Liquidity and Capital Resources
Cash flows
The major sources of Group liquidity over the three years ended 31 March 2004
have been cash generated from operations, borrowings through long term and short
term issuance in the capital markets, borrowings drawn from committed bank
facilities, asset disposals and, for the year ended 31 March 2002 only, the
proceeds from a share issuance. The Group does not use off-balance sheet special
purpose entities as a source of liquidity or for other financing purposes.
The Group's key sources of liquidity for the foreseeable future are likely to be
cash generated from operations and borrowings through long term and short term
issuances in the capital markets, as well as committed bank facilities.
Additionally, the Group has a put option in relation to its interest in Verizon
Wireless which, if exercised, could provide material cash inflow. Please see
"Option agreements".
The Group's liquidity and working capital may be affected by a material decrease
in cash flow due to factors such as increased competition, litigation, timing of
tax payments and the resolution of outstanding tax issues, regulatory rulings,
delays in development of new services and networks, inability to receive
expected revenues from the introduction of new services, reduced dividends from
associates and investments or dividend payments to minority shareholders. See
"Risk Factors", above. The Group is also party to a number of option agreements
that may result in a cash outflow if exercised. Option agreements are discussed
further in "Option agreements" at the end of this section.
Wherever possible, surplus funds in the Group (except in Albania, Egypt and
Hungary) are transferred to the centralised treasury department through
repayment of borrowings, deposits and dividends. These are then on-lent or
contributed as equity to fund Group operations, used to retire external debt or
invested externally.
Increase in cash in the year
During the year ended 31 March 2004, the Group increased its net cash inflow
from operating activities by 11% to 12,317 million and generated 1,069 million
of net cash flow, as analysed in the following table.
The Group holds its cash and liquid investments in accordance with the
counterparty and settlement risk limits of the Board approved treasury policy.
The main forms of liquid investments at 31 March 2004 were collateralised
deposits, money market funds and euro commercial paper.
Year ended Year ended
31 March 31 March
2004 2003
m m
Net cash inflow from operating
activities (Note 28) 12,317 11,142
Purchase of intangible fixed assets (21 ) (99 )
Purchase of tangible fixed assets (4,508 ) (5,289 )
Disposal of tangible fixed assets 158 109
Net capital expenditure on intangible
and tangible fixed assets (4,371 ) (5,279 )
7,946 5,863
Dividends from joint ventures
and associated undertakings 1,801 742
Taxation (1,182 ) (883 )
Interest on group debt 31 (475 )
Dividends from investments 25 15
Dividends paid to minority interests (100 ) (91 )
Net cash outflow for returns on
investments and servicing of finance (44 ) (551 )
Free cash flow 8,521 5,171
Other net capital expenditure and
financial investment 104 (80 )
Net cash outflow from acquisitions and disposals (1,312 ) (4,880 )
Equity dividends paid (1,258 ) (1,052 )
Management of liquid resources (4,286 ) 1,384
Net cash outflow from financing (700 ) (150 )
Increase in cash in the year 1,069 393
Capital expenditure and financial investment
The decrease in net cash outflow for capital expenditure and financial
investment from 5,359 million for the year ended 31 March 2003 to 4,267 million
for the year ended 31 March 2004 was due primarily to the timing of cash
payments for tangible fixed assets.
During the year ended 31 March 2004, 21 million was spent on intangible assets,
principally in respect of additional GSM spectrum in Italy. The Group's
expenditure on tangible fixed assets reduced by 781 million to 4,508 million
during the 2004 financial year, including approximately 1.5 billion spent on 3G
network infrastructure.
The Group expects capitalised tangible fixed asset additions to be approximately
5 billion in the next financial year. Incremental expenditure on 3G
infrastructure in the 2005 financial year is expected to represent approximately
35% of total capital expenditure, and is expected to be financed through
operating cash flows and existing borrowing facilities.
Dividends from associated undertakings and dividends to minority shareholders
Dividends from the Group's associated undertakings are generally paid at the
discretion of the Board of directors or shareholders of the individual operating
companies and Vodafone has no rights to receive dividends, except where
specified within certain of the companies' shareholders' agreements. Similarly,
the Group does not have existing obligations under shareholders' agreements to
pay dividends to minority interest partners of Group subsidiaries, except as
specified below.
Included in the dividends received from joint ventures and associated
undertakings was an amount of 671 million received from Verizon Wireless. Until
April 2005, Verizon
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Annual Report 2004 Vodafone Group Plc
41
Wireless' distributions are determined by the terms of the partnership agreement
distribution policy and comprise income distributions and tax distributions.
After the current distribution policy expires, tax distributions will continue
and a new distribution policy is expected to be set by the Board of
Representatives of Verizon Wireless. In making such policy determinations, the
Board shall take into account relevant facts and circumstances including,
without limitation, the financial performance and capital requirements of
Verizon Wireless. Current projections forecast that tax distributions will not
be sufficient to cover the US tax liabilities arising from the Group's
partnership interest until 2015, and in the absence of additional distributions
above the level of tax distributions during this period, this will result in a
net cash outflow for the Group. Under the terms of the partnership agreement,
the Board has no obligation to provide for additional distributions above the
level of the tax distributions.
Pursuant to changes in shareholder agreements that were effected in December
2003, from 1 January 2004 SFR commenced making scheduled quarterly dividend
payments. During the year ended 31 March 2004, cash dividends totalling 802
million were received in respect of SFR's earnings during the 2002 and 2003
financial years.
Verizon Communications has an indirect 23.1% shareholding in Vodafone Italy and,
under the terms of the shareholders' agreement, can request dividends to be
paid, provided that such dividend would not impair the financial condition or
prospects of Vodafone Italy including, without limitation, credit ratings. For
the year ended31 March 2004, Verizon Communications represented that it had no
intention of requesting a dividend. Should circumstances change and dividends be
paid in later periods, this may result in material cash outflows. At 31 March
2004, Vodafone Italy had cash on deposit with Group companies of 3,201 million.
Acquisitions and disposals
Net cash outflow from acquisitions and disposals of 1,312 million in the 2004
financial year arose primarily in respect of the business acquisitions of
additional stakes in certain existing European subsidiary undertakings and the
acquisition of three UK independent service providers, partially offset by the
disposal of Japan Telecom. The acquisitions are described in more detail under
"Business Overview -History and Development of the Company" and "Business
Overview - Mobile Telecommunications" above.
An analysis of the main transactions in the year ended 31 March 2004 is shown
below.
m
Acquisitions:
Vodafone Portugal (410 )
Vodafone Netherlands (144 )
Vodafone Greece (815 )
Singlepoint (417 )
Other acquisitions (278 )
Net cash acquired with subsidiary undertakings 10
Disposals:
Japan Telecom 966
Other disposals 34
Net cash disposed of with subsidiary undertakings (258 )
(1,312 )
Share purchase programme
When considering how increased returns to shareholders can be provided in the
form of dividends and share purchases, the Board reviews the free cash flow,
anticipated cash requirements and gearing of the Group.
On 18 November 2003, the directors decided to introduce a share purchase
programme and allocated 2.5 billion to this programme. Shares have been
purchased on market on the London Stock Exchange in accordance with shareholder
approval obtained at the Annual General Meeting ("AGM") in July 2003 and which
expires at the conclusion of the Company's AGM on 27 July 2004. The maximum
share price payable for any share purchase is no greater than 105% of the
average of the middle market closing price of the Company's share price on the
London Stock Exchange for the five business days immediately preceding the day
on which any shares were contracted to be purchased. Purchases are made only if
accretive to EPS, before goodwill amortisation and exceptional items. In
accordance with the Companies (Acquisition of Own Shares) (Treasury Shares)
Regulations 2003 issued on1 December 2003, shares purchased are held in
treasury.
For the period from 1 December 2003 to 31 March 2004, 800 million shares for a
total consideration of 1.1 billion, including stamp duty and broker commissions,
were purchased. The average share price paid, excluding transaction costs, was
135.3 pence, compared with the average volume weighted price over the same
period of 137.5 pence.
The Board intends to decide the amount to allocate to the share purchase
programme on an annual basis at the end of each financial year. In addition to
the 1.1 billion already expended, 3 billion of shares are planned to be
purchased during the next year, starting in early June 2004, subject to
maintenance of credit ratings, superseding the 2.5 billion announced in November
2003. Because shareholder approval to purchase shares expires on 27 July 2004,
this amount is subject to receiving renewed shareholder approval on 27 July 2004
at the AGM. In addition to ordinary market purchases, the Company currently
plans to purchase shares over its close periods by selling short dated put
options, subject to receiving shareholder approval at the AGM, and by placing
irrevocable purchase instructions, both prior to the start of a close period.
Further details of shares purchased under the programme during the 2004
financial year are shown in note 23.
From 1 April 2004 through to 8 June 2004, 189.5 million shares for a total
consideration of 242 million, including stamp duty and broker commissions, were
purchased.
Funding
As a result of the cash flow items discussed above and 144 million of foreign
exchange movements, the Group's consolidated net debt position at 31 March 2004
decreased to 8,488 million, from 13,839 million at 31 March 2003. This
represented approximately 10% of the Group's market capitalisation at 31 March
2004 compared with 18% at 31 March 2003. Average net debt at month end
accounting dates over the twelve month period ended 31 March 2004 was 11,164
million, and ranged between 8,488 million and 13,839 million during the year.
A further analysis of net debt, including a full maturity analysis, can be found
in notes 18 and 19 to the Consolidated Financial Statements.
The Group remains committed to maintaining a solid credit profile, as currently
demonstrated by its stable credit ratings of P-1/F1/A-1 short term and A2/A/A
long term from Moody's, Fitch Ratings and Standard & Poor's, respectively.
Credit ratings are not a recommendation to purchase, hold or sell securities, in
as much as ratings do not comment on market price or suitability for a
particular investor, and are subject to revision or withdrawal at any time by
the assigning rating organisation. Each rating should be evaluated
independently.
The Group's credit ratings enable it to have access to a wide range of debt
finance including commercial paper, bonds and committed bank facilities.
Commercial paper programmes
The Group currently has US and euro commercial paper programmes of $15 billion
and 5 billion, respectively, which are available to be used to meet short term
liquidity requirements and which were undrawn at 31 March 2004 and 31 March
2003. The commercial paper facilities are supported by $10.4 billion (5.7
billion) of committed bank facilities, comprised of a $5.5 billion Revolving
Credit Facility that matures in June 2004, but which can be extended for one
year, and a $4.9 billion Revolving Credit Facility that matures in June 2006. As
at 31 March 2004, no amounts had been drawn under either facility.
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Vodafone Group Plc Annual Report 2004
42
Operating and Financial Review and Prospects continued
Bonds
The Group has a 15 billion Medium Term Note programme and a $12 billion US shelf
programme, both of which are used to meet medium to long term funding
requirements. At 31 March 2004, amounts of 9.2 billion and $nil, respectively,
were in issue from these programmes.
The following table provides a summary of the Group's bond issues, each of which
have been undertaken since 1 April 2003 for general corporate purposes,
including working capital.
Bond issues during 2004 financial year
10 April 2003
$500m 5.375% bond with maturity 30 January 2015
500m 5.125% bond with maturity 10 April 2015
250m 4.625% bond with maturity 31 January 2008
4 June 2003
150m 6.25% bond with maturity 10 July 2008
750m 5.0% bond with maturity 4 June 2018
26 June 2003
$500m 4.625% bond with maturity 15 July 2018
22 September 2003
$1,000m 5.0% bond with maturity 16 December 2013
4 December 2003
250m 5.625% bond with maturity 4 December 2025
On 22 April 2003, Vodafone Americas, Inc. cancelled the following bonds after
repurchase by tender:
Bond buy backs in the 2004 financial year
$137.8m of $200m 6.35% bond with maturity 2005
$182.3m of $400m 7.50% bond with maturity 2006
$249.8m of $500m 6.65% bond with maturity 2008
DEM 308.4m of DEM 400m bond with maturity 2008
With respect to the US dollar bonds, a total cash payment of $658 million was
made to acquire 68.9%, 45.6% and 50.0% of the 2005, 2006 and 2008 issues
respectively. The DEM bond repurchase resulted in a total cash payment of 175
million to acquire 77.1% of the issue.
As at 31 March 2004, the Group had a total of 12,428 million of capital market
debt in issue.
Committed facilities
The following table summarises the committed bank facilities currently available
to the Group.
Committed Bank Facilities Amounts drawn
29 November 2001 The facility was drawn down in full on
225 billion term credit facility, 15 October 2002. The facility is
maturing 15 January 2007, entered available for general corporate
into by Vodafone Finance K.K. purposes, although amounts drawnmust be
on-lent to Vodafone Group Plc.
26 June 2003 No drawings have been made against this
$5.5 billion 364-day Revolving facility. The facility supports the
Credit Facility, maturing 25 June Group' s commercial paper programmes and
2004 with an option to extend for may be used to fund working capital
one year. requirements.
26 June 2003 No drawings have been made against this
$4.9 billion Revolving Credit facility.The facility supports the
Facility, maturing 26 June 2006. Group' s commercial paper programmes and
may be used for general corporate
purposes including acquisitions.
Under the terms and conditions of the $10.4 billion bank facilities, lenders
have the right, but not the obligation, to cancel their commitments and have
outstanding advances repaid no sooner than 30 days after notification of a
change of control of the Company. The facility agreements provide for certain
structural changes that do not affect the obligations of the Company to be
specifically excluded from the definition of a change of control. This is in
addition to the rights of lenders to cancel their commitment if the Company has
committed an event of default.
Substantially the same terms and conditions apply in the case of Vodafone
Finance K.K.'s 225 billion term credit facility, although the change of control
provision is applicable to any guarantor of borrowings under the term credit
facility. As of31 March 2004, the Company was the sole guarantor.
In addition, Vodafone Japan has fully drawn bilateral facilities totalling 12.1
billion (63 million). These bilateral bank facilities expire at various dates up
to January 2007.
Furthermore, certain of the Group's subsidiary undertakings are funded by
external facilities which are non-recourse to any member of the Group other than
the borrower, due to the level of country risk involved. These facilities may
only be used to fund their operations. Vodafone Egypt has a partly drawn
syndicated bank facility of EGP 2.0 billion (176 million) that fully expires in
September 2007, Vodafone Hungary has a partly drawn syndicated bank facility of
350 million (234 million), drawn in or swapped into Hungarian forints, that
fully expires in December 2008 and Vodafone Albania has committed facilities of
85 million (57 million) that expire at various dates up to and including October
2012.
In aggregate, the Group has committed facilities of approximately 7,366 million,
of which 5,793 million was undrawn at 31 March 2004.
The Group believes that it has sufficient funding for its expected working
capital requirements. Further details regarding the maturity, currency and
interest rates of the Group's gross borrowings at 31 March 2004 are included in
note 19 to the Consolidated Financial Statements.
Financial assets and liabilities
Details of the Group's treasury management and policies are set out below in
"Quantitative and Qualitative Disclosures About Market Risk". Analyses of
financial assets and liabilities, including the maturity profile of debt,
currency and interest rate structure, are included in notes 18 and 19 to the
Consolidated Financial Statements.
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Annual Report 2004 Vodafone Group Plc
43
Contractual obligations
A summary of the Group's principal contractual financial obligations is shown
below. Further details on the items included can be found in the notes to the
Consolidated Financial Statements.
Payments due by period m
(years)
Contractual Total <1 year 1-3 3-5 >5 years
obligations years years
Short term debt 2,054 2,054 - - -
Long term debt 12,224 - 3,256 1,698 7,270
Operating lease 2,737 586 661 474 1,016
commitments
Capital commitments 866 866 - - -
Purchase commitments 957 890 39 10 18
Preference shares 875 12 - - 863
Total contractual 19,713 4,408 3,956 2,182 9,167
cash obligations
An analysis of the Group's commitments under short and long term debt is shown
in note 19 and commitments under operating leases in note 26 to the Consolidated
Financial Statements.
Capital commitments shown in the table above are estimated to represent
approximately 17% of the Group's total capital expenditure in the 2005 financial
year and are primarily related to network infrastructure. Purchase commitments
predominantly comprise commitments for handsets.
The above table of contractual obligations excludes potential cash outflows of
up to 2.6 billion in relation to additional investments in Japan that were
announced on25 May 2004 (see note 33 to the Consolidated Financial Statements),
commitments in respect of options over interests in Group businesses held by
minority shareholders (see "Option agreements") and obligations to pay dividends
to minority shareholders (see "Dividends from associated undertakings and
dividends to minority interests"). Disclosures required by FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", are provided in note
27 to the Consolidated Financial Statements.
Option agreements
Potential cash inflows
As part of the agreements entered into upon the formation of Verizon Wireless,
the Company entered into an Investment Agreement with Verizon Communications,
formerly Bell Atlantic Corporation, and Verizon Wireless. Under this agreement,
dated3 April 2000, the Company has the right to require Verizon Communications
or Verizon Wireless to acquire interests in the Verizon Wireless partnership
from the Company with an aggregate market value of up to $20 billion during
certain periods up to August 2007, dependent on the value of the Company's 45%
stake in Verizon Wireless. This represents a further potential source of
liquidity to the Group.
Exercise of the option may occur in either one or both of two phases. The Phase
I option may be exercised during the period commencing 30 days before and ending
30 days after 10 July 2004 and provides for the aggregate amount paid to not
exceed $10 billion. The Phase II Option may be exercised during the periods
commencing 30 days before and ending 30 days after any one or more of 10 July
2005, 10 July 2006 and 10 July 2007. The Phase II Option also limits the
aggregate amount paid to $20 billion, less any amounts paid under Phase I, and
caps the payments under single exercises to $10 billion. Determination of the
market value of the Company's interests will be by mutual agreement of the
parties to the transaction or, if no such agreement is reached within 30 days of
the valuation date, by appraisal. If an initial public offering takes place and
the common stock trades in a regular and active market, the market value of the
Company's interest will be determined by reference to the trading price of
common stock.
Potential cash outflows
In respect of the Group's interest in the Verizon Wireless partnership, an
option granted to Price Communications, Inc. by Verizon Communications is
exercisable at any time up to and including 15 August 2006. The option gives
Price Communications, Inc. the right to exchange its preferred limited
partnership interest in Verizon Wireless of the East LP for either equity of
Verizon Wireless (if an initial public offering of such equity occurs), or
common stock of Verizon Communications. The option exercise would result in an
exchange for shares at a fixed value of $1.113 billion plus a preferred
allocation of profits from Verizon Wireless of the East LP on a quarterly basis,
but not to exceed 2.9151% per annum. If the exercise occurs, Verizon
Communications has the right, but not the obligation, to contribute the
preferred interest to the Verizon Wireless partnership, diluting the Group's
interest. However, the Group also has the right to contribute further capital to
the Verizon Wireless partnership in order to maintain its percentage partnership
interest at the level just prior to the exercise of the option. Such amount
would not exceed $1 billion.
Pursuant to an August 1999 shareholder agreement concerning the formation of
Vodafone Hungary, Antenna was granted a put option in respect of its interest in
Vodafone Hungary. On 7 October 2002 this put option was amended. The amended
option gives Antenna the right, but not the obligation, to sell its remaining
interest to the Group should its total interest be diluted below 10% of the
capital of Vodafone Hungary as a result of a capital increase. The option price
is the lower of fair market value or contributed capital plus accretion at the
lower of inflation or Budapest interbank offered rate plus 1%. Antenna currently
holds a 12.1% interest in Vodafone Hungary.
On 26 November 2002, an option was granted to France Telecom that gives it the
right, but not the obligation, to buy 43,561,703 shares (representing a 10.85%
stake) in Vodafone Greece at a price of 14.29 per share, following the purchase
by the Group of 58,948,830 shares in Vodafone Greece from France Telecom. France
Telecom may exercise this option (in whole or in part) at any time until
maturity on 29 November 2004. Furthermore, the option will expire when none of
France Telecom's exchangeable notes (maturing on 29 November 2004) with regard
to Vodafone Greece remain outstanding. On exercise of the option, the Group
would pay in cash the excess of the Vodafone Greece share price over 14.29 per
share. At 31 March 2004, Vodafone Greece's share price was 6.00 per share and
the Company is in the process of de-listing its shares, following its tender
offer and market purchases resulting in an increase of the Group's consolidated
shareholding to 99.4%.
On 27 November 2003, Vodafone Jersey Holdings Ltd was granted a call option over
20% of the issued ordinary share capital of MTC Vodafone (Bahrain) BSCC. The
option is exercisable in two tranches. Tranche one is exercisable at par at any
time on or after 28 December 2004 but before 28 December 2007. Tranche two is
exercisable at par plus 20% at any time on or after 28 December 2007 but before
28 December 2009.
On 31 December 2003, as part of the restructuring described within "History and
Development of the Company", the Group's associate investment, SFR, granted a
put option to SNCF over its 35% shareholding in Cegetel. SNCF may exercise the
put option, consisting of 4,982,353 shares, at any time during the period 1
January 2007 to 31 March 2010 and SNCF has been granted a value floor for the
option of an aggregate amount equal to the sum of EUR 183 million plus such
amount of interest as has accrued at the euro overnight index average rate on
the sum of 32 million between 31 December 2003 and the date on which the
transfer of the SNCF shareholding to SFR occurs. Furthermore, the option
exercise may be accelerated in certain circumstances. Reciprocally, SNCF has
granted SFR a call option over the 35% stake, which may be exercised at any time
between 1 April 2010 and 30 June 2013.
As part of ongoing discussions and negotiations with Telecom Egypt, in which it
would acquire a minority stake in Vodafone Egypt and enter into a Joint Venture
with the Vodafone Group, it has been agreed in principle to grant a put option
to Telecom Egypt
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Vodafone Group Plc Annual Report 2004
44
Operating and Financial Review and Prospects continued
over its direct and indirect stake in Vodafone Egypt. The option will give
Telecom Egypt the right to put its shares back to the Group at fair market
value. If agreed, this right is expected to remain for as long as the Group owns
in excess of 20% of Vodafone Egypt. Telecom Egypt acquired 8.6% of Vodafone
Egypt in December 2003 and is expected to acquire a further 16.9% from the Group
in 2004, thereby enabling it to contribute 25.5% of Vodafone Egypt shares to a
50:50 joint venture with the Group.
Off-balance sheet arrangements
The Group does not use off-balance sheet special purpose entities as a source of
liquidity or for other financing purposes. Please refer to notes 26 and 27 to
the Consolidated Financial Statements for a discussion of the Group's
off-balance sheet arrangements.
Quantitative and Qualitative Disclosures About Market Risk
The Group's treasury function provides a centralised service to the Group for
funding, foreign exchange, interest rate management and counterparty risk
management. Treasury operations are conducted within a framework of policies and
guidelines authorised and reviewed annually by the Company's Board of directors,
most recently on 20 January 2004. A Treasury Risk Committee, comprising of the
Group's Financial Director, Company Secretary, Treasurer, Financial Controller
and Director of Financial Reporting, meets quarterly to review treasury
activities and management information relating to treasury activities. In
accordance with the Group treasury policy a quorum for meetings is four members
and either the Financial Director or Company Secretary must be present at each.
The Group accounting function provides regular update reports of treasury
activity to the Board of directors. The Group uses a number of derivative
instruments that are transacted, for risk management purposes only, by
specialist treasury personnel. The Group's internal auditors review the internal
control environment regularly. There has been no significant change during the
financial year, or since the end of the year, to the types of financial risks
faced by the Group or the Group's approach to the management of those risks.
Funding and liquidity
The Group's policy is to borrow centrally, using a mixture of long term and
short term capital market issues and borrowing facilities, to meet anticipated
funding requirements. These borrowings, together with cash generated from
operations, are on-lent or contributed as equity to certain subsidiaries. The
Board of directors has approved three debt protection ratios, being: net
interest to operating cash flow (plus dividends from associated undertakings);
retained cash flow (operating cash flow plus dividends from associated
undertakings less interest, tax, dividends to minorities and equity dividends)
to net debt; and operating cash flow (plus dividends from associated
undertakings) to net debt. For each of these ratios, net debt includes financial
guarantees and redeemable preference shares.
These internal ratios establish levels of debt that the Group should not exceed
other than for relatively short periods of time and are shared with Moody's,
Fitch Ratings and Standard & Poor's.
Interest rate management
The Group's main interest rate exposures are to euro and yen and, to a lesser
extent, US dollar and sterling interest rates. Under the Group's interest rate
management policy, interest rates on monetary assets and liabilities are
maintained on a floating rate basis, unless the forecast interest charge for the
next eighteen months is material in relation to forecast results, in which case
interest rates are fixed. In addition, fixing shall be undertaken for longer
periods when interest rates are statistically low. The term structure of
interest rates is managed within limits approved by the Board, using derivative
financial instruments such as swaps, futures, options and forward rate
agreements.
At the end of the year, 20% (2003: 9%) of the Group's gross borrowings were
fixed for a period of at least one year. A one hundred basis point rise in
market interest
rates for all currencies in which the Group had borrowings at 31 March 2004
would adversely affect profit before taxation by approximately 21 million. The
interest rate management policy has remained unaffected by the acquisitions
completed during the financial year. Note 19 to the Consolidated Financial
Statements contains analysis of the Group's currency and interest profile of
financial liabilities.
Foreign exchange management
Foreign currency exposures arising from known future external transactions above
certain de minimis levels are hedged, including those resulting from the
repatriation of international dividends and loans. Forward foreign exchange
contracts are the derivative instrument most used for this purpose.
Although the Group reports its balance sheet in sterling, which is the principal
currency for most transactions undertaken in its shares, it does not hedge its
foreign currency balance sheet exposure for three reasons. First, the Group
believes its shareholders principally value its shares by discounting its
estimated future sterling and foreign currency cash flows and converting to
sterling at appropriate rates where necessary. Secondly, the Group manages the
currency of its net debt according to banded multiples of those currencies'
operating cash flows, adjusted for dividends and share purchases. As such, at 31
March 2004, 119% of net debt were denominated in currencies other than sterling
(59% euro, 57% yen and 3% US dollar) and 19% of net debt had been purchased
forward in sterling in anticipation of sterling denominated shareholder returns
via share purchases and dividends. This allows debt to be serviced in proportion
to anticipated cash flows and therefore provides a partial hedge against profit
and loss account translation exposure, as interest costs will be denominated in
foreign currencies. Thirdly, certain overseas businesses have foreign currency
acquisition goodwill allocated whilst other assets do not, therefore making
balance sheet comparisons difficult. A relative weakening in the value of
sterling against certain currencies of countries where the Group operates has
resulted in a currency translation adjustment charge of 5,292 million to Group
reserves in the year ended 31 March 2004 (2003: 9,039 million credit).
When the Group's international net earnings for 2004 are retranslated using a
10% strengthening/weakening of sterling against all exchange rates, the 2004
total Group operating loss would be reduced/increased by 451 million (2003: 595
million).
Counterparty risk management
Cash deposits and other financial instrument transactions give rise to credit
risks on the amounts due from counterparties. The Group regularly monitors these
risks and the credit ratings of its counterparties and, by policy, limits the
aggregate credit and settlement risk it may have with one counterparty. While
these counterparties may expose the Group to credit losses in the event of
non-performance, it considers the possibility of material loss to be acceptable
because of these control procedures. Additional information is set out in notes
19 and 20 to the Consolidated Financial Statements.
Trend Information and Outlook
Seasonality
The Group's financial results and cash flows have not, historically, been
subject to significant seasonal trends between the first and second half of the
financial year, though there are a number of offsetting trends.
Traditionally, the Christmas period sees a higher volume of customer
connections, contributing to higher equipment and connection revenues in the
second half of the financial year. Ongoing airtime revenues also demonstrate
signs of seasonality, with revenues generally lower during February, which is a
shorter than average month, and revenues from roaming charges higher during the
summer months as a result of increased travel by customers.
There is no assurance that these trends will continue in the future.
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Annual Report 2004 Vodafone Group Plc
45
Outlook
For the year ending 31 March 2005
In the coming year, on an organic basis, the Group anticipates high single-digit
average proportionate mobile customer growth, leading to growth in Group
turnover the 2005 financial year compared to the 2004 financial year.
The ongoing impact of the commercial launch of 3G services is expected to
increase depreciation and amortisation by around 0.6 billion in the 2005
financial year.
Factors that may affect the Group's future tax charge include the absence of
one-off restructuring benefits, the resolution of open issues, future planning
opportunities, corporate acquisitions and disposals, and changes in tax
legislation and rates.
For the 2005 financial year, total capitalised fixed asset additions are
expected to be around 5 billion, slightly higher than the 4.8 billion for the
year ended 31 March 2004, mainly due to deferred investment from that year.
Free cash flow is expected to be around 7 billion, lower than in the 2004
financial year, due to:
- the inclusion in that year of:
0.6 billion of one-off receipts from hedging instruments; and
0.2 billion of free cash flow from the fixed line business in Japan which
has been sold,
- together with higher cash expenditure expected in the 2005 financial year
on:
approximately 1 billion of additional capital expenditure, mainly due to
the unwinding of capital creditors; and
tax payments, which are expected to be under 2 billion.
Non-GAAP Information
In presenting and discussing the Group's reported results, free cash flow is
calculated and presented on the basis of methodologies other than in accordance
with UK GAAP.
The Group believes that it is both useful and necessary to communicate this
non-GAAP measure to investors and other interested parties, for the following
reasons:
- this statement allows the Company and external parties to
evaluate the Group's liquidity and the cash generated by the
Group's operations. Free cash flow does not include cash flows
relating to acquisitions and disposals or financing activities
and so reflects the cash available for such activities, to
strengthen the balance sheet or to provide returns to
shareholders in the form of dividends or share repurchases;
- it facilitates comparability of results with other companies;
and,
- it is useful in connection with discussion with the investment
analyst community and the debt rating agencies.
A reconciliation of net cash flow inflow from operating activities, the closest
equivalent GAAP measure, to free cash flow, is shown below:
Years ended 31 March
2004 2003 2002 2001 2000
m m m m m
Net cash inflow from 12,317 11,142 8,102 4,587 2,510
operating activities
Purchase of
intangible fixed (21 ) (99 ) (325 ) (13,163 ) (185 )
assets
Purchase of tangible (4,508 ) (5,289 ) (4,145 ) (3,698 ) (1,848 )
fixed assets
Disposal of tangible 158 109 75 275 294
fixed assets
Dividends received
from joint ventures 1,801 742 139 353 236
and associated
undertakings
Taxation (1,182 ) (883 ) (545 ) (1,585 ) (325 )
Net cash outflow for
returns on (44 ) (551 ) (936 ) (47 ) (406 )
investments and
servicing of finance
Free cash flow 8,521 5,171 2,365 (13,278 ) 276
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Vodafone Group Plc Annual Report 2004
46
Board of Directors and Group Executive Committee
Directors and Senior Management
The business of the Company is managed by its Board of directors. The Company's
Articles of Association provide that, until otherwise determined by ordinary
resolution, the number of directors will not be less than three.
Biographical details of the directors and senior management are as follows:
Directors
Chairman
Lord MacLaurin of Knebworth, DL, aged 67, has been a member of the Board of
directors since January 1997. He is Chairman of the Nominations and Governance
Committee and a member of the Remuneration Committee. Lord MacLaurin was
Chairman of Tesco Plc from 1985 to 1997 and has been a director of Enterprise
Oil Plc, Guinness Plc, National Westminster Bank Plc and Whitbread Plc.
Deputy Chairman
Paul Hazen, aged 62, has been a member of the Board of directors since June 1999
and became Deputy Chairman and the Board's nominated senior non-executive
director in May 2000. He is Chairman of the Audit Committee and a member of the
Nominations and Governance Committee. He became a director of AirTouch in April
1993. In 2001, he retired as Chairman and Chief Executive Officer of Wells Fargo
& Company and its principal subsidiary, Wells Fargo Bank, NA. Paul Hazen is also
a director of Safeway, Inc., Willis Group Holdings Limited, Xstrata AG and
E.piphany and he is Chairman of Accel-KKR.
Executive directors
Arun Sarin, Chief Executive, aged 49, has been a member of the Board of
directors since June 1999 and is a member of the Nominations and Governance
Committee. He was a director of AirTouch from July 1995 and was President and
Chief Operating Officer from February 1997 to June 1999. He was Chief Executive
Officer for the United States and Asia Pacific region until 15 April 2000, when
he became a non-executive director. He was appointed Chief Executive after the
AGM on 30 July 2003. Arun Sarin joined Pacific Telesis Group in San Francisco in
1984 and has served in many executive positions in his 20 year career in
telecommunications. He has also served as a director of The Gap, Inc., The
Charles Schwab Corporation and Cisco Systems, Inc.
Julian Horn-Smith, Group Chief Operating Officer, aged 55, has been a member of
the Board of directors since June 1996. He was appointed Group Chief Operating
Officer on 1 April 2001, having been Chief Executive of Vodafone's Continental
Europe businesses and a director of several of the Group's overseas operating
companies. He is responsible for ensuring the operating performance of Group
businesses. Julian Horn-Smith is the Chairman of the Supervisory Board of
Vodafone Deutschland GmbH and is a non-executive director of Smiths Group Plc.
Peter Bamford, Chief Marketing Officer, aged 50, has been a member of the Board
of directors since April 1998. He is responsible for the full range of marketing
and commercial activities including brand, product development, content
management, Partner Networks and global accounts. He is also responsible for the
Group's operations in the UK & Ireland. Previously, he was Chief Executive,
Northern Europe, Middle East & Africa Region. He was Managing Director of
Vodafone UK until April 2001. Before joining Vodafone in 1997, Peter Bamford
held senior positions with Kingfisher Plc and Tesco Plc and was a director of WH
Smith Plc.
Vittorio Colao, Chief Executive, Southern Europe, Middle East and Africa Region,
aged 42, joined the Board of directors on 1 April 2002. He has had
responsibility for the Group's businesses in Southern Europe since April 2001.
He spent the early part of his career at McKinsey & Co, where he was a Partner,
before joining Omnitel Pronto Italia S.p.A. as its Chief Operating Officer. In
1999, he became the Chief Executive Officer of
Omnitel Pronto Italia S.p.A. (now operating as Vodafone Italy). Vittorio Colao
is currently a member of the Aspen Institute and non-executive director of RAS
Insurance in Italy.
Thomas Geitner, Chief Technology Officer, aged 49, has been a member of the
Board of directors since May 2000. He is responsible for Group Technology &
Business Integration and will be leading the implementation of a standardised
architecture for business processes, Information Technology and network systems.
Prior to joining the Group, he was a member of the Management Board of RWE AG.
Thomas Geitner is a member of the Management Board of Vodafone Holding GmbH and
Vodafone Deutschland GmbH and a member of the supervisory board of Singulus
Technologies AG.
Ken Hydon, Financial Director, aged 59, has been a member of the Board of
directors since 1985. He is a Fellow of the Chartered Institute of Management
Accountants, the Association of Chartered Certified Accountants and the
Association of Corporate Treasurers. He is a director of several subsidiaries of
the Company and is a member of the Board of Representatives of the Verizon
Wireless partnership in the United States. Ken Hydon has recently been appointed
a non-executive director of Reckitt Benckiser Plc and Tesco Plc. He will retire
from the Board on conclusion of the AGM in 2005.
Non-executive directors
Dr. Michael Boskin, aged 58, has been a member of the Board of directors since
June 1999 and is a member of the Remuneration Committee and the Audit Committee.
He was a director of AirTouch from August 1996 to June 1999. He has been a
Professor of Economics at Stanford University since 1971 and was Chairman of the
President's Council of Economic Advisers from February 1989 until January 1993.
Dr Boskin is President and CEO of Boskin & Co., an economic consulting company,
and is also a director of Exxon Mobil Corporation, First Health Group Corp. and
Oracle Corporation.
Professor Sir Alec Broers, aged 65, has been a member of the Board of directors
since January 1998 and is a member of the Audit Committee and the Nominations
and Governance Committee. He is President of the Royal Academy of Engineering
and a former Vice-Chancellor of Cambridge University. He spent many years with
IBM and is a Fellow of the Royal Society, the Institute of Electrical Engineers
and the Institute of Physics. He is also a Foreign Associate of the US National
Academy of Engineering. Professor Sir Alec Broers chairs the Vodafone Group
Foundation and the Company's UK pension trustee company. On 1 May 2004, it was
announced that Her Majesty the Queen intends to make him a Life Peer in
recognition of his contribution to engineering and higher education.
John Buchanan, aged 61, has been a member of the Board of directors since April
2003. He is a member of the Audit Committee and, solely for the purposes of
relevant legislation, is the Board's appointed financial expert on that
Committee. He retired from the Board of BP Plc in 2002 after six years as Group
Chief Financial Officer and executive director following a wide-ranging career
with the company. He was a member of the United Kingdom Accounting Standards
Board from 1997 to 2001. He is the senior independent director of BHP Billiton
Plc and a non-executive director of AstraZeneca Plc.
Penny Hughes, aged 44, has been a member of the Board of directors since
September 1998, and is the Chairman of the Remuneration Committee. She has held
posts with The Coca-Cola Company, Next Plc and Body Shop International Plc. She
has particular expertise in marketing and has developed experience in many human
resource areas, including leadership development, motivation and retention.
Penny Hughes is a member of the advisory committee of Bridgepoint Capital
Limited and is a non-executive director of Scandinaviska Enskilda Banken AB,
Trinity Mirror Plc and The Gap, Inc.
Sir David Scholey CBE, aged 68, has been a member of the Board of directors
since March 1998. He is a member of the Nominations and Governance Committee and
the Audit Committee. He is Chairman of Close Brothers Group Plc, a non-executive
director of Anglo American Plc and Chubb Corporation, USA and is an
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Annual Report 2004 Vodafone Group Plc
47
adviser to UBS AG, Mitsubishi Corporation and IBCA-Fitch. Sir David was formerly
a director of the Bank of England and a Governor of the British Broadcasting
Corporation. He will retire from the Board on conclusion of the AGM in 2005.
Professor Jrgen Schrempp, aged 59, has been a member of the Board of directors
since May 2000 and is a member of the Nominations and Governance Committee and
Remuneration Committee. He has been Chairman of the Board of Management of
DaimlerChrysler AG since 1998. From 1995 until 1998 he was Chairman of the Board
of Management of Daimler-Benz AG. He was a member of the Supervisory Board of
Mannesmann AG until May 2000. Professor Jrgen Schrempp serves on the supervisory
board of Allianz AG and is a member of the Board of directors of Richemont SA
and Sasol Limited.
Luc Vandevelde, aged 53, was appointed to the Board on 1 September 2003 and is a
member of the Remuneration Committee. Chairman of Marks & Spencer Group Plc, one
of the UK's leading retailers of clothing, foods, homeware and financial
services, from 2000 to 2004, he was previously Chairman of Promodes, Vice
Chairman of Carrefour, and he had held senior European and international roles
with Kraft General Foods. Luc Vandevelde is Executive Chairman of Change Capital
Partners, a private equity fund, and is a non-executive director of Carrefour
SA.
Senior Management
Members of the Group Executive Committee who are not also executive directors
are regarded as senior managers of the Company. The Group Executive Committee
comprises the executive directors, details of whom are shown above, and the
senior managers listed below. Tomas Isaksson was also a member of the Group
Executive Committee until 1 April 2004, when he stepped down on taking up his
appointment as Chief Executive of Vodafone Netherlands.
Further details of the Group Executive Committee can also be found under
"Corporate Governance - Directors and Organisation".
Brian Clark, Chief Executive, Asia Pacific Region, aged 55, was appointed to
this position, based in Japan, on 1 January 2003. He joined Vodafone in 1997.
Prior to joining Vodafone he was Managing Director and Chief Executive Officer
of Telkom SA Limited, South Africa. He is also a non-executive director of
National Australia Bank Limited.
Alan Harper, Group Strategy Director, aged 47, joined Vodafone in 1995 as Group
Commercial Director and he subsequently became Managing Director of Vodafone
Limited, the UK network operating company. He was appointed Group Strategy
Director in July 2000. Prior to joining the Group he held the post of Business
Strategy Director with Mercury One2One and senior roles with Unitel and STC
Telecoms. He is also a member of the Group Operations Committee and Group Policy
Committee, a member of the Vodafone D2 Supervisory Board and Chairman of the
Vodafone UK Foundation.
Jrgen von Kuczkowski, Chief Executive, Northern Europe Region, aged 63, was
appointed to this position on 1 July 2003. He was previously the Chief
Executive, Central Europe Region. He joined Mannesmann Mobilfunk GmbH (now
Vodafone D2 GmbH) in October 1990, initially as Director of Sales and
Distribution, and he became Chief Executive Officer in 1994.
Stephen Scott, Group General Counsel and Company Secretary, aged 50, was
appointed to this position in the Group in 1991, prior to which he was employed
in the Racal Group legal department, having moved into industry in 1980 from
private law practice in London. He is a director of the Company's UK pension
trustee company and insurance companies and is a member of the Group Policy
Committee.
Phil Williams, Group Human Resources Director, aged 53, was appointed to this
position in the Group in 1989. In addition to his Human Resources
responsibilities, he is the senior Vodafone nominated director on the Board of
Vodacom Group (Pty) Limited, the Group's South African associate company. He is
also a director of several Group companies, a director of the Group Foundation
and the UK pension trustee company. He is a member of the Group Policy
Committee. Prior to joining the Group, he was Personnel Director with Costain
and Burmah Castrol.
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Vodafone Group Plc Annual Report 2004
48
Directors' Report
Review of the Group's Business
The Group is involved principally in the provision of mobile telecommunications
services. A review of the development of the business of the Company and its
subsidiary, joint venture and associated undertakings is contained elsewhere in
this Annual Report. Details of the Company's principal subsidiary undertakings,
associated undertakings and investments can be found in note 34 to the
Consolidated Financial Statements.
Future developments
The Group is currently involved in the expansion and development of its mobile
telecommunications and related businesses as described elsewhere in this Annual
Report.
Corporate governance
The directors are committed to business integrity and professionalism. As an
essential part of this commitment the Board supports high standards of corporate
governance and its statement on corporate governance is set out on pages 50 to
53 of this Annual Report. The "Board's Report to Shareholders on Directors'
Remuneration" on pages 54 to 63 of this Annual Report will be proposed for
approval at the Company's AGM on 27 July 2004.
Share capital
A statement of changes in the share capital of the Company is set out in note 22
to the Consolidated Financial Statements.
Purchase by the Company of its own shares
At the AGM of the Company held on 30 July 2003, shareholders gave the Company
permission, until the conclusion of the AGM being held on 27 July 2004, to
purchase up to 6,800,000,000 ordinary shares of the Company. A resolution for
permission for the Company to renew its authority to purchase its own shares
will be proposed at the AGM of the Company to be held on 27 July 2004.
During the period from 1 December 2003 to 31 March 2004, the Company purchased
800 million ordinary shares at a weighted average price, excluding transaction
costs, of 135.3p.
The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003
("the Regulations") allow companies to hold shares acquired by way of market
purchase in treasury, rather than having to cancel them. The Regulations came
into force on 1 December 2003. The directors may use the authority to purchase
shares and hold them in treasury (and subsequently sell or transfer them out of
treasury as permitted in accordance with the Regulations) rather than cancel
them, subject to institutional guidelines applicable at the time. The shares
purchased by the Company prior to 31 March 2004 are being held in treasury.
No dividends will be paid on shares whilst held in treasury and no voting rights
will attach to the treasury shares.
Results and dividends
The consolidated profit and loss account is set out on page 69 of this Annual
Report.
The directors have proposed a final dividend for the year of 1.0780 pence per
ordinary share, payable on 6 August 2004 to shareholders on the register of
members at close of business on 4 June 2004. An interim dividend of 0.9535 pence
per ordinary share was paid during the year, producing a total for the year of
2.0315 pence per ordinary share, a total of approximately 1,378 million. The
Company operates a dividend reinvestment plan, further details on which can be
found on page 128 in this Annual Report.
Subsequent events
Details of material subsequent events are included in note 33 to the
Consolidated Financial Statements included in this Annual Report.
Charitable contributions
During the year ended 31 March 2004, the Company made cash charitable donations
of 13.5 million to the Vodafone Group Foundation (2003: 10.0 million). In
addition, operating companies donated a further 7.2 million (2003: 4.2 million)
to local Vodafone Foundations and a further 2.0 million (2003: 2.6 million)
directly to a variety of causes. These donations total 22.7 million (2003: 16.8
million) and include donations of 3.0 million (2003: 3.2 million) made as
required by the terms of certain network operating licences.
More details regarding the activities of the Vodafone Group Foundation and local
Vodafone Foundations can be found in the Group's separate Corporate Social
Responsibility ("CSR") report.
Political donations
At the Annual General Meeting on 30 July 2003, the directors sought and obtained
shareholders' approval to enable the Company to make donations to EU Political
Organisations or incur EU Political Expenditure, under the relevant provisions
of the Political Parties, Elections and Referendums Act 2000 ("the Act"). The
approval given restricted such expenditure to an aggregate limit of 100,000 in
the period of 12 months following the date of the Annual General Meeting.
Although the Company had, and has, no intention of changing its current policy
and practice of not making political donations and will not do so without the
specific endorsement of shareholders, the directors sought the approval on a
precautionary basis, to avoid any possibility of unintentionally breaching the
Act.
The Company has made no political donations during the year.
The directors propose, again on a precautionary basis, to seek a renewal of
shareholders' approval at the AGM to be held on 27 July 2004. The amount of the
approval will again be restricted to 100,000 for a period of twelve months
following the AGM.
Creditor payment terms
It is the Group's policy to agree terms of transactions, including payment
terms, with suppliers and, provided suppliers perform in accordance with the
agreed terms, it is the Group's normal practice that payment is made
accordingly.
The number of days outstanding between receipt of invoices and date of payment,
calculated by reference to the amount owed to trade creditors at the year end as
a proportion of the amounts invoiced by suppliers during the year, was 29 days
(2003: 24 days) in aggregate for the Group. The Company did not have any trade
creditors at 31 March 2004.
Research and development
The Group continues to pursue an active research and development programme for
the enhancement of mobile telecommunications. Full details as to the Group's
research and development programme and activities can be found under "Business
Overview - Research and Development".
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Annual Report 2004 Vodafone Group Plc
49
Directors' interests in the shares of the Company
The "Board's Report to Shareholders on Directors' Remuneration" details the
directors' interests in the shares of the Company.
Directors' interests in contracts
None of the current directors had a material interest in any contract of
significance to which the Company or any of its subsidiary undertakings was a
party during the financial year.
Employees
Please refer to "Employees" on page 64.
Corporate social responsibility
A summary of the Company's CSR approach is contained on pages 20 and 21 of the
Annual Review & Summary Financial Statement and on page 65 of this Annual
Report. Further details are contained in the Group's CSR report.
Auditors
On 1 August 2003, Deloitte and Touche, the Company's auditors, transferred its
business to Deloitte and Touche LLP, a limited liability partnership
incorporated under the Limited Liability Partnership Act 2000. The Company's
consent has been given to treat the appointment of Deloitte and Touche as
extending to Deloitte and Touche LLP with effect from 1 August 2003 under the
provisions of section 26(5) of the Companies Act 1989.
Following a recommendation by the Audit Committee, a resolution proposing the
appointment of Deloitte and Touche LLP as auditors to the Company will be put to
the AGM.
In their assessment of the independence of the auditors and in accordance with
the US Independence Standards Board Standard No. 1, Independence Discussions
with Audit Committees, the Audit Committee receives in writing details of
relationships between Deloitte and Touche LLP and the Company that may have a
bearing on their independence and receives confirmation that they are
independent of the Company within the meaning of the securities laws
administered by the US Securities and Exchange Commission ("SEC").
In addition, the Audit Committee pre-approves the audit fee after a review of
both the level of the audit fee against other comparable companies, including
those in the telecommunications industry, and the level and nature of non-audit
fees, as part of its review of the adequacy and objectivity of the audit
process.
In a further measure to ensure auditor independence is not compromised, policies
have been adopted to provide for the pre-approval by the Audit Committee of all
permitted non-audit services by Deloitte and Touche LLP. Should there be an
immediate requirement for permitted non-audit services to be provided by
Deloitte and Touche LLP which have not been pre-approved by the Audit Committee,
the policies provide that the Group Audit Director will consult with the
Chairman of the Audit Committee for pre-approval.
In addition to their statutory duties, Deloitte and Touche LLP are also employed
where, as a result of their position as auditors, they either must, or are best
placed to, perform the work in question. This is primarily work in relation to
matters such as shareholder circulars, Group borrowings, regulatory filings and
business acquisitions and disposals. Other work is awarded on the basis of
competitive tender.
During the year Deloitte and Touche LLP charged 8 million (2003: 15 million) for
non-audit assignments. An analysis of these fees can be found in note 5 to the
Consolidated Financial Statements.
Major shareholders
The Bank of New York, as custodian of the Company's American Depositary Receipt
("ADR") programme, held approximately 11.6% of the Company's ordinary shares of
$0.10 each at 24 May 2004 as nominee. The total number of ADRs outstanding at 24
May 2004 was 783,776,194. At this date, 1,049 holders of record of ordinary
shares had registered addresses in the United States and in total held
approximately 0.005% of the ordinary shares of the Company. As at 24 May 2004,
the following percentage interests in the ordinary share capital of the Company,
disclosable under Part VI of the Companies Act 1985, have been notified to the
directors:
The Capital Group Companies, Inc. 5.60 %
Fidelity Management & Research Company 3.56 %
Legal & General Investment Management 3.47 %
Barclays PLC 3.28 %
The directors are not aware, as at 24 May 2004, of any other interest of 3% or
more in the ordinary share capital of the Company. The Company is not directly
or indirectly owned or controlled by any foreign government or any other legal
entity. There are no arrangements known to the Company that could result in a
change of control of the Company.
Going concern
After reviewing the Group' s and Company' s budget for the next financial year,
and other longer term plans, the directors are satisfied that, at the time of
approving the financial statements, it is appropriate to adopt the going concern
basis in preparing the financial statements.
By Order of the Board
/s/ Stephen Scott
Stephen Scott
Secretary
25 May 2004
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Vodafone Group Plc Annual Report 2004
50
Corporate Governance
Introduction
The directors of the Company support high standards of corporate governance,
which are critical to business integrity and to maintaining investors' trust in
the Company. The Company's Business Principles (the "Principles") define its
relationships with its stakeholders and govern how Vodafone conducts its
business. Amongst other things, the Principles state that the Company expects
all its employees to act with honesty, integrity and fairness. The Company also
promotes the Principles to its associate companies (where Vodafone holds a
minority stake) and to its business partners and suppliers.
The Company's ordinary shares are listed in the United Kingdom on the London
Stock Exchange. As such, the Company is required to make a disclosure statement
concerning its application of the Principles of and compliance with the
provisions of the Combined Code on corporate governance that is appended to the
Financial Services Authority's Listing Rules.
During the year, the Financial Reporting Council, which is responsible for
maintaining the Combined Code, approved a revised Combined Code taking into
account the recommendations of the Higgs Review of the role and effectiveness of
non-executive directors and a separate report by Sir Robert Smith in relation to
Audit Committees.
The revised Combined Code became effective for companies' financial periods
beginning on or after 1 November 2003, and therefore, for the Company, will
apply from the financial year which began on 1 April 2004.
For the financial year ended 31 March 2004, the directors confirm that the
Company has been in compliance with the provisions of the Combined Code
effective for that accounting period. The disclosures provided below are
nevertheless intended to provide the reader with an explanation of how the
Company's corporate governance practices measure against the revised Combined
Code as if it were currently in effect for the Company.
The Company's American Depositary Shares ("ADSs") are listed on the NYSE and the
Company is therefore subject to the rules of the NYSE as well as US securities
laws and the rules of the SEC. Pursuant to recently revised NYSE corporate
governance rules, Vodafone, as a foreign private issuer, is required to
summarise significant differences between the corporate governance provisions of
the NYSE applicable to US companies and the corporate governance principles
applicable to it and followed by it in the UK. In compliance with the new rules,
the Company will provide an appropriate summary in its Annual Report for the
year ending 31 March 2005. In July 2002, the US Congress passed the
Sarbanes-Oxley Act which, together with consequent adoption of new rules by the
SEC, has introduced a number of changes to the corporate governance requirements
on both US domestic companies and non-US registered issuers such as the Company.
During 2003, the Company established a Disclosure Committee with responsibility
for reviewing and approving controls and procedures over the public disclosure
of financial and related information, and other procedures necessary to enable
the Chief Executive and Financial Director to provide their Certifications of
the Annual Report on Form 20-F that is filed with the SEC. The Company also
adopted a corporate code of ethics for senior financial officers, separate from
and additional to the Principles. A copy of the code of ethics and the
Principles are available on the Company's website (www.vodafone.com). The
Company has already begun the work required to ensure compliance with section
404 of the Sarbanes-Oxley Act, which is required in its financial year ending 31
March 2006.
Directors and Organisation
The Company's Board of directors presently consists of fifteen directors,
fourteen of whom served throughout the year ended 31 March 2004. As at 31 March
2004, in addition to the Chairman, Lord MacLaurin, there were six executive
directors and eight non-executive directors. The Deputy Chairman, Paul Hazen, is
the nominated senior independent director and his role includes being available
for approach or
representation by directors or significant shareholders who may feel inhibited
from raising issues with the Chairman. He is also responsible for conducting an
annual review of the performance of the Chairman and, in the event it should be
necessary, convening an annual meeting of the non-executive directors.
Sir Christopher Gent retired as a director at the conclusion of the AGM on 30
July 2003. Dr John Buchanan and Luc Vandevelde joined the Board as non-executive
directors on 1 April 2003 and 1 September 2003, respectively. The Company
considers all its present non-executive directors to be fully independent. The
executive directors are Arun Sarin (Chief Executive), Julian Horn-Smith, Peter
Bamford, Vittorio Colao, Thomas Geitner and Ken Hydon.
The Company's Articles of Association provide that every director who was
elected or last re-elected at or before the AGM held in the third calendar year
before the current year shall automatically retire. Accordingly, Peter Bamford,
Julian Horn-Smith and Sir David Scholey will be retiring and, being eligible,
will offer themselves for reelection at the Company's AGM to be held on 27 July
2004. The Company's Articles of Association also provide that every director
appointed to the Board since the last AGM shall retire. Therefore, Luc
Vandevelde will retire and, being eligible, will offer himself for re-election.
Performance evaluation of the Board, its Committees and individual directors
takes place on an annual basis and is conducted within the terms of reference of
the Nominations and Governance Committee. The Chairman leads the assessment of
the non-executive directors, the Chief Executive reviews the executive directors
and the senior independent director conducts the review of the performance of
the Chairman. Each Board Committee undertakes a review of its work and in
relation to the performance of the Board, the Chairman invites suggestions from
all directors as to ways in which the Board and its processes may be improved. A
series of questionnaires is being developed to facilitate the evaluation
processes for the current and future years, each of which has been, and will in
the future be, conducted without the assistance of external consultants.
This year particular attention was paid to the contributions made by directors
requiring to offer themselves for re-election at the AGM and the Nominations and
Governance Committee confirmed to the Board that the performance of each such
director continued to be effective and, therefore, the Company should support
their re-election.
The Board met on eight occasions in the financial year to 31 March 2004.
Individual directors' attendance was: Lord MacLaurin (8), Paul Hazen (7), Arun
Sarin (8), Julian Horn-Smith (8), Peter Bamford (7), Vittorio Colao (8), Thomas
Geitner (8), Ken Hydon (8), Dr Michael Boskin (8), Professor Sir Alec Broers
(8), Penny Hughes (8), Sir David Scholey (8), Dr John Buchanan (8) and Professor
Jrgen Schrempp (6). Since Mr Vandevelde joined the Board there have been six
Board meetings in the financial year and he attended five. In addition to the
regular Board meetings, there were a number of other meetings to deal with
specific matters. Directors unable to attend a Board meeting because of another
engagement, as was the case for four directors in the year, are nevertheless
provided with all the papers and information relevant for such meeting and are
able to discuss issues arising in the meeting with the Chairman or the Chief
Executive.
The Board provides the effective leadership and control required for a listed
company. Actual financial results are presented to each meeting, together with
reports from the executive directors in respect of their areas of
responsibility. The Chief Executive presents his report to each meeting which
deals, amongst other things, with investor relations, giving Board members an
opportunity to develop an understanding of the views of major investors. From
time to time, the Board receives detailed presentations from non-Board members
on matters of significance or on new opportunities for the Group. Financial
plans, including budgets and forecasts, are regularly discussed at Board
meetings. The non-executive directors periodically visit different parts of the
Group and are provided with briefings and information to assist them in
performing
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Annual Report 2004 Vodafone Group Plc
51
their duties. The non-executive directors and the Chairman regularly meet
without executives present.
The Board is confident that all its members have the knowledge, talent and
experience to perform the functions required of a director of a listed company.
On appointment, all directors are provided with appropriate training and
guidance as to their duties, responsibilities and liabilities as a director of a
public and listed company and also have the opportunity to discuss
organisational, operational and administrative matters with the Chairman, the
Chief Executive and the Company Secretary. When considered necessary, more
formal training is provided.
The Board has a formal schedule of matters specifically referred to it for
decision, including the approval of Group commercial strategy, major capital
projects, the adoption of any significant change in accounting policies or
practices and material contracts not in the ordinary course of business. This
schedule is reviewed periodically. It was last reviewed and updated by the
Nominations and Governance Committee in March 2004 and its proposals were
approved by the Board in May 2004. The directors have access to the advice and
services of the Company Secretary and have resolved to ensure the provision, to
any director who believes it may be required in the furtherance of his or her
duties, of independent professional advice at the cost of the Company.
The executive directors, together with certain other Group functional heads and
regional Chief Executives, meet on ten occasions each year as the Group
Executive Committee under the chairmanship of the Chief Executive. This
Committee is responsible for the day-to-day management of the Group's
businesses, the overall financial performance of the Group in fulfilment of
strategy, plans and budgets and Group capital structure and funding. It also
reviews major acquisitions and disposals.
Two management committees, the Group Operational Review Committee and the Group
Policy Committee, oversee, together with the Group Executive Committee, the
execution of the Board's strategy and policy.
The Group Operational Review Committee, which meets ten times a year under the
chairmanship of the Group Chief Operating Officer, comprises other executive
directors, certain Group functional heads and regional Chief Executives. This
Committee is responsible for the operational performance and achievement of
targets of the Group's business, with a focus on the enhancement of voice
services and growth of non-voice services, new global products and services,
brand development, technology and other cost and revenue synergies within the
Group's regions.
The Group Policy Committee, which meets six times each year, is chaired by the
Chief Executive. The Financial Director and the Group Chief Operating Officer,
together with certain other Group functional heads, join him on the Committee,
which is responsible for the determination of policy and the monitoring of
non-operational areas of activity which are important to the Group overall,
including strategy, finance, human resources, legal, regulatory and corporate
affairs.
Committees of the Board
The standing Board committees are the Audit Committee, the Nominations and
Governance Committee and the Remuneration Committee. The composition and terms
of reference of these committees are published on the Company's website at
www.vodafone.com. The Secretary to these standing Board Committees is the
Company Secretary or his nominee.
The Audit Committee, which met on five occasions in the year, is comprised of
financially literate members having the necessary ability and experience to
understand financial statements. The Committee is chaired by Paul Hazen (5) and
the other members of the Committee are Michael Boskin (5), Professor Sir Alec
Broers*, Dr John Buchanan (4) and Sir David Scholey (4). There have been three
meetings of the Committee since Professor Sir Alec Broers joined. Due to other
business commitments arranged before he joined the Committee, he attended one of
these.
Solely for the purpose of fulfilling the requirements of the Sarbanes-Oxley Act
of 2002 and the Combined Code, the Board has designated Dr John Buchanan as its
financial expert on the Audit Committee. Further details of Dr Buchanan can be
found in "Directors and Senior Management".
Under its terms of reference the Audit Committee is required, amongst other
things, to oversee the relationship with the external auditors, to review the
Company's preliminary results, interim results and annual financial statements,
to monitor compliance with statutory and listing requirements for any exchange
on which the Company's shares are quoted, to review the scope, extent and
effectiveness of the activity of the Group Audit Department, to engage
independent advisers as it determines is necessary and to perform
investigations. At least twice a year the Audit Committee meets separately with
the external auditors and the Group Audit Director without management being
present. Further details on the overseeing of the relationships with the
external auditors can be found under "Directors' Report - Auditors".
The Nominations and Governance Committee (formerly the Nominations Committee)
met three times in the year and is chaired by Lord MacLaurin (3). The other
members of the Committee are Professor Sir Alec Broers (3), Arun Sarin, Paul
Hazen (3), Sir David Scholey (3) and Professor Jrgen Schrempp (2). Arun Sarin
has attended both of the meetings held since he joined the Committee. Sir
Christopher Gent was a member of the Committee prior to his retirement and
attended the one meeting held prior to that date. The Committee, which provides
a formal and transparent procedure for the appointment of new directors to the
Board, generally engages external consultants to advise on prospective Board
appointees. This year, the Committee recommended the appointment of a further
non-executive director. A detailed job profile was agreed by the Committee
before external search consultants were engaged to prepare a shortlist of
potentially suitable candidates. Only after a rigorous interview process was the
appointment recommended to the Board.
The Committee's name was changed during the financial year to reflect its remit,
which over time had come to include oversight and review of general matters of
corporate governance.
The Remuneration Committee met five times in the year. The Committee is chaired
by Penny Hughes (5). The other members of the Committee are Lord MacLaurin (5),
Michael Boskin (4) Professor Jrgen Schrempp (4), and Luc Vandevelde.Sir David
Scholey was a member of the Committee until 16 September 2003 and attended both
meetings held prior to that date. Mr Vandevelde joined the Committee on 16
September 2003 and attended the three meetings held between that date and 31
March 2004. The "Board's Report to Shareholders on Directors' Remuneration"
provides further information on this Committee.
Attendance is shown in brackets after each respective Committee member.
Internal Control and Disclosure Controls and Procedures
Introduction
The Board has established procedures that implement in full the Turnbull
Guidance, "Internal Control: Guidance for Directors on the Combined Code", for
the year under review and to the date of approval of the Annual Report. These
procedures, which are subject to regular review, provide an ongoing process for
identifying, evaluating and managing the significant risks faced by the Group.
Responsibility
The Board has overall responsibility for the system of internal control. A sound
system of internal control is designed to manage rather than eliminate the risk
of failure to achieve business objectives and can only provide reasonable and
not absolute assurance against material misstatement or loss. The process of
managing the risks
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Vodafone Group Plc Annual Report 2004
52
Corporate Governance continued
associated with social, environmental and ethical impacts is also discussed
under "Corporate Social Responsibility and Environmental Issues".
Control structure
The Board sets the policy on internal control that is implemented by management.
This is achieved through a clearly defined operating structure with lines of
responsibility and delegated authority. The Group Executive Committee, chaired
by the Chief Executive, manages this on a day-to-day basis.
Written policies and procedures have been issued which clearly define the limits
of delegated authority and provide a framework for management to deal with areas
of significant business risk. These policies and procedures are reviewed and,
where necessary, updated at Group Policy Committee meetings, chaired by the
Chief Executive.
Control environment
The Group's operating procedures include a comprehensive system for reporting
information to the directors. This system is properly documented and regularly
reviewed.
Budgets are prepared by subsidiary management and subject to review by both
regional management and the directors. Forecasts are revised on a quarterly
basis and compared against budget. When setting budgets and forecasts,
management identifies, evaluates and reports on the potential significant
business risks.
The Group Operational Review Committee, the Group Executive Committee and the
Board review management reports on the financial results and key operating
statistics.
Emphasis is placed on the quality and abilities of the Group's employees with
continuing education, training and development actively encouraged through a
wide variety of schemes and programmes. The Group has adopted a set of values to
act as a framework for its people to exercise judgement and make decisions on a
consistent basis.
Directors are appointed to associated undertakings and joint ventures and attend
the Board meetings and review the key financial information of those
undertakings. Clear guidance is given to those directors on the preparation that
should take place before these Board meetings and their activity at the Board
meeting. It is the Group's policy that its auditors are appointed as auditors of
associated companies and joint ventures, where possible.
The acquisition of any business requires a rigorous analysis of the financial
implications of the acquisition and key performance figures. A sensitivity
analysis takes place of the key assumptions made in the analysis. Post
investment appraisals of the Group's investments are conducted on a periodic and
timely basis.
A Treasury Report is distributed electronically on a daily basis that reports on
treasury borrowings and investments.
The Board reviews a half-yearly report detailing any significant legal actions
faced by Group companies.
The Group Policy Committee monitors legal, environmental and regulatory matters
and approves appropriate responses or amendments to existing policy.
Monitoring and review activities
There are clear processes for monitoring the system of internal control and
reporting any significant control failings or weaknesses together with details
of corrective action.
A formal annual confirmation is provided by the chief executive officer and
chief financial officer of each Group company detailing the operation of their
control systems and highlighting any weaknesses. Regional management, the Audit
Committee and the Board review the results of this confirmation.
The Chief Executive and the Financial Director undertake a review of the quality
and timeliness of disclosures that includes formal annual meetings with the
regional chief executives and the Disclosure Committee.
A Group Audit Department, reporting directly to the Audit Committee, undertakes
periodic examination of business processes on a risk basis and reports on
controls throughout the Group.
Reports from the external auditors, Deloitte & Touche LLP, on certain internal
controls and relevant financial reporting matters, are presented to the Audit
Committee and management.
Review of effectiveness
The directors, the Chief Executive and the Financial Director consider that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable and not absolute assurance of achieving the desired control
objectives. The Group's management is required to apply judgement in evaluating
the risks facing the Group in achieving its objectives, in determining the risks
that are considered acceptable to bear, in assessing the likelihood of the risks
concerned materialising, in identifying the Company's ability to reduce the
incidence and impact on the business of risks that do materialise and in
ensuring the costs of operating particular controls are proportionate to the
benefit.
The directors, the Chief Executive and the Financial Director confirm that they
have reviewed the effectiveness of the system of internal control and the
disclosure controls and procedures through the monitoring process set out above.
The Chief Executive and the Financial Director have evaluated the disclosure
controls and procedures as of the end of the period covered by this Annual
Report. They are not aware of any significant weakness or deficiency in the
Group's system of internal control. The directors, the Chief Executive and the
Financial Director have concluded that the disclosure controls and procedures
are effective for the year under review and to the date of approval of the
Annual Report.
During the period covered by this Annual Report, there were no changes in the
Company's internal controls over financial reporting or in other factors that
have materially affected or are reasonably likely to materially affect internal
controls over financial reporting.
Relations with Shareholders
The Company holds briefing meetings with its major institutional shareholders in
the UK, the US and in Continental Europe, usually twice each year after the
interim results and preliminary announcement, to ensure that the investing
community receives a balanced and complete view of the Group's performance and
the issues faced by the Group. Telecommunications analysts of stockbrokers are
also invited to presentations of the financial results. The Company, through its
Investor Relations team, responds to enquiries from shareholders.
The principal communication with private investors is through the provision of
the Annual Review & Summary Financial Statement, the interim results and the
AGM, an occasion which is attended by all the Company's directors and at which
all shareholders present are given the opportunity to question the Chairman and
the Board as well as the Chairmen of the Audit, Remuneration and Nominations and
Governance Committees. All substantive resolutions at the Company's AGMs are
decided on a poll. The poll is conducted by the Company's Registrars and
scrutinised by Electoral Reform Services. The proxy votes cast in relation to
all resolutions are disclosed to those in attendance at the meeting and the
results of the poll are published in national newspapers in the UK, the US and
Ireland, on the Company's website and announced via the regulatory news service.
Financial and other information is made available on the Company's website,
www.vodafone.com, which is regularly updated.
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Annual Report 2004 Vodafone Group Plc
53
Report from the Audit Committee
The composition and terms of reference of the Audit Committee is discussed under
"Committees of the Board".
During the year ended 31 March 2004 the principal activities of the Committee
were as follows:
Financial Statements
The Committee considered reports from the Financial Director and the Group
Financial Controller on the interim results, preliminary announcement and Annual
Report. It also considered reports from the external auditors, Deloitte & Touche
LLP, on the scope and outcome of the review of interim results and annual audit.
The financial statements were reviewed in the light of these reports and the
results of that review reported to the Board.
Risk Management and Internal Control
The Committee reviewed the process by which the Group evaluated its control
environment and its risk assessment process, and the way in which significant
business risks were managed. It also considered the Group Audit department's
reports on the effectiveness of internal controls, significant frauds and any
fraud that involved management or employees with a significant role in internal
controls.
The Committee also reviewed and approved arrangements by which staff could in
confidence raise concerns about possible improprieties in matters of financial
reporting or other matters. This was achieved through using existing reporting
procedures and introducing a website with a dedicated anonymous email feature.
External Auditors
The Committee reviewed the letter from Deloitte & Touche LLP confirming their
independence and objectivity. It also reviewed and pre-approved the scope of
non-audit services provided by Deloitte & Touche LLP to ensure that there was no
impairment of independence.
The Committee pre-approved the scope and fees for audit services provided by
Deloitte & Touche LLP and confirmed the wording of the recommendations put by
the Board to the shareholders on the appointment and retention of the external
auditors.
Private meetings were held with Deloitte & Touche LLP to ensure that there were
no restrictions on the scope of their audit and to discuss any items the
auditors did not wish to raise with management present.
Internal Audit
The Committee engaged in discussion and review of the Group Audit department's
audit plan for the year, together with its resource requirements. Private
meetings were held with the Group Audit Director.
Audit Committee Effectiveness
The Audit Committee conducts a formal review of its effectiveness annually and
concluded this year that it was effective and able to fulfil its terms of
reference.
/s/ Paul Hazen
Paul Hazen On behalf of the Audit Committee
25 May 2004
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Vodafone Group Plc Annual Report 2004
54
Board's Report to Shareholders on Directors' Remuneration
Introduction
The Board has delegated to the Remuneration Committee the assessment and
recommendation of policy on remuneration for executive directors.
At the 2002 AGM, shareholders approved a new remuneration policy ("the Policy")
the key principles of which are as follows:
the expected value of total remuneration must be benchmarked against
the relevant market;
a high proportion of total remuneration is to be delivered through
performance-related payments;
performance measures must be balanced between absolute financial
measures and sector comparative measures to achieve maximum alignment
between executive and shareholder objectives;
the majority of performance-related remuneration is to be provided in
the form of equity; and
share ownership requirements are to be applied to executive
directors.
The current Policy was produced following extensive consultation with
shareholders and institutional bodies in 2001 and 2002. In the two years since
the Policy was introduced, the Chairman and the Chairman of the Remuneration
Committee have maintained proactive annual dialogue on remuneration matters with
the Company's major shareholders and relevant institutions. Extensive
consultations with shareholders were held again in 2003 and 2004. The objective
of this dialogue is to provide information about the Company and its views on
remuneration issues and to listen to shareholders' opinions on any proposed
adjustments to policy implementation.
The Remuneration Committee strives to ensure that the Policy provides a strong
and demonstrable link between incentives and the Company's strategy and sets a
framework for remuneration that is consistent with the Company's scale and
scope. As a result of this year's review, the Remuneration Committee has
concluded that the existing policy continues to serve the Company and
shareholders well and will remain in place for the 2005 financial year. The
Committee has also reviewed the effectiveness of the current policy and is
satisfied that the incentive plans have delivered, or are forecast to deliver,
rewards that are consistent with the Company's performance achievement.
At the 2004 AGM, shareholders will be invited to vote on the Board's report to
shareholders on directors' remuneration. The chart that follows shows the
performance of the Company relative to the FTSE100 index and the FTSE Global
Telecommunications index, which are the most relevant indices for the Company.
[[Image Removed]]
It should be noted that the performance of the Company shown by the graph is not
indicative of vesting levels under the Company's various incentive plans.
Remuneration Committee
The Remuneration Committee consists of independent non-executive directors and
the Company Chairman. Penny Hughes (Chairman), Dr Michael Boskin, Lord
MacLaurin, and Professor Jrgen Schrempp all continue as members. Sir David
Scholey stepped down from the Committee in September 2003. He was replaced by
Luc Vandevelde who joined the Company as a non-executive director on 1 September
2003.
The Board has considered whether or not it remains appropriate for the Company
Chairman to continue to be a member of the Remuneration Committee. The
conclusion is that the Chairman provides important contributions to the work of
the Committee, for example in his contact with shareholders and management, and
therefore his membership remains appropriate.
The Chief Executive attends meetings of the Remuneration Committee, other than
when his own remuneration is being discussed. The Remuneration Committee met on
five occasions during the year.
The Remuneration Committee appointed and received advice from Towers Perrin
(market data and advice on market practice and governance) and Kepler Associates
(performance analysis and advice on performance measures and market practice)
and received advice from the Group Human Resources Director and the Group
Compensation and Benefits Director. The advisers also provided advice to the
Company on general human resource and compensation related matters.
Remuneration Policy
The Policy was approved by shareholders in July 2002. The Policy is set out
below:
The overriding objective of the Policy on incentives is to ensure that
Vodafone is able to attract, retain and motivate executives of the highest
calibre essential to the successful leadership and effective management of a
global company at the leading edge of the telecommunications industry.
To achieve this objective, Vodafone, from the context of its UK domicile,
takes into account both the UK regulatory framework, including best practice
in corporate governance, shareholder views, political opinion and the
appropriate geographic and nationality basis for determining competitive
remuneration, recognising that this may be subject to change over time as the
business evolves.
The total remuneration will be benchmarked against the relevant market.
Vodafone is one of the largest companies in Europe and is a global business;
Vodafone's policy will be to provide executive directors with remuneration
generally at levels that are competitive with the largest companies in
Europe. A high proportion of the total remuneration will be awarded through
performance-related remuneration, with phased delivery over the short, medium
and long term. For executive directors, approximately 80% of the total
expected remuneration will be performance-related. Performance measures will
be balanced between absolute financial measures and sector comparative
measures to achieve maximum alignment between executive and shareholder
objectives.
All medium and long term incentives are delivered in the form of Vodafone
shares and options. Executive directors are required to comply with share
ownership guidelines.
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Annual Report 2004 Vodafone Group Plc
55
The structure of remuneration for executive directors under the Policy
(excluding pensions) and the performance elements on which they are based is
illustrated below:
[[Image Removed: ]]
The Policy's key objective is to ensure that there is a strong linkage between
pay and performance. This is achieved by approximately 80% of the total package
(excluding pensions) being delivered by performance linked short and long term
incentive plans. Therefore, the only guaranteed payment to executive directors
is their base salary.
The Remuneration Committee selects performance measures for incentive plans that
provide the greatest degree of alignment with the Company's strategic goals and
that are clear and transparent to both directors and shareholders. The
performance measures adopted incentivise both operational performance and share
price growth.
Each element of the reward package focuses on supporting different Company
objectives, which are illustrated below:
Element Purpose Performance Measure
Base salary Reflects competitive market Individual contribution
salary level, role and
individual achievement
Annual deferred share Motivates achievement of EBITDA, Free cash flow, ARPU,
bonus annual business KPIs, Data % of Total Service
Provides incentive to Revenues, Customer
co-invest and achieve medium Satisfaction Adjusted EPS
term KPIs growth on share deferral
Aligns with Shareholders
Share Options Incentivise earnings growth Adjusted EPS growth
and creation of share price
growth Aligns with
Shareholders
Performance shares Incentivise share price and Relative Total Shareholder
dividend growth Return (TSR)
Aligns with Shareholders
The Policy principles are cascaded, where appropriate, to employees in all
subsidiary companies. Base salaries and short-term incentives are benchmarked
against relevant peer companies in each market and are targeted to deliver total
cash that is at the upper quartile position in the relevant market. Incentive
payments conditional on business performance are provided to employees at levels
that are competitive in each local market.
Report on 2003/04 Executive Directors'
Remuneration and Subsequent Periods
Total remuneration levels
In accordance with the Policy, the Company benchmarks total remuneration levels
against other large European domiciled companies, using externally provided pay
data. Total remuneration for these purposes means the sum of base salary and
short, medium and long term incentives. The European focus was selected because
Europe continues to be Vodafone's major market and the Company is one of the top
ten companies in Europe by market capitalisation.
In 2003, award levels for the Chief Executive were set to deliver target total
remuneration between the top 25% and the top 10% of the remuneration levels of
other chief executives of large European companies. The market position selected
reflects Vodafone's relative size in this region but recognises that Vodafone
also has significant interests outside of the European region. However, awards
of performance-linked incentives were determined so that this positioning would
only be attained if the Company meets exceptionally demanding performance. A
similar approach has been taken for the 2005 financial year.
The total remuneration levels of other executive directors were set at
approximately two-thirds of the Chief Executive level for the Group Chief
Operating Officer and at approximately half of the Chief Executive level for the
other executive directors.
Components of executive directors' remuneration
Overview
Executive directors receive base salary, annual deferred share bonus, long term
incentives and pension benefits.
Vesting of all short, medium and long term incentives is dependent on the
achievement of performance targets that are set by the Remuneration Committee
prior to the awards being granted.
Base Salary
Salaries are reviewed annually with effect from 1 July and adjustments may be
made to reflect competitive national pay levels, the prevailing level of salary
reviews of employees within the Group, changes in responsibilities and Group
performance. External remuneration consultants provide data about market salary
levels and advise the Committee accordingly. Pension entitlements are based only
on base salary.
Incentive awards
Short/medium term incentive
Annual deferred share bonus
The purpose of the Vodafone Group Short Term Incentive Plan ("STIP") is to focus
and motivate executive directors to achieve annual business KPIs that will
further the Company's medium term objectives.
The STIP comprises two elements: a base award and an enhancement award. The base
award is earned by achievement of one year KPI linked performance targets and is
delivered in the form of shares. The enhancement award of 50% of the number of
shares comprised in the base award is earned by achievement of a subsequent
two-year performance target following the initial twelve-month period. Release
of both elements of the award after the three-year period is dependent upon the
continued employment of the participant.
The target base award level for the 2004 financial year was 100% of salary with
a maximum of 200% of salary available for exceptional performance. Payments
earned for the year total on average 109.75% of salary. The bonus achievement
for the year reflects strong Group performance as described in "Operating and
Financial Review and Prospects".
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Vodafone Group Plc Annual Report 2004
56
Board's Report to Shareholders on Directors' Remuneration continued
The Remuneration Committee reviews and sets the base award performance targets
on an annual basis, taking into account business strategy. The performance
measures for the 2004 financial year relate to EBITDA, free cash flow, ARPU,
data as a percentage of total service revenues, and customer satisfaction. The
targets are not disclosed, as they would give clear indication of the Company's
business targets, which are commercially sensitive. For the 2005 financial year,
the targets for data as a percentage of service revenues and ARPU will be
replaced with a total service revenues target in order to provide clearer focus
on total revenue growth.
The vesting of the enhancement award shares is dependent upon the achievement of
an EPS performance target. For the awards made in 2003, which will vest in July
2005, the performance target was that annual compound growth in EPS, before
goodwill amortisation and exceptional items, must exceed UK RPI growth by 5% per
annum over the performance period.
The STIP awards made in July 2001 vested in July 2003. Details of STIP awards
are given in the table on page 60.
The Group may, at its discretion, pay a cash sum of up to the value of the base
award in the event that an executive director declines the share award. In these
circumstances, the executive director will not be eligible to receive the
enhancement award or any cash alternative.
Long term incentives
Performance shares
Performance shares are awarded annually to executive directors. Vesting of the
performance shares depends upon the Company's relative TSR performance. TSR
measures the change in value of a share and reinvested dividends over the period
of measurement. The Company's TSR performance is compared to that of other
companies in the FTSE Global Telecommunications index over a three-year
performance period. The Vodafone Group Plc 1999 Long Term Stock Incentive Plan
is the vehicle for the provision of these incentive awards.
In 2003/04, the Chief Executive received an award of Performance shares with a
face value of two times base salary; the Chief Operating Officer and other
executive directors one and a half times their base salary.
Performance shares will vest only if the Company ranks in the top half of the
ranking table; maximum vesting will only occur if the Company is in the top 20%.
Vesting is also conditional on underlying improvement in the performance of the
Company. Awards will only vest to the extent that the performance condition has
been satisfied at the end of the three-year performance period. To the extent
that the performance target is not met, the awards will be forfeit. The
following chart shows the basis on which the performance shares will vest:
[[Image Removed]]
The constituents of the FTSE Global Telecommunications index as at July 2003,
(applicable to 2003 awards), excluding the Company, were:
Alltel Olivetti
AT&T Orange
AT&T Wireless Services Portugal Telecom
BCE Royal KPN
BellSouth SBC Communications
BT Group Singapore Telecommunications
China Mobile (Hong Kong) Sprint Corp-FON Group
China Unicom Swisscom
Deutsche Telekom Telecom Italia
France Telecom Telefonica
Japan Telecom Telia Sonera
KDDI Telstra Corp
Nextel Communications TIM
Nippon Telegraph & Telephone Verizon Communications
NTT DoCoMo
Previously disclosed performance share awards granted in 2000 vested in 2003.
Details are given in the table on page 61.
Share options
Share options are granted annually to executive directors.
The exercise of the options is subject to the achievement of a performance
condition set prior to grant. The Remuneration Committee determined that the
most appropriate performance measure for 2003/04 awards was real (in excess of
UK RPI) growth in EPS, before goodwill amortisation and exceptional items. One
quarter of the option award will vest for achievement of EPS growth of UK RPI +
5% p.a. rising to full vesting for achievement of EPS growth of RPI + 15% p.a.
over the performance period. In setting this target the Remuneration Committee
has taken the internal long range plan and market expectations into account. The
Committee's advisers have confirmed that this EPS target is amongst the most
demanding of those set by large UK based companies. The Remuneration Committee
has decided that for 2004/05 grants, real EPS growth of 5-15% p.a. (over UK RPI)
will be replaced with absolute EPS growth of 8-18% p.a. The following chart
illustrates the basis on which share options granted in 2003/04 will vest:
[[Image Removed]]
Options have a ten-year term and vesting will be after three years. For 2003
options performance may be measured again after years four and five from a fixed
base year. The Committee, having considered this matter at length and taking
into account the evolving views of institutional investors, has decided to
remove the performance re-test at year four, but to retain the performance
re-test at year five, for 2004/05 grants. The Committee believes that for this
existing scheme, retaining the re-test with a stretching performance target
compounding from a fixed base year will continue to incentivise performance over
the longer term and this is in shareholders' interests. The re-test will be
reviewed again in 2005.
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Annual Report 2004 Vodafone Group Plc
57
The price at which shares can be acquired on option exercise will be no lower
than the market value of the shares on the day prior to the date of grant of the
options (or than the average of the market values for the immediately preceding
month in respect of Vittorio Colao, who is domiciled in Italy). Therefore,
scheme participants only benefit if the share price increases and vesting
conditions are achieved. The Vodafone Group Plc 1999 Long Term Stock Incentive
Plan is the vehicle for the provision of these incentive awards.
In July 2003, the Chief Executive received an award of options with a face value
of eight times base salary; the Chief Operating Officer and the other executive
directors six times their base salary.
Illustration
To help shareholders understand the value of the package provided to the Chief
Executive, the following chart illustrates the approximate pre-tax long term
incentive gains to the Chief Executive that would be delivered based on various
Company growth, EPS and TSR performance scenarios. The chart illustrates that in
order to gain value from the incentive plans, considerable shareholder value
must be created.
[[Image Removed]]
For example, if the Company's share price increases by over 50% from 145 pence
to approximately 219 pence, the Company's value increases by 50 billion, and
there is 50% vesting of long term incentives, the Chief Executive would have a
pre-tax gain of just under 5 million, representing less than a tenth of 1% of
the total increase in shareholder value.
The awards of performance shares and share options were made to executive
directors following the 2003 Annual General Meeting on 30 July 2003. 2004 awards
will be also be made following the AGM.
Awards are delivered in the form of ordinary shares of the Company. All awards
are made under plans that incorporate dilution limits as set out in the
Guidelines for Share Incentive Schemes published by the Association of British
Insurers. The current estimated dilution from subsisting awards, including
executive and all-employee share awards, is approximately 2.1% of the Company's
share capital at 31 March 2004 (2.0% as at 31 March 2003).
Share ownership guidelines
Executive directors participating in long term incentive plans must comply with
the Company's share ownership guidelines. These guidelines, which were first
introduced in 2000, require the Chief Executive to have a shareholding in the
Company of four times base salary and other executive directors to have a
shareholding of three times base salary.
It is intended that these ownership levels will be attained within five years
from the director first becoming subject to the guidelines and be achieved
through the retention of shares awarded under incentive plans.
Pensions
Arun Sarin is provided with a defined contribution pension arrangement to which
the Company contributes 30% of his base salary. The contribution is held in a
notional fund outside of the Company pension scheme.
Sir Christopher Gent (until his retirement), Julian Horn-Smith, Ken Hydon and
Peter Bamford, being UK-based directors, are contributing members of the
Vodafone Group Pension Scheme, which is a UK scheme approved by the Inland
Revenue.
This Scheme provides a benefit of two-thirds of pensionable salary after a
minimum of 20 years' service, with a contingent spouse's pension of 50% of the
member's pension. The normal retirement age is 60, but employees may retire from
age 55 with a pension proportionately reduced to account for their shorter
service but with no actuarial reduction. Pens