1st Quarter Results
British American Tobacco PLC
03 May 2006
QUARTERLY REPORT TO 31 MARCH 2006 3 May 2006
SUMMARY
THREE MONTHS RESULTS 2006 2005 Change
Revenue -as reported £2,297m £2,107m +9%
- like-for-like £2,297m £2,060m +12%
Profit from operations - as reported £616m £582m +6%
- like-for-like £652m £559m +17%
Adjusted diluted earnings per share 22.05p 19.26p +14%
• Reported Group profit from operations grew 6 per cent to
£616 million. However, profit from operations would have been
17 per cent higher or 8 per cent at constant rates of
exchange, if exceptional items and the impact arising from the
change in terms of trade following the sale of Etinera are
excluded. This like-for-like information provides a better
understanding of the subsidiaries' trading results. All the
regions contributed to this good result.
• Group volumes from subsidiaries grew by 1 per cent to
161 billion on a reported basis, while, on a like-for-like
basis, growth was 3 per cent. The four global drive brands
achieved an excellent overall volume growth of 14 per cent or
18 per cent on a like-for-like basis.
• Revenue, on a like-for-like basis, increased by 12 per cent or
5 per cent at constant rates of exchange.
• Adjusted diluted earnings per share rose by 14 per cent, as a
result of the increase in the profit from operations, the
improved contribution from associate companies and the benefit
from the share buy-back programme, partially offset by higher
taxation and minority interests. Basic earnings per share
were higher at 21.81p (2005: 20.35p).
• The Chairman, Jan du Plessis, commented "British American
Tobacco has made a good start to 2006, with the first
quarter's results maintaining the momentum achieved in 2005.
Although exchange gains are unlikely to continue at the recent
level as the year progresses, there is no doubt that the Group
is performing well."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph Edmondson/ 020 7845 1180 David Betteridge/ 020 7845 2888
Rachael Cummins 020 7845 1519 Teresa La Thangue/
Catherine Armstrong
BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 31 MARCH 2006
INDEX
PAGE
Chairman's comments 2
Business review 3
Group income statement 7
Group statement of changes in total equity 8
Segmental analyses of revenue and profit 9
Accounting policies and basis of preparation 11
Foreign currencies 12
Changes in the Group 12
Restructuring costs 13
Losses/gains on impairment of a business and disposal of
brands and joint venture 14
Net finance costs 14
Associates 15
Taxation 16
Earnings per share 16
Contingent liabilities 17
Share buy-back programme 18
CHAIRMAN'S COMMENTS 2.
British American Tobacco has made a good start to 2006, with the
first quarter's results maintaining the momentum achieved in 2005.
On a like-for-like basis, volumes in subsidiary companies were ahead
by 3 per cent and profit from operations increased by 17 per cent to
£652 million at current rates of exchange, or by 8 per cent at
comparable rates of exchange.
Adjusted diluted earnings per share rose by 14 per cent to 22.05p, as
a result of the increase in profit from operations, the improved
contribution from associate companies and the benefit from the share
buy-back programme, partially offset by higher taxation and minority
interests. During the three months to 31 March 2006, some 5 million
shares were repurchased at a cost of £72 million and at an average
price of 1435p per share. The programme will start up again shortly.
The strong performance from the Group's global drive brands has
improved still further on 2005, with overall growth of 18 per cent on
a like-for-like basis. Kent and Dunhill grew by 14 and 12 per cent
respectively, while Lucky Strike was down 7 per cent, as a result of
trading conditions in a number of its key markets. The star
performer, once again, was Pall Mall, up by 47 per cent, driven by
growth in existing markets as well as new launches.
The growth in our global drive brands continues to improve the
quality of our business, with revenue on a like-for-like basis
improving by 12 per cent at current rates of exchange and by 5 per
cent at comparable rates.
British American Tobacco's associate companies had volumes of
57 billion and our share of their post-tax profits excluding
exceptional items was £104 million, up from £88 million in the first
quarter of 2005, as a result of good earnings growth from both
Reynolds American and ITC.
It is worth drawing shareholders' attention to the announcement made
by Reynolds American on 25 April about the acquisition of Conwood, the
second largest manufacturer of smokeless tobacco products in the US,
for US$3.5 billion. This major strategic move into a fast-growing and
profitable category is consistent with our own views about the
importance of smokeless tobacco.
We have made a good start to the year. Although exchange gains are
unlikely to continue at the recent level as the year progresses,
there is no doubt that the Group is performing well.
Jan du Plessis
3 May 2006
BUSINESS REVIEW 3.
The reported Group profit from operations was 6 per cent higher at
£616 million. However, as explained on page 13, on a like-for-like
basis, profit from operations would have been 17 per cent higher or 8
per cent at constant rates of exchange. This like-for-like
information provides a better understanding of the subsidiaries'
trading results. All the regions contributed to this good result.
Group volumes from subsidiaries grew by 1 per cent to 161 billion on
a reported basis, while, on a like-for-like basis, growth was 3 per
cent. On a like-for-like basis, revenue grew by 12 per cent or 5 per
cent at constant rates of exchange.
The four global drive brands achieved an excellent overall volume
growth of 14 per cent. On a like-for-like basis, this reflected
overall growth of 18 per cent. Kent grew by 14 per cent with strong
performances in Russia, Romania, Ukraine and Chile, while Dunhill
rose 12 per cent mainly driven by a significant increase in South
Korea and strong growth in Taiwan and South Africa. Lucky Strike
volumes were down by 7 per cent as a result of competitive pricing
activities in Spain and lower industry volumes in Germany. Pall Mall
continued its exceptional growth, increasing by 47 per cent, driven
by Germany, Russia, Spain, Greece and Malaysia.
In Europe, profit was £13 million lower at £168 million, as 2005
included a one-off benefit arising from the change in terms of trade
following the sale of Etinera. Excluding this benefit, profit was
£10 million higher, with growth from Russia, France, Hungary and the
Netherlands, partly offset by declines in Germany, Poland and Spain.
Volumes on a like-for-like basis were up 3 per cent at 56 billion
with growth in Russia, Hungary, France and the Netherlands partly
offset by declines in Ukraine, Italy and Germany.
In Italy, the market as a whole is recovering after the introduction
last year of a virtual ban on indoor public smoking. Like-for-like
profit grew as margins improved with higher industry pricing,
although volumes and overall market share were lower.
In Germany, profit was affected by lower volumes, with the decline in
overall market size, and reduced margins in Pall Mall due to
competitive pricing, partially offset by overheads savings.
Cigarette market share grew mainly due to Pall Mall.
Profit in France grew strongly, benefiting from the timing of
shipments, higher margins and a better product mix as Lucky Strike
and Pall Mall increased market share. Profit in Switzerland
increased mainly due to the benefit of last year's price increase.
Despite the growth of Parisienne, overall market share was down due
to launches of low-price trade brands.
In the Netherlands, cost savings and the impact of the timing of
shipments ahead of an excise increase, resulted in higher profit. In
Belgium, profit was down due to lower volumes, while price
repositionings in Spain by a number of companies reduced
profitability significantly.
Business review cont... 4.
In Russia, market share grew with Pall Mall, Kent and Vogue up
substantially, driven by continued product innovation in the premium
and international segments. Volumes were significantly higher and,
with product mix improvements and a focus on productivity, profit
increased strongly. Market leadership in Romania was consolidated
with higher market share, driven by an excellent performance from
Kent, while profit benefited from a better mix and favourable
pricing.
In Ukraine, profitability was impacted by reduced volumes. In
Poland, although overall volume and market share increased, profit
was affected by market down-trading. Profit in Hungary rose due to
lower costs and higher volumes from Viceroy.
In Asia-Pacific, profit rose by £29 million to £155 million, mainly
attributable to Australasia and Malaysia, assisted by generally
stronger currencies. Volumes at 35 billion were 10 per cent higher
as strong increases in several markets were only partially offset by
a decline in Malaysia.
Profit grew strongly in Australia despite a reduced total market,
with higher margins and increased volumes and market share due to
good performances from Winfield and Holiday. In New Zealand, profit
increased significantly with higher margins and volumes, although
market share was down due to the growth in the low-price segment.
In Malaysia, industry volumes continued to decline after excise
increases in the past two years and the growth in illicit trade.
Overall market share was marginally lower although Dunhill stabilised
and Pall Mall grew strongly, while profit rose as costs were reduced.
In Vietnam, volume increased with further market share growth from
State Express 555 but profit was lower due to an increase in
marketing investment.
South Korea's industry volumes were significantly higher, reflecting
industry volume distortions last year as a result of the excise
increase at the end of 2004. Market share continued to grow, driven
by Dunhill and Vogue, but profit was slightly lower as the impact of
the one-off excise benefit last year more than offset the increase in
volumes.
In Pakistan, profit rose and market share was up significantly, with
excellent volume growth by Gold Flake and Capstan. Volumes rose
strongly in Bangladesh but profit fell due to down-trading and the
impact of the currency devaluation on costs. In Sri Lanka, profit
was slightly up and market share increased with a strong performance
by John Player Gold Leaf.
Profit in Latin America increased by £40 million to £155 million due
to good performances in many markets and strong local currencies.
Volumes at 38 billion increased by 5 per cent, with growth in most
markets.
Business review cont... 5.
In Brazil, profit was well ahead with higher cigarette volumes, a
better product mix and local currency appreciation, although the
latter had an adverse impact on leaf export margins. Market share
and volumes benefited from the good performances by Carlton and
Hollywood and continuing anti-illicit trade operations.
The strong profit growth in Mexico was driven by improving volumes
and margins, as well as the improved local currency. In Argentina,
volume grew impressively with an excellent performance by Viceroy,
but profit was lower due to reduced margins in response to the
increase in ultra low-price products from local competitors.
Good profits from Chile reflected volume growth, an improved product
mix and a stronger currency. In Venezuela, higher prices and volumes
led to an excellent increase in profit. The Central America and
Caribbean area profit rose with price increases, an improved product
mix and higher volumes.
Profit in Africa and Middle East grew by £17 million to £114 million
mainly driven by South Africa and Nigeria. There were also reduced
losses from Turkey but investment in new markets continued. Volumes
declined by 8 per cent to 23 billion, primarily due to Turkey.
In South Africa, good profit growth was achieved as a result of the
stronger currency, cost savings and higher margins. The product mix
continued to improve, as Peter Stuyvesant continued its growth, and
both Dunhill and Rothmans grew strongly. Volumes increased in
Nigeria, leading to a higher market share and a growth in profit.
In Iran, market share, volumes and profits all grew, but profit in
the Arabian Gulf markets was lower after volumes declined. The low-
price segment in Turkey has been under increased competitive pressure
which led to a decrease in volume and market share. However, higher
margins, following industry price increases, resulted in
significantly reduced losses.
Profit in America-Pacific increased by £5 million to £93 million,
although volumes fell 3 per cent to 9 billion as the volume decline
in Canada more than offset the increase in Japan.
The profit contribution from Canada was down £4 million to
£60 million, largely due to lower volumes following the growth in
contraband, partially offset by the impact of the stronger Canadian
dollar and the reduction in overheads. Profit was also affected by
the continuing shift to low-price products, with the premium segment
now representing 57 per cent of the total market compared with 61 per
cent. Imperial Tobacco Canada's total cigarette market share
decreased by 1 share point to 56 per cent.
Business review cont... 6.
In Japan, continued momentum from last year led to new highs in
market share, with strong performances of Kool and Kent generating
increased market share in a lower total market. Profit was up due to
volume growth and cost management.
Unallocated costs, which are net corporate costs not directly
attributable to individual segments, were £8 million higher at
£33 million, mainly as a result of increased pension and employee
share scheme costs.
The above regional profits were achieved before accounting for
restructuring costs and a charge on impairment of a business as
explained on pages 13 and 14.
Results of associates
The Group's share of the post-tax results of associates increased by
£32 million to £120 million, partly due to the favourable resolution
of tax matters in Reynolds American. Excluding this benefit, which
has been treated as an exceptional item, the Group's share of the
post-tax results of associates would have increased by £16 million to
£104 million.
The contribution from Reynolds American, excluding the exceptional
item noted above, was £9 million higher mainly due to improved
pricing and productivity, as well as the impact of the stronger
US dollar.
The Group's associate company in India, ITC, continued its strong
volume growth, leading to an increased profit.
Cigarette Volumes
The segmental analysis of the volumes of subsidiaries is as follows:
3 months to Year to
31.3.06 31.3.05 31.12.05
bns bns bns
Europe 55.4 56.7 244.0
Asia-Pacific 34.8 31.7 137.1
Latin America 38.1 36.3 149.3
Africa and Middle East 23.1 25.0 102.6
America-Pacific 9.3 9.6 45.0
----- ----- -----
160.7 159.3 678.0
===== ===== =====
In addition, associates' volumes for the quarter were 57.2 billion
(2005: 56.1 billion) and, with the inclusion of these, total Group
volumes would be 217.9 billion (2005: 215.4 billion).
GROUP INCOME STATEMENT - unaudited 7.
3 months to Year to
31.3.06 31.3.05 31.12.05
restated
£m £m £m
Gross turnover (including duty, excise and
other taxes of £3,739 million (31.3.05:
£3,257 million - 31.12.05: £14,659 million)) 6,036 5,364 23,984
====== ====== ======
Revenue 2,297 2,107 9,325
Raw materials and consumables used (676) (613) (2,760)
Changes in inventories of finished goods
and work in progress 31 (29) (2)
Employee benefit costs (361) (305) (1,557)
Depreciation and amortisation costs (106) (74) (383)
Other operating income 24 24 179
Other operating expenses (593) (528) (2,382)
------ ------ ------
Profit from operations 616 582 2,420
after (charging)/crediting:
- restructuring costs (21) (271)
- (losses)/gains on impairment of a business
and disposal of brands and joint venture (15) 72
Finance income 38 20 118
Finance costs (106) (64) (342)
Net finance costs (68) (44) (224)
Share of post-tax results of associates and
joint ventures 120 88 392
after crediting/(charging):
- restructuring costs (13)
- US Federal tobacco buy-out (12)
- brand impairments (29)
- exceptional tax credits and other
impairments 16 57
------ ------ ------
Profit before taxation 668 626 2,588
Taxation (178) (166) (690)
------ ------ ------
Profit for the period 490 460 1,898
====== ====== ======
Attributable to:
Shareholders' equity 452 430 1,771
====== ====== ======
Minority interests 38 30 127
====== ====== ======
Earnings per share:
Basic 21.81p 20.35p 84.53p
====== ====== ======
Diluted 21.62p 20.20p 83.85p
====== ====== ======
See notes on pages 11 to 18.
GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 8.
3 months to Year to
31.3.06 31.3.05 31.12.05
restated
£m £m £m
Differences on exchange 33 (64) 421
Cash flow hedges
- net fair value gains 10 20 17
- reclassified and reported in
net profit (13) 6 38
- reclassified as basis adjustments 1 3
Available-for-sale investments
- net fair value losses (1) (1)
- reclassified and reported in
net profit 1 1
Net investment hedges
- net fair value gains/(losses) 9 (1) (52)
Tax on items recognised directly
in equity (5) (9) (41)
------ ------ ------
Net gains/(losses) recognised
directly in equity 34 (47) 386
Profit for the period page 7 490 460 1,898
------ ------ ------
Total recognised income for the period 524 413 2,284
- shareholders' equity 479 376 2,128
- minority interests 45 37 156
Employee share options
- value of employee services 9 9 42
- proceeds from shares issued 16 15 30
Dividends - ordinary shares (910)
- to minority interests (39) (22) (112)
Purchase of own shares
- held in Employee Share Ownership
Trusts (72) (10) (48)
- share buy-back programme (72) (42) (501)
Other movements 6 3 17
------ ------ ------
372 366 802
Balance at 1 January 6,877 6,117 6,117
Change in accounting policy page 11 (42) (42)
------ ------ ------
Balance at period end 7,249 6,441 6,877
====== ====== ======
See notes on pages 11 to 18.
9.
SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE THREE MONTHS
- unaudited
Revenue 31.3.06 31.3.05
Inter Inter
External segment Revenue External segment Revenue
£m £m £m £m £m £m
Europe 820 117 937 830 132 962
Asia-Pacific 418 2 420 365 1 366
Latin America 423 423 322 322
Africa and
Middle East 275 5 280 223 4 227
America-
Pacific 237 237 230 230
----- ----- ----- ----- ----- -----
Revenue 2,173 124 2,297 1,970 137 2,107
===== ===== ===== ===== ===== =====
The segmental analysis of revenue is based on location of manufacture and
figures based on location of sales would be as follows:
31.3.06 31.3.05
£m £m
Europe 826 832
Asia-Pacific 444 393
Latin America 427 326
Africa and Middle East 360 326
America-Pacific 240 230
------ ------
Revenue 2,297 2,107
====== ======
Profit from operations 31.3.06 31.3.05
Adjusted
Segment segment Segment
result result* result
£m £m £m
Europe 149 168 181
Asia-Pacific 155 155 126
Latin America 155 155 115
Africa and Middle East 113 114 97
America-Pacific 77 93 88
----- ----- -----
Segmental result 649 685 607
Unallocated costs (33) (33) (25)
----- ----- -----
Profit from operations 616 652 582
===== ===== =====
*Excluding restructuring costs and a charge on impairment of a
business.
Segmental Analyses of Revenue and Profit for the three months cont. - unaudited 10.
The analyses for the year ended 31 December 2005 are as follows:
Revenue Location of manufacture Location of sales
External Inter segment Revenue Revenue
£m £m £m £m
Europe 3,456 569 4,025 3,497
Asia-Pacific 1,646 3 1,649 1,758
Latin America 1,541 4 1,545 1,555
Africa and Middle East 964 34 998 1,405
America-Pacific 1,108 1,108 1,110
------ ------ ------ ------
8,715 610 9,325 9,325
====== ====== ====== ======
Profit from operations Adjusted
Segment result segment result*
£m £m
Europe 696 784
Asia-Pacific 517 531
Latin America 524 530
Africa and Middle East 425 434
America-Pacific 354 436
------ ------
Segmental result 2,516 2,715
Unallocated costs (96) (96)
------ ------
Profit from operations 2,420 2,619
====== ======
* Excluding restructuring costs and gains on disposal of brands and
joint venture.
The segmental analysis of the Group's share of the post-tax results of
associates and joint ventures is as follows:
31.3.06 31.3.05 31.12.05
Adjusted Adjusted
Segment segment Segment Segment segment
result result* result result result*
£m £m £m £m £m
Europe 11 11 10 39 39
Asia-Pacific 23 23 18 107 81
Africa and
Middle East 1 1 2 2
America-Pacific 85 69 60 244 267
----- ----- ----- ----- -----
120 104 88 392 389
===== ===== ===== ===== =====
*Excluding restructuring costs, US Federal tobacco buy-out, brand
impairments and exceptional tax credits and other impairments.
11.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information comprises the unaudited results for the
three months to 31 March 2006 and 31 March 2005, together with the
audited results for the twelve months ended 31 December 2005. The
audited annual financial statements for 2005, which represent the
statutory accounts for that year, will be filed with the Registrar
of Companies. The auditors report on those statements is
unqualified and does not contain any statement concerning accounting
records or failure to obtain necessary information and explanations.
From 1 January 2005, the Group has prepared its annual consolidated
financial statements in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union (EU) and
implemented in the UK. These unaudited Group interim results have
been prepared on a basis consistent with the IFRS accounting
policies as set out in the Report and Accounts for the year ended
31 December 2005. These interim financial statements have been
prepared under the historical cost convention, except in respect of
certain financial instruments. In addition, these financial
statements do not comply with all the disclosures in IAS34 on
interim financial reporting and are therefore not in full compliance
with IFRS.
IAS32 and IAS39 on financial instruments were applied from 1 January
2005 and the changes to the total equity as at 1 January 2005
principally reflect:
(a) The measurement of available-for-sale investments at fair
value.
(b) The measurement of all derivative financial instruments at
fair value.
(c) Derecognition of deferred losses on derivatives.
This results in a reduction in total equity of £42 million as at
1 January 2005 which is shown as the impact of the change in
accounting policy on page 8.
In December 2005, the International Accounting Standards Board
issued both a clarification on and an amendment to IAS21 (the
effects of changes in foreign exchange rates). The clarification
was immediately applicable for reported results. This states that
inter company balances between any subsidiary (which may itself be a
foreign subsidiary) and a foreign subsidiary may form part of the
Group's investment in that foreign subsidiary and therefore, subject
to certain other tests, the exchange impact can be taken directly to
equity rather than to net finance costs in the income statement.
Previously, only balances between certain companies qualified for
this treatment. The quarterly results for the three months to 31
March 2005 have been restated accordingly from those originally
published last year. This has resulted in a reduction of £2 million
in net finance costs (page 7) with a compensating adjustment to
differences on exchange in the statement of changes in total equity
(page 8).
Accounting Policies and Basis of Preparation cont... 12.
The amendment to IAS21 will allow inter company balances that form
part of a reporting entity's net investment in a foreign operation
to be denominated in a currency other than the functional currency
of either the ultimate parent or the foreign operation itself. This
will mean that certain exchange differences currently taken to the
income statement will instead be reflected directly in changes in
total equity. However, this amendment is not applicable for Group
reporting until it is adopted by the EU but, as this is expected in
2006, it has been allowed for in the adjusted earnings per share
calculations (page 17).
FOREIGN CURRENCIES
The results of overseas subsidiaries and associate companies have
been translated to sterling as follows:
The income statement has been translated at the average rates for
the respective periods. The total equity has been translated at the
relevant period end rates. For high inflation countries, the local
currency results are adjusted for the impact of inflation prior to
translation to sterling at closing exchange rates.
The principal exchange rates used were as follows:
Average Closing
31.3.06 31.3.05 31.12.05 31.3.06 31.3.05 31.12.05
US dollar 1.753 1.891 1.819 1.735 1.890 1.717
Canadian dollar 2.024 2.319 2.206 2.024 2.286 2.005
Euro 1.457 1.442 1.463 1.433 1.454 1.455
South African rand 10.781 11.357 11.574 10.693 11.760 10.889
CHANGES IN THE GROUP
On 29 December 2004 the Group sold Etinera S.p.A., the distribution
business of its Italian subsidiary. In the first quarter of 2005,
following the sale, volumes and profits in Italy benefited by
3 billion and £23 million respectively from a change in the terms
of trade with Etinera. Around two-thirds of these benefits are
expected to reverse over time.
Changes in the Group cont... 13.
The table below shows like-for-like revenue and profit from
operations after excluding restructuring costs and a charge on
impairment of a business, as well as the change in terms of trade in
Italy. On this basis, the revenue for the three months to 31 March
2006 of £2,297 million would represent growth of 12 per cent or 5
per cent at constant rates of exchange, and the profit from
operations of £652 million would represent growth of 17 per cent or
8 per cent at constant rates of exchange.
Revenue Profit from
operations
3 months to 3 months to
31.3.06 31.3.05 31.3.06 31.3.05
£m £m £m £m
As reported (page 7) 2,297 2,107 616 582
Etinera - change in terms of trade (47) (23)
Exceptional items (page 7) 36
------ ------ ------ ------
Like-for-like 2,297 2,060 652 559
====== ====== ====== ======
On 4 October 2005, the Group announced that it had agreed the sale
of its 55 per cent stake in BAR Honda, held through BARH Ltd
(BARH), to Honda and the sale was completed on 20 December 2005.
For the period 7 January 2005 to 20 December 2005, BARH was equity
accounted, reflecting shared control with Honda.
On 21 October 2005, the Group announced the exercise of its pre-
emption rights over shares in Skandinavisk Tobakskompagni AS, its
Danish associate company, and the transaction was completed on
12 December 2005. This increased the Group's holding from 26.6 per
cent to 32.3 per cent at a cost of £95 million, resulting in
goodwill of £69 million.
On 25 November 2005, the Group acquired Restomat AG, the largest
operator of cigarette vending machines in Switzerland, at a cost of
£25 million, resulting in goodwill of £7 million.
On 10 March 2006, the Group's Italian subsidiary signed an agreement
to sell its cigar business, Toscano, to Maccaferri for euro 95
million. Completion of the sale is subject to regulatory and
governmental approval.
RESTRUCTURING COSTS
During 2003, the Group commenced a detailed review of its
manufacturing operations and organisational structure, including the
initiative to reduce overheads and indirect costs. The
restructuring continued during 2004 and 2005, with major
announcements during 2005 which covered the cessation of production
in the UK, Ireland and Canada, with production to be transferred
elsewhere. The profit from operations for the year ended
31 December 2005 includes a charge for restructurings of
£271 million. The three months to 31 March 2006 includes a charge
of £21 million (2005: £nil) mainly in respect of further costs for
the UK and Canada restructurings.
LOSSES/GAINS ON IMPAIRMENT OF A BUSINESS AND DISPOSAL OF BRANDS AND JOINT VENTURE
14.
The proposed sale of the Italian cigar business described on page 13
resulted in the recognition of an impairment charge of £15 million,
which is included in depreciation and amortisation costs in the
profit from operations in the first quarter of 2006.
In April 2005, the Group sold to Gallaher Group plc (Gallaher) its
Benson & Hedges and Silk Cut trademarks in Malta and Cyprus,
together with the Silk Cut trademark in Lithuania, resulting in a
gain on disposal of £68 million included in other operating income
in the profit from operations. The transactions are in accordance
with contracts of 1993 and 1994, in which Gallaher agreed to acquire
these trademarks in European Union states and the accession of
Malta, Cyprus and Lithuania necessitated the sale.
The transactions in respect of BARH described on page 13 resulted in
a gain of £5 million which is included in other operating income in
the profit from operations for the year ended 31 December 2005.
NET FINANCE COSTS
Net finance costs comprise:
3 months to
31.3.06 31.3.05
restated
£m £m
Interest payable (102) (95)
Interest and dividend income 32 26
Fair value changes - derivatives 26 (33)
Exchange differences (24) 58
--- ---
2 25
----- -----
(68) (44)
===== =====
Net finance costs at £68 million were £24 million higher than last
year principally reflecting the impact of derivatives and exchange
differences.
The £2 million gain (2005: £25 million) of fair value changes and
exchange differences reflects a gain of £4 million (2005:
£12 million) from the net impact of exchange rate movements and a
loss of £2 million (2005: £13 million gain) principally due to the
effect of interest rates on the fair value of derivatives.
Net finance costs cont... 15.
IFRS requires fair value changes for derivatives, which do not meet
the tests for hedge accounting under IAS39, to be included in the
income statement. In addition, certain exchange differences are
required to be included in the income statement under current IFRS
and, as they are subject to exchange rate movements in a period,
they can be a volatile element of net finance costs. These amounts
do not always reflect an economic gain or loss for the Group and, in
the quarterly results during 2005, the Group noted that it was
reviewing the appropriate treatment of these in the adjusted
earnings per share calculations. At the 2005 year end the Group
decided that, in calculating the adjusted earnings per share, it is
appropriate to exclude certain amounts. The adjustments for the
quarterly results to 31 March are as follows:
(a) £nil million (2005: £8 million gain) relating to derivatives for
which hedge accounting was obtained during 2005.
(b) £1 million loss (2005: £10 million gain) relating to exchange in
net finance costs where there is a compensating exchange amount
reflected in differences in exchange taken directly to changes in
total equity.
(c) £nil million (2005: £2 million gain) relating to exchange in net
finance costs which, when the revised IAS21 on foreign exchange
rates is endorsed by the EU as expected in 2006, will be taken
directly to changes in total equity (see page 12).
The adjusted earnings per share for the three months to 31 March
2005 have been adjusted accordingly from that originally reported
last year.
Excluding the above items, fair value changes and exchange
differences are a net gain of £3 million compared to a net gain of
£5 million in 2005.
ASSOCIATES
The share of post-tax results of associates and joint ventures is
after exceptional charges and credits.
In the three months to 31 March 2006 Reynolds American benefited
from the favourable resolution of tax matters of which the Group's
share was £16 million.
Associates cont... 16.
In the year ended 31 December 2005, Reynolds American incurred
restructuring costs and a one-off charge related to the
stabilisation inventory pool losses associated with the US tobacco
quota buy-out programme. The Group's share (net of tax) of these
amounted to £13 million and £12 million respectively. In addition,
in the fourth quarter of 2005, Reynolds American benefited from the
favourable resolution of tax matters of which the Group's share was
£31 million, and also modified the previously anticipated level of
support between certain brands and the projected net sales of
certain brands resulting in a brand impairment charge of which the
Group's share amounted to £29 million net of tax.
In the year to 31 December 2005, the contribution from ITC in India
included a benefit of £26 million (net of tax), principally related
to the write-back of provisions for taxes partly offset by the
impairment of a non-current investment.
On 25 April 2006, Reynolds American announced an agreement to
acquire Conwood, the second largest manufacturer of smokeless
tobacco products in the US, for US$3.5 billion. Completion of the
acquisition is subject to regulatory approval but the transaction is
expected to close by the end of the second quarter.
TAXATION
The tax rates in the income statement of 26.6 per cent for the three
months to 31 March 2006 (31 March 2005: 26.5 per cent) are affected
by the inclusion of the share of associates' post-tax profit in the
Group's pre-tax results. The underlying tax rate for subsidiaries,
reflected in the adjusted earnings per share shown below, was 32.4
per cent in 2006 and 32.1 per cent in 2005 and the increase reflects
changes in the mix of profits. The charge relates to taxes payable
overseas.
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 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.
The earnings per share are based on:
31.3.06 31.3.05 31.12.05
Earnings Shares Earnings Shares Earnings Shares
£m m £m m £m m
Basic 452 2,072 430 2,113 1,771 2,095
Diluted 452 2,091 430 2,129 1,771 2,112
Earnings per share cont... 17.
The earnings have been distorted by exceptional items, together with
certain distortions to net finance costs under IFRS (see page 15),
and 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
31.3.06 31.3.05 31.12.05
restated
pence pence pence
Unadjusted earnings per share 21.62 20.20 83.85
Effect of restructuring costs 0.67 10.13
Effect of impairment charge on a
business and gain on disposal of
brands and joint venture 0.48 (3.41)
Effect of associates' restructuring
costs, US Federal tobacco buy-out,
brand impairments and exceptional
tax credits and other impairments (0.77) (0.14)
Net finance costs adjustments 0.05 (0.94) (1.09)
------ ------ ------
Adjusted diluted earnings per share 22.05 19.26 89.34
====== ====== ======
Adjusted diluted earnings per share are based on:
- adjusted earnings (£m)
- shares (m) 461 410 1,887
2,091 2,129 2,112
Similar types of adjustments would apply to basic earnings per
share. For the three months to 31 March 2006, basic earnings
per share on an adjusted basis would be 22.25p (2005: 19.40p)
compared to unadjusted amounts of 21.81p (2005: 20.35p).
CONTINGENT LIABILITIES
As noted in the Report and Accounts for the year ended 31 December
2005, there are contingent liabilities in respect of litigation,
overseas taxes and guarantees in various countries.
Group companies, as well as other leading cigarette manufacturers,
are defendants in a number of product liability cases. In a number
of these cases, the amounts of compensatory and punitive damages
sought are significant. At least in the aggregate and despite the
quality of defences available to the Group, it is not impossible
that the results of operations or cash flows of the Group in
particular quarterly or annual periods could be materially affected
by this.
Contingent liabilities cont... 18.
Having regard to these matters, the Directors (i) do not consider it
appropriate to make any provision in respect of any pending
litigation and (ii) do not believe that the ultimate outcome of this
litigation will significantly impair the financial condition of the
Group.
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 2006,
5 million shares were bought at a cost of £72 million (31 March
2005: £42 million).
During the year to 31 December 2005, 45 million shares were bought
at a cost of £501 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
3 May 2006
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