1st Quarter Results
British American Tobacco PLC
29 April 2003
QUARTERLY REPORT TO 31 MARCH 2003 29 April 2003
SUMMARY
2003 2002 Change
Operating profit pre-goodwill amortisation £612m £617m -1%
Pre-tax profit £464m £463m -
Adjusted earnings per share 14.54p 13.95p +4%
• Operating profit, excluding goodwill amortisation, was
1 per cent lower at £612 million reflecting very
competitive conditions in the US and the weakness of a
number of currencies. At comparable rates of exchange,
operating profit would have risen by 2 per cent.
• The growth in volume for the Group's global drive brands
has continued, with Dunhill, Kent, Lucky Strike and Pall
Mall up a combined 15 per cent. International brands as
a whole grew 4 per cent, while the Group's total volumes
were fractionally ahead.
• Adjusted diluted earnings per share rose by 4 per cent to
14.54p, benefiting from reduced net interest costs and a
lower effective tax rate.
• The Group has initiated an on-market share buy-back
programme. Until the beginning of a close period at the
end of March, some 18 million shares were bought at a
cost of around £108 million, representing a solid start
to the programme. It is intended to continue the
programme following today's announcement.
• The Chairman, Martin Broughton, commented "Bearing in
mind the state of the world economy and the difficult
trading environment in the US, this is a very resilient
performance. There is no doubt that 2003 will be a
challenging year for businesses generally. We entered
the year in a strong competitive position and are
performing in line with expectations."
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BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 31 MARCH 2003
INDEX
PAGE
Chairman's comments 2
Business review 5
Group results 10
Segmental analyses of turnover and profit 11
Statement of total recognised gains and losses 12
Interest of British American Tobacco's shareholders 12
Accounting policies and basis of preparation 13
Changes in the Group 13
Foreign currencies 13
Goodwill amortisation 14
Net interest 14
Taxation 14
Earnings per share 15
Share buy-back programme 15
CHAIRMAN'S COMMENTS 2.
In the first three months, British American Tobacco's
operating profit before goodwill amortisation was
£612 million, marginally lower than last year's first quarter,
at current rates of exchange. At constant rates, profit would
have risen by 2 per cent. Bearing in mind the state of the
world economy and the difficult trading environment in the US,
this is a very resilient performance. Adjusted diluted
earnings per share improved by 4 per cent to 14.54p, as a
result of reduced interest costs and lower tax, mainly
reflecting a change in the geographical mix of profit.
As announced at the time of the full year's results, the Group
has initiated an on-market share buy-back programme. Until
the beginning of a close period at the end of March, some
18 million shares were bought at a cost of around
£108 million, representing a solid start to the programme.
The buy-back had a minimal impact on earnings in the quarter.
We intend to continue the programme following today's
announcement.
The growth in volume for the Group's global drive brands,
which was such a notable feature of 2002, has continued, with
Dunhill, Kent, Lucky Strike and Pall Mall up a combined 15 per
cent. The move to local manufacturing for Dunhill in South
Korea has gone smoothly. International brands as a whole grew
4 per cent despite the fact that the Group's worldwide
duty-free business has undoubtedly been affected by the impact
of reduced travel as a result of fears about the Iraq war.
The Group's total volumes were fractionally ahead.
There was a more mixed picture in terms of regional
performances, with good results from Europe, Asia-Pacific and
Africa and Middle East, while America-Pacific was affected by
significantly lower total industry profitability in the US.
Although profit was reduced in Latin America, the region
continued to demonstrate impressive resilience in the face of
some extremely difficult economic conditions.
During the war, our top priority has been the security of our
employees and their families. Our team in Dubai, covering
13 Middle East countries, immediately set up crisis management
systems which were so successful that other international
companies asked for their advice. While our primary focus was
on our employees, excellent cooperation with suppliers and
distributors has enabled our business in the Middle East to
keep going safely and sensibly, with no significant loss of
production and continuing distribution.
Chairman's comments cont... 3.
Turning to the regulatory field, the issue of 'Lights'
cigarettes is currently highly topical. Public health
authorities and tobacco control advocates are calling for bans
on 'Lights' descriptors on the grounds that consumers may be
misled by them.
Yet over the years, the low tar programme has been an
outstandingly successful example of cooperation between
governments and tobacco manufacturers. Average sales weighted
tar levels have fallen dramatically over 50 years and many
smokers now prefer a lighter taste. 'Lights' descriptors help
consumers who choose Light cigarettes because of taste to
recognise their preferred brand.
There is no longer a public health consensus that low tar
cigarettes may reduce some of the health risks of smoking and
today's very low tar brands have not been popular for long
enough to enable epidemiological studies to be conducted.
However, it is noticeable that the recent EU Tobacco Directive
lowered the 'tar ceiling' to 10 mg on health grounds.
Moving to litigation, there has been a most encouraging
development in the US in a case involving State Farm
Insurance, where the Supreme Court has issued guidance to
lower courts about punitive damages. It has determined that
punitive damages should not usually exceed a low single figure
ratio to compensatory damages and that multiple punitive
awards for the same alleged conduct should be avoided. In the
light of this sensible guidance, tobacco and other US
industries may surely now hope for more common sense in an
environment where punitive awards, in some State courts at
least, can stray into the realms of fantasy.
We have again been highly ranked in the Business in the
Environment Index of Corporate Environmental Engagement, this
year reaching what is called the 'Premier League' of companies
scoring over 95 per cent, as one of just 18 companies of some
200 assessed. We were also delighted to be awarded "Best
First-Time Social Reporter" in the Sustainability Reporting
Awards run by the UK Association of Chartered Certified
Accountants in March.
Chairman's comments cont... 4.
Finally, in terms of recognition, our website www.bat.com has
just won two awards from the Investor Relations Society for
Best Practice in Communications with Private Investors and
Analysts. Last year, a successful innovation was the web
version of our Social Report. As a result, we have decided to
build this year's Report entirely on the website. It should
be published around the end of June and shareholders will
receive a summary along with the half year results.
There is no doubt that 2003 will be a challenging year for
businesses generally given the Iraq war and its aftermath,
exchange rate fluctuations and the downbeat state of the world
economy. We entered the year in a strong competitive position
and are performing in line with expectations. We should see
more progress with our drive brands, a renewed focus on being
smart about costs and more engagement with our stakeholders.
We remain committed to continuous improvement in everything we
do and firmly focused on creating shareholder value.
MARTIN BROUGHTON
BUSINESS REVIEW 5.
Group operating profit, excluding goodwill amortisation set
out on page 14, was 1 per cent lower at £612 million, but at
comparable rates of exchange the growth in profit would have
been 2 per cent.
There were increased contributions from the Europe,
Asia-Pacific and Africa and Middle East regions. However,
these were more than offset by lower profit from the US and
the Latin America region where a number of currencies were
generally weaker compared to 2002.
Group volumes at 184 billion were slightly up from
183 billion, boosted by the strong performance of the four
global drive brands Dunhill, Kent, Lucky Strike and Pall Mall,
which achieved an overall growth of 15 per cent.
Profit from the America-Pacific region was £187 million
compared to £223 million for the same period last year, as the
contribution from the US cigarette business was significantly
lower. Good profit increases from Japan and South Korea were
partly offset by a lower contribution from Canada. Volumes in
the region were down 3 per cent to 24 billion, mainly as a
result of lower industry volumes in the US and Canada.
Imperial Tobacco Canada contributed £90 million profit, a
decrease of 2 per cent in local currency. As a result of high
tobacco tax increases and related trade loading in 2002, the
total market declined significantly. In addition, the market
is experiencing a resurgence of illicit trade and growth of a
lower-priced segment. Given these circumstances, the company
performed well and remains focused on the premium segment,
while beginning to address demand for lower-priced products in
a targeted approach.
The US remained a very competitive market. Industry volumes
were down 13 per cent, as a result of disproportionately high
shipments in the first quarter of 2002 and state excise tax
increases. Within this reduced market, increased discounting
and a growth in the deep-discount category, together with
volumes 10 per cent lower and one-off trade costs, resulted in
Brown & Williamson's contribution from its US cigarette
business being halved at £39 million. Shipment share was down
on the previous quarter but up from the same period last year.
Increased volumes by Kool, Pall Mall and Misty, partially
offset by decreases in GPC and Carlton, made this possible.
In Japan, Kent and Kool continued their growth while Lucky
Strike maintained market share. In a reduced total market,
the Group again increased volume and share and profit was
higher.
Business review cont... 6.
The outstanding performance over the last three years of
Dunhill Lights in South Korea continued, with market share
exceeding 12 per cent, up more than 4 share points from the
same period last year. This resulted in a substantial
increase in profit.
In Asia-Pacific, regional profit of £118 million was
£5 million above last year as a result of higher margins in
Australia, along with improved results from Malaysia, Vietnam
and India, partially offset by reduced duty-free sales.
Regional volumes at 48 billion were slightly lower than last
year, with increases from India and Vietnam largely
compensating for declines in volumes from Cambodia, Indonesia
and duty-free.
Australia delivered strong profit growth through higher
margins and lower overheads. Overall volumes were stable as
Dunhill volumes and share continued to grow, while Winfield
volumes and share were down slightly. In New Zealand, profit
was in line with last year, despite lower volumes.
Total market share and profit continued to grow in Malaysia,
driven by higher volumes. The addition of the new Dunhill
Lights and Menthol range saw Dunhill continuing to produce
steady growth in both volume and share.
In Vietnam, price increases and continued strong performances
by Craven 'A' and State Express 555 resulted in solid growth
of volume and profit. In Cambodia, profit was adversely
affected by lower volumes. The government-mandated price
increases in Indonesia continued to hamper competitiveness,
resulting in reduced volumes and profit. Profit was well
ahead in Taiwan with volumes higher as a result of a good
performance by Dunhill.
In Pakistan, volumes were stable and profit was up after prior
year price increases, with John Player Gold Leaf continuing
its strong performance. In Bangladesh, market share was
maintained in a growing market, leading to higher volumes.
However, profit was lower despite robust up-trading which
fuelled the growth of Benson & Hedges, as the company was
unable to pass on the full extent of the additional 2002
excise increase. Volumes, share and profits improved in
Sri Lanka, where John Player Gold Leaf has also displayed
strong growth. Profit from the Group's associated companies
in India grew strongly with increased volumes.
In Latin America, results were affected by currency
devaluations compared to last year, as well as by difficult
economic conditions. Consequently profit of £93 million was
down by £7 million. Increased contributions from Mexico,
Central America and the Caribbean were more than offset by
lower profit from Brazil and Venezuela. Volumes in the region
declined by 4 per cent to 36 billion primarily due to the lower
volumes from Brazil.
Business review cont... 7.
In Brazil, profit declined due to the average real/sterling
exchange rate depreciating by some 30 per cent and lower
volumes. Nevertheless, Souza Cruz improved operating profit
margins as a consequence of productivity improvements and cost
reduction initiatives. The lower volumes mainly reflect the
reduction in the size of the total official market. The high
level of contraband and counterfeit, which rose further
following the price increases, remains a concern.
Profit in Mexico was higher as a result of price increases and
initiatives to reduce variable and secondary supply chain
costs. In Argentina, volumes rose while in Chile, Belmont
continued its share growth but overall volumes were in line
with last year. However in all three countries profit reported
in sterling was affected by devaluations.
Profit in Venezuela was materially down as a result of the
severe devaluation of the currency since February 2002 and an
increase in VAT in September 2002. Market share was in line
with last year and total volumes were only slightly down
despite the disruption in supply of products as many outlets
closed for an extended period following a national strike.
Both Central America and the Caribbean recorded volume and
profit increases.
Total profit in Europe at £134 million increased by
£18 million with good performances from a number of markets
including Germany, Russia and Hungary as well as lower costs
in the UK. Regional volumes grew by 3 per cent to
52 billion, led by the performances in Russia and Italy.
In Germany, profit improvement was achieved through cost
savings and despite lower volumes as overall market
consumption declined, following an excise increase in
January. The three key brands, Lucky Strike, Pall Mall and
Gauloises Blondes continued to grow market share. In
France, higher margins stemming from a price increase were
not sufficient to compensate for a reduction in the overall
market size and both the profit and volumes were down.
Volumes in Switzerland were in line with last year, with all
three drive brands, Barclay, Lucky Strike and Parisienne
posting market share gains. In Italy, profit was adversely
affected by the one-off cost of supporting Pall Mall growth,
which led to a significant increase in volume. Results in the
UK improved as a result of the absence of the high spend
incurred last year to support the launch of State Express 555.
Business review cont... 8.
Russia continued its solid volume and profit growth with the
share in the top 30 cities growing to a record level as a
result of the success of Pall Mall, Kent and Vogue. In
addition, the company sustained its leading position in
Moscow with market share growing to over 32 per cent.
Weaker results in Poland reflected a decline in total market
profitability, stemming from renewed competition which
encouraged down-trading.
Higher prices contributed to a strong growth in profit in
Hungary, where sales volumes were slightly down on last
year. A solid volume increase was again achieved in Ukraine
where the company consolidated its leading position in the
market. Romania continued to suffer from weaker pricing,
resulting in a profit decline, although volumes and market
share grew predominantly on account of Kent.
The Smoking Tobacco and Cigars operations showed a small
increase in profit.
In the Africa and Middle East region, profit at £80 million was
up by £15 million with good results from many markets and
despite the cost of continuing investments being made in this
region. Regional volumes rose 9 per cent to 24 billion with
strong growth in Nigeria and the Middle East.
Sales volumes in South Africa were in line with the same period
last year. Profit improved strongly, largely through the benefit
of price and mix driven margin gains and a stronger currency,
partly offset by cost increases. The margin gains were achieved
through increased market shares of Peter Stuyvesant, Rothmans and
Dunhill.
Volumes in the Southern Africa area were in line with last year,
although profit fell marginally. Volume gains in Mozambique and
Angola, following the improved stability within these markets, were
offset mainly by a downturn in Zimbabwe.
Profit from Nigeria continued to increase as the product mix
improved and an excellent volume growth was achieved. The
distribution network was expanded, resulting in Benson & Hedges and
London increasing market share.
Business review cont... 9.
The investment in the greenfield operation in Turkey continued to
affect the profit in the quarter. Profit in the Middle East rose
very strongly as share growth was achieved in Iran, mainly through
Kent, coupled with pricing gains in Saudi Arabia where John Player
Gold Leaf and Benson & Hedges grew share.
Non-trading items
The above results were achieved before accounting for goodwill
amortisation described on page 14.
Group Cigarette Volumes
3 months to Year to
31.3.03 31.3.02 31.12.02
bns bns bns
America-Pacific 23.7 24.5 107.0
Asia-Pacific 48.2 48.6 192.5
Latin America 36.3 38.0 153.0
Europe 52.0 50.3 232.6
Africa and Middle East 23.5 21.6 92.2
----- ----- -----
183.7 183.0 777.3
===== ===== =====
GROUP RESULTS - unaudited 10.
3 months to Year to
31.3.03 31.3.02 31.12.02
£m £m £m
REVENUE
Subsidiary undertakings 5,438 5,521 23,330
Share of associates and joint
ventures 363 324 1,352
----- ----- ------
5,801 5,845 24,682
===== ===== ======
PROFIT
Subsidiary undertakings 480 496 2,180
after charging:
goodwill amortisation (97) (94) (378)
Share of associates and joint
ventures 35 27 123
----- ----- ------
Total operating profit 515 523 2,303
----- ----- ------
Profit on ordinary activities
before interest 515 523 2,303
Net interest (50) (59) (184)
Share of associates' and joint
ventures' net interest (1) (1) (6)
----- ----- ------
Profit before taxation 464 463 2,113
Taxation on ordinary activities (192) (202) (818)
----- ----- ------
Profit after taxation 272 261 1,295
Minority interests (37) (34) (143)
----- ----- ------
Profit for the period 235 227 1,152
===== ===== ======
Earnings per share
basic 10.78p 10.39p 50.91p
===== ===== ======
diluted - unadjusted 10.29p 9.87p 50.10p
===== ===== ======
diluted - adjusted 14.54p 13.95p 66.54p
===== ===== ======
See notes on pages 13 to 15.
SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - unaudited 11.
3 months to Year to
31.3.03 31.3.02 31.12.02
£m £m £m
Turnover excluding duty, excise
and other taxes
America-Pacific 883 901 4,026
Asia-Pacific 417 449 1,792
Latin America 276 354 1,410
Europe 778 721 3,064
Africa and Middle East 296 253 1,087
------ ------ ------
2,650 2,678 11,379
====== ====== ======
Operating profit
America-Pacific 187 223 1,018
Asia-Pacific 118 113 463
Latin America 93 100 393
Europe 134 116 547
Africa and Middle East 80 65 260
------ ------ ------
612 617 2,681
Goodwill amortisation (97) (94) (378)
------ ------ ------
515 523 2,303
====== ====== ======
Operating profit, before goodwill
amortisation, restated at
comparable rates of exchange 627 617 2,681
====== ====== ======
The net turnover analysis is based on external sales in each
region. The figures for the three months ended 31 March 2003 and
31 March 2002 based on regional location of manufacture would not
be materially different except for sales from Europe to Africa and
Middle East and Asia-Pacific which amounted to £117 million and
£27 million respectively, 2002 £94 million and £30 million.
12.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - unaudited
3 months to Year to
31.3.03 31.3.02 31.12.02
£m £m £m
Profit for the period 235 227 1,152
Differences on exchange 189 94 70
------ ------ ------
Total recognised gains related to the period (below) 424 321 1,222
====== ====== ======
INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - unaudited
3 months to Year to
31.3.03 31.3.02 31.12.02
£m £m £m
Balance 1 January 5,185 4,754 4,754
Total recognised gains related to the
period (above) 424 321 1,222
Issue of shares - share options 3 4 6
Dividends and other appropriations:
ordinary shares (755)
convertible redeemable preference
shares (42)
amortisation of discount on
preference shares (4) (4) (18)
Purchase of own shares (108)
Other movements 4 4 18
------ ------ ------
Balance at period end 5,504 5,079 5,185
====== ====== ======
See notes on pages 13 to 15.
ACCOUNTING POLICIES AND BASIS OF PREPARATION 13.
The financial statements comprise the unaudited results for the
three months ended 31 March 2003 and 31 March 2002 and the audited
results for the twelve months ended 31 December 2002.
The unaudited Group results have been prepared under the
historical cost convention and in accordance with applicable
accounting standards using the accounting policies set out in the
Report and Accounts for the year ended 31 December 2002.
CHANGES IN THE GROUP
Following the restructuring of its Malaysian businesses in 1999,
the Group had an operational subsidiary and a 54.7 per cent
holding in a separate non-trading company whose assets were
primarily short term deposits. In May 2002, the holding in this
separate company was sold for book value.
FOREIGN CURRENCIES
The results of overseas subsidiaries, associates and joint
ventures have been translated to sterling as follows:
Profit and loss for the three months to 31 March 2003 at the
average rates for that period. The comparatives for the three
months to 31 March 2002 and the year to 31 December 2002 at the
average rates for the year to 31 December 2002. The interest of
British American Tobacco's shareholders has been translated at
the relevant period end rate.
For high inflation countries, the translation from local
currencies to sterling makes allowance for the impact of
inflation on the local currency results.
The principal exchange rates used were as follows:
Average Closing
-------------- ----------------------------
2003 2002 31.3.03 31.3.02 31.12.02
US dollar 1.603 1.504 1.581 1.424 1.610
Canadian dollar 2.422 2.361 2.325 2.272 2.543
Euro 1.494 1.581 1.449 1.632 1.534
South African
rand 13.375 15.739 12.441 16.184 13.814
GOODWILL AMORTISATION 14.
The amortisation charge of £97 million is in respect of goodwill
which principally arose from the Rothmans transaction during
1999 and the Imasco transaction during 2000. The increase in
the charge reflects the impact of exchange rate movements shown
above.
NET INTEREST
The decrease in net interest of £9 million to £51 million
principally reflects the benefit from the Group's cash flow
since 31 March 2002.
TAXATION
3 months to
31.3.03 31.3.02
£m £m
British American Tobacco p.l.c.
and subsidiary undertakings - overseas 179 191
Share of associates and joint
ventures 13 11
---- ----
192 202
==== ====
Tax rate 41.4% 43.6%
==== ====
The tax rates for each period are adversely affected by goodwill
amortisation. The underlying tax rate reflected in the adjusted
earnings per share shown below was 34.2 per cent
(2002 36.3 per cent). The improvement in the tax rate at both
the published and underlying rate levels reflects a change in
the geographical mix of profit.
EARNINGS PER SHARE 15.
Basic earnings per share are based on the profit for the period
attributable to ordinary shareholders and the average number of
ordinary shares in issue during the period (excluding shares
held by the Group's two Employee Share Ownership Trusts).
For the calculation of diluted earnings per share the average
number of shares reflects the potential dilutive effect of
employee share schemes and the convertible redeemable preference
shares. The earnings are correspondingly adjusted to the amount
of earnings prior to charging dividends and the amortisation of
discount on the convertible redeemable preference shares.
The earnings have been distorted by goodwill amortisation. To
illustrate the impact of this distortion the adjusted diluted
earnings per share are shown below:
Diluted earnings per share
3 months to Year to
31.3.03 31.3.02 31.12.02
pence pence pence
Unadjusted earnings per share 10.29 9.87 50.10
Effect of goodwill amortisation 4.25 4.08 16.44
------ ------ ------
Adjusted earnings per share 14.54 13.95 66.54
====== ====== ======
A similar adjustment would apply to basic earnings per share.
For the three months to 31 March 2003 basic earnings per share
on an adjusted basis would be 15.31p (2002 14.77p) compared to
unadjusted amounts of 10.78p (2002 10.39p).
SHARE BUY-BACK PROGRAMME
The Group initiated an on-market share buy-back programme at the
end of February 2003. During the quarter to 31 March 2003,
17.8 million shares were bought at a cost of £107.9 million.
******
Copies of this Report will be posted to shareholders and may also
be obtained during normal business hours from the Company's
Registered Office at Globe House, 4 Temple Place, London WC2R 2PG.
Alan F Porter
Secretary
29 April 2003
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