1st Quarter Results
British American Tobacco PLC
04 May 2005
QUARTERLY REPORT TO 31 MARCH 2005 4 May 2005
SUMMARY
THREE MONTHS RESULTS 2005 2004 Change
Profit from operations £582m £604m - 4%
Adjusted diluted earnings per share 20.10p 15.91p +26%
• This is the first time that British American Tobacco has
reported its results under International Financial Reporting
Standards.
• Profit from operations in subsidiary companies was 6 per
cent higher if the changes in the Group resulting from
the merger of the Group's US businesses with
R.J. Reynolds and the sale of Etinera, with the
resulting change in its terms of trade, are excluded.
This "like for like" information provides a better
explanation of the subsidiaries' trading results than
the 4 per cent "headline" decline in profit from
operations, the difference being simply the result of
these changes in the Group.
• On a reported basis, Group volumes from subsidiaries were
affected by the transactions noted above, resulting in a 3 per
cent decrease to 159 billion. Excluding the impact of these
transactions, Group volumes from subsidiaries grew by 1 per
cent with many good market share performances. The four
global drive brands showed overall growth of 2 per cent.
• Adjusted diluted earnings per share rose by 26 per cent,
benefiting from the higher underlying operating performance,
reduced net finance costs due to the impact of IAS39, a lower
effective tax rate and minority interests, as well as the
impact of the Reynolds American transaction, the Etinera sale
and the subsequent change in terms of trade in Italy and the
share buy-back programme. The basic earnings per share were
impacted by the same factors, partly offset by the conversion
of the redeemable preference shares, and increased to 20.26p
(2004: 16.65p).
• The Chairman, Jan du Plessis, commented "The year has clearly
started well, benefiting from the Reynolds American
transaction, as well as good profit growth in all regions
apart from America-Pacific. Shareholders should, however,
remember that the comparisons with 2004 will become more
demanding, bearing in mind the various one-off tax benefits in
the second half of last year. As a result, the first
quarter's 26 per cent growth in earnings per share is
obviously not indicative of the outlook for the year as a
whole."
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BRITISH AMERICAN TOBACCO p.l.c.
QUARTERLY REPORT TO 31 MARCH 2005
INDEX
PAGE
Chairman's comments 2
Business review 5
Group income statement 9
Statement of changes in total equity 10
Segmental analyses of revenue and profit 11
Accounting policies and basis of preparation 13
Convertible redeemable preference shares 15
Foreign currencies 15
Changes in the Group 16
Restructuring costs 17
Investment costs written off 17
Gains on disposal of subsidiaries and non-current investments 17
Net finance costs 18
Associates 19
Taxation 19
Earnings per share 19
Share buy-back programme 21
CHAIRMAN'S COMMENTS 2.
British American Tobacco has clearly made an excellent start to the
year, with profit in four of our five regions being well ahead
compared to the first quarter of 2004.
This is the first time that the Group has reported its results under
International Financial Reporting Standards (IFRS). The changes in
presentation are further complicated by two significant transactions
that took place last year.
Profit from operations in subsidiary companies was 6 per cent higher
if the changes in the Group resulting from the merger of the Group's
US businesses with R.J. Reynolds and the sale of Etinera, with the
resulting change in its terms of trade, are excluded. This "like
for like" information provides a better explanation of the
subsidiaries' trading results than the 4 per cent "headline" decline
in profit from operations, the difference being simply the result of
these changes in the Group.
Reported volumes from the Group's subsidiaries declined by 3 per
cent to 159 billion cigarettes but, excluding the impact of the
above transactions, would have been 1 per cent ahead. There were
strong performances in Pakistan, Russia and Turkey.
Our global drive brands grew by 2 per cent, reflecting good
performances in France, Germany, Malaysia, Romania and Russia.
While Pall Mall was well ahead, the star performer was Kent, the
number one premium brand in Russia. The brand continued to improve
its market share in the top 30 cities and especially in Moscow,
where the launch of Dunhill has also gone extremely well. Dunhill
has grown market share to over 14 per cent in South Korea. Lucky
Strike has improved its share of the cigarette market in both
Germany and France compared to the previous quarter.
Turning to the regions, the results in America-Pacific are obviously
confusing because Brown & Williamson's US business was a subsidiary
this time last year and is now part of Reynolds American, an
associate. If the US is excluded from both periods, the region's
profits were £35 million lower at £88 million. Canada has suffered
from continued down trading, while conditions in Japan are intensely
competitive.
Our performances in the other four regions have been very good, with
profits growing by some £66 million, or 15 per cent. There were
good profit increases in South Korea, Brazil, Mexico, France,
Germany, Russia, South Africa and Nigeria.
Chairman's comments cont... 3.
It is worth noting that under IFRS, net finance costs are likely to
be much more difficult to forecast and may well be more volatile.
This is partly because financial instruments, such as derivatives,
have to be recognised at fair value. Net finance costs amounted to
£46 million but included the benefit of £23 million from fair value
changes and exchange differences. Excluding the impact of IAS 39,
the relevant Standard for derivatives, net finance costs were
similar to last year.
For the Group, one of the most important changes under IFRS concerns
the treatment of the results from associate companies. They now
have to appear post tax but have to be included at the pre-tax
level. Our principal associates are Reynolds American, ITC in India
and Skandinavisk Tobakskompagni in Denmark. Their combined volumes
amounted to 56 billion cigarettes in the first quarter. The Group's
share of their post tax results was £63 million higher at £88
million, principally because of the inclusion of £60 million for
Reynolds American.
As Reynolds American recently announced, the launch of their new
brand portfolio strategy is well underway and steps have been taken
to strengthen further the performance of the two investment brands,
Camel and Kool. The smooth integration has continued and they are
on target to deliver the merger related synergies.
Changes in the mix of profits have resulted in an underlying tax
rate of 31.0 per cent, compared to 35.7 per cent in 2004.
Adjusted diluted earnings per share rose by 26 per cent to 20.10p,
benefiting from the higher underlying operating performance and
reduced net finance costs, a lower effective tax rate and lower
minority interests, as well as the impact of the Reynolds American
transaction, the Etinera sale and the subsequent change in terms of
trade in Italy and the share buy-back programme.
Some 4 million shares were bought back during the period, at a cost
of £42 million and at an average price of £9.38. As usual, the
share buy-back programme will restart following the publication of
these results.
Chairman's comments cont... 4.
The year has clearly started well, benefiting from the Reynolds
American transaction, as well as good profit growth in all regions
apart from America-Pacific, where we expect the difficult trading
conditions in Canada and Japan to continue.
Shareholders should, however, remember that the comparisons with
2004 will become more demanding, bearing in mind the various one-off
tax benefits in the second half of last year. As a result, the
first quarter's 26 per cent growth in earnings per share is
obviously not indicative of the outlook for the year as a whole.
Jan du Plessis
4 May 2005
BUSINESS REVIEW 5.
The reported Group profit from operations was 4 per cent lower at
£582 million at current rates of exchange (3 per cent lower at
constant rates). However, profit would have increased by 6 per
cent, if adjusted to remove the impact of the sale of Etinera,
together with the resulting changes in terms of trade in Italy, and
to allow for the inclusion of the US tobacco business in associated
companies following the Reynolds American transaction (see page 16).
All regions showed strong growth apart from America-Pacific.
On a reported basis, Group volumes from subsidiaries were affected
by the transactions noted above, resulting in a 3 per cent decrease
to 159 billion. Excluding the impact of these transactions, there
was organic volume growth from subsidiaries of 1 per cent with many
good market share performances. The four global drive brands showed
overall growth of 2 per cent. Kent grew by 19 per cent and Pall
Mall by 6 per cent, while Dunhill and Lucky Strike fell by 11 per
cent and 5 per cent respectively. Dunhill was adversely affected by
an excise change in South Korea and Lucky Strike volumes reflected
overall industry volume declines in key markets. As noted in the
2004 Report & Accounts, Group volumes now include make-your-own
cigarette 'stix'.
In Europe, profit increased by £30 million to £181 million with
strong performances in Russia, Germany, France and Romania, while
the integration of the Smoking Tobacco and Cigars business into the
respective markets is already delivering benefits. Excluding the
impact of the sale of Etinera, and the resulting changes in the
terms of trade, profit would have increased by £17 million.
Regional volumes were 2 per cent higher at 57 billion, primarily due
to the growth in Russia and the change in terms of trade in Italy.
In Italy, volumes and profit were affected by the introduction in
January of a virtual ban on indoor public smoking, resulting in a
total market decline of over 12 per cent. Profit was also affected
by the sale of Etinera at the end of 2004 (see page 16). However,
the change in the terms of trade noted above resulted in a one-off
increase in reported volumes and profit. Excluding this distortion,
compared to the previous quarter, market share was higher after Pall
Mall and MS improved share, with MS recording growth for the first
time in several years.
Profit in Germany increased strongly through a price increase,
improved mix and lower costs. Volumes were lower although there was
share growth from Pall Mall. Cigarette 'stix' continued to grow
strongly and, in a market adversely affected by a steep excise
increase in December 2004, overall share was up. There were
improved results from France due to the better sales mix and lower
costs, with volumes and market share both higher.
Business review cont... 6.
Russia continued its excellent performance with another strong
increase in profit through a better mix and volume increases.
Higher volumes and market share were driven by the premium brand
Kent, supported by the growth of Vogue. In Romania, profit
increased with volume growth and higher margins from Kent and Pall
Mall.
In Switzerland, an excise increase in December resulted in lower
volume and slightly reduced profit, although market share was
maintained as Parisienne and Pall Mall performed strongly. In the
Netherlands and Belgium, integration of the Smoking Tobacco and
Cigars business, as well as cost savings, led to improved profit.
In Asia-Pacific, regional profit rose by £13 million to £126 million
as good performances in Australasia and Pakistan, assisted by a
benefit from the timing of excise payments in South Korea, more than
covered the reductions in Malaysia and Vietnam. Regional volumes at
32 billion were 1 per cent higher as strong increases in Pakistan
and Bangladesh were partially offset by volume declines in Vietnam
and South Korea. South Korea is now reported under the Asia-Pacific
region, rather than America-Pacific, with the 2004 comparatives
adjusted accordingly.
Australia continued its profit growth despite a small decline in
volumes, with higher margins and overall market share up due to
strong performances from Dunhill and Winfield. In New Zealand,
profit increased with improved margins, while volumes were stable.
Following the severe excise increase last September, profit in
Malaysia was lower as a result of pricing activities and the
incremental costs of complying with new regulations. In a reduced
market, Dunhill's share was up on the previous quarter and stable
compared to last year. Pall Mall's share also increased but
reductions in other brands led to a small overall decline in market
share. In Vietnam, market share rose but lower volumes led to a
decline in profit.
South Korea delivered strong profit growth due to the timing of
excise payments, which substantially reduced industry volume. Good
market share growth was driven by Dunhill.
In Pakistan, very strong volume growth by Gold Flake and John Player
Gold Leaf resulted in much higher profit and market share. Volumes
increased in Bangladesh but profit decreased as consumers continued
to down trade.
The Latin America region showed strong profit growth of £21 million
to £115 million with all major markets up. Volumes at 36 billion
were slightly lower as increases in Venezuela and Central America
were offset by declines in Argentina and Mexico.
Business review cont... 7.
Profit in Brazil was much higher following price increases, assisted
by a stronger local currency, with volumes fractionally lower. In
Venezuela, higher margins and increased volumes led to profit
growth, supported by higher disposable income levels and a reduction
in imported illegal product.
In Mexico, profit was higher as a result of an improved mix and
price increases last year, and was achieved despite lower volumes,
increased marketing investment and the depreciation of the currency
against sterling. The continued growth of the Group's premium brand
volumes were more than offset by the decline in the mid-priced and
low-priced segments.
Elsewhere in the region there were good performances, especially in
the Central America and Caribbean area which showed higher profit as
volumes increased, although volumes were lower in Argentina due to
the continued growth of low price local manufacturers.
Profit in the Africa and Middle East region grew by £15 million to
£97 million with good performances from South Africa and Nigeria.
There was excellent volume growth of 17 per cent to 25 billion,
mainly as a result of the strong growth in Turkey and other markets
in the Middle East.
In South Africa, profit benefited from a price increase and improved
sales mix as Peter Stuyvesant increased share, while total volumes
were stable. There was a strong increase in market share in Nigeria
and profit rose due to all products now being manufactured locally.
There were volume increases from Kent and Montana in Iran and
Viceroy in Iraq, and profits were higher driven by these volume
increases. Volume growth in Turkey was outstanding with good
performances by Viceroy and Pall Mall. While financial results
worsened as higher excise costs more than offset the volume
benefits, the position improved towards the end of the quarter.
On a comparable basis, the America-Pacific regional profit was
£35 million lower at £88 million, and volume was 8 per cent lower,
as both Canada and Japan showed lower profit and volumes. As the
comparative period included the US tobacco business now merged with
R.J. Reynolds and included in associates (see page 16), reported
regional volumes were down by 51 per cent to 10 billion and reported
profit was £100 million lower.
Imperial Tobacco Canada's profit was down £19 million to £64 million
as lower volumes and an adverse sales mix, as a result of continued
down trading, offset lower operating costs. Imperial's share of the
growing low-priced segment rose from 22 per cent to 36 per cent.
However, this is still below its overall cigarette market share
which declined from 59 per cent to 55 per cent due to the reduction
in the premium segment.
Business review cont... 8.
Profit in Japan was affected by lower volumes, as the total market
continued its decline, together with the impact of exchange and the
non-recurrence of a benefit from a business reorganisation included
in prior periods. Lucky Strike and Kool maintained share, while
Kent showed a slight decline, in an intensely competitive
environment.
Unallocated costs, which are net corporate costs not directly
attributable to individual segments, were up £6 million at
£25 million, mainly due to exchange gains in the 2004 comparative.
Results of associates
The Group's share of the post tax results of associates was up
£63 million at £88 million, reflecting the inclusion of £60 million
for Reynolds American following the transaction described on
page 16. On a pro-forma US GAAP basis, as if the combination with
Brown & Williamson had been completed as of 1 January 2004, Reynolds
American reported that first quarter 2005 operating profit increased
58 per cent and net income rose 70 per cent. This was due primarily
to increased pricing, merger related synergies and other cost
reductions, and a benefit related to the MSA Phase II growers'
trust. These were partially offset by volume declines, expenses
from the quota buyout programme and merger related costs.
There was an increased profit contribution from the Group's
associated companies in India, driven by their continued strong
volume growth.
Cigarette Volumes of Subsidiaries
3 months to Year to
31.3.05 31.3.04 31.12.04
Restated Restated
bns bns bns
Europe 56.7 55.6 240.2
Asia-Pacific 31.7 31.5 131.7
Latin America 36.3 36.6 147.6
Africa and Middle East 25.0 21.3 97.6
America-Pacific 9.6 19.6 68.4
----- ----- -----
159.3 164.6 685.5
===== ===== =====
In addition, associates' volumes for the quarter were 56.1 billion
(2004: 28.1 billion) and, with the inclusion of these, total Group
volumes would be 215.4 billion (2004: 192.7 billion).
GROUP INCOME STATEMENT - unaudited 9.
3 months to Year to
31.3.05 31.3.04 31.12.04
£m £m £m
Revenue 2,107 2,635 10,768
Raw materials and consumables used (613) (623) (2,670)
Purchase of finished goods by
distribution business (282) (1,086)
Changes in inventories of finished goods
and work in progress (29) 47 4
Employee benefit costs (305) (389) (1,552)
Depreciation and amortisation costs (74) (80) (357)
Other operating expenses (504) (699) (2,518)
------ ------ ------
582 609 2,589
Restructuring costs (5) (206)
Investment costs written off (50)
Gains on disposal of subsidiaries and
non-current investments
1,427
------ ------ ------
Profit from operations 582 604 3,760
Net finance costs (46) (54) (254)
Share of post tax results of associates 88 25 126
after
- restructuring costs (63)
- brand impairment (49)
- exceptional tax credits 49
------ ------ ------
Profit before taxation 624 575 3,632
Taxation (166) (197) (673)
------ ------ ------
Profit for the period 458 378 2,959
====== ====== ======
Attributable to:
Shareholders' equity 428 344 2,829
====== ====== ======
Minority interests 30 34 130
====== ====== ======
Earnings per share
basic 20.26p 16.65p 135.11p
====== ====== ======
diluted 20.10p 15.77p 131.22p
====== ====== ======
See notes on pages 13 to 21.
STATEMENT OF CHANGES IN TOTAL EQUITY - unaudited 10.
3 months to Year to
31.3.05 31.3.04 31.12.04
£m £m £m
Differences on exchange (62) (72) 40
Cash flow hedges 18
Net investment hedges (1)
------ ------ ------
Net (losses)/gains recognised
directly in equity (45) (72) 40
Profit for the period page 9 458 378 2,959
------ ------ ------
Total recognised income for the period 413 306 2,999
- shareholders' equity 376 281 2,879
- minority interests 37 25 120
Employee share options
- value of employee services 9 8 32
- proceeds from shares issued 15 12 36
Dividends and other appropriations
- ordinary shares (823)
- convertible redeemable
preference shares (33)
- amortisation of discount on
preference shares (4) (8)
- to minority shareholders (22) (23) (145)
Purchase of own shares
- held in Employee Share Ownership
Trusts (10) (63) (76)
- other (42) (165) (492)
Other movements 3 5 8
------ ------ ------
366 76 1,498
Balance 1 January 6,117 4,619 4,619
Change in accounting policy page 13 (42)
------ ------ ------
Balance at period end 6,441 4,695 6,117
====== ====== ======
See notes on pages 13 to 21.
11.
SEGMENTAL ANALYSES OF REVENUE AND PROFIT FOR THE THREE MONTHS - unaudited
31.3.05 31.3.04
Inter Inter
External Segment Revenue External Segment Revenue
£m £m £m £m £m £m
Europe 830 132 962 1,005 152 1,157
Asia-Pacific 365 1 366 353 353
Latin America 322 322 278 2 280
Africa and
Middle East 223 4 227 183 1 184
America-
Pacific 230 230 652 9 661
----- ----- ----- ----- ----- -----
Revenue 1,970 137 2,107 2,471 164 2,635
===== ===== ===== ===== ===== =====
The analysis for revenue is based on location of manufacture and figures
based on location of sales would be as follows:
31.3.05 31.3.04
£m £m
Europe 832 1,018
Asia-Pacific 393 393
Latin America 326 281
Africa and Middle East 326 290
America-Pacific 230 653
------ ------
2,107 2,635
====== ======
31.3.05 31.3.04
Segment result
excluding
Segment Segment restructuring
result result costs
£m £m £m
Europe 181 151 151
Asia-Pacific 126 113 113
Latin America 115 94 94
Africa and Middle East 97 82 82
America-Pacific 88 183 188
----- ----- -----
607 623 628
Unallocated costs (25) (19) (19)
----- ----- -----
582 604 609
===== ===== =====
12.
Segmental Analyses of Revenue and Profit for the three months cont. - unaudited
With effect from 1 January 2005, the Group has changed its regional
structure, with South Korea included in Asia-Pacific rather than the
America-Pacific region. The 2004 analyses on page 11 reflect this change
as do the restated IFRS analyses for the year ended 31 December 2004
below:
Location of manufacture Location of sales
External Inter Segment Revenue Revenue
£m £m £m £m
Europe 4,410 637 5,047 4,452
Asia-Pacific 1,489 1 1,490 1,629
Latin America 1,260 9 1,269 1,273
Africa and Middle East 853 2 855 1,339
America-Pacific 2,072 35 2,107 2,075
------ ------ ------ ------
10,084 684 10,768 10,768
====== ====== ====== ======
Segment result Segment result*
£m £m
Europe 591 750
Asia-Pacific 467 495
Latin America 438 448
Africa and Middle East 357 360
America-Pacific 2,010 639
------ ------
3,863 2,692
Unallocated costs (103) (103)
------ ------
3,760 2,589
====== ======
* Excluding restructuring costs, investment costs written off and gains
on disposal of subsidiaries and non-current investments.
The segmental analysis of the Group's share of post tax results of
associates is as follows:
31.3.05 31.3.04 31.12.04
£m £m £m
Europe 10 10 38
Asia-Pacific 18 14 67
Africa and Middle East 1 1
America-Pacific 60 20
----- ----- -----
88 25 126
===== ===== =====
13.
ACCOUNTING POLICIES AND BASIS OF PREPARATION
The financial information comprises the unaudited results for the
three months to 31 March 2005 and 31 March 2004, together with the
unaudited results for the twelve months ended 31 December 2004.
Prior to 2005, the Group prepared its audited annual financial
statements and unaudited quarterly results under UK Generally
Accepted Accounting Principles (UK GAAP). From 1 January 2005, the
Group is required to prepare its annual consolidated financial
statements in accordance with IFRS as adopted by the European Union
(EU) and implemented in the UK. As the annual 2005 financial
statements will include comparatives for 2004, the Group's date of
transition to IFRS under IFRS1 (First time adoption of IFRS) is
1 January 2004 and the 2004 comparatives will be restated to IFRS.
However, in preparing the comparative figures for 2004, the Group
has chosen to utilise the IFRS1 exemption from the requirement to
restate comparative information for IAS32 and IAS39 on financial
instruments.
To explain how the Group's reported performance and financial
position are affected by this change, the Report & Accounts for the
year ended 31 December 2004 set out on pages 75 to 84 a comparison
of key figures under UK GAAP for 2004, with unaudited restated IFRS
results and an explanation of the principal differences between UK
GAAP and IFRS, together with the accounting policies which are to be
used under IFRS.
These unaudited Group results for the three months to 31 March 2005
have been prepared on a basis consistent with the IFRS accounting
policies as set out on pages 81 to 84 of the Report & Accounts for
the year ended 31 December 2004. These interim financial statements
have been prepared under the historical cost convention, except in
respect of certain financial instruments. In addition, these
interim financial statements do not comply with all the disclosures
in IAS34 on interim financial reporting and are therefore not in
full compliance with IFRS.
As noted above IAS32 and IAS39 on financial instruments are being
applied prospectively from 1 January 2005 and the changes to the
balance sheet as at 1 January 2005 principally reflect:
(a) The measurement of available-for-sale investments at fair
value.
(b) The reclassification of interest accruals to form part of the
carrying value of the related asset or liability.
(c) The measurement of all derivative financial instruments at
fair value.
(d) Derecognition of deferred losses on derivatives.
These changes result in increases in total assets of £71 million and
total liabilities of £113 million, with total equity £42 million
lower. The impact on the first quarter of 2005 is set out in net
finance costs on page 18. As permitted, the Group is adopting the
amendment to IAS39 on cash flow hedge accounting of forecast intra
group transactions from 1 January 2005.
Accounting Policies and Basis of Preparation cont... 14.
The effect of the change to IFRS on total equity as at 31 March 2004
and profit for the three months to 31 March 2004 is as follows:
Profit for
Total equity the period
£m £m
UK GAAP 4,526 252
Post retirement benefits (481) 8
Deferred taxation (61) (3)
Dividends 585
Share schemes (7) (2)
Goodwill 125 118
Other 8 5
------ ------
IFRS 4,695 378
====== ======
The total equity under UK GAAP of £4,526 million comprises shareholders'
funds of £4,298 million, as disclosed in the First Quarter Report for
2004, and minority interests of £228 million.
The adjustments above are as explained on pages 75 to 77 of the
Report & Accounts for the year ended 31 December 2004. Also under
UK GAAP, operating profit, net finance costs, taxation and minority
interests included the Group's share of the associates' results,
whereas the income statement under IFRS only includes the Group's
share of the post tax and minority results of the associates as one
line before the Group's pre-tax profit.
The adjustments to the balance sheets as at 1 January 2004 and
31 December 2004, as well as the adjustments to profit for the year
ended 31 December 2004, are explained on pages 75 to 78 of the
Report & Accounts for the year ended 31 December 2004.
Accounting Policies and Basis of Preparation cont... 15.
These results are based on the IFRS expected to be applicable as at
31 December 2005 and the interpretation of those standards. IFRS
are subject to possible amendment by and interpretative guidance
from the International Accounting Standards Board, as well as the
ongoing review and endorsement by the EU, and are therefore still
subject to change. These figures may therefore require amendment,
to change the basis of accounting and/or presentation of certain
financial information, before their inclusion in the IFRS financial
statements for the year to 31 December 2005, when the Group prepares
its first complete set of IFRS financial statements.
CONVERTIBLE REDEEMABLE PREFERENCE SHARES
On 7 June 1999, the Company issued 241,734,651 convertible
redeemable preference shares (CRPS) of 25p each to R&R Holdings SA
as part consideration for the acquisition of the issued share
capital of Rothmans International BV. Subsequently, in accordance
with the terms of the CRPS, 50 per cent of the CRPS was redeemed for
cash on 7 June 2000 and the remaining 50 per cent was converted into
the same number of ordinary shares on 3 June 2004.
The amortisation of discount on preference shares referred to on
page 10 reflects the difference between the share price at the date
of the Rothmans transaction and the redemption price, which was
being amortised over the period to the redemption date.
FOREIGN CURRENCIES
The results of overseas subsidiaries and associated companies have
been translated to sterling as follows:
The income statement has been translated at the average rates for
the respective periods. The total equity has been translated at the
relevant period end rates. For high inflation countries, the local
currency results are adjusted for the impact of inflation prior to
translation to sterling at closing exchange rates.
The principal exchange rates used were as follows:
Average Closing
31.3.05 31.3.04 31.12.04 31.3.05 31.3.04 31.12.04
US dollar 1.891 1.838 1.830 1.890 1.819 1.920
Canadian dollar 2.319 2.424 2.384 2.286 2.384 2.300
Euro 1.442 1.470 1.475 1.454 1.497 1.413
South African rand 11.357 12.469 11.821 11.760 11.673 10.816
Foreign currencies cont... 16.
Under UK GAAP previously reported quarterly figures were restated to
the average rates for the year to date. Under IFRS, each quarter is
not restated for subsequent movements in foreign exchange during the
year and so the figures remain translated to sterling at the average
rates for the relevant periods. The comparative 2004 figures in
these results reflect this change, as well as the other adjustments
to IFRS.
CHANGES IN THE GROUP
On 23 December 2003, the Group completed the acquisition of Ente
Tabacchi Italiani S.p.A. (ETI), Italy's state tobacco company. On
29 December 2004 the Group sold Etinera S.p.A., the distribution
business of the Italian subsidiary, for €590 million. After
allocating the relevant portion of the goodwill on the ETI
acquisition to Etinera there was no gain on the disposal. It is
estimated that Etinera contributed £223 million of revenue and
£10 million of operating profit to the Group results for the three
months to 31 March 2004.
In the first quarter of 2005, following the sale of Etinera,
volumes and profits in Italy benefited by 3 billion and £23 million
respectively from a change in the terms of trade with Etinera, but
around three-quarters of this is expected to reverse over time.
The Group announced on 27 October 2003, and completed on 30 July
2004, the agreement to combine Brown & Williamson's (B&W) US
domestic businesses with R.J. Reynolds (RJR) under Reynolds
American Inc., a new holding company 58 per cent owned by RJR
shareholders and 42 per cent by the Group, through B&W. The Group
also sold Lane to Reynolds American for US$400 million in cash.
This transaction gave rise to goodwill relating to the Group's
investment in Reynolds American Inc. and a gain on the partial
disposal of the US domestic businesses. The goodwill on the
transaction is provisionally estimated at £1,285 million, with a
gain on the partial disposal of £1,389 million.
The Group consolidated the results of B&W and Lane for the seven
months to the end of July 2004, and from that date Reynolds American
Inc. is accounted for as an associated company. In the three months
to 31 March 2005, the Group's share of Reynolds American post tax
profit was £60 million while in the three months to 31 March 2004
B&W and Lane contributed £388 million of revenue and £65 million of
operating profit.
Excluding the Etinera, B&W and Lane operating profits from the 2004
first quarter would result in a profit for 2004 of £529 million.
On this basis, the operating profit for the first quarter of 2005
of £559 million, after excluding the benefit from the change in
terms of trade in Italy, would represent growth of 6 per cent.
Changes in the Group cont... 17.
The Group ceased to be the controlling company of British American
Racing (Holdings) Ltd (BAR) on 7 December 2004 when BAR went into
administration. The Group consequently ceased to consolidate BAR
from that date. In January 2005, a joint venture between British
American Tobacco and Honda Motor Co. Ltd. acquired the BAR
business. As there is now shared control with Honda, BAR is equity
accounted from January 2005.
RESTRUCTURING COSTS
During 2003, the Group commenced a detailed review of its
manufacturing operations and organisational structure, including the
initiative to reduce overheads and indirect costs. The
restructuring continued during 2004, with further announcements
during the year principally in respect of a reorganisation of the
Group's business in Germany, the closing and downsizing of some
factories and the integration of the Smoking Tobacco and Cigars
operations with the cigarette businesses in Europe and the UK. The
results of subsidiaries for the year ended 31 December 2004 include
a charge for restructurings of £206 million and for the three months
to 31 March 2004 include £5 million.
INVESTMENT COSTS WRITTEN OFF
Considering the uncertainty of the timetable and the significant
hurdles in establishing a major strategic investment in China, in
2004 the Group decided to write off all costs previously capitalised
in reaching that stage of the project.
GAINS ON DISPOSAL OF SUBSIDIARIES AND NON-CURRENT INVESTMENTS
In the year ended 31 December 2004, a gain on partial disposal of
£1,389 million arose from the agreement to combine Brown &
Williamson with R.J. Reynolds, with no gain on the disposal of
Etinera, as described on page 16.
In October 2004, the Group sold two non-current asset investments,
its 20 per cent stake in Lakson Tobacco Company in Pakistan and
Bollore Investissement S.A. in France. The total proceeds were
£66 million, resulting in a gain on disposal of £38 million.
NET FINANCE COSTS 18.
Net finance costs comprise:
3 months to
31.3.05 31.3.04
£m £m
Interest payable (95) (89)
Interest and dividend income 26 26
Fair value changes - derivatives (33)
Exchange differences 56 9
--- ---
23 9
----- -----
(46) (54)
===== =====
Net finance costs at £46 million were £8 million lower than last
year but, excluding the impact of IAS39 which has only been applied
prospectively from 1 January 2005, they were similar to last year.
The £23 million (2004: £9 million) of fair value changes and
exchange differences reflects:
(a) IAS39 requires all derivatives to be recognised at fair value
in the accounts. This results in a £8 million gain in the quarter
on applying fair values to derivatives which do not qualify for
hedge accounting under IAS39. However, this is principally in
respect of long term structural swaps as part of the Group's
treasury management. While valuations under IAS39 will be subject
to volatility over time, the intention is to hold the swaps to
maturity.
(b) £5 million related to swaps where the corresponding amounts in
2004 were included in interest paid.
(c) £10 million (2004: £9 million) principally reflecting exchange
differences which were included in reserve movements under UK GAAP.
Net finance costs under IFRS, especially with the implementation of
IAS39, are potentially more volatile than under UK GAAP. As
described on page 20, the Group will review the appropriate
treatment of this volatility for the adjusted earnings per share
calculations prior to publishing the first annual IFRS results for
2005.
ASSOCIATES 19.
The share of post tax results of associates for the year ended
31 December 2004 is after restructuring costs, brand impairment and
exceptional tax credits.
Following the combination of Brown & Williamson with R.J. Reynolds
as described on page 16, the new company Reynolds American incurred
restructuring costs in integrating the two businesses. For the
period to 31 December 2004 the Group's share of these amounted to
£63 million (net of tax), mainly in relation to asset write downs
and staff costs. There was also a £49 million (net of tax)
impairment charge following the implementation of a review of brand
strategies resulting from the combination of R.J. Reynolds and Brown
& Williamson. In addition there was a £49 million exceptional tax
credit arising from tax recoveries in Reynolds American.
TAXATION
The tax rates in the income statement of 26.6 per cent in 2005 and
34.3 per cent in 2004 are affected by the inclusion of the share of
associates post tax profit in the Group's pre-tax results. The
underlying tax rate for subsidiaries, reflected in the adjusted
earnings per share shown below, was 31.0 per cent in 2005 and
35.7 per cent in 2004, and the decrease reflects changes in the mix
of profits. On a similar basis the underlying tax rate for
associates was 36.1 per cent in 2005 and 35.4 per cent in 2004 and
the increase reflects the inclusion of the US tobacco business in
associated companies following the Reynolds American transaction.
EARNINGS PER SHARE
Basic earnings per share are based on the profit for the period
attributable to ordinary shareholders, after deducting the
amortisation of discount on the convertible redeemable preference
shares, and the average number of ordinary shares in issue during
the period (excluding shares held by the Group's two Employee Share
Ownership Trusts).
For the calculation of the diluted earnings per share the average
number of shares reflects the potential dilutive effect of employee
share schemes and, up to their redemption on 3 June 2004, the
convertible redeemable preference shares. The earnings are
correspondingly adjusted to the amount of earnings prior to
deducting the amortisation of discount on the convertible redeemable
preference shares.
The earnings per share are based on:
31.3.05 31.3.04 31.12.04
Earnings Shares Earnings Shares Earnings Shares
£m m £m m £m m
Basic 428 2,113 340 2,042 2,821 2,088
Diluted 428 2,129 344 2,181 2,829 2,156
Earnings per share cont... 20.
The earnings have been distorted by exceptional items 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
31.3.05 31.3.04 31.12.04
pence pence pence
Unadjusted earnings per share 20.10 15.77 131.22
Effect of restructuring costs 0.14 9.32
Effect of brand impairment 2.27
Investment costs written off 2.32
Effect of disposal of subsidiaries
and non current investments (66.33)
Effect of tax recoveries in
associated company (2.27)
------ ------ ------
Adjusted diluted earnings per share 20.10 15.91 76.53
====== ====== ======
Adjusted diluted earnings per share are based on
- Adjusted earnings (£m) 428 347 1,650
- Shares (m) 2,129 2,181 2,156
Similar types of adjustments would apply to basic earnings per
share. For the three months to 31 March 2005, basic earnings
per share on an adjusted basis would be 20.26p (2004: 16.79p)
compared to unadjusted amounts of 20.26p (2004: 16.65p).
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 included in reserve
movements under UK GAAP, are required to be included in the income
statement under current IFRS. As both these items are particularly
subject to exchange rate movements in a period, they can be a volatile
element of reported income, and especially net finance costs, which does
not always reflect an economic gain or loss for the Group. Subject to
further developments in IFRS during 2005, including interpretations of
IFRS and best practice in reporting IFRS results, the Group will review
the appropriate treatment of these in the adjusted earnings per share
calculations prior to publishing the first annual IFRS results for 2005.
SHARE BUY-BACK PROGRAMME 21.
The Group initiated an on-market share buy-back programme at the end
of February 2003. During the three months to 31 March 2005,
4 million shares were bought at a cost of £42 million.
During the year to 31 December 2004, 59 million shares were bought
at a cost of £492 million.
******
Copies of this Report will be posted to shareholders and may also be
obtained during normal business hours from the Company's Registered
Office at Globe House, 4 Temple Place, London WC2R 2PG.
Alan F Porter
Secretary
4 May 2005
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