Vodafone 2007 Annual Report Download - page 47

Vodafone Group Plc Annual Report 2007 45
PerformancePerformance
Adjusted operating profit
Adjusted operating profit increased by 12.5% to £9,399 million, comprising
organic growth of 11.8%, favourable exchange rate movements of 1.1%
partly offset by a 0.4% decline due to the acquisition and disposal activity
during the year.
Interconnect costs increased by 8.3% on an organic basis, as strong growth
in outgoing voice usage was partially offset by cuts in termination rates in a
number of markets and an increased proportion of outgoing traffic being to
other Vodafone customers, which did not result in interconnect expense.
The rise in the number of upgrades and the increased cost of upgrading
customers to 3G were the primary contributors to a 7.7% organic growth in
acquisition and retention costs, to £4,859 million. Operating expenses as a
percentage of service revenue for the 2006 financial year were comparable
to the 2005 financial year at 22.8%.
The charge relating to the amortisation of acquired intangible assets was
£157 million following acquisitions in the Czech Republic, India, Romania
and South Africa in the 2006 financial year. Depreciation and other
amortisation increased, principally due to the net impact of the acquisitions
and disposal in the 2006 financial year and the ongoing expansion of 3G
networks.
The Group’s share of the results in associated undertakings, before amounts
related to business acquisitions and disposals, grew by 21.5% after the
deduction of interest, tax and minority interest, primarily due to growth at
Verizon Wireless in the US. The Group’s share of the result in Verizon
Wireless increased by 25.5% to £2,112 million, before deduction of interest,
tax and minority interest, with a particularly strong performance in the
second half of the 2006 financial year.
Impairment losses
The Group recorded an impairment charge to the carrying value of goodwill
in the 2006 financial year of £23,515 million in respect of the Group’s
operations in Germany (£19,400 million) and Italy (£3,600 million)
reflecting a revision of the Group’s view of the prospects for these
businesses, particularly in the medium to long term, and a further £515
million in respect of the Swedish business following the announcement of
its disposal. An impairment loss was recognised in the 2005 financial year of
£475 million in respect of the Group’s Swedish operations and reflected
fierce competition along with onerous 3G licence obligations.
Investment income and financing costs
2006 2005 Change
£m £m %
Net financing costs before dividends
from investments (318) (293) 8.5
Potential interest charges arising on
settlement of outstanding tax issues (329) (245) 34.3
Changes in the fair value of equity put
rights and similar arrangements (161) (67) 140.3
Dividends from investments 41 19 115.8
Net financing costs (767) (586) 30.9
Net financing costs before dividends from investments increased by 8.5% to
£318 million as an increase in average net debt compared to the 2005
financial year was partially offset by gains on mark to market adjustments
on financial instruments in the 2006 financial year.
Potential interest charges arising on the settlement of outstanding tax
issues represents the Group’s estimate of any interest that may be due to
tax authorities when the issues are settled. This charge varies due to the
interest rates applied by the tax authorities, the timing of tax payments and
the status of discussions on tax issues with the relevant tax authorities. At
31 March 2006, the provision for potential interest charges arising on
settlement of outstanding tax issues was £896 million.
The change in the fair value of equity put rights and similar arrangements
comprised the fair value movement in relation to the potential put rights
held by Telecom Egypt over its 25.5% interest in Vodafone Egypt and the fair
value of a financial liability in relation to the minority partners of Arcor, the
Group’s non-mobile operation in Germany. Further details in respect of
these arrangements are provided in the section titled “Performance –
Financial Position and Resources” and in note 24 to the Consolidated
Financial Statements.
Taxation
The effective tax rate for the year to 31 March 2006 was (16.0)% compared
to 25.7% for the 2005 financial year. The negative effective tax rate arose as
a result of the £23,515 million impairment losses recognised in the 2006
financial year. These losses were not expected to be deductible for tax
purposes so were not expected to create a future benefit. The effective tax
rate, exclusive of the impairment losses, was 27.5% for the 2006 financial
year, which is lower than the Group’s weighted average tax rate as a result of
the repurchase of shares in Vodafone Italy and favourable tax settlements,
but had increased compared to the 2005 financial year as the 2005
financial year benefited from finalising the reorganisation of the Group’s
German operations.
Basic loss per share
Basic earnings per share from continuing operations fell from 8.12 pence to
a loss per share of 27.66 pence for the 2006 year. The basic loss per share
was after a charge of 37.56 pence per share in relation to an impairment of
the carrying value of goodwill, a further charge of 0.26 pence per share for
the change in fair value of equity put rights and similar arrangements, and a
credit of 0.05 pence per share for amounts relating to business acquisitions
and disposals.
(Loss)/profit for the financial year from discontinued operations
2006 2005 Change
£m £m %
Revenue 7,268 7,395 (1.7)
Adjusted operating profit 455 664
Impairment loss (4,900) –
Operating (loss)/profit (4,445) 664
Non-operating income and expense – 13
Net financing costs (3) (11)
(Loss)/profit before taxation (4,448) 666
Income tax (expense)/income(1) (140) 436
(Loss)/profit for the financial year (4,588) 1,102
Note:
(1) Included a deferred tax credit of £599 million in the year to 31 March 2005 in respect of losses
in Vodafone Holdings K.K. which became eligible for offset against profits of Vodafone K.K.
following the merger of the two entities on 1 October 2004.
On 17 March 2006, the Group announced that an agreement had been
reached to sell its 97.68% interest in Vodafone Japan to SoftBank. This
resulted in the Group’s operations in Japan being classified as an asset held
for sale and being presented as a discontinued operation. The disposal was
completed on 27 April 2006.
Following the announcement on 17 March 2006, the Group recognised an
impairment loss of £4,900 million in respect of Vodafone Japan. The
recoverable amount of Vodafone Japan was determined as the fair value
less costs to sell.