1st Quarter Results

British American Tobacco PLC 07 May 2008 QUARTERLY REPORT TO 31 MARCH 2008 7 May 2008 SUMMARY THREE MONTHS RESULTS 2008 2007 Change Revenue Â£2,541m Â£2,232m +14% Profit from operations Â£807m Â£684m +18% Adjusted diluted earnings per share 28.44p 24.31p +17% The reported profit from operations was 18 per cent higher at Â£807 million with a similar increase if exceptional items are excluded. All regions contributed to this strong result. Profit from operations, excluding exceptional items, would have been 10 per cent higher at comparable rates of exchange. The reported Group revenue increased by 14 per cent to Â£2,541 million as a result of favourable exchange, improved pricing and a better product mix. Revenue would have increased by 6 per cent at comparable rates of exchange. Group volumes from subsidiaries were 158 billion, an increase of 1 per cent, mainly as a result of the good performances by the four Global Drive Brands, which achieved overall volume growth of 23 per cent with around one third of the rise coming from brand migrations. Adjusted diluted earnings per share rose by 17 per cent, principally as a result of the strong growth in profit from operations and favourable exchange movements. Basic earnings per share were higher at 29.92p (2007:24.24p). The Chairman, Jan du Plessis, commented: "The year has clearly got off to a great start, with profit growth in all our regions. While the normal caveats about not reading too much into any particular quarter still apply, the Group's unrivalled spread of business between developed and developing markets should continue to serve shareholders well." ENQUIRIES: INVESTOR RELATIONS: PRESS OFFICE: Ralph Edmondson/ 020 7845 1180 David Betteridge/Kate 020 7845 2888 Sharon Woodcock 020 7845 1519 Matrunola/Catherine Armstrong BRITISH AMERICAN TOBACCO p.l.c. QUARTERLY REPORT TO 31 MARCH 2008 INDEX PAGE Chairman's comments 2 Business review 3 Group income statement 8 Group statement of changes in total equity 9 Segmental analyses of revenue and profit 10 Accounting policies and basis of preparation 12 Foreign currencies 12 Exceptional items 13 Other changes in the Group 14 Net finance costs 14 Associates 15 Taxation 15 Earnings per share 15 Contingent liabilities 16 Share buy-back programme 17 Net debt/financing 17 Financial calendar 2008 17 Disclaimers 17 CHAIRMAN'S COMMENTS For British American Tobacco, 2008 has started very well, with adjusted diluted earnings per share up 17 per cent to 28.4p. Revenue was 6 per cent ahead at constant rates of exchange and 14 per cent ahead at current rates. Profit from operations improved by 10 per cent at constant rates and by 18 per cent at current rates, reflecting the benefit of improved pricing, increased sales of premium brands and foreign exchange. The currency tailwind contributed Â£54 million to profit from operations at current rates, as almost all the key currencies in which we operate strengthened against sterling. Sales of our Global Drive Brands grew by 23 per cent, with around one third of the rise coming from brand migrations. Dunhill was up 8 per cent, Lucky Strike up 16 per cent and both Kent and Pall Mall increased by some 30 per cent. Volume from premium brands improved by 6 per cent and now represents 33 per cent of our total volume. Our associate companies had volumes of 54 billion and our share of their post-tax profits, excluding exceptional items, was marginally ahead of last year at Â£114 million. There were good performances from Skandinavisk Tobakskompagni (ST) and ITC but Reynolds American has been affected by reduced volumes. Reynolds American has announced a US$350 million share repurchase programme over the next 12 months. British American Tobacco will participate to maintain our shareholding at 42 per cent. At the adjusted diluted earnings per share level, the improved profit from operations, the benefit from foreign exchange, a slightly lower tax rate and the impact of the share buy-back programme were partly offset by higher net finance costs. During the period, some 2 million shares were bought back at an average cost of Â£18.70 per share. Work is continuing on the acquisitions in Turkey and Scandinavia announced in February. We have now received the approvals from Turkey's High Board of Privatisation and the Competition Authority for the acquisition of the cigarette assets of Tekel. As a result, we expect to complete this transaction around the middle of the year. The ST acquisition remains subject to EU competition approval. The year has clearly got off to a great start, with profit growth in all our regions. While the normal caveats about not reading too much into any particular quarter still apply, the Group's unrivalled spread of business between developed and developing markets should continue to serve shareholders well. Jan du Plessis 7 May 2008 Page 2 BUSINESS REVIEW The reported Group profit from operations was 18 per cent higher at Â£807 million with a similar increase if exceptional items are excluded. All regions contributed to this strong result. Profit from operations, excluding exceptional items, would have been 10 per cent higher at comparable rates of exchange, as all regions except Africa and Middle East benefited from exchange movements. The reported Group revenue was 14 per cent higher at Â£2,541 million as a result of favourable exchange, improved pricing and a better product mix. Revenue would have increased by 6 per cent at comparable rates of exchange. Group volumes from subsidiaries were 158 billion, up 1 per cent. Good volume growth in Russia, Pakistan, Iran, Bangladesh, Romania, Turkey and Spain was partly offset by declines in the Czech Republic, Mexico and Brazil. The four Global Drive Brands continued their strong performance and achieved overall volume growth of 23 per cent, resulting in share improvements in many markets with around one third of the rise coming from brand migrations. Kent grew by 30 per cent with excellent growth in Russia, Romania, Ukraine and Chile, while it maintained market share in a reduced Japanese market. It also benefited from a brand migration in South Africa and volume increases in new markets of Azerbaijan and Kazakhstan. Dunhill rose by 8 per cent, driven by good performances in South Korea, Taiwan, Australia, Italy, South Africa and Saudi Arabia, although volumes were slightly lower in Malaysia despite an increase in market share. Lucky Strike volumes were up 16 per cent with strong growth in Spain and increases in Italy, France and Argentina, slightly offset by a decline in Germany as a result of lower industry volumes. The roll-out of Pall Mall to more markets continued, resulting in an increase in volumes of 31 per cent, driven by Germany, Spain, Russia, Romania, Uzbekistan, Pakistan, Turkey, Malaysia and Taiwan, partly offset by lower volumes in the Czech Republic and Italy. In Europe, profit at Â£230 million was up Â£48 million, mainly as a result of excellent performances in Russia, Romania and Switzerland, with good growth in France and the Netherlands. These results benefited from favourable exchange rates and, at comparable rates of exchange, profit would have increased by Â£29 million or 16 per cent. Regional volumes were up 3 per cent at 53 billion, with improvements in Russia, Romania, Switzerland and Spain, partly offset by decreases in the Czech Republic and Germany. In Italy, profit grew as a result of cost savings from productivity programmes and favourable exchange rates. The volume and market share growth of Lucky Strike and Dunhill were more than offset by the decline of local brands and the disposal of some brands in 2007. Market share in Germany was maintained although industry volumes declined. Profit was lower, impacted by the reduced volumes and the timing of marketing investment. While industry volumes in France were lower after significant price rises in August 2007, market share rose as Lucky Strike and Pall Mall continued to gain share. Profit increased strongly as a result of the higher prices and lower costs. In Switzerland, volumes improved, resulting in higher profit and market share growth for Parisienne and Pall Mall. Page 3 Business review cont... In the Netherlands, profits were higher as a result of increased margins while volumes were in line with last year in a reduced overall market, resulting in share gains. Profit in Belgium was severely impacted by last year's excise-driven price increase, resulting in down-trading and lower margins that more than offset overheads savings. Volumes in Spain grew, following a strong performance by Lucky Strike, with improved results after a price rise at the beginning of the year. In Russia, profit increased significantly, benefiting from higher volumes and prices and an improved product mix. Market share grew, driven by the growth of Kent and Pall Mall. Industry volumes were higher as the comparative period was distorted by speculative trade buying at the end of 2006. In Romania, increased volumes, coupled with an improved product mix and pricing, resulted in significantly higher profit. Volume performance was driven by Kent, Pall Mall and Viceroy. Both profit and volumes in the Czech Republic were lower due to the effect of the trade buying at the end of 2007 ahead of an excise increase. In Poland, profitability improved through higher pricing. Market share was up although volumes were slightly lower as industry volumes declined as a result of the significant excise driven price increase in 2007. Volumes in Hungary were in line with last year although market share was slightly down. Dunhill, Lucky Strike and Pall Mall grew although increased marketing investment reduced profit. In Ukraine, volumes and profit improved due to the continued good performance of Kent. In Asia-Pacific, profit rose by Â£26 million to Â£193 million, mainly attributable to strong performances in Pakistan, Vietnam, Bangladesh and Malaysia and also benefiting from favourable exchange rates. At comparable rates of exchange, profit would have increased by Â£15 million or 9 per cent. Volumes at 37 billion were 4 per cent higher as good increases in Pakistan and Bangladesh were partially offset by lower volumes in Vietnam and Malaysia. Profit in Australia grew, mainly attributable to exchange rate movements and higher margins, partially offset by increased competitor discounting activities. Volumes were in line with last year and Dunhill performed well. In New Zealand, volumes were slightly higher and profit was up as the benefits of price increases and exchange were partly offset by higher expenses. In Malaysia, market share remained resilient with a continued good performance from Dunhill, which increased share and Pall Mall, which maintained leadership of the value-for-money segment. Profit rose due to price increases, an improved product mix and productivity savings, despite a small decline in volumes. In Vietnam, strong profit growth was achieved through better product mix, cost saving initiatives and higher prices. Volumes were down due to the growth in illicit trade after the price increases, although market share increased strongly with outstanding performances from Craven 'A' and Dunhill following successful new product launches. Volume and market share in South Korea were ahead of last year, with Dunhill continuing to grow. Profit was in line with last year, as the impact of higher volumes and better product mix were offset by higher marketing expenses. Profit in Taiwan was stable although volumes increased as a result of growth in Pall Mall and Dunhill. Page 4 Business review cont... Pakistan continued its strong growth with both volumes and market share higher, with Gold Flake the major contributor. The volume growth followed Government initiatives which led to a decline in illicit trade, and, with an improved product mix and effective cost management, resulted in good profit increases. In Bangladesh, profit was up as a result of improved margins, a better product mix and higher volumes. In Sri Lanka, profit benefited from excise driven price increases and market share improved, although volumes declined marginally. Profit in Latin America increased by Â£13 million to Â£193 million, mainly as a result of a stronger Brazilian real. At comparable rates of exchange, profit would have decreased by 1 per cent. Volumes were down 4 per cent at 36 billion with declines in Brazil, Mexico and Venezuela only partially offset by the increase in Chile. In Brazil, reported profit increased, benefiting from a stronger local currency. However, at comparable rates of exchange, profit was lower as price increases were not sufficient to offset the impact of lower volumes, higher excise and timing of marketing investment. Profit in Mexico was higher due to improved margins and the timing of expenditure although volumes and market share were lower. In Argentina, profit rose on higher margins and an improved product mix, while volumes remained flat compared to last year. In Chile, volumes were up with strong growth of Kent and Lucky Strike which, coupled with higher pricing and reduced costs, led to significantly higher profit. In Venezuela, while volumes were lower following price increases implemented in the last quarter of 2007, market share and profit in local currency were higher. Volumes in the Central America and Caribbean area were lower as a result of the resurgence in illicit trade, particularly affecting the low price segment. Profit declined due to the lower volumes and the weakening of some currencies. Profit in the Africa and Middle East region grew by Â£7 million to Â£131 million, mainly driven by Nigeria, Turkey and Saudi Arabia. At comparable rates of exchange, profit would have improved by Â£9 million or 7 per cent. Volumes were 3 per cent higher at 23 billion, following increases in Nigeria, Iran and Turkey and partly offset by declines in South Africa. In South Africa, profit growth in local currency was achieved as a result of improved product mix and pricing but this was more than offset by the impact of the weaker exchange rate. Volumes and market share were lower following the termination of the Chesterfield trademark license agreement at the end of 2007. However, Dunhill continued its strong performance growing volumes and market share, while Kent performed well after the migration of Benson & Hedges to Kent at the end of 2007. In Nigeria, profit increased significantly as a result of higher margins, improved product mix and productivity initiatives, supported by higher volumes. Page 5 Business review cont... In the Middle East, volumes were higher in Iran and shipments to Saudi Arabia increased, driven mainly by Dunhill which doubled its market share. Profit in Egypt benefited from growth in volumes. Strong sales across the Caucasus led to volume, market share and profit increases with Kent remaining the leading brand. In Turkey, results improved as volumes and margins rose, partly offset by higher overheads and marketing investment. Pall Mall and Viceroy grew and market share increased. Profit from the America-Pacific region improved by Â£30 million to Â£110 million. This was principally due to the higher contribution from Canada and stronger currencies. At comparable rates of exchange, profit would have increased by Â£18 million or 23 per cent. Volumes at 9 billion were up by one per cent. Profit in Canada grew significantly with a contribution to the Group of Â£64 million. This was the result of higher pricing, lower direct distribution costs, a stronger exchange rate and higher volumes. At comparable rates of exchange, profit was up Â£18 million or 47 per cent. Overall market share at 52 per cent was down 1.2 per cent as the decline in the premium segment was not offset by the growth in the value-for-money and the budget segments. In Japan, volumes were in line with last year despite the continued decline in total industry volumes. Market share gains were driven by the strong performance of Kool. Profit was up as a result of the higher pricing, improved mix and favourable exchange rates, partially offset by increased marketing expenditure. Unallocated costs, which are net corporate costs not directly attributable to individual segments, were Â£40 million compared to Â£41 million in 2007. The above regional profits were achieved before accounting for restructuring costs and gains on disposal of businesses and brands, as explained on page 13. Results of Associates Associates principally comprise Reynolds American, ITC and ST. The Group's share of the post-tax results of associates increased by Â£48 million, or 43 per cent, to Â£159 million. Excluding the exceptional items in 2008 explained on page 15, the Group's share of the post-tax results of associates increased by 3 per cent to Â£114 million, with similar growth at comparable rates of exchange. The contribution from Reynolds American was up 51 per cent at Â£109 million. However, excluding the benefit from the termination of a joint venture agreement this year, it was 11 per cent lower at Â£64 million. The benefits from higher cigarette pricing was more than offset by a number of factors that lowered volumes, including higher prices, wholesale inventory shifts and continuing weakness in the US economy. At comparable rates of exchange, excluding the exceptional item, the contribution from Reynolds American would have been 10 per cent lower. Page 6 Business review cont... The Group's associate in India, ITC, continued its strong profit growth and its contribution to the Group rose by Â£7 million to Â£34 million. At comparable rates of exchange, the contribution would have been Â£4 million higher, or 15 per cent on last year. The contribution from the Group's associate in Denmark, ST, rose by 27 per cent to Â£15 million and, at comparable rates of exchange, would have increased by 13 per cent. Cigarette volumes The segmental analysis of the volumes of subsidiaries is as follows: 3 months to Year to 31.03.08 31.03.07 31.12.07 bns bns bns Europe 53.0 51.5 245.0 Asia-Pacific 36.7 35.3 145.2 Latin America 36.1 37.7 150.5 Africa and Middle East 23.3 22.7 101.0 America-Pacific 9.3 9.2 42.3 -------- ------- ------- 158.4 156.4 684.0 ======== ======= ======= In addition, associates' volumes for the quarter were 54.0 billion (2007: 59.1 billion) and, with the inclusion of these, total Group volumes would be 212.4 billion (2007: 215.5 billion). Page 7 GROUP INCOME STATEMENT - unaudited 3 months to Year to 31.03.08 31.03.07 31.12.07 Â£m Â£m Â£m Gross turnover (including duty, excise and other taxes of Â£4,231 million (31.3.07: Â£3,587 million - 31.12.07: Â£16,216 million)) 6,772 5,819 26,234 ====== ====== ======= Revenue 2,541 2,232 10,018 Raw materials and consumables used (656) (615) (2,802) Changes in inventories of finished goods and work in progress (3) 25 30 Employee benefit costs (385) (344) (1,586) Depreciation and amortisation costs (83) (74) (336) Other operating income 23 30 205 Other operating expenses (630) (570) (2,624) ------ ------- ------- Profit from operations 807 684 2,905 after (charging)/crediting: ------------------------------------ - restructuring costs (10) (8) (173) - gains on disposal of businesses and brands 75 ------------------------------------ ------------------------------------ Finance income 90 30 136 Finance costs (185) (88) (405) --------- ---------- ---------- Net finance costs (95) (58) (269) Share of post-tax results of associates and joint ventures 159 111 442 after (charging)/crediting: ----------------------------------- - brand impairments (7) - termination of joint venture 45 ----------------------------------- ------ ------- -------- Profit before taxation 871 737 3,078 Taxation on ordinary activities (224) (199) (791) ------ ------- ------- Profit for the period 647 538 2,287 ====== ======= ======= Attributable to: Shareholders' equity 599 495 2,130 ====== ======= ======= Minority interests 48 43 157 ====== ======= ======= Earnings per share Basic 29.92p 24.24p 105.19p ====== ======= ======= Diluted 29.73p 24.06p 104.46p ====== ======= ======= See notes on pages 12 to 17. Page 8 GROUP STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 3 months to Year to 31.03.08 31.03.07 31.12.07 Â£m Â£m Â£m Differences on exchange (237) 4 312 Cash flow hedges - net fair value gains 3 2 15 - reclassified and reported in net profit (28) (5) (42) Available-for-sale investments - net fair value gains 1 1 - reclassified and reported in net profit (1) 1 Net investment hedges - net fair value (losses)/gains (38) 1 (35) Tax on items recognised directly in equity 3 (1) (19) ------ ------- ------- Net (losses)/gains recognised directly in equity (297) 1 233 Profit for the period page 8 647 538 2,287 ------ ------- ------- Total recognised income for the period 350 539 2,520 ------------------------------------- - shareholders' equity 300 492 2,348 - minority interests 50 47 172 -------------------------------------- Employee share options - value of employee services 13 7 37 - proceeds from shares issued 5 12 27 Dividends - ordinary shares (1,198) - to minority interests (38) (41) (173) Purchase of own shares - held in employee share ownership trusts (79) (25) (41) - share buy-back programme (35) (113) (750) Acquisition of minority interests (1) (2) (9) Other movements 4 (10) (3) ------ ------- ------- 219 367 410 Balance 1 January 7,098 6,688 6,688 ------ -------- ------- Balance at period end 7,317 7,055 7,098 ====== ======= ======= See notes on pages 12 to 17. Page 9 SEGMENTAL ANALYSES OF REVENUE AND PROFIT - unaudited Revenue The analyses for the three months are as follows: 31.3.08 31.3.07 Inter Inter External segment Revenue External segment Revenue Â£m Â£m Â£m Â£m Â£m Â£m Europe 925 51 976 760 62 822 Asia-Pacific 492 6 498 448 10 458 Latin America 499 136 635 452 104 556 Africa and Middle East 314 314 277 13 290 America-Pacific 118 118 106 106 ------- ------- ------- ------ ------ ------- 2,348 193 2,541 2,043 189 2,232 ======= ======= ======= ====== ====== ======= The analyses for the year ended 31 December 2007 are as follows: Inter External segment Revenue Â£m Â£m Â£m Europe 3,621 225 3,846 Asia-Pacific 1,874 22 1,896 Latin America 1,979 585 2,564 Africa and Middle East 1,224 15 1,239 America-Pacific 473 473 ------ ------ ------- 9,171 847 10,018 ====== ====== ======= The segmental analysis of revenue above is based on location of manufacture and figures based on location of sales would be as follows: 31.3.08 31.3.07 31.12.07 Â£m Â£m Â£m Europe 929 782 3,655 Asia-Pacific 494 448 1,876 Latin America 501 454 1,983 Africa and Middle East 359 336 1,445 America-Pacific 258 212 1,059 ------ ------ -------- 2,541 2,232 10,018 ======= ======= ======== Page 10 Segmental analyses of revenue and profit for the three months - unaudited cont... Profit from operations 31.3.08 31.3.07 31.12.07 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* Â£m Â£m Â£m Â£m Â£m Â£m Europe 223 230 177 182 782 842 Asia-Pacific 192 193 167 167 667 672 Latin America 193 193 180 180 680 680 Africa and Middle East 130 131 124 124 447 470 America-Pacific 109 110 77 80 436 446 ------ ------- ------ ------ ------ ------ Segmental results 847 857 725 733 3,012 3,110 Unallocated costs (40) (40) (41) (41) (107) (107) ------ ------- ------ ------ ------ ------ Profit from operations 807 817 684 692 2,905 3,003 ====== ======= ====== ====== ====== ====== *Excluding restructuring costs and gains on disposal of businesses and brands as explained on page 13. The segmental analysis of the Group's share of the post-tax results of associates and joint ventures is as follows: 31.3.08 31.3.07 31.12.07 Adjusted Adjusted Adjusted Segment segment Segment segment Segment segment result result* result result* result result* Â£m Â£m Â£m Â£m Â£m Â£m Europe 15 15 12 12 48 48 Asia-Pacific 35 35 27 27 110 110 Latin America 1 1 Africa and Middle East 1 1 America-Pacific 109 64 72 72 282 289 ------ ------- ------ ------ ------ ------ 159 114 111 111 442 449 ====== ======= ====== ====== ====== ====== *Excluding gain on termination of joint venture and brand impairments as explained on page 15. Page 11 ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information comprises the unaudited results for the three months to 31 March 2008 and 31 March 2007, together with the audited results for the year ended 31 December 2007. The annual consolidated financial statements for 2007, 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 Annual Report and Accounts for the year ended 31 December 2007. These interim financial statements have been prepared under the historical cost convention, except in respect of certain financial instruments. As indicated in the 2007 Annual Report and Accounts, IFRIC14 (IAS19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction) will be effective from 1 January 2008, once it has been endorsed by the EU. The interpretation clarifies the conditions under which a surplus in a post-retirement benefit scheme can be recognised in the financial statements, as well as setting out the accounting implications where minimum funding requirements exist. Currently, it is not expected that this change would materially alter the Group's reported profit and equity for 1 January 2008 or 31 December 2008. 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 31.3.08 31.3.07 31.12.07 31.3.08 31.3.07 31.12.07 US dollar 1.978 1.955 2.001 1.988 1.961 1.991 Canadian dollar 1.988 2.290 2.147 2.039 2.263 1.965 Euro 1.320 1.492 1.462 1.254 1.473 1.362 South African rand 14.931 14.155 14.110 16.151 14.225 13.605 Brazilian real 3.439 4.119 3.894 3.475 4.013 3.543 Page 12 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 which covered the cessation of production in the UK, Ireland, Canada and Zevenaar in the Netherlands, with production to be transferred elsewhere. The results for the twelve months to 31 December 2007 included a charge for restructuring of Â£173 million, principally in respect of costs associated with restructuring the operations in Italy and with the reorganisation of the business across the Europe and Africa and Middle East regions, as well as further costs related to restructurings announced in prior years. On 18 May 2007, the Group's Italian subsidiary announced the results of a review of its manufacturing infrastructure, including an intention to consolidate its operations at the plant in Lecce, close its operations at Rovereto and sell its facilities at Chiaravalle together with three national brands. The disposal of Chiaravalle was completed on 12 September 2007. The three months to 31 March 2008 include a charge for restructuring of Â£10 million (2007: Â£8 million), in respect of further costs related to restructurings announced in prior years. (b) Gains on disposal of businesses and brands On 20 February 2007, the Group announced that it had agreed to sell its pipe tobacco trademarks to the Danish company, Orlik Tobacco Company A/S, for euro24 million. The sale was completed during the second quarter in 2007 and resulted in a gain of Â£11 million included in other operating income in the profit from operations. However, the Group retained the Dunhill and Captain Black pipe tobacco brands. On 23 May 2007, the Group announced that it had agreed to sell its Belgian cigar factory and associated brands to the cigars division of ST. The sale includes a factory in Leuven as well as trademarks including Corps Diplomatique, Schimmelpennick, Don Pablo and Mercator. The transaction was completed on 3 September 2007 and a gain on disposal of Â£45 million was included in other operating income for the twelve months to 31 December 2007. On 1 October 2007, the Group agreed the termination of its license agreement with Philip Morris for the rights to the Chesterfield trademark in a number of countries in Southern Africa. This transaction resulted in a gain of Â£19 million included in other operating income in the profit from operations. Page 13 OTHER CHANGES IN THE GROUP On 22 February 2008, the Group announced that it had won the public tender to acquire the cigarette assets of Tekel, the Turkish state-owned tobacco company, with a bid of US$1,720 million. The transaction, financed with committed bank facilities (see page 17), is expected to be completed later this year. The privatisation only relates to the cigarette assets of Tekel, which principally comprise brands, factories and tobacco leaf stocks. The privatisation does not include employees and an announcement on employment by the Group is planned nearer to the completion of the transaction, after dialogue with employees and unions. On 27 February 2008, the Group agreed to acquire 100 per cent of ST's cigarette and snus business in exchange for its 32.35 per cent holding in ST and payment of DKK11,384 million in cash. This transaction, which is subject to approval by the European Commission, is being financed through bonds issued (see page 17) and completion is anticipated later this year. NET FINANCE COSTS Net finance costs comprise: 3 months to 31.3.08 31.3.07 Â£m Â£m Interest payable (106) (93) Interest and dividend income 27 29 Fair value changes - derivatives (100) (19) Exchange differences 84 25 ------ ------ (16) 6 ------ ------ (95) (58) ====== ====== Net finance costs at Â£95 million were Â£37 million higher than last year, principally reflecting the impact of derivatives and exchange differences, as well as a higher interest cost as a result of increased borrowings. The Â£16 million loss (2007: Â£6 million gain) of fair value changes and exchange differences reflects a loss of Â£13 million (2007: Â£4 million gain) from the net impact of exchange rate movements and a loss of Â£3 million (2007: Â£2 million gain) 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. These amounts do not always reflect an economic gain or loss for the Group and accordingly, the Group decided that, in calculating the adjusted diluted earnings per share, it is appropriate to exclude certain amounts. The quarterly results to 31 March 2008 exclude, in line with previous practice, an Â£11 million loss (2007: Â£nil) relating to exchange losses in net finance costs where there is a compensating exchange gain reflected in differences in exchange taken directly to changes in total equity. Page 14 ASSOCIATES The share of post-tax results of associates was Â£159 million (2007: Â£111 million) after taxation of Â£86 million (2007: Â£62 million). For the year to 31 December 2007, the share of post-tax results was Â£442 million after tax of Â£246 million. The share is after exceptional charges and credits. On 21 February 2008, Reynolds American announced that it would receive a payment from Gallaher Limited resulting from the termination of a joint venture agreement. While the payments will be received over a number of years, in the first quarter of 2008 Reynolds American recognised a pre-tax gain of US$328 million. The Group's share of this gain included in the results for the quarter, amounts to Â£45 million and is treated as an exceptional item (net of tax). In the year ended 31 December 2007, Reynolds American 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 Â£7 million (net of tax). TAXATION The tax rate in the income statement of 25.7 per cent for the three months to 31 March 2008 (31 March 2007: 27.0 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 30.8 per cent and 31.9 per cent in 2007. The decrease arises primarily from a change in the mix of profits and a reduction in national tax rates in several countries. 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 treasury shares). 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: 31.3.08 31.3.07 31.12.07 Earnings Shares Earnings Shares Earnings Shares Â£m m Â£m m Â£m m Basic 599 2,002 495 2,042 2,130 2,025 Diluted 599 2,015 495 2,057 2,130 2,039 Page 15 Earnings per share cont... The earnings have been distorted by exceptional items, together with certain distortions to net finance costs under IFRS in 2008, 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 31.3.08 31.3.07 31.12.07 pence pence pence Unadjusted earnings per share 29.73 24.06 104.46 Effect of restructuring costs 0.40 0.25 6.48 Effect of disposal of a business and brands (2.75) Net finance cost adjustment 0.55 Effect of associates' brand impairments and termination of joint venture (2.24) 0.34 ------- ------ ------- 28.44 24.31 108.53 ======= ====== ======= Adjusted diluted earnings per share are based on: - adjusted earnings (Â£m) 573 500 2,213 - shares (m) 2,015 2,057 2,039 Similar types of adjustments would apply to basic earnings per share. For the three months to 31 March 2008, basic earnings per share on an adjusted basis would be 28.62p (2007: 24.49p) compared to unadjusted amounts of 29.92p (2007: 24.24p). CONTINGENT LIABILITIES As noted in the Annual Report and Accounts for the year ended 31 December 2007, 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. Page 16 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 2008, 2 million shares were bought at a cost of Â£35 million (31 March 2007: 7 million shares at a cost of Â£113 million). NET DEBT/FINANCING The Group remains confident in its ability to successfully access the debt capital markets and has entered into the following financing agreements since the beginning of the financial year: On 13 February 2008, the Group entered into a revolving credit facility whereby lenders agreed to make available an amount of US$2 billion to finance certain acquisition activities. On 1 May 2008, this facility was syndicated in the market and was redenominated into two euro facilities, one of euro420 million and one of euro860 million. These facilities expire on 30 October 2009. On 5 March 2008, bonds of euro1.25 billion and Â£500 million, maturing in 2015 and 2024 respectively, were issued. This debt replaces the euro1.8 billion revolving credit facility, arranged on 19 December 2007, which was cancelled on 19 March 2008. The issue proceeds will be used to finance certain acquisition activities, as well as repay maturing debt. FINANCIAL CALENDAR 2008 31 July Interim results announced 6 August Ex-dividend date for 2008 interim dividend 8 August Record date 2008 interim dividend 17 September Payment date 2008 interim dividend 30 October Third quarter results announced DISCLAIMERS This report does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any British American Tobacco p.l.c. shares or other securities. This announcement contains certain forward looking statements which are subject to risk factors associated with, among other things, the economic and business circumstances occurring from time to time in the countries and markets in which the Group operates. It is believed that the expectations reflected in this announcement are reasonable but they may be affected by a wide range of variables which could cause actual results to differ materially from those currently anticipated. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser. ------------------------------------------------ Copies of this Report may 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 7 May 2008 Page 17 This information is provided by RNS The company news service from the London Stock Exchange

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