The Connected World by MAKING TECHNOLOGY ACCESS Ible to Customers Annual Report 2011 Report Annual

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harnessing the connected world By MAKING TECHNOLOGY ACCESS ible to customers annual report 2011 report annual

• Group Headline EPS up over 80% from 8.3p to 15.0p • Group statutory EBIT up 67% from £38.0m to £63.3m • Dividend of 5.0p per share

Headline financial highlights the home of

Group earnings per share group net funds / loan assets virgin mobile france: ebit the Connected World (pence) (£m) (100% BASIS) (£m) 15.0 51 36 21 120 100 carphone warehouse group plc annual report 2011 8.3

4.1 (23) (22)

2009 2010 2011 2010 2011 2009 2010 2011 Cash Virgin loan asset

BEST BUY EUROPE: revenue BEST BUY EUROPE: EBIT best buy europe: operating free (100% basis) (£m) BEFORE BEST BUY UK cash flow before best buy UK (100% basis) (£m) (100% basis) (£m) 15.0 98 213 3,563 3,572 3,529 172 46 8 135 114 97

(80) Carphone Warehouse Group plc 2009 2010 2011 2009 2010 2011 2009 2010 2011 1 Portal Way CPW Europe Best Buy Mobile London W3 6RS An explanation of Headline results is provided on page 80 and a reconciliation between Headline and statutory results is shown Telephone +44 (0)20 8617 6002 in note 10 to the Group financial statements. Details of the statutory result are provided in the Business Review on page 26. Fax +44 (0)20 8753 8085 Group earnings per share for years to 31 March 2010 has been adjusted for the share consolidation which occurred on Demerger. Email [email protected] Group net funds / loan assets have not been presented prior to the Demerger as the Group did not then exist in its current form. An explanation of the basis of preparation prior to the Demerger is provided in note 1 to the financial statements. Registered no. 07105905 www.cpwplc.com carphone warehouse group plc group warehouse carphone introduction

harnessing the connected world By MAKING TECHNOLOGY ACCESS ible to customers annual report 2011 report annual

• Group Headline EPS up over 80% from 8.3p to 15.0p • Group statutory EBIT up 67% from £38.0m to £63.3m • Dividend of 5.0p per share

Headline financial highlights the home of

4.1 (23) (22)

2009 2010 2011 2010 2011 2009 2010 2011 Cash Virgin loan asset

GROUP AT A GLANCE ts n

Results announcement 14 June 2011 stateme

Ex-dividend date 6 July 2011 carphone warehouse ial

Record date 8 July 2011 nc a Annual general meeting 27 July 2011 n fi group Dividend payment date 5 August 2011 Interim results announcement 8 November 2011 Following the demerger of TalkTalk, the Group comprises joint venture investments in Best Buy Europe and Virgin Mobile France and wholly owned property and other assets in the UK.

BEST BUY EUROPE virgin mobilE other assets

best buy europe CPW europe BEST BUY MOBILE US BEST BUY UK No.1 mvno in france FORFAITS property assets

Détendu du mobile

• Joint venture with Best Buy, • Founded in the UK in 1989, the business • Launched in the US in 2006 as • Best Buy UK is our Best Buy branded • Joint venture with Virgin Group, • Four freehold properties in the UK, a world-leading consumer has grown to become Europe’s leading a partnership between Carphone stores and online proposition in the leading experts in developing generally with long-term leases. electronics retailer. independent mobile phone retailer. Warehouse and Best Buy, through UK, which commenced trading in April MVNOs worldwide. which Best Buy Europe receives a 2010, offering full range of consumer • Specialist advice in areas of • Strong earnings growth over • Launched in 2006 and now by far profit share from Best Buy Mobile. electronics. product and service complexity. past two years, capitalising on the largest MVNO in France. an exciting technology pipeline. • Phenomenal growth in market share • Differentiated, service-led £74m market value • customer-focused, with a • Strong brand with innovative and earnings since launch, on the back proposition, with the ‘Connected World’ demonstrated track record • 2,429 stores of which approximately propositions and award-winning of a rapid rollout of its differentiated at its heart. of high quality service. 10% are franchises. customer service. proposition across the Best Buy estate. • Six ‘Big Box’ stores at March 2011 • Rolling out ‘Wireless World’ store • Strong relationships with retailers, • 190 stand-alone stores and 1,101 stores with typical size of 25,000-45,000 sqft. format, delivering excellent customer with over 2,500 retail points of sale. net funds AND LOAN ASSETS within Best Buy’s ‘Big Box’ stores. feedback and strong financial returns. • Five more ‘Big Box’ stores scheduled • continuing to grow strongly, with target • Plans for significant further growth, through to summer 2011. • net funds to cover short-term • online channels provide information of over 2 million customers this year. targeting 600-800 stand-alone stores commitments to joint ventures, and home and in-store delivery options. • Extended online range, with home within next five years. • Business now highly profitable, but available for distribution in and in-store delivery options. despite continued investment in growth. medium-term. • online platform relaunched in 2010 to provide improved customer • Loan assets being repaid by Designed and produced by Salterbaxter. experience. Virgin Mobile France from operating cash flows. Printed in the UK by Pureprint Group using their Pureprint® and Alcofree® environmental print technology. Pureprint is a CarbonNeutral® company.

This report is printed on Edixion 2,429stores 1,291stores 1.9m customers value of £156m Challenger Offset and is produced using 100% virgin fibre from well-managed forests and Elemental Chlorine Free (ECF) pulps and certified according to the rules of the Forest Stewardship Council® connections connections 12m 7m (FSC). Both the manufacturing mill and printer are certified with the ISO14001 environmental management system. Carphone Warehouse Group plc Annual Report 2011 81 overview Financial Calendar

GROUP AT A GLANCE ts n

Results announcement 14 June 2011 stateme

Ex-dividend date 6 July 2011 carphone warehouse ial

BEST BUY EUROPE virgin mobilE other assets

best buy europe CPW europe BEST BUY MOBILE US BEST BUY UK No.1 mvno in france FORFAITS property assets

Détendu du mobile

contents w vie r OVERVIEW DIRECTORS’ REPORT – FINANCIAL STATEMENTS 02 Chairman’s Statement BUSINESS REVIEW 45 Independent Auditors’ Report ove 04 The Connected World 09 Chief Executive Officer’s Review 46 Consolidated Income Statement 11 Best Buy Europe 47 Consolidated Statement of 21 Virgin Mobile France Comprehensive Income 26 Other Financials 47 Consolidated Statement 28 Corporate Responsibility of Changes in Equity 48 Consolidated Balance Sheet DIRECTORS’ REPORT – 49 Consolidated Cash Flow Statement GOVERNANCE 50 Notes to the Financial Statements 30 Board of Directors and Advisors 74 Five Year Record 32 Corporate Governance 75 Company Balance Sheet 37 Remuneration Report 76 Notes to the Company 43 Other Statutory Information Financial Statements 44 Statement of Directors’ 80 Glossary and Definitions Responsibilities 81 Financial Calendar

carphone warehouse group plc structure

BEST BUY europe Virgin mobile france other assets AND COSTS (50% owned) (47% owned) (100% owned) £60.4m £8.2m £(0.8)m Headline Group PAT Headline Group PAT Headline Group PAT

Overview p11 Overview p21 Performance Review p26

Marketplace p13 Marketplace p22

Strategy p14 Strategy p23

KPIs p15 KPIs p23

Performance Review p16 Performance Review p24

Risk p20 Risk p25

Where this annual report contains forward-looking statements, they are made by the directors in good faith based on the information available to them at the time of the approval of this annual report. These statements should be treated with caution due to the inherent risks and uncertainties underlying any such forward-looking information. The Group cautions users of this document that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under Risk sections of this document on pages 20, 25 and 27.

Carphone Warehouse Group plc Annual Report 2011 01 overview chairman’s statement harnessing the connected world to deliver value for shareholders and customers

One year on from the creation of the and provides an intuitive ease and diversity ‘new’ Carphone Warehouse Group of usage, which has changed our world through the successful demerger of and the way we live, work and play – and TalkTalk, it is a pleasure to report on will continue to do so. the company’s performance. Against this backdrop, competition among Strategically, Carphone is capitalising mobile operators and device manufacturers on the rapid growth and development of has grown even fiercer. The customer’s the ‘Connected World’. Operationally, its need for a trusted guide to the most execution has been impressive, driving its appropriate device, to how it works and position in its markets. Financially, despite to the best tariff for them has grown all the tough economic environment, it has the more relevant. We are by no means delivered results significantly ahead of immune to the economic climate, but it original expectations. During the year, is the product and service development Carphone consecutively increased its cycles which, for us, I believe are the guidance three times, ending the year more powerful and which place us well Charles Dunstone, with earnings per share of 15.0 pence, for the future. good cash flow generation from operations Chairman The smartphone revolution, the rapid and a strong balance sheet. emergence of tablets and the explosion One year on from It was in June 2000 that the original of applications are still just the beginning Carphone Warehouse floated on the of the ‘Connected World’. Big strides are a successful demerger, London Stock Exchange. At that time, being made in mobile payment systems, we are delighted we were still riding the growth wave in location based services, mobile video mobile penetration and we were benefiting and social networking. with the performance from being a source of both great variety Throughout our retail portfolio, Carphone and impartial advice – two constants in of the Carphone is extremely well positioned to bring our Carphone’s ethos. We had just seen the customers the latest and best products Warehouse Group. award of 3G licences and we were and services that the ‘Connected World’ looking forward to mobiles becoming has to offer. Our ‘Wireless World’ format the individual’s primary access to the stores, which have a wider range of internet as well as their primary means products and services than our traditional of voice communication. stores, produce excellent customer We could not have mapped out the feedback and compelling financial returns. explosive growth of mobile usage and We are accelerating the roll-out of these applications, but a great deal of what we stores in Europe with 350–400 planned saw in 2000 as possibilities, have now by the end of this year. CPW Europe’s become realities. The ‘mobile data wave’ Headline EBIT grew by 18% to £134.6m is well and truly with us. The internet and for 2011, reflecting the success of the indeed the office, are now in our pockets. business during the year. Increasingly, individuals, groups and The extraordinary performance of organisations are communicating and Best Buy Mobile in the US has exceeded accessing whatever information they all our expectations. Best Buy Mobile is want, wherever they are and whenever powerfully differentiated from its US they want – and, more and more, they competitors. It provides a wide range of are doing so ‘wirefree’, or at least smartphones, tablets and accessories, with a fusion of wireless and fixed line together with transparency on pricing broadband. Hardware advances have been and the impartial advice and strength of extraordinary, and mobile devices today customer service which are hallmarks are powerful computers. Perhaps more of both Carphone and Best Buy. Best Buy impressively, software now enables Mobile is now well-established in the US hundreds of thousands of applications mobile market, and we see considerable

02 Carphone Warehouse Group plc Annual Report 2011 w vie r potential to widen its penetration and build ove its market share through expanding its carphone warehouse group evolution store-within-a-store space and by rolling out new stand-alone stores. The business delivered connections growth of 28% CPW Best buy best buy virgin mobile TALKTALK in 2010-11, on top of 30% growth in the europe uk mobile US france GROUP previous year, and an increase in Best Buy Europe’s profit share of 111% to £97.9m. A year on from the launch of Best Buy 2010 2010 branded stores in the UK, I would like to Launch of Best highlight the fantastic achievement by Best Demerged as Buy UK with 6 separately listed Buy Europe in getting the business up and stores opened company running. We have been extremely pleased in 2010-11 2009 with the customer feedback – which is a Acquires Tele2 France credit to the quality of the team – and have providing learned a great deal about opportunities in additional the broader consumer electronics market. 2008 scale Best Buy acquires 50% of CPW Europe and its Best With the benefit of this experience we are Buy Mobile profit share to form Best Buy Europe in the process of evolving our strategy for this business. We are delighted with the progress of Virgin Mobile France. It has moved into 2006 2006 profit, and its customer growth has CPW Europe Launch of significantly exceeded our expectations. assists Best Virgin Mobile Its acquisition of Tele2 has given the Buy in roll-out France of US mobile business additional scale, and the phone offering successful integration has delivered all the synergies promised. Virgin Mobile France now has 1.9m customers, and 2003 Launched we are beginning to see strong profit and TalkTalk, which cash generation. It has continued to win develops to become one customer service awards, and the Virgin 1996 of the UK’s brand continues to maintain strong levels Start of leading international of recognition in France. Its financial telecoms expansion – companies performance reflects the business stores opened with over 4m transformation, with a 2010 £22.2m in France and customers Headline EBIT loss becoming a 2011 Ireland. Now Headline EBIT profit of £20.6m. stores in 9 countries In summary, a strong performance Carphone has a strong from Carphone Warehouse Group in its first year post demerger, and a track record of growing clear demonstration of the value of our successful businesses, combination with Best Buy. We believe we are well positioned for the future and this, applying its extensive coupled with our financial strength, has experience, commercial led us to commit to a progressive dividend 1989 relationships and an eye policy, starting with a recommended Carphone dividend for the year just ended of Warehouse for an opportunity to 5.0 pence per share. This is to be paid starts trading in the UK on 5 August 2011 to shareholders on the build value. record as of 8 July 2011. Everything that the Carphone Warehouse Group has achieved and all its potential are down to the commitment, efforts and quality of all our people. On behalf of the Board, I would like to thank them very much indeed. Charles Dunstone, Chairman

Carphone Warehouse Group plc Annual Report 2011 03 OVERVIEW the connected world

Best Buy Europe is on a wireless journey, with its vision being the Connected World. We aim to place customers at the heart of this journey. The ever increasing availability of the internet on the go and the rapid evolution of devices to support this have created amazing opportunities. We play a valuable role in translating the benefits of RK technology to customers. We exist to inspire

and guide in this ‘Connected World’, making W O people’s lives better through technology. ost p

w ne NET Connected World mobile 10:00 L join my group L8R SEND O

Impartial advice. As an In-store set-up. ‘Walk Out independent retailer, Best Buy Working’ is a service that helps Europe is able to provide impartial customers make the most of advice to customers on network their new device. In our ‘Wireless

offerings and tariffs, allowing World’ stores, the Geek Squad L them to make informed choices. can explain operating systems in This independence and impartial person, help customers download advice is a fundamental part of their first applications, set up their Best Buy Europe’s differentiated email accounts and register them retail proposition. for MyHub. MyHub. MyHub provides free backup of customers’ contacts, music and photos. The MyHub application allows customers to access their information wherever they are, without the need for cables or other synchronising software.

04 Carphone Warehouse Group plc Annual Report 2011

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“having an expert to guide me MEANS PEACE OF MIND”

Expert Advice Our customers tell us that having technology support, protection and repair services for their devices helps them get the most out of them. By placing the Geek Squad within our stores, we provide a direct opportunity for customers to engage and interact with them to find out all they need to know and get the services they need. The Geek Squad team can also fix problems remotely by accessing customers’ computers over the internet.

06 Carphone Warehouse Group plc Annual Report 2011 w vie r ove INSPIRATION THROUGH UNDERSTANDING “Can I tweet DELIVERING A BETTER Upgrade alerts and downlOAd CUSTOMER EXPERIENCE With our upgrade alert games at the We have spent considerable time service, we will remind understanding the customer journey customers when it’s time same time?” in order to provide the best experience for an upgrade. to meet customer needs. We have identified four segments that allow us to communicate to customers in a way that we hope is engaging, interesting Trade-ins and informative. These segments are Customers can trade-in defined in-store by demonstration their old mobile phones, zones, which help customers to sat navs, MP3 players, identify devices most suited to their and games consoles. needs. Whether our customers are looking for the latest and greatest, entertainment, social media or work-on-the-go technology, we try to make it easy to find exactly what’s right for them.

“STAYING IN TOUCH is vital for me” Connected customers BRINGING TECHNOLOGY TO OUR CUSTOMERS “I NEED ADVICE FROM PEOPLE I CAN TRUST”

Training our people Eye openers Through inspiration, engagement Launched in November 2009 to help and training we aim to deliver highly customers get the most from their skilled employees who put the applications, phones and tablets, customer at the heart of everything ‘eye openers’ features videos from they do. We provide access to the knowledgeable employees giving “who understands my best product and service knowledge useful tips and advice on a wide range technical needs?” to try to deliver a world class level of devices, to help people get more of service for our customers. We from their technology. It has quickly have implemented a number of been established as the most viewed programmes for our people including: technology channel on YouTube as it recently celebrated breaking • Five day induction training event; five million views. • Three week training ‘Boot Camp’ www.youtube.com/eyeopeners for Geek Squad agents; • E-learning accreditation for continual development; and • Nine week intensive training for Best Buy UK recruits.

Carphone Warehouse Group plc Annual Report 2011 07 OVERVIEW THE CONNECTED WORLD (continued)

By putting connectivity at the heart of our business we are committed to helping people experience and buy the best range of hardware, accessories, connections, content and services available to suit their individual needs.

hardware + Accessories + connections + content + services We have evolved our stores To enhance and support all Connections remain at the MyHub provides customers Supporting our customers to provide the broadest our hardware we provide heart of our proposition. with a simple, secure, and is our number one priority range of wireless devices. an eco-system of powerful online backup and so we make sure we offer accessories. storage service. My Music them technology support, Anywhere provides our protection and repair. With customers with the ability to ‘eye openers’ we help our listen to their playlists customers get the best through any device from their products. wherever they are.

phones support and advice

tablets cash for old phones

free upgrade netbooks reminder

laptops internet security

08 Carphone Warehouse Group plc Annual Report 2011 BUSINESS REVIEW

CHIEF EXECUTIVE officer’S review w evie r harnessing the connected usiness world TO GROW OUR BUSINESS b AND PROVIDE REAL VALUE TO OUR CUSTOMERS

This has been a year of considerable our reputation. They are also all the more success for the Group, during which relevant now that mobile phones and our businesses have made impressive other wireless devices have become progress. As a result, we ended the powerful computers, with an explosive year with Group Headline earnings per growth of applications, a rapid product share of 15.0p (2010: 8.3p) and a strong development cycle, and an increasing balance sheet with over £156m of funds range of home entertainment and and loan assets. The Group is well communication technology. positioned to maintain this momentum, Ownership of this ‘Connected World’ despite the tough economic environment. is at the heart of our retail strategy. This combination of financial strength We will continue to provide outstanding and positive outlook lies behind the value and service across a broad range inauguration of our progressive dividend of wireless products and accessories policy, with a dividend for the year ended and help simplify technology choices for 31 March 2011 of 5.0p. our customers. Carphone Warehouse Group comprises CPW Europe capitalised well on these Roger Taylor, a 50% joint venture share in Best Buy opportunities to grow its Headline EBIT Chief Executive Officer Europe, a separate joint venture with by 18% to £134.6m. Virgin, Virgin Mobile France, and directly owned property interests and other assets. During the year we saw an increase in We consider ourselves penetration of smartphones and currently Best Buy Europe has three main operations: well positioned to take around 80-90% of handsets sold with CPW Europe, Europe’s largest independent a postpay connection in the UK are advantage of smartphone mobile retailer; a profit share in Best Buy’s smartphones, with penetration in the mobile phone retailing operations in the and tablet technology rest of Europe increasing all the time. US; and Best Buy UK, our ‘Big Box’ We see internet connectivity and and are excited about consumer electronics stores and online smartphone features becoming the norm platform in the UK. the prospects for the across virtually all mobile devices, further Virgin Mobile France is France’s increasing smartphone penetration in the year ahead. leading MVNO. postpay segment. The prepay segment experienced lower penetration of Best Buy Europe smartphones, given the economic CPW Europe environment and higher price points. Some 21 years ago, the original Carphone Warehouse opened its first store on the Our ‘Wireless World’ format stores, Marylebone Road in London. Today, it has which have a wider range of products over 2,400 stores, covering the UK, Ireland and services than our traditional stores, and seven Continental European countries, continue to produce excellent customer and last year connected almost 12 million feedback and compelling financial returns. individuals with new mobile devices. As at the year end we had 106 ‘Wireless World’ stores across six markets. We From the outset, Carphone has been are accelerating the roll-out of these based on the principles of choice, stores with a target of 350-400 by the value and impartial advice for all our end of the current financial year and customers. These principles, together aspirations to convert most of the estate with our record of innovation, have stood within five years. us in good stead and are at the heart of

Carphone Warehouse Group plc Annual Report 2011 09 BUSINESS REVIEW CHIEF EXECUTIVe officer’S review (continued)

We are excited about the ever-expanding Best Buy UK range of tablet devices coming to the Best Buy UK opened an initial six ‘Big Box’ market, with forecasts for the size of this stores in the UK during 2010-11 and market increasing all the time. The CPW launched its online offering in November. Europe ‘Wireless World’ format is ideally A further four stores have opened since suited to offer a wide range of tablets, the year end. The execution of these particularly as 3G enabled tablet sales openings has been impressive, and we increase and more tablets are purchased are delighted with the customer feedback. in a bundle with a smartphone. Following this launch period we are in the process of evaluating the next steps Best Buy Mobile US in our multi-format/multi-channel Best Buy Mobile US had an outstanding consumer electronics strategy. year, surpassing our expectations by Growth of tablets (m)* some way. The US is one of the world’s Virgin Mobile France largest mobile marketplaces, with over Virgin Mobile France had an extremely 99 280 million mobile phone accounts. successful year, combining good organic 70 Perhaps surprisingly, though, the US growth with the successful integration consumer has traditionally lacked a retail of Tele2 France and delivering all the 48 80 offering of choice and impartiality. Our promised synergies. It is France’s largest 8 32 58 6 40 25 partnership with Best Buy, a world-leading MVNO with some 1.9 million customers electronic goods retailer, was created and a strong distribution network of over 2010 2011 2012 2013 2014 specifically to address this. It combines 2,500 third party retail outlets and around Western Europe the mobile retailing and connections 53,000 prepay voucher top-up points. Its North America experience of Carphone Warehouse management strength is illustrated by the Tablets – a non-existent with Best Buy’s formidable consumer completion of the Tele2 integration and its category just 18 months electronics retailing expertise and store ability then to return to customer growth, ago – have already captured portfolio across the US, and the impartial with 161,000 net customer additions in consumers’ imagination and advice heritage of both organisations. the fourth quarter. This took total net rapid growth is expected in The results have been spectacular. Best customer growth for the year to over this segment. Buy Mobile’s market share in the US now 200,000, bringing Virgin Mobile France stands at around 5%, up from around within sight of its long-standing target 1% when the venture started in 2006. of over 2 million customers. smartphone increase At the end of last year, all of Best Buy’s The financial result last year was a in western europe (%)** 1,101 US ‘Big Box’ stores had Best Buy transformation from a Headline EBIT 6 4 4 3 2 Mobile stores-within-a-store, and Best loss of £22.2m to a Headline EBIT profit 53 43 39 36 34 Buy Mobile had rolled-out 190 smaller of £20.6m. stand-alone stores, which are similar Virgin Mobile France now offers a much 31 34 in size to a ‘Wireless World’ format store 24 27 wider range of smartphones than it did for 19 in Europe. In addition, Best Buy Mobile 30 30 30 much of last year and has made significant 22 29 launched a new online platform during market share gains through its creative the year, providing new sales opportunities marketing campaigns. Looking ahead, it 2010 2011 2012 2013 2014 as well as developing the business’ will invest in its infrastructure to reduce Low cost multi-channel proposition. Basic costs and increase flexibility, and we Smart phone – entry level Best Buy Mobile’s US connections grew by believe it is well set to reinforce its number Smart phone – featured 28%, to over 7 million, and this increased one MVNO position in France and to deliver Smartphone penetration is set Best Buy Europe’s share of profits by 111% further growth in revenue and operating to increase, as devices become to £97.9m. profit in the current financial year. even more affordable. Best Buy Mobile increased the space In summary

* Table created by the Company based on allocated for some 370 stores-within-a- We continue to benefit from a strong Gartner data. Source: Gartner, Inc., Forecast: store during 2010-11, and has increased product cycle, with smartphone technology Connected Mobile Consumer Electronics, a further 230 since the year end. Looking continuing to develop and proliferate Worldwide, 2008-2015, 1Q11 Update, Carolina Milanesi et al, April 1, 2011. ahead, the business is targeting 600 to 800 rapidly, and an ever-expanding range of stand-alone stores over the next 5 years. tablets coming to the market. We believe ** Table created by the Company based on Gartner data. Source: Gartner, Inc., Forecast: We believe that Best Buy Mobile US can the business is well positioned to capitalise Mobile Devices, 2008-2015, 1Q11 Update, secure a 10% share of the US mobile retail on this despite the widespread uncertainty Carolina Milanesi et al, March 17, 2011. (Data points based on CPW’s definition of Western market in the medium term. around the economic environment. Europe which include Belgium, France, Germany, Ireland, Netherlands, Portugal, Roger Taylor, Chief Executive Officer Spain, Sweden, UK. Smartphone descriptions have been simplified by CPW Group plc for the purpose of this annual report.)

10 Carphone Warehouse Group plc Annual Report 2011 BUSINESS REVIEW

Best buy Europe: overview w evie r

Best Buy Europe Headline EBIT (100% basis) PERFORMANCE highlights 2011 2010 • CPW Europe benefitted from • Best Buy UK saw EBIT usiness

£m £m % strong smartphone sales, losses of £62.2m, up from b CPW Europe 134.6 114.4 18 and from the cost and £21.0m in 2010, reflecting margin initiatives launched significant investment in Best Buy Mobile US 97.9 46.4 111 in the previous year, to developing the brand 232.5 160.8 45 deliver Headline EBIT following launch. growth of 18%. Best Buy UK (62.2) (21.0) • Best Buy Mobile delivered EBIT 170.3 139.8 22 phenomenal profit growth, on the back of rapid expansion in like-for-like sales and retail space, and further improvements in operational execution. e ar

g n ket sh o wi r mar G Europe’s largest independent mobile phone retailer 106 wireless world stores open over 3,700 stores Best buy Europe 22% EBIT GROWTH 19 million connections impartial, expert advice walk out working

Our joint venture partner Management structure • Best Buy is a world– • It has established a • Best Buy Europe has its own • The board ordinarily leading consumer reputation for outstanding experienced team, meets formally once a electronics retailer, listed customer support, service led by Andrew Harrison, month, to agree strategy on the New York Stock innovation and expertise CEO, who has been with and to review performance. Exchange, with annual in the whole spectrum of Carphone Warehouse • Best Buy Mobile forms part sales of over $50bn. consumer electronics since 1995. of Best Buy but is governed technology. • It has operations in Canada, • The joint venture board by a separate management Mexico and China, as well as includes members of the committee, comprising the US, where it is a market management team and management and leader, with market share representatives of each representatives of both of over 20% in various shareholder. Best Buy and the Group. consumer electronics • The committee usually categories. meets monthly and covers strategic and operational matters.

Carphone Warehouse Group plc Annual Report 2011 11 BUSINESS REVIEW Best buy Europe: overview (continued)

background Best Buy Europe is a 50:50 joint venture with Best Buy formed in June 2008, when Best Buy acquired 50% of CPW Europe, including its profit share in Best Buy Mobile US. The venture draws on the innovative and customer-centric heritage of both businesses, and combines the Group’s expertise in delivering connected products and services with Best Buy’s retailing excellence and scale. The business has retail operations in nine European countries, primarily through The Carphone Warehouse and The Phone House brands, and more recently through the Best Buy brand in the UK, together with its profit share in Best Buy Mobile in the US.

CPW EUROPE STORE PORTFOLIO

United Kingdom Sweden Own stores: 805 Own stores: 102 Franchise stores: 10 Ireland Own stores: 78 Netherlands Belgium Own stores: 120 Own stores: 83 Franchise stores: 71 Online platform Spain Germany Own stores: 403 Alongside its extensive Own stores: 179 Franchise stores: 61 Franchise stores: 43 store portfolio, each of Best Portugal Buy Europe’s businesses Own stores: 137 France Franchise stores: 5 Own stores: 279 has well-developed online Franchise stores: 53 channels.

CPW Europe Best Buy Mobile US Best buy mobile us • CPW Europe is the largest independent • Best Buy Mobile offers the same expert, store growth mobile retailer in Europe, with impartial proposition as CPW Europe, 190 77 2,429 stores at March 2011 and and benefits from the scale and brand 39 well-developed online channels. of Best Buy. 1,023 1,070 1,101 • Its specialisation in combining • The business has had remarkable hardware, connections and services, success in a market in which the 5 6 4 183 and ongoing investment in high quality customer experience in mobile phone and well-trained consultants, make retailing has lagged that in Europe, 2007 2008 2009 2010 2011 it ideally placed to benefit from the increasing market share from around Stores-within-a-store Stand-alone stores evolution of smartphones and other 1% in 2006 to around 5% in 2010. areas of complex technology. • At March 2011, it operated through • Most of its stores are between 500 190 stand-alone stores, with a similar and 1,000 sqft with an average of format to ‘Wireless World’ stores in CPW approximately 620 sqft. Europe, and 1,101 branded stores within Best Buy’s ‘Big Box’ stores. It has plans • The business has been developing to open a further 150 stores in the coming ‘Wireless World’ stores, which are year, with a five year target of 600-800 generally larger than traditional format stand-alone stores, and also continues stores, typically 1,000 sqft to 1,600 sqft. to develop its online channels. These stores have a broader range of products and services, as well Best Buy UK as dedicated Geek Squad agents to • The joint venture launched six stores provide advanced technical support. and an innovative online platform • More recently, the format has been during the year, with five stores adapted to fit into a smaller space, in scheduled through to summer 2011. the form of ‘Wireless World Essential’ • We have used these platforms to stores, which also focus on a broader trial routes to market for consumer range, but typically in a 500 sqft to electronics in the UK, and are now 1,000 sqft format. evaluating the next steps in our multi-format/multi-channel consumer electronics strategy.

12 Carphone Warehouse Group plc Annual Report 2011 BUSINESS REVIEW

Best buy Europe: marketplace w evie r making the most of our changing marketplace The business is experiencing one of the most exciting periods of technological innovation that usiness it has ever known, with increasingly sophisticated smartphones evolving all the time, and the b advent of tablets in a wide range of formats. Like other retailers, the business is operating in a challenging economic environment, and this has undoubtedly affected the prepay category in the past year. But the business is in good shape operationally to face these challenges, and remains well-placed to capitalise on the market opportunity going forward.

The smartphone revolution Tablets enter the market The proliferation of smartphones into the Tablets share many similarities with market has stimulated consumer demand smartphones, typically employing touch- in both Europe and the US in a way that screen technology and designed to we haven’t seen for several years. provide multimedia services on-the-go. The tablet format only launched in 2010, Alongside the features available on but it has already established itself as an traditional handsets, smartphones offer important category and we expect it to multimedia functionality including fully become increasingly significant in the synchronised email, internet access, and years to come. the ability to download applications, at ever improving speeds. The past couple of With numerous devices coming to years have seen the entry of new product market, we see tablets as an important suppliers, creating new competition in the opportunity for the business, again playing market, both across products and handset into our proposition of impartial expert operating systems. This competition is advice, and ongoing customer support. resulting in rapid innovation, and ever Consumer electronics more affordable products. The consumer electronics market has Because smartphones enable customers seen a move to online channels in the past to access the web, music and movies year as consumers search for the best while they are on the move, they drive possible price and offering. significantly greater levels of network At the same time, we are seeing rapid activity, which provides the opportunity technological innovation in the market, for growth in operator data revenues. and increasing complexity in the products Smartphones are therefore also and services being offered. Many new stimulating competition between the products – including tablets, home network operators, again providing computers, home theatre systems and consumers with outstanding value. even some domestic appliances – offer The most compelling data packages to opportunities for synchronisation with date have been on postpay tariffs, and other devices, home networking we expect smartphones to dominate the and for receiving services across postpay category even further in the multiple devices. coming year. Due to a combination of We see this complexity increasing the relatively expensive data pricing on need for expert support and guidance, prepay propositions and weak consumer services which are more readily provided confidence, smartphones have not yet in a store environment. taken a significant share of the prepay category in our leading markets; however, we expect penetration to increase in the medium term, as smartphones reduce in price. We think our businesses in both the US and Europe are well-placed to capitalise on continuing smartphone growth. Our significant investment in training is all the more important as technology becomes increasingly complex and our impartial proposition ever more relevant as choices multiply around products, operating systems, services and content.

Carphone Warehouse Group plc Annual Report 2011 13 BUSINESS REVIEW Best buy Europe: strategy and KPIs harnessing the connected world THROUGH A CUSTOMER- CENTRIC STRATEGY

Strategy 1 Ownership of the Connected World

Provide outstanding value Help consumers simplify Enhance multi-channel and service across the complex areas of technology platforms to improve broadest range of products • Continue to invest in the ongoing customer choice training of our expert consultants, • Continue to construct innovative • Ongoing investment in online and to focus on in-store set-up through propositions and to find new ways transactional sites. the ‘Walk Out Working’ programme. to subsidise expensive products. • Increase range of delivery • Increase the number of stores with • Expand our ‘Wireless World’ store options across stores, home and dedicated Geek Squad resources, format to provide the broadest range of work to maximise convenience. and continue to develop Geek Squad smartphones and to extend the product phone and home support. • Access extended online range in- range into other connected devices. store to provide additional choice. • Maintain investment in operational • Offer a full suite of hardware, platforms to simplify transaction accessories, connections, content and processes. services to enable customers to make the most of their technology.

2 continue to build market share

Reinvest benefits of scale Continue to expand and Leverage global scale in improving the consumer improve the quality of the to secure exclusives and proposition, in turn, driving retail portfolio scarce products, and build further growth • Continue the rapid roll-out of stand- strategic relationships with alone stores in the US and increase • Best Buy Europe continues to maintain key suppliers selling space within Best Buy Mobile this long-held strategy in both Europe stores within ‘Big Box’ stores. • Apply combined scale of Best Buy and the US. Europe and Best Buy to drive • Improve the quality of European differentiation from competitors portfolio through migration of and obtain exclusive products. appropriate sites to a ‘Wireless World’ format. • Continue to develop commercial alignment with the mobile network operators, to enhance strategic partnerships. • Utilise Best Buy’s established own-label supply chain to improve the value proposition across all Best Buy Europe channels. 14 Carphone Warehouse Group plc Annual Report 2011 w evie r usiness b

KPIs sales channels

CPW Europe Best Buy Mobile US Best Buy UK • ‘Wireless World’ trials during the • Best Buy Mobile operates from • Best Buy UK opened six stores in year have generated a very positive all of Best Buy’s 1,101 ‘Big Box’ stores. 2010-11 across the UK. customer response, and demonstrated • In 2010-11 the space allocated to • The stores range from 25,000 sqft a good return on investment. approximately 370 of these centres to 45,000 sqft, and have been used • By March 2011, we had 106 new format was increased from an average of to trial varied ranges and layouts. stores open, and aim to have 350-400 1,100 sqft to 1,400 sqft, with space • Five further ‘Big Box’ stores across Europe over the next year, in a further 230 increased since the are scheduled to open in 2010-11. achieved through a mix of new store year-end. openings and the refurbishment of • The Best Buy UK website launched • It continued its rapid deployment of existing stores. in November 2010, offering an stand-alone stores, adding more than extended online range. • We continue to invest in our 100 sites during the year to take the transactional websites, and have total at March 2011 to 190. seen good growth in this channel • It plans to end its fiscal year (February year-on-year. 2012) with 325 stand-alone stores, with longer-term plans for 600-800. • Best Buy Mobile launched a new online platform during the year, streamlining the transaction process to improve the customer experience.

sales Performance

In both Europe and the US, we have CPW Europe connections US connections focused on high value postpay and (000) (000) smartphone segments, helping to drive value for the network operators. 12,463 12,496 11,494 11,845 10,014

7,055 5,505 4,224 2,205 2,665

2007 2008 2009 2010 2011 2007 2008 2009 2010 2011

The connections decline in 2011 reflects Continuing strong growth in connections lower demand for prepay connections reflects the rapid roll-out of the model and and the impact of the shift from 18 month the success of the proposition in capturing to 24 month contracts in the UK from new customers. mid-2009 onwards.

Carphone Warehouse Group plc Annual Report 2011 15 BUSINESS REVIEW Best buy Europe: performance review

The business delivered EBIT growth of over 20% year-on-year, despite incremental EBIT investment of over £40m in Best Buy UK, reflecting the strong performance of the US and European mobile businesses.

CPW Europe headline EBiT Headline income statement (100% basis) (£M) 2011 2010 £m £m 135 114 Revenue 3,572.0 3,528.8 97 Gross margin 990.1 1,037.1 GM % 27.7% 29.4% Operating expenses (830.6) (851.8) 2009 2010 2011 Best Buy Mobile US 97.9 46.4 EBITDA* 257.4 231.7 Depreciation and amortisation (87.1) (91.9) best buy mobile us EBIT 170.3 139.8 headline EBiT (£M) EBIT % 4.8% 4.0% 98 Interest (15.2) (16.3) Tax (34.3) (28.9) 46 PAT 120.8 94.6 8 Group share 60.4 47.3

2009 2010 2011 * Headline EBITDA includes the unwinding of discounts for the time value of money on network commissions receivable over the life of the customer. This unwind has a value of £10.0m in the year ended 31 March 2011 (2010: £8.0m) and is treated as interest income in the joint venture’s statutory results.

Best Buy Europe generated revenues continued to increase in the postpay of £3,572.0m, an increase of 1.2% on last segment, driving an improvement in year (2010: £3,528.8m). As anticipated, average revenue per connection. The revenues associated with our German prepay segment was more significantly service provider business fell year-on- affected by subdued consumer confidence, year, by around £100m, as we continued with low penetration of smartphones into to move to a more typical retail model. this category and some price deflation at This decrease was more than offset by the low end. Continuing the trend of last an increase in revenues from our dealer year, like-for-like growth was largely business in Germany, which has been driven by the UK business, although there developing its sales channels during the was an encouraging improvement in year, and which provides a platform for performance in some of the Group’s potential further growth in that market. operations outside the UK towards the Revenues were also adversely affected end of the year, reflecting investment in by around £50m due to the strengthening commercial and operational initiatives of Sterling year-on-year, being offset by in these territories. revenues from Best Buy UK, which As anticipated, connections volumes commenced trading in April 2010. dropped year-on-year, falling by 5.2% CPW Europe saw like-for-like revenue from 12.5m to 11.8m. This decrease growth of 0.9%, despite a difficult primarily reflects the weakness in the economic backdrop. The business prepay segment noted above. Towards capitalised well on an exciting product the end of the year, it also reflected the cycle, investing in live demonstration impact of the shift from 18 month to models, innovative new displays, and a 24 month contracts in the UK from broader range of associated accessories mid-2009 onwards, which is likely to and services. Smartphone penetration suppress year-on-year upgrade volumes during calendar 2011.

16 Carphone Warehouse Group plc Annual Report 2011 w evie r usiness b

CPW Europe opened or resited Best Buy Mobile achieved phenomenal Best Buy UK incurred EBIT losses approximately 140 stores and closed profit growth year-on-year, translating of £62.2m in the year, up from £21.0m around the same number, ending the year into an increase in Best Buy Europe’s profit in 2009-10. With only six stores at the at 2,429 stores, in line with the 2,430 at the share from £46.4m to £97.9m. Best Buy year-end, the business still has a start of the year. Within this portfolio, the Mobile traded from all of Best Buy’s 1,101 disproportionately high central cost number of franchise stores increased from (2010: 1,070) ‘Big Box’ stores in the US at base, and has made a substantial 206 at March 2010 to 243 at the end of the March 2011 and from 190 stand-alone investment during the year in year, primarily reflecting growth in France stores, up from 77 at the start of the year. marketing and promotional activity, and Spain. The decrease in own stores was The space allocated to Best Buy Mobile to develop awareness of its brand predominantly in Germany. stores-within-a-store was increased from and retail presence. an average of 1,100 sqft to around 1,400 The business has continued to develop Best Buy Europe’s Headline EBIT margin sqft in approximately 370 stores during the ‘Wireless World’ store format, with increased from 4.0% to 4.8%, despite the the year, with a further 230 increased since 106 such stores at the end of the year significant additional investment in Best the year-end. Best Buy Mobile plans to end across six markets. With a wider range Buy UK, reflecting the strong performance its fiscal year (February 2012) with 325 of products and services than traditional of CPW Europe and Best Buy Mobile US stand-alone stores and to increase the stores, this format continues to produce year-on-year. total number of stand-alone stores to excellent customer feedback and 600-800 within five years. The interest charge decreased from compelling financial returns. £16.3m to £15.2m, reflecting lower average Additionally, Best Buy Mobile launched After the year-end, we announced our borrowings, partly offset by the higher a new online platform during the year, decision to sell our retail operation in costs of the stand-alone banking facilities providing new sales opportunities as Belgium to Belgacom for a provisional introduced in 2009. well as developing the business’ multi- cash consideration of €22m, subject to channel proposition. Best Buy Europe had an effective clearance from the Belgian competition tax rate of 22.1% (2010: 23.4%). The authorities. Belgium is unique in Western Best Buy Mobile increased connections decrease reflects the anticipated Europe in being a largely unsubsidised by 28.2% to 7.1m in 2010-11, compared utilisation of tax losses that had not mobile market, which has always been to 5.5m in 2009-10. The business continues previously been recognised. a challenge for our business model. to invest in its differentiated customer proposition, and in marketing activity to Gross margins in the core CPW Europe increase awareness of the Best Buy Mobile business continued to strengthen year-on- brand and offering. year, reflecting the margin improvement initiatives that started to bear fruit in the The increasing scale and operating second half of the previous year. This was leverage of the business naturally had offset by the increase in low margin dealer a positive impact on operating profit revenues noted above and the lower sales margins year-on-year. This was partially margins and substantial investment in offset by the investment in marketing marketing in Best Buy UK. Overall, Best and customer proposition noted above. Buy Europe’s gross margin percentage We opened the first six Best Buy branded decreased by 170 basis points year-on- ‘Big Box’ stores in the UK during the year, year to 27.7% (2010: 29.4%). with four more following since March, Operating expenses decreased by 2.5% and the Best Buy transactional website year-on-year from £851.8m to £830.6m. launched in November 2010. Customer CPW Europe benefitted from reduced feedback during this launch period has operating costs in its German service been highly encouraging both in-store and provider business and from the annualised online, a lead indicator of the opportunity effects of last year’s cost reduction for an innovative, service-led proposition. programme, together with the strengthening of Sterling noted above. These savings were partly offset by additional expenditure in Best Buy UK.

Carphone Warehouse Group plc Annual Report 2011 17 BUSINESS REVIEW Best buy Europe: performance review (continued)

Best Buy Europe Cash flow (100% basis) Net Funds (£M) 2011 2010 £m £m 132 Headline EBITDA pre-Best Buy UK 317.0 252.7 Working capital (35.0) (27.1) 57 Capex (69.4) (53.9) Operating free cash flow pre-Best Buy UK 212.6 171.7 (47) Best Buy UK (78.0) (44.0) 2009 2010 2011 Other (60.3) (23.3) Movement in net funds 74.3 104.4 Opening net funds (debt) 57.4 (47.0) Closing net funds 131.7 57.4

Headline EBITDA within CPW Europe The business paid corporation tax of and Best Buy Mobile US grew by 25.4% £44.0m in the year, up from £24.0m in year-on-year from £252.7m to £317.0m, the previous year, reflecting the growth reflecting the strong improvements in in pre-tax earnings seen over the last profitability noted above. two years. CPW Europe absorbed £35.0m of working The principal other component of other capital in the year (2010: £27.1m) principally cash flows in the year is interest expense, reflecting increased stock levels. which was offset in the previous year by foreign exchange gains. The focus of capex in CPW Europe continued to be its store portfolio and IT At the end of the year, net funds within platforms. Capex increased from £53.9m Best Buy Europe were £131.7m, up from last year to £69.4m, principally due to £57.4m at the start of the year, reflecting additional investment in the store portfolio. the cash generation described above. Total cash investment in Best Buy UK Outlook was up from £44.0m in 2009-10 to £78.0m, Best Buy Europe continues to benefit from reflecting EBITDA losses of £59.6m the proliferation of smartphone technology (2010: £21.0m) and capex of £18.4m and the ever-expanding range of tablets (2010: £23.0m). Capex relates to new store coming to market, playing well into the openings, net of landlord contributions, business’ core proposition in both Europe and IT and online platforms. and the US. We believe that the business is well positioned strategically and operationally to capitalise on the strong product cycle over time. The business is not entirely immune to the wider economic environment, however, and there is some uncertainty on the outlook for the prepay segment in particular this year.

18 Carphone Warehouse Group plc Annual Report 2011 w evie r usiness b

We expect CPW Europe connections Overall, we anticipate a Headline EBIT Following the development of our Best Buy volumes to reduce by 0-5% in the coming from CPW Europe of between £135m and branded consumer electronics channels year, again reflecting potential weakness £150m (2011: £134.6m), with the ultimate during the past year, we are now in the in the prepay segment, together with the outcome within this range likely to be process of evaluating our next steps for impact in the upgrade segment of the dependent on the performance of the this business, and will provide further switch from 18 month to 24 month prepay segment over the key Christmas guidance once this process is complete. contracts in the UK from mid-2009. This trading period. We expect that Best Buy Europe’s existing switch will dampen postpay volumes, We expect continued strong progress from financing facilities will be replaced in the particularly in the first half of the year. Best Buy Mobile in the US, anticipating current year, and that this will result in The reduced upgrade volumes will have overall connections growth of around 20%, lower cost and more flexible facilities a negative impact on earnings in the with growth in the critical postpay category going forward. Accelerated amortisation short-term, especially in the first half, likely to be higher than this. on existing facilities is likely to offset although this will start to be offset some of the profit benefit of this in the The business is rolling out around 150 towards the end of the year by the benefit current year. more stand-alone stores during the year, of renegotiated network commercials, providing additional average space of The tax charge will benefit from the which provide the business with a greater approximately 13%. These stores do not lower rates in the UK, and we expect share of revenues beyond the customer immediately enjoy the same level of footfall an effective rate of 23-24% for the year. contract term. as the well-established ‘Big Box’ stores, The accelerated roll-out of ‘Wireless We expect this short-term impact to be and consequently will not immediately World’ stores in CPW Europe is expected fully offset by incremental profits from generate the same level of connections, to result in an increase in capex year-on- our ‘Wireless World’ stores, alongside the but they provide a critical building block year, offsetting anticipated EBITDA growth operational and commercial initiatives for increasing market share and earnings and resulting in flat operating free cash that are being implemented across our over time. flow from CPW Europe and Best Buy European businesses. The additional space allocated to Best Buy Mobile US. We anticipate a like-for-like revenue Mobile stores-within-a-store translates range of -2% to +2%, with an increasing into a further increase of around 7-8% in proportion of non-connection revenue average space. This additional capacity is within the mix. As we accelerate the primarily focused on accessories and roll-out of the slightly larger ‘Wireless other ancillary products, but is also World’ format store, and expand our expected to support continued strong presence in the Spanish market, we like-for-like growth in connections through would expect an increase in average this format. space of 2-3%. As in the second half of 2010-11, we Following the completion of the migration anticipate that the benefits of increasing of our service provider base in Germany, scale will be partially re-invested in the we anticipate a further reduction of around customer proposition and marketing to £100m in revenue from that business, with drive the business’ long-term positioning an associated drop in profits of around in the marketplace, and as a result expect £10m in 2011-12. EBIT growth of approximately 20-30% year-on-year from £97.9m to around £120m-£130m.

Carphone Warehouse Group plc Annual Report 2011 19 BUSINESS REVIEW Best buy Europe: risk

Best Buy Europe has a well-established risk management function, which monitors the key risks facing the business. The table below summarises the most material risks identified, and the ways in which the business seeks to mitigate them.

Consumer environment Risk Mitigation Best Buy Europe’s major markets have suffered low The business undertook a major reorganisation programme or negative economic growth since 2009, and there is in 2009, and maintains an ongoing programme to try to uncertainty surrounding the economic outlook. Some improve efficiency, and to ensure that it is well-positioned of the products and services offered by the business to deal with an uncertain environment. may be viewed as discretionary, and may therefore be particularly affected by consumer confidence.

Dependence on key suppliers and customers Risk Mitigation Best Buy Europe’s principal revenue streams are The business has moved towards commercial from mobile network operators, and any change in arrangements that provide a closer alignment of interests their strategy could affect the revenues and profits with the network operators, whereby the risks and rewards of the business. of customer ownership are shared, and has focused on the high value postpay and smartphone segments to help The business is also dependent on relationships with to drive economic value for the networks. key suppliers to source products on which availability may be limited. The business seeks to increase and leverage the scale of its operations to support global strategic relationships.

Competition Risk Mitigation Best Buy Europe operates in markets that are highly The business has sought to differentiate itself through competitive, in which the behaviour of competitors innovative propositions, high quality customer service, may damage revenues and margins. and a good supply of scarce products.

Regulation Risk Mitigation Best Buy Europe is subject to regulation in a number The business has internal committees and control of areas, including insurance operations, information structures to manage these requirements, to ensure security and customer management. appropriate compliance, and to react swiftly should issues arise.

Operations Risk Mitigation Best Buy Europe’s operations are dependent on internal A significant investment has been made over recent years and external IT systems which could fail or be unable in the IT infrastructure of the business, supported by testing to keep pace with the needs of the business. processes and ongoing business continuity planning.

Foreign exchange Risk Mitigation A material part of Best Buy Europe’s earnings are The business may hedge a proportion of such earnings, denominated in US Dollars and Euros, giving rise to provide certainty of their value. to exposure to foreign currency fluctuations.

20 Carphone Warehouse Group plc Annual Report 2011 BUSINESS REVIEW

virgin mobile france: overview w evie r Performance highlights • Virgin Mobile France has • After several years of EBIT usiness

grown rapidly in the current and cash investment in b year, with net customer growth, the business has additions of 0.2m, well now reached a scale where ahead of our expectations at it is generating good profits e the beginning of the year. and cash flows, even while it continues to grow. ar ket sh mar

g n o wi r

G 1.9 million customers

No.1 FRENCH mvno wide distribution network virgin mobile france over 40% revenue growth outstanding customer service Strong brand awareness

our joint venture partner Management structure • The Virgin Group was • It has become one of the • Virgin Mobile France has • Three representatives founded by entrepreneur leading exponents of the its own experienced from each shareholder sit Sir Richard Branson, and MVNO business model management team, led alongside Geoffroy on the operates across a range worldwide, having also by Geoffroy Roux de joint venture board. of sectors globally. set up Virgin Mobile Bezieux, Chairman. • The board ordinarily meets operations in the UK, US, • Geoffroy joined Carphone formally once a month to Australia, Canada, India Warehouse in 1995, founding agree strategy and review and South Africa. its retail business in France, performance. • Management of Virgin and was a member of the Mobile France also hold Old Carphone Warehouse a minority stake. board before leaving to set up this venture.

Carphone Warehouse Group plc Annual Report 2011 21 BUSINESS REVIEW virgin mobile france: OVERVIEW AND marketplace

Through its innovative propositions, high quality customer service and its network relationships, Virgin Mobile France has been able to capitalise on the opportunities in the French marketplace to become the clear number one MVNO.

BACKGROUND Support for MVNOs In order to stimulate greater competition • The largest MVNO in France with in the French market, the French 1.9m customers. government and the local telecoms • It was launched in 2006, building on regulator, ARCEP, have encouraged the Carphone Warehouse’s commercial development of MVNOs. Virgin Mobile relationships and Virgin’s experience France has been the chief beneficiary of as one of the leading MVNO operators this drive, as a clear leader in the French worldwide. MVNO market. • The acquisition of Tele2 France in 2009 Entry of a fourth network transformed the business, giving it a In December 2009, ARCEP announced that Well established brand significant step-up in scale, which a fourth 3G mobile network licence was The brand enjoys prompted improved its strategic standing and being awarded to Free Mobile, a part of the awareness and customer financial performance. Iliad group. satisfaction ratings of • It has a strong distribution network, The introduction of this fourth network is over 85%. with over 2,500 third party handset likely to increase the level of competition sales points, some 53,000 distribution within the market. points for prepay vouchers, a small The incumbent networks have sought to portfolio of Virgin branded stores, and strengthen their positions through ‘Quad a well established online platform. Play’ offerings (i.e. television, fixed line • The Virgin brand is well recognised telephone, broadband internet and mobile in France and the business enjoys telephone). a reputation for high quality Virgin Mobile France continues to develop customer service. its range of products and services to ensure that it is well placed to meet this MARKETPLACE new competition. Competitive landscape France’s mobile market is one of the Increasing data As in other European markets, a Award-winning service largest in Western Europe, with approximately 63m subscribers. combination of competition and regulatory Virgin Mobile France’s high intervention has reduced voice revenues quality customer service The French market has historically been over recent years. was recognised through one of the less competitive mobile phone the élu Service Client award markets in Europe, with only three However, the proliferation of internet of 2011 in the mobile phone network operators. In recent years, none usage on smartphones and other portable operator category. of these networks has engaged in an communication devices has provided an aggressive expansion strategy, providing opportunity to mitigate this through an opportunity for Virgin Mobile France. growing data revenues. We anticipate continued significant growth in network usage, providing further opportunities to try to monetise this activity.

22 Carphone Warehouse Group plc Annual Report 2011 BUSINESS REVIEW

virgin mobile france: strategy and KPIs w evie r usiness b

Strategy KPIs

Grow base to reinforce sales 1 position as #1 MVNO performance

Targeting over 2m customers evolution of the base (000) • The business is well on track to meet its long-standing 2m customer target this year.

• Our aim is to maintain this growth to continue to improve 1,917 1,715 the business’ scale and strategic position. 1,114 805 Expanding our own distribution, 470 and third party distribution 2007 2008 2009 2010 2011 • The business continues to develop its third party distribution 5 year revenue growth (£M) channels, including mobile and consumer electronics specialists, and generalists and hypermarkets. • It also has 28 Virgin Mobile branded stores, in store-within- 328 a-store and stand-alone store formats, and is targeting further stores in the current year. Together with its well- 233 established online platform, this will help to provide further 139 distribution capacity. 29 87

2007 2008 2009 2010 2011

Improve profitability EBIT performance 2 and cash generation

Increase scale benefits headline EBIT PROGRESSION (£M) • After several years of investment and growth, the business is now seeing the benefits of scale and achieving strong profit and cash generation. 21 • We are targeting an EBIT margin of 10% over time. • We are embarking on the development of a fuller MVNO infrastructure, which will result in greater flexibility, better (17) speed to market and a lower cost base. (23) (23) (22) 2007 2008 2009 2010 2011

Carphone Warehouse Group plc Annual Report 2011 23 BUSINESS REVIEW virgin mobile france: performance review

A year of transformed profitability and cash generation, alongside continued strong growth.

Headline income statement The business produced a Headline EBIT The significant year-on-year uplift in (100% basis) margin in 2010-11 of 6.3% (2010: negative EBITDA described above translated into 9.5%) despite high levels of customer strong operating free cash flow. As 2011 2010 £m £m acquisition, reflecting the benefits of scale anticipated, the business has seen an noted above. increase in capex year-on-year, with spend Revenue* 328.4 232.8 of £6.8m against £3.7m in the previous Interest increased year-on-year from EBITDA 24.3 (19.3) year, principally relating to a programme £1.5m to £2.9m, reflecting the additional to bring billing operations in-house. Depreciation and (3.7) (2.9) debt associated with the Tele2 acquisition. amortisation Other cash inflows in the year include A tax rate of 34% has been assumed, in £6.7m in relation to the finalisation of the EBIT 20.6 (22.2) line with the rate applicable in France. Tele2 purchase price. Other cash flows in EBIT % 6.3% (9.5)% The tax charge for the year was partly the prior year reflect an outflow of £45.2m offset by a credit of £5.9m in relation to Interest (2.9) (1.5) in relation to Tele2, partially offset by an brought forward tax losses, of which the increase of £5.6m of share capital. Tax (0.7) 5.1 Group share is £2.8m. It is now anticipated PAT 17.0 (18.6) that these losses will be utilised in France Outlook rather than the UK, attracting relief at We expect the business to break through Group share 8.2 (8.2) 34% rather than the rate in the UK. the 2 million customer target this year, * Revenue excludes contributions towards subscriber acquisition with guidance for net additions of between costs from network operators and customers, as the directors Virgin Mobile France recorded 100,000 and 150,000. The strong growth consider that this provides a better representation of amortisation on acquisition intangibles underlying performance. These items, which had a value of seen in the second half of last year, arising on the Tele2 acquisition, of which £55.1m in the year ended 31 March 2011 (2010: £41.6m) are together with these net additions, are netted off against acquisition costs within EBITDA. the Group’s post tax share is £2.2m (2010: expected to deliver revenue growth of £0.6m). This charge is excluded from 10-15%. Virgin Mobile France saw a transformation Headline results to avoid distortion of in its profitability year-on-year, reflecting underlying performance. Some of the margin benefits of improving the additional scale achieved through its scale will be reinvested this year in driving acquisition of Tele2’s French customer further growth and in developing a fuller Cash flow (100% basis) base in December 2009. Headline EBIT MVNO infrastructure, to help to improve moved from a loss of £22.2m last year to a 2011 2010 flexibility and speed to market, and to £m £m profit of £20.6m in the year to March 2011. improve medium-term operating margins. EBITDA 24.3 (19.3) Revenue increased by 41.1% year-on-year As a result, we expect an EBIT margin of from £232.8m to £328.4m. Revenue Working capital 2.6 2.9 around 7%. growth at a constant currency was 47.0%, As in the year just ended, we expect an Capex (6.8) (3.7) with organic growth on the same basis underlying tax rate of 34% to apply, and before Tele2 of 29.0%. Operating free 20.1 (20.1) on a net basis we expect the Group’s share cash flow The venture delivered substantial of the venture’s profits to be £7-8m. customer growth this year, adding over Other 4.5 (39.4) The full MVNO project will also require 200,000 customers to take the closing Movement in 24.6 (59.5) an increased capital investment, with base to 1.92m customers. Most of this net debt total capex expected at around £10m growth occurred in the final quarter of (2011: £6.8m). Despite this we anticipate the year, when the business had secured Opening net debt (88.2) (28.7) continued good cash generation, on the deals with some key new product Closing net debt * (63.6) (88.2) back of EBITDA growth and further suppliers – enabling it to offer a full range positive movements on working capital. of smartphones – and a number of new * Comprises shareholder loans of £74.3m (2010: £105.6m) and net distribution channels. It took advantage cash of £10.7m (2010: £17.4m). of market opportunities in that period to deliver a significant increase in market share.

24 Carphone Warehouse Group plc Annual Report 2011 BUSINESS REVIEW

virgin mobile france: RISK w evie r Virgin Mobile France has developed its own risk management

processes during the year, to identify the main risks facing the usiness business. The table below summarises the most material b risks identified and the ways in which the business seeks to mitigate them.

Consumer environment Risk Mitigation Consumer confidence in France remains relatively low, The business is focused on improving the quality of its which may affect the level of customer spend and the proposition through a wider product and service offering, ability of the business to acquire new customers. increased distribution channels and ongoing brand development.

Dependence on key suppliers Risk Mitigation The business is reliant on third parties for the provision Virgin Mobile France has a strong relationship with its of its network infrastructure. key suppliers, and its increasing scale helps to improve its commercial position. The business is in the process of developing a fuller MVNO infrastructure to reduce dependency and improve flexibility over time.

Competition Risk Mitigation The entry of a fourth network, expected in 2012, may The business continues to invest in the quality of its make the market more competitive, and adversely proposition, brand and distribution channels to try to affect the business’ revenues and margins. improve its scale and competitive position.

Operations Risk Mitigation The business is reliant on internal and external IT A significant investment has been made over recent years systems which could fail or be unable to keep pace in the IT infrastructure of the business, supported by with the needs of the business. evolving business continuity plans.

Carphone Warehouse Group plc Annual Report 2011 25 BUSINESS REVIEW other financials d

en other £ divid

5 p financials EPS up over 80% to 15p £156m of net funds / loan assets

Headline Group income statement Statutory results 2011 2010 2011 2010 £m £m £m £m Revenue 5.6 5.5 PAT 65.6 218.8 Operating expenses (8.7) (6.0) EPS 14.5p 48.7p Best Buy Europe1 60.4 47.3 Prior year statutory profits include 2 Virgin Mobile France 8.2 (8.2) dividend income of £182.0m which EBIT 65.5 38.6 arose in association with the Demerger. Freehold properties Interest 3.9 (1.6) Current year statutory profits include While our freeholds are amortisation of acquisition intangibles Taxation (1.6) 0.4 not strategic investments, in Virgin Mobile France, which had a we anticipate that minor PAT 67.8 37.4 post-tax effect of £2.2m (2010: £0.6m). These items are excluded from Headline development work in the EPS 15.0p 8.3p short-term will help to results to avoid distortion of underlying 1 See page 16. performance. A reconciliation between maximise capital returns. 2 See page 24. In Preston, we have Headline results and statutory results is provided in note 10 to the Group financial developed retail units Revenue represents rental income from statements. alongside our office space, the Group’s freehold properties, and and may find opportunities increased from £5.5m in 2009-10 to £5.6m for further expansion in the in 2010-11. Group balance sheet coming year. As anticipated, operating costs increased 2011 2010 year-on-year, from £6.0m to £8.7m, in the £m £m first year of a stand-alone PLC function Best Buy Europe 571.8 512.6 following the Demerger. Virgin Mobile France 20.4 29.2 Net interest income for the period was Cash 120.6 100.0 £3.9m (2010: expense of £1.6m) reflecting Property 67.8 65.9 interest on cash and on loans to Virgin Mobile France, facility fees from Best Other (22.6) (17.2) Buy Europe and income from minority Net assets 758.0 690.5 investments. A tax charge of £1.6m arose in the year, Group net assets increased by £67.5m compared to a credit of £0.4m in the prior year-on-year to £758.0m (2010: £690.5m) year, reflecting increased interest income broadly in line with net profits for the year. and a proportion of disallowable costs The Group’s interests in Best Buy Europe within profit before taxation. comprise our share of the joint venture’s Revenue and operating expenses are net assets, together with goodwill on the expected to remain similar in the year investment, and the year-on-year growth to March 2012. in its value is closely in line with our share of Best Buy Europe PAT. The Group’s interests in Virgin Mobile France include loans due to the Group as well as our share of the venture’s net liabilities. Strong cash generation enabled the business to repay £14.6m of loans to the Group, leaving £35.7m outstanding at the end of the year. These loan repayments contributed to an increase in the Group’s cash balances year-on-year from £100.0m to £120.6m. 26 Carphone Warehouse Group plc Annual Report 2011 w evie r freehold properties usiness Book Current Market b value rental income value £68m £5.6m £74m

Dividends Capital structure, financing Except for a Euro denominated loan As previously communicated, the Board and treasury provided to Virgin Mobile France, the is commencing a progressive dividend The Group is funded entirely by equity, Group has limited direct exposure to policy, with the aim of maintaining a which at 31 March 2011 totalled £758.0m foreign currency fluctuations. The Group dividend cover of at least three times, (2010: £690.5m). The Group had net funds ceased net investment hedging in May 2010 generally based on Headline earnings. including loans to joint ventures of £156.3m but continues to hedge its loan to Virgin Accordingly, we are proposing a dividend (2010: £150.8m) and an unused bank Mobile France in order to prevent income for the year of 5.0p per share. The ex- facility of £50m (2010: £50m). This facility statement fluctuations arising from foreign dividend date is Wednesday 6 July 2011, is backed by the Group’s property assets currency movements. with a record date of Friday 8 July 2011 and matures in July 2012. The Group’s The Group is more significantly affected and an intended payment date of Friday funds and facilities cover potential funding by foreign currency fluctuations through 5 August 2011. obligations to its joint ventures, which the results of its joint ventures. All of Virgin include an RCF of £62.5m to Best Buy Other KPIs Mobile France’s profits arise in Euros, Europe which expires in March 2013, The Group’s principal KPIs relate to its joint while those of Best Buy Europe are and a further formal commitment to venture operations and are reported in the materially affected by both the Euro and Best Buy Europe of £50m. Best Buy relevant sections of the Business Review. the US Dollar. Best Buy Europe may hedge provides an equal RCF and commitment The KPIs which are relevant for the Group a proportion of its non-Sterling earnings to to Best Buy Europe. as a whole are those regarding shareholder provide certainty of their value. Best Buy return, profitability and growth. Best Buy Europe has a Receivables Europe provides some funding to its Financing Agreement (“RFA”) provided subsidiaries in currencies other than Headline KPIs 2011 2010 by a syndicate of banks, which enables Sterling, giving it limited exposure within ROCE 9.4% 5.4% it to borrow up to £350m against certain net funds to currency fluctuations. trade receivables. This facility is used EPS 15.0p 8.3p Going concern to finance working capital and other A review of the Group’s business activities, requirements during the year, and is The improvements in return on capital together with the factors likely to affect supplemented by the committed employed and EPS reflect the growth in its future development, performance and shareholder RCF of £125m noted profitability already detailed in this report. position are set out elsewhere within this above. The RFA matures in July 2012. Business Review, including the Risk Risk Virgin Mobile France is funded entirely sections. The financial position of the The key risks of the Group relate to its joint through equity and shareholder loans, Group, its cash flows, liquidity position venture operations and such risks are which are provided by its shareholders and borrowing facilities are shown in the described on pages 20 and 25. The Group in proportion to their shareholding. balance sheet, cash flow statement and does not exercise control over Best Buy accompanying notes to the Group financial Europe or Virgin Mobile France and As indicated by the proposed dividend statements. therefore material decisions can only for the year just ended, it is the Board’s be made with the consent of the relevant intention to return any excess cash to The directors, in their consideration of joint venture partner. Inability to reach shareholders as it becomes available. going concern, have reviewed the future consensus on such decisions could have cash and profit forecasts of the Group’s The Group’s investment policy is to an adverse effect on the growth, business joint venture investments and other maximise investment returns whilst and financial results of these operations. businesses. The directors consider that ensuring low risk and suitable liquidity. Such risks are mitigated through agreed these forecasts are based on prudent strategies, defined and documented Treasury policies permit the use of assumptions, and based on these processes and regular communication. long-term derivative products for the forecasts, that it is appropriate to prepare management of currency and interest the Group financial statements on the The Group is also exposed to market risks rate risk and the Group’s exposures going concern basis. In arriving at this such as interest rate risk and foreign are monitored regularly. The Group conclusion, they have noted that at currency risk. Further details on such does not trade or speculate in any 31 March 2011 there were net funds risks are provided below. financial instruments. of £120.6m and an unused committed facility of £50m which does not mature until July 2012.

Carphone Warehouse Group plc Annual Report 2011 27 BUSINESS REVIEW corporate responsibility

corporate responsibility The Board is committed to high standards of corporate and social responsibility and expects the same from the investments of the Group.

Whilst all businesses of the Group Community & charity The Carphone Warehouse Foundation is seek to operate in a socially Best Buy Europe has always been about a fund to which employees or charities responsible way, given its relative connecting people and helping them can apply for donations or support with size, this effort is focused especially realise what’s possible in their lives. That’s individual causes. For example, if there within Best Buy Europe. why it supports Get Connected, its chosen is a local community charity that needs charity partner, whose purpose is to support or a charity that means a lot to During the year Best Buy Europe devised ensure that every child and young person an employee personally, then the fund a clear corporate and social responsibility in the UK can connect with the support can help. The foundation will match an strategy which focuses on the following they need, when they need it. Best Buy employee’s fundraising up to a maximum key areas: Europe in the UK has had the privilege of of £200. For national charity campaigns • Community & charity working with Get Connected for over eight or emergency disaster funds, it also years and in that time more than 107,000 makes donations on behalf of Best Buy • Environment young people have been connected to Europe. During the year the Carphone • People confidential help, advice and support for Warehouse Foundation provided £107,000 their emotional and physical well-being. to support a range of charities and causes. By focusing on one or two projects in each area the aim has been to make Best Buy Europe’s dedicated corporate Environment positive, long-term, sustainable changes responsibility team has worked closely The Group’s businesses are not by their which can be measured and reported on. with Get Connected, supporting exciting nature particularly high impact in terms of charity events like auctions, dare-devil carbon emissions and waste. Nonetheless, By focusing on one or two sky diving and adventure treks, as well we are committed to reducing our impact projects in each area the aim as providing office space and technical and continue to look at all aspects of the support for the charity’s vital work. This business to contribute to environmental has been to make positive, is a true partnership and a special sustainability. The key strategy and focus long-term, sustainable nationwide fundraising week is held of Best Buy Europe is to reduce carbon across the UK business each year. emissions by 10% over the next 12 months. changes which can be In November 2010, 24 employees travelled Some of the environmental initiatives measured and reported on. to Ecuador to help with vital building work over the past year include: on a school in a small rural community • installation of smart electricity meters near Cotopaxi National Park. These to allow the effectiveness of any new employees lived and worked alongside initiatives to be measured; the locals, helping to create a much needed school where the local children • upgrade of air-conditioning and could get a better education in improved lighting at the main warehouse facilities. Each participant raised over in Wednesbury, to reduce £2,500 in order to participate, with this carbon emissions; money contributing to building materials, • roll-out of motion-sensor lighting and £65,000 was raised in total for across parts of the business; and Get Connected. • installation of mains-fed water coolers Best Buy Europe again held a charity which also raised money to provide auction for Get Connected, and through clean drinking water wells to the generosity of the guests and sponsors, communities in Africa. was able to raise £160,000.

28 Carphone Warehouse Group plc Annual Report 2011 w evie r Best Buy Europe continues to be As any retailer would tell you, committed to the recycling and reuse of

old handset components. Anyone can drop a business is only as good usiness off an old handset at a store to be recycled as the people it employs. b and, in thanks for doing this, £10 is donated to charity (with £5 to Get Connected and £5 Best Buy Europe has developed an to the Carphone Warehouse Foundation). inclusive culture with an open door policy These phones may be refurbished for local where feedback is encouraged and people use, reused in developing countries or are kept informed through a whole host broken down for recycling, to avoid toxic internal communications. These materials being taken to landfill. communications include regular emails, weekly ‘Chalk Talk’ presentations within Since its launch, each team on business progress and other updates, and quarterly presentations by environmental initiatives executive management to all employees have been central to at the support centre in Acton. Employee ‘Pulse’ surveys take place every three Best Buy UK. months on a range of topics to assess Since its launch, environmental initiatives and measure employee engagement, which is a key performance indicator of have been central to Best Buy UK. The Get Connected, Best Buy the business. Each team manager receives business stocks a range of energy efficient Europe’s chosen charity, the results for their team to allow them devices, as well as energy monitoring and provides support to young to develop plans to improve employee saving appliances. It is dedicated to people by phone, email, satisfaction and engagement. When providing advice to customers both and webchat, 365 days of the ‘Pulse’ survey was first released in-store and online as to how they can the year. help the environment while also reducing in February 2008, CPW Europe’s UK their own ongoing costs. Best Buy UK also employee engagement was measured provides a trade-in service which makes at 75% and the most recent survey in it easy to part with old technology such as April 2011 reported 87%, being its phones, laptops and TVs and make room highest recorded level. for the latest products. It doesn’t matter The business continues to operate how old the products are, the customer employment engagement activities will get a fair price. Even if it doesn’t have including: a trade-in value, the customer can still bring it into the store to be recycled free • projects such as the Ecuador venture of charge. described above; People • the opportunity to win holidays for As any retailer would tell you, a business providing feedback on how to improve the business; and 24 employees travelled to is only as good as the people it employs Ecuador to raise money for and this couldn’t be more true with • competitions between regions on Get Connected and help Best Buy Europe, which has over 15,000 innovation, and incentives for providing a community improve the employees. We look for employees high quality customer service. facilities of its local school. who are professional, committed and enthusiastic, who take pride in their The success of this approach was work and who want to have fun while at reflected in being honoured as one of work. This pursuit of outstanding people the top ‘Big Company’ employers in the was reflected in Best Buy Europe winning ‘Sunday Times 2011 Best Companies Mobile Magazine’s Store Manager of To Work For’ awards. the Year competition for the second year in a row. Best Buy Europe was recognised as one of the top employers in the UK by the Sunday Times.

Carphone Warehouse Group plc Annual Report 2011 29 governance board of directors and advisors

Charles Dunstone Roger Taylor Nigel Langstaff Chairman Chief Executive Officer Chief Financial Officer

John Gildersleeve Baroness Morgan of Huyton John Allwood Non-Executive Deputy Chairman Non-Executive Director Non-Executive Director

30 Carphone Warehouse Group plc Annual Report 2011 e c n a n r Charles Dunstone John Gildersleeve Company Secretary ove

Chairman Non-Executive Deputy Chairman Tim Morris g Age 46. Founder of Carphone Warehouse. and Senior Independent Director Chairman of the Group since January Age 66. Joined the Board in January 2010 Advisors 2010 and Chief Executive Officer of Old as a non-executive director. He was a Principal Bankers: Carphone Warehouse from 1989 to 2010. member of the board of Old Carphone HSBC Bank plc He was appointed Chairman of TalkTalk Warehouse from 2000 and was Non- Royal Bank of Scotland Group PLC Telecom Group PLC in 2010 and is a Executive Chairman between 2005 and Corporate Brokers: non-executive director of The Daily Mail 2010. He is a non-executive director Credit Suisse (Europe) Limited and General Trust PLC and Independent of British Land PLC and, since 2010, 1 Cabot Square Media Distribution PLC. He is Chairman a non-executive director of TalkTalk London E14 4QJ of The Prince’s Trust Trading Board and Telecom Group PLC. He was Chairman a member of its Council. He is also a of New Look Retail Group until 2011, UBS director of Best Buy Europe Distributions. Gallaher Group PLC until 2007 and 1 Finsbury Avenue EMI Group PLC until 2007. Previously, London EC2M 2PP Roger Taylor he was an executive director of Tesco PLC Registrars: Chief Executive Officer until he retired in February 2004. Prior Equiniti Limited Age 46. Chief Executive Officer of the to this he was a non-executive director Aspect House Group since 2010 and Chief Financial of Vodafone Group PLC from 1998 to 2000. Spencer Road, Lancing Officer of Old Carphone Warehouse from West Sussex BN99 6DA 2000 to 2010. He is responsible for new Baroness Morgan of Huyton business development, strategic initiatives Non-Executive Director Auditors: and investor relations. He was appointed Age 51. Joined the Board in January 2010 Deloitte LLP, London Non-Executive Deputy Chairman of as a non-executive director. She was a TalkTalk Telecom Group PLC in 2010. non-executive director of Old Carphone Registered Office He is also a director of Best Buy Europe Warehouse from 2005 to 2010. From 2001 1 Portal Way Distributions and Virgin Mobile France. until 2005, she was Director of Government London W3 6RS Relations at 10 Downing Street. Prior to Registered number: 07105905 Nigel Langstaff this she was Political Secretary to the Chief Financial Officer Prime Minister from 1997 to 2001, and Age 42. Chief Financial Officer of the was appointed Minister for Women Group since 2010, and previously held and Equalities in 2001. In 2006 she was various roles with Old Carphone appointed as a board member of the Warehouse from 1997 to 2010 including Olympic Delivery Authority and was also UK Finance Director and Group Finance appointed as a non-executive director of Director. He is responsible for the Group’s Southern Cross Healthcare Group PLC. finance functions, financial reporting and She is an advisor to the board of the procedures. He is also a director of Virgin children’s charity ARK and a member of Mobile France. the advisory committee of Virgin Group Holdings Limited. She was appointed Chair of Ofsted in March 2011.

John Allwood Non-Executive Director Age 59. Joined the Board in 2010 as a non-executive director. He is a non- executive director of TalkTalk Telecom Group PLC. Previously he was Chief Operating Officer and latterly Group Finance Director of Mecom Group plc. Prior to this, he was Managing Director of Telegraph Media Group Limited. Formerly, he was Chief Executive of Orange UK and also Chief Executive of Mirror Group plc. He is currently a member of Exeter University Council.

Carphone Warehouse Group plc Annual Report 2011 31 governance corporate governance

The Board of Directors is committed to high standards of corporate governance.

As stated in the Prospectus, the Company was not required at the time of its issue to comply with the Combined Code on Corporate Governance published by the UK Financial Reporting Council (“FRC”) in June 2008 (the “Code”). However, the Company agreed to comply with the Code with effect from its admission on 29 March 2010. The Board is committed to the highest standards of corporate governance and in accordance with the Listing Rules of the UK Listing Authority the Board confirms that, except to the extent stated below, the Company has throughout the year and as at the date of this annual report complied with the provisions set out in Section 1 of the Code. In accordance with the Listing Rules, the relevant parts of this Report have been reviewed by the Company’s auditors and their opinion is contained in the Independent Auditors’ Report on page 45.

Board of Directors Members Responsibilities and reserved matters • Charles Dunstone (Chairman) The overriding responsibility of the Board is to provide clear, entrepreneurial and responsible leadership to the Group within • Roger Taylor (Chief Executive Officer) a framework of efficient and effective controls so as to allow the • Nigel Langstaff (Chief Financial Officer) key issues and risks facing the business to be assessed and managed. Specifically, the Board: • John Gildersleeve (Non-Executive Deputy Chairman) • determines the overall strategic direction of the Group; • John Allwood (Non-Executive Director) • manages the Group’s investments, including reviewing their • Baroness Morgan (Non-Executive Director) performance; The wide range of experience and expertise of the non-executive • reviews and challenges management performance; directors, combined with the skills of the executive directors, provides vast retailing, mobile and general business experience, • ensures that the necessary operational, financial and strong personal skills and independence of thought and human resources are in place to enable the Group to meet perspective. its objectives; John Gildersleeve is also the Senior Independent Director. • develops an understanding of the views of major John Allwood is the non-executive director with relevant shareholders about the Company; and financial experience. • communicates with shareholders in conjunction with its dedicated internal investor relations department. Meetings There are also documented schedules of matters reserved to • The Board had six formal meetings during the year as the Board and matters delegated to Committees of the Board. well as other meetings as were appropriate for approving certain announcements to shareholders. Such reserved matters include: • All directors attended these meetings with the exception • approval of published financial statements; of Nigel Langstaff who was absent from the meeting held • declaration of interim and final dividends; on 3 June 2010 and John Gildersleeve who was absent from the meeting held on 17 January 2011, both due • approval of budget and strategy; to prior engagements that could not be changed. • appointment and remuneration of directors and auditors;

Other governance matters • approval of major acquisitions and disposals; • All Board papers are sent out on a timely basis with • approval of authority levels for expenditure; and sufficient information for the directors to be able to discharge their duties. • approval of treasury and risk management policies. • The Company Secretary ensures that all Board papers are sent to non-attending directors and that, where possible and relevant, their comments are captured so that they can be expressed at the meeting.

32 Carphone Warehouse Group plc Annual Report 2011 e c n a n r ove g

UK Corporate Governance Code Excluding the Chairman, all of the non- The Chairman meets regularly with all On 28 May 2010 the FRC published a executive directors are considered to be the non-executive directors, usually new UK Corporate Governance Code independent and therefore, more than half in the evening prior to a Board meeting. (“New Code”) to replace the Code. The of the directors excluding the Chairman This provides the opportunity to raise New Code will apply to the reporting are independent. any questions regarding the performance periods beginning on or after 29 June 2010. of the executive directors or in respect Executive directors and the Chairman have It will therefore apply to the Company for of any other matters. service contracts that can be terminated the year ending 31 March 2012 and not for by either the Company or the director on The Senior Independent Director also the financial year covered by this Report. between six and twelve months’ notice, met with the non-executive directors, The Board has however reviewed the depending on the individual. The non- in the absence of the Chairman, to assess New Code and has decided voluntarily to executive directors have three year periods the Chairman’s effectiveness, having first adopt the following principles ahead of the of appointment, the terms of which are reviewed the results of a performance implementation of the New Code. First, substantially in the same format as evaluation questionnaire completed all directors will stand for re-appointment suggested by the Code, with three month by all of the directors apart from the annually at the Company’s annual general notice periods and no compensation for Chairman. The Board is of the opinion meeting starting from the 2011 meeting. loss of office. Further details on each that the Chairman had no other significant Second, the performance of the Board director’s remuneration and notice period commitments during the year that affected will be externally reviewed at least every are set out in the Remuneration Report on his performance in his role. three years, with the first review to be pages 37 to 42. External appointments carried out no later than the year ending Performance evaluation The Board supports executive directors 31 March 2014. During the year, the balance of skills, taking up non-executive directorships as Independence and compliance knowledge and experience of the directors part of their continued development and The Board has six members, three of was reviewed. The Board and each the Board believes that this will ultimately whom, excluding the Chairman, are individual director, also undertook benefit the Company. Further details are considered independent non-executive performance evaluations. Using the provided in the Remuneration Report on directors. These directors are John Higgs ‘Suggestions for Good Practice’ pages 37 to 42. Gildersleeve, John Allwood and as guidance, the individual directors initially Board Committees Baroness Morgan. completed separate questionnaires. The There are three key Board Committees: results were collated for and analysed This is the first annual report of the Audit, Remuneration and Nomination. by the Chairman, the Senior Independent Company since the Demerger and, The Committees are provided with Director, the Chief Executive Officer and as stated in the Prospectus, Charles sufficient resources via the Company the Board as a whole. The areas covered Dunstone, Chairman, was not independent Secretary and, where necessary, have included the roles of the executive and on his appointment since he was previously direct access to independent professional non-executive directors, the Board, Chief Executive Officer of Old Carphone advisors to undertake their duties. the Board Committees, the Chairman, Warehouse and also had a significant preparation for and performance at shareholding in the Company. The Board meetings, the effectiveness of each believed that the appointment of Charles director, leadership, culture and corporate as Chairman benefitted the Group, given governance. The results were then that Charles was the founder of the considered by the Board as a specific business and his knowledge of the Group’s item of business. businesses was likely to be important to its future development. Major shareholders Following such performance evaluation were consulted prior to the appointment. the Chairman confirms that all directors seeking re-election at the annual general meeting continue to be effective and demonstrate a commitment to the role, including having time to attend all necessary meetings and to carry out other appropriate duties.

Carphone Warehouse Group plc Annual Report 2011 33 governance corporate governance (continued)

In light of the assessments and review Audit Committee undertaken, the Committee recommended Members Responsibilities to the Board that Deloitte LLP be retained • John Allwood (Chairman) The Committee has the following as auditors of the Company. This key duties: recommendation was endorsed by the • John Gildersleeve Board. The policy relating to the provision • monitoring the integrity of the • Baroness Morgan of non-audit services by the external Group’s financial statements and any auditors specifies the types of work from formal announcements relating to which the external auditors are excluded; Meetings the Group’s financial performance; • The members of the Committee for which the external auditors can be met three times during the year. • reviewing significant financial engaged without referral to the reporting judgements; Committee; and for which a case-by-case • All members attended each of decision is required. In order to safeguard • reviewing the Group’s financial these meetings except for John the external auditors’ objectivity and controls and internal control and Gildersleeve who was absent independence, the ratio of non-audit risk management systems; from the meeting held on 27 May fees to audit fees is monitored by the 2010 due to a prior engagement • monitoring and reviewing the Committee within an overall limit set that could not be changed. effectiveness of the Group’s internal by the Board on the recommendation of • The Chief Executive Officer, Chief audit functions; the Committee. Financial Officer, other senior • making recommendations to the A statement of fees paid or accrued management and representatives Board in relation to the appointment for services from the external auditors of the Company’s external auditors, of external auditors; during the year is set out below: Deloitte LLP, attend the Committee meetings by invitation. • reviewing and monitoring the 2011 2010 relationship with the external £m £m auditors, including their Advisors Audit services – 0.1 0.1 independence, effectiveness, statutory audit • The Board makes funds available remuneration and terms of to the Committee to enable it to engagement; Tax services 0.1 – take independent legal, accounting or Total 0.2 0.1 other advice when the Committee • considering arrangements by reasonably believes it necessary to which employees may raise concerns do so. about possible improprieties in In addition to the fees above, the Group’s matters of financial reporting or share of the external auditors’ statutory other matters; Other governance matters audit fees for joint ventures was £0.7m • The Chairman of the Committee • considering other topics, as defined (2010: £0.6m) and the Group’s share of updates the Board on any significant by the Board; and their fees for tax and other services was issues that have arisen at the £0.1m (2010: £0.1m). All fees relating to the • referring matters to the Board which, previous Committee meeting. Demerger were incurred by TalkTalk Group in its opinion, should be addressed at in the year ended 31 March 2010. • The external auditors have direct a meeting of the Board. access to the Committee during Certain non-audit services are pre- The terms of reference of the formal meetings and time is set aside approved by the Committee depending Committee are available on the Group’s for them to have private discussions upon the nature and cost of the service. website (www.cpwplc.com) or on with the Committee, in the absence Tax services principally comprise technical request from the Company Secretary. of management. advice associated with relevant UK and international fiscal laws and regulations and, in particular, assessment of the potential implications of proposed corporate transactions or restructuring. Having undertaken a review of the non-audit related work, the Committee

34 Carphone Warehouse Group plc Annual Report 2011 e

The Company has established a risk management programme c n a

that assists management throughout the Group to identify, n assess and mitigate business, financial, operational and r ove compliance risks. The Board views management of risk as g integral to good business practice.

has satisfied itself that the services Nomination Committee undertaken during the year did not prejudice the external auditors’ Members Responsibilities independence. • John Gildersleeve (Chairman) The key responsibility of the Nomination Committee is to consider • Baroness Morgan At each of its meetings the Committee succession planning and appropriate reviewed and considered reports on the appointments to the Board. Key duties status of the Group’s risk management Meetings as such include: systems, findings from reviews of internal controls in joint venture operations, and • The Committee meets as and • overseeing the identification, reports on the status of any weaknesses in when required. selection and appointment of internal controls identified by the internal • The Committee met once during directors; or external auditors. the year and both members attended • reviewing the structure, size, Risk management and internal control the meeting. composition and leadership needs The Company has established a risk of the Board; management programme that assists • considering other commitments management throughout the Group to of directors relative to the time identify, assess and mitigate business, required for them to fulfil their duties; financial, operational and compliance risks. The Board views management • evaluating the skills, knowledge of risk as integral to good business and experience of the Board; and practice. The programme is designed • making recommendations to to support management’s decision- the Board. making and to improve the reliability of business performance. The terms of reference of the Committee are available on the Group’s The directors have overall responsibility website (www.cpwplc.com) or on for the Group’s systems of internal control request from the Company Secretary. and for reviewing their effectiveness. The Board delegates to executive management the responsibility for designing, operating and monitoring these systems. The The systems of internal control described The Board has conducted an annual review systems are based on a process of above were in place throughout the year of the effectiveness of the systems of risk identifying, evaluating and managing key and up to the date of approval of the annual management and internal control in risks and include the risk management report and financial statements. The operation during the year and up to the processes set out above. effectiveness of these systems is date of the approval of the annual report periodically reviewed by the Audit and financial statements and this was Executive management of Best Buy Europe Committee in accordance with the revised approved by the Audit Committee and and Virgin Mobile France have direct guidance in the Turnbull Report. These the Board. responsibility for the risk management systems are also refined as necessary to programmes of their businesses. meet changes in the Group’s business and Consequently, the Board places reliance associated risks. The systems of internal as far as possible on the risk management control are designed to manage rather processes of the joint venture boards. than eliminate the risk of failure to achieve The Board’s focus is primarily on reviewing business objectives. They can only provide the effectiveness of these processes, more reasonable and not absolute assurance than involving itself in the processes against material errors, losses, fraud or themselves. Specific controls and breaches of laws and regulations. processes are detailed further below.

Carphone Warehouse Group plc Annual Report 2011 35 governance corporate governance (continued)

Joint venture control processes Other key controls in place for Best Buy Communication with investors A dedicated team of risk specialists, Europe and Virgin Mobile France are as The Board believes it is important to including internal auditors, form the Best follows: explain business developments and Buy Europe Risk and Business Assurance financial results to the Company’s • Best Buy Europe has its own audit function. Members of this team conduct shareholders and to understand any committee. Roger Taylor is a member risk workshops and reviews within each shareholder concerns. The principal of the committee and Nigel Langstaff of the main Best Buy Europe operating communication media used to impart attends meetings by invitation. Internal divisions and have assisted Virgin Mobile information to shareholders are audit and risk reports are provided at France with similar risk reviews. news releases (including results all meetings. announcements), investor presentations The risk management processes of • Charles Dunstone and Roger Taylor and Company publications. Best Buy Europe and Virgin Mobile France are members of the Best Buy Europe have involved assessments of key business The Chief Executive Officer and Chief Distributions board of directors and risks which are wide-ranging, covering Financial Officer have lead responsibility Tim Morris is Company Secretary. risks arising from the regulatory for investor relations. They are supported Roger Taylor, Tim Morris and Nigel environment, strategy, counter-parties by a dedicated investor relations Langstaff are directors of Virgin Mobile and organisational change associated department that, amongst other matters, France. These boards ordinarily meet with acquisitions and major projects. The organises presentations for analysts and every month and have ultimate output from each assessment is a list of institutional investors. There is a full responsibility for strategic, key strategic, financial, operational and programme of regular dialogue with major operational, risk and compliance compliance risks. Associated action plans institutional shareholders, fund managers, matters for each business. and controls to mitigate them are also put analysts, and retail brokers, upon which in place where this is possible and to the • The board meetings of Best Buy Europe the Chairman ensures that the Board extent considered appropriate, taking and Virgin Mobile France are receives regular updates at Board account of costs and benefits. supplemented by frequent informal meetings. In all such dialogue, care is interaction between shareholders and taken to ensure that no price sensitive Reports, action plans and any changes management on strategic and information is released. The Board also to the status of the key risks and the risk operational matters. receives periodic reports on investors’ matrices are reported at each Audit views of the performance of the Company. Committee meeting and at Board meetings The Chairman and all the non-executive where applicable. During the year the directors, in particular the Senior Board has not identified or been advised Independent Director, are available to of any significant control failings. meet with major shareholders, if such meetings are required. The Company also communicates with shareholders through the annual general meeting, at which the Chairman gives an account of the progress of the business over the last year, a review of current issues, and provides the opportunity for shareholders to ask questions. Further financial and business information is available on the Group’s website, www.cpwplc.com.

36 Carphone Warehouse Group plc Annual Report 2011 remuneration report e c n a

Part 1: Remuneration Committee, Policies And Structure (Unaudited) n r ove g

Remuneration Committee Members Responsibilities • John Gildersleeve (Chairman) Responsibility for the establishment of overall remuneration policy for the Group lies with the Board. The Committee has the • John Allwood following key duties: • Baroness Morgan • making recommendations to the Board on the Company’s framework of executive remuneration; Meetings • The members of the Committee met four times during the • considering and making recommendations to the Board year and all members attended these meetings. on the remuneration of the executive directors and senior management relative to performance and market data; Advisors • approving contracts of employment which exceed defined • Deloitte LLP – employment tax and share option schemes. thresholds of total remuneration or have unusual terms • PricewaterhouseCoopers LLP – long-term incentive plans. or termination periods; • Deloitte LLP are the Group’s auditors and provide other • considering and agreeing changes to remuneration policy services as described in the report on Corporate Governance or major changes to employee benefit structures; and on pages 32 to 36. • approving employee share-based incentive schemes and associated performance conditions and targets. Other governance matters • None of the members of the Committee has any personal The terms of reference of the Committee are available on financial interest (other than as shareholders) in the matters the Group’s website (www.cpwplc.com) or on request from to be decided by the Committee nor potential conflicts of the Company Secretary. interest arising from cross-directorships. • No director or any person advising the Committee plays a part in any discussion about his or her own remuneration. • All Committee members are non-executive directors who have no day-to-day involvement in running the Group’s business.

Remuneration policy The Group’s remuneration policy has been defined so as to meet the Committee’s remuneration strategy Remuneration strategy Remuneration policy The Committee seeks to ensure that remuneration In order to achieve this strategy, the remuneration policy and incentive schemes: is to: • achieve alignment between employees and shareholders; • provide overall packages which are market competitive and capable of rewarding exceptional performance; • provide a strong link to individual and business performance; • set fixed remuneration at market median levels; • attract, retain and incentivise individuals of high quality • offer variable rewards, linked to the performance of who have the skills to achieve the highest levels of the Group, which can provide significant overall levels performance; and of remuneration for exceptional performance and shareholder value creation; and • are in line with best practice. • require executive directors to retain a shareholding in the Company, including share options and value enhancement scheme shares, of at least 200% of their annual salary.

Carphone Warehouse Group plc Annual Report 2011 37 governance remuneration report (continued)

Components of remuneration The main fixed and performance-related elements of remuneration for executive directors are as follows: Component Reason Basic salary and benefits (fixed) Provide fixed remuneration and benefits reflecting skills, experience and responsibilities to attract and retain key employees.

Pension (fixed) Provide reasonable and competitive retirement benefits.

Annual performance bonus Reward individual and Group performance on both financial (short-term variable) and non-financial measures.

Value enhancement and share option Align long-term interests of key employees and shareholders, schemes (long-term variable) through incentivising a good return on shares in the Company.

Basic salary and benefits Annual performance bonus Medium-term incentive plan Salaries are reviewed annually with Bonuses are governed by performance Old Carphone Warehouse had a medium- changes ordinarily taking effect on 1 July conditions set by the Remuneration term incentive plan for Roger Taylor which each year. Salary reviews take into account Committee to ensure that maximum rewarded increases in the market individual and business performance and variable rewards are paid only for capitalisation of this group between June market data. There has been no change in exceptional performance. The bonus 2009 and December 2010. This incentive the salaries of the executive directors scheme for the year ended 31 March 2011 plan has been measured using the during the year. Taxable benefits consist of was based on Headline EPS together with combined share price of the Group and car allowances and private medical cover. specific business unit targets based on TalkTalk Group, and the maximum payout a balanced scorecard approach. The of £1.0m was made. This payment was Pension scorecard considers the achievement made by TalkTalk Group and as such has The Company pays 5% of the executive of financial, customer, employee and not been included in Roger’s aggregate directors’ basic salary to defined strategy related objectives. remuneration from the Group. contribution pension schemes or self- invested pension plans. The Company does The bonus scheme has a maximum Value enhancement scheme not operate any defined benefit pension payment of 200% of annual salary. The Prior to the Demerger, Old Carphone schemes for the executive directors. bonus scheme for 2011-12 will have a Warehouse introduced the Best Buy Non-executive directors do not participate similar structure. Europe VES, to provide long-term in any pension schemes. incentives to its senior management The Remuneration Committee is satisfied group in relation to Best Buy Europe. that this bonus structure provides an excellent link between reward and The Best Buy Europe VES enables performance and that it drives the participants to share in up to 2.24% of any creation of further shareholder value. increase in the value of Best Buy Europe over an opening valuation determined by The Chairman and non-executive the Old Carphone Warehouse board as at directors do not receive an annual 1 April 2009. The incremental value is performance bonus. measured after a minimum annual rate of return of 7% on this valuation. The Group advanced loans to participants to enable them to purchase A shares in CPW Retail Holdings Limited, which holds part of the Group’s investment in Best Buy Europe.

38 Carphone Warehouse Group plc Annual Report 2011 e c n a n r ove g

The value of the Best Buy Europe VES Also prior to the Demerger, Old Carphone Share gift pool is adjusted on vesting for any change Warehouse introduced the TalkTalk VES, In December 2008, shares were gifted by in the Company’s market capitalisation in which certain Company directors the Old Carphone Warehouse Group’s since 6 April 2009, such that an increase and other key management participate. ESOT to certain senior employees within in the Company’s market capitalisation The scheme has a similar structure to Old Carphone Warehouse Group and increases the value of the pool. The the Best Buy Europe VES, but is based Best Buy Europe, including Nigel Langstaff Company’s opening market capitalisation on the value of TalkTalk Group, with the prior to his appointment as a director of for this purpose represents an allocation obligation to acquire the relevant shares the Company. The shares were restricted of the market capitalisation of Old lying with TalkTalk Group. As with the until 30 June 2010 and were conditional on Carphone Warehouse at that date, based Best Buy Europe VES, the Group advanced meeting various internal performance on the market capitalisations of the loans to participants to enable them conditions, principally in relation to Company and TalkTalk in the five days to purchase TalkTalk VES shares. earnings and cash generation. Loans were following the Demerger. The Company The terms of these loans are similar provided to cover the tax arising on this has an obligation to acquire these shares to those of the Best Buy Europe VES. gift; these loans were forgiven by the if performance conditions are met, to Remuneration Committee subsequent to Share options provide participants with the share of the year-end. Old Carphone Warehouse Group had a value described above. It is intended that market priced share option scheme for Joint venture long-term incentive plans the Company’s shares would be used as executive directors and senior managers. The remuneration strategy of the Group consideration for this purpose. With the exception of share schemes which is also applied as far as possible within Performance is measured over an initial lapsed due to the Demerger, all share Best Buy Europe and Virgin Mobile France. performance period to July 2013, at which options were cancelled and replaced Alongside short-term incentive plans, point participants have a put option over with share options in the Company and Best Buy Europe has its own VES, which 60% of their shares, and a subsequent TalkTalk. Share option holders received vests in 2014. The scheme enables performance period to July 2014, at which two share options in TalkTalk and one participants to share in incremental point participants have a put option over share option in the Company for every profits generated by Best Buy Europe over the remainder of their shares. On a change two share options previously held. a base defined in respect of the year to of control, Best Buy Europe VES shares No share options have been issued 3 April 2010. may vest early if the relevant performance to executive directors by the Group, Senior management of Best Buy Mobile conditions have been achieved. Loans are as long-term variable benefits have been participate in a long-term incentive plan ordinarily repayable in full if performance provided through the Best Buy Europe VES. which is based on incremental earnings conditions are met. If performance Old Carphone Warehouse Group also had generated, in the same way as Best Buy conditions are not met or a participant nil priced share options. These options Europe’s profit share. The scheme vests leaves the scheme before vesting, the Best were replaced at Demerger in the same in annual instalments to February 2013. Buy Europe VES shares are transferred to way as noted above. All such outstanding the Group for the lower of market value at Virgin Mobile France has issued market options had vested prior to the Demerger that date and the value of the participant’s and nil priced share options to certain except for those granted by Old Carphone outstanding loan. However, if market value employees of the business. These options Warehouse in December 2006. This at the date of transfer is lower than the vest over periods of two to four years. scheme was subject to TSR performance value of the loan, the participant will targets measured against an initial Directors of the Company do not ordinarily be required to repay only 20% of performance period to 4 June 2010. These participate in these joint venture schemes. the difference. targets were not met and as such the scheme lapsed. Since the Demerger, nil priced and market priced share options have been issued to members of Group management who did not participate in the Best Buy Europe VES. The directors do not participate in these schemes.

Carphone Warehouse Group plc Annual Report 2011 39 governance remuneration report (continued)

External appointments Directors’ interests in shares and service contracts The Board supports executive directors taking non-executive directorships as a Details of directors’ interests in the ordinary shares of the Company and service part of their continuing development. contracts are shown in the following table: The Board has reviewed all such Ordinary shares appointments and those appointments 2011 2010 Date of contract Notice period that the Board believes require disclosure C Dunstone 133,083,481 148,072,267 28 Jan 2010 12 months pursuant to the Code are set out below. N Langstaff 500,000 500,000 28 Jan 2010 6 months The Board has also agreed that the executive directors may retain their fees R Taylor 522,030 502,197 28 Jan 2010 6 months from such appointments. J Allwood – – 28 Jan 2010 3 months Roger Taylor is the Non-Executive J Gildersleeve 123,000 123,000 28 Jan 2010 3 months Deputy Chairman of TalkTalk Telecom Baroness Morgan 991 991 28 Jan 2010 3 months Group PLC, for which he received £75,000 during the year. Fees for independent non-executive directors Each of the non-executive directors has a letter of appointment substantially in the The fees for the independent non-executive directors are determined by the Board form suggested by the Code. The Company after considering external market research. Independent non-executive directors has no age limit for directors. receive a basic fee of £43,000 plus additional fees as detailed below:

Minimum shareholdings £’000 In order to align the interests of the Chairperson of Audit Committee 15 executive directors and shareholders, the Company requires executive directors to Member of Audit Committee 4 build up and retain a shareholding in the Chairperson of Nomination Committee 5 Company of at least 200% of their annual Member of Nomination Committee 4 salary. The Company may, in calculating this percentage, take into account share Chairperson of Remuneration Committee 10 options and shares issued under the Member of Remuneration Committee 4 Best Buy Europe VES. Senior Independent Director 17 Performance graph The graph opposite shows the Group’s performance measured through TSR, TSR PERFORMANCE COMPARED TO THE FTSE 250 index compared with the FTSE 250 Index, since 350 29 March 2010 when the Company was first admitted to the London Stock 300 Exchange. The FTSE 250 Index was selected as it is a broad market which 250 includes competitors of the Company. 200

150

100

0 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Carphone Warehouse Group plc FTSE 250 index

40 Carphone Warehouse Group plc Annual Report 2011 remuneration report (continued) e c n a

Part 2: Remuneration Details (Audited) n r ove g

The Accounting Regulations under the Companies Act 2006 (“Regulations”) require the Company’s auditors to report to the members on this part of the Report and to state, in their opinion, that this part of the Report has been properly prepared in accordance with the Companies Act 2006.

Aggregate remuneration The total amounts of directors’ remuneration and other benefits (excluding pension contributions) were as follows: Basic salary Taxable Annual Total Total /fees benefits bonuses 2011 2010 (i) £000 £000 £000 £000 £000 C Dunstone 240 – – 240 3 N Langstaff 275 9 449 733 2 R Taylor 440 12 719 1,171 4 J Allwood 62 – – 62 11 J Gildersleeve 79 – – 79 1 Baroness Morgan 55 – – 55 –

(i) Total remuneration for 2010 relates only to that paid to directors for their role as directors of the Company. Charles Dunstone, Roger Taylor, John Gildersleeve and Baroness Morgan were directors of Old Carphone Warehouse for which they respectively received total remuneration of £1,734,000, £1,167,000, £396,000 and £58,000 for the period from 1 April 2009 to 28 March 2010. These directors were remunerated by the Company from 29 March 2010.

Nigel Langstaff was an employee but not a director of Old Carphone Warehouse. Nigel was remunerated by the Company for his role as a director of the Company from 29 March 2010. John Allwood was not a director of Old Carphone Warehouse and was remunerated by the Company from 28 January 2010, when he was appointed as a director of the Company. Tim Morris and Neil King were directors of the Company from 15 December 2009 to 28 January 2010 and received no remuneration for their roles during this period.

Pension contributions The schedule below sets out payments by the Group to pension schemes on behalf of executive directors: 2011 2010(i) £000 £000 N Langstaff 14 – R Taylor 22 –

(i) Roger Taylor received pension contributions of £20,000 in the period ended 28 March 2010 from Old Carphone Warehouse during his directorship of this company.

Carphone Warehouse Group plc Annual Report 2011 41 governance remuneration report (continued)

Long-term benefits Details of directors’ interests in share options are as follows: At At Exercise 1 April 31 March price per Exercisable Expiry 2010 Exercised Lapsed 2011 share £ from date N Langstaff 70,000 – – 70,000 0.76 6 Jun 06 6 Jun 13 87,501 – – 87,501 nil 28 Jul 08 28 Jul 14 99,265 – (99,265) – nil 4 Jun 10 4 Dec 16 99,265 – (99,265) – nil 4 Jun 11 4 Dec 16 R Taylor 222,222 – – 222,222 0.76 6 Jun 06 6 Jun 13 231,928 – – 231,928 0.70 11 Jun 05 11 Jun 12 100,000 (100,000) – – 1.26 19 May 02 23 Jul 10 100,000 (100,000) – – 1.68 19 May 02 23 Jul 10 120,000 – – 120,000 1.04 21 May 04 21 May 12 337,500 – – 337,500 nil 28 Jul 07 28 Jul 14 337,500 – – 337,500 nil 28 Jul 08 28 Jul 14 241,269 – (241,269) – nil 4 Jun 10 4 Dec 16 241,269 – (241,269) – nil 4 Jun 11 4 Dec 16

The market price per share when share options were exercised by Roger Taylor was 192.0p. The market price was 364.0p as at 31 March 2011 and during the year ranged between 155.0p and 434.5p.

Best Buy Europe VES shares The number of A ordinary shares of CPW Retail Holdings Ltd held by executive directors as a part of the Best Buy Europe VES are as follows: 2011 2010 N Langstaff 376 376 R Taylor 1,070 1,070

Compliance This Remuneration Report has been prepared in accordance with the Regulations, the relevant Listing Rules of the Financial Services Authority and the Code. The constitution and operation of the Remuneration Committee are in compliance with the Code. In framing its remuneration policy the Committee has given full consideration to the matters set out in Schedule A of the Code. As required by the Regulations, a resolution to approve this Report will be proposed at the annual general meeting to be held on 27 July 2011. This Report was approved by the Board on 13 June 2011. John Gildersleeve Chairman, Remuneration Committee

42 Carphone Warehouse Group plc Annual Report 2011 governance

Other Statutory Information e c n a n r ove g

Employee involvement Capital structure The total interests of the directors are The Group places significant emphasis on Details of the movements in authorised detailed in the Remuneration Report on its employees’ involvement in the business and issued share capital during the year pages 37 to 42. are provided in notes 20 and 21 to the at all levels. Managers are remunerated Property, plant and equipment Group financial statements. The Company according to results wherever possible Movements in property, plant and has one class of ordinary shares which and employees are kept informed of issues equipment are set out in note 12 to the carries the right to one vote at a general affecting the Group through formal and Group financial statements. In the opinion meeting of the Company and has no right informal meetings and through the Group’s of the directors the current open market to fixed income. Details of employee share internal publications. The management value of the Group’s interests in freehold schemes are provided in note 6 to the team regularly communicates matters land and buildings exceeds the book value Group financial statements. The Group’s of current interest and concern with all by £5.9m at 31 March 2011. employees. Information on the employee ESOT held 2.9m shares on 31 March 2011, engagement activities of Best Buy Europe but does not vote or receive dividends. Auditors Each director at the date of approval of this is included in the report on Corporate The shareholder agreements of Best Buy annual report confirms that: Responsibility on pages 28 and 29. Europe and Virgin Mobile France include Employment of disabled people change of control clauses, whereby if there • so far as the director is aware, there It is the Group’s policy to encourage is a change of control event in relation is no relevant audit information of application for employment from disabled to the Company, the other shareholders which the Company’s auditors are people, and to assist with their training have the option to acquire the Company’s unaware; and ownership of these investments, or require and career development, having regard • the director has taken all the steps the Company to acquire the other to particular aptitudes and abilities. that he/she ought to have taken as shareholders’ interests. Every endeavour is made to find suitable a director in order to make himself/ alternative employment and to re-train Significant shareholdings herself aware of any relevant audit any employee who becomes disabled The Company had been notified, in information and to establish that the while serving the Group. accordance with Chapter 5 of the Company’s auditors are aware of Supplier payment policy Disclosure and Transparency Rules that information. of the UK Financial Services Authority, The Group’s policy is to agree terms This confirmation is given and should of the following interests in the Company’s of transactions, including payment be interpreted in accordance with the shares at 31 March 2011: terms, with suppliers and, provided that provisions of s.418 of the Companies suppliers perform in accordance with the Act 2006. agreed terms, it is the Group’s normal Percentage Number of share practice that payment is made accordingly. Name of shares capital Deloitte LLP were appointed as the Trade payables were immaterial at Company’s auditors on incorporation D P J Ross 63,888,526 13.98% 31 March 2011. and have expressed their willingness to FMR LLC 48,016,290 10.51% continue in office as auditors. A resolution Donations Newton Investment to re-appoint them will be proposed at Information on the Group’s charitable the forthcoming annual general meeting. activities is included in the report on Management Ltd 21,959,404 4.80% Corporate Responsibility on pages 28 TIAA-CREF Carphone Warehouse Group plc and 29. Best Buy Europe made charitable Investment 1 Portal Way donations of £107,000, with a further Management LLC 14,913,027 3.26% London W3 6RS £244,000 provided to Get Connected By order of the Board through fundraising and £160,000 raised Between 31 March 2011 and 1 June 2011, through a charity auction. No political the Company had received notification T S Morris donations were made during either year by from TIAA-CREF Investment Management Company Secretary the Group or its joint venture investments. LLC that its holding had reduced below the 13 June 2011 Contracts with significant shareholders 3% reporting threshold and from FMR LLC There are no material contracts with that its holding had increased to 50,487,907 significant shareholders, except as shares, being 11.05% of the Company’s disclosed in the Remuneration Report share capital. on pages 37 to 42.

Carphone Warehouse Group plc Annual Report 2011 43 governance statement of directors’ responsibilities

The directors are responsible for preparing the annual report Responsibility statement and the financial statements in accordance with applicable law We confirm that to the best of our knowledge: and regulations. • the financial statements, prepared in accordance with the Company law requires the directors to prepare financial relevant financial reporting framework, give a true and fair statements for each financial year. Under that law the directors view of the assets, liabilities, financial position and profit or are required to prepare the consolidated financial statements loss of the Company and the undertakings included in the in accordance with IFRS and Article 4 of the IAS Regulation and consolidation taken as a whole; and have elected to prepare the Company financial statements in • the management report, which is incorporated into the accordance with UK GAAP. Under company law the directors Directors’ Report, includes a fair review of the development must not approve the accounts unless they are satisfied that and performance of the business and the position of the they give a true and fair view of the state of affairs of the Company and the undertakings included in the consolidation Company and Group and of the profit or loss of the Company taken as a whole, together with a description of the principal and Group for that period. risks and uncertainties that they face. In preparing the Company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; By order of the Board on 13 June 2011 • make judgements and accounting estimates that are reasonable and prudent; R Taylor N Langstaff Chief Executive Officer Chief Financial Officer • state whether applicable UK GAAP has been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. In preparing the consolidated financial statements, IAS 1 requires that directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s financial position and financial performance; and • make an assessment of the Group’s ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

44 Carphone Warehouse Group plc Annual Report 2011 Independent auditors’ report ts n e m We have audited the financial statements of Carphone • the Company financial statements have been properly Warehouse Group plc for the year ended 31 March 2011 which prepared in accordance with UK GAAP; and comprise the Consolidated Income Statement, the Consolidated • the financial statements have been prepared in accordance cial state

Statement of Comprehensive Income, the Consolidated n with the requirements of the Companies Act 2006 and, a

Statement of Changes in Equity, the Consolidated Balance n

as regards the Group financial statements, Article 4 of the fi Sheet, the Consolidated Cash Flow Statement, the notes to IAS Regulation. the Consolidated Financial Statements 1 to 23, the Company Balance Sheet and the notes 1 to 9 of the Company Financial Opinion on other matters prescribed by the Companies Statements. The financial reporting framework that has Act 2006 been applied in the preparation of the consolidated financial In our opinion: statements is applicable law and IFRS. The financial reporting • the part of the Directors’ Remuneration Report to be framework that has been applied in the preparation of the audited has been properly prepared in accordance with Company financial statements is UK GAAP. the Companies Act 2006; and This report is made solely to the Company’s members, as a • the information given in the Directors’ Report for the financial body, in accordance with Chapter 3 of Part 16 of the Companies year for which the financial statements are prepared is Act 2006. Our audit work has been undertaken so that we might consistent with the financial statements. state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. Matters on which we are required to report by exception To the fullest extent permitted by law, we do not accept or We have nothing to report in respect of the following matters assume responsibility to anyone other than the Company and where the Companies Act 2006 requires us to report to you if, the Company’s members as a body, for our audit work, for this in our opinion: report, or for the opinions we have formed. • adequate accounting records have not been kept by the Respective responsibilities of directors and auditors Company, or returns adequate for our audit have not been As explained more fully in the Statement of Directors’ received from branches not visited by us; or Responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied • the Company financial statements and the part of the that they give a true and fair view. Our responsibility is to audit Directors’ Remuneration Report to be audited are not in and express an opinion on the financial statements in agreement with the accounting records and returns; or accordance with applicable law and International Standards • certain disclosures of directors’ remuneration specified on Auditing (UK and Ireland). Those standards require us to by law are not made; or comply with the Auditing Practices Board’s Ethical Standards for Auditors. • we have not received all the information and explanations we require for our audit. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts Although not required to do so, the directors have voluntarily and disclosures in the financial statements sufficient to give chosen to provide a report on Corporate Governance detailing reasonable assurance that the financial statements are free the extent of their compliance with the UK Corporate from material misstatement, whether caused by fraud or Governance Code. We reviewed: error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Company’s • the directors’ report, contained on page 27 of the Business circumstances and have been consistently applied and Review, in relation to going concern; adequately disclosed; the reasonableness of significant • the part of the report on Corporate Governance relating to accounting estimates made by the directors; and the overall the Company’s compliance with the nine provisions of the presentation of the financial statements. In addition, we read UK Corporate Governance Code specified for our review; and all the financial and non-financial information in the annual report to identify material inconsistencies with the audited • certain elements of the Remuneration Report. financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. John Murphy Opinion on financial statements (Senior statutory auditor) In our opinion: for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor • the financial statements give a true and fair view of the state London, United Kingdom of the Group’s and of the Company’s affairs as at 31 March 13 June 2011 2011 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRS;

Carphone Warehouse Group plc Annual Report 2011 45 Consolidated INCOME Statement FOR THE YEARS ENDED 31 March 2011 AND 31 MARCH 2010

Before After amortisation Amortisation amortisation Before After of acquisition of acquisition of acquisition amortisation Amortisation amortisation intangibles and intangibles and intangibles and of acquisition of acquisition of acquisition exceptional exceptional exceptional intangibles intangibles* intangibles items items* items 2011 2011 2011 2010 2010 2010 Notes £m £m £m £m £m £m Revenue 2 5.6 – 5.6 5.5 – 5.5 Cost of sales – – – – – – Gross profit 5.6 – 5.6 5.5 – 5.5 Operating expenses (8.7) – (8.7) (6.0) – (6.0) Share of results of joint ventures 2,14 68.6 (2.2) 66.4 39.1 (0.6) 38.5 Profit before investment income, 3 65.5 (2.2) 63.3 38.6 (0.6) 38.0 interest and taxation Interest income 7 3.9 – 3.9 3.7 – 3.7 Interest expense 7 (0.6) – (0.6) (5.3) – (5.3) Investment income 4,7 0.6 – 0.6 – 182.0 182.0 Profit before taxation 69.4 (2.2) 67.2 37.0 181.4 218.4 Taxation 8 (1.6) – (1.6) 0.4 – 0.4 Net profit for the year 67.8 (2.2) 65.6 37.4 181.4 218.8

* A reconciliation of Headline results to statutory results is provided in note 10 to the financial statements.

The accompanying notes are an integral part of this Consolidated Income Statement. All amounts relate to continuing operations.

Earnings per share Basic 11 15.0p 14.5p 8.3p 48.7p Diluted 11 14.4p 13.9p 8.2p 47.8p

46 Carphone Warehouse Group plc Annual Report 2011 Consolidated Statement of Comprehensive Income FOR THE YEARS ENDED 31 March 2011 AND 31 MARCH 2010 ts n e m

2011 2010 £m £m Net profit for the year 65.6 218.8 cial state n

Currency translation (0.1) 4.2 a n

Total recognised income and expenses for the year 65.5 223.0 fi

The accompanying notes are an integral part of this Consolidated Statement of Comprehensive Income.

Consolidated Statement of Changes in Equity FOR THE YEAR ENDED 31 March 2011

Share Share premium Accumulated Translation Demerger capital reserve profits reserve reserve Total £m £m £m £m £m £m At the beginning of the year 0.5 754.0 675.1 12.1 (751.2) 690.5 Total recognised income and expenses – – 65.6 (0.1) – 65.5 for the year Net purchase of own shares – – (2.7) – – (2.7) Tax on items recognised directly – – 1.0 – – 1.0 in reserves Share of other reserve movements – – 1.5 – – 1.5 of joint ventures Net movement in relation to – – 1.2 – – 1.2 share schemes Movements in demerger reserve – – – – 1.0 1.0 At the end of the year 0.5 754.0 741.7 12.0 (750.2) 758.0

For the year ended 31 March 2010 Share Share premium Accumulated Translation Demerger capital reserve profits reserve reserve Total £m £m £m £m £m £m At the beginning of the year – – 457.8 7.9 (51.8) 413.9 Total recognised income and expenses – – 218.8 4.2 – 223.0 for the year Issue of share capital 0.5 754.0 – – (754.5) – Net movement in relation to – – (1.5) – – (1.5) share schemes Movements in demerger reserve – – – – 55.1 55.1 At the end of the year 0.5 754.0 675.1 12.1 (751.2) 690.5

The accompanying notes are an integral part of this Consolidated Statement of Changes in Equity.

Carphone Warehouse Group plc Annual Report 2011 47 Consolidated Balance Sheet As at 31 March 2011 and 31 March 2010

2011 2010 Notes £m £m Non-current assets Property, plant and equipment 12 67.8 65.9 Non-current investments 13 0.1 0.1 Interests in joint ventures 14 592.2 541.8 Deferred tax assets 8 1.4 0.8 661.5 608.6 Current assets Trade and other receivables 15 6.5 5.6 Cash and cash equivalents 17 120.6 100.0 127.1 105.6 Total assets 788.6 714.2

Current liabilities Trade and other payables 16 (16.2) (10.1) Corporation tax liabilities (1.2) – Provisions 19 (13.2) (13.6) Total liabilities (30.6) (23.7) Net assets 758.0 690.5

Equity Share capital 20,21 0.5 0.5 Share premium reserve 21 754.0 754.0 Accumulated profits 21 741.7 675.1 Translation reserve 21 12.0 12.1 Demerger reserve 21 (750.2) (751.2) Funds attributable to equity shareholders 758.0 690.5

The accompanying notes are an integral part of this Consolidated Balance Sheet.

The financial statements on pages 46 to 73 were approved by the Board on 13 June 2011 and signed on its behalf by:

R Taylor N Langstaff Chief Executive Officer Chief Financial Officer

48 Carphone Warehouse Group plc Annual Report 2011 Consolidated Cash Flow Statement For the years ended 31 March 2011 and 31 March 2010 ts n e m

2011 2010 Notes £m £m Operating activities cial state n

Profit before investment income, interest and taxation 63.3 38.0 a n

Adjustments for non-cash items: fi Share-based payments 1.9 2.4 Non-cash movements on joint ventures (66.4) (38.5) Depreciation 0.8 0.7 Impairment of non-current investments – 0.1 Operating cash flows before movements in working capital (0.4) 2.7 Decrease (increase) in trade and other receivables 0.2 (0.6) Increase in trade and other payables 5.0 3.0 Decrease in provisions (0.4) (2.6) Cash flows from operating activities 4.4 2.5

Investing activities Investment income received 0.6 182.0 Interest received 3.9 3.7 Acquisition of property, plant and equipment (2.3) (0.8) Net receipts from (investment in) joint ventures 14.6 (32.4) Cash flows from investing activities 16.8 152.5

Financing activities Movements on loans from TalkTalk Group 22 – (397.4) Movements on loans to Best Buy Europe 22 – 293.3 Settlement of financial instruments 2.7 – Net purchase of own shares (2.7) – Interest paid (0.6) (5.3) Cash flows relating to movements in the demerger reserve – 54.4 Cash flows from financing activities (0.6) (55.0)

Net increase in cash and cash equivalents 20.6 100.0 Cash and cash equivalents at the start of the year 100.0 – Cash and cash equivalents at the end of the year 120.6 100.0

The accompanying notes are an integral part of this Consolidated Cash Flow Statement.

Carphone Warehouse Group plc Annual Report 2011 49 notes to the financial statements

1 ACCOUNTING POLICIES Certain operating expenses relating to the operations of the Group arose in companies that did not form part of the Group a) Basis of preparation on completion of the Demerger. Included within such costs are The Company was incorporated on 15 December 2009 in the certain central operating expenses that were borne during the United Kingdom and it commenced operations on 17 December year ended 31 March 2010 by Old Carphone Warehouse, which 2009. This is its first annual report. The financial statements formed part of TalkTalk Group following the Demerger. A of the Group have been prepared on a going concern basis in proportion of these costs has been allocated to the Group using accordance with IFRS as applied in accordance with the a basis of allocation consistent with the nature of the cost. These provisions of the Companies Act 2006 and Article 4 of the EU IAS allocations do not necessarily reflect the results that the Group Regulation. The financial statements have been presented in UK might have had if it had been a separate, stand-alone group Sterling on the historical cost basis except for the revaluation of during this time. certain financial instruments. The principal accounting policies Additionally, as the Group did not exist in its current structure adopted are set out below. until the Demerger, certain cash flows that relate to the Going concern operations of the Group actually arose in companies that Note 18 to the financial statements includes the Group’s formed part of TalkTalk Group following the Demerger. As policies and processes for managing its exposure to liquidity such cash flows are not reflected in the companies that risk. At 31 March 2011, the Group had cash and cash equivalents comprise the Group, they are reflected within “cash flows of £120.6m (2010: £100.0m) and undrawn committed borrowing relating to movements in the demerger reserve” in the cash facilities of £50.0m (2010: £50.0m). flow statement. The directors have reviewed the future cash and profit forecasts During the year ended 31 March 2010, Old Carphone Warehouse of the Group’s joint venture investments and other businesses, provided funding to various companies within the Group. These which they consider to be based on prudent assumptions. The financial statements reflect the historical loans and deposits directors are of the opinion that the forecasts, which reflect within the Group, adjusted where necessary for transactions both the current uncertain economic outlook and reasonably required to form the Group. Adjustments have also been made possible changes in trading performance, show that the Group to present the funding of the Group’s joint ventures as though it should be able to operate within its facilities and comply with its had been made via the Company, to reflect the ongoing structure banking covenants. In arriving at this conclusion the directors of their funding, although the funding was in fact provided were mindful that the Group has significant cash and cash directly by Old Carphone Warehouse. Where such adjustments equivalents, and borrowing facilities which are committed have been made, interest income and expense has been until July 2012. adjusted for the interest on joint venture loans so as to recognise this in the Group. Accordingly the directors have a reasonable expectation that the Company and the Group have adequate resources Following the Demerger, shareholders of Old Carphone to continue in operation for the foreseeable future and Warehouse received two shares in TalkTalk and one share in the consequently the directors continue to adopt the going Company for every two shares in Old Carphone Warehouse. As concern basis in the preparation of the financial statements. the Group received no compensation for the issue of these shares, the recognition of the share capital and share premium has been Presentation of comparative periods offset by an entry in the demerger reserve. On 26 March 2010, the Demerger of Old Carphone Warehouse Group was effective, resulting in the formation of the Group and Joint ventures TalkTalk Group. Following the Demerger, the Group comprised Where necessary, adjustments are made to the financial investments in two joint ventures, Best Buy Europe and Virgin statements of joint ventures to bring accounting policies used Mobile France, and various other investments, including into line with those used by the Group. The accounting policies freehold properties. below also relate to those used by joint ventures of the Group. The financial statements for the year to 31 March 2010 have been b) Basis of consolidation prepared with the objective of presenting the results, net assets The financial statements reflect the Group’s results for the and cash flows of the Group in the form that arose on completion year from 1 April 2010 to 31 March 2011 and comparative of the Demerger, as if it had been a stand-alone group during the information for the year from 1 April 2009 to 31 March 2010. entire year. Best Buy Europe reports to a retail calendar, whereby its year end date is normally the Saturday closest to 31 March. As such The financial statements have been prepared by aggregating the its results for the year ended 31 March 2011 cover the 52 weeks financial accounts of the companies and assets that comprised ended 2 April 2011 and its results for the year ended 31 March the Group following the Demerger. Any assets and liabilities 2010 cover the 52 weeks ended 3 April 2010. held within the consolidation of Old Carphone Warehouse Group that relate to the Group have been reflected in these financial The results of subsidiaries and joint ventures acquired or sold statements, as though they had always formed part of the during the year are included from or to the date on which control Group. The principles of IAS 27 ‘Consolidated and Separate or significant influence passed, except as described above in Financial Statements’ and SIC 12 ‘Consolidation — Special relation to accounting for the Demerger. Intercompany Purpose Entities’ have been applied in determining the transactions and balances between subsidiaries are eliminated companies and assets to be combined and the principles to on consolidation. be followed.

50 Carphone Warehouse Group plc Annual Report 2011

ts n e m In accordance with UITF 38 ‘Accounting for ESOP Trusts’, • commission receivable on sales, being commission which shares in the Company held by the Group’s ESOT are shown as is contractually committed, and for which there are no a reduction in shareholders’ funds. Other assets and liabilities ongoing performance criteria, is recognised when the sales cial state held by the Group’s ESOT are consolidated with the assets of to which the commission relates are made, net of any n a the Group. provision for promotional offers and network operator n performance penalties. Commission includes a share of fi c) Foreign currency translation and transactions customer airtime spend, to the extent that it can be reliably Material transactions in foreign currencies are hedged using measured and there are no ongoing service obligations. forward purchases or sales of the relevant currencies and are Where the time value of money has a material impact, recognised in the financial statements at the exchange rates an appropriate discount is applied such that revenue is thus obtained. Unhedged transactions are recorded at the recognised at an amount equal to the present value of the exchange rate on the date of the transaction. Material monetary future consideration received; assets and liabilities denominated in foreign currencies are hedged, mainly using forward foreign exchange contracts to • other ongoing revenue is recognised as it is earned over the create matching liabilities and assets, and are retranslated at lives of the relevant customers; each balance sheet date. Hedge accounting as defined by IAS 39 • volume bonuses receivable from network operators are ‘Financial Instruments: Recognition and Measurement’ has been recognised when the conditions on which they are earned applied by marking to market the relevant financial instruments have been met; at the balance sheet date and recognising the gain or loss in reserves in respect of cash flow hedges, and through the income • volume bonuses received from suppliers of products are statement in respect of fair value hedges. recognised as an offset to product cost when the conditions on which they are earned have been met, and are recognised Until May 2010 financial instruments were used for the purposes within cost of sales when the products to which the volume of net investment hedging. Hedges of net investments in foreign bonuses relate have been sold; operations are accounted for similarly to cash flow hedges in that the gain or loss on the effective portion of the hedges is • insurance premiums are typically paid monthly or quarterly recognised in equity, while gains or losses on any ineffective in advance. Initial administration fees, which are specified portion is recognised in the income statement. in the contract, are recognised at the point of sale; insurance premium income is recognised over the lives The results of overseas operations are translated at the average of the relevant policies; foreign exchange rates for the year, and their balance sheets are translated at the rates prevailing at the balance sheet date. • revenue from the sale of prepaid credits is deferred until Exchange differences arising on the translation of net assets, the customer uses the airtime or the credit expires; goodwill and results of overseas operations are recognised in • revenue generated from the provision of fixed and mobile the translation reserve. All other exchange differences are network services is recognised as it is earned over the lives included in the income statement. of the relevant customers; and The principal exchange rates against UK Sterling used in these • all other revenue is recognised when the relevant goods financial statements are as follows: or services are provided. Average Closing e) Share-based payments 2011 2010 2011 2010 Equity settled share-based payments are measured at fair value Euro 1.17 1.13 1.13 1.12 at the date of grant, and expensed over the vesting period, based on an estimate of the number of shares that will eventually vest. United States Dollar 1.56 1.60 1.60 1.52 Fair value is measured by use of a Binomial model for share- If a foreign operation is sold, the gain or loss on disposal based payments with internal performance criteria (such as EPS recognised in the income statement is determined after taking targets) and a Monte Carlo model for those with external into account the cumulative currency translation differences performance criteria (such as TSR targets). that are attributable to the operation. For schemes with internal performance criteria, the number d) Revenue of options expected to vest is recalculated at each balance sheet Revenue comprises rental income on investment properties date, based on expectations of performance against target and and is stated net of VAT and other sales related taxes. All such of leavers prior to vesting. The movement in cumulative expense revenue is recognised as the services are provided. since the previous balance sheet date is recognised in the income statement, with a corresponding entry in reserves. The following accounting policies are applied to revenue arising in the Group’s joint ventures: • revenue arising on the sale of mobile and other products and services is recognised when the relevant products or services are provided;

Carphone Warehouse Group plc Annual Report 2011 51 notes to the financial statements continued

1 ACCOUNTING POLICIES continued A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against For schemes with external performance criteria, the number which the asset can be utilised. Current and deferred tax is of options expected to vest is adjusted only for expectations of recognised in the income statement except where it relates leavers prior to vesting. The movement in cumulative expense to an item recognised directly in reserves, in which case it is since the previous balance sheet date is recognised in the recognised directly in reserves. income statement, with a corresponding entry in reserves. Deferred tax assets and liabilities are offset where there is If a share-based payment scheme is cancelled, any a legal right to do so in the relevant jurisdictions. remaining part of the fair value of the scheme is expensed j) Intangible assets through the income statement. If a share-based payment Goodwill scheme is forfeited, no further expense is recognised and Goodwill arising on the acquisition of subsidiary undertakings any charges previously recognised through the income and businesses, representing the excess of the fair value of the statement are reversed. consideration given over the fair value of the identifiable assets Share-based payment charges are also recognised on loans and liabilities acquired, is recognised initially as an asset at cost that are provided to employees to settle personal tax liabilities; and is subsequently measured at cost less any accumulated the cost of such loans is expensed on grant. impairment losses. At the acquisition date, goodwill is allocated to each of the CGUs expected to benefit from the combination Charges also arise on loans that are provided to employees to and held in the currency of the operations to which the goodwill fund the purchase of shares in the Group as part of long-term relates. Goodwill is reviewed at least annually for impairment, or incentives plans, to the extent to which the loans are not, in more frequently where there is an indication that goodwill may certain circumstances, repayable; the cost of the relevant part be impaired. Impairment is determined by assessing the future of such loans is expensed over the course of the relevant cash flows of the CGUs to which the goodwill relates. Where the incentive plans. future cash flows are less than the carrying value of goodwill, f) Pensions an impairment charge is recognised in the income statement. Contributions to defined contribution schemes are charged to On disposal of subsidiary undertakings and businesses, the the income statement as they become payable in accordance relevant goodwill is included in the calculation of the profit or with the rules of the schemes. loss on disposal. g) Dividends Software and licences Dividend income is recognised when payment has been received. Software and licences includes internal infrastructure and Final dividend distributions are recognised as a liability in the design costs incurred in the development of software for financial statements in the year in which they are approved by internal use. Internally generated software is recognised as the shareholders. Interim dividends are recognised in the year an intangible asset only if it can be separately identified, it is in which they are paid. probable that the asset will generate future economic benefits, h) Leases and the development cost can be measured reliably. Where Rental payments under operating leases are charged to the these conditions are not met, development expenditure is income statement on a straight-line basis over the period of the recognised as an expense in the year in which it is incurred. lease. Lease incentives and rent-free periods are amortised Software and licences are amortised on a straight-line basis through the income statement over the period of the lease. over their estimated useful economic lives of up to 8 years. i) Taxation Key money Current tax, including UK corporation tax and overseas tax, Key money paid to enter a property is stated at cost, net of is provided at amounts expected to be paid or recovered using amortisation and any provision for impairment. Amortisation is the tax rates and laws that have been enacted or substantively provided on key money at rates calculated to write off the cost, enacted by the balance sheet date. less estimated residual value, on a straight-line basis over 10 years or the lease term if less. Deferred tax is provided in full on temporary differences between the carrying amount of an asset or liability in the Acquisition intangibles balance sheet and its tax base. Acquisition intangibles are amortised over their expected useful lives of up to 5 years on a straight-line basis. The value Deferred tax liabilities represent tax payable in future periods attributed to such assets is based on the future economic in respect of taxable temporary differences. Deferred tax benefit that is expected to be derived from them, calculated as assets represent tax recoverable in future periods in respect the present value of future cash flows after a deduction for of deductible temporary differences, and the carry-forward contributory assets. of unused tax losses and credits. Deferred tax is determined using the tax rates that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled.

52 Carphone Warehouse Group plc Annual Report 2011

ts n e m k) Property, plant and equipment o) Stock Property, plant and equipment, principally for the Group Stock is stated at the lower of cost and net realisable value. comprising investment property (property held to earn rental Cost, net of discounts and volume bonuses from product cial state income and/or for capital appreciation) is stated at cost, net of suppliers (see note 1d), includes all direct costs incurred in n a depreciation and any provision for impairment. Depreciation is bringing stock to its present location and condition and n provided on all property, plant and equipment, except for land, represents finished goods and goods for resale. Net realisable fi at rates calculated to write off the cost, less estimated residual value is based on estimated selling price, less further costs value, of each asset on a straight-line basis over its expected expected to be incurred to disposal. Provision is made for useful life from the date it is brought into use, as follows: obsolete, slow-moving or defective items where appropriate. Investment properties: 2% per annum p) Cash and cash equivalents Short leasehold costs: 10% per annum or the lease term if less Cash and cash equivalents represent cash on hand, demand Network equipment deposits and short-term, highly liquid investments that are and computer hardware: 12.5-50% per annum readily convertible to known amounts of cash. Fixtures and fittings: 20-25% per annum q) Loans and other borrowings Motor vehicles: 25% per annum Loans represent loans to and from related parties, while other l) Recoverable amount of non-current assets borrowings in the balance sheets of joint ventures represent At each reporting date, the Group assesses whether there is committed and uncommitted bank loans, bank overdrafts, and any indication that an asset may be impaired. Where an indicator loans from shareholders other than the Group. of impairment exists, the Group makes a formal estimate of the Bank fees and legal costs associated with the securing of asset’s recoverable amount. Where the carrying amount of an external financing are ordinarily capitalised and amortised over asset exceeds its recoverable amount, the asset is considered the term of the relevant facility. Borrowing costs associated with to be impaired and is written down through an accelerated qualifying assets are included in the cost of the asset. All other amortisation charge to its recoverable amount. The recoverable borrowing costs are recognised in the income statement in the amount is the higher of an asset’s or CGU’s fair value less period in which they are incurred. costs to sell and its value in use, and is determined for an individual asset, unless the asset does not generate cash flows r) Provisions that are largely independent of those from other assets or Provisions are recognised when a legal or constructive groups of assets. obligation exists as a result of past events and it is probable that an outflow of resources will be required to settle the m) Investments obligation and a reliable estimate can be made of the amount Investments, other than subsidiaries and joint ventures, of the obligation. Provisions are discounted where the time value are initially recognised at cost, being the fair value of the of money is considered to be material. consideration given plus any transaction costs associated with the acquisition. Investments are categorised as available-for- Provisions in the Group relate primarily to warranties provided sale and are then recorded at fair value. Changes in fair value, in relation to the Best Buy Europe Joint Venture Transaction. together with any related taxation, are taken directly to reserves, Provisions in Best Buy Europe and Virgin Mobile France include and recycled to the income statement when the investment is the following categories: sold or determined to be impaired. Sales n) Interests in joint ventures Sales provisions relate to ‘cash-back’ and similar promotions, Interests in joint ventures are accounted for using the equity product warranties, product returns, and network operator method. The consolidated income statement includes the performance penalties. The anticipated costs of these items Group’s share of the post-tax profits or losses of the joint are assessed by reference to historical trends and any other ventures based on their financial statements for the year. In information that is considered to be relevant. the consolidated balance sheet, the Group’s interests in joint ventures are shown as a non-current asset in the balance sheet, Insurance representing the Group’s investment in the share capital of the Full provision is made for the estimated cost of all claims joint ventures, as adjusted by post-acquisition changes in the notified but not settled at the balance sheet date. Provision is Group’s share of the net assets or liabilities less provision for also made for the estimated cost of claims incurred but not any impairment. Any associated goodwill is included within the reported at the balance sheet date, based on historical carrying value of the investment and is assessed for impairment experience of the value of such claims. Any differences between as part of that investment. original claims provisions and subsequent settlements are reflected in the income statement in the relevant year. Where a joint venture has net liabilities, any loans advanced to it are included in the Group’s equity-accounted investment in it. Reorganisation Where a joint venture has net assets, any loans advanced to it Reorganisation provisions relate principally to redundancy are shown separately in the balance sheet, as a receivable to costs and are only recognised where plans are demonstrably the Group. committed and where appropriate communication to those affected has been undertaken at the balance sheet date. Provisions are not recognised in respect of future operating losses.

Carphone Warehouse Group plc Annual Report 2011 53 notes to the financial statements continued

1 ACCOUNTING POLICIES continued Provisions The Group’s provisions are based on the best information Other available to management at the balance sheet date. However, Other provisions relate to dilapidations and similar property the future costs assumed are inevitably only estimates, which costs, and all other provisions, principally being the anticipated may differ from those ultimately incurred. costs of unresolved tax issues and legal disputes, and costs u) Recent accounting developments associated with onerous contracts. All such provisions are The following standards or interpretations have become assessed by reference to the best available information at the effective during the year ended 31 March 2011 and have the balance sheet date. potential to be relevant to the results or position of the Group: s) Headline results • IFRS 3 (Revised) ‘Business Combinations’ has amended Headline results are stated before the amortisation of certain aspects of acquisition accounting, including requiring acquisition intangibles and any exceptional items that are that re-measurements of contingent consideration or considered to be one-off and so material that they require deferred tax assets are recorded in the income statement in separate disclosure to avoid distortion of underlying subsequent years and that transaction costs are expensed. performance. • IAS 27 (Revised) ‘Consolidated and Separate Financial t) Use of critical accounting estimates and assumptions Statements’ requires the effects of all transactions with Estimates and assumptions used in the preparation of the non-controlling interests to be recorded in equity if there is financial statements are continually reviewed and revised as no change in control. necessary. Whilst every effort is made to ensure that such estimates and assumptions are reasonable, by their nature • IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ they are uncertain, and as such changes in estimates and clarifies certain matters in relation to net investment assumptions may have a material impact. hedging, such that hedges may be held by any entity in a group, and ensures the appropriate application of IAS 21 The principal items in the financial statements where changes to the hedged item. in estimates and assumptions may have a material impact are as follows: • ‘Improvements to IFRSs 2009’ has made minor amendments to a variety of standards. Recoverable amount of non-current assets All non-current assets, including goodwill and other intangible In addition to these developments, the Group has adopted early assets, are reviewed for potential impairment using estimates of IAS 24 (Amendment) ‘Related Party Disclosures’ which has the future economic benefits attributable to them. Any estimates amended the definition of a related party. Consequently TalkTalk of future economic benefits made in relation to non-current is no longer considered a related party of the Group. assets may differ from the benefits that ultimately arise and The following standards, amendments and interpretations are materially affect the recoverable value of the asset. not yet approved by the European Union and as such cannot be Trade and other receivables adopted early by the Group: Provisions for irrecoverable receivables are based on extensive • IFRS 1 (Amendment) ‘First-time Adoption of IFRS’ on historical evidence and the best available information in ‘Financial Instrument Disclosures’ expected to be effective relation to specific issues, but are unavoidably dependent on for the year ending 31 March 2012. future events. • IFRS 9 ‘Financial Instruments’ on ‘Classification and Revenue recognition Measurement’ expected to be effective for the year ending Commission receivable within Best Buy Europe depends for 31 March 2014. certain transactions on customer behaviour after the point of sale. Assumptions are therefore required, particularly in • IFRS 10 ‘Consolidated Financial Statements’ expected to be relation to levels of customer default within the contract period, effective for the year ending 31 March 2014. and minimum levels of customer spend. Such assumptions are • IFRS 11 ‘Joint Arrangements’ expected to be effective for the based on extensive historical evidence, and provision is made for year ending 31 March 2014. the risk of potential changes in customer behaviour, but they are nonetheless inherently uncertain. • IFRS 12 ‘Disclosure of Interests in Other Entities’ expected to be effective for the year ending 31 March 2014. Current taxation The complex nature of tax legislation across the tax jurisdictions • IFRS 13 ‘Fair Value Measurement’ expected to be effective for in which the Group and its joint ventures operate necessitates the year ending 31 March 2014. the use of many estimates and assumptions, where the outcome • IAS 12 (Amendment) ‘Income Taxes’ on ‘Deferred Tax’ may differ from that assumed. expected to be effective for the year ending 31 March 2013. Deferred taxation • IFRIC 19 ‘Extinguishing Financial Liabilities With Equity The extent to which tax losses can be utilised depends on the Instruments’ expected to be effective for the year ending extent to which taxable profits are generated in the relevant 31 March 2012. jurisdictions in the foreseeable future, and on the tax legislation then in force, and as such the value of associated deferred tax assets is uncertain.

54 Carphone Warehouse Group plc Annual Report 2011

ts n e m

2 Segmental reporting

Segmental results are analysed as follows: cial state n

Investment a

Virgin Mobile properties n Best Buy Europe France and central fi (see note 14) (see note 14) functions Total 2011 £m £m £m £m Revenue – – 5.6 5.6 Headline EBIT before share of results of joint ventures – – (3.1) (3.1) Share of Headline results of joint ventures (post-tax) 60.4 8.2 – 68.6 Headline EBIT 60.4 8.2 (3.1) 65.5 Share of amortisation of joint venture acquisition intangibles (post-tax) – (2.2) – (2.2) Statutory EBIT (segment results) 60.4 6.0 (3.1) 63.3

Assets 571.8 20.4 196.4 788.6 Liabilities – – (30.6) (30.6) Net assets 571.8 20.4 165.8 758.0

Investment Virgin Mobile properties Best Buy Europe France and central (see note 14) (see note 14) functions Total 2010 £m £m £m £m Revenue – – 5.5 5.5 Headline EBIT before share of results of joint ventures – – (0.5) (0.5) Share of Headline results of joint ventures (post-tax) 47.3 (8.2) – 39.1 Headline EBIT 47.3 (8.2) (0.5) 38.6 Share of amortisation of joint venture acquisition intangibles (post-tax) – (0.6) – (0.6) Statutory EBIT (segment results) 47.3 (8.8) (0.5) 38.0

Assets 512.6 29.2 172.4 714.2 Liabilities – – (23.7) (23.7) Net assets 512.6 29.2 148.7 690.5

Transactions between segments are on an arm’s length basis.

Carphone Warehouse Group plc Annual Report 2011 55 notes to the financial statements continued

3 Profit before investment income, interest and taxation

Profit before investment income, interest and taxation is stated after charging (crediting): 2011 2010 £m £m Auditors’ remuneration – see below 0.2 0.1 Impairment of non-current investments – 0.1 Depreciation of property, plant and equipment 0.8 0.7 Investment property rental income (5.6) (5.5) Share-based payments 1.9 2.4 Other employee costs (see note 5) 4.7 3.2

Auditors’ remuneration comprises the following: 2011 2010 £m £m Statutory services – audit of the Company and the Company’s subsidiaries 0.1 0.1 Tax services – advisory and compliance services 0.1 – 0.2 0.1

The Group’s share of audit fees for Best Buy Europe and Virgin Mobile France was £0.7m (2010: £0.6m) in the year and the Group’s share of fees for their tax compliance services was £0.1m (2010: £0.1m).

4 Exceptional items

The following prior year item has been disclosed separately given its size and one-off nature: 2011 2010 £m £m Investment income – 182.0

During the year ended 31 March 2010, as part of the Demerger, the Group received dividends of £182.0m from Old Carphone Warehouse. These dividends do not reflect the ongoing operations of the Group and have therefore been disclosed separately.

56 Carphone Warehouse Group plc Annual Report 2011

ts n e m

5 Employee costs

As the Group did not exist in its current form prior to the Demerger, the employee costs for the year ended 31 March 2010 represent cial state

an allocation of the cost of a number of Old Carphone Warehouse employees (including directors) for the year. The aggregate n a

remuneration recognised in the income statement in each year is as follows: n

2011 2010 fi £m £m Salaries and performance bonuses 3.9 2.8 Social security costs 0.7 0.4 Other pension costs 0.1 – 4.7 3.2 Share-based payments (see note 6) 1.9 2.4 6.6 5.6

The average number of employees (including directors) during the year ended 31 March 2011 was 18 (2010: 19). Compensation earned by key management, comprising the Board of Directors (an allocation of the compensation of Old Carphone Warehouse directors in the year ended 31 March 2010) and senior executives, was as follows:

2011 2010 £m £m Salaries 1.4 1.0 Performance bonuses 1.5 1.3 Share-based payments 1.7 2.4 4.6 4.7

Amounts of £0.3 million were paid to HMRC during the year ended 31 March 2009 on behalf of a number of key management; these amounts were outstanding at 31 March 2011 and 31 March 2010. Interest is charged on these loans at market rates; however up to 5 April 2011 this interest has been waived at the discretion of the Company’s Remuneration Committee. At the discretion of the Company’s Remuneration Committee, these loans were forgiven in May 2011.

At 31 March 2011 the Group had made loans to key management in relation to the Best Buy Europe VES, TalkTalk VES and the share gift (see note 6) of £10.2m (2010: £7.9m) of which £7.3m (2010: £5.6m) related to directors of the Company. Interest is charged on the loans at market rates and interest of £0.5m (£0.4m relating to directors of the Company) has been recognised during the year ended 31 March 2011.

Carphone Warehouse Group plc Annual Report 2011 57 notes to the financial statements continued

6 Share-based payments

In the years prior to the Demerger, Old Carphone Warehouse issued equity settled share-based payments to certain employees of Best Buy Europe, TalkTalk Group and the Group, and since the Demerger the Company has issued equity settled share-based payments to certain employees of the Group. With the exception of share schemes which lapsed due to the Demerger, following the Demerger all shares and share options in Old Carphone Warehouse were cancelled and replaced with shares and share options in the Company and TalkTalk. Share and option holders received two shares or share options in TalkTalk and one share or share option in the Company for every two shares or share options previously held in Old Carphone Warehouse. The following analysis includes options in the Company held by employees and former employees of Best Buy Europe, TalkTalk Group and the Group. The share options data reflects the share consolidation that occurred on Demerger as though it had applied throughout the year ended 31 March 2010. The WAEP for each scheme has also been restated to reflect the Demerger, with the WAEP for Old Carphone Warehouse allocated between the Company and TalkTalk based on their respective market capitalisations in the 60 days following the Demerger. a) Value enhancement schemes Prior to the Demerger, Old Carphone Warehouse introduced two value enhancement schemes to provide long-term incentives to its senior management group in relation to its principal businesses, Best Buy Europe and the TalkTalk Business. Best Buy Europe VES The Best Buy Europe VES enables participants to share in up to 2.24% of any increase in the value of Best Buy Europe over an opening valuation determined by the Old Carphone Warehouse board as at 1 April 2009. The incremental value is measured after a minimum annual rate of return of 7% on this valuation. The Group advanced loans totalling £5.8m to participants to enable them to purchase A shares in CPW Retail Holdings Limited, which holds part of the Group’s investment in Best Buy Europe. The value of the Best Buy Europe VES pool is adjusted on vesting for any change in the Company’s market capitalisation since 6 April 2009, such that an increase in the Company’s market capitalisation increases the value of the pool. The Company’s opening market capitalisation for this purpose represents an allocation of the market capitalisation of Old Carphone Warehouse at that date, based on the market capitalisation of the Company and TalkTalk in the five days following Demerger. The Company has an obligation to acquire these shares if performance conditions are met, to provide participants with the share of value described above. It is intended that the Company’s shares would be used as consideration for this purpose. Performance is measured over an initial performance period to July 2013, at which point participants have a put option over 60% of their shares, and a subsequent performance period to July 2014, at which point participants have a put option over the remainder of their shares. On a change of control, Best Buy Europe VES shares may vest early if the relevant performance conditions have been achieved. Loans are ordinarily repayable in full if performance conditions are met. If performance conditions are not met or a participant leaves the scheme before vesting, the Best Buy Europe VES shares are transferred to the Group for the lower of market value at that date and the value of the participant’s outstanding loan. However, if market value at the date of transfer is lower than the value of the loan, the participant will ordinarily be required to repay only 20% of the difference. At 31 March 2011, all of the shares in the Best Buy Europe VES pool had been issued to senior management. TalkTalk VES The Group also advanced loans totalling £3.6m to certain participants in the TalkTalk VES. This scheme has a similar structure to the Best Buy Europe VES, but the value of the scheme is dependent on the performance of TalkTalk Group, and the obligation to acquire the TalkTalk VES shares lies with TalkTalk rather than the Company. b) Joint venture incentive schemes Best Buy Europe also introduced a VES during the year ended 31 March 2010, to provide long-term incentives to senior management. The scheme enables participants to share in incremental profits generated by Best Buy Europe over a base defined in respect of the year to 3 April 2010, with the percentage of incremental profits varying by Best Buy Europe division. Participants acquired A and B shares in Best Buy Europe Distributions. The Company and Best Buy jointly have an obligation to acquire these shares if certain performance conditions are met. These performance conditions are measured over a performance period to March 2014. Virgin Mobile France has also issued nil priced and market priced share options to certain employees of the business, which would be settled with shares in Virgin Mobile France if exercised.

58 Carphone Warehouse Group plc Annual Report 2011

ts n e m c) Performance Share Plan Old Carphone Warehouse had a Performance Share Plan which used share options to provide long-term incentives to senior management of Old Carphone Warehouse. Awards made under the Performance Share Plan in the years ended 31 March 2007 cial state and 29 March 2008 were subject to TSR performance targets and were measured over a performance period to 4 June 2010. n a

The performance targets were not met and as such the scheme lapsed. n fi Awards made in earlier years have already vested. If the options remain unexercised after a period of ten years from the date of grant, the options expire. The following table summarises the number and WAEP of share options for the scheme:

2011 2010 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the year 6.7 – 11.1 – Lapsed during the year (3.6) – (1.2) – Exercised during the year (1.5) – (3.2) – Outstanding at the end of the year 1.6 – 6.7 – Exercisable at the end of the year 1.6 – 3.1 –

The options outstanding at 31 March 2011 had a weighted average remaining contractual life of 3.6 years (2010: 6.6 years). The options exercised during the year were exercised at a weighted average market price of £2.90 (2010: £1.60). d) Executive Share Option Scheme Old Carphone Warehouse had an Executive Share Option Scheme under which share options were issued at market value. All Executive Share Option Scheme options have already vested. If the options remain unexercised after a period of ten years from the date of grant, the options expire. The following table summarises the number and WAEP of share options for the scheme:

2011 2010 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the year 2.6 0.95 3.8 0.87 Exercised during the year (1.4) 1.10 (1.2) 0.80 Outstanding at the end of the year 1.2 0.79 2.6 0.95 Exercisable at the end of the year 1.2 0.79 2.6 0.95

The options outstanding at 31 March 2011 had a weighted average remaining contractual life of 1.6 years (2010: 1.8 years). The options exercised during the year were exercised at a weighted average market price of £2.54 (2010: £1.64). The summary above includes 0.6m options (2009: 1.7m) that were granted before 7 November 2002. In accordance with IFRS 2 ‘Share-based Payment’, no cost has been recognised in respect of these options. e) Share gift In December 2008, 1.8 million shares were gifted by Old Carphone Warehouse’s ESOT to certain senior employees within Old Carphone Warehouse, of which 0.4m related to employees of the Group. The shares were restricted until 30 June 2010 based on various internal performance conditions, principally in relation to earnings and cash generation. The performance conditions were met and as such the shares become unrestricted during the year.

Carphone Warehouse Group plc Annual Report 2011 59 notes to the financial statements continued

6 Share-based payments continued f) Other Old Carphone Warehouse share option schemes Old Carphone Warehouse had a savings-related share option scheme which permitted the grant to employees of options linked to a bank save-as-you-earn contract for a term of three or five years, with contributions from employees of between £5 and £250 per month. Options could be exercised at the end of the three or five year period at a subscription price not less than 80% of the middle market quotation on the date of grant. All save-as-you-earn schemes were forfeited on Demerger. Market priced options were also granted during the year ended 31 March 2009 by Old Carphone Warehouse to certain senior employees within Old Carphone Warehouse Group. These awards were subject to internal performance conditions, principally in relation to earnings and cash generation, over a period to March 2010. The performance conditions were met and the options vested during the year. 2011 2010 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the year 3.6 0.75 4.7 0.90 Lapsed during the year – – (0.9) 1.40 Exercised during the year (2.4) 0.74 (0.2) 0.96 Outstanding at the end of the year 1.2 0.76 3.6 0.75 Exercisable at the end of the year 1.2 0.76 – –

The options outstanding at 31 March 2011 had a weighted average remaining contractual life of 7.6 years (2010: 8.7 years). The options exercised during the year were exercised at a weighted average market price of £2.39 (2010: £1.60). g) Carphone Warehouse Group plc Long-Term Incentive Plan 2010 In March and April 2010 the Group made awards under a Long-Term Incentive Plan, which uses share options to provide long- term incentives to employees of the Group. The options were granted at a combination of market price and zero price and are subject to TSR performance targets and are measured over a performance period to 29 March 2013. An average annual TSR of 20% is required for all options in the scheme to vest. Subject to performance, 60% of options will vest on 29 March 2013, with the remaining 40% vesting on 29 March 2014. 2011 2010 Number WAEP Number WAEP million £ million £ Outstanding at the beginning of the year 1.4 1.35 – – Granted during the year 0.7 0.77 1.4 1.35 Outstanding at the end of the year 2.1 1.17 1.4 1.35 Exercisable at the end of the year – – – –

The options outstanding at 31 March 2011 had a weighted average remaining contractual life of 9.0 years (2010: 10.0 years). h) Fair value models The fair value of options with external performance targets was estimated at the date of grant using a Monte Carlo model. The model combines the market price of a share at the date of grant with the probability of meeting performance criteria, based on the historical performance of Old Carphone Warehouse shares. For share options granted in the year, a volatility of 36.0% and a dividend yield of 2.2% was assumed. The VES shares described in notes 6a and 6b above were acquired by participants at market value as calculated by third party valuation experts using option pricing methodology, cross checked to an expected returns approach adopting discounted cash flow methodology. The discount rates and discounts for lack of marketability employed, where appropriate, reflected the market risk and volatility of the VES shares in question over their expected vesting period. An accounting charge arises on the respective schemes since the loans provided to acquire the shares are in certain circumstances not fully repayable. The charge has been derived using a Black Scholes option pricing model, reflecting equity volatilities specific to the relevant shares.

60 Carphone Warehouse Group plc Annual Report 2011

ts n e m i) Charge to income statement and entries in reserves During the year ended 31 March 2011, the Group recognised a charge to the income statement of £1.9m (2010: £2.4m) in respect of equity settled share-based payments, which is offset by an entry through reserves. As explained in note 6a above, there are cial state circumstances in which part of the loans advanced to VES participants may not be repayable. As required by IFRS 2 ‘Share-based n a

Payment’, the element of the loans in respect of which repayment is uncertain has been reflected in reserves, being £0.7m (2010: n £3.9m). fi j) Employee Share Ownership Trust The Group has an ESOT which held 2.9m shares in the Company at 31 March 2011 (2010: 5.2m) for the benefit of the employees of the Group and the Old Carphone Warehouse Group. The ESOT has waived its rights to receive dividends and none of its shares has been allocated to specific schemes.

At 31 March 2011 the shares had a market value of £10.4m (2010: £8.3m).

7 Interest income, INTEREST EXPENSE AND INVESTMENT INCOME

Interest income is analysed as follows: 2011 2010 £m £m Interest on cash and cash equivalents 0.8 – Interest and other finance income from joint ventures 2.6 3.7 Other interest income 0.5 – 3.9 3.7

Interest expense is analysed as follows: 2011 2010 £m £m Interest on loans from TalkTalk Group – 5.3 Other interest expense 0.6 – 0.6 5.3

Investment income is analysed as follows:

2011 2010 £m £m Dividends relating to the Demerger (see note 4) – 182.0 Income from minority investments 0.6 – 0.6 182.0

Carphone Warehouse Group plc Annual Report 2011 61 notes to the financial statements continued

8 Taxation

The tax charge (credit) comprises:

2011 2010 £m £m Current tax: UK corporation tax 1.2 – 1.2 – Deferred tax: Origination and reversal of timing differences 0.2 (0.6) Adjustments in respect of prior years 0.2 0.2 0.4 (0.4) Total tax charge (credit) 1.6 (0.4)

The principal differences between the tax charge (credit) and the amount calculated by applying the standard rate of UK corporation tax of 28% (2010: 28%) to the profit before taxation are as follows:

2011 2010 £m £m Profit before taxation 67.2 218.4 Profit before taxation at 28% (2010: 28%) 18.8 61.2 Adjustments in respect of prior years 0.2 0.2 Items attracting no tax relief or liability (17.4) (61.8) Total tax charge (credit) 1.6 (0.4)

Items attracting no tax relief or liability primarily relate to the Group’s share of results of joint ventures. Taxation associated with the Group’s interests in joint ventures is recognised within their results. Deferred tax assets recognised by the Group and movements thereon during the year are as follows:

2011 2010 £m £m Opening balance 0.8 0.2 (Charge) credit to the income statement (0.4) 0.4 Movements through accumulated profits 1.0 – Movements through the demerger reserve – 0.2 Deferred tax assets 1.4 0.8

On 23 March 2011 the government announced the reduction of the UK corporation tax rate from 28% to 26% from 6 April 2011 and then to 23% over the following three years. The impact of this reduction is not material to the wholly-owned Group.

62 Carphone Warehouse Group plc Annual Report 2011

ts n e m

9 Equity dividends

The proposed dividend for the year ended 31 March 2011 is 5.0p per share at an expected cost of £22.7m. As this dividend cial state

is subject to shareholders’ approval at the forthcoming annual general meeting it has not been included as a liability in these n a

financial statements. The expected cost of the dividend reflects the fact that the Group’s ESOT has agreed to waive its rights n to receive dividends (see note 6). fi No dividends have been paid by the Company in the year (2010: £nil).

10 Reconciliation of Headline results to statutory results

Profit before investment Net income, interest Profit before profit for and taxation taxation the year 2011 £m £m £m Headline results 65.5 69.4 67.8 Share of amortisation of joint venture acquisition intangibles (post-tax) (see note 14) (2.2) (2.2) (2.2) Statutory results 63.3 67.2 65.6

Profit before investment Net income, interest Profit before profit for and taxation taxation the year 2010 £m £m £m Headline results 38.6 37.0 37.4 Share of amortisation of joint venture acquisition intangibles (post-tax) (see note 14) (0.6) (0.6) (0.6) Exceptional items (see note 4) – 182.0 182.0 Statutory results 38.0 218.4 218.8

Headline information is provided because the directors consider that it provides assistance in understanding the Group’s underlying performance.

Carphone Warehouse Group plc Annual Report 2011 63 notes to the financial statements continued

11 Earnings per share

2011 2010 Headline earnings (£m) 67.8 37.4 Statutory earnings (£m) 65.6 218.8

Weighted average number of shares (millions): Average shares in issue 457.1 457.1 Less average holding by Group ESOT (see note 6) (4.4) (7.8) For basic earnings per share 452.7 449.3 Dilutive effect of share options 5.7 8.4 Dilutive effect of value enhancement schemes 12.7 – For diluted earnings per share 471.1 457.7

Basic earnings per share 2011 2010 Headline 15.0p 8.3p Statutory 14.5p 48.7p

Diluted earnings per share 2011 2010 Headline 14.4p 8.2p Statutory 13.9p 47.8p

As the Group did not exist during the year ended 31 March 2010 in the form that arose on Demerger, the average actual shares in issue during this period does not provide a meaningful basis for calculating EPS. EPS has therefore been calculated based on the average number of Old Carphone Warehouse shares in issue and the shareholding of the Old Carphone Warehouse ESOT in this year, adjusted for the fact that following the Demerger two shares in Old Carphone Warehouse were replaced with one share in the Company. Diluted EPS has been calculated based on options held over Old Carphone Warehouse shares and its share price during the year ended 31 March 2010, adjusted for the two-to-one ratio noted above. As detailed in note 6, prior to the Demerger, Old Carphone Warehouse introduced the Best Buy Europe VES to provide incentives to the Group’s senior management. The scheme enables participants to share in any increase in the value of Best Buy Europe above a defined minimum annual rate of return. The scheme has an initial performance period to July 2013 and a subsequent performance period to July 2014. It is expected that the scheme will be settled using the Company’s shares. As also detailed in note 6, Best Buy Europe also introduced a VES in the year ended 31 March 2010. The Group’s obligations in relation to this scheme are also expected to be met using the Company’s shares. The ultimate dilutive effect of these schemes cannot yet be determined, as they are both based on future performance, which is as yet unknown. The potential effect of the schemes has therefore been assessed by calculating the dilution that would have occurred had they vested during the year, taking an average of the results that would have occurred on each day. The value of the schemes has been derived from final results for the years ended 31 March 2010 and 31 March 2011 and the Group’s latest financial guidance for the year to 31 March 2012, as communicated in June 2011. In order to maintain alignment with shareholders, the Company’s Remuneration Committee has capped the potential dilution associated with these schemes at 5% of total shares in issue at the vesting date. There were no shares that could be issued under share option schemes but that are not considered to be dilutive at 31 March 2011 (2010: 5.9m).

64 Carphone Warehouse Group plc Annual Report 2011

ts n e m

12 Property, plant and equipment

2011 2010 £m £m cial state n a

Opening balance 65.9 65.8 n fi Additions 2.7 0.8 Depreciation (0.8) (0.7) Closing balance 67.8 65.9

Cost 72.2 69.5 Accumulated depreciation (4.4) (3.6) Net carrying amount 67.8 65.9

Property, plant and equipment held by the Group is principally investment property. The fair value of the investment property at 31 March 2011 was £73.7m (2010: £72.5m). The valuation of properties was performed internally at March 2011 by reference to appropriate yield rates and market evidence of recent transactions. At the balance sheet date, the Group had contracted with tenants for the following future minimum lease payments:

2011 2010 £m £m Within one year 4.9 4.9 In two to five years 21.6 21.0 After five years 44.1 49.6 70.6 75.5

13 Non-current investments

2011 2010 £m £m Opening balance 0.1 0.2 Impairment – (0.1) Closing balance 0.1 0.1

Principal Company investments The Company has investments in the following subsidiary undertakings, which, alongside joint ventures, principally affected the profits or losses or net assets of the Group. To avoid a statement of excessive length, details of investments which are not significant have been omitted. All holdings are in equity share capital and give the Group an effective holding of 100% on consolidation.

Name Country of incorporation or registration Nature of business CPW Acton One Limited Isle of Man Property holding company CPW Acton Five Limited * England and Wales Property holding company CPW Tulketh Mill Limited * England and Wales Property holding company CPW Irlam Limited * England and Wales Property holding company

*Investment held directly by the Company.

Carphone Warehouse Group plc Annual Report 2011 65 notes to the financial statements continued

14 Interests in joint ventures

Interests in joint ventures are as follows: 2011 2010 Business Principal activities Country of incorporation interest interest Best Buy Europe Retail, distribution, insurance, MVNO England and Wales 50.0% 50.0% Virgin Mobile France MVNO England and Wales 47.1% 47.5%

The Group’s interest in Virgin Mobile France reduced from 47.5% at 31 March 2010 to 47.1% at 31 March 2011 following the issue of shares during the year to management of Virgin Mobile France. Senior management of Virgin Mobile France also hold warrants that give them the right to acquire up to an additional 8.5% of the issued share capital of the business, at a price based on the value of existing shareholder funding and an additional amount which increases with the quantity of shares being acquired. a) Group balance sheet interests The Group’s interests in joint ventures are analysed as follows: Net assets (liabilities) Goodwill Loans Total 2011 £m £m £m £m Opening balance 384.7 106.3 50.8 541.8 Share of results 66.4 – – 66.4 Loans repaid (net) – – (14.6) (14.6) Share of other reserve movements 1.5 – – 1.5 Foreign exchange 1.0 (3.4) (0.5) (2.9) Closing balance 453.6 102.9 35.7 592.2

Best Buy Europe 468.9 102.9 – 571.8 Virgin Mobile France (15.3) – 35.7 20.4 Closing balance 453.6 102.9 35.7 592.2

Net assets (liabilities) Goodwill Loans Total 2010 £m £m £m £m Opening balance 339.5 108.5 21.7 469.7 Share of results 38.5 – – 38.5 Loans provided (net) – – 29.8 29.8 Additions 2.6 – – 2.6 Foreign exchange 4.1 (2.2) (0.7) 1.2 Closing balance 384.7 106.3 50.8 541.8

Best Buy Europe 406.3 106.3 – 512.6 Virgin Mobile France (21.6) – 50.8 29.2 Closing balance 384.7 106.3 50.8 541.8

A revolving credit facility of £125m is provided to Best Buy Europe equally by the Company and Best Buy. At 31 March 2011 and 31 March 2010 no amounts were drawn under this facility. The Company and Best Buy provide further financial support to Best Buy Europe under a letter of support through which both companies are committed to providing further funding to a maximum of £50m each. Prior to the Demerger, loans were provided by the Company to Best Buy Europe under a £475m RCF. Loans are provided to Virgin Mobile France under a shareholder agreement; funding requirements are agreed between the shareholders on a regular basis and are provided in proportion to each party’s shareholding.

66 Carphone Warehouse Group plc Annual Report 2011

ts n e m b) Analysis of profits and losses The Group’s share of the results of its joint ventures is as follows:

2011 2010 cial state

Best Buy Europe £m £m n a n

Revenue 3,572.0 3,528.8 fi Headline EBITDA * 257.4 231.7 Depreciation and amortisation (87.1) (91.9) Headline EBIT 170.3 139.8 Net interest expense (15.2) (16.3) Taxation (34.3) (28.9) Profit after taxation 120.8 94.6 Group share of profit after taxation 60.4 47.3

* Headline EBITDA includes the unwinding of discounts for the time value of money on network commissions receivable over the life of the customer. This unwind has a value of £10.0m in the year ended 31 March 2011 (2010: £8.0m) and is treated as interest income in the joint venture’s statutory results.

2011 2010 Virgin Mobile France £m £m Revenue * 328.4 232.8 Headline EBITDA 24.3 (19.3) Depreciation and amortisation (3.7) (2.9) Headline EBIT 20.6 (22.2) Net interest expense (2.9) (1.5) Taxation on Headline results (0.7) 5.1 Headline profit (loss) after taxation 17.0 (18.6) Group share of Headline profit (loss) after taxation before change in share ownership 8.0 (9.0) Gain on reduction of % share ownership 0.2 0.8 Group share of Headline profit (loss) after taxation 8.2 (8.2) Group share of amortisation of acquisition intangibles (post-tax) (2.2) (0.6) Group share of profit (loss) after taxation 6.0 (8.8) * Revenue excludes contributions towards subscriber acquisition costs from network operators and customers, as the directors consider that this provides a better representation of underlying performance. These items, which have a value of £55.1m in the year ended 31 March 2011 (2010: £41.6m), are netted off against acquisition costs within EBITDA. Reported revenue on a statutory basis for the year ended 31 March 2011 is £383.5m (2010: £274.4m).

2011 2010 Total Group share £m £m Headline 68.6 39.1 Statutory 66.4 38.5

Carphone Warehouse Group plc Annual Report 2011 67 notes to the financial statements continued

14 Interests in joint ventures continued c) Analysis of assets and liabilities The Group’s share of the assets and liabilities of its joint ventures is as follows: 2011 2010 Best Buy Europe £m £m Non-current assets 661.7 677.4 Cash and overdrafts (net) 146.8 175.3 Other borrowings (15.1) (117.9) Other assets and liabilities (net) 144.5 77.7 Net assets 937.9 812.5 Group share of net assets 468.9 406.3

2011 2010 Virgin Mobile France £m £m Non-current assets 95.1 100.8 Cash and overdrafts (net) 10.7 17.4 Loans from the Group (35.7) (50.8) Other borrowings (38.6) (54.8) Other assets and liabilities (net) (64.0) (58.0) Net liabilities (32.5) (45.4) Group share of net liabilities (15.3) (21.6)

2011 2010 Total Group share £m £m Total Group share of net assets of joint ventures 453.6 384.7

Best Buy Europe is in ongoing discussions with HMRC in relation to VAT on “free gift” promotions, which may result in new assessments. Having undertaken internal investigations and obtained third party advice, the Board considers that further provision for any such exposures would be inappropriate. There are no material contingent liabilities in relation to Virgin Mobile France. Best Buy Europe had capital commitments at 2 April 2011 of £4.0m (2010: £11.0m). Within the cash and overdrafts of Best Buy Europe, £45.0m (2010: £65.0m) is held by its insurance business to cover regulatory reserve requirements; these funds are not available to offset other Best Buy Europe borrowings. The Group’s principal CGUs are its joint venture investments and freehold properties, which are tested annually for impairment or more frequently if there are indications that they might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The Group prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next four or five years and extrapolates cash flows in perpetuity based on a growth rate of up to 1.5% (2010: 1.0%). The pre-tax rates used to discount the forecast cash flows range between 6.5% and 10.3% (2010: 6.5% and 10.0%). The key assumptions for the value in use calculations are those in relation to the discount rates, growth rates and expected changes to selling prices and direct costs, all of which are based on historical patterns and expectations of future market developments. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. The directors do not consider that there are any CGUs where a realistic change to one of the key assumptions on which the value in use calculations are based would result in the CGU’s recoverable amount falling below its carrying value.

68 Carphone Warehouse Group plc Annual Report 2011

ts n e m

15 Trade and other receivables

2011 2010 cial state

£m £m n a

Other receivables 6.5 5.6 n fi 6.5 5.6

Other receivables include loans of £5.2m (2010: £3.6m) to members of senior management relating to the Best Buy Europe VES and TalkTalk VES (see note 6). In certain circumstances these loans would be repayable within one year and for this reason they are included within current assets. In certain other circumstances they would become payable in more than one year. The Group’s trade and other receivables are all not yet due, are entirely denominated in UK Sterling and are expected to be fully recoverable.

16 Trade and other payables

2011 2010 £m £m Other payables 8.4 6.5 Accruals and deferred income 7.8 3.6 16.2 10.1

17 Cash and cash equivalents, loans and other borrowings

Cash and cash equivalents comprise: 2011 2010 £m £m Short-term bank deposits and money market funds 120.6 100.0 120.6 100.0

Cash and cash equivalents include bank deposits with maturities of up to six months which are available on demand.

£50m revolving credit facility The Group has a committed RCF of £50m, which matures in July 2012. The interest rate payable in respect of drawings under this facility is at a margin over LIBOR for the relevant period. A commitment fee is payable in respect of amounts available but undrawn under this facility. Although no covenants based on Group performance are included in the RCF, it is a requirement of the facility that certain covenants relating to Best Buy Europe’s £350m Receivables Financing Agreement have been achieved; this was the case at both 31 March 2011 and 31 March 2010. This facility was undrawn throughout the year. Securities and guarantees No facilities are secured over Group assets although the sale of some such assets would in certain circumstances lead to a reduction in those facilities. The Group has provided guarantees to third party suppliers of Virgin Mobile France, alongside the other shareholders of the business. The Group’s maximum potential exposure on these guarantees is £21.0m. Functional currency All of the Group’s material subsidiaries prepared accounts in UK Sterling. The businesses that had a material effect on the Group’s joint venture investments prepared accounts in UK Sterling, Euro and US Dollar.

Carphone Warehouse Group plc Annual Report 2011 69 notes to the financial statements continued

18 Financial risk management and derivative financial instruments

The book value and fair value of the Group’s financial assets, liabilities and derivative financial instruments, excluding the Group’s loans and other borrowings, is as follows: 2011 2010 £m £m Cash and cash equivalents 120.6 100.0 Loans to Virgin Mobile France (see note 14) 35.7 50.8 Trade and other receivables 6.5 5.6 Trade and other payables (16.2) (10.1)

Fair values have been arrived at by discounting future cash flows, assuming no early redemption, or by revaluing forward currency contracts to year-end market rates or rates as appropriate to the instrument. Financial risk management policies The Group’s activities expose it to certain financial risks including market risk (such as foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Group Treasury function, which operates under approved treasury policies, uses certain financial instruments to mitigate potential adverse effects on the Group’s financial performance from these risks. These financial instruments may consist of bank loans and deposits, spot and forward foreign exchange contracts, and foreign exchange swaps. Other products, such as interest rate swaps and currency options, may also be used depending on the risks to be covered. The Group does not trade or speculate in any financial instruments. Foreign exchange risk Translational risk and net investment hedges The Group uses forward currency contracts to hedge balance sheet assets and liabilities and also for short-term liquidity management. Translational currency risk, primarily arising on funding of Virgin Mobile France, is hedged using foreign exchange swaps. In May 2010 the Group discontinued net investment hedging in order to avoid exposure to potential cash volatility on the associated hedges. The Group’s foreign exchange position is calculated daily and any positions are closed out unless the exposure is immaterial. The translation risk on converting overseas currency profits or losses is not hedged and such profits or losses are converted into UK Sterling at average exchange rates throughout the year. This gives the Group a direct exposure to the Euro in respect of Virgin Mobile France. As noted above, while Best Buy Europe reports in UK Sterling, its results are materially affected by the Euro and US Dollar. Best Buy Europe hedges a proportion of its non-Sterling earnings to provide certainty of their value. At 31 March 2011, the total notional principal amount of outstanding currency contracts was £35.8m (2010: £109.5m), none of which (2010: £60.3m) was held in relation to net investment hedges. Currency loans and foreign exchange contracts are sensitive to movements in foreign exchange rates. This sensitivity can be analysed in comparison to year-end rates (assuming all other variables remain constant) where a 10% movement in the UK Sterling / Euro exchange rate would have no impact on the income statement or equity (2010: £6.0m movement in equity). Changes in the value of currency loans and foreign exchange contracts would not be expected to have an impact on the income statement, as they match currency assets, the value of which would rise or fall correspondingly with the hedging instrument, assuming the hedges remain fully effective. The impact on equity of revaluations would have been offset when the Group undertook net investment hedging by the revaluation of foreign currency net assets of joint venture investments that are hedged by these borrowings and derivatives. Best Buy Europe’s policies for translational risk are consistent with those of the Group and it ceased net investment hedging in the year ended 3 April 2010. Virgin Mobile France has limited translational risk exposures as its operations are based solely in France. Transactional risk and cash flow hedges The Group is exposed to limited cross-border transactional commitments but where significant, these are hedged at inception using forward currency contracts. At 31 March 2011 and 31 March 2010 the Group held no material cash flow hedges. Best Buy Europe’s operations are exposed to foreign currency transactional risks, primarily through the Best Buy Mobile profit share arrangement and purchases of stock. Best Buy Europe uses foreign exchange contracts to mitigate against foreign currency fluctuations arising on these transactions.

70 Carphone Warehouse Group plc Annual Report 2011

ts n e m Interest rate risk The Group’s interest rate risk arises primarily on cash, cash equivalents and loans to joint ventures, all of which are at floating rates of interest and which therefore expose the Group to cash flow interest rate risk. These floating rates are linked to LIBOR and other cial state interest rate bases as appropriate to the instrument and currency. Future cash flows arising from these financial instruments n a depend on interest periods agreed at the time of rollover. Group policy permits the use of long-term interest rate derivatives in n managing the risks associated with movements in interest rates although the Group holds none of these products at present. fi Cash and borrowings, as well as some foreign exchange products, are sensitive to movements in interest rates. This sensitivity can be analysed through calculating the effect on the income statement of a 1% movement in the interest rate in relation to cash, cash equivalents and loans to joint ventures. This analysis has been prepared on the assumption that the year-end positions prevail throughout the year, and therefore may not be representative of fluctuations in levels of borrowings. A 1% movement in the interest rate would result in a £1.6m (2010: £1.5m) movement in the income statement. Liquidity risk The Group manages its exposure to liquidity risk by regularly reviewing the long-term and short-term cash flow projections for the business against facilities and other resources available to it. Regular reports are made to the Audit Committee assessing current facilities and debt and daily reports are circulated to senior management showing the Group’s net funds. Headroom is assessed based on historical experience as well as by assessing current business risks, including foreign exchange movements. Credit risk The Group’s exposure to credit risk is regularly monitored and the Group’s policy updated as appropriate. Deposits and foreign exchange transactions are spread amongst a number of banks, all of which have credit ratings appropriate to the Group’s policies and exposures. Embedded derivatives No contracts with embedded derivatives have been identified and accordingly no such derivatives have been accounted for separately.

19 Provisions

2011 2010 £m £m Opening balance 13.6 16.2 Charge in income statement – 0.1 Released in the year (0.4) (2.7) Closing balance 13.2 13.6

Provisions relate principally to warranties provided in relation to the Best Buy Europe Joint Venture Transaction.

20 Share capital

2011 2010 2011 2010 million million £m £m Allotted, called-up and fully paid ordinary shares of 0.1p each 457.1 457.1 0.5 0.5

Carphone Warehouse Group plc Annual Report 2011 71 notes to the financial statements continued

21 Reserves and accumulated profits

Share Share premium Accumulated Translation Demerger capital reserve profits reserve reserve Total 2011 £m £m £m £m £m £m At the beginning of the year 0.5 754.0 675.1 12.1 (751.2) 690.5 Net profit for the year – – 65.6 – – 65.6 Currency translation – – – (0.1) – (0.1) Net purchase of own shares – – (2.7) – – (2.7) Tax on items recognised directly – – 1.0 – – 1.0 in reserves Share of other reserve movements – – 1.5 – – 1.5 of joint ventures Net movements in relation to – – 1.2 – – 1.2 share schemes Movements in demerger reserve – – – – 1.0 1.0 At the end of the year 0.5 754.0 741.7 12.0 (750.2) 758.0

Share Share premium Accumulated Translation Demerger capital reserve profits reserve reserve Total 2010 £m £m £m £m £m £m At the beginning of the year – – 457.8 7.9 (51.8) 413.9 Net profit for the year – – 218.8 – – 218.8 Currency translation – – – 4.2 – 4.2 Issue of share capital 0.5 754.0 – – (754.5) – Net movements in relation to share – – (1.5) – – (1.5) schemes Movements in demerger reserve – – – – 55.1 55.1 At the end of the year 0.5 754.0 675.1 12.1 (751.2) 690.5

72 Carphone Warehouse Group plc Annual Report 2011

ts n e m

22 Analysis of changes in Group funding

Opening Cash flows Closing cial state

2011 £m £m £m n a

Cash and cash equivalents 100.0 20.6 120.6 n fi

Opening Cash flows Closing 2010 £m £m £m Cash and cash equivalents – 100.0 100.0 Loans from TalkTalk Group (397.4) 397.4 – Loans to Best Buy Europe 293.3 (293.3) – (104.1) 204.1 100.0

23 Related party transactions

During the year, the Group had the following disclosable transactions and balances with its joint ventures (see also note 14) and other related parties: 2011 2010 Virgin Virgin Best Buy Mobile TalkTalk Best Buy Mobile Europe France Group Europe France £m £m £m £m £m Revenue for services provided 3.1 – 1.7 3.8 – Net interest and other finance income (expense) 1.0 1.6 (5.3) 2.6 1.1 Loans owed to the Group – 35.7 – – 50.8 Other amounts owed by the Group (1.2) – – – – Other amounts owed to the Group 0.2 0.1 0.1 1.9 –

Revenue for services provided relates to investment property rental income.

Carphone Warehouse Group plc Annual Report 2011 73 Five year record (unaudited)

2011 2010 2009 2008 2007 £m £m £m £m £m Headline results a) Group Share of results of Best Buy Europe 60.4 47.3 28.6 67.0 58.0 Share of results of Virgin Mobile France 8.2 (8.2) (8.4) (6.0) (8.0) Other (0.8) (1.7) (1.9) (3.0) (3.0) Net profit 67.8 37.4 18.3 58.0 47.0

Earnings per share – Basic 15.0p 8.3p 4.1p 12.8p 10.6p – Diluted 14.4p 8.2p 4.0p 12.4p 10.2p b) Best Buy Europe Revenue 3,572.0 3,528.8 3,562.6 3,091.0 2,886.0 EBITDA 257.4 231.7 185.3 211.0 201.0 EBIT 170.3 139.8 98.0 145.0 147.0 Interest (15.2) (16.3) (11.9) 3.0 (16.0) Taxation (34.3) (28.9) (28.9) (14.0) (15.0) Profit after taxation 120.8 94.6 57.2 134.0 116.0

EBIT by division CPW Europe 134.6 114.4 97.2 145.0 147.0 Best Buy Mobile US 97.9 46.4 7.8 – – Best Buy UK (62.2) (21.0) (7.0) – – 170.3 139.8 98.0 145.0 147.0 c) Virgin Mobile France Revenue 328.4 232.8 138.9 87.0 29.0 EBITDA 24.3 (19.3) (20.2) (16.0) (23.0) EBIT 20.6 (22.2) (22.7) (17.0) (23.4) Interest (2.9) (1.5) (1.4) (1.0) (0.6) Taxation (0.7) 5.1 6.7 6.0 7.0 Profit (loss) after taxation 17.0 (18.6) (17.4) (12.0) (17.0)

The financial results for periods prior to the Demerger have been prepared on the basis that the structure of the Group at Demerger had been in place for the duration of all periods reported. Further details on the basis of preparation are included in note 1 to the Group financial statements.

74 Carphone Warehouse Group plc Annual Report 2011 Company balance sheet As at 31 March 2011 ts n e m

2011 Notes £m Fixed assets cial state

3 n Investments 750.4 a n fi Current assets Cash and cash equivalents 163.5 Debtors: due within one year 4 46.2 209.7 Creditors: amounts falling due within one year 5 (10.9) Net current assets 198.8

Total assets less current liabilities 949.2 Provisions 6 (13.2) Net assets 936.0

Equity Share capital 8 0.5 Share premium account 8 754.0 Profit and loss account 8 181.5 Total capital employed 936.0

The accompanying notes are an integral part of this Company Balance Sheet. The financial statements on pages 75 to 79 were approved by the Board on 13 June 2011 and signed on its behalf by:

R Taylor N Langstaff Chief Executive Officer Chief Financial Officer

Carphone Warehouse Group plc Annual Report 2011 75 Notes to the Company Financial Statements

1 Accounting policies If a share-based payment scheme is cancelled, any remaining part of the fair value of the scheme is expensed a) Basis of preparation through the profit and loss account. If a share-based payment The Company was incorporated on 15 December 2009 in the scheme is forfeited, no further expense is recognised and any United Kingdom and it commenced operations on 17 December charges previously recognised through the profit and loss 2009. This is its first annual report. The financial statements account are reversed. have been prepared on a going concern basis (see Note 1 of the Share-based payment charges are also recognised on loans that Group financial statements) and in accordance with applicable are provided to employees to settle personal tax liabilities; the United Kingdom accounting standards under the historical cost cost of such loans is expensed on grant. convention, as modified by FRS 26 ‘Financial Instruments: Measurement’. Charges also arise on loans that are provided to employees to fund the purchase of shares in the Group as part of long-term The Group’s financial statements for the period ended 31 March incentives plans, to the extent to which the loans are not, in 2011 contain a consolidated cash flow statement. Consequently, certain circumstances, repayable; the cost of the relevant part the Company has applied the exemption in FRS 1 ‘Cash Flow of such loans is expensed over the course of the relevant Statements’ not to present its own cash flow statement. incentive plans. The following principal accounting policies have been applied d) Dividends consistently throughout the current period. Dividends receivable from the Company’s subsidiaries are b) Investments recognised only when they are approved by shareholders. Investments held in subsidiaries and joint ventures are Final dividend distributions to the Company’s shareholders recognised at cost, being the fair value of consideration, are recognised as a liability in the financial statements in the acquisition charges associated with the investment and capital period in which they are approved by the Company’s contributions by way of share-based payments, less any shareholders. Interim dividends are recognised in the period provision for permanent diminution in value. in which they are paid. Investments where the Company does have not have control e) Foreign currency translation or significant influence are treated as available-for-sale and Material transactions in foreign currencies are hedged using recorded at fair value. Changes in fair value, together with any forward purchases or sales of the relevant currencies and are related deferred taxation, are taken directly to reserves, and recognised in the financial statements at the exchange rates recycled to the profit and loss account when the investment is thus obtained. Unhedged transactions are recorded at the sold or is determined to be impaired. exchange rate on the date of the transaction. Material monetary c) Share-based payments assets and liabilities denominated in foreign currencies are Equity settled share-based payments are measured at fair value hedged, mainly using forward foreign exchange contracts to at the date of grant and expensed over the vesting period, based create matching liabilities and assets, and are retranslated at on an estimate of the number of shares that will eventually vest. each balance sheet date. Hedge accounting as defined by FRS 26 has been applied in the period. Fair value is measured by use of a Binomial model for share- based payments with internal performance criteria (such as f) Loans and other borrowings EPS targets) and a Monte Carlo model for those with external Bank fees and legal costs associated with the securing of performance criteria (such as TSR targets). external financing are capitalised and amortised over the term of the relevant facility. All other borrowing costs are recognised For schemes with internal performance criteria, the number in the profit and loss account in the period in which they are of options expected to vest is recalculated at each balance sheet incurred. date, based on expectations of performance against target and of leavers prior to vesting. The movement in cumulative expense g) Provisions since the previous balance sheet date is recognised in the profit Provisions are recognised when a legal or constructive and loss account, with a corresponding entry in reserves. obligation exists as a result of past events and it is probable that an outflow of resources will be required to settle the obligation For schemes with external performance criteria, the number and a reliable estimate can be made of the amount of the of options expected to vest is adjusted only for expectations of obligation. Provisions are discounted where the time value leavers prior to vesting. The movement in cumulative expense of money is considered to be material. since the previous balance sheet date is recognised in the profit and loss account, with a corresponding entry in reserves.

76 Carphone Warehouse Group plc Annual Report 2011

ts n e m

2 Profit and loss account

In accordance with the exemption permitted by section 408 of the Companies Act 2006, the profit and loss account of the Company is cial state not presented separately. The profit recognised for the period to 31 March 2011 was £176.2m. Information regarding the audit fees for n a the Group is provided in note 3 to the Group financial statements. n fi

3 FIXED asset investments

2011 £m On incorporation – Additions 2,298.9 Disposals (986.9) Impairments (559.1) Foreign exchange (2.5) At 31 March 2011 750.4

Cost 752.0 Accumulated impairments (1.6) Net carrying amount 750.4

On 25 March 2010 the Company became the holding company of Old Carphone Warehouse Group. Following the receipt of a dividend from Old Carphone Warehouse, the Company impaired its investment in Old Carphone Warehouse and subsequently acquired investments from it. The Demerger became effective on 26 March and the Company disposed of the TalkTalk Business. Fixed asset investments comprise investments in subsidiary undertakings, joint venture investments and other minority investments. Details of the Company’s investments in material subsidiary undertakings are provided in note 13 to the Group’s financial statements.

4 DEBTORS

2011 £m Amounts owed by Group undertakings 7.5 Loans to joint ventures 35.7 Deferred tax asset 1.4 Other debtors 1.6 46.2

Amounts owed by Group undertakings are repayable within 12 months of the balance sheet date.

5 CREDITORS

2011 £m Amounts owed to Group undertakings 1.2 Other creditors 2.4 Accruals and deferred income 7.3 10.9

Carphone Warehouse Group plc Annual Report 2011 77 Notes to the Company Financial Statements continued

6 PROVISIONS

2011 £m On incorporation – Transferred from Old Carphone Warehouse 13.5 Charge to the profit and loss account 0.1 Released in the period (0.4) At 31 March 2011 13.2

Provisions relate principally to warranties provided in relation to the Best Buy Europe Joint Venture Transaction.

7 Financial instruments

The Company has applied the exemption under FRS 25 ‘Financial Instruments: Presentation’ not to disclose details of financial instruments held by the Company. Full disclosure of the Group’s financial instruments under FRS 29 (IFRS 7) ‘Financial Instruments: Disclosures’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ is provided in note 18 to the Group’s financial statements. The Company has provided guarantees to third party suppliers of Virgin Mobile France, alongside the other shareholders of the business. The Company’s maximum potential exposure on these guarantees is £21.0m.

8 Share capital, reserves and accumulated profits

2011 2011 million £m Allotted, called-up and fully paid ordinary shares of 0.1p each 457.1 0.5

Share premium Profit and Demerger Share capital account loss account reserve Total £m £m £m £m £m On incorporation – – – – – Retained profit for the period – – 176.2 – 176.2 Net cost of share-based payments – – 4.3 – 4.3 Tax on items recognised directly in reserves – – 1.0 – 1.0 Insertion as holding company of – – – 1,741.4 1,741.4 Old Carphone Warehouse Group Capitalisation of demerger reserve 1.4 1,740.0 – (1,741.4) – Demerger of TalkTalk Group (0.9) (986.0) – – (986.9) At 31 March 2011 0.5 754.0 181.5 – 936.0

The Company became the holding company of the Old Carphone Warehouse Group on 25 March 2010 which created a demerger reserve. This demerger reserve was converted to share capital and share premium and the demerger of the TalkTalk Group on 26 March 2010 resulted in the reduction of these balances. The proposed dividend for the period ended 31 March 2011 is 5.0p. As this dividend is subject to shareholders’ approval at the forthcoming annual general meeting it has not been included as a liability in these financial statements. No dividends have been paid by the Company in the period. Note 6 of the Group financial statements provides further details on equity settled share-based payments.

78 Carphone Warehouse Group plc Annual Report 2011

ts n e m

9 Related party transactions

The Company has taken advantage of the exemption under FRS 8 ‘Related Party Disclosures’ not to provide details of related party cial state

transactions with other Group companies, as the Company’s financial statements are presented together with the consolidated n a

Group financial statements. n fi During the year, the Company had the following disclosable transactions and balances with its joint ventures and other related parties: 2011 TalkTalk Best Buy Virgin Mobile Group Europe France £m £m £m Net interest and other finance income (expense) – 1.0 1.6 Loans owed to the Company – – 35.7 Other amounts owed by the Company – (1.2) – Other amounts owed to the Company 0.1 0.2 0.1

Carphone Warehouse Group plc Annual Report 2011 79 glossary and DEFINITIONS

The following definitions apply throughout this annual report unless the context otherwise requires: Acquisition intangibles Acquired intangible assets such as customer bases, brands and other intangible assets acquired through a business combination capitalised separately from goodwill. Best Buy Best Buy Co., Inc. (incorporated in the United States) and its subsidiaries and interests in joint ventures and associates. Best Buy Europe Best Buy Europe Distributions and its subsidiaries and interests in joint ventures and associates jointly owned by Best Buy and the Group. Best Buy Europe Distributions Best Buy Europe Distributions Limited (incorporated in England and Wales) being the head entity of Best Buy Europe. Best Buy Europe Joint Venture Old Carphone Warehouse’s disposal of a 50% interest in its mobile retail and distribution business Transaction (Best Buy Europe), including its economic interests in Best Buy Mobile US, in June 2008. Board The Board of Directors of the Company. CGU Cash generating unit. Company Carphone Warehouse Group plc (incorporated in England and Wales). Demerger The demerger of Old Carphone Warehouse into the Group and the demerger of TalkTalk Group, effective on 26 March 2010. Dividend cover Reflects how many times dividends declared are covered by the net profit of the Group. It is calculated as basic EPS divided by dividends declared in the financial year. Earnings Profit after taxation, unless the context otherwise requires. EBIT Earnings before investment income, interest and taxation. EBITDA Earnings before investment income, interest, taxation, depreciation and amortisation. EPS Earnings per share (basic unless otherwise indicated). ESOT Employee share ownership trust. Group The Company, its subsidiaries and interests in joint ventures, which following the Demerger includes joint venture investments in Best Buy Europe and Virgin Mobile France as well as freehold properties and a number of minority investments in certain other businesses. Headline results Results before the amortisation of acquisition intangibles, and before exceptional items which are considered to be one-off and so material that they require separate disclosure to avoid distortion of underlying performance. The phrases “Headline earnings”, “Headline EBIT”, “Headline EBITDA” and “Headline EPS” should be interpreted in the same way. The Headline results of the Group’s joint ventures also include certain reclassifications, as detailed in note 14 to the Group financial statements, to aid understanding of underlying performance. IFRS International Financial Reporting Standards as adopted by the European Union. MVNO Mobile virtual network operator. OFCF Operating free cash flow. Old Carphone Warehouse TalkTalk Telecom Holdings Limited (formerly “The Carphone Warehouse Group PLC”) (incorporated in England and Wales). Old Carphone Warehouse Group Old Carphone Warehouse and its subsidiaries and interests in joint ventures prior to the Demerger. PAT Profit after taxation. Prospectus The Company’s prospectus issued as a part of the Demerger on 29 January 2010 (available on the Company’s website at www.cpwplc.com). ROCE Return on capital employed. Net profit as a percentage of capital employed, calculated using Headline earnings and with capital employed defined as average equity and average non-current debt. Averages are calculated based on the opening and closing positions for the relevant year. RCF Revolving credit facility. TalkTalk TalkTalk Telecom Group PLC (incorporated in England and Wales). Talk Talk Business The UK fixed line telecommunications division of Old Carphone Warehouse which following the Demerger was owned by TalkTalk. TalkTalk Group TalkTalk and its subsidiaries and other investments. TSR Total shareholder return. UK GAAP United Kingdom Accounting Standards and applicable law. VES Value enhancement scheme. Virgin Mobile France Omer Telecom Limited (incorporated in England and Wales) and its subsidiaries, operating an MVNO in France as a joint venture between the Company, Bluebottle UK Limited and Financom S.A.S. WAEP Weighted average exercise price.

80 Carphone Warehouse Group plc Annual Report 2011 overview Financial Calendar

GROUP AT A GLANCE ts n

Results announcement 14 June 2011 stateme

Ex-dividend date 6 July 2011 carphone warehouse ial

BEST BUY EUROPE virgin mobilE other assets

best buy europe CPW europe BEST BUY MOBILE US BEST BUY UK No.1 mvno in france FORFAITS property assets

Détendu du mobile

harnessing the connected world By MAKING TECHNOLOGY ACCESS ible to customers annual report 2011 report annual

• Group Headline EPS up over 80% from 8.3p to 15.0p • Group statutory EBIT up 67% from £38.0m to £63.3m • Dividend of 5.0p per share

Headline financial highlights the home of

4.1 (23) (22)

2009 2010 2011 2010 2011 2009 2010 2011 Cash Virgin loan asset