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 £2,541m £2,232m +14%
Profit from operations £807m £684m +18%
Adjusted diluted earnings per share 28.44p 24.31p +17%
The reported profit from operations was 18 per cent higher at
£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 £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
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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 £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 £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 £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 £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 £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 £230 million was up £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 £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 £26 million to £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 £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 £13 million to £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 £7 million to £131 million,
mainly driven by Nigeria, Turkey and Saudi Arabia. At comparable rates of
exchange, profit would have improved by £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 £30 million to £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 £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 £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 £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 £40 million compared to £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 £48
million, or 43 per cent, to £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 £114 million, with similar growth at
comparable rates of exchange.
The contribution from Reynolds American was up 51 per cent at £109 million.
However, excluding the benefit from the termination of a joint venture agreement
this year, it was 11 per cent lower at £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 £7 million to £34 million. At comparable rates
of exchange, the contribution would have been £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 £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
£m £m £m
Gross turnover (including duty, excise
and other taxes of
£4,231 million (31.3.07: £3,587 million -
31.12.07: £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
£m £m £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
£m £m £m £m £m £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
£m £m £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
£m £m £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*
£m £m £m £m £m £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*
£m £m £m £m £m £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 £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
£10 million (2007: £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 £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 £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 £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
£m £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 £95 million were £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 £16 million loss (2007: £6 million gain) of fair value changes and exchange
differences reflects a loss of £13 million (2007: £4 million gain) from the net
impact of exchange rate movements and a loss of £3 million (2007: £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 £11 million loss (2007: £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 £159 million (2007:
£111 million) after taxation of £86 million (2007: £62 million). For the year to
31 December 2007, the share of post-tax results was £442 million after tax of
£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 £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 £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
£m m £m m £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 (£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 £35 million (31 March 2007: 7 million shares at a cost of £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 £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
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