Interim Results - Part 1

14th Nov 2006 07:04

Vodafone Group Plc14 November 2006 VODAFONE GROUP PLCINTERIM RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2006 PART I Embargo: Not for publication before 07:00 hours 14 November 2006 VODAFONE ANNOUNCES RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2006 PART I Highlights(1): * Group revenue of £15.6 billion, with organic growth of 4.1% * Profit before taxation for the period increased to £4.8 billion before impairment charges of £8.1 billion. Loss before taxation was £3.3 billion * Adjusted basic earnings per share increased by 17.7% to 5.98 pence, including the benefit from an interim adjusted effective tax rate of 29.2%. Basic loss per share from continuing operations of 8.02 pence * Free cash flow from continuing operations of £3.0 billion and net cash inflow from operating activities from continuing operations of £4.8 billion, after net taxation paid of £1.2 billion * Interim dividend per share increased by 6.8%, to 2.35 pence, giving a pay out of £1.2 billion Outlook summary(2): * No change to the full year organic proportionate mobile revenue growth range of 5% to 6.5% and proportionate organic mobile EBITDA margin expectations of around 1 percentage point lower than last year * Free cash flow from continuing operations outlook increased to an expected range of £4.7 billion to £5.2 billion due to the delayed settlement of certain long-standing tax issues * Capitalised fixed asset additions outlook unchanged with a range of £4.2 billion to £4.6 billion * Full year adjusted effective tax rate expected to be lower than previously indicated at around 30%. Longer term percentage rate now expected to be in the low 30's (1) See page 4 for Group Financial and Operating Highlights, page 40 for use of non-GAAP financial information and page 41 for definition of terms (2) See page 39 for a cautionary statement on Forward-Looking Statements Arun Sarin, Chief Executive, commented: "These results show that Vodafone is on track to deliver on its key targets forthe current financial year. Competitive and regulatory pressures in the Europeanregion have been offset by strong performances in our developing markets and theUnited States. We have also made good progress since May in the execution of ournew strategy and the response to our new products and services has been veryencouraging." CHIEF EXECUTIVE'S STATEMENT Vodafone has announced first half results showing progress in very competitivemarkets. Despite the pressures from competition and regulation, we continue to execute the strategy laid out to shareholders in May and are on track to meet our full year targets. We have a unique franchise of international customers, with over 191 millionproportionate mobile customers, of whom 147 million are in controlled or jointlycontrolled entities. Proportionate mobile revenue for the first half of this financial year increasedby 6% on an organic basis. The Europe region remains very competitive with flatorganic growth year on year. Of our four principal markets, Germany, Italy andthe UK saw declining total revenue after taking into account the impact oftermination rate cuts, whilst Spain continued its strong progress, postinganother period of double digit top line growth. Our high growth markets in theEMAPA region continued to perform well, growing organically at 13.7% year onyear. Together with the US, where Verizon Wireless revenue grew 18.2% year onyear in local currency, this strong performance helped to offset the lowergrowth in our more established markets. Proportionate mobile EBITDA margins on an organic basis were only slightlylower year on year, though the mobile EBITDA margin is expected to fall by alarger amount year on year in the second half of the 2007 financial year. Free cash flow from continuing operations was slightly lower at £3.0 billion inthe first half of the financial year; a 6.9% increase in operating free cashflow was offset by higher tax payments of £1.2 billion. Higher interest rates, along with pricing and continued regulatory pressures in the German market, led to an impairment charge of £8.1 billion in the totalcarrying value of goodwill in respect of our German and Italian operations. In May this year, we announced five core strategic goals to drive forwards thefinancial and operating results of the Company: Revenue stimulation and cost reduction in Europe In our mature European markets, we are fighting the twin pressures of priceerosion and regulation. The core strategy in this region is to stimulate revenueand cut costs. Average monthly voice usage per customer in Europe is still below 150 minutes.Central to stimulating revenue is driving fixed to mobile substitution withlarger minute bundles and innovative tariffs, prepaid to contract migrations andtargeted promotions. In Germany and the UK, new larger and better value bundleshave been launched, maintaining competitiveness in the respective marketplaces.In Italy, revenue declines appear to be stabilising following a successfulsummer promotion. We are targeting fixed to mobile substitution throughVodafone At Home and similar offerings in Germany, Italy, the UK, Greece, Hungary and Portugal. Expansion of this offering will occur, with a further three countries expected to launch by the end of the current financial year. Building on our success in business, we continue to deliver leading edge services, such as Oficina Vodafone in Spain and applications using the benefitsof mobile broadband following the introduction of HSDPA. Progress has also been made on core cost reduction programmes which willdemonstrate benefits over time. In outsourcing, we have chosen EDS and IBM tomanage application development and maintenance services in a global IToutsourcing deal, which is expected to deliver 25% to 30% unit cost savingswithin three to five years. We continue to look at the cost of owning andmaintaining networks, with recent announcements including 2G and 3G networksharing in Spain and entering into discussions on network sharing in the CzechRepublic. We have also announced quicker than expected progress on data centreconsolidation in Europe, where we expect to save costs of around 25% to 30% in two to three years. Deliver strong growth in emerging markets Our focus in emerging markets is to build on our strong track record of creatingvalue, having delivered strong performances over time in markets such as Egyptand South Africa. This has continued in the first half of this financial year,with organic service revenue growth of 40.2% in Egypt and 20.8% in South Africa. Our more recent acquisitions are performing very well, with first half year onyear organic service revenue growth of 31.3% in Romania and 14.4% in the CzechRepublic. In Turkey, we are very pleased with progress and the company isperforming well ahead of its acquisition business plan. In India, organicrevenue growth was greater than 50%. All of these performances are ahead of ourexpectations at the time of each acquisition. Innovate and deliver on our customers' total communications needs As customer needs are evolving, we are providing a sub-segment of our customerbase with fixed broadband connectivity as part of a total telecommunicationssolution. This type of service will typically be provided using wholesalerelationships with infrastructure providers and we have announced deals with BTin the UK, Fastweb in Italy and Arcor in Germany. We are continuing to develop a mobile advertising revenue stream and in this respect we have announced today our intent to partner with Yahoo! in the UK. Weare also developing products and services which will integrate the mobile and PCenvironments. We will continue to pursue a mobile centric approach, focusing on the corebenefits to customers of mobility and personalisation, and will resell fixedline technologies only according to customer needs. Actively manage our portfolio to maximise returns Vodafone will seek to invest only where we can generate superior returns for ourshareholders in markets that offer a strong local position, with focus a onspecific regions. In keeping with this strategy, in the first half of the financial year we closedthe sale of Vodafone Japan and recently completed the sale of our 25% stake in Proximus in Belgium for cash proceeds of €2 billion. For Proximus, this represented a good exit price with an enterprise value of 7.2 times forecast EBITDA for the current financial year. Most recently, we announced the proposed acquisition of up to a further 4.9% of Vodafone Egypt, increasing our exposure to this high growth market. We will continually review the countries in which we operate going forward. Align capital structure and shareholder returns policy to strategy In May this year, we outlined a new capital structure and returns policycommensurate with the operational strategy of the business. As a result, we arenow targeting a low single A credit rating. The Board also announced a targeted annual 60% payout of adjusted earnings pershare in the form of dividends. We are announcing an interim dividend of 2.35pence, up by 6.8% when compared to last year. Having returned over £19 billion to shareholders, excluding dividends, in thelast two financial years, we have no current plans for further share purchasesor other one-off returns. Prospects for the current year Revenue progression remains in line with expectations and the Group continues toexpect organic growth in proportionate mobile revenue to be in the range of 5%to 6.5% and proportionate mobile EBITDA margins to be around 1 percentage pointlower than the 2006 financial year on an organic basis. Free cash flow from continuing operations on an underlying basis is stillexpected to be in the range of £5.2 billion to £5.7 billion. As a result of adelay in the settlement of certain items, payments in respect of long standingtax issues are expected to be around £0.5 billion for this financial year,leading to an expected range of £4.7 billion to £5.2 billion for reported freecash flow from continuing operations. Summary We are successfully executing a clear five point strategy to provide long termvalue creation for our shareholders. The financial results for the first sixmonths highlight that we are on track to deliver on our key full year targets.We will continue to deliver real value to customers that will enable us toachieve our targets in the face of tough competition and regulatory pressures. Arun Sarin GROUP FINANCIAL AND OPERATING HIGHLIGHTS ----------------------------------------------------------------------------------------- 2006 2005 Change % -------------------Continuing operations(1)(2): Page £m £m Reported OrganicFinancial information Revenue 21 15,594 14,548 7.2 4.1Operating (loss)/profit 21 (2,952) 4,286 (Loss)/profit before taxation 21 (3,330) 3,911 (Loss)/profit for the period 21 (4,548) 2,629 Basic (loss)/earnings per share (pence) 21 (8.02)p 4.07p Capitalised fixed asset additions 1,824 1,750 4.2 Net cash flow from operating activities 19 4,840 5,227 (7.4) ----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------Performance reporting(3) Group EBITDA 7 6,242 5,907 5.7 2.8Adjusted operating profit 7 5,141 4,782 7.5 7.4Adjusted profit before tax 17 4,724 4,558 3.6 Adjusted effective tax rate 17 29.2% 31.5% Adjusted profit for the period attributable to equity shareholders 29 3,441 3,237 6.3 Adjusted basic earnings per share (pence) 29 5.98p 5.08p 17.7 Free cash flow 19 2,955 3,252 (9.1) Net debt at 30 September 19 20,229 13,421 50.7 ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- 2006 2005 Change % ------------------Continuing operations(1)(2): Page Million Million Reported OrganicOperational(4)(5) Vodafone live! - Closing active devices 44 30.7 22.2 38.3 Closing 3G registered devices 44 10.9 3.3 230.3 Closing Vodafone Mobile Connect data cards 1.0 0.6 66.7 Mobile voice usage (minutes) 48 112,649 84,077 34.0 18.2----------------------------------------------------------------------------------------- The interim results have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") (including International AccountingStandards ("IAS") and interpretations issued by the International AccountingStandards Board ("IASB") and its committees, and as interpreted by anyregulatory bodies applicable to the Group) and adopted for use in the EuropeanUnion ("EU"). This interim results announcement contains certain information on the Group'sresults and cash flows that have been derived from amounts calculated inaccordance with IFRS but are not themselves IFRS measures. They should not beviewed in isolation as alternatives to the equivalent IFRS measure and should beread in conjunction with the equivalent IFRS measure. Further disclosures areprovided under "Use of Non-GAAP Financial Information" on page 40. See page 41 for definition of terms (1) Excluding the results of discontinued operations. See note 9 to the interim consolidated financial statements (2) Amounts presented as at 30 September or for the six months then ended (3) These measures are stated excluding impairment losses, non-recurring amounts related to business acquisitions and disposals, changes in the fair value of equity put rights and similar arrangements and net foreign exchange gains and losses on certain financial instruments and intercompany borrowings (4) Cumulative number as at 30 September (5) Figures represent 100% of subsidiary information and a pro-rata share in joint ventures GROUP PROPORTIONATE INFORMATION 2006 2005 Change % -------------------- £m £m £ Organic--------------------------------------------------------------------------------Financial Information Revenue Europe - Germany 2,827 2,913 (3.0) - Italy 2,174 2,240 (2.9) - Spain 2,268 1,968 15.2 - UK 2,549 2,568 (0.7) - Other Europe 2,230 2,457 (9.2) Less: revenue between Europe operations (218) (197) ------ ------ 11,830 11,949 (1.0) 0.6 ------ ------EMAPA - Subsidiaries and joint ventures 2,867 1,865 53.7 - Associated undertakings and investments 6,712 6,092 10.2 Less: revenue between EMAPA operations (6) (5) ------ ------ 9,573 7,952 20.4 13.7 ------ ------Other(1) 606 528 14.8 Eliminations (112) (114) ------ ------Group - Continuing operations 21,897 20,315 7.8 6.2 ====== ======Mobile operations - Continuing operations 21,263 19,798 7.4 6.0 EBITDA Europe - Germany 1,263 1,353 (6.7) - Italy 1,128 1,207 (6.5) - Spain 813 721 12.8 - UK 785 781 0.5 - Other Europe 819 849 (3.5) ------ ------ 4,808 4,911 (2.1) (1.6) ------ ------EMAPA - Subsidiaries and joint ventures 988 657 50.4 - Associated undertakings and investments 2,689 2,344 14.7 ------ ------ 3,677 3,001 22.5 17.5 ------ ------Other(1) 301 243 23.9 ------ ------Group - Continuing operations 8,786 8,155 7.7 6.2 ====== ======Mobile operations - Continuing operations 8,656 8,090 7.0 5.6 ====== ====== Percentage PercentageEBITDA margin Points PointsEurope - Germany 44.7% 46.4% (1.7) - Italy 51.9% 53.9% (2.0) - Spain 35.8% 36.6% (0.8) - UK 30.8% 30.4% 0.4 - Other Europe 36.7% 34.6% 2.1 ------ ------ 40.6% 41.1% (0.5) ------ ------EMAPA - Subsidiaries and joint ventures 34.5% 35.2% (0.7) - Associated undertakings and investments 40.1% 38.5% 1.6 ------ ------ 38.4% 37.7% 0.7 ------ ------Group EBITDA margin - Continuing operations 40.1% 40.1% - - Mobile EBITDA margin - Continuing operations 40.7% 40.9% (0.2) (0.1) (1) Other operations include the Group's fixed line operator in Germany, Arcor, and common functions which represent revenue from Partner Markets and unallocated central Group income and expenses Proportionate information is presented and calculated on the basis described onpage 37. See page 41 for definition of terms -------------------------------------- 2006 2005 Change % ------------------- Million Million Reported OrganicMobile customers Net proportionate customer additions(1) 12.0 10.1 18.8 Proportionate customers at 30 September 191.6 156.3 22.6 13.9 -------------------------------------- (1) Excludes additions from acquisitions and stake changes and the impact of a change in the application of the disconnection policy. Further analysis is provided on page 43 Customers are presented for continuing operations. See page 41 for definition ofterms OUTLOOK Please see "Forward-Looking Statements" on page 39, "Use of non-GAAP financialinformation" on page 40 and definition of terms on page 41. 2007 financial year Outlook ------------------------------------------------ ---------------------------Organic proportionate mobile revenue growth(1) 5% to 6.5% Organic proportionate mobile EBITDA margin(1) Around 1 percentage point lower than 2006 financial year Free cash flow from continuing operations* £4.7 to £5.2 billion Capitalised fixed asset additions £4.2 to £4.6 billion Adjusted effective tax rate(2) Around 30% ------------------------------------------------ --------------------------- * Stated after an estimated £0.5 billion of tax payments, including associated interest, in respect of a number of long standing tax issues (1) Assumes constant exchange rates and excludes the impact of business acquisitions and disposals for the financial measures and adjusted to reflect like-for-like ownership levels in both years (2) See page 17 for adjusted effective tax rate calculation For the year ending 31 March 2007 ("2007 financial year") The Group continues to expect organic growth in proportionate mobile revenue tobe in the range of 5% to 6.5%. Proportionate mobile EBITDA margin is also still expected to be around 1percentage point lower than the year ending 31 March 2006 ("2006 financialyear") on an organic basis, excluding the impact of any one-off businessrestructuring costs. In line with the outlook provided on 30 May 2006, proportionate mobile EBITDAmargin is expected to fall by a larger amount year on year for the second halfof the 2007 financial year than for the first half of the 2007 financial year.This is primarily as a result of the timing of commercial initiatives, includingpricing changes, in Europe and in particular in Germany and the UK. The Group expects capitalised fixed asset additions to still be in the range of£4.2 billion to £4.6 billion, which is higher than the 2006 financial year dueto the effect of recently completed acquisitions and disposals and the Group'srollout of HSDPA. Free cash flow from continuing operations is still anticipated to be in therange of £5.2 billion to £5.7 billion before tax payments and associatedinterest in respect of the potential settlement of a number of long standing taxissues. Due to a delay in the settlement of some of these issues, tax paymentsand associated interest in the current financial year are now expected to beapproximately £0.5 billion, giving an expected range of £4.7 billion to £5.2billion for reported free cash flow from continuing operations. The Group stillexpects significant cash tax and associated interest payments over the next fewyears in respect of these long standing issues, although certain settlements maybe later than previously anticipated. The effective tax rate for the year is expected to be similar to the 2006financial year at around 30%, slightly higher than in the first half of thefinancial year due to the net benefit of one-off items recorded in full in thefirst half. The Group now expects its longer term effective tax rate percentageto be in the low 30's, having previously anticipated this in the mid 30's. The Group continues to maintain its existing provision in respect of the ongoingenquiry by HM Revenue & Customs with regard to the application of the UKControlled Foreign Company ("CFC") legislation to the Group, as described in theGroup's Annual Report for the year ended 31 March 2006. A recent judgment in asimilar case in the European Court of Justice has provided guidance to the UKcourts and whilst it may be some time before the enquiry is finally resolved, the Group has not made any additional provision. For the year ending 31 March 2008 ("2008 financial year") In order to simplify its financial reporting and improve understanding of itsresults, the Group will be moving to a single basis of statutory reporting andwill no longer provide proportionate financial information with effect from the2008 financial year. The Group's outlook statement will also change to reflectonly statutory financial measures. The full outlook for the 2008 financial yearwill be provided with the preliminary results of the 2007 financial year in May2007. Revenue stimulation and cost reduction The Group continues to anticipate delivering benefits through its One Vodafoneinitiatives equivalent to at least 1% additional revenue market share in the2008 financial year compared with the 2005 financial year, which the Group ismeasuring in Germany, Italy, Spain and the UK against its principal competitors. Capitalised fixed asset additions are expected to be 10% of revenue in the 2008financial year for the total of the Group's Europe region and common functions,which will require reducing expenditure in that year by approximately £400million to £500 million when compared with the 2006 financial year. Assuming no significant changes in exchange rates and after adjusting foracquisitions and disposals, the Group expects operating expenses to be broadlystable in the 2008 financial year when compared with the 2006 financial year forthe total of its Europe region and common functions, excluding the potentialimpact from developing and delivering new services and from any businessrestructuring costs. BUSINESS REVIEW In April 2006, the Group announced changes to the organisational structure ofits operations, effective from 1 May 2006. The following results are presentedfor continuing operations in accordance with the new organisation structure.Europe includes the results of the Group's mobile operations in Western Europe,while EMAPA includes the Group's operations in Eastern Europe, the Middle East,Africa, Asia and the Pacific area and the Group's associates. Other operationscomprise the Group's common functions and its fixed line business in Germany. ---------------------------------------------------------------------------------------------- Europe EMAPA Other Eliminations 2006 2005 % change ------------- £m £m £m £m £m £m £ Organic Voice revenue 9,006 2,436 - (72) 11,370 10,771 5.6 2.4Messaging revenue 1,458 331 - (3) 1,786 1,613 10.7 6.3Data revenue 603 56 - (9) 650 504 29.0 30.0Fixed line and DSL revenue - 34 706 (14) 726 603 20.4 14.0 ------------------------------------------------------Total service revenue 11,067 2,857 706 (98) 14,532 13,491 7.7 4.4Acquisition revenue 457 176 - - 633 603 5.0 Retention revenue 174 8 - - 182 202 (9.9) Other revenue 132 34 86 (5) 247 252 (2.0) ------------------------------------------------------Total revenue 11,830 3,075 792 (103) 15,594 14,548 7.2 4.1Interconnect costs (1,760) (520) (172) 98 (2,354) (2,256) 4.3 1.8Other direct costs (780) (353) (121) 5 (1,249) (1,032) 21.0 10.5Acquisition costs (1,158) (313) (40) - (1,511) (1,418) 6.6 4.5Retention costs (763) (91) (43) - (897) (924) (2.9) (2.1)Operating expenses (2,561) (698) (82) - (3,341) (3,011) 11.0 8.1 ------------------------------------------------------EBITDA 4,808 1,100 334 - 6,242 5,907 5.7 2.8Acquired intangibles amortisation (8) (189) - - (197) (52)278.8 Purchased licence amortisation (443) (24) - - (467) (471) (0.8) Depreciation and other amortisation (1,365) (364) (115) - (1,844) (1,773) 4.0 Share of result in associates 2 1,405 - - 1,407 1,171 20.2 23.6 ------------------------------------------------------Adjusted operating profit 2,994 1,928 219 - 5,141 4,782 7.5 7.4Adjustments for: - Impairment losses (8,100) - - - (8,100) (515) - Other - - 1 - 1 - - Non-operating income of associates - 6 - - 6 19 ------------------------------------------------------Operating (loss)/profit (5,106) 1,934 220 - (2,952) 4,286 ====================================================== GROUP RESULTS Revenue increased by 7.2% to £15,594 million for the six months ended 30September 2006, resulting from organic growth of 4.1% and the impact from theacquisitions in the Czech Republic, Turkey and India, the stake increases inRomania and South Africa and the disposal of the Group's operations in Sweden of3.4%, partially offset by the impact of unfavourable movements in exchange ratesof 0.3%. The EMAPA region accounted for more than 70% of the organic growth in revenue,with the Europe region and other operations also growing organically, whilst theEMAPA region accounted for all the growth in reported revenue. Adjusted operating profit increased by 7.5% to £5,141 million, with organicgrowth of 7.4%. The EMAPA region achieved organic growth of 26.1%, partiallyoffset by a decline in profitability in the Europe region due to the challengesof increased competition, high penetration and termination rate cuts.Unfavourable exchange rate movements reduced reported growth for the Group by0.5%, whilst the net impact of acquisition and disposal activity and theclassification of the Group's associated undertaking in Belgium as held for salefollowing announcement on 25 August 2006 of the agreement to sell the Group's25% interest in Proximus to Belgacom, improved reported growth by 0.6%. The Group recorded an impairment charge of £8,100 million in relation to thecarrying value of goodwill in the Group's operations in Germany (£6,700 million)and Italy (£1,400 million) following an increase in long term interest rates,along with increased price competition and continued regulatory pressures in the German market. The increase in long term interest rates, which led to higherdiscount rates, resulted in a reduction in value of £3,700 million. The impairment charge was the primary reason for the operating loss of £2,952 million for the current period compared with an operating profit of £4,286 million for the six months to 30 September 2005. EUROPE Germany Italy Spain UK Other Eliminations Europe % change -------------- £m £m £m £m £m £m £m £ OrganicSix months ended 30 September 2006 Voice revenue 2,114 1,732 1,738 1,846 1,743 (167) 9,006 (2.4) (0.7)Messaging revenue 386 275 190 365 256 (14) 1,458 2.9 3.7Data revenue 190 89 122 134 91 (23) 603 27.2 29.1 --------------------------------------------------------Total service revenue 2,690 2,096 2,050 2,345 2,090 (204) 11,067 (0.4) 1.1Acquisition revenue 71 57 153 120 56 - 457 (5.6) Retention revenue 17 20 62 29 46 - 174 (12.1) Other revenue 49 1 3 55 24 - 132 (12.0) --------------------------------------------------------Total revenue 2,827 2,174 2,268 2,549 2,216 (204) 11,830 (1.0) 0.6Interconnect costs (363) (326) (349) (489) (437) 204 (1,760) (3.1) (1.1)Other direct costs (167) (111) (174) (209) (119) - (780) 5.0 6.4Acquisition costs (274) (114) (323) (292) (155) - (1,158) (1.9) 0.6Retention costs (182) (62) (183) (186) (150) - (763) (9.6) (7.7)Operating expenses (578) (433) (426) (588) (536) - (2,561) 4.4 7.7 --------------------------------------------------------EBITDA 1,263 1,128 813 785 819 - 4,808 (2.1) (1.6)Acquired intangibles amortisation - - - (4) (4) - (8) 166.7 Purchased licence amortisation (172) (37) (34) (166) (34) - (443) - Depreciation and other amortisation (367) (252) (194) (297) (255) - (1,365) (4.6)Share of result in associates - - - - 2 - 2 (33.3) --------------------------------------------------------Adjusted operating profit 724 839 585 318 528 - 2,994 (1.5) (2.7) ========================================================EBITDA margin 44.7% 51.9% 35.8% 30.8% 37.0% 40.6% Six months ended 30 September 2005 Voice revenue 2,225 1,816 1,546 1,864 1,923 (148) 9,226 Messaging revenue 408 262 162 334 253 (2) 1,417 Data revenue 128 81 89 119 84 (27) 474 --------------------------------------------------------Total service revenue 2,761 2,159 1,797 2,317 2,260 (177) 11,117 Acquisition revenue 72 46 123 152 91 - 484 Retention revenue 31 30 47 31 59 - 198 Other revenue 49 5 1 68 27 - 150 --------------------------------------------------------Total revenue 2,913 2,240 1,968 2,568 2,437 (177) 11,949 Interconnect costs (394) (366) (323) (438) (472) 177 (1,816) Other direct costs (144) (122) (155) (180) (142) - (743) Acquisition costs (251) (85) (246) (368) (231) - (1,181) Retention costs (211) (71) (161) (230) (171) - (844) Operating expenses (560) (389) (362) (571) (572) - (2,454) --------------------------------------------------------EBITDA 1,353 1,207 721 781 849 - 4,911 Acquired intangibles amortisation - - - (2) (1) - (3) Purchased licence amortisation (171) (37) (34) (166) (33) - (441) Depreciation and other amortisation (407) (247) (158) (293) (326) - (1,431)Share of result inassociates - - - - 3 - 3 --------------------------------------------------------Adjusted operating profit 775 923 529 320 492 - 3,039 ========================================================EBITDA margin 46.4% 53.9% 36.6% 30.4% 34.8% 41.1% % % % % % Change at constant exchange rates Voice revenue (5.4) (5.1) 11.9 (1.0) (9.8) Messaging revenue (5.8) 4.8 16.6 9.3 0.4 Data revenue 48.4 8.3 36.2 12.6 8.3 ----------------------------------Total service revenue (3.0) (3.4) 13.5 1.2 (8.0) Acquisition revenue (1.7) 22.5 24.4 (21.1) (39.6) Retention revenue (46.4) (32.7) 29.9 (6.5) (22.0) Other revenue 0.3 (85.1) - (19.1) (11.1) ----------------------------------Total revenue (3.4) (3.4) 14.7 (0.7) (9.6) Interconnect costs (8.4) (11.3) 7.6 11.6 (7.8) Other direct costs 15.2 (9.3) 11.6 16.1 (16.2) Acquisition costs 8.9 32.2 30.6 (20.7) (33.5) Retention costs (14.3) (13.2) 13.2 (19.1) (12.8) Operating expenses 2.8 10.9 16.9 3.0 (7.0) ----------------------------------EBITDA (7.0) (7.0) 12.2 0.5 (4.0) Acquired intangibles amortisation - - - 100.0 - Purchased licence amortisation - - - - 300.0 Depreciation and other amortisation (11.0) (1.7) 18.0 1.4 (22.5) Share of result in associates - - - - - ----------------------------------Adjusted operating profit (6.9) (9.3) 10.0 (0.6) 7.3 ==================================EBITDA margin movement (1.7) (2.0) (0.8) 0.4 2.2 -------------------------------------------------------------------------------------- Germany Italy Spain UK Other EuropeKPIs Closing customers ('000) - 2006 29,622 19,337 14,024 16,287 16,257 95,527 - 2005 28,259 17,884 12,418 15,764 16,630 90,955 Average monthly ARPU - 2006 €22.3 €27.3 €35.9 £24.1 £21.9 - 2005 €24.4 €30.1 €37.1 £24.9 £23.5 Annualised blended churn (%) - 2006 21.4% 21.3% 28.9% 35.2% 26.3% - 2005 18.5% 18.0% 21.2% 32.7% 23.7% Closing 3G devices ('000) - 2006 2,724 2,830 1,739 1,348 1,726 10,367 - 2005 815 1,044 315 438 695 3,307 Voice usage (millions of minutes) - 2006 15,593 15,737 14,511 14,786 14,120 74,747 - 2005 12,784 14,337 11,507 13,747 13,927 66,302 See page 41 for definition of terms-------------------------------------------------------------------------------------- The Europe region continues to be a challenging environment as a result ofintense competition from established mobile operators and new market entrants,coupled with penetration rates exceeding 100% in many markets, and continuingregulator-imposed rate reductions on incoming calls. The strategy for the regionis, therefore, to focus on stimulating additional voice and data usage in a waythat enhances customer value and revenue. This includes extending the currentmobile only offering by innovating and delivering total communicationssolutions, whilst continuing to leverage regional scale to reduce the coststructure. Revenue Total revenue fell slightly in the six months ended 30 September 2006,consisting of a 0.6% growth on an organic basis and a 0.4% impact fromfavourable exchange rate movements, offset by a 2.0% decline following thedisposal of the Group's operations in Sweden in January 2006. The organic growthin total revenue arose from a 7.9% increase in the average customer base, drivenby competitively priced tariffs, successful promotions and innovative services,partially offset by pressures on pricing and termination rate cuts. Theestimated impact of termination rate cuts and other non-recurring adjustments onthe growth in total revenue in the current period is as follows: Estimated impact of Total revenue termination rate growth at cuts and other constant adjustments(1) Underlying Underlying exchange Impact of on total revenue total service rates disposals growth revenue growth revenue growth % % % % % Germany (3.4) - 3.6 0.2 0.7Italy (3.4) - 6.5 3.1 3.3Spain 14.7 - 4.9 19.6 18.9UK (0.7) - 0.3 (0.4) 1.6Other Europe (9.6) 9.8 3.2 3.4 5.0Europe - Total (1.4) 2.0 3.6 4.2 5.0 Note: (1) Revenue for certain arrangements is now presented net of associated direct costs Service revenue increased by 1.1% on an organic basis due to growth in thecustomer base, which was partially offset by a decline in ARPU. Reported growthshowed a slight decline, with strong growth in Spain and certain markets inOther Europe offset by slight declines in Germany and Italy. Competitive offerings have contributed to the growth in average customers inEurope, with particularly strong rises in Spain and Greece, with the former alsobenefiting from favourable mobile number portability results. A continuing focuson customer retention has led to contract churn falling in many markets, whilstprepaid churn has risen due to intensified competition from existing networkoperators and new virtual network operators, as well as being influenced bycustomer self-upgrades in a number of markets. In Spain and Other Europe, churnhas been impacted by certain one-off adjustments from a change in theapplication of the Group's policy on customer disconnections. Excluding theresulting one-off disconnections, blended churn would have been 20.3% and 24.5%for Spain and Other Europe, respectively. The service revenue growth in Spain resulted from the increase in the averagecustomer base, up 16.9% in the period, driven by successful promotions andcompetitive tariffs, targeted at both the consumer and business segments. Thisgrowth was complemented by a strong handset portfolio which has resulted in morethan 60% of gross additions joining as 3G customers, and led to a market leadingshare of net additions in the first half of the financial year. In Other Europe,service revenue growth was 2.1% excluding the impact of the disposal of Sweden,mainly due to service revenue growth in Greece and Portugal of 4.0% and 5.1%respectively, in local currency, primarily resulting from increases inrespective customer bases, offset by a small decline in the Netherlands,principally from the impact of a termination rate cut. The decreases in servicerevenue experienced in Germany and Italy were driven by termination rate cutsand the impact of competition. The underlying trend was relatively stable inGermany, whilst in Italy the trend improved when comparing year on year growthin the second quarter of the period to the first quarter. Voice usage in Italybenefited from a successful summer promotion for which 2.8 million customersregistered. The voice promotion allowed customers to make free voice calls toother Vodafone customers for a monthly fee. Both Germany and the UK recently announced tariff changes to maintaincompetitiveness in their respective marketplaces. In Germany, larger and bettervalue bundles, which now include calls to customers of other mobile operatorsand new flat rate plans with unlimited calls and text messages to other Vodafoneand fixed line customers, are now available. These tariff changes contributed tothe impairment loss in Germany in the period. In the UK, bigger bundles withmore choice are available for contract customers that allow them to add extraminutes, extra texts or extra entertainment, without adding anything extra tothe cost of their bill. Voice revenue Demand stimulation initiatives and targeted promotions, along with the growth inthe customer base, led to a 19.9% increase in outgoing voice minutes on anorganic basis. In particular, Vodafone Zuhause in Germany and Vodafone Casa inItaly, which promote fixed to mobile substitution in the home, and summerpromotions in Spain and in Italy, all contributed to strong growth in outgoingminutes to both fixed line numbers and other Vodafone customers. Theseadditional voice minutes contributed to interconnect costs falling as apercentage of voice revenue. Total voice usage in the UK increased due to theongoing impact of the Stop the Clock proposition and an offer to prepaidcustomers, launched in July 2006, providing free weekend calls and text messagesif they spend a minimum amount during weekdays. This offer had benefited morethan 600,000 customers by 30 September 2006. This increased voice usage was partially offset by the impact of pricingpressures from increased competition and resulted in a 2.6% increase in outgoingvoice revenue compared with the same period last year, excluding the impact ofthe disposal of the Swedish operation. Incoming voice revenue decreased as growth in incoming voice minutes from othermobiles was more than offset by termination rate cuts in many of the markets inthe Europe region. In Italy, termination rates were reduced from 12.1 eurocentsper minute to 11.2 eurocents per minute in July 2006 and the regulator hasindicated further reductions in both July 2007 and 2008. A further terminationrate cut has been announced in Spain, with a cut of 7% to 11.35 eurocents perminute effective from October 2006, along with a target to lower the averagerate to 7 eurocents per minute by April 2009. The volume of roaming minutes increased by 15.9% on an organic basis comparedwith the same period last year, driven by an increased customer base and thesuccess of Vodafone Passport, which enables customers to take their domesticprice plan abroad for a small connection fee per call. Data for June and July2006 showed that Vodafone Passport customers paid approximately 50% less perminute for their voice roaming calls when compared to the average cost ofroaming in the summer of 2005. Roaming revenue increased by 0.4%, excluding theimpact of the disposal of the Swedish operations, as price declines were offsetby higher usage. The average cost of a voice roaming call for these customers isnow below 45 eurocents per minute. At 30 September 2006, almost 9 millioncustomers in the Group's controlled operations in the Europe region had signedup to Vodafone Passport. Total voice revenue decreased by 2.4% as the decline in incoming revenueoutweighed the revenue from increased outgoing voice traffic. On an organicbasis, voice revenue decreased by 0.7% compared with the same period last year,which includes a 3.3% decline from the impact of termination rate cuts. Non-voice revenue Messaging revenue rose by 2.9%, or 3.7% on an organic basis. This increase wasmainly attributable to increased messaging volumes in Spain and the UK whereincreased average customer bases, competitively priced offerings and targetedpromotions encouraged usage growth. In Germany, the success of voice offeringsimpacted messaging volumes resulting in a small decline in messaging revenue. Data revenue increased by 27.2%, or 29.1% on an organic basis, with the primarydriver being an additional 7.1 million 3G devices registered on the Group'snetworks since 30 September 2005, bringing the total to 10.4 million devices,and in particular, the increase in devices in the business segment. Particularlystrong growth was experienced in Germany and Spain where specific promotionsencouraged increased usage, whilst both of these markets benefited from growthin the use of Vodafone Mobile Connect data cards. The business segment is theimpetus behind this growth in data usage with a number of markets offering flatrate tariff options. Additionally, the launch of HSDPA technology in sixEuropean markets assisted in increasing penetration of Vodafone Mobile Connectdata cards and has also resulted in their increased usage. In Italy and the UK,70% and 60%, respectively, of all Vodafone Mobile Connect data cards sold arenow HSDPA enabled. In the consumer segment, Germany has had particular successfrom bundling data services with a new contract tariff which encourages datausage by offering free mobile TV, surfing the Vodafone live! portal and musicdownloads for a flat fee each month. Adjusted operating profit Adjusted operating profit fell by 1.5%, or 2.7% on an organic basis with thedisposal of Sweden being the primary difference, whilst the EBITDA margindecreased by 0.5 percentage points, or by 0.9 percentage points on an organicbasis. Growth in operating expenses was the principal driver for the reductionin the EBITDA margin. However, this was partially offset by an improvement inoperating expenses for common functions, excluding certain non-recurring items,as discussed on page 16. Increased centralisation of functions, which isexpected to demonstrate benefits over time, higher marketing and distributioncosts, including additional investment in publicity and Vodafone's own directsales channels, and a higher charge for the use of brand and related trademarksin Italy, have all contributed to higher operating expenses. Acquisition and retention costs have remained relatively stable on an organicbasis, with increases in the volume of additions in Italy, and additions andupgrades in Spain, being offset by a reduction in sales in the indirect channelin the UK and changes to the sales mix in Greece and the Netherlands. The smallrise in interconnect costs on an organic basis was driven by the increase inoutgoing call volumes, partially offset by decreases in termination rates and byan improving outgoing call mix. In Germany, the EBITDA margin was impacted by additional intercompany recharges,presented within operating expenses, from the centralisation of data centreoperations, which were offset by a similar reduction in depreciation expense. Ahigher proportion of contract additions in the indirect sales channel offset bylower interconnect costs from the termination rate cut also contributed to thefall in the EBITDA margin. Excluding restructuring costs of £11 million and theimpact of the data centre change, operating expenses fell due to costefficiencies. Higher charges for brand and related trademarks in Italy, introduced in thesecond half of the previous financial year, reduced the EBITDA margin byapproximately 1.0 percentage point. Centralisation of the local data centre inthe second quarter of the current financial year and additional publicityexpenditure also impacted the margin. In Spain, a higher proportion of contract additions and higher total grossadditions were the main drivers in the 0.8 percentage point reduction in theEBITDA margin. Operating expenses were broadly stable as a percentage ofrevenue. Increased voice usage, with a rise in the proportion of calls made to customersof other mobile networks, has led to a rise in interconnect costs in the UK,though the impact on EBITDA margin was offset by savings from targetedacquisition and retention investment. Savings in operating expenses fromcontinuous cost reduction have been reinvested, particularly in increasedpublicity spending. In October 2006, Vodafone agreed terms with Phones 4u, a leading independentmobile retailer in the UK, to be the exclusive third party retailer for Vodafonecontract customers in the UK high street. As a result, indirect connectioncommissions in the second half of the current financial year are expected to besimilar to those in the same period in the previous financial year. Vodafoneexpects to deliver greater value to customers acquired through the indirectchannel through a closer working relationship with Phones 4u and better targetedpropositions. On an organic basis, adjusted operating profit in Other Europe grew by 2.5%,whilst the EBITDA margin was broadly stable. Europe targets The Group has set targets in respect of revenue market share, operating expensesand capitalised fixed asset additions. The operating expense and capitalisedfixed asset additions targets relate to the Europe region and common functionsin aggregate. Progress against the revenue market share target is measured bytracking performance in Germany, Italy, Spain and the UK against the Group'sprincipal competitors. The targets are detailed in the Outlook on page 6. During the first half of the 2007 financial year, the implementation of a rangeof group wide initiatives and cost saving programmes commenced, designed todeliver savings in the 2008 financial year and beyond. The key initiatives areas follows: * The application development and maintenance initiative is focusing on driving cost and productivity efficiencies through outsourcing the application development and maintenance for key IT systems. In October 2006, the Group announced that EDS and IBM had been selected to provide application development and maintenance services to separate groupings of operating companies within the Vodafone Group and terms were agreed with EDS and IBM on 2 November 2006. The Group currently anticipates that this initiative will result in greater economies of scale and improved quality of software produced, as well as greater flexibility, leading to the faster rollout of more varied services to customers. * The supply chain management initiative focuses on centralising network related supply chain management activities and leveraging Vodafone's scale in purchasing activities. Through the standardisation of designs and driving scale strategies in material categories, the Group is aiming to increase the proportion of purchasing performed globally. In the core networks area, the Group is introducing new suppliers and alternative transmission technologies aimed at reducing costs. * The IT operations initiative has created a shared service organisation to support the business with innovative and customer focused IT services. This organisation is aiming to consolidate localised data centres into regionalised northern and southern centres and to consolidate hardware, software, maintenance and system integration suppliers to provide high quality IT infrastructure, services and solutions. * The Group has commenced a three year business transformation programme to implement a single integrated operating model, supported by a single ERP system covering HR, finance and supply chain functions. The programme is expected to provide improved information for decision making and reduced operating costs in the longer term, though additional investment, including restructuring expenditure, will be required in the near term. * In summer 2006, the Group undertook a review of the organisation and of its central functions and the balance between Group and locally managed activities, resulting in operating expenditure savings and the reduction of over 500 positions in the corporate centre. * Many of the Group's operating companies are participating in external benchmarking studies and using the results to target local cost reductions. Initiatives that have been implemented to date include reductions to planned network rollout, outsourcing and off shoring of customer services operations, property rationalisation, replacing leased lines with owned transmission, network site sharing and renegotiation of supplier contracts and service agreements. Mobile Plus strategy To encourage further revenue growth within the Europe region, the Groupannounced in May 2006, as part of the Group's Mobile Plus strategy, theintention to focus on extending Vodafone's service offerings in the home and inthe office, including the provision of DSL. The Vodafone At Home proposition is a series of initiatives and tariffs aimed atgenerating additional mobile usage in the home area by specifically targetingthe substitution of fixed line usage to mobile. The offerings in Germany,Vodafone Zuhause, and in Italy, Vodafone Casa, proved popular, with 1,378,000and 362,000 customers respectively by the end of September 2006. These customersare generating higher voice usage and ARPU than previously, demonstrating thesuccess of this proposition. Vodafone Casa was also launched in Portugal inOctober 2006. Vodafone Office is an office-based proposition that provides alternatives to thefixed line network, by offering the opportunity to reduce the number of fixeddesk phones and encouraging fixed to mobile substitution in the office. A closeduser group tariff, allowing employees to call each other for a flat monthly fee,is a key part of the offer. The number of Oficina Vodafone customers in Spain atthe end of September 2006 was 713,000. In the second quarter of the financial year, it was announced that theseservices would be expanded to include a DSL option in conjunction with Arcor,the Group's fixed line operator in Germany, and Fastweb, Italy's leadingalternative broadband provider. During September 2006, Vodafone UK announced a partnership with BT for theprovision of fixed line and DSL services, which will be available to Vodafoneconsumer contract customers in early 2007. Vodafone Germany has also signed an agreement with an advertising agency as aninitial step in facilitating revenue generation from advertising on the Vodafonelive! portal. EMAPA Middle East Eastern Africa Associates Associates Europe & Asia Pacific US Other EMAPA % change -------------- £m £m £m £m £m £m £ OrganicSix months ended30 September 2006 Voice revenue 951 1,027 458 2,436 50.7 19.6Messaging revenue 147 66 118 331 68.9 28.2Data revenue 25 11 20 56 47.4 38.3Fixed line and DSL revenue - 34 - 34 - - -------------------------------------------------------Total service revenue 1,123 1,138 596 2,857 54.4 20.8Acquisition revenue 23 105 48 176 46.7 Retention revenue 8 - - 8 100.0 Other revenue 8 4 22 34 (2.9) -------------------------------------------------------Total revenue 1,162 1,247 666 3,075 53.1 20.8Interconnect costs (217) (178) (125) (520) 47.7 22.0Other direct costs (141) (112) (100) (353) 73.9 14.9Acquisition costs (91) (144) (78) (313) 51.2 19.9Retention costs (31) (36) (24) (91) 111.6 88.6Operating expenses (278) (246) (174) (698) 47.6 12.6 -------------------------------------------------------EBITDA 404 531 165 1,100 50.5 23.1Acquired intangibles amortisation (127) (61) (1) (189) 285.7Purchased licence amortisation (8) (9) (7) (24) (20.0)Depreciation and other amortisation (151) (122) (91) (364) 35.8Share of result in associates - - - 1,015 390 1,405 20.3 23.7 -------------------------------------------------------Adjusted operating profit 118 339 66 1,015 390 1,928 24.2 26.1 ======================================================= EBITDA margin 34.8% 42.6% 24.8% 35.8% Six months ended 30 September 2005 Voice revenue 513 643 460 1,616 Messaging revenue 59 37 100 196 Data revenue 14 5 19 38 Fixed line and DSL revenue - - - - -------------------------------------------------------Total service revenue 586 685 579 1,850 Acquisition revenue 22 64 34 120 Retention revenue 4 - - 4 Other revenue 6 6 23 35 -------------------------------------------------------Total revenue 618 755 636 2,009 Interconnect costs (130) (104) (118) (352) Other direct costs (35) (68) (100) (203) Acquisition costs (62) (87) (58) (207) Retention costs (18) (15) (10) (43) Operating expenses (139) (151) (183) (473) -------------------------------------------------------EBITDA 234 330 167 731 Acquired intangibles amortisation (49) - - (49) Purchased licence amortisation (6) (16) (8) (30) Depreciation and other amortisation (89) (78) (101) (268) Share of result in associates - - - 772 396 1,168 -------------------------------------------------------Adjusted operating profit 90 236 58 772 396 1,552 ======================================================= EBITDA margin 37.9% 43.7% 26.3% 36.4% % % % % % Change at constant exchange rates Voice revenue 88.9 66.2 7.0 Messaging revenue 149.2 83.3 28.3 Data revenue 78.6 120.0 11.1 Fixed line and DSL revenue - - - --------------------------Total service revenue 95.1 72.9 10.6 Acquisition revenue 4.5 78.0 45.5 Retention revenue 100.0 - - Other revenue 33.3 (20.0) 4.8 --------------------------Total revenue 91.1 72.7 12.1 Interconnect costs 69.5 79.8 12.6 Other direct costs 314.7 72.3 7.5 Acquisition costs 51.7 75.6 41.8 Retention costs 72.2 140.0 166.7 Operating expenses 104.4 70.8 1.2 --------------------------EBITDA 74.9 68.0 6.5 Acquired intangibles amortisation 159.2 - - Purchased licence amortisation 60.0 (43.8) - Depreciation and other amortisation 73.6 62.7 (3.2) Share of result in associates - - - 33.7 (0.8) ------------------------------------------------Adjusted operating profit 31.1 50.7 24.5 33.7 (0.8) ================================================EBITDA margin movement (3.2) (1.2) (1.3) 2006 2005 ------------------------------------------- ----------------------------------------- Middle Middle East East Eastern Africa Eastern AfricaKPIs Pacific Europe & Asia EMAPA Pacific Europe & Asia EMAPA ------------------------------------------- -----------------------------------------Closing customers ('000) 5,423 25,879 24,169 55,471 5,059 11,119 13,266 29,444Average monthly ARPU £18.5 £9.3 £6.9 £19.8 £10.8 £10.0 Annualised blended churn (%) 40.7% 21.2% 45.1% 39.5% 24.1% 19.5%3G devices ('000) 534 2 - 536 17 - - 17Voice usage (millions of minutes) 5,402 15,296 17,204 37,902 4,583 5,873 7,319 17,775 See page 41 for definition of terms Vodafone's strategy in the EMAPA region is to build on the Group's strong trackrecord of creating value in emerging markets, having delivered strongperformances over time in markets such as Egypt and South Africa. Selectiveopportunities will be sought to increase the Group's emerging markets footprintas well as taking opportunities to increase stakes in existing markets, with aview to gaining control where possible over time. EMAPA continues to perform strongly, principally driven by the emerging markets,and has benefited from the prior year acquisitions in the Czech Republic andIndia, as well as the stake increases in Romania and South Africa. However,reported growth has been impacted by adverse exchange rate movements. On 24 May 2006, the Group completed the acquisition of the trade and assets ofTelsim, the number two operator in Turkey, from the Turkish Savings and DepositInsurance Fund, for consideration of approximately US$4.7 billion. The resultsof Telsim are included in Eastern Europe from the completion date. Revenue Total revenue increased by 53.1%, or 20.8% on an organic basis, driven byorganic service revenue growth of 20.8%. The impact of the acquisitions in theCzech Republic, India and Turkey, as well as the stake increases in Romania andSouth Africa, increased reported revenue growth by 39.0%, with the impact ofunfavourable exchange rate movements of 6.7% accounting for the remainingdifference between reported and organic growth. A 33.9% organic increase in average customers, or 93.8% including the impact ofacquisitions and stake increases, along with the success of usage stimulationinitiatives, were the primary reasons for the increase in service revenue,offset by declining ARPU in a number of markets from the increasing proportionof lower usage prepaid customers. Particularly strong customer growth wasachieved in Eastern Europe and Middle East, Africa and Asia, where markets aretypically less penetrated than in Western Europe or the Pacific area. Eastern Europe In Eastern Europe, the acquisitions in the Czech Republic, Romania and Turkeywere the key drivers of growth in service revenue. In the Czech Republic, an introductory offer to try Vodafone's services forfree, a summer promotion for new customers and the launch of new consumer andbusiness tariffs, all contributed to an increase in customers and 14.4% growthin service revenue in local currency, assuming the Group's equity interest isreflected in the whole of the previous period. The launch of an innovative proposition in Romania, which provides moreflexibility for prepaid customers by allowing the validity period of SIM cardsbetween top ups to be extended, has had a significant positive impact on prepaidchurn and, along with continued customer growth and a 2.0% rise in ARPU,contributed to a 31.3% organic increase in local currency service revenue. Theexpansion of the 3G network, targeted promotional offers, the launch of HSDPAand increased sales of Vodafone Mobile Connect data cards led to strong growthin data revenue in Romania and consolidated Vodafone's market leadership in thebusiness segment. The Group's acquisition in Turkey has performed ahead of the Group'sexpectations at the time of the completion of the auction. Improving networkquality has contributed to 11.4% customer growth in a little over four monthssince acquisition and combined with some tariff increases has led to strongrevenue growth. Middle East, Africa and Asia Underlying service revenue growth in the Group's operations in the Middle East,Africa and Asia was also strong. A combination of usage initiatives and tariff changes in the prepay marketcontributed to the local currency service revenue growth of 40.2% in Egypt. The launch of several products, services and promotions, including new prepaidtop-up packages, new bundled tariffs and Vodafone Simply, contributed to 24.9%organic growth in the customer base of Vodacom and its subsidiaries, and drove a20.8% organic rise in service revenue. The growth in the customer base excludedthe impact of a change in the application of the disconnection policy. Excludingthe resulting one-off disconnections, blended churn for Middle East, Africa andAsia would have been 36.9% in the current period, which was higher than in theprevious period following the impact of the Group's acquisition in India. The newly acquired interest in Bharti Airtel, which operates in India and isaccounted for as a joint venture, continued to perform well, with strong growthin customer numbers and revenue. Pacific Service revenue growth in the Group's operations in the Pacific area wasimpacted by a decrease in New Zealand's service revenue due to increasedcompetition and a termination rate cut at the end of the last financial year.Excluding the impact of the termination rate cut, service revenue for thePacific area would have increased by 4.5%. In Australia, local currency servicerevenue growth of 16.1% was achieved from the rise in the customer base, strongprepaid usage and a focus on higher value customers, particularly with newconnections of contract customers, contributing to an increase in ARPU. Adjusted operating profit Adjusted operating profit increased by 24.2%, or 26.1% on an organic basis, withthe impact of unfavourable exchange rate movements impacting growth by 2.7%. Thenet impact of the acquisitions, disposals and stake increases improved reportedgrowth by 0.8%. The EBITDA margin fell by 0.6 percentage points principally dueto the lower margins of the newly acquired operations and increased by 0.7percentage points on an organic basis. The acquisitions in the Czech Republic, India and Turkey, and the stakeincreases in South Africa and Romania, led to the rise in acquired intangiblesamortisation. These acquisitions, combined with the continued expansion ofnetwork infrastructure in the region, including 3G and HSDPA upgrades, led tothe rise in depreciation charges. Eastern Europe The impact of the newly acquired operations led to a 3.1 percentage pointdecrease in the EBITDA margin in Eastern Europe. An annual regulatory fee inTurkey amounting to 15% of revenue impacted direct costs in the current period.Loyalty programmes were made available through indirect channels in Romania,leading to a strong positive impact on churn along with increased investment inretention. The decrease in margin was partly offset by a reduction inacquisition costs in Romania which resulted from a higher proportion of salesmade through direct channels. Middle East, Africa and Asia The EBITDA margin in Egypt was broadly stable despite the significant customerand revenue growth which, combined with a modest increase in depreciationexpense, led to strong operating profit growth. Growth in reported operating profit in South Africa was impacted by 9.0% fromadverse exchange rate movements. Despite increased competition and focusedinvestment in retention activities, the EBITDA margin was broadly stable due tosavings in operating expenses. Pacific Investment in higher value customers in Australia, particularly targeted at thecontract segment, led to an improvement in revenue and lower contract churn, andwas the key driver in an increase in local currency EBITDA and adjustedoperating profit, although the additional investment contributed to a fall inthe EBITDA margin in both Australia and the Pacific area as a whole. Associates 2006 2005 % change --------------------------- --------------------------- ----------------- Verizon Verizon Verizon Verizon Wireless Other Total Wireless Other Total Wireless Wireless £m £m £m £m £m £m £ $ --------------------------- --------------------------- -----------------Share of result of associates Operating profit 1,214 563 1,777 952 576 1,528 27.5 29.7Interest (94) (7) (101) (100) (12) (112) (6.0) (4.5)Tax (73) (166) (239) (54) (176) (230) 35.2 37.0Minority interest (32) - (32) (26) 8 (18) 23.1 27.2 --------------------------- --------------------------- 1,015 390 1,405 772 396 1,168 31.5 33.7 =========================== =========================== Verizon Wireless (100% basis) Total revenue (£m) 10,327 8,891 EBITDA margin (%) 38.7% 37.1% Closing customers ('000) 56,747 49,291 Average monthly ARPU ($) 52.6 51.6 Blended churn (%) 14.2% 15.1% Non-voice revenue as a percentage of service revenue (%) 12.9% 7.5% The US market produced another period of strong customer growth, withpenetration reaching an estimated 75% at 30 September 2006. Verizon Wireless,the Group's associated undertaking in the US, continued to perform well,achieving an estimated 38% share of net additions in the period, whilstmaintaining its US mobile telecommunications industry leading EBITDA marginposition. The strong net additions performance was achieved through acombination of growth in the number of new customer additions and lower customerchurn driven by improvements in customer loyalty. The resulting increase in thecustomer base together with an increase in ARPU led to a 17.9% growth in servicerevenue. ARPU growth was driven by the success of data services, with VerizonWireless leveraging the strength of its wireless data product portfolio andwireless broadband ("EV-DO") network coverage by obtaining exclusive handsetdistribution rights for iconic handsets in the US. Cost and revenue initiatives led to an improvement in the adjusted operatingprofit margin. The Group's share of the tax attributable to Verizon Wireless forthe six months ended 30 September 2006 relates only to the corporate entitiesheld by the Verizon Wireless partnership. The tax attributable to the Group'sshare of the partnership's pre-tax profit is included within the Group taxcharge. Verizon Wireless consolidated its spectrum position during the six month periodwith the acquisition of spectrum covering the eastern half of the US and Hawaiifor $2.8 billion, through the FCC's Advanced Wireless Services auction whichcompleted on 18 September 2006, licences for which are expected to be granted inlate 2006 or early 2007. The Group's associated undertakings in EMAPA have been impacted by intensecompetition and reductions in termination rates, similar to the experience ofthe Groups' businesses in the Europe region, which has had a negative impact onrevenue and margins. SFR, the Group's associated undertaking in France, reportedslight growth in revenue due to good customer and usage growth offset by theaforementioned pressures, but a marginal decrease in operating profit,principally as a result of additional overheads to support both customer growthand increased licence fees. Vivendi Universal reports its third quarter results including those of SFR on 16November 2006. Investments China Mobile, in which the Group has a 3.27% stake and is accounted for as aninvestment, increased its customer base by 10.2% in the period to 287.1 million.Dividends of £57 million were received in the six months ended 30 September2006. Other Financial Highlights 2006 2005 % change ------------------------------ ---------------------------- -------------------- Common Other Common Other Common Other Functions Operations Total Functions Operations Total Functions Operations £m £m £m £m £m £m £ £ ------------------------------ ---------------------------- Revenue 86 706 792 70 622 692 22.9 13.5Direct costs - (376) (376) - (343) (343) - 9.6Operating expenses 122 (204) (82) 112 (196) (84) 8.9 4.1 ------------------------------ ---------------------------- EBITDA 208 126 334 182 83 265 14.3 51.8Depreciation and other amortisation (72) (43) (115) (29) (45) (74) 148.3 (4.4) ------------------------------ ---------------------------- Adjusted operating profit 136 83 219 153 38 191 (11.1) 118.4 ============================== ============================ Common functions represents the results of Partner Markets and the net result ofunallocated central Group costs and recharges to the Group's operations.Adjusted operating profit has been impacted in the current period byrestructuring costs incurred in the central functions, principally marketing andtechnology, which amounted to £30 million. Other operations comprise the Group's interest in the fixed linetelecommunications business in Germany, Arcor. In local currency, Arcor'srevenue increased by 13.1%, primarily due to customer and usage growth,partially offset by tariff decreases in a competitive market. The incumbentfixed line market leader continued to drive intensive competition, althoughArcor further strengthened its position as the main competitor. Contract ISDNvoice customers increased in the current period by 58%, to 1,765,000, and DSLcustomers by 80%, to 1,554,000. Together with an additional 122,000 DSL-Rcustomers, which is a DSL product from Deutsche Telekom resold under the Arcorbrand in areas where Arcor does not have a fixed line infrastructure, Arcorincreased its share of the DSL market to 12%. Revenue growth and costefficiencies led to an improvement in the EBITDA margin to 17.8%. In October 2006, the Group announced an organisational change to its NewBusiness and Innovation team. This will result in Arcor becoming part of theEurope region. The Group's preliminary announcement of results for the yearending 31 March 2007 will present restated trading results for the Europe regionreflecting this change. FINANCIAL UPDATE INCOME STATEMENT Investment income and Financing costs Six months to Six months to 30 September 30 September 2006 2005 £m £m Investment income 425 165Financing costs (813) (540) ------------- -------------- (388) (375) ============= ==============Analysed as: - Net financing costs before dividends from investments (264) (141)- Potential interest charges arising on settlement of outstanding tax issues (202) (124)- Changes in fair value of equity put rights and similar arrangements (see note 5) 21 (151)- Dividends from investments 57 41 ------------- -------------- (388) (375) ============= ============== Net financing costs before dividends from investments increased by 87.2% to £264million following an increase in average net debt of 21.5%, a change in thecurrency mix, higher interest rates for euro and US dollar denominated debt andadverse mark to market adjustments on financial instruments in the currentfinancial year. At 30 September 2006, the provision for potential interestcharges arising on settlement of outstanding tax issues was approximately £1.0billion. Taxation Six months to Six months to 30 September 30 September 2006 2005 £m £m Tax on (loss)/profit 1,218 1,282Share of associated undertakings' tax 240 232Tax on items not related to underlying business performance 2 - ------------- --------------Adjusted tax on (loss)/profit 1,460 1,514 ============= ============== (Loss)/profit before tax (3,330) 3,911Adjustments: - Share of associated undertakings' non-operating income (6) (19)- Impairment losses 8,100 515- Other income and expense (1) -- Non-operating income and expense (10) -- Change in fair value of equity put rights and similar arrangements (21) 151- Foreign exchange(1) (8) - ------------- --------------Adjusted profit before tax 4,724 4,558Add: Share of associated undertakings' tax and minority interest 271 250 ------------- --------------Adjusted profit before tax for the purpose of calculating adjusted effective tax rate 4,995 4,808 ============= ==============Adjusted effective tax rate 29.2% 31.5% ============= ==============Note: (1) Comprises foreign exchange differences reflected in the income statement in relation to certain intercompany balances, and the foreign exchange differences on financial instruments received as consideration in the disposal of Vodafone Japan to SoftBank, which completed in April 2006. The adjusted effective tax rate for the six months ended 30 September 2006 was29.2% compared with 31.5% for continuing operations in the prior period. This isbased on the expected effective tax rate for the year ending 31 March 2007 ofaround 30%, which is lower than the Group's long term effective tax rate as aresult of one-off events noted below. During the period, the Group pursued an opportunity to claim additional taxdeductions introduced by the Italian government, resolved a number of historictax issues following discussions with tax authorities, and has not madeadditional provision for the ongoing UK CFC enquiry. The Group continues to maintain its existing provision in respect of the ongoingenquiry by HM Revenue & Customs with regard to application of the UK CFClegislation to the Group, as described in the Group's Annual Report for the yearended 31 March 2006. A recent judgment in a similar case in the European Courtof Justice has provided guidance to the UK courts but it may be some timebefore the enquiry is finally resolved. Discontinued operations On 17 March 2006, the Group announced that an agreement had been reached to sellits 97.7% interest in Vodafone Japan to SoftBank. This resulted in the Group'soperations in Japan being classified as an asset held for sale and beingpresented as a discontinued operation in the 2006 Annual Report. The disposalwas completed on 27 April 2006. The loss includes the cumulative exchange differences previously recognised inother recognised income and expense from 1 April 2004 through to 27 April 2006. Six months to 30 September 2006 £m Profit for the period from operations 111 Loss on disposal(1) (747) Taxation 145 ------Loss from discontinued operations (491) ====== Note: (1) Includes £794 million of foreign exchange differences transferred to the income statement on disposal (Loss)/earnings per share from continuing operations Adjusted earnings per share increased by 17.7% from 5.08 pence to 5.98 pence forthe six months ended 30 September 2006. Basic earnings per share from continuingoperations fell from 4.07 pence to a loss per share of 8.02 pence for thecurrent period. Adjusted earnings per share is stated before charges of 14.08 pence per share inrelation to an impairment of the carrying value of goodwill and credits of 0.03pence per share for non-operating income, 0.04 pence per share for the change infair value of equity put rights and similar arrangements and 0.01 pence pershare for other items. Total shareholder returns Dividends The Company provides returns to shareholders through dividends. The Company hashistorically paid dividends semi-annually, with a regular interim dividend inrespect of the first six months of the financial year payable in February and afinal dividend payable in August. The directors expect that the Company willcontinue to pay dividends semi-annually. In considering the level of dividends, the Board takes account of the outlookfor earnings growth, operating cash flow generation, capital expenditurerequirements, acquisitions and divestments, together with the amount of debt.Accordingly, the directors announce an interim dividend of 2.35 pence per share,representing a 6.8% increase over last year's interim dividend. The Board hasalso indicated that its ongoing target dividend pay-out ratio is approximately60%, being the interim and proposed final dividends per share as a percentage ofadjusted earnings per share from continuing operations. The pay-out ratio forthe 2006 financial year was 60%. The ex-dividend date is 22 November 2006 for ordinary shareholders, the recorddate for the interim dividend is 24 November 2006 and the dividend is payable on2 February 2007. Special distribution of £9 billion On 17 March 2006, the Group stated that it would make a special distribution toshareholders of approximately £6 billion. Through targeting a low single Acredit rating, on 30 May 2006 the Group announced that it would return a further£3 billion to shareholders, resulting in a total distribution of approximately£9 billion in the form of a B share arrangement. This equated to 15 pence pershare. The B share arrangement was approved at an Extraordinary General Meeting of theCompany on 25 July 2006. Payment in respect of redemption of the B sharearrangement was made in August 2006 and all but £33 million of the total amountpayable had been settled as at 30 September 2006. During such time that theremaining B shares are outstanding, they will accrue a non-cumulative dividendat the rate of 75% of sterling LIBOR, payable semi-annually in arrears untilredemption. The Company has the right to redeem all remaining B shares by 5August 2008. Other returns As a result of targeting a lower credit rating and the £9 billion specialdistribution, the Group has no current plans for further share purchases orother one off shareholder returns. The Board will periodically review the freecash flow, anticipated cash requirements, dividends, credit profile and gearingof the Group and consider additional shareholder returns. Cash flows and funding During the six months ended 30 September 2006, net cash inflow from operatingactivities fell by 18.2% to £4,975 million and generated £2,947 million of freecash flow, as analysed in the following table: Six months to Six months to 30 September 30 September 2006 2005 £m £m % Net cash inflow from operating activities 4,975 6,084 (18.2) - Continuing operations 4,840 5,227 (7.4) - Discontinued operations 135 857 Add: Taxation 1,217 667 Purchase of intangible fixed assets (298) (252) Purchase of property, plant and equipment (1,892) (2,328) Disposal of property, plant and equipment 11 10 ------ ------Operating free cash flow 4,013 4,181 (4.0) - Continuing operations 4,021 3,761 6.9 - Discontinued operations (8) 420 Taxation (1,217) (667) Dividends received from associated undertakings(1) 371 375 Dividends paid to minority shareholders in subsidiary undertakings (34) (21) Dividends received from investments 57 41 Interest received 256 135 Interest paid (499) (349) ------ ------Free cash flow 2,947 3,695 (20.2) ====== ====== - Continuing operations 2,955 3,252 (9.1) - Discontinued operations (8) 443 Note: (1) Six months ended 30 September 2006 includes £240 million (2005: £295 million) from the Group's interest in SFR and £119 million (2005: £79 million) from the Group's interest in Verizon Wireless An analysis of net debt for continuing operations is as follows: 30 September 31 March 2006 2006 £m £mCash and cash equivalents (as presented in the consolidated cash flow statement) 776 2,932Bank overdrafts 13 18Cash and cash equivalents for discontinued operations - (161) --------- ---------Cash and cash equivalents (as presented in the consolidated balance sheet) 789 2,789 --------- ---------Trade and other receivables(1) 317 310Trade and other payables(1) (207) (219)Short-term borrowings (4,114) (3,448)Long-term borrowings (17,014) (16,750) --------- --------- (21,018) (20,107) --------- ---------Net debt as extracted from the consolidated balance sheet (20,229) (17,318) ========= =========Note: (1) Certain mark to market adjustments on financing instruments are included within trade and other receivables and trade and other payables The Group revised its credit rating target when it announced its results on 30May 2006 and now targets low single A long term credit ratings from Moody's,Fitch Ratings and Standard & Poor's, respectively. Credit ratings are not arecommendation to purchase, hold or sell securities, in as much as ratings donot comment on market price or suitability for a particular investor, and aresubject to revision or withdrawal at any time by the assigning ratingorganisation. Each rating should be evaluated independently. The Group's credit ratings enable it to have access to a wide range of debtfinance, including commercial paper, bonds and committed bank facilities. Inaggregate, the Group has committed facilities of approximately £7,864 million,of which £5,976 million was undrawn and £1,888 million drawn at 30 September2006. The undrawn facilities include a $5.0 billion Revolving Credit Facilitythat matures in June 2012 and a $5.9 billion Revolving Credit Facility thatmatures in June 2009. Both facilities support US and euro commercial paperprogrammes of up to $15 billion and £5 billion respectively. At 30 September2006, $512 million (£274 million) was outstanding under the US commercial paperprogramme and £30 million and $1,004 million (£680 million) were outstandingunder the euro commercial paper programme. Other undrawn facilities of £126million are specific to the Group's subsidiary in Egypt. The Group has a €25 billion Euro Medium Term Note (EMTN) programme and a $12billion US shelf programme which are used to meet medium to long term fundingrequirements. In the six months ended 30 September 2006, bonds with a nominalvalue of £1,766 million were issued under the EMTN programme. The bonds issuedduring the six months ended 30 September 2006 were as follows: Amount US shelf programme or Euro Date bond issued Maturity of bond Currency million Medium Term Note (EMTN) Programme 14 June 2006 14 June 2016 EUR 300 EMTN Programme 14 June 2006 13 January 2012 EUR 1,000 EMTN Programme 10 August 2006 10 January 2013 AUD 265 EMTN Programme 29 August 2006 13 January 2012 EUR 300 EMTN Programme 5 September 2006 5 September 2013 EUR 850 EMTN Programme At 30 September 2006, the Group had bonds outstanding with a nominal value of£16,032 million. SIGNIFICANT TRANSACTIONS The Group's net cash inflow resulting from acquisition and disposal activities,including the purchase and disposal of investments, in the six months ended 30September 2006 was £4,060 million(1) . An analysis of the significanttransactions and the changes to the Group's effective interest in the entitiesis shown below: £mAcquisitions: Telsim Mobil Telekomunikasyon Hizmetleri (from nil to 100% of trade and assets)(2) 2,547Disposals: Vodafone Japan (from 97.7% to nil) (6,810)Other net acquisitions and disposals, including investments 203 ------- (4,060) =======Notes: (1) Amounts are shown net of cash and cash equivalents acquired (2) Discussed in more detail on page 31 On 25 August 2006, the Group announced the sale of its 25% interest in Proximus,the Group's associated undertaking in Belgium, for consideration of €2.0billion. The sale completed on 3 November 2006. The sale proceeds will be usedto reduce the Group's net indebtedness. Vodafone and Proximus have signed arevised long term partner market arrangement in Belgium, allowing Proximus andVodafone customers to continue to benefit from Vodafone's global products andservices. The two companies will also continue to co-operate in servinginternational corporate customers. SUBSEQUENT EVENTS On 8 November 2006, the Group announced its intention to launch a tender offerfor an additional 4.9% of the shares in Vodafone Egypt for a maximum possibleconsideration of approximately £108 million. Telecom Egypt has given anirrevocable undertaking to accept the tender in respect of at least 3.97% and upto 4.69% of the shares in Vodafone Egypt. If fully accepted, this tender offerwill take Vodafone's shareholding in its Egyptian subsidiary to 55%, with afurther 45% held by Telecom Egypt. Subject to regulatory approvals, the tenderoffer is expected to be launched later in November 2006. Vodafone and TelecomEgypt also announced they have entered into a strategic partnership to increaseco-operation between both parties and to jointly develop a range of products andservices for the Egyptian market. This information is provided by RNS The company news service from the London Stock Exchange

---

Related Shares:

Vodafone