450 Fifth Street, NW Washington, DC 20549. Information on the operation of
the public reference room can be obtained in the US by calling the SEC on +1-800-SEC-0330. In addition, some of the Companys SEC filings, including all those filed on or after 4 November 2002, are available on the SECs website at
www.sec.gov. Shareholders can also obtain copies of the Companys Memorandum and Articles of Association from the Vodafone website at www.vodafone.com or from the Companys
registered office.
Material contracts
At the date
of this Annual Report, the Group is not party to any contracts that are considered
material to the Groups results or operations, except for its $10.9 billion credit
facilities which are discussed under Financial Position and Resources Liquidity and Cash Resources.
Exchange controls
There are no
UK government laws, decrees or regulations that restrict or affect the export
or import of capital, including but not limited to, foreign exchange controls
on remittance
of dividends on the ordinary shares or on the conduct of the Groups operations, except as otherwise set out under Taxation below.
Taxation
As this is a complex area, investors should consult their own tax adviser regarding the US federal, state and local, the UK and other tax consequences of owning and disposing of
shares and ADSs in their particular circumstances.
This section describes for a US holder (as defined below), in general terms, the principal US federal income tax and UK tax consequences of owning shares or ADSs in the Company as capital assets (for US and UK tax purposes). This section does not, however, cover the tax consequences for members of certain classes of holders subject to special rules and holders that, directly or indirectly, hold 10 per cent or more of the Companys voting stock.
A US holder is a beneficial owner of shares or ADSs that is for US federal income tax purposes:
(i) | a citizen or resident of the United States; |
(ii) | a US domestic corporation; |
(iii) | an estate the income of which is subject to US federal income tax regardless of its source; or |
(iv) | a trust if a US court can exercise primary supervision over the trusts administration and one or more US persons are authorised to control all substantial decisions of the trust. |
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, and on the tax laws of the United Kingdom and the Double Taxation Convention between the United States and the United Kingdom (the Treaty), all as currently in effect. These laws are subject to change, possibly on a retroactive basis.
This section is further based in part upon the representations of the Depositary and assumes that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
Based on this assumption, for purposes of the Treaty and the US-UK double taxation convention relating to estate and gift taxes (the Estate Tax Convention), and for US federal income tax and UK tax purposes, a holder of ADRs evidencing ADSs will be treated as the owner of the shares in the Company represented by those ADSs. Generally, exchanges of shares for ADRs, and ADRs for shares, will not be subject to US federal income tax or to UK tax, other than stamp duty or stamp duty reserve tax (see the section on these taxes below).
Taxation of dividends
UK taxation
Under
current UK tax law, no withholding tax will be deducted from dividends paid by
the Company.
A shareholder that is a company resident for UK tax purposes in the United Kingdom will not be taxable on a dividend it receives from the Company. A shareholder in the Company who is an individual resident for UK tax purposes in the United Kingdom is entitled, in calculating their liability to UK income tax, to a tax credit on cash dividends paid on shares in the Company or ADSs, and the tax credit is equal to one-ninth of the cash dividend.
US federal income taxation
A
US holder is subject to US federal income taxation on the gross amount of any
dividend paid by the Company out of its current or accumulated earnings and profits
(as determined for US federal income tax purposes). Dividends paid to a non-corporate
US holder in tax years beginning before 1 January 2009 that constitute qualified
dividend income will be taxable to the holder at a maximum tax rate of 15%, provided
that the ordinary shares or ADSs are held for more than 60 days during the 121
day period beginning 60 days before the ex-dividend date and the holder meets
other holding period requirements. Dividends paid by the Company with respect
to the shares or ADSs
will generally be qualified dividend income.
A US holder is not subject to a UK withholding tax. The US holder includes in gross income for US federal income tax purposes only the amount of the dividend actually received from the Company, and the receipt of a dividend does not entitle the US holder to a foreign tax credit.
144 | Vodafone Group Plc Annual Report 2006 |
Shareholder Information | |
Dividends must be included in income when the US holder, in the case of shares, or the Depositary, in the case of ADSs, actually or constructively receives the dividend and will not be eligible for the dividends-received deduction generally allowed to US corporations in respect of dividends received from other US corporations. Dividends will be income from sources outside the United States. Dividends paid in taxable years beginning before 1 January 2007 generally will be passive or financial services income, and dividends paid in taxable years beginning after 31 December 2006 generally will be passive or general income, which in either case is treated separately from other types of income for the purposes of computing any allowable foreign tax credit.
In the case of shares, the amount of the dividend distribution to be included in income will be the US dollar value of the pound sterling payments made, determined at the spot pound sterling/US dollar rate on the date of the dividend distribution, regardless of whether the payment is in fact converted into US dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is to be included in income to the date the payment is converted into US dollars will be treated as ordinary income or loss. Generally, the gain or loss will be income or loss from sources within the United States for foreign tax credit limitation purposes.
Taxation of capital gains
UK taxation
A
US holder may be liable for both UK and US tax in respect of a gain on the disposal
of the Companys
shares or ADSs if the US holder is:
(i) | a citizen of the United States resident or ordinarily resident for UK tax purposes in the United Kingdom; |
(ii) | a citizen of the United States who has been resident or ordinarily resident for UK tax purposes in the United Kingdom, ceased to be so resident or ordinarily resident for a period of less than 5 years of assessment and who disposed of the shares or ADSs during that period (a Temporary Non-Resident), unless the shares or ADSs were also acquired during that period, such liability arising on that individuals return to the UK; |
(iii) | a US domestic corporation resident in the United Kingdom by reason of being centrally managed and controlled in the United Kingdom; or |
(iv) | a citizen of the United States or a corporation that carries on a trade, profession or vocation in the United Kingdom through a branch or agency or, in respect of companies, through a permanent establishment and that has used the shares or ADSs for the purposes of such trade, profession or vocation or has used, held or acquired the shares or ADSs for the purposes of such branch or agency or permanent establishment. |
Under the Treaty, capital gains on dispositions of the shares or ADSs are generally subject to tax only in the country of residence of the relevant holder as determined under both the laws of the United Kingdom and the United States and as required by the terms of the Treaty. However, individuals who are residents of either the United Kingdom or the United States and who have been residents of the other jurisdiction (the US or the UK, as the case may be) at any time during the six years immediately preceding the relevant disposal of shares or ADSs may be subject to tax with respect to capital gains arising from the dispositions of the shares or ADSs not only in the country of which the holder is a resident at the time of the disposition but also in that other country (although, in respect of UK taxation, generally only to the extent that such an individual comprises a Temporary Non-Resident).
US federal income taxation
A
US holder that sells
or otherwise disposes of the Companys shares or ADSs will recognise a capital
gain or loss for US federal income tax purposes equal to the difference between
the US dollar value of the amount realised and the holders tax basis, determined
in US dollars, in the shares or ADSs. Generally, a capital gain of a non-corporate
US holder that is recognised before 1 January 2009 is taxed at a maximum rate
of 15%, provided the holder has a holding period of more than one year. The gain
or loss will generally be income or loss from sources within the United States
for foreign tax credit limitation purposes. The deductibility of losses is subject
to limitations.
Additional tax considerations
UK inheritance tax
An
individual who is domiciled in the United States (for the purposes of the
Estate Tax Convention) and is not a UK national will not be subject to UK
inheritance tax in respect of the Companys shares or ADSs on the individuals
death or on a transfer of the shares or ADSs during the individuals
lifetime, provided that any applicable US federal gift or estate tax is paid,
unless the shares or ADSs are part of the business property of a UK permanent
establishment or pertain to a UK fixed base used for the performance of independent
personal services. Where the shares or ADSs have been placed in trust by
a settlor, they may be subject to UK inheritance tax unless, when the trust
was created, the settlor was domiciled in the United States and was not a
UK national. Where the shares or ADSs are subject to both UK inheritance
tax and to US federal gift or estate tax, the Estate Tax Convention generally
provides a credit against US federal tax liabilities for UK inheritance tax
paid.
UK stamp duty and stamp duty reserve tax
Stamp
duty will, subject to certain exceptions, be payable on any instrument transferring
shares in the Company to the Custodian of the Depositary at the rate of 1.5%
on the amount or value of the consideration if on sale or on the value of such
shares if not on sale. Stamp duty reserve tax (SDRT), at the rate of 1.5% of
the price or value of the shares, could also be payable in these circumstances,
and on issue to such a person, but no SDRT will be payable if stamp duty equal
to such SDRT liability is paid. In accordance with the terms of the Deposit Agreement,
any tax or duty payable on deposits of shares by the Depositary or the Custodian
of the Depositary will be charged to the party to whom ADSs are delivered against
such deposits.
No stamp duty will be payable on any transfer of ADSs of the Company, provided that the ADSs and any separate instrument of transfer are executed and retained at all times outside the United Kingdom.
A transfer of shares in the Company in registered form will attract ad valorem stamp duty generally at the rate of 0.5% of the purchase price of the shares. There is no charge to ad valorem stamp duty on gifts. On a transfer from nominee to beneficial owner (the nominee having at all times held the shares on behalf of the transferee) under which no beneficial interest passes and which is neither a sale nor in contemplation of a sale, a fixed £5.00 stamp duty will be payable.
SDRT is generally payable on an unconditional agreement to transfer shares in the Company in registered form at 0.5% of the amount or value of the consideration for the transfer, but is repayable if, within six years of the date of the agreement, an instrument transferring the shares is executed or, if the SDRT has not been paid, the liability to pay the tax (but not necessarily interest and penalties) would be cancelled. However, an agreement to transfer the ADSs of the Company will not give rise to SDRT.
Vodafone Group Plc Annual Report 2006 | 145 |
Form 20-F Cross Reference Guide
Certain of the information in this document that is referenced in the following table is included in the Companys Annual Report on Form 20F for 2006 filed with the SEC (the 2006 Form 20F). No other information in this document is included in the 2006 Form 20F or incorporated by reference into any filings by the Company under the US Securities Act of 1933, as amended. Please see Documents on display for information on how to access the 2006 Form 20F as filed with the SEC. The 2006 Form 20F has not been approved or disapproved by the SEC nor has the SEC passed judgement upon the adequacy or accuracy of the 2006 Form 20F.
Item | Form 20F caption | Location in this document | Page |
1 | Identity of Directors, Senior Management | ||
and Advisers | Not applicable | | |
2 | Offer Statistics and Expected Timetable | Not applicable | |
3 | Key Information | ||
3A Selected Financial Data | Financial Highlights | 2 | |
Introduction Foreign Currency Translation | 25 | ||
3B Capitalisation and indebtedness | Not applicable | | |
3C Reasons for the offer and use of proceeds | Not applicable | | |
3D Risk Factors | Risk factors, Trends and Outlook Risk Factors | 43 | |
4 | Information on the Company | ||
4A History and Development of the Company | Business Overview History and Development of the Company | 19 | |
Investor Information Contact Details | back cover | ||
4B Business Overview | Business Overview | 12 | |
Operating Results Review of Operations | 32 | ||
Risk Factors, Trends and Outlook Trend Information | 44 | ||
Investor Information Material Contracts | 144 | ||
4C Organisational Structure | Note 12 Principal subsidiary undertakings | 94 | |
Note 13 Investments in joint ventures | 95 | ||
Note 14 Investments in associated undertakings | 96 | ||
Note 15 Other investments | 96 | ||
4D Property, Plant and Equipment | Business Overview Licences and network infrastructure Mobile network infrastructure | 14 | |
Financial Position and Resources | 38 | ||
Corporate Responsibility and Environmental Issues Environmental Issues | 60 | ||
4A | Unresolved Staff Comments | None | |
5 | Operating and Financial Review and Prospects | ||
5A Operating Results | Operating Results | 30 | |
Note 24 Borrowings | 102 | ||
Introduction Inflation | 25 | ||
5B Liquidity and Capital Resources | Financial Position and Resources Liquidity and Capital Resources | 39 | |
5C Research and Development, Patents and | |||
Licences, etc. | Business Overview Global Services Research and Development | 19 | |
5D Trend Information | Risk Factors, Trends and Outlook Trend Information | 44 | |
5E Off-balance sheet arrangements | Financial Position and Resources Liquidity and Capital Resources Off-balance sheet arrangements | 42 | |
Note 30 Commitments | 116 | ||
Note 31 Contingent liabilities | 117 | ||
5F Tabular disclosure of contractual obligations | Financial Position and Resources Contractual Obligations | 39 | |
5G Safe harbor | Cautionary Statement Regarding ForwardLooking Statements | 46 | |
6 | Directors, Senior Management and Employees | ||
6A Directors and Senior Management | Board of Directors and Group Management | 50 | |
6B Compensation | Boards Report to Shareholders on Directors Remuneration | 61 | |
6C Board Practices | Corporate Governance | 53 | |
Boards Report to Shareholders on Directors Remuneration | 61 | ||
Board of Directors and Group Management | 50 | ||
6D Employees | Employees | 58 | |
Note 34 Employees | 119 | ||
6E Share Ownership | Boards Report to Shareholders on Directors Remuneration Directors interests in the shares of the Company | 66 | |
Note 19 Called up share capital | 98 | ||
7 | Major Shareholders and Related Party Transactions | ||
7A Major Shareholders | Investor Information Major shareholders | 142 | |
7B Related Party Transactions | Boards Report to Shareholders on Directors Remuneration | 61 | |
Note 36 Related party transactions | 120 | ||
Note 31 Contingent liabilities | 117 | ||
7C Interests of experts and counsel | Not applicable | | |
8 | Financial Information | ||
8A Consolidated Statements and Other Financial | Consolidated Financial Statements | 71 | |
Information | Report of Independent Auditors | 131 | |
Note 31 Contingent liabilities | 117 | ||
Financial Position and Resources Equity Dividends | 38 | ||
8B Significant Changes | Note 35 Subsequent events | 119 | |
146 | Vodafone Group Plc Annual Report 2006 |
Shareholder Information | |
Item | Form 20F caption | Location in this document | Page |
9 | The Offer and Listing | ||
9A Offer and listing details | Investor Information Share Price History | 141 | |
9B Plan of distribution | Not applicable | | |
9C Markets | Investor Information Markets | 142 | |
9D Selling shareholders | Not applicable | | |
9E Dilution | Not applicable | | |
9F Expenses of the issue | Not applicable | | |
10 | Additional Information | ||
10A Share capital | Not applicable | | |
10B Memorandum and articles of association | Investor Information Memorandum and Articles of Association and Applicable English law | 144 | |
10C Material contracts | Investor Information Material Contracts | 144 | |
10D Exchange controls | Investor Information Exchange Controls | 144 | |
10E Taxation | Investor Information Taxation | 144 | |
10F Dividends and paying agents | Not applicable | | |
10G Statement by experts | Not applicable | | |
10H Documents on Display | Investor Information Documents on Display | 144 | |
10I Subsidiary information | Not applicable | | |
11 | Quantitative and Qualitative Disclosures About Market Risk |
Note 24 Borrowings | 102 |
12 | Description of Securities Other than Equity Securities |
Not applicable | |
13 | Defaults, Dividend Arrearages and Delinquencies |
Not applicable | |
14 | Material Modifications to the Rights of Security Holders and Use of Proceeds |
Not applicable | |
15 | Controls and Procedures | Corporate Governance | 53 |
16 | 16A Audit committee financial expert | Corporate Governance Committees of the Board The Audit Committee | 55 |
16B Code of Ethics | Corporate Governance Introduction US Listing Requirements | 53 | |
16C Principal Accountant Fees and Services | Note 4 Operating (loss)/profit | 83 | |
Corporate Governance Auditors | 57 | ||
16D Exemptions from the Listing Standards for Audit Committees |
Corporate Governance Committees of the Board The Audit Committee | 55 | |
16E Purchase of Equity Securities by the Issuer and Affiliated Purchasers |
Financial Position and Resources Liquidity and Capital Resources Treasury shares | 41 | |
Note 21 Transactions with equity shareholders | 102 | ||
17 | Financial Statements | Not applicable | |
18 | Financial Statements | Consolidated Financial Statements | 71 |
19 | Exhibits | Filed with the SEC | |
Vodafone Group Plc Annual Report 2006 | 147 |
SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this transition report on its behalf.
VODAFONE GROUP PUBLIC LIMITED COMPANY | |
(Registrant) | |
/s/ Arun Sarin |
|
Arun Sarin | |
Chief Executive | |
Dated: 14 June 2006 |
Index to Exhibits to Form 20-F for year ended 31 March 2006
2. | Indenture, dated as of February 10, 2000, between the Company and Citibank, N.A. as Trustee, including forms of debt securities (incorporated by reference to Exhibit 4(a) of Amendment No. 1 to the Company’s Registration Statement on Form F-3, dated November 24, 2000). (File No. 333-10762)). |
4.3. | Vodafone Group Long Term Incentive Plan (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.4. | Vodafone Group Short Term Incentive Plan (incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.5. | Vodafone Group 1999 Long Term Stock Incentive Plan (incorporated by reference to Exhibit 4.7 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.6. | Vodafone Group 1998 Company Share Option Scheme (incorporated by reference to Exhibit 4.8 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.7. | Vodafone Group 1998 Executive Share Option Scheme (incorporated by reference to Exhibit 4.9 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.8. | Vodafone Group 2005 Global Incentive Plan. |
4.9. | Agreement for Services with Lord MacLaurin of Knebworth (incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.10. | Letter of Appointment of Paul Hazen (incorporated by reference to Exhibit 4.15 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2003). |
4.11. | Service Contract of Arun Sarin (incorporated by reference to Exhibit 4.20 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2003). |
4.12. | Service Contract of Julian Horn-Smith (incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.13. | Service Contract of Peter Bamford (incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.14. | Service Contract of Thomas Geitner (incorporated by reference to Exhibit 4.13 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2005). |
4.15. | Service Contract of Kenneth Hydon (included in and incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2001). |
4.16. | Service Contract of Andrew Halford. |
4.17. | Letter of Appointment of Sir John Bond (incorporated by reference to Exhibit 4.15 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2005). |
4.18. | Letter of Appointment of Dr. Michael Boskin(incorporated by reference to Exhibit 4.9 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2003). |
4.19. | Letter of Appointment of Professor Sir Alec Broers, now Lord Broers, (incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2003; at a meeting of the Directors of the Company held on September 16, 2003, the term of office of Professor Sir Alec Broers was extended until December 31, 2006). |
4.20. | Letter of Appointment of Dr. John Buchanan(incorporated by reference to Exhibit 4.11 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2003). |
4.21. | Letter of Appointment of Penelope Hughes(incorporated by reference to Exhibit 4.17 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2003; at a meeting of the Directors of the Company held on September 16, 2003, the term of office of Penelope Hughes was extended until August 31, 2007). |
4.22. | Letter of Appointment of Anne Lauvergeon. |
4.23. | Letter of Appointment of Sir David Scholey (incorporated by reference to Exhibit 4.21 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2003; at a meeting of the Directors of the Company held on September 16, 2003, the term of office of Sir David Scholey was extended until the Annual General Meeting of the Company in 2005). |
4.24. | Letter of Appointment of Jurgen Schrempp (incorporated by reference to Exhibit 4.21 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2004). |
4.25. | Letter of Appointment of Luc Vandevelde (incorporated by reference to Exhibit 4.22 to the Company’s Annual Report on Form 20-F for the financial year ended March 31, 2004). |
4.26. | Letter of Appointment of Anthony Watson. |
4.27. | Letter of Appointment of Philip Yea. |
7.1 | Computation of the ratio of earnings to fixed charges for the years ended 31 March 2006 and 2005. |
7.2 | Computation of the ratio of earnings to fixed charges for the years ended 31 March 2004, 2003 and 2002. |
8. | The list of the Company’s subsidiaries is incorporated by reference to note 12 to the Consolidated Financial Statements included in the Annual Report. |
12. | Rule 13a 14(a) Certifications. |
13. | Rule 13a 14(b) Certifications. |
15. | Consent of Deloitte & Touche LLP. |