Vodafone Group 6-K 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rules 13a-16 or
Dated May 30, 2007
PUBLIC LIMITED COMPANY
(Exact name of registrant as specified in its charter)
VODAFONE HOUSE, THE CONNECTION, NEWBURY, BERKSHIRE, RG14 2FN, ENGLAND (Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
If Yes is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):
This Report on Form 6-K contains a news release issued by Vodafone Group Plc on May 29, 2007, entitled VODAFONE ANNOUNCES RESULTS FOR THE YEAR ENDED 31 MARCH 2007.
The Group has delivered against its financial and operating targets and made good progress on executing against its five strategic objectives
Voice and data usage growth offset competitive and regulatory pressures in Europe
Continued strong performance in emerging markets, with the recent acquisition in India significantly increasing its presence in high growth markets
The Group remains confident of delivering its stated capital and operating expenditure targets in Europe in the 2008 financial year, with core cost reduction initiatives well on track
Group revenue of £31.1 billion, with organic growth of 4.3%
Adjusted basic earnings per share increased by 11.4% to 11.26 pence. Basic loss per share was 8.94 pence, with loss before taxation for the year of £2.4 billion, after impairment charges of £11.6 billion
Free cash flow of £6.1 billion and net cash inflow from operating activities of £10.2 billion, after net taxation paid of £2.2 billion
Increasing returns to shareholders:
Total dividends per share increased by 11.4% to 6.76 pence, with a final dividend per share of 4.41 pence, giving a dividend payout ratio of 60% and a total payout of £3.6 billion for the financial year
In recognition of the earnings dilution arising from the Hutchison Essar transaction, the Board is targeting modest increases in dividend per share in the near term until the payout ratio returns to 60% in accordance with current policy
(1) See page 4 for Group Financial and Operational Highlights and page 30 for use of non-GAAP financial information.
(2) From continuing operations.
Arun Sarin, Chief Executive, commented:
These results show we have made good progress in the execution of our strategy. We have implemented core cost reduction measures, introduced targeted revenue stimulation initiatives in Europe and launched a number of services focusing on our customers total communications needs. The last year has also seen a further reshaping of Vodafones portfolio, with our acquisitions in Turkey and India further increasing the Groups exposure to the exciting growth opportunities in emerging markets. We are well placed to continue delivering on our strategy.
CHIEF EXECUTIVES STATEMENT
We have met or exceeded our stated financial expectations for the year in all areas and made good progress executing the strategy we set out in May 2006.
Robust cash generation continues to support returns to our shareholders, with dividends per share increasing by 11.4% to 6.76 pence per share, representing a payout of 60% of our adjusted earnings per share of 11.26p.
Our customer franchise was further strengthened through organic growth and acquisition and now exceeds 206 million proportionate customers.
Proportionate mobile revenue increased by 6.3% on an organic basis. The Europe region, where competitive and regulatory pressure is most intense, delivered organic proportionate revenue growth of 1.4%. Continued strong progress in Spain, which delivered another year of double digit revenue growth was offset by year on year declines in Germany and Italy. Our EMAPA region delivered another year of strong growth with organic proportionate revenue growth of 14.9%, with strong performances in many emerging markets and revenue growth of 17% in local currency from Verizon Wireless in the US. Proportionate mobile EBITDA margins were slightly lower year on year in line with our outlook statement, with lower margins in Europe offsetting stable margins in EMAPA.
We invested £4.2 billion in capital expenditure during the year and have now achieved the core level of 3G and HSDPA coverage across our European networks necessary for the wider uptake of high speed data services. Free cash generation remains strong at £6.1 billion, after £0.4 billion of payments in respect of long standing tax issues but benefiting from £0.5 billion of timing differences and the deferral of payments originally expected in the year.
Pricing intervention on top-up fees in Italy in the second half of the year led to a further impairment of £3.5 billion to the carrying value of goodwill in addition to the £8.1 billion recorded in the first half of the year for Germany and Italy.
In May 2006, we introduced five new strategic objectives to ensure our continued success. Our focus on executing this strategy throughout the year has generated positive results across a number of areas.
Revenue stimulation and cost reduction in Europe
In Europe, our focus is to drive additional usage and revenue from core voice and messaging services and to reduce our cost base thereby positioning ourselves well for the future.
Central to stimulating revenue is driving mobile usage through larger minute bundles, innovative tariffs, prepaid to contract migrations and targeted promotions. We are also focused on leveraging our market leading position in the business segment which represents around 25% of European service revenue. However, pricing pressure is expected to remain strong in the year ahead and improving price elasticity is core to our revenue stimulation objective in Europe.
Over 11 million customers now benefit from lower roaming pricing through Vodafone Passport and our European customers are now benefiting from our commitment to reduce roaming prices by 40% compared to summer 2005. We expect roaming revenues to be lower year on year in 2008 due to the combined effect of Vodafones own initiatives and direct regulatory intervention.
During the year, we began implementing the core cost reduction programmes we developed last year. We have successfully outsourced IT application development and maintenance to EDS and IBM and are well on track to deliver the expected unit cost savings. We also made faster than expected progress on data centre consolidation in Europe and completed the centralisation of network supply chain management in April 2007. In addition, we are seeking to reduce the longer term cost of ownership of our networks through network sharing arrangements and have announced initiatives in Spain and the UK.
Innovate and deliver on our customers total communications needs
There are several key initiatives underway in this area and we expect these to increase in significance throughout the next financial year. Taken together our total communications initiatives are expected to represent an additional 10% of Group revenue in three years.
As part of our drive to substitute fixed line usage for mobile, we have launched several fixed location pricing plans offering customers fixed prices when they call from within or around their home or office. We now have over 3 million Vodafone At Home customers and over 2 million Vodafone Office customers.
Complementary to our high speed (HSDPA) mobile broadband offerings, Vodafone is now offering fixed broadband services (DSL) in 5 markets. Various business models exist for the provision of DSL. Whilst we continue to favour the resale approach, in some of our markets it will make more sense to use a mixed approach of wholesale and our own infrastructure.
We are also developing products and services to integrate the mobile and PC environments by enhancing our Vodafone live! service and forming partnerships with leading internet players. In the coming months, our customers will be able to experience PC to mobile instant messaging with Yahoo! and Microsoft and use their mobiles to search with Google, participate in mobile auctions via eBay, watch videos through YouTube and use MySpace for social networking. These initiatives are expected to enhance our data revenue, which increased by 30% in the year to £1.4 billion.
Mobile advertising is also a potentially significant future revenue stream for our business. We have signed agreements with Yahoo! in the UK and leading providers in Germany and Italy to enter into this new business through banner and content based advertising.
Deliver strong growth in emerging markets
Our focus is to build on our strong track record of creating value in emerging markets. We have delivered further strong performances in our existing operations with organic revenue growth of 41% in Egypt, 28% in Romania and 22% in South Africa. Our recent acquisition in Turkey has performed ahead of our business plan at the time of the acquisition with strong year on year revenue growth of around 37% in local currency and better than expected profitability.
Gaining control of Hutchison Essar in India significantly increases our presence in emerging markets. With market penetration still around 14% and with a population of over 1.1 billion, India provides a very significant opportunity for future growth. A key priority for the year ahead is to continue the expansion of the network and capture the growth opportunity in the market.
Actively manage our portfolio to maximise returns
In line with this strategy, we executed a number of transactions during the year. We sold our non-controlling interests in Belgium and Switzerland at attractive valuations, with cash proceeds of £1.3 billion and £1.8 billion respectively. More recently, we increased our exposure to emerging markets with an additional 4.8% interest in Vodafone Egypt and gained control in India for £5.5 billion in May 2007.
Align capital structure and shareholder returns policy to strategy
In May 2006, we outlined a new capital structure and returns policy consistent with the operational strategy of the business, resulting in a targeted annual 60% payout of adjusted earnings per share in the form of dividends. We also moved to a low Single A credit rating and, having returned over £19 billion to shareholders excluding dividends for the two previous financial years, including a £9 billion one-off return in August 2006, we have no current plans for further share purchases or one-time returns.
The Board remains committed to its existing policy of distributing 60% of adjusted earnings per share by way of dividend. However, in recognition of the earnings dilution arising from the Hutchison Essar acquisition, it has decided that it will target modest increases in dividend per share in the near term until the payout ratio returns to 60%.
Prospects for the year ahead
We expect market conditions to remain challenging for the year ahead in Europe, notwithstanding continued positive operating trends in data revenue and voice usage. Overall growth prospects for the EMAPA region remain strong due to increasing market penetration and are further enhanced by the recent acquisition in India.
Against this background, Group revenue is expected to be in the range of £33.3 billion to £34.1 billion, with adjusted operating profit in the range of £9.3 billion to £9.8 billion. Capital expenditure on fixed assets is anticipated to be in the range of £4.7 billion to £5.1 billion, including in excess of £1.0 billion in India. Free cash flow is expected to be £4.0 billion to £4.5 billion, after taking into account £0.6 billion of payments related to long standing tax issues, a net cash outflow of £0.8 billion in respect of India and a £0.5 billion outflow from items rolling over from 2007.
We are well placed to continue executing our strategy in the year ahead to deliver the core benefits of mobility to our customers and to generate superior returns for our shareholders.
GROUP FINANCIAL AND OPERATIONAL HIGHLIGHTS
See page 30 for definition of terms.
(1) Excluding the results of the discontinued operations in Japan. The results of the Groups disposed associated undertakings in Belgium and Switzerland are included until the date of the announcement of disposal.
(2) Where applicable, these measures are stated excluding non-operating income of associates, impairment losses and other income and expense, changes in the fair value of equity put rights and similar arrangements and certain foreign exchange differences.
(3) Cumulative number at 31 March.
(4) Figures represent 100% of subsidiary information and a pro-rata share in joint ventures.
(5) Prior year amounts have been adjusted. See Key Performance Indicator section beginning on page 32 for further details.
(6) Service revenue from the mobile telecommunications businesses excludes fixed line operators and DSL revenue and other service revenue.
GROUP PROPORTIONATE INFORMATION
For the year ending 31 March 2008 (2008 financial year)
The Groups outlook statement now reflects only statutory financial measures. Following completion of the Hutchison Essar Limited (Hutch Essar) transaction in India on 8 May 2007, its results will be fully consolidated into the Groups results from that date and are therefore reflected in the outlook measures set out below. The Groups outlook ranges reflect current expectations for average foreign exchange rates for the 2008 financial year.
Operating conditions are expected to continue to be challenging in Europe, with competition remaining intense and ongoing regulatory pressure, notwithstanding continued positive trends in data revenue and voice usage growth. Increasing market penetration continues to result in overall strong growth prospects for the EMAPA region.
Group revenue is expected to be in the range of £33.3 billion to £34.1 billion. Adjusted operating profit is expected to be in the range of £9.3 billion to £9.8 billion, with the Group EBITDA margin lower year on year. Total depreciation and amortisation charges are anticipated to be around £5.8 billion to £5.9 billion, higher than the 2007 financial year, primarily as a result of the Hutch Essar acquisition.
The Group expects capitalised fixed asset additions to be in the range of £4.7 billion to £5.1 billion, including in excess of £1.0 billion in India.
Reported free cash flow is expected to be in the range of £4.0 billion to £4.5 billion. This is after taking into account £0.6 billion of expected tax payments and associated interest in respect of the potential settlement of a number of long standing tax issues, a net cash outflow of approximately £0.8 billion anticipated in respect of India and £0.5 billion from deferred payments and the reversal of certain timing differences that benefited the 2007 financial year. The outlook for free cash flow is stated including the impact of known spectrum or licence payments only.
The Group still expects that significant cash tax and associated interest payments may be made in the next two years in respect of long standing tax issues, although the timing of such payments remains uncertain. Within this timeframe, the Group continues to anticipate possible resolution to the application of the UK Controlled Foreign Company legislation to the Group.
The adjusted effective tax rate percentage is expected to be in the low 30s, slightly higher than the 2007 financial year and consistent with the Groups longer term expectations.
Revenue stimulation and cost reduction in Europe
The Group continues to target delivering benefits equivalent to at least 1% additional revenue market share in the year compared with the 2005 financial year. Capitalised mobile fixed asset additions are expected to be 10% of mobile revenue for the year for the total of the Europe region and common functions.
The Group also expects mobile operating expenses to be broadly stable for the total of the Europe region and common functions when compared with the 2006 financial year on an organic basis, excluding the potential impact from developing and delivering new services and from any business restructuring costs.
During the year ended 31 March 2007, the Group changed the organisational structure of its operations. The following results are presented for continuing operations in accordance with the new organisational structure. Europe includes the results of the Groups mobile operations in Western Europe and its fixed line business in Germany, while EMAPA includes the Groups operations in Eastern Europe, the Middle East, Africa and Asia and the Pacific area and the Groups associates and investments.
(1) Within the Europe region, certain revenue and costs relating to Arcor have been reclassified. All prior periods have been adjusted accordingly. The reclassification had no effect on total revenue, EBITDA or adjusted operating profit.
(2) Certain revenue relating to content delivered by SMS and MMS has been reclassified from messaging revenue to data revenue to provide a fairer presentation of messaging and data revenue.
Revenue increased by 6.0% to £31,104 million in the year to 31 March 2007, with organic growth of 4.3%. The net impact of acquisitions and disposals contributed 3.3 percentage points to revenue growth, offset by unfavourable movements in exchange rates of 1.6 percentage points, with both effects arising principally in the EMAPA region.
The Europe region recorded organic revenue growth of 1.4%, whilst the EMAPA region delivered organic revenue growth of 21.1%. As a result, the EMAPA region accounted for more than 70% of the organic growth in Group revenue. Strong performances were recorded in Spain and a number of the Groups emerging markets.
An increase in the average mobile customer base and usage stimulation initiatives resulted in organic revenue growth of 2.5% and 7.0% in voice and messaging revenue, respectively. Data revenue is an increasingly important component of Group revenue, with organic growth of 30.7%, driven by increasing penetration from 3G devices and growth in revenue from business services.
Adjusted operating profit increased by 1.4% to £9,531 million, with organic growth of 4.2%. The net impact of acquisitions and disposals and unfavourable exchange rate movements reduced reported growth by 0.3 percentage points and 2.5 percentage points, respectively, with both effects arising principally in the EMAPA region. The Europe region declined 4.7% on an organic basis, whilst the EMAPA region recorded organic growth of 24.3%. Strong performances were delivered in Spain, the US and a number of emerging markets.
Group EBITDA was £11,960 million (2006: £11,766 million) and is stated after charges in relation to regulatory fines in Greece of £53 million and restructuring costs within common functions, Vodafone Germany, Vodafone UK and Other Europe of £79 million. The EMAPA region accounted for all of the Groups reported and organic growth in EBITDA.
Certain of the Groups cost reduction and revenue stimulation initiatives are managed centrally within common functions. Consequently, operating and capital expenses are incurred centrally and recharged to the relevant countries, primarily in Europe. This typically results in higher operating expenses with a corresponding reduction in depreciation for the countries concerned.
Europes EBITDA margin declined to 38.2% (2006: 39.8%), reflecting the increase in other direct costs and operating expenses, the latter primarily driven by the establishment of central data centres, which results in a corresponding reduction in depreciation and amortisation for the Europe region.
The EBITDA margin fell by 1.5 percentage points in the EMAPA region to 34.9%, principally due to the lower margin of the recently acquired Telsim business in Turkey.
The acquisitions and stake increases led to the rise in acquired intangible asset amortisation, and these acquisitions, combined with the continued expansion of network infrastructure in the region, resulted in higher depreciation charges.
The Groups share of results from associates increased by 13.0% mainly due to Verizon Wireless, which reported record growth in net additions and increased ARPU. The growth in Verizon Wireless was offset by a reduction in the Groups share of results from its other associated undertakings, which fell due to the disposals of Belgacom Mobile SA and Swisscom Mobile AG as well as the impact of reductions in termination rates and intense competition experienced by SFR in France.
Statutory operating loss was £1,564 million compared with a loss of £14,084 million in the previous financial year following lower impairment charges. In the year ended 31 March 2007, the Group recorded an impairment charge of £11,600 million (2006: £23,515 million) in relation to the carrying value of goodwill in the Groups operations in Germany (£6,700 million) and Italy (£4,900 million). The impairment in Germany resulted from an increase in long term interest rates, which led to higher discount rates along with increased price competition and continued regulatory pressures in the German market. The impairment in Italy resulted from an increase in long term interest rates and the estimated impact of legislation cancelling the fixed fees for the top up of prepaid cards and the related competitive response in the Italian market. The increase in interest rates accounted for £3,700 million of the reduction in value during the year.
Other income and expense for the year ended 31 March 2007 included the gains on disposal of Proximus and Swisscom Mobile, amounting to £441 million and £68 million, respectively.
Investment income and financing costs
(1) Includes a one off gain of £86 million related to the Group renegotiating its investments in SoftBank.
(2) Comprises foreign exchange differences reflected in the income statement in relation to certain intercompany balances and the foreign exchange differences on financial instruments received as consideration in the disposal of Vodafone Japan to SoftBank, which completed in April 2006.
Net financing costs before dividends from investments increased by 36.8% to £435 million as increased financing costs, reflecting higher average debt and interest rates, and losses on mark to market adjustments on financial instruments, more than offset higher investment income resulting from new investments in SoftBank, which arose on the sale of Vodafone Japan during the year, including an £86 million gain related to the renegotiation of these investments. At 31 March 2007, the provision for potential interest charges arising on settlement of outstanding tax issues was £1,213 million.
(1) See loss per share from continuing operations
The adjusted effective tax rate for the year to 31 March 2007 was 30.5% compared to 30.4% for the prior year. The rate is lower than the Groups weighted average tax rate due to the resolution of a number of historic tax issues with tax authorities and additional tax deductions in Italy. The prior year benefited from the tax treatment of a share repurchase in Vodafone Italy and favourable tax settlements.
A significant event in the year was a European Court decision in respect of the UK Controlled Foreign Company (CFC) legislation, following which Vodafone has not accrued any additional provision in respect of the application of UK CFC legislation to the Group.
The adjusted effective tax rate percentage for the year ending 31 March 2008 is expected to be in the low 30s.
Loss per share from continuing operations
Adjusted earnings per share increased by 11.4% from 10.11 pence to 11.26 pence for the year to 31 March 2007. Basic loss per share decreased from 27.66 pence to 8.94 pence for the year to 31 March 2007.
(1) On 27 April 2006, the Group completed the sale of its 97.7% interest in Vodafone Japan to SoftBank. The Groups operations in Japan are presented as discontinued operations.
(2) See note 2 in investment income and financing costs.
(3) In the year ended 31 March 2007, 215 million (2006: 183 million) shares have been excluded from the calculation of diluted loss per share as they are not dilutive.