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
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OR
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ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: March 31, 2004 |
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OR
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TRANSITION REPORT PURSUANT
TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: to |
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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. |
Ordinary Shares of $0.10 each |
67, 427, 304, 257 |
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 which financial statements item the registrant has elected to follow: |
Item 17 Item 18 |
Vodafone Group Plc
Annual Report
For the year ended 31 March 2004
Annual Report 2004 Vodafone Group Plc | |
1 | |
Contents | |
References to the Group or Vodafone are references to Vodafone Group Plc (the Company) and its subsidiary undertakings and, where the context requires, its interests in joint ventures and associated undertakings. |
This Annual Report contains forward-looking statements within the meaning of the United States 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 Risk Factors and Legal Proceedings Risk Factors for a discussion of the risks associated with these statements.
Vodafone Group Plc Annual Report 2004 | |
2 | |
Financial Highlights | |
The selected financial data set out on the following pages is derived from the Consolidated Financial Statements on pages 68 to 127 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 Company. Where appropriate, balances have been restated to reflect the adoption of changes in accounting standards as described in note 37 to the Consolidated Financial Statements. The Consolidated Financial Statements are prepared in accordance with UK GAAP, 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 36 to the Consolidated Financial Statements, US GAAP information. Solely for convenience, amounts represented below in dollars have been translated at $1.8400: £1, the Noon Buying Rate on 31 March 2004.
At/year ended 31 March | |||||||||||||
2004 | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||
$m | £m | £m | £m | £m | £m | ||||||||
Consolidated Profit and Loss Account Data | |||||||||||||
UK GAAP | |||||||||||||
Group turnover | 61,749 | 33,559 | 30,375 | 22,845 | 15,004 | 7,873 | |||||||
Of which in respect of: | continuing operations | 60,244 | 32,741 | 28,547 | 21,767 | 15,004 | 7,873 | ||||||
discontinued operations | 1,505 | 818 | 1,828 | 1,078 | | | |||||||
Total Group operating (loss)/profit | (7,783 | ) | (4,230 | ) | (5,451 | ) | (11,834 | ) | (6,989 | ) | 798 | ||
Of which in respect of: | continuing operations | (7,904 | ) | (4,296 | ) | (5,208 | ) | (11,408 | ) | (6,989 | ) | 798 | |
discontinued operations | 121 | 66 | (243 | ) | (426 | ) | | | |||||
(Loss)/profit for the financial year | (16,588 | ) | (9,015 | ) | (9,819 | ) | (16,155 | ) | (9,885 | ) | 542 | ||
US GAAP | |||||||||||||
Group turnover | 50,882 | 27,653 | 22,416 | 16,561 | 11,103 | 7,873 | |||||||
(Loss)/profit for the financial year | (14,954 | ) | (8,127 | ) | (9,055 | ) | (16,688 | ) | (7,071 | ) | 553 | ||
Consolidated Cash Flow Data | |||||||||||||
Net cash inflow from operating activities | 22,663 | 12,317 | 11,142 | 8,102 | 4,587 | 2,510 | |||||||
Net cash outflow for capital expenditure and | |||||||||||||
financial investment | (7,851 | ) | (4,267 | ) | (5,359 | ) | (4,441 | ) | (18,988 | ) | (752 | ) | |
Free cash flow (Non-GAAP measure)(1) | 15,679 | 8,521 | 5,171 | 2,365 | (13,278 | ) | 276 | ||||||
Consolidated Balance Sheet Data | |||||||||||||
UK GAAP | |||||||||||||
Equity shareholders funds | 205,940 | 111,924 | 128,630 | 130,540 | 144,979 | 140,589 | |||||||
Net assets | 211,473 | 114,931 | 131,493 | 133,395 | 147,400 | 142,109 | |||||||
Total assets | 270,718 | 147,129 | 163,239 | 162,867 | 172,362 | 153,541 | |||||||
US GAAP | |||||||||||||
Equity shareholders funds | 230,053 | 125,029 | 140,436 | 140,887 | 155,522 | 146,334 | |||||||
Total assets | 368,462 | 200,251 | 221,412 | 197,913 | 206,753 | 165,323 |
Annual Report 2004 Vodafone Group Plc | |
3 | |
At/year ended 31 March | ||||||||||||
2004 | 2004 | 2003 | 2002 | 2001 | 2000 | |||||||
Earnings Per Share (EPS) | ||||||||||||
Weighted average number of shares (millions)(2) | ||||||||||||
Basic | 68,096 | 68,155 | 67,961 | 61,439 | 27,100 | |||||||
Diluted | 68,096 | 68,155 | 67,961 | 61,439 | 27,360 | |||||||
UK GAAP | ||||||||||||
Total Group operating loss (per ordinary share) | (11.43 | )¢ | (6.21 | )p | (8.00 | )p | (17.42 | )p | (11.38 | )p | 2.94 | p |
Total Group operating loss from continuing | ||||||||||||
operations (per ordinary share) | (11.47 | )¢ | (6.31 | )p | (7.64 | )p | (16.79 | )p | (11.38 | )p | 2.94 | p |
(Loss)/earnings (per ordinary share) | ||||||||||||
Basic | (24.36 | )¢ | (13.24 | )p | (14.41 | )p | (23.77 | )p | (16.09 | )p | 2.00 | p |
Diluted | (24.36 | )¢ | (13.24 | )p | (14.41 | )p | (23.77 | )p | (16.09 | )p | 1.98 | p |
Basic (loss)/earnings (pence per ADS) | (243.6 | )¢ | (132.4 | )p | (144.1 | )p | (237.7 | )p | (160.9 | )p | 20.0 | p |
US GAAP | ||||||||||||
(Loss)/earnings (per ordinary share) | ||||||||||||
Basic | (21.95 | )¢ | (11.93 | )p | (13.29 | )p | (24.56 | )p | (11.51 | )p | 2.04 | p |
Diluted | (21.95 | )¢ | (11.93 | )p | (13.29 | )p | (24.56 | )p | (11.51 | )p | 2.02 | p |
Basic (loss)/earnings per ADS | (219.5 | )¢ | (119.3 | )p | (132.9 | )p | (245.6 | )p | (115.1 | )p | 20.4 | p |
Cash dividends(3) | ||||||||||||
Pence per ordinary share | 3.7380 | ¢ | 2.0315 | p | 1.6929 | p | 1.4721 | p | 1.4020 | p | 1.3350 | p |
Pence per ADS | 37.380 | ¢ | 20.315 | p | 16.929 | p | 14.721 | p | 14.020 | p | 13.350 | p |
Other Data | ||||||||||||
UK GAAP | ||||||||||||
Ratio of earnings to fixed charges(4) | (1.3 | ) | (1.3 | ) | (1.9 | ) | (7.2 | ) | (3.7 | ) | 4.0 | |
Deficit | $(6,710 | )m | £(3,647 | )m | £(4,828 | )m | £(11,267 | )m | £(6,947 | )m | | |
US GAAP | ||||||||||||
Ratio of earnings to fixed charges(4) | (5.7 | ) | (5.7 | ) | (5.0 | ) | (11.0 | ) | (5.8 | ) | 3.8 | |
Deficit | $(19,922 | )m | £(10,827 | )m | £(9,946 | )m | £(16,540 | )m | £(10,038 | )m | |
Notes: | |
(1) | Refer to Non-GAAP Information on page 45 for a reconciliation of this non-GAAP measure to the most comparable GAAP measure and a discussion of this measure. |
(2) | See note 10 to the Consolidated Financial Statements, Loss per share. Earnings per ADS is calculated by multiplying earnings per ordinary share by ten, the number of ordinary shares per ADS. Dividend per ADS is calculated similarly. EPS and dividend information has been restated for the capitalisation (bonus) issue on 30 September 1999. |
(3) | The final dividend for the year ended 31 March 2004 was proposed by the directors on 25 May 2004. |
(4) | For the purposes of calculating these ratios, earnings consist of income on ordinary activities before taxation, 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. |
Vodafone Group Plc Annual Report 2004 | |
4 | |
Chairmans Statement | |
It is my privilege to report, once again, another highly successful year for your company, with an excellent overall operating performance generating further substantial growth in profits and cash flows. Your companys total venture mobile customer base has increased to over 340 million people. This is a wonderful achievement for a company that is only 20 years old and provides us with a really strong platform as we transition into the next phase of our development. It is only with the dedication and commitment of all members of staff throughout the world that we have achieved such excellent results to date and on behalf of the Board I thank them all.
For us, the year saw a rapid uptake of Vodafone live! across our footprint, following its successful launch last year, with nearly 7 million controlled customers now enjoying the richer mobile telecommunications the service delivers. We also started to introduce 3G to our customers. In February, we launched the Vodafone Mobile Connect 3G/GPRS datacard, which provides fast, secure access to corporate networks from lap top computers, across seven European countries and more recently we announced the launch of consumer services through Vodafone live! with 3G in Germany, Portugal, Italy and Spain. I believe that this technological evolution offers us significant growth opportunities and Vodafone is very well positioned to take advantage of these opportunities due to its global footprint and its continued strong financial performance. Although the mobile telecommunications industry remains extremely competitive, with new entrants driving new technologies and many existing operators having recovered from the financial pressures they faced only a short time ago, your company remains the industry leader.
As our international business expands it is essential that, in order to deliver the best possible experience to our customers and to achieve brand preference, we provide similar levels of excellence in all of our markets. To this end we have created two new central functions, Group Marketing and Group Technology & Business Integration. Group Marketing, led by Peter Bamford, provides leadership and coordination across a range of marketing and commercial activities including brand, product development, content management, Partner Networks and global accounts. Group Technology & Business Integration, headed by Thomas Geitner, leads the implementation of a standardised architecture for business process, information technology and network systems, which will support the next generation of products and services and the critical role of introducing and operating 3G capacity.
During the year, we continued our policy of increasing our shareholdings in existing operations, moving to 100% in Vodafone Malta and over 99% in Vodafone Greece. In the UK, we acquired prominent service providers, Singlepoint (4U) Limited and Project Telecom
plc, increasing our direct access to our UK contract customer base to over 90%. We also disposed of interests in mobile businesses in India and Mexico, as well as our fixed line operations in Japan. In addition, we extended our Partner Networks to a total of 13 countries through new agreements with operators in Bahrain, Cyprus, Iceland, Lithuania, Luxembourg and Singapore. We expect to add further countries in the coming year.
In February of this year, we entered into a high profile auction process for the acquisition of AT&T Wireless in the US. One of the many responsibilities that your Board has is its duty to shareholders to explore opportunities where it believes enhanced shareholder value may be achieved. Your Board considered that acquiring AT&T Wireless at the right price would have enhanced the Groups position in the US and delivered, over time, better returns for shareholders.
In entering the auction process your Board determined a price ceiling which, had it been exceeded, would not have provided the returns we considered necessary to justify such an acquisition. In the event, our ceiling price was exceeded by Cingular Wireless and we retain our 45% investment in the leading mobile operator in the US, Verizon Wireless. Our relationship with Verizon Communications, our partner in Verizon Wireless, remains strong. They supported our participation in the auction and we look forward to continuing to work with them to further strengthen Verizon Wireless.
Corporate governance continues to be at the forefront of your Boards considerations. During the year we have fully complied with the Combined Code relating to corporate governance, as appended to the Listing Rules of the UK Listing Authority. In addition, we also have to comply with US securities laws. The Sarbanes-Oxley Act of 2002 has introduced a number of changes to corporate governance requirements with which we have complied this year and with which we will comply as new requirements are introduced over the coming years. More details of the corporate governance work of your Board are provided later in this Annual Report.
On 1 September 2003, Luc Vandevelde joined the Board as a non-executive director. He brings with him many years of experience gained in retailing and consumer goods and his financial, management and marketing skills in international business will be of great value to the Board. I would also like to congratulate my colleague Alec Broers who was advised on 1 May 2004 that Her Majesty the Queen intends to make him a Life Peer for his contribution to engineering and higher education.
Vodafone is a vibrant company, dedicated to the creation of shareholder value. This value is achieved through the enhancement of products and services such as Vodafone live!, the advance in technology 3G and the investment in assets where positive returns may be clearly identified. A progressive dividend policy and our share buy back programme are means by which value is returned to shareholders. In light of the excellent results and the confidence with which it views the future, the Board is recommending the payment of a final dividend per share of 1.0780 pence which, together with the interim dividend already paid, makes a total dividend for the year of 2.0315 pence, an increase of 20%. We will also seek your approval to extend the share buy back programme we announced in November, with £3 billion of purchases planned for next year, following the £1.1 billion purchased up to March 2004.
As a global business, we are mindful of our responsibilities to all stakeholders around the world and in particular that the delivery of our services should have as little impact on the environment as possible. As part of this endeavour, I would encourage shareholders to receive communications from us electronically. In doing so, documents are provided more quickly, communications are less costly and importantly it is more environmentally friendly.
As we transition to a new era in mobile telecommunications, I am confident that through our focus on our strategic goals we are well positioned to make further significant progress in the year ahead.
Lord MacLaurin of Knebworth, DL
Chairman
Annual Report 2004 Vodafone Group Plc | |
5 | |
Chief Executives Statement | |
Mobile telecommunications is one of the most dynamic industries today. Its potential is vast. Today wireless technology only reaches one fifth of the world's population. In fact, 2 billion people have never even made a phone call. I'm delighted by the prospect that their first call could very well be made on a mobile phone.
In the coming years, the increasing number of mobile customers will enjoy a very different range of services. With the arrival of 3G and other new technologies and the significant increase in voice capacity and data rates they provide, the opportunity for growth in this industry is tremendous. The wireless future holds even more ways for people to share memorable moments, anywhere, anytime.
During my first year with Vodafone I have visited every part of our organisation, met with customers, employees, business leaders, regulators and stakeholders. I have reviewed our strategies, studied our operational practices and taken stock of the business we are managing on behalf of our customers and our shareholders. I am inspired by what I see.
Across our business we have plans to capitalise on market trends by applying our understanding of customer needs and deploying systems and technology to deliver high quality, great value, wireless services.
Our Position
This past year, Vodafone has delivered another
set of solid financial results. We have had excellent customer growth,
good revenue growth, continued margin improvement and generated outstanding
free cash flow. As a result of this performance we propose to increase
the dividend by 20% and expand the share purchase programme we introduced
at the end of last year.
Today we operate across 26 markets, including 16 controlled operations. In addition, through our Partner Network programme, we have a further presence in 13 markets where we have a strong brand and service position without financial investment. More than 50,000 Vodafone employees now serve 133 million proportionate customers.
I believe that our company is in an unprecedented position to take full advantage of opportunities in the wireless world. All of us at Vodafone are working hard to grow
revenue, navigate the forces that impact our business and lay claim to the benefits of our global scale and scope.
Opportunities for Growth
At Vodafone we predict significant growth
will come from: Telecommunications, Information Technology and Infotainment.
Voice remains at the heart of our business and there continues to be significant demand. Today, only about 20% of voice usage is mobile, so we can expect some portion of the remaining 80% to migrate to our networks. It is interesting to note that the growth of mobile has not significantly eroded the value of the fixed line industry. In effect, mobile has served to increase the value of the entire telecoms industry.
The second growth area is in Information Technology or what we think of as the productivity market. We plan to grow revenues by mobilising office tools and software applications. We have already begun by establishing a number of strategic partnerships with other industry players aimed at unleashing powerful 'made for mobile' applications over our 3G networks.
The third area where we see revenue growth potential is Infotainment the combination of information and entertainment. We have already seen eagerness for these services through Vodafone live!. Our customers can take and send pictures, browse branded infotainment, listen to audio files, watch video clips, play games and customise ringtones with their favourite songs, all from an integrated camera phone and an easy to use icon-driven menu.
Whilst we have made a strong start, the real opportunity to unearth more revenue comes with 3G, when capacity and speeds are far better than those we have today.
We can't predict all of the applications that customers will want in the coming years but we can anticipate their needs, build the infrastructure and platforms and collaborate with companies that understand how to grant the freedom to play games, watch television, conduct business and communicate anywhere and anytime.
Best of all, most of these activities are things people are already doing through different media today. Our success doesn't require a big behavioural change. We are simply mobilising those things that people are already accustomed to doing.
Forces on the Business
As we move forward, we must successfully
navigate four forces impacting on our business customers,
technology, competitors and regulation addressing
the inherent opportunities and challenges they bring.
Our customers today expect more from us. They want to pay less yet get greater value for their pound, dollar, euro or yen. They expect greater coverage and reliability.
Advances in technology hold the key to delighting our customers and we are fully committed to making 3G deliver on its promises. We are investing significantly every year in 3G and we are investing time and energy to encourage cooperation between vendors so that the mobile environment can operate to global standards that way our customers get the best from our services wherever they go.
Another significant force impacting our business is competition. We face different competitors across our markets, but we have a tremendous advantage. Vodafone can draw from resources across all our markets and respond competitively in a way that does not impact the performance of the organisation as a whole.
Regulation is also part of our everyday life. Regulators understand that Vodafone is an important company in their respective countries. They are keenly aware of the economic and social impact we have on their citizens and communities. We hope that future decisions will continue to be made in the best interests of our customers and the health of this vital global industry.
Vodafone Group Plc Annual Report 2004 | |
6 | |
Chief Executives Statement continued | |
Our Goals
At Vodafone, everything we do furthers our
desire to create mobile connections for individuals, businesses and communities.
Our Vision is to be the world's mobile communications leader and we're delighted
by the prospects for the future of our industry.
Our commitment to this industry is underlined by our company values, which state that everything we do is driven by our passion for customers, our people, results and the world around us.
The success of our effort requires a commitment to deliver on our six strategic goals:
Provide superior shareholder
returns
The continued strength in our financial
performance enables us to increase returns to our shareholders on an ongoing
basis. During the past year we have done this through increasing our dividends
and our share purchase programme. In the next 12 months, we intend to expand
this share purchase programme further, buying back shares worth £3
billion and returning, through our dividends and our share purchases, more
than 50% of the cash we have generated.
By delivering on our goals and conducting rigorous economic and financial analyses before we make pricing, acquisition and scale decisions, we demonstrate the discipline to always act in the best interests of our shareholders.
Delight our customers
We have rededicated ourselves to delighting
our customers because we believe this is the foundation for our continued
success.
We recognise that every customer interaction provides another opportunity to win loyalty and that's why we continue to raise standards on the quality of customer care in our call centres and our stores and the quality of our networks.
Key to delighting our customers is our ability to deliver superior voice and data services according to differing customer needs. Vodafone live! with 3G has been introduced in four countries in Europe and several more countries will follow in the next few months. For our business customers, the launch of Vodafone Mobile Connect 3G/GPRS datacard in February has been very successful.
Throughout the past few years, Vodafone has done a terrific job of building brand awareness as we have moved towards a single global brand. Beyond brand awareness, we want people to understand that the Vodafone name represents great service, great value and great innovation. When our name becomes synonymous with these attributes we will achieve brand preference and expect to see our market share climb as a result.
Leverage global scale and
scope
Another unique advantage for Vodafone is
our expansive global footprint. Operating in 26 markets puts us in an enviable
position to leverage our global scale and scope. We are using this advantage
to deliver exceptional 3G-based services. When we introduce 3G handsets
in large volumes later this year we will be well equipped to drive demand
and attract even higher market share in the 3G world.
Another competitive advantage is our leadership position on cost and time to market. From network services to sales, and marketing to customer care and billing, we have many varied systems in use across the business. With strong cooperation between our various operating companies we can achieve further savings.
Expand market boundaries
Expanding our market boundaries is another
priority for Vodafone. We continue to build productive strategic relationships
in the mobile environment. In the productivity areas we are working with
Microsoft and other IT companies. In the content areas, we have recently
taken a big step forward in the music arena through our agreement with
Sony Music.
In our changing industry, opportunities to expand geographically will continue to present themselves and, if they make sense both strategically and financially, we will give them serious consideration.
We have just reinforced our long term commitment to Japan by making a further investment of up to £2.6 billion. Our transactions in Japan will simplify the structure, confirm our commitment to the Japanese marketplace and enable us to deliver on the changes needed to improve our position.
Build the best global Vodafone
team
As the business expands and the environment
around us evolves, it is crucial for us to develop, recruit and retain
the people that will lead us into this new world. We are working hard to
make sure our employees have the right skills and knowledge to anticipate
our customers' needs. We are identifying new ways to share the best of
what we do on a global basis. We continue to reap the benefits of a motivated
team with a strong customer service culture, which will help earn a reputation
for Vodafone that is second to none.
Be a responsible business
As a large, multinational company we inevitably
raise expectations amongst all our stakeholders and hold ourselves up to
public scrutiny. Being a responsible business is about the way we manage
our impact on society, the environment and the economy. We are committed
to the highest standards of business integrity and corporate governance.
Our businesses around the world are important to the infrastructure of the economies and societies we serve and we take our broader corporate responsibilities seriously. Through our actions we will continue to strive to earn the trust and confidence of all our stakeholders worldwide.
Six Goals, One Aim
These six goals are well within our reach.
Now it comes down to execution. Country by country, we have assembled a team
of the most capable leaders in the wireless industry. They are supported
by outstanding people who come to work every day eager and prepared to delight
our customers, win market share and produce great results.
We are in an enviable industry position to succeed by virtue of our scale and scope and our operating philosophy. We are passionate and excited about our future and we look forward to sharing our success with you in the years ahead.
Arun Sarin
Chief Executive
Annual
Report 2004 Vodafone
Group Plc
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7 | |
Business Overview | |
Contents
Overview
Vodafone Group Plc is the worlds
leading mobile telecommunications company, with a significant presence in
Europe, the United States and the Asia Pacific region through the Companys
subsidiary undertakings, associated undertakings and investments. The Group
also has arrangements to market certain of its services, through its Partner
Networks scheme,
in additional territories, without the need for equity investment. The Group
provides a wide range of mobile telecommunications services, including voice
and data telecommunications. The Group also has controlling interests in
certain non-mobile telecommunications businesses.
The Companys ordinary shares are listed on the London Stock Exchange and the Companys American Depositary Shares (ADSs) are listed on the New York Stock Exchange (NYSE). The Companys ordinary shares were also listed on the Frankfurt Stock Exchange until 23 March 2004. The Company had a total market capitalisation of approximately £92 billion at 24 May 2004, making it the second largest company in the Financial Times Stock Exchange 100 index, or FTSE 100, and the eleventh largest company in the world based on market capitalisation at that date.
The Company is a public limited company incorporated in England and Wales under registered number 1833679. Its registered office is Vodafone House, The Connection, Newbury, Berkshire, RG14 2FN England. Its principal telephone number is +44 (0) 1635 33251.
Business
strategy
As the worlds
mobile telecommunications leader, the Groups vision is to enrich customers lives,
helping individuals, businesses and communities to be more connected in
a mobile world.
The Group has maintained a strategy of focusing on global mobile telecommunications and providing enhanced network coverage to allow its customers to communicate using mobile products and services.
Whilst the customer base continues to grow, the Groups strategy is increasingly focused on revenue growth and margin improvement from growing usage and providing enhanced services to the customer base.
Vodafones strategic roadmap seeks to achieve six key goals:
| delight our customers; |
| build the best global Vodafone team; |
| leverage our global scale and scope; |
| expand our market boundaries; |
| be a responsible business; and, |
| provide superior returns to shareholders. |
Geographic
operations
The Company has equity interests in 26 countries,
through its subsidiary undertakings, associated undertakings and investments.
Partner network arrangements extend to a further 13 countries.
At 31 March 2004, based on the registered customers of mobile telecommunications ventures in which it had ownership interests at that date, the Group had approximately 133.4 million customers, calculated on a proportionate basis in accordance with the Groups percentage interest in these ventures, and 340.1 million registered venture customers. The table on the next page sets out a summary of the Companys worldwide mobile operations at 31 March 2004 and venture customer growth in the year then ended (the 2004 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 other current
operators of mobile telecommunications services. Competitive pressures
have led to reductions in tariffs and other acquisition and retention initiatives
and this has helped to manage the level of customer churn.
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. The scope of this increased competition, and the extent of the impact on the results of operations, is discussed further in Risk Factors and Legal Proceedings.
A summary of the Companys direct competitors in its markets at 31 March 2004 is also provided in the following table.
Vodafone
Group Plc Annual Report
2004
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8 | |
Business Overview continued | |
Summary of Group mobile telecommunications businesses at 31 March 2004
Registered | ||||||||||
Venture | Venture | proportionate | ||||||||
Percentage | customers | (3) | customer | customers | Registered | Names of competitor | ||||
Country by region(1) | ownership | (2) | (thousands | ) | growth (%)) | (4) | (thousands) | prepaid (%)(5) | network operators(6) | |
UK & Ireland | ||||||||||
UK | 100.0 | 14,095 | 6 | 14,095 | 60 | 3, Orange, O2, T-Mobile | ||||
Ireland | 100.0 | 1,864 | 7 | 1,864 | 72 | 3, Meteor, O2 | ||||
TOTAL | 15,959 | 6 | 15,959 | 61 | ||||||
Northern Europe | ||||||||||
Germany | 100.0 | 25,012 | 9 | 25,012 | 51 | E-Plus, O2 , T-Mobile | ||||
Hungary | 87.9 | 1,428 | 50 | 1,255 | 82 | Pannon GSM, Westel | ||||
Netherlands | 99.9 | 3,403 | 4 | 3,399 | 57 | KPN Mobile, Orange, T-Mobile, Telfort | ||||
Sweden | 100.0 | 1,438 | 9 | 1,438 | 34 | 3, SpringMobil, Tele2, Telia | ||||
Belgium | 25.0 | 4,351 | 2 | 1,088 | 59 | BASE (KPN), Mobistar (Orange) | ||||
France | 43.9 | 14,370 | 8 | 6,309 | 46 | Bouygues, Orange | ||||
Poland | 19.6 | 5,740 | 19 | 1,126 | 54 | Centertel, ERA | ||||
Switzerland | 25.0 | 3,838 | 6 | 960 | 37 | Orange, Sunrise, Tele2 | ||||
TOTAL | 59,580 | 9 | 40,587 | 51 | ||||||
Southern Europe | ||||||||||
Italy | 76.8 | 21,137 | 9 | 16,232 | 92 | TIM, Wind, 3 | ||||
Albania | 99.7 | 528 | 35 | 527 | 97 | AMC | ||||
Greece | 99.4 | 3,678 | 9 | 3,655 | 68 | Cosmote, Q-Telecom, Telestet | ||||
Malta | 100.0 | 161 | (1 | ) | 161 | 91 | Go Mobile | |||
Portugal | 100.0 | 3,248 | 5 | 3,248 | 72 | Optimus, TMN | ||||
Spain | 100.0 | 9,705 | 7 | 9,705 | 57 | Amena, Telefónica Móviles | ||||
Romania | 20.1 | 3,672 | 37 | 738 | 63 | Orange, Cosmorom, Zapp | ||||
TOTAL | 42,129 | 10 | 34,266 | 78 | ||||||
Americas | ||||||||||
United States(7) | 44.4 | 38,909 | 17 | 17,257 | 6 | National operators(8): | ||||
AT&T Wireless(9), Cingular Wireless(9), | ||||||||||
Nextel, Sprint PCS, T-Mobile | ||||||||||
Asia Pacific | ||||||||||
Japan | 69.7 | 14,951 | 7 | 10,427 | 9 | au, NTT DoCoMo, Tu-ka | ||||
Australia | 100.0 | 2,486 | (3 | ) | 2,486 | 55 | 3, Optus, Orange, Telstra | |||
New Zealand | 100.0 | 1,607 | 25 | 1,607 | 79 | Telecom, TelstraClear | ||||
Fiji | 49.0 | 114 | 25 | 56 | 92 | | ||||
China | 3.3 | 150,256 | 21 | 4,913 | 66 | China Netcom, China Telecom, | ||||
China Unicom | ||||||||||
TOTAL | 169,414 | 20 | 19,489 | 61 | ||||||
Middle East & Africa | ||||||||||
Egypt | 67.0 | 2,872 | 27 | 1,924 | 81 | Mobinil | ||||
South Africa | 35.0 | 9,725 | 24 | 3,404 | 85 | Cell C, MTN | ||||
Kenya | 35.0 | 1,529 | 77 | 535 | 99 | Kencell(10) | ||||
TOTAL | 14,126 | 28 | 5,863 | 86 | ||||||
GROUP TOTAL | 340,117 | 15 | 133,421 | 56 | ||||||
Notes: | |
(1) | All controlled networks operate under the Vodafone brand. Networks in which the Company does not have a controlling interest operate under the following brands: Belgium Proximus; France SFR; Poland Plus GSM; Switzerland Swisscom Mobile; Romania Mobifon; United States Verizon Wireless; Fiji Vodafone; China China Mobile; South Africa Vodacom; Kenya Safaricom. |
(2) | All ownership percentages are stated as at 31 March 2004 and exclude options, warrants or other rights or obligations of the Group to increase or decrease ownership in any venture as detailed in Operating and Financial Review and Prospects Liquidity and Capital Resources Option agreements. Ownership interests have been rounded to the nearest tenth of one percent. |
(3) | See page 23 for a definition of a customer. |
(4) | Venture customer growth is for the twelve month period to 31 March 2004. |
(5) | Prepaid customer percentages are calculated on a venture basis. |
(6) | Table excludes mobile virtual network operators (MVNOs) and other competitors who do not operate a mobile telecommunications network. |
(7) | The Group s 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 2004. 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. |
(8) | 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. |
(9) | On 17 February 2004, Cingular Wireless announced an agreement to acquire AT&T Wireless. This acquisition is subject to US regulatory approval. |
(10) | The Kenyan Government has awarded a third licence but the operator had not commenced service at 25 May 2004. |
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Licences and network infrastructure
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 subsidiary companies
and details of their related network infrastructure:
Date of commencement | ||||||
Country by region | Licence type | Licence expiration date | Network type | of commercial service | ||
UK & Ireland | ||||||
UK | 2G | See note | (1) | GSM/GPRS | December 1991 | |
3G | December 2021 | W-CDMA | February 2004 | |||
Ireland | 2G | December 2014 | GSM/GPRS | March 1993 | ||
3G | October 2022 | W-CDMA | May 2003 | |||
Northern Europe | ||||||
Germany | 2G | December 2009 | GSM/GPRS | June 1992 | ||
3G | December 2020 | W-CDMA | February 2004 | |||
Hungary | 2G | July 2014 | GSM/GPRS | November 1999 | ||
Netherlands | 2G | February 2013 | (2) | GSM/GPRS | September 1995 | |
3G | December 2016 | W-CDMA | February 2004 | |||
Sweden | 2G | December 2010 | (2) | GSM/GPRS | September 1995 | |
3G | March 2015 | W-CDMA | February 2004 | |||
Southern Europe | ||||||
Italy | 2G | January 2015 | GSM/GPRS | December 1995 | ||
3G | December 2021 | W-CDMA | February 2004 | |||
Albania | 2G | June 2016 | GSM | August 2001 | ||
Greece | 2G | September 2012 | GSM/GPRS | July 1993 | ||
3G | August 2021 | W-CDMA | | |||
Malta | 2G | (3) | September 2010 | GSM/GPRS | July 1997 | |
Portugal | 2G | October 2006 | GSM/GPRS | October 1992 | ||
3G | January 2016 | W-CDMA | February 2004 | |||
Spain | 2G | July 2022 | (2) | GSM/GPRS | October 1995 | |
3G | April 2020 | W-CDMA | February 2004 | |||
Asia Pacific | ||||||
Japan | 2G | See note | (4) | PDC | April 1994 | |
3G | See note | (4) | W-CDMA | December 2002 | ||
Australia | 2G | March 2015 | GSM/GPRS | September 1993 | ||
3G | October 2017 | W-CDMA | | |||
New Zealand | 2G | March 2021 | GSM/GPRS | October 2001 | ||
3G | March 2021 | W-CDMA | | |||
Middle East & Africa | ||||||
Egypt | 2G | May 2013 | GSM/GPRS | November 1998 | ||
Notes: | |
(1) | Indefinite licence with a one-year notice of revocation. |
(2) | Date relates to 1800MHz spectrum licence. Vodafone Netherlands, Vodafone Spain and Vodafone Sweden also have separate 900MHz spectrum licences which expire in March 2010, March 2010 and December 2010, respectively. |
(3) | Also refers to 3G services. |
(4) | Licences are issued for a five year term with a presumption of renewal where there is a continuing commercial need for spectrum. |
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Business Overview continued | |
3G
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.
Cumulative expenditure on 3G licences was £14.4 billion at 31 March 2004 and was funded from the Groups existing facilities. Most of this expenditure (£13.1 billion) occurred during the 2001 financial year.
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.
The construction of 3G network infrastructure has continued throughout the 2004 financial year, with tangible capital expenditure on 3G network infrastructure amounting to approximately £1.5 billion during the financial year. The Group presently expects capitalised tangible fixed asset additions to be around £5.0 billion in the 2005 financial year, 35% of which is expected to be in respect of 3G network infrastructure. This expenditure is expected to be financed through operating cash flows and existing borrowing facilities. The Groups 3G network infrastructure supply is managed by agreements for pricing and terms with all key suppliers, including Ericsson, Nokia, Nortel and Siemens.
The launch of the 3G data service in February 2004 was an example of Vodafone leveraging its scale and scope. 3G commercial services in Europe, in the form of the Vodafone Mobile Connect 3G/GPRS datacard, were able to be launched in much reduced timescales in seven countries in early 2004 through working with common suppliers using universal network technology. The commercial launch of the 3G service was the result of a three year global programme of technology selection, development and testing across the Group companies.
In Japan, the 3G network has been rolled out with the goal of national coverage and the eventual replacement of the current Personal Digital Cellular (PDC) network. In Europe, the deployment of 3G has been centred on major metropolitan areas, thereby providing a complementary service to the current 2G and 2.5G networks. The introduction of Wideband Code Division Multiple Access (W-CDMA) as the third generation standard will, over time, provide roaming capabilities between Japan and other territories that use the W-CDMA standard.
Vodafone live! with 3G was introduced to both business and consumer markets in Europe on 4 May 2004.
2G
The majority of the Groups controlled networks operate on a Global System for Mobile Communications (GSM) network on which General Packet Radio Service (GPRS) is also provided.
Wireless LAN
Four of the Groups subsidiary companies, in Germany, Italy, Portugal and Spain, now offer a public access Wireless LAN service. The Group views public access Wireless LAN as important in offering a complete mobile data connectivity solution to its customers, and more of the Groups operating companies are expected to launch Wireless LAN services, mainly through roaming agreements.
A major focus of the Groups strategy is to delight its customers, delivering a superior customer experience and developing customer loyalty at all touchpoints, introducing end to end voice and data propositions to target customer segments, and achieving customer preference for the Vodafone brand.
To achieve this objective requires a highly focused, increasingly integrated and operationally efficient business, providing the best products and services across the greatest number of markets. The Group established two new central functions in July 2003; Group Marketing and Group Technology & Business Integration.
Group Marketing provides leadership and coordination across the Group on a range of marketing and commercial activities, including product, content, brand management and development, Partner Networks and global accounts. These activities include the design and rollout of segmented service propositions to consumer and business customers, such as Vodafone live!, and the Groups business offerings.
Group Technology & Business Integration leads in the selection, development and implementation of global technology solutions to support the terminals, service platforms, network and IT requirements of the Group. It drives the benefits of scale and scope to deliver enhanced customer experience, increased speed to market and an improved strategic cost position by applying the principle of design once, deploy many times and by working closely with suppliers.
A new function, Business Integration, has been created within Group Technology to further leverage the scale of the Groups global footprint. This function is expected to improve the Groups speed to market for new products at the same time as improving the Groups strategic cost position. The work of this function was initiated in October 2003 and is intended to lead the Group through a business transformation process spanning up to five years.
The Service Delivery Platform, which in part delivers Vodafone live!, is one early example of the Groups develop once, deploy many times concept. This concept allows the architecture, design and development of core enabling technologies to be undertaken only once, and rolled out to the Groups operating companies, thus saving on costs of design and development in each country. The Group continues to build its capability to manage suppliers on a global basis and has delivered synergies through negotiating global contracts, particularly in the areas of terminals, network infrastructure and IT. There has been continued progress in eCommerce activities with the Group taking an industry leading position in the effective use of e-auctions. The Group continues to leverage scale in the handset area, consolidating country requirements and volumes for supplier negotiation. This has provided savings and has supported Vodafones ability to shape an enhanced customer experience through the specification of features and functions.
These early business integration programmes provide a model for common development in other Group Technology areas, to enable the Group to take advantage of future opportunities to leverage the Groups scale and scope. The number of different markets in which the Group now operates provides opportunities for extensive sharing of best practice across operating companies, ensuring reduced time to market, increased customer relevance and greater competitive advantage.
Voice services
Revenues from voice services make up the largest portion of the Groups turnover and, consequently, the Group is undertaking a wide range of activities to encourage growth in the usage of these services.
Pricing is an important factor for customers choosing a mobile phone network and is also important in encouraging usage of services whilst maximising revenues and margins. Two main pricing models exist in the mobile market contract and prepaid. Relationships with contract customers are usually governed by a formal, written contract and credit facilities are granted to them to enable access. Within a prepaid pricing scheme, a customer pays in advance, or tops up, in order to gain access to mobile network services. The take-up of these models in the markets in which the Group operates varies significantly, from Japan and the US, where the vast majority of customers are on contract plans, to Italy, where the market is predominantly prepaid.
The Group has continued to invest in providing enhanced network services and coverage for existing services to endeavour to ensure that customers can use their mobile phone whenever they want to, making it an integral part of their lives. Together
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with enhanced coverage, the Group has also invested in improving the usability of services such as voicemail, to encourage penetration of these services. Increased usage of voicemail has been shown, in turn, to drive volume of voice calls and is a key revenue enabler. Initiatives have also been run to encourage customers to populate their phonebooks, which in turn drives growth in calling circles, and missed call notification services, such as text messages telling customers that they have missed a call when their phone is switched off.
In addition to product and infrastructure development, a significant amount of effort has been directed at educating customers in mobile phone usage and helping customers get the most from their mobile phone. Several markets have also engaged in programmes to redesign their retail outlets into Experience Stores where store staff are trained to educate customers in responsible mobile phone usage, in addition to more conventional retail activities.
Data services
Part of the Groups strategy to expand its market boundaries involves the stimulation of demand in adjacent markets such as infotainment and IT wireless productivity.
Short Messaging Service (SMS or Text Messaging)
All of the Groups mobile networks offer this service, which allows customers to send and receive text messages using mobile handsets and various other devices.
Vodafone live!
Vodafone live!, the Groups integrated messaging and multimedia content service, was launched in six countries during the 2004 financial year, including the Groups associated networks in France (SFR) and Switzerland (Swisscom Mobile), bringing the total number of markets in which the service is available to 16 at 25 May 2004. At 31 March 2004, there were over 6.8 million controlled Vodafone live! customers, with a further 0.7 million customers connected to associated company networks. In addition, Vodafone K.K. (Vodafone Japan) had 13.0 million Vodafone live! customers following the rebranding of its J-Sky service to Vodafone live! on 1 October 2003.
The range of services available on Vodafone live! has continued to be improved throughout the year, with the integration of services such as real music tones, as well as broadening the range of handsets available. New capabilities have also been introduced such as video messaging, video streaming and Search, a new facility enabling customers to use their mobile handsets to search across an extensive portfolio of content. The scale of the customer base together with the broader reach of Vodafone live! has meant that the Group has increasingly been able to attract stronger content partners and recent agreements have involved such established brands as Warner Bros. Online, UEFA Champions League Football, Sony Pictures, Sony Music Entertainment and Disney.
During the year, the range of Vodafone live! handsets has increased from three to fifteen. By focusing its handset development resources, the Group aims to offer a wider range of handsets with enhanced functionality. The first GSM-enabled megapixel camera phone launched in the European market, the Sharp GX30, had been introduced into 10 controlled markets by 25 May 2004.
Vodafone live! with 3G
Vodafone is the first mobile operator to bring 3G technology to both business and consumer markets across a number of European countries. Vodafones 3G consumer service was launched in Europe on 4 May 2004 when Vodafone live! with 3G was introduced in Germany and Portugal and from 25 May 2004 in Italy and Spain. In the first phase of Vodafone live! with 3G, Vodafone live! has been enhanced with video telephony and video downloads as well as improved ringtones and new content. Vodafone live! with 3G will be enhanced later in the year, when a wider range of handsets will become available, together with an even more extensive range of content and services. The Group is prioritising efforts to ensure timely availability of handsets and plans for handset deliveries later in 2004 and 2005 are at an advanced stage.
Mobile Connect Card
The Mobile Connect Card, first launched in November 2002 and which enables customers to connect to e-mail and business applications from a range of access devices, has been enhanced to operate across both GPRS and 3G technologies with the introduction in certain markets of the Vodafone Mobile Connect 3G/GPRS datacard in February 2004. By 31 March 2004, Germany, Italy, the Netherlands, Portugal, Spain, Sweden and the UK had all opened their networks for commercial service. The Groups associated network in Belgium launched the datacard on 13 May 2004. The Vodafone Mobile Connect 3G/GPRS datacard provides customers with data speeds up to seven times faster than GPRS when used on the Groups 3G networks.
Other business services
During the year the Group continued to build on its business propositions. In November 2003, the Group commenced the roll-out of Vodafone Wireless Office, a mobile handset solution reducing the need for fixed line phones, and Blackberry from Vodafone, which delivers voice, email, SMS, browser and organiser functions in a single mobile device.
On 22 October 2003, the Group announced a joint initiative with Oracle to offer enterprise customers integrated mobility solutions enabling mobile access to business systems.
Roaming services
The Group has introduced new pricing structures in its networks for its roaming services, with a view to encouraging the use of services when travelling abroad.
In November 2003, Vodafone Limited (Vodafone UK) launched Vodafone World, a new branded roaming tariff that delivers simple, transparent pricing for roaming all over the world, with preferential rates available for roaming onto all the Groups networks. Now available in 13 markets, Vodafone World builds on the success of Eurocall, a European roaming service, and replaces it with a concept that is relevant to the Groups markets and partners worldwide. By making roaming prices worldwide easier to understand, Vodafone World represents an important step in the Groups strategy to meet the needs of the Groups roaming customers at an affordable price and encourage change in the roaming market.
Vodafones Data Roaming Tariff was launched across 10 networks in October 2003 and provides a new, simple price plan for roaming data services including Vodafone live! and the Groups business services.
On 22 December 2003, the Group and Verizon Wireless announced the introduction of transatlantic text messaging between their respective customers. By 31 March 2004, this service had been launched in 11 of the Groups networks.
The Group and Verizon Wireless have continued to cooperate in the development of inter-standard roaming products. An agreement for the Group to licence its Mobile Connect dashboard know-how to Verizon Wireless has recently been completed, setting the stage for the launch of inter-standard data card products in Europe and the United States, in due course.
Partner Networks
The Groups Partner Network strategy has become a more broadly established business concept for the delivery of the Groups mobile services in the year. By partnering with leading mobile operators around the world, the Group is able to market its portfolio of global services in new territories, extend its brand reach into new markets and derive additional revenue from fees and visitor roaming without buying equity stakes.
The Group has signed a further six Partner Network Agreements during the year with Og Fjarskipti in Iceland, Bite in Lithuania, M1 in Singapore, MTC in Bahrain, LuxGSM in Luxembourg and Cytamobile in Cyprus, bringing the total number of partners to thirteen. With two partners in the Middle East and one in Asia Pacific, the Partner
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Business Overview continued | ||
Network strategy is becoming increasingly relevant for mobile operators outside Europe.
Mobilkom-Group, which operates in Austria, Croatia and Slovenia, will become the first Partner Network to introduce Vodafone live! and is expected to launch services in June 2004. The Vodafone Mobile Connect 3G/GPRS datacard has been launched in Austria and the Mobile Connect Card has been introduced in Bahrain, Croatia, Denmark, Slovenia, Estonia and Finland.
Content standards
In October 2002, a dedicated Content Standards team was established to provide leadership in mobile content standards in order to protect customers from inappropriate content, contact and commercialism. Specific emphasis is placed on protecting young mobile phone users. The Group recognises that, although acceptable to an older audience, not all content and services are suitable for all ages and it has committed to exercise responsibility in ways that are consistent with its customer and public values.
The Content Standards team has actively supported a number of initiatives, such as the UK mobile operators Code of Practice and the Groups age verification mechanism currently being piloted in Germany. Looking ahead, the Content Standards team will work with the operating companies to implement policies and develop an independent auditing process to ensure they are maintained.
Marketing
Brand
All controlled mobile subsidiary companies operate under the Vodafone brand. Brand marketing is designed to increase general public awareness of the Vodafone brand, or other local Group brands, and its values, products and services and embraces marketing specifically directed at certain distribution channels. Brand communications include sponsorships and advertising on radio, television, in general circulation newspapers, in magazines and in specialised publications.
The Group has focused on driving brand preference and usage of Vodafone live! services, as well as core voice and text usage. Advertisements used feature the Groups key sponsorships: Ferrari, Manchester United, Michael Schumacher, Rubens Barrichello and David Beckham. Communications materials have been adapted for use in Partner Network markets. The Vodafone speechmark icon is achieving increasing recognition as a key visual identity symbol of the brand.
The three year brand migration programme was completed during the year, with Italy and Japan migrating to the Vodafone brand in May and October 2003, respectively. Having established the Vodafone brand in the Groups controlled markets, the focus is now shifting and more emphasis and resources are aimed at increasing customer satisfaction and brand preference. In order to do this, Vodafone has put in place a framework for measuring and improving its performance on every element of customer experience. In addition, the Group has put in place a segmentation framework that has been arrived at on a basis of extensive research. All marketing plans and activities, both global and local, are now built around seven customer segments identified through the research.
Local marketing
In addition to the Groups initiatives to establish a global Vodafone brand, funds are also invested in local marketing activities. Customer database marketing is widely used to communicate directly with customers and, when linked with customer service, provides a strong basis for building customer relationships. Loyalty schemes are beginning to be more widely used as a way of increasing customer satisfaction and reducing customer churn.
Associated companies are generally marketed under their local brands.
Distribution
Distribution is achieved through a wide variety of direct and third party 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. Directly owned stores are becoming increasingly prevalent in most markets. The look and feel of these stores, particularly in Italy, Greece and the UK, has focused more on the user experience during the year, with customers invited to try out service offerings such as Vodafone live!. Local Internet sites 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. Service providers receive discounts on the Groups airtime rates for each tariff. Service providers also receive financial incentives from the Group related to their success in attracting new customers to the network. These incentives comprise gross connection bonuses, airtime growth awards and other specific incentives. Independent dealers are used in the majority of markets, with own-branded stores, business store-within-stores and kiosks becoming increasingly frequent as channels to market. Supermarket chains and multiple retailers are also used to achieve broad distribution of prepaid products, with top-up facilities available in a wide selection of outlets such as petrol stations, newsagents and local stores.
The Groups leading global customers are served by the International Accounts team, with a designated executive link.
In the United States, Verizon Wireless sells its service directly to customers through its own sales force and stores, telemarketing centres and the Internet, and indirectly through arrangements with independent retailers and agents. Additionally, Verizon Wireless also sells wireless capacity to resellers, which allows independent companies to package and resell wireless services to end-users.
On 13 October 2003, the Group announced with Microsoft an intention to use mobile SIM based authentication and billing to help create open Web services standards that will enable new business opportunities for application developers and mobile network operators and deliver new integrated services for customers across fixed and mobile networks.
On 10 March 2004, the Group announced that it had signed a memorandum of understanding with other leading companies from the mobile industry to apply for a mobile Top Level Domain (TLD) from the Internet Corp. for Assigned Names and Numbers. A mobile TLD would be a key step in bridging the world of mobility and the Internet.
The Group Research and Development (R&D) function was formed in April 2001 from the Vodafone research and development teams in Newbury, Maastricht, Vodafone Pilotentwicklung in Munich and the Strategic Technology team in Walnut Creek, California. Since then, centres of excellence in Milan, Madrid and Tokyo have been added, thereby creating an international and multicultural team for applied research in mobile telecommunications and its applications.
The work of the Group R&D function is divided broadly into four categories. These categories are technical leadership and research support for the work of the Group
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Strategy department, research into technology that will typically start to be used in Vodafones business in three or more years time, leadership for the Groups work in international standards, and tactical development work largely on behalf of Group Marketing and Group Technology and Business Integration. Governance of Group R&D is provided by the Group R&D Steering Committee. The Group Strategy Director chairs this committee which, along with the Group R&D Director, consists of the chief technology officers from eight of the operating companies, together with the head of products and services in Group Marketing and the heads of three functions within Group Technology and Business Integration.
Group R&D focuses on applied research that is positioned between the basic research undertaken by universities and commercial product development. Since the Group is primarily a user of technology, the emphasis of the Group 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 of the function is organised into five main streams: applied research, strategic technology analysis, standards and industry fora, intellectual property development and publicity and communications. The applied research and strategic technology analysis functions are concerned with expanding business boundaries, disruptive technologies, customer behaviour, service enablers, terminals and smart cards, radio technologies, network architectures, performance and optimisation, and security and computing technologies.
The work of Group R&D is delivered through four main programmes concerned with radio, IP networks, service enablement and business support. In addition, Group R&D provides leadership for funding research into health and safety aspects of mobile telecommunications, technical support for the Groups spectrum strategy and technical support for the protection of intellectual property, including the Vodafone patent portfolio.
Much of the work of Group R&D is done in collaboration with others, both within the Group and external to it. For example, Group R&D provides leadership for the Groups involvement with international standards, although many delegates and contributions are drawn from the Groups operating companies. Group R&D provides the means to protect the Groups intellectual property, many of the innovations that are protected coming from across the operations, and Group functions infrastructure and handset suppliers work with Group R&D on many of its projects from providing equipment for trials, through co-authoring research reports, to being a partner in some of the research and development programmes. At the more academic end of the spectrum of applied research, Group R&D has developed relationships with a number of universities. These include sponsoring research students, collaboration in European research activities, funding specialised research activities and fostering working relationships with academic chairs and readerships funded through the Vodafone Foundation.
The research and development 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 subsidiaries of the Company and Group 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 spent £171 million in the 2004 financial year on research and development, compared with £164 million in 2003 and £110 million in 2002. This expenditure was incurred principally on developing new products and services, billing systems and on network development.
Regulation
The Groups operating companies are generally subject to regulation governing the operation of their business activities. Such regulation
generally 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 European Union (“EU”) and selected countries in which the Group has significant interests. Many of the regulatory developments reported in the following section involve on-going proceedings or consideration of potential regulation which 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
The Member States of the European Union (“Member States”) were expected to implement the new EU Regulatory Framework for the communications sector (“the new EU Framework”), which was adopted in 2002, into national law by 24 July 2003. Denmark, Finland, Ireland, Norway, Sweden, and the UK had completed implementation by that date. Austria, Italy, Portugal,
and Spain have since completed implementation. In April 2004, the European Commission (“the Commission”) issued infringement proceedings against those Member States that had failed to implement the new EU Framework, being Belgium, France, Germany, Greece, Luxembourg and the Netherlands.
Those countries which joined the EU on 1 May 2004, including Hungary, Poland and Malta, were required to implement the new EU Framework before accession. Hungary implemented the new EU Framework in January 2004. However, Malta and Poland have not yet implemented the new EU Framework.
The new 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 new 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 Commission in a Recommendation when deciding which markets to investigate. The first such Recommendation was published by the Commission in February 2003 and includes the market for voice call termination on individual mobile networks, the wholesale national market for international roaming and the market for access and call origination on mobile networks (“the relevant markets”). NRAs may, with the Commissions consent, also propose markets not included in the Recommendation. The Commission will periodically review the Recommendation.
Regulation, under the new EU Framework, can only be applied to undertakings with significant market power (“SMP”) (either individually or collectively) in the relevant markets so identified, subject to the Commissions consent. SMP under the new 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. These guidelines set out principles for use by NRAs in the analysis of markets and effective competition to determine if undertakings have SMP in a relevant market under the new EU Framework.
In April 2004, the European Regulators Group (“ERG”), comprising Member State NRAs and the Commission, issued a common position on the application of remedies
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Business Overview continued | |
by NRAs on those undertakings that are found to have SMP in a relevant market under the new EU Framework.
Appeal rights, under the new EU Framework, are strengthened by the introduction of a right of appeal on the merits of any NRA decision. However, the practical consequences of the new EU Framework for the Group will depend upon how the Commission seeks to further interpret the application of the relevant Directives, how Member States and NRAs choose to implement such guidance and how the Member States implement the relevant Directives into national law.
The UK and Irish NRAs have either concluded or are at an advanced stage with their first reviews, under the new EU Framework, to determine if undertakings have SMP in the relevant markets, and to propose remedies that should be applied to undertakings found to have SMP (“market reviews”). Other Member State NRAs have commenced or are anticipated to commence their market reviews during 2004.
In January 2000, the Commission commenced an investigation into the market for international roaming services. The Commission published its preliminary findings in December 2000. The Commission stated that excessive pricing and price collusion are likely concerning both the level of wholesale rates and the mark-ups applied in retail markets for international roaming services. To date, the Commission has not published the results of this further review.
Officials of the Commission conducted unannounced inspections of the offices of mobile network operators in the UK and Germany, including Group subsidiaries, in July 2001. The Commission said it was seeking evidence of collusion and/or excessive prices, in relation to both retail and wholesale roaming charges, and the Commission has subsequently sought, or been provided with, additional information about roaming charges. The Commission has yet to indicate how, when or if it may proceed in these specific matters or in relation to its general enquiries into the roaming market, but if the Commission 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.
The wholesale national market for international roaming is a market defined for the purposes of review by NRAs under the new EU Framework but at least one NRA has indicated that it will await the outcome of the Commissions investigations before undertaking such reviews. The ERG has proposed to consider this issue towards the end of 2004.
UK & Ireland
United Kingdom
The new Communications Act, implementing the new EU Framework and creating a new NRA for communications, was enacted in July 2003. In December 2003, the Office of Communications (“OFCOM”) replaced the Office of Telecommunications (“Oftel”).
Oftel conducted and concluded its review of the mobile access and call origination market and found that no operator had SMP. As a result, the existing SMP obligations on Vodafone UK (including the requirement to offer indirect access) were removed. On 1 June 2004 OFCOM published its final decision following its review of the call termination market and has found that all mobile network operators have SMP in the market for wholesale voice call termination on individual mobile networks, and proposes that for Vodafone the 2G voice call termination rate should be subject to a target average charge for 2004/05 and for 2005/06 of 5.63 pence per minute.
OFCOM has published consultancy reports on spectrum fees to be paid by operators and these reports will inform its decision making. It is also currently consulting on
certain aspects of spectrum trading, including proposals that certain mobile frequencies are tradable from 2007, which would enable operators to transfer rights of use on commercial terms, subject to oversight by OFCOM.
A law making it an offence for drivers to use hand-held mobile phones or similar devices whilst driving came into force on 1 December 2003.
Ireland
Regulations implementing the new EU Framework were adopted in June 2003. The Irish NRA is currently consulting on its reviews of the relevant markets. In its review of the mobile access and call origination market, the NRA proposes and is consulting on a finding that Vodafone Ireland Limited (“Vodafone Ireland”) and O2 jointly have SMP, but Meteor and 3 do not. The NRA proposes potential remedies, including a 2G national roaming obligation, and a range of options to impose further obligations to provide network access to third parties. In its market review of voice call termination on individual mobile networks, the NRA has proposed that all mobile network operators have SMP. The NRA proposed the imposition of obligations of cost-orientation, non-discrimination, accounting separation and transparency. The NRA is also considering the use of price controls and stated that it expects Vodafone Ireland and O2 to fulfil undertakings made to reduce average mobile termination rates by 5% and 8% below inflation, calculated by reference to the Irish consumer prices index, respectively in 2004. The NRA is expected to issue its final decisions on its market reviews during 2004.
Mobile Number Portability, which allows customers to switch network provider whilst retaining their existing mobile telephone number, was implemented in July 2003.
Northern Europe
Germany
Germany is expected to enact national law implementing the new EU Framework during 2004. The NRA has commenced its market reviews, which are expected to be completed during 2004. In March 2004, the NRA announced its decision to allocate 450MHz spectrum for the provision of public access mobile radio (“PAMR”) services. Vodafone Germany is seeking leave to appeal this decision.
Hungary
Hungary implemented the new EU framework in January 2004 as part of its preparations for joining the EU on 1 May 2004.
Netherlands
The Netherlands is expected to enact national law implementing the new EU Framework during 2004. The mobile operators have reached agreement with the NRA and the Dutch National Competition Authority (“NCA”) to reduce mobile call termination rates between 1 January 2004 and 1 December 2005. Vodafone Libertel N.V. (“Vodafone Netherlands”) rates were reduced from 20.6 to 15.5 eurocents per minute on 1 January 2004 and are to be reduced to 13.5 and 11.0 eurocents per minute on 1 December 2004 and 1 December 2005 respectively.
Sweden
Sweden enacted national law implementing the new EU Framework in July 2003. The NRA has commenced its market reviews. The NRA has proposed that each of the mobile operators and MVNOs be designated as having SMP on the market for voice call termination on individual mobile networks. The NRA is at an advanced stage of assessing a Long Run Incremental Cost (“LRIC”) model to be used to set mobile call termination rates.
The NRA is also reviewing the 3G coverage achieved by the four 3G licensees by 31 December 2003 in accordance with their licence requirements. To date, none of the 3G licensees have achieved the obligation to provide coverage for at least 8,860,000 people by the end 2003. Discussions between the Government, the NRA,
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and the licensees are being held on the implications of failure to achieve this obligation.
The NRA has requested expressions of interest in the allocation of a 450MHz licence for the provision of PAMR services and is currently considering the nature of the award process.
Belgium
Belgium is expected to enact national law implementing the new EU Framework during 2004. The NRA has commenced its market reviews.
France
France is expected to enact national law implementing the new EU Framework during 2004.
The NRA has commenced work to consider new price controls on mobile call termination charges for the period 2005-2007. In December 2003, a French consumers association lodged a complaint with the national competition authority alleging collusion amongst the three French mobile operators on SMS retail pricing.
The French Government has agreed to extend SFRs 2G licence until March 2021. SFR will be required to pay an annual fee of €25 million plus 1% of 2G turnover per year from March 2006.
The NRA postponed the obligation to commercially launch 3G services until 31 December 2004.
Poland
Legislation implementing the new EU Framework in Poland, which joined the EU on 1 May 2004, is due for enactment during 2004.
Southern Europe
Italy
Italy enacted national law implementing the new EU Framework in September 2003. The NRA has commenced its market reviews, which are expected to be completed during 2004.
Greece
Greece is expected to enact national law implementing the new EU Framework during 2004. Vodafone-Panafon Hellenic Telecommunications Company S.A. (“Vodafone Greece”) reduced mobile termination rates for fixed to mobile calls on 5 October 2003 from 19 eurocents and a minimum charge of 42 seconds to 17.5 eurocents and a minimum charge of 33 seconds and further reduced its rates on 1 January 2004 to 17 eurocents with a minimum charge of 30 seconds. On 1 October 2003, it reduced the mobile termination rate for mobile to mobile calls from 19 eurocents with a minimum charge of 42 seconds to 18 eurocents with a minimum charge of 30 seconds.
Malta
Legislation implementing the new EU Framework in Malta, which joined the EU on 1 May 2004, is due for enactment during 2004.
Portugal
Portugal enacted national law implementing the new EU Framework in February 2004. The NRA has commenced its market reviews, which are expected to be completed during 2004. In July 2003, Vodafone Portugal-Comunicações Pessoais, S.A, (“Vodafone Portugal”) agreed to reduce its mobile termination rates by 7% per quarter, with the last reduction proposed for 1 April 2004, and did so for the three successive quarters ending January 2004.
Vodafone Portugal has requested the renewal of its 2G licence for a further 15 years, which is due to expire in October 2006.
Spain
Legislation implementing the new EU Framework was enacted in November 2003. Remaining regulations, implementing the new EU Framework, on SMP and universal service are expected to be completed in 2004. The NRA has commenced its market reviews, which are expected to be completed during 2004.
In December 2003, the NRA imposed price caps on average mobile termination rates of all mobile network operators. The mobile termination rate of Vodafone España S.A. (“Vodafone Spain”) was set at 14.62 eurocents from 31 January 2004. The Spanish NCA is conducting an investigation following a complaint of alleged price squeezing against Telefonica, Vodafone Spain and Amena, and has now issued a Statement of Objections which will be considered by the Competition Tribunal during 2004. Vodafone Spain is contesting this Statement of Objections. In April 2004, the NCA requested Spanish mobile operators to provide data on SMS pricing, although it has not yet opened an official proceeding.
Albania
In May 2004, the NRA designated Vodafone Albania as having SMP in the mobile market, this may lead to increased regulation. Vodafone Albania has appealed this decision. In addition, the NRA intends to regulate mobile interconnection rates, Vodafone Albania is preparing to appeal any such regulation.
Romania
In March 2003, the NRA determined Mobifon S.A. as having SMP in the national interconnection market. From 31 December 2003 until the development of a LRIC model, Mobifons mobile termination rates were reduced from 0.11 USD to 0.10 USD. The completion of a LRIC model and the calculation of a LRIC-based average mobile termination rate are scheduled for July 2004.
Americas
United States
The Federal Communications Commission (“FCC”), the United States NRA, has investigated the level of termination rates charged by foreign mobile operators to fixed operators and has issued an Order in which it committed to undertake a Notice of Inquiry into foreign mobile termination rate impact on US carriers and consumers. The FCC stated that it is “very concerned about the possibility that US consumers might be paying rates that are unreasonably high or discriminatory”. The inquiry is expected to begin within six months from April 2004 and will seek input on the status of foreign mobile termination rates, including actions taken by foreign regulators addressing the issue to date.
From 2 February 2004, the FCC allowed certain spectrum licensees, including mobile operators, to enter various types of leasing arrangements with third parties. Licensees in general may, within the scope and term of their licence, lease any amount of spectrum, in any geographic area, for any time period.
In November 2003, the FCC adopted licensing and flexible service rules for advanced wireless spectrum at 1.7 GHz and 2.1 GHz, which the FCC is expected to license via auction in 2005 at the earliest.
From 24 November 2003, the FCC required US mobile operators to provide mobile number portability for customers switching their mobile operator within the same local service area.
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Asia Pacific
Japan
The NRA has introduced transitional measures to allow fixed network operators to set retail prices for fixed to mobile calls using the fixed network operators override dial code. Until 31 March 2004, mobile operators set retail prices for fixed-to-mobile calls (Vodafone Japans current retail price is ¥120 per three minutes). Fixed line operators then deduct a fixed line interconnection charge and billing and collection costs. Since 1 April 2004, a retail price of ¥60 per three minutes has applied to fixed-to-mobile calls which use a fixed operators override dial code, which is a short code which must be inserted before the telephone number being called. Vodafone Japan will receive a mobile termination charge of approximately ¥40 per three minutes in respect of these calls. Vodafone Japan will continue to set the retail price for non-override calls, which are calls where the override dial code has not been inserted. From 1 April 2005, fixed operators set the retail price for override calls and mobile operators set the retail price for non-override calls. Mobile operators will receive a mobile termination charge in respect of override calls at a level yet to be determined.
The NRA is actively considering the introduction of mobile number portability.
Australia
The Australian Consumer and Competition Commission (ACCC), the NRA, commenced a review of mobile services in March 2003. The review examines what form of regulation, if any, should be applied to the mobile terminating and originating access services, domestic and international roaming services and 3G mobile services. The ACCC has released a draft decision regarding the regulation of mobile terminating access rates that, if implemented, would see continued regulation of 2G voice termination services and the extension of that regulation to 3G voice services. The proposed regulation would require rate decreases of 3 cents per annum (local currency) each year for the next three years, representing a total reduction of 50% in real terms during the period to 31 December 2006. A final decision is expected by summer 2004.
New Zealand
The NRA made a determination regarding the calculation and allocation of costs of the telecommunications universal service obligation in December 2003. In April 2004, the High Court ruled that, while it would not grant leave to appeal on this occasion, Vodafone New Zealand was free to take up the matter again with the NRA in the context of the 2002/03 telecommunications universal cost obligation cost calculation.
The NRA announced, in April 2004, that it would investigate mobile termination rates and retail prices for fixed to mobile calls. The NRA has yet to announce details of the timeframe or process for the investigation but it is expected to conclude the investigation and make recommendations to the Government in November 2004.
China
At the end of 2003, the Ministry of Information Industry announced that the second phase of 3G external field testing would start in February 2004, with China Mobile testing W-CDMA, China Unicom testing CDMA2000, and China Telecom testing both W-CDMA and CDMA2000. All carriers will also test TD-SCDMA in smaller field trials. There has been no formal announcement of the timing or number of 3G licences to be issued in China.
Middle East and Africa Region
Egypt
In December 2003, Vodafone Egypt and MobiNil agreed each to pay EGP1,240 million over a five year period to the NRA in return for access to 1800 MHz spectrum and other benefits.
South Africa
The Government published draft communications convergence legislation for consultation, with a view to finalising new legislation in 2004. Discussions continue on the permanent allocation of 1800 MHz spectrum to Vodacom. An industry working group is drafting an Information Communication Technologies Black Economic Empowerment Charter (the Charter) to comply with Broad-Based Black Empowerment Act 2003 (BBEE Act). The Charter, in satisfying the objectives of the BBEE Act, will set BBEE targets related to company ownership, management, employment and skills development, procurement, enterprise development, and residual investment. The Charter is expected to be finalised in June 2004.
The Groups non-mobile telecommunications businesses mainly comprise interests in Arcor, Cegetel and Japan Telecom, until its deconsolidation on 1 October 2003.
Arcor is the second largest fixed line telecommunications provider in Germany. With its own Germany-wide voice and data network covering more than 40,000 km, Arcor utilises the latest technologies to offer its customers a full range of services for voice and data transfer, including complete ISDN/DSL connection services.
Cegetel is Frances second largest fixed line telephony operator and offers a wide range of fixed line telephone services to residential and business customers as well as special corporate services ranging from network and customer relations management to Internet-Intranet hosting services. Cegetel also owns the most extensive private telecommunications network in France, with 21,000km of fibre optic cable.
History and Development of the Company
The Company was formed in 1984 as a subsidiary of Racal Electronics Plc. Then known as Racal Telecom Limited, approximately 20% of the Companys capital was offered to the public in October 1988. It 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. Following its merger with AirTouch Communications, Inc. (AirTouch), the Company changed its name to Vodafone AirTouch Plc in June 1999 and, following approval by the shareholders in General Meeting, reverted to its former name, Vodafone Group Plc, on 28 July 2000.
The Group has completed a number of business transactions over the past three years, the most significant of which were the acquisition of further interests in Vodafone Japan and Vodafone Spain. In addition, the Group has increased its equity interests in certain other existing Group companies through a series of transactions. These transactions are described in more detail below and, when combined with others, most notably the merger with AirTouch, which completed on 30 June 1999, and the acquisition of Mannesmann AG (Mannesmann) in April 2000, have increased the geographic footprint and substantially increased the customer base of the Groups mobile operations, particularly in Europe and Asia, and have significantly impacted the results of operations.
Acquisition of additional interests in Vodafone Japan and of Japan Telecom
The Groups investment in Japan at 1 April 2001, following the merger with AirTouch and subsequent transactions and agreements, comprised a 26% stake in J-Phone Communications Co., Ltd. (J-Phone Communications), which had a controlling interest of approximately 50% in each of the three regional mobile telecommunications companies, J-Phone East, J-Phone West and J-Phone Central, collectively known as the J-Phone Group.
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On 12 April 2001, the acquisition of a 15% stake in Japan Telecom, the controlling shareholder of the J-Phone Group, from West Japan Railway Company and Central Japan Railway Company was completed. On 27 April 2001, the Group completed the acquisition of a further 10% stake in Japan Telecom from AT&T Corporation for a cash consideration of $1.35 billion (£0.9 billion), bringing the Groups interest in Japan Telecom to 25% at that time.
On 2 May 2001, the Company announced that it had agreed to acquire, for a cash consideration of approximately £3.7 billion, BT Group plcs (BTs) ownership interests in the J-Phone Group and Japan Telecom, comprising BTs combined shareholdings of 20% in Japan Telecom and 20% in J-Phone Communications for £3.1 billion, and BTs aggregate interest of approximately 4.9% in the J-Phone operating companies for a further £0.6 billion. The transaction completed on 1 June 2001, except for the acquisition of BTs interests in the operating subsidiaries of J-Phone Communications, which did not complete until 12 July 2001. As a result of these transactions, the Group had a 46% interest in J-Phone Communications, not including its indirect interest through Japan Telecom, and interests of 18.9%, 15.2% and 14.9%, respectively, in J-Phone Communications regional mobile companies J-Phone East, J-Phone West and J-Phone Central, excluding the Companys indirect interests through Japan Telecoms and J-Phone Communications holdings in these companies.
On 24 August 2001, the Company announced the proposed merger of J-Phone Communications and the J-Phone operating companies into a new company, J-Phone Co., Ltd. The merger became effective on 1 November 2001 and, as a result, the Group held a 39.67% ownership interest in the new company.
On 20 September 2001, the Company announced an agreed tender offer by its subsidiary, Vodafone International Holdings B.V., to acquire up to 693,368 Japan Telecom ordinary shares, representing 21.7% of the ordinary shares of Japan Telecom, for a cash consideration of up to ¥312 billion (£1.8 billion). The offer successfully completed in October 2001.
On 31 July 2002, Japan Telecom announced that it had established a wholly owned subsidiary, Japan Telecom Co., Ltd, and that Japan Telecom was to be renamed Japan Telecom Holdings Co., Ltd. The existing fixed line business was transferred to Japan Telecom Co., Ltd. All of these changes took effect from 1 August 2002. This created a telecommunications service group comprising two core businesses of mobile and fixed telecommunications, namely J-Phone Co., Ltd and Japan Telecom.
The Group has sold its interest in Japan Telecom, as described under Sales of Businesses. In addition, J-Phone Co., Ltd was renamed Vodafone K.K. (Vodafone Japan) on 1 October 2003 and Japan Telecom Holdings Co., Ltd. was renamed Vodafone Holdings K.K. on 10 December 2003.
At 31 March 2004, the Group held, through its wholly owned subsidiary undertakings, a 66.7% stake in Vodafone Holdings K.K., and a 39.67% stake in Vodafone Japan. In addition Vodafone Holdings K.K. held 45.08% of the issued share capital in Vodafone Japan, making the Groups effective interest in Vodafone Japan 69.7%.
Acquisition of additional interests in Vodafone Spain
On 2 May 2001, the Company announced that it had agreed to acquire BTs 17.8% shareholding in Vodafone Spain for a cash consideration of £1.1 billion, increasing its ownership interest in Vodafone Spain to approximately 91.6%. The acquisition was completed on 29 June 2001, following the receipt of regulatory approval.
On 2 April 2002, the Company acquired a further 2.2% interest in Vodafone Spain for £0.4 billion, following the exercise of a put option held by Torreal, S.A, increasing the Groups interest to 93.8%.
On 21 January 2003, the Company announced that it had acquired the remaining 6.2% interest in Vodafone Spain for approximately €2.0 billion (£1.4 billion) following the exercise of a put option held by Acciona, S.A. and Tibest Cuatro, S.A. under the terms of an agreement originally made in January 2000. The transaction completed
on 27 January 2003, at which time Vodafone Spain became a wholly owned subsidiary of the Group.
Acquisition of interests in China Mobile (Hong Kong) Limited (China Mobile)
In an offering that closed on 3 November 2000, the Group acquired newly issued shares representing approximately 2.18% of China Mobiles share capital for a cash consideration of $2.5 billion. On 27 February 2001, the Company and China Mobile signed a strategic alliance agreement, setting out the principal terms for a strategic alliance and co-operation between the two parties in mobile services, technology, operations and management.
On 18 June 2002, the Group invested a further $750 million in China Mobile and obtained the right to appoint a non-executive director to the China Mobile board. The Groups stake in China Mobile increased to approximately 3.27% as a result of this transaction.
Acquisition of interests in Société Française du
Radiotéléphone (SFR) and Cegetel S.A.S.
(Cegetel)
As at 1 April 2001, the Group had a 20% direct interest in SFR and an approximate 15% interest in Cegetel Groupe S.A. (Cegetel Group), the French telecommunications group and the remaining 80% shareholder in SFR, making the Groups effective interest in SFR approximately 31.9%.
On 16 October 2002, the Group announced that it had agreed to acquire BTs 26% interest in Cegetel Group and SBC Communications, Inc.s (SBCs) 15% interest in Cegetel Group for €4.0 billion cash and $2.27 billion cash, respectively. Vivendi Universal S.A. (Vivendi) had pre-emption rights in connection with the Cegetel Group shares held by SBC and BT. At the same time, the Group announced that it had made a non-binding cash offer of €6.8 billion to Vivendi for its 44% interest in Cegetel Group.
On 29 October 2002, the Board of Vivendi announced it had decided not to accept the Groups offer to purchase its 44% interest in Cegetel Group and, accordingly, the offer lapsed. On 3 December 2002, Vivendi also announced its intention to exercise its preemption rights to acquire BTs 26% interest in Cegetel Group.
On 21 January 2003, the Company announced that its subsidiary, Vodafone Holding GmbH, completed the acquisition of SBCs 15% interest in Cegetel Group for a cash consideration of $2.27 billion (£1.4 billion), increasing the Groups effective interest in SFR to approximately 43.9%.
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., a company in which SFR has a 65% stake, giving the Group an effective interest of 28.5%. The Groups interest in SFR remained at approximately 43.9% as a result of this reorganisation.
Other significant transactions
Purchase of additional minority stakes in existing subsidiary undertakings
In line with the Groups strategy of increasing its shareholding in existing operations where it believes opportunities arise to enhance value for the Companys shareholders, the Group purchased minority stakes in certain of the Groups subsidiary undertakings in order to be able to more closely align the respective businesses to the Groups business.
Europolitan Vodafone AB (Vodafone Sweden)
During September 2002, the Group increased its effective interest in its then listed subsidiary Vodafone Sweden by 3.6% to 74.7% through a series of market purchases.
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A recommended cash offer for all remaining shares in Vodafone Sweden not held by the Group was announced on 5 February 2003. As a result of shares bought in the offer and in the market, the Company increased its effective shareholding in Vodafone Sweden to approximately 99.1%. The total aggregate cash consideration paid was £391 million.
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. An arbitral tribunal in Sweden is currently determining the purchase price for the shares and a decision is expected in autumn 2004.
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 for a total consideration of SEK62 million (£4 million).
Vodafone Swedens shares have been de-listed from the O-list, Attract 40, of the Stockholm Exchange. The last day of trading for Vodafone Swedens shares was 28 March 2003.
Vodafone Netherlands
On 27 November 2002, the Group purchased for cash an additional 7.6% interest in Vodafone Netherlands, increasing the Groups interest from 70% to 77.6%.
In January 2003, the Company entered into discussions with the board of Vodafone Netherlands concerning a possible tender offer to acquire the remaining shares of Vodafone Netherlands not held by the Group. A cash offer for these shares was announced on 12 February 2003 and was declared unconditional on 28 March 2003. Following a post-closing acceptance period, the Company, as a result of the offer and market purchases, increased its overall effective interest in Vodafone Netherlands to 97.2% at 31 March 2003. The total aggregate cash consideration paid in the 2003 financial year was £486 million, with a further £110 million paid in April 2003. As a result of private transactions, the Group has increased its effective interest in Vodafone Netherlands to 99.9% at 31 March 2004. The Group has exercised its rights under Dutch law and initiated compulsory acquisition procedures in order to acquire the remaining shares, completion of which is expected during the first half of the 2005 financial year. 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.
Vodafone Portugal
During September 2002, the Group increased its effective interest in its then listed subsidiary Vodafone Portugal to 61.4% through market purchases.
In January 2003, the Company entered into discussions with the board of Vodafone Portugal concerning a possible tender offer to acquire, for cash, all remaining shares not held by the Group. The offer was announced on 28 February 2003. Following completion of the offer, the Companys effective interest in Vodafone Portugal increased to approximately 94.4% as a result of shares purchased in the offer and in the market. The total aggregate cash consideration paid in the 2003 financial year was £184 million, with a further £336 million paid in April 2003. Having achieved an effective interest of greater than 90%, the Company implemented compulsory acquisition procedures to acquire the remaining shares, which became effective on 21 May 2003 for further consideration of £74 million, as a result of which Vodafone Portugal became a wholly owned subsidiary of the Group. De-listing of the shares occurred on 22 May 2003.
Vodafone Greece
On 27 November 2002, the Group announced an agreement to acquire from France Telecom S.A. (FT) its 10.85% interest in Vodafone Greece for £216 million in cash. The transaction completed on 3 December 2002 and increased the Groups effective shareholding in Vodafone Greece from 51.88% to 62.73%. In addition, the Company
granted FT a cash settled call option to cover certain of FTs obligations under its 4.125% Exchange Notes due 29 November 2004, which are convertible into Vodafone Greece shares. Exercise of this option will not change the Groups effective interest in Vodafone Greece. During the 2003 financial year the Group made additional market purchases which increased the Groups effective interest in Vodafone Greece to 64.0% at 31 March 2003.
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.
Other subsidiaries
On 3 May 2002, the Group completed the purchase of the 4.5% minority interest in Vodafone Australia Limited (Vodafone Australia), formerly Vodafone Pacific Limited, for a cash consideration of £43 million, as a result of which Vodafone Australia became a wholly owned subsidiary.
On 23 January 2003, the Group increased its stake in V.R.A.M. Telecommunications Limited, now called Vodafone Hungary Mobile Telecommunications Limited (Vodafone Hungary), to 83.8% by purchasing RWE Com GmbH & Co OHGs 15.565% interest in Vodafone Hungary for an undisclosed cash consideration. Options were granted to Antenna Hungaria RT (Antenna) on 23 January 2003 over certain of the shares acquired from RWE on this date, representing a maximum interest of 3.89%. All of these options expired on 9 October 2003, unexercised.
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. Antennas call options over 5,659,500, 5,072,700 and 7,845,855 Vodafone Hungary C shares, relating to equity injections in October 2001, April 2002 and June 2003, respectively, expired on 9 October 2003 unexercised.
On 16 May 2003, the Group increased its shareholding in Vodafone Egypt from 60.0% to 67.0% for an undisclosed sum. In December 2003, it was announced that a preliminary understanding had been reached with Telecom Egypt for the proposed disposal of a 16.9% stake in Vodafone Egypt, which would reduce the Groups effective interest to 50.1%.
On 1 August 2003, the Group announced that it had increased its shareholding in Vodafone Malta Limited (Vodafone Malta) from 80% to 100% by purchasing Maltacom Plcs 20% interest in Vodafone Malta for cash consideration of €30 million.
Acquisition of remaining 50% interest in Vizzavi
On 29 August 2002, the Group acquired Vivendis 50% stake in the Vizzavi joint venture, which operated a mobile content business, for a cash consideration of €143 million (£91 million). As a result of this transaction, the Group owns 100% of Vizzavi, with the exception of Vizzavi France, which is now wholly owned by Vivendi. Vizzavi services are now provided under the Vodafone brand.
Acquisition of service providers by Vodafone UK
On 22 September 2003, the Group acquired 100% of Singlepoint (4U) Limited (Singlepoint) for 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.
Acquisition of additional interests in associated companies
During December 2002, the Group completed the purchase of an additional 3.5% indirect equity stake in its South African associated undertaking, Vodacom Group (Pty)
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Limited (Vodacom), for the sterling equivalent of £78 million. The transaction increased the Groups effective interest in Vodacom to 35%.
On 10 January 2003, under an agreement with Mobitelea Ventures Limited, the Group completed the purchase of a 5% indirect equity stake in the Groups Kenyan associated undertaking Safaricom Limited (Safaricom) for approximately $10 million (£6 million), increasing the Groups effective interest in Safaricom to 35%.
Sales of businesses
As a consequence of certain of the acquisitions described above, the Group also acquired interests in companies that were either outside the Companys core business, or in which the Company was prevented from retaining interests due to regulatory restrictions. The Group has undertaken a series of transactions to facilitate the orderly disposal of such interests, as described
below.
Disposal of Mannesmann businesses
Following the acquisition of Mannesmann, the Group completed the sale of a number of Mannesmann businesses. The Group used the proceeds from these divestments to reduce its indebtedness. Those completed in the three years ended 31 March 2004 are described below.
Disposal of interests in Atecs Mannesmann AG (Atecs)
In April 2000, Mannesmann reached an agreement with Siemens AG and Robert Bosch GmbH for the sale of a controlling interest in Atecs, its engineering and automotive business. The transaction valued Atecs at approximately €9.6 billion, including pension and non-trading financial liabilities to be assumed on closing. On 29 September 2000, a payment of approximately €3.1 billion (£1.9 billion) plus interest was made to Mannesmann in exchange for the transfer of a 50% plus two shares stake in Atecs, which was completed on 17 April 2001, following approval from the relevant European and US regulatory authorities. Atecs also repaid Group loans of €1.55 billion (£1.0 billion) in March 2001.
On 15 January 2002, Vodafone announced that it had exercised put options to sell its remaining stake in Atecs to Siemens AG. The proceeds from this disposal amounted to €3.66 billion (£2.2 billion), and were received on 4 March 2002.
Disposal of Orange
As a condition to its approval of the Companys acquisition of Mannesmann, the European Commission required the Company to dispose of its interest in Orange, which Mannesmann had acquired in 1999. Orange became a subsidiary of the Company as a result of the Mannesmann acquisition. On 19 April 2001, the remaining cash payment of €4.9 billion that was due to be received from France Telecom in March 2002, in respect of the disposal of Orange, was monetised for €4.7 billion (£2.9 billion).
Disposal of Arcor rail business
On 25 January 2002, the Group announced that Arcor, the Groups German fixed line business, had agreed terms for the sale of its railway-specific business, Arcor DB Telematik GmbH (Telematik), to the German rail operator Deutsche Bahn, for €1.15 billion (£709 million), €1 billion of which was received on 26 March 2002. The sale completed in April 2002 following receipt of all necessary approvals and registration in the German commercial register. On completion, Arcor sold 49.9% of Telematiks equity to Deutsche Bahn and entered into a put / call arrangement governing the remaining 50.1% equity interest, exercisable from 1 July 2002. Deutsche Bahn exercised its option to purchase the remaining 50.1% equity interest for the remaining €0.15 billion on 1 July 2002.
Disposal of tele.ring Telekom Service GmbH (tele.ring)
On 8 May 2001, the Group announced that agreement had been reached to sell its 100% equity stake in the Austrian telecommunications company, tele.ring, to Western
Wireless International Corporation. The transaction completed on 29 June 2001, following receipt of regulatory approval.
Disposal of holding in Ruhrgas AG
On 30 October 2001, the Group announced that it had reached agreement with E.ON AG for the sale of the Groups 23.6% stake in Bergemann GmbH, through which it held an 8.2% stake in Ruhrgas AG. The transaction completed on 8 July 2002, realising cash proceeds of €0.9 billion.
Disposal of Japan Telecom
On 14 November 2003, Vodafone Holdings K.K. (formerly Japan Telecom Holdings Co., Ltd.) completed the disposal of its 100% interest in Japan Telecom. Receipts resulting from this transaction are ¥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) withholding tax recoverable, which is expected to be received in the 2005 financial year. The Group ceased consolidating the results of Japan Telecom from 1 October 2003.
Other disposals
On 24 August 2001, the Group announced that agreement had been reached to sell its 11.7% equity stake in the Korean mobile operator, Shinsegi, for an undisclosed amount to SK Telecom, Ltd. The value of net assets disposed of represented less than 1% of the Groups net assets at the date of disposal.
During the 2004 financial year the Group disposed of its interests in its associated undertakings in Mexico, Grupo Iusacell, and India, RPG Cellular.
Formation of Verizon Wireless
The Cellco Partnership, which operates under the name Verizon Wireless, was formed from the combinations of the US mobile operations of the Company, Bell Atlantic Corporation and GTE Corporation in 2000. The Group owns 45% of Verizon Wireless and designates four of the nine members of Verizon
Wireless Board of Representatives, while Verizon Communications, Inc. (Verizon
Communications) designates the five other members.
Proceeds, in addition to those realised prior to 1 April 2001, of £0.2 billion were realised during the 2002 financial year, following the disposal of overlapping properties in the US, such disposals being a condition of the regulatory approval of the transaction. No further proceeds from the disposal of overlapping properties were received during the 2003 and 2004 financial years.
Mannesmann synergies
Mannesmann has been integrated into the Group and the expected synergies for the year ended 31 March 2004 announced at the time of the acquisition have been achieved, exceeding the target mainly as result of higher
savings from capital expenditure, handset procurement and additional revenue opportunities.
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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 and services, including, for example, 3G services, Vodafone live! and other new or existing 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 like Microsoft or Oracle; the ability to integrate our 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, including the expected benefits of GPRS, 3G and other services and demand for such services; 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 improvements in margin, non-voice services and their revenue contribution; 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; off-balance sheet arrangements; contractual obligations; mobile penetration and coverage rates; 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 requiring changes in pricing models and/or new product offerings or resulting in higher costs of acquiring new customers or providing new services; |
| the impact on capital spending from investment in network capacity and the deployment of new technologies, or the rapid obsolescence of existing technology; |
| slower customer growth or reduced customer retention; |
| the possibility that technologies, including mobile internet platforms, and services, including 3G services, will not perform according to expectations or that vendors performance will not meet the Groups requirements; |
| changes in the projected growth rates of the mobile telecommunications industry; |
| the Groups ability to realise expected synergies and benefits associated with 3G technologies and the integration of our operations and those of recently acquired companies; |
| future revenue contributions of both voice and non-voice services offered by the Group; |
| lower than expected impact of GPRS, 3G and Vodafone live! and other new or existing products, services or technologies on the Groups future revenues, cost structure and capital expenditure outlays; |
| the ability of the Group to harmonise mobile platforms and any delays, impediments or other problems associated with the roll-out and scope of 3G technology and services and Vodafone live! 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; |
| greater than anticipated prices of new mobile handsets; |
| 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 one or more of the measurements of our financial performance and may affect the level of dividends; |
| any unfavourable conditions, regulatory or otherwise, imposed in connection with pending or future acquisitions or dispositions; |
| changes in the regulatory framework in which the Group operates, including possible action by European or US NRAs or by the European Commission regulating rates the Group is permitted to charge; |
| the Groups ability to develop competitive data content and services which will attract new customers and increase average usage; |
| the impact of legal or other proceedings against the Group or other companies in the mobile telecommunications industry; |
| the possibility that new marketing campaigns or efforts are not an effective expenditure; |
| the possibility that the Groups integration efforts do not increase the speed to market for new products or improve the cost position; |
| changes in exchange rates, including particularly the exchange rate of pounds sterling to the euro, US dollar and the Japanese yen; |
| 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 with other negative implications; |
| 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; |
| timing of tax payments relating to the resolution of open issues; and, |
| loss of suppliers or disruption of supply chains. |
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 and Legal Proceedings Risk Factors. 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.
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Risk Factors and Legal Proceedings | |
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 could further adversely affect
the pricing for services the Group offers. Further details on the regulatory
framework in certain regions in which the Group operates can be found in Business
Overview
Regulation.
Increased competition may reduce market share or revenues.
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 mobile services from other providers.
The focus of competition in many of the Companys 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 revenues 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, whether 2G or 3G.
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. Commercially viable 3G
handsets may not be available in the timeframe required or in the amounts needed, which may delay
commercial launch of, or reduce the potential revenue benefits from, 3G services. 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.
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 3G licences and in its mobile networks, including the rollout 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 3G technology. 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 for more information on expenditures in connection with the acquisition of 3G licences and expected expenditure in connection with the roll-out of 3G services. There can be no assurance that the commercial launch of 3G services will proceed according to anticipated schedules or that the level of demand for 3G services will justify the cost of setting up and providing 3G 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 revenues per customer notwithstanding its efforts to increase revenues 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 revenues 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
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Risk Factors and Legal Proceedings continued | |
in accordance with expected time schedules, there is no assurance that revenues from such services will increase ARPU.
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 Legal Proceedings below, 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.
Legal Proceedings
Save as disclosed below, the Company and its subsidiaries are not involved in any legal or arbitration proceedings (including any governmental proceedings which are pending or known to be contemplated) which are
expected to 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 on 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 risk alleged in such personal injury claims have been substantiated and will be vigorously defending such claims.
Between 18 September and 29 November 2002, nine complaints were filed in the United States District Court for the Southern District of New York against the Company and Lord MacLaurin, the Chairman of the Company and Sir Christopher Gent, Julian Horn-Smith and Ken Hydon, executive officers of the Company. The Court subsequently consolidated these actions and designated lead plaintiffs and lead plaintiffs counsel. The plaintiffs filed a consolidated class action complaint on 6 June 2003 which alleged, among other things, that certain public statements made by or attributed to the defendants and the timing of the Companys decision to write down the value of goodwill and certain impaired assets in the financial year ended 31 March 2002 violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaints sought, among other things, unspecified damages on behalf of the purchasers of the Companys securities during the period between 7 March 2001 and 28 May 2002. On 9 October 2003, the Court ordered that the complaint be dismissed, with leave for the plaintiffs to re-plead. On 10 November 2003, the plaintiffs filed a second consolidated amended class action complaint, which contained allegations and claims which were substantially similar to those in the original complaint and it added allegations that certain other statements by one or more of the defendants were materially false or misleading and in violation of the United States Federal Securities laws. That new complaint no longer included Lord MacLaurin as a defendant. On 26 March 2004, the Court struck a number of the allegations in the second consolidated amended complaint and dismissed without prejudice all of the individual defendants from this action. It also gave the plaintiffs a further opportunity to re-plead. On 7 May 2004, the plaintiffs filed a third consolidated amended class action complaint. The new complaint names only the Company as a defendant and contains allegations and claims which are substantially similar to those asserted in the prior complaints. The Company intends to defend the action vigorously.
Annual Report 2004 Vodafone Group Plc | |
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Operating and Financial Review and Prospects | |
Contents
Introduction
The following discussion is based on the Consolidated Financial Statements included elsewhere in this Annual Report. Such Consolidated Financial Statements are prepared in accordance with Generally Accepted Accounting
Principles in the United Kingdom, or UK GAAP, which differ in certain significant respects from US GAAP. Reconciliations of the material differences in the UK GAAP Consolidated Financial Statements to US GAAP are disclosed in note 36 to the
Consolidated Financial Statements, US GAAP information.
The directors have endeavoured to follow the principles set out in the Accounting Standards Boards Statement, Operating and Financial Review, which was issued in January 2003. The information in this regard is provided in this section or elsewhere in this Annual Report.
Vodafone Group Plc is the worlds leading mobile telecommunications company, with equity interests in 26 countries across Europe, the United States and Asia Pacific. The Group has over 133 million registered proportionate mobile customers based on ownership interests at 31 March 2004. Partner Network arrangements extend the Groups footprint by a further 13 countries. As the worlds mobile telecommunications leader, the Groups vision is to enrich customers lives, helping individuals, businesses and communities to be more connected in a mobile world. See Business Overview Business strategy.
The Group currently provides a range of voice and data communication services, including Short Message Services (SMS), Multimedia Messaging Services (MMS) and other data services. Services are provided to both consumer and corporate customers, through a variety of both prepay and postpay tariff arrangements.
In the majority of the Groups controlled networks, services are offered over a Global System for Mobile Communications (GSM) network, on which a General Packet
Radio Service (GPRS) service is also provided. Where licences have been issued, the Group has also secured 3G licences in all jurisdictions in which it operates through its subsidiary undertakings and continues to rollout mobile 3G network infrastructure. See Business Overview Licences and network infrastructure.
The Group faces a number of significant risks that may impact on its future performance and activities. Please see Risk Factors and Legal Proceedings.
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 because it provides readers with access to additional financial information regularly reviewed by management and management believes these measures assist investor assessment of the Groups performance from period to period. This information 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.
Mobile customer definition
A mobile 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 / 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).
Activity level
Active customers are defined as customers who have made or received a chargeable event in the last three months. Where this information is not available, customers who have made a chargeable event in the last three
months are used.
The active customers are expressed as a percentage of the closing customer base. Contract and prepaid activity is reported separately.
ARPU
ARPU is calculated as total revenues, excluding handset revenues and connection revenues, divided by the weighted average number of customers in the period. ARPU is reported externally on a twelve month rolling basis
and on a month only basis for major subsidiaries only.
This performance indicator is commonly used in the mobile telecommunications industry and by Vodafone management to compare service revenues to prior periods and internal forecasts. Management believes that this measure provides useful information for investors regarding trends in customer revenues derived from mobile telecommunications services and the extent to which customers change their use of mobile services and the network from period to period.
Churn
Churn is calculated as total gross customer
disconnections divided by average total customers in the period. Stated churn
figures are twelve month average figures.
Organic growth
The percentage movements in organic growth are presented to reflect operating performance on a comparable basis. Where a subsidiary or associated undertaking was newly acquired or disposed of in the current or prior
year, the Group would adjust, under organic growth calculations, the results for the current and prior year 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 an associated undertaking in the current or prior year, the Groups share of results for the prior
year are restated at the current years ownership level. A further adjustment in organic calculations excludes the effect of exchange rate
Vodafone Group Plc Annual Report 2004 | |
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Operating and Financial Review and Prospects continued | |
movements by restating the current periods results as if they had been generated at the prior periods exchange rates. Management believes that these measures provide useful information to assist investors in assessing the Groups operating performance from period to period.
Foreign Currency Translation
The Company publishes its Consolidated Financial Statements in pounds sterling. However, many of the Companys subsidiary and associated
undertakings report their turnover, costs, assets and liabilities in currencies other than pounds sterling and the Company translates the turnover, costs, assets and liabilities of those subsidiary 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.
In this Annual Report, references to US dollars, $, cents or ¢ are to United States currency and references to pounds sterling, £, pence or p are to UK currency. References to euros or € are to the currency of the EU Member States which have adopted the euro as their currency. Prior to 1 January 2002, the euro was used only in paperless transactions. Euro banknotes and coins were issued on 1 January 2002. References to yen or ¥ are to the currency of Japan. Merely for convenience, this Annual Report contains translations of certain pounds sterling, euro and yen amounts into US dollars at specified rates. These translations should not be construed as representations that the pounds sterling, euro or yen 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 and euro amounts into US dollars have been made at $1.8400 per £1.00, $1.2292 per €1.00 and ¥104.18 per $1.00, the Noon Buying Rate in the City of New York for cable transfers in pounds sterling, euro and yen amounts as certified for customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate) on 31 March 2004. The Noon Buying Rates on 24 May 2004 were $1.7908 per £1.00, $1.1978 per €1.00 and ¥112.66 per $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 per £1.00, to two decimal places.
Years ended 31 March | Period end | Average | High | Low | |||||
2000 | 1.59 | 1.61 | 1.68 | 1.55 | |||||
2001 | 1.42 | 1.47 | 1.60 | 1.40 | |||||
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 | |||||
Month | High | Low | ||
November 2003 | 1.72 | 1.67 | ||
December 2003 | 1.78 | 1.72 | ||
January 2004 | 1.85 | 1.79 | ||
February 2004 | 1.90 | 1.82 | ||
March 2004 | 1.87 | 1.79 | ||
April 2004 | 1.86 | 1.77 | ||
May 2004(1) | 1.79 | 1.75 | ||
Note: | |
(1) | In respect of May 2004, for the period from 1 May to 24 May 2004, inclusive. |
The following table sets out the average exchange rates compared to pounds sterling of other principal currencies of the Group.
Years to 31 March | Change | |||||
Currency | 2004 | 2003 | % | |||
Euro | 1.44 | 1.56 | (8 | ) | ||
Yen | 191.5 | 188.2 | 2 | |||
Inflation
Inflation has not had a significant effect on the Groups results of operations and financial condition during the three years ended 31
March 2004.
Critical Accounting Estimates
The Group prepares its Consolidated Financial Statements in accordance with UK GAAP, the application of which often requires judgements to be made by management when formulating the Groups financial position and results. Under UK GAAP, the directors are required to adopt those accounting policies most appropriate to the Groups circumstances for the purposes of giving a true and fair view and to review them regularly. The Group also prepares a reconciliation of the Groups revenues, net loss, shareholders equity and total assets between UK GAAP 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 UK GAAP accounting policy, a separate explanation is provided.
The discussion below should also be read in conjunction with the Groups disclosure of material UK GAAP accounting policies, which is provided in note 2 to the Consolidated Financial Statements, Accounting policies on pages 73 to 75 and with the description of the Groups US GAAP accounting policies and other US GAAP related disclosures provided on pages 117 to 119.
Management has discussed its critical accounting estimates and associated disclosures with the Companys Audit Committee.
Goodwill and intangible assets
The relative size of the Groups goodwill and other intangible assets makes a number of judgements surrounding the determination of their
carrying value, and related amortisation, critical to the Groups financial position and performance.
At 31 March 2004, intangible assets, including goodwill attributable to the acquisition of interests in associated undertakings, amounted to £93,622 million (2003: £108,085 million), and represented 70% (2003: 70%) of the Groups total fixed assets. In addition, a further £1,190 million of goodwill is charged against reserves (2003: £1,190 million).
The charge for goodwill amortisation is included within operating profit as a separate category of administrative expenses. The charge for amortisation of capitalised licence and spectrum fees is included within cost of sales.
Goodwill, including associated charges for amortisation, affects all of the Groups reported segments. However, given that the majority of the current goodwill asset arose in connection with the Mannesmann acquisition, the Groups results for Northern Europe and Southern Europe are most affected, individually representing £8,147 million and £4,826 million, respectively, of the £15,207 million total charge for goodwill amortisation.
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25 | |
US GAAP
Under US GAAP, the accounting treatment for goodwill and other intangible assets is different to that required by UK GAAP and represents the most significant adjustment made to the Groups results and financial position under UK GAAP when reconciling to US GAAP.
The principal differences are:
(a) | The allocation of the surplus of the resultant purchase price, over the fair value attributed to the share of net assets acquired, to a series of identifiable intangible assets under US GAAP as opposed to only goodwill under UK GAAP; |
(b) | The US GAAP deferred tax treatment of intangible assets, which increases acquisition liabilities; |
(c) | The difference in goodwill arising as a result of the different basis by which the purchase price is derived under US GAAP. |
Of these adjustments, the only one to involve significant management judgement and estimation is (a). Allocation of the purchase price affects the future results of the Group under US GAAP, as finite-lived intangibles are amortised whereas indefinite-lived intangible assets are not amortised, and could result in differing amortisation charges based on the allocation to goodwill, indefinite-lived intangible assets and finite-lived intangible assets.
Bases of amortisation
Goodwill
Once capitalised, goodwill is amortised on a straight-line basis over its estimated useful economic life.
Other intangible assets
Other intangible assets primarily represents the Groups aggregate amounts spent on the acquisition of 2G and 3G licences, stated after deduction of related amortisation charges.
Since revenues cannot be generated until a network is available for commercial service, amortisation of capitalised licences begins at this time. As networks are typically brought into service over a period of time, the charge for amortisation is initially calculated by reference to the capacity of the network compared to capacity at network maturity. For this purpose, network maturity is determined as being reached after a maximum period of five years from service launch. Thereafter, amortisation is on a straight-line basis over its remaining useful economic life. Management considers this policy is the appropriate method of matching the amortisation with the economic benefit derived from the licences.
If the licences were amortised over their economic life on a straight-line basis, the annual amortisation charge would be higher in the period to network maturity and lower thereafter.
US GAAP
Goodwill and other indefinite-lived intangible assets are not amortised but reviewed annually for impairment. Impairment reviews are discussed in more detail below. The majority of the Groups intangible assets, primarily 2G and 3G licences, are finite-lived and are amortised over their estimated economic life on a straight-line basis, which commences when the network is available for commercial service.
Estimation of useful economic life
The economic life used to amortise goodwill and other intangible fixed 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.
Goodwill
For acquired mobile network operators, the useful economic life of goodwill reflects the useful economic life of the licences acquired with those businesses up to a maximum of twenty-five years. In managements view, such businesses cannot operate in their respective jurisdiction without a licence, and so the licence term is the most appropriate life for the goodwill. The useful economic lives are reviewed annually and revised if necessary.
For other businesses acquired, the useful economic life principally reflects managements view of the average economic life of the acquired customer base. The useful economic life is assessed by reference to customer churn rates. An increase in churn rates may lead to a reduction in the useful economic life and an increase in the amortisation expense. Historically, changes in churn rates have been insufficient to impact the useful economic life.
Other intangible assets
For licence and spectrum fees, the estimated useful economic life is, generally, the term of the licence. Using the licence term reflects the period over which the Group will receive economic benefit. The economic lives are periodically reviewed, taking into consideration such factors as changes in technology. Historically, the economic lives have not been changed following these reviews.
Tangible fixed assets
Tangible fixed assets 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 economic 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 profit and loss account.
The useful economic lives of Group assets are determined by management at the time the asset is acquired and regularly reviewed 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 economic 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 2004, internal costs capitalised represented approximately 6% of expenditure on tangible fixed assets and approximately 4% of total operating expenses, excluding goodwill amortisation.
Impairment reviews
Asset recoverability is an area involving
management judgement, requiring assessment as to whether the carrying value
of assets can be supported by the net present value of future cash flows derived
from such assets using cash flow projections which have been discounted at
an appropriate rate. In calculating the net
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26 | |
Operating and Financial Review and Prospects continued | |
present value of the future cash flows, certain assumptions are required to be made in respect of highly uncertain matters, as noted below.
UK GAAP requires management to undertake a review for impairment if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Group management currently undertake a review of goodwill, intangible assets and investments in associated undertakings at least annually to consider whether a full impairment review is required.
US GAAP
Under US GAAP, the requirements differ from UK GAAP and the principal differences are:
• | Annual impairment reviews are performed for goodwill and other indefinite-lived intangible assets; and |
| For finite-lived intangible assets and tangible assets, whenever events or changes in circumstances indicate that their carrying amount may not be recoverable, the carrying value is compared to undiscounted future cash flows. |
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 revenues, including those relating to the achievement the Groups strategy on data products and services; |
| Changes in operating margin; |
| 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. |
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.
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 a formal 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 Liquidity
and Capital Resources.
The growth in complexity of the Groups structure following its rapid expansion geographically over the past few years 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 therefore 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 profit and loss account and tax payments.
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 timing 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.
Non-discounting of deferred tax assets and liabilities
UK GAAP permits, and US GAAP prescribes, calculating deferred taxation assets or liabilities on an undiscounted basis. It is the Groups accounting policy to measure deferred taxation on an undiscounted basis. If deferred taxation liabilities were calculated using discounting techniques, the Groups UK GAAP net deferred taxation liability would be lower.
Revenue recognition and presentation
Turnover from mobile telecommunications comprises
amounts charged to customers in respect of monthly access charges, airtime
charges, airtime usage, messaging, the provision of other mobile telecommunications
services, including data services and information provision, fees for connecting
customers to a mobile network, revenue from the sale of equipment, including
handsets, and revenues arising from the Groups Partner Network agreements.
Following the issuance of the Application Note to FRS 5, Reporting the Substance of Transactions, in November 2003, the Group has amended its accounting policy on revenue recognition in relation to the deferral of certain equipment, connection, upgrade and tariff migration fees. The effect of the revised policy on the Groups turnover and results is not material in either the current or previous financial years.
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 the 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 a disclosed agent, revenue is recognised on a net basis, with turnover representing the margin earned.
US GAAP
For the period to 30 September 2003, the Group applied US Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which resulted in the Groups connection revenues being accounted for in a different way to that prescribed under UK GAAP and described above. SAB 101 specifies that performance is viewed from the perspective of the customer and takes place over the estimated life of the customer relationship.
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27 | |
Deferring connection revenues and associated costs over the estimated life of the customer relationship, using the methodology required under SAB 101, resulted in the Groups revenues for the 2003 and 2002 financial years being reduced by £1,760 million and £1,044 million, respectively. Profits are materially unaffected by this adjustment as a broadly equal amount of costs are also deferred.
For all new contracts entered into from 1 October 2003, the Group has adopted the requirements of Emerging Issue Task Force (EITF) Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The adoption of EITF 00-21 substantially aligns the Groups US GAAP revenue recognition policy with UK GAAP.
As contracts entered into before 1 October 2003 are accounted for in accordance with SAB 101, the related deferred connection revenues, and related costs, will continue to be recognised over the remaining life of the customer relationship. For the 2004 financial year, the Groups revenue under US GAAP increased by £188 million as a result of following the methodology under SAB 101 for the first six months and EITF 00-21 for the remainder of the year. At 31 March 2004, deferred revenue accounted for in accordance with SAB 101 amounted to £3,737 million.
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 was to improve or deteriorate. 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.
Vodafone Group Plc Annual Report 2004 | |
28 | |
Operating and Financial Review and Prospects continued | |
Operating Results | ||||||
Group overview | ||||||
Years ended 31 March | ||||||
2004 | 2003 | 2002 | ||||
£m | £m | £m | ||||
Turnover | 33,559 | 30,375 | 22,845 | |||
Direct costs and operating expenses(1) | (20,919 | ) | (19,158 | ) | (14,814 | ) |
Depreciation and amortisation(1)(2) | (4,549 | ) | (4,141 | ) | (2,960 | ) |
Share of profit in joint ventures and associated undertakings(1) | 2,658 | 2,105 | 1,973 | |||
10,749 | 9,181 | 7,044 | ||||
Goodwill amortisation | (15,207 | ) | (14,056 | ) | (13,470 | ) |
Exceptional operating items | 228 | (576 | ) | (5,408 | ) | |
Total Group operating loss | (4,230 | ) | (5,451 | ) | (11,834 | ) |
Exceptional non-operating items | (103 | ) | (5 | ) | (860 | ) |
Net interest expense | (714 | ) | (752 | ) | (845 | ) |
Taxation | (3,154 | ) | (2,956 | ) | (2,140 | ) |
Loss on ordinary activities after taxation | (8,201 | ) | (9,164 | ) | (15,679 | ) |
Loss for the financial year | (9,015 | ) | (9,819 | ) | (16,155 | ) |
Notes: | |
(1) | before goodwill amortisation and exceptional operating items |
(2) | includes loss on disposal of tangible fixed assets |
2004 financial year compared to 2003 financial year
Turnover
Turnover increased 10% in the 2004 financial year, as analysed below:
Mobile | Non-mobile | Group | ||||
% | % | % | ||||
Impact of | ||||||
Organic growth | 10 | 5 | 10 | |||
Foreign exchange | 4 | 9 | 4 | |||
Acquisitions & disposals | 1 | (49 | ) | (4 | ) | |
Reported growth | 15 | (35 | ) | 10 | ||
The impact of acquisitions and disposals resulted mainly from the disposal of Japan Telecom. The foreign exchange impact primarily arose due to a stronger Euro.
Mobile telecommunications
Years ended 31 March | Change | |||||
2004 | 2003 | |||||
£m | £m | % | ||||
Service revenues: | ||||||
Voice | 23,618 | 21,201 | 11 | |||
Data | 4,540 | 3,622 | 25 | |||
Subtotal | 28,158 | 24,823 | 13 | |||
Equipment & other | 3,557 | 2,719 | 31 | |||
Total mobile revenues | 31,715 | 27,542 | 15 | |||
The principal component of the increase in turnover from mobile telecommunications arose from service revenue growth of 13%, driven primarily by growth in the Groups controlled customer base, which increased by 9% over the prior year.
ARPU was up 4% in Italy and 8% in the UK and down 7% and 1% in Japan and
Germany, respectively, compared with the year ended 31 March 2003. Total outgoing voice usage in controlled mobile businesses increased by 11% over the year to 154.8 billion minutes for the year ended 31 March 2004, although the effect on ARPU was partially offset by tariff reductions and regulatory intervention. Lower termination rates, resulting from regulatory changes, have reduced service revenue by an estimated £0.3 billion in the year.
Another key driver of the growth in service revenue was the continued success of the Groups data product and service offerings. Revenues from data services increased 25% to £4,540 million for the year ended 31 March 2004 and represented 16.1% of service revenues in the Groups controlled mobile subsidiaries for the twelve months ended 31 March 2004, compared with 14.6% for the 2003 financial year. SMS revenues continue to represent the largest component of both the level of and growth in data revenues. Non-messaging data revenues increased to 4.2% of service revenues from 3.6% in the prior financial year as a result of the increased focus on providing value-added services, particularly through Vodafone live!, the Groups business offerings and the increased penetration of data services into the Groups customer base.
Mobile equipment and other turnover increased 31% to £3,557 million, due to revenues from non-Vodafone customers acquired as a result of the acquisition of service providers in the UK and increased acquisition and retention activity. Excluding these revenues, mobile equipment and other turnover increased slightly as a result of higher gross connections and upgrades.
Non-mobile businesses
Turnover from other operations decreased by 35% to £1,844 million in the year, principally as a result of the deconsolidation of Japan Telecom from 1 October 2003, and the disposal of the Telematik business by Arcor in the previous year.
Operating loss
After goodwill amortisation and exceptional items, the Group reported a total operating loss of £4,230 million, compared with a loss of £5,451 million for the previous year. The £1,221 million reduction in the total operating loss arose as a result of a £228 million credit in respect of exceptional operating items in the year ended 31 March
Annual Report 2004 Vodafone
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29 | |
2004, compared with an expense of £576 million in the prior year, and a £1,568 million increase in operating profit before goodwill amortisation and exceptional items partially offset by a £1,151 million increase in the goodwill amortisation charge. The charges for goodwill amortisation, which do not affect the cash flows of the Group or the ability of the Company to pay dividends, increased by 8% to £15,207 million, principally as a result of the impact of foreign exchange movements.
Expenses
Years ended 31 March | ||||
2004 | 2003 | |||
% of turnover | % of turnover | |||
Direct costs | 39.9 | 38.9 | ||
Operating expenses | 22.5 | 24.1 | ||
Depreciation and amortisation | 13.6 | 13.6 | ||
The increase in direct costs as a percentage of turnover is principally due to an increase in the proportion of acquisition and retention costs, primarily following the acquisition of a number of service providers in the UK. Acquisition and retention costs net of equipment revenues as a percentage of service revenues, for the Groups controlled mobile businesses, increased to 12.6%, compared with 12.3% for the comparable period. This was partially offset by the disposal of Japan Telecom.
The principal reason for the improvement in operating expenses as a percentage of turnover was the maintenance of network operating costs at a similar level to the previous financial year, despite the growth in customer numbers and usage. Operating expenses as a proportion of turnover also benefited from the disposal of Japan Telecom.
Depreciation and amortisation charges, excluding goodwill amortisation, increased by 10% to £4,549 million from £4,141 million in the comparable period. The launch of 3G services in a number of countries resulted in approximately £0.3 billion of additional depreciation and amortisation in the current year as 3G infrastructure and licences have been brought into use.
Goodwill amortisation
Retranslating the goodwill amortisation charge for the year ended 31 March 2004 at the average exchange rates applicable for the year ended 31 March 2003 would have reduced the charge by £965 million to £14,242 million, with a corresponding reduction in total Group operating loss.
Exceptional operating items
Net exceptional operating income for the year ended 31 March 2004 of £228 million comprises £351 million of recoveries and provision releases in relation to a contribution tax levy on Vodafone Italy that is no longer expected to be levied, net of £123 million of restructuring costs principally in Vodafone UK. Net exceptional operating charges of £576 million were charged in the year ended 31 March 2003, comprising £485 million of impairment charges in relation to the Groups interests in Japan Telecom and Grupo Iusacell, and £91 million of reorganisation costs relating to the integration of Vizzavi into the Group and related restructuring.
In accordance with accounting standards the Group regularly monitors the carrying value of its fixed assets. A review was undertaken at 31 March 2004 to assess whether the carrying value of assets was supported by the net present value of future cash flows derived from assets using cash flow projections for each asset in respect of the period to 31 March 2014. The results of the review undertaken at 31 March 2004 indicated that no impairment charge was necessary.
Exceptional non-operating items
Net exceptional non-operating charges for the year of £103 million principally relate to a loss on disposal of the Japan Telecom fixed line operations. In the prior year, net exceptional non-operating charges of £5 million mainly represented a profit on disposal of fixed asset investments of £255 million, principally relating to the disposal of the Groups interest in Bergemann GmbH, through which the Groups 8.2% stake in Ruhrgas AG was held, offset by an impairment charge in respect of the Groups investment in China Mobile of £300 million.
Loss on ordinary activities before interest
The Groups loss on ordinary activities before interest fell by 21% to £4,333 million due a reduction in the total operating loss of £1,221 million offset by an increase in charge for exceptional non-operating items of £98 million.
Net interest payable
Net interest payable, including the Groups share of the net interest expense of joint ventures and associated undertakings, decreased from £752 million for the year ended 31 March 2003 to £714 million for the year ended 31 March 2004.
The Group net interest cost for the current year increased to £499 million, including £215 million (2003: £55 million) relating to potential interest charges arising on settlement of a number of outstanding tax issues, from £457 million for the prior year and was covered 28 times by operating cash flow plus dividends received from associated undertakings. The Groups share of the net interest expense of associated undertakings and joint ventures decreased from £295 million to £215 million, principally as a result of the sale of the Groups stake in Grupo Iusacell.
Taxation
The effective rate of taxation for the year ended was (62.5)% compared with (47.6)% for the year ended 31 March 2003. The effective rate includes the impact of goodwill amortisation and exceptional items, which may not be deductible for tax purposes. Aside from the negative impact of non-tax deductible goodwill amortisation on the effective tax rate, the Groups tax charge has benefited further from the Groups Italian operations in the prior year, from the current year restructuring of the French operations, from a fall in the Groups weighted average tax rate and from other tax incentives. These benefits have outweighed the absence of the one-off benefit arising from the restructuring of the German group in the previous year.
Basic loss per share
Basic loss per share, after goodwill amortisation and exceptional items, improved from a loss per share of 14.41 pence to a loss per share of 13.24 pence for the year ended 31 March 2004. The loss per share includes a charge of 22.33 pence per share (2003: 20.62 pence per share) in relation to the amortisation of goodwill and a charge of 0.01 pence per share (2003: 0.60 pence per share) in relation to exceptional items.
Vodafone Group Plc Annual Report 2004 | |
30 | |
Operating and Financial Review and Prospects continued | |
2003 financial year compared to 2002 financial year
Turnover
Turnover increased 33% in the 2003 financial year, as analysed below:
Mobile | Non-mobile | Group | ||||
% | % | % | ||||
Impact of | ||||||
Organic growth | 11 | 5 | 11 | |||
Foreign exchange | 2 | | 2 | |||
Acquisitions & disposals | 20 | 30 | 20 | |||
Reported growth | 33 | 35 | 33 | |||
The impact of acquisitions and disposals mainly comprised Vodafone Japan and Japan Telecom, which both became subsidiaries from October 2001. Changes in exchange rates beneficially impacted the reported growth in total turnover as a result of a stronger euro partly offset by a weaker yen.
Mobile telecommunications
Years ended 31 March | Change | |||||
2003 | 2002 | |||||
£m | £m | % | ||||
Service revenues: | ||||||
Voice | 21,201 | 16,646 | 27 | |||
Data | 3,622 | 2,093 | 73 | |||
Subtotal | 24,823 | 18,739 | 32 | |||
Equipment & other | 2,719 | 2,003 | 36 | |||
Total mobile revenues | 27,542 | 20,742 | 33 | |||
Mobile service revenue increased as a result of greater usage of voice services, increased penetration of data products and services and the benefit of a full years service revenues from Vodafone Japan. This was partially offset by both reductions in interconnect rates in a number of the Groups markets, mainly in Europe, and the effect of increased competitive activity in certain key European markets by existing competitors looking to attract market share and generate customer loyalty.
Voice services increased as the Group achieved a sustained improvement in ARPU in many key markets in Europe, compared with the year ended 31 March 2002, as benefits from the Groups continued focus on high value customers led to increased penetration of the contract customer segment and initiatives to stimulate usage, including the launch of new and innovative products, were realised.
Another key driver of the growth in turnover and improved ARPU position was the continued success of the Groups data product and service offerings, in particular, increased SMS usage in the Groups controlled networks. During the period, Vodafone live! and the Mobile Connect Card were launched in most of the Groups European markets.
The Groups main markets of Germany, Italy, the UK and Japan, all experienced increases in mobile data revenues, with SMS revenues continuing to be the principal component of these revenue streams, except in Vodafone Japan where internet data remained the principal component due to the high proportion of Vodafone Japans customer base with internet-capable phones.
The mobile equipment and other turnover increase was largely attributable to the volume of gross customer connections and upgrades in the 2003 financial year, the effects of the reduction in handset subsidies, in line with the Groups strategy, and the full year impact of the acquisition of a controlling interest in Vodafone Japan.
Non-mobile businesses
Turnover from other operations, which comprised turnover relating to the Groups interests in its fixed line businesses in Japan (Japan Telecom) and Germany (Arcor), and turnover from Vodafone Information Systems GmbH, a German IT and data services business, increased from £2,103 million to £2,833 million. The increase was primarily as a result of the full year inclusion of Japan Telecom following completion of the Groups acquisition of a controlling stake in October 2001.
Operating loss
After goodwill amortisation and exceptional items, the Group reported a total operating loss of £5,451 million, compared with a loss of £11,834 million for the comparable period. This net change of £6,383 million arose as a result of a £4,832 million reduction in respect of exceptional items, and a £2,137 million increase in operating profit, before goodwill amortisation and exceptional items, partly offset by a £586 million increase in the goodwill amortisation charge, which increased primarily as a result of the acquisition of Vodafone Japan and Japan Telecom in the second half of the 2002 financial year.
Expenses
Years ended 31 March | ||||
2003 | 2002 | |||
% of turnover | % of turnover | |||
Direct costs and operating expenses | 63.1 | 64.8 | ||
Depreciation and amortisation | 13.6 | 13.0 | ||
The Groups direct costs consist primarily of financial incentives to service providers and dealers, payments to landline and mobile operators for delivering calls outside the Groups networks and for providing landline or microwave links, depreciation of network infrastructure, the cost of customer equipment sold and network operating costs.
Excluding Vodafone Japan, the Groups equipment costs and cost of providing financial incentives to service providers and dealers for acquiring and retaining customers declined to 13.8% of turnover from mobile telecommunications, compared with 14.7% for the prior year, demonstrating the continued focus on gaining and retaining high-value customers in the most cost-efficient manner. Inclusive of Vodafone Japan, equipment costs and financial incentives amounted to 21.1% of turnover from mobile telecommunications as costs to connect and retain customers, although reducing, remained higher in Japan than in the Groups other key markets.
Depreciation increased by £1,099 million for the year ended 31 March 2002 to £3,979 million for the year ended 31 March 2003, primarily as a result of the full year inclusion of Vodafone Japan and Japan Telecom. In Japan, depreciation also increased as a result of a charge in respect of its UMTS network, which was opened for commercial service in December 2002, and in Germany, depreciation increased as a result of the prior year expenditure on network infrastructure improvements.
Goodwill amortisation
The charge for goodwill amortisation increased from £13,470 million for the year ended 31 March 2002 to £14,056 million for the year ended 31 March 2003 as a result of a full years charge for prior year acquisitions, charges in respect of current year acquisitions and the impact of foreign exchange.
Exceptional operating items
Exceptional operating costs of £576 million for the year ended 31 March 2003 comprised impairment charges of £405 million and £80 million for the Groups interest in Japan Telecom and Grupo Iusacell, respectively, additional costs incurred as a result of the integration of Vizzavi into the Group, following the acquisition of the remaining 50% interest in August 2002, and related restructuring of the Groups Global mobile platform business.
Annual Report 2004 Vodafone Group Plc | |
31 | |
For the 2002 financial year, exceptional operating costs of £5,408 million comprised impairment charges of £5,100 million in relation to the carrying value of goodwill for Arcor, Cegetel, Grupo Iusacell and Japan Telecom, and £222 million representing the Groups share of exceptional items of its associated undertakings and joint ventures, comprising £107 million of, principally, asset write downs in Vodafone Japan and £115 million of reorganisation costs in Verizon Wireless and Vizzavi. A further £86 million of reorganisation costs was also incurred in the 2002 financial year, principally in respect of the Groups operations in Australia and the UK.
In accordance with applicable accounting standards, the Group regularly monitors the carrying value of its fixed assets. A review was undertaken at 31 March 2003 to assess whether the carrying value of assets was supported by the net present value of future cash flows derived from assets using cash flow projections for each asset in respect of the period to 31 March 2013.
The results of the review indicated that, whilst no impairment charge was necessary in respect of the Groups controlled mobile businesses, impairment charges totalling £810 million were necessary in respect of non-controlled mobile and non-mobile businesses as detailed below.
Company | Year ended | |
31 March 2003 | ||
£m | ||
Japan Telecom | 430 | |
Grupo Iusacell | 80 | |
China Mobile | 300 | |
810 | ||
The charge in respect of China Mobile and £25 million of the charge for Japan Telecom are included within exceptional non-operating items.
Exceptional non-operating items
Net exceptional non-operating items amounted to £5 million for the year ended 31 March 2003. Exceptional non-operating items during the 2003 financial year principally included impairment charges of £300 million in respect of the Groups interest in China Mobile and £25 million in respect of certain investments held by Japan Telecom, offset by a profit on disposal of fixed asset investments of £255 million, principally relating to the disposal of the Groups interest in Bergemann GmbH, through which the Groups 8.2% stake in Ruhrgas AG was held, and £55 million representing the Groups share of the profit on disposal for cash of AOL Europe shares by Cegetel.
The 2002 financial year exceptional non-operating costs of £860 million principally comprised an impairment charge of £900 million in respect of the Groups investment in China Mobile, partly offset by an aggregate profit of £60 million on the disposal of fixed assets, businesses and fixed asset investments, principally relating to the reduction in the Groups interest in Vodafone Greece from 55% to 51.9%, the disposal of the Groups interest in the Korean mobile operator, Shinsegi, offset by a net loss on disposal of certain other operations.
Loss on ordinary activities before interest
During the year ended 31 March 2003, the Group reported a loss on ordinary activities before interest of £5,456 million, compared with a loss for the year ended 31 March 2002 of £12,694 million. The principal items that resulted in the decreased loss were improved total Group operating profit, before goodwill amortisation and exceptional items, which increased from £7,044 million for the year ended 31 March 2002 to £9,181 million for the year ended 31 March 2003 and the decrease in exceptional operating items and exceptional non-operating items, which decreased from £5,408 million for the year ended 31 March 2002 to £576 million for the year ended 31 March 2003 and £860 million for the year ended 31 March 2002 to £5 million
for the year ended 31 March 2003, respectively. These were partially offset by the increased charge in respect of goodwill amortisation from £13,470 million for the year ended 31 March 2002 to £14,056 million for the year ended 31 March 2003.
Net interest payable
Total Group net interest payable, including the Groups share of the net interest expense of joint ventures and associated undertakings, decreased from £845 million for the year ended 31 March 2002 to £752 million for the year ended 31 March 2003. Net interest costs in respect of the Groups net borrowings decreased from £503 million for the year to 31 March 2002 to £457 million for the year ended 31 March 2003, reflecting the reduction in average net debt levels. The Groups share of the net interest expense of joint ventures and associated undertakings decreased from £342 million for the year ended 31 March 2002 to £295 million for the year ended 31 March 2003 partly as a result of the consolidation of the Groups former associate undertakings, Japan Telecom and Vodafone Japan, from October 2001, and of Vizzavi from 29 August 2002, and reduced levels of indebtedness in SFR.
Taxation
The effective rate of taxation for the year ended 31 March 2003 was (47.6)% compared with (15.8)% for the year ended 31 March 2002. The effective rate includes the impact of goodwill amortisation and exceptional items, which may not be deductible for tax purposes. Aside from the negative impact of non-tax deductible goodwill amortisation on the effective tax rate, the Groups tax charge for the year ended 31 March 2003 benefited from the reorganisation of the Groups Italian operations and a one-off benefit in Germany arising from the reorganisation of the German Group of companies. In the year ended 31 March 2002, the Groups tax charge included a one-off tax credit received in Germany arising from the distribution of earnings and also the Visco law incentive scheme in Italy. The Visco law was subsequently replaced by a less favourable regime.
Basic loss per share
Basic loss per share, after goodwill amortisation and exceptional items, decreased from a loss of 23.77p for the year ended 31 March 2002 to a loss per share of 14.41p for the year ended 31 March 2003. The loss per share of 14.41p included an increase in the charge for the amortisation of goodwill from 19.82p per share for the year ended 31 March 2002, to a charge of 20.62p per share for the year ended 31 March 2003, offset by a decrease in the charge for exceptional items from 9.10p per share for the year ended 31 March 2002 to 0.60p per share for the year ended 31 March 2003.
Vodafone Group Plc Annual Report 2004 | |
32 | |
Operating and Financial Review and Prospects continued | |
Regional review
Please refer to the summary of Key Performance Indicators on page 38 and note 3 of the Consolidated Financial Statements.
In June 2003, the Group announced changes in the regional structure of its operations. The former Northern Europe and Central Europe regions were combined into a new Northern Europe region, with the exception of the United Kingdom and Ireland which now form their own region. The following results are presented in accordance with the new regional structure.
2004 financial year compared to 2003 financial year
Mobile telecommunications
UK & Ireland
Years ended 31 March | Change | |||||
2004 | 2003 | |||||
£m | £m | % | ||||
Turnover | ||||||
United Kingdom | ||||||
Voice services | 3,487 | 3,207 | 9 | |||
Data services | 671 | 541 | 24 | |||
Total service revenue | 4,158 | 3,748 | 11 | |||
Equipment and other | 586 | 278 | 111 | |||
4,744 | 4,026 | 18 | ||||
Ireland | 760 | 629 | 21 | |||
5,504 | 4,655 | 18 | ||||
Operating profit* | ||||||
United Kingdom | 1,098 | 1,120 | (2 | ) | ||
Ireland | 262 | 206 | 27 | |||
1,360 | 1,326 | 3 | ||||
* Total Group operating profit before goodwill amortisation and exceptional items
United Kingdom
Vodafone UK successfully maintained its leading market position, based on revenue share, according to the regulators last published data, in line with its strategic objectives, despite pricing pressures caused by intensifying competition and regulatory activity.
Total UK turnover increased by 18% to £4,744 million, driven by organic growth of 12% and the acquisition of a number of service providers, including Singlepoint which contributed growth of 6%. The organic growth resulted from the larger customer base and increased usage of both voice and data services, partially offset by a regulatory reduction in termination rates and the inclusion of calls to other mobile operators within new bundled price plans. Data revenues, as a percentage of service revenues, improved over the year to 16.1% for the year ended 31 March 2004 as usage levels of SMS and other data offerings increased. The increased number of Vodafone live! customers contributed towards the improved data usage. Equipment and other revenue increased by 111%, principally as a result of revenues from non-Vodafone customers acquired with the service providers and increased customer acquisition and upgrade activity.
Blended ARPU increased in the year, mainly due to growth in prepaid ARPU and the Singlepoint acquisition. Prepaid ARPU improved to £130 for the year ended 31 March 2004 from £125 for the year ended 31 March 2003. Contract ARPU, excluding the impact of the Singlepoint acquisition, increased by £14 to £531 for the year ended 31 March 2004.
Vodafone UKs share of mobile service revenue in the latest quarterly review by OFCOM, the new national UK regulator, for the quarter ended 30 September 2003, was 31.8%, representing a lead of 6.5 percentage points over the second placed competitor.
Registered customers increased by 6% to 14,095,000 and the proportion of contract customers and activity levels remained stable throughout the year. The acquisition of the service providers, including Singlepoint, during the year increased the proportion of in-house managed contract customers from 57% to 93%, enabling closer management of the contract customer base.
On 24 July 2003, Vodafone UK reduced its termination charges by RPI minus 15% (on the weighted average charge for the previous year) to comply with its licence requirements. This reduction implemented the decision of the UK Competition Commission in January 2003. OFCOM is required to conduct a market review of call termination under the new EC regulatory framework brought into force on 25 July 2003 and is expected to conclude its review in summer 2004. The previous regulator, Oftel, had proposed further cuts in the current and next financial year.
UK operating profit before goodwill amortisation and exceptional items fell by £22 million to £1,098 million. Contributing factors included: increased investment in the acquisition and retention of the customer base; increased interconnect costs due to changes in the call mix; lower incoming revenues due to the reduction in termination rates; increased depreciation as a result of a general increase in capital expenditure; and amortisation of the 3G licence, which was charged for the first time in this year. As the Singlepoint business has a lower margin, this has diluted the margin in the second half of the year. These factors have been partially offset by operating efficiencies, including reductions in network operating costs as a percentage of turnover.
Vodafone UK announced a restructuring programme in the second half of the year which resulted in an exceptional charge of £130 million relating to staff costs, property provisions and the write down of other assets. The objective of the restructuring is to consolidate recent business acquisitions and to reorganise the customer management organisation to meet the changing needs of Vodafone UKs customers. In addition, the business reorganised its network and technology organisations and implemented a programme to consolidate switching centres in its network. The benefits of this strategic initiative are expected to be realised through a reduction in operating expenses during the coming financial years.
Ireland
Vodafone Irelands turnover increased by 12% when measured in local currency, benefiting from increased voice and data usage. Blended ARPU grew from €553 to €582, in part as a result of strong growth in data revenues, which improved to represent 20.5% of service revenues for the year ended 31 March 2004, from 19.1% for the prior year. Ireland continues to have the highest levels of outgoing voice usage per customer in the Groups controlled mobile businesses and the highest data usage in the Groups European mobile businesses, which combine to generate the strong ARPU performance. Operating profit before goodwill amortisation and exceptional items increased by 16% when measured in local currency, principally driven by the increased turnover combined with improvements in operating efficiency.
Vodafone Ireland successfully maintained its leadership with an approximate market share of 54% and a closing customer base of 1,864,000. Phase 1 of its 3G licence obligation was met on 1 May 2003.
Annual Report 2004 Vodafone Group Plc | |
33 | |
Northern Europe
Local | ||||||||
Years ended 31 March | Change | currency change | ||||||
2004 | 2003 | |||||||
£m | £m | % | % | |||||
Turnover | ||||||||
Germany | ||||||||
Voice services | 4,123 | 3,699 | 11 | 3 | ||||
Data services | 895 | 728 | 23 | 14 | ||||
Total service revenue | 5,018 | 4,427 | 13 | 5 | ||||
Equipment and other | 386 | 219 | 76 | 63 | ||||
5,404 | 4,646 | 16 | 8 | |||||
Other Northern Europe | 1,949 | 1,531 | 27 | |||||
7,353 | 6,177 | 19 | ||||||
Operating profit* | ||||||||
Germany | 1,741 | 1,435 | 21 | 9 | ||||
Other Northern Europe | 1,451 | 1,077 | 35 | |||||
3,192 | 2,512 | 27 | ||||||
* Total Group operating profit before goodwill amortisation and exceptional items
Germany
Vodafone Germany performed well in the year, further improving its operational performance.
Turnover in Germany increased by 8% when measured in local currency, reflecting the increase in the customer base offset by marginally lower ARPU. Germany represents the largest mobile market in Europe in terms of customer numbers and, notwithstanding a 10% growth in the market for the 2004 financial year, penetration, at an estimated 80%, is still relatively low. Vodafone Germanys customer base increased by 9% in the 2004 financial year. The mix of contract customers increased from 47% at 31 March 2003 to 49% at 31 March 2004, although new contract customers have been, in general, lower usage customers than the existing customer base. As a result, contract ARPU fell from €519 for the 12 months ended 31 March 2003 to €494 for the 12 months ended 31 March 2004. Prepaid ARPU remained stable at €130 during the year after increasing over the course of the prior year. Data revenues increased by 14% when measured in local currency and represented 17.4% of service revenues, up from 16.4% in the previous financial year, primarily due to Vodafone live! Increased investment in acquisition and retention has contributed to the improved churn rate and high customer growth.
Operating profit before goodwill amortisation and exceptional items improved by £306 million to £1,741 million, principally driven by cost efficiencies in the second half of the year, particularly in network and IT costs. Acquisition costs as a percentage of turnover were also lower over the Christmas period, in comparison to the same period in the prior financial year, due to lower handset subsidies and trade commissions. These benefits were partially offset by higher depreciation and licence amortisation costs as the 3G network was brought into use in February 2004.
Other Northern Europe
Proportionate customers for the other markets in the Northern Europe region increased by 11% to 15,575,000 in the period, including the effect of stake increases in the Netherlands, from 97.2% to 99.9%, and Hungary, from 83.8% to 87.9%.
The increase in turnover was primarily as a result of growth in the Netherlands and Hungary. In the Netherlands, the increase in revenues was principally driven by an increased contract customer base and higher data service usage and revenue. In Hungary, turnover growth followed the increase in the customer base.
Operating profit, before goodwill amortisation and exceptional items, grew principally as a result of an increase in the profits of the Groups associated undertaking, SFR. This business reported a strong financial performance, with revenue increasing as a result of an 8% increase in the customer base to 14,370,000, and higher data revenue. Blended ARPU was broadly unchanged from the previous year. The reported results also benefited from the full year impact of an effective stake increase in the mobile business of SFR from 31.9% to 43.9% in the second half of the previous financial year.
In the Netherlands, the operating profit before goodwill amortisation and exceptional items increased following the growth in the customer base, partially offset by higher acquisition and retention costs. In Sweden, operating expenses increased significantly as a result of the cost of building out 3G network coverage, which led to a decrease in operating profit before goodwill amortisation and exceptional items.
Partner Network Agreements were signed in the year with Og Fjarskipti in Iceland, Bite GSM in Lithuania and LuxGSM in Luxembourg.
Southern Europe
Local | ||||||||
Years ended 31 March | Change | currency change | ||||||
2004 | 2003 | |||||||
£m | £m | % | % | |||||
Turnover | ||||||||
Italy | ||||||||
Voice services | 4,346 | 3,656 | 19 | 10 | ||||
Data services | 668 | 463 | 44 | 34 | ||||
Total service revenue | 5,014 | 4,119 | 22 | 13 | ||||
Equipment and other | 262 | 252 | 4 | (3 | ) | |||
5,276 | 4,371 | 21 | 12 | |||||
Other Southern Europe | 4,500 | 3,680 | 22 | |||||
9,776 | 8,051 | 21 | ||||||
Operating profit* | ||||||||
Italy | 2,143 | 1,588 | 35 | 23 | ||||
Other Southern Europe | 1,156 | 907 | 27 | |||||
3,299 | 2,495 | 32 | ||||||
* Total Group operating profit before goodwill amortisation and exceptional items
Italy
Vodafone Italy produced another strong set of results, in spite of the increasingly competitive and highly penetrated market.
In local currency, turnover increased by 12% driven by a 13% growth in service revenues, partially offset by a 3% decrease in equipment and other revenues arising from reduced handset sales. The increase in service revenue was driven by the larger customer base and increased usage, particularly of data services, partially offset by the impact of regulatory changes on interconnect rates. Data revenues improved significantly, to represent 13.3% of service revenues for the year (2003: 11.3%), mainly due to SMS but also the positive contribution from Vodafone live! and Mobile Connect card. Blended ARPU increased by 4% to €361 following the rise in prepaid ARPU from €298 to €309 and contract ARPU increased by 10% to €900.
Vodafone Italy responded to increased competition levels in the Italian market with continued investment in the Vodafone One loyalty scheme and retail stores, coupled with a strong focus on business and higher value customers. This contributed to the increase in ARPU and the reduction in churn.
Operating profit before goodwill amortisation and exceptional items grew significantly, partially as a result of a reduction in acquisition and retention costs, as a percentage of revenue, operational efficiencies and no accrual being made for a contribution tax levied
Vodafone Group Plc Annual Report 2004 | |
34 | |
Operating
and Financial Review and Prospects continued |
|
by the local regulatory authority following a favourable European Court of Justice ruling on its legality. These factors were partially offset by higher interconnect costs, due to higher interconnect volume and increased international roaming traffic and the commencement of depreciation on the 3G network and the related licence amortisation.
Other Southern Europe
Proportionate customers for the Groups other operations in the Southern Europe region increased by 19% during the year, including 10%
arising from stake changes in the Groups operations in Greece, Portugal, Albania and Malta.
Vodafone Spains turnover for the year ended 31 March 2004 increased by 22% to £2,608 million (13% when measured in local currency) as a result of a 7% rise in the customer base and improved voice and data usage, partially offset by reduced prices. Operating profit before goodwill amortisation improved due to the increased proportion of data revenue and reduced acquisition and retention costs as a percentage of turnover, partially offset by a higher proportion of depreciation and licence amortisation charges, as a result of the commencement of depreciation on the 3G network and related licence amortisation.
The results for the remaining markets in the region also improved. In Greece, turnover increased by 17%, when measured in local currency, reflecting an increase in the customer base of 9% and increased voice and data usage, partially offset by price reductions. Vodafone Greeces operating profit before goodwill amortisation and exceptional items improved due to reduced acquisition costs and operational efficiencies. Vodafone Portugals turnover improved by 7%, when measured in local currency, driven by voice and data usage on top of an increase in customer numbers. Similar to Greece, Vodafone Portugals operating profit before goodwill amortisation and exceptional items improved due to operational efficiencies.
In February 2004 a Partner Network Agreement was signed with Cytamobile in Cyprus.
Americas
Local | |||||||
Years ended 31 March | Change | currency change | |||||
2004 | 2003 | ||||||
£m | £m | % | % | ||||
Turnover | |||||||
Verizon Wireless | | | | | |||
Other Americas | | 5 | (100 | ) | |||
| 5 | (100 | ) | ||||
Operating profit/(loss)* | |||||||
Verizon Wireless | 1,406 | 1,270 | 11 | 20 | |||
Other Americas | (13 | ) | (51 | ) | (75 | ) | |
1,393 | 1,219 | 14 | |||||
* Total Group operating profit before goodwill amortisation and exceptional items |
United States
The Americas Region predominantly comprises the Groups interests in Verizon Wireless, which is accounted for using equity accounting.
Accordingly, the turnover from this operation is not included in the Groups statutory profit and loss account.
In a highly competitive US market, Verizon Wireless continues to outperform its competitors and ranked first in customer net additions for the year ended 31 March 2004. The total customer base increased by 17% over the year to 38,909,000. At 31 March 2004, US market penetration and Verizon Wireless market share were approximately 56% and 24%, respectively.
Churn rates continued to improve and are among the lowest in the US wireless industry despite the introduction of local number portability in the largest 100 metropolitan service areas from 24 November 2003, which allows customers to keep their phone numbers when switching providers. The low churn rate is attributable to
the quality of Verizon Wireless network and the success of retention programmes such as the Worry Free GuaranteeSM, which includes the New Every TwoSM plan.
In local currency, the Groups share of Verizon Wireless operating profit before goodwill amortisation increased by 20%, reflecting an 18% increase in turnover, increased cost efficiencies being partially offset by increased acquisition and retention costs net of equipment revenues, as a percentage of service revenues resulting from higher gross additions and upgrade activities. Verizon Wireless turnover growth was driven by higher service revenue from the larger customer base and an increase in ARPU. Data products, such as picture messaging, positively contributed to an increase in data revenue of 172%, which represents 2.7% of service revenue for the current year. The rise in ARPU was primarily due to a higher proportion of customers on higher access price plans.
Verizon Wireless continued to expand its product base, with the launch during the period of the first graphics based instant messaging application and a picture messaging service to complement its data products. Additionally, Verizon Wireless began to expand its BroadbandAccess service nationally. Powered by its Evolution-Data Optimized wide-area network, BroadbandAccess commercial service will be available in many major US cities later this year.
On 23 May 2003, Verizon Wireless completed a transaction with Northcoast Communications L.L.C., to purchase 50 Personal Communications licences and related network assets for approximately $762 million in cash. The PCS licences cover large portions of the East Coast and Midwest, serving approximately 47 million people.
Other Americas
On 29 July 2003, the Group completed the disposal of its stake in the Mexican mobile operator Grupo Iusacell.
Asia Pacific
Local | ||||||||
Years ended 31 March | Change | currency change | ||||||
2004 | 2003 | |||||||
£m | £m | % | % | |||||
Turnover | ||||||||
Japan | ||||||||
Voice services | 4,788 | 4,776 | | 2 | ||||
Data services | 1,350 | 1,216 | 11 | 12 | ||||
Total service revenue | 6,138 | 5,992 | 2 | 4 | ||||
Equipment and other | 1,607 | 1,547 | 4 | 5 | ||||
7,745 | 7,539 | 3 | 4 | |||||
Other Asia Pacific | 1,040 | 825 | 26 | |||||
8,785 | 8,364 | 5 | ||||||
Operating profit* | ||||||||
Japan | 1,045 | 1,310 | (20 | ) | (20 | ) | ||
Other Asia Pacific | 167 | 111 | 50 | |||||
1,212 | 1,421 | (15 | ) | |||||
* Total Group operating profit before goodwill amortisation and exceptional items |
Japan
This financial year has been challenging for Vodafone Japan due to the strength of competitor offerings.
Turnover increased by 4% in local currency to £7,745 million for the year ended 31 March 2004. The customer base increased by 7% over the year, with the proportion of lower value prepaid customers increasing to 9% from 6%. ARPU reduced by 7%, as a result of higher value contract customers migrating to competitors and the effect of new price plans and the increased prepaid customer base was felt.
Vodafone Japans market share, at 31 March 2004, was marginally lower, at 18.4%, than at 31 March 2003. Overall mobile penetration levels in Japan remain low
Annual Report 2004 Vodafone Group Plc | |
35 | |
compared with the other markets in which the Group operates, increasing over the year from 64% to 68% at 31 March 2004. 20% of Japanese mobile users were connected to 3G network services at 31 March 2004, compared with 9% at 31 March 2003. The lack of suitable 3G handsets available for the Vodafone Global Standard W-CDMA network, compared with the range available through other operators using different 3G technologies amongst other factors, has limited Vodafone Japans ability to compete effectively in the 3G market. Vodafone Japan held less than 1% of the customers in the 3G market at 31 March 2004. To counteract these competitive pressures, Vodafone Japan implemented measures in October 2003 including new price plans, additional investment in the upgrade of existing customers and improved loyalty schemes, and introduced a new range of 2.5G handsets.
Operating profit before goodwill amortisation and exceptional items fell as expected, particularly in the second half of the financial year, due to higher retention costs reflecting a high volume of upgrades, increased marketing spend, higher network operating costs, an increase in provisions for slow moving handsets and a higher depreciation charge due to launch of the 3G network in December 2002.
The Group is developing a full range of 3G handsets which are expected to be available in the quarter leading up to Christmas 2004 and are expected to put Vodafone Japan in a better competitive position. However, until these handsets are introduced the necessary focus on retention and upgrades is expected to keep margins depressed. A plan is in place to improve Vodafone Japans performance and competitive position, focusing on cost reductions through leveraging the Groups global scale and scope, improving the efficiency of the distribution structure, enhancing customer propositions, including new product offerings, and focusing on business customers and refining the organisational structure to ensure Vodafone Japan is more agile and commercially driven.
Other Asia Pacific
Proportionate customers for the Groups other operations in the Asia Pacific region increased by 14% during the year, including the
Groups share of China Mobiles customers, which is accounted for as an
investment.
The increase in turnover was driven primarily by Vodafone New Zealand, resulting from a larger customer base and higher equipment revenues. Vodafone Australia also experienced turnover growth despite intense competitor activity. The operating profit of both Vodafone New Zealand and Vodafone Australia improved, due largely to the cost savings from operational efficiencies.
Vodafone Fiji increased its customer base by 25% and the operating profit improved.
China Mobile, in which the Group has a 3.27% stake, increased its customer base by 21% to 150,256,000 in the year ended 31 March 2004. ARPU continued to fall with the increase in low usage customers. Dividends totalling £25 million were received from China Mobile during the year.
The Group disposed of its interest in its Indian associate, RPG Cellular Services Ltd, during the year.
In November 2003, a Partner Network Agreement was announced with M1 in Singapore, the first Vodafone partner in this region.
Middle East and Africa
Years ended 31 March | Change | |||||
2004 | 2003 | |||||
£m | £m | % | ||||
Turnover | 297 | 290 | 2 | |||
Operating profit* | 273 | 197 | 39 | |||
* Total Group operating profit before goodwill amortisation and exceptional items |
The Groups operations in the Middle East and Africa region comprise Vodafone Egypt and the Groups associated companies in South Africa (Vodacom) and Kenya (Safaricom). In addition, the Group has two Partner Network Agreements with MTC, covering Kuwait and Bahrain.
Vodafone Egypt experienced turnover growth of 41% when measured in local currency, driven mainly by strong customer growth, improved contract ARPU and increased roaming revenue. Operating profit before goodwill amortisation and exceptional items improved, principally as a result of increased roaming and operational efficiencies. The reported results were, however, affected by the continued weakness of the Egyptian Pound against Sterling.
The Group has reached a preliminary understanding with Telecom Egypt for the proposed disposal of a 16.9% stake in Vodafone Egypt, which would reduce its stake to 50.1%. In December 2003, Vodafone Egypt was listed on the Cairo and Alexandria Stock Exchange.
The Groups associated undertakings in the region reported improved operating performance in the year, primarily as a result of strong customer growth of 24% in Vodacom and 77% in Safaricom.
Other operations
Years ended 31 March | Change | |||||
2004 | 2003 | |||||
£m | £m | % | ||||
Turnover | ||||||
Europe | 947 | 854 | 11 | |||
Asia Pacific | 897 | 1,979 | (55 | ) | ||
1,844 | 2,833 | (35 | ) | |||
Operating profit/(loss)* | ||||||
Europe | (59 | ) | (138 | ) | (57 | ) |
Asia Pacific | 79 | 149 | (47 | ) | ||
20 | 11 | 82 | ||||
* Total Group operating profit before goodwill amortisation and exceptional items |
Europe
The Groups other operations in Europe comprise interests in fixed line telecommunications businesses in Germany (Arcor) and France
(Cegetel), and Vodafone Information Systems, an IT and data services business based in Germany.
In local currency, Arcors turnover increased by 5%. Excluding the results of the Telematik business which was disposed of in June 2002, turnover increased by 16%, primarily due to customer and usage growth, partially offset by tariff decreases caused by the competitive market. The fixed line market leader continues to drive this intensive competition, although Arcor strengthened its position as the main competitor during the year, increasing its contract voice customers by 11%. The number of customers of Arcors ISDN service, Direct Access, increased by 98% to 389,000 at 31 March 2004. This revenue growth and further cost control measures resulted in a significantly improved operating loss and positive cash flow.
Cegetel has the second largest residential customer base in France. The Group increased its stake in Cegetel from 15% to 30% in the second half of the previous financial year. Following the reorganisation of the Cegetel-SFR group structure in December 2003, the Groups effective interest in the Cegetel fixed line business, whose business was enlarged through the merger with Télécom Développement, became 28.5%.
Asia Pacific
The Groups 66.7% controlled entity Vodafone Holdings K.K. (formerly Japan Telecom Holdings Co., Ltd.) completed the disposal of its 100%
interest in Japan Telecom in November 2003. Receipts resulting from this transaction are ¥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) withholding tax recoverable, which is expected to
be received in the 2005 financial year. The Group ceased consolidating the results
of Japan Telecom from 1 October 2003.
Vodafone Group Plc Annual Report 2004 | |
36 | |
Operating
and Financial Review and Prospects continued
|
|
2003 financial year compared to 2002 financial year
Mobile telecommunications
UK & Ireland
Years ended 31 March | Change | |||||
2003 | 2002 | |||||
£m | £m | % | ||||
Turnover | ||||||
United Kingdom | 4,026 | 3,763 | 7 | |||
Ireland | 629 | 477 | 32 | |||
4,655 | 4,240 | 10 | ||||
Operating profit* | ||||||
United Kingdom | 1,120 | 941 | 19 | |||
Ireland | 206 | 113 | 82 | |||
1,326 | 1,054 | 26 | ||||
* Total Group operating profit before goodwill amortisation and exceptional items |
The UK & Ireland Region benefited from the first full year inclusion of Vodafone Ireland, which became a subsidiary of the Group in May 2001.
United Kingdom
At 31 March 2003, Vodafone UK was, according to a quarterly review by Oftel, the largest mobile network operator in terms of mobile service revenue share for outbound calls, with a lead of seven percentage points over
its nearest competitor.
During the period, Vodafone UK continued to focus on the acquisition of high value customers and as such saw increases in its contract customer base. At 31 March 2003, Vodafone UKs in-house service provider companies accounted for 57% of the contract customer base, which includes 370,000 customers arising from the acquisition of Cellular Operations Limited during the year.
Vodafone UK continued to invest in its network infrastructure to improve network quality and maintain its position as the leading network, in terms of customer satisfaction. Vodafone UK continues to be recognised in Oftel surveys as the leading UK network, with a call success rate of 98.3%.
The revenue increase in Vodafone UK was as a result of a larger customer base and improved customer mix, activity levels and ARPU.
The improvement in the proportion of contract customers was as a result of the Groups commercial policy to focus on high value customers. Customer activity levels also improved reflecting the improved customer mix and increased usage. Contract ARPU fell due to the continued migration of higher value prepaid customers to contract tariffs. Despite this migration, ARPU for the prepaid customer base increased due in part to the disconnection of inactive customers. Prepaid churn increased partially due to the migration of prepaid customers onto contract tariffs.
Ireland
In Ireland, strong growth in data revenues resulted in data revenues representing 19.1% of service revenues for the year ended 31 March 2003 and have exceeded 20% of service revenues since December 2002. As a result of
this growth in data usage, and continued high levels of voice usage, ARPU in Ireland continued to be amongst the highest in the Groups European businesses.
Northern Europe
Local | ||||||||
Years ended 31 March | Change | currency change | ||||||
2003 | 2002 | |||||||
£m | £m | % | % | |||||
Turnover | ||||||||
Germany | 4,646 | 4,112 | 13 | 8 | ||||
Other Northern Europe | 1,531 | 1,257 | 22 | |||||
6,177 | 5,369 | 15 | ||||||
Operating profit* | ||||||||
Germany | 1,435 | 1,429 | | (3 | ) | |||
Other Northern Europe | 1,077 | 745 | 45 | |||||
2,512 | 2,174 | 16 | ||||||
* Total Group operating profit before goodwill amortisation and exceptional items |
Revenues for the Northern Europe Region comprise those in respect of the Groups subsidiaries in Germany, the Netherlands, Sweden and Hungary.
Germany
The turnover increase was driven by the improved mix in the customer base and higher usage of both voice and data services.
Contract ARPU decreased as a result of higher contract penetration, including customer migration from prepaid to contract tariffs. Prepaid ARPU increased reflecting higher usage levels.
Total Group operating profit, before goodwill amortisation and exceptional items, remained stable as the effect of the growth in turnover, as describe above, was almost entirely offset by increased costs, predominantly due to higher acquisition costs, and a higher depreciation charge as a consequence of the expenditure on network infrastructure and IT system improvements in the 2002 financial year.
Other Northern Europe
The rest of the Northern Europe Region saw turnover increase due to an increased customer base and an increase in data usage.
Total Group operating profit, before goodwill amortisation and exceptional items benefited from the increase in the Groups effective stake in SFR from 32.0% to approximately 43.9% in January 2003.
Southern Europe
Local | |||||||
Years ended 31 March | Change | currency change | |||||
2003 | 2002 | ||||||
£m | £m | % | % | ||||
Turnover | |||||||
Italy | 4,371 | 3,711 | 18 | 13 | |||
Other Southern Europe | 3,680 | 3,032 | 21 | ||||
8,051 | 6,743 | 19 | |||||
Operating profit* | |||||||
Italy | 1,588 | 1,267 | 25 | 18 | |||
Other Southern Europe | 907 | 805 | 13 | ||||
2,495 | 2,072 | 20 | |||||
* Total Group operating profit before goodwill amortisation and exceptional items |
Annual Report 2004 Vodafone Group Plc | |
37 | |
Italy
Vodafone Italys
turnover increase was driven almost entirely by a 16% growth in service revenues
(11% when measured in local currency). In addition, equipment sales also increased
36% as the benefits from increased handset prices more than offset the lower
gross customer additions. The increase in service revenues was generated by
the continued growth in the customer base, improved customer retention and
increased ARPU, as the effect of higher usage levels more than offset the
voluntary reduction in termination rates. The increase in blended ARPU reflected
growth in contract ARPU and growth in prepaid ARPU from €297 to €298
for the same period. Data revenues increased 50% largely as a result of increases
in SMS messaging.
Churn decreased primarily as a result of commercial offers and incentives focused on customer loyalty.
The improvement in total Group operating profit, before goodwill amortisation and exceptional items, was principally driven by the growth in turnover, as described above, and the continued focus on controlling acquisition and retention costs.
Other Southern Europe
The increase in results in the Groups
other interests was driven by growth in Vodafone Spain and Vodafone Greece, which saw turnover increase by 21% and 35%, respectively, (16% and 29%, respectively, when measured in local currency) as a result of growth in the customer base, with venture
customer numbers in controlled operations increasing by 15% since 31 March 2002, and improved ARPU. The Southern Europe Region also experienced higher roaming revenues and significant growth in data revenues from increased SMS activity during the
financial year ended 31 March 2003.
Americas
Local | ||||||||
Years ended 31 March | Change | currency change | ||||||
2003 | 2002 | |||||||
£m | £m | % | % | |||||
|
|
|
|
|||||
Turnover | ||||||||
Verizon Wireless | | | | | ||||
Other Americas | 5 | 12 | (58 | ) | ||||
|
|
|
|
|||||
5 | 12 | (58 | ) | |||||
Operating profit* | ||||||||
Verizon Wireless | 1,270 | 1,332 | (5 | ) | 5 | |||
Other Americas | (51 | ) | (15 | ) | | |||
|
|
|
|
|||||
1,219 | 1,317 | (7 | ) | |||||
* Total Group operating profit before goodwill amortisation and exceptional items
The Americas Region predominantly comprises the Groups interests in Verizon Wireless and Grupo Iusacell, both of which are accounted for using equity accounting. Accordingly, the turnover from these operations are not included in the Groups statutory profit and loss account.
The results of the Americas Region, which largely reflect the Groups interest in Verizon Wireless, were adversely affected by the relative strength of sterling against the US dollar.
Verizon Wireless
In Verizon Wireless, total Group operating
profit, before goodwill amortisation and exceptional items, decreased as a result
of foreign exchange movements. When measured in local currency, total Group
operating profit, before goodwill amortisation and exceptional items, increased
5%, driven by customer growth and improved usage, particularly in data revenues,
which increased by 106% over the comparable period to £136 million. ARPU
increased due to a focus on selling plans with higher access price points, also
reflected in an increase in acquisition and retention costs.
Other Americas
The total Group operating loss,
before goodwill amortisation and exceptional items, for the other interests
of the Group in the Americas Region, increased due to the deterioration in
the financial performance of Grupo Iusacell.
Asia Pacific
Local | ||||||||
Years ended 31 March | Change | currency change | ||||||
2003 | 2002 | |||||||
£m | £m | % | % | |||||
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Turnover | ||||||||
Japan | 7,539 | 3,323 | 127 | 132 | ||||
Other Asia Pacific | 825 | 749 | 10 | |||||
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8,364 | 4,072 | 105 | ||||||
Operating profit* | ||||||||
Japan | 1,310 | 523 | 150 | 152 | ||||
Other Asia Pacific | 111 | 66 | 68 | |||||
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1,421 | 589 | 141 | ||||||
* Total Group operating profit before goodwill amortisation and exceptional items
The results of the Asia Pacific Region increased mainly from the full year inclusion of Vodafone Japan, which became a subsidiary of the Group on 11 October 2001.
Japan
Vodafone Japan continued to produce the
highest ARPU in the Group and, although voice ARPU declined as expected, data
and content
revenues continued to improve. This increase was largely driven by the increase
in J-Sky (now rebranded Vodafone live!)
web usage and content revenue, together with the continued success of Vodafone
Japans other data offerings, Sha-mail and Movie
Sha-mail.
Vodafone Japans total Group operating profit, before goodwill amortisation and exceptional items, increased as a result of the stake changes and the benefits of increased turnover and corporate efficiency initiatives. Average acquisition and retention costs reduced as a result of lower customer acquisition subsidies and more cost efficient purchasing. However, the increase in total Group operating profit, before goodwill amortisation and exceptional items, as a result of these measures was partially offset by an increase in the depreciation charge as a result of the launch of 3G services.
Other Asia Pacific
The results of the Groups
other operations in the Asia Pacific Region improved principally as a result
of a focus on operational efficiencies in Vodafone Australia and Vodafone New
Zealand.
Middle East and Africa
2003 | 2002 | Change | ||||
£m | £m | % | ||||
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Turnover | 290 | 306 | (5 | ) | ||
Operating profit* | 197 | 161 | 22 | |||
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* Total Group operating profit before goodwill amortisation and exceptional items |
In the Middle East and Africa Region, turnover, which represents the Groups operations in Egypt, decreased as a result of the continuing devaluation of the Egyptian pound. When measured in local currency, turnover increased 17% for the year ended 31 March 2003, largely attributable to growth in the customer base, which increased over 31% to 2,263,000 at 31 March 2003.
Total Group operating profit, before goodwill amortisation and exceptional items, increased largely as a result of the Groups Egyptian subsidiary, which focused on cost effectiveness to improve margins. The Groups South African associate, Vodacom,
Vodafone Group Plc Annual Report 2004 | |
38 | |
Operating and Financial Review and Prospects continued | |
reported improved results as its operations in Tanzania, Lesotho and the Democratic Republic of Congo continued to grow. Safaricom also improved its profitability in the year.
Other operations
The Groups other operations reported a total Group operating profit, before goodwill amortisation and exceptional items, of £11 million for the year ended 31 March 2003, compared with a loss of £323 million for the year ended 31 March 2002. Japan
Telecom, which became a subsidiary of the Group in October 2001, accounted for a total Group operating profit, before goodwill amortisation and exceptional items, of £149 million for the year ended 31 March 2003, compared with a loss of £17 million in the prior year, as the benefits of managements transformation plan start to be realised. The Groups European non-mobile businesses, principally Arcor and Cegetel, also reported reduced losses, from £306 million for the year ended 31 March 2002 to £138 million for the year ended 31 March 2003.
Summary of Key Performance Indicators (KPIs) for principal markets |
31 Mar 2004 | 31 Mar 2003 | 31 Mar 2002 | ||||
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United Kingdom | ||||||
Customers (000s)(1) | 14,095 | 13,300 | 13,186 | |||
Prepaid (%) | 60 | 59 | 62 | |||
Activity level (%)(1) | 91 | 91 | 89 | |||
Churn (%)(1) | 29.6 | 30.0 | 27.3 | |||
ARPU (£)(1) | ||||||
Prepaid | 130 | 125 | 118 | |||
Contract | 551 | 518 | 555 | |||
Blended | 309 | 286 | 276 | |||
Non-voice revenue as a % of | ||||||
service revenues(2) | 16.1 | 14.4 | 11.8 | |||
Acquisition and retention costs | ||||||
net of equipment revenues, as | ||||||
a % of service revenues(3) | 15.6 | 11.9 | N/A | |||
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31 Mar 2004 | 31 Mar 2003 | 31 Mar 2002 | ||||
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Germany | ||||||
Customers (000s)(1) | 25,012 | 22,940 | 21,434 | |||
Prepaid (%) | 51 | 53 | 57 | |||
Activity level (%)(1) | 93 | 92 | 91 | |||
Churn (%)(1) | 18.7 | 21.2 | 23.5 | |||
ARPU (€)(1) | ||||||
Prepaid | 130 | 130 | 110 | |||
Contract | 494 | 519 | 559 | |||
Blended | 310 | 313 | 298 | |||
Non-voice revenue as a % of | ||||||
service revenues(2) | 17.4 | 16.4 | 14.4 | |||
Acquisition and retention costs | ||||||
net of equipment revenues, as | ||||||
a % of service revenues(3) | 13.4 | 12.6 | N/A | |||
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31 Mar 2004 | 31 Mar 2003 | 31 Mar 2002 | ||||
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Italy | ||||||
Customers (000s)(1) | 21,137 | 19,412 | 17,711 | |||
Prepaid (%) | 92 | 92 | 91 | |||
Activity level (%)(1) | 93 | 95 | 93 | |||
Churn (%)(1) | 16.7 | 17.3 | 18.9 | |||
ARPU (€)(1) | ||||||
Prepaid | 309 | 298 | 297 | |||
Contract | 900 | 818 | 769 | |||
Blended | 361 | 347 | 345 | |||
Non-voice revenue as a % of | ||||||
service revenues(2) | 13.3 | 11.3 | 8.7 | |||
Acquisition and retention costs | ||||||
net of equipment revenues, as | ||||||
a % of service revenues(3) | 2.8 | 3.4 | N/A | |||
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31 Mar 2004 | 31 Mar 2003 | 31 Mar 2002 | ||||
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Japan | ||||||
Customers (000s)(1) | 14,951 | 13,912 | 12,185 | |||
Prepaid (%) | 9 | 6 | 4 | |||
Activity level (%)(1) | 97 | 98 | 99 | |||
Churn (%)(1) | 23.0 | 23.3 | 25.6 | |||
ARPU (¥) | ||||||
Prepaid | N/A | N/A | N/A | |||
Contract | N/A | N/A | N/A | |||
Blended | 80,695 | 87,159 | 91,903 | |||
Non-voice revenue as a % of | ||||||
service revenues(2) | 21.9 | 20.3 | 15.1 | |||
Acquisition and retention costs | ||||||
net of equipment revenues, as | ||||||
a % of service revenues(3) | 21.0 | 21.9 | N/A | |||
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Notes: | |
(1) | See page 23 for definitions. |
(2) | Non-voice services as a percentage of service revenues is calculated before the elimination of intercompany revenue. This performance indicator is used by management to assess the growth in data revenues. Management believes that this performance indicator provides useful information for investors regarding trends in service revenues in mobile telecommunications derived from data products and services and the extent to which customers are increasing or decreasing their use of data products such as SMS and Vodafone live!. |
(3) | Acquisition and retention costs, net of equipment revenues, as a percentage of service revenues is calculated before the elimination of intercompany revenue. This performance indicator is used by management to compare the level of acquisition and retention activity to prior periods and internal forecasts. Management believes that this performance indicator provides useful information for investors regarding trends in the costs of acquiring and retaining customers. |
Annual Report 2004 Vodafone Group Plc | |
39 | |
Balance Sheet
Certain comparative amounts have been restated as a result of changing accounting standards as described in note 37 Changes in accounting standards.
Assets
Intangible fixed assets decreased from £108,085
million at 31 March 2003 to £93,622 million at 31 March 2004, as a result
of £13,095 million of goodwill amortisation and £98 million of
other amortisation charges to the profit and loss account in the 2004 financial
year
and £2,714 million of exchange movements, partially offset by £1,434
million of goodwill arising on acquisitions made in the 2004 financial year.
See Business
Overview
History and Development of the Company Acquisitions of
businesses.
Tangible fixed assets decreased from £19,574 million at 31 March 2003 to £18,083 million at 31 March 2004 as a result of £4,362 million depreciation charges in the 2004 financial year and assets disposed of with Japan Telecom, offset by £4,751 million of additions during the year. Network infrastructure assets of £14,823 million (2003: £16,230 million) represented approximately 82% (2003: 83%) of the total tangible fixed asset base at 31 March 2004. Additions to network infrastructure in the year totalled £3,299 million. The capital expenditure on 3G network infrastructure is discussed in Business Overview Licences and network infrastructure. The net book value of tangible fixed assets resulting from the disposal of Japan Telecom during the year amounted to £1,309 million.
The Groups investments in associated undertakings reduced from £25,825 million at 31 March 2003 to £21,226 million at 31 March 2004 mainly as result of £2,830 million of exchange movements and £2,112 million of goodwill amortisation charges in the 2004 financial year.
Other fixed asset investments at 31 March 2004 totalled £1,049 million (2003: £1,164 million) and include the Groups equity interest in China Mobile.
Current assets increased to £13,149 million from £8,591 million principally as a result of the increase in cash and liquid investments in the 2004 financial year. See Liquidity and Capital Resources Cash flows.
Liabilities
The Groups
total liabilities increased by only 1.4% over the 2004 financial year.
Equity shareholders
funds
Total equity shareholders
funds decreased from £128,630 million at 31 March 2003 to £111,924
million at 31 March 2004. The decrease comprises the loss for the year of £9,015
million (which includes goodwill amortisation of £15,207 million and exceptional
items, net of tax and minority interests, of £6 million), equity dividends
of £1,378 million, net currency translation losses of £5,292 million,
purchases of treasury shares of £1,088 million and £19 million of
other movements, offset by the issue of new share capital of £86 million.
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 2004 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 | ||||||||||||
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Year ended 31 March | Interim | Final | Total | Interim | Final | Total | |||||||
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2000 | 0.6550 | 0.6800 | 1.3350 | 1.0430 | 1.0227 | 2.0657 | |||||||
2001 | 0.6880 | 0.7140 | 1.4020 | 0.9969 | 1.0191 | 2.0160 | |||||||
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 | (1) | 2.0315 | 1.7601 | 1.9305 | (2) | 3.6906 | |||||
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Notes: | |
(1) | The final dividend for the year was proposed on 25 May 2004 and is payable on 6 August 2004 to holders of record as of 4 June 2004. |
(2) | The final dividend will be payable in US dollars to ADS holders under the terms of the deposit agreement. The final dividend in sterling has been translated at the Noon Buying Rate at 24 May 2004. |
The Company has historically paid dividends semi-annually, with the regular interim dividend payable in February and the regular final dividend payable in August. The directors expect that the Company will continue to pay dividends semi-annually.
In considering the level of dividend to declare and recommend, the Board takes account of the outlook for earnings growth, operating cash flow generation, capital expenditure requirements, acquisitions and divestments together with the possibilities for debt reductions and share purchases. Accordingly, the directors are recommending a final dividend of 1.0780 pence per share, bringing the total for the year to 2.0315 pence per share, representing a 20% increase over last years total dividend. The Board expects progressively to increase the payout ratio in the future.
Cash dividends, if any, will be paid by the Company in respect of ordinary shares in 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 Restatement 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.
Net loss under US GAAP for the year ended 31 March 2004 was £8,127 million (2003: £9,055 million). This compares with a net loss of £9,015 million (2003: £9,819 million) under UK GAAP. The principal differences between US GAAP and UK GAAP, as they relate to the determination of net loss, are the methods of accounting for intangible assets, capitalisation of interest and taxation.
In the year to 31 March 2004, revenues from continuing operations under US GAAP were £27,653 million compared with revenues from continuing operations under UK GAAP of £32,741 million. In the year to 31 March 2003, revenues from continuing operations under US GAAP were £22,416 million compared with revenues from continuing operations under UK GAAP of £28,547 million. The difference in both periods relates primarily to the non-consolidation of Vodafone Italy. The existence of significant participating rights of minority shareholders has required the equity method of accounting to be adopted under US GAAP rather than the full consolidation of results under UK GAAP. This has not affected the net income of the Group.
For a further explanation of the differences between UK GAAP and US GAAP, including a summary of the impact of recently issued US accounting standards, see note 36 to the Consolidated Financial Statements, US GAAP information.
Vodafone
Group Plc Annual Report 2004 |
|
40 | |
Operating and Financial Review and Prospects continued | |
Liquidity and Capital Resources
Cash flows
The major sources of Group liquidity over the three years ended 31 March 2004 have been cash generated from operations, borrowings through long term and short term issuance in the capital markets, borrowings drawn from
committed bank facilities, asset disposals and, for the year ended 31 March 2002 only, the proceeds from a share issuance. 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 material cash inflow. Please see Option agreements.
The Groups liquidity and working capital may be affected by a material decrease in cash flow due to factors such as 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 revenues from the introduction of new services, reduced dividends from associates and investments or dividend payments to minority shareholders. See Risk Factors, above. The Group is also party to a number of option agreements that may result in a cash outflow if exercised. Option agreements are discussed further in Option agreements at the end of this section.
Wherever possible, surplus funds in the Group (except in Albania, Egypt and Hungary) 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.
Increase in cash in the year
During the year ended 31 March 2004, the Group
increased its net cash inflow from operating activities by 11% to £12,317 million and generated £1,069
million of net cash flow, as analysed in the following
table.
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 2004 were collateralised deposits, money market funds and euro commercial paper.
Year ended | Year ended | |||
31 March | 31 March | |||
2004 | 2003 | |||
£m | £m | |||
Net cash inflow from operating | ||||
activities (Note 28) | 12,317 | 11,142 | ||
Purchase of intangible fixed assets | (21 | ) | (99 | ) |
Purchase of tangible fixed assets | (4,508 | ) | (5,289 | ) |
Disposal of tangible fixed assets | 158 | 109 | ||
Net capital expenditure on intangible | ||||
and tangible fixed assets | (4,371 | ) | (5,279 | ) |
7,946 | 5,863 | |||
Dividends from joint ventures | ||||
and associated undertakings | 1,801 | 742 | ||
Taxation | (1,182 | ) | (883 | ) |
Interest on group debt | 31 | (475 | ) | |
Dividends from investments | 25 | 15 | ||
Dividends paid to minority interests | (100 | ) | (91 | ) |
Net cash outflow for returns on | ||||
investments and servicing of finance | (44 | ) | (551 | ) |
Free cash flow | 8,521 | 5,171 | ||
Other net capital expenditure and | ||||
financial investment | 104 | (80 | ) | |
Net cash outflow from acquisitions and
disposals |
(1,312 | ) | (4,880 | ) |
Equity dividends paid | (1,258 | ) | (1,052 | ) |
Management of liquid resources | (4,286 | ) | 1,384 | |
Net cash outflow from financing | (700 | ) | (150 | ) |
Increase in cash in the year | 1,069 | 393 | ||
Capital expenditure and financial investment
The decrease in net cash outflow for capital expenditure
and financial investment from £5,359 million for the year ended 31 March 2003 to £4,267
million for the year ended 31 March 2004 was due primarily to the timing of cash
payments for tangible fixed assets.
During the year ended 31 March 2004, £21 million was spent on intangible assets, principally in respect of additional GSM spectrum in Italy. The Groups expenditure on tangible fixed assets reduced by £781 million to £4,508 million during the 2004 financial year, including approximately £1.5 billion spent on 3G network infrastructure.
The Group expects capitalised tangible fixed asset additions to be approximately £5 billion in the next financial year. Incremental expenditure on 3G infrastructure in the 2005 financial year is expected to represent approximately 35% of total capital expenditure, and is expected to be financed through operating cash flows and existing borrowing facilities.
Dividends from associated undertakings and dividends to minority shareholders
Dividends from the Groups associated undertakings are generally paid at the discretion of the Board of directors or shareholders of the
individual operating companies and Vodafone has no rights to receive dividends, except where specified within certain of the companies shareholders agreements. 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 joint ventures and associated undertakings was an amount of £671 million received from Verizon Wireless. Until April 2005, Verizon
Annual Report 2004 Vodafone Group Plc | |
41 | |
Wireless distributions are determined by the terms of the partnership agreement distribution policy and comprise income distributions
and tax distributions. After the current distribution policy expires, tax distributions will continue and a new distribution policy is expected to be set by the Board of Representatives of Verizon Wireless. In making such policy determinations, the
Board shall take into account relevant facts and circumstances including, without limitation, the financial performance and capital requirements 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 until 2015, and in the absence of additional distributions above the level of tax distributions
during this period, this will result in a net cash outflow for the Group. Under the terms of the partnership agreement, the Board has no obligation to provide for additional distributions above the level of the tax distributions.
Pursuant to changes in shareholder agreements that were effected in December 2003, from 1 January 2004 SFR commenced making scheduled quarterly dividend payments. During the year ended 31 March 2004, cash dividends totalling £802 million were received in respect of SFRs earnings during the 2002 and 2003 financial years.
Verizon Communications has an indirect 23.1% shareholding in Vodafone Italy and, under the terms of the shareholders agreement, can request dividends to be paid, provided that such dividend would not impair the financial condition or prospects of Vodafone Italy including, without limitation, credit ratings. For the year ended 31 March 2004, Verizon Communications represented that it had no intention of requesting a dividend. Should circumstances change and dividends be paid in later periods, this may result in material cash outflows. At 31 March 2004, Vodafone Italy had cash on deposit with Group companies of £3,201 million.
Acquisitions and disposals
Net cash outflow from acquisitions and disposals
of £1,312 million in the 2004 financial year arose primarily in respect
of the business acquisitions of additional stakes in certain existing European
subsidiary undertakings and the acquisition of three UK independent service providers,
partially offset by the disposal of Japan Telecom. The acquisitions are described
in more detail under Business Overview History and Development of the Company and
Business Overview Mobile Telecommunications above.
An analysis of the main transactions in the year ended 31 March 2004 is shown below.
£m | ||
Acquisitions: | ||
Vodafone Portugal | (410 | ) |
Vodafone Netherlands | (144 | ) |
Vodafone Greece | (815 | ) |
Singlepoint | (417 | ) |
Other acquisitions | (278 | ) |
Net cash acquired with subsidiary undertakings | 10 | |
Disposals: | ||
Japan Telecom | 966 | |
Other disposals | 34 | |
Net cash disposed of with subsidiary undertakings | (258 | ) |
(1,312 | ) | |
Share purchase programme
When considering how increased returns to shareholders can be provided in the form of dividends and share purchases, the Board reviews the free cash flow, anticipated cash requirements and gearing of the Group.
On 18 November 2003, the directors decided to introduce a share purchase programme and allocated £2.5 billion to this programme. Shares have been
purchased on market on the London Stock Exchange in accordance with shareholder
approval obtained at the Annual General Meeting (AGM)
in July 2003 and which expires at the conclusion of the Companys AGM on 27 July 2004. The maximum share price payable for
any share purchase is no greater than 105% of the average of the middle market
closing price of the Companys share price on the London Stock Exchange for the five business
days immediately preceding the day on which any shares were contracted to be
purchased. Purchases are made only if accretive to EPS, before goodwill amortisation
and exceptional items. In accordance with the Companies (Acquisition of Own
Shares) (Treasury Shares) Regulations 2003 issued on
1 December
2003, shares purchased are held in treasury.
For the period from 1 December 2003 to 31 March 2004, 800 million shares for a total consideration of £1.1 billion, including stamp duty and broker commissions, were purchased. The average share price paid, excluding transaction costs, was 135.3 pence, compared with the average volume weighted price over the same period of 137.5 pence.
The Board intends to decide the amount to allocate to the share purchase programme on an annual basis at the end of each financial year. In addition to the £1.1 billion already expended, £3 billion of shares are planned to be purchased during the next year, starting in early June 2004, subject to maintenance of credit ratings, superseding the £2.5 billion announced in November 2003. Because shareholder approval to purchase shares expires on 27 July 2004, this amount is subject to receiving renewed shareholder approval on 27 July 2004 at the AGM. In addition to ordinary market purchases, the Company currently plans to purchase shares over its close periods by selling short dated put options, subject to receiving shareholder approval at the AGM, and by placing irrevocable purchase instructions, both prior to the start of a close period.
Further details of shares purchased under the programme during the 2004 financial year are shown in note 23.
From 1 April 2004 through to 8 June 2004, 189.5 million shares for a total consideration of £242 million, including stamp duty and broker commissions, were purchased.
Funding
As a result of the cash flow items discussed above
and £144 million of foreign exchange movements, the Groups
consolidated net
debt position at 31 March 2004 decreased to £8,488 million, from £13,839
million at 31 March 2003. This represented approximately 10% of the Groups
market capitalisation at 31 March 2004 compared with 18% at 31 March 2003. Average
net debt at month end accounting dates over the twelve month period ended 31
March 2004 was £11,164 million, and ranged between £8,488 million and £13,839
million during the year.
A further analysis of net debt, including a full maturity analysis, can be found in notes 18 and 19 to the Consolidated Financial Statements.
The Group remains committed to maintaining a solid credit profile, as currently demonstrated by its stable credit ratings of P-1/F1/A-1 short term and A2/A/A long term from Moodys, Fitch Ratings and Standard & Poors, respectively. 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 2004 and 31 March 2003. The commercial paper facilities are supported by $10.4 billion (£5.7
billion) of committed bank facilities, comprised of a $5.5 billion Revolving
Credit Facility that matures in June 2004, but which can be extended for one
year, and a $4.9 billion Revolving Credit Facility that matures in June 2006.
As at 31 March 2004, no amounts had been drawn under either facility.
Vodafone Group Plc Annual Report 2004 | |
42 | |
Operating and Financial Review and Prospects continued | |
Bonds
The Group has a €15 billion Medium Term Note programme and a $12 billion US shelf programme, both of which are used to meet medium to long
term funding requirements. At 31 March 2004, amounts of €9.2 billion and $nil, respectively, were in issue from these programmes.
The following table provides a summary of the Groups bond issues, each of which have been undertaken since 1 April 2003 for general corporate purposes, including working capital.
Bond issues during 2004 financial year |
10 April 2003 4 June 2003 26 June 2003 22 September 2003 4 December 2003 |
On 22 April 2003, Vodafone Americas, Inc. cancelled the following bonds after repurchase by tender: Bond buy backs in the 2004 financial year |
$137.8m of $200m 6.35% bond with maturity
2005 $182.3m of $400m 7.50% bond with maturity 2006 $249.8m of $500m 6.65% bond with maturity 2008 DEM 308.4m of DEM 400m bond with maturity 2008 |
With respect to the US dollar bonds, a total cash payment of $658 million was made to acquire 68.9%, 45.6% and 50.0% of the 2005, 2006 and 2008 issues respectively. The DEM bond repurchase resulted in a total cash payment of €175 million to acquire 77.1% of the issue.
As at 31 March 2004, the Group had a total of £12,428 million of capital market debt in issue.
Committed facilities
The following table summarises the committed bank facilities currently available to the Group.
Committed Bank Facilities | Amounts drawn |
29 November 2001 ¥225 billion term credit facility, maturing 15 January 2007, entered into by Vodafone Finance K.K. |
The facility was drawn down in full on 15 October 2002. The facility is available for general corporate purposes, although amounts drawnmust be on-lent to Vodafone Group Plc. |
26 June 2003 $5.5 billion 364-day Revolving Credit Facility, maturing 25 June 2004 with an option to extend for one year. |
No drawings have been made against this facility. The facility supports the Group s commercial paper programmes and may be used to fund working capital requirements. |
26 June 2003 $4.9 billion Revolving Credit Facility, maturing 26 June 2006. |
No drawings have been made against this facility.The facility supports the Group s commercial paper programmes and may be used for general corporate purposes including acquisitions. |
Under the terms and conditions of the $10.4 billion 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 ¥225 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 2004, the Company was the sole guarantor.
In addition, Vodafone Japan has fully drawn bilateral facilities totalling ¥12.1 billion (£63 million). These bilateral bank facilities expire at various dates up to January 2007.
Furthermore, certain 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 syndicated bank facility of EGP 2.0 billion (£176 million) that fully expires in September 2007, Vodafone Hungary has a partly drawn syndicated bank facility of €350 million (£234 million), drawn in or swapped into Hungarian forints, that fully expires in December 2008 and Vodafone Albania has committed facilities of €85 million (£57 million) that expire at various dates up to and including October 2012.
In aggregate, the Group has committed facilities of approximately £7,366 million, of which £5,793 million was undrawn at 31 March 2004.
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 2004 are included in note 19 to the Consolidated Financial Statements.
Financial assets and liabilities
Details of the Groups treasury management and policies are set out below in Quantitative and Qualitative Disclosures About Market Risk. Analyses of financial assets and liabilities, including the maturity profile of
debt, currency and interest rate structure, are included in notes 18 and 19 to the Consolidated Financial Statements.
Annual Report 2004 Vodafone Group Plc | |
43 | |
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 (years) | ||||||||||
Contractual obligations | Total | <1 year | 1-3 years | 3-5 years | >5 years | |||||
Short term debt | 2,054 | 2,054 | | | | |||||
Long term debt | 12,224 | | 3,256 | 1,698 | 7,270 | |||||
Operating lease commitments | 2,737 | 586 | 661 | 474 | 1,016 | |||||
Capital commitments | 866 | 866 | | | | |||||
Purchase commitments | 957 | 890 | 39 | 10 | 18 | |||||
Preference shares | 875 | 12 | | | 863 | |||||
Total contractual cash obligations | 19,713 | 4,408 | 3,956 | 2,182 | 9,167 | |||||
An analysis of the Groups commitments under short and long term debt is shown in note 19 and commitments under operating leases in note 26 to the Consolidated Financial Statements.
Capital commitments shown in the table above are estimated to represent approximately 17% of the Groups total capital expenditure in the 2005 financial year and are primarily related to network infrastructure. Purchase commitments predominantly comprise commitments for handsets.
The above table of contractual obligations excludes potential cash outflows of up to £2.6 billion in relation to additional investments in Japan that were announced on 25 May 2004 (see note 33 to the Consolidated Financial Statements), commitments in respect of options over interests in Group businesses held by minority shareholders (see Option agreements) and obligations to pay dividends to minority shareholders (see Dividends from associated undertakings and dividends to minority interests). Disclosures required by FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, are provided in note 27 to the Consolidated Financial Statements.
Option agreements
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 further potential source of
liquidity to the Group.
Exercise of the option may occur in either one or both of two phases. The Phase I option may be exercised during the period commencing 30 days before and ending 30 days after 10 July 2004 and provides for the aggregate amount paid to not exceed $10 billion. 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 2005, 10 July 2006 and 10 July 2007. The Phase II Option also limits the aggregate amount paid to $20 billion, less any amounts paid under Phase I, 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. The option exercise would result in an exchange for shares at a fixed value of $1.113 billion plus a preferred allocation of profits
from Verizon Wireless of the East LP on a quarterly basis, but not to exceed 2.9151% per annum. 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 would not exceed $1 billion.
Pursuant to an August 1999 shareholder agreement concerning the formation of Vodafone Hungary, Antenna was granted a put option in respect of its interest in Vodafone Hungary. On 7 October 2002 this put option was amended. The amended option gives Antenna the right, but not the obligation, to sell its remaining interest to the Group should its total interest be diluted below 10% of the capital of Vodafone Hungary as a result of a capital increase. The option price is the lower of fair market value or contributed capital plus accretion at the lower of inflation or Budapest interbank offered rate plus 1%. Antenna currently holds a 12.1% interest in Vodafone Hungary.
On 26 November 2002, an option was granted to France Telecom that gives it the right, but not the obligation, to buy 43,561,703 shares (representing a 10.85% stake) in Vodafone Greece at a price of €14.29 per share, following the purchase by the Group of 58,948,830 shares in Vodafone Greece from France Telecom. France Telecom may exercise this option (in whole or in part) at any time until maturity on 29 November 2004. Furthermore, the option will expire when none of France Telecoms exchangeable notes (maturing on 29 November 2004) with regard to Vodafone Greece remain outstanding. On exercise of the option, the Group would pay in cash the excess of the Vodafone Greece share price over €14.29 per share. At 31 March 2004, Vodafone Greeces share price was €6.00 per share and the Company is in the process of de-listing its shares, following its tender offer and market purchases resulting in an increase of the Groups consolidated shareholding to 99.4%.
On 27 November 2003, Vodafone Jersey Holdings Ltd was granted a call option over 20% of the issued ordinary share capital of MTC Vodafone (Bahrain) BSCC. The option is exercisable in two tranches. Tranche one is exercisable at par at any time on or after 28 December 2004 but before 28 December 2007. Tranche two is exercisable at par plus 20% at any time on or after 28 December 2007 but before 28 December 2009.
On 31 December 2003, as part of the restructuring described within History and Development of the Company, the Groups associate investment, SFR, granted a put option to SNCF over its 35% shareholding in Cegetel. SNCF may exercise the put option, consisting of 4,982,353 shares, at any time during the period 1 January 2007 to 31 March 2010 and SNCF has been granted a value floor for the option of an aggregate amount equal to the sum of EUR 183 million plus such amount of interest as has accrued at the euro overnight index average rate on the sum of €32 million between 31 December 2003 and the date on which the transfer of the SNCF shareholding to SFR occurs. Furthermore, the option exercise may be accelerated in certain circumstances. Reciprocally, SNCF has granted SFR a call option over the 35% stake, which may be exercised at any time between 1 April 2010 and 30 June 2013.
As part of ongoing discussions and negotiations with Telecom Egypt, in which it would acquire a minority stake in Vodafone Egypt and enter into a Joint Venture with the Vodafone Group, it has been agreed in principle to grant a put option to Telecom Egypt
Vodafone Group Plc Annual Report 2004 | |
44 | |
Operating and Financial Review and Prospects continued | |
over its direct and indirect stake in Vodafone Egypt. The option will give Telecom Egypt the right to put its shares back to the Group at fair market value. If agreed, this right is expected to remain for as long as the Group owns in excess of 20% of Vodafone Egypt. Telecom Egypt acquired 8.6% of Vodafone Egypt in December 2003 and is expected to acquire a further 16.9% from the Group in 2004, thereby enabling it to contribute 25.5% of Vodafone Egypt shares to a 50:50 joint venture with the Group.
Off-balance sheet arrangements
The Group does not use off-balance sheet special purpose entities as a source of liquidity or for other financing purposes. Please refer to notes 26 and 27 to the Consolidated Financial Statements for a discussion of
the Groups off-balance sheet arrangements.
Quantitative and Qualitative Disclosures About Market Risk
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 20 January 2004. A Treasury Risk Committee, comprising of the Groups Financial Director, Company Secretary, Treasurer, Financial Controller
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
Financial Director or Company Secretary must be present at each. The Group accounting function 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.
Funding and liquidity
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. For each of these ratios, net debt includes financial guarantees and redeemable preference shares.
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 Moodys, Fitch Ratings and Standard & Poors.
Interest rate management
The Groups main interest rate exposures are to euro and yen and, to a lesser extent, US dollar and sterling interest rates. 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 interest rates are fixed. In addition, fixing shall be undertaken for longer periods when interest rates are statistically low. The term structure of interest
rates is managed within limits approved by the Board, using derivative financial instruments such as swaps, futures, options and forward rate agreements.
At the end of the year, 20% (2003: 9%) of the Groups gross borrowings were fixed for a period of at least one year. A one hundred basis point rise in market interest
rates for all currencies in which the Group had borrowings at 31 March 2004 would adversely affect profit before taxation by approximately £21 million. The interest rate management policy has remained unaffected by the acquisitions completed during the financial year. Note 19 to the Consolidated Financial Statements contains analysis of the Groups currency and interest profile of financial liabilities.
Foreign exchange management
Foreign currency exposures arising from known future external transactions above certain de minimis levels are hedged, including those resulting from the repatriation of international dividends and loans. Forward
foreign exchange contracts are the derivative instrument most used for this purpose.
Although the Group reports its balance sheet in sterling, which is the principal currency for most transactions undertaken in its shares, it does not hedge its foreign currency balance sheet exposure for three reasons. First, the Group believes its shareholders principally value its shares by discounting its estimated future sterling and foreign currency cash flows and converting to sterling at appropriate rates where necessary. Secondly, the Group manages the currency of its net debt according to banded multiples of those currencies operating cash flows, adjusted for dividends and share purchases. As such, at 31 March 2004, 119% of net debt were denominated in currencies other than sterling (59% euro, 57% yen and 3% US dollar) and 19% of net debt had been purchased forward in sterling in anticipation of sterling denominated shareholder returns via share purchases and dividends. This allows debt to be serviced in proportion to anticipated cash flows and therefore provides a partial hedge against profit and loss account translation exposure, as interest costs will be denominated in foreign currencies. Thirdly, certain overseas businesses have foreign currency acquisition goodwill allocated whilst other assets do not, therefore making balance sheet comparisons difficult. A relative weakening in the value of sterling against certain currencies of countries where the Group operates has resulted in a currency translation adjustment charge of £5,292 million to Group reserves in the year ended 31 March 2004 (2003: £9,039 million credit).
When the Groups international net earnings for 2004 are retranslated using a 10% strengthening/weakening of sterling against all exchange rates, the 2004 total Group operating loss would be reduced/increased by £451 million (2003: £595 million).
Counterparty risk management
Cash deposits and other financial instrument transactions give rise to credit risks on the amounts due from counterparties. The Group regularly monitors these risks and the credit ratings of its counterparties and, by
policy, limits the aggregate credit and settlement risk it may have with one counterparty. 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 these control procedures. Additional information is set out in notes 19 and 20 to the Consolidated Financial Statements.
Trend Information and Outlook
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, though there are a number of offsetting trends.
Traditionally, the Christmas period sees a higher volume of customer connections, contributing to higher equipment and connection revenues in the second half of the financial year. Ongoing airtime revenues also demonstrate signs of seasonality, with revenues generally lower during February, which is a shorter than average month, and revenues 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.
Annual Report 2004 Vodafone Group Plc | |
45 | |
Outlook
For the year ending 31 March 2005
In the coming year, on an organic basis, the Group anticipates high single-digit average proportionate mobile customer growth, leading to growth in Group turnover the 2005 financial year compared to the 2004 financial
year.
The ongoing impact of the commercial launch of 3G services is expected to increase depreciation and amortisation by around £0.6 billion in the 2005 financial year.
Factors that may affect the Groups future tax charge include the absence of one-off restructuring benefits, the resolution of open issues, future planning opportunities, corporate acquisitions and disposals, and changes in tax legislation and rates.
For the 2005 financial year, total capitalised fixed asset additions are expected to be around £5 billion, slightly higher than the £4.8 billion for the year ended 31 March 2004, mainly due to deferred investment from that year.
Free cash flow is expected to be around £7 billion, lower than in the 2004 financial year, due to:
the inclusion in that year of: | |
| £0.6 billion of one-off receipts from hedging instruments; and |
| £0.2 billion of free cash flow from the fixed line business in Japan which has been sold, |
together with higher cash expenditure expected in the 2005 financial year on: | |
| approximately £1 billion of additional capital expenditure, mainly due to the unwinding of capital creditors; and |
| tax payments, which are expected to be under £2 billion. |
Non-GAAP Information |
In presenting and discussing the Groups reported results, free cash flow is calculated and presented on the basis of methodologies other than in accordance with UK GAAP.
The Group believes that it is both useful and necessary to communicate this non-GAAP measure to investors and other interested parties, for the following reasons:
| this statement 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 cash flows relating to acquisitions and disposals or financing activities and so reflects the cash available for such activities, to strengthen the balance sheet or to provide returns to shareholders in the form of dividends or share repurchases; |
| it facilitates comparability of results with other companies; and, |
| it is useful in connection with discussion with the investment analyst community and the debt rating agencies. |
A reconciliation of net cash flow inflow from operating activities, the closest equivalent GAAP measure, to free cash flow, is shown below:
Years ended 31 March | ||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||
£m | £m | £m | £m | £m | ||||||
Net cash inflow from operating activities | 12,317 | 11,142 | 8,102 | 4,587 | 2,510 | |||||
Purchase of intangible fixed assets | (21 | ) | (99 | ) | (325 | ) | (13,163 | ) | (185 | ) |
Purchase of tangible fixed assets | (4,508 | ) | (5,289 | ) | (4,145 | ) | (3,698 | ) | (1,848 | ) |
Disposal of tangible fixed assets | 158 | 109 | 75 | 275 | 294 | |||||
Dividends received from joint ventures and associated undertakings | 1,801 | 742 | 139 | 353 | 236 | |||||
Taxation | (1,182 | ) | (883 | ) | (545 | ) | (1,585 | ) | (325 | ) |
Net cash outflow for returns on investments and servicing of finance | (44 | ) | (551 | ) | (936 | ) | (47 | ) | (406 | ) |
Free cash flow | 8,521 | 5,171 | 2,365 | (13,278 | ) | 276 | ||||
Vodafone Group Plc Annual Report 2004 | |
46 | |
Board of Directors and Group Executive Committee | |
Directors and Senior Management
The business of the Company is managed by its Board of directors. The Companys Articles of Association provide that, until otherwise determined by ordinary resolution, the number of directors will not be less than three.
Biographical details of the directors and senior management are as follows:
Directors
Chairman
Lord MacLaurin of Knebworth, DL, aged 67, has been a member of the Board of directors since January 1997. He is Chairman of the Nominations and Governance Committee and a member of the Remuneration 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.
Deputy Chairman
Paul Hazen, aged 62, has been a member of the Board of directors since June 1999 and became Deputy Chairman and the Boards nominated senior non-executive director in May 2000. He is Chairman of the Audit Committee and a member of the Nominations and Governance Committee. He became a director of AirTouch 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. Paul Hazen is also a director of Safeway, Inc., Willis Group Holdings Limited, Xstrata AG and E.piphany and he is Chairman of Accel-KKR.
Executive directors
Arun Sarin, Chief Executive, aged 49, has been a member of the Board of directors since June 1999 and is a member of the Nominations and Governance Committee. He was a director of AirTouch from July 1995 and was President and Chief Operating Officer from February 1997 to June 1999. He was Chief Executive Officer for the United States and Asia Pacific region until 15 April 2000, when he became a non-executive director. He was appointed Chief Executive after the AGM on 30 July 2003. 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 has also served as a director of The Gap, Inc., The Charles Schwab Corporation and Cisco Systems, Inc.
Julian Horn-Smith, Group Chief Operating Officer, aged 55, has been a member of the Board of directors since June 1996. He was appointed Group Chief Operating Officer on 1 April 2001, having been Chief Executive of Vodafones Continental Europe businesses and a director of several of the Groups overseas operating companies. He is responsible for ensuring the operating performance of Group businesses. Julian Horn-Smith is the Chairman of the Supervisory Board of Vodafone Deutschland GmbH and is a non-executive director of Smiths Group Plc.
Peter Bamford, Chief Marketing Officer, aged 50, has been a member of the Board of directors since April 1998. He is responsible for the full range of marketing and commercial activities including brand, product development, content management, Partner Networks and global accounts. He is also responsible for the Groups operations in the UK & Ireland. Previously, he was Chief Executive, Northern Europe, Middle East & Africa Region. He was Managing Director of Vodafone UK until April 2001. Before joining Vodafone in 1997, Peter Bamford held senior positions with Kingfisher Plc and Tesco Plc and was a director of WH Smith Plc.
Vittorio Colao, Chief Executive, Southern Europe, Middle East and Africa Region, aged 42, joined the Board of directors on 1 April 2002. He has had responsibility for the Groups businesses in Southern Europe since April 2001. He spent the early part of his career at McKinsey & Co, where he was a Partner, before joining Omnitel Pronto Italia S.p.A. as its Chief Operating Officer. In 1999, he became the Chief Executive Officer of
Omnitel Pronto Italia S.p.A. (now operating as Vodafone Italy). Vittorio Colao is currently a member of the Aspen Institute and non-executive director of RAS Insurance in Italy.
Thomas Geitner, Chief Technology Officer, aged 49, has been a member of the Board of directors since May 2000. He is responsible for Group Technology & Business Integration and will be leading the implementation of a standardised architecture for business processes, Information Technology and network systems. Prior to joining the Group, he was a member of the Management Board of RWE AG. Thomas Geitner is a member of the Management Board of Vodafone Holding GmbH and Vodafone Deutschland GmbH and a member of the supervisory board of Singulus Technologies AG.
Ken Hydon, Financial Director, aged 59, has been a member of the Board of directors since 1985. He is a Fellow of the Chartered Institute of Management Accountants, the Association of Chartered Certified Accountants and the Association of Corporate Treasurers. He is a director of several subsidiaries of the Company and is a member of the Board of Representatives of the Verizon Wireless partnership in the United States. Ken Hydon has recently been appointed a non-executive director of Reckitt Benckiser Plc and Tesco Plc. He will retire from the Board on conclusion of the AGM in 2005.
Non-executive directors
Dr. Michael Boskin, aged 58, has been a member of the Board of directors since June 1999 and is a member of the Remuneration Committee and the Audit Committee. He was a director of AirTouch 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, First Health Group Corp. and Oracle Corporation.
Professor Sir Alec Broers, aged 65, has been a member of the Board of directors since 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 and is a Fellow of the Royal Society, the Institute of Electrical Engineers and the Institute of Physics. He is also a Foreign Associate of the US National Academy of Engineering. Professor Sir Alec Broers chairs the Vodafone Group Foundation and the Companys UK pension trustee company. On 1 May 2004, it was announced that Her Majesty the Queen intends to make him a Life Peer in recognition of his contribution to engineering and higher education.
John Buchanan, aged 61, has been a member of the Board of directors 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 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 the senior independent director of BHP Billiton Plc and a non-executive director of AstraZeneca Plc.
Penny Hughes, aged 44, has been a member of the Board of directors since September 1998, and is the Chairman of the Remuneration Committee. She has held posts with The Coca-Cola Company, Next Plc and Body Shop International Plc. She has particular expertise in marketing and has developed experience in many human resource areas, including leadership development, motivation and retention. Penny Hughes is a member of the advisory committee of Bridgepoint Capital Limited and is a non-executive director of Scandinaviska Enskilda Banken AB, Trinity Mirror Plc and The Gap, Inc.
Sir David Scholey CBE, aged 68, has been a member of the Board of directors since March 1998. He is a member of the Nominations and Governance Committee and the Audit Committee. He is Chairman of Close Brothers Group Plc, a non-executive director of Anglo American Plc and Chubb Corporation, USA and is an
Annual
Report 2004 Vodafone
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47 | |
adviser to UBS AG, Mitsubishi Corporation and IBCA-Fitch. Sir David was formerly a director of the Bank of England and a Governor of the British Broadcasting Corporation. He will retire from the Board on conclusion of the AGM in 2005.
Professor Jürgen Schrempp, aged 59, has been a member of the Board of directors since May 2000 and is a member of the Nominations and Governance Committee and Remuneration Committee. He has been Chairman of the Board of Management of DaimlerChrysler AG since 1998. From 1995 until 1998 he was Chairman of the Board of Management of Daimler-Benz AG. He was a member of the Supervisory Board of Mannesmann AG until May 2000. Professor Jürgen Schrempp serves on the supervisory board of Allianz AG and is a member of the Board of directors of Richemont SA and Sasol Limited.
Luc Vandevelde, aged 53, was appointed to the Board on 1 September 2003 and is a member of the Remuneration Committee. Chairman of Marks & Spencer Group Plc, one of the UKs leading retailers of clothing, foods, homeware and financial services, from 2000 to 2004, he was previously Chairman of Promodes, Vice Chairman of Carrefour, and he had held senior European and international roles with Kraft General Foods. Luc Vandevelde is Executive Chairman of Change Capital Partners, a private equity fund, and is a non-executive director of Carrefour SA.
Senior Management
Members of the Group Executive Committee who are not also executive directors are regarded as senior managers of the Company. The Group Executive Committee comprises the executive directors, details of whom are shown above, and the senior managers listed below. Tomas Isaksson was also a member of the Group Executive Committee until 1 April 2004, when he stepped down on taking up his appointment as Chief Executive of Vodafone Netherlands.
Further details of the Group Executive Committee can also be found under Corporate Governance Directors and Organisation.
Brian Clark, Chief Executive, Asia Pacific Region, aged 55, was appointed to this position, based in Japan, on 1 January 2003. He joined Vodafone in 1997. Prior to joining Vodafone he was Managing Director and Chief Executive Officer of Telkom SA Limited, South Africa. He is also a non-executive director of National Australia Bank Limited.
Alan Harper, Group Strategy Director, aged 47, joined Vodafone in 1995 as Group Commercial Director and he subsequently became Managing Director of Vodafone Limited, the UK network operating company. He was appointed Group Strategy Director 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 Group Operations Committee and Group Policy Committee, a member of the Vodafone D2 Supervisory Board and Chairman of the Vodafone UK Foundation.
Jürgen von Kuczkowski, Chief Executive, Northern Europe Region, aged 63, was appointed to this position on 1 July 2003. He was previously the Chief Executive, Central Europe Region. He joined Mannesmann Mobilfunk GmbH (now Vodafone D2 GmbH) in October 1990, initially as Director of Sales and Distribution, and he became Chief Executive Officer in 1994.
Stephen Scott, Group General Counsel and Company Secretary, aged 50, was appointed to this position in the Group 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 insurance companies and is a member of the Group Policy Committee.
Phil Williams, Group Human Resources Director, aged 53, was appointed to this position in the Group in 1989. In addition to his Human Resources responsibilities, he is the senior Vodafone nominated director on the Board of Vodacom Group (Pty) Limited, the Groups South African associate company. He is also a director of several Group companies, a director of the Group Foundation and the UK pension trustee company. He is a member of the Group Policy Committee. Prior to joining the Group, he was Personnel Director with Costain and Burmah Castrol.
Vodafone Group Plc Annual Report 2004 | |
48 | |
Directors Report | |
Review of the Groups Business
The Group is involved principally in the provision of mobile telecommunications services. A review of the development of the business of the Company and its subsidiary, joint venture and associated undertakings is contained elsewhere in this Annual Report. Details of the Companys principal subsidiary undertakings, associated undertakings and investments can be found in note 34 to the Consolidated Financial Statements.
Future developments
The Group is currently involved in the expansion and development of its mobile telecommunications and related businesses as described elsewhere in this Annual Report.
Corporate governance
The directors are committed to business integrity and professionalism. As an essential part of this commitment the Board supports high standards of corporate governance and its statement on corporate governance is set out on pages 50 to 53 of this Annual Report. The Boards Report to Shareholders on Directors Remuneration on pages 54 to 63 of this Annual Report will be proposed for approval at the Companys AGM on 27 July 2004.
Share capital
A statement of changes in the share capital of the Company is set out in note 22 to the Consolidated Financial Statements.
Purchase by the Company of its own shares
At the AGM of the Company held on 30 July 2003, shareholders gave the Company permission, until the conclusion of the AGM being held on 27 July 2004, to purchase up to 6,800,000,000 ordinary shares of the Company. A resolution for permission for the Company to renew its authority to purchase its own shares will be proposed at the AGM of the Company to be held on 27 July 2004.
During the period from 1 December 2003 to 31 March 2004, the Company purchased 800 million ordinary shares at a weighted average price, excluding transaction costs, of 135.3p.
The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 (the Regulations) allow companies to hold shares acquired by way of market purchase in treasury, rather than having to cancel them. The Regulations came into force on 1 December 2003. The directors may use the authority to purchase shares and hold them in treasury (and subsequently sell or transfer them out of treasury as permitted in accordance with the Regulations) rather than cancel them, subject to institutional guidelines applicable at the time. The shares purchased by the Company prior to 31 March 2004 are being held in treasury.
No dividends will be paid on shares whilst held in treasury and no voting rights will attach to the treasury shares.
Results and dividends
The consolidated profit and loss account is set out on page 69 of this Annual Report.
The directors have proposed a final dividend for the year of 1.0780 pence per ordinary share, payable on 6 August 2004 to shareholders on the register of members at close of business on 4 June 2004. An interim dividend of 0.9535 pence per ordinary share was paid during the year, producing a total for the year of 2.0315 pence per ordinary share, a total of approximately £1,378 million. The
Company operates a dividend reinvestment plan, further details on which can be found on page 128 in this Annual Report.
Subsequent events
Details of material subsequent events are included in note 33 to the Consolidated Financial Statements included in this Annual Report.
Charitable contributions
During the year ended 31 March 2004, the Company made cash charitable donations of £13.5 million to the Vodafone Group Foundation (2003: £10.0 million). In addition, operating companies donated a further £7.2 million (2003: £4.2 million) to local Vodafone Foundations and a further £2.0 million (2003: £2.6 million) directly to a variety of causes. These donations total £22.7 million (2003: £16.8 million) and include donations of £3.0 million (2003: £3.2 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 Groups separate Corporate Social Responsibility (CSR) report.
Political donations
At the Annual General Meeting on 30 July 2003, the directors sought and obtained shareholders approval to enable the Company 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 Annual General Meeting. Although the Company had, and 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 directors sought the approval on a precautionary basis, to avoid any possibility of unintentionally breaching the Act.
The Company has made no political donations during the year.
The directors propose, again on a precautionary basis, to seek a renewal of shareholders approval at the AGM to be held on 27 July 2004. The amount of the approval will again be restricted to £100,000 for a period of twelve months following the AGM.
Creditor payment terms
It is the Groups policy to agree terms of transactions, including payment terms, with suppliers and, provided suppliers perform in accordance with the agreed terms, 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 trade creditors at the year end as a proportion of the amounts invoiced by suppliers during the year, was 29 days (2003: 24 days) in aggregate for the Group. The Company did not have any trade creditors at 31 March 2004.
Research and development
The Group continues to pursue an active research and development programme for the enhancement of mobile telecommunications. Full details as to the Groups research and development programme and activities can be found under Business Overview Research and Development.
Annual Report 2004 Vodafone Group Plc | |
49 | |
Directors interests in the shares of the Company
The Boards Report to Shareholders on
Directors Remuneration details the directors interests in the shares of the Company.
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.
Employees
Please refer to Employees on page 64.
Corporate social responsibility
A summary of the Companys
CSR approach is contained on pages 20 and 21 of the Annual Review & Summary
Financial Statement and on page 65 of this Annual Report. Further details are
contained in the Groups CSR report.
Auditors
On 1 August 2003, Deloitte and Touche, the Companys auditors, transferred its business to Deloitte and Touche LLP, a limited liability
partnership incorporated under the Limited Liability Partnership Act 2000. The Companys consent has been given to treat the appointment of Deloitte and Touche as
extending to Deloitte and Touche LLP with effect from 1 August 2003 under the provisions of section 26(5) of the Companies Act 1989.
Following a recommendation by the Audit Committee, a resolution proposing the appointment of Deloitte and 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 and 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 US Securities and Exchange Commission (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 and Touche LLP. Should there be an immediate requirement for permitted non-audit services to be provided by Deloitte and 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 and 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 and Touche LLP charged £8 million (2003: £15 million) for non-audit assignments. An analysis of these fees can be found in note 5 to the Consolidated Financial Statements.
Major shareholders
The Bank of New York, as custodian of the Companys American Depositary Receipt (ADR) programme, held approximately 11.6% of the Companys
ordinary shares of $0.10 each at 24 May 2004 as nominee. The total number of ADRs outstanding at 24 May 2004 was 783,776,194. At this date, 1,049 holders of record of ordinary shares had registered addresses in the United States and in total held
approximately 0.005% of the ordinary shares of the Company. As at 24 May 2004, 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:
| The Capital Group Companies, Inc. | 5.60 | % |
| Fidelity Management & Research Company | 3.56 | % |
| Legal & General Investment Management | 3.47 | % |
| Barclays PLC | 3.28 | % |
The directors are not aware, as at 24 May 2004, 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.
Going concern
After
reviewing the Group s and Company s
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
/s/ Stephen Scott
Stephen Scott
Secretary
25 May 2004
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50 | |
Corporate Governance | |
Introduction
The directors of the Company support high standards of corporate governance, which are critical to business integrity and to maintaining investors trust in the Company. The Companys Business Principles (the Principles) define its relationships with its stakeholders and govern how Vodafone conducts its business. Amongst other things, the Principles state
that the Company expects all its employees to act with honesty, integrity and fairness. The Company also promotes the Principles to its associate companies (where Vodafone holds a minority stake) and to its business partners and suppliers.
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 Combined Code on corporate governance that is appended to the Financial Services Authoritys Listing Rules.
During the year, the Financial Reporting Council, which is responsible for maintaining the Combined Code, approved a revised Combined Code taking into account the recommendations of the Higgs Review of the role and effectiveness of non-executive directors and a separate report by Sir Robert Smith in relation to Audit Committees.
The revised Combined Code became effective for companies financial periods beginning on or after 1 November 2003, and therefore, for the Company, will apply from the financial year which began on 1 April 2004.
For the financial year ended 31 March 2004, the directors confirm that the Company has been in compliance with the provisions of the Combined Code effective for that accounting period. The disclosures provided below are nevertheless intended to provide the reader with an explanation of how the Companys corporate governance practices measure against the revised Combined Code as if it were currently in effect for the Company.
The Companys American Depositary Shares (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. Pursuant to recently revised NYSE corporate governance rules, Vodafone, as a foreign private issuer, is required to summarise significant differences between the corporate governance provisions of the NYSE applicable to US companies and the corporate governance principles applicable to it and followed by it in the UK. In compliance with the new rules, the Company will provide an appropriate summary in its Annual Report for the year ending 31 March 2005. In July 2002, the US Congress passed the Sarbanes-Oxley Act which, together with consequent adoption of new rules by the SEC, has introduced a number of changes to the corporate governance requirements on both US domestic companies and non-US registered issuers such as the Company. During 2003, the Company 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 Financial Director to provide their Certifications of the Annual Report on Form 20-F that is filed with the SEC. The Company also adopted a corporate code of ethics for senior financial officers, separate from and additional to the Principles. A copy of the code of ethics and the Principles are available on the Companys website (www.vodafone.com). The Company has already begun the work required to ensure compliance with section 404 of the Sarbanes-Oxley Act, which is required in its financial year ending 31 March 2006.
Directors and Organisation
The Companys Board of directors presently consists of fifteen directors, fourteen of whom served throughout the year ended 31 March
2004. As at 31 March 2004, in addition to the Chairman, Lord MacLaurin, there were six executive directors and eight 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.
Sir Christopher Gent retired as a director at the conclusion of the AGM on 30 July 2003. Dr John Buchanan and Luc Vandevelde joined the Board as non-executive directors on 1 April 2003 and 1 September 2003, respectively. The Company considers all its present non-executive directors to be fully independent. The executive directors are Arun Sarin (Chief Executive), Julian Horn-Smith, Peter Bamford, Vittorio Colao, Thomas Geitner and Ken Hydon.
The Companys Articles of Association provide that every director who was elected or last re-elected at or before the AGM held in the third calendar year before the current year shall automatically retire. Accordingly, Peter Bamford, Julian Horn-Smith and Sir David Scholey will be retiring and, being eligible, will offer themselves for reelection at the Companys AGM to be held on 27 July 2004. The Companys Articles of Association also provide that every director appointed to the Board since the last AGM shall retire. Therefore, Luc Vandevelde will retire and, being eligible, will offer himself for re-election.
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. The Chairman leads the assessment of the non-executive directors, the Chief Executive reviews 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 work and in relation to the performance of the Board, the Chairman invites suggestions from all directors as to ways in which the Board and its processes may be improved. A series of questionnaires is being developed to facilitate the evaluation processes for the current and future years, each of which has been, and will in the future be, conducted without the assistance of external consultants.
This year particular attention was paid to the contributions made by directors requiring to offer themselves for re-election at the AGM and the Nominations and Governance Committee confirmed to the Board that the performance of each such director continued to be effective and, therefore, the Company should support their re-election.
The Board met on eight occasions in the financial year to 31 March 2004. Individual directors attendance was: Lord MacLaurin (8), Paul Hazen (7), Arun Sarin (8), Julian Horn-Smith (8), Peter Bamford (7), Vittorio Colao (8), Thomas Geitner (8), Ken Hydon (8), Dr Michael Boskin (8), Professor Sir Alec Broers (8), Penny Hughes (8), Sir David Scholey (8), Dr John Buchanan (8) and Professor Jürgen Schrempp (6). Since Mr Vandevelde joined the Board there have been six Board meetings in the financial year and he attended five. In addition to the regular Board meetings, there were 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 four 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.
The Board provides the effective leadership and control required for a listed company. Actual financial results are presented to each meeting, together with reports from the executive directors in respect of their areas of responsibility. The Chief Executive presents his report to each meeting which deals, amongst other things, with investor relations, giving Board members an opportunity to develop an understanding of the views of major investors. 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
Annual Report 2004 Vodafone Group Plc | |
51 | |
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, talent 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.
The Board has a formal schedule of matters specifically referred to it for decision, including the approval of Group commercial strategy, major capital projects, the adoption of any significant change in accounting policies or practices and material contracts not in the ordinary course of business. This schedule is reviewed periodically. It was last reviewed and updated by the Nominations and Governance Committee in March 2004 and its proposals were approved by the Board in May 2004. The directors have access to the advice and services of the Company Secretary and have resolved to ensure the provision, to any director who believes it may be required in the furtherance of his or her duties, of independent professional advice at the cost of the Company.
The executive directors, together with certain other Group functional heads and regional Chief Executives, meet on ten occasions each year as the Group Executive Committee under the chairmanship of the Chief Executive. This 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.
Two management committees, the Group Operational Review Committee and the Group Policy Committee, oversee, together with the Group Executive Committee, the execution of the Boards strategy and policy.
The Group Operational Review Committee, which meets ten times a year under the chairmanship of the Group Chief Operating Officer, comprises other executive directors, certain Group functional heads and regional Chief Executives. This Committee is responsible for the operational performance and achievement of targets of the Groups business, with a focus on the enhancement of voice services and growth of non-voice services, new global products and services, brand development, technology and other cost and revenue synergies within the Groups regions.
The Group Policy Committee, which meets six times each year, is chaired by the Chief Executive. The Financial Director and the Group Chief Operating Officer, together with certain other Group functional heads, join him on the Committee, which is responsible for the determination of policy and the monitoring of non-operational areas of activity which are important to the Group overall, including strategy, finance, human resources, legal, regulatory and corporate affairs.
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 Companys
website at www.vodafone.com. The Secretary to these standing Board Committees
is the Company Secretary or his nominee.
The Audit Committee, which met on five occasions in the year, is comprised of financially literate members having the necessary ability and experience to understand financial statements. The Committee is chaired by Paul Hazen (5) and the other members of the Committee are Michael Boskin (5), Professor Sir Alec Broers*, Dr John Buchanan (4) and Sir David Scholey (4). There have been three meetings of the Committee since Professor Sir Alec Broers joined. Due to other business commitments arranged before he joined the Committee, he attended one of these.
Solely for the purpose of fulfilling the requirements of the Sarbanes-Oxley Act of 2002 and the Combined Code, the Board has designated Dr John Buchanan as its financial expert on the Audit Committee. Further details of Dr Buchanan can be found in Directors and Senior 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, 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 Audit Department, to engage independent advisers as it determines is necessary and to perform investigations. 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 overseeing of the relationships with the external auditors can be found under Directors Report Auditors.
The Nominations and Governance Committee (formerly the Nominations Committee) met three times in the year and is chaired by Lord MacLaurin (3). The other members of the Committee are Professor Sir Alec Broers (3), Arun Sarin, Paul Hazen (3), Sir David Scholey (3) and Professor Jürgen Schrempp (2). Arun Sarin has attended both of the meetings held since he joined the Committee. Sir Christopher Gent was a member of the Committee prior to his retirement and attended the one meeting held prior to that date. The 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 a further non-executive director. A detailed job profile was agreed by the Committee before external search consultants were engaged to prepare a shortlist of potentially suitable candidates. Only after a rigorous interview process was the appointment recommended to the Board.
The Committees name was changed during the financial year to reflect its remit, which over time had come to include oversight and review of general matters of corporate governance.
The Remuneration Committee met five times in the year. The Committee is chaired by Penny Hughes (5). The other members of the Committee are Lord MacLaurin (5), Michael Boskin (4) Professor Jürgen Schrempp (4), and Luc Vandevelde. Sir David Scholey was a member of the Committee until 16 September 2003 and attended both meetings held prior to that date. Mr Vandevelde joined the Committee on 16 September 2003 and attended the three meetings held between that date and 31 March 2004. The Boards Report to Shareholders on Directors Remuneration provides further information on this Committee.
Attendance is shown in brackets after each respective Committee member.
Internal Control and Disclosure Controls and Procedures
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
Vodafone Group Plc Annual Report 2004 | ||
52 | ||
Corporate Governance continued | ||
associated with social, environmental and ethical impacts is also discussed under Corporate Social Responsibility and Environmental Issues.
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 Group Executive Committee, chaired by the Chief Executive, manages this on a day-to-day basis.
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 significant business risk. These policies and procedures are reviewed and, where necessary, updated at Group Policy Committee meetings, chaired by the Chief Executive.
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 Group Operational Review Committee, the Group 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 that its auditors are appointed as auditors of associated companies and joint ventures, where possible.
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.
A Treasury Report is distributed electronically on a daily basis that reports on treasury borrowings and investments.
The Board reviews a half-yearly report detailing any significant legal actions faced by Group companies.
The Group Policy 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 detailing 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 Financial Director undertake a review of the quality and timeliness of disclosures that includes formal annual meetings with the regional chief executives and the Disclosure Committee.
A Group 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 Financial Director 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 Financial Director 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. The Chief Executive and the Financial Director have evaluated the disclosure controls and procedures as of the end of the period covered by this Annual Report. They are not aware of any significant weakness or deficiency in the Groups system of internal control. The directors, the Chief Executive and the Financial Director have concluded that the disclosure controls and procedures are effective for the year under review and to the date of approval of the Annual Report.
During the period covered by this Annual Report, there were no changes in the Companys internal controls over financial reporting or in other factors that have materially affected or are reasonably likely to materially affect internal controls over financial reporting.
Relations with Shareholders
The Company holds briefing meetings with its major institutional shareholders in the UK, the US and in Continental Europe, usually twice each year 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 of stockbrokers are also invited to presentations of the financial results. The Company, through its Investor Relations team, responds to enquiries from shareholders.
The principal communication with private investors is through the provision of the Annual Review & 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. 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 in national newspapers in the UK, the US and Ireland, 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.
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53 | |
Report from the Audit Committee
The composition and terms of reference of the Audit Committee is discussed under Committees of the Board.
During the year ended 31 March 2004 the principal activities of the Committee were as follows:
Financial Statements
The Committee considered reports from the Financial Director and the Group Financial Controller on the interim results, preliminary announcement and Annual Report. It also considered reports from the external auditors, Deloitte & Touche LLP, on the scope and outcome of the review of interim results and 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 and 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 introducing a website 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.
/s/ Paul Hazen |
Paul Hazen | On behalf of the Audit Committee |
25 May 2004 |
Vodafone Group Plc Annual Report 2004 | ||
54 | ||
Boards Report to Shareholders on Directors Remuneration | ||
Introduction
The Board has delegated to the Remuneration Committee the assessment and recommendation of policy on remuneration for executive directors.
At the 2002 AGM, shareholders approved a new remuneration policy (the Policy) the key principles of which are as follows:
| the expected value of total remuneration must be benchmarked against the relevant market; |
| a high proportion of total remuneration is to be delivered through performance-related payments; |
| performance measures must 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 is to be provided in the form of equity; and |
| share ownership requirements are to be applied to executive directors. |
The current Policy was produced following extensive consultation with shareholders and institutional bodies in 2001 and 2002. In the two years since the Policy was introduced, the Chairman and the Chairman of the Remuneration Committee have maintained proactive annual dialogue on remuneration matters with the Companys major shareholders and relevant institutions. Extensive consultations with shareholders were held again in 2003 and 2004. The objective of this dialogue is to provide information about the Company and its views on remuneration issues and to listen to shareholders opinions on any proposed adjustments to policy implementation.
The Remuneration Committee strives to ensure that the Policy provides a strong and demonstrable link between incentives and the Companys strategy and sets a framework for remuneration that is consistent with the Companys scale and scope. As a result of this years review, the Remuneration Committee has concluded that the existing policy continues to serve the Company and shareholders well and will remain in place for the 2005 financial year. The Committee has also reviewed the effectiveness of the current policy and is satisfied that the incentive plans have delivered, or are forecast to deliver, rewards that are consistent with the Companys performance achievement.
At the 2004 AGM, shareholders will be invited to vote on the Boards report to shareholders on directors remuneration. The chart that follows 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.
It should be noted that the performance of the Company shown by the graph is not indicative of vesting levels under the Companys various incentive plans.
Remuneration Committee
The Remuneration Committee consists of independent non-executive directors and the Company Chairman. Penny Hughes (Chairman), Dr Michael Boskin, Lord MacLaurin, and Professor Jürgen Schrempp all continue as members. Sir David Scholey stepped down from the Committee in September 2003. He was replaced by Luc Vandevelde who joined the Company as a non-executive director on 1 September 2003.
The Board has considered whether or not it remains appropriate for the Company Chairman to continue to be a member of the Remuneration Committee. The conclusion is that the Chairman provides important contributions to the work of the Committee, for example in his contact with shareholders and management, and therefore his membership remains appropriate.
The Chief Executive attends meetings of the Remuneration Committee, other than when his own remuneration is being discussed. The Remuneration Committee met on five occasions during the year.
The Remuneration 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. |
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55 | |
The structure of remuneration for executive directors under the Policy (excluding pensions) and the performance elements on which they are based 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 by performance linked short 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.
Each element of the reward package focuses on supporting different Company objectives, which are illustrated below:
Element | Purpose | Performance Measure | ||
Base salary | Reflects competitive market salary level, role and individual achievement | Individual contribution | ||
Annual deferred share bonus | Motivates achievement of annual business
KPIs, Provides incentive to co-invest and achieve medium term KPIs Aligns with Shareholders |
EBITDA, Free cash flow, ARPU, Data % of Total Service Revenues, Customer Satisfaction Adjusted EPS growth on share deferral | ||
Share Options | Incentivise earnings growth and creation of share price growth Aligns with Shareholders | Adjusted EPS growth | ||
Performance shares | Incentivise share price and dividend growth
Aligns with Shareholders |
Relative Total Shareholder Return (TSR) |
The Policy principles are cascaded, where appropriate, to employees in all subsidiary companies. Base salaries and short-term incentives are benchmarked against relevant peer companies in each market and are targeted to deliver total cash that is at the upper quartile position in the relevant market. Incentive payments conditional on business performance are provided to employees at levels that are competitive in each local market.
Report on 2003/04 Executive Directors
Remuneration 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.
In 2003, award levels for the Chief Executive were set to deliver target total remuneration between the top 25% and the top 10% of the remuneration levels of other chief executives of large European companies. The market position selected reflects Vodafones relative size in this region but recognises that Vodafone also has significant interests outside of the European region. However, awards of performance-linked incentives were determined so that this positioning would only be attained if the Company meets exceptionally demanding performance. A similar approach has been taken for the 2005 financial year.
The total remuneration levels of other executive directors were set at approximately two-thirds of the Chief Executive level for the Group Chief Operating Officer and at approximately half of the Chief Executive level for the other executive directors.
Components of executive directors remuneration
Overview
Executive directors receive base salary, annual deferred share bonus, long term incentives and pension benefits.
Vesting of all short, medium and long term 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 with effect from 1 July 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 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/medium term incentive
Annual deferred share bonus
The purpose of the Vodafone Group Short Term Incentive Plan (STIP) is to focus and motivate executive directors to achieve annual business KPIs that will further the Companys medium term objectives.
The STIP comprises two elements: a base award and an enhancement award. The base award is earned by achievement of one year KPI linked performance targets and is delivered in the form of shares. The enhancement award of 50% of the number of shares comprised in the base award is earned by achievement of a subsequent two-year performance target following the initial twelve-month period. Release of both elements of the award after the three-year period is dependent upon the continued employment of the participant.
The target base award level for the 2004 financial year was 100% of salary with a maximum of 200% of salary available for exceptional performance. Payments earned for the year total on average 109.75% of salary. The bonus achievement for the year reflects strong Group performance as described in Operating and Financial Review and Prospects.
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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 2004 financial year relate to EBITDA, free cash flow, ARPU, data as a percentage of total service revenues, and customer satisfaction. The targets are not disclosed, as they would give clear indication of the Companys business targets, which are commercially sensitive. For the 2005 financial year, the targets for data as a percentage of service revenues and ARPU will be replaced with a total service revenues target in order to provide clearer focus on total revenue growth.
The vesting of the enhancement award shares is dependent upon the achievement of an EPS performance target. For the awards made in 2003, which will vest in July 2005, the performance target was that annual compound growth in EPS, before goodwill amortisation and exceptional items, must exceed UK RPI growth by 5% per annum over the performance period.
The STIP awards made in July 2001 vested in July 2003. Details of STIP awards are given in the table on page 60.
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.
Long term incentives
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 over a three-year performance period. The Vodafone Group Plc 1999 Long Term Stock Incentive Plan is the vehicle for the provision of these incentive awards.
In 2003/04, the Chief Executive received an award of Performance shares with a face value of two times base salary; the Chief Operating Officer 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 only 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 forfeit. The following chart shows the basis on which the performance shares will vest:
The constituents of the FTSE Global Telecommunications index as at July 2003, (applicable to 2003 awards), excluding the Company, were:
Alltel | Olivetti |
AT&T | Orange |
AT&T Wireless Services | Portugal Telecom |
BCE | Royal KPN |
BellSouth | SBC Communications |
BT Group | Singapore Telecommunications |
China Mobile (Hong Kong) | Sprint Corp-FON Group |
China Unicom | Swisscom |
Deutsche Telekom | Telecom Italia |
France Telecom | Telefonica |
Japan Telecom | Telia Sonera |
KDDI | Telstra Corp |
Nextel Communications | TIM |
Nippon Telegraph & Telephone | Verizon Communications |
NTT DoCoMo |
Previously disclosed performance share awards granted in 2000 vested in 2003. Details are given in the table on page 61.
Share options
Share options are granted annually to executive directors.
The exercise of the 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 2003/04 awards was real (in excess of UK RPI) growth in EPS, before goodwill amortisation and exceptional items. One quarter of the option award will vest for achievement of EPS growth of UK RPI + 5% p.a. rising to full vesting for achievement of EPS growth of RPI + 15% 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 Committees advisers have confirmed that this EPS target is amongst the most demanding of those set by large UK based companies. The Remuneration Committee has decided that for 2004/05 grants, real EPS growth of 5-15% p.a. (over UK RPI) will be replaced with absolute EPS growth of 8-18% p.a. The following chart illustrates the basis on which share options granted in 2003/04 will vest:
Options have a ten-year term and vesting will be after three years. For 2003 options performance may be measured again after years four and five from a fixed base year. The Committee, having considered this matter at length and taking into account the evolving views of institutional investors, has decided to remove the performance re-test at year four, but to retain the performance re-test at year five, for 2004/05 grants. The Committee believes that for this existing scheme, retaining the re-test with a stretching performance target compounding from a fixed base year will continue to incentivise performance over the longer term and this is in shareholders interests. The re-test will be reviewed again in 2005.
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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 (or than the average of the market values for the immediately preceding month in respect of Vittorio Colao, who is domiciled in Italy). Therefore, scheme participants only benefit if the share price increases and vesting conditions are achieved. The Vodafone Group Plc 1999 Long Term Stock Incentive Plan is the vehicle for the provision of these incentive awards.
In July 2003, the Chief Executive received an award of options with a face value of eight times base salary; the Chief Operating Officer and the other executive directors six times their base salary.
Illustration
To help shareholders understand the value of the package provided to the Chief Executive, the following chart illustrates the approximate pre-tax long term incentive gains to the Chief Executive that would be delivered based on various Company growth, EPS and TSR performance scenarios. The chart illustrates 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 145 pence to approximately 219 pence, the Companys value increases by £50 billion, and there is 50% vesting of long term incentives, the Chief Executive would have a pre-tax gain of just under £5 million, representing less than a tenth of 1% of the total increase in shareholder value.
The awards of performance shares and share options were made to executive directors following the 2003 Annual General Meeting on 30 July 2003. 2004 awards will be also be made following the AGM.
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 2.1% of the Companys share capital at 31 March 2004 (2.0% as at 31 March 2003).
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
Arun Sarin is provided with a defined contribution pension arrangement to which the Company contributes 30% of his base salary. The contribution is held in a notional fund outside of the Company pension scheme.
Sir Christopher Gent (until his retirement), Julian Horn-Smith, Ken Hydon and Peter Bamford, being UK-based directors, are contributing members of the Vodafone Group Pension Scheme, which is a UK scheme approved by the Inland Revenue.
This Scheme provides a benefit of two-thirds of pensionable salary after a minimum of 20 years service, with a contingent spouses pension of 50% of the members pension. The normal retirement age is 60, but employees may retire from age 55 with a pension proportionately reduced to account for their shorter service but with no actuarial reduction. Pensions increase in payment by the lower of 5% per annum or the maximum amount permitted by the Inland Revenue. Peter Bamford, whose benefits are restricted by Inland Revenue earnings limits, also participates in a defined contribution Vodafone Group Funded Unapproved Retirement Benefit Scheme (FURBS) to enable pension benefits to be provided on his base salary above the earnings cap. The Company makes a contribution of 30% of base salary above the earnings cap.
In respect of Vittorio Colao, a contribution is made to a defined contribution plan for dirigenti in Italy, which includes the supplementary dirigenti contribution required under the national collective agreements. 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, but will not be subject to actuarial reduction. The pension increases in line with inflation and a spouses pension of 60% of his pension is payable.
All the plans referred to above provide for benefits on death in service.
Further details of the pension benefits earned by the directors in the year to 31 March 2004 can be found on page 60. Liabilities in respect of the pension schemes in which the executive directors participate are funded to the extent described in note 32 to the Consolidated Financial Statements, Pensions.
Other remuneration matters
All-employee share incentive schemes
All Employee Share Plan
The Remuneration Committee has approved that an award of shares based on the achievement of performance conditions will be made to all employees in the Vodafone Group on 5 July 2004. This replaces previous practice of granting share options to all Group employees. These awards have a dilutive effect of approximately 0.03%.
Sharesave Options
The Vodafone Group 1998 Sharesave Scheme is an Inland Revenue approved scheme open to all UK permanent employees.
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 62.
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 63.
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 July 2003, the previous increase having been made in 2000. An additional annual fee of £10,000 is payable for the responsibility of chairing a principal Board Committee (Audit,
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Boards Report to Shareholders on Directors Remuneration continued | |
Remuneration or Nominations and Governance). No increases are planned in 2004. Details of each non-executive directors remuneration are included in the table on page 59.
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. 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.
Details of the contract terms of the executive directors follow:
Contract start date | Unexpired term* | Notice period | ||||
Arun Sarin | 1 April 2003 | Indefinite | One year from | |||
1 April 2004 | ||||||
Peter Bamford | 1 April 1998 | Indefinite | One year | |||
Vittorio Colao | 22 July 1996 | Indefinite | Up to one year | |||
Thomas Geitner | 5 June 2000 | To 31 May 2005 | Contract expires | |||
31 May 2005 | ||||||
Julian Horn-Smith | 4 June 1996 | Indefinite | One year | |||
Ken Hydon | 1 January 1997 | Indefinite | One year | |||
* | until normal retirement age |
At the time of his appointment to the Board, Thomas Geitner was employed under a fixed term five-year service contract with Mannesmann AG (now Vodafone Holding GmbH), which was the normal contract arrangement for Mannesmann AG board members. Mr Geitner agreed in 2001, without recompense, to accept amended terms which provided that following the expiry of the current contract on 31 May 2005 the new contract would have a one year term.
Executive directors service contracts do not provide for termination payments that extend entitlements beyond payments due for the remainder of the contract term.
In accordance with the National Collective Labour Agreement for dirigenti for industrial companies in Italy, Vittorio Colao is entitled to receive an end of service indemnity.
All the UK-based executive directors have, whilst in service, entitlement under a long term disability plan from which two-thirds of base salary would be provided until normal retirement date. In the event of disability, Vittorio Colao is entitled to a lump sum payment of €207,000, whilst Thomas Geitner would receive his normal retirement pension based on his accrued service.
Some executive directors hold positions in other companies as non-executive directors. The fees received in respect of the 2004 financial year and retained by directors were as follows:
Company in which non-executive | Fees Retained by the individual | |||
directorship is held | in 2003/04 (£000) | |||
Arun Sarin | Cisco Systems, Inc | 18.8 | ||
Vittorio Colao | RAS SpA | 19.2 | ||
Thomas Geitner | Singulus Technologies AG | 33.5 | ||
Julian Horn-Smith | Smiths Group Plc | 36.6 | ||
Ken Hydon | Reckitt Benckiser Plc | 13.3 | ||
Tesco Plc | 6.3 | |||
* | Fees were retained in accordance with Company policy |
Chairman and non-executive directors
After completing an initial three-year term, in March 2003, the Chairman accepted the invitation of the Nominations and Governance Committee and the Board to continue in office. The appointment continues indefinitely 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 Annual General Meeting (for 15 minutes prior to the meeting and during the meeting).
John Buchanan and Luc Vandevelde were appointed to the Board as non-executive directors with effect from 1 April 2003 and 1 September 2003 respectively. Both hold office on the same terms as other non-executive directors.
Appointment of new Chief Executive and retirement of previous Chief Executive
Sir Christopher Gent formally stepped down as Chief Executive at the end of the AGM on 30 July 2003. To enable a smooth transition, he continued as an adviser until he retired from the Company on 31 December 2003. Sir Christopher received no severance payment and his entitlements under the incentive and retirement plans in which he participated were determined by the standard rules applicable to retirement. All long term incentive awards under the current remuneration policy and the previous global market-related policy provide for awards to be pro-rated for both time and performance in the event of retirement. Sir Christopher received no salary increase in the 2004 financial year, nor did he participate in the short term incentive plan after 30 July 2003. No long term incentive awards were made to him during 2003/04. In accordance with the standard Rules of the Scheme he received an immediate pension based on his accrued benefit with no actuarial penalty or any enhancement.
The Remuneration Committee agreed that ownership of Sir Christopher Gents company car would transfer to him on retirement. The taxable value of the car is included in the benefits column of the Remuneration table.
Arun Sarin commenced employment as Chief Executive Designate on 1 April 2003. He became Chief Executive on 30 July 2003.
Arun Sarin was employed with a basic salary of £1.1 million. The incentives and benefits that formed the remainder of his remuneration package are consistent with the existing executive director remuneration policy described previously and comparable in quantum to those received by Sir Christopher Gent for the year ended 31 March 2003. In accordance with the Companys normal policy it was agreed to meet the costs of Arun Sarin relocating to the UK and these costs are included in the benefits column of the Remuneration table.
Arun Sarin has entered into a service contract that can be terminated by the Company at the end of an initial term of two years or at any time thereafter on one years notice. Arun Sarin is required to give the Company one years notice if he wishes to terminate the contract. There are no specific provisions for termination payments under the terms of the service contract.
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Report 2004 Vodafone
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Audited Information
Remuneration for the Year to 31 March 2004
The remuneration of the directors for the year to 31 March 2004 was as follows:
Salary/fees | Incentive schemes | Benefits | Total | |||||||||||||
2004 | 2003 | 2004(1) | 2003 | 2004(2) | 2003 | 2004 | 2003 | |||||||||
£000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | |||||||||
Chairman | ||||||||||||||||
Lord MacLaurin | 473 | 432 | | | 22 | 31 | 495 | 463 | ||||||||
Deputy Chairman | ||||||||||||||||
Paul Hazen | 124 | 105 | | | | | 124 | 105 | ||||||||
Chief Executive | ||||||||||||||||
Sir Christopher Gent | 425 | 1,270 | 429 | 1,586 | 11 | 40 | 865 | 2,896 | ||||||||
Arun Sarin | 1,100 | 65 | 1,217 | | 879 | | 3,196 | 65 | ||||||||
Executive directors | ||||||||||||||||
Peter Bamford | 733 | 691 | 722 | 843 | 34 | 31 | 1,489 | 1,565 | ||||||||
Vittorio Colao(3) | 531 | 469 | 651 | 695 | 9 | 9 | 1,191 | 1,173 | ||||||||
Thomas Geitner(3) | 644 | 556 | 673 | 694 | 35 | 23 | 1,352 | 1,273 | ||||||||
Julian Horn-Smith | 908 | 846 | 950 | 1,057 | 39 | 37 | 1,897 | 1,940 | ||||||||
Ken Hydon | 733 | 691 | 776 | 863 | 29 | 28 | 1,538 | 1,582 | ||||||||
Non-executive directors | ||||||||||||||||
Dr Michael Boskin | 80 | 65 | | | | | 80 | 65 | ||||||||
Professor Sir Alec Broers | 80 | 65 | | | | | 80 | 65 | ||||||||
John Buchanan | 80 | | | | | | 80 | | ||||||||
Penny Hughes | 90 | 72 | | | | | 90 | 72 | ||||||||
Sir David Scholey | 80 | 65 | | | | | 80 | 65 | ||||||||
Professor Jürgen Schrempp | 80 | 65 | | | | | 80 | 65 | ||||||||
Luc Vandevelde | 50 | | | | | | 50 | | ||||||||
Former directors(4) | 541 | | | | 313 | 510 | 854 | 510 | ||||||||
6,752 | 5,457 | 5,418 | 5,738 | 1,371 | 709 | 13,541 | 11,904 | |||||||||
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 2004. These awards are in relation to the performance achievements above targets in EBITDA, before exceptional items, ARPU, free cash flow, data as a percentage of service revenues and customer satisfaction for the 2003/04 financial year. |
(2) | Benefits principally comprise cars and private health and disability insurance. For Arun Sarin, the figure includes £835,000 (gross) to cover the costs of relocating from the US to the UK. The relocation expenses paid covered costs including legal expenses, stamp duty, transportation costs and other out-of-pocket costs in accordance with normal Company policy. |
(3) | Salary and benefits for Vittorio Colao and Thomas Geitner have been translated at the average exchange rate for the year of €1.4442: £1 (2003: €1.5570: £1). |
(4) | Under the terms of an agreement, Sam Ginn, a former director of the Company, provides consultancy services to the Group and is entitled to certain benefits. The estimated value of the benefits received by him in the year to31 March 2004 was £183,000, translated at the average exchange rate for the year of $1.6953: £1. From 31 July to 31 December 2003 Sir Christopher Gent provided consultancy services to the Company and was entitled to certain benefits. On his retirement on 31 December 2003, his company car was transferred to him and the benefit value is included in the benefits column above. The total value of benefits provided, including the value of the car, was £130,000. |
The aggregate compensation paid by the Company to its senior management(1) as a group for services in all capacities for the year ended 31 March 2004, is set out below. The aggregate number of senior management in the year ended 31 March 2004 was 6, compared to 7 in the year ended 31 March 2003. |
2004 | 2003 | |||
£000 | £000 | |||
Salaries and fees | 2,341 | 2,502 | ||
Incentive schemes(2) | 2,415 | 5,430 | ||
Benefits | 462 | 213 | ||
5,218 | 8,145 | |||
Notes: | |
(1) | Aggregate compensation for senior management is in respect of those individuals who were members of the Executive Committee as at, and for the year ended, 31 March 2004, other than executive directors. |
(2) | Comprises the incentive scheme information for senior management on an equivalent basis as 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 the Short Term Incentive, Long Term Incentives and Share Options tables on pages 60 and 61. |
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Boards Report to Shareholders on Directors Remuneration continued | |
Pensions
Pension benefits earned by the directors in the year to 31 March 2004 were:
Transfer value | Employer | |||||||||||||||
Change in | Change in | of change in | Allocation/ | |||||||||||||
Total accrued | Change in | transfer value | accrued | accrued | Contribution to | |||||||||||
benefit at | accrued | Transfer value | Transfer value | over year less | benefit in | benefit net of | Defined | |||||||||
31 March | benefit over | at 31 March | at 31 March | member | excess of | member | Contribution | |||||||||
2004 | (1) | the year | (1) | 2003 | (2) | 2004 | (2) | contributions | inflation | contributions | Plans | |||||
Name of Director | £000 | £000 | £000 | £000 | £000 | £000 | £000 | £000 | ||||||||
Arun Sarin | | | | | | | | 330.0 | ||||||||
Sir Christopher Gent(3) | 701.9 | 39.9 | 10,388.9 | 15,519.8 | 5,097.1 | 22.6 | 466.6 | | ||||||||
Peter Bamford | 23.0 | 4.0 | 217.4 | 275.5 | 54.7 | 3.5 | 38.3 | 151.0 | ||||||||
Vittorio Colao(4) | | | | | | | | 5.5 | ||||||||
Thomas Geitner(4) | 64.7 | 19.2 | 510.7 | 763.1 | 252.4 | 18.1 | 212.9 | | ||||||||
Julian Horn-Smith | 480.3 | 83.2 | 5,962.4 | 7,498.8 | 1,506.3 | 72.8 | 1,106.9 | | ||||||||
Ken Hydon | 476.6 | 52.0 | 7,864.1 | 9,129.0 | 1,240.3 | 40.9 | 758.9 | | ||||||||
Notes: | |
(1) | The pension benefits earned by the directors are those, which would be paid annually on retirement, on service to the end of the year, at the normal retirement age. Salaries have been averaged over three years where necessary in order to compare with Inland Revenue regulations. 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) | Sir Christopher Gent retired from the Board on 30 July 2003 and from the Company on 31 December 2003. 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. The figures for 2003 and 2004 are not directly comparable due to different bases of calculation. The 2003 figure is based on service to date and payment at normal retirement age (60). The 2004 figure reflects an additional year of service, an updated pensionable salary, changes in annuity values and immediate payment. |
(4) | In respect of Thomas Geitner the amounts as at 31 March 2003 have been translated at the exchange rate at that date of €1.4486: £1. Other amounts in respect of Vittorio Colao and Thomas Geitner have been translated at the 31 March 2004 exchange rate of €1.4955: £1. |
In respect of senior management, the Group has made aggregate contributions of £484,808 into pension schemes.
Directors interests in the shares of the Company
Short Term Incentive
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 2004 are also shown below.
Shares conditionally | ||||||||||||||||||||||
Shares conditionally | awarded during the | Shares added | ||||||||||||||||||||
awarded during the | year as enhancement | during the | Shares sold or | |||||||||||||||||||
Total interest | year as base award in | shares in respect | year through | transferred during the | ||||||||||||||||||
in STIP at | respect of 2002/2003 | of 2002/2003 | dividend | year in respect of | ||||||||||||||||||
1 April 2003 | STIP awards | STIP awards | reinvestment | 2000/2001 STIP awards(1) | Total interest in STIP as at 31 March 2004 | |||||||||||||||||
Value at | Value at | In | In | |||||||||||||||||||
Total | date of | date of | Total | respect | respect of | Number of | Number of | Total | ||||||||||||||
number of | award(2)(3) | award(3) | number of | of base | enhancement | Base Award | enhancement | value(4) | ||||||||||||||
shares | Number | £000 | Number | £000 | shares | awards | shares | shares | shares | £000 | ||||||||||||
Sir Christopher Gent | 793,202 | | | | | 5,950 | 532,768 | 266,384 | | | | |||||||||||
Arun Sarin | | | | | | | | | | | | |||||||||||
Peter Bamford | 1,058,209 | 704,311 | 843 | 352,155 | 422 | 15,515 | | | 1,420,127 | 710,063 | 2,743 | |||||||||||
Vittorio Colao | | 628,010 | 752 | 314,005 | 376 | | | | 628,010 | 314,005 | 1,213 | |||||||||||
Thomas Geitner | 306,570 | 219,470 | 263 | 109,735 | 131 | 4,494 | | | 426,846 | 213,423 | 824 | |||||||||||
Julian Horn-Smith | 431,852 | 882,713 | 1,057 | 441,357 | 529 | 3,239 | 290,060 | 145,031 | 882,713 | 441,357 | 1,705 | |||||||||||
Ken Hydon | 431,852 | 720,883 | 863 | 360,441 | 432 | 3,239 | 290,060 | 145,031 | 720,883 | 360,441 | 1,392 | |||||||||||
Notes: | |
(1) | Shares in respect of 2000/2001 STIP awards were transferred on 1 July 2003 and 21 November 2003. |
(2) | Previously disclosed within directors emoluments for the year ended 31 March 2003. |
(3) | Value at date of award is based on the purchase price of the Companys ordinary shares on 30 June 2003 of 119.75p. |
(4) | The value at 31 March 2004 is calculated using the closing middle market price of the Companys ordinary shares at 31 March 2004 of 128.75p. |
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 1,634,000. For a description of the performance and vesting conditions, see Short/medium term incentive on page 55.
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Long Term Incentives
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 2004 are also shown below.
Shares added | Shares | Shares sold or | ||||||||||||||
during the | forfeited | transferred | ||||||||||||||
Total interest in | year through | in respect of | in respect of | |||||||||||||
Long Term incentives | Shares conditionally awarded | dividend | 2000/2001 and | 2000/20001 and | Total interest in Long Term | |||||||||||
at 1 April 2003(1) | during the year | reinvestment | 2002/03 awards | 2002/03 awards | Incentives at 31 March 2004 | |||||||||||
Value at | ||||||||||||||||
date of | Total | |||||||||||||||
award(2) | Number of | value(4) | ||||||||||||||
Number | Number | £000 | Number | Number | Number(3) | shares | £ 000 | |||||||||
Sir Christopher Gent | 2,963,018 | | | 41,899 | 2,031,684 | 422,571 | 550,662 | 709 | ||||||||
Arun Sarin | | 1,844,863 | 2,200 | | | | 1,844,863 | 2,375 | ||||||||
Peter Bamford | 1,441,524 | 882,000 | 1,052 | 20,294 | 74,582 | 43,614 | 2,225,622 | 2,865 | ||||||||
Vittorio Colao | 694,022 | 648,868 | 774 | 10,175 | | | 1,353,065 | 1,742 | ||||||||
Thomas Geitner | 1,016,319 | 781,633 | 932 | 14,899 | | | 1,812,851 | 2,334 | ||||||||
Julian Horn-Smith | 1,822,879 | 1,080,000 | 1,288 | 25,886 | 74,583 | 43,613 | 2,810,569 | 3,619 | ||||||||
Ken Hydon | 1,441,524 | 882,000 | 1,052 | 20,294 | 74,582 | 43,614 | 2,225,622 | 2,865 | ||||||||
Notes: | |
(1) | Restricted share awards under the Vodafone Group Long Term Incentive Plan and the 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 purchase price of the Companys ordinary shares on 30 July 2003 of 119.25p. |
(3) | Shares in respect of 2000/2001 awards were sold or transferred on 1 July 2003 and 13 November 2003. The balance of Sir Christopher Gents 2002/03 share awards, following application of performance conditions and pro-ration in respect of service to retirement, were sold or transferred on 14 January 2004 and 8 April 2004. |
(4) | The value at 31 March 2004 is calculated using the closing middle market price of the Companys ordinary shares at 31 March 2004 of 128.75p. |
The aggregate number of shares conditionally awarded during the year to the Companys senior management is 2,373,014 shares. For a description of the performance and vesting conditions see Long term incentives on pages 56 and 57. |
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, which are all Inland Revenue 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 Inland Revenue 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 56 and 57.
Options held at | Options | Options | Weighted | |||||||||||||
1 April 2003 | granted | exercised | Options | Options | average | Earliest | ||||||||||
or date of | during | during | lapsed during | held at | exercise price at | date | Latest | |||||||||
appointment(1) | the year(1) | the year | the year | 31 March 2004 | 31 March 2004 | from which | expiry | |||||||||
Number | Number | Number | Number | Number | Pence | exercisable | date | |||||||||
Sir Christopher Gent | 25,365,387 | | 178,000 | | 25,187,387 | 167.6 | Jul 2001 | Dec 2004 | ||||||||
Arun Sarin(2)(3) | 11,250,000 | 7,396,164 | | | 18,646,164 | 154.0 | Jun 1999 | Jul 2013 | ||||||||
Peter Bamford | 12,204,753 | 3,739,677 | | | 15,944,430 | 155.1 | Jul 2000 | Jul 2013 | ||||||||
Vittorio Colao | 3,011,611 | 2,751,202 | | | 5,762,813 | 108.8 | Jul 2004 | Jul 2013 | ||||||||
Thomas Geitner | 11,196,479 | 3,373,582 | | | 14,570,061 | 160.7 | Jul 2003 | Jul 2013 | ||||||||
Julian Horn-Smith | 15,794,101 | 4,654,088 | 1,254,500 | | 19,193,689 | 149.9 | Jul 2001 | Jul 2013 | ||||||||
Ken Hydon | 12,695,553 | 3,739,677 | 1,044,000 | | 15,391,230 | 156.7 | Jul 2001 | Jul 2013 | ||||||||
91,517,884 | 25,654,390 | 2,476,500 | | 114,695,774 | ||||||||||||
Notes: | |
(1) | The weighted average exercise price of options over shares in the Company granted during the year and listed above is 119.25 pence. The earliest date from which they are exercisable is July 2006 and the latest expiry date is 29 July 2013. For a description of the performance and vesting conditions see Long term incentives on pages 56 and 57. |
(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 1,125,000. |
(3) | The terms of the share options granted over 11,250,000 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. |
Vodafone Group Plc Annual Report 2004 | |
62 | |
Boards Report to Shareholders on Directors Remuneration continued | |
The aggregate number of options granted during the year to the Companys senior management, other than executive directors, is 11,058,407. The weighted average exercise price of the options granted to senior management during the year is 119.25 pence. The earliest date from which they are exercisable is July 2006 and the latest expiry date is 29 July 2013. The weighted average exercise price of options granted to US-based senior management has been translated at the average exchange rate for the year of $1.6953: £1.
Further details of options outstanding at 31 March 2004 are as follows:
Exercisable Market price | Exercisable Option price | |||||||||||||||||
greater than option price(1) | greater than market price(1) | Not yet exercisable | ||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||
average | Latest | average | Latest | average | Earliest date | |||||||||||||
exercisable | expiry | Options | exercise | expiry | Options | exercise | from which | |||||||||||
Options held | price | date | held | price | date | held | price | exercisable | ||||||||||
Number | Pence | Number | Pence | Number | Pence | |||||||||||||
Sir Christopher Gent | 9,294,123 | 97.0 | Dec 04 | 15,893,264 | 208.9 | Dec 04 | | | | |||||||||
Arun Sarin | 5,000,000 | 95.1 | Jun 06 | 6,250,000 | 242.4 | Jul 06 | 7,396,164 | 119.2 | Jul 06 | |||||||||
Peter Bamford | 150,500 | 58.7 | Jul 04 | 3,360,755 | 272.5 | Jul 10 | 12,433,175 | 124.5 | Jul 04 | |||||||||
Vittorio Colao | | | | | | | 5,762,813 | 108.8 | Jul 04 | |||||||||
Thomas Geitner | | | | 2,933,055 | 290.4 | Jul 10 | 11,637,006 | 128.0 | Jul 04 | |||||||||
Julian Horn-Smith | | | | 3,136,455 | 280.4 | Jul 10 | 16,057,234 | 124.4 | Jul 04 | |||||||||
Ken Hydon | | | | 3,235,255 | 279.8 | Jul 10 | 12,155,975 | 123.9 | Jul 04 | |||||||||
14,444,623 | 34,808,784 | 65,442,367 | ||||||||||||||||
Notes: | |
(1) | Market price is the closing middle market price of the Companys ordinary shares at 31 March 2004 of 128.75p. |
(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, with the option price being translated at the average exchange rate for the year of $1.6953: £1. |
The Companys register of directors interests (which is open to inspection) contains full details of directors shareholdings and options to subscribe. These options by exercise price were:
Options held at | ||||||||||||
1 April 2003 | Options | Options | Options lapsed | Options | ||||||||
Option | or date of | granted during | exercised during | during | held at | |||||||
price | appointment | the year | the year | the year | 31 March 2004 | |||||||
Pence | Number | Number | Number | Number | Number | |||||||
Vodafone Group Plc Executive Share Option Scheme (Approved 1988) |
||||||||||||
Vodafone Group Plc Share Option Scheme (Unapproved 1988) | ||||||||||||
Vodafone Group 1998 Company Share Option Scheme (Approved) | ||||||||||||
Vodafone Group 1998 Executive Share Option Scheme (Unapproved) | ||||||||||||
58.70 | 2,627,000 | | 2,476,500 | | 150,500 | |||||||
155.90 | 1,520,500 | | | | 1,520,500 | |||||||
255.00 | 764,000 | | | | 764,000 | |||||||
&nbs |