1st Quarter Results

British American Tobacco PLC 27 April 2004 QUARTERLY REPORT TO 31 MARCH 2004 27 April 2004 SUMMARY 2004 2003 Change Operating profit pre-goodwill amortisation and exceptionals £640m £620m +3% Pre-tax profit £454m £468m -3% Adjusted earnings per share 15.59p 14.71p +6% • Operating profit, excluding goodwill amortisation and exceptional items, was 3 per cent higher at £640 million, affected by the translation of results at generally weaker exchange rates. At comparable rates of exchange, operating profit would have risen by 9 per cent. • Group volumes grew by 5 per cent to 192 billion, through solid organic growth and acquisitions. The Group's global drive brands, Kent, Pall Mall, Lucky Strike and Dunhill were up a combined 3 per cent. • Pre-tax profit was 3 per cent lower at £454 million and basic earnings per share fell to 10.53p (2003: 10.83p). • Adjusted diluted earnings per share rose by 6 per cent to 15.59p, benefiting from higher operating profit and the impact of the share buy-back programme. • The Chairman, Martin Broughton, commented "We expect our real momentum to continue, although these results clearly demonstrate the extent to which good progress can be masked by the impact of the strength of sterling on the translation of our profit." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson/ 020 7845 1180 David Betteridge/ Rachael Cummins 020 7845 1519 Teresa La Thangue/ 020 7845 2888 Ann Tradigo BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 31 MARCH 2004 INDEX PAGE Chairman's comments 2 Business review 5 Group results 9 Segmental analyses of turnover and profit 10 Statement of total recognised gains and losses 11 Interest of British American Tobacco's shareholders 11 Accounting policies and basis of preparation 12 Foreign currencies 12 Changes in the Group 13 Restructuring costs 14 Goodwill amortisation 14 Write down of loan to joint venture 14 Loss on disposal of subsidiaries 14 Net interest 15 Taxation 15 Earnings per share 15 Share buy-back programme 16 CHAIRMAN'S COMMENTS 2. At current rates of exchange, British American Tobacco's operating profit before goodwill amortisation and exceptional items was 3 per cent ahead at £640 million in the first three months. This reflects the impact of the weakness in almost all our key currencies on the translation of profit into sterling, a factor we drew to shareholders' attention at the end of February when reporting last year's results. At constant rates of exchange, profit grew by 9 per cent. Adjusted diluted earnings per share grew by 6 per cent benefiting from higher operating profit and the impact of the share buy-back. Some 24 million shares have been repurchased so far this year at an average price of £8.18, costing around £197 million. The Group's volumes improved by 5 per cent to 192 billion, driven by organic growth and the acquisitions in Italy, Serbia and Peru during 2003. Our global drive brands grew by 3 per cent, with Kent continuing to perform well in Japan and Russia, while Dunhill has been affected by lower sales in South Korea and Malaysia. With Lucky Strike broadly stable, the real star has once again been Pall Mall, driven by outstanding results in Italy. Now that we own Ente Tabacchi Italiani, everything we have seen gives us yet more confidence in the strong future of the business. We knew that we were acquiring a revitalising company with rising profits and that there were significant synergies to be achieved by combining our existing small business in Italy with ETI's 25 per cent market share. It is safe to say that the results so far, with a profit of around £43 million from the combined business in Italy, are exceeding our expectations. The European region is obviously benefiting from this initial contribution, which has more than offset the difficulties in Germany and France as a result of swingeing excise increases. The other regions have also made good progress, although much of their growth has been masked by adverse exchange differences. In terms of transparency and responsibility, we have now made our Standards of Business Conduct available externally. They require high standards of business integrity from our employees worldwide in many important areas such as conflicts of interest, bribery and corruption, political contributions and contraband. No manager has the authority to order or approve any action contrary to the Standards and we make it clear that they must never be compromised for the sake of results. Chairman's comments cont... 3. In this context, it was pleasing to see the UK Department of Trade and Industry conclude its three year investigation into allegations of the Group's involvement in tobacco smuggling with the announcement that it had found no evidence of illegal activity and that no further action would be taken. We work actively with governments and customs authorities to help them eliminate smuggling and we have always maintained that our companies acted legally. More generally, British American Tobacco also seeks to work with governments to achieve sound and fair regulation that can help to reduce the impact of tobacco on public health, can tackle under age smoking and can also ensure that adult consumers are allowed to continue making informed choices about a legal product. Yet in some countries, our companies are denied even the fair hearing from regulators that this constructive position merits. In the UK, the proposed amendments to the Tobacco Advertising and Promotions Act 2003, which restrict the information available at each retail outlet to the size of an A5 card, 30 per cent of which has to be a health warning, are unreasonable and disproportionate. That is why we, along with other tobacco companies operating in the UK, are seeking a judicial review. For tobacco, policy making can flout accepted good regulatory practice. Laws can go far beyond what is reasonable and can seem to be 'cut and pasted' from pressure group proposals with little basis in sound science, cost/benefit or even basic notions of a fair society. An example is the growing use of 'graphic image' health warnings, which threaten our intellectual property rights on the pack and can offend and harass consumers - yet in fact only convey the same health messages as are carried in print. However, I do see some growing understanding that tobacco - this challenging, risky, yet legal and enduringly enjoyable product for its consumers - is simply not going to vanish. Many governments welcome support from our companies in achieving more appropriate tobacco marketing, in tackling under age smoking, accommodating non-smokers and smokers alike and in appropriately reinforcing the message that smoking poses risk to health. Chairman's comments cont... 4. Turning back to our more immediate prospects, we expect our real momentum to continue, although these results clearly demonstrate the extent to which good progress can be masked by the impact of the strength of sterling on the translation of our profit. We can, of course, be affected by particular circumstances in individual countries. This year, for example, market factors are likely to impact profitability in Canada. In the US, the proposed transaction between Brown & Williamson's US businesses and R.J. Reynolds remains on track and, subject to regulatory approvals, should be completed around the middle of the year. MARTIN BROUGHTON BUSINESS REVIEW 5. Group operating profit, excluding goodwill amortisation and exceptional items set out on page 14, was 3 per cent higher at £640 million, affected by the translation of results at generally weaker exchange rates. The growth in profit at comparable rates of exchange would have been 9 per cent as sterling strengthened against almost all currencies, especially the US and Canadian dollars. Good underlying performances were reported in all regions. Group volumes grew by 5 per cent to 192 billion. Solid organic growth, together with the volumes from acquisitions, more than offset declines in some markets. The four global drive brands increased volumes by 3 per cent with strong performances by Kent and Pall Mall, a stable position for Lucky Strike and lower volumes for Dunhill as a result of competitor launches in South Korea and timing of shipments in Malaysia. Profit from the America-Pacific region was £187 million, £3 million lower than last year, as profit increases from Japan and the US were more than offset by the continuing US and Canadian dollar exchange rate weakness and lower contributions from Canada and South Korea. Volumes in the region were down 6 per cent to 22 billion mainly as a result of declines in the US and Canada. Imperial Tobacco Canada suffered from lower industry volumes and strong growth of the lower price segment as a result of continued high increases in tobacco taxes. Player's, du Maurier and Matinee all performed well and Imperial increased its share of the premium market. The company also grew share in the lower price segment, but significant down-trading to the lower price brands eroded Imperial's overall market share. The company contributed £83 million of profit, down 13 per cent from last year as reduced operating costs were more than offset by the lower volumes, the continued shift in the sales mix and exchange rate movements. In the US, although there was a 3.5 per cent decline in industry volumes due to continued deloading at wholesale level, Brown & Williamson's contribution from its US cigarette business was up 21 per cent at £46 million. This increase was due to lower secondary supply chain and marketing costs, following one-off trade costs last year, partly offset by a weaker US dollar, lower volumes and lower net pricing. The strategic brands, Kool, Pall Mall and Misty increased market share but this was offset by declines in the non-strategic brands, mainly GPC, and overall market share was slightly lower. In Japan, Kent and Kool performed well in an increasingly competitive environment. Profit rose and volumes were in line with last year despite the fall in total industry volume. In South Korea, profit was lower as volumes of Dunhill Lights decreased as a result of competitor product launches. Business review cont... 6. In Asia-Pacific, regional profit of £124 million was £5 million higher with strong results in Australia, India, Malaysia and generally higher duty free sales, although reported results were affected by currency weakness in Malaysia and India. Regional volumes at 49 billion were 3 per cent ahead with increases in Pakistan, Bangladesh and India partially offset by lower Malaysian sales. Australia and New Zealand continued to deliver strong profit growth through higher margins, volumes, and overall market share. In Australia, Dunhill and Winfield increased market share, with Winfield rising to over 22 per cent. Local currency profit in Malaysia was higher as margins improved as a result of price increases, partly offset by lower volumes as a result of timing of shipments. In Vietnam, both volumes and profits increased with State Express 555 improving market share. In Pakistan, volumes and profit rose with good performances from Gold Flake and John Player Gold Leaf. Bangladesh continued to strengthen the business through a focussed investment in international brands, resulting in share growth for Benson & Hedges, although profit was lower due to higher marketing expenditure. Volumes and profits in local currency from the Group's associated companies in India grew strongly. In Latin America, profit of £90 million was £1 million lower with increased contributions from Brazil, Argentina, Venezuela and Mexico, more than offset by generally weaker exchange rates against sterling. Volumes in the region were slightly up at 37 billion as the small declines in Brazil and Mexico were more than covered by increases in Chile, Venezuela and the impact of the acquisition in Peru. Profit in Brazil increased with higher prices partially offset by the depreciation of the real against sterling and marginally lower sales volumes as a consequence of the price increases and competitor pricing activities. In Mexico, price increases coupled with lower variable costs and secondary supply chain expenses, resulted in higher profit in local currency but profits reported in sterling were affected by the exchange devaluation. Market share was lower reflecting competitor activities and timing of shipments following the January 2004 price increases. Volumes in Argentina were similar to last year although market share was down following significant growth of local companies in the lower price segment. Profit was substantially higher than last year as a significant price increase improved margins. Business review cont... 7. In Chile, profit was down as the premium segment was affected by the economic situation and excise increases. However, overall volumes were up, driven by Belmont and Derby and the success in reducing illicit trade. Volumes and profit were higher in Venezuela as consumer purchasing power increased, resulting in a higher market share mainly driven by Consul. In Central America, volumes were in line with last year but profit was lower due to exchange rate movements. Total profit in Europe was up £17 million to £153 million due to the inclusion of Ente Tabacchi Italiani S.p.A. (ETI), which was acquired at the end of December 2003. Good performances from a number of businesses were offset by declines in France, Germany, Switzerland and Hungary. Volumes for the region increased by 17 per cent to 61 billion, due to the acquisitions last year as well as strong growth from Russia, Poland and Romania, partly offset by decreases in France and Germany. In Germany, total market share was maintained, with Pall Mall and Gauloises Blondes growing share and Lucky Strike stable, while Pall Mall was rolled out into western Germany. Lower profit and volumes reflected a decline in total cigarette volumes of around 6 per cent, following the excise related price increases, but the Group achieved a strong performance in other tobacco products. Market share in France increased due to the strong performances of Winfield and Lucky Strike. However, volumes and profit were down as market shipments contracted by 23 per cent as a result of two consecutive large excise increases. In Italy, volume and profit showed strong growth following the acquisition of ETI and the successful repositioning of Pall Mall which almost doubled market share from last year. The integration of the new business is firmly on track with combined market share higher and total profit from the business in Italy of around £43 million. Overall market share in Switzerland was slightly down although Parisienne continued share growth. The timing of marketing spend behind two brand launches in 2004 resulted in lower profit. Higher margins led to a profit growth in Belgium while lower overheads contributed to better results in the Netherlands, despite a small volume decline in both markets. In Russia, continued strong volume growth, higher market share and improved mix, led by an excellent performance from Kent, resulted in significantly higher profit. In Romania, higher market share, volume and margins led to an improved performance. A better result in Poland was mainly driven by higher volumes and increased market share. Excessive excise increases in Hungary, which reduced the total market by 17 per cent and the company volumes by 10 per cent, and reduced volumes in Ukraine, resulted in lower profit in both markets. The Smoking Tobacco and Cigars operations showed a strong increase in profit with all product groups showing a good performance. Business review cont... 8. In the Africa and Middle East region, profit rose £2 million to £86 million, despite the costs of continued investment in new markets and the difficulties in Zimbabwe. Volumes were down 3 per cent to 23 billion with strong growth in Nigeria more than offset by the declines in South Africa and the Middle East. Volumes in South Africa were lower as the overall market declined by 5 per cent due to significant excise driven price increases. However, profit improved as a result of higher margins and share gains made by Peter Stuyvesant and Dunhill. In Equatorial Africa, volumes and profits were lower, principally reflecting the economic conditions in Zimbabwe. Volumes in the West Africa area were higher, primarily due to Nigeria, where Benson & Hedges grew share as a result of improved distribution. Area profit was ahead of last year, with margin improvement in a number of smaller markets. In the Middle East area, profit was down, reflecting the increased investment in Iran with the move to local manufacture. Area volumes were lower as shipment delays and distributor stock reductions in some markets offset gains elsewhere, mainly for Viceroy. The further costs of the market entry investment into Turkey were partly eased by increased market share and higher volumes. Non-trading items The above results were achieved before accounting for goodwill amortisation and exceptional items. Group Cigarette Volumes 3 months to Year to 31.3.04 31.3.03 31.12.03 bns bns bns America-Pacific 22.3 23.7 102.9 Asia-Pacific 49.5 48.2 192.2 Latin America 36.7 36.3 149.6 Europe 61.0 52.0 249.0 Africa and Middle East 22.7 23.5 98.2 ----- ----- ----- 192.2 183.7 791.9 ===== ===== ===== GROUP RESULTS - unaudited 9. 3 months to Year to 31.3.04 31.3.03 31.12.03 £m £m £m REVENUE Subsidiary undertakings 7,502 5,499 24,151 Share of associates and joint ventures 348 371 1,471 ----- ----- ------ 7,850 5,870 25,622 ===== ===== ====== PROFIT Subsidiary undertakings 479 484 1,777 after charging: restructuring costs (5) (437) goodwill amortisation (118) (100) (405) Share of associates and joint ventures 38 36 75 after charging: write down of loan to joint venture (87) ----- ----- ------ Total operating profit 517 520 1,852 Loss on disposal of subsidiaries (72) ----- ----- ------ Profit on ordinary activities before interest 517 520 1,780 Net interest (63) (51) (209) Share of associates' and joint ventures' net interest (1) (4) ----- ----- ------ Profit before taxation 454 468 1,567 Taxation on ordinary activities (202) (195) (779) ----- ----- ------ Profit after taxation 252 273 788 Minority interests (33) (37) (157) ----- ----- ------ Profit for the period 219 236 631 ===== ===== ====== Earnings per share basic 10.53p 10.83p 26.93p ===== ===== ====== diluted - unadjusted 10.04p 10.33p 26.69p ===== ===== ====== diluted - adjusted 15.59p 14.71p 69.21p ===== ===== ====== See notes on pages 12 to 16. SEGMENTAL ANALYSES OF TURNOVER AND PROFIT - unaudited 10. 3 months to Year to 31.3.04 31.3.03 31.12.03 £m £m £m Turnover excluding duty, excise and other taxes America-Pacific 697 880 3,562 Asia-Pacific 415 420 1,765 Latin America 284 271 1,309 Europe 1,154 792 3,502 Africa and Middle East 295 302 1,289 ------ ------ ------ 2,845 2,665 11,427 ====== ====== ====== 3 months to Year to 31.3.04 31.03.03 31.12.03 £m £m £m Operating profit America-Pacific 187 190 995 Asia-Pacific 124 119 473 Latin America 90 91 440 Europe 153 136 536 Africa and Middle East 86 84 337 ------ ------ ------ 640 620 2,781 Goodwill amortisation (118) (100) (405) Restructuring costs (5) (437) Write down of loan to joint venture (87) ------ ------ ------ 517 520 1,852 ====== ====== ====== Operating profit, before exceptional items and goodwill amortisation, restated at comparable rates of exchange 674 620 2,781 ====== ====== ====== Net turnover for the three months includes £205 million (2003 £214 million) in respect of associates and joint ventures. The net turnover analysis is based on external sales in each region. The figures for the three months ended 31 March 2004 and 31 March 2003 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 £107 million and £34 million respectively, 2003 £117 million and £27 million. In December 2003 the Group acquired ETI as described on page 13, which is being integrated with the Group's other Italian operations. In the first quarter of 2004, it is estimated that ETI contributed £323 million of turnover and £38 million of operating profit to the Group results above. 11. STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES - unaudited 3 months to Year to 31.3.04 31.3.03 31.12.03 £m £m £m Profit for the period 219 236 631 Differences on exchange (73) 188 206 ------ ------ ------ Total recognised gains related to the period (below) 146 424 837 ====== ====== ====== INTEREST OF BRITISH AMERICAN TOBACCO'S SHAREHOLDERS - unaudited 3 months to Year to 31.3.04 31.3.03 31.12.03 Restated Restated £m £m £m Balance 1 January 4,483 5,185 5,185 Accounting policy changes (122) (107) (107) ------ ------ ------ 4,361 5,078 5,078 Total recognised gains related to the period (above) 146 424 837 Issue of shares - share options 3 3 5 Dividends and other appropriations: ordinary shares (799) convertible redeemable preference shares (47) amortisation of discount on preference shares (4) (4) (18) Purchase of own shares (165) (108) (698) Consideration paid for purchase of own shares held in Employee Share Ownership Trusts (63) (58) (58) Consideration received on the exercise of options over own shares held in Employee Share Ownership Trusts 9 3 15 Credit in respect of employee share schemes 7 7 28 Other movements 4 4 18 ------ ------ ------ Balance at period end 4,298 5,349 4,361 ====== ====== ====== See notes on pages 12 to 16'. ACCOUNTING POLICIES AND BASIS OF PREPARATION 12. The financial statements comprise the unaudited results for the three months ended 31 March 2004 and 31 March 2003 and the audited results for the twelve months ended 31 December 2003. The unaudited Group results have been prepared under the historical cost convention and in accordance with applicable UK accounting standards using the accounting policies set out in the Report and Accounts for the year ended 31 December 2003, with the exception as described below. From 1 January 2004, the Group has amended its accounting for employee share schemes and Employee Share Ownership Trusts (ESOTs) in accordance with UITF abstracts 17 (as revised) and 38. As a result the cost of awards made under the share schemes is now calculated with reference to the fair value of the shares at the date of the award rather than the cost of the shares purchased by the Group. In addition, the net carrying value of shares held by the Group's ESOTs, previously shown as an asset in the balance sheet, is now deducted from shareholders' funds. The comparative figures for 2003 have been restated to reflect the impact of these changes. Consequently the interest of British American Tobacco's shareholders at 1 January 2003 and 31 December 2003, as published last year, have been reduced by £107 million and £122 million respectively to reflect the deduction of the net carrying value of the shares from shareholders' funds. The impact of the revision to UITF 17 on the charges in respect of the share scheme awards is not material. FOREIGN CURRENCIES The results of overseas subsidiaries and associated undertakings have been translated to sterling as follows: Profit and loss for the three months to 31 March 2004 at the average rates for that period. The comparatives for the three months to 31 March 2003 and the year to 31 December 2003 at the average rates for the year to 31 December 2003. The interest of British American Tobacco's shareholders has been translated at the relevant period end rate. Foreign currencies cont... 13. 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 -------------- ---------------------------- 2004 2003 31.3.04 31.3.03 31.12.03 US dollar 1.838 1.635 1.819 1.581 1.790 Canadian dollar 2.424 2.288 2.384 2.325 2.313 Euro 1.470 1.445 1.497 1.449 1.419 South African Rand 12.469 12.331 11.673 12.441 11.949 CHANGES IN THE GROUP On 4 April 2003 the Group announced that it had acquired controlling interests in a number of companies in Peru, including Peru's leading tobacco company Tabacalera Nacional S.A.A. With the aggregate consideration to the vendors of all the various shareholdings acquired of £146 million, the goodwill arising on these transactions is provisionally estimated at £123 million. On 23 December 2003 the Group completed the acquisition of Ente Tabacchi Italiani S.p.A. (ETI), Italy's state tobacco company, for €2.32 billion and the goodwill arising on this transaction is provisionally estimated at £1.6 billion. It was announced on 4 August 2003 that the Group successfully bid for a 67.8 per cent holding in the Serbian tobacco company Duvanska Industrija Vranje. The Group's shareholding was subsequently increased to 78.8 per cent, which brought the total consideration to £43 million. The acquisition resulted in goodwill of £40 million. In addition, the Group has committed to invest £17 million in factory modernisation over two years and further amounts over five years on social programmes. The Group announced on 27 October 2003 the agreement to combine Brown & Williamson's (B&W) US domestic businesses with R.J. Reynolds (RJR) under Reynolds American, a new holding company 58 per cent owned by RJR shareholders and 42 per cent by the Group, through B&W. The proposed transaction remains on track and, subject to regulatory approvals, should be completed around the middle of the year. The Group will also sell Lane to Reynolds American for US$400 million in cash. RESTRUCTURING COSTS 14. During 2003, the Group commenced a detailed review of its manufacturing operations and organisational structure, including the initiative to reduce overheads and indirect costs. As a result, in the second quarter of 2003 the Group announced proposals to restructure the businesses in the UK and Canada. These proposals included the closure of the Darlington factory in the UK, with manufacturing consolidated in the larger Southampton plant, and a major restructuring of the business in Canada, including the closure of the Montreal factory with production transferred to other Canadian facilities, as well as the closure of the leaf threshing operations at Aylmer, Ontario. Manufacturing rationalisation continued in the second half of 2003, notably with the agreed closure plan for the Merksem factory in Belgium. In addition, there have been a number of changes to the organisational structure at all levels of the Group and a review of the supply chain is underway. The results for the three months to 31 March 2004 included a charge of £5 million in respect of the above restructurings, following the charge of £437 million for the year to 31 December 2003. GOODWILL AMORTISATION The amortisation charge of £118 million is in respect of goodwill which principally arose from the Rothmans transaction during 1999, the Imasco transaction during 2000 and the ETI transaction during 2003. The increase in the charge mainly reflects the impact of the acquisition of ETI at the end of December 2003. WRITE DOWN OF LOAN TO JOINT VENTURE The write down relates to the reduction in value of the convertible loan stock of British American Racing (Holdings) Ltd (BAR), as part of taking a controlling interest in that company. On 12 December 2003, the Group converted US$136 million of its convertible loan stock in BAR, raising its shareholding in BAR from 50 per cent to 89.7 per cent and changing the status of BAR from a joint venture to a subsidiary. No goodwill was created by this transaction. LOSS ON DISPOSAL OF SUBSIDIARIES On 29 September 2003, a subsidiary of the Group, absolutely and irrevocably transferred to a newly created trust (the Trust) all of its rights, title and interest in and to 100 per cent of the issued and outstanding shares of The Flintkote Company (Flintkote) together with US$3 million in cash and did not receive any consideration in return. The Trust, administered by an independent trustee, was created for the management, conservation and eventual disposition of the assets transferred to the Trust and named a medical facility active in the research and treatment of asbestos-related diseases as ultimate beneficiary. The Group will have no continuing involvement in the Trust. Since by virtue of this arrangement Flintkote is no longer a Group subsidiary, the Group ceased to consolidate Flintkote effective 29 September 2003. The transfer resulted in a loss on disposal of £62 million before tax. Loss on disposal of subsidiary cont... 15. The loss on disposal of subsidiaries during 2003 also included a provision for losses on the announced sale of the Group's shareholding in a company in Myanmar. NET INTEREST Net interest rose by £11 million to £63 million due to the impact of the share buy-back programme and the cost of acquisitions, partly offset by the benefit from the Group's cash flow since 31 March 2003. TAXATION 3 months to 31.3.04 31.3.03 £m £m British American Tobacco p.l.c. and subsidiary undertakings - overseas 188 182 Share of associates and joint ventures 14 13 ---- ---- 202 195 ==== ==== Tax rate 44.5% 41.7% ==== ==== 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 35.3 per cent (2003 34.3 per cent) and the increase reflects changes in the mix of profits. EARNINGS PER SHARE 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 the 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. For the year to 31 December 2003, the convertible redeemable preference shares were not dilutive for the unadjusted earnings per share calculation and therefore the weighted average number of shares in issue is also adjusted. Earnings per share cont.... 16. The earnings have been distorted by exceptional items and goodwill amortisation. To illustrate the impact of these distortions, the adjusted diluted earnings per share are shown below: Diluted earnings per share 3 months to Year to 31.3.04 31.3.03 31.12.03 pence pence pence Unadjusted earnings per share 10.04 10.33 26.69 Convertible redeemable preference shares 1.47 Effect of restructuring costs 0.14 15.71 Effect of goodwill amortisation 5.41 4.38 18.07 Effect of write down of loan to joint venture 3.88 Effect of disposal of subsidiaries 3.39 ------ ------ ------ Adjusted earnings per share 15.59 14.71 69.21 ====== ====== ====== Similar types of adjustments would apply to basic earnings per share. For the three months to 31 March 2004 basic earnings per share on an adjusted basis would be 16.45p (2003 15.50p) compared to unadjusted amounts of 10.53p (2003 10.83p). SHARE BUY-BACK PROGRAMME The Group initiated an on-market share buy-back programme at the end of February 2003. During the three months to 31 March 2004, 20.1 million shares were bought (2003 17.8 million) at a cost of £164.5 million (2003 £107.9 million). During the year to 31 December 2003, 106.3 million shares were bought at a cost of £697.6 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 27 April 2004 This information is provided by RNS The company news service from the London Stock Exchange

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