XLON:VOD Vodafone Group PLC Annual Report 20-F Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report:                     

For the transition period from:                      to                     

Commission file number: 001-10086

 

VODAFONE GROUP 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)

Rosemary Martin (Group General Counsel and Company Secretary)

tel +44 (0) 1635 33251, fax +44 (0) 1635 238 080

 

Vodafone House, The Connection, Newbury, Berkshire RG14 2FN, England

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

See Schedule A   See Schedule A

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Ordinary Shares of 11 3/7 US cents each

     49,645,940,182   

7% Cumulative Fixed Rate Shares of £1 each

     50,000   

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes  þ    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨    No  þ

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  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  þ   Accelerated filer  ¨   Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

US GAAP  ¨   International Financial Reporting  þ   Other  ¨
  Standards as issued by the  
  International Accounting  
  Standards Board  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow

Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No   þ

 

 

SCHEDULE A

 

Title of each class

  

Name of each exchange
on which registered

Ordinary shares of 11 3/7 US cents each

   NASDAQ Global Select Market*

American Depositary Shares (evidenced by American Depositary Receipts) each representing ten ordinary shares

   NASDAQ Global Select Market

5.00% Notes due December 2013

   New York Stock Exchange

4.150% Notes due June 2014

   New York Stock Exchange

5.375% Notes due January 2015

   New York Stock Exchange

5% Notes due September 2015

   New York Stock Exchange

3.375% Notes due November 2015

   New York Stock Exchange

2.875% Notes March 2016

   New York Stock Exchange

5.75% Notes March 2016

   New York Stock Exchange

5.625% Notes due February 2017

   New York Stock Exchange

1.625% Notes due March 2017

   New York Stock Exchange

4.625% Notes due July 2018

   New York Stock Exchange

5.450% Notes due June 2019

   New York Stock Exchange

4.375% Notes due March 2021

   New York Stock Exchange

7.875% Notes due February 2030

   New York Stock Exchange

6.25% Notes due November 2032

   New York Stock Exchange

6.15% Notes due Feb 2037

   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.

 

 

 


Table of Contents

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Table of Contents

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Table of Contents
   Vodafone Group Plc    01
   Annual Report 2012   
     
     
     

 

In this

year’s

report

 Business review#

02   Overview
 

 

  02    Who we are
  04    What we do and how we do it
  06    Where we do it
  08    Where we are heading
  10    How we’re doing

 

12   Chairman’s statement

 

14   Chief Executive’s review

 

18   Industry trends

 

20   How we do business

 

22   Strategy
 

 

  22    Mobile data
 

 

  26    Emerging markets
 

 

  28    Enterprise and total communications
 

 

  30    New services

 

32   Core strengths

 

34   Our people

 

36   Sustainable business

 

38   Mobile for Good

 

39   Risk overview

 

 Performance#

40   Operating results

 

50   Guidance

 

51   Principal risk factors and uncertainties

 

54   Financial position and resources

 

 

 Governance#

60   Board of directors and Group management

 

63   Corporate governance

 

74   Directors’ remuneration

 

 

 Financials

88   Contents

 

89   Directors’ statement of responsibility#

 

90   Audit report on internal controls

 

91   Critical accounting estimates

 

93   Audit report on the consolidated financial statements

 

94   Consolidated financial statements

 

143  

This page is intentionally left blank.

 

144  

This page is intentionally left blank.

 

 

Additional information

150   Shareholder information#

 

158   History and development#

 

159   Regulation#

 

163   Non-GAAP information#

 

166   Form 20-F cross reference guide

 

169   Forward-looking statements

 

171   Definition of terms

 

173   Selected financial data

 

Exhibit     7

 

Exhibit     12

 

Exhibit     13

 

Exhibit     15.1

 

Exhibit     15.2

 

 

#These sections make up the directors’ report.

 

 

LOGO

 

LOGO

 


Table of Contents
Vodafone Group Plc    02   
Annual Report 2012      

 

Who we are

LOGO


Table of Contents
   Vodafone Group Plc    03
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    04   
Annual Report 2012      

 

What we do and how we do it

LOGO


Table of Contents
   Vodafone Group Plc    05
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    06   
Annual Report 2012      

 

Where we do it

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Table of Contents
   Vodafone Group Plc    07
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    08   
Annual Report 2012      

 

Where we are heading

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Table of Contents
   Vodafone Group Plc    09
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    10   
Annual Report 2012      

 

How we’re doing

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   Vodafone Group Plc    11
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    12   
Annual Report 2012      

 

Chairman’s statement

 

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   Vodafone Group Plc    13
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    14   
Annual Report 2012      

 

Chief Executive review

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   Vodafone Group Plc    15
   Annual Report 2012   

 

LOGO


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Vodafone Group Plc    16   
Annual Report 2012      

 

LOGO


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   Vodafone Group Plc    17
   Annual Report 2012   

 

LOGO


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Vodafone Group Plc    18   
Annual Report 2012      

 

Industry trends

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   Vodafone Group Plc    19
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    20   
Annual Report 2012      

 

How we do business

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   Vodafone Group Plc    21
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    22   
Annual Report 2012      

 

Strategy

Mobile data services

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   Vodafone Group Plc    23
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    24   
Annual Report 2012      

 

LOGO


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   Vodafone Group Plc    25
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    26   
Annual Report 2012      

 

Emerging markets

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   Vodafone Group Plc    27
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    28   
Annual Report 2012      

 

Enterprise and total communications

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Table of Contents
   Vodafone Group Plc    29
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    30   
Annual Report 2012      

 

New services

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   Vodafone Group Plc    31
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    32   
Annual Report 2012      

 

Core strengths

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   Vodafone Group Plc    33
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    34   
Annual Report 2012      

 

Our people

LOGO


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   Vodafone Group Plc    35
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    36   
Annual Report 2012      

 

Sustainable business

LOGO


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   Vodafone Group Plc    37
   Annual Report 2012   

 

LOGO


Table of Contents
Vodafone Group Plc    38   
Annual Report 2012      

 

Mobile for Good: the work of the Vodafone Foundations

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   Vodafone Group Plc    39
   Annual Report 2012   

 

Risk Overview

 

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Table of Contents
Vodafone Group Plc    40   
Annual Report 2012      
Operating results

 

This section presents our operating performance, providing commentary on how the revenue and the adjusted EBITDA performance of the Group and its operating segments within Europe, Africa, Middle East and Asia Pacific, and Non-Controlled Interests and Common Functions have developed in the last three years.

2012 financial year compared to the 2011 financial year

Group1

     

Europe
£m

   

Africa,
Middle East

and Asia

Pacific

£m

    

 

Non-Controlled 
Interests and 
Common 

Functions2

£m 

   

  Eliminations
£m

   

2012

£m

   

2011

£m

   

 

 

% change

 
               
                         £       Organic  
Revenue      32,181        13,868         423        (55       46,417          45,884        1.2        2.2   
Service revenue      29,914        12,751         272        (52     42,885        42,738        0.3        1.5   
Adjusted EBITDA      10,445        4,115         (85            14,475        14,670        (1.3     (0.6
Adjusted operating profit      5,260        1,472         4,800               11,532        11,818        (2.4     2.5   
Adjustments for:                                                                  

Impairment loss

                                      (4,050     (6,150                

Other income/(expense)3

                                      3,705        (72                
Operating profit                                       11,187        5,596                   
Non-operating (expense)/income4                                       (162     3,022                   
Net (financing costs)/investment income                                       (1,476     880                   
Profit before taxation                                       9,549        9,498                   
Income tax expense                                       (2,546     (1,628                
Profit for the financial year                                       7,003        7,870                   

Notes:

1 Current year results reflect average foreign exchange rates of £1:1.16 and £1:US$1.60.
2 Common Functions primarily represent the results of the partner markets and the net result of unallocated central Group costs.
3 Other income/(expense) for the year ended 31 March 2012 includes a £3,419 million gain on disposal of the Group’s 44% interest in SFR and a £296 million gain on disposal of the Group’s 24.4% interest in Polkomtel. The year ended 31 March 2011 included £56 million representing the net loss on disposal of certain Alltel investments by Verizon Wireless. This is included within the line item “Share of results in associates” in the consolidated income statement.
4 Non-operating (expense)/income for the year ended 31 March 2011 included £3,019 million profit arising on the sale of the Group’s 3.2% interest in China Mobile Limited.

 

Revenue

Group revenue was up 1.2% to £46.4 billion, with service revenue of £42.9 billion, an increase of 1.5%* on an organic basis. Our overall performance reflects continued strong demand for data services and further voice penetration growth in emerging markets, offset by regulatory changes, ongoing competitive pressures and challenging macroeconomic conditions in a number of our mature markets. As a result of the leap year, service revenue growth of 2.3%* in Q4 benefited from the additional day by around 1 percentage point.

AMAP service revenue was up by 8.0%*, with a strong performance in India, Qatar, Ghana and Vodacom and a return to growth in Egypt offset by a decline in Australia.

In Europe, service revenue was down by 1.1%* reflecting challenging macroeconomic conditions in Southern Europe partially offset by growth in Germany, the UK, the Netherlands and Turkey.

Adjusted EBITDA and profit

Group adjusted EBITDA was down 1.3% to £14.5 billion, as revenue growth was offset by higher customer investment due to increased smartphone penetration.

Adjusted operating profit was down 2.4% to £11.5 billion, driven by a reduction in our share of profits from associates following the disposal of our 44% interest in SFR in June 2011. Our share of profits of Verizon Wireless grew by 9.3%* to £4.9 billion.

Operating profit increased by 100% to £11.2 billion, primarily due to the gain on disposal of the Group’s 44% interest in SFR and 24.4% interest in Polkomtel, and lower impairment losses compared to the prior year.

An impairment loss of £4.0 billion was recorded in relation to Italy, Spain, Portugal and Greece, primarily driven by lower projected cash flows within business plans and an increase in discount rates, resulting from adverse changes in the economic environment.

Net (financing costs)/investment income

 

     

 

2012

£m

   

 

2011

£m

 
Investment income      456        1,309   
Financing costs      (1,932     (429
Net (financing costs)/investment income      (1,476     880   
Analysed as:                 

Net financing costs before income from investments

     (1,642     (852

Potential interest credit/(charges) arising on settlement of outstanding tax issues1

     9        (46

Income from investments

     19        83   

Foreign exchange2

     138        256   

Equity put rights and similar arrangements3

            95   

Interest related to the settlement of tax cases

            872   

Disposal of SoftBank Mobile Corp. Limited financial instruments

            472   
       (1,476     880   

Notes:

1 Excluding interest credits related to a tax case settlement.
2 Comprises foreign exchange rate differences reflected in the income statement in relation to certain intercompany balances and the foreign exchange rate differences on financial instruments received as consideration on the disposal of Vodafone Japan to SoftBank in April 2006.
3 The year ended 31 March 2011 included foreign exchange rate movements, accretion expense and fair value charges.

Net financing costs before income from investments increased from £852 million to £1,642 million, primarily due to the decision to increase the fixed rate debt mix, which is expected to result in lower interest in future periods, and the subsequent recognition of mark-to-market losses. Income from investments decreased by £64 million as a result of the disposal of the Group’s 3.2% interest in China Mobile Limited and the Group’s interests in SoftBank Mobile Corp. Limited during the 2011 financial year.

 

 

 


Table of Contents
   Vodafone Group Plc    41
   Annual Report 2012   
     
     
     

 

 

Taxation

     

 

2012

£m

   

2011

£m

 
Income tax expense      2,546        1,628   
Tax on adjustments to derive adjusted profit before tax      (242     (232
Tax benefit related to settlement of tax cases             929   
Adjusted income tax expense      2,304        2,325   
Share of associates’ tax      302        519   
Adjusted income tax expense for purposes of calculating adjusted tax rate      2,606        2,844   
Profit before tax      9,549        9,498   
Adjustments to derive adjusted profit before tax1      369        1,505   
Adjusted profit before tax      9,918        11,003   
Add: Share of associates’ tax and non-controlling interest      382        604   
Adjusted profit before tax for the purpose of calculating adjusted effective tax rate      10,300        11,607   
Adjusted effective tax rate      25.3%        24.5%   

Note:

1 See “Earnings per share”.

The adjusted effective tax rate for the year ended 31 March 2012 was 25.3%. This is in line with our mid 20s adjusted effective tax rate guidance range.

The Group’s share of associates’ tax declined due to the absence of the tax related to SFR following the disposal of our 44% interest in June 2011.

Income tax expense has increased in the year ended 31 March 2012 largely due to the favourable impact of a tax settlement in the 2011 financial year.

Earnings per share

Adjusted earnings per share was 14.91 pence, a decline of 11.0% year-on-year, reflecting the loss of our 44% interest in SFR and Polkomtel’s profits, the loss of interest income from investment disposals and mark-to-market items charged through finance costs, partially offset by a reduction in shares arising from the Group’s share buyback programme. Basic earnings per share was 13.74 pence (2011: 15.20 pence), reflecting the profit on disposal of our 44% interest in SFR and 24.4% interest in Polkomtel and lower impairment charges compared to the prior financial year, all of which are excluded from adjusted earnings per share.

 

     

 

2012

£m

   

2011

£m

 
Profit attributable to equity shareholders      6,957        7,968   
Pre-tax adjustments:                 

Impairment loss1

     4,050        6,150   

Other income and expense1 2

     (3,705     72   

Non-operating income and expense1 3

     162        (3,022

Investment income and financing costs4

     (138     (1,695
       369        1,505   
Taxation1      242        (697
Non-controlling interests      (18       
Adjusted profit attributable to equity shareholders      7,550        8,776   
       Million        Million   
Weighted average number of shares outstanding                 

Basic

     50,644        52,408   

Diluted

     50,958        52,748   

Notes:

 

1 Taxation for the 2012 financial year includes a £206 million charge in respect of the disposal of the Group’s 24.4% interest in Polkomtel. The 2011 financial year included £929 million credit in respect of a tax settlement and a £208 million charge in respect of the disposal of the Group’s 3.2% interest in China Mobile Limited. The impairment charges of £4,050 million and £6,150 million in the 2012 and 2011 financial years respectively do not result in any tax consequences. The disposal of our 44% interest in SFR did not give rise to a tax charge.
2 Other income and expense for the 2012 financial year includes a £3,419 million gain on disposal of the Group’s 44% interest in SFR and a £296 million gain on disposal of the Group’s 24.4% interest in Polkomtel. The 2011 financial year includes £56 million representing the net loss on disposal of certain Alltel investments by Verizon Wireless. This is included within the line item “Share of results in associates” in the consolidated income statement.
3 Non-operating income and expense for the 2011 financial year includes £3,019 million profit arising on the sale of the Group’s 3.2% interest in China Mobile Limited.
4 See notes 2 and 3 in “Net (financing costs)/investment income” on page 40.
 

 

Europe

     

Germany

£m

    

Italy

£m

    

Spain

£m

    

UK

£m

    

Other

£m

    

Eliminations

£m

    

Europe

£m

            %  change  
                       

 

             £m

   

 

Organic

 
Year ended 31 March 2012                                                                                
Revenue      8,233         5,658         4,763         5,397         8,352         (222      32,181         0.5        (0.1
Service revenue      7,669         5,329         4,357         4,996         7,780         (217      29,914         (0.6     (1.1
Adjusted EBITDA      2,965         2,514         1,193         1,294         2,479                 10,445         (3.5     (4.5
Adjusted operating profit      1,491         1,735         566         402         1,066                 5,260         (8.1     (9.6
Adjusted EBITDA margin      36.0%         44.4%         25.0%         24.0%         29.7%                  32.5%                    
Year ended 31 March 2011                                                                                
Revenue      7,900         5,722         5,133         5,271         8,253         (264      32,015         (2.5     0.6   
Service revenue      7,471         5,432         4,735         4,931         7,787         (259      30,097         (3.4     (0.4
Adjusted EBITDA      2,952         2,643         1,562         1,233         2,433                 10,823         (7.1     (3.7
Adjusted operating profit      1,548         1,903         915         348         1,012                 5,726         (9.8     (6.1
Adjusted EBITDA margin      37.4%         46.2%         30.4%         23.4%         29.5%                 33.8%                    

 

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Table of Contents
Vodafone Group Plc    42   
Annual Report 2012      
Operating results (continued)

 

 

Revenue increased by 0.5% including a 0.5 percentage point impact from favourable foreign exchange rate movements. On an organic basis service revenue declined by 1.1%* primarily due to the impact of MTR cuts, competitive pricing pressures and continued economic weakness, partially offset by growth in data revenue. Growth in the UK, Germany, the Netherlands and Turkey was offset by declines in most other markets, in particular, Italy, Spain and Greece.

Adjusted EBITDA declined by 3.5% including a 1.1 percentage point favourable impact from foreign exchange rate movements. On an organic basis adjusted EBITDA decreased by 4.5%*, resulting from higher customer investment due to the increased penetration of smartphones, and a reduction in service revenue in most markets, partially offset by direct cost efficiencies.

 

     

 

Organic

change

%

   

Other

activity1

pps

   

Foreign

exchange

pps

   

Reported

change

%

 
Revenue – Europe      (0.1     0.1        0.5        0.5   
Service revenue                                 
Germany      1.2        (0.1     1.6        2.7   
Italy      (3.4            1.5        (1.9
Spain      (9.4     (0.1     1.5        (8.0
UK      1.6        (0.3            1.3   
Other Europe      1.7        (0.2     (1.6     (0.1
Europe      (1.1            0.5        (0.6
Adjusted EBITDA                                 
Germany      (1.1            1.5        0.4   
Italy      (6.4            1.5        (4.9
Spain      (24.9     (0.2     1.5        (23.6
UK      5.0        (0.1            4.9   
Other Europe      1.7        (0.1     0.3        1.9   
Europe      (4.5     (0.1     1.1        (3.5
Adjusted operating profit                                 
Germany      (5.3     0.1        1.5        (3.7
Italy      (10.4            1.6        (8.8
Spain      (39.2     (0.3     1.4        (38.1
UK      15.7        (0.2            15.5   
Other Europe      3.0        (0.6     2.9        5.3   
Europe      (9.6     (0.2     1.7        (8.1

Note:

1 “Other activity” includes the impact of M&A activity and the revision to intra-group roaming charges from 1 October 2012. Refer to “organic growth” on page 172 for further detail.

Germany

Service revenue increased by 1.2%* as strong growth in data and enterprise revenue more than offset the impact of an MTR cut effective from 1 December 2010 and increasing competitive pressures. Data revenue grew by 21.3%* driven by a higher penetration of smartphones, an increase in those sold with a data bundle and the launch of prepaid integrated tariffs. Enterprise revenue grew by 5.6%* driven by significant customer wins and the success of converged service offerings. A number of innovative products were launched during the second half of the 2012 financial year, including OfficeNet, a cloud based solution.

The roll out of LTE has continued, following the launch of services in the prior financial year. Nearly 2,700 base stations had been upgraded to LTE at 31 March 2012, providing approximately 35% household coverage.

Adjusted EBITDA declined by 1.1%* as the higher revenue was offset by restructuring costs and regulation changes.

Italy

Service revenue declined by 3.4%* as a result of weak economic conditions, intense competition and the impact of an MTR cut effective from 1 July 2011. Strong data revenue growth of 16.8%* was driven by mobile internet which benefited from a higher penetration of smartphones and an increase in those sold with a data bundle. From Q3, all new consumer contract customers are now on an integrated tariff. Enterprise revenue grew by 5.1%* with a strong contribution from Vodafone One Net, a converged fixed and mobile solution, and growth in the customer base. Fixed line growth benefited from strong customer additions although slowed in Q4 due to intense competition.

Adjusted EBITDA decreased by 6.4%*, and adjusted EBITDA margin fell by 1.9* percentage points resulting from the decline in service revenue partially offset by operating cost efficiencies such as site sharing agreements and outsourcing of network maintenance to Ericsson.

Spain

Service revenue declined by 9.4%* impacted by intense competition, continuing economic weakness and high unemployment during the year, which have driven customers to reduce or optimise their spend on tariffs. Data revenue increased by 18.4%* benefiting from the penetration of integrated voice, SMS and data tariffs initially launched in October 2010. Improvements were seen in fixed line revenue which increased by 7.3%* resulting from a competitive proposition leading to good customer additions. Mobile customer net additions were strong as a result of our more competitive tariffs and a focus on improving the retention of higher-value customers.

Adjusted EBITDA declined by 24.9%*, with a 5.5* percentage point fall in adjusted EBITDA margin, primarily due to lower revenue with sustained investment in acquisition and retention costs. This was partially offset by operating cost efficiencies.

UK

Service revenue increased by 1.6%* driven by an increase in data and consumer contract revenue supported by the success of integrated offerings. This was partially offset by the impact of an MTR cut effective from 1 April 2011 and lower consumer confidence leading to reduced out-of-bundle usage. Data revenue grew by 14.5%* due to higher penetration of smartphones and an increase in those sold with a data bundle.

Adjusted EBITDA increased by 5.0%* and adjusted EBITDA margin improved by 0.6* percentage points, due to a number of cost saving initiatives, including acquisition and retention efficiencies.

Other Europe

Service revenue increased by 1.7%* as growth in Albania, Malta, the Netherlands and Turkey more than offset a decline in the rest of the region, particularly in Greece, Portugal and Ireland, which continued to be impacted by the challenging macroeconomic environment and competitive factors. Service revenue in Turkey grew by 25.1%* driven by strong growth in consumer contract and data revenue resulting from an expanding contract customer base and the launch of innovative propositions. In the Netherlands service revenue increased by 2.1%*, driven by an increase in the customer base, partially offset by MTR cuts, price competition and customers optimising tariffs.

Adjusted EBITDA grew by 1.7%*, with strong growth in Turkey, driven by a combination of service revenue growth and cost efficiencies, partially offset by declines in the majority of the other markets.

 

 

 


Table of Contents
   Vodafone Group Plc    43
   Annual Report 2012   
     
     
     

 

Africa, Middle East and Asia Pacific

 

     

India

£m

    

Vodacom

£m

    

 

Other

Africa,

Middle East

and

Asia Pacific

£m

    

Eliminations

£m

   

Africa,

Middle East

and Asia

Pacific

£m

             % change  
                             £m               Organic  
Year ended 31 March 2012                                                              
Revenue      4,265         5,638         3,965                13,868         4.2         8.4   
Service revenue      4,215         4,908         3,628                12,751         3.7         8.0   
Adjusted EBITDA      1,122         1,930         1,063                4,115         2.9         7.8   
Adjusted operating profit      60         1,084         328                1,472         15.7         22.4   
Adjusted EBITDA margin      26.3%         34.2%         26.8%                 29.7%                     
Year ended 31 March 2011                                                              
Revenue      3,855         5,479         3,971         (1     13,304         20.0         9.5   
Service revenue      3,804         4,839         3,650         (1     12,292         20.0         9.5   
Adjusted EBITDA      985         1,844         1,170                3,999         20.7         7.5   
Adjusted operating profit      15         827         430                1,272         55.5         8.6   
Adjusted EBITDA margin      25.6%         33.7%         29.5%                 30.1%                     

 

Revenue grew by 4.2% after a 4.2 percentage point adverse impact from foreign exchange rate movements. On an organic basis service revenue grew by 8.0%* driven by customer and data growth, partially offset by the impact of MTR reductions. Growth was driven by strong performances in India, Vodacom, Ghana and Qatar and a return to growth in Egypt, offset by service revenue declines in Australia and New Zealand.

Adjusted EBITDA grew by 2.9% after a 4.8 percentage point adverse impact from foreign exchange rate movements. On an organic basis, Adjusted EBITDA grew by 7.8%* driven primarily by strong growth in India and Vodacom and improved contributions from Ghana and Qatar, offset in part by declines in Egypt and Australia.

 

     

 

Organic

change

%

   

Other

activity1

pps

   

Foreign

exchange

pps

   

Reported

change

%

 
Revenue – Africa, Middle East and Asia Pacific      8.4               (4.2     4.2   
Service revenue                                 
India      19.5        (0.1     (8.6     10.8   
Vodacom      7.1               (5.7     1.4   
Other Africa, Middle East and Asia Pacific      (1.8     (0.1     1.3        (0.6
Africa, Middle East and Asia Pacific      8.0               (4.3     3.7   
Adjusted EBITDA                                 
India      22.9        (0.2     (8.8     13.9   
Vodacom      11.3               (6.6     4.7   
Other Africa, Middle East and Asia Pacific      (9.1     (0.1     0.1        (9.1
Africa, Middle East and Asia Pacific      7.8        (0.1     (4.8     2.9   
Adjusted operating profit                                 
India      389.3        (40.6     (48.7     300.0   
Vodacom      41.1               (10.0     31.1   
Other Africa, Middle East and Asia Pacific      (22.4     (0.2     (1.1     (23.7
Africa, Middle East and Asia Pacific      22.4        (0.3     (6.4     15.7   

India

Service revenue grew by 19.5%,* driven by an 11.8% increase in the customer base, strong growth in incoming and outgoing voice minutes and 51.3%* growth in data revenue. 3G services were available to Vodafone customers in 860 towns and cities across 20 circles at 31 March 2012. Growth also benefited from mobile operators starting to charge for SMS termination during the second quarter of the 2012 financial year. At 31 March 2012 the customer base had increased to 150.5 million, with data customers totalling 35.4 million, a year-on-year increase of 81.5%. This was driven by an increase in data enabled handsets and the impact of successful marketing campaigns. Whilst the market remains highly competitive, the effective rate per minute remained broadly stable during the year, with promotional offers offsetting headline price increases.

Adjusted EBITDA grew by 22.9%* driven by the increase in revenue and economies of scale, partially offset by higher customer acquisition costs and increased interconnection costs. Full year adjusted EBITDA margin increased 0.8* percentage points to 26.3%, driven by cost efficiencies and scale benefits.

Vodacom

Service revenue grew by 7.1%,* driven by service revenue growth in South Africa of 4.4%*, where strong net customer additions and growth in data revenue was partially offset by the impact of MTR cuts (effective 1 March 2011 and 1 March 2012). Despite competitive pricing pressures, data revenue in South Africa grew by 24.3%,* driven by higher smartphone penetration and data bundles leading to a 35.4% increase in active data customers to 12.2 million at 31 March 2012.

Vodacom’s mobile operations outside South Africa delivered strong service revenue growth of 31.9%*2, driven by customer net additions and the simplification of tariff structures in Mozambique and Tanzania. M-Pesa, our mobile phone based money transfer service, continues to perform well in Tanzania with over 3.1 million active users.

Adjusted EBITDA increased by 11.3%* driven by robust service revenue growth and continued focus on operating cost efficiencies.

Notes:

1 “Other activity” includes the impact of M&A activity and the revision to intra-group roaming charges from 1 October 2012. Refer to “Organic growth” on page 172 for further detail.
2 Excludes Gateway and Vodacom Business Africa.
 

 

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Table of Contents
Vodafone Group Plc    44   
Annual Report 2012      

Operating results (continued)

 

 

Other Africa, Middle East and Asia Pacific

Organic service revenue, which now includes Australia, declined by 1.8%* with both New Zealand and Australia being impacted by MTR cuts effective from 6 May 2011 and 1 January 2012, respectively. In Australia, despite improvements in network and customer operations performance, service revenue declined by 8.8%* driven by the competitive market and weakness in brand perception following the network and customer service issues experienced from late 2010 to early 2011 and further accelerated by MTR cuts. On 22 March 2012, Vodafone Hutchison Australia appointed Bill Morrow as its new CEO. In Egypt service revenue was suppressed by the challenging economic and political environment, however, organic growth of 1.4%* was achieved as a result of an increased customer base and strong data usage. In Qatar an increase in the customer base delivered service revenue growth of 27.1%*, despite a competitive pricing environment. Service revenue in Ghana grew by 29.2%* through strong gains in customer market share.

Adjusted EBITDA margin declined 2.2* percentage points, driven by the service revenue decline in Australia and the challenging economic and competitive environment in Egypt, partially offset by growth in Qatar and Ghana.

Safaricom, Vodafone’s associate in Kenya, grew service revenue by 13.6%*, driven by increases in customer base, voice usage and M-Pesa activity. Adjusted EBITDA margin improved in the second half of the 2012 financial year through a tariff increase in October, operating cost efficiencies and a strengthening of the local currency to take the margin for the 2012 financial year to 35.0%.

Non-Controlled Interests

Verizon Wireless1 2 3

 

     

2012

£m

   

2011

£m

           %  change  
       £    

 

Organic

 
Service revenue      18,039        17,238        4.6        7.3   
Revenue      20,187        18,711        7.9        10.6   
Adjusted EBITDA      7.689        7,313        5.1        7.9   
Interest      (212     (261     (18.8        
Tax2      (287     (235     22.1           
Group’s share of result in Verizon Wireless      4,867        4,569        6.5        9.3   

In the United States Verizon Wireless reported 4.6 million net mobile customer additions bringing its closing mobile customer base to 93.0 million, up 5.2%.

Service revenue growth of 7.3%* continues to be driven by the expanding customer base and robust growth in data ARPU driven by increased penetration of smartphones.

Adjusted EBITDA margin remained strong despite the competitive challenges and macroeconomic environment. Efficiencies in operating expenses and customer acquisition costs resulting from lower volumes have been partly offset by a higher level of customer retention costs reflecting the increased demand for smartphones.

Verizon Wireless’ net debt at 31 March 2012 totalled US$6.4 billion4 (31 March 2011: net debt US$9.8 billion4), after paying a dividend to its shareholders of US$10 billion on 31 January 2012.

Notes:

1 

All amounts represent the Group’s share based on its 45% equity interest, unless otherwise stated.

2  The Group’s share of the tax attributable to Verizon Wireless relates only to the corporate entities held by the Verizon Wireless partnership and certain state taxes which are levied on the partnership. The tax attributable to the Group’s share of the partnership’s pre-tax profit is included within the Group tax charge.
3 

Organic growth rates include the impact of a non-cash revenue adjustment which was recorded to defer previously recognised data revenue that will be earned and recognised in future periods. Excluding this the equivalent organic growth rates for service revenue, revenue, adjusted EBITDA and the Group’s share of result in Verizon Wireless would have been 6.8%*, 10.1 %’, 6.7%* and 7.5%* respectively.

4 

Net debt excludes pending credit card receipts. Comparatives are presented on a comparable basis.

 

 

 


Table of Contents
   Vodafone Group Plc    45
   Annual Report 2012   
     
     
     

 

2011 financial year compared to the 2010 financial year

Group1

      Europe
£m
    

 

Africa,
Middle East
and Asia
Pacific

£m

    

Non-Controlled
Interests and
Common

Functions2

£m

   

Eliminations

£m

   

2011

£m

   

2010

£m

           %  change  
                         £        Organic3  
Revenue      32,015         13,304         659        (94     45,884        44,472        3.2        2.8   
Service revenue      30,097         12,292         412        (63     42,738        41,719        2.4        2.1   
Adjusted EBITDA      10,823         3,999         (152            14,670        14,735        (0.4     (0.7
Adjusted operating profit      5,726         1,272         4,820               11,818        11,466        3.1        1.8   
Adjustments for:                                                                   

Impairment losses

                                       (6,150     (2,100                

Other (income)/expense4

                                       (72     114                   
Operating profit                                        5,596        9,480                   
Non-operating income/(expense)5                                        3,022        (10                
Net investment income/(financing costs)                                        880        (796                
Profit before taxation                                        9,498        8,674                   
Income tax expense                                        (1,628     (56                
Profit for the financial year                                        7,870        8,618                   

Notes:

1 

2011 results reflect average exchange rates of £1:1.18 and £1:US$1.56.

2 

Common Functions primarily represent the results of the partner markets and the net result of unallocated central Group costs.

3 

Organic growth includes Vodacom at the 2011 level of ownership but excludes Australia following the merger with Hutchison 3G Australia on 9 June 2009.

4 

Other income and expense for the year ended 31 March 2011 included £56 million representing the net loss on disposal of certain Alltel investments by Verizon Wireless. This is included within the line item “Share of results in associates” in the consolidated income statement.

5 

Non-operating income and expense for the year ended 31 March 2011 includes £3,019 million profit arising on the sale of the Group’s 3.2% interest in China Mobile Limited.

 

Revenue

Group revenue increased by 3.2% to £45,884 million and Group service revenue increased by 2.4% to £42,738 million. On an organic basis Group service revenue increased by 2.1%*, with a 0.8 percentage point improvement between the first and second half of the 2011 financial year as both Europe and AMAP delivered improved organic service revenue trends.

In Europe service revenue fell by 0.4%* with a decline of 0.3%* in the second half of the 2011 financial year. Both the UK and Germany performed well delivering full year service revenue growth of 4.7%* and 0.8%* respectively. Spain continued to experience economic pressures which intensified competition leading to a 6.9%* decline in service revenue. Service revenue also declined by 2.1 %* in Italy driven by a challenging economic and competitive environment combined with the impact of MTR cuts. Our improved commercial offers in Turkey delivered service revenue growth of 28.9%*, despite a 52% cut in MTRs which was effective from 1 April 2010. Challenging economic and competitive conditions continued in our other central European businesses where service revenue growth was also impacted by MTR cuts. European enterprise revenue increased by 0.5%* with improved roaming activity and important customer wins.

In AMAP service revenue grew by 9.5%*. Vodacom continued to perform well, with strong data revenue growth from mobile broadband offsetting weaker voice revenue which was impacted by two MTR cuts during the year. In India service revenue increased by 16.2%*, driven by an increase in the mobile customer base and a more stable pricing environment towards the end of the 2011 financial year. In Qatar the customer base reached 757,000 by 31 March 2011, with 45% of the population actively using Vodafone services less than two years after launch. On an organic basis, service revenue in Egypt declined by 0.8%* where performance was impacted by the socio-political unrest during the fourth quarter of the 2011 financial year.

Adjusted EBITDA and profit

Adjusted EBITDA decreased by 0.4% to £14,670 million with a 1.1 percentage point decline in both the reported and organic adjusted EBITDA margin.

In Europe adjusted EBITDA decreased by 3.7%*, with a decline in adjusted EBITDA margin of 1.7 percentage points, primarily driven by a reduction in service revenue in most markets and higher investment in acquisition and retention costs, partially offset by operating cost efficiencies.

In AMAP adjusted EBITDA increased by 7.5%*, driven primarily by growth in India, together with improvements in Vodacom, Ghana, New Zealand and Qatar, partially offset by a slight decline in Egypt. The adjusted EBITDA margin fell 0.6* percentage points, the two main factors behind the decline being higher recurring licence fee costs in India and the change in regional mix from the strong growth in India.

Adjusted operating profit grew by 3.1% as a result of an increase in the Group’s share of results of Verizon Wireless partially offset by the decline in Group adjusted EBITDA. The Group’s share of results in Verizon Wireless, the Group’s associate in the United States, increased by 8.5%* primarily due to the expanding customer base, robust data revenue, efficiencies in operating expenses and lower acquisition costs partially offset by higher customer retention costs reflecting the increased demand for smartphones in the United States.

The Group recorded other net income of £5,342 million, primarily in relation to a £2.8 billion net gain on the sale of the Group’s interest in China Mobile Limited, £1.8 billion on the settlement of a tax case and £0.5 billion from the disposal of investment in SoftBank Mobile Corp. Limited.

Operating profit decreased by 41.0% primarily due to higher impairment losses compared to the prior year. Impairment losses totalling £6,150 million were recorded relating to our businesses in Spain (£2,950 million), Italy (£1,050 million), Ireland (£1,000 million), Greece (£800 million) and Portugal (£350 million) primarily resulting from increased discount rates as a result of increases in government bond rates together with lower cash flows within business plans, reflecting weaker country-level macroeconomic environments. The impairment loss in the 2010 financial year was £2,100 million.

Profit for the year decreased by 8.7%.

 

 

LOGO

 


Table of Contents
Vodafone Group Plc    46   
Annual Report 2012      
Operating results (continued)

 

 

Net investment income/(financing costs)

 

     

2011

£m

   

2010

£m

 
Investment income      1,309        716   
Financing costs      (429     (1,512
Net investment income/(financing costs)      880        (796
Analysed as:                 

Net financing costs before income from investments

     (852     (1,024

Potential interest charges arising on settlement of outstanding tax issues1

     (46     (23

Income from investments

     83        145   

Foreign exchange2

     256        (1

Equity put rights and similar arrangements3

     95        (94

Interest related to the settlement of tax cases4

     872        201   

Disposal of SoftBank Mobile Corp. Limited financial instruments

     472          
       880        (796

Notes:

1 

Excluding interest credits related to a tax case settlement.

2 

Comprises foreign exchange rate differences reflected in the income statement in relation to certain intercompany balances and the foreign exchange rate differences on financial instruments received as consideration on the disposal of Vodafone Japan to SoftBank in April 2006.

3 

Includes foreign exchange rate movements, accretion expense and fair value charges.

4 

The £872 million in the year ended 31 March 2011 relates to the settlement of a tax case and the £201 million in the year ended 31 March 2010 relates to the settlement of the German tax loss claim.

Net financing costs before income from investments decreased from £1,024 million to £852 million primarily due to a reduction in net debt, partially offset by an increase in average interest rates for debt denominated in US dollars. In addition, £138 million of interest was capitalised compared to £1 million in the prior year. At 31 March 2011 the provision for potential interest charges arising on settlement of outstanding tax issues was £398 million (31 March 2010: £1,312 million), with the reduction primarily reflecting the settlement of a tax case.

Taxation

 

      2011     2010  
   £m     £m  
Income tax expense      1,628        56   
Tax on adjustments to derive adjusted profit before tax      (232     (39
Tax benefit related to settlement of tax cases1      929        2,103   
Adjusted income tax expense      2,325        2,120   
Share of associates’ tax      519        572   
Adjusted income tax expense for purposes of calculating adjusted tax rate      2,844        2,692   
Profit before tax      9,498        8,674   
Adjustments to derive adjusted profit before tax2      1,505        1,890   
Adjusted profit before tax      11,003        10,564   
Add: Share of associates’ tax and non-controlling interest      604        652   
Adjusted profit before tax for the purpose of calculating adjusted effective tax rate      11,607        11,216   
Adjusted effective tax rate      24.5%        24.0%   

Notes:

1 

The £929 million in the year ended 31 March 2011 relates to the settlement of a tax case and the £2,103 million in the year ended 31 March 2010 relates to the settlement of the German tax loss claim.

2

See “Earnings per share”.

The adjusted effective tax rate for the year ended 31 March 2011 was 24.5%. This is in line with the adjusted effective tax rate for the year ended 31 March 2010 of 24.0%. Tax on adjustments to derive adjusted profit before tax includes tax payable on the gain on the disposal of the Group’s 3.2% interest in China Mobile Limited.

Income tax expense includes a credit of £929 million arising as a result of the settlement of a tax case in July 2010.

Earnings per share

Adjusted earnings per share increased by 4.0% to 16.75 pence for the year ended 31 March 2011 due to growth in adjusted earnings and a reduction in shares arising from the Group’s share buyback programme. Basic earnings per share decreased to 15.2 pence primarily due to the £6,150 million of impairment charges partially offset by a gain on disposal of the Group’s 3.2% interest in China Mobile Limited and the settlement of a tax case.

 

     

 

2011

    2010  
   £m     £m  
Profit attributable to equity shareholders      7,968        8,645   
Pre-tax adjustments:                 

Impairment loss1

     6,150        2,100   

Other income and expense2

     72        (114

Non-operating income and expense3

     (3,022     10   

Investment income and financing costs4

     (1,695     (106
       1,505        1,890   
Taxation1      (697     (2,064
Adjusted profit attributable to equity shareholders      8,776        8,471   
      Million     Million  
Weighted average number of shares outstanding                 

Basic

     52,408        52,595   

Diluted

     52,748        52,849   

Notes:

1 

Taxation for the 2011 financial year included £929 million credit in respect of a tax settlement and a £208 million charge in respect of the disposal of the Group’s interest in China Mobile Limited. The 2010 financial year included £2,103 million arising from the German tax authorities’ decision that 15 billion of losses booked by a German subsidiary in 2001 were tax deductible. The impairment charges of £6,150 million and £2,100 million in the 2011 and 2010 financial years respectively did not result in any tax consequences.

2 

The year ended 31 March 2011 includes £56 million representing the net loss on disposal of certain Alltel investments by Verizon Wireless. This is included within the line item’ Share of results in associates in the consolidated income statement.

3 

The year ended 31 March 2011 includes £3,019 million representing the profit arising on the sale of the Group’s 3.2% interest in China Mobile Limited.

4 

See notes 2, 3, and 4 in “Net investment income/(financing costs)”.

 

 

 


Table of Contents
   Vodafone Group Plc    47
   Annual Report 2012   
     
     
     

 

Europe

 

      Germany      Italy      Spain      UK      Other      Eliminations     Europe             %  change  
   £m      £m      £m      £m      £m      £m     £m      £m     Organic  
Year ended 31 March 2011                                                                               
Revenue      7,900         5,722         5,133         5,271         8,253         (264     32,015         (2.5     0.6   
Service revenue      7,471         5,432         4,735         4,931         7,787         (259     30,097         (3.4     (0.4
Adjusted EBITDA      2,952         2,643         1,562         1,233         2,433                10,823         (7.1     (3.7
Adjusted operating profit      1,548         1,903         915         348         1,012                5,726         (9.8     (6.1
Adjusted EBITDA margin      37.4%         46.2%         30.4%         23.4%         29.5%                 33.8%                    
Year ended 31 March 2010                                                                               
Revenue      8,008         6,027         5,713         5,025         8,357         (297     32,833                    
Service revenue      7,722         5,780         5,298         4,711         7,943         (295     31,159                    
Adjusted EBITDA      3,122         2,843         1,956         1,141         2,582                11,644                    
Adjusted operating profit      1,695         2,107         1,310         155         1,084                6,351                    
Adjusted EBITDA margin      39.0%         47.2%         34.2%         22.7%         30.9%                 35.5%                    

 

Revenue declined by 2.5% reflecting a 3.2 percentage point impact from unfavourable foreign exchange rate movements. On an organic basis service revenue declined by 0.4%* reflecting reductions in most markets offset by growth in Germany, the UK, the Netherlands and Turkey. The decline was primarily driven by lower voice revenue resulting from continued market and regulatory pressure on pricing and the challenging economic climate, partially offset by growth in data and fixed line revenue.

Adjusted EBITDA decreased by 7.1% including a 3.5 percentage point impact from unfavourable exchange rate movements. On an organic basis adjusted EBITDA decreased by 3.7%*, with a 1.7 percentage point decline in adjusted EBITDA margin resulting from a reduction in service revenue in most markets and higher customer investment, partially offset by operating cost savings.

 

     

Organic

change

%

   

M&A

activity

pps

    

Foreign

exchange

pps

   

Reported

change

%

 
         
         
Revenue – Europe      0.6        0.1         (3.2     (2.5

 

Service revenue

                                 
Germany      0.8                (4.1     (3.3
Italy      (2.1             (3.9     (6.0
Spain      (6.9             (3.7     (10.6
UK      4.7                       4.7   
Other Europe      0.5        0.5         (3.0     (2.0
Europe      (0.4     0.1         (3.1     (3.4

 

Adjusted EBITDA

                                 
Germany      (1.5             (3.9     (5.4
Italy      (3.1             (3.9     (7.0
Spain      (16.8             (3.3     (20.1
UK      8.0                       8.0   
Other Europe      (2.4     0.2         (3.6     (5.8
Europe      (3.7     0.1         (3.5     (7.1

 

Adjusted operating profit

                                 
Germany      (4.9             (3.8     (8.7
Italy      (5.9             (3.8     (9.7
Spain      (27.3             (2.9     (30.2
UK      125.1                       125.1   
Other Europe      (2.0     0.3         (4.9     (6.6
Europe      (6.1     0.1         (3.8     (9.8

Germany

Service revenue increased by 0.8%* driven by strong data and messaging revenue growth. Data revenue grew by 27.9%* as a result of increased penetration of smartphones and Superflat Internet tariffs. Mobile revenue remained stable in the fourth quarter of the 2011

financial year despite an MTR cut effective from 1 December 2010. Enterprise revenue grew by 3.6%* driven by strong customer and data revenue growth.

Adjusted EBITDA declined by 1.5%*, with a 1.6 percentage point reduction in the adjusted EBITDA margin. This decline was driven by increased customer acquisition and retention, contributed to by the launch of the iPhone in the third quarter, partially offset by operating cost efficiencies.

During the 2011 financial year we acquired LTE spectrum in Germany and launched LTE services towards the end of the year, initially targeting rural areas underserved by fixed broadband.

Italy

Service revenue declined by 2.1%* primarily driven by the challenging economic and competitive environment, the impact of MTR cuts and customer tariff optimisation. The average contract customer base grew by 12.6% enabling the partial offset of these pressures. Data revenue growth remained strong at 21.5%* driven by the high level of customers migrating to smartphones and taking advantage of data plans. There was continued investment to improve quality and coverage of the network. Fixed line revenue continued to grow with the broadband customer base reaching 1.7 million at 31 March 2011 on a 100% basis.

Adjusted EBITDA decreased by 3.1%*, with a fall in the adjusted EBITDA margin of 1.0 percentage point, as a result of the decline in service revenue and higher investment in acquisition and retention costs partially offset by a reduction in operating expenses.

Spain

Service revenue declined by 6.9%* impacted by continued intense competition, general economic weakness and the penetration of lower priced tariffs into the customer base. New integrated plans were introduced in the third quarter in response to the demand for combined voice and data tariffs driven by the increase in smartphones. Data revenue grew by 14.8%* driven by mobile broadband and mobile internet. One-off items contributed to a 1.8* percentage point improvement to service revenue growth for the fourth quarter of the 2011 financial year.

Adjusted EBITDA declined 16.8%*, with a 3.8 percentage point fall in the adjusted EBITDA margin, due to lower service revenue and proportionately higher acquisition and retention costs, partially offset by a reduction in operating expenses.

UK

Service revenue increased by 4.7%* driven by data revenue growth due to increasing penetration of smartphones and mobile internet bundles and strong net contract customer additions, which more than offset continued competitive pressures and weaker prepaid revenue. The MTR cuts announced in March 2011 were expected to have a significant negative impact on revenue growth during the 2012 financial year.

 

 

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Table of Contents
Vodafone Group Plc    48   
Annual Report 2012      
Operating results (continued)

 

 

Adjusted EBITDA increased by 8.0%* with the adjusted EBITDA margin increasing by 0.7 percentage points, reflecting higher service revenue partially offset by higher customer acquisition and retention costs.

Other Europe

Service revenue increased by 0.5%* with growth in Turkey and the Netherlands being partially offset by declines in other markets due to the challenging economic environment and intense competitive factors. In Turkey service revenue grew by 28.9%* driven by strong

growth in both data and voice revenue, despite a 52% cut in MTRs effective from 1 April 2010. In Greece service revenue declined by 19.4%* with intense competition driving a reduction in prepaid revenue and economic factors leading to customer tariff optimisation.

Adjusted EBITDA declined by 2.4%*, with declines in all markets except Turkey and the Netherlands, due primarily to lower service revenue and higher acquisition and retention costs partially offset by operating cost efficiencies.

 

 

Africa, Middle East and Asia Pacific

     

India

£m

   

Vodacom

£m

    

Other

£m

    

Eliminations

£m

   

Africa,
Middle East

and Asia

Pacific

£m

    

 

 

 

% change

 
               

 

             £m

    

 

        Organic1

 
Year ended 31 March 2011                                                             
Revenue      3,855        5,479         3,971         (1     13,304         20.0         9.5   
Service revenue      3,804        4,839         3,650         (1     12,292         20.0         9.5   
Adjusted EBITDA      985        1,844         1,170                3,999         20.7         7.5   
Adjusted operating profit      15        827         430                1,272         55.5         8.6   
Adjusted EBITDA margin      25.6%        33.7%         29.5%                 30.1%                     
Year ended 31 March 2010                                                             
Revenue      3,114        4,450         3,526         (1     11,089                     
Service revenue      3,069        3,954         3,224         (1     10,246                     
Adjusted EBITDA      807        1,528         977                3,312                     
Adjusted operating (loss)/profit      (37     520         335                818                     
Adjusted EBITDA margin      25.9%        34.3%         27.7%                 29.9%                     

Note:

1 

Organic growth includes Vodacom at the 2011 level of ownership and excludes Australia following the merger with Hutchison 3G Australia on 9 June 2009.

 

Revenue grew by 20.0% with an 8.5 percentage point benefit from foreign exchange rate movements and the full year impact of the consolidation of Vodacom results from 18 May 2009 partially offset by the impact of the creation of the Vodafone Hutchison Australia (‘VHA’) joint venture on 9 June 2009. On an organic basis service revenue grew by 9.5%* despite the impact of MTR reductions and difficult economic environments. The growth was driven by a strong performance in India and continued growth from Vodacom and the rest of the region, other than Egypt where performance was impacted by the socio-political unrest during the fourth quarter of the 2011 financial year.

Adjusted EBITDA grew by 20.8% with foreign exchange rate movements contributing 8.0 percentage points of growth. On an organic basis Adjusted EBITDA grew by 7.5%* driven primarily by growth in India, together with improvements in Vodacom, Ghana, Qatar and New Zealand, partially offset by a decline in Egypt following pricing pressure and socio-political unrest.

     

 

Organic
change
%

    

 

M&A
activity
pps

   

 

Foreign
exchange
pps

   

 

Reported
change
%

 
Revenue – Africa, Middle East and Asia Pacific      9.5         2.0        8.5        20.0   

 

Service revenue

                                 
India      16.2                7.7        23.9   
Vodacom      5.8         6.7        9.9        22.4   
Other Africa, Middle East and Asia Pacific      7.2         (0.9     6.9        13.2   
Africa, Middle East and Asia Pacific      9.5         2.2        8.3        20.0   

 

Adjusted EBITDA

                                 
India      15.1                7.0        22.1   
Vodacom      4.9         4.9        10.9        20.7   
Other Africa, Middle East and Asia Pacific      5.1         10.6        4.1        19.8   
Africa, Middle East and Asia Pacific      7.5         5.3        8.0        20.8   

 

Adjusted operating profit

                                 
India      134.0                6.5        140.5   
Vodacom      5.7         38.2        15.1        59.0   
Other Africa, Middle East and Asia Pacific      2.2         29.2        (3.0     28.4   
Africa, Middle East and Asia Pacific      8.6         39.9        7.0        55.5   
 

 

 


Table of Contents
   Vodafone Group Plc    49
   Annual Report 2012   
     
     
     

 

 

India

Service revenue grew by 16.2%* including a 1.7* percentage point benefit from Indus Towers, the Group’s network sharing joint venture. Growth was driven by a 39.0% increase in the average mobile customer base and stable usage per customer trends, partially offset by a fall in the effective rate per minute due to an increase in the penetration of lower priced tariffs into the customer base and strong competition in the market.

February 2011 saw the launch of commercial 3G services following the purchase of 3G spectrum in May 2010 and subsequent network build. By 31 March 2011 1.5 million customers had activated their 3G access.

Adjusted EBITDA grew by 15.1%* driven by the increase in the customer base and economies of scale which absorbed pricing and cost pressures.

Vodacom

Service revenue grew by 5.8%* driven by South Africa where growth in data revenue of 35.9%*1 offset a decline in voice revenue caused by MTR cuts effective from 1 March 2010 and 1 March 2011.

In South Africa data revenue growth was driven by a 48.9%* increase in data usage due to strong growth in mobile connect cards and smartphones. In addition, successful commercial activity, particularly in off-peak periods, drove higher voice usage during the 2011 financial year which partially offset the impact of MTR cuts. Net customer additions returned to pre-registration levels for the first time in the third quarter of the 2011 financial year, with the trend continuing during the fourth quarter of the 2011 financial year with net additions of 1.2 million.

In Vodacom’s operations outside South Africa service revenue growth continued with strong performances from Tanzania and Mozambique. Trading conditions remain challenging in the Democratic Republic of Congo and the Gateway operations.

Adjusted EBITDA grew by 4.9%* driven by the increase in service revenue, strong handset sales and lower interconnection costs, partially offset by higher operating expenses.

On 1 April 2011 Vodacom refreshed its branding to more closely align with that of the Group.

Other Africa, Middle East and Asia Pacific

Service revenue grew by 7.2%* with growth across all markets except Egypt. In Qatar the customer base reached 757,000 by 31 March 2011, with 45% of the population actively using Vodafone services. The decline in Egypt service revenue was driven by a combination of MTR reductions, competitive pressure on pricing and socio-political unrest during the fourth quarter of the 2011 financial year, offset in part by strong customer and data revenue growth during the year. In Ghana service revenue growth of 21.0%* was supported by competitive tariffs and improved brand awareness.

VHA integration remained on track and a number of important initiatives were completed during the 2011 financial year to begin realising the benefits of the merger. Contact centre operations were consolidated into two major centres in Hobart and Mumbai India, substantial progress was made in the consolidation of the retail footprint, and a major refit of retail stores was underway. VHA appointed new suppliers for network managed services, core, transmission and IT managed services.

Adjusted EBITDA increased by 5.1%* driven by growth in Ghana, New Zealand and Qatar partially offset by a decline in Egypt resulting primarily from the lower effective price per minute but also impacted by the socio-political unrest during the fourth quarter of the 2011 financial year.

Note:

1 

Data revenue in South Africa grew by 41.8%*. Excluding the impact of reclassifications between messaging and data revenue during the year, data revenue grew by 35.9%*.

Non-Controlled Interests

Verizon Wireless2 3 4

 

    

2011

£m

   

2010

£m

                    % change  
      £     Organic  
Service revenue     17,238        15,898        8.4        5.8   
Revenue     18,711        17,222        8.6        6.0   
Adjusted EBITDA     7,313        6,689        9.3        6.7   
Interest     (261     (298     (12.4        
Tax3     (235     (205     14.6           
Group’s share of result in                                
Verizon Wireless     4,569        4,112        11.1        8.5   

In the United States Verizon Wireless reported 2.6 million net mobile customer additions bringing its mobile customer base to 88.4 million at 31 March 2011, a 3.1% increase. Customer growth improved in the fourth quarter of the 2011 financial year following the launch of the iPhone 4 on the Verizon Wireless network in February 2011.

Service revenue growth of 5.8%* was driven by the expanding customer base and robust data revenue primarily derived from growth in the penetration of smartphones.

The adjusted EBITDA margin remained strong despite the competitive challenges and economic environment. Efficiencies in operating expenses and lower customer acquisition costs resulting from lower volumes were partly offset by a higher level of customer retention costs reflecting the increased demand for smartphones.

As part of the regulatory approval for the Alltel acquisition, Verizon Wireless was required to divest overlapping properties in 105 markets. On 26 April 2010 Verizon Wireless completed the sale of network and licence assets in 26 markets, encompassing 0.9 million customers, to Atlantic Tele-Network for US$0.2 billion. On 22 June 2010 Verizon Wireless completed the sale of network assets and mobile licences in the remaining 79 markets to AT&T Mobility for US$2.4 billion. As a result the Verizon Wireless customer base reduced by approximately 2.1 million net customers on a 100% basis, partially offset by certain adjustments in relation to the Alltel acquisition.

On 23 August 2010 Verizon Wireless acquired a spectrum licence, network assets and related customers in southwest Mississippi and in Louisiana, formerly owned by Centennial Communications Corporation, from AT&T Inc. for cash consideration of US$0.2 billion. This acquisition was made to enhance Verizon Wireless’ network coverage in these two locations.

Verizon Wireless net debt at 31 March 2011 totalled US$9.8 billion5 (31 March 2010: US$22.6 billion5).

Notes:

2 

All amounts represent the Group’s share based on its 45% equity interest, unless otherwise stated.

3 

The Group’s share of the tax attributable to Verizon Wireless relates only to the corporate entities held by the Verizon Wireless partnership and certain state taxes which are levied on the partnership. The tax attributable to the Group’s share of the partnership’s pre-tax profit is included within the Group tax charge.

4 

Organic growth rates include the impact of a non-cash revenue adjustment which was recorded by Verizon Wireless to defer previously recognised data revenue that will be earned and recognised in future periods. Excluding this the equivalent organic growth rates for service revenue, revenue, adjusted EBITDA and the Group’s share of result in Verizon Wireless would have been 6.4%*, 6.6%*, 8.2%* and 10.8%* respectively.

5 

Net debt excludes pending credit card receipts. Comparatives are presented on a comparable basis.

 

 

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Table of Contents
Vodafone Group Plc    50   
Annual Report 2012      
Guidance

 

 

Performance against 2012 financial year guidance

Based on guidance foreign exchange rates, our adjusted operating profit for the 2012 financial year was £11.8 billion, at the top end of the £11.0 billion to £11.8 billion range set in May 2011. On the same basis, our free cash flow was £6.2 billion, in the middle of the £6.0 billion to £6.5 billion range.

2013 financial year guidance

     

 

Adjusted
operating profit

£bn

    

Free

cash flow
£bn

 
2012 reported performance      11.5         6.1   
SFR/Polkomtel contribution and restructuring cost              (0.2
Foreign exchange1      (0.4      (0.3
2012 financial rebased reported      11.1         5.6   
                   

 

2013 financial year guidance

     11.1 – 11.9         5.3 – 5.8   

Note:

1 

Impact of rebasing the 2012 reported performance using the 2013 financial year guidance foreign exchange rates of £1:1.23 and £1:$US1.62.

Guidance for the 2013 financial year is based on our current assessment of the global macroeconomic outlook and assumes foreign exchange rates of £1:1.23 and £1: US$1.62. In addition, we will no longer receive a dividend from SFR after the sale of our stake during the 2012 financial year. We have restated the 2012 financial year adjusted operating profit and free cash flow for both these changes in the table above.

Therefore, on an underlying basis, we expect growth in adjusted operating profit, and stability in free cash flow, compared with the 2012 financial year.

Adjusted operating profit is expected to be in the range of £11.1 billion to £11.9 billion and free cash flow in the range of £5.3 billion to £5.8 billion, excluding any income dividends received from Verizon Wireless.

We expect the Group adjusted EBITDA margin decline to continue its improving trend, supported by continued strong growth and operating leverage in our AMAP region, and improving control of commercial costs in Europe. We expect capital expenditure to remain broadly steady on a constant currency basis.

In November 2010 we gave annual guidance ranges for organic service revenue growth and free cash flow which were based on the prevailing macroeconomic environment, regulatory framework and foreign exchange rates. Given larger MTR reductions than previously envisaged, we now expect organic service revenue growth in the 2013 financial year to be slightly below our previous medium term guidance range. We will provide an update on revenue prospects for the 2014 financial year when we publish our results for the year ending 31 March 2013. We expect the Group adjusted EBITDA margin to stabilise by March 2014.

Our medium term free cash flow guidance is £5.5 billion to £6.5 billion per annum to March 2014. This was based on the prevailing foreign exchange rates in November 2010, including an exchange rate of £1: 1.15. Based on the £1: 1.23 foreign exchange rate used for the 2013 financial guidance, the equivalent range is £5.2 billion to £6.2 billion. This cash generation underpins the three year 7% per annum dividend per share growth target issued in May 2010. We continue to expect that total ordinary dividends per share will be no less than 10.18 pence for the 2013 financial year.

Assumptions

Guidance for the 2013 financial year and the medium term is based on our current assessment of the global macroeconomic outlook and assumes foreign exchange rates of £1:1.23 and £1:US$1.62. It excludes the impact of licence and spectrum purchases, income dividends from Verizon Wireless, material one-off tax-related payments, restructuring costs and any fundamental structural change to the eurozone. It also assumes no material change to the current structure of the Group.

With respect to the 7% per annum dividend per share growth target, as the Group’s free cash flow is predominantly generated by companies operating within the eurozone, we have assumed that the euro to sterling exchange rate remains within 5% of the above guidance foreign exchange rate.

Actual foreign exchange rates may vary from the foreign exchange rate assumptions used. A 1% change in the euro to sterling exchange rate would impact adjusted operating profit by £40 million and free cash flow by approximately £30 million and a 1% change in the dollar to sterling exchange rate would impact adjusted operating profit by approximately £50 million.

 

 

 


Table of Contents
   Vodafone Group Plc    51
   Annual Report 2012   
Principal risk factors and uncertainties   

 

 

1. Regulatory decisions and changes in the regulatory environment could adversely affect our business.

Risk: We have ventures in both emerging and mature markets, spanning a broad geographical area including Europe, Africa, Middle East, Asia Pacific and the United States. We need to comply with an extensive range of requirements that regulate and supervise the licensing, construction and operation of our telecommunications networks and services. Pressure on political and regulatory institutions both to deliver direct consumer benefit and protect consumers interests, particularly in recessionary periods, can lead to adverse impacts on our business. Financial pressures on smaller competitors can drive them to call for regulators to protect them. Increased financial pressures on governments may lead them to target foreign investors for further taxes or licence fees.

2. We could suffer loss of consumer confidence and/or legal action due to a failure to protect our customer information.

Risk: Mobile networks carry and store large volumes of confidential personal and business voice traffic and data. We host increasing quantities and types of customer data in both enterprise and consumer segments. We need to ensure our service environments are sufficiently secure to protect us from loss or corruption of customer information. Failure to adequately protect customer information could have a material adverse effect on our reputation and may lead to legal action against the Group.

3. Our business could be adversely affected by a failure or significant interruption to telecommunications networks.

Risk: We are dependent on the continued operation of telecommunications networks. As the importance of mobile communication in everyday life, as well as during times of crisis, increases, organisations and individuals look to us to maintain service. Major failures in the network may result in service being interrupted resulting in serious damage to our reputation and consequential customer and revenue loss.

.4. Technological advances in handsets and use of alternative communication services may result in less demand for our traditional service offerings.

Risk: Strategic handset and technology suppliers are developing mobile content and services. Advancements in smartphone branding and technology places more focus on devices rather than the underlying services provided by mobile operators. The development of applications which make use of the internet as a substitute for some of our more traditional services, such as messaging and voice, could erode revenue. Reduced demand for our core services of voice, messaging and data and the development of services by handset suppliers could significantly impact our future profitability.

5. Increased competition may reduce our market share and profitability.

Risk: We face intensifying competition; in particular competing with established competitors in mature markets and competing with new entrants in emerging markets, where all operators are looking to secure a share of the potential customer base. Competition could lead to a reduction in the rate at which we add new customers, a decrease in the size of our market share and a decline in our average revenue per customer, as customers may choose to receive telecommunications services or other competing services from alternate providers. Competition can also lead to an increase in customer acquisition and retention costs. The focus of competition in many of our markets has shifted from acquiring new customers to retaining existing customers, as the market for mobile telecommunications has become increasingly mature.

6. Our business may be impaired by actual or perceived health risks associated with the transmission of radio waves from mobile telephones, transmitters and associated equipment.

Risk: Concerns have been expressed that the electromagnetic signals emitted by mobile telephone handsets and base stations may pose health risks. We are not aware that such health risks have been substantiated, however, in the event of a major scientific finding supporting this view this might result in prohibitive legislation being introduced by governments (or the European Union), a major reduction in mobile phone usage (especially by children), a requirement to move base station sites, significant difficulty renewing or acquiring site leases and/or major litigation. An inadequate response to electromagnetic fields (‘EMF’) issues may result in loss of confidence in the industry and Vodafone.

7. One or more countries may exit the eurozone.

Risk: In light of recent economic conditions in Europe, there is a possibility of one or more countries exiting the eurozone, causing currency devaluation in those countries and possibly leading to a reduction in our revenue and impairment of our financial and non-financial assets. This may also lead to adverse economic impacts elsewhere.

8. We may be unable to obtain additional/renew sufficient spectrum with an adequate return.

Risk: The spectrum we use for the delivery of our services is regulated in each of our markets. The regulators supervise the allocation of frequency spectrum and 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 us or to third parties, including the implementation of unsustainable cost and revenue models, could adversely affect our future operations in these geographic areas. Our mobile data strategy and roll out of 4G/LTE services is dependent upon us being able to renew and obtain additional spectrum licences.

 

 

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Table of Contents
Vodafone Group Plc    52   
Annual Report 2012      
Principal risk factors and uncertainties (continued)

 

 

9. We may not satisfactorily resolve major tax disputes.

Risk: We operate in many jurisdictions around the world and from time to time have disputes on the amount of tax due. In particular, in spite of a recent positive India Supreme Court decision relating to an ongoing tax case in India, as set out on pages 139 and 140, the Indian government is proposing retroactive tax legislation which would in effect overturn the court’s decision.

Such or similar types of action in other jurisdictions may expose us to significant additional tax liabilities which would affect the results of the business.

10. A malicious attack on our network may be successful and disrupt our services or compromise our data.

Risk: There is a risk that an attack by a malicious individual or group could be successful on our networks. This could lead to a loss of confidential customer data or availability of critical systems. Our network is also susceptible to interruption due to a physical attack and theft of our network components as the value and market for network components increases (for example copper, batteries, generators and fuel).

11. Changes in assumptions underlying the carrying value of certain Group assets could result in impairment.

Risk: Due to the substantial carrying value of goodwill under International Financial Reporting Standards (‘IFRS’), revisions to the assumptions used in assessing its recoverability, including discount rates, estimated future cash flows or anticipated changes in operations, could lead to the impairment of certain Group assets. While impairment does not impact reported cash flows, it does result in a non-cash charge in the consolidated income statement and thus no assurance can be given that any future impairments would not affect our reported distributable reserves and, therefore, our ability to make dividend distributions to our shareholders or repurchase our shares.

 

 

 


Table of Contents
   Vodafone Group Plc    53
   Annual Report 2012   
     
     
     

 

 

Eurozone risk

Country and currency risk

Recent conditions in the eurozone have resulted in a higher risk of disruption and business risk from high currency volatility and/or the potential of an exit of one or more countries from the euro.

As part of our response to these conditions we have reviewed our existing processes and policies, and in places, evolved them with the aim of both minimising the Group’s economic exposure and to preserve our ability to operate in a range of potential conditions that may exist in the event of one or more of these future events.

Our ability to manage these risks needs to take appropriate account of our needs to deliver a high quality service to our customers, meet licence obligations and the significant capital investments we may have made and may need to continue to make in the markets most impacted.

Currency related risks

While our share price is denominated in sterling, the majority of our financial results are generated in other currencies. As a result the Group’s operating profit is sensitive to either a relative strengthening or weakening of the major currencies in which it transacts.

The “Operating results” section of the annual report on pages 40 to 49 sets out a discussion and analysis of the relative contributions of the Group’s Europe and AMAP regions and the major geographical markets in each, to the Group’s service revenue and adjusted EBITDA performance. Our markets in Italy, Ireland, Greece, Portugal and Spain have been most directly impacted by the current market conditions and in order of contribution, represent 17% (Italy), 8% (Spain), 3% (Portugal) and 3% (Ireland and Greece combined) of the Group’s adjusted EBITDA. An average 3% decline in the sterling equivalent of these combined geographical markets due to currency revaluation would reduce Group adjusted EBITDA by £0.1 billion. The Group’s foreign currency earnings are diversified through its 45% equity interest in Verizon Wireless, which operates in the United States and generates its earnings in US dollars. Verizon Wireless, which is equity accounted, contributed 42% of the Group’s adjusted operating profit for the year ended 31 March 2012.

The Group employs a number of mechanisms to manage elements of exchange rate risk at a transaction, translation and economic level. At the transaction level our policies require foreign exchange risks on transactions denominated in other currencies above certain de minimis levels to be hedged. Further, since the Company’s sterling share price represents the value of its future multi-currency cash flows, principally in euro, US dollars and sterling, we aim to align the currency of our debt and interest charges in proportion to our expected future principal multi-currency cash flows, thereby providing an economic hedge in terms of reduced volatility in the sterling equivalent value of the Group and a partial hedge against income statement translation exposure, as interest costs will be denominated in foreign currencies.

In the event of a country’s exit from the eurozone, this may necessitate changes in one or more of our entities’ functional currency and potentially higher volatility of those entities’ trading results when translated into sterling, potentially adding further currency risk.

A summary of this sensitivity of our operating results and our foreign exchange risk management policies is set out within “Financial risk management – Market risk – Foreign exchange management” within note 21 to the consolidated financial statements.

Operational planning

We have worked to develop operational plans to use as a basis for continuity planning across the Group in the event of significant exchange rate volatility and/or the withdrawal of one, or a small number of countries, from the euro. We have categorised “at risk” countries into three categories based on risk profile and identified three broad areas of operational risks for the Group where work has been focused, being:

Financial/investment risk: Our activities are focused on counterparty risk management and in particular the protection and availability of cash deposits and investments. Exposures in relation to liquid Group investments have been reviewed and actions have been taken to reduce counterparty limits with certain financial institutions and to convert a significant proportion of euro denominated holdings and deposits into sterling and US dollar investments. Existing Group policy requires cash sweep arrangements, to ensure no operating company has more than 5 million on deposit on any one day. Further, the Group has had in place for a number of years collateral support agreements with a significant number of its counterparties to pass collateral to the Group under certain circumstances. The Group has a net £980 million of collateral assets in its statement of financial position at 31 March 2012. Further information is provided within “Financial risk management – Credit risk” within note 21 to the consolidated financial statements.

Trading risks: We have investigated the structure of existing procurement contracts and we have started the process of amending certain contractual clauses to place the Group in a better position in the event of the exit of a country from the eurozone.

Business continuity risks: We have identified a number of key business continuity priorities which are focused on planning to allow migration to a more cash-based business model in the event banking systems are frozen, developing dual currency capability in contract customer billing systems or ensuring the ability to move these contract customers to prepaid methods of billing, and the consequential impacts to tariff structures. We have also put in place contingency plans with key suppliers that would assist us to continue to support our network infrastructure, retail operations and employees.

The Group continues to maintain appropriate levels of cash and short-term investments in many currencies and, with a carefully controlled group of counterparties, to minimise the risks to the ongoing access to that liquidity and therefore to the ability of the Group to settle debts as they become due. Further information is provided within “Financial risk management – Liquidity risk” within note 21 to the consolidated financial statements.

Risk of change in carrying amount of assets and liabilities

The main potential short-term financial statement impact of the current economic uncertainties is the potential impairment of non-financial and financial assets.

The Group has significant amounts of goodwill, other intangible assets and plant, property and equipment allocated to, or held by, companies operating in the eurozone. We have performed impairment testing for each country in Europe as at 31 March 2012 and identified aggregate impairment charges of £4.0 billion in relation to Vodafone Italy, Spain, Greece and Portugal. Further detail on this exercise together with the sensitivity of the results of this assessment to reasonably possible adverse assumptions is set out in note 10 to the consolidated financial statements.

Our operating companies in Italy, Ireland, Greece, Portugal and Spain have billed and unbilled trade receivables totalling £2.0 billion. IFRS contains specific requirements for impairment assessments of financial assets. We have a range of credit exposures and provisions for doubtful debts that are generally made by reference to consistently applied methodologies overlaid with judgements determined on a case-by-case basis reflecting the specific facts and circumstances of the receivable. Detailed disclosures made in relation to provisions against loans and receivables as well as disclosures about any loans and receivables that are past due at the end of the period, concentrations of risk and credit risk more generally as set out in “Financial risk management – Credit risk” within note 21 to the consolidated financial statements.

 

 

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Table of Contents
Vodafone Group Plc    54   
Annual Report 2012      
Financial position and resources

 

 

Consolidated statement of financial position

     

 

2012

£m

    

 

2011

£m

 
Non-current assets                  
Intangible assets      59,514         68,558   
Property, plant and equipment      18,655         20,181   
Investments in associates      35,108         38,105   
Other non-current assets      6,274         7,373   
       119,551         134,217   
Current assets      20,025         17,003   
Total assets      139,576         151,220   
Total equity shareholders’ funds      76,935         87,555   
Total non-controlling interests      1,267         6   
Total equity      78,202         87,561   
Liabilities                  
Borrowings                  

Long-term

     28,362         28,375   

Short-term

     6,258         9,906   
Taxation liabilities                  

Deferred tax liabilities

     6,597         6,486   

Current taxation liabilities

     2,148         2,262   
Other non-current liabilities      2,140         1,373   
Other current liabilities      15,869         15,257   
Total liabilities      61,374         63,659   
Total equity and liabilities      139,576         151,220   

Assets

Intangible assets

At 31 March 2012 our intangible assets were £59.5 billion (2011: £68.6 billion) with goodwill comprising the largest element at £38.4 billion (2011: £45.2 billion). The decrease primarily resulted from impairment losses of £3.9 billion, amortisation of £3.5 billion and unfavourable foreign exchange rate movements of £4.2 billion partially offset by £2.9 billion of additions. Refer to note 10 to the consolidated financial statements for further information on the impairment charge.

Property, plant and equipment

Property, plant and equipment decreased to £18.7 billion at 31 March 2012 from £20.2 billion at 31 March 2011 predominantly as a result of £4.4 billion of depreciation charges and unfavourable foreign exchange rate movements of £1.3 billion partially offset by £4.7 billion of additions.

Investments in associates

Investments in associates decreased to £35.1 billion at 31 March 2012 from £38.1 billion at 31 March 2011 primarily due to a reduction of £4.0 billion in relation to the sale of our 44% interest in SFR and £4.0 billion of dividends received partially offset by our share of the results of associates, after deductions of interest, tax and non-controlling interest, which contributed £5.0 billion, mainly arising from our investment in Verizon Wireless.

Other non-current assets

Other non-current assets decreased to £6.3 billion at 31 March 2012 (2011: £7.4 billion) mainly due to other investments which totalled £0.8 billion at 31 March 2012 compared to £1.4 billion at 31 March 2011.

Current assets

Current assets increased to £20.0 billion at 31 March 2012 from £17.0 billion at 31 March 2011 due to an increase in cash and short-term investments resulting from the element of the proceeds from the disposal of our 44% interest in SFR not yet utilised for the share buyback programme, and an increase in other receivables due to the second tranche of the proceeds from the sale of our interest in SoftBank Mobile Corp. Limited which was received in April 2012.

Total equity and liabilities

Total equity

Total equity decreased to £78.2 billion at 31 March 2012 from £87.6 billion at 31 March 2011. The profit for the year of £7.0 billion was more

than offset by equity dividends of £6.7 billion, other comprehensive loss of £4.7 billion, share buyback of £4.7 billion and £1.9 billion in relation to the acquisition of non-controlling interests, primarily in India. Total non-controlling interests have increased by £1.3 billion primarily as a result of the exercise of put options over non-controlling interests during the year.

Borrowings

Long-term borrowings and short-term borrowings decreased to £34.6 billion at 31 March 2012 from £38.3 billion at 31 March 2011 mainly as a result of foreign exchange rate movements, bond repayments during the year and settlement of certain put options held by the Essar Group.

Taxation liabilities

Current tax liabilities decreased to £2.1 billion at 31 March 2012 from £2.3 billion at 31 March 2011 mainly as a result of the resolution and payment of longstanding tax disputes.

Other current liabilities

Other current liabilities increased to £15.9 billion at 31 March 2012 from £15.3 billion at 31 March 2011. Trade payables at 31 March 2012 were equivalent to 43 days (2011:37 days) outstanding, calculated by reference to the amount owed to suppliers as a proportion of the amounts invoiced by suppliers during the year. It is our policy to agree terms of transactions, including payment terms, with suppliers and it is our normal practice that payment is made accordingly.

Contractual obligations and contingencies

A summary of our principal contractual financial obligations is shown below. Further details on the items included can be found in the notes to the consolidated financial statements. Details of the Group’s contingent liabilities are included in note 29 to the consolidated financial statements.

 

 

Payments due by period £m

 

Contractual

obligations1

 

 

Total

    <1 year     1-3 years     3-5 years     >5  years  
Borrowings2     42,079        6,266        11,419        10,400        13,994   
Operating lease commitments3     6,141        1,110        1,633        1,152        2,246   
Capital commitments3 4     2,018        1,798        195        25          
Purchase commitments     5,138        3,237        1,081        446        374   
Total     55,376        12,411        14,328        12,023        16,614   

Notes:

1 The above table of contractual obligations includes commitments in respect of options over interests in Group businesses held by non-controlling shareholders (see “Option agreements and similar arrangements”) and obligations to pay dividends to non-controlling shareholders (see “Dividends from associates and to non-controlling shareholders”). The table excludes current and deferred tax liabilities and obligations under post employment benefit schemes, details of which are provided in notes 6 and 23 to the consolidated financial statements respectively. The table also excludes the contractual obligations of associates.
2 See note 22 to the consolidated financial statements.
3 See note 28 to the consolidated financial statements.
4 Primarily related to network infrastructure.

Equity dividends

The table below sets out the amounts of interim, final and total cash dividends paid or, in the case of the final dividend for the 2012 financial year, proposed, in respect of each financial year.

 

 

Pence per ordinary share

 

 

Year ended 31 March

   Interim     Final     Total  
2008      2.49        5.02        7.51   
2009      2.57        5.20        7.77   
2010      2.66        5.65        8.31   
2011      2.85        6.05        8.90   
2012      7.05 1      6.47 2      13.52   

Notes:

1 Includes the 4.0 pence special dividend paid in February 2012.
2 The final dividend for the year ended 31 March 2012 was proposed on 22 May 2012 and is payable on 1 August 2012 to holders on record as of 8 June 2012. For American depositary share (‘ADS’) holders the dividend will be payable in US dollars under the terms of the ADS depositary agreement. Dividend payments on ordinary shares will be paid by direct credit into a nominated bank or building society account or, alternatively, into the Company’s dividend reinvestment plan.
 

 

 


Table of Contents
   Vodafone Group Plc    55
   Annual Report 2012   
     
     
     

 

 

We provide returns to shareholders through dividends and have historically paid dividends semi-annually, with a regular interim dividend in respect of the first six months of the financial year payable in February and a final dividend payable in August. The directors expect that we will continue to pay dividends semi-annually.

In November 2011 the directors announced an interim dividend of 3.05 pence per share representing a 7.0% increase over last year’s interim dividend. In addition a special, second interim, dividend of 4.0 pence per share was paid in February 2012 following the receipt of a US$4.5 billion (£2.9 billion) income dividend from Verizon Wireless. The directors are proposing a final dividend of 6.47 pence per share. Total dividends, excluding special dividends, for the year increased by 7.0% to 9.52 pence per share.

In May 2010 the directors issued a dividend per share growth target, excluding special dividends, of at least 7% per annum for each of the financial years in the period ending 31 March 2013, assuming no material adverse foreign exchange rate movements. We expect that total ordinary dividends per share will therefore be no less than 10.18 pence for the 2013 financial year. See page 50 for the assumptions underlying this expectation.

Liquidity and capital resources

The major sources of Group liquidity for the 2012 and 2011 financial years were cash generated from operations, dividends from associates, disposal of investments and borrowings through short-term and long-term issuances in the capital markets. We do not use non-consolidated special purpose entities as a source of liquidity or for other financing purposes.

Our 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.

Our liquidity and working capital may be affected by a material decrease in cash flow due to factors such as reduced operating cash flow resulting from further possible business disposals, increased competition, litigation, timing of tax payments and the resolution of outstanding tax issues, regulatory rulings, delays in the development of new services and networks, licence and spectrum payments, inability to receive expected revenue from the introduction of new services, reduced dividends from associates and investments or increased dividend payments to non-controlling shareholders. Please see the section titled “Principal risk factors and uncertainties” on pages 51 to 53.

We are also party to a number of agreements that may result in a cash outflow in future periods. These agreements are discussed further in “Option agreements and similar arrangements” at the end of this section.

Wherever possible, surplus funds in the Group (except in Albania, Egypt, India, Qatar and Vodacom) are transferred to the centralised treasury department through repayment of borrowings, deposits, investments, share purchases and dividends. These are then loaned internally or contributed as equity to fund our operations, used to retire external debt, invested externally or used to fund shareholder returns.

Cash flows

Cash generated by operations decreased by 3.7% to £14.8 billion primarily driven by working capital movements and lower adjusted adjusted EBITDA.

Free cash flow decreased by 13.4% to £6.1 billion primarily due to increased cash capital expenditure, working capital movements and lower dividends from associates1, offset by lower payments for taxation.

Cash capital expenditure increased by £0.8 billion, driven by a reduction in working capital creditors and increased investment, particularly in Vodacom and Germany.

Payments for taxation decreased by 24.2% to £2.0 billion primarily due to accelerated tax depreciation in the United States and the timing of tax payments in Italy.

Dividends received from associates and investments1 decreased by £0.3 billion due to the loss of dividends resulting from the disposal of the Group’s interest in SFR and China Mobile Limited. Net interest payments were stable at £1.3 billion.

 

     

 

2012

£m

   

2011

£m

    %  
Adjusted EBITDA      14,475        14,670        (1.3
Working capital      206        566           
Other      143        156           
Cash generated by operations      14,824        15,392        (3.7
Cash capital expenditure2      (6,423     (5,658        
Capital expenditure      (6,365     (6,219        
Working capital movement in respect of capital expenditure      (58     561           
Disposal of property, plant and equipment      117        51           
Operating free cash flow      8,518        9,785        (12.9
Taxation      (1,969     (2,597        
Dividends received from associates and investments1      1,171        1,509           
Dividends paid to non-controlling shareholders in subsidiaries      (304     (320        
Interest received and paid      (1,311     (1,328        
Free cash flow      6,105        7,049        (13.4
Tax settlement3      (100     (800        
Licence and spectrum payments      (1,429     (2,982        
Acquisitions and disposals4      4,872        (183        
Equity dividends paid      (6,643     (4,468        
Purchase of treasury shares      (3,583     (2,087        
Foreign exchange      1,283        709           
Income dividend from Verizon Wireless      2,855                  
Disposal of the Group’s 3.2% interest in                         
China Mobile Limited             4,269           
Disposal of the Group’s SoftBank