Vodafone 2004 Annual Report Download - page 31

Annual Report 2004 Vodafone Group Plc
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2004, compared with an expense of £576 million in the prior year, and a £1,568
million increase in operating profit before goodwill amortisation and exceptional items
partially offset by a £1,151 million increase in the goodwill amortisation charge. The
charges for goodwill amortisation, which do not affect the cash flows of the Group or
the ability of the Company to pay dividends, increased by 8% to £15,207 million,
principally as a result of the impact of foreign exchange movements.
Expenses
Years ended 31 March
2004 2003
% of turnover % of turnover
Direct costs 39.9 38.9
Operating expenses 22.5 24.1
Depreciation and amortisation 13.6 13.6
The increase in direct costs as a percentage of turnover is principally due to an
increase in the proportion of acquisition and retention costs, primarily following the
acquisition of a number of service providers in the UK. Acquisition and retention costs
net of equipment revenues as a percentage of service revenues, for the Group’s
controlled mobile businesses, increased to 12.6%, compared with 12.3% for the
comparable period. This was partially offset by the disposal of Japan Telecom.
The principal reason for the improvement in operating expenses as a percentage of
turnover was the maintenance of network operating costs at a similar level to the
previous financial year, despite the growth in customer numbers and usage. Operating
expenses as a proportion of turnover also benefited from the disposal of Japan
Telecom.
Depreciation and amortisation charges, excluding goodwill amortisation, increased by
10% to £4,549 million from £4,141 million in the comparable period. The launch of
3G services in a number of countries resulted in approximately £0.3 billion of
additional depreciation and amortisation in the current year as 3G infrastructure and
licences have been brought into use.
Goodwill amortisation
Retranslating the goodwill amortisation charge for the year ended 31 March 2004 at
the average exchange rates applicable for the year ended 31 March 2003 would have
reduced the charge by £965 million to £14,242 million, with a corresponding
reduction in total Group operating loss.
Exceptional operating items
Net exceptional operating income for the year ended 31 March 2004 of £228 million
comprises £351 million of recoveries and provision releases in relation to a
contribution tax levy on Vodafone Italy that is no longer expected to be levied, net of
£123 million of restructuring costs principally in Vodafone UK. Net exceptional
operating charges of £576 million were charged in the year ended 31 March 2003,
comprising £485 million of impairment charges in relation to the Group’s interests in
Japan Telecom and Grupo Iusacell, and £91 million of reorganisation costs relating to
the integration of Vizzavi into the Group and related restructuring.
In accordance with accounting standards the Group regularly monitors the carrying
value of its fixed assets. A review was undertaken at 31 March 2004 to assess
whether the carrying value of assets was supported by the net present value of future
cash flows derived from assets using cash flow projections for each asset in respect
of the period to 31 March 2014. The results of the review undertaken at 31 March
2004 indicated that no impairment charge was necessary.
Exceptional non-operating items
Net exceptional non-operating charges for the year of £103 million principally relate to
a loss on disposal of the Japan Telecom fixed line operations. In the prior year, net
exceptional non-operating charges of £5 million mainly represented a profit on
disposal of fixed asset investments of £255 million, principally relating to the disposal
of the Group’s interest in Bergemann GmbH, through which the Group’s 8.2% stake in
Ruhrgas AG was held, offset by an impairment charge in respect of the Group’s
investment in China Mobile of £300 million.
Loss on ordinary activities before interest
The Group’s loss on ordinary activities before interest fell by 21% to £4,333 million
due a reduction in the total operating loss of £1,221 million offset by an increase in
charge for exceptional non-operating items of £98 million.
Net interest payable
Net interest payable, including the Group’s share of the net interest expense of joint
ventures and associated undertakings, decreased from £752 million for the year
ended 31 March 2003 to £714 million for the year ended 31 March 2004.
The Group net interest cost for the current year increased to £499 million, including
£215 million (2003: £55 million) relating to potential interest charges arising on
settlement of a number of outstanding tax issues, from £457 million for the prior year
and was covered 28 times by operating cash flow plus dividends received from
associated undertakings. The Group’s share of the net interest expense of associated
undertakings and joint ventures decreased from £295 million to £215 million,
principally as a result of the sale of the Group’s stake in Grupo Iusacell.
Taxation
The effective rate of taxation for the year ended was (62.5)% compared with (47.6)%
for the year ended 31 March 2003. The effective rate includes the impact of goodwill
amortisation and exceptional items, which may not be deductible for tax purposes.
Aside from the negative impact of non-tax deductible goodwill amortisation on the
effective tax rate, the Group’s tax charge has benefited further from the Group’s Italian
operations in the prior year, from the current year restructuring of the French
operations, from a fall in the Group’s weighted average tax rate and from other tax
incentives. These benefits have outweighed the absence of the one-off benefit arising
from the restructuring of the German group in the previous year.
Basic loss per share
Basic loss per share, after goodwill amortisation and exceptional items, improved from
a loss per share of 14.41 pence to a loss per share of 13.24 pence for the year
ended 31 March 2004. The loss per share includes a charge of 22.33 pence per
share (2003: 20.62 pence per share) in relation to the amortisation of goodwill and a
charge of 0.01 pence per share (2003: 0.60 pence per share) in relation to
exceptional items.