Vodafone 2006 Annual Report Download - page 13

Vodafone Group Plc Annual Report 2006 11
Strategy
We have a significant opportunity to deliver
value to both our customers and shareholders.
£9 billion
Special distribution
Capital expenditure on fixed assets is expected to be in the range of £4.2 billion to
£4.6 billion, higher than last year due to the investment needs for recent acquisitions
and the wider rollout of HSDPA. Free cash flow is anticipated to be in the range of
£4.0 billion to £4.5 billion. Higher tax payments, including around £1.2 billion, with interest
costs, from settling some long standing disputes, increased capital expenditure and
higher financing costs from our increased borrowing, are expected to offset continued
growth in underlying operating cash flows.
Executing our strategy
We have a good track record of delivering against our plans and demonstrating
outperformance against the majority of our principal competitors. However, our
environment is changing and we need to adapt to ensure we continue to meet our
customer needs and deliver superior returns to shareholders.
We have established clear strategic objectives: cost reduction and revenue stimulation
in Europe; innovating and delivering total communications solutions; delivering
strong growth in emerging markets; actively managing our portfolio to maximise
returns; and aligning our financial policies to our strategy. We have reorganised the
business as we begin to deliver against these objectives.
Vodafone is well placed to execute on this strategy. Our scale makes us the clear partner
of choice for others and we have a track record for innovation. We have a strong brand
and an unrivalled customer reach. As customer demands evolve and technology
converges, we remain focused on the core benefits of mobility and personalisation
as we seek to deliver total communications solutions. We have a significant opportunity
to deliver value to both our customers and shareholders.
On a final note, on behalf of the Board, I would like to express sincere thanks to Ian
MacLaurin, who is retiring as Chairman, for his service and support to the Company
since 1997. We wish him continued success.
Arun Sarin
Chief Executive
02468
Dividends (pence)
2005
2006
4.07
6.07
+49%
02468
Share purchases (£bn)
2005
2006
4.0
6.5
+£2.5bn
Financial implications
Our One Vodafone programme, which primarily has been focused on our mature
mobile markets in Europe, delivers efficiencies in operating costs, being payroll and
other operating expenses, and in capital expenditures. We have previously targeted
keeping these total costs broadly stable between the 2004 and 2008 financial years,
with operating costs expected to rise at a lower rate than revenue. Through our new
strategic objectives, we now expect underlying operating costs alone to be broadly
stable between the 2006 and 2008 financial years for the total of our European
operations and central costs.
On the same basis, we continue to target expenditures on fixed assets to be 10% of
revenue for the 2008 financial year. We also continue to expect at least 1% additional
revenue market share between the 2005 and 2008 financial years, measured against
our established principal competitors in Germany, Italy, Spain and the UK.
Our strategic changes also have implications on returns to shareholders and our capital
structure. We have previously indicated an intention to pay out approximately 50% of
adjusted earnings per share for the 2007 financial year onwards. We now consider it
appropriate to target a 60% payout ratio, with effect for the full 2006 financial year, with
a view to growing the dividend per share in line with underlying earnings per share
thereafter. Dividends per share have, therefore, increased by 49% to 6.07 pence for
the year.
As we enter a new phase in our development, we believe that the most appropriate
capital structure, which meets the needs of both the business and shareholders, is one
that reflects a higher level of gearing. The incremental borrowing capacity this provides
enables an additional return of £3.0 billion to shareholders, which will be combined with
the £6.0 billion return of cash from the sale of Japan in early August. As a result, we do
not currently plan any further share purchases or other one-off returns to shareholders.
This £9.0 billion one-off return, together with the £6.5 billion share purchase
programme completed during the last year and £3.7 billion of dividends, gives an overall
return to shareholders of £19.2 billion.
Prospects for the year ahead
While we are delivering on cost reduction, revenue stimulation and emerging market
growth in the shorter term, the potential benefits from serving our customers’ total
communications needs will materialise over a longer timeframe.
For the year ahead, we expect operating conditions to remain challenging, with a
continued intense competitive environment and further regulatory pressure, but
nevertheless see continued growth in Group revenue. We are anticipating higher
customer investment, pricing pressures and further termination rate reductions to
impact growth in adjusted operating profit, however initiatives to deliver further cost
efficiencies are expected to mitigate this effect.