1st Quarter Results
British American Tobacco PLC
03 May 2007
QUARTERLY REPORT TO 31 MARCH 2007 3 May 2007
SUMMARY
THREE MONTHS RESULTS 2007 2006 Change
Revenue £2,232m £2,297m -3%
Profit from operations £684m £616m +11%
Adjusted diluted earnings per share 24.31p 22.05p +10%
• The reported profit from operations was 11per cent higher at £684million,
or 6per cent higher if exceptional items are excluded. However, the results
from all the regions were adversely impacted by exchange. Profit from
operations, excluding exceptional items, would have been 18 per cent higher
at comparable rates of exchange, with all regions contributing to this
strong result except for America-Pacific which was slightly lower than last
year.
• Group volumes from subsidiaries were 156 billion, a decrease of 3per cent,
mainly as a result of the high level of trade buying in some markets at the
end of 2006, supply chain disruptions in the Middle East and the loss of
StiX in Germany. The Group saw share improvements across many markets,
particularly for its global drive brands. The four global drive brands
achieved an overall volume growth of 6per cent. The reported Group revenue
was 3per cent lower at £2,232million but, at comparable rates of exchange,
would have increased by 6per cent as a result of more favourable pricing
and better product mix.
• Adjusted diluted earnings per share rose by 10 per cent, benefiting from
the increase in profit from operations, an improved contribution from
associate companies, lower net finance costs, a lower tax rate and the
impact of the share buy-back programme, partly offset by a higher
minorities charge.
• The Chairman, Jan du Plessis, commented "We have started the year with
strong growth in both revenue and operating profit at comparable rates of
exchange, as a result of improved pricing and cost savings. In addition,
the first quarter has been somewhat flattered by excellent performances in
Brazil and South Africa. Looking ahead, it is worth remembering that
earnings per share benefited from a number of one-off factors in the second
quarter of 2006. For the year as a whole, adverse exchange rates are
expected to hold back our earnings per share growth."
ENQUIRIES:
INVESTOR RELATIONS: PRESS OFFICE:
Ralph Edmondson/ 020 7845 1180 David Betteridge/Kate Matrunola/ 020 7845 2888
Rachael Brierley 020 7845 1519 Catherine Armstrong
BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 31 MARCH 2007
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 11
Changes in the Group 12
Exceptional items 12
Net finance costs 13
Associates 13
Taxation 13
Earnings per share 14
Contingent liabilities 15
Share buy-back programme 15
CHAIRMAN'S COMMENTS
British American Tobacco has made a solid start to 2007 with 10 per cent growth
in adjusted diluted earnings per share. Profit from operations was ahead by 6
per cent at current ratesof exchange, if exceptional items are excluded. The
results have been particularly affected by foreign exchange and profit from
operations would have increased by 18 per cent at comparable rates.
Similarly, revenue declined by 3 per cent at current rates but grew by 6 per
cent at comparable rates, despite volumes being down 3 per cent. Our good
performance is the result of better pricing and the continued growth in our
global drive brands, which is improving our product mix. The lower volumes are
largely the result of temporary trading patterns in a number of markets, with
Russia and the Middle East being the most significant.
This performance, together with the benefit of successful cost savings
programmes, drove the improvement in profit from operations. Profit grew in
every region apart from America-Pacific, where the impact of illicit trade
and higher distribution costs in Canada more than offset the good results
from Japan.
The Group's global drive brands grew by 6 per cent. Kent increased by 10 per
cent as a result of good growth in Japan and Russia, as well as a wide range of
smaller markets. Dunhill was ahead by 9 per cent, with excellent performances in
its key markets of South Korea, Malaysia and South Africa. Lucky Strike was down
1 per cent, primarily as a result of lower industry volumes in Japan and the
Netherlands, while Pall Mall was up by 2 per cent. Pall Mall's growth would
have been 9 per cent if sales of its fine cut tobacco in Germany are included.
Our associate companies' volumes were 60 billion and our share of their post-tax
profits was £111 million, a 7 per cent improvement if exceptional items are
excluded. At constant rates of exchange, our share would have been £122 million,
up 17 per cent.
The growth in profit from operations, the improvement in associates, lower net
finance costs, a lower tax rate and the benefit of the share buy-back programme,
was partly offset by a higher minorities charge. As a result, adjusted diluted
earnings per share increased by 10 per cent to 24.31p.
During the first quarter, some 7 million shares were bought back at a cost of
around £113 million and at an average price of £15.71. The programme will
restart following the publication of these results.
We have started the year with strong growth in both revenue and operating profit
at comparable rates of exchange, as a result of improved pricing and cost
savings. In addition, the first quarter has been somewhat flattered by excellent
performances in Brazil and South Africa. Looking ahead, it is worth remembering
that earnings per share benefited from a number of one-off factors in the second
quarter of 2006. For the year as a whole, adverse exchange rates are expected
to hold back our earnings per share growth.
Jan du Plessis
3 May 2007
Page 2
BUSINESS REVIEW
The reported Group profit from operations was 11 per cent higher at £684 million
or 6 per cent higher if exceptional items, as explained on page 12, are excluded.
However, the results from all regions were adversely impacted by exchange.
Profit from operations, excluding exceptional items, would have been 18 per
cent higher at comparable rates of exchange, with all regions contributing to
this strong result except for America-Pacific which was slightly lower than
last year.
Group volumes from subsidiaries were 156 billion, a decrease of 3 per cent,
mainly as a result of the high level of trade buying in some markets at the
end of 2006, supply chain disruptions in the Middle East and the loss of StiX
in Germany. The Group saw share improvements across many markets, particularly
for its global drive brands. The reported Group revenue was 3 per cent lower at
£2,232 million but, at comparable rates of exchange, would have increased by
6 per cent as a result of more favourable pricing and better product mix.
The four global drive brands achieved an overall volume growth of 6 per cent.
Kent grew by 10 per cent with good growth in Japan, Russia, Romania, Ukraine,
Chile and Switzerland, helped by additional volume from the new markets
of Azerbaijan and Kazakhstan. Dunhill rose by 9 per cent, driven by strong
performances in South Korea, Malaysia, South Africa, Russia and Saudi Arabia,
although volume was lower in Taiwan.
Lucky Strike volumes were down 1 per cent as the growth in Spain, France,
Argentina and the Czech Republic was more than offset by declines as a
result of lower industry volumes in Japan and the Netherlands. Pall Mall
grew by 2 per cent, hampered by the absence of Pall Mall StiX in Germany in
2007. Growth would have been 9 per cent if sales of fine cut tobacco in
Germany are included.
In Europe, profit at £182 million was up £14 million, mainly as a result of
good performances in Russia, Romania, Italy and Spain, which were partly offset
by the impact of reduced volumes in a number of markets and the adverse impact
of exchange. At comparable rates of exchange, profit would have increased by
£19 million or 11 per cent. Regional volumes were down 7 per cent at 52 billion,
with reductions in Russia, Germany, the Netherlands and Ukraine, partly offset
by increases in Spain, Romania and Italy.
In Italy, profit grew strongly as improved margins after industry price
increases, higher volumes and the benefit of the productivity programme,
were only partly offset by the absence of the profit from the Toscano cigar
brand disposed of in July 2006. Volumes were up with higher share from Pall
Mall and Lucky Strike, although there was a slight decline in overall
market share.
Volumes in Germany declined due to the loss of StiX and the growth of illicit
trade. However, the impact of lower volumes and margins, as well as exchange,
was largely offset by reduced costs, resulting in slightly lower profit.
Sales volumes in France were flat compared to the previous year but profit
grew as a result of an improved product mix and lower overheads. In
Switzerland, profit decreased as a result of lower volumes and an
unfavourable product mix, following the excise increase at the beginning
of the year.
In the Netherlands, volumes and profit were lower as a result of the impact
of industry-wide loading by the trade in 2006, ahead of an excise increase.
Profit in Belgium was down following an excise increase but volumes were
stable as Pall Mall gained share. Market share in Spain grew with a strong
performance by Lucky Strike and this, together with higher margins,
led to improved results.
Page 3
Business review cont...
Sales volumes in Russia were reduced by speculative trade buying at the
end of last year in anticipation of the new excise system at the beginning
of 2007. Profit, however, grew strongly, benefiting from higher margins
and an improved product mix. A higher overall market share was achieved
with significantly increased volumes of Dunhill and Vogue, supported by
growth from Kent. In Romania, higher prices and volumes, with an improved
product mix, resulted in significantly higher profit. Volume performance
was driven by Kent, the largest selling brand, as well as Dunhill and
Vogue.
Volume and profit in Ukraine were lower due to reduced sales of local brands.
Profit grew impressively in Hungary, despite an excise increase and heavy
price competition, benefiting from improved margins and ongoing efficiency
programmes, while Viceroy and Pall Mall grew strongly. In Poland,
profitability was lower as a result of price competition and reduced volumes.
In Asia-Pacific, profit rose by £12 million to £167 million, mainly
attributable to strong performances from Australasia, South Korea, Vietnam
and Pakistan, despite the adverse impact of exchange. At comparable rates
of exchange, profit would have increased by £24 million or 15 per cent.
Volumes at 35 billion were slightly higher as good increases in Pakistan,
South Korea and Vietnam were partially offset by declines in Bangladesh
and Indonesia.
Profit grew in Australia, mainly attributable to improved margins from a
combination of product cost reductions and price increases, partly offset
by industry volume declines. Although there were heightened levels of
competitor discounting during the quarter, the global drive brands continued
to perform strongly with share growth from Dunhill and continuing steady
progress from Pall Mall. In New Zealand, strong competition in the low price
segment continued to affect market share adversely. Profit was lower due
to the consequent reduction in volume, partly offset by price increases.
In Malaysia, industry volume showed some signs of improvement after
three years of decline. Dunhill performed strongly with both volume
and share up. However, profit declined due to reduced volumes in the
low price segment, the timing of spend and the impact of exchange,
partly offset by higher pricing, improved mix and productivity savings.
In Vietnam, volumes grew strongly due to product innovation and improved
distribution, with outstanding performances from Dunhill and Pall Mall. Profit
increased significantly, driven primarily by higher volumes, favourable product
mix and the benefit of productivity initiatives.
Volume and profit in South Korea were ahead of last year. Dunhill volumes
continued to grow and this, together with supply chain savings, resulted in
increased profit. Volume in Taiwan was lower, due to the decline in the premium
segment following a price increase at the end of 2006, leading to lower profit
despite the higher prices and cost reductions.
Pakistan continued its growth and volumes increased across all key segments,
with Gold Flake the major contributor, resulting in an increase in overall
market share. The strong volume growth, coupled with price increases and
effective cost management, led to an impressive profit performance. In
Bangladesh, profit was higher following a price increase and an improvement in
the product mix. However, volumes were lower as a result of the price increases,
while market share was down due to the growth of the low price segment. In Sri
Lanka, profit benefited from higher margins and lower expenses, but this was
more than offset by the effect of a weaker exchange rate.
Page 4
Business review cont...
Profit in Latin America increased by £25 million to £180 million, due to good
performances across the region, which more than offset the adverse impact of
weaker local currencies. At comparable rates of exchange, profit would have
increased by £43 million or 28 per cent. Volumes were marginally down at
38 billion as the increases in Brazil and Venezuela were offset by declines in
Mexico, Argentina and Central America.
In Brazil, profit grew strongly, benefiting from higher margins and higher
volumes, partly offset by the impact of the weaker local currency. Profit in the
leaf business recovered as prices increased, although the shipment volumes were
lower than last year. Market share rose and cigarette volumes increased as a
result of a decline in illicit trade, following law enforcement actions.
Industry volume in Mexico suffered following excise driven price increases early
in the quarter and this, together with exchange, resulted in a much reduced
profit. In Argentina, profit rose as prices increased with some recovery from
the severe price competition in the market, although volumes were lower than
last year.
In Chile, volumes grew slightly and this, coupled with price increases and
strong up-trading to Kent and Lucky Strike, led to higher profit. In Venezuela,
profit increased due to price increases, as well as higher volumes and market
share through good performances by Belmont and Consul. The Central America and
Caribbean area benefited from higher margins and more efficient product
sourcing. However, profit was down as the benefit from these was more than
offset by the impact of exchange, as well as lower volumes as a result of excise
and price increases in some markets.
Profit in the Africa and Middle East region grew by £10 million to £124 million,
mainly driven by South Africa and Nigeria and despite generally weaker
currencies. At comparable rates of exchange, profit would have increased by
£41 million or 36 per cent. Volumes were 4 per cent lower at 22 billion,
principally as a result of the disruption of supply in the Middle East.
In South Africa, despite the sharply weaker average exchange rate, excellent
profit growth was achieved as a result of significant trade buying, prior to the
excise increase in February 2007, and market share gains in the quarter. The
main brand, Peter Stuyvesant, continued its strong performance and grew share,
while Dunhill maintained share.
In Nigeria, profit increased due to higher prices and an improvement in the
product mix, with increased market shares for Benson & Hedges and Rothmans,
although overall volumes were lower. In sub-Saharan Africa, despite supply
difficulties in certain markets, volume and profits grew in a number of markets
in West and East Africa, with particularly good performances in Kenya, Uganda
and Zambia.
In the Middle East, volume and profit were adversely affected by supply chain
problems although premium brands continued to grow and Dunhill performed
strongly in Saudi Arabia. Profit in Egypt benefited from higher volumes and a
reduction in costs.
In Turkey, industry price increases led to higher margins but the
value-for-money segment has been under increased competitive pressure from new
launches and the price repositioning of brands, which impacted Viceroy and led
to a decrease in volumes and profitability.
The profit from the America-Pacific region decreased by £13 million to
£80 million. This was principally due to weaker currencies and, at comparable
rates of exchange, profit would have decreased by £2 million or 2 per cent.
Volumes were slightly lower at 9 billion. The increase in profit and volumes
from Japan were more than offset by the lower profit contribution and decline in
volumes in Canada.
Page 5
Business review cont...
Profit in Canada was down to £38 million, affected by the greater prevalence of
illicit trade, increased costs of direct distribution, continued down-trading to
lower priced products and the weaker exchange rate. These were partly offset by
higher margins and cost savings resulting from the transfer of manufacturing to
Mexico. At comparable rates of exchange, profit was down by 28 per cent. Market
share grew slightly in the first quarter, rising to over 53 per cent, compared
to the last quarter of 2006.
In Japan, volume and market share grew significantly due to the strong
performances of Kent and Kool, despite the continuing decline in total industry
consumption and a quarter of unusually high competitive activities. Profit rose
as a result of the increase in volumes and the benefit of last year's
manufacturers' price increase, which more than offset the impact of exchange.
Unallocated costs, which are net corporate costs not directly attributable to
individual segments, were £8 million higher at £41 million, mainly as a result
of higher share scheme and other costs and the timing of expenses.
The above regional profits were achieved before accounting for restructuring
costs and losses/gains on disposal of a business and brands, as explained on
page 12.
Results of associates
The Group's share of the post-tax results of associates decreased by £9 million
to £111 million. Excluding the exceptional item in 2006 explained on page 13,
the Group's share of the post-tax results of associates increased by £7 million
to £111 million.
The contribution from Reynolds American, excluding the benefit from the
favourable resolution of certain tax matters in 2006, was £3 million higher due
to unusually strong margins for R.J. Reynolds and the inclusion of Conwood,
which more than offset the impact of the much weaker US dollar. At comparable
rates of exchange, the contribution from Reynolds American would have been
£11 million, or 16 per cent, higher than last year. As explained on page 13,
Reynolds American acquired Conwood on 31 May 2006 and reported that on a
proforma basis, as if it had been owned since the beginning of 2006, Conwood
increased both its profits and margins.
The Group's associate in India, ITC, continued its strong performance and its
contribution to the Group rose by £4 million to £27 million. At comparable rates
of exchange, the contribution would have been £7 million, or 34 per cent, higher
than last year, with the growth assisted by one-off costs in the comparative
quarter.
Cigarette volumes
The segmental analysis of the volumes of subsidiaries is as follows:
3 months to Year to
31.3.07 31.3.06 31.12.06
bns bns bns
Europe 51.5 55.4 247.7
Asia-Pacific 35.3 34.8 141.9
Latin America 37.7 38.1 152.6
Africa and Middle East 22.2 23.1 103.3
America-Pacific 9.2 9.3 43.8
-------- ------- --------
155.9 160.7 689.3
======== ======= ========
In addition, associates' volumes for the quarter were 59.6 billion (2006: 57.2
billion) and, with the inclusion of these, total Group volumes would be 215.5
billion (2006: 217.9 billion).
Page 6
GROUP INCOME STATEMENT - unaudited
3 months to Year to
31.3.07 31.03.06 31.12.06
£m £m £m
Gross turnover (including duty, excise and other taxes of
£3,587million (31.3.06: £3,739 million - 31.12.06: £15,427million)) 5,819 6,036 25,189
======= ======= ========
Revenue 2,232 2,297 9,762
Raw materials and consumables used (615) (676) (2,861)
Changes in inventories of finished goods and work in progress 25 31 (11)
Employee benefit costs (344) (361) (1,554)
Depreciation and amortisation costs (74) (106) (401)
Other operating income 30 24 181
Other operating expenses (570) (593) (2,494)
------- -------- --------
Profit from operations 684 616 2,622
after (charging)/crediting exceptional items: ___________________________________________
- restructuring costs (8) (21) (216)
- (losses)/gains on disposal of a business and brands (15) 41
___________________________________________
___________________________________________
Finance income 30 38 110
Finance costs (88) (106) (399)
___________________________________________
Net finance costs (58) (68) (289)
Share of post-tax results of associates and joint ventures 111 120 431
after (charging)/crediting exceptional items: ___________________________________________
- brand impairments (13)
- exceptional tax credits 16 17
___________________________________________
------- -------- --------
Profit before taxation 737 668 2,764
Taxation on ordinary activities (199) (178) (716)
------- -------- --------
Profit for the period 538 490 2,048
======= ======== ========
Attributable to:
Shareholders' equity 495 452 1,896
======= ======== ========
Minority interests 43 38 152
======= ======== ========
Earnings per share
Basic 24.24p 21.81p 92.08p
======= ======== ========
Diluted 24.06p 21.62p 91.33p
======= ======== ========
See notes on pages 11 to 15.
Page 7
GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited
3 months to Year to
31.3.07 31.3.06 31.12.06
£m £m £m
Differences on exchange 4 33 (685)
Cash flow hedges
- net fair value gains 2 10 13
- reclassified and reported in net profit (5) (13) (15)
Available-for-sale investments
- net fair value losses (1) (2)
- reclassified and reported in net profit 1
Net investment hedges
- net fair value gains 1 9 117
Tax on items recognised directly in equity (1) (5) (12)
------- -------- ---------
Net gains/(losses) recognised directly in equity 1 34 (584)
Profit for the period page 7 538 490 2,048
------- ------- --------
Total recognised income for the period 539 524 1,464
___________________________________________
- shareholders' equity 492 479 1,334
- minority interests 47 45 130
___________________________________________
Employee share options
- value of employee services 7 9 41
- proceeds from shares issued 12 16 28
Dividends
- ordinary shares (1,008)
- to minority interests (41) (39) (137)
Purchase of own shares
- held in employee share ownership trusts (25) (72) (77)
- share buy-back programme (113) (72) (500)
Acquisition of minority interests (2) (13)
Other movements (10) 6 13
------- ------- ---------
367 372 (189)
Balance 1 January 6,688 6,877 6,877
------- ------- --------
Balance at period end 7,055 7,249 6,688
======= ======= ========
See notes on pages 11 to 15.
Page 8
SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE THREE MONTHS - unaudited
Revenue 31.3.07 31.3.06
Inter Inter
External segment Revenue External segment Revenue
£m £m £m £m £m £m
Europe 760 62 822 820 117 937
Asia-Pacific 448 10 458 418 2 420
Latin America 452 104 556 423 423
Africa and Middle East 277 13 290 275 5 280
America-Pacific 106 106 237 237
-------- -------- -------- ------- ------- --------
2,043 189 2,232 2,173 124 2,297
======== ======== ======== ======= ======= ========
The segmental analysis of revenue is based on location of manufacture and
figures based on location of sales would be as follows:
31.3.07 31.3.06
£m £m
Europe 782 826
Asia-Pacific 448 444
Latin America 454 427
Africa and Middle East 336 360
America-Pacific 212 240
--------- ----------
2,232 2,297
========= =========
Profit from operations
31.3.07 31.3.06
Adjusted Adjusted
Segment segment Segment segment
result result* result result*
£m £m £m £m
Europe 177 182 149 168
Asia-Pacific 167 167 155 155
Latin America 180 180 155 155
Africa and Middle East 124 124 113 114
America-Pacific 77 80 77 93
-------- -------- -------- -------
725 733 649 685
Unallocated costs (41) (41) (33) (33)
-------- -------- -------- -------
684 692 616 652
======== ======== ======== =======
*Excluding restructuring costs, as well as losses/gains on disposal of a
business and brands as explained on page 12.
Page 9
Segmental analyses of revenue and profit for the three months - unaudited cont...
The analyses for the year ended 31 December 2006 are as follows:
Revenue Location of manufacture Location of sales
Inter
External segment Revenue Revenue
£m £m £m £m
Europe 3,495 526 4,021 3,545
Asia-Pacific 1,755 27 1,782 1,839
Latin America 1,780 2 1,782 1,791
Africa and Middle East 1,063 24 1,087 1,489
America-Pacific 1,090 1,090 1,098
------- ------- ------- -------
9,183 579 9,762 9,762
======= ======= ======= =======
Profit from operations Adjusted
Segment result segment result*
£m £m
Europe 676 781
Asia-Pacific 609 616
Latin America 611 611
Africa and Middle East 444 468
America-Pacific 385 424
-------- --------
Segment result 2,725 2,900
Unallocated costs (103) (103)
-------- --------
2,622 2,797
======== ========
*Excluding restructuring costs, as well as losses/gains on disposal of a business and brands as explained on page 12.
The segmental analysis of the Group's share of the post-tax results of associates and joint ventures is as follows:
31.3.07 31.3.06 31.12.06
Adjusted Adjusted Adjusted
Segment segment Segment segment Segment segment
result result* result result* result result*
£m £m £m £m £m £m
Europe 12 12 11 11 46 46
Asia-Pacific 27 27 23 23 92 92
Africa and Middle East 1 1 4 4
America-Pacific 72 72 85 69 289 285
------- ------- ------ ------ ------ -------
111 111 120 104 431 427
======= ======= ====== ====== ====== =======
*Excluding brand impairments and exceptional tax credits as explained on page 13.
Page 10
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information comprises the unaudited results for the three months
to 31 March 2007 and 31 March 2006, together with the audited results for the
year ended 31 December 2006. The annual financial statements for 2006, which
represent the statutory accounts for that year, have been filed with the
Registrar of Companies. The auditors' report on those statements was unqualified
and did 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 2006. These interim financial statements have been prepared under
the historical cost convention, except in respect of certain financial
instruments.
In December 2005, the International Accounting Standards Board issued an
amendment to IAS21 on foreign exchange rates. The amendment to IAS21 allowed
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
meant that certain exchange differences previously taken to the income statement
are instead reflected directly in changes in total equity. As this amendment was
only adopted by the EU in 2006, the interim report to 30 June 2006 contained the
first published results to reflect this change. The previously published results
were restated accordingly, but there was no impact on net finance costs for the
three months to 31 March 2006.
FOREIGN CURRENCIES
The results of overseas subsidiaries and associates 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
31.3.07 31.3.06 31.12.06 31.3.07 31.3.06 31.12.06
US dollar 1.955 1.753 1.844 1.961 1.735 1.957
Canadian dollar 2.290 2.024 2.091 2.263 2.024 2.278
Euro 1.492 1.457 1.467 1.473 1.433 1.484
South African rand 14.155 10.781 12.520 14.225 10.693 13.799
Brazilian real 4.119 3.842 4.009 4.013 3.765 4.179
Page 11
CHANGES IN THE GROUP
On 10 March 2006, the Group's Italian subsidiary signed an agreement to sell its
cigar business, Toscano, to Maccaferri for euro 95 million. The sale was subject
to regulatory and governmental approval and was completed on 19 July 2006.
From August 2006, the Group purchased minority interests in its subsidiary in
Chile for a cost of £91 million, raising the Group shareholding from 70.4 per
cent to 96.5 per cent. The goodwill arising on this transaction was £80 million
and the minority interests in Group equity were reduced by £11 million.
EXCEPTIONAL ITEMS
(a) 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, with major
announcements during 2005 and 2006 which covered the cessation of production in
the UK, Ireland, Canada and Zevenaar in the Netherlands with production to be
transferred elsewhere. The profit from operations for the year ended 31 December
2006 included a charge for restructuring of £216 million.
The three months to 31 March 2007 includes a charge for restructuring of
£8 million (2006: £21 million), in respect of further costs related to
restructurings announced in prior years.
(b) Losses/gains on disposal of a business and brands
The sale of the Italian cigar business in 2006 described above resulted in a
loss of £19 million, reflecting a £15 million impairment charge included in
depreciation and amortisation costs in the profit from operations and £4 million
of other costs included in other operating expenses in the profit from
operations. The impairment charge is reflected in the three months to 31 March
2006.
On 29 November 2006, the Group completed a trademark transfer agreement with
Philip Morris International. Under the arrangement the Group sold its Muratti
Ambassador brand in certain markets, as well as the L&M and Chesterfield
trademarks in Hong Kong and Macao, while acquiring the Benson & Hedges trademark
in certain African countries. These transactions resulted in a gain of £60
million included in other operating income in the profit from operations.
On 20 February 2007, the Group announced that it has agreed to sell its pipe
tobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for euro 24
million. The sale, which is staged in a number of phases, is expected to close
by the end of the second quarter. However, the Group has retained the Dunhill
and Captain Black pipe tobacco brands.
Page 12
NET FINANCE COSTS
Net finance costs comprise:
3 months to
31.3.07 31.3.06
£m £m
Interest payable (93) (102)
Interest and dividend income 29 32
Fair value changes - derivatives (19) 26
Exchange differences 25 (24)
------- --------
6 2
------- --------
(58) (68)
======= ========
Net finance costs at £58 million were £10 million lower than last year,
principally reflecting the impact of derivatives and exchange differences, as
well as one off items in 2006 and the benefit of the Group's cash flow since 31
March 2006.
The £6 million gain (2006: £2 million) of fair value changes and exchange
differences reflects a gain of £4 million (2006: £1 million loss) from the net
impact of exchange rate movements and a gain of £2 million (2006: £3 million)
principally due to interest related changes in the fair value of derivatives.
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 IFRS and, as they are subject to exchange rate movements in a
period, they can be a volatile element of net finance costs.
ASSOCIATES
The share of post-tax results of associates was £111 million (2006:
£120 million) after tax of £62 million (2006: £42 million). For the year to 31
December 2006, the share of post-tax results was £431 million after tax of
£216 million. The share 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.
In the year ended 31 December 2006, Reynolds American benefited from the
favourable resolution of tax matters of which the Group's share was £17 million.
Reynolds American 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 £13 million
(net of tax).
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, and the acquisition was completed on 31 May 2006.
TAXATION
The tax rate in the income statement of 27.0 per cent for the three months to 31
March 2007 (31 March 2006: 26.6 per cent) is affected by the inclusion of the
share of associates' post-tax profit in the Group's pre-tax results. The
underlying rate for subsidiaries reflected in the adjusted earnings per share
below was 31.9 per cent and 32.4 per cent in 2006. The decrease arises primarily
from a change in the mix of profits. The charge relates to taxes payable
overseas.
Page 13
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:
31.3.07 31.3.06 31.12.06
Earnings Shares Earnings Shares Earnings Shares
£m m £m m £m m
Basic 495 2,042 452 2,072 1,896 2,059
Diluted 495 2,057 452 2,091 1,896 2,076
The earnings have been distorted by exceptional items, together with certain distortions to net
finance costs under IFRS in 2006, 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
31.3.07 31.3.06 31.12.06
pence pence pence
Unadjusted earnings per share 24.06 21.62 91.33
Effect of restructuring costs 0.25 0.67 8.09
Effect of disposal of a business and brands 0.48 (1.11)
Effect of associates' brand impairments and exceptional
tax credits (0.77) (0.19)
Net finance costs adjustments 0.05
------- ------- -------
Adjusted diluted earnings per share 24.31 22.05 98.12
======= ======= =======
Adjusted diluted earnings per share are based on:
- adjusted earnings (£m) 500 461 2,037
- shares (m) 2,057 2,091 2,076
Similar types of adjustments would apply to basic earnings per share. For the three months to
31 March 2007, basic earnings per share on an adjusted basis would be 24.49p (2006: 22.25p)
compared to unadjusted amounts of 24.24p (2006: 21.81p).
Page 14
CONTINGENT LIABILITIES
As noted in the Report and Accounts for the year ended 31 December 2006, 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.
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 2007, 7 million shares were bought at
a cost of £113 million (31 March 2006: 5 million shares at a cost of £72
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 and from our website www.bat.com
Nicola Snook
Secretary
3 May 2007
Page 15
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